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Pork barrelling at election time rarely yields worthwhile long term outcomes. Let’s hope we don’t see another ill-considered forestry intervention of the kind John Howard, Paul Lennon and Scott McLean stitched up in the 2004 election campaign.

A better outcome is likely if the round table’s negotiations to achieve long term restructuring are allowed to run their course.

This article provides an update on my earlier estimate of support for the Tasmanian forest industry ( Links to Dr Wells’ analyses on TT, below ). In the last two years I estimate there has been a further $90 million in subsidies, with the total from 1997-8 to 2009-10 now amounting to $777 million.  (later corrected to $767 million, see below)

But wait, there’s more to come. The contractors have asked for further support of $50m plus $1m per week until conditions return to normal – say $100m. And, as I detail below, there is also a $40 million subsidy involved in the sale of Forestry Tasmania wood at discounted prices.

And that’s before the federal politicians start feeding the chooks in marginal electorates.

The contractors have a right to feel aggrieved. They have been led up the garden path. 

In 2007 the Tasmanian Forest Contractors Association (TFCA) submitted a proposal to the Commonwealth government for $93m to support industry consolidation and industry exit for unprofitable operators. The URS report on their market prospects ( http://www.daff.gov.au/_media/documents/forestry/australias-forest-policies/pressures-report.pdf ) has proved to be remarkably prescient, and even now it is worthwhile reading for its outlook for woodchip markets.

For example it details how, as early as 2002, the major Japanese woodchip importers (Mitsubishi, Nippon Paper and Oji Paper) were signalling that they would shift their sources of supply to plantation and/or FSC certified chips.  To be sure, the global financial crisis accelerated the downturn, but the long term outlook should have been clear when Scott McLean and John Howard joined forces in 2004 to maintain the status quo. 

But I digress. The TFCA request for exit assistance fell on deaf ears. For anyone prepared to see, it was an industry in trouble. Employment was declining, real woodchip prices were forecast to fall further, and closures of sawmills and paper mills were in prospect. It was obvious that despite massive support over the previous decade, there had been little structural adjustment of the kind required to produce the products that the market is prepared to buy.

Now roll forward to 2009. The contractors have asked for further support of $50m plus $1m per week until conditions return to normal – say $100m.

It is not so well known that there are already substantial subsidies involved in selling Tasmanian forest products at fire sale prices. Minister Bryan Green’s recent $3m package provides a good example. His enthusiastic press release on 2 June is worth quoting:

‘Using the $3 million assistance package, forestry contractors will be able to work in outlying coupes that have a higher percentage of sawlog and wood suitable for rotary peeling. … It isn’t often that a $3m investment will net a $20m return within months’

It sounds like a great deal, doesn’t it? Is it too good to be true?

Yes.

In reply to my queries, Minister Green has clarified the basis of his calculation. It is estimated that the $3m subsidy will be associated with the sale of 30,000 tonnes of Forestry Tasmania timber for the next 10 months or so, until normal market conditions are restored. Forestry Tasmania’s valuation model was used to estimate the value of the products derived from this resource of 300,000 tonnes – a mix of export woodchips, export logs, dressed timber, veneers, and so on.  This is what the $20m represents.

In other words the average price is around $66 per tonne.

Had the trees been left in the forest and sold at a later date when Forestry Tasmania expect market conditions to return to normal, the same trees could have been sold, at a minimum, at the export woodchip price which in 2010 is $189.50 per tonne. This is a minimum, because dressed timbers and veneers are included in the total.

But taking this as the relevant opportunity cost, the subsidy involved with selling wood at this discounted price is $37 million, or with the $3m transport subsidy, $40 million.

A far cry from the dazzling returns claimed by Minister Green.   

In summary, we have supported the industry to the tune of $777 million over the last 12 years. If the contractors’ requests were to be met, there will be another $140 million over the next year or so just to keep them above water.

This money has bought some structural adjustment, but not much. We should demand that any further support be directed to achieving long-term structural change, not maintaining the status quo. 

Updated estimates of support for Tasmanian forestry. 

My estimates published a year ago showed that, in 2007-08 prices, support for forestry in Tasmania over the previous decade amounted to 632 million dollars. ( http://tasmaniantimes.com/images/uploads/WELLS_ECONOMIC_REPORT.pdf )

Extending this analysis to include the two years since then suggests a figure of $777 million. In what follows I outline my calculations.

In the table below, the first column shows my original set of estimates. The second column updates these by expressing them in current prices. The third column details additional support provided over the last two years, while the fourth column provides an estimate of support over the whole period 1997-8 to 2009-10.

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The methodology underlying my calculations is described in my original report; the same approach has been adopted here. 

One-Off Subsidies

This includes $6m (announced in two tranches) of assistance to forestry contractors. I have not attempted to estimate the implicit subsidy involved in the 800,000 tonne deal (February 2010) to sell woodchips to China at below cost (Robert Eastment, Mercury, May 7, p.2). 

Regional and Community Forest Agreements

Under the schedules provided in the Tasmanian Community Forest Agreement, payments by the Commonwealth ceased in 2007-8. Payments by the State government of $26.2m and $27.0m were scheduled in 2008-9 and 2009-10 respectively. The total in current prices is $53.9m. Much of this money has yet to have any effect on transforming the forestry industry – in its 2008-09 Annual Report, $40m of the TCFA money was revealed to take the form of an interest-free loan to Forestry Tasmania.

State Owned Enterprises and Private Forests Tasmania

I followed the same approach as in my previous report.

Managed Investment Schemes

Estimates of subsidies are based on:

· 11,000 hectares of MIS plantations established in 2008-09 (8,000 by Gunns Plantations Limited, 2300 hectares by FEA, and 700 hectares by others).
· 4,000 hectares of MIS plantations established in 2009-10. There were few, if any new woodlot projects sold in Tasmania in 2009-10. The present estimate comprises ‘carry-overs’ from woodlots sold in 2008-09.

As in my first report, the difference in rate of return induced by the tax concession is taken to be 2%, which is then converted into a dollar amount of subsidy per woodlot. 

Earlier on Tasmanian Times:
Dr Amos: Dated material of little relevance
Economic assessment of the Gunns Pulp mill
Da Vinci, Picasso and Tony Burke
Minister Burke, please explain
The flawed methodology of this report is not the template to follow
Analysis: the wood supply contract

Negotiations best way forward, says Our Common Ground

First published 09.08.10 5:38 am

This article sparked an intense debate between Dr Wells and FIAT Chairman Dr Julian Amos. Here are the links to those subsequent articles:
Beware of academics bearing arithmetic
Gifts and Arithmetic
Dr Amos, it’s just plain nonsense
Beware of academics bearing arithmetic (round 2)
Amos and Wells on forestry subsidies (Round 3)