Image for Amos and Wells on Forestry Subsidies: Round 3

I doubt whether I’m going to convince Mr Amos of the merits of my approach to measuring subsidies. But in this, my third round, I’m going to have one last try. 

1. Subsidies

Mr Amos appears to define a subsidy as a ‘payment to enable the industry to continue without change’.

Most analysts would adopt a more expansive definition. In June 2009 for example, an IMC team led by Bruce Felmingham completed a report for FIAT and Forestry Tasmania on subsidies to various Tasmanian industries. [My critique of this report is available at http://tasmaniantimes.com/index.php?/article/the-flawed-methodology-of-this-report-is-not-the-template-to-follow/ ]

The IMC report started from a fairly standard definition of subsidies (p.11), taken from an article by Riedy, ( http://fueltaxinquiry.treasury.gov.au/content/Submissions/Public/downloads/RiedyC_276.pdf )

Although I was not previously aware of the Riedy article, I note that the subsidy categories more or less correspond to those I used in my analysis. The Riedy list is:

Direct subsidies and rebates;
Favourable tax treatment;
Provision of infrastructure and public agency services below cost;
Public contributions for research and development (R&D);
Provision of capital at less than market rates;
Failure of government-owned entities to achieve normal rates of return; and
Trade policies, such as import and export tariffs and non-tariff barriers.

Although the Riedy reference was cited in the FIAT report, this is not exactly how the list was reproduced – I’ve italicised the words ‘public agency services’ and ‘Failure of government-owned entities to achieve normal rates of return’ because these words went missing while copying from Riedy’s article to the FIAT report.

Rather than relying on this use of the delete key, I argued that part of Forestry Tasmania’s sub-par rate of return amounts to a subsidy by Tasmanian taxpayers to the forestry industry.

Mr Amos appears to be arguing that the whole of the difference between Forestry Tasmania’s rate of return and the risk-free government bond rate, no matter how large that difference, is attributable to implicit and explicit community service obligations.

The remedy to this fractious dispute seems fairly obvious – legislate for the value of the community service obligations being provided. 

Other categories of subsidy were also dismissed in the IMC report – in the case of MIS schemes because ‘In some cases tax havens are not designed to facilitate the operations of an industry, they are designed to attract investors to the industry’ (p.12). 

Surely that qualifies as a subsidy in terms of the Riedy list? ‘Provision of capital at less than market rates’? 

Turn to other categories identified by Riedy – research and development, for instance. With respect to R and D, Mr Amos asks ‘how should these costs be met?’. ‘And would you call such costs a subsidy?’

The answer to Mr Amos’ latter question is provided in the IMC report he commissioned.

Yes.

2. Minister Green

Mr Amos’ account is as follows:

‘The Minister has advised that the $3 million assistance package (to contractors) will net a $20 million return, by enabling access to 25,000 tonnes of high quality sawlogs and veneer logs from outlying coupes.  Although the Minister also talks of low quality wood no volume has been ascribed’.

‘Graeme has made an assumption that this equates to a total volume of 300,000 tonnes.  If we accept this assumption, then this will involve a total volume of around 300,000 tonnes of green timber, which as Graeme advises comes out at around $66/tonne.  A lesser volume would equate to a higher price.  So the argument is now based upon an assumption Note this is an average price for the sawlogs supplied, veneer logs supplied, pulp logs supplied, and that the price is a pre-processing mill door price’.

I did not ‘assume’ 300,000 tonnes of wood was involved. This was indicated in Minister Green’s letter to me.

I did not confuse an end-product price with a ‘pre-processing mill door price’, as Mr Amos implies.

To clarify, I quote directly from Minister Green’s letter to me:

‘The total amount of the assistance package ($3M) has been set at a level that will sustain the additional 30,000 tonnes per month production for about ten months. This is judged to be a sufficient period for the anticipated return to normal product conditions, for some log products, and for anticipated development of ongoing demand at reasonable prices in the new export markets that are being developed for other log products’

‘The $20M estimate is the forecast actual value represented by the end products [italics added] to be derived from the additional quantity of logs produced during the period .... Most of this value will be captured during the period itself, although the component represented by sawn timber (in particular) may not be captured until the drying and dressing of the timber is completed (i.e. up to eighteen months).’
 
As I indicated in my original article, I did, however, confuse green tonnes with bone dry tonnes.

Fortunately, we can put pre- and post- processing prices on the same ‘green tonnes’ basis. Forestry Tasmania estimates the mill door landed value (MLDV) of its sales from eucalypt forest, hardwood plantations, and softwood plantations.

In 2008-09, the average MLDV for non-plantation eucalypt wood production was approximately $64 per green tonne. [See Forestry Tasmania, Sustainable Forest Management Data Tables 2008-09, p.7. Some of the Forestry data are expressed in tonnes, and some in cubic metres. I have assumed 1 green tonne = 1 cubic metre which I understand is a sufficiently close approximation to not materially change the results]. 
In 2008-09, Forestry Tasmania barely covered its operating expenses, and the harvesting contractors were not doing so well either. So $64 was by no means an inflated mill-door price.

By contrast, the 300,000 tonnes sold under Mr Green’s arrangement is going to earn after processing, $66.7 per tonne.

The relevant comparison is between a normal mill-door supply price of $64 per tonne, and Mr Green’s end-use value of $66.7 per tonne.
At these prices, someone – Forestry Tasmania, the contractors, the processors, or all three – has to be taking a financial hit. So it seems disingenuous to claim, as Minister Green did, that ‘It isn’t often that a $3m investment will net a $20m return within months’.

3. The Future

It makes good headlines to continually point out other people’s arithmetic errors.

I’ve corrected arithmetic errors, and my estimate of the subsidies given to Tasmanian forestry over the period 1997-98 to 2009-10 is $767 million. 

Mr Amos doesn’t give an estimate but I gather his estimate would be close to zero. 

No agreement there.

But I’m sure we can agree that the forest industry is in a parlous state.

Attention should turn to the future.

We all want to ensure that whatever the future arrangements for forestry, sustainable outcomes are achieved.

In that context, surely John Lawrence’s observations ( John Lawrence analyses HERE )about the FFIC’s recent ‘New Forestry’ report deserve a response.

John’s article highlights the importance of the report’s implicit assumption that plantations established under MIS schemes will be replanted. He argues that ‘New Forestry’ data indicate that a $2.13 billion investment in new forestry plants will yield annual earnings before interest and depreciation of just $20 million.

So, whether we call it a subsidy, structural adjustment assistance or whatever, it appears that taxpayer support will be required if the ‘New Forestry’ program is to attract private investors.

Over to you, Mr Amos.