26 October 2016
Minister for Resources
Ministerial Statement: Forestry
** Check against delivery **
- I rise today to inform the House of the Government’s decisions on a number of matters relating to the future of Forestry Tasmania and of our sustainable, renewable forest industry.
- In doing so I acknowledge the very significant contribution of my predecessors in the Forestry portfolio – particularly Peter Gutwein with whom I have worked closely as my fellow FT Shareholder Minister since my appointment to Cabinet.
- The matters I lay before the House today are of vital importance to growth and employment in our renewable, sustainable forest industry - particularly for workers and families in regional communities.
- The Government’s decisions are informed by the confronting reality of advice provided by the Board of Forestry Tasmania, as well as our unwavering belief in the benefits that the forestry industry delivers to our economy and regional communities.
- In shaping our approach for the 21st Century, we are guided by the words of perhaps the greatest mind of the 20th Century – Albert Einstein – who said: ‘We cannot solve our problems with the same thinking that created them’.
- We are not turning back: We are looking forward.
- The Vice Chancellor of the University of Tasmania, Professor Rathjen, summed up our situation earlier this year when he said: ‘The capacity to create value around forestry and timber is one of the keys to unlocking economic renewal in Tasmania, but we understand the sector of the future will look very different to the industry of the past’.
- Madam Speaker, Tasmania is heavily forested. Forests cover half of our entire island. We have around 7 hectares of forest for every living Tasmanian – one of the highest per capita rates of forest cover in the world.
- After a prolonged and devastating downturn our forestry sector has turned the corner. Confidence, investment, production and jobs all are growing strongly. Exports more than doubled in the year to June and – according to 2015-16 ABS data – employment in the sector has grown to over 3 600 from the low of 2 700 reported in 2013.
- That is great news, particularly for workers and their families as well as regional communities, however we must maintain and build on that momentum.
- We need to ensure that the model for forestry is based on sound market principles and is not constrained by an historic business model reliant on public funding.
- We need to extract higher value and more jobs and we need to promote the environmental, economic and social advantages of wood produced from our sustainable, renewable forestry operations.
- As we enter the Timber Age and the Age of the Bioeconomy, our challenge is to ensure Tasmania is positioned to attract the highest and best use of its forest resources and to obtain its fair share of growth.
- Australia’s Forest Industry Advisory Council says the forest industry should lead the transition to the bioeconomy, which it says can triple the economic value of the industry by 2050. We must aim for a similar growth trajectory in Tasmania.
Current State of Play
- With regard to our public forest estate that is available for commercial use – the Permanent Timber Production Zone – there is, however, an urgent issue which we need to confront.
- In 2012-13 the State’s public production forests totalled nearly 1.5 million hectares. As a result of the Tasmanian Forest Agreement, the area of Permanent Timber Production Zone was nearly halved to 812,000 hectares and the legislated wood supply obligation to industry was reduced from 300,000 cubic metres of high quality sawlog to 137,000 cubic metres per annum.
- Some of the former wood production land was included within an expanded Tasmanian Wilderness World Heritage Area, while another almost 400,000 hectares was set aside for Future Reserves.
- This loss of resource to the industry exacerbated the severe impact of market difficulties, in particular the collapse of the Tasmania’s largest forest company – Gunn’s. This had devastating impacts on workers, families, forestry businesses and regional communities.
- The downturn impacted Forestry Tasmania along with the rest of the industry. The only way the business was able to survive was by the former Government pumping in over $100 million to enable it to continue to trade – with no plan to return it to sustainability.
- Following the 2014 election, the incoming Liberal Government repealed the Tasmanian Forests Agreement Act and converted the Future Reserve Land to Future Potential Production Forest, creating a “wood bank” to support future forestry operations.
- The Government also conducted a review into Forestry Tasmania, which found that Forestry Tasmania’s current business model will not provide a long term financially sustainable approach to manage and make commercially available Tasmania’s production native forest resources.
- Based on the findings of the review the Government announced a number of high level strategies. Central to these were:
- Ending the direct subsidy of Forestry Tasmania’s commercial operations which uses money which this Government believes would be better spent on front line services such as police, schools and hospitals;
- Keeping a government business model for the public production forest manager;
- Maintaining the legislated requirement to make available a minimum of 137,000 cubic metres of high quality sawlog each year;
- Not creating sovereign risk by over-riding FT’s commercially negotiated contracts;
- Focussing FT’s activities on growing trees, managing land and selling wood to domestic customers;
- Moving from mill door sales to a hybrid model including stumpage sales, with the private sector taking greater responsibility for harvesting and transport;
- Transitioning responsibility for export sales and value added products to the private sector
- Conducting an Expression of Interest process for southern residues to test private sector interest in re-establishing a viable southern avenue to market;
- Selling parts of the business unrelated to the new business model; and
- Selling so much of the hardwood plantations as would be needed to fund the transition to a sustainable business model.
- In the period since those announcements a significant amount of progress has been made including:
- The previous subsidy of FT’s commercial operations at the expense of front line services has been discontinued;
- The change to a stumpage sale model has commenced and the first stumpage contracts have been signed;
- FT’s commercially negotiated contracts have been retained and respected, with five-year price point negotiations completed with most processors with the clear objective of increasing the contribution domestic processors make towards the cost of production more closely matching national pricing;
- The southern residues Expression of Interest process has been completed, and contracts have been signed with two proponents to address the need for commercially sustainable access to residue markets from the south of the state;
- Proposals for longer-term residues solutions have been referred to the Coordinator-General’s Office to provide opportunities for further development;
- Further value-adding proposals have been encouraged through the Government’s $1.25 million Wood and Fibre Processing Innovation Program and 13 successful projects involving total investment of more than $7 million have been awarded assistance;
- Investigation and due diligence to inform the sale of FT’s hardwood plantations has been completed;
- Forestry Tasmania is preparing a strategy to exit its direct export operations, transitioning them to the private sector; and
- Forestry Tasmania has implemented further cost saving measures to improve efficiencies and minimise its cost of production.
- To sum up, we have taken positive action, however significant challenges remain and there is much more to be done!
Advice from the
Board of Forestry Tasmania
- On the 29th September 2016 the Board of Forestry Tasmania formally advised shareholder Ministers that, despite the efforts to date, the business was not operating profitably and would be unable to do so for the foreseeable future.
- The Board also advised that on a straight commercial basis the legislated requirement to make available 137,000 cubic metres of high quality sawlog from the Permanent Timber Production Zone would need to be reduced to as little as 96,000 cubic metres. The reason is of course that so much commercially available forest was locked up.
- The Board’s advice laid bare the continuing problems facing the business. I tabled that advice in this House yesterday.
- FT is losing money because:
- Above around 96 000 cubic metres of high quality sawlog, the cost of production is higher than the revenue generated at current prices;
- Too much of the production forest has been locked up and of the remaining production areas some are costly to access and a long way from market;
- According to the Board’s advice, FT’s prices are significantly lower than comparative rates interstate and there are limits to how quickly domestic producers can adjust their business to higher prices;
- FT remains responsible for maintaining roads which it no longer requires but are needed for other purposes including tourism and residential access and fire prevention;
- Almost 40 per cent of the Permanent Timber Production Zone– or some 340,000 hectares - is in informal reserves or otherwise unavailable for harvest, with no commercial return;
- FT currently has 178 full time equivalent employees, but is carrying a large superannuation legacy from when the forestry business employed hundreds more staff, and which is effectively a cost of production in the past not of today.
- It is many years since the business has been able to operate commercially without Government support – whether that was through previous Government’s direct subsidy of commercial operations, equity transfer, borrowings or sale of assets.
- That leaves both the business itself and the customers it serves commercially vulnerable - and the Government is not willing to allow that situation to continue.
- The Government accepts the advice of the Forestry Tasmania Board that while the required wood volumes are in fact available on the Permanent Timber Production Zone, a significant volume cannot be harvested commercially at current prices.
- This is because of factors such as the quantity and quality of wood, the distance to market, cost of harvesting, and the cost of new road construction for coupes that are not readily accessible from the existing road network.
- The Government also accepts advice from the Board that even after substantial recent contract price increases including built-in escalation clauses, it will not be possible for the business to meet its full supply obligations at a commercial rate of return for the foreseeable future.
- The Government does not accept that the answer lies in a return to perpetual subsidies or other assistance to support FT’s commercial operations. Tasmanians are entitled to expect that industry pays its own way for the public native forest that it utilises.
- The Government recognises – but does not accept - the Board’s advice that a commercial solution would be to sell all of the hardwood plantations, accept a consequent reduction in the sustainable yield from the Permanent Timber Production zone, and use proceeds from the full sale of plantation to compensate mills for the cutbacks.
- This would significantly impact jobs and families, particularly in regional communities, and would be directly contrary to the Government’s plans to grow the industry. It will not happen under this Government.
- The Government is not prepared to impose a reduction in wood supply to industry and give rise to wider sovereign risk concerns for the Tasmanian economy.
- This is not about whether wood supply obligations are met – it is about how those obligations are met.
- I need to be clear. The Government will not reduce the legislated requirement for Forestry Tasmania to make available 137,000 cubic metres of high quality sawlog to its customers and it will not support proposals that would see the business unable to honour its current wood supply contracts.
Decisions in Detail
- Madam Speaker, let me outline the Government’s response to the Board’s advice and the decisions it has taken in some detail:
- Forestry Tasmania needs fundamental change to its structure, its focus, its cost base and the way in which governments have traditionally governed and directed it.
- The business has a responsibility to its ultimate owners – the people of Tasmania – to demonstrate that it can deliver a credible pathway to achieve and maintain a commercial approach to dealing with the state’s substantial commercial forestry assets.
- This will be challenging – change always is.
- The business must be restructured to ensure:
- Its operations reflect the new operating environment
- It is focussed on core commercial functions
- There is clear accountability for responsibilities
- There is a wood production division focussed on managing production and selling wood
- It has a non-commercial division to focus on business activities not directly related to wood production – such as land management - including reserve management, fire prevention and suppression, research and development, as well as community development activities such as trails and mountain biking.
- The non-commercial division will also be responsible for management of community service obligations required by government.
- To be absolutely clear and to ensure a level playing field with no unfair competition for private forestry growers, the wood production division will be expected to transition to financial sustainability as soon as practicable.
- The Government forestry business will remain a GBE, but will be downsized and will be leaner, more efficient and more agile and will have a more defined commercial focus. It will also be renamed.
- The new name will be Sustainable Timber Tasmania, which will begin operating from 1 July 2017.
- Transparency is vital in order to build community and industry trust in Sustainable Timber Tasmania.
- Keeping a single public forest entity with clearly delineated divisions between production and land management and community service roles will ensure the most efficient approach, while improving transparency and accountability.
- If industry is to accept that over time it must pay higher prices, it must be satisfied that Sustainable Timber Tasmania is as efficient as possible.
- Benchmarking will be undertaken and regularly reported to demonstrate that this is the case.
- The wood production division needs to be able to clearly demonstrate as quickly as possible that it can operate commercially and without subsidy.
- As I have said, we will not reduce the legislated requirement for the business to make available 137,000 cubic metres of high quality sawlog to its customers. It is simply a question of how this is achieved.
- There are two ways in which the Board’s advice in respect to harvesting levels above 96,000 cubic metres can be tackled.
- First, higher prices can be sought to offset the more costly coupes. The Board has already put in place a process to improve prices from sawmills for the forthcoming 5‑year period. However it is constrained in how far it can go by existing contracts and industry’s capacity to transition to higher prices.
- The second approach is to look for lower cost sources of supply by finding alternative areas to harvest.
- Other available areas include the private forest estate and the Future Potential Production Forest, which was set aside by Parliament for just such an eventuality.
- To this end, I intend to table legislation next year to remove the requirement for legislated wood supply obligations to be met solely from the Permanent Timber Production Zone.
- The proposed changes, which I will outline in more detail at a later date, will make the Future Potential Production Forest land available for access for commercial harvesting from 1 July 2018 – two years earlier than initially envisaged. This will apply to just over 357,000 hectares of the FPPF land – it will not apply to the 35,000 hectares which has been incorporated into the Tasmanian Wilderness World Heritage Area.
- It also will make clear that wood will also be sourced from the private forest estate to help meet the legislated requirement to make available 137,000 cubic metres of high quality sawlog, subject to commercial agreement with interested private growers.
- Subject to Parliamentary approval, the Future Potential Production Forest land will in future be known as Production Forest land to reflect its intended usage.
Private sector involvement
- The Government will not authorise harvesting by Sustainable Timber Tasmania on public land outside the Permanent Timber Production Zone. The opportunity instead will be offered to private sector forest managers and growers.
- Any private sector interest in operations on the Production Forest Land will be required to be conducted under the same conditions and to the same standards as apply on the Permanent Timber Production Zone land. This will include full compliance with Tasmania’s forest management system including forest practices and other environmental standards. It also will require the contracted forest manager to seek independent third party forest management certification to ensure that issues of sustainable yield and the reasonable social, environmental and economic expectations of the community are met.
- In this regard the Government will require companies interested in conducting forest operations on the Production Forest Land either to seek certification in their own right or engage a group certification scheme provider.
- These measures mean that Sustainable Timber Tasmania’s management unit will remain entirely within the Permanent Timber Production Zone.
- The forest management standards and practices of the public forest manager also will remain unchanged, as will its aspiration – which is fully supported by the Government – to achieve Forest Stewardship Council certification. All harvesting and regeneration activities will need to pass the world-leading standards applied by the Forest Practices Authority.
- There will be no watering down of these standards for any private sector access to the Production Forest land. The standards will be exactly the same. It is worth noting also that private forest managers have been able to achieve full FSC Forest Management certification on native forestry operations.
- That means there is no reason to believe there would be any detriment to FT’s application for FSC certification from any access by others to the FPPF Wood Bank – in fact it may help by reducing harvest pressure on the PTPZ.
- This will broaden the sources from where wood can be supplied to Tasmanian processors.
- Sustainable Timber Tasmania also will be encouraged to provide more opportunities for the private sector on the Permanent Timber Production Zone. Under the successful expression of interest process for southern residues a stumpage model is already underway.
- Going forward the Government forestry business will focus on its core responsibilities of growing trees, managing land and selling wood to domestic customers.
- This approach will provide more opportunities for the private sector and greater certainty in respect to the operating environment.
- Prices need to increase to reflect the national market value of the raw product, at a pace that reflects the ability of domestic processors to adjust.
- The Board has advised the Government that current prices are substantially lower than comparable prices interstate.
- A process of addressing this imbalance is underway but the simple fact is that over time industry will need to pay more for the wood it receives.
- This is not something that can occur immediately without job losses or businesses closing.
- Government and industry need to work together to increase the value of the products produced from Tasmanian timber and strengthen the brand and marketing that goes along with it.
- This will occur between now and the time of the next round of price reviews for major customers. These reviews will occur over the next two to five years, and will be conducted on the basis of moving to fully commercial pricing and a more transparent approach.
- Through the Ministerial Advisory Council a draft Industry Growth Plan has been developed. Now that the outlook for the government forest manager is clear, I am looking forward to the MAC getting on with the job of further refining and finalising this plan.
- Implementing the growth strategy will over time deliver a more sustainable forest manager, along with higher value products with better margins and a more secure future for all industry participants.
- No longer can Tasmanian wood products be treated as a low value commodity. The resource needs to be valued more appropriately and more highly and government and industry need to work together to deliver that outcome.
- Sustainable Timber Tasmania must ensure that it receives maximum value from all parts of its harvesting activities.
- This is exactly the reason why the Government pursued the southern residue EOI process.
- While the contracts entered into significantly improve the situation, it remains important that a longer term solution, such as a port in the south or some form of on-island use of the residues is developed over time.
- This is an important priority for this Government.
Exit from Exports
- In keeping with the commitment for the government forest manager to focus on core business and exit from activities where the private sector can operate, FT is preparing a strategy to exit from direct exports.
- The exact timing of this change will be announced in coming months.
- This move will simplify operations, remove the business from a market it doesn’t need to be directly involved in, and provide further opportunity for the private sector to fill the gap.
- While Forestry Tasmania has reduced costs over recent years and significantly reduced employee numbers, there is more to do before the business is fit for purpose in its new operating environment.
- Further staff reductions – up to 35 positions over time - will unfortunately need to be pursued as the restructuring proceeds, and non-salary savings will be implemented to further strengthen the operating position.
- That is deeply regrettable, but inevitable as the business continues to respond to the commercial realities of the market place.
- FT also has processes underway to more effectively make use of technology to achieve efficiencies and improve the level of information available at a management reporting level. This will drive improvements across the business and will transfer to Sustainable Timber Tasmania.
- Forestry Tasmania has identified the cost of maintaining its road network as a structural constraint. This is a complex issue given the multiple use nature of many of the roads and the sheer size of the forestry road network which has developed over time – almost 14,000 kilometres.
- This includes roads which provide the primary access to some of Tasmania’s prime tourism destinations, including the Tarkine Forest Drive, the Walls of Jerusalem, the Big Tree Reserve in the Styx and the road to Cockle Creek. It also includes significant local access routes such as the Plenty Link Road between the Derwent and Huon Valleys.
- In a number of cases, non-forestry usage significantly outweighs ongoing forestry requirements.
- Infrastructure Tasmania will undertake a review of Forestry Tasmania’s road network to ensure the current arrangements for ownership and maintenance are appropriate. It is anticipated this review will be completed by March 2017.
- The need for alternative funding arrangements, with Government potentially paying more to account for the multiple use nature of the roads, will be considered following this review.
- The Government has previously announced that Forestry Tasmania will divest so much of its hardwood plantation assets as is required to support its operating deficits over the transition period, subject to appropriate due diligence, including impact on sustainable yield and certification.
- That due diligence process has been completed with the assistance of Sale Advisors Gresham Advisory Partners Limited.
- FT’s estate is extensive and consists of various grades of plantation estate, with around 20,000 ha managed for sawlog production post 2027. This is an important part of the sustainable sawlog yield and for that reason we have determined to retain it. By doing so – in conjunction with other resource changes we are making - there is no question about the sustainability of the legislated requirement to make available 137,000m3 of high quality sawlog each year, and therefore no detriment to certification.
- The Government has agreed that FT will pursue the sale of only the remaining pulpwood plantations. Further details will be released in coming weeks, but the Government’s view is this will involve the sale of a long term forestry right – in the order of 99 years.
- In line with our earlier commitments, there will be no outright sale of land on which the plantations are standing.
- FT also owns around 6,000 hectares of former farm properties which it purchased on a freehold basis for plantation conversion. These will not be part of the long-term forestry rights sale, but the Board will retain the option to consider further whether a return to agricultural use may be appropriate for these properties at a later time.
- While it would be unwise for the Government or Forestry Tasmania to set a price expectation for the approximately 30,000 hectares of plantation resource ahead of the market process, the intent is that sale proceeds are used to repay debt and help fund the transition period as the business moves to a commercial model.
Non Commercial Activities
- Various cost pressures are embedded in the Forestry Tasmania business model which don't relate to the future cost of supply. This includes the defined benefit superannuation liability for past employees, the maintenance of multiple use roads across a very large and dispersed road network, and the management of land not used for the purposes of production activity.
- In the past these costs have been able to be met by FT as the scale of its operations were much broader. This is no longer possible or appropriate.
- Since 2010, FT’s employment has fallen from 549 to 178 FTEs. There are now more former employees on superannuation than full time employees in the business. Consequently it stands to reason that the business can no longer absorb the superannuation liability associated with an organisation that was once many times larger, and which really reflects wood supply in the past with no relationship to the cost of delivering wood in the future.
- Therefore the Government, in re-setting the new business model, will absorb those liabilities associated with past employees, or liabilities attached to any further employee reductions that occur as a result of restructuring and establishment of Sustainable Timber Tasmania. The mechanism by which this occurs and the likely impact on the state’s balance sheet and operating statement are still to be determined. However, it would be expected that superannuation costs would be offset by around $5 million per year. This change will significantly reduce the level of volatility in annual financial statements due to movements in valuation of the superannuation liability.
- Together with a review of other CSOs covering non-forestry costs associated with maintaining a vast multiple use road network and the requirements of managing 340,000 ha of non-commercial forest within the Permanent Timber Production Zone, these measures will provide support for activities that are unrelated to the commercial business.
- Together with the renewed focus on commercial sustainability in the wood production division, they will assist in putting the business on a sound financial footing.
- However, they will not remove the need for the business to reflect the commercial realities of the marketplace. Tasmania’s high quality timbers are at least as good, if not better than, interstate products and prices need to reflect that quality. Over time this will involve price increases across the customer base, including the sawmilling sector, the peeler sector and the fibre processing sector.
- In the interim, the business will need to manage any transitional funding 'gap' through the remaining two years of cable harvesting funding, any surplus sale proceeds from the sale of the pulp plantations after debt is repaid and seeking out lower cost resource to supply to industry wherever possible.
- This will involve a significant change for all stakeholders. Business costs need to come down further, it must prove itself to be efficient through improved levels of transparency and it needs to be more innovative and flexible in respect to how it makes available a sufficient level of resource over time.
Special Species Timbers
- Access to special species timbers has been significantly impacted by creation of new reserves, including the 2013 extension to the Tasmanian Wilderness World Heritage Area.
- The Government will proceed with the currently legislated program to allow access to the FPPF Land from October 2017, subject to a new Special Species Timbers Management Plan which is currently under development.
- The Government also will request the bsuienss to consider the opportunity for special species timbers access to around 340,000 hectares of the Permanent Timber Production Zone which is in informal reserves or otherwise unavailable for commercial eucalypt harvest. Any such access would of course need to be considered by the Board in the context of the current application for FSC certification.
Private Forests Tasmania
- In coming to its decisions over the future of the public forestry operating model, the Government has been conscious of ensuring the forest industry, including the private forestry sector, continues to grow in Tasmania.
- It is therefore Government’s intention to consult with the private forest growers and managers in the coming months, over the role and functions of Private Forests Tasmania and what, if any, further reforms are recommended.
- The challenges are substantial. This will not be easy but we have a lot going for us.
- Our forests overwhelmingly are protected in our world-leading system of parks and reserves;
- Our forest management system for production forests is acknowledged as one of the best in the world; and
- We are committed to achieving and maintaining high levels of independent certification of our forestry operations.
- All of our major industrial forest managers – across both public and private land, and both plantation and native forests – have independent forest management certification, and increasingly our smaller growers are following the same path.
- The Government remains absolutely committed to work with industry to grow our industry, provide more jobs for regional communities, and add value to our renewable, sustainable forest production.
- We are moving the public forestry business to a new commercial footing. The plantation sale will provide the key source of funding for the transition, supported by the current price increases being progressed with industry and further business efficiencies.
- Some of the non-commercial costs currently being shouldered by Forestry Tasmania will be removed in the pathway to sustainability, which will also hasten the transition.
- In the medium term, new options for pulpwood and the continuation of national-parity pricing for sawlogs and peelers will also be key ingredients.
- The Government will continue to partner with industry to ensure that they - and the Tasmanian community - are able to achieve the best value for the timber produced from our public native forests.
- One of the keys to unlocking the opportunities ahead is research and development and we are fortunate to have two major initiatives to bring together our research efforts – the National Transformation Training Centre for Forestry and Wood Products and the Launceston hub of the new National Institute for Forest Products Innovation.
- We look forward with confidence to the sunrise industry of the future, with this new research focus providing the spark for new confidence, new directions, new value-added products, new investment and new jobs based on our renewable, sustainable production forests.
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