THE SECRET is out. Recent work done by readers of Tasmanian Times and Andrew Bent (1) has blown the whistle on the reasons why the industrial forestry behemoth’s activities are creating so much division in Tasmania.

The choice of low profit commodity sales

Since the false promise that wood chipping would be confined to unused trash on the forest floor, Tasmanian logging groups have ramped up their activities to include whole trees for chipping to sell as low value commodities. Selling commodities is a low profit business, and so relies on high volumes at low prices for the original resource, as well as requiring low cost operations to be competitive.

The pulp/chip commodity business is fraught with risks as massive low wage countries that dwarf Tasmania, like Brazil and Russia, can offer these commodities in huge volumes and so influence commodity prices. Attempting to be globally competitive in this market from such a small island so far from global markets is no easy thing and would normally trigger a strategy of differentiation by moving to a low volume/high price & profit suite of products…unless you were too lazy and relied on constant government subsidies!

In Tasmania, the public has borne the low prices for trees, with its agent Forestry Tasmania expending most of its $55 million per year budget each year to help Gunns. Those monies are spent on developing roads and bridges, various research efforts, public relations and other activities that underpin the commodity market. The monopsony of Gunns dominates Forestry Tasmania’s priorities and most of Forestry Tasmania’s expenditures work directly to Gunns benefit.

A recent pulp log supply deal announced by Forestry Tasmania, provides forest timber to Gunns at around $15 per tonne compare with firewood at around $50 tonne. Even forecast values of around $35 tonne for credits given to lock up the carbon contained in trees offer superior returns. There has been considerable public disquiet about these low prices, with many believing special deals are being done to advantage Labor ‘mates’.

These low timber prices may well be justified to support the low value/low return commodity market for wood chips.

What needs to be questioned if it is to be supported by taxpayers, is whether this is the type of market best suited to Tasmania’s circumstances. This question is more easily answered when the total costs to taxpayers are added up.

Containing costs

A look at Tasmania’s logging operations reveals mammoth waste, with massive windrows of forest ‘waste’, which often include valuable timbers such as myrtle and celery top, being burned to create asthma inducing, carbon releasing smoke plumes that grey out Tasmania’s horizons. We see huge loads of valued timbers, including blackwood and sassafras, being run directly into the wood chipper, converting logs worth $1,000 into $100 worth of chips. The pulp mill plans to take 26 Gl of river water (worth $2.6 billion if purified and sold at 10c a litre) and convert it into a toxic waste stream that could pollute Bass Strait.

These are the impacts of choosing to operate in a commodity market.

The most important way in which the Tasmanian forest industry cuts its costs is to transfer them to the public, e.g. not charging loggers for road and bridge maintenance – a hefty price since log trucks do severe road damage.

Other cost relief includes tax subsidised plantation developments, subsidised access to water, free and unmeasured water for plantations, relief from planning laws and reporting regulations, allowing the industry to ‘self police’, (or as many would say ‘be entirely unaccountable to the public’) and providing frequent and substantial cash grants.

There appear many one time capital costs as well, from the federal government’s road and railway upgrades for the pulp mill, to Paul Lennon’s water and sewerage pipeline, which totals some $390 million already, but they are chicken feed compared to the repeated subsidies required over decades to keep the pulp mill operating profitably.

Over the years…

As the woodchip industry has grown over time, so has international competition. Each year the industry has approached different levels of government to ask for help in various forms. The industry has lobbied for itself extremely well and has managed to retain and build its levels of government support over time.

The net effect of the industry’s success has been an accumulating list of subsidies, costs relief, favours and exemptions that have helped maintain the industry in the low value/low return business.

Perhaps because of the way that industry support has grown over the years, and perhaps because of the multiple levels of government involved, the total costs to the communities of Tasmania and Australia are now so high that questions must be raised about whether Tasmania and Australia can continue to support the business.

Downstream value adding

Apart from turning chips into biofuels, there’s not a lot that you can do with them except make pulp for paper. The plan for a Tamar pulp mill is designed to do exactly that. It takes about 4 tonnes of chips to produce a tonne of pulp so 4 t of chips worth around $260 will be converted to a tonne of pulp worth around $800 currently.

This conversion will advantage the pulp mill operators, delivering a higher value product to them. The investment in a mill is for a long duration - Warwick Raverty tells us that a modern mill operates for about 100 years - so before that investment is made it’s important to make sure that we can afford to maintain the operation for that period of time.

The Premier’s idea (1) that a pulp mill is ‘manufacturing’ is entirely misleading (again…sigh), it is actually ‘resource processing’. Manufacturing creates huge numbers of additional opportunities for complementary manufacturers as in the vehicle industry. Resource processing adds value to the end product for the processor alone. This simple error also explains why reports in the likes of ‘Enterprise’ magazine of 21,000 jobs being created by the pulp mill are unsupportable.

NIMBY?

Unfortunately for the Premier (1), the objection of not wanting a toxic and smelly industry in peoples’ backyard is entirely valid when that industry can be located so that it isn’t in anybody’s backyard.

Although Tasmania is a small island, it has plenty of remote locations to place unpleasant, unhealthy or dangerous industries. The Premier’s dismissal of community concerns as coming from a ‘NIMBY crowd’ demonstrates a total lack of concern for the issues from the community’s perspective, and it is these issues that are now concerning people.

Of course communities are concerned about a completely inexperienced group like Gunns operating a ‘world scale’ pulp mill in their backyard, with all of its attendant hazards. The trashing of the due process designed to protect people is a major part of those concerns, as was the breaching of the promise of a mill that met all Guidelines (it failed 13 according the Miotti who helped write them).

The emerging issue

The environment for Tasmanians is one of collapsing services in health, aged care, child welfare and education. These collapses are described by Lara Giddings and Paul Lennon as being due to budget constraints. They demand that agencies work within budgets that are patently too small to service the needs of the people, thereby placing the public at risk.

It is these reported shortfalls, coupled with increasing demands from the logging industry, that have resulted in closer inspection of the budgets being consumed by the logging companies. While many of the expenses are either secret or unreported, TT can now confirm what Harry Quick alerted us all to a year ago (2).

He said “Corporate welfare in the form of taxpayer handouts (to the logging industry) is draining healthcare, education and other community services (while) industry leaders are swimming in hundreds of millions of dollars of public money.”

The extent of costs of logging to the public appears to be currently around $280 million each year - money that could have gone to hire doctors, nurses and teachers, buy much needed equipment and improve our schools. If a pulp mill is built, increased plantations, water use and road maintenance costs will push that figure up to around $350 million per year in today’s dollars, on average.

It is this staggering annual cost to maintain the pulpwood industry that is now a key point of focus and that begs the question about whether we’re getting value for our money. An industry that returns only $70 million a year in profit and only creates about 3,500 jobs, yet costs the public $280 million to operate, is totally unsustainable, particularly given current threats like climate change, fuel prices and global financial collapses.

$280 million is a very large cost at anytime, let alone each and every year. The idea of locking in that amount plus more for decades just to support a pulp mill is highly questionable.

From a financial perspective, the wood chip industry can be seen to be incredibly inefficient, converting $280+ million in resources into $70 million in profits. Worse, when looked at over 20 years, the new annual subsidy of $360 million per year results in over $7 billion dollars of public assets producing a return of $6.7 billion.

At the same time forestry’s activities deplete water catchments, reduce food producing land area, contaminate rivers with biocides, threaten the lifestyles and investments of tens of thousands of people, clear fell our carbon sinks, and threaten other industries like tourism and fishing.

How can the costs be worth the risks?

Is Rudd serious?

It’s very difficult to see how the federal government could continue to support a pulp mill given the total costs of subsidies. The only barrier to the federal government intervening appears to be that the complete facts are being concealed.

Which of us couldn’t take $280 million and convert it into 3,500 jobs and return $70 million in ‘profits’?

Tourism generates about $1 billion and creates around 28,000 jobs, which means that it creates one job for each $36,000 dollars (approx).

Forestry’s 3,500 jobs with $280+ million means that it takes $80,000 to create each job.

Converting tourism income to logging income means a loss of overall income, and an overall loss of jobs, both in quality and quantity.

Because the pulp mill will tend to ‘lock in’ these various subsidies, it is hardly surprising that communities are angry that they will face decades of declining services in heath, education and other critical areas.

This is now expressing itself as concern that the Lennon government is plundering the public purse to advantage its mates. Hence the growing calls for an inquiry about the entire relationship between the state government and logging industry.

Given the shocking nature of Harry Quick’s revelations in 2007, and the total lack of any government concern or response since then, we are all left to wonder how the Rudd government will follow up on these frightening numbers.

The cost to taxpayers in Tasmania

To be clear, $360 million a year in subsidies is equivalent to $720 per year for every man, woman and child in Tasmania. Distributed over 100,000 Tasmanian taxpayers, that requires each taxpayer to contribute $3,600 each year to benefit Gunns.

Paul Lennon promised we’d all be $870 a year better off, but it looks like the costs to us, just in subsidies, are going to be way more than that. Were we to add in the $billions under threat in agriculture, tourism, fishing, brand etc. the total losses far exceed any conceivable ‘benefit’ from a pulp mill. Why wouldn’t the government study these risks? Why are we being prevented from looking at the complete picture?

Given the clear financial perils ahead, it’s very hard to see how the federal government can commit to decades of corporate subsidies at the required level.

When putting up a ‘honey trap project’, the game plan is to get the government committed so that they pay further subsidies to avoid embarrassing disclosures about the project. The worse the project, the greater the subsidies - champers all round!

After his guarantee to represent ALL Australians, Kevin Rudd’s responses to this worrying situation will quickly reveal his government’s real priorities.

The question is whether these important messages are going to be presented to Mr. Rudd at all. So far, he’s been in a bubble with public servants sending written submissions about these issues to the inexperienced environment Minister, who does not answer any of the concerns.

The sooner Mr Rudd’s government recognises the risks, the sooner this situation will be clarified, and the sooner everyone can settle down and plan for their futures in the face of climate change, financial turmoil, drought and food & fuel cost increases.

At the very least, the potential risks indicate the need for full socio-economic study to identify all costs and risks, thereby arming the government with information that can allow them to mitigate those risks.

The easiest way forward is for the federal government to proscribe subsidies to the forestry industry and the pulp mill, after the current round of infrastructure costs. Of course, Gunns will need to know this limitation before they sign on any dotted lines.

Without a full understanding of the impacts, our governments are flying blind.


Mike Bolan
http://www.abetteraustralia.com
Mike is a complex systems consultant, change facilitator and executive and management coach.


1) Andrew Bent: http://tasmaniantimes.com/index.php?/weblog/article/mill-doing-the-sums/
(Andrew Bent’s figures result from estimates of the true costs of all of the various favours, subsidies and exemptions received by loggers in Tasmania. The government publishes no figures for these costs, nor is there any consolidated picture of what the industry costs Tasmania or Australia. With these constraints in mind, TT welcomes more accurate numbers and recommends that governments publish the whole costs of subsidies and cost relief provided to all industries in Tasmania, and in Australia.)
2) Matthew Denholm interviewing Paul Lennon for The Australian http://www.theaustralian.news.com.au/story/0,25197,23374656-28737,00.html
3) http://www.news.com.au/mercury/story/0, ... 21,00.html

 

 

 

Mike Bolan An examination of Your taxes at work - let’s add it up

Is Rudd serious? It’s very difficult to see how the federal government could continue to support a pulp mill given the total costs of subsidies. The only barrier to the federal government intervening appears to be that the complete facts are being concealed. Which of us couldn’t take $280 million and convert it into 3,500 jobs and return $70 million in ‘profits’?  Tourism generates about $1 billion and creates around 28,000 jobs, which means that it creates one job for each $36,000 dollars (approx).  Forestry’s 3,500 jobs with $280+ million means that it takes $80,000 to create each job.  Converting tourism income to logging income means a loss of overall income, and an overall loss of jobs, both in quality and quantity. Because the pulp mill will tend to ‘lock in’ these various subsidies, it is hardly surprising that communities are angry that they will face decades of declining services in heath, education and other critical areas.