Gottstein mission identifies business case for high return on plantation investment

Gottstein missionAUSTRALIA’S forest industry should establish a business case for direct government investment in growing trees to establish critical mass in timber resources, based on benefits for the public good.
That’s one of the conclusions by Cameron MacDonald, chief operating officer at HVP Plantations, who has returned from a Gottstein fellowship study mission to industry operations in Europe.
Mr MacDonald said Ireland was investing $15,580,000 (about €100m) a year on establishing a private plantation resource based on a business case developed by a respected economist.
“The business case established that the returns to Irish economy would exceed the government’s initial investment,” Mr MacDonald said.
“The rationale that underpins this investment could be a model for securing government investment in Australia,” he said.
“Forest management services funded through compulsory levies or direct government support is critical to develop private growers’ knowledge in growing trees and faith in timber markets.”
Mr MacDonald said Finland had established a management service network for private growers through a compulsory levy system facilitated by a significant established resource base.
“Ireland has established a similar network by allocating a fixed proportion of government grants for the establishment of plantations to the contractor workforce charged with putting the trees in the ground,” he said.
“Resource and market information is critical to private growers; the Irish government has developed site productivity information to ensure planting programs funded by government target suitable sites.
“An NGO in Finland, supported by government contract work, has developed systems skills that are not only utilised locally but have been taken to the world through Finnish-sponsored foreign aid programs.
Mr MacDonald said private landowner support to provide the land base for plantation investment was critical for ensuring a sustainable estate was established.
Growers had a voice in the establishment and/or management of the private resource in both Ireland and Finland, primarily through peak agricultural bodies. This enabled the industry (private, industrial and processing) to present a united voice to government that facilitated establishing a positive policy environment for the industry rather than one where government could sit on the fence and point to industry dissent.
“A closer working relationship with the National Farmers Federation in Australia is a logical starting point for the forest industry in Australia,” Mr MacDonald said.
Even though Mr MacDonald says he was aware of the market distortions created by the European Union, and more specifically the Common Agriculture Policy, he “naively latched on to the fact” that Ireland had established 200,000 ha of private plantations as a possible solution to Australia’s inability to fund investment in long rotation plantations.
“While I quickly learnt that politically Europe is a totally different proposition relative to Australia, there are still concepts and approaches that we can learn from here,” he said.
Mr MacDonald encouraged readers of his report to take an open mind to the contents, and before they denounced some of the ideas as “never working here”, they should consider the thought process that has been followed, and more importantly how the needs of a key stakeholder (i.e. the landowner) have been placed front and centre in both expanding the resource base but also building a powerful coalition for the industry more broadly.
In background comments to the report, Mr MacDonald said both Ireland and England entered the 20th century with very little forest cover; <1% and 5% respectively, essentially caused by deforestation to facilitate agricultural expansion.
The lack of timber resources meant that England nearly ran out of domestic timber supplies during World War 1, resulting in programs to re-establish plantations on government land.
Today, the UK Forestry Commission has more than 250,000 ha of commercial plantation in consolidated blocks, 75% of which is conifer species – Sitka spruce (Picea sitchensis) in the uplands and Scots pine (Pinus sylvestris) in the lowlands.
There have been various grant schemes to encourage planting on private land over the last 90 years, particularly in the UK where more than 1.3 million ha of woodland has been established in parcels averaging 13 ha, of which 75% are broad-leaved species.
Central to the provision of these grants has been funding from the European Union of up to 70% of the cost of the various schemes, linked to two complementary policy objectives:
• To reduce the over-production of food in the EU by diverting up to 15% of marginal farmland into alternative land use, primarily to grow trees.
• Increasing forest cover in countries that had experienced significant deforestation, such as Ireland and the UK.
With the EU funding has come certain requirements, particularly in terms of environmental constraints. The key requirement is a cap on the area planted under exotic species in a given compartment, which is currently set at 65%.
“The government has been clever in how the payments have been structured (as distinct from a simple tax deduction of 48.5c in the dollar to wealthy investors in MIS schemes in Australia),” Mr MacDonald said.
The measures to protect the government investment and to ensure ongoing investment in plantation forestry include:
• About 40% of the grant is allocated to pay consultants to submit the grant application and to forest management contractors to do the work. This is to avoid landowners seeking to take short-cuts, but also a key element of the business case for government funding is to develop employment opportunities in depressed regional communities.
• Not all the premium is paid up front. A proportion is held in reserve until age four until the performance of the stand is assessed by a registered forestry consultant or the Forestry Service to ensure the stand has met a minimum performance standard.
• The site must pass a strict assessment of the productivity and growth potential to ensure the benefit of the investment is maximised in terms of saleable product.
Perhaps most importantly, Mr MacDonald said, the land was permanently classified for timber production and a condition of the felling licence was that the landowner had to re-establish the next stand at their own expense.
He said grants, premiums and profits from sale of produce were tax free in Ireland and the UK.
“The Irish government is considering putting a cap on the tax-free amount of €125k per annum (about $A39,200) which would be breached if a farmer were to clearfall more than 6 ha in any one yea,” Mr MacDonald said.
“In addition to the up-front payments, farmers can apply for additional payments for activities conducted over the lifetime of the plantation.”
Note: HVP Plantations owns 160,000 ha of softwood and hardwood plantations in Victoria, selling around 3 million tonnes of log products a year to sawmills and paper mills.
Cameron MacDonald graduated from the University of Melbourne in 1989 with a Bachelor of Forest Science (Hons) and has subsequently gained a post-graduate degree in accounting and a MBA from the Melbourne Business School. He has more than 20 years’ experience in the industry in both the plantation and native forest sector covering both operational and finance roles.