Wednesday, July 7, 2010

Chapter 4 : Unofficial Timber Rent Appropriation in Sarawak (Part 9 - Conclusion)

This analysis of Sarawak's nine largest timber concession holding groups provides much new data to support the findings of Dauvergne (1997) and Ross (1996) that Taib Mahmud awarded timber concessions to achieve patronage objectives. Timber concessions were awarded to provide political parties in the state's ruling coalition with political warchests for state elections. Fifteen individuals serving as ruling coalition proxies, six for the PBB party and nine for the SUPP party, hold managerial and equity positions in many of the concessions licensed to the state's top four timber conglomerates. Timber concessions were also awarded to the most powerful politicians now in Taib's inner ruling circle, including nominees and/or relatives of Minister of Finance George Chan, Minister of Industry Abang Johari, as well as direct awards to Secretary of State Hamid Bugo, Deputy Secretary of State Abdul Aziz, and deputy speaker of the state assembly and executive editor of the Borneo Post, People's Mirror, Sarawak Tribune, and Utusan Sarawak, Mohamad Awang Asfia Awang Nasar. Concessions were also awarded to repay the loyalty of those who stood with Taib in the Ming Court affair, including the son of Sim Kheng Hong, the wife and nephew of Alfred Jabu, and the family, friends and associates of Wahab Dollah. Also there is the function reserved almost exclusively for the Taib family group of timber concessions of providing managerial and equity shares to either current or former heads of the three most powerful Iban families and seven of their relatives, all of whom help bring in the votes of the state's largest group, the Iban community. As this represents an enormous diversion of rent toward clientelist rather than developmentalist ends, it suggests that Sarawak has failed to balance the dual imperative.

There is also strong evidence indicating that a fantastic sum of timber rent has been diverted neither toward building development nor toward creating political support, but instead toward something that is vastly less societally-productive, namely, the personal financial gain of the chief minister, his family and his close personal friends. The Taib group itself is the third largest concession holder in the state, a position of market dominance unmatched by any other head of state in any of the cases discussed in this dissertation. While the chief minister himself occupies no publicly recorded directorships or shareholdings in any of the timber concessions said to belong to him, informants identified nine of his personal nominees in such positions. Moreover, the chief minister's family members, including three of his brothers, his sister, his brother-in-law and his cousin, occupy managerial and equity positions on the boards of the timber concessions of the top four major Sarawak timber conglomerates. In addition, the Taib family owns the shipping company through which an estimated $4 billion in timber exports must pass each year. Also, there is Taib's financial penetration into various timber conglomerates. This has catapulted him into owning the largest private financial entity in the state, the CMS corporation, which raises his personal earning power to another order of magnitude.

Sarawak is also a textbook example of something that the comparative political economy of development tends to overlook, namely, that the challenge for many would-be developing states is not capitalists using state leaders to seek rent, but rather state leaders using capitalists to seek rent. Between the head of state and capital, heads of state often have the upper hand, as demonstrated by: Taib's extraction of angpau from timber magnates during the Chinese New Year; Sibu's timber conglomerate heads returning from all over the world to greet Tun Rahman when he came to visit their city; Lau Hui Kang's being forced to turn on his own brother; Ting Pek Khiing's skyscraper being used to provide penthouse office space to the chief minister's son; Prime Minister Mahathir's sending IRS agents to raid Rimbunan Hijau headquarters after his son had a falling-out with the group's owner; Rimbunan Hijau head Tiong Hiew King's holding a golf umbrella for Chief Minister Tun Rahman and Ling group head Ling Beng Siew's sending his sons to London to wash the body of Tun Rahman after both Tiong and Ling had been jailed by Tun Rahman on trumped-up charges. Such vast inequalities of power demonstrate the degree to which, in the developing world, it is not rent-seeking capitalists who use the state as a tool, but rent-seeking leaders who use capitalists as a tool.

Official timber rent capture in Sarawak 

My hypothesis predicted that state timber revenues would be lower than optimal in Sarawak because the chief minister and other political elites were unofficially appropriating enormous amounts of timber rent, resulting in less timber rent remaining to be captured by the government. This turned out to be the case.

Despite the failure of timber revenue policy in Sarawak, two tax hikes did take place, in 1989 and again in 1993. In those years, the government respectively increased timber revenues from $11 to $20, and from $20 to $30, for each cubic meter of red meranti harvested and bound for export. At first glance, these seem like substantial revenue hikes. It can be seen that in the years during which these revenue increases took place, the amount of timber rent unofficially earned by timber concessionaires, and appropriated by the political elites who ran or owned many of these concessions, remained constant or increased. What this tells us is these revenue hikes did not significantly reduce the net profit of those who had to pay them.
While the royalty on red meranti rose from $11 to $20 in 1989, the ten percent tax on the export of red meranti was totally eliminated in that same year. Thus, in spite of the royalty nearly doubling, timber concessionaires came out only slightly worse than the year before. The amount of rent their political masters were able to appropriate from each cubic meter of red meranti fell a minuscule $1.20, from $64 in 1988 to $62.80 in 1989, the year the revenue hike was enacted.

As to the second major timber revenue hike of 1993, when the decision was made to increase the royalty on red meranti by 50 percent, from $20 to $30 per cubic meter, this also turned out to be painless for those who were asked to pay it as it followed on the heels of the skyrocketing prices of Sarawak timber. The 1993 hike in timber revenues took place in the aftermath of a gigantic leap in prices of raw logs on the world market in 1992, a leap to some degree engineered by the government of Sarawak itself.

By the early 1990s, Sarawak was the main world supplier of tropical hardwood logs. (Indonesia had outlawed the export of logs, the supply of logs from Sabah had dwindled and Papua New Guinea had not yet become a major exporter). Therefore, Sarawak was in a position to effect world price movements. This excerpt from a World Bank internal memorandum written in late 1992 argued that the government of Sarawak itself drove up world tropical hardwood log prices in late 1992:

The targeted [log production] level for 1992 was to have been 18 million m3 but by August [Sarawak concessionaires] had already produced 15 million m3. The government then put on a quota - dividing the remaining 3 million m3 between all of the existing concession operators. As a consequence there has been a shortage of logs during the last quarter of the year (for both domestic processing and export) causing log prices to shoot up as supplies tighten and operators seek to maintain cash flows from reduced production levels. Log prices in August averaged about $125 per m3. In October they have risen to about $165 per m3 (World Bank 1992t: 5).

The executive director of the Sarawak Timber Association confirmed that the government fully anticipated that a freeze in exports in December, 1992 would drive up the prices of logs and help Sarawak producers in the long run. Cheong Ek Choon, Director of Forests, was the one who ordered the freeze. Sarawak loggers were at first angered by the freeze, and telephone calls flooded into the Sarawak Timber Association. The executive director anticipated the deluge of phone calls and made sure that he was out of the country, and unreachable, during December 1992. Due to the freeze in late 1992, log exporters enjoyed a 300 to 400 percent increase in the price of logs in 1993. While those high prices did not last, the Sarawak Timber Association executive director calculated that the average price per cubic meter for raw logs in 1993 was over $40 higher than it had been in 1992 (13 November 1996 interview with Barney Chan). In fact, Sarawak Timber Association records show that the average log export price in 1993 was $65 higher than in 1992.

In short, because of the astronomical leap in the price of Sarawak logs, the 1993 timber royalty hike was not painful. Again, a hike in royalties from $20 to $30 per cubic meter may seem substantial but, as shown in Figure 4.2 above, in 1993, the year of the increase, the amount of timber rent earned by timber concessionaires, or appropriated by their political patrons, skyrocketed from $108 to $160 per cubic meter of timber, an all-time high for any of the cases covered by this dissertation. Although they paid $10 more in royalties, timber concessionaires and their political patrons also netted $52 more in timber rent for each cubic meter of red meranti harvested and exported.

The painlessness of the 1993 revenue hike was confirmed in several quarters. Sarawak Timber Association executive director Barney Chan characterized the reaction of his membership, stating, "There were no complaints because log prices had shot up concurrently with the royalty increases." Director of Forests Cheong Ek Choon confirmed Chan's account, adding that the "decision was well-timed" (13 November 1996, separate interviews with Barney Chan and Cheong Ek Choon).

The state's fourth largest timber concessionaire also confirmed that the royalty hike of 1993 was not felt by those who paid it. I asked Lau Hui Kang, chairman of the KTS group and President of the Sarawak Timber Association, about the royalty increase of 1993. At first, Lau said that no such increase had taken place. When I reminded him that Sarawak Forest Department publications stated that royalties on red meranti had risen from $20 to $30 per cubic in July, 1993 he replied, "This increase was only due to the rise in the price of raw logs" (30 October 1996 interview with Lau Hui Kang). The fact that Sarawak's fourth largest timber concessionaire could not even recall the largest timber royalty increase in the history of the state and then, when reminded of it, dismissed it's significance, is an indication of the failure of the government of Sarawak to capture timber rent in any meaningful sense.

Concentrating the spoils 

While it is true that over the thirty year period covered by this study the lion's share of timber rent appropriation has been from raw log exports, over the last decade other wood products, especially plywood, have assumed increasing importance in Sarawak's timber export profile. In fact, during the last half-decade processed wood exports, especially plywood, have exceeded logs to become the largest portion of Sarawak's wood exports. In Sarawak (as in Indonesia) plywood industrial policy is increasingly used as a tool to concentrate timber rent in the hands of a few politically-connected timber conglomerates.

The policy tool used by the government to concentrate logs and the appropriation of rent in the hands of a small group of large companies is called the Log Export Requirement Quota (LERQ). Although nominally set up to ensure the supply of raw material to smaller, independent mills, the LERQ now does the opposite. The LERQ committee has been subtly adjusted over the years by the Department of Forestry and the Sarawak Timber Association so that today it works to drive smaller, independent mills out of business. While ostensibly promoting the efficiency of Sarawak's wood processing mills, the LERQ increasingly ensures the log supply to and continuing market domination of "efficient" (e.g., large, politically-connected, conglomerate-owned) plywood mills.

The LERQ committee, established in 1988, originally met on a quarterly basis to set timber export quotas with representatives of the Department of Forestry, the Sarawak Timber Association, and later adding representatives from the Sarawak Timber Industry Development Corporation. LERQ was designed to limit the amount of raw logs that any timber concessionaire could sell for export. The following table shows the percentage of logs set aside for domestic processing over time by the LERQ committee.

Table 4.11 Domestic quotas set by Sarawak's Log Export Requirement Quota committee

Year        Percentage of logs processed domestically                Percentage of logs exported
1988                              10                                                                  90
1989                              10                                                                  90
1990                              15                                                                  85
1991                              20                                                                  80
1992                              30                                                                  70
1993                              36                                                                  64
1994                              36                                                                  64
1995                              45                                                                  55
1996                              55                                                                  45

Source: Edmund Daging Mangku, STIDC, 14 November 1996

While the LERQ committee did, in fact, divide the overall log production of Sarawak into that allowed for log export and that allowed for plywood factories and sawmills, the real work of LERQ became setting raw log quotas for each mill based on capacity. This command-and-control decision-making produced a clear set of winners and losers: the winners are the larger, newer and more efficient mills, attached to the big timber conglomerates, which have come to control an increasingly large share of processed wood exports over time. The losers are the smaller, older and less efficient independent mills. 

The executive director of the Sarawak Timber Association explained that while the smaller mills may have believed for a time that the LERQ would help them obtain increasingly scarce logs, they soon realized that the opposite was the case:

Even before the log set aside policy began, the independent mills were mad that Sarawak's timber concessionaires were not selling more logs to them. However, the position of the independent mills did not improve with time, but in fact got worse. This is due to the fact that it was always the policy of the Forestry Department and the Sarawak Timber Association to set aside fewer logs for Sarawak mills than was represented by their capacity (13 November 1996 interview with Barney Chan).

This policy of deliberately starving the smaller mills was undertaken, according to Chan, to weed out the least efficient mills. Said Chan, "Cheong [Ek Choon, Director of Forests] and I agreed all along that we should starve the mills a little bit." The policy continues to this day, as Chan explained, there are still "small, inefficient mills that I am trying to weed out" (8 and 13 November 1996 interviews with Barney Chan). 

Cheong also confirmed that there was a deliberate policy of starving the mills in order to cull the least efficient ones. He said that the intention and result of the LERQ's policies was "concentration in the industry, which must put some sawmills out of business." Speaking bluntly, Cheong said, "Small mills must die" (13 November 1996 interview).

In truth it is difficult to know whether the LERQ's policy of starving smaller mills was motivated primarily by a desire to create more efficient mills or by a desire to concentrate as much raw material and rent as possible in the hands of a few politically-connected firms. One thing is for sure: more than a decade after the initial implementation of the LERQ's policies, Sarawak's mills are still not known for their efficiency. On the contrary, they maintain a log to lumber conversion ratio of 2:1, the same as in the rest of Southeast Asia.


In Sarawak, as in Indonesia, timber rent is funneled to the head of state on a large scale. Analysis of the managerial and equity positions of the timber concessions licensed to each of Sarawak's top four private timber concession holding groups, as well as other evidence with respect to the fifth through the ninth top groups, suggests that not only the political supporters, but more significantly, the families and friends of the chief minister, are virtually omnipresent as managers and owners of these concessions. Anticipating this maze of ties, I hypothesized at this study's outset that timber revenues would be low in Sarawak. In fact, the rate of official government rent capture in Sarawak is the lowest of any case in this study. Similarly, the rate of unofficial rent appropriation is the highest, reaching more than $160 per cubic meter during one year, despite the fact that timber royalties were increased by 50 percent in that same year. Sarawak was also found, like Indonesia, to be setting aside timber rent for large, politically-connected plywood conglomerates.

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