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Out of Step

Canadian forest management is on a very different path compared to the management systems of its competitors in the market. Is our government-controlled, production-based system delivering the most value?

By Dr. Michael J Heit and John McPherson



The Canadian forest industry revolves around provincial Crown land, with the provinces, provincial based industrial associations and companies operating independently. The end result of all this is a government-industrial complex. Senior forest company staff tend to be selected for their skills in government liaison. Even if staff is selected for their business abilities, they still end up spending valuable time trying to improve their company’s financial success through negotiations with their landlord the government. As a result, the great forestry debates such as Ontario’s Lands for Life, BC’s Forest Practices Code or even Alberta’s fibre play of the 1980s, tend to reflect insular provincial thinking. If we are selling in a global economy, and we are, there is a need to consider decisions, costs and financial operations in a wider context. We need to be more conscious of market pull as opposed to operations push. We need more intelligence on our competitors’ strategic moves to formulate our own strategic positions. If anyone doubts the close government/ industry relationship this system requires, they should check out the daytimers of senior executives of Canadian forest companies compared to their American counterparts. Our executives spend much more time on government issues and bureaucratic meetings than their global counterparts.

Consequently, Canada has a series of government-driven, isolated, unique polices on stumpage, tenure, and land use based on too much geography and too much local history. We are missing the large paradigm shifts impacting the global forestry business. The provincial base of forestry and insular nature of the industry has disconnected us from the large global business and financial issues. The kind of public and business policy cauldron that exists in Canada is just not conducive to flexibility or adaptability the cornerstones of global competition. Our competitors are in strategy sessions, restructuring, shifting markets, creating shareholder value, and changing product mixes meanwhile our Canadian talent is stuck in meetings with their government landlords.

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In the past, the world was short of commercial wood and Canada had large uncommitted volumes of timber and chips. Labour, companies and government all fed well off the high resource rents from our natural forests. This is no longer the case. We have to work smarter. We need to break out of the insular government-industry complex. We need to follow, if not lead, international business and financial trends. On the world stage, Canada has gone from being the exporter of forest products to just another exporter of forest products. The world is awash with fibre and Canada could move from a player towards being a future bit player fairly quickly. We are already losing market share in newsprint, pulp, paper, softwood lumber and value-added wood products. Some of the most important global forest industry changes occurring today are happening in the institutional land management arena. At the risk of being over simplistic, Canadian forestry consists of a large block of Crown land being involved in an area or volume based tenure relationship.

 

These tenures were the building blocks for hinterland settlements and powerful province-building mechanisms. Over time, these tenures have been the chosen instruments for delivering multiple use, industrial strategy, value-added process-ing and revenue generators. Typically a large tenure area feeds all of its logs through one or two sawmills and then chips flow to a pulp mill under a chip contract. The engineers try to build a one-size-fits-all mill or, perhaps have a small and a large log line mill. Historically, this was a good policy framework. However, it is now clear that our huge forestry estates are generating a low or even negative return, hence Canadians are not benefiting from capital accumulation from what is our largest capital asset. Our forest assets have changed from province-building forces to provincial liabilities. It is also becoming clear that the one-mill-fits-all is keeping our product mix in the low end commodity arenas. Why is this and can we do better? The comments referring to a low or even negative return are much less true with many of our international forestry competitors.

 

The USA, Scandinavia, northern Europe and recently New Zealand (and soon South Africa and part of Australia) are pursuing shareholder value (both corporate shareholder value and society’s shareholder value) in different ways. These countries are pursuing shareholder value through a more active liaison with the great hordes of capital driven by mutual fund managers and pension funds. Compared to these other countries, Canada is going in the other direction and continues to pursue shareholder value by revisiting and rearranging our command-and- control regulatory and tenure systems. Large areas of multispecies natural forests are reduced to their lowest common denominator in the attempt to produce low value commodity wood products in the most efficient way possible. This overall approach ignores the possibilities for additional value and job creation. Our tendency is to haul a lump of logs, run this lump through high-speed, high production socalled spaghetti mill operations and dump this commodity lump into one mar-ket. Lump in = lump out, to steal a phrase. Canadians are becoming quite unique in their approach to creating value from forests. For example, BC has about four per cent of its forested lands in private hands (Quebec eight per cent, Ontario 11 per cent). In the US, about 68 per cent of the forested lands are privately owned with Sweden at about 70 per cent.

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New Zealand has now sold the rights to almost all of its plantation forests to various internationalcorporations and financial institutions, for periods of up to 70 years. South Africa is now in the process of privatizing its soft-wood plantation forests, as is part of Australia. Our unflattering summary of Canada’s policy discussion is that it becomes too “provincial” very quickly. To put it in a broader context, and to objectively explain some of the paradigm shifts currently going on, we can look at three common-wealth countries that have a provincial structure, parliamentary systems, large Crown land holdings and land claims sim-ilar to Canada. The accompanying chart gives a brief outline on how New Zealand, Australia (Victoria State) and South Africa have decided to change their approach to forest “ownership” and tenure as they look for new ways to create shareholder value from their forests. It can be seen that these forests have been changed from being government owned to being “privately owned” (at least for 70 years) with some sort of positive cash value being generated for the government coffers.

Forest policy changes in NZ, Australia and South Africa
• The process in New Zealand was driven by the national financial crisis. The forest privatization process was complicated by the land claims (Treaty of Waitangi claims) and the conflict-ing claims of the forest industry, conservation groups, and the public’s rights of access.
• The political overtones of selling the “Crown jewels” were overcome by leasing the land and selling the trees.
• They have leased the land and sold the harvest rights to the trees. Fee simple land sales are not a viable political option. Right, central, and left wing governments have all entered into this “keeping the land and selling the tree” paradigm shift.
• All three of these countries have land claim issues that have very high political profiles. South Africa, for example, has over 3,000 land claims.
• New Zealand now has a growing fibre base and a stable fiscal climate. • In New Zealand, sawmills and panel plants have not closed as a result of forest ownership changes.
• In New Zealand, trees and even parts of trees are “merchandized” and then directed toward processes that tend to maximize the inherent value of each tree. (Note: The Southern Hemisphere softwood plantations are largely pine. However, the various plantations can contain up to three or four different species of pine in each leaseholding.) • Australia (state of Victoria) is a perpetual licence and includes 100 per cent “crop equity” in the trees. The rationale can be expressed as “what business does government have growing trees for industry” (remember these are plantation lands) and “could we not get better industrial development without the rigidities that government ownership implies”.
• The large leases have raised the most cash for government, but have not spun off many jobs and value-added growth. Medium and smaller leases have been used to develop skilled jobs and value-added products. • It can now be argued that some of the original leaseholders have paid too much and have struggled under the debt load. • Global scale pension and mutual funds are all well-acquainted with and knowledgeable of government forest privatization.




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