Rrg Svftt 2008 Final Report

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RiverRedGumForestryintheNewSouthWalesRiverina

SeeingtheValuefortheTrees

Areportforthe

NationalParksAssociationofNSWandTheWildernessSociety FINALREPORT

August2008

PreparedbyEconomistsatLarge&Associates



TableofContents

EXECUTIVESUMMARY 5

OVERVIEWOFFINDINGS 9

INTRODUCTION 12

PART1:THEECONOMICSOFRESOURCES 15

1.1 THEVALUEOFFORESTS 15

PART2:THEECONOMICSOFTHERIVERREDGUMFORESTRYINTHERIVERINA 18

2.1RRGINDUSTRYVALUECHAIN 182.2RRGENVIRONMENT 20REGIONALGEOGRAPHICCONTEXT 20MANAGEMENTZONES,STATEFORESTSANDRRG 21SUSTAINABLEYIELDS 232.3RRGLOGGING[FOREST‐GATE] 24SILVICULTUREMETHODS 24RESOURCETYPESANDLOGGRADING 25HARVESTVOLUMES 25REVENUESATTHEFOREST‐GATE 26VALUEATTHEFOREST‐GATE 27COSTCOMPARISONWITHPRIVATEGROWER 28FNSWESTIMATEDTRUECOMMERCIALCOSTS 302.4RRGROYALTYRATESANDMETHODS 322.5CALCULATINGFULLECONOMICCOSTSOFRRGLOGGING 35ENVIRONMENTALCOSTS 35LOSSOFNON‐USEVALUES 352.6RRGPROCESSING/MILLING[MILL‐GATE] 38ANNUALVOLUMESANDSOURCESOFRRG 41RECOVERYRATES 41ESTIMATEDGROSSMILL‐GATEREVENUE 43ESTIMATEDNET MILL‐GATEREVENUE 442.7RRGFORESTRY –TOTALVALUEADDED 452.8CHANGESINRRGPRODUCTION 462.9EMPLOYMENTSUPPORTEDBYTHERRGTIMBERINDUSTRY. 49

PART3:ALTERNATIVEINDUSTRIESANDOPPORTUNITIESINTHERIVERINA 51

3.1THEECONOMICSOFTHEREGION 513.2PLANTATIONFORESTRY/FARMFORESTRY 513.3FIREWOOD 533.4NATIONALPARKSVALUES 54THEOPPORTUNITYCOSTOFLOGGING:POTENTIALTOURISMVALUES 563.5CARBONMARKETS 58

PLANTATIONSANDFARMFORESTRY 58



w w w . e c o l a r g e . c o m 3

NATIVEFORESTRESTORATION 583.6TOURISMINTHERIVERINA 60TOURISM –ECONOMICACTIVITY 60TOURISM –SUPPORTEDEMPLOYMENT 60

CONCLUSIONS 62

REFERENCES 67




Tables,FiguresandCharts

Table1:ForestManagementZonesandAreaManaged–AllCrownLands ___________________________________ 22Table2:ForestManagementZonesandAreaManaged–RRGStateForests __________________________________ 23

Table3:RRGGradingtypes,royaltyunitsandapproximateageharvested. ___________________________________ 25Table4:VolumesofRRGHarvested‐byResourceType‐fromNSWStateForests(2005/06)______________________ 26Table5:RevenueprofileforFNSWRiverinaRegion(2005/2006)____________________________________________ 27 Table6:EstimationofcurrentroyaltyratespaidforRRG _________________________________________________ 27 Table7:EstimatedProfit&LossprofileforFNSWRiverinaRegion __________________________________________28Table8:ComparisonofFNSWRRGCostsvsPrivateWoodlotProduction_____________________________________ 29Table9:FNSWProfitifCommercialCostsareIncluded ___________________________________________________ 30Table10:Existingversus‘efficient’policyoutcomesonRRGforestharvesting ________________________________ 31Table11:RoyaltyRatesfor2001and2005/06. _________________________________________________________ 32Table12:Non‐useChoiceModellingValueofRRGlogged_________________________________________________ 36Table13:EstimatedAnnualUncompensatedLossandIndustrySubsidy ______________________________________ 37 Table14:EstimatedRoyaltiesandSubsidytoRRGTimberIndustryin2005/06 ________________________________ 37

Table15:EstimatedNumberofOperatorsinNSW(2006) _________________________________________________ 38Table16:RRGOperatorProfile‐MobileMills(2008) _____________________________________________________ 38Table17:RRGOperatorProfile‐FirewoodProducers(2008)_______________________________________________ 39Table18:RRGOperatorProfile‐FixedMills(2008) ______________________________________________________ 40Table19:AnnualVolumesandSourceofRRGTimber(2001) ______________________________________________41Table20:RecoveryRatesbyLogGrade________________________________________________________________ 42Table21:EstimateofSaleableProductsbyProductCategory,atMill‐gate ___________________________________ 42Table22:PricesforDifferentProductCategories(2008) __________________________________________________ 42Table23:EstimatedGrossMill‐gateRevenuesforStateForestRRG(2008) ___________________________________ 43Table24:RecoveryRatesforTotalOutputandSawnOutput. _____________________________________________44Table25:EstimatedNetMill‐gateRevenue‐2008_______________________________________________________45Table26:RRGTimberIndustryValueAdded‐2008

1 _____________________________________________________ 45

Table27:EstimatesofEmploymentSupportbyRRGForestry–TopDown ____________________________________ 49Table28:EstimatesofEmploymentSupportbyRRGForestry–BottomUp ___________________________________ 50Table29:EstimatedNationalParkOpportunityCostofRRGAreasLogged ___________________________________ 57 Table30:TourismExpenditureinNSWRiverina

1 ,(2007) __________________________________________________ 60

Table31:SummaryofTourismBusinessesinDeniliquinLGA _______________________________________________61Table32:SummaryofTourismBusinessesinDeniliquinLGA _______________________________________________61

Figure1:TotalEconomicValueofNativeForests ________________________________________________________ 16Figure2:RRGTimberIndustryValueChain_____________________________________________________________ 19

Chart1:ChangesinRRGProduction(1995‐2006)_______________________________________________________47

EconomistsatLarge&Associates

[email protected]

Phone:+61395624472|Fax:+61395624118

POBox256,NoblePark,Melbourne,Australia,3174

ReportpreparedbyRoderickCampbell,TristanKnowles&SimonO’Connor

withFrancisGrey(PrincipalEconomist)




ExecutiveSummaryThis report provides an economic analysis of River Red Gum (RRG) Forestry in the Riverina region of NSW

specificallywithregardtothecurrenteconomicbenefitsoftheRRGtimberindustryandthepotentialbenefitsofalternativeforestmanagementandregionaldevelopmentstrategies.ThisreportisprimarilyconcernedwithRRGin

onCrownLandsandsurroundingareasthatinteracteconomicallyandecologicallywiththeforests.

Theanalysisshowsthecurrentfocusoftimbersupplyiseconomicallyunjustifiedandthefulleconomicvalueofthe

publicforestestateisnotbeingrealised.Timbersupplyasitcurrentlyisrealisedisunsustainablebotheconomically

andenvironmentally.Thepotentialreturnsfromencouragingprivateproductionandinvestment,forestrestoration

and using public forests for tourism activities could stimulate substantial economic returns and better

environmentaloutcomes.

ChangingthemanagementpoliciesregardingRRGonCrownLandswouldbenefitthelocalandStateeconomyby;

stimulatingprivate industry, supporting farmdiversification,providinglocaljobsandhelpingtomitigate climate

change. Changes to currentmanagement policieswould ensure the sustainable use of natural capital for the

benefitofcurrentandfuturegenerations.

Citedvaluesmisleading

Theanalysisshowsthatcitedvalues fortheRRGtimberindustryarepotentiallymisleadinganddisguiseamore

complicatedsituation.Thepreviouslycitedindustryvalueof$60m(bytheNSWMinisterforPrimaryIndustriesand

byFNSW, 2008)implies that the industryis large and beneficial for theNSW public,and isusedto claim that

currentaccessarrangementstopubliclyownedpartsoftheRRGresourceshouldbemaintained.

OurvaluationoftheRRGforestryintheRiverinaindicatesthatthisfigureismisleadingbecauseofthefollowing:

• Calculationsarenotpublished‐thealleged$60misbasedonvaluessuppliedbyindustryand“standard”

economicmultipliers‐itisnotsubjecttopeerreview.

• Itisconsiderablyhigherthanthemill‐gategrossrevenuevaluewehavecalculatedfromtimbersourced

frombothprivateandpubliclandintheRiverina‐$41.4m.

• Theuseofeconomicactivityandamultipliertoinflatetheeconomicvalueoftheindustryismisleading

andverypooreconomicpolicy.Itimpliesthatallofthe$60mwouldbelostifpublicforestloggingwere

tostop,whichisnotthe caseasthemultipliercomponentwouldalsobegeneratedby othereconomic

activitiesinplaceofRRGforestry.




• Keytothisdebateisthenetvaluecreatedbythecurrentpatternoftimberusecomparedtoalternatives‐

e.g.loggingofCrownLandsversusprivateforestryversustourism.

• Since it is only forestry operations within Crown Lands that is being investigated in this report, the

estimatedvalueatstakeisthenetvaluecreatedbytheseforestryoperationsonly.Wehaveestimated

thisunderconservativeconditionstobeonly$0.94minnetprofit‐orvalueadded‐fromsaleoftimberat

the forest gate (i.e. revenue to government) and $6.4m at the mill gate. Hence the total value we

calculatefortheRRGforestryindustryinthepublicforestsoftheRiverinaisonly$7.3m.

• Therelevantagencyfailstomakeavailable sufficientdata forindependent,arms lengthanalysisofthe

truestateofthepublicsectorforestryprocess.Wehavethereforeestimatedresultsfromavailabledata

andprimaryresearchinordertoanswersomeverybasicquestionsofpublicpolicy.

Publicvalueofcurrentforestsmanagementisverylow

ThekeyquestioninthisanalysisiswhatvaluethepublicreceivesforloggingofCrownLands.Asstatedabove,our

analysisshowsthatthepublicreceivesanetprofit–valueadded‐of$0.94mforthe4757haoftimberharvested

(orestimated127,145m3oftimbersold)annuallyatthe forest‐gate ‐thepointofsalebythegovernmentagency.

Itislikelythatthisfigureisoverlyoptimisticsinceitdoesnotcoversignificantcoststhatwouldbeincurredby

FNSWifitoperatedunderregularcommercialarrangements.

Onceatrue‘shadow’or actualproductioncostiscalculatedandfactoredin,itis ourestimatethatthepublicis

highlylikelytoreceivealossonthesaleoftimberfromCrownLands,attheforest‐gate.Thereported cost of

publicRRGforestoperationsintheRiverinais$3.85m.Weestimatethat$3.16mofthisisattributabletotimber

activities.Usingourestimateofprivatesectorproductioncostspertonneforfirewood,weestimatethatthiscost

isunderstatedbyapproximately88%.Ifthefullcostswereincludeditislikelythattheywouldbeintheorderof

$5.9m,andhencethiswouldresultinalossonpublicforestryoperations,attheforestgate,intheorderof$1.8m.

Themilloperatorsareestimatedtomakeaprofit‐ornetvalueadded‐of$6.4monthepublictimbertheyreceive

fromCrownLands.Ifthemilloperatorspaidthepublicthetruecostforthetimber,itispossiblethatthecombined

operationofmillsand publicforestharvestingwouldbeuneconomic.

Theneedforgovernmentagenciestocreateschemesthat‘fix’thepriceoftimbertostimulatethemillindustry

havegone. Indeed this heavy‐handedgovernment interventionis likely tobedragging theindustry backwards

throughdetermining‘appropriate’profitsandunderminingprivatesectorsupplyresponsesthatcouldultimately

guaranteetheindustry’sfuture.




Bettermanagementwouldstimulateprivatesectorinvestment

Public sector forestry, through its uneconomic management, has thoroughly undercut private sector forestry

investmentthatmayhaveprovidedanalternativeproductformills.

Resolvingthisdilemmaprovidestheopportunityforawin‐winsolutionthatseespublicforestryreplacedbyprivate

sectorforestryinvestmenton farmlandasanalternativeresource.Ifmanagedappropriately,thiscouldresultin

negligibleecologicalimpacts.

Tourismofferssignificantpotentialbenefits

Finally,the replacementof theforestryactivitieswith tourismhas thepotentialto replacea loss‐makingsector

withveryprofitableandlargescale,employmentintensiveindustry.Thepotentialisfortourismtocreateatleasta

fewmilliondollarsofunequivocal,netvalueaddedfortheregion.

Inaregionalcontext,wefoundthatcomparedtoanindustrysuchastourism,RRGforestryissmallbothintermsof

incomeandemploymentgenerated.RRGharvestingattributabletopubliclandgeneratesaround$22.4minmill‐

gategrossrevenueandsupportsapproximately136jobs.Consideringthatintwoofthethreelocalgovernment

areaswhereRRGmillingtakesplace,tourismsupportsover1000jobsandacrosstheregiongenerates$797.5m

annuallyin tourismexpenditure,we cansee the significantpotential of tourism to the region. The important

distinctiontomakehereisthatRRGindustries,in particularthe fixedsawmills,areusuallyimportanton alocal

scale foremployment. Anychanges to currentmanagement policieswill have to be aware of the importance

locallyofmillingindustriesandprovideappropriatestructuraladjustmentinitiatives.

Currentenvironmentallossexceedsloggingbenefits

Onthenon‐financialsideofthepublicledgeraretheenvironmentalcostscausedbytheloggingofecologically

strained RRG resources. Such costs are borne by both current and future generations from all states (and

internationally)asalosstototaleconomicvalueandthepublicgood.TheNSWpubliciscurrentlyuncompensated

for this costas forest‐gateprices, andmillprices, are too low. Inotherwordseven if forest gateprices were

‘efficiently’calculated,thecompensationthatisrequiredfortheNSWpublictoacceptloggingissohighastomake

theloggingoptionabadpublicpolicyoutcome.Inshortthepublicdon’twanttheirforestslogged,and,unless

thereissomeseriouspublicpolicyrationale,theindustryshouldbeclosedandreplacedwithsomethingthatthe




publiccansupport.OtherworkontheSnowyriverinquiryduringthelate1990’s,hasindicatedapublicwillingness

tosupport(pay)remedialprogramstoadjustruralindustrytoasustainabletrajectory.

UsingextrapolationsonVictorianChoiceModellingdata,wehaveestimatedthenon‐usevalueoftheareaofRRG

loggedannuallyintheRiverinaat$17.7m.Withcurrentforest‐gaterevenuesbeingconsiderablylowerthanthis,at

onlyanet$0.94m,theNSWpublicareineffectsufferinganuncompensatednetlossof$16.8mandsubsidisingthe

RRGtimberindustrytothetuneof$13.6m.This$17.7mmillionfigureistheminimumamounttheNSWpublic

wouldneedascompensationtoacceptlogging,fromstumpagerevenueattheforestgate.Basedonthisanalysis,

wehavecalculatedthatcurrentsubsidiesperunitare$171perm3forsawlogsand$51pertonneforresidues.

Conclusion:Currentmanagementundercutsrealeconomicpotential

ItisourconclusionthattheactualeconomicbenefitsoftheRRGindustryarepredominatelyaccruingtothemill

operators,withlittlebenefittotheNSWpublic.Thisisduetohighsubsidiessupportingcheapaccesstothetimber

resourcethatisleadingtoperverseincentivestoprocesshighquantitiesoflowvalueproduct.Perversely,this

processisunderminingtheexistenceoftheveryindustryitself,whichcanonlybemadesecurebya diverseand

significantprivatelygrownresourcebase.Itisshowninthisreportthatotherusesoftheforestshavethepotential

togeneratemoreeconomicactivity than iscurrentlygenerated,withamuchlowerenvironmentalcost,ifnota

positiveenvironmentaloutcome.

The emerging vision of a Riverina region with healthy RRG forests, a strengthening economy, new tourism

opportunitiesand a rapidlyexpanding privatefarm forestry sector that resultsin a sustainable future iswithin

grasp.




OverviewofFindings RegionsofAnalysis

Geographic/Ecological/PoliticalRegions FNSWRiverinaManagementRegion,RiverinaTourismRegion,MurrayTourismRegion,RiverinaBioregion

LocalGovernmentAreas Balranald,Berrigan,Conargo,Corowa,Deniliquin,Griffith,Hay,Jerilderie,Leeton,Murrumbidgee,Murray,Narrandera,Wakool,Wentworth,Urana

KeyRRGMillingTownsinNSW(forRRGsourcedfromStateForests)

Barham,Deniliquin,DarlingtonPoint

ENVIRONMENT

ManagementAreasandStateForests CentralMurrayManagementAreaGulpa,Moira,Millewa,Tuppal,Deniliquin,WeraiKoondrook,Perricoota,CampbellsIslandMurrumbidgeeManagementAreaCuba,Wilbriggie,Benerembah,Yarradda,MIAI,MIAIIMilduraManagementAreaBalranald,Mildura,Pooncarrie

TotalAreaofStateForestedlandsundermanagement

byFNSW

410,742ha

TotalAreaofRRGonStateForestsinRiverina 103,698ha

TotalAreaofRRGonallCrownLandsinRiverina 131,715ha

PercentageoftotalRRGavailableforforestrymanagementactivities

98%

SourcesofRRG CrownLand(StateForests&WesternLandsLease),PrivateLand

TotalAreaHarvestedin2007 4757

TotalAreaHarvestedin2007asPercentageofTotalAreaofRRGonCrownLands

3.6%

TotalVolumeHarvestedin2005/06 127,145m3

LOGGING/FORESTGATENOTE:Forforest‐gatecalculations,averageof2005/06harvestvolumesareused

PrimaryIndustriesassociatedwithRRGStateForests Timber,Grazingandotherssuchasapiculture

Typesofoperators/processors Fixedmills,mobilemills,firewoodproducers

Total AllocationVolumes‐ByResourceType(2005/06) 34,186m3–HQ/Quota27,253m3–LQ/Ex‐quota87,631m3‐Residue149,069m3‐Total

TotalHarvestedVolumes‐ByResourceType(2005/06) 32,430m3–HQ/Quota27,383m3–LQ/Ex‐quota67,333m3‐Residue

127,145m3‐Total




RevenuesfromallFNSWactivitiesinRiverina(2005/06) $5m

RoyaltiesforsaleofRRGTimberfromCrownLands(2005/06)

$3.1m–SawlogRoyalties$1.0m‐ResidueRoyalties$4.1m–TotalRoyalties

Estimatedaverageroyaltyrates(2005/06) Sawlogs–$51perm3

Residues‐$15pertonne

RevenuesfromLandRentalActivitiesonCrownLands(2005/06)

$0.18m

OtherRevenues(2005/06) $0.73m

EstimatedRevenuesfromRRGtimberactivitiestoFNSW–Riverina

$4.1m

EstimatedCostsofRRGactivitiestoFNSW–Riverina(2006/07)

$3.16m

EstimatedValueAddedatForestGate $0.94m

EstimatedTrueCostsofRRGactivitiestoFNSW–Riverina(2006/07)

*Withcommercialcostsfactoredin.

$5.9m

EstimatedValueAddedatForestGate*Withcommercialcostsfactoredin.

‐$1.8m(loss)

UncompensatedLossesandSubsidies

EstimatedAnnualNon‐UseValueofCurrentAreaBeingLogged

$17.7m

EstimatedAnnualUncompensatedLosstoNSWPublic($17.7mminusestimatedvalueadded)

$16.8m

EstimatedAnnualSubsidytoRRGTimberIndustry(17.7mminusroyaltiespaidfortimber)

$13.6m

PROCESSING/MILLGATE

NOTE:Formill‐gatecalculations,2006harvestvolumesareused

EstimatedTotalHarvestedVolumes–byOperatorType(2006)NSWBasedOperatorsOnly

44,141m3‐FixedMills11,365m3‐MobileMills55,030m3‐FirewoodProducers110,536m3‐Total

EstimatedAverageRecoveryRatesforSawlogsbyProductCategoryFixedandMobileMillsOnly

6%‐Appearance14%‐Structural17%‐Residual35%‐Mulch

29%‐FirewoodEstimatedProductOutputasPercentageofTotalHarvest

SawnTimber–17%3%‐Appearance7%‐Structural7%‐ResidualOtherProducts–83%18%‐Mulch65%‐Firewood

TotalEstimatedSaleableVolumesForProductCategories(2008)

3,139m3‐Appearance8,105m3‐Structural7,803m3‐Residual

20,052m3‐Mulch




71,437tonnes‐Firewood

TotalEstimatedMill‐GateOutputattributabletoaccesstoRRGonCrownLands(2008)*Roundingerrorsexistintherowsbelow,resultinginatotalof$22.3m,ratherthan$22.4m

$22.4m

TotalEstimatedOutputattributabletoaccesstoRRGonCrownLands‐byProductCategory‐(2008)*2006volumeswith2008prices

$22.3m‐Total$8.5m‐Appearance$4.6m‐Structural$2.8m‐Residual$0.54m‐Mulch$5.9m‐Firewood

TotalEstimatedOutputattributabletoaccesstoRRGonCrownLands‐byOperatorType‐(2008)*2006volumeswith2008prices

$22.3m‐Total$15.6m–FixedMills$2.2m–MobileMills$4.5m–FirewoodProducers

TotalEstimatedMill‐GateOutputattributabletoaccesstoRRGonPrivateLands(2008)

$19.1m

TotalEstimatedMill‐GateOutput(2008) $41.4m

EstimatedValueAddedatMillGateattributabletoRRGonCrownLands

$6.4

EstimatedValueAddedatMillGateattributabletoRRGonPrivateLands

$5.2m

TotalEstimatedIndustryValueAdded $11.6m

TotalEstimatedIndustryValueAddedAttributabletoaccesstoRRGonCrownLands

$7.3m

EstimatedNumberofJobsinNSWSupportedbyAccesstoRRGonCrownLands

136

REGIONALECONOMICS/ALTERNATIVEUSES

ConservativeHarvestCycleofRRG 20years

EstimatedTourismOpportunityCost(invalueadded)ofAnnualLogging*Assuming4757haloggedanda20yearharvestcycle

$25m

EstimatedEconomicoutputoftourisminRiverina $797.5m

EstimatedValueAddedofTourisminRiverina*Assumingsamerevenue/coststructureasforestryforcomparativepurposes.

$215m

Totalvisitornights 4.7m

Totalvisitordays 2m

EstimatedJobssupportedbytourismintheregion*ForDistrictofDeniliquinandWakoolShireonly. 1218




IntroductionRiverRedGum(eucalyptuscamaldulensis)forestscoverlargeareasofinternationallysignificantwetlandsinNSW,

VictoriaandSA.TheforestsareendemictoAustraliaandmakeupcomplexecologicalcommunitiesthathavegreatsignificanceforbothindigenousandnon‐indigenousAustralians. Localandregional economies interactdirectly

with River Red Gum (RRG) forests through forestry, agriculture, apiculture, recreational activities, ecosystem

servicesandthetourismindustry.

Due to their size, significance and the many associated industries and values, there are many stakeholders

interestedinthemanagementofRRGforests–thisisparticularlyrelevanttoRRGonCrownLandsintheRiverina,

whicharethepredominantfocusofthisreport.

Thetimberindustryandconservationgroupstendto bethemostvocal stakeholdersinthe controversieswhich

oftensurroundthemanagementoftheseforests,havingperhapsthemostdirectandconflictingvaluesassociated

with forestuse. Other stakeholders, such asagriculture/agroforestryindustries, recreationalusers, touristsand

tourismoperators tend tobe murmurs in the background of this louder logging vsconservation debate. The

volume atwhich this debate is conducted tends to drown out its subtleties, and turn into a misleading and

simplistic“jobsvs.trees”debate.AnindicationofthenatureofscaleofinterestgeneratedbyRRGmanagement

issues is evidenced by the nearly 7000written submissionsmade in response to the Victorian EnvironmentalAssessmentCouncil(VEAC)DraftProposalsPaper(2006),(VEAC,2008).

Itis rare that a full andtransparent economicassessmentismade in relationto forests,let aloneRRGforests.

Economicvaluesareoftenconfusedwitheconomicoutput–i.e.financial“dollar”valuesthatareeasilyquantifiable

throughmarketinteractions,suchastimberprices.However,morerobusteconomicanalysiswilllookatthetotal

economicvalue(TEV)ofa resource,in thiscaseRRGforests. Itisimportanttorealise that ‘value’cananddoes

takeonformsotherthanthosepurelyfinancial.Non‐financialvaluesandfinancialvaluesofalternativeusesare

equallyimportantaspectsof economicanalysis. Allvaluesmust thereforebe considered foraccurateeconomic

policydecisionsthatseektomaximisethevaluetosocietyofscarceresources.

RRGForestsintheRiverinaarenotunderuniformmanagementandaccordinglyhavedifferentstakeholders.Large

areas areon Crown LandsmanagedbyForestsNSW(FNSW),a PublicorGovernment TradingEnterprise (GTE)

withintheNSWDepartmentofPrimaryResources(DPI)thatisfacedwiththedifficult,andoftencompetinggoals

ofcommercialefficiency,environmentalcareandforestrymanagement.SignificantareasofRRGnativeforestsare

alsounderprivateownershipandmanagement.




Analysisof the areasof agricultural land and towns surrounding RRG forests are also important for thorough

economicanalysis.TheyareaffectedbyactivitiesinRRGforestsintermsofagriculturalandagroforestryrelated

productionaswellastheirinvolvementorrelianceonindustriesandecosystemservicesassociatedwiththeRRG

forests.

IndustriesandvaluesassociatedwiththeRRGresource: Thisreportaimstolookathowdifferentindustries,usersandnon‐usersgainvaluefromtheRRGforestresource

andconsiderhowthesevaluescanbemaximised.

Part1providesabriefintroductiontotheeconomicsofresources,providingaframeworkforthevaluesthatare

representedbynativeforests.

Part2 isconcernedwiththeeconomicsofRRGforestry,specificallylookingattheloggingandmillingoftimber

sourcedfrompublicland.Thissectionaimstolookathowtheindustryisstructuredandanalysethefinancialand

non‐financialbenefitsandcostsoftheindustry.

Part 3 looks atalternative industries and opportunities for the region, some ofwhichare affected by current

managementpoliciesconcerningaccesstoRRGinStateForests.




Notesonmethodology:

This study has been conducted for the National Parks Association of New South Wales (NPANSW) and The

WildernessSociety.Theresearchwasundertakenthroughacomprehensivereviewofavailableexistingdataand

reports.A fieldtripwasalsoconductedintheregion.ThisreportalsodrawsonGeographicInformationSystem

(GIS) data providedunder licenceby FNSWto theNPANSW. The licensor hasnot scrutinisedor endorsed the

analysis or any views, conclusions or recommendations that might arise from that analysis contained in this

document.

RRGforestsandsurroundingareasfallwithinvariousphysical,politicalandmanagementboundaries. Thereare

someinstanceswheredatasetsforthisregionarebasedondifferingsetsofboundariesduetothelackofsource

dataintheregion.Thishasbeenconsideredwhenanalysingthedata.

Thereislittlereliable,publiclyavailabledataforRRGrelatedindustries.Weusednumeroussourcesallofwhich

arefullyreferenced.Inallcases,themostconservativechoicewasused,inorderthatvaluespresentedareatthe

lowendofourestimates.Aconservativechoiceoffiguresformill‐gateoutputisthereverse,withestimatesmost

likelybeingatthehighendoftherangeintermsofeconomicoutputgeneratedbytheindustry.

Thelong‐standingnatureofthesedebatesandthefailuretoprovideadequatedataonmanyaspectsoftheissue

highlighttheneedforathoroughpublicanalysisofpolicydecisionsin thisareatoensurepoliticalaccountability

regardingpublicresourcedecisions.Itshouldbenotedthatthisdatadeficiencyhasbeenapparentforatleast

threedecades,andyethasnotbeenrectified.Thebeneficiariesofthislackofdataarethosewhopresentlyusethe

publicresourcesincethelackofdatareduceslegitimateparliamentaryandpublicscrutiny.Inordertomaximise

returnstosocietytransparentreportingmustbeimplemented,andhencedatadeficiencieseliminated.Thelackof

data, of itself, is sufficient to compromise economic performance. We urge stakeholders and government

departmentstopublishmoredatainatransparentmannerinrelationtotheseindustries.




Part1:TheEconomicsofResources

Economicsisconcernedwiththeallocationofscarceresourcestomaximisethecreationofvalue(iewelfare,utility,

happiness)bysociety.Thevalueofaresourceisoftenmeasuredonlybymarket“dollar”valuesor‘financialvalue’

asweprefertocallthisaspectofeconomicvalue.However,consideringonlyfinancialvaluesfailstoacknowledge

that‘value’tosociety,asdefinedineconomictheoryandpractice,aswellasacknowledgedinpublicpolicytheory

andpractice,includesmorethanjustfinancialvalues.

economicbenefitreferstotheentiretyofnetsocialbenefitsderivedfromapolicy,bythecommunity.Ithasbeencommon,andinaccurate,torefertoeconomicbenefitsas iftheyonlyincludedfinancialbenefits.Neo‐classicaleconomicanalysishasalwaysreferredtothe

totalnetsocialbenefitsofpolicychoices,ofwhichfinancialbenefitwasoneamongstmany.(Grey,2000,p.3)

1.1 TheValueofForestsThe goal of good economic policy is to distribute the community’s scarce resources in such a manner that

maximisesthewelfare(i.e.happiness)ofsociety.Lookingatthedirectfinancialvaluerelatedtotheextractionand

processingofaresourcedoesnotnecessarilycapturethefullvaluetheresource(suchasaforest)mayprovide.

Tobetterunderstandthevaluesthatnativeforestsrepresent,EconomistsatLargehavedevelopedthefollowing

framework(Figure1),basedonaframeworkforparkvaluesusedbyPricewaterhouseCoopers(2003b),andfurther

informedbywork undertaken forthe IUCN (2000) (see Appendix13). Thisframework is similarto many such

diagramsusedtoexplainthemulti‐valuechoicesavailabletosocietywhenweusecomplexresourceslikeforests.




Figure 1: Total Economic Value of Native Forests

Source: Pricewaterhouse Coopers (2003b), IUCN (2000) and EcoLarge Analysis

Theabovediagramidentifies thethreecomponentsof thevaluecapturedbyhumansinrelationtoRRGforests.

Thesethreecomponents;economic,socialandenvironmental,althoughseparatedarein‐factinterdependentas

showninthediagram.Thesummationofthesethreevaluescanbecalled‘TotalEconomicValue’(TEV)reflecting

thetotalutilityexperiencedbyexistingandfuturegenerationsfromtheRRGforests.PWCfocussedtheirworkon

assessingthecontributiontotheeconomyintermsofeconomicactivityresultingfromtheselectedparks.Assuch

PWCcalled theirwork ‘TotalEconomicValue’(totalwelfare) ratherthanthemoreaccurate(butsomewhat less

sexy)‘TotalMacroeconomicValue’(economicactivityand/orfinancialvaluecreation).Thedistinctionisimportant

sinceTotalMacroeconomicValueisa subsetof totaleconomicvalueandthetwoshouldnotbe confusedwhen




makingpolicydecisions.TotalMacroeconomicValueisthecontributiontoeconomicactivity(i.e.financialvalueor

economicoutput)fromaparticulararea,whileTotalEconomicValue(TEV)isoftengivendifferentmeanings,that

mostoftenrelatetoeconomic,socialandenvironmentalfactorsthatmakeupthe totalwelfare(value,utilityor

happiness)derivedby societyfromanyresourcesuchasaforest. InthecontextofthisreportwerefertoTotal

Valueastheaggregationofallthevaluesderivedbysocietyfromaresource.FinancialvalueisasubsetofTotal

Value,andrefersto theneteconomic(i.e.intermsoftheeconomy)financialvalueaddedcreatedbyaresource

suchasaforest.

Themacroeconomiccontributionofapolicyoptionisasubsetofthepackageof ‘values’derivedfromanygiven

policyframework. Forests,forexample,canalsoprovidebiologicalvalue,non‐usevalueand recreational value,

amongstmany others, aswell asmacro‐economic value. The aggregated value outcome frommany different

valuescomprisestheTotalValuegeneratedbyanygivenpolicyframework.Itisthis‘TotalValue’thatisperceived

bysociety–andwhichpublicpolicyseekstoinfluenceintheinterestsofall.Privateinterestsseektoinfluencethis

policytomaximisetheirprivateinterestoftenattheexpenseofthepublicgood.Publicpolicyisdrivenbythenet

impact ofdiffering optionson Total Value (i.e.which optionmaximises thewelfare/utility/happiness of society

giventhatsocietyisconstrainedtobeintergenerationallysustainable).

Intergenerational considerations should provide a clear constraint to policy action. Any policy action that

endangers aspeciesiseconomicallyinappropriateby definition. Theclearestmetaphoris toconsider afishery.

Oursocietyconsidersitwrong,indeed‘criminal’toexploitafisherytodestruction.Thisisbecauseasocietysees

suchdestructionasinequitableonanintergenerationalscale.Similarlyforotherformsofnaturalcapital,suchas

speciesdiversity,eachgeneration,isboundtoactsustainablyorelseweareliterallystealingfromourchildrenand

undermininggoodpublicandeconomicpolicy.

IntheRRGforestscontextwewishto:

• EnsurethattheRRGforestsareallocatedtothemixofusesthatmaximisesthewelfareofsociety;

•

ReviewtheexistingallocationofRRGresourcestoestablishanaccuratemeasureoftheirmacroeconomiccontribution(asasubsetofthetotalvaluecreatedforsociety);

• EvaluatetheeconomicpotentialofshiftingtheRRGforeststoalternativeusepatterns




Part2:TheEconomicsoftheRiverRedGumForestryintheRiverina ThemanagementoftheRRGtimber industryhasbeendescribedin conflictingways. Itsmanagementhasbeen

called“professionalandwelldone”(BISShrapnelForestryGroup,2001,p15)byitssupporters,butisconsidered“a

marginal,verylowvalueindustrybyothers”(NPA,2008,p1).NSWMinisterforPrimaryIndustries,IanMacdonald,

hasstatedthatthe“Redgumtimberindustryisworth$60milliondollarstoNSW”(Macdonald,2007).Thisfigure

appearstobebasedona figurefortotalindustryoutputgivenin theFNSWESFMPlanfor2008(p.37andp.38).

Sourceshavenotbeenprovidedforthisfigure.Wehavebeentoldonlythat:

This figure is based on reported grossmill product output volumes supplied and indicativemarketvalues foreachproductas supplied byindustry.A standard economicmultiplierwasappliedtoestimateflowoneffects.(Bullen,2008)

ThissectionaimstoexplainhowtheRRGtimberindustryisstructuredandhenceprovidearangeofmeasuresand

valuesthatdescribetheindustryinamoreconsideredeconomiccontext.Weexaminehowtimberisloggedand

allocated at the “forest‐gate”, before examining thepreparation of timber to amill‐gate stage and its various

products.

2.1RRGIndustryValueChain

Inlookingatatopicinvolvinganyresource,itisimportanttounderstandthevaluechainoftheresource.Tobetter

understandthisanddefinethescopeofthisreport,EconomistsatLargehavedevelopedthefollowingchartto

representtheRRGindustryvaluechain(Figure2).




Figure 2: RRG Timber Industry Value Chain

Source: EcoLarge Analysis

Thisreportwillbefocusingprimarilyonforestryindustriesassociatedwithcurrentforestmanagementregimesfor

Crowntimberedlands.Assuch,areasingreyarebeyondthescopeofthisreport.Thiswillnecessarilyinclude

businesseswhoon‐sellRRGproductstoendconsumers.Worthmentioningherearefurnituremakerswhowork

withRRG.Althoughnotalargeindustry,thesebusinessesdohaveeconomicandsocialsignificancetothetownsin

whichtheyexist.AnecdotalevidencesuggeststhatRRGcanproduceveryhighlypricedfurnitureproductsgiven

thetimber’snaturalqualities,andthedifficultyandtimetakentoworkthetimber.Economicanalysisofthisretail

sideofRRGisbeyondthescopeofthisreportsincethefurnituremakershavetheabilitytosubstituteRRGtimber

foralternativesandin‐factusuallysellamixoffurniture’smadefromdifferenttimbers.Furthermore,suchhigh

valueusesofthetimberonlymakeupaverysmallpercentageoftotaloutputfromvolumesharvested,bythis

reportat2%.

Informationabout theaboveactivities, from licenseapplication toharvesting, isoftendifficultto obtainand is,

inappropriately,restricted frompublicavailability by therelevant agencies. NPAand Economists atLargehave

made numerous Freedom of Information (FOI) requests, phone calls and emails relating to timber license

conditions, royalty calculations and other aspects of forest management. While some information has been

forthcoming,greatertransparency around accessconditions is requiredas it contributes,all other thingsbeing




equal,tomoreefficientmanagementofforests,sincepublicscrutinycanleadtogreaterpublicaccountability.The

present‘opaque’conditionsunderwhichtheNSWpublicissellingtheirtimbertoprivate,profitdrivencompanies

canonlycontributetolessthanoptimaltotaleconomicvalueandtotalmacroeconomicvalueoutcomes.

2.2RRGEnvironmentTheRRGindustry inNSWbeginswithin theforestsof theRiverinawhere RRGtrees grow until theresource is

harvested. AlthoughRRG is sourced from both private and Crown lands, this report will be focusing on RRG

sourcedfromCrownlands.Theseareasaremanaged,primarily,undertheForestryAct,1916,byForestsNSW

(FNSW),aPublicTradingEnterprisewithintheNSWDepartmentofPrimaryResources(DPI).FNSWofficesareco‐

locatedwithDPIofficesinDeniliquin,DaretonandYanco(Macdonald,2008).

RegionalGeographicContext

FNSWmanagesharvestingof RRGfromwithinthe RiverinaManagementRegionarea asdefinedby FNSWand

shown in appendix 1. The region is further divided into the Murray,Mildura and Narrandera/Murrumbidgee

ManagementAreas.Alloftheseareasfallwithinvariousother‐sometimesoverlapping‐political,economicand

ecologicalboundariesincluding:

• TheRiverinaTourismRegion

• TheMurrayTourismRegion

• TheRiverinaBioregion

ThefollowingLocalGovernmentAreasarelocatedwithintheRiverinaRegionidentifiedasundermanagementby

FNSW:

•

Balranald• Berrigan

• Conargo

• Corowa

• DistrictofDeniliquin

• Griffith

• Hay

• Jerilderie

• Leeton




• Murrumbidgee

• Murray

• Narrandera

•

Wakool• Wentworth

• Urana

ManagementZones,StateForestsandRRG

Within theRiverinaManagement Region, FNSW is responsible formanaging approximately 400,000ha of State

forested, or Crown Lands. Crown lands consistmainly of State Forest and Western Lands Lease areas. RRG

volumesassessedthroughoutthisreportarebasedonvolumesobtainedbyFNSWfrombothStateForestsand

OtherCrownTimberLands. FiguresforthetotalareaofRiverRedGumonStateForestsundermanagementby

FNSWareprovidedby BISShrapnel ForestryGroupto be150,000ha(BIS ShrapnelForestryGroup,2001,p.11).

Approximatelytwothirdsofthis,or100,147ha(Todd&McDonnell,2003,section6.1.1)hasbeencalculatedtobe

theareaofRRGonStateForests.UsingFNSWGeographicInformationSystems(GIS)dataobtainedunderFOIin

2008,addingupallRRGvegetationtypesoccurringinStateForestsintheRiverina,theNPANSWarrivedatasimilar

figureof103,698haforRRGonStateForests.

Thetotalareaof RRGresourceonallCrowntenures,coveringbothStateForestsandWesternLandLeases,was

alsocalculatedbyNPANSWusingthesameGISdata,resultingintotalfigureforRRGonCrownlandsintheRiverina

of131,715ha.ThisislowerthanthefigurequantifiedbyBISShrapnelForestryGroup(2001)as180,726ha.

InformationontheextentofRRGresourceonprivatetenuresishardertoobtainandisoutsidethescopeofthis

report.Crowntimberlandsin theNSWRiverina,whicharenotpureRRG,wouldbecomprisedofBlackBoxand

GreyBox,withlimitedareasofCypressPine,BullOak,YellowBoxandRiverOak(ForestsNSW,2008,p.11).Areas

ofRRGonCrownLandareallmanagedbyFNSWaccordingtoaparticularForestManagementZone(FMZ).FNSW

dataforallRiverinaStateforested(Crown)landsisshownbelow,followedbydatashowingtheFMZallocationsfor

RRGStateForestsonly.




Table 1: Forest Management Zones and Area Managed – All Crown Lands

ForestManagementZone(FMZ)PercentageoftotalmanagedbyFNSW

Area(ha)

FMZ1–SpecialProtection(harvestingexcluded) 0.87% 3,607

FMZ2–SpecialManagement(harvestingexcluded)

0.00% 0

FMZ3A–HarvestingExcluded 24.03% 98,713

FMZ3B–SpecialPrescriptions 2.86% 11,738

FMZ4–GeneralManagement 71.75% 294,706

FMZ5‐HardwoodPlantations 0.04% 151

FMZ6‐SoftwoodPlantations 0.03% 114

FMZ7‐NonForestryUse 0.08% 314

FMZ8–Areasforfurtherassessment 0.34% 1,399

TotalAreaundermanagementinWhichLoggingIsPermitted(FMZ3B+FMZ4)

75% 306,444

TotalAreaundermanagementinWhichLogging,GrazingorOtherManagementActivitiesarePermitted(FMZ3+FMZ4)

99% 405,157

TOTALAreaofCrownLands 100% 410,742

TotalAreaofRRGonStateForestsinRiverina 25% 103,698

TotalAreaofRRGonallCrownTenuresinRiverina 32% 131,715Source: Forests NSW (2008, pp.24, 26 and 27) and NPANSW calculations based on GIS data provided by FNSW.

Wecan see that RRG inthe Riverina accounts for approximately 32%ofall Crowntimbered lands, yet timber

royaltiesfromRRGcontributetoatleast82%oftotalrevenuesforFNSWintheregion(asisshownintable2

below).Thetablebelowshowsthebreakdownof theRRGStateForestresourceintoit’sassociatedFMZs. This

analysiswascarriedoutusingthesameGISdatausedtocalculatetotalareasofRRGinStateForests,applyingFMZ

datatocalculateareasofRRGStateForestbeingmanagedundereachFMZ.




Table 2: Forest Management Zones and Area Managed – RRG on State Forests

ForestManagementZones(FMZ) Area(ha) PercentageofTotalArea(%)

FMZ1 1,771 2%

FMZ3A 13,668 13%

FMZ3B 8,303 8%

FMZ4 79,956 77%

Total 103,698 100%

FMZ1 1,771 2%

FMZ3A 13,668 13%

FMZ3Band4 88,259 85%

Total 103,698 100%Source: NPANSW calculations using GIS data obtained from FNSW. For these and subsequent calculations, we will use thismarginally higher figure of 103,698ha since it is more recent than the 100,147ha provided by Todd & McDonnell (2003).NOTE: The GIS FMZ layer was only available for RRG on State Forests. Because of this, only the table above showing FMZs for

RRG on State Forests has been provided. A similar breakdown for the 28,017 ha of RRG on other Crown Tenures is not currentlyavailable.

FMZs applicable to an analysis of current management practices relating to forestry are Special Prescription

(FMZ3B)andGeneralManagement(FMZ4).Zone1areasaresetasideforconservationpurposesowingto“very

high natural and cultural conservation values, (Forests NSW, 2008, p.25). Zone 3 areas are managed for

conservationor ecosystem valueswhilstalsoallowing forothermanagement andproduction activities such as

forestry.Zone3Aareasare‘harvestingexcluded’,withothermanagementactivitiessuchasgrazingpermitted.In

Zone 3B areas, harvesting is permitted but with lower intensity. Zone 4 areas are for managed for timber

production, “utilising the full range of silvicultural options,as appropriate”, (Forests NSW, 2008, p.25). These

silviculturaloptionsarecoveredinsection2.3.

Asisshowninthetableabove,85%RRGStateForestareas,or88,259haisavailabletoallmanagementactivities

includinglogging.13%ofRRGStateForestareas,or13,668haisnotavailabletologging,butisavailabletoother

managementactivitiessuchasgrazing.2%ofRRGStateForestareasaresetasidepurelyforconservation.

SustainableYields

FNSWusestheMurray,Murrumbidgee/NarranderaandMilduraManagementAreaManagementPlanstocalculate

timberyieldsanddecidewhichareasof theStateForestwillbelogged. Themanagementplanswerewrittenin

1985, 1986 and1982 respectively(ForestsNSW, 2008, p35). Yields forhigh qualitysawlogs prescribed in the

MurrayandMilduraManagementAreaplansarestillinplacetoday.FNSWiscurrentlyundergoingareviewof

long‐termyieldsforStateForestsintheRiverinawhich isscheduledforcompletionbytheend of2008(Forests

NSW,2008,p34). An interim reviewof yields in theMurrumbidgee/NarranderaManagement Area hasalready

indicatedthatyieldsforhighqualitysawlogsmaybereducedtoaround50%ofyieldscalculatedinthe1980’s.

ForestsNSW(2008,p.35)statesthatfollowingthisreview,long‐termannualyieldswillbereducedto2000m3by

2009.Thisisfrom4000m 3prescribedintheManagementPlanForMurrumbidgeeManagementArea(1986,p.29).




Giventhesevereandprolongeddroughttheregionhassuffered–resultinginExceptionalCircumstances(EC)being

declaredfortheRiverina,(DepartmentofAgriculture,FisheriesandForestry,2008)–andtheresultingdecreased

floodingofRRGhabitats,thisistobeexpected.VEAC(2006,p.207),statesthat“Theproductivityofriverredgum

forestshasdeclinedsubstantially,duepartlytofewerandshorterwinter‐springfloods”.Droughtisnotnewtothe

area or RRGs, however, given predictions of increased frequency of droughts across Australia due to climate

change,CSIRO(2007),allocatedquotasneedtobereassessedtoensurethelongtermsustainabilityoftheforests.

Suchclimaticchangesarerelatedtoandexacerbatedbyanthropogenicchangestotheriverineecosystemswhich

RRGforestsareapartof.Thesechangeshavelargelyinvolvedwaterallocationrightsforirrigationofagricultural

landsintheregion.Thecombinedeffectsofclimaticchange(beitshorttermorlongterm)andriverregulationby

humanactivitiesmeans thatRRGForestsaresuffering fromseveredecreasesin floodingvital tohealthygrowth

andregeneration.TheimpactthiswillhaveonsustainableyieldsisgivenbyVEAC(2008b,p.102)

thesustainableharvestlevelwouldfallto4294cubicmetresperyear,or71percentofitscurrentsize, without implementation of any VEAC recommendations as a result of several factors,notably,lowergrowthratescausedbyreducedforestfloodinginrecentyears.

Based on the findings of the VEAC report and analysis of revisions to yields from the interim review of the

Murrumbidgee/NarranderaManagementArea,itishighlylikelythatlong‐termsustainableyieldsintheothertwo

managementareaswillalsobedecreased.

2.3RRGLogging[Forest‐Gate]

SilvicultureMethods

LoggingofRRGiscurrentlyundertakenorcontractedoutbysawmillers/processorsthemselves.Threesilviculture

approachesforharvestingsawlogsareprescribedbyFNSWintheNativeForestSilvicultureManual .Theseare:

• SingleTreeSelection(STS)

• AustralianGroupSelection(AGS),orpatchclearfelling and

• Thinning

Source: Forests NSW (2008, p.35)

AustralianGroupSelection(AGS)isthemostcommonlyusedoftheseandusuallyfollowsa“three‐pass”systemas

describedbyBISShrapnelForestryGroup (2001,p.21). Thisinvolvesa quotamillerharvestingandtransporting

quota/HQsawlogs andany allocationofex‐quota/LQ from theforest. Anex‐quota/LQmiller,usually amobile

millerthenfollowswithin6months,producingendproductson‐site(usuallystructuraland residual sleeperand

gardenproducts).Within2yearsofthemobilemiller,aresidueoperator(firewoodproducer)willharvestany

greenanddryresiduesfromthesiteforfirewoodandmulchproducts.Inthisway,anareaselectedforforestryis

effectivelystrippedofallgradesofresources,HQ,LQandResidues.Theareaisthenlefttonaturallyregenerate.




ResourceTypesandLogGrading

Forthepurposeofroyaltycalculationsandtreeselection,RRGisgivendifferentresourcetypesandgrades.The

RedGumGradingRule(RRGR)hastraditionallybeenusedtogradesawlogsintoeitherquotaorex‐quotagrades.

ResiduesarealsoharvestedandcanincludegreensawlogsthatdonotfallintotheHQorLQcategoriesandgreen

ordryresiduesoccurringasaresultofloggingornaturalcauses.StateForests(NSW,2001,p.5)proposedchanges

to the grading rule to divide quota log grades into HQ1 and HQ2 grades. Recent data available for sawlogs

harvested,ForestsNSW(2008,p.41)doesnotseparateHQ1andHQ2andsoitappearsthatlogs/resourcetypes

arecurrentlydividedasshowninthetablebelow.

Table 3: RRG Grading types, royalty units and approximate age harvested.

ResourceType/Grade RoyaltiesPaid

PerApproximateAgeHarvested

(years)1

HQ/Quota1 Sawlogs m3Anywherefromeightyuptoseveral

hundredyearsold

LQ/ex‐quota/salvage Sawlogs m3 60

Residues GreenSawlogs tonne 40

GreenandDryResidues tonne VariesSource: Adapted from State Forests NSW (2001,pp.4-5) and DPI (2008b)1

40 years is given for “Firewood”, which we assume accounts for green sawlogs recovered as residues. The age of other green anddry residues would vary.

HarvestVolumes

In 2005/2006, 60,000 m3 of sawlogs and 67,000 tonnes of residueswere harvested fromNSW State Forests.

Convertingresiduestocubicmetres,thisequatestoatotalof127,000m3harvestedfromStateForestswithinthe

threemanagementareasidentifiedabove.Thisisshowninthetablebelowandinappendix2.




Table 4: Volumes of RRG Harvested - by Resource Type - from Crown Lands in the Riverina (2005/06)

2005/06 Volumes PercentageofTotalHarvest

TotalSawlogs(m3) 59,813 48%

HQ 32,430 26%

LQ 27,383 22%

Residues(tonnes) 67,333

Conversionratefortonnestom31

1

Residues(m3) 67,333 53%

TOTAL(m

3

) 127,145 101%Source: White (2006), see appendix 2. Rounding Errors exist in percentages.1

Bootle (2005) provides a green density of 1130kg/m3 and a dry density of 900 kg/m3. Since we are applying the conversion rate toresidues which would have differing moisture contents and are subject to air drying, we assume the average of these two figures of1015 kg/m3, rounded down to 1000kg/m3 or a conversion rate of 1.

Aswecansee,26%ofallharvestedtimberisHQorquotagradesawlogs,22%isLQorex‐quotasawlogsand53%is

residues.ThenextsectionwilllookattherevenuesFNSWreceivesonbehalfoftheNSWPublicforthesaleofthe

RRGresource.

RevenuesattheForest‐gate

FNSWreceivedrevenueforcommercial(ormanagement)activitieswithinRRGforestsintheformofroyaltiesand

licensingfees.RoyaltiesforRRGsawlogsarepaidperm3‘atstump’accordingtothegradeofthesawlogandper

tonneforresidues.InformationonlicensesishardertoobtainbutBISShrapnelForestryGroup(2001,pp.22‐23)

indicatesthatannualallocationsforQuotasawlogstoCrownfixedsawmillsarebasedon“historicaltimberrights”.

Ex‐quotaallocationsaresometimesincludedin quotaallocationsoron aparcel sale/oneoffbasis. BISShrapnel

(2001,pp.22‐23)statesthat80%ofex‐quotaallocationisdirectlyallocatedtoentitieswhile20%issoldbywayof

‘competitivetender’.Noinformationonresidueallocationsorlicensingisavailable.

ThevalueofRRGtimberroyaltiespaidforRRGtoFNSWisestimatedat$4.1mforthe2005/06financialyear(see

appendix5).Ofthis,approximately$3.08mcanbeattributedtosawlogroyaltiesand$1.03mtoresidueroyalties,

asshowninthetablebelow.Basedontablesinappendix4andanecdotalevidence,weassumethatalltimber

revenues in the Riverina are based on RRG forestry management activities. Timber harvesting is the major

managementactivityassociatedwithsuchforestsalthoughotheractivitiessuchasgrazingandapiculturealsoexist

and contribute around $0.18m in revenues, Forests NSW (2008, p.41). This report will be focused on timber

industriesassociatedwithRRGinStateForests.




Table 5: Revenue profile for FNSW Riverina Region (2005/2006)

PercentageofRevenue Value($)

RevenuesfromForestryManagement 100% 5,000,000RevenuesattributabletoRRGtimbersales 82% 4,100,000

Royaltiesattributabletosawlogs 75% 3,075,000Royaltiesattributabletoresidues 25% 1,025,000Revenuesattributabletoothersources 18% 900,000Landrentalrevenues(grazingandapiary) 2 4% 175,000

Otherrevenues 15% 725,000

RevenuesAttributabletoRRGTimberIndustries 82% 4,100,000

1Source: Forests NSW (2008, p.37) and Macdonald (2007a). See tables and calculations in appendix 4, it is assumed that all timber

sales in the Riverina are attributable to RRG State Forests since figures available for RRG royalties approximate very closely figuresabove.2

Source: Forests NSW (2008, p.38)NOTE: BIS Shrapnel (2001, p.23) indicates that 20% of LQ allocations to mobile mills are sold via 'competitive tender'. For 2006,allocations to mobile mills for LQ sawlogs were 10,996 m

3, 20% of this is approximately 2200 m

3. Due to a lack of data, we have

assumed that this 2200 m3 would not contribute significantly to revenues attributable to timber industries.

Therevenuesfromtimbersalesaboveareestimatedtobegeneratedontheharvestedvolumes,averagedacross

2005/06,fromtable4above.

Basedon this,it ispossibleto calculatethe followingestimatesof currentaverageroyaltyratesforsawlogsand

residues.Table6belowshowsthesecalculations.

Table 6: Estimation of current royalty rates paid for RRG

Amount($)RoyaltyRates

PaidPer

VolumesHarvestedfor2005/2006

EstimatedAverageRoyaltyrates($)

RevenuesfromForestryManagement

5,000,000

Revenuesattributabletotimbersales

4,100,000

Timbersalesattributableto

sawlogs

3,075,000 m3 59,813 51

Timbersalesattributabletoresidues

1,025,000 tonnes 67,333 15

Source: Forests NSW (2008, p.37) and White(2006), see appendix 5.

ValueattheForest‐gate

TheannualoperatingcostoftheForestNewSouthWalesRiverinaManagementRegionfor2006⁄2007was$3.85m

(Macdonald,2008).Combiningthiswithcalculationsfromtable5above,itispossibletocreateaprofitandloss

profileforFNSWintheRiverina.Thisisshownintable7below:




Table 7: Estimated Profit & Loss profile for FNSW Riverina Region

Value($)

RevenuesfromallActivities 5,000,000CostsofManagementforallActivities 3,850,000

EstimatedProfitfromallActivities 1,150,000

RevenuesattributabletoRRGTimberActivities 1 4,100,000

CostsofManagementattributableRRGForestryActivities2

3,157,000

EstimatedProfitfromRRGForestryActivities 943,000Source: Forests NSW (2008) and Macdonald (2008), Revenues are from 2005/2006 and Costs for 2006/2007.1

Includes RRG Sawlog sales and residue sales. Does not include any land rental attributable to RRG State Forests, this is likely tobe a small amount, being either $175,000 from table 5, or a portion of this.2 Attributes the same proportion of costs as revenues - 82% - to RRG operations.

Soweseethatattheforest‐gate(asopposedtothemill‐gate),thevalueaddedoftheRRGtimberindustryaccruing

tothetaxpayerofNSWisaround$0.94m,ifweacceptFNSWdataasaccurate.ThisisthevaluethepublicofNSW

gains from currentmanagementactivities, over 80%ofwhich isattributable toselling127,000m3oftimberto

private,profit‐drivenbusinesses. It should alsobenotedthatthis analysisis basedon the FNSW estimate of

operating costs, without considering financial costs suchas a return on past investments (e.g. roading), other

capitalassetssuchaslandacquisitionandvehiclecosts,potentialcarbonlosses,non‐paymentofrates,government

subsidiesandtheneedforfuturecapitalinvestment.ThelowcostsofFNSWareaseriousissueforprivategrowers

oftrees,mostofwhomwouldnormallybelocalfarmerstryingtodiversifytheirincome.

CostComparisonwithPrivateGrower

Estimates made using FNSW data indicate that approximately 127,000 m3 of RRG from 4757 hectares was

harvestedin2007intheRiverina.Thecoststomanagetheseoperationswerehavebeenestimatedas$3.2m,with

grossrevenueof$4.1mandnetprofitof$0.94m.InTable8wehavecomparedthecostperhectareandthecost

pertonnefortheprivategrowerversusFNSWinRRGStateForests.Theeconomicsoftreegrowingarecomplex

butitissignificanttonotethescaleofcostdifferencebetweenaprivategrowerperhectare(theprivategrower

seeksgreaterdensity)andthecostpertonne.




Table 8: Comparison of FNSW RRG Costs vs Private Woodlot Production

Gross

RevenueOperatingCosts

NetProfit

AllRRGManagementActivities 1 $4,100,000 ‐$3,157,000 $943,000

PerHectare(@4757ha/yr)2 $862 ‐$664 $198

FNSW

PerTonne(@127,145tonnes/yr) 3 $32 ‐$25 $7

PerHectare(@2000ha/yr) 4 $9,800 ‐$9,141 $659Private

PerTonne(@390,000tonnes/yr) 5 $50 ‐$47 $3Source: Grey(1999), see appendix 4 and EcoLarge Analysis1

Revenues, costs and net profit from table 7. 2

Per hectare revenues, costs and net profit, based on areas harvested, see appendix 3.3

Per tonne revenues, costs and net profit, based on total tonnes harvested of 116,477, see appendix 2. 4

Per hectare revenues, costs and net profit for private grower [Air dried tonnes] 5

Per tonne revenues, costs and net profit for private grower [Air dried tonnes]

Note: The table above assumes that FNSW has scale advantages over private growers.

Ifwetakethecostpertonneastheeffectiveoutputoftheindustrywecanseethatprivatelygrown,fullycosted

timber for firewood, grownover a short 15 year cycle is costing about $47 per tonne on our estimates (see

appendix4 – totalling all the costsunder the $/tonne column). The figures from table 8 for private growers

representsapotential‘shadowcost’and‘shadowprice’fortimber.Thatisthepricethatwouldbechargedto

cover costs ifthemarketfor timberwasgovernedby an‘efficient’policystructureandhencewasan ‘efficient’

marketwithoutsubsidies.Ideallytheshadowpriceshouldequaltheactualpricefortimber.Wheretheshadow

pricedivergesfromtheactualpricethereisnormallyan‘inefficiency’inthemarketcausedbygovernmentpolicies

andintervention. Ifsuchpolicies resultin inefficientanddistortedeconomicoutcomes,thenanother, socialor

environmental justification must exist for maintaining that particular policy. In the case of the RRG timber

industry, social and environmental justification for current policy regimes are non‐existent in the case of

environmental.Socialjustificationforcurrentmanagementpolicyregimescouldbesaidtoexistaroundsupport

forlocalindustriesintheRiverinawhicharealreadyaffectedadverselybydemographictrendsandenvironmental

conditions(i.e.prolongeddrought).However,suchapolicywouldbewrong‐headedin‐lightoftheecologicaland

environmentaldistortions that currentpolicies result inand opportunities foralternative industriesdiscussed in

section3.

OurcalculationsshowthatFNSWpays$25pertonneforoperatingcostsbeforefinancialcosts,whilsttheprivate

grower pays anestimated$47per tonneforall costsincludingbothoperatingand financial costs. If FNSW is

correct, then prima facie, it is undercutting private sector players without good public policy reasons, and is

challenging the Federal Governments policieson competition policy (i.e. a level playing field for all industries,

ceterisparibus)asshouldbeenforcedbytheACCCandNationalCompetitionPolicy.Inparticular,itshouldbe

noted that theinterestcostisalsoasignificant factorin thecoststructure that is,apparently,notborneby the

stateagency.




FNSWEstimatedTrueCommercialCosts

The above represents a very rough cost comparison between the results of a ‘firewood’ business plan that

EconomistsatLargehadpreviouslycompiledfortheVictorianNationalParksAssociation(Grey,1999).Onthis

basis it couldbe said that private costs are 88% higher on a per tonne basis than thosepresented by FNSW

(calculatedbysubtracting$25from$47anddividingby$25multipliedby100).Thisisshowninthetablebelow:

Table 9: FNSW Profit if Commercial Costs are Included

PertonneoperatingcostsofFNSW $25PertonneoperatingcostsofPrivategrower $47PertonneoperatingadvantageofFNSW $22OperatingadvantageofFNSW(%) 88%RevenuesfromRRGForestryManagement $4,100,000CostsofRRGForestryManagement $3,157,000Costadjustmentfactor 1.88

EstimatedTrueCommercialCostsofManagementforFNSWRiverinaRegion $5,935,160

EstimatedTrueCommercialProfitofFNSWRiverinaRegion

‐$1,835,160

Source: Forests NSW(2008), Macdonald(2008) and Grey(1999). Revenues are from 2005/2006 and Costs for 2006/2007.

OnthisbasisweestimatethatoncecommercialcostsnotbornbyFNSWarefactoredin,FNSWintheRiverina

would actually operate at a loss of $1.8m. A Productivity Commission report (Productivity Commission, 2008,

p.314)indicatesthatthisislikelytobethecase:

OnlytwoofthesixforestryGTEsachievedareturnthatexceededtherisk‐freerateofreturnon

assets—FPCWAandForestrySA.ThissuggeststhattheremainingforestryGTEsarenot

operatingonacommerciallysustainablebasis.

ThisprocesshasasignificantimpactonthestatedvalueoftheRRGforestindustry.Thisreporthasgathereddata

tofillinthefollowingtable.Thenumbersinblackareactualdatathatwehavebeenabletoobtaineitherthrough

publicly availablesources,orviaparliamentaryquestionsandFOI requests. Thedataingreenrepresentsactual

businesscoststotheRRGstateownedforestrybusiness(attheforestgate)thatarenotpresentlyavailableor

includedinthenetprofitfigure.Whentheadditionalcostsareincludeditislikelythatthestateownedforestry

enterpriseislosingmoney.Thetablebelowexplorestheimpactofaneconomicallyefficientpolicystructureinthe‘adjusted’column. Insimpletermsthestateownedforestindustryseesitbusinessdisappearto bereplacedby

farm‐basedgrowers,incloseproximitytotherelevantmills.




Table 10: Existing versus ʻefficientʼ policy outcomes on RRG forest harvesting

Cost&Revenuecategory

ForestGate–publisheddatabasedonexisting

policysettings

Forestgateadjusteddatabasedonefficientpolicy

settings

Impactofexistingpricingpolicy

Grossrevenue $4.1m Revenuewouldbedeterminedbyproximitytomilling

Restrainsthetradeofprivategrowersclosetomillsbysubsidisingdistantstateownedforestsupplies

Operatingcost $3.2m Productioncostsprobablyunderstatedwhencomparedwithprivateoperations.Timberresourceisprobablyover‐

exploited.

Increasesthetransportcostforsomemillsattheexpenseofprofitsforothermills.Transportcostsbecomeabiggerproportionoftheindustrycostbase.

Netprofit $0.94m ProbablyanetlosstoNSWtaxpayers–wouldbecloseddown.

Makesprivateforestryuneconomic,permanentlybindsthemillownerstothe‘whims’ofthestateforestagency

Taxation Notavailable–notincluded,asfaraswecantell,inRRGforestproductioncosts

Included Levelstheplayingfieldandincreasesprivatesectorinvestment

LandRates&charges Notavailable–notincluded,asfaraswecan

tell,inRRGforestproductioncosts

Included Levelstheplayingfieldandincreasesprivatesector

investment

ReturnonInvestedCapital

Notavailable–notincluded,asfaraswecantell,inRRGforestproductioncosts


Depreciation Notavailable–notincluded,asfaraswecantell,inRRGforestproductioncosts


BorrowingCosts Notavailable–notincluded,asfaraswecan

tell,inRRGforestproductioncosts

Included Levelstheplayingfieldandincreasesprivatesector

investment

CarbonCosts Notavailable–notincluded,asfaraswecantell,inRRGforestproductioncosts


PossibleimpactonNetProfitattheforestgate

Nochange Stateforestprofitgoesdown,butprivateforestprofitgoesupandmillresourcebasegetsbigger

Levelstheplayingfieldandincreasesprivatesectorinvestment




InanefficientpolicymillsarefreedfromhavingtheirprofitsdeterminedatStateForestsheadoffice.Thisbizarre

commercialpracticewherebyprivatebusinessmustsubmititsprofittoscrutinybypublicservantsisaresultofa

failedattemptatindustrydevelopmentbytheStateForestagency.Centraliseddirectionofbusinessfailedinthe

formerSovietUnionandithasfailedintheRRGStateForestsaswell. Thiscentralisedprocess,thatcanonlybe

describedas‘kremlinesque’,isinfact,alsocostingthefutureofthemillingindustry.Thisindustrycanonlysurvive

ifthefarmersbeginto investinlongtermsuppliesoftimber–andthiscanthappenuntilthestateagencystops

undercuttingthemarketofprivategrowersthroughbadpolicydesign.

2.4RRGRoyaltyRatesandMethods Thislowvalueof$0.94maccruingtotheNSWpublicsuggests,asvariouseconomistshavenoted,thattheamount

paidfortimberroyaltiesonpubliclandisfartoolow(MarsdenJacobs,2001).

Basedonfiguresforvolumesharvestedandrevenuesreceivedfromtables4and7,ofroyaltyratesforRRGcanbe

calculatedareshowninthetablebelow,forafullsummaryofcalculations,seeappendix5.

Table 11: Royalty Rates for 2001 and 2005/06.

2001 2005/061

Sawlogaverage 38 51HQ($/m3) 41 55

LQ($/m3

) 35 47Residues($/tonne) 11 15

Source: BIS Shrapnel Forestry Group (2001, pp115-117), Forests NSW (2008) and White (2006), see appendix 5 1

Breakdown of HQ vs LQ royalty rates for 2005/06 assumes same weighting as in 2001. Figures for 2001 were calculated using abottom up approach whilst 2005/06 figures used a top down approach due to lack of other data. See appendices for tablessummarising calculations

Whatthetableabovedoesnotshowisthatroyaltiesvarysignificantlyfromareatoarea.Pricesclosertomilling

townstendcanbeashighas$50/m3,whilemoredistantquotagradelogshaveroyaltiesofonly$29/m

3.Forex‐

quotalogs,wealsoseeawiderangeofvaluesdependentonproximitytosawmillsrangingfrom$48/m3to$22/m

3.

(BISShrapnelForestryGroup,2001),seeappendix5fordataandcalculations.

Toputthevaluescalculatedforroyaltyratesincontext,itisusefultounderstandhowtheyarecalculatedinNSW.

Thesevaluesandmethodsofcalculatingroyaltiesareattheveryheartofthisquestionmarkaroundthetruevalue

oftimberonpublicland.

Accordingtofederalgovernmentdepartments,royaltyvaluesshould:




reflectthefullcostof[forest]operations,i.e.theyshouldcoveranormalreturnoncapital,theforestmanagementcostsrelatedtotheseoperations,appropriateresourceusepaymentsandtherepairofanyenvironmentaldamagecausedbytheseoperations.Resourceusereturnstothecommunity(asownersofpublicforests)shouldbesetatlevelsthatreflecttheestimatedvalue ofthe basicresource,i.e. the trees andotherforest resources. If themarginal market

value of the extractedproducts is less than the marginal value of the full resource costsofforestryoperations,theoperationsshouldalterordiscontinue.(DepartmentofEnvironment,Water,HeritageandtheArtswebsite,Sec.6.2)

Royalties arecalculated using amethod known as theHardwoodLogValue Pricing System,a form of residual

valuation (SFNSW2000 andMarsdenJacobs2001). Royalties arecalculatedas “the residualvalueto a sawlog

processing company after deducting all the reasonable costs of manufacturing, distribution and otherwise

conductingabusiness,includingareasonablelevelofprofit,fromthevalueofend‐products”(SFNSW,2000p2).

Thuscalculationsforroyaltiesareworkedoutby:

Marketpriceforendproducts

less“appropriate”levelofprofit

lesshaulageandtransportcosts

lesscostsofproduction

lessloggingcosts

=RoyaltyrateSource:MarsdenJacobs(2001,p3.7)

Clearlythismethodofcalculatingroyaltiesisflawed.Firstly,becauseitisbasedonmarketpricesinanalready

distortedmarket. ThemarketisdistortedduetoavoidanceofcommercialcostsbyFNSW,thefailuretopricein

externalities resulting from logging activities and the distorting manner in which transport costs have been

handled.Tomakeallareasofforestsequallyprofitabletoharvest,timberfromareasfurtherfrommillsispriced

morecheaply,astransportcostsaregreater.

By including transport andother costsofextraction,otherwiseuneconomicalforests arepotentiallysubsidised.

Thisexploitationofforestareasthatarefurtherawayandmoredifficulttoaccessisirrational,asitisineffect

payingmoreforlessefficientproduction.AsMarsdenJacob(2001,p3.10)putit:

thisisequivalenttoguaranteeingbananagrowersintheAntarcticthesameprofitsasbanana growersinmoresuitablenaturalclimatessuchasCoffsHarbour.

Secondly,becausethepricingprocessissubjective–whatshouldconstitutean“appropriate”rateofprofit–and

whyshouldpublicservantsdecidewhatitisonbehalfofprivateenterprise?




Thirdly, andmost significantly, isthat each loggingsite isprevented from bearingits owncosts.Hencea more

distantsitewouldhavehighercostsandhencenotbelogged,whilstanearbysitemaybelogged.Theneteffectis

thatthepublicasMarsdenJacobdescribeareleftholdingthebag(MarsdenJacob(2001,p3.17).

ThepolicyapproachusedbyFNSWwithrespecttotimbersupplyislikeacommunityemploymentprogramforthe

millingindustry.ThetaxpayersofNSWguaranteethatmillerswillprofitfromthesaleoftimber,irrespectiveofthe

costtothetaxpayer.FNSWhaseffectivelyprivatisedtheprofits(suchastheyare)fromthesaleoftimberand

‘given’them to thetimberindustry,whilstthe lossesandthe riskshave beensocialisedand given to theNSW

taxpayer.

TheprocessultimatelydefeatstheobjectiveofFNSWwhich,wecaninfer,istosupportandgrowtheRRGindustry

(often referred to as industry development policy). Since the pricing approachmakes it hard for farmers to

competetheindustry,includingthemillers,arenotfreetogrowasustainabletimbersupplyoutsidetheFNSW

approach.Hencethereisnosupplysecuritythatwouldcomefromadiversecustomerbase.Meanwhilethere

appearstobelittleincentivetogrowtheRRGresourcebase,withthesamededicationthatafarmermightgrow

sometreesfor‘superannuation’.

Royaltyratesshouldinsteadbesettoincludethefullcosts,includingenvironmentalcosts,ofloggingoperations.

Royaltycalculationsshouldalsobetransparentandopentothepublic.MarsdenJacob(2001)recommendthatto

improvepublicconfidence,andeconomicefficiency,royaltiesshouldbesetbybodies“atarmslength”fromFNSW.

Insummary,thecurrentroyaltycalculationmethodshaveextremelysignificantandnegativeconnotationsforthe

publicownersoftheforest.Theforest‐gatepriceisnot setbasedonthecostofforestproductionandthedemand

attheforest‐gate. Forestproductionoperationsarebeingconductedwithoutregardforthecostofproduction.

Distantforestswould‘sell’timberatlessthancostofproduction,andevennearbyforestscouldbesellingatnear

costofproduction.Thepublicforestsarebeing‘thrown’attheindustryinthe‘desperatehope’thataninfant

industrywillgrowintoa‘grownup’industry.After50yearsthisstrategy,liketheSovietUnion,canbesaidtohave

failed.Thepublicmanagersoftheforest,consequentlyhavedifficultyfindingoutthesellingpriceof‘theirforest’.

Thismakes itdifficult, ifnot impossible, forfarmers to price timberon their lands,or evaluateinvestmentsin

timberproduction.Thislackofinformationreducesthefarmer’sincentivetoplanttreesandbeinvolvedintimber

supply. Asa result therehasbeenminimalprivate investment inhardwoodsawntimbersupply–ensuringan

inadequatesupplytothetimberindustry.




2.5CalculatingFullEconomicCostsofRRGLogging

Analysisin thelastsection incorporatedonlydirect‐extractivefinancialcostsin calculatingthevalueoftheRRG

timber industryat theforest‐gate. Theanalysis didnot include theimpactloggingthe foresthason theTotal

Economic Value (seeFigure1) ofRRGforests. These includeenvironmental andsocialcosts that arelinkedto

indirecteconomiccostsanddirecteconomicuseandnon‐usecosts.Examplesofthesearethelossofnon‐use

valuesandopportunitycoststootherusersof theRRGresource.Whiledifficulttoquantify,thesecostsarereal

andsignificant,thissectionwilldiscussandwherepossible,quantifysomeofthesecosts.

EnvironmentalCosts

The Environmental costs of logging RRG forests are significant due to the depletion of natural capital and

diminishedservicesrenderedbyRRGforests.ThisisparticularlythecasewherepatchclearfellingorAGSisusedas

amethodoftimberextraction.Indeed,areviewconductedofpatch‐clearfellinginNorth‐EasternNSWconcluded

that:

Clearfelling ofgaps greater than approximately 40mdiameter isincompatiblewith optimalhabitat tree protection and recruitment. Any creation of gaps of larger size must beundertakenwiththeexpectationthathollowdependantfaunawilldecline.

(Attiwillet.al.,1996.)

InNSW State Forests, patch clearfelling is carried out over large areas, though exact detailed figures are not

available. AGS silviculture usually follows the “three‐pass” system described in section 2.3 of this report.

Environmental costs associatedwith this includedamageto ecosystemservices andspecies diversity aswell as

reduced recreation values andthe lossof non‐usevalues to thepublic. Clearfelling also reduces theability of

ecosystemstorecoverleadingto(andexacerbatedby)theinvasionofweedsandferalspecies.

LossofNon‐useValues

Economic analysis and public debate often focusesonlyon direct‐use valuesmeasuredusing availablemarket

prices. However, analysis ofthe non‐usevaluesis important fora properunderstandingof thetotaleconomic

valueofaresource.Itistotaleconomicvalue,ratherthandirectfinancialvalueofoneuse,thatshouldinform

publicpolicydecisions.Non‐usevalueshavebeendefinedas:

thevaluesthatpeopleinthecommunitymightholdforenvironmentalassets,irrespectiveofwhethertheyhavedirectorindirectcontactwiththem…thevaluethatpeopleobtain,forexamplefromknowingthatecosystemswillbeprotectedforfuturegenerations.(URS,2007,pg.1)

Economistsmeasurethesevaluesthroughwhatareknownasnon‐marketorimplicitpricingtechniques.In2006,a




study was carried out measuring the full value of RRG forests in Victoria using a method known as “choice

modelling”.

CommissionedbyVEACandcarriedoutbyURSAustralia,thestudycollecteddatafromhouseholdsinMelbourne

andseveral areas around Victoria. Householdswere surveyed andasked to choosewhat price they would be

willingto payannually foran increasein area ofhealthyRRG forest. Theresultsfound that theaverage price

Victorian households were prepared to pay annually for a 1000ha increase in healthy RRG forests was $1.60

(Gillespieetal,2007andURS,2007).

Thisprovidesanestimateofthevaluethatthepublicplacesonthenon‐marketvaluesofRRGforests.Assuming

thatasimilarfigurewouldbeobtainedinNSW,itispossibletocalculateavaluethatwouldcompensatetheNSW

publicforthedamagethatloggingoperationscausetoareasoftheforest.

Table 12: Non-use Choice Modelling Value of RRG logged

Estimatedtotalhectareslogged(2007) 4757AveragePriceeachhouseholdispreparedtopaytoconserve onethousandhectaresofRRG

$1.60

AverageValueeachhouseholdispreparedtopaytoconservearealogged

$7.61

NumberofhouseholdsinNSW 2,328,218

Implicitvalueofloggedareas $17,720,533Source: FNSW logging schedules, provided to NPA (See Appendix 3), Gillespie et al (2007), URS (2007) and Australian Bureau ofStatistics (2007)

This isthe non‐market valuethattheNSW public places on the areaof RRG forest logged annually. It isthe

minimumcompensation that shouldbe paid throughthe collectionof revenueformanagementactivitieswhich

impactonRRGinStateForests.CurrentrevenuesgeneratedbyFNSWfromRRGtimberroyaltiesareconsiderably

lowerthanthis,atonly$4.1m.Basedonthisanalysis,iftheenvironmentalopportunitycostsincurredbythestate

areinternalisedinevaluationsoftheRRGactivitiesofFNSW,thenFNSWwouldoperateatalossof$16.8m.This

costisbornebytheNSWpublicthroughtheun‐compensatedextractionoftheirforestresource.Fromthisfigure,

wecanalsoestimatethattheRRGtimberindustryiscurrentlysubsidisedtothetuneof$13.6m.




Table 13: Estimated Annual Uncompensated Loss and Industry Subsidy

RevenuesattributabletoRRGTimberRoyalties $4,100,000

CostsofManagementattributableRRGTimberActivities $3,157,000

EstimatedProfitfromRRGForestryActivities $943,000

LossofNon‐usevalues $17,720,533

UncompensatedlosstoNSWPublic $16,777,533

EffectivesubsidytoRRGtimberindustry $13,620,533

Source: EcoLarge Analysis, Table 7 and Table 12.

Thisfigureof$17.7misaconservativeestimate.Thesurveymeasuredhousehold’swillingnesstopayannuallyfor

a20 yearperiod,butthisongoingvalueisnotincludedhere,toreflectthatsomevaluesareregainedaslogged

areasregenerate.However,thenetpresentvalueofthisfigurewouldbesubstantiallyhigher,asitwouldinclude

discountedlossesinthefuture.Factoringinintergenerationalequityconsiderations,thefull,uncompensatedloss

wouldbeevengreaterstill.

ThereductionintotaleconomicvaluethattheRRGindustryiscausinginitsloggingphasedemonstratesthatFNSW

royaltyratesinRRGforestsaretoolow.Theindustry’slossiseffectivelybeingoffsetbytheNSWpublicthrough

theuncompensated reductionin naturalcapital andservices renderedby publiclyownednativeforests. These

costsshouldbecoveredbyroyaltypayments,andnotasapublicsubsidytotheRRGtimberindustry.

Basedonthedataandcalculationsabove,itispossibletoestimatetheroyaltyrateswhichwouldreflectthisnon‐

usevalueandfollowingthis,theextentofthesubsidiesonam3/tonnebasiswhichtheindustrycurrentlyreceives.

Table 14: Estimated Royalties and Subsidy to RRG Timber Industry in 2005/06

Percentageof

Revenues

EstimatedVolumes

Royaltieswhichshouldbepaid

ontotalvolumesharvested

Royalties

whichshouldbepaidper

unitharvested

Current

EstimatedRoyaltiesperunit

CurrentEstimatedEffective

Subsidyperunit

Sawlogs(m3) 75% 59,813 $13,290,400 $222 $51 $171Residues(tonnes)

25% 67,333 $4,430,133 $66 $15 $51

Source: Tables 5, 7 & 11 and appendix 5.

ThissubsidydistortstheuseofRRGresourcesanddoesnotensurethatthebestinterestsoftheNSWpublicare

beingconsidered.




2.6RRGProcessing/Milling[Mill‐Gate]

Oncethesawlogsorresiduesareharvested,theyareprocessedor‘milled’intoproductsbyfixedmills,mobilemills

orfirewoodproducers.RRGisgenerallyprocessedintogreensawnproductswithfurtherprocessingsometimes

being carriedout toproduce kiln dried (KD) furniture grade timber,tongueandgroove (T&G) flooring, feature

panellingorveneer.Asignificantamount(calculatedat83%byEcoLarge)ofalltimberprocessedbecomesmulch

andfirewood.

ThetablebelowshowsthenumberofoperatorswhichweestimatetobebasedonNSWfortaxpurposes.Forour

analysisofmill‐gateoutputattributabletotheNSWeconomy,weonlyconsiderNSWbasedoperators.

Table 15: Estimated Number of Operators in NSW (2006)

GivenLicensestooperateinNSW

StateForestsBasedinNSW1

FixedMills 6 4MobileMills 10 10FirewoodProducers2 30 30

Source: White(2006)1

Since no information to the contrary is available, we have assumed that all mobile mills and firewood producers are located in NSWfor tax purposes.2

Forests NSW (2008, p.30) states that there are 30 additional operators licensed to harvest residues for 'fuel wood'). This correlates

with White (2006) which shows a maximum of 30 residue operators operating, some are likely to be operating across different MAs.

Tables16,17and18showthedifferentprofilesforeachtypeofoperatorprovidinginputtypesandvolumesthey

utilise(harvestedvolumes)andtherangeofproductstheyproduce.

Table 16: RRG Operator Profile - Mobile Mills (2008)

Quality/Grade TotalHarvested(m3)1 ProductCategories EndProduct

LQ 11,365 SawnProducts

Appearance Green

Structural Railsleepers Housestumpsandfencing(AGrade)

Residual Landscapesleepers(BGrade)

OtherProducts

Mulch Chips

Mulch

Sawdust

Firewood Firewood

TOTAL 11,365

Source: Adapted from BIS(2001, pp.113-114), State Forests NSW(2001, p.20), VEAC(2006, p.226), White(2006).




Table 17: RRG Operator Profile - Firewood Producers (2008)

Quality/Grade TotalHarvested(m3)1 ProductCategories2 EndProduct

Residue 55,030 OtherProducts

Mulch Chips

Mulch

Sawdust

Firewood Firewood

TOTAL 55,030





Table 18: RRG Operator Profile - Fixed Mills (2008)

Quality/Grade TotalHarvested(m3)1 ProductCategories EndProduct

HQ 21,755 SawnProducts

Appearance KDFurnituregrade

Veneerleaf T&Gblanks

KD

Green

Structural Railsleepers

Housestumpsandfencing(AGrade)

Residual Gardensleepers(BGrade)

OtherProducts

Mulch Chips

Mulch

Sawdust

Firewood Firewood

LQ 11,268 SawnProducts


Veneerleaf

T&Gblanks

KD

Green




OtherProducts

Mulch Chips

Mulch

Sawdust

Firewood FirewoodResidueSawlogs 7,100 SawnProducts


Veneerleaf

T&Gblanks KD

Green




OtherProducts

Mulch Chips

Mulch

NOTE: Residueharvested by fixed millsin NSW was calculatedat 19,250 m3 ( Seeappendix 8.). OtherResidue is obtained from19,250 - 7,100. For thepurposes of our analysis,all residue sawlogs areassumed to beprocessed by fixed mills.

Sawdust

Firewood Firewood

OtherResidue 4017 OtherProducts

Mulch Chips

Mulch

Sawdust

Firewood Firewood

TOTAL 44,141


InthissectionweestimatethepotentialmarketvalueoroutputofthetimbermilledbytheRRGtimberindustryin

2008.Theindustryincludesthethreeoperatortypeslistedaboveandtheirrespectiveproductprofiles.Valuesfor




outputarecalculatedbyapplyingrecoveryratestothevariousresourcetypes(quota/HQ,ex‐quota/LQ,residue)

harvestedandmultiplyingresultingsaleablevolumesperproductcategorybyaveragemarketpricesperproduct

category.Seeappendix6forafulloverviewofmethodologyappliedtoarriveatestimates.Ourcalculationsused

datafromreportsbyBISShrapnelForestryGroup,ForestsNSW,theVictorianEnvironmentalAssessmentCouncil,

informationobtainedfromFNSWbyNationalParksAssociationNSWwithFOIrequestsandpriceinformationfrom

localmills.

AnnualVolumesandSourcesofRRG

ThisreportisfocusingmainlyonRRGsourcedfrompublicland,however,itisimportanttorealizethat46%ofRRG

harvestedcomesfromnativeforestsonprivatelandinNSW.ThebreakdownofpublicandprivatesourcesofRRG

fromnativeforestsisshowninthetablebelow.

Table 19: Annual Volumes and Source of RRG Timber (2001)

Tenure Sawlogs(m3)

Residues(m3)

Total(m3)

Percentage

Publica 66,400 75,000 141,400 54%

Private 68,500 53,750 122,250 46%

Total 134,900 235,656 263,650 100%

Sources: State Forests NSW (2001, p.2)a Our calculations, using White (2006), see appendix 2, come in at 148,168m3 for 2001. We use our figures for all other areas, butused State Forests NSW figures here for consistency in comparison of the amounts harvested from the different tenures.

Assuming a similar profile for resources harvested and products produced as for RRG from State Forests,we

assume thatRRG fromprivate landaccounts for 46% ofthe totalmill‐gate output. Due toa lackofdata,we

assumethatthis54%/46%splithasremainedunchangedsince2001.

ThetablesbeneathwillonlycoverdataforRRGsourcedfromStateForests,althoughthisassumedsplitbetween

publicandprivatesourcesisusedinotherareassuchascalculatingcoststooperatorsandtotalindustrymill‐gate

output.

RecoveryRates

Beforecalculatingthemill‐gatevalueof theindustry,it isnecessaryto considertherecoveryratesforRRG.The

recovery rate refers to the amount of sawlog “roundwood” that is converted to milled, marketable timber.

RecoveryratesforRRGvarydependingonthegradeofthesawlogbeingprocessed.Thetablebelowshowsthe

recoveryratesforthevariousgradesoflog,forcalculationsanddata,seeappendix7.




Table 20: Recovery Rates by Log Grade

AppearanceRecovery

StructuralRecovery

ResidualRecovery

MulchRecovery

FirewoodRecovery

HQ/Quota 10% 18% 11% 33% 28%LQ/Ex‐Quota/Salvage 3% 16% 17% 35% 29%Residues 4% 8% 22% 36% 30%

Average 6% 14% 17% 35% 29%Source: State Forests NSW(2001, p.20, Table 20), BIS Shrapnel Forestry Group (2001, p.113, table 15) and White (2006). Seeappendix 7 for original data and calculationsNote: The figures above assume that all waste materials resulting from harvesting and processing RRG are recovered and sold as'Other Products' (Mulch and Firewood).

Table 21: Estimate of Saleable Products by Product Category, at Mill-gate

ProductCategoryTotalSaleableVolumes 1 SaleableVolumesasPercentageofTotalInputs

Appearance 3,139 3%

Structural 8,105 7%

Residual 7,803 7%

Mulch 20,052 18%

Firewood 71,437 65%Source: See appendix 7 and 8.1

Based on m3

volumes for all product categories including firewood.

Tocalculatemill‐gateoutputonthesevolumes,pricesfromvarioussourceshavebeenusedandarecalculatedas

showninthetablebelow.

Table 22: Prices for Different Product Categories (2008)

ProductCategory EndProduct AveragePrice($)AveragePricefor

ProductCategory($)

SawnProducts

KDFurniture(800mm‐wideslabsfortableorbenchtops.

4,000

KDselectandfeaturegrade

2,400

Appearance

Generalfurnitureand

flooring

1,750

2,716.7

Structuraltimbers 750Structural

Railwaytimbers 650700.0

Residual Lowgradetimbers 360 360.0

OtherProducts

Mulch1 Chips

Sawdust27 27.0

Firewood2 83 82.5Source: VEAC(2006, p.227) and BIS Shrapnel Forestry Group (2001, p. 114, table 16) and prices obtained directly from mills in 2008[for Mulch and Firewood]1

Average prices are used, ignoring sawdust, which has a low value and is likely to make up a very small percentage of sales2

Prices for firewood given in tonnes, all others are m3.

3Structural Prices for Mobile mills are priced at $108 per m3 in light of recent contract prices for railway sleepers for a Victorian

Government contract.




EstimatedGrossMill‐gateRevenue

Multiplying theprices from table 21 above through themill‐gate product categories,we estimate RRG timber

sourcedfrompubliclandtogenerategrossmill‐gaterevenueof$22.2m.Assumingthatthisrepresents54%of

totalinputandthattheother46%(privatesources)hasasimilarprocessingprofile‐thatis,thesameproportionof

inputsareprocessedintothesameproportionofsaleableoutputs‐grossmill‐gaterevenuevalueforalltenuresin

theNSWRiverinaisestimatedat$43.3m.

Table 23: Estimated Gross Mill-gate Revenues for RRG fro Crown Lands (2008)

TotalInputs(m3) 110,536

TotalRevenues($) 22,367,430

ProductCategory

TotalSaleableVolumes1

EstimatedAveragePricesperProduct

Category($)

EstimatedRevenuesperProductCategory

($)

RevenuesPerCategoryasPercentageofTotalRevenues

Appearance 3,139 2,716.7 8,526,307 38%

Structural 8,105 700.0 4,597,208 21%

Residual 7,803 360.0 2,808,964 13%

Mulch 20,052 27.0 541,411 2%

Firewood 71,437 82.5 5,893,541 26%1Based on m

3volumes for all product categories including firewood. For calculating revenues per product category, firewood is

converted back to tonnes.

Itshouldbenoted thatcalculationsabovearebasedon pricesgivenatmill‐gate toan individual,in aretail‐like

situation.Theyrepresentthemaximumpossiblemill‐gatevalueoftheindustry.Inarecentcontractforprovision

of railway sleepers(structural) with the Victorian Government, products were considerably cheaper than our

estimates. Contracts for approximately 300,000 railway sleepers (approximately 75,000m3) were priced at

$8,098,995,givingapriceof$108/m3.Aslargecustomersreceiveconsiderablediscounts,therealmill‐gatevalue

oftheindustryispotentiallyfarlowerthantheestimateprovidedhere.

Ourcalculationsalsoassumethatallpotentialsawnproducts(afterapplyingrecoveryratestologgrades)product

category areutilised. Thefiguresfor saleable volumesarethereforelikelyto behighestestimatesofpotential

revenuesrealisable.Thisisshowninthetablebelow,inwhichwecompareourestimatestothosefromother

sources.




Table 24: Recovery Rates for Total Output and Sawn Output.

EcoLarge BIS VEAC

TotalInput(m3) 110,536TotalSawnOutput

(m3) 19,046TotalOtherOutput(m3)

91,489

AggregateDataNotAvailable

RecoveryRatesforTotalOutput

RecoveryRatesforSawnOutput

RecoveryRatesforTotalOutput1

RecoveryRatesforSawnOutput1

SawnTimberRecoveryRatesbyProductCategories Appearance 3% 16% 7% 4%Structural 7% 43% 18% 58%Residual 7% 41% 14% 38%

SUB‐TOTAL 17% 100% 39% 100%

OtherProductsRecoveryRatesbyProductCategories Mulch 18% 34% Firewood 65% 28%

SUB‐TOTAL 83% 61%

TOTAL 100% 100% 1

Recovery rates for total output are provided by BIS Shrapnel Forestry Group (2001, p.113, Table 15) and for recovery of sawnoutput by VEAC (2006, p.227, table 14.5). We suspect that differences in recovery rates (being higher than our estimates in bothcases - except for residual as a percentage of sawn output - are due to the use of mainly fixed mill data for modelling. In the case ofVEAC, the figures were based on a single fixed mill, for BIS, it is unclear but is likely that modelling was carried out for fixed millsonly. Appearance recovery as sawn output is high under our model. We assume this is due to the use of highest estimates ofpotential for appearance grade products based on estimated appearance recovery rates. This may have resulted in our estimates ofmill-gate output being overly high.

EstimatedNetMill‐gateRevenue

Whenconsideringestimatesabove,itisimportanttorememberthattheyaregrossvalues.Theyassumethatall

timberissawnbasedonit’sfullpotentialforappearance,structuralandresidualcategoriesandsoldatthemarket

priceappropriatetoitsquality.Inthissection,anattempthasbeenmadebyEconomistsatLargetocalculatethe

netrevenueorvalueaddedattributableatthemill‐gate.Thisiscalculatedasthegrossrevenuesminuscosts.

Thereis nopublicly available information oncosts facedby the industry, asis tobe expectedofmostprivate

industries,howeverBISShrapnelForestry Group (2001)estimated costs tomill‐gate as$25m peryear in2001

(p.47).Thisestimaterepresented“meandeliveredcostofsawlogstothemillyardand…weightedtotalcostof

processingallproductsfromlogtomill‐gate”(p.47).Nocalculationsareshowntosupportthisfigurebutasitisthe

onlydataavailableonthis,wehaveuseditinourowncalculations.Sincewearelookingat2008mill‐gatevalue

added,wehaveadjustedthefigureof$25mforinflationsince2001,resultinginestimatedcostsin2008of$29.8m

(seeappendix10).

Thefollowingshouldbeconsideredoptimisticestimatesoftheindustry’snetrevenue.




Table 25: Estimated Net Mill-gate Revenue - 2008

PrivateLand CrownLands AllTenures

PercentageoftotalRRGSourcedfromTenure1

46% 54% 100%

EstimatedRevenuesforTenure

19,053,737 22,367,430 41,421,167

Estimatedcostsfortenure 13,840,638 16,008,722 29,849,360EstimatedValueAddedforTenure

5,213,099 6,358,709 11,571,807

Source: White (2006), State Forests NSW (2001, p.2) and table 2.6.1 above.1

As costs were provided in 2001, we assume that the percentage of resource harvested by tenure flows through to equal the samepercentage of gross revenue and attribute the same proportion of costs to this revenue. That is, costs are assumed to be 54% oftotal costs for RRG Harvested from Crown Lands and 46% of total costs for RRG harvested from private land. This is a crudemethod but is provided as a rough estimate at total industry revenue from all tenures.

2.7RRGForestry–TotalValueAddedTaking figuresfrom tables7 and25,wecan seethat thetotalvalueadded ofthe RRGindustry attributableto

accesstoRRGonCrownLandsis$7.3m. Thiscombinesthevalueaddedfiguresformill‐gateandforest‐gate. It

representstheprofitFNSWandRRGOperatorsachievethroughtheharvestingandprocessingofaround127,000

m3ofRRGfromapproximately4757haofStateForests.

Table 26: RRG Timber Industry Value Added - 2008

1

Forest-Gate Value Added – Crown Lands $943,000Mill-Gate Value Added - All Tenures $11,571,807Mill-Gate Value Added - Crown Lands $6,358,709Total Value Added - All Tenures $12,514,807Total Value Added - Crown Lands $7,301,709

Note: Forest-Gate value added for private land is not included as it is beyond the scope of this report. As 54% of RRG is sourcedfrom public lands, we could assume that forest-gate value added for private lands would be similar to the figure for state forests of$0.95m

The industry’s profitability seemsmarginal under theexisting arrangements, which, aswehave seen in earlier

sections,arealreadyslantedheavilyinitsfavour.FortheRRGindustrytocontinueusingpublicforeststheprofit

marginatthemillgateonstateownedtimberneedstoabsorbthelossesincurredatanefficientmarketpriceat

theforestgate,andstillprovidemillownerswithasuitablereturn.Themillprofitatthemillgateisestimatedto

be$6.36m.Theprofitattheforestgateisestimatedat$0.94m.Bothofthesecanbecombinedtogiveanetvalue

createdbythepublicRRGforestsof$7.3m. Thisnetvalueisthenreducedbyanyadditionalcostsnotincluded

anywhereelse.ThesecostsbeginwiththecostsingreenonTable10.Thesereducethevalueattheforestgate.

The correction of FNSW harvesting costs to reflect more likely commercial costswould see forest gate value

reducedtoalossof$1.8mandsooverallvalueaddedto$4.6m.Furtherreductionswouldberequiredtoinclude

othercostshighlightedintable10.




Forthemomentletusassumethatthevalueofthecombinedprofitofforestandmill‐gateactivitiessettlesatthe

higher figureof$7.3m,afterall costs areaccurately included, andassuming that transport andother costs are

adjustedtoeliminatethedistortionresultingfromresidualvaluepricing.Thetrueworthofthis‘investment’will

bedeterminedbythereturnoncapital–valueaddeddividedbythevalueofcapitalassetsofbothforestandmills.

Themillownersarepresumablysatisfiedwiththeirreturnbuttheinclusionof‘forestassets’evenifonlylimitedto

roadsislikelytoswingthereturnoninvestmenttothelowendofscale.Thiswouldmakethecombinedenterprise

‘uneconomic’i.e.itcannotcompetewithotherlikelyusesofcapital,forthesamerisk.

Thissuggeststhatthecombinedforestharvestingandmillbasedprocessingofstateownedtimberispotentiallya

net drain on the regional, state and national economy. State controlled forestry and timber production isdestroyingvalue,ratherthancreatingvalue.ItisexactlythispracticeofKremlinstyleeconomicsthatsentthe

formerSovietUnionintobankruptcy–divertingvaluableandscarcecapitalintoprojectsthatcannotproducea

goodreturnoninvestment.FinallythisleavesnoprofittocompensatetheNSWpublicforthedestructionoftheir

forests.ItisabitlikeallowingoildrillingontheGreatBarrierReefbutwithoutanyprospectofmakingmoney

beyondcostsandnoprospectofcompensationfordamagecaused.

2.8ChangesinRRGProductionInanearliersection,wesawthattheRRGindustryissubsidisedintheformofflawedroyaltycalculationmethods

anduncompensatedlossestonon‐usevaluesoftheRRGresource.EconomistsatLargehaveestimatedthetotal

subsidyrepresentedby this uncompensated lossof non‐usevaluesat $13.4m. Continuedsubsidies sustainthe

currentstructureoftheindustryandpreventitfromchanging.Itneedstochangeinlightofmarketrealities–

cheapsubstitutesexistformanyofitsproductssuchasstructuralandlandscapetimbersandsleepers.

Aconcerningtrendisdisplayedinthefollowinggraph.Weseethatresidues,mainlyfirewood,inorange,haveincreased absolutely and as a proportion ofthe totalRRGharvest. Lowerqualityex‐quota timber appears to

becoming,slowly,largerproportionofthetimbersupplyrelativetothehigherqualityquotatimbers.




Chart 1: Changes in RRG Production (1995 - 2006)

Source: White (2006)

Asshowninthetableabove,residuesharvestedhavechangedfromaround50,000m3in1995,toalmost70,000m3

for2006.HQsawlogsvolumeshavefluctuatedbetweenabout30,000and40,000m3andLQsawlogsbetween

20,000and30,000m3overthesameperiod.Threefactors,amongstothers,couldbepushingthistrendtowardsa

higherquantityoflowvalueresourcebeingharvested:

1. Privateproducerswilltendtofocusproductiononareaswiththegreatestreturnoncapital,notareasthatmakethemostrevenueoreventhosethatmakethehighestabsoluteprofit.CurrentlytheRRGtimber

industryisdominatedbyfixedmillsandfirewoodproducersintermsofharvestedvolumes.Forthefixed

millsespecially,gainingareturnonthiscapitalrequiresthelargevolumesofsubsidisedtimberthatthe

industryisaccustomedto.Assubstitutesforstructuraltimbersandotherhigh‐gradeusesenterthe

market,agreaterreturnoncapitalisobtainedfromlowervalueuses,i.e.firewood,whichhasthe

advantageofminimalcapitalexpenditure.

2. Duetotheroyaltycalculationmethodsbeing‘atstump’,thereissignificantincentiveandopportunityforsawmillerstoincorrectlyallocateharvestedtimberstotheresiduecategory.Thatis,theincreasein

residuesharvestedoverthistimecouldwellbereflectingactualincreasesinHQandLQharvests,which

arebeingreportedasresiduesduetomuchlowerroyaltyratesbeingappliedtoresidues(FNSWprovides

noindependentauditingthatweareawareof).Deliveredsales,orlogmerchandisingisonewayaround

thisandinvolvesForestsNSWarrangingfortheharvestinganddeliveryoftimbertothesawmillers,rather

thanthesawmillersthemselves.FNSWsaysthatitwill“pursuetheintroductionofdeliveredsales…where

appropriate.”andhighlightsseveralbenefitsofthisapproach(ForestsNSW,2008,p.38).

3. Assubsidisedloggingcontinues,qualitytimberisbecomingincreasinglydifficulttosource,withanoverall




decreaseinquality.AnecdotesfromlandscapegardenersinMelbournesuggestthatredgumsleeper

qualityhavedeclined,assuppliesofsuitablelogsarelowerthaninthepast.

Variousreviewsof theindustryhaveurgedittowardsvalue‐addingandinvestinginmorecapital (URS2001,BIS

Shrapnel2001).Several,thoughnotall,millshaveinvestedinplantsuchaskilndryingfacilitiesandaveneerplant.

Theseinvestments,however,arereliantonasustainablesupplyofhighvolume,subsidisedtimber.Arecentorder

ofworksfortheRRGforestryareastates“Highquality,largesawlogs,suitableforveneer,arescatteredunevenly

throughout the estate. If scheduled compartments don’t produce suitable quantities, wewill need to shift.”

(Rodda,2006)

Thus,weseethat,duetocurrentmanagementpoliciessurroundingRRGonCrownLands,subsidisedloggingis

skewing investment in themilling/processingindustry. Thesubsidised timber supply encourages investment in

plant that is reliant on high volumes and low prices for its return on capital, reinforcing the current industry

structure. Thisforcesthe industryto consumeits ownfuture, trying to increase volumesandmoving towards

lowervalue.

Agoodexampleofthis isthemove towardsmechanisedharvestingandpatch‐clearfelling. Large investmentin

machineryisrequired(attheexpenseoflabour)toprocesslargevolumesoftimber,producinglargervolumesof

residue.Thisprocessalsoaffectsthe forestsabilitytoregenerate,asRRGtendsto “coppice”– sproutoutagain

fromstumps‐producinggrowththatisonlysuitableforfirewood.(Tuck,2008)

Privateforestrygroup,AustralianForestGrowers,havealsonotedthat“alongstandingpre‐occupationwithlarge,

highquality and/or large diameter sawlogshas contributedto a lack of capacity inmost regionsfor processing

lowergradeorsmallerdiameterproducts.”TheAFGnotethatinvestmentincapitalthatutilisesawiderrangeof

productsis needed,but itis the subsidiseduse oflarge logs frompublic forests that entrenches this trendby

skewinginvestmentinlargescalemillingequipment.(AFG,2008)

IftheRRGindustryweretopaypricesfortimberinlinewiththerealcostsofproduction,theindustrycouldmove

towardssmallervolume,highervalueoperations.ThiswouldalsoencouragetheemergenceofafarmbasedRRG

industryintheregiontoprovidefirewoodandothertimberproducts.




2.9EmploymentSupportedbytheRRGTimberIndustry.

TheissueofemploymentisacommonthemeinthedebatearoundtheRRGindustry.However,informationabout

employmentintheindustryislimited.Themostrecentofficialestimatesuggeststhatthereare300jobs(Forests

NSW,2008)althoughnomethodology for this calculation is displayed. Earlier studiescommissionedby FNSW

arrived at a range between 314‐364 (URS, 2001 and BIS Shrapnel ForestryGroup, 2001) however both these

estimatesincludedseasonal,part‐timeandcasualjobs.

Asdiscussedinearliersections,itisimportanttorememberthatalmosthalftheRRGtimberindustryisbasedon

timber sourcedfromprivateland. Theemployment impactof theloggingof public forestsmust take this into

account.ThefollowingcalculationsapproximatethenumberofjobsinNSWthatarederivedfromtimberindustryaccesstoStateForests.

Table 27: Estimates of Employment Support by RRG Forestry – Top Down

FNSWestimateofRRGtimberindustryjobs 1 300

46%ofRRGissourcedfromprivateland 2,accountingfor142jobs ‐138

TotalNumberoftimberjobssupportedbyaccesstoRRGonCrownLands 162

Fixedmillsaccountforaround130jobs 3with20%ofallocationtofixedmillsgoingtofixedmillsinVictoria4

‐26

TotalNSWbasedjobssupportedbyaccesstoRRGonCrownLands 136

1Source: Forests NSW, 2008.2

See table 18

3URS (2001) and BIS Shrapnel Forestry Group(2001) 4White (2006)

Thisfigureisapproximatedbybottomupcalculationsusingestimatesofoperatornumbersandaverageemployees

peroperator.Thesecalculationsareshowninthetable28below.




Table 28: Estimates of Employment Support by RRG Forestry – Bottom Up

OperatorType

EstimatedAverageNumberofEmployees,

includingowner

operators1

Estimatednumberofoperators(NSW

only)

TotalEstimated

Jobs

Supported

FixedMills 21 4 84

MobileMills 3 10 30FirewoodProducers 1 30 30

Total 44 144Source: appendix 111

Estimates for number of employees come from State Forests NSW (2001)

These figures should be examined bearing inmind that they seem to include casual, part‐time and seasonal

positions. Theyalsoinclude administration,accounting andtradesstaffwitheasilytransferable skills. Someof

these jobs will also beattributable to timber sourced from private and public land in Victoria, that wouldbe

unaffectedbychangingindustryaccesstoNSWStateForests.

AswewillseeinPart3,thereisalsopotentialforexpansionoftimbersupplyfromplantationandfarmsourcesas

wellasotherindustriesthatcancreatejobsrequiringsimilarskillsetsandknowledge.

Finally,itshouldbenotedthatforthepurposesofsoundeconomicanalysissuchdataisirrelevant.Economicpolicy

should focus on themaximisationof total economicvaluewithin the contextof theoptimal balancebetween

financial and non‐financial values. When such wealth is appropriately distributed, more employment will be

created, and thosewho lose from economic change can be compensated. To follow the opposite path is to

condemnsocietytodecliningprosperityandultimatefailure.Asustainablesocietyisbasedoncompassionand

equityandhencetheproductionanddistributionofwealthshouldalwaysbedeliveredwithregardtobothpresent

andintergenerationalneeds.Anypolicywhichfailstodothisis failingtomaximise thetotaleconomicvalue to

bothcurrentandfutureAustralians.




Part3:AlternativeIndustriesandOpportunitiesintheRiverina ThissectionputstheRRGindustryintocontext,examiningindustriesandpartsoftheRiverinaeconomythatare

affectedbyorexistalongsidetheRRGtimberindustry.Webeginbydiscussingcloselyrelatedindustriesalsobased

ontreesandforests–plantationandfarmforestry,firewoodwoodlots,nationalparksandcarbonsequestration.

WethencomparetheRRGforestryindustrytobroaderregionaltourismdata.

3.1TheEconomicsoftheRegion

It is sometimes assumed that withoutcontinued government financial support to the timber industry, regional

economieswillbeatrisk. Inthissection,wewilllookatindustriesthatbenefitfromtheRRGresourceina non‐

extractivewayorwhicharenotdependentonsubsidisedaccesstopubliclyownedresources.Theseindustriesare

established(tourism)orshowpotentialforgrowthanddiversification(plantations,carbonsequestration,national

parks)whichcansupporttheRiverinaeconomywithoutadverseimpactstotheenvironmentandotherindustries.

3.2PlantationForestry/FarmForestry

Bothplantationandfarmforestry referto thegrowingoftreesforcommercialpurposesonprivateorprivately

managedland.Plantationstendtofocusexclusivelyonforestry,whilefarmforestryincorporatestimbergrowing

intoamorediverseagriculturalsystem.Inthissectionweusethetermfarmforestrytorefertofarmersgrowing

standsoftreesfortimberharvestingratherthanbroaderbenefitsincludingfirewood,shelter,treecropsetc,which

wewill refer to as agroforestry. Agroforestry,plantation forestry and farm forestryaredirectly andadversely

affectedbythecurrentstructureoftheRRGtimberindustry.

Plantationtimberisalargeandgrowingindustry,mostlygrowingtreesfortimberorpulp.Increasingtheareaof

commercial plantations is a stated goal of government and governments invest heavily in its promotion and

development(e.g.managedinvestmentschemes).

Plantationsare notwithout drawbacks. Concernshavebeen raisedabout their ecologicalimpacts,potential to

displaceotherindustriesandgovernmenttaxationincentives.However,ifmanagedandimplementedcarefully,

plantations have potential to contribute environmental benefits such as salinity mitigation, soil improvement,

carbonsequestrationandhabitatprovision(Plantations2020,2008b).Economicallyitisclearlydesirabletosource

timberfromprivatesupplierswhoshoulderthe riskontheirinvestmentandprovidearenewableresourcewith




environmentalbenefitswhilereducingextractionfromhigh‐valueconservationareasofpubliclands.

In 1997 Commonwealth, state and territory governments and industryformed a partnership called Plantations

2020. The stated aim of Plantations 2020 is to “enhance regional wealth creation and international

competitivenessthrougha sustainableincreaseinAustralia'splantation resources,basedonanotional targetof

treblingtheareaofcommercialtreecropsby2020.”(Plantations2020,2008)

MoneyfromthesaleofTelstrawasdirectedbythegovernmentthroughPlantations2020andNationalHeritage

Trust towardsinvestmentin farm forestry promotion andextension programs, including in theRiverina region.

MurrayRiverinaFarmForestry(MRFF)wasa“PrivateForestryDevelopmentCommittee”establishedto“enhance

the economic development potential of their region through increasing the commercial plantation estate”

(Plantations2020,2008a).Itranfrom1997–2003withfourstaffindifferentofficesaroundtheRiverina,and

duringthistimehelpedestablishover2000haofplantationforestryonprivateland(Scott,2008).

Despite this government support, private forest plantations and farm forestry face considerable obstacles.

Growersmust pay costsfor land,pay toprepare soil,plant trees, costsof establishment and managementof

plantations and consider the opportunity cost of other land uses. None of these costs are considered to be

incurredbytimberoperationsinStateForests,asdiscussedinPart2.Itisaconsiderablebarriertotheexpansion

ofthisindustryintheRiverinaregionthatitisforcedtocompeteagainstasupplierthatpaysnoneofthesecosts.

MurrayRiverinaFarmForestryhadinteractionwithFNSWandtimbermillmanagers.Whilemillsexpressedsome

willingnesstopayapremiumforplantation‐growntimber,itwasonaconditionthattimberwasstraighterandlogs

wereofhigherqualitythanthoseavailable tothemin theStateForests.Withcheap,public timberavailableto

them,thereislittleincentiveformillstoencouragetheplantationindustry.(Scott,2008).

SuchsubsidiestoforestryoperationsarenotuncommonandhavebeenthesubjectofstudiessuchasForestryand

Competition Policy (Marsden Jacob, 2001),whonoted that in all States of Australia, timber from State‐owned

establishednativeforestscompeteswithtimberfromplantations–butnotona levelplayingfield. InallStates,

theplayingfieldistiltedagainstplantationsandfarmforestryinfavourofexploitationofnativeforests.Thereport

outlined the key impacts of the lack of competitive neutrality between State‐managed forestry in established

forestsandprivateforestryactivitiesasitmakesprivateinvestmentinfarmforestryandplantationslessattractive:

‐distortstheallocationofwoodsourceswithintheforestsector;




‐encouragesgreaterexploitationofpublicnativeforestsineachState;‐undercutscompetingusesofpublicnativeforests;and‐worsensthestateoftheenvironmentandresourcebase.(MarsdenJacobAssociates,2001)

PlantationforestryinAustraliaisexpandingrapidly(PlantationsNortheast,2008)anddespitethepresenceofthe

subsidisedstateforestrysector,hasbeenmeetingwithsuccessesintheRiverinaregion(Tilbury,etal,2003).While

Tilburyetal,notedsuccesseswitharangeofdifferentspecies,MRFFplantedalmostexclusivelyhardwoodvarieties

fortimberproduction.ThisisincontrastwithplantationsAustralia‐wide,wheresoftwoodspeciesandhardwoods

for pulp are more common. One reason for MRFF’s focus on hardwood timber species was the presence of

sawmills. Being too farfrom ports andprocessing tomake pulp production viable, they chose timber species

becauseof theestablishedmillingfacilities. Thepresenceof themillsgivestheRiverina regionanadvantagein

establishingamoresustainableplantationtimberindustry.

3.3Firewood

Liketheplantation/farmforestryindustry,thereareconsiderableenvironmentalbenefitsderivedfromfirewood

plantations. Theycanprovideon‐farm benefitsthroughshelteringstockandcrops,help to reduce salinity and

watertableproblems,andimportantlytheycanprovideanalternative,sustainableincomestreamforlandholders.

AnearlierstudybyEconomistsat Large (Grey,1999) foundthatgrowingtreesforfirewoodcanbe profitableon

private land inVictoria. A compoundreturnrate of11%perhectareperyearwascalculated asthereturn to

potentialinvestors,dependingonvariousassumptions.

As discussed in an earlier section,large and increasing amountsof firewoodare produced in theRiverina and

largelyexportedtotheMelbournemarket(URS,2001).AsmuchofthisfirewoodissourcedfromStateForestsor

residuefromtimberoperationsinStateForests,italsoenjoysthepublicsubsidythatthetimberindustrydoes.Ineffect,Melbourneconsumersareenjoyingartificiallycheapfirewoodpricesattheexpenseofthenaturalcapitalof

theRiverina.

Indeed it couldbeargued that the firewood industryis potentiallyconsuming some ofthe timber thatwould

otherwise flow through to the timber industry. This re‐allocation is driven by the more attractive cash flow

opportunitiesof the firewoodmarketcompared with thetimbermarket. Noneof this changesthe underlying

trendtothepublicresourcebeingexhaustedatsometimeinthenottoodistantfuture.Thisexhaustioneventwill

extinguishthisindustryfortimberandeventuallyfirewoodharvestingonpublicland.Anydecisiontostopthis




trend toexhaustion, in thepublicpresentand future interest, is in thebest interests of theindustry andlocal

communitiesforthemtoensureintergenerationalequity.

RemovingthesubsidytotimberfromtheRRGtimberharvestingneednotreducetheexistingfirewoodindustry,or

thejobsitcreates,butwouldallowamorerealisticpricetobepaidforfirewood.Thiswouldencourageprivate

landholders toplantwoodlots for firewoodproduction. The short term process of plantingmore trees could

provide theindustry assistancefor those affected by lost harvestingopportunities until thenew resourceis on

stream. With the appropriate government adjustment program the industry could recover strongly from this

adjustmentandbuildasustainablefutureinthiscarbonconstrainedworld–freeofitsdependenceonthepublic

purseandpublicassets.

3.4NationalParksValues

As shownin Figure 1, RRG forests have a range ofeconomic use and non‐use values. Some ofthese can be

measuredwithmarketprices,whileothersrequiredifferentapproachestoestimatetheirvalue.ConvertingState

Foreststonationalparkswouldhaveanimpactonextractiveindustriessuchastimber,since,StateForestsaccount

for54%ofRRGharvested(seeTable18)and54%ofgrossrevenue(seeTable24)totheindustry.Non‐usevalues

andusevaluescanandshouldbemanagedsoastodeliveranoptimalcombinationfromanymixed‐useresource.

Insomecasesthismayrequirethecreationofanationalpark,whilstinothercasesdifferentmanagementregimes

maybeappropriate.

Whatisinappropriateisforaresourcetobemanagedinsuchamannerthatasubsetofvaluesareprivilegedover

theothervalues,wherethatisnoteconomicallyjustifiedbythebestinterestsofthesociety.Forexamplelogging

shouldnotdominateovertourismorviceversa.The‘value’productionofanareashouldbedeterminedbylong‐

termsustainability requirementsto protectintergenerational equity andshort‐term‘value’ requirementsof the

existingsociety(loggingversustourismversusecosystemservices).Inthiscaseweexaminethefinancialbenefitsflowingfromnationalparksinordertoplaceincontextthefinancialbenefitsthatpresentlyflowfromloggingthe

RRGforests.

Anumberofstudieshave indicated therolenationalparkscanplay ingeneratingeconomic activity inregional

economies, through both upfront establishment expenditure and ongoing tourism and park maintenance

expenditure. A study by the NSW National Parks and Wildlife Service (NSW NPWS, 1998) found that the

establishmentoftheCoolahTopsNationalParkinCentralNSWhada$2.7millioneffectonthelocaleconomy.The

workestablishingtheNationalPark,whichhadformerlybeenastatepark,employed17peoplein1996‐97and10




in1997‐98.ThesebenefitsaccruedduetoNPWSinvestmentinnewstructures,roads,facilitiesandstaff.While

thesebenefitsarelargelyfocusedontheinitialyearsofthenationalparksestablishment,NationalParksstatuscan

bringbenefitsintermsofincreasedvisitationincomparisontoStateParks.ForestsNSW(2008,p.39)statesthat

RRGforestsintheRiverinacurrentlyreceivearound500,000visitordaysperannum.Theissuewithregardtoany

changeinmanagementpoliciesforRRGistowhatextentthisfigurewillincreaseafterdeclarationofNationPark

status.Thisfigureshouldbeinterpretedwithsomecautionhoweverasitisnotsourcedanditisunclearwhetherit

appliestoalltenures,oronlyvisitationtoStateForests.

NSWNPWS(1998,Part2‐15)observedinthecaseoftheCoolahTopsNationalParkthat:

In1994‐95StateForestsofNSWestimatedtherewere2,000visitorstotheparkbeforeitwasreclassifiedasanationalpark.TheNPWSestimatedthattherewere4,000visitorstotheParkin1997‐98

Thestudyalsofoundthatsincebeingreclassifiedasanationalpark,CoolahTopswasattractingadifferentmixof

visitors.Previouslymostvisitorshadbeenfromlocalareasvisitingforthedayorcampingovernight,contributing

only small amounts to the Coolah economy. This changed to include 5% of visitors staying in commercial

accommodation,spendingconsiderablymorepervisitorday.Thestudyforecastthatthiswouldfurtherincreaseto

30%dayvisitors,50%campersand20%stayingincommercialaccommodation.

SimilarresultswereshownfromstudiesoftourismgrowthintheGrampians,Victoria.Sincebecominganational

parkin1984,touristnumbershavegreatlyincreased,particularlyamonginternationalvisitors(Wescott1992and

Wartook2008).Wescott(1992)highlightsthattourismgrowthwas:

morerapidafterthanbeforethecreationoftheGrampiansNationalPark.Thisimprovementwasbuiltonanalreadysolidbaseand soitis tempting tosuggestthat thedeclarationofanationalparkacceleratestherateofincrease. (Wescott,1992)

BothCoolahTopsandtheGrampianshavecommontraitswithapotentialnationalparkintheRiverina.Bothare

inland and a considerable distance from major cities,with high conservation values. Like NSWRiverina State

Forests, the Grampians had a history of tourism and other uses, including grazing, mining and timber. The

GrampiansNational Park, at 167,000ha (Wartook, 2008) is a similar size toNSWRRGState Forests that cover

around150,000ha(DPI,2008b).




TheOpportunityCostofLogging:PotentialTourismValues

A PriceWaterhouse Coopers study carriedout in2003 found that theGrampians NationalPark (GNP), through

directtourismexpenditure,contributesanestimatedannual$186.6milliontotheregionaleconomyandsupports

around2307tourismrelatedjobs(PWC,2003a).Thisfigurewascalculatedusingregionalvisitationdatamultiplied

throughaveragetourismexpendituredatatoarriveatanaverageyearlycontributiontotheregionaleconomyof

$231.3m.Thisfigurewasthenadjustedwith80%ofovernighttripsand100%ofdaytripsbeingattributedtothis

expenditurefigure,resultinginadirectexpenditureestimateof$186.6m.Giventhesimilarrespectivelandsizeof

theGrampiansNationalParktoRRGforestsinNSWandtheimportanceoftourismtotheregion(discussedbelow),

similaritiescanbedrawnfromthepotentialpromotionofthetourismbenefitsofRRGNativeForests.

Usingthe PWC studyas comparativeexampleto the potential for RRG NationalParks inthe Riverina, wecan

provideanindicativeestimateofthepotentialvalueofthecurrentloggingarea,ifitwereconvertedtoNational

Park.

TheGNPstudybyPriceWaterhouseCoopersestimatedthattheparkgenerated$186.6mindirectexpenditurefor

thelocaleconomyusing167,000hectares,(PWC,2003a).Thisequatesto$1116perhectareindirectexpenditure.

On thebasis that this benefit ‘transfers’ to theRRGforeststhis equates to approximately$101m ineconomic

activityforthelocalRiverinaeconomy.TheGNPcosts$11perhectareperyeartoadminister–wewillassumea

higherfigureof$34basedonothersourcesgiveninfootnotestotable29.Ourestimationsoftheprofileofthe

RRGtimberindustrybasedon accesstoRRGinStateForestssuggestthatmillingbusinessesearnapproximately

$22.2minrevenueandhavecostsofapproximately$16m(2008pricesfromTable25). Thisprovidesthemilling

industrywithaprofitmargin(orvalueadded)ofabout$6.2mperannum.Applyingasimilarrevenue/costratioto

theestimated$101mintourismrevenuegeneratedintheregionyieldsamarginof$28minprofitforthelocal

tourismindustry.Oncemanagementcostsfortheareaarefactoredin,wecanseeanetvalueaddedfromtourism

of$25m

Thetablebelowprovidesanestimateofthesizeofthepotentialforegonetourismopportunitycausedbyalogging

operationequivalenttoanaverage4757hectaresperyear,asdiscussedabove.




Table 29: Estimated National Park Opportunity Cost of RRG Areas Logged

AreasStillRecoveringfromLogging

Attributabletourismbenefitperhectare $1,116

Attributableparkmaintenanceperhectare 1 $34

RRGarealogged 95140ha

AverageHarvestcycle2 20years

TotalareaofRRG‘recovering’fromloggingandthusunavailabletotourism

90,383ha

Attributabletourismexpenditure $100,858,562

Costofparkmaintenance $3,234,760

NetvalueaddedbyTourismOperators 3 $28,240,397

Netvalueaddedbytourismoperatorslessthecostofparkadministration

$25,005,637

1PriceWaterhouse Coopers (2005, p. 51) results in a figure per hectare of $11. RACAC (2002, p.5) has a higher figure per hectare,

the highest being $30. Recent anecdotal evidence suggests that the average cost per hectare for NSW is $34.

2 Based on cycles of between 15 and 30 years given in VEAC(2006, p.221) 3

Assuming same profit margin as RRG operators in Table 24 - 2008 Prices (28%) Source: PriceWaterhouse Coopers (PWC, 2003a), EcoLarge analysisNOTE: Park maintenance is attributed to the area of hectares being harvested only, not to any total areas of potential newly createdNational Parks.

Thetableaboveshowsthat,inanyoneyear,forevery4757hectaresofharvestedRRGforest,assuminga20year

harvestcycle,thereisatleastanother90,000hectares(19times4757hectaresofforest)thatisrecoveringfrom

previousharvesting.Actualharvestingcyclesarelongerbutthe‘recovery’impliesarecoveryineffectivetourism

values–the20yearperiodisacrudeestimate–wesuspectthatactualrecoveryintourismvaluewouldtakemuch

longer.However,forillustration,thepointcanbemadewithanassumed20yearcycleinlossandrecoveryoftourismvalues.Thisreflectsthefactthat,allowingforharvestcyclesandtreere‐growth,anyareaharvestedwill

notbeavailablefortourism‘value’productionforatleast20years.Asaresultofthiscycle,eachyear,across,

95,140 hectares, National Park administration would have cost $3.2m and delivered $101m in gross tourism

expenditureresultingin$25mintotalnetvalueadded.

We can see that the potential annual tourism value of the area currently being logged is $101m in terms of

economicactivityand$25mintermsoftotalnetvalueadded.Parkmanagementattributabletothisareawould

incura costorfinanciallosstoNSWof$3.2mperannum.Giventotaleconomicvalueconsiderationsandvalues

discussed throughout thisreport, this would represent a small annual cost to theNSWpublicwith a hugenet

benefitinvaluecreationat boththefinancialandnon‐financiallevels.Whiletheactualsuccessof anyNational

Park depends on the ecological and cultural traits of a particular forest, RRG forests have traits that indicate

significant potential for National Park status. Transport linkages, other infrastructure and accommodation

availability arealso important to thesuccess ofnationalparksand tourismbutefforts to improvethesewould

represent an opportunity for renewal and diversity of activities in the region. The figures above need to be

considered in public policy decisions as they represent one of the opportunity costs of current forestry

managementpracticesforRRGresources,whereforestrypracticesconflictwithpotentialtourismvalues.




3.5CarbonMarketsMarketsfor carbonsequestration inAustralia lookset to increase followingAustralia’sratificationof theKyoto

Protocolandthegrowthin thevoluntaryoffsetmarket. Morerecentdevelopments includethereleaseofRoss

Garnaut’sdraftClimateChangereviewandthereleaseoftheFederalGovernment’sCarbonPollutionReduction

SchemeGreen Paper indicate that forestry will be part of a nation emissions tradingscheme (ETS) eventually.

ThesedevelopmentsareanopportunityfortheRiverina’seconomytotakeadvantageofitsforestsandagricultural

areasin asustainableway. Atpresenttheharvestingofforestscouldbe assumedtobeanetcarbonemissions

source.Thisrepresentsyetanotherunaccountedforcostofforestry.Eventuallyforestharvestingwillhavetopay

itsfullcostsincludingcarbonemissionsfromdeforestation.

Carbonmarketsworkbyallowingemittersofcarbontopayaproviderofcarbonsequestrationservicestooffset

thecarbonthattheyemit.Forexample,afactoryinSydneythatemitscarbonmightpayafarmerintheRiverinato

growtreesontheirbehalfsufficienttooffsetanamountofcarbonthefactoryemits.Thesecarbonoffsetscouldbe

createdthroughbothplantationsornativeforestrestoration.Currently,inAustralia,thereexistseveralcompanies

offeringvoluntaryoffsetting.AstudyofthesecompaniesconductedbyRMITin2007showedanaveragepriceper

tonneofcarbonsequesteredof$16(RibonandScott,2007).Alikelypricepertonneforcarbonunderanational

ETSisasyetunclearandwoulddependonanycapssetandpermitsallocated.

PlantationsandFarmForestry

Companies suchasCO2GroupLimitedarepayinglandholdersforlong‐termleasesofland,onwhichtheyplant

treesto storecarbon. CO2GroupplantMalleetreesonclearedland,inareaswithanaverageannualrainfallof

over275mm(CO2Group,2008).LargeareasoftheRiverinaaresuitable‐ Deniliquin’saverageannualrainfallis

over400mm‐andwithabundantclearedagriculturalland.Anecdotalevidencealsosuggeststhatfarmersinthe

regionarelookingat salt bushfor on farm plantations,whichcan have other benefitswhengrazingis allowed

including better tasting lamb. In such examples, carbon sequestration will not replace traditional production

processes, butdoessupplement themand allowsdiversificationof incomes for landholders in the region (DPI,

2008).

NativeForestRestoration

NativeForestssuchastheRRGforestsofNSWpresentanopportunitytotakepartin suchschemesandusethe

regeneration of land cleared before 1990 to generate and sell carbon credits. As highlighted by Hall (2001),

althoughplantationforestscanrapidlysequestercarbon,native forestshavea greaterabilityto retainbiomass,




which may be more important. Associated ecosystem services which reforestation offers, although hard to

quantify, would also be significant in terms of habitat and restoration of natural assets. To accurately value

reforestationofRRGhabitatslookingatthepotentialtosellcarboncredits,morerigorousecologicalandeconomic

analysisisrequired.WorkbyHassall&Associates(1998)providesagoodstart,butfurtherworkisneeded.

AlthoughforestrymayonlybeincludedinitiallyinanETSonanopt‐inbasis,forestswillcontinuetohavevalueas

“carbonsinks”involuntarymarketsforcarbonandwilleventuallybecoveredbyaNationalETS.Thelessonslearnt

fromvoluntarymarketsshouldbeappliedtotheeventualinclusionofforestryinanationalETStoensureoptimal

economicandecologicaloutcomes.




3.6TourismintheRiverina

Tourism–EconomicActivity

TourismisamajorcontributortoeconomicactivityintheNSWRiverina.AccordingtoTourismNSW,thetotalannualtourismexpenditurefortheregionis$797.5m.

Table 30: Tourism Expenditure in NSW Riverina1, (2007)

Visitors

TotalNumberofdays/nights

Avg.Spendpernight

TotalTouristSpend

RIVERINA

DomesticOvernight 787,000 2,259,000 $104.00 $234,936,000

InternationalOvernight UnreliableData

DomesticDayTrip 1,230,000 1,230,000 $126.00 $154,980,000

MURRAY DomesticOvernight 867,000 2,490,000 $126.00 $313,740,000

InternationalOvernight UnreliableData

DomesticDayTrip 802,000 802,000 $117.00 $93,834,000

TOTAL $797,490,000Source: Tourism NSW (2007 and 2007a)1Data for both the Riverina and Murray regions - as defined by Tourism NSW – is included because these regions include key RRG

Forestry areas covered in this report.

Thistableillustratesthemagnitudeofeconomicactivitythetourismindustryintheregiongeneratesandprovides

a goodcomparisonwith thevaluesthe RRGtimberindustry generates ascalculated inpart 2. Asouranalysisshowed (table 24), the economic activity generated by RRG forestry is approximately5%of the total tourism

expenditureintheregion.ThisindicatesthatRRGForestryactivitiescontributesasmallproportiontotheregional

grossoutput,particularlyincomparisontotourism.AreportfortheVictorianEnvironmentalAssessmentCouncil,

foundthattheentireRRGtimberindustryinVictoriarepresentedonly0.56%ofgrossregionaloutput(Gillespieet

al,2007p20).However,thesefiguresshouldbeunderstoodinthecontextofgeographicalboundaries.ForRRG

industries,thefocusisusuallyaroundafewkeymillingtowns,whereas,datafortourismwasacrossthebroader

Riverinaarea.Thatis,whiletheregionalaffectsofRRGindustriesmaybeminor,theyareoftenkeyindustriesin

thetownsinwhichtheyexist.

Tourism–SupportedEmployment

Lookingatthe District ofDeniliquinand theWakoolShire,we cansee that tourismis also a considerablelocal

employer. Surrounding districts where mill processing exists including theMurrumbidgee LGA have not been

includedduetolackofdata.




Table 31: Summary of Tourism Businesses in Deniliquin LGA

TourismBusinessesNumberofBusinesses

EstimatedNumberofemployees

OwnerOperated 129 129Micro(1‐4employees) 75 150

Small(5–19employees) 45 270

MediumandLarge(20ormoreemployees) 15 315

TOTAL 264 864Source: Tourism Research Australia, 2008a.Note: Low range figures for each size business were used so the real number of employees is likely to be higher.

Table 32: Summary of Tourism Businesses in Deniliquin LGA

TourismBusinessesNumberofBusinesses

EstimatedNumberofemployees

OwnerOperated 33 33

Micro(1‐4employees) 48 96

Small(5–19employees) 6 36

MediumandLarge(20ormoreemployees) 9 189

TOTAL 96 354Source: Tourism Research Australia, 2008b.Note: Low range figures for each size business were used so the real number of employees is likely to be higher.

Wecanseethat,betweenthesetwoLocalGovernmentAreas,employmentdirectlyrelatedtotourismequals1218

jobsandgreatlyexceedsthatofemploymentdirectlyrelatedtoaccesstostatesourcesofRRG,calculatedinthis

reportas136jobs.




Conclusions

Thepremiseofthisreport

TheclaimhasbeenmadethattimberandotherprimaryindustriesassociatedwithRRGforestscontribute$60mto

theregionaleconomy.Ourfindingssuggestthatthisclaimappearstobenumericallyincorrectandeconomically

misleading.Thisfigurefailstonoteisthatiftheindustrydidnotexist,theneteconomicoutcomefortheRRG

regionmightbeevenlargerthan$60m–i.e.theRRGindustryaspresentlystructured,couldbepreventingbetter

economicoutcomesforthelocalcommunity.Evidenceofprofitisnotproofthatthemostprofitablepathhasbeen

taken.Obviousrevenue/profitdoesnotmeanthehighestrevenue/mostprofitableoptionisobvious.

Inshort,thereporthasendeavouredtoinvestigatewhetherthealleged$60mgeneratedbypublicforestsisreal

and whether there is another allocation of the public resource (forests, money, public servants) that creates

greatervaluefortheNSWpublic

ValueofPrivatevsPublicForests

Ouranalysis revealsthat theRRG industrycomprisesbotha privateand apublic forest resource. Thepublicly

owned component comprises approximately half of the industry output at mill‐gate ($22.4m) and forest‐gate

($4.1m).Thegovernment’sown$60meconomicfigureincludesthecontributionofbothprivateandpublicforests.

Forthepurposesofthisreport,weareinterestedintheeconomicvaluesofthepublicforests.

RRGNativeForestsonprivatelandspresentadifferenteconomicproblem.Eachlandholderwilloperatetheirland

accordingtotheirownincentivestructure.Recentyearshaveseenprivatelandownersvaluenativetreesontheir

landfortheirnon‐usebenefitsandagrowingrecognitionofthecross‐boundaryimpactsoftreeclearance.Thishas

beguntoprovidearevisedincentiveframeworkforprivateownerstoprotectthevalueoftheirpropertiesand

theirneighbourhoodsbyvoluntarilyprotectingtheirtrees.

Inthepublicsector,theforestagencyhasenactedaforestmanagementsystemwhichisseeingthepublicforest

estatehollowedouttoanextentthatitisprobablyonlygoodtoproducefirewood,andeventhatisunderthreatfromoverextraction.

Thisreportdissects thealleged$60m economic value of theRRGforest industry. The$60m figure reportedly

includesthemill‐gatevalueandtheeconomicmultipliereffect.TheNSWpublichaveachoicetocontinuewiththe

forestloggingoperationsortoallocatetheforesttonon‐loggingactivity.Inthecontextofthatchoicethe$60m,to

theextentthatit includesmultipliers, isagrossover‐estimateifnotadistortionof theargument. If theannual

governmentexpenditurethatsupportstheforestindustryweredivertedto analternativeprogramitwouldstill

create multiplier effects. The economic multiplier effect is therefore an illegitimate economic tool in this

circumstance. Itcouldthereforebe statedthatFNSW isobstructingpublicpolicybynotprovidinga transparent




databreakdownonthesplitbetweenmillgatevalueandmultiplier.

Whatmatters is that forests are deployed to the use of highest value within amulti‐generational framework

(sustainability).

ThechoiceforNSWpolicymakers

InsimpletermstheNSWpublicfacesachoiceoveritsuseofRRGforests.Theappropriatechoiceistochoosethe

optionthatcreatesthegreatestvalueforthecommunity.Value,aswehaveexplainedisbothafinancialandnon‐

financial concept. The financial value generated byRRGforests is in twocomponents. The first component –

knownastheforest‐gate–istheprocessofgrowingandharvestingtreesanddeliveringthemtotheforest‐gate.

Atthispoint,allowingfortransportcoststhatarepartofthemill ’scoststructure,harvestedtimberispassedover

tothemillwhereitprocesseduntilittooispassedoutthemill‐gatetothenextstageofprocessing.Thealleged

$60m (net of the multiplier) is generated, according to FNSW,at the mill‐gate. Inotherwords this so called

economicvalueisacombinationofforestharvestingandmillprocessing.

ThechoicefacingNSWdecision‐makersisovertheuseandallocationoftheforest–whichendsattheforest‐gate.

The use ofthe$60m number conflatesthevalue attheforestgate and atthemill gate. Critical hereto NSW

citizensisthevaluecreatedattheforest‐gatefromtimberproduction.Thevalueatthemillstageisnotrelevantif

theproductionprocessattheforest‐gateisuneconomic.OnceagainFNSWisunwillingtoprovideabreakdownof

thealleged$60m(netofmultipliers)intoforestandmillcomponents.Onceagainthisisasignificantandsevere

hindrancetopublicpolicythatservestheinterestsofFNSWbypreventingscrutinyoftheirperformance.

PublicForestValues

Inouranalysiswehaveprovidedestimatesofthevalueof publicforestoutputattheforest‐gateandtimberoutput

atthemill‐gate. Theseestimatessuggestthatforestgateoutputis$4.1mwhilstmill‐gateoutputis,atitsmost

optimistic,about$22.4mingrosssalesrevenue.Thiscanbedisaggregated,afterindustrycosts,intoavalueadded

(orprofitmargin)atthemillgateofapproximately$6.4mand,$0.94mattheforestgate.Thesearegenerousand

conservativeestimatesthatsuggesttheactualcontributionoftheindustry(mill‐gate+forest‐gate)islessthanthe

combined$26.5mor$7.3mvalueadded.

This$7.3misvalueaddedaccruedatthemill‐gate(includingforestgatenetvalue).Ifthevalueaddedattheforest‐

gatecannotcompensateforthevalueslostinforestloggingthentheNSWcommunityisbetteroffifRRGforest

loggingceases.ThenetvalueaddedattheRRGforest‐gateisestimatedtobe$0.94m.Thisfigureisbasedon

operationalexpensesof$3.16manddoesnotincludecapitaldepreciationandotheritemsthatarenotavailable

fromtheagency.

Usingcostsofaprivatesectoragroforestryoperationwewereabletocalculatethat,onapertonneofwoodbasis,




thecostsoftheagencymayhavebeenunderstatedbyupto88%.OnthisbasisFNSWforestryoperationsinthe

Riverinawouldactuallybeoperatingatalossof$1.8m.ThisfindingiscorroboratedbyaProductivityCommission

reportthatfoundForestryGovernmentTradingEnterprisesarenotoperatingonacommerciallysustainablebasis.

Putsimply,forestryoperationsinNSWasawhole,andfortheRiverina,resultinnetvaluelossestoregionaland

stateeconomicwelfare.

TheUn‐levelPlayingField

Economictheoryandpracticeindicatethatoptimaloutcomesaremetwhenbusinessescompeteonafairandlevel

playing field. Anything else leads to poor economic outcomes. Private forest growers have to meet all the

requirementsofacommercialmarketplace–payforland,taxesandrates,marketratesforcapitaletc.TheFNSW

RRG forest operations do not appear to pay any of these imposts and yet still only manage very small andquestionableprofit. At thevery least,a level playingfieldneeds tobeestablishedwhichwould,based on the

analysisprovidedinthisreport,probablyresultinRRGtimberoperationshavinganegativeprofit–revealingthat

theyareunsustainableandrepresentapoorpolicydecisionbothenvironmentallyandfinancially.

Thelogicalcorollaryoflowpricesinthepublicforestsectoristhatinvestmentinprivatefarmforestry,mainlyinits

mostefficientformasintegratedtreeproductiononexistingclearedagriculturalland,issuppressed.Removingthe

competitivedeadweightofastatesubsidisednearmonopolywoulddoalottocreateapositiveenvironmentfor

privatesector investmenton regionalfarms. Theexistenceofthe statesectorhas,allotherthingsbeingequal,

negativelyimpactedonprivateinvestmentintreeproductionandhenceundercuttheresourcesecurityofthemill

operators.

Itisfeasibletodesigna government investmentprogramtargetingprivatelandholderstodevelopwoodlotsand

smallagroforestryoperations,whilstalsorestoringholdingsofRRGnativeforests.Suchagovernmentinvestment

programon privatelandwould providenet additionalbenefitsto thewidercommunity throughenvironmental

protection,possibleimprovedcarbonsinkfunctionality,addedtourismfromimprovedvisualandenvironmental

amenity,improvedagriculturaloutcomesthroughcarefulintegrationwithfarmoperationsandeventuallyprovide

farmerswithanadditionalsupplyoftreesforthemillindustry.

Theclosureoftheloss‐making,under‐pricedRRGforestwillresultinapriceincreaseforRRGtimberasunderpriced

timberisremovedfromthemarketdecreasingoverallsupply.Thiswillallowprivategrowerstoinvestwithgreater

certaintyofhigherprices.Allotherthingsbeingequal,theclosureofRRGpublicforestrywould,ironically,belikely

toleadtoanexpansionofprivateinvestmentintimberproductionintheRiverinaregion.Thisinvestmentwould

providethemillindustrywithapermanentsustainablebaseandguaranteeitsfutureinacarbonconstrainedworld

whereefficienttreeproductionwillberequired.

ThelandpresentlyavailablefortheRRGloggingwouldthenalsobecomeavailableforotheruses.Thenetresultis

thatNSWsociety,wouldbebetterofftothetuneof$17.7msimplybecausetheyknowthattheirforestsarefinally




nowbeingprotected.

OtherForestUsesCanProvideGreaterEconomicBenefits

UnderanefficienteconomicframeworkthatseekstomaximisethevaluereceivedbyNSWsociety,theRRGforests

wouldappeartobeuneconomicforloggingpurposes.Theforests,however,doservearangeofotherpurposes.

Alteringthemanagement regimesuch that itpursuesutilitymaximisationin a sustainablemannerwouldallow

otherusesoftheforeststobeconsideredonalevelplayingfield.Oneoftheseuses,tourism,generatesdirect

cashflowfortheregion.Anappropriatemanagementregimecouldstimulatethiscashflowevenfurther.

In this paper,we have demonstrated that other regions have increased tourismnumbers through a ‘branding

recognition’ofnationalparkstatus.ThisisapossibilityfortheRRGforests.Thevalueofthistourismprocessis

likelytogrowovertheyearsastheforestrecoversandthedemandfortourism(positivelycorrelatedwithrising

incomes)growseverstronger.

TheRRGforestsalreadyreceivevisitorswhoaremakinganeconomiccontributiontotheregion.Thelossofthe

forest results in this income being reduced. The cessation of logging would interrupt that pattern and likely

increasethe number of visitors. Furthermore, thedeclarationof national park status is also likely to increase

visitationandwithit,incometotheregion.

Itshouldalsobenotedthattourismandloggingarenotmutuallyexclusive.Theycurrentlyco‐exist–thekeypolicy

questionshouldbewhatisthechangeinvalueiftheloggingisreducedandthetourismpotentialincreased?Ifthis

wastoleadtoapositivevaluegainfromthepresentposition,thensuchanoutcomeislikelytobethepreferred

publicpolicyposition,allthingsbeingequal,ofanygovernmentlookingaftertheinterestsofsociety.

Extrapolating from theexperience ofother national parks, thearea ofRiverina RRGin State Forestswhich are

currently usedfor timberextraction couldbeexpectedto generatedirecttourism expenditure inthe regionof

$101m. Assuminga profitmarginof28%and adjusting forparkmanagement costs,this results inanetvalue

addedofapproximately$25mperannum.Thiscompareswiththecurrentannualvalueaddedattheforestgateof

$0.94mandthetotal,approximate,valueaddedoftheforest‐gateplusmill‐gatesectorsof$7.3mperannum.




Conclusion

Thereporthasdemonstratedthatthroughananalysisofthebestavailabledata,RRGloggingonpubliclandinthe

Riverinaisnottheoptimaleconomicoutcomefortheregionandthatthereareotheroptionsthatarelikelyto

createbettereconomicandsocialoutcomesfortheregion,whilstprotectingtheecologicalintegrityoftheforests.

Wewouldencourageagreatlyimprovedleveloftransparencybytheforestryagencyinorderthatafullandopen

discussioncanbehadaroundtheoptionsforforestmanagementintheRiverina.

Weconcludethattheweightofeconomicprosperity,socialandenvironmentalwellbeingisagainstacontinuation

ofloggingasitpresentlystandsintheRiverinaregion.




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Rrg Svftt 2008 Final Report

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