Return to the Current Issue
Out of Step
Canadian forest management is on a very different path compared to
the management systems of its competitors in the market. Is our government-controlled,
production-based system delivering the most value?
By Dr. Michael J Heit and John McPherson
The Canadian forest industry revolves around provincial Crown land, with the provinces,
provincial based industrial associations and companies operating independently. The end
result of all this is a government-industrial complex. Senior forest company staff tend to
be selected for their skills in government liaison. Even if staff is selected for their
business abilities, they still end up spending valuable time trying to improve their
companys financial success through negotiations with their landlord the government.
As a result, the great forestry debates such as Ontarios Lands for Life, BCs
Forest Practices Code or even Albertas fibre play of the 1980s, tend to reflect
insular provincial thinking. If we are selling in a global economy, and we are, there is a
need to consider decisions, costs and financial operations in a wider context. We need to
be more conscious of market pull as opposed to operations push. We need more intelligence
on our competitors strategic moves to formulate our own strategic positions. If
anyone doubts the close government/ industry relationship this system requires, they
should check out the daytimers of senior executives of Canadian forest companies compared
to their American counterparts. Our executives spend much more time on government issues
and bureaucratic meetings than their global counterparts.
Consequently, Canada has a series of government-driven, isolated, unique polices on
stumpage, tenure, and land use based on too much geography and too much local history. We
are missing the large paradigm shifts impacting the global forestry business. The
provincial base of forestry and insular nature of the industry has disconnected us from
the large global business and financial issues. The kind of public and business policy
cauldron that exists in Canada is just not conducive to flexibility or adaptability the
cornerstones of global competition. Our competitors are in strategy sessions,
restructuring, shifting markets, creating shareholder value, and changing product mixes
meanwhile our Canadian talent is stuck in meetings with their government landlords.
In the past, the world was short of commercial wood and Canada had
large uncommitted volumes of timber and chips. Labour, companies and government all fed
well off the high resource rents from our natural forests. This is no longer the case. We
have to work smarter. We need to break out of the insular government-industry complex. We
need to follow, if not lead, international business and financial trends. On the world
stage, Canada has gone from being the exporter of forest products to just another exporter
of forest products. The world is awash with fibre and Canada could move from a player
towards being a future bit player fairly quickly. We are already losing market share in
newsprint, pulp, paper, softwood lumber and value-added wood products. Some of the most
important global forest industry changes occurring today are happening in the
institutional land management arena. At the risk of being over simplistic, Canadian
forestry consists of a large block of Crown land being involved in an area or volume based
These tenures were the building blocks for hinterland settlements
and powerful province-building mechanisms. Over time, these tenures have been the chosen
instruments for delivering multiple use, industrial strategy, value-added process-ing and
revenue generators. Typically a large tenure area feeds all of its logs through one or two
sawmills and then chips flow to a pulp mill under a chip contract. The engineers try to
build a one-size-fits-all mill or, perhaps have a small and a large log line mill.
Historically, this was a good policy framework. However, it is now clear that our huge
forestry estates are generating a low or even negative return, hence Canadians are not
benefiting from capital accumulation from what is our largest capital asset. Our forest
assets have changed from province-building forces to provincial liabilities. It is also
becoming clear that the one-mill-fits-all is keeping our product mix in the low end
commodity arenas. Why is this and can we do better? The comments referring to a low or
even negative return are much less true with many of our international forestry
The USA, Scandinavia, northern Europe and recently New Zealand (and
soon South Africa and part of Australia) are pursuing shareholder value (both corporate
shareholder value and societys shareholder value) in different ways. These countries
are pursuing shareholder value through a more active liaison with the great hordes of
capital driven by mutual fund managers and pension funds. Compared to these other
countries, Canada is going in the other direction and continues to pursue shareholder
value by revisiting and rearranging our command-and- control regulatory and tenure
systems. Large areas of multispecies natural forests are reduced to their lowest common
denominator in the attempt to produce low value commodity wood products in the most
efficient way possible. This overall approach ignores the possibilities for additional
value and job creation. Our tendency is to haul a lump of logs, run this lump through
high-speed, high production socalled spaghetti mill operations and dump this commodity
lump into one mar-ket. Lump in = lump out, to steal a phrase. Canadians are becoming quite
unique in their approach to creating value from forests. For example, BC has about four
per cent of its forested lands in private hands (Quebec eight per cent, Ontario 11 per
cent). In the US, about 68 per cent of the forested lands are privately owned with Sweden
at about 70 per cent.
New Zealand has now sold the rights to almost all of
its plantation forests to various internationalcorporations and financial institutions,
for periods of up to 70 years. South Africa is now in the process of privatizing its
soft-wood plantation forests, as is part of Australia. Our unflattering summary of
Canadas policy discussion is that it becomes too provincial very
quickly. To put it in a broader context, and to objectively explain some of the paradigm
shifts currently going on, we can look at three common-wealth countries that have a
provincial structure, parliamentary systems, large Crown land holdings and land claims
sim-ilar to Canada. The accompanying chart gives a brief outline on how New Zealand,
Australia (Victoria State) and South Africa have decided to change their approach to
forest ownership and tenure as they look for new ways to create shareholder
value from their forests. It can be seen that these forests have been changed from being
government owned to being privately owned (at least for 70 years) with some
sort of positive cash value being generated for the government coffers.
Forest policy changes in NZ, Australia and South Africa
The process in New Zealand was driven by the national financial crisis. The forest
privatization process was complicated by the land claims (Treaty of Waitangi claims) and
the conflict-ing claims of the forest industry, conservation groups, and the publics
rights of access.
The political overtones of selling the Crown jewels were overcome by
leasing the land and selling the trees.
They have leased the land and sold the harvest rights to the trees. Fee simple land
sales are not a viable political option. Right, central, and left wing governments have
all entered into this keeping the land and selling the tree paradigm shift.
All three of these countries have land claim issues that have very high political
profiles. South Africa, for example, has over 3,000 land claims.
New Zealand now has a growing fibre base and a stable fiscal climate. In New
Zealand, sawmills and panel plants have not closed as a result of forest ownership
In New Zealand, trees and even parts of trees are merchandized and then
directed toward processes that tend to maximize the inherent value of each tree. (Note:
The Southern Hemisphere softwood plantations are largely pine. However, the various
plantations can contain up to three or four different species of pine in each
leaseholding.) Australia (state of Victoria) is a perpetual licence and includes
100 per cent crop equity in the trees. The rationale can be expressed as
what business does government have growing trees for industry (remember these
are plantation lands) and could we not get better industrial development without the
rigidities that government ownership implies.
The large leases have raised the most cash for government, but have not spun off
many jobs and value-added growth. Medium and smaller leases have been used to develop
skilled jobs and value-added products. It can now be argued that some of the
original leaseholders have paid too much and have struggled under the debt load.
Global scale pension and mutual funds are all well-acquainted with and knowledgeable of
government forest privatization.