ACHIEVING CONTRACTOR SUSTAINABILITY IS JUST GOING TO BE PLAIN TOUGH

B.C. logging contractors are continuing to push for a viable business sustainability model, but there is some tough work ahead to achieve that goal.

By S. J. Trotton

For a good part of last year, Canada’s forest industry generated economically positive headlines that ranged from news about healthy lumber prices to wide-spread multinational support for the United States-Mexico-Canada Agreement (USMCA) trade deal, even though there are no signs of a deal on softwood lumber.

However, what has not changed as we enter 2019 is the status of the industry’s logging contractors, who continue to find themselves struggling when it comes to staying sustainable in the long-term.

Simply put, those familiar with this contractor sustainability challenge define it as an economic imbalance between what logging contractors are paid and what licencees expect of them. Others say it is a bigger-picture problem that involves logging contractors finding consistent work at high-enough rates to keep their operations viable. However, all groups agree: the monetary discrepancy is so significant, dozens of contractors have been squeezed out of the business in recent years—or they plan to abandon the sector if conditions get worse.

The contractor business model itself has some easy-to-identify challenges to overcome, say observers. The first being owners are aging and don’t have succession plans, and the vocation is not attracting enough potential employees starting their post-secondary training. The second challenge industry analysts cite is the average profit margins seen by those looking to take over contracting businesses are considered marginal, and they claim it’s because of chronic financial underperformance.

Vancouver Island company W.D. Moore Logging is an example of a coastal logging contractor closing its doors due to an ineffective supply chain model that would not allow them to stay in operation. At the time of its closure in 2017, which came after almost 90 years of being in business, owners said the timber tenure system had become so complicated, they had no choice but to shut down. In British Columbia, groups like the Truck Loggers Association (TLA) and Northwest Logging Association (NWLA) have vocalized their concerns for years, and report as many as 30 to 40 logging contractors throughout the province have shut down in the last decade alone. NWLA director and associate member Rick Brouwer has gone on record repeatedly to say: “What we see (evidence of) is that our members and contractors throughout B.C. are becoming increasingly less viable.”

When qualifying what he means by viability, Brouwer explains further: “There are few new or young workers coming into forestry in our region, and without them, we won’t have the chance to develop or catch the interest of the next generation of contractors.”

In his messaging, he also points out that a significant reason for this sustainability issue is the lack of understanding when it comes to recognizing the costs involved with logging, and the fact that logging contractors are just like any other business—operators need to make a profit and have access to reinvestment capital.

Finally, Brouwer says, over the years, logging contractors have been challenged by “long delays in processing plans and permits by government agencies. 

Among the recommendations that have been made to improve operating conditions for B.C. logging contractors is that British Columbia’s Ministry of Forests should work with contractor associations to develop a government/industry funded training program beginning in 2019, and that the program be delivered in the field around the province.

“These delays can mean local licencees are unable to consistently provide contractors with a steady flow of blocks to log and/or develop, resulting in lots of stops and starts, mobilization and de-mobilizations,” Brouwer added. “The contractors try to accommodate the needs of the licencees, but the moves and the ‘I-promise-it’s-just-temporary’ and ‘the-permit-should-be-here-any-day’ delays mean higher costs, less revenue, and much more frustration.”

Their concerns have prompted action at the provincial government level in British Columbia where 13 recommendations resulting from the lengthy Logging Contractor Sustainability Review were made last year.

Among these recommendations that are focused on improving the overall competitiveness of both logging contractors and licensees were:

• BC Timber Sales should be encouraged, within its mix of blocks for auction, to offer a greater number of smaller blocks.

• Encourage licencees to support contractor purchases of equipment.

• Government to work with industry associations to develop best practice models and options.

• Licencees work with contractors on planning and permitting in order to schedule work for 12 months ahead, and that the Ministry Forests take the necessary steps to facilitate this through improvements to the permitting process.

• Government acquire the most advanced version of LiDAR (2.0) and make province-wide topographical and inventory data freely available to all partners on the Crown land base.

• Information on quality of contractor/licensee relationships should be gathered by government and published annually.

• Models must be shared with contractors.

And, British Columbia’s Ministry of Forests, Lands, Natural Resource Operations and Rural Development should work with contractor associations to develop a government/industry funded training program beginning in 2019 and the program be delivered in the field around the province.

Aaron Sinclair, Principal of PNL Consulting Inc., a Prince George, B.C.-based financial consultancy who provides fiscal expertise for mid-market companies, has studied the issue for many years and echoes the need for dramatic improvements when it comes to fixing the logging contracting business model. His company has worked with numerous clients who report they can’t have a succession plan because nobody wants the business.

“I have talked to owners in their 70’s and a few of them have said, ‘I will continue to run the business until I die to support the employees whose families depend on these jobs,’” says Sinclair. “A lot of these contracting businesses are generally not making enough money to make them worth somebody buying them out and taking on all the risks associated with those investments. They are worth more sending their equipment to auction than as going concerns.”

Sinclair, who describes British Columbia’s forest sector contractors as “a shrinking breed”, says the industry as a whole needs to find ways to work more collaboratively.

“They need to look at, how do we actually make the supply chain most efficient and sustainable, with the end product being top of mind,” he explains. “Instead, there’s just a lot of fighting about cost management along the way.

“Many are too busy trying to create the cliché of a larger piece of the pie instead of working together to make a larger pie.”

A step toward fixing the current business model, explains Sinclair, would be to incorporate more best practices when it comes to logging and all of the associated costs. “Generally, if there were more opportunities of sharing best practices, we would see some improvement on the sustainability side. Setting contractors up for success can be a more important factor of a sustainable supply chain than the actual rate,” maintains Sinclair. Among those best practices would be what Sinclair describes as a very standard piece of advice: “Contractors need to cost every piece of equipment they need for their operation. They also need to cost all aspects of any project they take on. Those who do that generally have a better return on investment,” says Sinclair.

Sinclair says the “long-term solution to supply chain sustainability is creating an attractive investment environment for capital. That doesn’t necessary mean rates have to increase. It means that the return has to justify the risks of the operating environment.”

The B.C. government is currently working on a report that will be completed by Dan Miller, a former premier and provincial cabinet minister who was hired back in August as a third-party facilitator. In his role, Miller will be responsible for bringing the province’s contractor and licensee associations together to identify where there is consensus, in which case whether or not action can be taken on those recommendations, and where there may be differences of opinion.

Wayne Lintott, who is general manager of B.C.s Interior Logging Association and has been working in the industry since 1974, says his association will be very interested to hear what the final outcome of this review process will be as his association was actively involved in lobbying the government to conduct the review in the first place.

“We felt that the industry was simply not sustainable so requested a review be conducted,” he says.

He says that the 13 recommendations were what associations like the ILA expected, and that they all come down to, “a better line of communication between the licencee and contractor.”