Image for Beware of Academics Bearing Arithmetic (Round 2)

I note the response of Graeme Wells to my article, and appreciate his various acknowledgements ( Gifts and Arithmetic, HERE ).

When we sign on as individuals, we are responsible only to ourselves for what we say.  However, when signing a letter as an academic, he must take on the mantle of academic integrity, just as when I sign on as FIAT Chairman, I must act with respect to a broader constituency.

Graeme says he wishes to engage in a debate and I am happy to oblige in this matter.  I note in passing that a number of your readers have responded with a degree of personal spite about me and my position, but I suspect that says more about them than me.

Graeme expresses concern that the forest industry has received subsidies in the past.  I have disputed his essential premise relating to subsidies, and maintain that what support there has been has paid dividends back to the State.

Despite admitting that his figure is wrong, Graeme continues to promote a figure of $65 million as an annualised subsidy to industry. I have challenged this figure and continue to do so.  Payments made under the RFA and TCFA are compensation payments for resource lost, as distinct from subsidy payments to enable the industry to continue without change.  The one-off payments he refers to have little to do with providing support for industry but relate to Government processes such as the RPDC and an upgrade to the East Tamar Highway. 

He says he has excluded conservation funding from his calculations, but excluded they are not.
 
We may continue on this track and query his sums, and the degree of benefit for support given, but I would like to explore for a moment why support is given.  It has little to do with political favours sought and given, as many of your readers would seem to argue, but has much to do with the nature of the product on which the industry is built, ie trees.

First and foremost, let us accept that half of Tasmania’s public forests, containing some 80% of “old growth” forest, are presently in formal reserves.  I think we need to ask how these forests are managed, and what is being spent on them.  And how should we regard these costs?  Would you call this a subsidy?

Forestry Tasmania is responsible for the remaining public forest estate.  However, of the 1.5 million hectares that it manages, some 520,000 hectares is also in reserves and another 307,000 ha outside planned harvesting areas.  And these areas are reserved for all the proper conservation values, such as biodiversity, streamside reserves and the like.  Would you call the cost of managing these reserved areas a subsidy? 

The remaining area is available for production, and costs are incurred in managing these areas.  And a return is gained from managing these production forests.  However, if some of this area on which costs have been incurred are then removed from production, such as what occurred with the Regional Forest Agreement and the Tasmanian Community Forest Agreement, then the costs spent in those areas cannot be recouped. 
Should compensation be paid to FT for that loss?

An argument has been made that the remaining production forest area may be managed in a different, more intensive way, that harvesting may be carried out in a different way, that rotation times may be varied etc etc.  Again there are significant costs associated with changing the management regime.  How should these additional costs be met?

An argument has been put forward that plantations may be the answer to providing high quality sawlog.  However, as yet this has not been proven, and remains an idea.  Work needs to be done and is being done to prove up this idea.  It is called R and D.  How should these costs be met? And would you call such costs a subsidy?

And of course in all this, we need to recognise that the rotation time for this “crop” is not like wheat or potatoes or pasture or horticultural crops, where the proving up of the R and D can be determined in short order.

Life cycles span a number of years, from around 20-30 years, and out to 90 years in some instances, and it doesn’t take a genius to work out that waiting for this period of time to get a return on your investment is not particularly encouraging to get the investment in the first place.

So much of the money that Graeme refers to as subsidies for industry has in fact been directed to assist in resolving issues such as those raised above.

To create the view that industry is somehow passively sitting back and gaining the spoils of some form of largesse is a nonsense.  Industry doesn’t pocket these funds.  Industry is actively engaged in a range of R and D programs, new growing techniques, new milling techniques etc.

The objective of such spending is as Graeme asserts to ensure the industry remains relevant and competitive in the market place, and in doing so can create an environment for investment and employment.  It happens in forestry – it happens in every industry.

Let me now address some of Graeme’s further comments.

Minister Green.

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.

However, Graeme then further confuses his argument by comparing this with the woodchip price, which is for (i) a bone dry product (ii) after processing.  In other words, two areas of difference.  The latter price reflects processing costs and losses, as well as relating to a bone dry product.  Again I fear Graeme is comparing oranges with apples in order to prosecute his case, which again fails once these discrepancies are realised.

The point being made by the Minister is that the assistance being spent now helps support forest workers now.  Graeme may well be right in his assumption that a higher end-use price might be on the cards a year from now, but that doesn’t help the workers now.  And the philosophy behind the assistance package was to keep forest workers in work now.

Definition of the forestry industry.

MIS schemes were a tax-linked mechanism that provided an immediate benefit to investors, so that they could provide funds to agricultural schemes like plantation development.  No subsidy accrued to the plantation owner/manager other than providing access to a source of funds for that purpose.  As I have mentioned above, plantations are not a cash crop where returns are realised over a short time frame.  In many instances cash flow does not occur until the end of the growth cycle when the trees are harvested, which could take up to 30 years.  Without such support schemes, money would not have been available for the enterprise.

Without staying to defend these schemes, the MIS concept relied on a continual flow of funds.  When the funds dried up during the GFC, then the schemes ran into a serious cash deficit.  Some companies failed, others survived.  Forest companies may well have benefitted from that activity, but not from that activity being subsidised.  Note the plantations are still there and the trees are still growing.

I have recognised Forestry Tasmania in industry statistics.  The point I was making is whether payments to FT should be regarded as an industry subsidy, and I have pointed out above that there are a range of costs associated with activities within FT that have little bearing on “industry” as such.

RFA and TFCA Payments

I have made the point that payments made under these agreements were made as compensation payments for resource “lost” and compensating adjustments as a result of that loss of resource.  I stand by those comments.

FT Returns

I am pleased to note that on this item Graeme acknowledges that his argument is based on assumptions, rather than facts.

Conclusion

In his conclusion Graeme asks four questions

1 Why are forestry jobs subsidised to the tune of $13,000 pa?

To which my answer is:
Graeme continues to use this figure even though there are serious flaws in his logic and his calculations.  I do not accept this figure, and have gone to some length to explain my reasons.

2 What would the industry look like if subsidies were removed?

To which my answer is:
The question should be rephrased to read: what would the industry look like if 450,000 ha of resource was not removed by the RFA and TFCA agreements?  Without the loss of resource there would have been no need for compensation payments to be made in the first place.

3 Can we afford to subsidise private sector employment by $13,000 pa?

To which my answer is:
see 1 above.

4 Is there a better way of doing things?
To which my answer is

Certainly.  I believe we need to consider the management of the entire public forest estate, including carbon storage, conservation management and fibre production.

I am willing to engage in an open debate on these matters, to find alternative ways to manage the forest estate, to process product to its highest value, to provide jobs for the Tasmanian economy, and to gain the support of all of the community to do so. 

Continuing ill-informed attacks on the forest sector do not assist such a process, especially when there is such a preponderance of misinformation and open denigration of its operatives.  Already the Tasmanian forest sector manages the resource with sensitivity to a variety of needs, and does so in a sustainable way. 

Recognition of this fact is not a bad starting point.