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Chapter six - Future plantation-sourced sawlog supply
Introduction
6.1
Paragraph (d) of the Committee's terms of reference
requires it to ascertain whether there is demonstrable need for government
action to encourage long rotation plantations, particularly in order to increase
the supply of plantation sawlogs. It is issues arising from this paragraph of
the terms of reference that are addressed in this Chapter.
6.2
The Committee, in examining this issue, sought to
establish the demand for longer rotation plantation timber, the extent of that
demand, and the extent of any shortfall. It also examines actions that the government
might pursue to encourage longer term rotation plantations.
Longer Rotation Plantations?
6.3
Evidence provided to the Committee suggested that there
is general agreement regarding the need to develop longer rotation timber
plantations and, as a consequence, an unmet and increasing demand for sawlogs. Sections
of the Australian plantation forestry industry told the Committee that the need
for longer rotation plantations had been acknowledged and that serious
consideration was being given to facilitating the expansion of this sector of
the industry.
6.4
The Australian Forest Growers (AFG) suggested that
planning longer rotation plantations can ensure supply of logs for sawing and
veneer. AFG argued that the expansion of Australia's longer rotation
plantations is necessary in order to replace the declining resource available
from public native forests as more of that resource is reserved from
production.[183]
6.5
By way of example, AFG pointed to the need for softwood
plantations specifically to expand existing resources in regions where current
supply is insufficient to support sustainable long-term integrated processing
industries: in south west Western Australia, south east NSW, northern Tasmania,
northern and south eastern NSW and northern Queensland. AFG also stressed the
value of longer rotation plantations in terms of their landcare and
conservation benefits, such as soil binding, nutrient recycling and habitat creation.[184]
6.6
The National Association of Forest Industries (NAFI)
argued that future investment prospects for short-rotation pulpwood crops are
positive but limited, given the current resource base and future market
opportunities. As a consequence, "any additional growth in the industry
would rely on investment in longer-rotation crops to produce material for
sawing, peeling and slicing".[185]
6.7
NAFI drew attention to the West Victorian Regional
Forest Agreement, which makes specific reference to the removal of export
controls from unprocessed wood and woodchips sourced from Victorian plantations.
It also noted agreement by parties to the West Victorian RFA, that the current
scale of hardwood sawlog plantations will not be adequate to provide an
alternative source of supply to native forest hardwood sawlog resources in the West
Victoria region.
6.8
Signatories to the West Victoria RFA also agree that a
significant expansion of both hardwood and softwood plantations (on previously
cleared land) in the West Victoria
Region would be advantageous to the
industry. The fact that "governments recognise the need to facilitate
product diversification in the plantation sector" is also seen as being
beneficial to the industry.[186]
6.9
In a submission to the inquiry, Saltgrow Pty Ltd - a horticultural
company with offices in New South Wales and Queensland - highlighted the fact
that that some RFA agreements (particularly in Queensland) are based on the
transition from native forest logging to plantation hardwoods over a 25 year
period and argued that the achievement of this target will require immediate
investment in long rotation hardwood plantations.
6.10
The Saltgrow submission expressed qualified support for
the 2020 Vision, describing it as
both "commendable and necessary".[187] However, the
company's criticism of the current Vision strategy centred on what it described
as its overly simplistic analysis in relation to the geographic and demographic
distribution of plantation development; and the Vision's failure to "maximise
the potential social and environmental benefits from co-ordinated and targeted
plantation resource developments".[188]
6.11
It highlighted several serious impediments which need
to be addressed in order to encourage private investment in longer rotation
plantations, and more specifically to integrate this type of operation into
agricultural enterprises on a fully commercial basis. These impediments include
the long term investment required for hardwood plantations for solid wood
production. The time period of approximately 20 years is greater than the seven
to ten year horizons expected in the mainstream investment community.[189]
6.12
In support of longer rotation plantations, the Plantation
Timber Association of Australia (PTAA) argued that they have the capacity to
supply a range of logs suitable for a number of end products. They also claim to
have a greater potential to supply fully integrated processing operations which
have the capacity to maximise income and employment outcomes for regional
communities.[190]
6.13
It was further argued that the current softwood
plantation resources in Northern Tasmania, South West Western Australia, South
East NSW, Northern NSW and North Queensland are not of sufficient size to
support internationally competitive processing operations in the long term. They
indicated that the existing longer rotation plantation resources - those that
are located in regions which have not yet reached critical mass - should be
expanded to enable their full potential to be realised.
6.14
However, the Institute
of Foresters of Australia (IFA) argued
that sawlogs are essentially no more economically valuable than other forms of
wood production such as pulpwood, and that any decisions regarding longer
rotation plantations should be left to the market. Nonetheless, the IFA stated
that if there was a possibility for a substantial increase in public good
benefits from encouraging longer sawlog rotations then government should
examine this on a case by case basis:
For example there may be a case for subsidising longer rotation
plantations, at least for an initial establishment period, where it can be
clearly demonstrated that it would assist in smoothing industry adjustment
arising from reductions in the availability of native forest sawlogs or would
lead to substantial economic development outcomes. In a similar vein, there may
be a rationale for government to encourage longer rotations on the basis of
delivering improved environmental, especially biodiversity, outcomes in some
situations. This would depend on a number of factors such as species planted,
landscape context, silvicultural management regime and where it is proposed to
manage surrounding land for conservation purposes. It may be that establishing
an investment framework which fosters the development of secondary markets for
longer rotation crops is the most efficient means of encouraging such tree
crops.[191]
6.15
The IFA submission also stressed the importance of
determining the types of wood processing industries that are going to be
developed in specific plantation zones and then ensuring that the 2020 Vision includes strategies aimed at
facilitating the appropriate mix of short and long rotation plantations to
provide the necessary resources for these industries.
6.16
In addition, the IFA suggested that, given Australia's
traditional reliance on larger native forest sawlogs, the development of
appropriate technologies for converting smaller diameter hardwood logs into high
value products is as important as an adequate supply of sawlogs from longer
rotation plantations. It argued that:
There may be a case for increasing funding for research and
development into the efficient processing and marketing of products from
smaller logs. Without building the expertise to commercially process and market
products from small hardwood sawlogs, there may not be sufficient incentive to
encourage a widespread expansion of plantations for sawlogs.[192]
6.17
The Committee notes that the argument that longer
plantations rotations are necessary rests heavily on the view that it will be
required to fill a shortfall resulting from decisions to wind down harvesting
from native forests. While there are suggestions that more environmental
benefits may flow from longer term rotations than short term rotations, these
seem to be speculative. As outlined in the previous chapter, further research
is necessary to establish what, if any, environmental benefits will result.
However, what is clear is that investment for longer plantation rotation is
difficult to attract. The general view is that one of the major factors
creating the difficulty is the time required for investors to get a return on
the investment.
Government Incentives
6.18
During the inquiry the Committee received evidence from
a number of organisations outlining proposals to encourage longer term
plantation rotation. These included:
-
Research and development.
Taxation Incentives - Secondary Markets
6.19
The proposal that had the greatest support, and
requires government action, was the proposition of the introduction of tax
arrangements for secondary markets for longer plantation rotations. The
Saltgrow submission, for example, argued that a viable solution to the problem
of encouraging long term investment is the development of a secondary market
for plantations. This would allow multiple investors to derive returns from the
growth in asset value over the period of a solid-wood rotation - or at least
provide the option of exiting from an investment prior to maturity.[193]
6.20
The current tax arrangements were outlined by
the Executive Director of Treefarm Investment Managers of Australia (TIMA):
... when you establish a plantation from the beginning, because it
is an agricultural operation you are legitimately able to deduct the cost of
that establishment. When you purchase a plantation that is already standing, the
tax treatment is that that is a capital asset and, as a consequence, you cannot
deduct the purchase price of that asset and you are not able to until you
dispose of that asset later. The whole idea of having to hold on to an asset
that is so illiquid for such a long time is the thing that has discouraged the
people who would perhaps purchase such an asset. Without that, the people who
are establishing the asset want to shorten the rotation link as much as
possible so that they can get a return on their investment a lot sooner, rather
than putting something in the ground that they could sell to somebody else,
because the people are not there to buy it.[194]
6.21
The PTAA submission noted that ABARE was about to
commence a study which is expected to identify the causes for the current low
level of investment in longer rotation plantations - in comparison to the quite
significant level of investment in shorter rotation plantations.[195] It also anticipated
such a study could identify reasons why a secondary market for immature
plantations has not developed in Australia,
particularly when such markets exist in other countries.
6.22
Without pre-empting the ABARE study, it was argued that:
... one possible means of increasing investment in longer rotation
plantations would be through the development of secondary markets for immature
plantations. The existence of such markets would allow investors to enter or
exit the market at any time without waiting for a final harvest to realise a
return on investment. Such markets would also allow different investors to
specialise in managing the risks associated with different parts of the
plantation investment cycle.[196]
6.23
The AFG submission also stressed the importance of
developing a secondary market in order to encourage further investment, particularly
in longer rotation plantations. It was argued that the capacity to trade in
immature standing plantations and to freely sell out of and buy into this
particular type of asset would overcome the long-term illiquidity which has
made this type of investment unattractive to many investors in the past. AFG
noted that while inappropriate tax treatment is often put forward as a major
barrier to this type of investment:
... this has never really been tested, and the problem may indeed
be one of perception. While tax is certainly an issue, there are enough
alternative plantation-trading scenarios to indicate a rather more complex
policy challenge.
Other factors could well be part of the solution - eg,
transparent and reliable market information - and alternative approaches could
circumvent the 'tax problem' - eg, developing alternative investment vehicles,
such as unit trusts, and trading rights to the trees.
Whatever the solutions might be, the pursuit of them must be
taken seriously. The former Ministerial Council on Forestry, Fisheries and
Aquaculture requested a study on this subject early in 2001. Completion of this
work needs to be given a high priority, to inform the formulation of
appropriate and effective policies. The importance of secondary markets for
immature plantations increases to the degree that harvest guarantee loses its
appeal to prospective investors.[197]
6.24
NAFI also pointed out that other factors may be
required to be part of any equation that would include taxation provisions for
secondary markets:
By improving log market transparency and access to overall
market information, broadening the range of investment vehicles on offer and
promoting a better use of the existing taxation provisions, it should be
possible to encourage the development of active markets for buying and selling
immature plantations. If those markets do arise, the level of uncertainty and
illiquidity associated with long-rotation plantation investments should be
reduced.[198]
6.25
The Executive Director of TIMA also informed the
Committee:
It is not just a simple matter of a private grower to a possible
private buyer later down the track; there are large corporations and state
government forests are being sold. There are also problems with managed
investment plantations where tax ruling TR 2000/8 on investment schemes
specifically prohibits the selling of an immature plantation if there is a
trail or evidence that you intended to get out before final harvest. There is a
range of different scenarios for moving plantations and for buying and selling
and they all have different tax consequences. Phil
[Mr Phil
Townsend, Deputy Executive
Director of NAFI] was looking at all that and he pointed out that it was not
necessarily only the conventional problem that has been viewed as the main
reason for their being no secondary markets; there are other ways to look at
it.[199]
6.26
Further, he told the Committee that as there was no
chance the Commonwealth Treasury would respond positively to any request for
changes to the taxation arrangements in relation to tradability of plantations,
industry participants need to look at alternative ways of developing secondary
markets:
... I can tell you the Treasury has no interest in taking that
seriously. I had similar discussions with the Treasury tax policy officers in 1994
and I have had several in the intervening period, and there is no traction in
that argument whatsoever. They will not even countenance the idea that they
would change that arrangement.
So we do have to look for alternative ways of starting those
secondary markets. That is why the ministerial council in 2000 basically gave a
direction to the industry to examine what the real impediments are to getting
secondary markets in Australia.[200]
6.27
The Executive Director's view was reinforced by ABARE's
submission to the inquiry; the submission focusing on economic issues affecting
longer rotation plantations and the supply of sawlogs. It suggested that the
decision to plant short rotation plantations to supply pulp logs or to
concentrate on longer rotation plantations for the supply of sawlogs will be
based on the relative returns from the two types of investment.[201]
6.28
Further, it commented that concerns over this issue
emerge partly from the current expansion of blue gum plantations for pulpwood
production, and partly from community pressure to reduce logging in native
forests. It also argued that it is difficult to identify impediments that
disadvantage other types of plantation investment relative to short rotation
eucalypt plantations. Investment decisions for long rotation plantations are
made under the same institutional conditions:
Government intervention to alter investment patterns away from
short rotation into long rotation plantations needs to be clearly directed to
overcoming market failures rather than simply altering the economic viability
of the two types of investment. A shorter planning horizon for pulpwood
plantations reduced risks for investors by reducing discounting of future
returns at harvest, and reducing the risk of supply agreements with buyers. Pulpwood
marketing depends more on volume and less on quality than sawlog marketing,
reducing the risk to potential buyers entering into supply agreements.[202]
6.29
The Committee notes the gGovernment's
reluctance and believes that it would apply to a scheme proposed by Mr
Robert Newman.
Mr Newman proposed specific changes to the taxation arrangements in order to
encourage long rotation species plantations that included the creation of a
secondary market. His suggestions included:
-
allowing an investor to sell trees which [he]
originally established to a second owner at a taxation profit at the end of ten
years; and then
-
allowing the buyer of the ten year old
plantation a tax deduction as a primary producer (on the value for which he
purchased the trees).
6.30
Mr Newman
told the Committee that his suggested changes to the taxation arrangements
would:
... establish some interest by natural forest owners in
maintaining their forests by valuing their forests at the start and end of the
period and taking a taxable profit, and even enabling another member of the
family to buy the interest as a primary producer. This system could be repeated
on the same forest asset several times. You could have a plantation of
50-year-old red cedar with five successive owners.
...
Additionally, it would allow the creation of a secondary market
for all investors, whether they have interests in 10-year-old blue gum
currently growing, in eucalypt forests or in rainforests that are 100 years
old. The method of calculating the profit over the 10-year periods would need
to be established and the plantation blocks registered so that the tax system
would receive its share each time. That would mean that the Commonwealth would
get money over a shorter period than is the case now when people invest in
radiata pine for 25 years.[203]
Taxation Incentives - Others
6.31
Other taxation incentives
suggested during the inquiry included the proposal by the Vice President of the Conservation Council of
Western Australia for a sliding scale of tax incentives:
If you are going to grow your tree on for 30 or 50 years to
produce a sawlog, your tax benefit should be greater than if you are doing it
on a 15 or 10-year rotation for a chip log. I have not run that by an
economist, but it should not be beyond the wit of economists to work out some
way of giving better taxation incentives to people who are prepared to grow
their crop for longer to produce sawlogs.[204]
6.32
The General Manager of Operations of Forestry Tasmania,
Mr Paul
Smith, told the Committee
that Forestry Tasmania was very keen to see a taxation regime that would
encourage longer term investment in plantations and suggested that the
Commonwealth had a role to play in attracting investment to Tasmania:
Currently investors are reluctant to
commit to 20 to 25 years for eucalyptus solid wood plantations and those longer
rotations are required for pruning and to get the value. As I said before we
are growing longer rotation hardwood crops for sawlog and rotary veneer
production and we have the object of encouraging new industry to utilise these
plantation products. It would be good to see a resource grown on private
property that complements that from state forests. In the expansion of
processing industries, I guess the Commonwealth could assist in attracting
timber investment to the state and in doing so expand the processing industry
by compiling information on the comparative advantages in infrastructure, land
and labour costs and make that available to potential investors.[205]
6.33
In terms of current taxation arrangements, NAFI argued
that in addition to the current range of managed investment projects, it is
possible to use existing tax legislation for developing other project
structures, particularly those that come under the Capital Gains Tax (CGT)
rules and the rights provisions of the Income
Tax Assessment Act 1997:
With the current managed investment projects, investors are in
the business of growing trees for timber production. Alternatively, the
investors could purchase an immature plantation (shortly after it has been
established) with the intent of selling the plantation at some time prior to
the clearfelling operation. Under those circumstances, investors would be in
the business of buying and selling an asset and therefore come under the CGT
rules and possibly the CGT exemptions.[206]
6.34
Further:
... there is nothing to prevent plantation owners from selling
the rights to the standing timer under a profit a prendre arrangement. In that
case, the right becomes a tradeable commodity that can be traded like a futures
contract. There is also the possibility of generating superannuation-based
investment products. In those cases, the investors may be seeking to hold onto
the assets for a specified period of time or liquidate their assets to fund
retirement prior to the clearfelling operations.[207]
6.35
The Committee notes that the reduction in logging
native forests will create a need for longer rotation plantations. Such
plantations are subject to the same taxation incentives as short term
plantations and yet represent a much greater period of investment. The
Committee considers that such investment may provide some security to regional
communities and therefore makes the following recommendation.
Recommendation 11
6.36
The Committee recommends that the government
investigate the possibility of introducing a taxation incentive related to the
period of time a plantation is grown, however urges the government to keep in
mind the necessity for the industry to meet environmental goals without
significant subsidies and tax benefits.
Harvest Guarantee
6.37
The Saltgrow submission informed the Committee that with
any plantation investment and, in particular, long rotation investments, the
issue of harvest security remains a significant risk in the minds of investors.
It was argued that this perception needs to be addressed, and that it will require
a uniform approach between states, and a clearly articulated policy at the
federal level, to remove the current state of doubt and confusion.[208]
6.38
AFG also argued that the development of workable
guarantees to right of harvest remains a central objective of the 2020 Vision. Whilst they acknowledged
that states have moved, or are moving to, enact appropriate legal provisions,
they added that:
Harvest guarantee will be more effective if it embodies the
'quality assurance' approach, relying upon self assessment, independent audit
and penalty for non-compliance. And it is vital that provision be made for
appropriately compensating the plantation grower if, ultimately, that right of
harvest is withdrawn.
Since no government can make decisions that bind a future
government, the security required for investment in a 30-year plantation will
always be based on faith and trust. Future governments must be trusted to abide
by the spirit and intention of a harvest guarantee.[209]
6.39
The PTAA and NAFI shared similar concerns regarding
harvest guarantees.
6.40
The Committee agrees that the inability to provide
harvest guarantee on plantations is a factor that can act to discourage long
term investment in longer plantation rotation. While it does not propose that
governments legislate in an attempt to bind successive governments, it would
encourage State governments to investigate the possibility of establishing
shared risk proposals with the plantation industry.
Research
and Development
6.41
Finally, AFG argued that additional research and new
technologies are required in the area of plantation sawlog production. Examples
of the type of research which is currently producing promising results were
projects in relation to:
-
'high intervention' pruning and thinning
silviculture to produce fat sawlogs faster, including in low rainfall
environments;
-
sawing and drying trials to minimise faults and
maximise recovery in fast-grown young eucalypt sawlogs; and
-
innovative uses of small logs.[210]
6.42
It was argued that more positive results from this type
of work to shorten rotation length will provide encouragement to small-scale
growers taking up a farm forestry enterprise. It will also assist those
plantations managers involved in managed investment schemes to attract more
growers into sawlog projects, as well as increase the possibility for
successful commercial farm forestry in the lower rainfall regions where the
environmental requirement for revegetation is more extreme.[211]
6.43
The PTAA also referred to the management of existing
short rotation hardwood plantations, and argued that while decisions about the
marketing and use of plantation timber should be made by the owners on a
commercial basis, it is:
... probably inevitable that some of these plantations will be
grown on to produce larger logs for solid timber production. This will require
research to identify the appropriate silvicultural systems and wood processing
and marketing strategies. Research funding will assist this process but the
imperative created by rapidly increasing resource availability will be a
significant driver. Such a process was also undertaken for Radiata Pine, which
has been transformed from a virtually unrecognised timber to a major player in
the manufacture of a range of different products.[212]
6.44
The need for additional research was also raised by
ABARE as follows:
The decision to alter the supply of sawlogs from plantations
requires an analysis of the lowest cost option of sawlog supply. With
burgeoning plantation supply in the Pacific Rim, the
lowest cost source of sawlogs could include imports, particularly from New
Zealand. In other industries, the long term
market implications of changing international supply are assessed using trade
models that are not currently available for Australian forest products.
Investment in this research would help to target the most efficient strategy
for forest industry development.[213]
Conclusions
6.45
It is clear to the Committee that the industry believes
that there will be a shortfall in the availability of sawlogs for the local
market if strategies to encourage investment in longer rotation commercial
plantations are not developed. The identified strategies that could be put in
place by government were primarily investment driven. Harvest guarantees and
research and development were also proposed.
6.46
The Committee has made a recommendation in relation to
taxation incentives and has suggested State government action in relation to
harvest guarantees.
6.47
However, the returns on a locally grown sawlog product
were less well defined. The Committee is of
the view that the most significant benefits of longer rotation plantations may
be environmental benefits. These, as was discussed in the last chapter, require
considerable further research to understand the links between resources and
plantations.
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