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RURAL AFFAIRS AND TRANSPORT REFERENCES COMMITTEE
30/03/2011
Sale of timber assets by the South Australian government

CHAIR (Senator Heffernan) —I declare open this public hearing of the Rural Affairs and Transport References Committee. The committee is hearing evidence on its inquiry into the sale of timber assets by the South Australian government. I welcome you all here today. This is a public hearing and a Hansard transcript of proceedings is being made. Before the committee starts taking evidence I remind all witnesses that, in giving evidence to the committee, they are protected by parliamentary privilege. It is unlawful for anyone to threaten or disadvantage a witness on account of evidence given to a committee and such action may be treated by the Senate as a contempt. It is also a contempt to give false or misleading evidence to a committee.

The committee prefers all evidence to be given in public but, under the Senate’s resolutions, witnesses have the right to request to be heard in private session. It is important that witnesses give the committee notice if they intend to give evidence in camera. If a witness objects to answering a question the witness should state the ground on which the objection is taken and the committee will determine whether it will insist on an answer, having regard to the ground which is claimed. If the committee determines to insist on an answer, the committee may request that the answer be given in camera. Such a request may of course be made at any other time. Finally, on behalf of the committee I would like to thank those who have made submissions and sent representatives here today and for their cooperation with this inquiry.

I welcome Councillors Gandolfi, Sage and Perryman, from the Wattle Range Council, the District Council of Grant and the City of Mount Gambier. I understand you have a PowerPoint presentation. Do you want to start with that? Do you think you will make an opening statement along with the PowerPoint presentation?

Councillor Sage —We can do that for sure.

CHAIR —We are in your hands, so if you are technically equipped to do this, then God bless you!

Councillor Sage —I think the projector goes behind you.

CHAIR —I have eyes in the back of my head, so it is not a problem!

Councillor Sage —Thank you very much for allowing us to come and present today. As you can see, we are very concerned about the proposal to forward-sell. The impact of the decision by the South Australian government to forward-sell the state’s $2.8 billion timber assets is of great concern not only to the three councils but to the region as a whole. While we are getting the data projector and the screen set up, maybe we could hand over to Mayor Gandolfi.

Councillor Gandolfi —I have a short opening statement. First of all I would like to thank the committee for coming to Mount Gambier. As Mayor of Wattle Range I would like to focus on our council area. In the late 1800s the state government of the day decided to establish the Woods and Forests Department, now known as ForestrySA. By the middle of last century plantations of pinus radiata were well established and government built its first sawmill in Mount Burr. Today the state government, through ForestrySA, owns more than 70,000 hectares of pine plantations here in the Green Triangle region and the private sector now own and operate all the local mills.

More than half of ForestrySA plantations—in fact, 46,500 hectares—are located in the Wattle Range area. Two sawmills currently operate in Wattle Range: Kalangadoo and Nangwarry. In the south-east our local sawmills employ about 600 people directly and a further 3,000 people are contracted to the timber industry. The state government’s plan to sell our forests for up to 120 years in advance puts these jobs and many others at risk. ForestrySA is required, through its charter, to encourage and facilitate regionally based economic activities. In contrast, a private owner of a plantation would sell log to the highest bidder, directly exporting log and bypassing our local sawmills. Having no secure log supply will result in certain job losses in our local sawmills.

The impact on the broader community with the loss of jobs would be substantial. The flow-on effect will result in further job losses across the board. With a decline in population and an increase in unemployment the social fabric of our communities will be torn apart and further demand will be placed on our welfare services.

As the committee may be aware, Kimberly-Clark Australia announced earlier this year a restructure of its pulp and paper operations at Snuggery. A total of 205 jobs will be lost at their Millicent paper mill by May this year, and a further 65 jobs will be lost at their Tantanoola pulp mill if a new owner for the mill is not found by December this year. I am advised that Kimberly-Clark are currently in talks with a number of companies interested in taking ownership of the Tantanoola pulp mill. The proposed sale of ForestrySA plantations puts at risk the security of an ongoing supply of pulpwood for the prospective new owners. The Tantanoola pulp mill currently purchases 550,000 tonnes of pulpwood, which is the first and second thinnings of our forests, from ForestrySA plantations for their operations.

In a recent meeting with the current state Treasurer, Jack Snelling, he said that the new owners of the plantations would be responsible for the management of the forests, and added that the volunteer Country Fire Service would take responsibility for fire prevention and fighting. This raises very serious questions about the region’s future firefighting capabilities. Currently, our CFS volunteers work hand-in-hand with ForestrySA and have a cooperative relationship in fire prevention and suppression. To shift the responsibility of firefighting entirely onto our CFS volunteers would be irresponsible and put lives and property at risk.

To sum up, the state government’s proposal to forward-sell our plantations provides no benefit to the state, to this region; instead, it will have a devastating impact on our local communities. Three and a half thousand jobs are at risk—or 20 per cent of our region’s workforce. To put this in context, this would be like Adelaide losing 80,000 jobs. Thank you for your time.

CHAIR —Thanks very much for that. You can go to the PowerPoint presentation now.

A PowerPoint presentation was then given—

Councillor Sage —On the likelihood of regular job losses, we had a community impact assessment undertaken by Dr Bob Smith. In it he described 2,100 direct jobs and almost 1,000 indirect jobs in the lower south-east region will be affected as a result of the unrestricted sale of ForestrySA estate. By 2027-28 the purchaser would have the option to sell 100 per cent of the logs outside the south-east region. There is the potential by 2020-21 for around 40 per cent of the logs from ForestrySA softwood estates to be exported, reducing the wood base manufacturing jobs in the south-east area. The community and the three councils are strongly of the view that the combination of strong revenue streams from ForestrySA to the South Australian government, and the commitment to regional processing and jobs, provide strong support for the continuation of the current ownership arrangements of ForestrySA.

On the flow-on effects to the communities in the timber-reliant regions, the number of building applications and value of applications in the District Council of Grant are as follows from 2008-11: 334 building applications, with roughly $97 million worth of development; in 2009-10 there were 345 applications with roughly $199 million worth of development applications; and in 2010-11, up until March this year, we have only had 184 applications and roughly $12 million in assets with respect to development. As you can see, the threat of the forward-selling is already starting to have some dramatic effects.

Anecdotal evidence is that transport companies have seen decreasing freight in and out of the region. Engineering companies are seeing decreasing development, expansion and maintenance at a lot of the local mills. In education, there has been a decrease in the number of student enrolments in some of the smaller timber towns as those mills are either reducing in size or closing altogether. We have also seen an increase in demand for health services.

On the potential decrease in council rate revenue, the valuation of land and property are currently on the decrease, as can be seen in some of the evidence we have put before you. There is the potential of reducing value-adding locally, increasing offshoring. The economic impact of the timber industry in the Green Triangle region in 2003-04, prepared by Econsearch Pty Ltd on 31 June 2005, shows the direct regional contribution of gross regional product generated by wood and paper products sector in the Green Triangle region, from an output of $840 million was around $401 million in 2003-04. Associated reductions in the forestry sector were from an output of $214 million to $114 million.

The flow-on of the GRP to other sectors in the Green Triangle region goes to almost $263 million. The flow-ons were greatest in the trade of transport, ownership of dwellings, business services, other manufacturing, utilities and the finance sectors. Directly and indirectly, the timber industry—that is, forests and processing—contributed over $778 million to GRP for the Green Triangle region economy in 2003-04, approximately 16 per cent of the total.

Direct employment generated by the wood and paper product sector in the Green Triangle region was around 3,400, and in the forestry sector approximately 830, in 2003-04. Flow-on employment to other sectors in the region as a result of timber industry activities came to almost 4,600 jobs. Directly and indirectly the timber industry generated almost 8,800 jobs in the Green Triangle region in 2003-04, approximately 12 per cent of the total employment throughout the region.

Related matters include forestry research programs to improve wood growth, lower costs and better management risks, by the leading agency in Australia for forest industry herbicide research. The estimated value of the financial benefit to ForestrySA plantations, the carbon storage stock under the national carbon accounting system, including the value of abatement certificates, has not been evaluated as yet.

ForestrySA’s extensive fire prevention measures—fire breaks, roadside slashing, automatic dispatch of fire attack suppression forces—ensures a minimum of two ForestrySA appliances are on the scene within 15 minutes on any fire index day of 35-plus. We have seven ForestrySA Fire King appliances, valued at over $1 million each, in the region. We are also concerned about the existing contract of aircraft for water bombing surveillance during the fire season. Who is going to pay for that in the future?

In the social and community area, ForestrySA manages 16,000 hectares of native forest reserves and a further 9,300 hectares of other native vegetation areas, mostly embedded in ForestrySA plantation estates. It undertakes biodiversity conservation initiatives. It provides services to enhance visitor enjoyment and appreciation of South Australian forests. ForestrySA finds forest resources to be a renewable plantation resource and not a native forest. Existing recreational use of ForestrySA reserves, cultural and heritage management and several restoration projects have been undertaken.

Regarding the community engagement and participation in 2009-10, volunteers in the community programs contributed more than 35,000 hours of their time to improve the social values and environmental services of the state forests. This involved 44 different groups and equated to more than 18.6 full-time equivalents if you employed those staff. How will these important works continue to be funded? ForestrySA returned a dividend of $44.8 million from the total capital and operational expenditure of $112 million in 2009.

Who will value the proposed harvest rights of ForestrySA plantations and who can predict what that value will be in the next one to 100 years? Who determines what constitutes the number of years for a rotation? They are currently at 35 years. Can the purchaser decrease these years to increase the number of rotations from 35 years back to, say, 28? It will increase the log volume, but the log quality will decrease. These questions are yet unanswered.

CHAIR —Thank you very much for that. Councillor Perryman, do want to make some sort of opening statement?

Councillor Perryman —It has been pretty well covered. There are a couple of things I would like to mention before we move any further. The City of Mount Gambier is the second-biggest population centre in South Australia. It is the biggest regional centre outside of our capital city, Adelaide. We have a population of 25,216 people. Our council area encompasses 2,700-odd hectares. We are only a small council area; however, we have six timber mills located within our council area. Mount Gambier has been the home and the heart of the timber industry in South Australia since its establishment over 100 years ago.

The forward sale proposal has prompted unprecedented public demonstration by our community over the past six months or so, with two rallies being held on the steps of parliament in Adelaide. The most recent one attracted around 3,000 people. The vast majority of those people took a 1,000-kilometre roundtrip from the south-east to Adelaide to take part in that demonstration against the forward sale.

In the forest plantations down here in the south-east and in all of South Australia, Pinus radiata is a sustainable renewable resource. It was established to provide an economic base for the south-east in particular and it has done that job very well. It has served our community and our state for many decades and for many generations.

The main concern I have in regard to the investigations that have been undertaken by the state government is that the terms of reference that have been provided to us are very general. One section of it asks to look at the short-, medium- and long-term impacts of a decision to forward-sell rotations. It then says to look at five, 10 and 20-year periods. In normal circumstances, 20 years might be seen as a long-term view but it is certainly not in the case of forestry. One rotation is somewhere between 33 and 38 years. So looking at a 20-year impact does not even cover growing a tree out from its seedling stage up to harvesting and processing it.

So it is not taking a long enough view. I do not know how many people in the room have read The Lord of the Rings, but we are talking about the Ents here. They are long-living creatures. When we are talking about three rotations we are talking about over 100 years. So we are talking about a virtual privatisation of the industry.

Senator O’BRIEN —You could not cut them down if they were the Ents.

Councillor Perryman —We like to see them cut down and we like to see them replanted, but we like to see them milled locally and for the value-adding to happen locally. What we have just heard from Mayor Sage is that there is the prospect that within 17 years, under a full and unconditional forward sale, every log grown within South Australia could be harvested and sent outside of the region for milling and value-adding. That could mean it happened either outside of this region or, even worse, outside of the country. Our concern is that we will be exporting jobs offshore and destroying an industry and an economy that has served us well for over 100 years.

CHAIR —Thanks. I would just like to clarify a couple of things before we start. Regarding the potential decrease in council rate income, I am a burnt-out shire president. We can control the percentage of increase in local government rates, but surely if there is a decrease in the valuations that does not decrease your rates.

Councillor Perryman —The plantations are located in other two council areas, so I will defer to them.

CHAIR —At the present time, are the forests subject to rates even though they are state government owned?

Councillor Gandolfi —I understand that since the corporatisation of ForestrySA, all of the properties are rateable. Half of the rates collected are to be spent on roads that are impacted by the work of forestry. The council works with ForestrySA in identifying those roads. When you look at housing, while we may have a decrease in the valuation of housing, we can increase the rate of the dollar to make up the shortfall, but if people are doing it tough it would be pretty hard for a council to impose an increase in rates while things are not looking good.

CHAIR —So in the privatisation of the forests and the 100-year forward sale, the government still owns the land?

Councillor Gandolfi —As we have been told by the state government, the government would still own the land but they would forward-sell the trees or the crop.

CHAIR —So the government is saying that they can rate the land that they own? If the government still owns the land, the government is agreeing to the local councils putting a rate on the freehold, which is land owned by the state government.

Councillor Gandolfi —That is right. So the state government will continue to have a liability—and one would be rates—and depending on how ForestrySA would operate in the future, the unknown part is over who would manage the plantation. The state would still be liable for rates.

CHAIR —What sort of consultative process did they have with the local shires before they announced the sale?

Councillor Sage —If you go back to when they recently put it in their budget deliberations, there was no consultation; it was only that we have—

CHAIR —They announced it and talked to you after the announcement?

Councillor Sage —They were hoping that that would be further down the track—

CHAIR —So this was sort of like selling goods and chattels to service the mortgage of the state government?

Councillor Sage —That is right.

CHAIR —On the fire protection, are there no contractual arrangements with the purchasers of the forests for the next 100 years? Isn’t there a legal obligation on them to provide fire protection for forests?

Councillor Sage —That has yet to be determined and depends on what terms they have in the forward sale.

CHAIR —Wouldn’t it be highly irresponsible? As in New South Wales, the forest looks after the forest and the volunteers look after it when it comes out of the forest. Are you saying that under what is proposed the volunteers potentially have to look after the fire in the forest?

Councillor Sage —The indication we got from the Treasurer the last time we spoke was that he was looking at the volunteers taking more of an active role in the fire preparedness of the forestry industry.

Councillor Gandolfi —Mayor Sage and I met with the current Treasurer about a month or so ago, and the question was put to him of who would be responsible for fire suppression and firefighting. His response was that the CFS would be. I am not sure whether the Treasurer was aware of ForestrySA’s involvement today in firefighting and fire suppression, so it is certainly an unknown and certainly a very big concern, because ForestrySA have invested heavily in their firefighting capabilities, and if you—

—So where does the gear such as the million-dollar machines go? Maybe whoever the minister is you met with would not be aware if he was on fire himself, but did you get the impression from talking to him that the government had not really thought through the issue? This is a serious issue, the fire stuff. There are serious liabilities based around forest fires.

Councillor Gandolfi —I think, with the whole concept of the forward sales being driven by Treasury, what they have done is looked at the dollar value of the asset and not actually considered what it involves in the detail of ForestrySA operations, particularly here in the south-east.

CHAIR —I can tell you that for volunteer firefighters—all the good local volunteers—there is a lot of difference between putting out a grass fire that is running and a forest fire. If you want to get yourself singed, play around in a forest when you do not know what you are playing around with.

Councillor Perryman —What we have just touched on with that part of the discussion, and what Mayor Gandolfi pointed out quite rightly, is that this is a decision at the direction of the state Treasury, and there is a profound lack of knowledge and understanding of the industry and how it works. There is a whole raft of issues which have not been considered.

CHAIR —Obviously, to put a pun on it, this is a fire sale.

Senator XENOPHON —Thank you for your submissions. Can I just go to the issue of your input into the state government’s process. I understand there is to be a regional impact statement prepared by ACIL Tasman. What is your understanding of that? From the correspondence from the Treasurer, I note that the state government has provided a submission, but all government departments have declined to appear today to answer questions. What is your understanding of the progress of that regional impact statement? What input have you had into it? Basically, where is it at? The Treasurer indicated that it would be available by the end of March.

Councillor Sage —With regard to ACIL Tasman, they actually came and met with a stakeholder group in Mount Gambier, and—

Senator XENOPHON —How long ago was that?

Councillor Sage —We have had two meetings now. The first one was back in mid-February and the last one was only just last month, so they have had two meetings with us. The first was to come and meet and greet; the second one was a bit more serious. In the first one, I think they came into town in order to find out what they had actually taken on as a contract. Their qualifications across many spectrums have been many and varied, but I think they actually came down and found out that what they had taken on was a lot bigger than they thought it was going to be.

Senator XENOPHON —Are you satisfied that ACIL Tasman has expertise in dealing with the timber industry? It is quite a specialised field.

Councillor Perryman —No, I am not. The same lack of understanding and knowledge of the timber industry in South Australia was evident in the questions that were being asked in that first reconnaissance trip that they undertook back in February. I was quite alarmed at some of the questions being asked, in particular by the consultant. One of them was, ‘In a worst-case scenario for us as a community, if a full, unencumbered forward sale occurred, what was the community planning for its plan B?’ My response to him was that I was not aware that a community had to have a plan B when plan A had worked so well for over 100 years. I said that perhaps he should go and see the Treasurer or the Premier and ask them what plan B is for the south-east.

Senator XENOPHON —This is a federal inquiry, and it is to do with what role a federal parliament could have in relation to this and also the impact on regional development. Mayor Perryman, in relation to the whole issue, you said you were concerned about the sorts of questions that were being asked. Can you give any other instances of the level of expertise of ACIL Tasman?

10:14:52

Councillor Perryman —Lack of knowledge of the players in the region. I had a one-on-one meeting with the representatives from ACIL Tasman in the first instance. The second meeting was a joint meeting with the representative of the stakeholder group. They informed me of the people that they planned to speak to in that first trip. There were a number of groups and individuals employed in the local regional economic development board who should have been on their list for a visit, but they did not meet with them.

Senator XENOPHON —Have they seen the regional economic development board or not?

Councillor Perryman —I am pretty sure they have since, but at that point in time they were not aware of the key people in the industry or the key bodies involved in economic development.

Senator XENOPHON —Was it in mid-February that you saw them?

Councillor Perryman —Yes.

Senator XENOPHON —And they are supposed to provide a report—is it a draft report—by the end of March?

Councillor Perryman —Yes.

Senator XENOPHON —That does not give you much time, does it?

Councillor Perryman —No, and it does not give you much faith in their ability to do a thorough and informed report either.

Senator XENOPHON —Have they been on the ground since then.

Councillor Perryman —Once to my knowledge.

Senator XENOPHON —Are you satisfied with the terms of reference that ACIL Tasman has been given?

Councillor Perryman —We have not been given them. We have not been provided with them by the state government.

Senator XENOPHON —Have you requested them?

Councillor Perryman —Repeatedly. This is the problem. No-one knows what the terms of reference are. No-one knows what type of sale we are talking about—whether it is one or two or three rotations and what conditions would be put in place. It is very difficult for us as a community to gain any understanding of what the impacts will be, because we do not know what the terms of reference for the sale are.

Senator XENOPHON —Given the Treasurer’s statements and the premier’s statements in answer to this issue last month in the South Australian parliament, is it your understanding that it is all going to be dependent on the regional impact statement?

Councillor Sage —That is right.

Councillor Perryman —Yes.

Senator XENOPHON —Do all three mayors agree on that Councillor Gandolfi?

Councillor Gandolfi —Yes. One of the concerns comes back to a meeting we had with Treasurer Snelling. He made it clear that the regional impact statement will go to him at the end of this month, in a couple of days’ time.

Senator XENOPHON —As Councillor Perryman said, you do not know what they scope and terms of reference of the regional impact statement are.

Councillor Gandolfi —We do not know what model they are using to try to forward sell the plantations.

Senator XENOPHON —So you do not know whether it is one, two or three rotations?

Councillor Gandolfi —No. We do not know who will manage the plantations, and we get contradictory—

CHAIR —Do you think this is because they do not know either?

Councillor Gandolfi —I think that is the case. A year ago the first Treasurer said to us that ForestrySA would operate as normal. Since then, with the new Treasurer, we have had contradictions. He said, ‘I am unsure what the former Treasurer said.’ So, yes, I do not think they know. The concern here is that the regional impact statement will go to the new Treasurer, in the next few days, I assume, and then he will advise us that two weeks later it will go to cabinet and a decision will be made. What we do not know is what the model of the sale that is going to cabinet will be. So I think they have missed another consultation process, because we would like to know how it is going to work so that we can comment on that.

Senator XENOPHON —So the future of the timber industry is in a sense dependent on an impact statement, the terms of reference of which you are not aware of and you are also not aware of the terms of the potential sale—the forward selling? And presumably you have asked for all of these things from the state government.

Councillor Gandolfi —Yes.

Senator XENOPHON —Repeatedly?

Councillor Gandolfi —Yes.

Councillor Sage —In writing.

Senator XENOPHON —Has there been any breakthrough or any indication that you would get that information in due course?

Councillor Sage —The only indication we have got is that it is a standard format and the regional impact statement is something that is on their website and we can get access to it. But it needs to be modelled and go back to what we are talking about.

Councillor Perryman —To clarify, we do have a terms of reference; it is the generic terms of reference that the state government uses for any of these types of processes. But they have not defined the model or the conditions for that impact statement to be undertaken having consideration for it.

Senator XENOPHON —Because the terms of reference would be meaningless without being anchored to that modelling and those assumptions?

Councillor Perryman —Correct.

Senator XENOPHON —And you do not know those assumptions?

Councillor Perryman —Correct.

CHAIR —You will be pleased to know though that Mr Snelling has told us bugger all, as well. He implied the terms, I should say—it is a matter for the South Australian government. That is the essence of it. I guess that is because he does not know and he does not want us to find out he does not know.

Councillor Perryman —It is a matter for the people of South Australia.

Councillor Gandolfi —You will notice that the driver from the state government has been all about state debt and seeing what assets they can sell. There are no competition issues, there are no liability issues and it actually generates a profit to the state and to the community. It not only returns a profit to Adelaide but of course it stimulates our economy locally. The driver for this whole process has all been about retiring state debt.

Senator XENOPHON —What is expected in the state budget papers? Is it $500 million? What was the estimate?

Councillor Sage —They have not given any indication what value they have put on it. They have just said that it is part of their deliberations to work out what their budget is going to be.

Senator XENOPHON —But the current income stream is about $45 million a year?

Councillor Perryman —Correct. That has been described as commercial in confidence. They do not want to reveal those figures and prejudice a sale. But you are correct about the annual return being in the order of $45 million. On top of that is the money that is invested in R&D for the forest industry and the fire protection measures.

Senator XENOPHON —We have a minister for regional development, Simon Crean. Minister Crean, who I think has a long history in terms of regions and agriculture and is probably respected on both sides of the fence for his work. Have you approached him to express your concerns about the potential impact on jobs?

Councillor Perryman —No, we have not. The forests minister, Michael O’Brien, was going to do that. He gave an undertaking to ensure that he would speak to Minister Crean about the infrastructure spending that has been carried out by the Australian government over the parliamentary term. He assured us that he would be working as hard as he could to ensure that both South Australia and the south-east would get its fair share would get their fair shares of the infrastructure money. The question that occurs to me is: for what? If they are selling the industry that underpins our economy, what are they actually going to be asking for when they no longer own the assets?

Senator XENOPHON —So you assumption is that the federal minister has been contacted about this in an indirect way as a result of undertaking given to you by the state agriculture minister.

Councillor Perryman —Yes.

Senator XENOPHON —In relation to federal funds for infrastructure that supports the local forest industry, what can you tell us about that over the years? What sort of infrastructure investment has there been at a federal level for infrastructure, or is it indirect, through roads and other infrastructure?

Councillor Perryman —Yes, in an indirect sense, perhaps. Probably more so from the state government itself. During the fifties and sixties and into the seventies the state government invested in the mills themselves. They were subsequently sold off. In more recent times the investment has been through the corporatised ForestrySA providing a commercial return and providing re-investment in terms of increasing the size of the plantation estate.

Senator XENOPHON —You mentioned the whole issue of certainty and lack of certainty—I think we will hear about that from the Hardware Association of South Australia and the building industry later on. What can you tell us about that, because as I understand it retailers have experienced a lessening or drop in sales in some parts of the retail sector. Is that your understanding?

Councillor Sage —Yes, it definitely is. There is insecurity, not only within the community but also for the local millers, who are currently trying to negotiate long-term contracts with ForestrySA, and it has been very difficult. To be able to grow the industry into the future and make sure that we have got value-adding and jobs in the region. We need to have long-term contracts with good quality logs. This is something that is not even in the equation as far as the government goes.

Senator XENOPHON —Finally, in terms of your assumptions, is it your understanding that any sale will not necessarily require the timber in the longer-term to be processed here in South Australia, in terms of value-adding?

—That is right. Whoever purchases logs will at the end of the day be able to determine what percentage is left for the local millers to run their businesses.

Councillor Perryman —If conditions like that are applied, it will reduce the value of the asset and the sale price. If the South Australian government wants the best price it can get from the sale of the asset, it would be looking to sell it with minimal conditions. That is something that gives us concerns.

Senator O’BRIEN —What is the state of the manufacturing capacity in Mount Gambier in terms of the age of the plants and the level of investment over the years. I am interested because there has been a similar experience in north-eastern Tasmania, where ultimately one city’s processing has gone to another because a processor won the resource and constructed a much more modern and economically viable facility in an existing facility.

Councillor Perryman —It varies. Recently in Nangwarry, in Mayor Gandolfi’s area, a plant that was manufacturing LVL, laminated veneer lumber, closed down. That production has been shifted to Victoria. At the Kimberly-Clark site there is a range of ages of the plant and equipment. There has been re-investment on different parts of the plant and different production lines at all of the mills over a period of time. A situation like this destabilises the local industry. It makes investment slow. When we are talking about contracts, some of our locally owned mills—our small millers—are dealing with three- to five-year contracts, so, at best it is difficult for them to make long-term investment decisions on their plant and equipment. Some of the bigger plants, like Carter Holt Harvey, have a contract that has a 15-year term. But, again, we are talking about an industry that has a 35- or 38-year rotation for their crop. So it is an industry that needs to have consistency. The charter of ForestrySA provides a great deal of comfort, I am sure, for all of the millers in terms of it needing to encourage and facilitate regionally based economic activity to make sure that there is a supplier for our local mills, which will not be the case under a private owner.

Senator O’BRIEN —It would be interested to have the history of how ForestrySA has operated in terms of contractual arrangements with millers over the years and how that has impacted on development as it stands. The other question is that one of the submissions—I think it is your submission, but one of the three submissions—refers to international interests buying forest assets here. I know that Gunns sold their assets recently, but I do not know who bought them. What can you tell us about what has occurred with those assets since they have been purchased by international interests?

Councillor Gandolfi —My understanding, but I would need to confirm it with Gunns, is that they have a buy-back arrangement. So whilst the capital was sold, as such, they have a contractual arrangement back to supply Gunns themselves. When you compare Australian mills and our local mills with those overseas, they have certainly got the capacity to purchase the raw product at a higher price because their mills, from what I am advised, are much bigger than ours and of course their labour costs are going to be much less than ours. My understanding is that over at the wharf at Portland log is sold for a far greater price than it is locally. But of course there is the benefit to the state and the region, so there are flow-on economic benefits, and that is the benefit of ForestrySA plantations remaining in public hands.

Senator O’BRIEN —In terms of timber production in mainland Australia, what are the areas where the competition comes from for the green triangle.

Councillor Sage —China and Pakistan—

Senator O’BRIEN —I am talking about within mainland Australia. Where is the domestic supply currently produced? I know that Tasmania produces some, but not much for the national market.

Councillor Gandolfi —It might be something that Ian McDonnell might be able to give you more detail on, but I imagine the fact that we are so close to our plantations—our sawmillers are here—and that we have so much of it, that there is a domestic advantage to our sawmillers here. When the finished product leaves here it just travels a few kilometres from the forest to the mill. There are state forests in Victoria, New South Wales and Queensland. But as it stands, we are quite high when it comes to domestic supply.

Senator O’BRIEN —So you would be supplying all over Australia, but substantially to Melbourne and Adelaide.

Councillor Gandolfi —Yes, definitely.

Senator O’BRIEN —Why do you think that would change if there were different ownership of the resource.

Councillor Gandolfi —New owners are going to look for the highest bidder. I do not think they will be that interested in whether they and our local mills are supplying the domestic market with structural timber and so on. They would be looking for the biggest buck, and their demand in the future is going to come from China and India. I imagine that they will be bidding the highest for the raw product.

Councillor Perryman —Australia has always been a net importer of timber, I am told. While some timber products are exported, we consume more than we can provide. Getting back to foreign interests, what is of concern is that when you look at the phenomenal growth rate of places like China. According to some industry newsletters that I have read, the projected growth in consumption of timber in China alone between now and 2012, I think—when I read this I think it was 2009 and 2012—is something like 500 million cubic metres. I might not be entirely accurate with the terms that I use, but that will give you an indication. In South Australia we harvest on an annual basis from ForestrySA one million cubic metres. So we are just a very small fraction of the increase in demand in one country alone. That is why I hold the fear that a foreign interest may come in and buy it all up and export it all overseas for their own needs.

Senator O’BRIEN —Where do those countries get their timber now?

Councillor Gandolfi —That is something I cannot answer.

Councillor Sage —Currently China is taking something like a million tonnes of log a month out of New Zealand. We are currently losing something like 20,000 tonnes out through Portland every month. We do not want that to increase. We do not want to see our local mills being starved for timber to value-add and put into the domestic market.

Senator O’BRIEN —What about pulp. You particularly mentioned that there was a question mark over it.

Councillor Perryman —I think that has changed in recent weeks with the events in Japan.

Councillor Gandolfi —At a local level Kimberly-Clark Australia at the Tantanoola pulp mill take 550,000 tonnes of pulp wood a year. As I mentioned in my opening statement, that mill is now for sale. Hopefully we can secure a buyer by the end of this year; otherwise it will be closed down. This is where there is a risk in the uncertainty when it comes to the supply of pulp wood for that mill into the future, because that pulp wood comes from ForestrySA.

Senator O’BRIEN —Is the resource here large enough for a world-scale processing mill, on either a pulp or a sawn timber basis?

Councillor Gandolfi —There is a proposal on the books, probably more around the blue gum industry, for a pulp mill at Penola. But these thinnings in the past would rot on the ground, and now it is an industry in itself and actually generates money to the state.

Senator O’BRIEN —What about sawn timber? I am talking about the scale of mills overseas.

Councillor Gandolfi —ForestrySA’s strategic plan for a number of years has contained an aim to grow the size of the plantation estate, to be able to attract a second world-class sawmill. The view of ForestrySA is that, with an increase of I think around 25,000 hectares, they would be able to adjust the way that the forests are managed to be able to provide resources for two large-scale mills. That type of investment would cost somewhere around $200 million to $250 million to buy the land and plant it—and then of course you would have to wait for it to grow out. So it is not all beer and skittles, but it is an objective that it would be great to see the state government embracing rather than selling the farm off.

Senator O’BRIEN —I don’t think too many state governments are investing in forest plantations anymore. That was the way that plantations were established around the country, but I don’t think any state governments are investing in that in any significant way.

Councillor Gandolfi —There is no rule against it, though.

Senator O’BRIEN —That doesn’t mean it is going to happen.

Councillor Sage —There is still some opportunity for the state government and private enterprise to work together. Superannuation schemes are an opportunity to grow the industry in the future.

CHAIR —Before I pass to Senator Colbeck, I want to put something on the record. It is a shame we do not have the state government to appear—from Gunns’ submission to this inquiry, we probably should have Gunns—but Minister O’Brien has been applauded for his honesty. I have to say, when I read this into the record, it is pretty honest—but it is pretty stupid! This is in a response to questions. He says ‘The government is still reviewing the proposal’. He is asked: who else is revising and reviewing the proposal? Are you aware that local stakeholders have not been consulted to date?’ And this is obviously a response to the GFC by the government in the lead-up to how we are going to retain our triple-A rating:

Minister O’Brien—there is a feeling that there’s been an enormous amount of work occurring that I’ve been involved in. It is a process that is being run by Treasury and Finance. Julian has been involved ...

And then he says:

I’ve had no involvement in it. A few other people were called in for a bit of advice on various issues by forestry management, but this process has been run by the Bank of Scotland—

we know what happened to the Bank of Scotland: they went bust—

and by Treasury and Finance. We didn’t consult widely. My views weren’t sought. I don’t think Brian’s were in any depth.

Senator COLBECK —Thanks for the handpass Bill! I am just trying to work through some of the issues that have been raised. With respect to the firefighting, which Senator Heffernan looked at a bit, has there been any offer of additional resources to the CFS to take up this additional workload?

Councillor Sage —No. I think we are a bit too far down the track for them. They have not really given any indication of the way they are going to go, because they have not worked out how many rotations they are going to sell them.

Senator COLBECK —But surely, if that responsibility is indicated to be passed to the CFS, it does not matter how many rotations there are; the liability and responsibility is still there, and you are still going to have to have a significant additional resource available to them.

Councillor Gandolfi —Certainly, from my informal discussions with those involved with the CFS, I know they are very concerned that they would have to take responsibility for the operations that ForestrySA currently undertake when it comes to firefighting and suppression. In the summer season of 2009-10, ForestrySA manned our fire towers for I think 97 days.

Senator BACK —Volunteers?

Councillor Gandolfi —No, this is ForestrySA. These are the sorts of roles that ForestrySA currently do. I think a lot of it comes down to just a clear fact that the state government is unaware of its role, and that is a concern. I think it needs to be raised and highlighted that these current practices of ForestrySA do need to continue. You cannot expect volunteers to sit in fire towers for three months.

Senator COLBECK —Do the human resources to take that role over exist?

Councillor Gandolfi —It is going to rely purely on volunteers, so I don’t believe that would be the case.

Senator COLBECK —Is there any suggestion that any of the charter obligations of ForestrySA are going to be rolled over into this new process? You have had no indication at all as to what might happen?

Councillor Gandolfi —No.

Senator COLBECK —The firefighting being one example.

Councillor Perryman —They are saying that it will likely be business as usual for ForestrySA. Having said that, they will not give any guarantee that the buyer will not be able to direct ForestrySA to do certain things, for example shorten the rotation cycle.

Senator COLBECK —But ‘business as usual’ for ForestrySA could mean a number of things.

Councillor Perryman —Correct.

Senator COLBECK —And ForestrySA would be relying to a significant extent, I would have thought, on their income from the forest to provide some of the services that they provide, including firefighting. If they do not have access to the resource for the revenue, because that has been sold off, then how do you actually fund it? So, effectively what the government is doing transferring its financial problem to somebody else.

Councillor Gandolfi —In the last few months the position has changed in some of the public statements that have been made by the two Treasurers that we have had. The first Treasurer made it quite clear that it would be business as usual for ForestrySA. The new Treasurer changes that phrase a little bit and says that ForestrySA will remain publicly owned. It is not about who owns ForestrySA; it is about what it does. So if it comes down to six people in a dark office in Adelaide, it is not going to be much good to us.

Senator COLBECK —With respect to the regional impact statement—we have copies of the terms of reference, such as they are—does this appear to be effectively a case of ‘We’re doing it because we have to do it; we’re going through a process but we’re going to sell it anyway—this is just something that has to be done because the rules say it has to be done’?

Councillor Gandolfi —The announcement was made in the budget estimates in 2008. That is how we discovered that it was going to happen.

Senator COLBECK —The RIS appears to be being done over a very short period of time. The consultation process, as you have described it to us, seems fairly sparse, and the consultants appear to be on a pretty steep learning curve as part of that process. And if they are looking to report by the end of March, which is tomorrow, it is a pretty Herculean effort to try and get through all that and provide something of value to the government.

Councillor Perryman —The former member for Mount Gambier, Rory McEwan, was the forestry minister at the time. When it appeared in the budget papers, and when he was asked about it publicly, he said that there would be an 18-month period of investigation—that is the investigation that has been undertaken by the Bank of Scotland—and that at the end of it everyone would know what all the options were. Well, that is far from the truth—it has not been released publicly. We are still unclear about what the model is that is going to be pursued, but we have been told by either Minister O’Brien or one of the two Treasurers we have had, or a Treasury official, that there was enough in the Bank of Scotland’s investigations to justify them moving on to the next stage, which is what is now being done by ACIL Tasman.

Senator XENOPHON —Has that Bank of Scotland report been released publicly?

Councillor Perryman —No.

Senator XENOPHON —You asked for it?

Councillor Perryman —We were just told that there was enough in it for them to go to the next step.

Senator XENOPHON —But you do not know what is in it?

Councillor Perryman —No, it has never seen the light of day.

CHAIR —Why the Bank of Scotland? Are they the financiers of it? Where do they fit in? Why did we pick the Bank of Scotland?

Councillor Perryman —I am not sure.

CHAIR —They had their own serious problems at the time. All of this is pretty scary.

Councillor Perryman —That point has been noted in the past locally as well.

Senator COLBECK —Moving onto forestry itself, do you have any figures on the value in the local contracts or what the coming returns are in the local contracts versus the prices for export logs? You indicated that there are about 20,000 tonnes. Is that a month going out of Portland?

Councillor Sage —Yes.

Senator COLBECK —And a significant amount goes into those South-East Asian countries out of New Zealand?

Councillor Sage —Yes.

Senator COLBECK —Do you have any indications of the various log values in those particular areas? We might be able to deal with this later when Robert Eastment talks to us, but have you got any figures on that?

Councillor Perryman —We did have a bit of analysis done that I think compared 100,000 tonnes milled locally compared to 100,000 tonnes of logs going out raw through the port. It looked at the payroll, taxes, levies and rates benefits that are paid through the local milling. I do not have a copy on me but we can certainly provide the committee a copy of that.

Senator COLBECK —I understand that there is a flow-on value from local conversion. What I am trying to look at are the trends. You expressed concern that perhaps there would be an increase in the value that goes out as whole logs rather than being processed locally. I am looking for the trends of what the local market is paying for the whole log here versus what the global market is paying.

One of the things we want to look at is the future impact of this because it is obviously a concern to you as well. I am just wondering if you had any information on those two comparators. From conversations I have had with people from New Zealand, I am aware that their local milling industry seems to be doing it pretty tough at the moment because of the volume of timber that is being exported as whole logs. In this argument, that is a key indicator of where it is going. As you have said, the new owner is going to want to get the highest value for money. One of the things that has driven the change in locations and the dislocation in local timber towns in Tasmania, where I come from, is that push for a higher value return. I will pursue that with Mr Eastment this afternoon.

Councillor Sage —You have Ian McDonnell coming after us and he would be able to give you a good indication because he is a local miller.

Senator COLBECK —The capacity for expansion of the local plantations in the state is another thing. I noticed in one of the submissions that up to 30 per cent of the hardwood MIS might not go back into hardwood. What is your view on the capacity of that to go into softwood? It is a much different rotation and it is a lot shorter rotation, so there is capacity to grow that. What are your views on the capacity of that to occur?

Councillor Sage —Some work has been done, and ForestrySA have been involved in that as well, to check out these land masses and the soil types to see why the blue gums have not grown as well and if they can put pines back in there. A lot of that work has already been done and there is a capacity to grow it. One of the issues we need to sort out is the water licensing for plantations. That has been on the books for a long time and it needs to be sorted so that we can grow the industry and work within those constraints. So there is capacity and there is willingness. We need to seek out—

Senator COLBECK —Obviously, there is some uncertainty over the decisions around it, though.

Senator BACK —Gentlemen, thank you for your evidence. You have presented us with figures in terms of direct jobs and indirect jobs that would be affected. Have you put a dollar figure on what you believe would be the impact on the south-east region if there was an unrestricted sale?

Councillor Sage —From the $112 million that is turned over annually from ForestrySA, it is estimated that $2.8 billion is returned back to the local economy through the value-adding process. The actual growing of the trees in the harvesting is not where the money is; the money is in the value adding and the milling of the timber.

Senator BACK —So what proportion of that $2.8 billion would be lost to this economy? Obviously there would still be harvesting and there would still be transport, so what proportion of that $2.8 billion do you estimate would be lost to your combined economies if this took place?

Councillor Sage —I would not have a guess. It would be difficult to put a figure on it.

Senator BACK —But presumably by the time this decision has to be taken it would be a valuable figure for you to have, would it not, to put to government?

Councillor Sage —Yes.

Senator BACK —What would be the alternatives for employment in the south-east region in the event that this sale took place and, over time, the proportion of logs going into local milling declined and effectively ceased? What are the alternative employment opportunities down here?

Councillor Sage —At this stage there are not too many. This is the heart and soul of our community. We have our agricultural pursuits—dairying, cattle and sheep—and the only one that takes a lot of labour input is dairy. As far as being able to take the capacity of the rest of the staff is concerned, it would be very difficult to find an industry that would take so many people on.

Senator BACK —So the logical events then would be that in some instances people would drift away and in other instances they would go on to some sort of unemployment benefit with the likelihood of their not being able to pick up other employment.

Councillor Sage —That is right.

Councillor Gandolfi —If I could just comment on how many people would be actually employed in our mills. In our submission we touch on the fact that there are 21 mill and manufacturing facilities here in the south-east and there are 600 people employed there. Then we refer to the 3,000 others who are contracted—our harvesters and our haulers are all contracted. Then we separate ForestrySA, where there are another 200 jobs. So it would be about 600 jobs—if the mills were to close tomorrow but the hauling was still to continue, it would be 600 jobs straight up. Then there is the flow-on effect—the contractors would maintain those mills and so on.

Senator XENOPHON —What is the multiplier?

Councillor Gandolfi —If I work on the basis of the multiplier that Kimberly-Clark have used in their modelling in the past, it would be 2.3. So, if there were 1,000 jobs lost, it would be 2,300 in total.

Senator BACK —I honestly do think it is a very important figure that you have to come up with and defend, and I would suggest you do it fairly soon. You have mentioned a dividend of about $45 million a year from a total capital and operational expenditure of $112 million in 2009. That is a better-than 25 percent return.

Councillor Sage —Yes, that is right.

Senator BACK —It is not a bad business, is it? It has been bandied around, but I have read a figure of $2.8 billion, other than the one you just mentioned, as being the possible target figure that the government would want to try to attract in the event that they were to move towards this sale. Is that correct?

Councillor Perryman —No.

Councillor Sage —No; that is what the asset is worth.

Senator BACK —But has there been any estimate made of the return to government, immediately or in the very near future, in the event that they went down this path?

Councillor Perryman —Because we do not know the model, it is very difficult to calculate—they are keeping all that commercial-in-confidence. But looking at other examples in Victoria and Queensland and doing some educated sums, it would be somewhere between $½ billion and $1 billion. That is what we assume.

Senator BACK —Somewhere between $½ billion and $1 billion? Well, I am—

Councillor Perryman —The $2.8 billion, I am assuming, includes the value of the land, not just the trees.

Senator BACK —So you think the whole exercise is aimed at yielding to the government somewhere between half a billion and $1 billion?

Councillor Perryman —Enough to build a stadium or a hospital in Adelaide.

Senator BACK —And, in so doing, tie up the forests for 100 years. I am a very simple person, but with a yield of $45 million per year without adjusting for future value of money, if you multiply that out 100 years that is actually $4.5 billion.

Councillor Perryman —Correct. Another way to look at it would be that if you capitalised $40 million of 10 per cent, you would only pay $400 million for it in today’s money, and that would be the bottom end. If it is going to have the restraints that it has today then that is all it would be worth, so why would you sell it and then turf out $60-odd million a year to run a forestry estate of managed forest? It does not make any sense to say—

Senator BACK —Senator Colbeck, who I respect in this field because he knows all about forestry, tells me that we actually spend $1 million a day in Australia importing timber.

Senator COLBECK —Softwood.

Senator BACK —Softwood. We spend $365 million a year importing softwood for building construction purposes: $1 million a day—a figure I did not know. It leads me to a question. I am from Western Australia and we are watching the demise of our southern jarrah forest industry at the moment. Gunns have just announced they are closing up the mill in Manjimup. The only two potential buyers there were China and India, and their interest lies not in doing any milling or value adding in the south-west but in getting logs onto ships as soon as they possibly can. This causes me to ask: is there any move led by yourselves for some form of alternative approach to the South Australian government from the south-east, whether it be led by local government but with private sector involved as well, to, if you like, put an alternative plan to government? If they are getting $45 million on $112 of capital and operational expenditure, it seems to me as though it is a very lucrative investment. What is being done, if anything, to try and propose an alternative to government in the event that this RIS actually recommends to government that they proceed with this?

Councillor Gandolfi —Definitely the restraints are basically encompassed in the charter of Forestry South Australia—and I have a clean copy here if you would like me to table it—but we would certainly like that in place. What we would really like to see is an expansion of the forests. If we see an expansion of the forest, we actually have more chance of securing more industry and more jobs into the future. Our climate, as you can see today, is ideal for growing things. That is where we would like to see the government invest. It is actually returning a profit to the state; it is not a liability.

Senator BACK —This is really my final question. I do not know if you are the people with the capacity, but it just causes me to ask the question: how can the return to government from this enterprise actually be increased beyond the $45 million? Is it only in more area planted for softwood?

Councillor Sage —If the government were to take the same approach as what we fear the private sector might if they owned it—and that would be to sell directly overseas—the benefits would be twofold in that we would generate income for the state government through employment down here. It would make much more sense for the government to look at expanding the forest rather than becoming the unconstrained owner of the forest. The charter actually provides us with some certainty in the future. The private sector do invest. We have private forestry, they do invest, and ForestrySA’s involvement in plantations does not restrict the private sector investing. There has been quite substantial private forest here.

Senator BACK —Thank you, gentlemen.

Senator COLBECK —There is not demand for the product when they are bringing in a $1 million a day worth of sawn software.

Senator XENOPHON —The state Treasurer was asked a question in parliament on 23 February about whether a final decision was made and he seemed to say, ‘We are waiting on this report.’ But in your meetings with the state Treasurer, is it the case that it is a foregone conclusion or is it all hinging on this report, of which you do not know the assumptions or the full terms of reference?

Councillor Sage —With regard to the Treasurer’s comments, he made a statement and a promise to us that if the regional impact statement came back as negative for the whole of the state and the region this issue would be taken off the table.

Senator XENOPHON —But you do not know what the regional impact statement is based on.

Councillor Sage —That is right.

Senator XENOPHON —It is a bit dodgy, isn’t it?

Councillor Sage —He still reassured us that we would have some chance to rebuff it.

Senator XENOPHON —So you have been given a reassurance on a study, the terms of which you just do not know anything about?

Councillor Sage —That is right.

CHAIR —Thanks very much. This certainly has the smell of the electricity sell-off in New South Wales.

Proceedings suspended from 11.01 am to 11.16 am