The inquiry's terms of reference required the committee to consider the
impact of the decision by the South Australian Government to forward-sell that
state's $2.8 billion timber assets on its economy, timber industry and on
jobs, and any other broader impacts, with particular reference to:
the likelihood of regional job losses;
the flow-on effects to communities in timber-reliant regions;
the potential for the private buyer not to consider local
the potential for reduced value-adding locally and increased
any other related matters.
This chapter discusses the main issues raised in relation to each of the
terms of reference.
The likelihood of regional job losses and flow-on effects to communities in
Terms of reference (a) and (b) required the committee to consider the
likelihood of regional job losses and flow-on effects to communities in
The submission of the Construction, Forestry, Mining and Energy Union (CFMEU)
summarised the general concerns of many submitters and witnesses:
...the forward sale could decimate regional communities
throughout South Australia if there is an unrestrained ability of the
purchasing organisation to sell saw logs and fiber overseas, potentially
forcing local mill closures and causing massive job losses.
The committee heard from a number of local communities outlining similar
concerns. The City of Mount Gambier (CMG) and Wattle Range Council (WRC) were
'extremely concerned about [the]...region's economic and social future should a
The CMG and WRC submissions stated:
The forward sale of our heritage and our future poses a
serious threat not only to the viability of South East timber mills and jobs
right across our economy; it also undermines community confidence and any
future industry development into our region.
Regional job losses
The committee heard that there would be significant potential for
sustained job losses if the proposed forward sale were to proceed. In terms of
total numbers, the National Association of Forest Industries (NAFI) submitted
that the South Australian forest and forest products industry produced $2.6
billion in goods and services and employed 13 000 people in 2006-07.
The CMG and WRC submissions provided the following snapshot of the
extent to which employment in the south-east region was dependent on forestry
and the associated forest products industry:
Forestry and the associated timber industry in the broader
Mount Gambier region is estimated to directly contribute between 18‐20 per cent of gross
regional product (estimated at $2.8 billion for 2009-10). At an activity level,
forestry plantation supports approximately 600 direct jobs, with the actual
value added processing of timber from those plantations by 21 milling and
manufacturing facilities and numerous contractors adding approximately another
3000 jobs. The majority of wood product processing employment is associated
with resources supplied from softwood plantations—including those earmarked for
sale by the SA Government. In 2009-10, workers in this industry earned around
$240 million, representing approximately 18 per cent of income paid in the
South East of South Australia region.
In terms of the employment multiplier effect of the forestry and forest
products industries, there was significant scope for broader impacts on
employment and economic activity through the proposed forward sale:
There is also a ripple effect driven by the purchase of goods
and services from local industries and commercial providers to support timber
industry activities in South East region. These activities support another
3,500 jobs generating approximately 20 per cent of total employment in the
South East region, 2009/10. We also need to consider a decline in professional
services, tradespeople and educational providers; we will not have the
population to support them, therefore the pool of spending will decrease,
leading to business closures and the migration of skilled residents from our
CMG observed that the proposed forward sale also carried the possibility
of job losses at ForestrySA:
In addition to the jobs lost within mills, [ForestrySA's]
current 190+ employees are also in limbo. The management role of [ForestrySA]
would possibly change to that of potentially providing contracted services to
the new purchaser, and the likely outcome of that is that [ForestrySA] jobs
will also be lost.
A number of submitters and witnesses suggested that there would be a
strong likelihood of job losses if the proposed forward sale were to proceed.
CMG and WRC noted that the South Australian Government had 'admitted that it is
impossible to place conditions on a sale to protect jobs and industry, and
pointed to Victoria as an example of poor outcomes for local communities':
In Victoria, where similar actions were taken in the softwood
industry, we have seen many small sawmills close and an increase in the export
of whole logs to China, India and other developing countries with devastating
affects in regional areas.
As a specific example of the potential for job losses, Gunns noted that,
if the proposed forward sale were to proceed without sufficient conditions
protecting the viability of the local industry, the company would be likely to
relocate to a region that could better support 'the investment of a modern high
Gunns observed that its withdrawal would 'have a devastating impact [on]...local
communities'. This would result in:
...significant job losses in the value add solid timber processing
business in the Green Triangle, which in turn will have a devastating impact
[on]...the social fabric of the Green Triangle region.
The Australian Manufacturing Workers Union (AMWU) observed that the
potential unemployment effects from the proposed forward sale could exacerbate
and entrench more recent job losses:
This sale is being proposed against a back drop where the
region has already recently been hit by the closure of two of the oldest tissue
machines at Kimberley Clark Australia's
Millicent mill leading to a loss of approximately 170 permanent jobs. On
top of this the Tantanoola Pulp Mill has also been placed on the market and
will close towards the end of the year if a buyer cannot be found enabling the
Mill to continue its operations which will lead to a further 65 job losses.
The forward sale adds to potentially further restrict...our
members' ability to
find alternative jobs if the successful buyer fails to utilise the current
value adding manufacturing processes that are in place today.
Impacts on forestry and forest
The committee heard concerns that, should the proposed forward sale go
ahead, there would be significant flow-on effects to the local forestry and
forest products industries as well as more broadly.
NAFI submitted that, in contrast to current arrangements, the proposed
forward sale did not include any guarantee of local supply:
The proposal does not provide any assurances to local
industry of long term plantation timber supply for local processing and/or
export. Part of ForestrySA's charter is to encourage the growth of the local
forest industry to meet international standards. As such, it deals with local
mills and provides for variable harvest rights up to 10 years. Without such
guaranteed security of supply there is a greater risk to invest, which will
inhibit the ability of local saw mills to invest in new technology and adapt to
The CMG submission described significant uncertainty surrounding future
supply contracts for local processors since the announcement of the proposed
forward sale. It noted that, if future supply were not ensured, South
Australian sawmills would not be competitive in the future:
...the longest supply agreements currently in place with local
processors will expire within 10‐15
years. With the proposed sale ranging between 30 and 114 years, this creates a
large amount of uncertainty...Geographically, the industry is at a disadvantage
in Australia as the main markets for the processed timber are on the eastern
seaboard and it has only been competitive due to the high quality of the
resource grown in SA. If prices for local mills to purchase log are increased
and the size of the logs decrease due to shortened rotations, SA sawmills will
not be able to compete with other regions in Australia or foreign imports.
Mr Ian McDonnell, a local sawmill owner, shared these concerns over
From a business point of view it would be almost impossible
to make the investment necessary to remain competitive in today's market unless
longer term resource security can be guaranteed.
Sawmilling is a very capital intensive business and a medium
sized business like ours needs to invest large amounts of capital every 5‐10 years to remain
viable, to do this we need the security of resource to be able to do this.
A reasonable supply agreement needs to be in the order of 15
years minimum. This is something private owners have not wanted to commit to in
other areas and we have seen sales agreements for as short as 12 months in New
Zealand and 4‐5
years here in Australia.
Mr McDonnell observed that privately owned plantations tended to prefer
short supply agreements in order to 'maximise returns for that forest owner
without any regard for the regional economies where the timber is grown'.
A number of submitters and witnesses expressed concerns about impacts of
the proposed forward sale beyond the forestry and forest products industries.
In general terms, Gunns noted that:
...the decision by the State Government to forward sell its
rotations lacks any comprehensive review of the decision both from the local
timber industry, social and environmental impact in the Green Triangle region.
Similarly, the Hardware Association of South Australia (HASA) and the
Timber and Building Materials Association (TABMA) submitted that:
The viability and profitability of many South Australian
businesses is under threat as a result of the planned decision of the South
Australian State Government to sell off forward rotations of timber products
harvested from the softwood plantations managed by ForestrySA. This will have
an enormous impact on the economy of South Australian, the South Australian
Hardware industry and the South Eastern regions or the 'Green Triangle'.
The HASA and TABMA submissions detailed significant potential threats to
employment in the hardware and building industries and the local housing market
if the forward sale were to go ahead:
The timber that originates from the South East not only
provides local jobs it also provides thousands of jobs in the Hardware and
Building Industries in South Australia. The timber our members sell would very
likely be for the houses we build across the state. The immediate threat that
is foreseen would be:
- a shortage
quality timber being available to the industry and the consumer;
- loss of
self sufficiency in the supply of timber; and
All these would result in increased costs that will flow
through to the everyday consumer, crippling the affordability of housing even
further in a market that is already considered to be flat.
CMG and WRC identified a number of negative social effects that would be
likely to flow from substantial job losses in the region:
It is well documented that unemployment substantially impacts
on mental and physical health, general well‐being
and family relationships. If the forestry sale goes ahead, greater demand will
be placed on these services due to family breakdown and potential increases in
domestic violence, mental health issues, young people leaving due to a lack of
job opportunities, an ageing population base further isolated because young
families move to where the jobs and facilities are, increased reliance on
community or charitable services, and a decreased skill and education base.
Current impacts of the proposed
A number of submitters and witnesses observed that the uncertainty
surrounding the proposed forward sale had already impacted on the confidence of
local communities. This had created an uncertain investment environment, which
was 'depressing housing prices and undermining investments by all businesses
operating in the local community'.
The CMG and WRC submissions observed:
Increasing uncertainty within the community caused by the
proposed forward sale of the ForestrySA logs is already having an adverse
impact on the South East business community particularly in the lending, retail
and service sectors. The negative flow‐on
effects are also being demonstrated in the real estate sector in terms of
regional house prices and saleability and a decline in the uptake of commercial
The District Council of Grant (DCG) submission supported this view,
stating that 'there is no doubt that since the announcement of the proposed
sale there has been a realised impact on real estate prices, industry expansion
and employment generation'.
The DCG submission went on to say:
Further, it is considered that lack of confidence is causing
contracts for building work to be postponed and other businesses are putting
plans on hold to expand. Several of the local engineering companies have
encouraged workers to take long service leave and paid annual leave to reduce
their cash flow.
The potential for the private buyer not to consider local impacts
Commercial imperatives overriding
local community and economic interests
CMG and WRC expressed concern that a purchaser in relation to the
proposed forward sale would be primarily motivated by commercial interests, as
opposed to local interests, and would 'find their commercial interests better
served by exporting logs to non‐regional
markets'. The submissions explained:
Unlike the current...[Forestry] SA Charter, a new owner would
not be constrained by regional development outcomes or bound by expectations to
'encourage and facilitate regionally based economic activity based on forestry
and other industries'.
HASA and TABMA also stressed that the current ownership of South
Australia's timber plantations by ForestrySA on behalf of the State Government
effectively meant that the timber plantations were publically owned and
operated for the benefit of South Australians.
HASA and TABMA were also concerned that an interstate or foreign buyer would
effectively disregard the interests of the South Australian community in
seeking to maximise return from the timber assets:
If the demand for timber were to increase in interstate or
overseas the new owner would not have the same loyalty to the South Australian
market as ForestrySA.
There would be a strong likelihood that timber normally
destined for the South Australian market will be sold interstate or overseas
leaving the market in South Australia short of timber.
On this issue, Mr McDonnell commented that a purchaser would be likely
to pursue commercial imperatives at the expense of social or local economic
The ForestrySA plantations are regarded as some of the best
quality plantations in Australia and New Zealand for producing structural
quality timber...This can be [affected]...very quickly by reducing the rotation age
and or changing the [silvicultural] practices that have been such an important
part of making the forests what they are today.
A private company in control of this could and probably would
be tempted to do this to get a quicker turnaround of rotations and selling the
log to export markets.
Mayor Peter Gandolfi, representing WRC, supported these comments:
New owners are going to look for the highest bidder. I do not
think they will be that interested in whether they and our local mills are
supplying the domestic market with structural timber and so on. They would be
looking for the biggest buck, and their demand in the future is going to come
from China and India. I imagine that they will be bidding the highest for the
The DCG submitted that similar privatisations of forestry assets in
Australia suggested that private purchasers would not consider the requirements
of local sawmills:
Information obtained indicates that the purchaser of the
Victorian Forest Assets has not considered local impacts. Indeed, it is understood
that local mills in and around Mount Gambier have largely been unable to obtain
log resource since this purchase occurred.
Mr Robert Eastment, who appeared in a private capacity, offered a number
of insights into the economic factors and market dynamics influencing the
likely commercial imperatives of a prospective buyer.
Mr Eastment noted that economies of scale and regulatory factors affecting
price are critical drivers of trade in the forestry industry, and observed that
timber processing community in the Green Triangle was comprised of relatively
small scale operators which enjoyed access to 'cheap wood' sourced from
ForestrySA. If the forward harvesting rights were sold, the purchaser would not
necessarily be willing to sell locally at a price that 'would suit the
sawmillers' and be competitive with what could be earned by 'putting it on a
ship and sending it [to large timber processing facilities overseas]'.
To illustrate such market dynamics, Mr Eastment noted that Australia
currently imports '$1 million worth of sawn [soft] wood each day', which was
increasingly coming from a European producer, Stora Enso. Mr Eastment observed:
The reason that Stora Enso is able to send it here so cheaply
is that the primary product its sawmills are producing in Europe is woodchips,
because Europeans have a subsidy for bioenergy and they have commitments to
meet certain renewable energy targets, so the logs are going into the Stora
Enso sawmills, and a by-product of the sawmills is sawn wood. Therefore, as
long as the Europeans are subsidising their energy, Australia will be flooded
with cheap wood. That is the reason why the guys here cannot sell it. It is
because we have got this influx of cheap wood coming in. That is the
straightforward dynamics of it. Yes, we have continued demand for softwood
here. The only way we can stop the imports coming in is by reducing our
processing costs—taking costs out of our production to be able to meet the
import costs, to get import parity.
In terms of competing with large overseas processors to ensure that
timber resources were processed in the region, Mr Eastment observed that there
would need to be a significant restructuring of the local industry:
There is no doubt that, if we were to keep the timber here
and process it, we would have to be looking at a million-tonne-a-year mill.
Otherwise, imports are gradually going to take it away. You cannot have you
cake and eat it. If you are going to keep your wood here, you have got to be
able to process it sufficiently efficiently to compete. To do that, you are
going to have to reduce your labour costs. But the labour that you keep will
have to be of a much higher calibre. There will be far more professionals
involved—technical people. A lot of it will be computer driven, made to order.
Mills will be running in darkness because all the people will be sitting at
consoles operating it—that type of stuff.
However, Mr Eastment observed that, while there would be 'some damage to
the local industry' on account of such market dynamics, it would be in a
purchaser's interests to ensure that the local timber processing industry was
sufficiently preserved. He explained:
I assume that...[the purchaser]...would be...an international
investor, and today they would be wanting to put it on a boat, because the
demand in China is high. But you really would not want to lose your fallback
position or plan B, which could well be selling it into the local market. So
you would certainly want to keep enough of the local industry alive to ensure
that, if your export markets collapsed or the dollar moved significantly
against you...[that] you could have that domestic pool...[to] sell it into. So you
would want to hedge your bets both ways. There could well be some collateral
damage in the local domestic processing, because you may not have enough to
keep everybody alive.
In addition to such economic factors, Mr Eastment also identified
certain market dynamics as being likely to have a large influence on the
selling strategies of a purchaser of South Australia's timber assets. He
explained that whole log export market is a spot market which is subject to
price fluctuations arising from ad hoc demand factors (such as the recent
earthquake in Japan driving up demand) and foreign exchange rates. Mr Eastment
At the minute export markets...[are] pretty high because there
are a number of drivers out there and it is reasonably competitive...There are
other times when that market can really collapse. It is not the timber business
or the owners who have much control over the pricing fluctuation on those
markets; it is the foreign exchange. If our dollar stays high, technically the
logs going offshore should be at a lower price but they are not because demand
is strong. If our dollar fell back to 60c, why would you want to sell anything
to a local sawmill? Put the log on a boat and get rid of it. You make more
money. We are an open economy. If the dollar goes up to a $1.50 and people
simply cannot afford to do that then they will be more inclined to put it on a
Discontinuation of beneficial
In addition to the concerns over a purchaser's consideration of local
impacts, , CMG and WRC described a number of non-commercial activities,
currently fulfilled by ForestrySA, that a purchaser in the proposed forward
sale would not be bound to consider in the absence of specific conditions:
Under the current ownership and operating framework, FSA, in
addition to fulfilling commercial and sustainable regional development
requirements, is also responsible for resourcing regional forest protection
programs (eg fire and forest health), environmental sustainability (example
conservation of 25,000 ha of native forest) and community, recreational and
sponsorship activities. With an unconstrained sale of FSA's softwood estate,
the direct resourcing of these non‐commercial
activities, estimated to currently cost approximately $6.5m/yr, would have to
come from elsewhere.
With particular reference to fire fighting capabilities, Mayor Gandolfi
[The SA] Treasurer...[has] said that the new owners of the
plantations would be responsible for the management of the forests, and added
that the volunteer Country Fire Service [CFS] would take responsibility for
fire prevention and fighting. This raises very serious questions about the
region's future firefighting capabilities. Currently, our CFS volunteers work
hand-in-hand with ForestrySA and have a cooperative relationship in fire
prevention and suppression. To shift the responsibility of firefighting
entirely onto our CFS volunteers would be irresponsible and put lives and
property at risk.
Mayor Richard Sage, representing DCG, also commented on the potential
loss of ForestrySA's current contribution to fire prevention:
ForestrySA’s extensive fire prevention measures—fire breaks,
roadside slashing, automatic dispatch of fire attack suppression forces—ensures
a minimum of two ForestrySA appliances are on the scene within 15 minutes on
any fire index day of 35-plus. We have seven ForestrySA Fire King appliances, valued
at over $1 million each, in the region. We are also concerned about the
existing contract of aircraft for water bombing surveillance during the fire
season. Who is going to pay for that in the future?
The CMG, DCG and WRC submissions also noted the cultural and heritage
contributions, community engagement activities and environmental achievements
of ForestrySA; as well as the extent of its fire prevention and fighting
activities. The submissions observed that it was unlikely that these programs
would continue and be funded under the proposed forward sale. This was
particularly so in light of the South Australian Government's admission that it
would not place conditions on the proposed forward sale to protect jobs and
The potential for reduced value-adding locally and increased off-shoring
HASA highlighted a number of findings from a community impact statement
indicating the potential for substantially reduced access of local value-adding
industry to timber from the South Australian Government plantations in the
event of a forward sale proceeding. The statement noted that:
there is the potential by 2020-21 for around 40 per cent of logs
from ForestrySA's softwood estate to be exported [thereby] reducing wood based
manufacturing jobs in the south-east area; and
by 2027-28 the purchaser would have the option to sell 100 per
cent of logs outside the South East Region.
Mr Michael Bleby, who provided a submission in a private capacity,
considered that the proposed forward sale 'could be very detrimental' to the
region if it did not ensure the continued support of the integrated supply
arrangements that existed in the region for the mix of value adding industries.
Mr Bleby's submission explained:
The [south-east region] has companies that specialise in
milling high quality sawlogs and others who have equipment and access to
markets suited to lower quality logs. There are particle board plants, wood
chip export outlets, and markets for by-products such as wood shavings, boiler
fuel, and even bark for compost and landscape supplies. Of special importance
(particularly for the Millicent region) is the existing KCA pulp mill. This,
along with the roundwood preservation markets, is absolutely critical to the
economics of thinning and the creation of the higher value forest products,
later in rotations. One would hope that any forward sale provides for local
pulpwood supplies into the future – but who knows?
NAFI also commented on the importance of considering the sale in the
context of the vertical integration of the South Australian softwood industry.
The NAFI submission commented:
Consideration does not appear to have been given to the
regional significance of the forest industry and its vertical integration. The
Government's proposal appears to treat the forest resource as separate from the
downstream processing and export businesses, which are reliant upon a reliable
supply of timber product.
Mr Bleby noted that a prospective buyer would presumably want to retain
control over who it might sell its wood to. Any conditions to require a buyer
to sell to local industries could reduce the sale price and bring into question
the value for money represented by the forward sale.
As a specific example, HASA and TABMA raised particular concerns that
the forward sale would impact on the availability of pine bark used for the
production of potting mixes and as landscape materials. The HASA and TABMA
The majority of potting mixes within South Australia use pine
bark as the base ingredient. Much work has been done by industry over many
years to prepare high quality potting mixes based on pine bark. Manufacturers
have invested in the technology to produce potting mixes that suit the local
If harvested logs are sent off overseas untreated...[that, is,
with] the bark not removed, this will dramatically reduce the availability of
pine bark for use in the production of potting mixes and as landscape
Any other related matters
Adequacy of the justification for the proposed forward sale
A number of submitters and witnesses provided comment on the perceived
adequacy of the stated motivation or justification for the proposed forward
sale. The South Australian Treasurer, provided the following information concerning
the reasons underpinning the proposed forward sale:
In the wake of the unfolding Global Financial Crisis, the
South Australia Government announced in the 2008-09 Mid-Year Budget Review,
several measures aimed at realising some of the value of the State's assets,
with the intention of reducing net debt. Reducing the State's net debt will
improve the long term sustainability of our finances, contribute to the
retention of our triple A credit rating and reduce interest borrowings, thereby
helping our operating balance. One of these measures was looking at options to
sell the harvesting rights of ForestrySA...
Mr Jerry Leech, who provided evidence to the committee in a private
capacity, expressed concern about the stated rationale for the proposed forward
You have heard about the AAA credit rating, but if...[the South
Australian Government] have got the forests in their books at, say, $1.3
billion including the land then they are in essence mortgaging the forests at
$1.3 billion. So if you sell it for $500 million or $600 million, where are you
going to [find] the other $700 million of assets to support the credit rating,
even if you do use that $600 million to pay off the state debt? No-one has
effectively explained that to me, and that concerns me.
The Treasurer noted that the South Australian Government would consider
a range of relevant factors in deciding whether the proposed forward sale would
I note that the South Australian Government is the owner of
FSA and needs to consider, in the context of a tight fiscal position, whether a
forward sale of FSA timber rotations will deliver better value to the State
than proceeding with FSA operating on a business as usual basis. Other State
Governments have taken similar decisions, albeit with different models for
realising value, for example Victoria in 1998 and Queensland in 2010. Such a
decision will not be taken without considering a range of relevant issues,
consultation with affected parties and analysis of the regional impacts
(including the factors listed at (a) to (d) in [the inquiry's terms of
Gunns submitted that the apparent justification for the proposed forward
...indicates that the forward sale is not part of an overriding
broader strategic plan by the South Australian Government where all factors of
a decision of this magnitude are very carefully considered but rather a 'knee
jerk' reaction to a debt position that needs rectification [for the state] to
retain its AAA rating.
NAFI expressed similar reservations:
It would appear the proposed sale is not part of a genuine
reform agenda and is simply a revenue raising measure, with scant regard for
regional consequences and industry efficiencies and long term outcomes.
A common view was that a balancing of future annual returns against a
likely forward sale price did not indicate sufficient economic justification
for the sale to proceed. HASA and TABMA, for example, criticised the decision
as 'short sighted...with no long-term benefit to the state's economy'.
HASA and TABMA noted that a sale price would be set against the direct income
and multiplier effect which the industry currently generated. The current value
of timber assets to South Australia included, for example:
a return to the South Australian Government of $45 million in
2009-10 (a 93 per cent increase on 2008-09) and a return of 11.5 per cent on
funds invested (up 23 per cent on 2008-09);
$2.6 billion of goods and services produced by the forest and
forest products industry in 2006-07; and
13 000 people directly and indirectly employed in timber and wood
The AMWU commented:
The AMWU believes that it is not sound to sell an asset that
is providing nearly $1 million per week into the state government treasury to
provide an income stream in the short term whilst risking the long term
viability of employment opportunities in the south east region.
This view was supported by CMG and WRC, which submitted:
...the combination of consistent revenue streams from
ForestrySA to the South Australian Government and a commitment to regional
processing and jobs provides a clear basis of support for the continuation of
current management arrangements with ForestrySA.
CMG and WRC provided the following analysis:
The State Government has publicly admitted that the forward
sale of forestry plantations has been designed to cover lost revenue caused by
the global financial crisis. Currently, the SA Government receives dividends
and taxation payments from the assets managed by FSA. For 2009/2010 approximately
$44m was paid by [ForestrySA] in dividends and taxes. Based on an income stream
of $41m plus pa and allowing for a more aggressive marketing approach with less
social obligation, the new owners could recoup their investment money in as
little as a decade, which is certainly not a good outcome for all South
A number of submitters and witnesses felt that the South Australian
Government should consider improving the income and growth potential of the
forestry and forest products industry instead of contemplating a forward sale.
Mr Des Taylor, who provided a submission in a private capacity, commented:
The real way to get back South Australia's AAA Credit Rating
is not to sell off what we have but to advance and expand forestry because of
the demand from overseas for our timber supplies. In this way local timber
communities will not be destroyed and the government coffers will be added to
Similarly, Mr McDonnell stated:
I believe our state government needs to look at growing its
plantation estate and attracting more business and investment to our state
instead of the short term cash grab they appear to be focused on.
Mr Leech submitted:
Given the return on equity I have great difficulty
understanding why a state Government would want to sell their forestry asset
that is earning 11.5% and reduce state debt when with a AAA credit rating they
would be paying far, far less than 11.5% servicing their borrowings.
Mr Leech suggested that, given the return on equity for ForestrySA was
11.5 per cent in 2009-10, and that the forest industry was at least 'in
part counter cyclical to normal investment trends', superannuation funds could
invest funds in ForestrySA and provide improved growth prospects.
Gunns submitted that the South Australian Government should consider
alternative options to the proposed forward sale. The Gunns submission stated:
The State Government [should] consider alternative sale
options such as the sale of smaller parcels of standing timber to local
processors as an alternative to the current mill door price sale process
managed by ForestrySA. This will maximise efficiencies for both local
processors and ForestrySA, provide long term resource security to local
processors and have the added benefit of avoiding the creation of [a] monopoly
private forest owner in the region.
Adequacy of public consultation and information
The committee received a substantial amount of evidence commenting on
the adequacy of public consultation and information in relation to the proposed
forward sale. Gunns, for example, commented:
The decision to forward sell forestry rotations appeared to
be made by the South Australian Department of Treasury and Finance with little
or no consultation with any stakeholders.
Gunns noted that the lack of public consultation appeared, in the light
of comments made by the South Australian Minister for Forests, to be matched by
a lack of consultation within the South Australian Government, and that there
appeared to be little value placed on consulting with the local community'.
The Minister was reported to have said:
...this process has been run by the Bank of Scotland and by
Treasury and Finance. We didn't consult widely. My views weren't sought. I
don't think [the views of the Chief Executive Officer of ForestrySA were
sought]...in any depth.
The CFMEU commented:
The South Australian Government has taken a piecemeal,
precarious approach by not comprehensively and transparently sharing their
knowledge of the trade offs (costs and benefits) of the proposal with regional
NAFI commented that, while it supported the efforts of governments to
'open up publicly held assets and businesses to competition and market
efficiencies', it was important that appropriate consultation was undertaken:
...it is important that when government embarks on such a
program that it is part of a transparent reform agenda, that it is cognisant of
the need for appropriate and genuine consultation with the affected industries
and communities that are reliant on them, and that it produces a thorough
impact statement of the proposed reform.
Regional Impact Statement
The committee heard that, while no detailed cost-benefit analysis of the
proposed forward sale was provided at the time it was announced, the South
Australian Government has since commissioned a Regional Impact Statement (RIS).
The South Australian Treasurer advised:
As part of the decision to investigate the sale of the
forward harvest, the [South Australian] State Government has commissioned an
independent external economics consulting firm, ACIL Tasman, to develop a
Regional Impact Statement (RIS), to identify the potential social and economic
impacts on the South·East from selling the forward harvest.
ACIL Tasman has begun a comprehensive consultation process
with interested parties including local councils, timber industry
representatives, unions and chambers of commerce and it is expected that ACIL
Tasman will deliver its report by the end of this month [March 2011]. The
report will include:
- issues and
views expressed through the consultation;
- costs and
benefits to the region and community, particularly looking at employment;
- the impact of
the proposal on social inclusion and economic development; and
- strategies for
managing identified risks and impacts, including those on downstream industries
and mills in the area.
The committee heard that there are many considerations in relation to
the broader potential impacts of the proposed forward sale. NAFI commented:
The State's plantation forests provide multiple benefits,
including natural resource management outcomes (e.g. salinity and erosion
control) and highly significant socioeconomic, regional development and
NAFI identified a number of social, economic and environmental factors
that should be included in a detailed cost-benefit analysis of a proposal to
privatise public assets. These included:
employment generation, training opportunities, labour force
social stability and community cohesion;
service quality and choice;
cost reduction and other productivity effects;
pricing policies and cross subsidisation;
new investment and disinvestment;
flow-on effects to local businesses.
The committee heard that, based on interactions with ACIL Tasman to
date, there were concerns that the scope of the RIS would be too restricted in
terms of the timeframes studied as well as consideration of the broader
economic implications of the proposed forward sale.
Issues relating to potential conditions attaching to proposed forward sale
A number of submitters and witnesses observed that there were
significant areas of risk relating to the sale that could result in the seller
or a prospective buyer insisting on attaching particular conditions to the
NAFI, for example, identified uncertainty around water policy as an
apparent risk that would be likely to have a 'detrimental effect on the
viability of the proposed sale for private investors' and which might therefore
affect the sale price of the timber assets.
The NAFI submission warned that:
...without a transparent and comprehensive policy framework for
future investment in the industry (e.g. dealing with current water policy and sovereign
risk issues), there is the potential for perverse policy outcomes in terms of
long term innovation, downstream processing and related employment and
More generally, Mr Leech considered that risk was a critical issue in
the context of the proposed forward sale:
To me the critical issue is risk; how is risk to be
identified and measured, who is to carry the risk, and how is it to be
accounted for in the states accounts.
The reply by [the South Australian Treasurer]...to the three Green
Triangle Mayors did not address this issue at all. It would seem almost as
though The Treasurer does not understand the term risk, nor understand how
important risk is in forest management, nor how it should be accounted for.
Risk includes the effect of fire on the future ability to maintain wood supply,
the possible effects of insect or pathogenic attacks (such as the Sirex
noctilio epidemic), and errors in predicting forward yields. There are many
other uncertainties given the long time frame involved in forest management
Lack of information regarding
potential conditions of sale
A number of submitters and witnesses commented on the lack of
information regarding conditions, if any, which may be attached to the proposed
The CMG and WRC submissions noted that, although the South Australian
Government had stated that the plantation estate would remain under the
management of ForestrySA, it had also 'admitted that it is impossible to place
conditions on a sale to protect jobs and industry'.
Gunns made a number of recommendations regarding conditions that should
be imposed on any forward sale, generally aimed at preserving the quality and
viability of South Australia's timber plantations, as well as ensuring that a
purchaser is required to contribute to the maintenance and growth of the local
forestry industry. Such recommendations included requiring a purchaser to:
maintain the current clear-fell age or rotation of plantations;
maintain the existing size of the radiata pine plantation;
continue to invest in growing the radiata pine plantation estate;
contribute to the growth of the local forestry industry; and
enter into long-term supply agreements with stakeholders in the
local forestry industry.
Gunns submitted that without such conditions as outlined above, it would
not have the confidence 'to invest in its processing facilities in the Green
Effect of conditions on sale price
A number of submitters and witnesses also pointed out that the
imposition of sale conditions could affect the forward sale price, bringing
into question whether the sale would represent value for money over the long
term. Mr Bleby, for example, submitted:
Getting a good price for harvesting rights depends very much
on where the associated risks might lie. If the Government wants to carry lots
of the risk itself, or not spell out lots of conditions in any contract with a
buyer, then they might get a better price for the sale. If on the other hand,
it wants the buyer to take on some of the risk, then the buyer will offer a
reduced price accordingly.
Mayor Perryman observed:
If conditions like that are applied, it will reduce the value
of the asset and the sale price. If the South Australian government wants the
best price it can get from the sale of the asset, it would be looking to sell
it with minimal conditions. That is something that gives us concerns.
A number of submitters and witnesses provided evidence which suggested
that a lack of appropriate conditions regarding the maintenance of plantations
could negatively impact on the quality of the asset on its return to public
ownership. The CFMEU noted that there were potential risks associated with
private sector management of plantations:
A major risk to maintenance of softwood processing jobs in
Australia is the low rate of replanting of harvested softwood plantations and
their expansion. The private sector does not have a good track record of
establishing and/or expanding softwood plantations.
Similarly, Mr Eastment observed:
...if the commercial company that is buying [the resource]...have
to produce an eight per cent return instead of a four per cent return...they will
therefore cut costs and some of the costs will be the work that is required to
produce better timber resources for future rotations. You can argue that that
has possibly happened in Victoria, Queensland and in my home state of Tasmania.
Mr Eastment advised that a potential solution to this problem would be
to separate the right to take the timber from the role of developing the timber
resources. However, such an arrangement would necessarily involve a lower sale
price for the right to harvest the timber:
The problem of separating the taking of the wood from the
future management of the forests is that people do not want to pay as much for
the wood, because if they have to pay the government money to manage the forest
it lessens the return for them.
Mr Eastment noted in the context of such sales that he had 'not seen a
resource that has been sold that has improved in quality'.
CMG and WRC also commented on the potential for a private owner to fail
to adequately maintain and enhance the plantations subject to the proposed
...the private sector does not have a positive record of re‐establishing and/or
softwood plantations, yet it is only by increasing softwood resources available
for processing that investment and jobs will be maintained in a price
competitive and trade exposed industry such as wood processing. Wood processing
industries require threshold levels (volumes) of wood input to be financially
viable. It is probable that [production strategies of a purchaser]...will not
only reduce the number of processing industries but also change and rationalise
the mixture of small and medium size processing facilities.
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