How To Save B.C.'s Coastal Forest Industry

British Columbia's coastal forest industry has driven off a cliff and is unlikely to survive without structural changes

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How To Save B.C.'s Coastal Forest Industry

By Richard Bassett and Daniel Veniez, Special to the Sun
May 1, 2009

British Columbia's coastal forest industry has driven off a cliff and is unlikely to survive without structural changes.

The fanciful notion, popular with some politicians, that a recovery in the U.S. housing market will "save the coastal forest" industry is, at best, wishful thinking, and at worst, deceitful.

It has long been the case that B.C.'s coastal forest industry is the world's highest-cost producer of wood products, which means that any time there is a downturn in the wood or pulp markets anywhere, the products from the B.C. coast are the first to be cut, and when a upturn comes, B.C.'s coast is the last to feel the benefit.

Against this backdrop and coupled with the uncertainty of significant political changes every four years, it is not possible to attract new investment for sawmills, pulp mills and other wood conversion facilities that are needed to prevent the coast forest industry from disappearing.

The industry needs new capital but it can't attract any because it has been a financial loser for so long that investors are not prepared to put up the billions necessary to build modern mills.

Many have contributed to this disaster, but the most significant player is the provincial government, which effectively controls 80 per cent of the industry's economics through tenure and stumpage policies; regulatory and administrative burdens; environmental and labour laws, and the failure to resolve first nations issues.

There is no silver bullet that can come from an inspired CEO or union leader to solve these problems, only the government can.

Today, an acre of forest land held under a government tenure is worthless, and in many cases has a negative value. This isn't new. In 2001, Peter Pearse wrote that: "Nearly two-thirds of the total volume of timber authorized for harvesting was of negative net value, in some cases as low as minus $50 per cubic metre. Overall, the value in good timber is wiped out by the losses on the poor, and the addition of stumpage fees goes a long way to explaining the poor financial performance of the coast logging sector."

As long as the forest tenures are worthless and the management of the tenures by Victoria is uncertain, no new investment will come to the B.C. coast, and this will not change when the global wood products market improves. Investors know that under the current system of running forest policy as though it were social policy, the lion's share of any gains from a market upturn will be taken by others.

If you're not directly employed in the forest industry, why should you care? Perhaps because the total tax contribution from the coastal forest industry in 2008 was in excess of $1.7 billion, and $1.7 billion a year pays the salaries of a lot of nurses, teachers and policemen. Twenty years ago that tax contribution, adjusted to 2009 dollars, was $3 billion.

The broad impact of the demise of the coastal forest industry doesn't stop with the loss of revenues. As the industry dies there will be bills for taxpayers from higher unemployment, retraining and welfare costs, the cost of bailing out bankrupt municipalities that are completely dependent on forestry, and for the environmental remediation costs left in the wake of bankrupt former owners.

Tenure reform is the single most important act that the provincial government can take today. Forest licences of five to 25 years are ridiculous when it takes 60 to 80 years to grow a tree. While the licences are renewable, investors have learned not to trust the government that this is automatic, and this deters significant investment. Forest licences need to be at least 125 years, and the underlying terms need to be substantially revised.

The stumpage system is a throwback to failed 19th-century philosophies and should be replaced by a single capital payment at the time a new forest lease is made. The holders of 125-year leases should pay an upfront capital amount that is equivalent or greater than the net amount that the government can reasonably expect to collect from stumpage payments over the next 125 years.

By auctioning these new leases with new licence terms, we are confident that the government would receive a minimum of $2 billion and as much as $5 billion. Contrast this gain to the public with the 2009 Ministry of Forests budget which has costs in excess of $800 million, but will collect less than $600 million in stumpage and other fees. In other words, there is no net benefit to B.C. taxpayers from the current system.

Our suggestion is that the proceeds from the auction of these leases would be used to create a B.C. Heritage Fund that could be used to fund capital projects in health, recreation and other activities in perpetuity.

By capitalizing the stumpage costs we remove the biggest single argument in the American softwood lumber dispute, namely the manipulation of stumpage by Canadian provinces. Currently, the forest products from government tenures are paying duties of 15 per cent on exports to the U.S. while owners of private forest lands in Canada pay zero per cent. These duties take $200 million a year away from B.C.

Further, at least $400 million a year is spent by the province to collect stumpage and to micro-manage the industry; that t$400 million could be better spent on other uses.

In its micro-management of the forest industry, Victoria imposes administrative and other burdens of more than $1.2 billion on the forest industry -- none of which relates to silviculture or other reforestation efforts.

The onerous and punitive economic rent from municipal property taxes, and the highest labour costs in the world simply add to the structural problems that have not been dealt with.

Richard Bassett is the founder of Neucel, owner of the Port Alice Specialty Cellulose Mill. Daniel Veniez was president and chief executive officer of Skeena Cellulose.

Additional Information

Web Site: http://www.vancouversun.com/save+coastal+forest+industry/1552587/story.html

Category: Forestry>Industry Trends

Region: BC - Canada

Ad Running: 5/4/2009-5/4/2011

Ad Posted: 5/4/2009 12:30:27 PM

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