Chapter three - Impediments to Achievement of 2020 Vision
Targets, Economic and Regulatory Issues
Introduction
3.1
The Committee's terms of reference require it to
establish if "there are impediments to the achievement of the aims of Plantations for Australia: The 2020 Vision
strategy".[76] In addition
it is asked to comment on whether elements of the strategy require alteration "in
light of any impediments identified".[77]
3.2
In this Chapter the Committee examines the
evidence provided during the inquiry to identify whether there are impediments to
the Vision and, if so, what they are. The question of whether the strategy
needs to be altered is also addressed.
3.3
In Chapter 2 the Committee outlined the
'impediments' to the development of plantation forests identified in the 1997 2020 Vision. These impediments or
challenges included land availability and commercial incentives (see paragraph 2.16).
The strategies outlined in the 1997 2020
Vision were aimed at addressing these challenges. The revised 2020 Vision accepted that impediments to
the development of plantation forest remain but focuses action on the
industry's capacity "to maximise economic, environmental and social
opportunities".[78] In so doing
it is not clear whether the impediments identified in 1997 continue to operate
in the forest plantation industry or whether these have been replaced by a new
set of impediments.
3.4
The Committee has therefore made its assessment
as to what impediments continue to operate in the forest plantation industry.
To undertake the task before it the Committee had to define not only what
should be considered as an impediment but also clearly focus on understanding
the aims of the 2020 Vision strategy.
Impediments - a Definition
3.5
In definitional terms, the Committee considers
the word 'impediment' to mean something - an action or prevailing situation -
that does or has a potential to impede an activity or course of conduct either
by way of hindrance or obstruction. In this context, the term can be interpreted
in two different senses.
3.6
The first sense is as an obstacle which acts to prevent achievement of a pre-determined or a
planned goal. In this sense factors such as regulatory and planning
restrictions, which are broadly described in the 2020 Vision as 'impediments' can be viewed as obstacles if they have the effect of causing stated 2020 Vision targets and aims to be
frustrated or prevented.
3.7
The second sense in which the term impediment
can be used is as an externally imposed requirement intended to moderate, allow
assessment, delay or even prevent a proposed course of action. In this sense
'impediment' means a restraint or a restriction.
3.8
The Committee notes
that 'impediment' was used in the 1997 2020
Vision the first sense. That is it applies to an obstacle or challenge
which is something that must be overcome or set aside if the aims of the Vision
are to be achieved.
3.9
However, in some submissions and evidence the
word refers to the second usage. That is, a range of restrictions and
mechanisms aimed at achieving a balance in land planning, environmental,
resources and land use. This approach includes the view, often put to the Committee
by regional and rural communities, as to what 'impediments' should ideally govern,
limit or control future plantation development.
Aims of the 2020
Vision Strategy
3.10
The overarching aspect of the revised 2020 Vision is the statement of broad
goals. These have three parts: 'Vision', 'Target' and 'Strategy'.
3.11
The following aims are outlined by the 'Vision':
The sustainable expansion of the
plantation forest estate will be achieved with significant private sector
investment. By 2020 the expanded plantation forest estate will provide Australia's
plantation-based processing industries with the capacity to:
- operate in the global marketplace;
- be internationally competitive; and,
- be commercially oriented - market driven and
market-focussed in all their operations.
Returning trees to the landscape as a
profitable crop can also significantly benefit rural and regional communities
and the environment.[79]
3.12
A major focus of the 1997 2020 Vision was the
'Target' - to "treble the acreage goal". In the revised 2020 Vision, the 'Target' is:
The Vision has a notional target of
trebling the effective area of Australia's
plantations between 1997 and 2020. This does not necessarily mean each region must
treble its plantation area. Different regions will make different contributions
to achieving the target, in line with the availability of suitable land and
prevailing market opportunities.
It is noted that plantation area is
only one measure of the success of the Plantations 2020 Vision. The quality,
product mix, location and effective management of the plantation resource will
also be vital to the delivery of maximum social, economic and environmental
benefits to Australia.[80]
3.13
The goal statement of 'Strategy' strives to
achieve an investment environment that will result in achievement of the
acreage target:
The vision Partners will collaborate
in facilitating an environment that will attract the private investment
necessary to develop a significant plantation resource ... [81]
3.14
The general direction of the goal is that the
'Vision' and the 'Strategy' will be directed to support achievement of the
'Target'.
3.15
Underpinning these objectives are the Strategic
Elements which, with the exception of Strategic Element 5 (Monitoring and
Review), outline actions to be taken to achieve the goals. The Strategic Elements
also allocate responsibility for carrying out the actions and a summary of
'Expected Outcomes' for each.
3.16
The first three Strategic Elements relate to
aspects of policy and regulatory regimes, including investment growth. While
the three separate Elements are clearly defined there is also some overlap
between the Actions allocated to each Strategic Element. Strategic Element 2 -
the regulatory framework - in Action 4 for example, proposes the development of
structures to encourage investment. Strategic Element 3 proposes a further five
Actions to provide for investment growth. The Committee therefore considers the
first three Strategic Elements as interrelated. This Chapter focuses on these
Strategic Elements and highlights the associated impediments. Chapter 4
examines Strategic Element 4, which relates to social and environmental factors
and considers the socio-economic or community and environment impediments.
Strategic Element 5, relating to monitoring and review, is considered in
Chapter 9.
Possible Impediments
3.17
Before discussing the issue of possible and
continuing impediments to the achievement of the revised 2020 Vision in detail, the Committee should make an important
observation. That is, the 'impediments' raised during this inquiry and which
are discussed here have been identified gradually over the period since the
creation of the 2020 Vision process
in 1997.
3.18
The Committee accepts that one central idea
underlying the drawing up of the 2020
Vision was, amongst other matters, to identify where impediments to a
larger scale development of forest plantations in Australia were and are, and
to provide some systematic way of addressing and, where appropriate, removing
them. In that context, the Committee's observations on the impediments to the
achievement of the 2020 Vision will
be part of a continuing process of fine-tuning the operation of the scheme.
3.19
The Committee also notes that the final version
of the revised 2020 Vision was not made publicly available until November 2003.
It has therefore been possible for the revision process to avail itself of the evidence
made available to the Committee during the initial stages of its inquiry.
The Target
3.20
The initial target of trebling the acreage of
plantation forests by 2020 is expressed in the revised 2020 Vision in less prescriptive terms - as 'a notional target'.
The evolution of the target goal reflects comments received by the Committee
during the inquiry. Initial comment on the acreage target indicated success but
cautioned the need for the revised 2020
Vision to be broader than target acreage.
3.21
In a covering letter that accompanied the DAFF
submission, the Secretary stated that on current indications - principally the
planting record for 1997-2001 - the acreage target "...will be easily
achieved".[82]
Additional relevant comment by the DAFF was on the need for 'refocusing' of the
2020 Vision:
Instead of focussing action on the
removal of impediments, the revised 2020 Vision recognises that the future of the industry
lies in its capacity to maximise economic, environmental and social
opportunities. [83]
3.22
This note of caution was echoed in other
evidence. The Institute of Foresters
of Australia (IFA) also noted that, whilst the stated target acreage could be
achieved by 2020, the strategy of the 2020
Vision:
... may not be sufficiently sharply
focussed to ensure that it achieves the desired outcomes in regard to the
development of efficient forest industries, the production of the quantities
and types of forest products that will be needed, the delivery of appropriate
environmental benefits and the achievement of the desirable outcomes in rural
communities.[84]
3.23
The National Association of Forest Industries' (NAFI)
view of the revised 2020 Vision is
similar. NAFI commented at length on the necessity for the 2020 Vision to be wider and more comprehensive in its nature and
that it should include elements of forest planning to increase not only
economic, but social and environmental benefits to communities.
3.24
NAFI noted that when measuring the success of the
2020 Vision, the planting record for
1997-2001 "...modestly exceeds the target of 80 000 hectares per annum".[85] According to
NAFI, the significance placed on the acreage achieved by the 2020 Vision has been over-stressed and
that:
As the annual audit of responses to
the 2020 Vision actions indicate, a number of impediments to investment in the
sector have been addressed, while other actions are on-going and some new
issues requiring action have arisen. These matters are reflected in the revised
2020 Vision’s content, which is designed to balance resource security and a
supportive policy framework for timber growers, timber processors and others in
the community that benefit indirectly from the growth of the timber industry.[86]
...
With Australia’s
plantation estate expected to reach 1.6 million hectares by the end of the
planting season in 2002, there remains a substantial amount of interest in the
future investment in plantation resources. A further 1.4 million hectares of
trees would be required to fulfil the 2020 Vision alone. Given the nature of
the existing plantation and native forest resources, it is possible to see the
need for a further permanent increase in the pulpwood plantation resource of
approximately 200,000 hectares. Beyond that, there is a great deal of
uncertainty over what species should be planted and the combined rotation
length, location and management regimes that should be applied to those trees. [87]
3.25
Several submissions to the Committee's inquiry
observed that it may be difficult to achieve a trebling of plantation acreage each
year (which occurred between 1997 and 2003) from now until 2020. In its
submission the Tasmanian Department of Infrastructure Energy and Resources (DIERR),
for example, indicated that:
It is noted that the area of land that
is available and suitable for plantations in Tasmania
is naturally limited by factors such as soil, rainfall, slope and existing
forest cover. It is also limited by competition from other rural land uses. For
these reasons, Tasmania is not
expected to triple its 1996 area of plantations by 2020.[88]
3.26
This concern that land availability (in the face
of increased competition for land) will act as a brake on acreage achievements
was also a growing concern expressed in other submissions. [89]
3.27
Further, the distractive nature of the
"trebling target" cannot be discounted. In evidence to the Committee,
the Executive Director of Treefarm Investment Managers Australia (TIMA) noted
the focus of attention on the acreage target:
... for the last several years I have
seen so much attention focused on trebling the plantation estate but very
little attention given by its critics and others in the community to all the
things that it is trying to achieve and to the strategy that actually underpins
the target. The target is the thing that gets mentioned over and over again
and, while it has been valuable, there is a downside to it. It can be a
distraction from the real game, which is about developing a viable, vigorous
plantation growing and processing sector.[90]
3.28
This comment was supported by the Australian
Forest Growers (AFG):
Driven by a plantation target
obsession, the 2020 vision has become in my view insensitive to changes in the
environment, be they market, social or ecological. The planting target should
be scrapped and replaced by a more flexible and comprehensive approach....[91]
3.29
The Committee notes that the revised 2020 Vision describes the trebling of
acreage as a "notional target".
3.30
In seeking to clarify the nature of a 'notional
target', the Committee sought advice from the then National Strategy Coordinator
of the 2020 Vision on how the idea of
the national target for trebling of the plantation acreage should be
considered. In his reply the Coordinator advised:
The notional area target is designed
to provide a ‘headline’ figure, or a ‘call to action’ for the Vision partners.
Of importance to the industry is not only the notional total area target, but
the quality, scale and location of these plantations with regard to proximity
to markets.
The Vision’s structure is one where
Government partners aim to provide an enabling environment for plantation
development, and industry partners aim to provide capital and expertise for
plantation development. Using such a market-based mechanism for plantation
development means that trees will generally be grown where it is most
profitable to do so. As the structure of regional areas changes over time, for
example competition for land increasing due to high prices for alternative
agricultural activities, other regions may become commercially attractive for
tree growing. It is not the role of the Plantations 2020 Vision, or the
Coordinator, to identify preferred plantation areas, but to support processes
which will do this in a rational way.[92]
3.31
During the inquiry, the Committee also received
evidence from Ms Judy
Clark, a Postdoctoral Fellow from the Centre
for Resource and Environmental Studies, Australian
National University,
arguing that:
... [the] target be scrapped and replaced
by a more flexible approach at the regional and national level, where market
trends, the existing plantation estate, manufacturing competitiveness,
environmental issues and social requirements can be truly and jointly
considered.[93]
3.32
Later in her evidence, Ms
Clark added:
... some people may wish to downplay
the importance of the target, but when you look at media releases, press
statements, monitoring and performance, the planting target is king.[94]
3.33
The Committee notes that the May 2004 Communiqu
of the Primary Industries Ministerial Council does indeed address plantation
forests in terms in increased acreage and that there was agreement to
investigate any further actions that could be taken "to maintain progress
towards the Plantations 2020 Vision
target of 3 million ha".[95]
3.34
The Committee agrees that such a focus
compromises other aspects of the work of the 2020 Vision. Further, it fails to recognise complex factors that
must be taken into account if the industry is to develop in the rational way
described in the then National Strategy Coordinator's letter. The Committee
finds a "notional target of trebling acreage" no different in its
impact than an actual target and believes it acts as an impediment. It presents
obstacles to the plantation industry achieving the type of efficient and market
oriented industry providing social, environmental and community benefits
envisaged by the revised strategy.
Recommendation 1
3.35
The Committee therefore recommends that the revised
2020 Vision be amended by deleting all references to trebling the acreage by
2020 or plantation acreage of 3 million hectares. This should be replaced with
the target of increasing the acreage of plantation forests at a sustainable and
economic level.
Strategic Element 1- the Policy Framework
3.36
Strategic Element 1 relates to the policy
framework and provides for two Actions relating to regional planning for
plantation expansion and a comprehensive policy approach to support
development. The responsibility for undertaking these actions lays mainly with those
in the industry. All levels of government have a role in supporting industry
development and identifying development needs, in terms of both physical and
social infrastructure.
3.37
The reintroduction of a 12 month prepayment rule
for plantation forestry in October 2001 allows investors to obtain an immediate
deduction for funds contributed in one financial year for activities undertaken
the following year. Minister Tuckey
announcing the decision explicitly tied the initiative to support for the 2020 Vision. Many of the comments from
submitters to the inquiry regarding the acreage target are explicitly or
implicitly also directed to the way tax effective investment schemes promote
increased acreage, rather than a viable, vigorous plantation growing and processing
sector.
3.38
Ms Clark
commented:
Encouraged by the 2020 plantation vision
and tax effective investment schemes, Australia's eucalypt plantation industry has, in my view, planted
a wood glut.[96]
3.39
Ms Naomi
Edwards noted that there is now more than $2
billion invested in the plantation prospectus industry and warns that
prospectus assumptions appear to be set outside currently achieved price levels
and that the discrepancy between prospectus promises and eventual returns may
have serious consequences for the savings of plantation investors. She stated
that prospectuses in 2001/02 quoted returns of $32 to $50/m3 for plantation hardwood, compared with
current prices in the order of $18-$30/m3.[97]
Recommendation
2
3.40
The Committee recommends that the government
commission an independent assessment of how the plantation prospectus industry
relates to the 2020 Vision, including an evaluation of prospectus assumptions
against returns likely to be achieved.
3.41
Evidence provided to the Committee indicated
that the policy framework does require more coherence to allow all levels of
government, industry and the community to participate in a consensus on a
policy framework.
3.42
An example is the analysis by NAFI, which
emphasises the combination of rapid and significant structural changes in the
forestry industry, during the period between 1996-2003, having given rise to a
new set of considerations. These will need to be integrated in policy planning
to achieve an holistic approach to further development. The actions,
responsibilities and outcomes set out in this Strategic Element can operate to
achieve this as a goal.
3.43
Further, the creation of a position of National
Strategy Coordinator would be a positive step to developing a strong policy
framework which integrates the plantation industry with the aspirations of the
existing rural communities. The Committee urges the industry to appoint a
person to the position as a matter of urgency.
3.44
The rate of new plantation establishment in Tasmania
exceeds that in all other states (10 881 hectares in 2003, and an average of 13
500 hectares per annum during the last five years).[98] In addition,
most new plantations in Tasmania,
on both public and private land, are established by clearing native vegetation.
Because Tasmania has such a large
proportion of Australia's
plantations, including 22 percent of hardwood plantations, its situation is a
significant contributor to the national success or failure of plantation policy
and the 2020 Vision. Forestry and
logging generally and plantations in particular are so controversial in Tasmania
that the Committee has prepared a separate chapter for the state (see Chapter
8).
3.45
Strategic Element 1 requires a ‘comprehensive
policy approach’ to support the Vision. Evidence to the inquiry noted
inconsistent policy approaches in some areas.
3.46
Ms Judy
Clark, noted that there
are two options to ensure that the plantation sector is not commercially
damaged:
The first is by playing in the physical market in terms of wood
volumes from native forests and secondly by playing in the price market. I am not making a recommendation about which
market the government should play in. I am suggesting that the committee should
consider both options.[99]
3.47
In Tasmania
the problem is exacerbated by the ability to subsidise plantation establishment
through clearing native forests (see Chapter 8).
3.48
Finally, the Committee has not identified any
impediments and therefore has no recommendations to alter Strategic Element 1.
However, the Committee believes that the growth of the industry is best
achieved in an environment where the plantation industry's infrastructure needs
are considered in the context of the overall development of the rural
communities and regions in which they are developed.
Strategic Element 2 - The Regulatory Framework
3.49
Strategic Element 2 of the revised 2020 Vision addresses the question of
regulatory issues and impediments. Strategic Element 2, headed 'The Regulatory
Framework' has as its overarching aim:
A consistent
regulatory framework is essential to deliver long-term certainty for plantation
investors, growers and processors. The Plantations 2020 Vision will promote the
continued development of a regulatory framework that supports and complements
the policy framework to maintain investor confidence and encourage plantation sector
investment.[100]
3.50
The actions under the strategy (Actions 3-7) are
directed at securing plantation development by legislative protection under the
regulatory (legislative) structure. The responsibilities for achieving outcomes
under the Strategic Element are largely directed to the Commonwealth, State or Territory
governments, in conjunction with the Coordinator. The actions required by
Strategic Element 2 read:
Action 3 Promote
development of legislation covering the rights to plant, harvest and trade
plantations and their products.
Action 4 Promote
the development of appropriate structures to encourage investment in the
plantation sector.
Action 5 Promote
the development of guidelines and codes of practice that support sustainable
plantation development.
Action 6 Work with State and Territory forestry organisations in terms
of National Competition Policy and developing transparent and competitive
markets.
Action 7 Promote
the development of State, Territory and Australian Government legislation that
complements plantation establishment.[101]
Regulatory Impediments - State and Local
Government Regulatory Framework
3.51
The
Committee has received considerable comment on the impediments placed on the
achievement of the 2020 Vision aims by regulatory frameworks.
3.52
NAFI noted that:
There is some concern that particular pieces of State legislation
discriminate between plantation forestry and other landuse activities. For
example, plantation forest managers may be required to meet the specifications
of State-based codes of practice or face particular planning approvals, water
resource management, land rates, infrastructure provision, fire fighting
guidelines, biodiversity conservation constraints or regional vegetation
management guidelines. These regulations place an additional burden onto
prospective plantation growers and this has been recognised as reducing the
level of new investment in some States.[102]
3.53
As a broad issue, the role of the regulatory
environment as an 'impediment' to the rate of plantation development envisaged
by the 2020 Vision has focussed on
various state and local government plantation, forestry and planning
requirements. For example, the NSW Plantations
and Reafforestation Act 1999[103] contains detailed arrangements for the
development of forestry plantations. Compliance with the terms of the Act and
approvals granted to plantation development companies have, on occasion, been
advanced as a significant impediment.
3.54
In evidence to the Committee, NAFI told the
Committee that:
We run into a number of risks that
face investors. New South Wales
is a prime example: without a plantation strategy, or a way to deal with
impediments to plantation establishment, no new trees are being established in New
South Wales-or very few. I think less that five per
cent of the establishment of new plantations occurs in New
South Wales. Risk to investors is the major concern
as well as the complex regulatory framework. They need to start dealing with
these sorts of issues to attract investors and take away the risks and
concerns.[104]
3.55
A similar comment has been made with regard to
local government planning and infrastructure requirements. The NAFI submission
to the Committee summarised the points made in
several submissions:
As identified in a number of submissions raised during the 2020 Vision
review process, local governments have the jurisdictional control over certain
aspects of plantation forestry. However, they may not have the capacity to
resolve a number of difficult issues associated with plantation forestry or the
understanding to balance the needs of the plantation sector against the other
priorities they face. In general, there is no adequate mechanism currently
available for those local governments to raise their issues, concerns or
difficulties with other local government authorities, State governments or the
Commonwealth.[105]
3.56
In comment to the Committee, NAFI noted that:
There needs to
be a way for local governments who have a concern or issues about plantation
forestry to talk to one another and then go back and be able to talk to both state
and Commonwealth governments about how they resolve their issues-down into
areas like transport and infrastructure, planning approvals processes and
understanding where the industry might be headed across time.[106]
3.57
Views from the plantation industry, in this case
the Plantation Timber Association of Australia (PTAA), have identified impediments
likely to be posed by local government:
Local Government
in some States is responsible for implementing some aspects of the legislative
land-use planning framework and has the capacity to frustrate plantation
projects through its role in planning approvals and conditions imposed on the
management of the plantations and harvesting of plantation products. Plantation growers generally operate across a wide area and may be
required to deal with several local governments all imposing different
regulatory conditions and significant additional costs on plantation growers.
There is a need for across region consistency in approaches (a form of mutual
recognition or broader legislative backing) so that investors are not tyring to
meet differing requirements when they move across larger areas.[107]
3.58
This view that governments are not pursuing
their obligations under the strategy was also voiced by the Commonwealth. DAFF told
the Committee:
The revised 2020 Vision ... has suggested actions for State and local
Governments. State and local Governments now have to demonstrate their support
for the 2020 Vision and the
plantation industry, and commit to meeting their agreed obligations.[108]
3.59
In its submission, DAFF addressed specific areas
of state and local government responsibilities that required action:
... State and local governments still
need to make a concerted effort to address the uncertainty over rights to
plant, manage, harvest and trade plantations and preferably achieve a level of
consistency across the industry.[109]
3.60
Other submissions, particularly those from
bodies representing forest agencies and/or industry and plantation timber
companies, suggested adherence to the Strategic Elements of the 2020 Vision as they were approved by the
Ministerial Council.[110]
3.61
While the Committee recognises this evidence
does outline impediments to achieving increases in plantation forest acreage it
believes that many are impediments that act as a restraint. It is therefore
reluctant to make any recommendations to alter Strategic Element 2 in light of
these comments. It notes that Action 5 and Action 7 under Strategic Element 2
have some internal tensions and believes that these are best resolved 'on the
ground'. In Australia's
federal system that level is frequently the local government.
3.62
Finally, where the 2020 Vision operates, not only economic considerations must be
borne in mind, but also social, environmental, community, indigenous and the
most intrinsic values of the landscape. These issues now have a direct impact
on an increasing number of regional communities in Australia.
It is therefore important to examine how changes brought about by plantation
forestry are achieved. The Committee's view is that if the plantation industry
is to develop as a sustainable industry it must engage with local communities
in genuine partnership arrangements.
Regulatory Impediments - National Competition Issues
3.63
Action 6 under Strategic Element 2 specifically
mentions compliance obligations under the National Competition Policy
Agreement. The Committee received a number of submissions which addressed competition
issues for plantation forestry. The Committee sought advice from the National
Competition Council (NCC) on the specific question of how the NCC views the
forest plantation industry.
3.64
The NCC advised that:
The Council has reported on the
competitive neutrality and legislation review activities of governments with
respect to forestry in its last two annual assessments of government's progress
in implementing the national competition policy and related reforms.
....
To date, the Council has not made any
recommendations to the Commonwealth treasurer on jurisdictions' application of
CN [ie, competitive neutrality] to forestry because a number of complex issues
are yet to be resolved. Some of this complexity was discussed in the 2001 and
2002 assessments. [111]
3.65
The NCC's own comment on how its assessments
will, or may, affect forest plantation activity focussed on legislative review
(as well as pricing policy review) and was characterised as follows:
The [NCC 2001] assessment referred to
the impact of restrictions on competition in native forests and plantation
forestry. The impacts would interact across two segments of forestry. Restrictions
on competition in native forest exploitation include entry requirements
(including licences, permits leases). Environmental planning restrictions can
affect competition between plantations and may also affect plantation
forestry's capacity to compete with production from native forests.
And:
Outside national parks and reserves
the assessment suggested that the least restrictive approach to meeting these
objectives in public native forests is to define and allocate tradeable rights
to delineated areas of forest. Such rights (or forest leases) would oblige
holders to protect specified non-tradeable forest values (with the potential
for cancellation should holders not meet those obligations), and be long term
to encourage right-holders to maintain forest productivity.[112]
3.66
The NCC noted that the guiding principle of the
Competition Principles Agreement (CPA) between the Commonwealth and the States
and Territories was that:
... legislation ... should not
restrict competition unless it can be demonstrated that the benefits of the
restriction to the community outweigh the costs and the objectives of the
legislation can only be achieved by restricting competition. Since 1995,
governments have reviewed around 1800 pieces of legislation and most have
reviewed their forestry legislation.[113]
3.67
The Committee notes that the revised 2020 Vision provided for a review of
forestry obligations under the National Competition Policy Agreement and would
encourage state governments and forestry agencies to undertake the reviews as soon
as is practical.
General Comment on Strategic Element 2
3.68
Although the inquiry revealed two major issues
(which can be considered as impediments) with aspects of Strategic Element 2,
the Committee has not proposed any alterations to the Element or its Actions.
3.69
It is the Committee's strong view that the
expected outcomes under Strategic Element 2 can be, in the majority of cases, the
subject of objective assessment and reporting. However, matching outcomes under
this Strategic Element will require some flexibility in deciding whether
particular goals are reached. A detailed account of what stage each expected
outcome has reached should be included in the Coordinator's report.
Recommendation 3
3.70
The Committee recommends that
research and other studies to be carried out under Action 5 of Strategic
Element 2, relating to codes of practice to support sustainable plantation
development be the subject of a separate public report by the Coordinator, to
be presented to the Primary Industries Ministerial Council and Federal and
State Parliaments.
Strategic Element 3 - Investment Growth
3.71
Strategic Element 3 reads:
Private sector investment is essential
in delivering the objectives of the Plantations 2020 Vision. Information is
required at several levels to enable transparent and repeatable assessment of
the plantation sector as a destination for investment capital. This complements
Strategic Element 2, and includes information on Australia's
international competitiveness, investment and environmental regulatory systems,
and market access, plantation valuation and trading mechanisms. Research
activities aimed at delivering a long-term competitive advantage to the
plantation sector and market transparency for growers are other important
priorities.[114]
3.72
Strategic Element 3 includes Actions 8 to 12,
which are:
Action 8 Provide
better information to maintain foreign and local investor confidence in the
plantation sector and build on existing investment levels.
Action 9 Improve
grower and investor access to markets.
Action 10 Inform
farmers of the profitability of plantations as part of an on-farm production
system.
Action 11 Identify
research and development priorities for the plantation sector to complement the
industry's potential growth.
Action 12 Improve
skills and safety of commercial tree growers through extension, education and
training.[115]
Investment Impediments - Lack of Sufficient
Market Information
3.73
The Australian Bureau for Agricultural and
Resource Economics (ABARE) is a principal analyst and adviser on agricultural
and resource economics to the Commonwealth government. In its submission to the
Committee, it noted that:
Impediments can be caused by
institutional factors such as property rights, taxation and environmental
regulation that alter the private returns from plantations relative to other
investments. Private investment may also fall below socially optimal levels if
plantations generate significant environmental, amenity or other positive
externalities not fully captured in private investment decisions. They can also
arise from the structure of the industry if monopoly power creates barriers to
the entry of new private investment.[116]
3.74
ABARE also identified (based on a major study of
the plantation forestry industry, The Abareconomics-Jaako Poyry 1999 Study)
nine specific "potential impediments to private sector investment in
plantations" which covered a range of high risk factors in plantation
investment from capital availability to the possibility of sovereign risk.
3.75
A summary of the range of potential economic
impediments to private sector investment in forest plantations drawn from the
Abareconomics-Jaako Poyry research report include:
-
the
high risk
of investment loss: as a result of fire and disease;
-
the
high cost of financing the investment;
-
the
need for a critical mass of wood availability before processing facilities can
be developed;
-
the
long period of investment, whereby high initial costs are needed for establishment
but revenue is only received on harvest;
-
the
lack of information on appropriate species,
establishment and management techniques;
-
the
lack of regional infrastructure to support plantation development;
-
the
high risk of marketing products especially for small wood from thinnings;
-
the
lack of secondary plantation markets to allow
the sale of plantations before harvesting; and
-
the
limited rights to harvest or other government restrictions that may be
perceived as sovereign risk. [117]
3.76
In specific terms, the Abareconomics-Jaako Poyry
study identifies the principal 'paradox' of the plantation timber industry:
A paradox in the plantation industry
is that its most efficient economic structure may be responsible for one of the
most important perceived impediments to additional private investment. A recent
ABARE survey of 20 industry leaders confirmed that log prices are difficult to
obtain in the forest industries. Log prices play an important role in the
analysis of new plantation investments, and without this data, capital may flow
to alternative investments for which information is easier to access.
Log prices are difficult to obtain in Australia
because the industry is dominated by a handful of large processors and growers
in each region. The need for a large
scale resource to support an internationally competitive processing industry
means this is the most efficient structure of the industry. Investment in large scale processing requires
secure access to a long term supply of wood, encouraging long term supply
agreements. Long term supply agreements
between a small number of large scale growers and processors effectively means
there is no spot market for logs, making it difficult for new growers to enter
the market.[118]
3.77
NAFI identified economic and associated factors
which it considers impediments to the 2020
Vision in a related point. In a discussion of the difficulty of limited
market information NAFI noted that:
The lack of regularly supplied market
information for timber and timber products is an impediment to the attraction
of patient capital investment to the plantation sector. Institutional
investors, such as superannuation companies, have suggested that they would
show a greater level of interest in plantation forestry projects if they could
monitor the resource and final product markets on a regular basis, with a
sophisticated approach for assessing the long-term changes in the value of
their forestry assets. The supply of regular market information would also be
needed to support an active and effective market for trading immature
plantations.[119]
3.78
In its submission to the inquiry, the PTAA also
supported such a view. Its submission noted that one of the two major factors
limiting further investment in plantation expansion is the lack of complete
knowledge of the "current low level of investment in longer rotation
plantations".[120]
3.79
In evidence, the Executive Director of AFG also
remarked on the limitation and impediment placed on further plantation
expansion and development in the context of the 2020 Vision:
We
also look to the vision to help facilitate the development of market access for
small parcels of product that will stand alongside larger production units as a
diversified resource. We have identified one of the major mechanisms that will
assist this process is to ensure transparency in log pricing and in other
market indicators, at least on a national basis. As a former agriculturalist, I
am constantly bewildered by the lack of market information available. The
solution to this that seems to have little opposition is to have nationally
significant data collected and made more widely available as the first step towards
injecting greater transparency into an opaque market.[121]
3.80
The Institute
of Foresters of Australia (IFA) noted
that, without a better level of market understanding and appreciation, it will
continue to be a major impediment to the expansion and development of
plantations.[122]
3.81
The importance of market information and an
understanding of prices that may be obtained for wood, both currently and in
the future, has led to comment and analysis of estimated returns on plantation
investment. In the course of the Committee's inquiry, it heard evidence from
witnesses claiming that the price estimates for future cropped plantation
timber were either impossible to forecast, or were incorrect.
3.82
In evidence to the Committee, Ms
Judy Clark
pointed out the central importance of market information to investment decisions
in managed investment schemes in plantations. She stressed that the basis of
her submission was partly based on market information on supply and demand for
wood commodity material widely available:
Wood growers are
at the bottom of the commodity production pile. I do not think most prospective
investors would have this understanding; most farmers do. The key market trend
for wood growers is that, globally, manufacturers of wood products-producers of
sawn timber, pulp paper and wood based panels-are using less wood to make their
products.[123]
3.83
In a submission to the Committee which addresses
similar issues of market behaviour and market forecasting, Ms Naomi Edwards put
to the Committee that forecasts contained in at least one prospectus for
plantation investment indicated that realisable prices for wood were higher
than the market was returning.[124]
3.84
In fact, forecasting wood prices in either a local
or international market (particularly stumpage prices) present considerable
difficulty. For example, the ANU Forestry
Market Report on stumpage prices for the future concludes that inconsistent
predictions on market conditions and price are a major impediment to the achievement
of certainty in the Australian forestry market. That finding is summarised as:
Not knowing what the next 10, 20, 30...
years hold [for stumpage prices] adds significantly to the problems of large
risks inherent in the decade(s) long activity of forestry. Regrettably, there
is not (sic) simple solution for the
problem...[125]
3.85
The Committee agrees that the lack of market
information can act as an impediment to growth in investment from the private
sector. It notes that the Disclosure Code for Afforestation Managed Investment
Schemes has been finalised by the industry but market information remains a
concern.
Investment Impediments - Taxation
3.86
A principal impediment identified to the
Committee, and a factor that has been suggested as an impediment to plantation
development for some time, was the impact of current taxation policy and tax
ruling interpretation on plantation investment. The Committee anticipated this
concern and invited submissions to the inquiry by both the Commonwealth
Treasury and the Australian Tax Office (ATO).
3.87
The Committee sought ATO advice in order to
clarify a number of continuing concerns over the ATO approach to plantation
forestry, particularly in the area of managed plantations. In its submission
the ATO told the Committee - in summary - that it classified forest industries
as follows:
The plantation forests industry in Australia
consists of two distinct sectors. Although there is some crossover between
these two sectors[126]
it is important to distinguish between these two different parts of the
plantation industry because it provides an understanding of which entity the
relevant taxation laws and taxation rulings will apply to.
The first category is comprised of
what might be described as the 'traditional' plantation industry.
In this sector large companies, in
their own right, carry on the business of planting, tending and felling trees
in their own plantations in various parts of Australia.
Companies in this category include Harris
Daishowa, Gunns and Midway Forest
Products. Companies such as these
usually also have licences to log and process timber from native forests under
Regional Forest Agreements.
The second category is comprised of
the managed plantation industry.
In this sector, a management company
with forestry expertise contracts with a number of smaller entities, often
individuals, to establish a plantation, to maintain the plantation during a
defined growing period and, at the end of that period, harvest and sell the
trees or wood produce on behalf of those participants. In
summarising current taxation rulings, the ATO advised the Committee:
The tax laws and rulings that apply to
the afforestation industry can be categorised as:
-those that apply to primary producers
generally;
-those that apply to the afforestation
industry specifically; and
-those that apply only to participants
in the managed plantation industry.
Taxation laws and rulings that fall
within the first two categories apply equally to both companies in the
'traditional' plantation sector and to the individual participants in the
managed plantation sector.[127]
3.88
In relation to the first two of these
categories, the ATO noted that Taxation
Ruling TR 95/6 addresses the taxation treatment of primary production and
forestry.
3.89
In relation to managed plantations, the ATO
advised that:
From a taxation administration
perspective, it is the managed plantation sector that has received most of the
ATO's focus in recent years. This focus
has mainly flowed from a need to address concerns relating to tax minimisation
in the wider managed investment industry, but to do this in a way that did not
adversely impact on legitimate arrangements, including legitimate afforestation
projects, that were within taxation law, Corporations Law and related common
law. [128]
3.90
In its approach to the plantation industry, the
ATO also indicated that it had implemented two 'major initiatives'. They are:
-
A Taxation Ruling covering afforestation schemes
-
Product Rulings which are ... a recognition that
the private rulings system was not designed to adequately meet the needs of
ordinary taxpayers who may be considering investing in a managed project and
wished to ensure that their investment complied with the law.
Product Rulings are a form of public
ruling (as distinct from a private ruling) that allow the ATO to provide a
clearly defined 'class of persons' with certainty
by ruling publicly on the taxation aspects of specific projects.
The Product Ruling describes an
arrangement in which a number of taxpayers individually enter into
substantially the same transactions with a common entity or a group of
entities. It provides certainty to
potential investors by confirming that the tax benefits set out in the Ruling
part of the Product Ruling are available, provided that the specific
Arrangement described in the Ruling is carried out in accordance with the
information provided by the applicant.[129]
3.91
The final aspect of taxation treatment of the
managed forest plantation industry dealt with by the ATO submission was in
relation to the so-called '13 month rule'. The ATO told the Committee that:
Legislation removing the '13 month rule'
was enacted from 11 November 1999.
The new provisions applying to managed projects required that an immediate
deduction could only be claimed if the services were supplied in the same year
as that in which the expenditure was incurred.
If the services were not fully
supplied in the expenditure year the deduction was apportioned over the period
during which the services were to be supplied. Where expenditure was incurred
towards the end of a financial year this had the effect of pushing most of the
deduction into the year after year in which the expenditure was incurred.[130]
3.92
The Committee received several submissions from
plantation industry participants which view the taxation provisions as a major
impediment to the achievement of the 2020 Vision goals. NAFI's
submission noted that, after the ending of the '13 month rule' in November
1999:
... investment in the sector had delivered an annual plantation
establishment rate approaching 95,000 hectares, compared to less than 30,000
hectares per annum being established at the start of the decade. The 95,000
hectares planted in 1999 were established primarily using funds that had been
collected prior to 30 June 1998.
In 2000, the plantation establishment rate exceeded 135,000 hectares,
although that area included the establishment of plantations based on funds
collected up to June 1999 and a second set of funds collected prior to 30 June
2000. If the level
of funds collected in June 1999 had been equivalent to the level of funds
collected in June 1998, it is reasonable to suggest that around 70% of the
plantations established in 2000 were funded by investments made in 1999. For
2000, the actual level of investment in the sector may have only been enough to
support the establishment of approximately 40,000 hectares of plantations. On
that basis, the withdrawal of the 13-month rule had a significant impact on the
collection of investment funds for supporting plantation establishment.[131]
3.93
Following representations by the managed
plantations industry, the ruling was reinstated:
Managed plantation companies believed
that these changes adversely affected their ability to forward plan their
activities because expenditure had to be committed before they knew how many
participants would invest in their projects.
.....
In October 2001 the government
responded by introducing a new 12 month rule for prepaid expenditure in the
managed plantation forestry sector where that expenditure was for 'seasonally
dependent agronomic activities'.
The government also amended the
non-commercial loss provisions to correct an unintended impact of those
provisions on afforestation projects.
....
Prior to the enactment of these new
concessional provisions the ATO's Product Rulings area and the Tax Value Method
Centre of Expertise worked with the managed plantation industry to ensure that
boundaries of the new legislation were understood.[132]
3.94
NAFI noted that:
It is too hard to tell if the introduction of the 12-month rule has had
an impact on investor sentiments as there are other changes being introduced by
ASIC that could have positive or negative impacts on investor confidence. [133]
3.95
In evidence to the Committee, and in answer to
criticisms of taxation treatment of plantation proposals, Treasury officials
advised that:
... My understanding is that the issue they have
raised is basically access to the five-year averaging provisions that are
available to primary producers. I think that is my understanding of the issue
they are raising. My reading of the submissions is that they are saying that,
assuming that they are not connected to any other primary production business,
the nature of forestry is such that they might get a large amount in one year,
when the timber is cut, or whatever the circumstances. The first time I saw
that issue raised was in the context of these submissions. I have not seen that
issue raised before. Once again, it would not be high on the agenda because, as
far as we were aware, the averaging provisions were operating okay for primary
producers across the board. Whether they have a valid argument is difficult to
answer because, as I said, it would depend on their circumstances.[134]
3.96
On the general issue of perceived taxation
disincentives, representatives of the Treasury also put the following view:
Mr Mullins-Regarding disincentives,
we are aware of the ones that have been flagged in some of the written
submissions. It would be fair to say that we have not had a lot of
representations on these issues. That may be because there is this committee.
The issues around the rights issues, the profit a prendre, are probably the
only ones we have had much feedback on. Even then, there has been very little.
I am not sure what you would specifically like to know about the broader tax
issues and primary producers. It is a big area.
CHAIR-Does
Treasury have any involvement at all? If so, can you explain that in terms of
investment in plantation industries, but more particularly from the point of
view of the tax regime’s interaction with the tax office for certain types of
investment schemes being put in place?
Mr Mullins-We
do not have a lot of involvement with the ATO on these issues. Certainly from
our group’s perspective, if there are issues or concerns raised in the work the
ATO does they will be flagged with us. From the revenue group perspective, we
do not have an active involvement; our fiscal group may. Mike’s
unit handles primary producer issues in general and, obviously, there are
issues on the public agenda around things such as farm management deposits and
so on, but certainly the forestry issues have not been a big issue.
Senator MURPHY-In
terms of policy formation with regard to the application of taxation measures,
do you give any thought to how taxation measures might be applied to plantation
forestry or, indeed, to other agricultural businesses of that nature?
Mr Mullins-It
depends on the measure. We have a broad range of tax measures that we consider,
and if it appears that the measure does have an impact, for example, on the
primary production sector then we will consider those impacts.[135]
And:
Senator MURPHY-From
an equitable taxation point of view, if a decision-political or otherwise-is
taken at government level to allow for certain deductibility activities to take
place in respect of plantation forestry on the basis of seasonal problems, so perceived,
what have you done about other seasonal agribusiness activities that, as far as
I can see, confront the same seasonal problems? Surely, some assessment ought
to have been made about the equitable application of tax law. I am not arguing
against what happened in regard to plantations; I am just wondering how we got
to a point where it was found that we ought to do it for plantation forestry
but not for other agribusiness sectors.
Mr Mullins-As
I said, the government have made a decision about that issue. I do not think it
is for us to argue whether they should have granted it to plantation forests or
granted it to other types of business.[136]
3.97
The Committee considers that the current
taxation arrangements for the plantation industry should be given a period to
operate before the efficacy or otherwise of the arrangements are assessed. It
notes that the Commonwealth government is not currently considering further
alterations to incentive arrangements for plantation investment. The impact on investment
of the introduction of the '12 month rule' should be examined. Following this
assessment it may be opportune for the industry to reconsider the issues and
for government to consider any proposals industry may make.
3.98
The Committee notes that the AFG/TIMA representatives,
who appeared before the Committee and discussed this issue, reinforced this
view.
3.99
It is clear that private investment is essential
to the growth of plantation forests if the level of investment is to increase,
as opposed to being maintained at the current level. The taxation incentives
for such investment have been under regular scrutiny and the Committee notes
that a period of time is required to test new arrangements.
3.100
The Committee notes that the identified 'impediments'
are largely to be addressed by the Actions in Strategic Element 3. Of
particular interest is the problem for investors (particularly smaller
investors) and industry addressed by Action 8 ie, the level of market
information. The Committee believes there is a need for a better, up-to-date
and more comprehensive market information source with regard to Australian
timber prices.[137]
In relation to the current wording of Action 8, the Committee considers that there
is a need for a specific outcome, under the Action's stated 'expected outcomes',
for a clear statement on this issue.
Recommendation 4
3.101
The Committee recommends
that Action 9 under Strategic Element 3 be amended to include as an expected
outcome the establishment of a Market Information Centre, based on the model of
the current New Zealand body (or service), which will make available full and
up-to-date information on current and projected prices and returns on various
types of timber, including plantation timber.
3.102
In relation to other matters to be covered by
this Strategic Element, the Committee considers that its recommendations in
Chapter Nine should be adopted. The Coordinator's report envisaged in Chapter
Nine's recommendations is capable of producing useful and up-to-date
information on the goals of Strategic Element 3.
Conclusion
3.103
The Committee has considered the views and
perceptions of impediments and how Strategic Elements 1, 2 and 3 should be
amended in light of these views. The Committee is of the view that, in general
terms, these Strategic Elements are clear and comprehensive. While they are
designed to address the concerns that emerged during the inquiry, they can also
be regarded as directed at reducing the impact of an excessive degree of
regulatory control or a lack of planning on future plantation development.
3.104
One of the major impediments to achieving the
aims of the 2020 Vision is the
target, albeit notional, of achieving a certain number of hectares under plantation
forest by 2020. The Committee agrees that it acts as a distraction from the
aims and has therefore recommended that it be amended.
3.105
The other recommendations made by the Committee
relate to the Actions outlines under Strategic Elements 2 and 3. In relation to
Strategic Element 2 the Committee has sought to increase accountability rather
than amending the actions.
3.106
The final recommendation relates to market
information available to investors. The Committee notes that the lack of such
information can impede investment and therefore recommends that a market
information service be established.
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