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Rural and Regional Affairs and Transport Legislation Committee
16/05/2011
Illegal Logging Prohibition Bill 2011

KUFFER, Mrs Moira, Policy Officer, Australian Forest Growers

RAGG, Mr Warwick, Chief Executive, Australian Forest Growers

CHAIR: I welcome representatives from the Australian Forest Growers. You have lodged submission 28 with the committee. Would you like to make any amendments or additions to that submission?

Mr Ragg : No, we do not, except for what we say in evidence.

CHAIR: In that case, I invite you to make a short opening statement before we go to questions from the committee.

Mrs Kuffer : AFG would like to thank the committee for this opportunity. As the national representative body for small-scale private forest growers, both of plantation wood lots and managed native forests on private land, we will seek to confine our commentary today to the way in which we believe the proposed legislation and companion regulations will impact small-scale private forest owners. AFG supports action to ensure that timber entering the marketplace is legally sourced. AFG regards the current compliance requirements on Australian growers under the existing domestic legislative framework prevailing in various jurisdictions within Australia as substantial and well implemented. As a demonstration of legality, this should give confidence of the legality of the industry in Australia. AFG believes that there should be no unnecessary additional cost burden applied to forest growers in Australia as a result of this policy framework.

The current bill presents some challenges as it requires a code of conduct and timber industry certifiers, which seems to require a further layer of compliance costs from industry, which are ultimately borne by the grower as reduced returns because they have no-one left to pass costs on to. For small growers, compliance costs need constant vigilance. In the same way that forest management certification remains beyond the capacity of most small growers, we fear that the compliance requirements of a code of conduct may be equally as expensive and difficult to comply with. In the context of example costs, we seek to table an article from the Australian Forest Grower magazine, Spring 2010 edition, which indicates costs of above $20,000 for full FSC certification. Secondly, an article from the Summer 2005 edition of the same magazine refers to the cost of $3,500 for an audit under AFS in 2005.

Our principal purpose here today is to seek to ensure that an equitable and cost-efficient outcome can be found that will allow small growers to continue to take part in the Australian forest and wood products market. We look forward to answering the committee's questions.

CHAIR: Thank you, Mrs Kuffer.

Senator COLBECK: I note that you do not support the code of conduct and the process of putting in place the industry certifiers because of the cost burden that applies—I think I am quoting you correctly. Given the various state based systems of permission required to undertake harvesting mechanisms within the coupes of private forest growers, is there enough documentation in that process that would be able to provide a declaration of legality of product?

Mr Ragg : I would have thought so. As you have rightly outlined, there is a complex and robust legislative requirement in jurisdictions that provide most of the timber from the private sector. It seems to us that having a legislative framework that says we will have a code of conduct and a timber industry certifier is just pseudo-certification. The reason we outlined those examples in our opening statement was to give some picture of the likely costs that we see. We have not been able to do any analysis of the current scheme because we really do not know what it is. It seems to us to make more sense to have an architecture in legislation to have a requirement that you show some evidence rather than stipulate what the evidentiary process is.

In terms of connecting the growing resource with the market, I would envisage something like a one-page declaration, not unlike an MLIS or some other farmer-friendly type of system, that simply says: 'I've got legal right of access to the trees. I've complied with the prevailing legislation in the jurisdiction in which I am accessing the resource and I have put it on the market,' or words to that effect. To me it does not seem to need a complex, new system when we could just link to an existing chain-of-custody framework, for example, by such a declaration to the first point of sale, and then it could travel through. So you would have that connectivity from the forest to the end user by a chain-of-custody type of arrangement rather than having an almost parallel mechanism, as we think is proposed by the legislation.

In that context, the government announcement says that it has adopted a co-regulatory approach, which is something we would probably support. I am not convinced that this is the best co-regulatory approach. It looks more regulatory than co-regulatory. The argument for the co-regulatory regime is that the industry will develop a code of conduct which the government will sign off on. It is still a legislative requirement to have a code of conduct. If the legislation requires an evidentiary process without specifying a code of conduct and timber industry certifiers, which seems to be a whole new bureaucracy, there probably are systems currently available in the market, and a couple of simple declarations would be much less of a cost burden on the small grower sector then we think is currently proposed. If the legislation required an evidentiary process without specifying a code of conduct and timber industry certifiers—which seems to be a whole new bureaucracy—then there are probably systems currently available in the market, and a couple of simple declarations would be much less of a cost burden on the small grower sector then what we think is currently proposed.

I add to that that if the intent is to do it without detail in the regulations—and we have not yet seen the regulations—then it may be appropriate to have a code of conduct mechanism as part of the regulations in the context of the suite of measures, not as the only measure available—which is how I read the current bill.

Senator COLBECK: Was it your intention to table those two—

Mr Ragg : Yes, if that is okay with the committee.

Senator COLBECK: Those particular costs that you talk about, what do they do to the economics of a private forest growers operation? I suppose it depends a bit on scale, but a lot of these are farm based, if you like, and part of an integrated farm business. How do these costs actually calculate in relation to that, depending on scale?

Mr Ragg : As you rightly say, it does depend on scale. If you take the certification examples, which are probably the only examples we have got available to us, in the article by Francis Clarke that you have now got in front of you, titled 'A small growers viewpoint of the Australian forestry standard', his annual audit cost is 3½ thousand dollars. You are required, as I recall, to have certification for at least the three years around your harvest. So you are talking in the ballpark of 10K, and if you are not putting out a significant amount of resources it really falls heavily on your cost margins and probably makes it uneconomic to do so. It is certainly approaching being uneconomic to do so.

To create a similar cost burden from a code of conduct would be of considerable moment, particularly to those farmers whom we all know use it as a form of superannuation. They have a forest or a woodlot there that they tend, but want to have available when other commodities that they may be involved in are not as lucrative as forestry perhaps is. So to have to learn and go through all this process maybe five years down the track for a one-off harvest event—for the cost burden and for the lack of education that is likely to be available for that—is of significant concern. To the degree that this becomes law we are concerned that there may be some resource owners—small forest growers—who will just opt out and simply say, 'Oh no, it's just too hard to do, we'll just graze cattle under the trees'.

Senator COLBECK: Effectively, it could be a pseudo way of actually making less resource available that may otherwise sustainably be there and usable by the industry?

Mr Ragg : Yes, which begs a philosophical question: do you want resource available domestically that is of very low risk and of very high legality, or rely on importing or replacement resource that may be of more suspect risk?

Senator COLBECK: You talked about regs—and I assume you are part of the current negotiation process?

Mr Ragg : Yes.

Senator COLBECK: Has there been any development, or have you seen any drafts, of potential regulations yet? Or are we not to that stage?

Mr Ragg : Not at this point, and I guess that is our criticism. We may be more comfortable about the architecture of the legislation if we knew what the regulatory environment that sits underneath it is, but as it currently stands all we have seen is draft legislation. In the absence of at least draft regulation to understand how it would really apply and how domestic producers would fall in a risk matrix—we presume low, but we have not seen that said anywhere—is of concern. I guess we would argue that either the legislation warrants amending to allow more scope or we should hold the legislation until we see the substantive regulations so we can better understand how it is going to impact. It is a bit hard at the moment without having seen anything.

Senator COLBECK: Effectively, all you have is the intent that is demonstrated through the current discussions and written word that you have had, and that leads particularly to concerns about imposed costs through the certification equivalence type process?

Mr Ragg : I have had a look at the AFTA submission. Their proposal of putting the onus of proof on the processor and the importer through whatever mechanism fits their system seems more attractive to us and more able to accommodate a simple declaration of legality for domestic—particularly small domestic—producers.

Senator COLBECK: I think we have already covered this, but in pretty much all circumstances there is a process that someone has to go through to actually harvest the timber on their land anyway. So a declaration with a capacity to actually view the relevant documentation that sits behind that should provide a reasonable level of security or surety. That is probably what we are looking for—a reasonable level of surety or something that can be demonstrated by documentation that we have what we say we have.

Mr Ragg : I guess I would make two points on that. Firstly, as we have already discussed, there is a robust legal framework which is audited in almost all cases that I can think of anyway by the regulatory authority, which is the state government. So in terms of compliance with the regulation, that is already dealt with. Do we need to deal with it again? To be able as a grower to say, 'Okay, I live in New South Wales, I own this, I have right of access to this resource—whether I own it or I have a contract for right of access—and I have a property vegetation plan for private native forestry which I have complied with. Therefore, I declare I have a right to the timber and it is legally sourced.' If there is some problem with whether or not it complies with the regulation or legislation in the state then that would seem to me to be the province of the state to deal with and that it would not need another regime.

I think we should separate the subtle difference within the certification regime that it is also about sustainability and not just about legality. Sustainability is another layer. The cost of forest management certification would not be justified to prove legality either, but a declaration to fit into a chain-of-custody mechanism that may or may not be an AFS or NFC chain of custody would seem to us to be a more acceptable and sensible approach.

Senator COLBECK: These processes are not necessarily inconsistent with the certification process but they could be designed to fit within the certification process for somebody further down the track who is looking for that level of confidence. A retailer who is looking for AFS or FSC certification can have the surety of a documented process at the grower level in the private forest sector in Australia that the requirements they have for legality are met.

Mr Ragg : Yes.

Senator O'BRIEN: So presumably a legal requirement for a private forest grower to sign a declaration of legality would also involve a significant penalty for improperly or untruthfully signing such a declaration?

Mr Ragg : I have not turned my mind to that, but I presume that would be inevitable, yes. That is reasonable.

Senator O'BRIEN: Because the miller who purchases the timber—it is usually a sawmiller—ought to be able to rely on that and sign a similar declaration based upon that if this system were to go forward, making the initial declaration so much more important.

Mr Ragg : I am no lawyer but I would have thought that if you sign a document making a false claim then that would already be contestable.

Senator O'BRIEN: Would there be as onerous a penalty as for someone who knowingly imported illegally logged timber?

Mr Ragg : Probably not.

Senator O'BRIEN: Why?

Mr Ragg : Because knowingly importing would be different from falsely declaring. Then it goes to the question of: did they say that they owned the timber and did not, or did they say that they harvested under the provisions of the code of practice and did not—rather than knowingly accessing illegal timber? It probably gets highly technical in a legal sense but it probably goes to the issue of whether you made a minor or a major error.

Senator O'BRIEN: Let's take the word 'knowingly' out of it and say that importer X does not perform due diligence and takes the risk and thereby imports illegally logged timber. Forest grower Y signs a document with no regard whatsoever for the accuracy of the statement. Is there any difference in the breach?

Mr Ragg : I would not have thought it was a material difference. It is probably similar.

Senator O'BRIEN: So it should be a similar penalty in those circumstances?

Mr Ragg : In the same ballpark, I would have thought.

Senator O'BRIEN: Does your organisation have any view on the impact potentially of competition from products containing illegally-sourced timbers?

Mr Ragg : Only anecdotal and from the perspective that those that are going through a process of due diligence will bear a cost for that, whether they are domestic or importers. Those that are importing and are not going through a cost of due diligence would not be bearing that cost, and that would inherently undermine the market, in our view. We would say that our preference is for all timber to be sourced domestically, but it is a big wide world out there, and we accept that. I do not have any figures to back that up, but you can have plenty of conversations with plenty of people and figure out who is telling the line, if you like, and who is seeking not to.

Senator O'BRIEN: Does your organisation have any view on the cost implications of the legislation?

Mr Ragg : DAFF has a view. I am quoting from a document, which I am happy to table. It is Illegal logging policy: small business impact statement, prepared as part of the architecture of the initial consultation process. There is a table in there which we can table for you, if you like, that talks about industry classes potentially affected by illegal policy options. The first line says, 'Forestry unlikely to be affected.' We do not hold that view. This report was written before the legislation was out. It also goes on to say that there could be costs for potentially affected businesses in the range of $2,000 for initial setting up, $2,000 for training and $2,000 for collecting documentary material from suppliers. I am happy to make that available. You can have my copy. It will not be for nothing. Someone will have to figure out how to do the paperwork and how to comply with it and pay for the third-party auditor fees—which, in the context of the certification standards, are significant, which we discussed with Senator Colbeck, in the context of the likely scale of the return from the harvest. I think there is likely to be a material impact on the sector.

Senator O'BRIEN: Do you think that cost will be able to be passed on?

Mr Ragg : We have got no-one left to pass it on to. It is like being a farmer. Inherently it falls down to the producer. The producer does not have enough capacity in the marketplace because of the predominance of public or large company supplied material to influence the price.

Senator O'BRIEN: I have heard this argument in a number of areas. With trees on your property, unless there is a pressing financial need to liquidate that asset, they do not deteriorate, normally. They probably get a bit better if you leave them in the ground a bit longer, and therefore waiting out the financial response to the legislation might be something that benefits the grower.

Mr Ragg : I agree with that, but I would still maintain my view that they have much less capacity to influence the price in the marketplace, and, if the rest of the growing sector is absorbing the costs across a broader scale of production and those costs pressures are pushed back down, they still not going to be any better off and I cannot see how they are not going to be worse off.

Senator O'BRIEN: Presumably, if there is a cost to everyone—both importers and local producers—in this system, both sectors will be passing on or attempting to pass on the costs, so there will not be a competition advantage to one side or the other if—

Mr Ragg : Except that, I would argue, we do not know what the compliance costs with various other legislations in other countries are, and in Australia there are compliance costs already. Are we adding to those compliance costs where, as part of those compliance costs, we are undertaking a legal framework?

Senator O'BRIEN: Yes, I suppose so; but if you are already going through compliance costs to be legal the compliance costs to sign off that you are legal are not great.

Mr Ragg : I agree with that, and that is exactly the point I am making.

Senator O'BRIEN: So the costs have already been incurred, perhaps.

Mr Ragg : If all I have to do is sign a bit of paper to say that I have complied with the legislation and have legal right of access to this resource, then I agree with you; but if I have to go through another, parallel audit process by a timber industry certifier that does not currently exist and pay for his time—typically $2,000 or $3,000 per day—then I have a cost that I would not otherwise have had.

Senator O'BRIEN: Yes. So are you expecting the legislation to mandate that?

Mr Ragg : The cost?

Senator O'BRIEN: The engagement of a consultant to certify—

Mr Ragg : I would argue that the legislation as it is currently drafted does require that, probably not for the grower but for the processor and the importer, so there would be a proportional cost for the processor and they would seek to either gain it out of internal efficiencies, increase their price to the market or reduce the payment back to the grower.

Senator O'BRIEN: That is why I was asking whether it changes the position of the grower. It may change the position of the processor and of the financial side that we have been debating in a separate question, but I am talking about the actual cost. Anyhow, we have had that exchange. Thank you.

Senator COLBECK: I just want to further explore the cost impost. Do you have a sense of at what sort of scale it starts to make a coupe—a plot—unviable?

Mr Ragg : I do not yet, other than those figures I have just quoted you, which are not my figures.

Senator COLBECK: But using those as an indicative cost, at what sort of level do you start getting to a stage where someone says 'this is not viable any more' and it disappears from the market, and what proportion of the market might that be?

Mr Ragg : On the latter question, typically most of the people engaged in that sector are doing it on quite a small-scale—that is, several truckloads rather than several tens or hundreds of truckloads per event. I cannot imagine that those costs are going to be easily defrayed. I know you want a number, but I do not have a number. If you look at a typical stumpage being, for example, $45 a cube and it costs you $3 a cube to do this—I do not know whether it does, but let us say that it does—that is 10 percent of your margin. If you are only putting out 300 or 500 cube per harvest event, then it is probably going to have an impact. But again, as I have argued before, unless and until we know how this is going to impact by understanding what is in the regulation and how it is going to apply, it is really difficult to draw that number out.

Senator COLBECK: You have given me a bit of something to work on anyway, so we can make some assumptions, if we need to, from there.

Mr Ragg : I guess I would say that as we go into that regulatory environment it would be useful to ensure that there is some pretty robust economic analysis of the costs along the value chain, of how they might be passed forward and back and of what the impact might be on the domestic industry compared to that small proportion of imported product that is suspect. If we incur the same costs in compliance as the potentially non-complying imports then they have not taken any hit. They have just incurred the same costs we have. It remains out of balance, if you like.

CHAIR: I thank the witnesses for their time.