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Sale of timber assets by the South Australian government

CHAIR —Welcome, Mr McDonnell. If you want to make any amendments to anything you have said or done, now is your big opportunity and then we will ask you some questions.

Mr McDonnell —Thanks for taking the time to come down here today. I am the Managing Director of N.F. McDonnell and Sons, a family owned sawmilling business here in Mount Gambier. I am the third generation of our business. It was started in 1944 here in the south-east by my grandfather, father and his uncle. My brother and I run the business along with my son Sean. He is obviously the fourth generation of the business. We employ approximately 85 people on a full-time basis. We source most of our logs from ForestrySA so this issue is very big to me and could have a profound impact on our business, in my opinion.

I apologise for my submission. I do not know what happened with the original one; it disappeared somewhere in the computer system. I think the brief you have in front of you is something I had to put together in a hurry yesterday.

I think the comments on the plantations here in the south-east were made in good faith earlier by the mayors. One of the things that the south-east is so renowned for is the quality of our plantations. The people of ForestrySA, the foresters and all the staff there, have done a marvellous job over the years in cultivating what is arguably the best quality pine and radiata plantation in Australia and possibly New Zealand. That is the thing that sets us apart from other plantations in Australia and New Zealand. We get a high yield of structural timber and this is pivotal to the success and continuation of our industry.

I think to be fair to everybody, when we make descriptions of logs and we talk about structural timber, it comes from the outer part of the log—the heartwood. There is the circle in the middle, the pith in the middle and the centre of the log is usually a lower grade material that goes into packaging, fencing products and things like that.

Down here there has been a big concentration on silvicultural practices. ForestrySA operates its own nursery where it conducts a very strong tree breeding program to breed trees that maximise returns to both the government and the purchaser of the logs for conversion into high-value products. That can be affected dramatically by the quality of the seed that you grow your tree from and also in the way that you look after your forest.

Here we have a practice where we do a first thinnings. In years gone by, it went up to a fifth or sixth thinnings before a final clear fell. Years ago, plantations were grown out to 50-plus years. That has since changed for commercial reasons. There have been advances in the tree breeding system and in growing, and it has been brought back to 38 years. If anybody had control of the forests and reduced that rotation age dramatically into the low 20s or something like that to get cash returns, that would have a dramatic effect on the viability of sawmills here in the region. That is a huge concern of the sawmilling fraternity here in the south-east.

Geographically, we live a long way from the major markets. Out of the Mount Gambier region, our main markets are Sydney, Melbourne, Adelaide and Perth. We do put a little bit of wood into Brisbane but unfortunately, with the national roads systems and so forth, we are not as competitive as, say, the New Zealanders are in putting product into Brisbane.

The big thing we have that sets us apart from most others is the quality of our timber. I cannot stress that enough. I have seen it happen in other places—and if we do move into camera I am happy to talk about those sort of things at length—where silvicultural practices have changed dramatically and have had a big impact on the yield that a sawmill can get. It has absolutely no impact on an export industry; in fact, it enhances that because they get more wood, they get the yield quicker, and they can turn their rotations over quicker and sustain an export market. A log is a log is a log, in some instances, when it goes over the wharf. I see that as one of the biggest threats we would have from some foreign ownership or unrestrained sale of the forest harvesting rights.

In our history, we have always had short supply agreements with ForestrySA. Five years ago I negotiated with ForestrySA to get a 15-year supply agreement. That allowed for some certainty to increase our business and grow it substantially. In everything I have seen with private ownership, it is all about short supply agreements in order to maximise returns to that forest owner without any regard for the regional economies where the timber is grown.

It was not easy—it took nearly two years to negotiate the supply agreements—but some of the big things that we were able to work with the government on were the regional benefits of making an investment, employing more people and having regular income coming into the region, which is part of ForestrySA’s charter. Those benefits were a big influence in getting those supply agreements. At that time there were two other sawmills that also got similar supply agreements because of those negotiations.

I have touched on the capital investment, but I would like to cover a couple of comments that were made earlier on the ACIL Tasman process. I do believe and will say strongly that the RIS, in my opinion, was something that was put together by the government just to tick the boxes in this process. I do not believe for a minute that it was done with any genuine regard for the south-east region or the industry down here. Our initial meeting with ACIL Tasman was a phone call at two in the afternoon asking if we could be available in an hour to meet these representatives at the District Council of Grant.

Senator XENOPHON —When was this?

Mr McDonnell —This was in February. A few of us were able to get to the meeting—and, when I say ‘a few’, it was only about five or six. ACIL Tasman were very vague on the terms of reference and what their charter was. They kept telling us that they would have to refer us to the government if we wanted to know any of those details. We asked them at the time, ‘How many times are you coming down and who are you going to be talking to?’ Their answer was, ‘Maybe once more’. The reason I am making these comments is I think you need to understand the attitude that surrounded this whole thing. We protested to the state government through our local member, an Independent, Don Pegler. Over the course of the next couple of weeks, we were notified that ACIL Tasman would come down and talk to other people. I had a one-on-one interview with them a couple of days after that; they came back to Mount Gambier. When I asked them about who they were going to talk to, I was told not just industry people but other people in the town. I suggested the president of the chamber of commerce, other major retailers, car dealers, hardware dealers—those sorts of things. They replied by saying that they did not really think that was necessary; they have national modelling to do that sort of thing. I found it amazing that their attitude was, ‘We can go and get statistics that will verify what we want to do.’

CHAIR —They are as independent as the people who pay them, bear in mind.

Mr McDonnell —Yes, okay. The point is that I think the best independent people down here are in the main street, with respect, Senator.

CHAIR —Sure.

Mr McDonnell —They are the ones who are going be affected.

CHAIR —We had better to go questions because we have only got about half an hour left. It seems to me that this has all the hallmarks of a mortgagee sale by the government, where sense—S, E, N, S, E—is more driven by C, E, N, T, S than anything else. Were you a bit surprised that the minister himself said, ‘We really did not take account of the forest side of it’? I am sure the Treasurer probably does not know much about forestry: how to work a chainsaw or a crosscut saw or something. Were you a bit surprised that they used the influence of people like the Bank of Scotland, for God’s sake?

Mr McDonnell —I think we were all pretty gobsmacked from the meeting with the minister when he came down in October and by some of the frank admissions that he made and some of the comments like that.

Senator XENOPHON —He was being honest, was he?

Mr McDonnell —He was, but much to his detriment, I think.

CHAIR —People have asked today what we are going to do about it. Hopefully, if we inform the taxpayers of South Australia of the great unknown about this and the great panic, as it were, with the mortgagee sale philosophy behind it, we will be doing everyone a favour.

Senator COLBECK —I want to start with a question that I talked to your local governments about. It is about your understanding of prices for whole log at the moment versus what is being paid for locally for milling logs and comparison of those two as a product, because they may have a variation, obviously, as far as quality is concerned. You do not have to give me any commercial-in-confidence numbers, but I just want to get an idea of where those things sit in a comparative sense at the moment, particularly, as I said earlier, because of what is currently occurring in New Zealand, with a large proportion of their stuff going offshore whole rather than being processed locally—to the detriment of the local processing sector.

Mr McDonnell —That can vary, really; it is a supply and demand type of thing. I think Steve mentioned the growth in China. Korea and India are other destinations now. Increasingly, the prices are going up in some of those destinations, but it depends on the quality of the log and those sorts of things. I think the big thing that you need to consider is that while I might pay, let’s say, $100 for a log and it might be the same that ForestrySA gets for that log at Portland for export, there is no GST paid on an export sale and I pay a GST component. I process it onshore here. The government picks up payroll tax, land tax, fuel excise and all those other costs. So when you hear that they might get $130 for that log at the wharf at Portland, you look at those two figures and it might make sense to say, ‘Gee, they are getting a lot more money.’ Well, it does not make sense at all. We continually generate income for the state through a whole raft of other charges that are not taken into consideration when somebody just compares the two figures.

Senator COLBECK —Yes, the value-adding process adds to not only the local coffers but also the government coffers.

Mr McDonnell —Federal and state.

Senator COLBECK —What about the type of log? How comparable are the logs that are going out across the wharf versus what you are taking at the moment?

Mr McDonnell —Late last year, when we were struggling to get logs and the demand was high for export, I literally sat on the road out at Portland and kept ringing ForestrySA because our mill had no logs. I rang and asked, ‘Why can’t we have these logs?’ and they literally turned trucks around and brought them back to our yard. So they are the same logs.

Senator COLBECK —So it is not a thinning or a younger product, or anything like that?

Mr McDonnell —Some are. There is a raft of different descriptions. Some are pulp. They used ‘K16’ and ‘K14’ and there is a whole raft of descriptions but, by and large, it is the same tree.

Senator COLBECK —Going back to the discussion about reducing rotation age, that effectively means over-harvesting, doesn’t it? You are going to get a different quality of product at that age unless you have some advances in silviculture technology. You are almost going into over-harvesting, aren’t you?

Mr McDonnell —Yes, I would like to cover that further in camera later on.

Senator COLBECK —Okay. On the supply agreements, we have already heard evidence that there is a range of them and you have said that you have achieved a 15-year one, which is really what you want if you are going to make a substantial investment in your business.

Mr McDonnell —As a minimum.

Senator COLBECK —What is the average term of supply agreements? Are they generally on a five-year cycle and you are out of the ordinary by having a 15-year agreement?

Mr McDonnell —Yes, in recent times we are, but it ranges anywhere from five to 15 years. Depending on the type of wood that might be available, there might be a window where they have a bit more thinning or clear fell or something like that, so it might be a shorter term thing. It ranges and really depends on the specific time, but the trend has been to make them a lot shorter. In years gone by, there have been 20-year supply agreements.

Senator XENOPHON —In your submission you said that you speak with some authority because you owned and operated a sawmill in Victoria from 1998 to 2008, and you saw something similar happening there. Can you just explain that to the committee?

Mr McDonnell —Only in camera.

Senator XENOPHON —Okay. In your other mills in the area, what is the uncertainty of this process doing for investment confidence and wanting to invest in new plant and equipment?

Mr McDonnell —It is considerable. By its nature, the sawmilling industry is expensive because of the machinery. You wear machinery out quite quickly. It is an abrasive type of industry so you need to continually reinvest in your business to stay competitive. At the moment we have a 10-year window so we can be reasonably assured, but I have a 30-year-old son who has just become a partner in our business. For his future, some of your decisions need to be for longer than 10 years. So that is where I see the uncertainty.

11:34:58 —Finally, regarding the ACIL Tasman process, have you seen them since then? You spoke to them at the meeting that was arranged with an hour’s notice. How much time did you spend with them in that first meeting?

Mr McDonnell —About an hour, as a group. The next meeting, a private one, maybe went for an hour and a half or two hours.

Senator XENOPHON —What is your understanding of their level of knowledge about the timber industry and the economics of the region?

Mr McDonnell —I think their knowledge of the industry is very basic. I do not think they understand the variances of the south-east and how the south-east operates with the timber industry. Also, from the initial discussions, I do not believe they have a true understanding of the impacts this could have on the south-east.

Senator XENOPHON —Did they share with you any of the assumptions they were asked to make in relation to their approach to their report.

Mr McDonnell —They were very tight-lipped on that. They would not expand on that at all.

Senator XENOPHON —So how much confidence to you have in the ACIL Tasman process?

Mr McDonnell —Very little.

Senator BACK —To help my understanding could you give us an idea of how many mills there are in the south-east, how many of them are owned by people equivalent to you—in other words, local mill owners—and how many are owned by out-of-towners or corporates? Could you give us some idea of the structure of the processing side of the industry as it stands here.

Mr McDonnell —Carter Holt Harvey would be the largest sawmilling operator here in the south-east. They have two sawmills here and they would be the largest customer of saw log from ForestrySA. Gunns are the next largest operator here in the south-east. They rely mostly on their own plantations. In order of saw log, we would be the next. Then there are two other family owned sawmills of significance here in the south-east.

CHAIR —Who do you rely on for logs?

Mr McDonnell —Ninety per cent of it from ForestrySA.

Senator BACK —Would Carter Holt Harvey be heavily reliant on them also?

Mr McDonnell —They do buy some log, but it is a very small amount, from Hancock Victorian Plantations, across the border. When Carters bought the mills from the government they inherited supply agreements with the mills from the government.

Senator COLBECK —What is the term of those?

Mr McDonnell —I think the longest term they have left is around 15 years, but I could not speak on authority on that.

Senator BACK —In your evidence you mentioned that you have owned and operated a mill in the Gippsland from 1998 to 2008 and during this time the Victorian government sold Australia out of plantations to private overseas companies and the effects on your business was almost immediate. Could you expand on that?

Mr McDonnell —I would prefer to do that in camera, but it would be all about how the supply agreements were interpreted—and then the continuing supply of log.

Senator BACK —Obviously not to your benefit.

Senator COLBECK —Or satisfaction.

Senator BACK —That is right. You sold that mill recently. Was it to another family owned operation or a corporate?

Mr McDonnell —Carter Holt.

Senator BACK —You have may heard me ask the mayors earlier, for the industry in the south-east what are the alternatives to just watching this process happen, in terms of local government, the private sector, you and others. The industry does seem to yield a reasonable return to the south-east when you take into account direct dollar value back to state governments, social benefits, employment et cetera. If the figure of half a billion dollars is realistic in terms of what the government might expect to sell this operation for and if they are getting somewhere near $50 million a year return at the moment, selling an asset for the equivalent of 10 years of value when you are locking it up for 100 years does not appear to me to be the most sensible economic decision of all time. What are the alternatives? If in fact the South Australian government says for whatever reason that it just has to have that half billion dollars of return now, are there any other options for the industry here?

Mr McDonnell —No, not really, with the sheer volume of people. If you are talking about other industries we could invest in, not of that magnitude.

Senator BACK —And there is not an alternative business model?

Mr McDonnell —No, there is not. Not when you are talking about 3,500-odd people. You hear of different areas reinventing in tourism and those sorts of things. We are very lucky in the south-east that we have a range of industries from farming to wine to fishing and those sorts of things. But with those businesses the wine industry, for example, is in a downturn. Those industries are fully fledged industries. There is not an alternative here for that number of people or volume of investment.

CHAIR —It is time that we go in camera. Before we do, the obvious problem is going to be that if the South Australian government supplies 90 per cent of your logs, they have no obligation to maximise the profit, as it were, for themselves. They have social obligations. If it is privateered the maximum obligation, under a penalty from ASIC, is to maximise the profit of the shareholders, which certainly will be of no interest to the people who needs the logs rather than the profit that can be derived.

Evidence was then taken in camera but later resumed in public—

[12.02 pm]