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Systems for Verification of Legality in the Forest Sector, Malaysia

Research reports

Forest cover in Malaysia constitutes some 19.52 million hectares (59.5% of land area). Of this, 14.93 million hectares have been designated as Permanent Reserved Forests (PRFs), including some 11.18 million hectares of production forests. The Malaysian timber industry accounts for 3.4% of GDP and 4.3% of total export earnings. In 2003, Malaysia was the world's third leading exporter of logs after Russia and the US ; the second largest exporter of plywood after Indonesia ; and eighth leading exporter of sawn timber.  As supplies of domestic timber decline, and with around 1000 sawmills in operation, a growing proportion of Malaysia's exports consist of timber originally sourced from a variety of neighbouring countries including Indonesia, PNG and Myanmar.

In line with the Federal Constitution, Malaysia 's 13 States have jurisdiction over land as well as forest gazettement, management and licensing. Malaysia does not therefore constitute a single entity for the purposes of legal verification in the forest sector. While uniformity of practice has been achieved amongst timber-producing States in Peninsular Malaysia, verification systems in Sabah and Sarawak have evolved separately. These reflect:

    * Differences in licensing, e.g. in the Peninsula, concessions are issued on a short-term basis, while Sabah has moved to a system of 100-year Sustainable Forest Management License Agreements;

    * Differing policy objectives - e.g. Sarawak 's monitoring and verification systems ensure compliance with log reservation quotas for processing within the State.

All three systems stand out as examples of state-based verification of legality, relying (amongst others) on routine monitoring of harvest practices, paper-based timber administration and periodic audits of District Forest Offices and license holders. Third-party verification is not intrinsic to the design of these state-based systems. Even in Sarawak , where the State has outsourced monitoring of log reservation quotas to a wholly owned State subsidiary (Harwood Sdn. Bhd), this was done with the purpose of enhancing administrative efficiency as opposed to introducing third-party oversight.

Forestry agencies argue that third-party oversight of legal compliance is provided de facto through two unrelated but complementary policy initiatives:

   1. Quality Management System audits under the ISO 9000 family of standards. These have been applied to routine timber administration systems, in line with a Prime Ministerial drive on administrative efficiency.

   2. Certification under the Malaysian Timber Certification Council (MTCC) and FSC. MTCC certification has been applied on a State-wide basis in the Peninsula, as well as to one license holder in Sarawak (Sam Ling Corp.). Sabah is focusing on FSC, with one certified model concession (Deramakot).

However, so long as the Malaysian Timber Certification Council (MTCC) remains under the authority of the Ministry of Plantation Industries and Commodities, questions remain over its independence as a form of third-party oversight.

The Sabah Forestry Department has also brought in an independent auditor to complement its own General Procedure for SFM Audit of licensees, but only in respect of one case. Third-party auditors have not been introduced as a general requirement. This is partly justified on grounds of cost.

The strengths of existing verification systems lie in functioning checks and balances between public-sector monitoring and audit by State Forest Departments and various the forms of third-party external audit. For example, internal audits of State Forestry Departments by the Federal level in the Peninsula apply the same standards of performance as audits under MTCC certification of individual States. Federal audits will also follow up on corrective actions identified by MTCC auditors.

Within defined parameters, e.g. revenue collection, the administration of transport permits ('removal passes'), and monitoring of domestic log movements, there is strong commitment to effective implementation. This has been enhanced by the introduction of ISO standards to specific procedures, as well as (to a more limited extent) computerised tracking systems.

Measures that could be taken to further enhance verifiability include:

   1. A shift to 100% tree-tagging and computer tracking under mandatory Chain of Custody. Sabah is already committed to making this transition.

   2. Verification of mill throughout and recovery rates to enable reconciliation of registered legal timber (both domestic and imported) with registered output.

   3. Upgrading structures and standards for administration and verification of timber imports. Options include:

      - bilateral instruments (e.g. Malaysia - Indonesia ) to secure chain of custody;

      - prior notification of customs authorities on imports of timber;

      - publication of disaggregated customs data on timber imports, to enable reconciliation with production and export statistics; as well as,

      - issuances of transport permits (removal passes) for imported sawn timber in the same way as imported logs to enhance traceability to specific mills.

   4. Guidance on public access to/ confidentially of the results of public-sector audits by forestry agencies. Guidance is also needed on when third-party auditors should be brought to bear to complement the Sabah Forestry Department's General Procedure for SFM Audit.

   5. Establishing an accreditation system to enhance MTCC's independence, whereby MTCC would step back from issuing certificates.

Verifiability is complicated by debate over legal standards. Forestry officials point to the need to separate major infringements which render an operator or consignment 'illegal' from minor infringements which can be managed through corrective actions. Civil society groups also raise the need for the existing legal framework to better accommodate the rights and interests of forest-dependent, native communities. Steps could be taken to accommodate rulings of the Court of Appeal that affirm a fiduciary duty on States to: (i) gazette aboriginal land, and (ii) pay reasonable compensation should that land be taken for other purposes.

Adrian Wells