FORESTRY POLICIES, LEGISLATION AND INSTITUTIONS

Privatization

The most far-reaching forestry policy of the past decade in New Zealand has been the privatization policy. Since 1987 Government has shed ownership of more than 30 percent of New Zealand's planted forest resource, selling much of the estate into the hands of overseas interests. Given the current interest in privatization, globally, a brief review of the New Zealand experience is appropriate.

The intention of actual privatization of public assets, including forests, was announced in December 1987 as part of a Government fiscal strategy statement. Government businesses were to be sold with the primary aim of reducing public debt. More philosophical reasons for state asset sales were also given, namely; Ministers are not good owners of businesses; to avoid the potential for future calls from the businesses for Government cash; to minimize the Government's risk exposure in the business sector of the economy; and to enable Ministers to concentrate on matters of economic and social policy. The criteria for asset sales were that taxpayers must receive more from the sale of a business than they would from continued ownership; and the sale of a business must make a positive contribution to the Government's economic and social policies. However, the primary rationale for forest asset sales was probably ideological, namely the question of whether it is appropriate for the State to own commercial forests.

A major objective was to rationalize State forest assets to produce a more efficient, internationally competitive forestry sector. A 1988 Forestry Working Group noted, "It is generally recognized that the New Zealand forestry resources would benefit from rationalization. Ownership of forests does not often reflect sensible economic packaging". A particular concern was the need to provide security of supplies to processors in order to attract new investment into forestry value adding industries. The sale of forests to enable processors to integrate supplier functions into their current operations was seen as a long run optimal mechanism to achieve this end.

The first round of forest sales was in the form of a sealed bid tender which closed in July 1990. Bids were to be made for the outright purchase of trees and fixed assets but with the forest land being leased under a tradable Crown Forestry Licence. This initial sales round was relatively unsuccessful in terms of actual forest divestment. Only two bids, for 72,600 hectares of forests, were accepted with all other bids being rejected as being too low. However, on the basis of these bids the Government entered into a negotiated round of sales that resulted in the sale of an additional 174,000 hectares of forests. The buyers included New Zealand forestry corporates, and several Asian-based companies.

The third stage in the privatization of New Zealand's forests was the sale of forests placed under the authority of the State-owned enterprise New Zealand Timberlands. The sale intention was announced in the Government's July 1991 Budget. In April 1992 Timberlands was sold to an American Company, ITT Rayonier. Table 13 summarizes the sales of the privatization process.

Table 13: Details of Government Forest Asset Sales

Source: Brown and Valentine

The final step in the privatization process may be taken later in 1996³. The Government is presently in the process of selling the Forestry Corporation of New Zealand, its last remaining forests of national significance. Whether this sale is achieved prior to the 1996 election may determine, to a large extent, the shape of New Zealand's commercial forestry sector in the foreseeable future. It is unlikely a sale will be made by an MMP government.

An important question in any privatization process arises as to the scope of the sale and, particularly, whether the sale should be open to foreign investors. In New Zealand the decision was relatively clear-cut. The principal rationale was revenue maximization and this end was most likely to be achieved by placing as few possible constraints on the process as possible and maximising bidding competition. The Government recognized that overseas investors had potentially greater access to capital and were consequently more likely to invest in new downstream processing facilities and this has generally proved to be the case. A side effect of the forest privatization was that it doubtless acted to effectively market investment opportunities in New Zealand forestry. The entry of foreign investors into the New Zealand forestry sector also had benefits in terms of the introduction of new technologies, the improvement of market awareness and opportunities and the promotion of efficiency through enhanced domestic competition. The major downside to opening the sale to foreign bidders was a negative public perception of foreign resource control.

Patterns of Investment

The privatization policy and general economic liberalization of New Zealand have had a profound effect on investment and ownership in the New Zealand forestry Sector. Figure 6 shows changes in the status of forest ownership between 1987 and 1995.

Figure 6: Changes in Forest Ownership in New Zealand

1987 1995

Source: NZMOF

In 1987 the Government owned all of the Timberlands' forests. Fletcher Challenge and Carter Holt Harvey were predominantly New Zealand-owned companies and Elders Resources-NZFP was a short-lived and ill-fated Australian purchase of New Zealand Forest Products which shortly after reverted to Carter Holt Harvey.

By 1995 the picture is markedly different. A host of overseas firms have moderate holdings in New Zealand forests, ranging downward from Rayonier's 7 percent. Carter Holt Harvey's majority shareholder is American multinational International Paper, Fletcher Challenge also has the majority of its equity held offshore. Government maintains control of around 20 percent of the forests but is attempting to sell its 12 percent in Forestry Corporation, quite possibly to an overseas company, otherwise to one of the nominally New Zealand multinationals.

Investment in new forestry is being increasingly undertaken by small landowners rather than the forestry companies. In part, escalating land costs may be dissuading the forestry companies, however, the international focus of the sector in New Zealand may presently see better opportunities available in other countries where tangible investment incentives are still paid. There may also be a recognition, as forecast in Table 3, that New Zealand's processing capacity is presently insufficient to warrant further forest expansion, particularly with wood likely to begin to accumulate in the forest during the next decade.

Nonetheless, substantial investment has gone into increasing and upgrading New Zealand's wood processing capacity in the period 1988-1998 announced major processing investment totals more than US$1.4 billion. The majority of this investment has been directed at upgrading of pulp and paper facilities, establishment of new MDF capacity, or the development of laminating mills, particularly laminated veneer lumber and plywood. More than US$600 million of this investment has been by foreign-domiciled companies. The 1992 NZFIC Forest Industries Strategy Study identified an investment capital requirement of US$2.1 billion to implement its fibreboard dominated wood processing scenario to 2005. The study recognized that a large proportion of this investment would necessarily be foreign. These investment requirements seem relatively consistent with the scenarios presented in the Section on New Zealand Forest Industries, given the amount of investment which has occurred or been announced during the past 4 years, and a horizon to 2010.

Institutional Strengthening and Capacity building

In terms of the functions of Government in the New Zealand forestry sector the dis-establishment of the Forest Service in 1987 saw a fundamental restructuring of responsibilities within the State sphere. For the first time there was a formal recognition of, and a clear distinction made between, the separate roles of planted and natural forests in New Zealand, and a similar division between commercial and non-commercial forestry activities.

The Government's major strategy in restructuring and strengthening the forestry sector was to move toward efficient allocation of resources through specialization. The varied activities of Forest Service were spread across at least seven specialist agencies with the principal thrust being toward having a single and clearly defined purpose or goal for each of these agencies, and to make operations in these new agencies transparent and accountable.

In broad terms the restructuring gathered the planted forests into three separate state-owned corporations. The differing legal and contractual status of various Government owned planted forests made this a sensible structure. Two new Government departments were established. A Department of Conservation, with policy and administrative responsibilities for the natural forest estate, and a Ministry of Forestry with policy and forest health responsibilities pertaining mainly (but not exclusively) to the commercial, mainly planted, forests. In 1992 a restructuring of the science and research sector saw the Government's forestry research capacity divided into two Crown Research Institutes, The New Zealand Forest Research Institute and Landcare Research New Zealand. These remain Government-owned but have been given a strong commercial ethos and are expected to operate as competitive and commercial research facilities. An entire restructuring of New Zealand's science sector has attempted to promote commercially-oriented research with a sound economic basis.

Future change is imminent if the privatization of Forestry Corporation of New Zealand proceeds. This would leave only two small forest owning state-owned enterprises. Timberlands West Coast, with responsibilities for managing Government's few commercial operations in natural forests (the result of a deal struck with industry and environmentalists) is likely to see its activities quietly wound down to a point where Government no longer operates industrial forestry in natural forests. Crown Forestry Management which manages scattered forests residual to the forest asset sales process may also be quietly wound down. These forests may be used to help settle maori land grievances, used for natural forest swaps or sold to the private sector.

Environmental Issues and Initiatives - Sustainable Forest Management

Sustainable management is presently the key environmental driver in the international environmental debate on forests. In New Zealand, two pieces of legislation, the Resource Management Act 1991 and the 1993 Amendments to the Forests Act 1949 contain the central legal thrust toward sustainable forest management in a New Zealand context.

(i) The Resource Management Act 1991

The Resource Management Act (RMA) is the core of New Zealand's sustainable management strategy. It was introduced to specifically to promote the sustainable management of natural and physical resources. The Act establishes a national framework defining sustainable management and requiring that, beneath this framework regional authorities implement detailed plans establishing the broad variety of thresholds which are deemed to constitute sustainable management. By delegating the resource management planning process downward to smaller authorities Government is attempting to recognize that thresholds for sustainable management vary across regions and different geographic features.

Sustainable management is defined in the RMA as:

Managing the use, development, protection of natural and physical resources in a way, or at a rate, which enables people and communities to provide for their social, economic, and cultural well being and for their health and safety while -

(a) Sustaining the potential of natural and physical resources (excluding minerals) to meet the reasonably foreseeable needs of future generations; and

(b) Safeguarding the life supporting capacity of air, water, soil, and ecosystems; and

(c) Avoiding, remedying, or mitigating any adverse effects on the environment.

The focus of the RMA is on controlling the environmental effects rather than activities per se. Consequently, thresholds are set for such measurable indicators as water quality, water quantity, soil retention, air quality and suchlike. A specific activity cannot be banned under the Act if it can be proved to adequately conform with all the prescribed thresholds. Note that the RMA impacts on both land use and industrial activities. Consequently, forest establishment, management and harvesting must comply with the Act, as must processing facilities and particularly their discharges, and disposal of wastes and effluents.

(ii) The 1993 Amendments to the Forests Act 1949

The Forests Act was amended in 1993 specifically to define and implement the principles of sustainable management of New Zealand's indigenous forest land. It defines sustainable management of indigenous forests as:

"the management of an area of indigenous forest land in a way that maintains the ability of the forest growing on that land to continue to provide a full range of products and amenities in perpetuity while retaining the forest's natural values".

The indigenous forest management provisions envisage both the retention of forests in their present extent and condition, and ultimately the enhancement of natural forest values. It is recognized that these forests are vital for the conservation of a wide range of New Zealand's biological diversity, particularly threatened plants and animals; and the protection of natural landscapes. The amendments require that a government-approved sustainable management plan cover all harvesting operations, that processing facilities be licensed by Government, and that unprocessed wood not be exported abroad. There are several exempted areas under the Act which remain controversial in New Zealand but are less important on a global level.

The indigenous forest provisions of the Forests Act work in conjunction with the provisions for sustainable management in the Resource Management Act 1991. Included in the Resource Management Act 1991 is scope for the protection of areas of significant indigenous vegetation.

Environmental Issues and Initiatives - Ecosystem and Biological Conservation

Conservation and preservation policy is developed and administered by the Department of Conservation in New Zealand. The Department of Conservation also administers the Government's protected natural forest estate. This includes National parks, forest parks and other state-owned protected forest land. In 1996 this forest estate was estimated at 4.9 million hectares.

The Department of Conservation also administers the Government's endangered species programme, a part of which comprises protecting unique ecosystems from disruption or incursion of introduced species. Most of New Zealand's rare or endangered species are forest-dwelling birds which have been decimated by introduced mammals. A central part of this programme involves maintenance of "clean" offshore islands which are free from predators, notably cats, rats, weasels and stoats.

The primary destroyer of natural forest trees and plants is the introduced Australian brush-tailed possum. This possum remains a major pest and present efforts to control possum populations are inadequate.

Forestry taxation

New Zealand's general approach to taxation is toward the creation of a system which is "neutral" in that it is equitable and does not provide advantage for any business sector over another. Consequently forest product businesses are treated in much the same way in terms of taxation as other businesses.

New Zealand's forestry specific taxation rules specify that costs incurred by a forestry business in planting, tending and maintaining a crop of trees are fully deductible from income of any source in the same year costs are incurred. This system replaced the previous system whereby costs incurred in forest growing were deferred until an income was generated from the harvest of that forest. The value of a forest must be capitalized and expensed against revenue from the forest as it occurs.

Indigenous Peoples' Issues

Maori are significant players in the New Zealand forestry sector, with around 7,000 hectares of Maori controlled forest, and a further 70,000 hectares of forestry on Maori owned land. In some regions of New Zealand this involvement is proportionally more significant for example in Northland, where Maori forestry holdings make up more than 25 percent of the planted estate.

Significant claims have been registered with the Waitangi Tribunal for over 60,000 hectares of forest land. This Tribunal, charged with working through and resolving Maori land grievances, can return Crown lands (and potentially forests) to Maori if claims are substantively proved. Similar ownership issues affect "Crown" forestry leases, where the government holds forestry leases on Maori lands for periods of up to 90 years - tribal groups are looking to assume ownership of the forestry leases where a satisfactory settlement can be agreed with Government.

Increasingly Maori see forestry as a significant vehicle for sustainable capital development to benefit both current and future generations. In regions of New Zealand like the East Coast (where Maori landowners have access to grant monies to help with the planting of trees for conservation purposes) and on Northland (where the Ministry of Forestry works to facilitate forestry development on otherwise unmanaged land) forestry will play an important role in Maori sustainable development. A significant recent trend is the emergence of tribal-based forest companies. This is an example of increasing Maori economic confidence and independence.

3 Stoppress: The Forestry Corporation of New Zealand was sold 20 September 1996 to a consortium of New Zealand and Chinese companies.