75: Out of the woods
Sale and leasing of state forests
The problem: badly run forests
State-owned forestry companies are bureaucratic and have a more remote interest in the success and management of forests than would local people or owners. Unfortunately, forests are often difficult to privatize. They cover large areas, and local people are often concerned about access rights, or the use of woodland areas for recreation. There is sometimes the feeling that large forestry landowners will not be sensitive enough to the views and needs of neighbouring farms and communities.
The idea: sales, leases, and access rights
It is better to privatize the forests where there are no public interest issues at stake. That puts them into the hand of private-sector owners who have a direct interest in maintaining, conserving, and developing this valuable resource. Elsewhere, use forest leases or long concessions, so that private enterprises still have the same incentive, but where clauses or covenants to protect public access rights or recreational use can be built in. In some areas, think about setting up new mutual companies owned by local people to take over the management of land and forest.
Example: different continents, ideas
State forestry can be heavy-handed and is rarely successful. Private managers have a much stronger interest in husbanding this important resource. Commercial forests should therefore be transferred to the private sector, as successfully implemented in a number of countries.
In South Africa, Safcol, the state-owned forestry enterprise, was privatized in five separate packages. Five bidders were shortlisted. The government decided to disaggregate the company - which included 330,000 hectares of forest and five sawmills - in order to promote competition and efficiency.
In the United Kingdom, Mrs Thatcher's government reorganized the Forestry Commission, responsible for managing state-owned woodlands. Britain's largest landowner, the Commission had been notorious for smothering the hillsides of Wales and Scotland with blankets of unattractive, inaccessible, dark conifer forest. It was hopelessly non-commercial, making an annual average rate of return of a mere 3 per cent, and loss-making for each of its first 75 years of existence.
Beginning in 1989, the Conservative government announced its plan to sell 100,000 hectares of the Forest Commission estate. No amenity woodlands would be sold where it was deemed that there were important public access rights unless the same access could be guaranteed. By March 1997, the Commission had sold 66,000 hectares for a sum of £75 million.
New Zealand uses forest leases to combine the benefits of private-sector management with the maintenance of public control over access and amenity rights. Forests are an important resource in New Zealand. They cover around 29 per cent of the country's land area. Natural forest accounts for 6.4 million hectares:1.7 million hectares are planted production woodland. Most of this commercial forest comprises radiata pine, a versatile timber that grows faster in New Zealand than anywhere else.
In the mid 1980s the then Labour government implemented a radical reorganization of the state-owned woodlands. It separated the forest authority from the forest owning bodies and identified those forests that should be managed principally for amenity use.
Prior to lease sales, the state owned 600,000 hectares of forest. In 1986 the management of the native forest was transferred to the Department of Conservation while a state-owned company, the NZ Forestry Corporation, was set up to manage state-owned plantations. The company was responsible for managing forests on a commercial basis within broad environmental guidelines.
The corporatization process led to an immediate improvement in performance. Within two years, profits have increased by 138 per cent, although timber sales remained relatively static and planting continued at the previous pace.
This corporatized forestry service had two main subsidiaries: Timberlands Ltd, which operated the plantations and Prolog Ltd, which ran two sawmills. Timberland's managing director, Andrew Kirkland, summarized the company's achievements: "Corporatization has reversed decades of net funding by taxpayers of New Zealand forestry and set the scene for the sector to stand on its own feet commercially. The state's commercial forests are capable from now on of yielding increasing returns."
However, corporatization was only a transitional phase towards full privatization of cutting rights. In 1990 the government sold cutting rights to 277,000 hectares and in 1991 a further 97,000 hectares were sold through a tender sale. A notable feature of this leasing arrangement was that purchasers were required to protect Maori land rights and public access to plantations. Cutting rights were sold on 35-year rolling leases, renewed annually. The eventual purchasers included not only New Zealand interests but investors from the US, Japan, China, Malaysia, Hong Kong and Indonesia.
The New Zealand government completed its exit from forestry through the sale of the Forestry Corporation for NZ$2 billion, covering cutting rights for 170,000 hectares and two solid wood processing facilities. This in turn led to further foreign investment as the new owners, a consortium led by Fletcher Challenge Ltd, rationalized their holdings.
New forest plantings has risen sharply over the last decade. Timber production has expanded dramatically throughout the 1990s. In the year to June 1998, over $2.4 billion was earned in exports of forest products to countries such as Japan, Korea and Australia. The wood harvest is expected to double by 2010.
Assessment: cutting a deal
Forests are a valuable wealth creator in rural areas, employing a significant number of people. In New Zealand almost 30,000 people are engaged in forestry and first-stage processing activities. Forestry accounts for 7 per cent of GDP and is the country's third largest export earner.
Leasing provides an alternative method of transfer land and forest ownership to the private sector, and can help protect public access rights and safeguard public-amenity or environmental features, while simultaneously allowing the holding and management of state-owned woodland to be rationalized and improved.
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Copyright 2002: Adam Smith Institute
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