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Midas Raw

This week —

Pulp: revenue arrow

misses the target

n Oct. 1, 1987, the

government of British

Columbia changed a few
things that would have an impact
on the forest industry. Were these
changes for the better or worse?

Some said it was for the better.
The new policy would remove a
15 percent export tax on softwood
lumber, it meant predictable
revenues for the for the provincial
government, and it meant that the
larger forest companies would
become directly responsible for
replanting where they harvested.
But many didn’t believe this new
policy was an improvement over
the old system. Some even said it
would destroy the industry. Who
was right?

As far as thé stumpage appraisal
system is concerned, the change
was basic. The old Rothery system
began with an assumed selling
price of the end product. This was
divided by a "profit and risk allow-
ance" which allowed the company
a 13 percent profit plus additional
risk allowances for fluctuating
prices, decadent timber and excep-
tional road construction and log-
ging costs. From this the total
operating costs were subtracted;
those cost were basically, the
predicted cost of harvesting the
trees, hauling them to the mill, and
producing the lumber.

The new system, the Compara-

tive Value Timber Pricing system,
offered a new concept in business
management. The first considera-
tion was to be a "target rate". This
"target rate" would be the total
amount collected by the province
through stumpage rates in any
given year. .

Once the government decided -

how much they needed or wanted,
all companies would be assessed a
stumpage trate either above or
below an average that was based
on timber quality and ease of
logging. These "target" averages
were set at $10.59 per cubic metre
on the coast and $8.59 per cubic
meter in the interior.

The direct "profit and risk allow-
ance", though, was gone. It was a
thing of the past. Particularly the
profit side ‘of things. Profit was
something that forest companies
could only hope they would eam,
but it wouldn’t happen unless
world market lumber prices just
happened to be higher than their
costs. If they weren’t, forest com-
panies would just have to settle for
a loss.

And there were other changes
that some felt might compound the
risk of losing money rather than
earning it. That is, for the forest
company. The government’s profit,
remember, was - predetermined
before any of the other factors
were known.

tet A

ne of these changes was
QO the time allowed between

setting new averages. The
old -system was based on an
average of actual market prices for
the previous three months. This
meant that if prices dropped, forest
companies would have to sell their
lumber products at a lower profit,
or perhaps even a loss, for any-
where up to three months. On the
plus side of things, though, when
market prices rose those same
companies could expect compara-
tive windfall profits for the next
three months.

The new system, however,
changed this time frame to six
months. This meant that if prices
dropped, forest companies would
have to operate with low profits or
a loss for a much longer period of
time, and some believed that
period of time might be too long
for any company that was in any-
thing but excellent financial health.
Adding to the problem was the
simple fact of life that market

| — Letter to the Editor — _ -
Still no clear answer to Sustut question

To the Editor;

During the Premier’s recent
town hall meeting in Terrace the
issue of timber from the Sustut-
Takla came up. Someone
wanted to know why timber
which should have gone to
Hazelton and Smithers was
given instead to Prince George.
The questioner was concerned
because that action had resulted
in the closure of a Hazelton mill
and it had also been a severe
economic blow to Smithers, The
person who should have been
made to answer that question —
former Minister of Forests at the
time — Dave Parker, ever said a
word. Not surprising since Dave
once admitted on radio that he
hadn’t been in as much trouble

now that he was saying less. In-
stead it was the Premier and the
present Minister of Forests who
dealt with the issue.

The Premier responded by
claiming that not to give the
wood to the Prince George firms
would have cost Prince George a
hundred jobs. Before anyone
could remind him that it cost
Hazelton and Smithers more
than that, he turned the question
over the Claude Richmond.

Mr. Richmond explained that
the issue had been discussed by
Catinet ‘‘a number of times’’
and that the decision had been
‘avery difficult one’’ for
Cabinet. His new estimate for
job losses to Prince George if it
did not get the timber stood at

g
Pifer “== Continued from page A6

terms under which the Vander ©
Zalms operated the theme park
for the past four years.

Meanwhile, the media con-
tinues to do what it has always
done — and that is to reflect
what is truly happening, rather
than to present only the

‘government's, or Mr. Vander

Zalm’s, interpretation of it.

Premier - Vander Zalm has
more than once accused me
and other commentators on the
B.C. political scene of being
negative, negative, negative.

As a rabid optimist who
always sees the glass as half

full, rather than half empty, I
disagree. Here are a couple of
thoughts to bolster my argu-
ment.

1. I am positive that he
believes that the Fantasy
Gardens scandal is a ‘‘side
issue’”’ of little relevance or im-
portance in the whole scheme
of things, and is not even a
scandal.

2. I am positive that he is
dead wrong on that, and it may
well cost him his government
or his position, or both.

How’s that for being
positive?!

300 to 400. No comment was
made about the equal if not
more severe impact of a loss of
employment to towns the size of
Hazelton or Smithers, There was
nary a peep from Mr. Parker
and he is still the official rep-
resentative of the Hazeltons and
Smithers.

While listening to all the talk
about Cabinet dealing with the
issue, I was reminded of the ex-
change which is recorded in
Hansard and which took place
in the Legislature on June 20,
1988. The Sustut-Takla decision
had just been announced. NDP
member Bob Williams asked the
then-Minister of Forests, Dave
Parker: ‘“‘With respect to the
Takla matter, the chief forester
made that decision. Is that the
case?’’ Parker answers, ‘‘The
deputy chief forester made that
decision, The chief forester was
not available,”

How could anyone who took
part in ‘ta number of Cabinet
discussions’ on the matter when
it was a very ‘“‘difficult decision’
(for Cabinet) not know the dif-
ference between ‘the deputy
chief forester making that deci-
sion’, and ‘Cabinet making the
decision’? The fact that Cabinet
did not have the legal right to
grant forest licenses in June of
1988 may have had something to
do with Parker’s inability to give
a clear answer,

Helmut Giesbrecht,
"New Democratic
Candidate for Skeena.

| <

by Tod Strachan, in consultation with Rod Arnold and Doug Davies

Terrace Review — Wednesday, October 17, 1990 Al

Forestry

prices always drop much faster
than they rise. The recovery time
under this new system, then, might
be much longer than the industry
could stand.

There was something else to be
considered from the industry’s
point of view. Costs rose with the
introduction of the Comparative
value system by about 15 percent.
Why? In the mid-1980’s the
United States decided Canadian
lumber was unfair competition in

the U.S. market. Our forest indus-

try, they said, was subsidized
through low stumpage rates. So to
bring things into better balance,
they slapped on a 15 percent
import tariff. .

The Canadian federal government
had a solution to this dilemma,
however. They told the U.S. that if
they dropped their import tariff,
Canada would apply a 15 percent
export tax to all softwood lumber
headed for the American market.
The Americans agreed and at least

this. way, reasoned Ottawa, the 15.

percent stayed in Canada. Some
though, called it a band-aid solu-
tion.

Victoria didn’t like the idea at
all. A tax revenue from their

‘resource going into federal coffers

wasn’t a good plan at all. So, a
new solution: build the 15 percent
into the province’s stumpage ap-
pmaisal formula and perhaps Ottawa
might drop the export tax. And it
worked. Now, they said, at least
all that money is staying in the

province.
S parative Pricing system
there was at least one
player who was assured an income.
The government, with their "target
rate", always knew exactly how
much they would earn. In fairness,
it could be argued that if the pro-
vince planned to put all this
forestry-generated revenue back
into the forest industry, reforesta-
tion and stand tending might be a
good place to invest it, the plan
was a good one. It was financially
sound.

Unfortunately, however, re-
investment in the industry didn’t
seem to be a part of the govern-
ment’s plan. Revenue from stump-
age fees still goes directly into
gencral revenue and is spent on
things like new roads and hos-
pitals; only a very small part of It
is ever spent on insuring the future
of that revenue. A revenue, that if
it’s not protected, could dry up.
Some observers, therefore, don’t
view this system as a very sound
long-term plan.

Of course, the old system wasn’t
perfect either and many of those
who oppose the new system might

o under this new Com-

ee

have been brought on-side if some
of the Rothery system short-
comings had been addressed, One
opportunity missed, for example,
was the opportunity to make the
pulp industry begin to paying their
own way in the world and take
that burden off the lumber indus-
try. But it didn’t, and many see
this as a flaw that could endanger
the financial viability of the lum-
ber industry.

Sawmills sell chips to the pulp
industry at a loss and are expected
to recover their loss through profits
on their lumber... profits that all
too often aren’t even there. For the
pulp industry, though, who have to
compete on world markets, the
system offers a suitable supply of
low-cost base product allowing
them to operate at a profit.

Obviously, some people can
appreciate the benefits of such a
system. Particularly, for example,
the board of directors who manage
a pulp mill. Unfortunately, how-
ever, « this. same’ system’ which
seems to offer them such great
benefits has led the powers-that-be
to make a wrong decision.

A good example of this was seen
in the recession of the carly
1980’s. A number of boards of
directors looked at the balance
sheet and discovered that their
sawmill was losing money while
their pulp mill was making it.
They forgot about the "subsidy" on
chips, therefore, and decided to
re-invest profits into their pulp
mills. Perhaps they could even
increase their output and make
even more money.

The result, though, was predict-
able. Upgraded pulp mills needed
more chips, and that meant their
sawmills made even less monty
than they did before. Today, those
sawmills are inefficient, out of
date, but they don’t generate
enough profit to warrant an
upgrade. Another downside to this
story is the fact that it means
tuming even more trees into chips,
and that might mean poor utili-
zation of our remaining resource.

This could be viewed as the
beginning of a downward spiral for
the lumber industry, and in the
end, selling off our last tree for far
less than it’s worth. And when that
happens, there will be nothing to

debate.
B happen. Perhaps one day
the U.S. will decide that
selling chips to the our pulp indus-
try below market value is in fact
subsidizing that industry. And if
they do, they might introduce a 15
percent import tariff on our pulp.

ut perhaps that won't

— Continued on page AB