05 March, 2014

Vic government timber business just chasing its tail

Mathew Dunckley
The Australian Financial Review, Wednesday 5 March 2014

Imagine a world where the state owns a school demolition business.  It roams the countryside knocking down perfectly fine public scvhools chosen by the state government.  This company then sells the rubble to merchants.

Not that anyone really wants to buy it, so the school-dozing company barely breaks even despite government subsidies.  The obscene arrangement is made on the basis that several hundred school rubble jobs are at stake.  This patently nuts.  It is also the world in which we live right now.

In Victoria, state-owned "business" VicForests demolishes state-owned native forests and sells the logs to a handful of mills, who struggle to profit from flogging the resulting product.  This is done almost solely to preserve native timber jobs.  It is too generous to even call it a make-work scheme.  At least when such schemes were used after World War 1 and in the Great Depression, Victoria created assets such as the Great Ocean Road.  This system consumes a state asset.

The supposed social contract was neatly described in a review of VicForests' first five years of operation by consulting agency URS in 2010.  It says dividends paid to the state should  "in theory represent the resource rent extracted from the forests wood products (minus the costs incurred in the management of the process).  As VicForests does not have to carry the productive asset for the whole of its lifecycle, the rent should not only cover these costs but also cover any forgone surplus, from society's point of view, in not allocating the forest to other, non-consumptive, uses."

Too right.  But unfortunately the dividends are next to non-existent. VicForests has paid total dividends of $5 million since its inception in 2004.  If it coughs up the $250,000 it has proposed as a dividend this year, it will be its first cheque since 2007.  Imagine the Treasurer's delight when it arrives.

The reason for the lack of dividends is VicForests has made $13.5 million in profits.  Total.  That's for a business that, since 2007, turned over more than $100 million a year.  The bottom line profit last year was $802,000 on revenue of $106 million a year.  The previous year $119 million came in the door generating a $96,000 loss.

This is despite state government gifted advantages - not least feedstock - that is as good as free.  Yes, the trees VicForests cuts down are provided at the grand cost of having to care for their replacements for seven years as part of a "make good".  That compares to the 83 years regeneration time frame for mountain ash and 113 years for mixed forests.  VicForests also gets access to cheap government-backed debt (extended to even cover cash flow issues), tax breaks and occasional grants.  If it were a private business and asking for this level of assistance, what would be the answer in this new entitlement-less age?

If it were a private business and asking for this level of assistance, what would be the answer in this new entitlement-less age?

The number of jobs protected through all this financial running on the spot is hotly contested.  VicForests employs 114 staff.  A further 400 or so are employed in harvest and haulage.  Then there are those also employed in 30 or so mills around the state with VicForests contracts, which depend to varying degrees on native timber and toss in some limited manufacturing.

This, the state's Auditor-General reported, amounted to "considerable" benefits for regional communities.  VicForests also has challenges not its own making.  The high dollar has hurt, as has competition from plantations and overseas as well as falling demand.  The market is so bad that last year 250,000 cubic metres of residual wood, 16 percent of the total harvest, that would once have been carted off for pulp, was left on the forest floor and burnt.  Those in the know report heavy government interference preventing VicForests from addressing issues.  An example is the continued logging of highly marginal stretches of far eastern Victoria, which is political no-go.

VicForests is also forbidden from exporting unprocessed native logs and cannot operate in the plantation forest space where other state forestry companies have profitably focused their efforts.

Ardent supporters of VicForests suggest it will struggle to survive in the long term.  There are plenty in Victorian politics who have also formed the same view.

There are rumblings in the major parties that the time has come to reassess this arrangement.  VicForests itself is looking for a parachute.  It has flagged marketing forests as carbon offsets.  You see, even VicForests thinks it can make more money not cutting down the trees.

Mathew is our Melbourne bureau chief, covering Victoria politics and state issues.

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