Devolving Forest Ownership in New Zealand: Processes, Issues and Outcomes
New Zealand Institute of Economic Research (Inc.)
Wellington, New Zealand
1987 to 1996 marked a decade of change for New Zealand's plantation forestry sector. The first visible change occurred when the government's forestry operations, run by the New Zealand Forest Service, were corporatized in 1987. However, the seeds of change were sown long before this. Indeed, the changes that took place could be regarded as a natural and logical evolution of forest management in New Zealand: as the industry grew from an "infant" in need of nurturing to a mature and competitive force, the need for state involvement diminished. Between 1990 and 1992 the government sold to the private sector over 350,000 ha of planted forests. The most recent chapter occurred only two years ago, in 1996, when the government sold its shares in the Forestry Corporation of New Zealand.
The main purposes of this paper are to trace the process of devolution, which in New Zealand's case is synonymous with privatization, discuss the policy intentions and results, and examine the issues and outcomes of devolution.
From 1919 to 1987, the government's forestry operations were run by a single agency the New Zealand Forest Service. The department's governing legislation of 1949 established that its primary objective was to produce and market forest products profitably. This was amended in 1976 to enable a "balanced approach" whereby, other factors were taken into consideration, including policies and directives to undertake afforestation in regions requiring economic development, employment provision, utilization of low productivity lands, meeting of planting targets, and environmental objectives.
During this period the government, through its direct and indirect involvement, laid the foundations of New Zealand forestry. By the mid-1980s a number of driving forces converged suggesting that it was time for the government to rethink how it managed its forest assets. Some of these forces included:
The decision to corporatize the commercial functions of the New Zealand Forest Service was made in September 1985. Procedural options were debated and in November of the same year the government determined that the New Zealand Forestry Corporation be formed and empowered to operate as a commercial enterprise.
It was further decided that the non-commercial functions of the New Zealand Forest Service be transferred to two new government departments (Figure 1), the Department of Conservation (which manages the state's natural forest estate) and the Ministry of Forestry (which had policy, forest health and protection, and forestry research functions). The roles of the Ministry of Forestry were transferred to the new Ministry of Agriculture and Forestry in 1997.
In April 1987, the New Zealand Forestry Corporation was formally established, together with eight other state-owned enterprises, as a limited liability company under the Companies Act. A clear commercial focus was regarded as a prerequisite for the New Zealand Forestry Corporation to compete effectively with the private sector. The principle objective of all state-owned enterprises was to operate as a successful business. Indeed, the New Zealand Forestry Corporation proved very successful in turning a loss-making government agency into a highly profitable corporate agency (see Figure 1).
Figure 1: Restructuring the government’s forestry functions in 1985
Commercial success, however, was not sufficient to embed the new institutional approach to managing the government's commercial interests in forestry. A number of considerations meant that change was just on the horizon, including:
When the government's commercial forestry operations were corporatized the intention was to transfer the forest assets from the government's books to that of the new state-owned enterprise. However, the values of the forests assets estimated by government officials and by the New Zealand Forestry Corporation respectively were widely divergent. And differences persisted. Officials ultimately suggested that a pragmatic way of resolving the dispute was to sell the assets.
Greater value-added processing was impeded by:
The sale of the government's planted forests was to overcome both impediments. It provided processors the opportunity to vertically integrate their activities backwards into wood production and, thereby, guaranteed their future raw material supply.
Despite its commercial success, many regarded the New Zealand Forestry Corporation as a hybrid between a government department and a full commercial entity. Caught between two worlds some believed that its structure would only convey the worst of both. Indeed, there were provisions in the State-Owned Enterprises Act that allowed for political interference: it granted shareholding ministers powers of intervention and access to all the information relating to the affairs of the corporation. While Ministers deliberately restrained from interfering on the political level, this did little to sway the perceptions that, because the New Zealand Forestry Corporation was state-owned, the government could intervene in the name of other than commercial objectives.
In its December 1987 Economic Statement, the government announced a fiscal strategy aimed at substantially reducing the level of public debt. In the same year approximately one fifth of government expenditure was needed to meet the annual servicing charge for official debts. The announced privatization was to use the sales' proceeds to repay overseas debts and, thereby reduce interest payments and future budget deficits. In the 1989 fiscal year emphasis was switched to the repayment of both domestic and overseas debt.
The 1988 budget established criteria for determining which government businesses would be sold:
The government's 1988 budget also announced that the commercial forest assets (550,000 ha of planted forests) were to be included among government businesses to be sold. The sale's objective was revenue maximization. A Forestry Working Group, comprising government officials and private sector consultants, was appointed shortly afterwards, and "...charged with making firm recommendations on... the optimal process to be used by the Crown in quitting its forestry assets". In its October 1988 report the Forestry Working Group advised that only the forests should be sold - and not the land on which they stood. It recommended that the forest be sold as transferable cutting and management rights and that the forest estate be split up into a number of sale parcels. The New Zealand Forestry Corporation was appointed the government's sales agent in November 1988.
The government's right to sell its forest assets was enabled by the passing of the Crown Forest Assets Act 1989. The government's forest estate was divided into 90 units ranging in size from 51 ha to 132,112 ha. The 1989 Act, amongst other aspects, established for each unit tradable property rights called Crown Forestry Licenses. The licenses contained individual terms and conditions of sale.
The government intended that sealed bids be accepted for individual units, or groups of units, with the combination of bids giving the best return deciding the forests allocation. The sales process was designed to allow bidders the flexibility to tailor their own packages, to attract a large number of bidders and, thereby, facilitate a competitive bidding process.
Tenders were called for in April 1990, but only for 66 of the 90 units originally meant for tender. Forests in the Bay of Plenty and Canterbury were removed from the public tendering process because of uncertainties involving contractual supplies to New Zealand's two major forestry companies, Tasman Pulp and Paper and Carter Holt Harvey respectively.
Bids closed on 4 July 1990. Eighty-two parties had registered, and about half of these were foreign based. However, of the 82, only two bids met the mark:
A substantial round of bids and negotiations followed. The New Zealand Forestry Corporation, the Treasury, and outside experts were involved in negotiations with potential buyers. As a result a further 175,676 ha of state forests were sold including the Hawkes Bay and Canterbury forests which were sold to Carter Holt Harvey, ending the legal disputes. The 1990 sales process grossed over one billion New Zealand dollars.
Bids received for many of the government's forest assets were not satisfactory. Fifty-five percent of the forest assets originally intended for sale remained unsold at the conclusion of the 1990/91 round of sales. Three new state-owned enterprises were established to take control of the unsold forest assets. These commenced operations on 1 December 1990. The New Zealand Forestry Corporation ceased to exist in its original form on 30 November 1990, but remained as a shell company to receive dividends from the new state-owned enterprises. Timberlands Bay of Plenty (later renamed the Forestry Corporation of New Zealand) was formed to take control of forests on the central North Island and the country's largest sawmill, Waipa. Subject to the resolution of contractual difficulties with respect to the supply from these forests, this state-owned enterprise remained on the government's sales agenda.
State-owned production forests on the West Coast were withdrawn from the sales agenda. Bids received did not reflect the true value of the forest resource. Timberlands West Coast was formed to manage these resources, which included 21,000 ha of natural forests. The remaining unsold forests became the responsibility of Timberlands New Zealand Limited (Figure 2). The next chapter in the privatization of New Zealand's state forest assets picks up from here.
Figure 2: Where the forests went
The government's intention to sell New Zealand Timberlands Ltd. was announced in 1991. The plantations managed by the state-owned enterprise totaled 109,000 ha (36 forests throughout the North and South Islands of New Zealand).
In announcing its decision, the government indicated that it would maintain a flexible sales approach. Bids for individual forests, regions of forests, and the entire planted forest estate managed by the state-owned enterprise would all be considered.
Two key changes in sales conditions were the inclusion of a replanting covenant, and five-year sales contracts to New Zealand Timberlands Ltd. existing clientele. The replanting condition applies unless the licensee wishes to use the land for an alternative sustainable purpose approved by the Crown.
Indicative bids were received in February 1992, and parties approved to enter due diligence were identified quickly. The tender was competitive with a healthy number of bids received in early April 1992. On the last day of April it was announced that New Zealand Timberlands Ltd. had been sold to ITT Rayonier New Zealand (now known as Rayonier New Zealand) for NZ$ 366 million. Some forests were excluded from the sale because of environmental concerns or grievances of New Zealand's indigenous people - the Maori.
In 1996 the Minister of Finance announced the government's intention to sell its shares in the Forestry Corporation of New Zealand. The Corporation's assets were Crown Forestry Licenses to 188,000 ha of planted forests in the central North Island, processing plants in various locations, a nursery and a seed orchard.
The resolution of the contractual supply dispute between the Forestry Corporation and Tasman Pulp and Paper towards the end of 1995 had enabled the government to consider its options in respect of the Corporation, including sale. Following the announcement to sell, potential bidders were faced with what ultimately became a three-step process.
The first step required them to pass a threshold of confidence that they planned to add value to the woodflows from the Corporation's forests. The means of holding the successful bidder to its claimed intentions was by making breaches known to the general public. Stricter controls risked limiting the successful bidders flexibility to respond to market changes, and were determined to be difficult to police.
Once past the threshold, step two was the tendering of closed bids. The sole criterion was price. A handful of large forestry companies and consortia submitted bids. However, as the strength of the bids was not as great as hoped, a third step was introduced into the sales process: bidders were asked to re-submit their bids.
In August 1996 it was announced that the Forestry Corporation had been sold to the Fletcher Challenge led consortium in a deal that valued the assets at NZ$ 2.026 billion. The other partners to the consortium were China International Trust and Investment Corporation (Citifor), and Brierley Investments.
The devolution , i.e. privatization, of New Zealand's state forest assets gave rise to a number of issues. These included:
The Treaty between the Crown and Maori signed in 1840 guarantees Maori ownership and governance of their land and other possessions. However, throughout New Zealand's history successive governments took land from the Maori for a variety of purposes and by a variety of means, some more questionable than others.
Recognizing this, in New Zealand's more recent history, legal and institutional mechanisms have been put in place to hear Maori grievances and work towards a resolution. There are an average 1.5 claims by Maori on the land in respect of the 90-odd forests owned by the state before 1990. Most forests on the North Island have claims against them - one has as many as 5 claims from different tribal groupings. All forests on the South Island have been subjected to claims.
Among other things, the Forestry Working Group of 1988, which informed the government's privatization process, was directed to analyze and make recommendations on how to preserve the rights of Maori, without compromising the government's objective of revenue maximization. Following consultations with representative Maori groups, the recommendations of the Working Group were to:
These recommendations were given legislative effect in the 1989 Crown Forest Assets Act. To date, only one claim has been fully resolved. The resolution sat largely outside the strategies contemplated in the legislation. Resolution strategies are being developed in respect of another two successful claims. Many more claims remain. There are concerns about the capacity of the Waitangi Tribunal to hear and rule on claims; there are issues about whether alternative resolution processes should be followed.
The New Zealand Forestry Corporation successfully turned the losses of its predecessor into profits (Figure 3). Despite this success, many felt that the profits could be higher still if the forest assets were owned by the private sector.
Figure 3: Turning losses into profits (in million NZ$)
Source: Kirkland (1996)
Prior to the sales, the New Zealand forestry industry was dominated by the government (which either owned or leased 52 percent of the forest estate) and a handful of large domestic corporates. Australian company Elders Resources NZFP was the only significant foreign investment in the industry (Figure 4).
Figure 4: Forest ownership in 1989 (based on a forest area of 1.2 million ha)
Source: Ministry of Forestry
As a result of the sales and subsequent private sector transactions, the government now owns less than 7 percent of the planted forest area. New foreign players have entered the industry. The first round of forest sales in 1990 and 1991 saw the entry of Asian investors, who today account for just over 12 percent of the forest estate. The second round of forest sales, International Paper's acquisition of a controlling interest in Carter Holt Harvey in 1995, and the recent sale of Nelson forests to Weyerhaeuser, has meant that United States investors now account for a third of the New Zealand forest estate (Figure 5).
Figure 5: Forest ownership in 1998 (based on a forest area of 1.5 million ha)
Source: Ministry of Forestry (1998)
Have these changes enhanced the competitiveness and profitability of forestry, as many of the proponents of change claimed it would? It is not easy to answer this question. However, the following graph helps to shed some light on this issue (Figure 6). The line resembles the rate of mark-up on input prices in forestry relative to the non-tradable sector. This is an internal rate of exchange that measures the relative ability of forestry to attract resources from other sectors of the New Zealand economy. Graphically, an upward movement represents a deterioration in competitiveness and, conversely, a downward movement represents an improvement.
Clearly forestry has improved its competitive position since the late 1980s, concurrent with the period of corporatization and privatization. However, to attribute this entirely to the two processes would be misleading. A key factor underlying the movements in the graph is the log price spike in 1993. Nonetheless, economic theory, which tells us that contestability increases as the number of players in the industry increases, suggests that we can reasonably ascribe part of these movements to devolution.
Figure 6: Competitiveness of forestry
Source: Malcolm 1996 (updated)
In 1987, when the New Zealand Forestry Corporation opened its doors, it was a much leaner organization than its predecessor. To improve labor efficiency, its deliberate strategy was to place heavy emphasis on contractors and cut back heavily on head office staff (Table 1).
Table 1: Employment changes
New Zealand Forest Service (1986)
New Zealand Forestry Corporation (1987)
Whether jobs have been gained or lost as a result of privatization is a debate that has generated more heat than light, which is compounded by a scarcity of empirical studies. Some jobs were simply transferred following acquisition, some new owners have reduced staff numbers in pursuit of labor efficiency gains, others have created new jobs as they diversified forestry and wood processing activities. To illustrate the murkiness of this issue, examples on the positive side include:
On the negative side of the ledger the Fletcher Challenge, Brierley Investments and Citifor consortium has rationalized its activities following its acquisition of Crown forest assets in the Bay of Plenty.
Whatever the net outcome, one should not place too much weight on its importance: forestry is not the fountain of jobs that many within New Zealand perceive it to be. The average number of persons employed in overseas-owned agriculture, forestry and fishing enterprises in New Zealand is 19. While this is certainly greater than an average of three for domestic enterprises in the same industries, it is a long way off the average for overseas-owned enterprises in the communication services industry, for example, which is more than 300 (Figure 7).
Furthermore, the larger numbers of people employed on average by overseas enterprises are insufficient to prove that privatization has led to net employment increases. In the case of forestry, at least, more plausible explanations include the larger sizes of overseas enterprises and that forestry contractors with profits below NZ$ 30,000 are excluded from the official statistics.
Figure 7: Average number of full time equivalent persons per economically significant enterprise
Source: Statistics New Zealand (1997)
When the government first announced its intentions to privatize its forest assets, there was a considerable debate regarding whether a condition of ownership should be the reforestation of logged areas.
The first round of sales in 1990/91 excluded any replanting requirements (unless conservation or other objectives deemed such necessary). The prevailing school of thought was that the new owners should be free to put the land to its most profitable use. Given the land was already in forests and, at the time, forestry was proving itself to be a profitable activity, reforestation and afforestation were expected to be attractive options. Furthermore, the government was concerned not to include any sale condition that could result in a discounted price for its assets.
By the second and third round of sales (in 1992 and 1996, respectively), the political sentiment had swayed. A condition of these sales was that the land be replanted unless the forest owner intended to convert the land to some other government approved sustainable use. This provision was not introduced because planting levels had declined, rather it was introduced to provide assurances to the advocates of reforestation. Such assurances were, arguably unnecessary as a range of factors (tax changes, forest product price increases, hype) culminated in the 1990s to encourage replanting and caused afforestation levels to surge to new historical heights (Figure 8).
Figure 8: Annual planting area (in ha)
Source: Ministry of Forestry (1998)
The New Zealand Forestry Corporation was constrained in its ability to process the wood derived from its forests. Some argued that its contractual supply arrangements with processors did not provide sufficient resource security to enable processors to expand their operations or establish new facilities. Privatization, many argued, would overcome both these impediments.
Others were not convinced. Independent processors were concerned that existing supply arrangements, however imperfect, would be threatened. Others still argued that the new owners would export logs to provide an immediate cashflow to cover their purchase costs and have little intention of processing the wood within New Zealand. The government paid increasing attention to these concerns with successive sales:
What has been the reality? All new forest owners have, or intend to, invest in value-added processing. This includes the establishment of an MDF plant by Rayonier New Zealand. This is significant, as when the company first brought forests it had no intention of processing; it was up-front about its plans to export logs. Of the NZ$ 1.6 billion of announced intentions to invest between 1990 and 2005, 90 percent is attributable to the purchasers of state forest assets.
Figure 9: Announced wood processing investment intentions (in New Zealand dollars millions)
Source: Ministry of Forestry (1998)
While processing intentions have picked up in the late 1980s, a large and increasing volume of logs continues to be exported (Figure 9). As New Zealand's wood supply grows, it is very likely that log exports will continue to increase. Between NZ$ 4 billion and NZ$ 6 billion has been estimated as the investment necessary to process the wood within New Zealand. Investment intentions are nowhere near these levels. The debate is continuing why this is so: is this the optimal market outcome, or are there market failures (such as investment information gaps or the like) standing in the way of more domestic processing?
Devolution, i.e. privatization, was a natural and logical change in the way New Zealand managed its planted forestry resources, consistent with the maturing of the industry. In some areas of the industry, however, different considerations have proved themselves to be prevailing. For example, the Crown continues to lease Maori land for wood production. Treaty partnership considerations explain its continued role in this respect. Changes in political sentiment and the commercial operating environment shaped outcomes, and include:
Brichfield, R. and I. Grant. 1993. Out of the Woods, GP Publications. Wellington.
Clarke, M. 1996. Corporatisation, Privatization and Beyond. Internal paper. Ministry of Forestry.
Clarke, M.. 1998. Foreign Direct Investment in New Zealand Forestry. Speech to the New Zealand Institute of Forestry Investment Conference. Wanganui. February.
Crown Forestry Rental Trust. 1997. Report to Appointors. Wellington.
Forestry Working Group. 1988. Sale of the Crown's Commercial Assets. Report of the Forestry Working group to the Minister of Finance and the Minister of State Owned Enterprises. October.
Malcolm, G. 1996. New Zealand real exchange rates. NZIER Working Paper, 96/14. Wellington.
Ministry of Forestry. 1995. Processing Investment Options in the New Zealand Forest Industry. Wellington.
Ministry of Forestry. Investment Update. various.
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Kirkland, A. 1996. A Century of State-Honed Enterprise: 100 years of State Plantation Forestry in New Zealand. unpublished draft.