MARY CLARKE
Senior Economist, New Zealand Institute of Economic
Research
The years from 1987 to 1996 marked a decade of change for New Zealand's plantation forestry sector.11 The first apparent change occurred in 1987 when the New Zealand Forest Service was dismantled and the government's commercial forestry operations were taken over by a State-run enterprise, the New Zealand Forestry Corporation. 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. The most recent stage of this evolution has been the privatization of New Zealand's forests. Between 1990 and 1992 the government sold to the private sector over 350 000 ha of planted forests. An additional 188 000 ha of government-owned forests were sold in 1996.
This article traces the process of privatization, discusses the policy intentions and results and examines the issues and outcomes.
From 1919 to April 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 objective was amended in 1976 to take other factors 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.
By the mid-1980s, a number of converging factors suggested that it was time for the government to rethink how it managed its forest assets.
– A surge in the supply of wood from the forests was forecast for the 1990s, and a more commercial operating environment was regarded as necessary to maximize returns; this would require downstream investments.
– The environmental movement was seeking to ensure that the government broadened its focus to consider not only wood supply, but also other aspects of sustainable management, including environmental issues.
– The government's economic policy was to deregulate industries and thereby to expose business enterprises to the pressures of a competitive environment for efficiency.
– As a subset of the above, government policy was to clarify organizational objectives and thereby enable transparency and accountability.
In 1985 the decision was made to corporatize the commercial functions of the New Zealand Forest Service, i.e. to transfer these functions to a State-run enterprise. Thus, in April 1987 the New Zealand Forestry Corporation was established as a limited liability company empowered to manage the government's commercial forestry operations (550 000 ha of forest plus sawmills, nurseries and other assets). The non-commercial functions of the Forest Service were transferred to two new government departments, the Department of Conservation (which would manage the State's natural forest estate) and the Ministry of Forestry (which would have 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.
The New Zealand Forestry Corporation was a much leaner organization than its predecessor. Some jobs were transferred to the newly established government departments; others were turned into positions for contractors as part of a strategy to improve labour efficiency; still others, particularly head office jobs, were lost.
The principle objective of the New Zealand Forestry Corporation, as with all State-owned enterprises, was to operate as a successful business. A clear commercial focus was regarded as a prerequisite to enable the corporation to compete effectively with the private sector.
Indeed, the New Zealand Forestry Corporation proved very successful in turning a loss-making government agency into a highly profitable corporate enterprise. No longer constrained by social and environmental objectives - which were now the domains of the newly established government departments - it focused on its profit objective.
Commercial success was not sufficient, however, to entrench the new institutional approach to managing the government's commercial interests in forestry. The following considerations suggested that further change was needed and that the answer would be to sell the government's forests.
Since 1984, New Zealand's programme of economic reform has been underpinned by a free market philosophy. Protectionism and regulation had dampened any need or incentive to be competitive. Exposing industries to the realities of the international marketplace forced New Zealand's business enterprises either to continuously seek to create anew and build on their existing competitive advantages, or to face ultimate demise. The programme of deregulation in forestry included the removal of price controls that had existed for some products, the adoption of a market pricing strategy for export logs from State forests, a scaling-down of tariffs and other constraints on the import of forest products, the establishment of a stand-alone, commercially oriented forest research institute, the commercialization of the State's planted forestry operations and, subsequently, the sale of the forest assets managed by these corporate bodies.
Within this wider programme of economic reform, in December 1987 the government announced a privatization strategy aimed at substantially reducing the level of public debt. The policy was to sell State-owned corporations to maximize revenue, unless there were good economic or social reasons to retain ownership. The 1988 budget established criteria for determining which government businesses would be sold (Clarke, 1996):
– the government would have to receive more for the sale of the business than it expected to receive if it retained ownership;
– the sale of any particular business would have to contribute to, and not impede, the social and economic objectives of government.
The 1988 budget included the commercial forest assets - 550 000 ha of planted forests - among the government businesses to be sold.
Despite its commercial success, many regarded the New Zealand Forestry Corporation as a hybrid between a government department and a full commercial entity. Some believed that its structure, caught between two worlds, would only convey the worst of both (Clarke, 1996). Indeed, provisions in the State-Owned Enterprises Act allowed for political interference: the act 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 perceptions that, because the New Zealand Forestry Corporation was State-owned, the government could intervene in the name of other than commercial objectives.
The New Zealand Forestry Corporation was constrained in its ability to process the wood derived from its forests. It was 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. Another impediment was the New Zealand Forestry Corporation's limited ability to raise capital and the requirement that any intended investment first received the approval of shareholding ministers. It was hoped that the privatization of the government's planted forests would overcome these impediments.
When the government's commercial forestry operations were corporatized, the intention was to transfer the forest assets from the government's books to those of the new State-owned enterprise. However, the government and the New Zealand Forestry Corporation came up with widely divergent estimates of the value of the forest assets (Kirkland, 1996). As the disagreement could not be resolved, officials ultimately suggested that a pragmatic way of resolving the dispute would be to sell the assets.
Shortly after the sale of forests was announced in 1988, a Forestry Working Group, comprising government officials and private-sector consultants, was appointed to recommend the optimal process for delivering the Crown of its forestry assets. The working group advised that only the forests should be sold, and not the land on which they stood. It recommended that the forests be sold as transferable cutting and management rights and that the forest estate be split up into a number of sale parcels (Forestry Working Group, 1988). The New Zealand Forestry Corporation was appointed the government's sales agent in November 1988.
The Crown Forest Assets Act 1989 established the government's right to sell its forest assets and divided the forest estate into 90 units ranging in size from 51 to 132 112 ha. Each unit was assigned tradable property rights called Crown Forestry Licenses containing individual terms and conditions of sale.
The government intended to accept sealed bids for individual units or groups of units. The combination of bids giving the best return would decide the forest 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 to facilitate a competitive bidding process.
Tenders for 66 of the 90 units were called for in April 1990. The remaining units were removed from the public tendering process because of uncertainties involving contractual supplies to New Zealand's two major forestry companies.
By the time bids closed in July 1990, 82 parties had registered. About half of these were foreign based. However, only two bids met the mark:
– 47 030 ha of forest were sold to New Zealand's Tasman Forestry Limited;
– 24 000 ha and a sawmill were sold to the Singaporean-Malaysian interest Ernslaw One Limited for the combined sum of NZ$364 million.12
A substantial round of bids and negotiations followed between potential buyers and the New Zealand Forestry Corporation, the Treasury and outside experts. As a result, a further 175 676 ha of State forests were sold, including some of the units previously removed from tender, whose sale ended the legal disputes.
The 1990 sales process grossed over NZ$1 000 million.
Three new State-owned enterprises were established to take control of the 55 percent of forest assets that remained unsold. These enterprises, which commenced operations in December 1990, were Timberlands Bay of Plenty (later renamed the Forestry Corporation of New Zealand), controlling 170 000 ha that remained on the government's sales agenda; Timberlands West Coast, managing 24 000 ha of natural forests which were withdrawn from the sales agenda; and New Zealand Timberlands Ltd, managing 109 000 ha in 36 forests throughout the North and South Islands. The New Zealand Forestry Corporation ceased to exist, but it remained as a shell company to receive dividends from the new State-owned enterprises.
The government's intention to sell New Zealand Timberlands was announced in 1991. 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.
In April 1992, it was announced that New Zealand Timberlands 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 (formerly Timberlands Bay of Plenty). The corporation's assets were Crown Forestry Licenses to planted forests which had expanded to 188 000 ha in the central region of North Island, processing plants in various locations, a nursery and a seed orchard.
A handful of large forestry companies and consortia submitted bids. The sole criterion was price. However, as the strength of the bids was not as great as hoped, bidders were asked to resubmit their bids. In August 1996 it was announced that the Forestry Corporation of New Zealand had been sold to a consortium led by Fletcher Challenge in a deal that valued the assets at NZ$2 026 million.
The privatization of New Zealand's State forest assets gave rise to a number of issues. The following are a handful of the more topical issues:
– What would be the best way to preserve the rights of New Zealand's indigenous people, the Maori, to reclaim land proved to be rightfully theirs?
– What would be the implications of the institutional changes for the competitiveness and profitability of forestry?
– How would jobs be affected?
– Would the new owners replant and expand plantations?
– Would privatization enable greater on-shore processing or further encourage log exports?
A treaty signed between the Crown and the Maori in 1840 guarantees the Maori ownership and governance of their land and other possessions. However, throughout New Zealand's history successive governments had taken land from the Maori for a variety of purposes and by a variety of means, some more questionable than others. There are now legal and institutional mechanisms for hearing Maori grievances and working towards their resolution.
The Maori have made claims against most forests on the North Island and all forests on the South Island. The 90-odd forests owned by the State before 1990 have been subjected more than 125 claims - an average of 1.5 claims each (Crown Forestry Rental Trust, 1997). One forest has as many as five claims from different tribal groupings.
The Forestry Working Group of 1988 which informed the government's privatization process was also directed to analyse how to preserve the rights of the Maori without compromising the government's objective of revenue maximization. Following consultations with representative Maori groups, the Working Group recommended (Forestry Working Group, 1988) that the government:
– sell the trees and not the land;
– charge a land rent and hold proceeds in trust for whomever the Waitangi Tribunal might rule to be the ultimate owner of the land;
– provide for the gradual return of land to successful Maori claimants as the existing tree crop is harvested;
– compensate the Maori for the lost opportunity to utilize their land, as they see fit.
These recommendations were given legislative effect in the 1989 Crown Forest Assets Act. To date, only one claim has been fully resolved, largely using strategies not contemplated in the legislation. Resolution strategies are being developed in respect of another two successful claims. There are concerns about the capacity of the Waitangi Tribunal to hear and rule on claims, and controversy about whether alternative resolution processes should be followed.
Prior to the forest 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 corporations. An Australian company held the only significant foreign investment in the industry.
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 1990-1991 saw the entry of Asian investors, who today account for just over 12 percent of the forest estate. After the second round of sales, United States investors now account for one-third of the New Zealand forest estate.
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. The rate of mark-up on input prices in forestry relative to the non-tradable sector 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 as the mark-up on input prices in forestry has narrowed relative to those in the non-tradable goods sector, enticing resources to move out of the former sector and into the latter. Conversely, a downward movement represents an improvement, as forestry has become more profitable relative to the non-tradable goods sector.
Forestry has clearly 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 movement in the graph is the log price spike in 1993. Nonetheless, economic theory, which states that contestability increases as the number of players in the industry increases, suggests that part of this movement can reasonably be ascribed to devolution.
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 reduced staff numbers in pursuit of labour efficiency gains; others have created new jobs as they diversified forestry and wood processing activities. Whatever the net outcome, its importance should not be exaggerated: forestry is not the fountain of jobs that many within New Zealand perceive it to be.
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 1990-1991 excluded any replanting requirements (unless conservation or other objectives deemed it necessary). The prevailing school of thought was that the new owners should be free to put the land to its most profitable use (Forestry Working Group, 1988). Given that the land was already in forests and since, at the time, forestry was 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 time of the 1992 and 1996 sales, the political sentiment had swayed. A condition of these later 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, as they had not. Rather it was to provide assurances to the advocates of reforestation. Such assurances were arguably unnecessary, as several factors - tax changes, forest product price increases, publicity - were encouraging replanting in the 1990s and bringing afforestation levels to historical highs.
As discussed above, one of the goals of privatization was to enable growth in processing industries. Some observers, however, were not convinced that it would have this outcome. Independent processors were concerned that existing supply arrangements, however imperfect, would be threatened. Others argued that the new owners would export logs to provide an immediate cash flow to cover their purchase costs and that they would have little intention of processing the wood within New Zealand.
The government paid increasing attention to these concerns with successive sales:
– The 1990-1991 sales did not have as conditions any supply constraints or processing requirements. As with replanting, it was argued that the purchasers should be free to put the resource to the uses they judged to be most profitable.
– When New Zealand Timberlands was sold in 1992, the purchaser was required to honour five-year supply arrangements with existing clients.
– When the Forestry Corporation of New Zealand was sold in 1996, the sales process required potential bidders first to demonstrate their intention to add value to the resource within New Zealand. Public pressure was judged sufficient to hold the new owner to its claimed intentions: bidders were warned that any breach would be made known to the general public.
What has been the reality? All new forest owners have invested, or intend to invest, in value-added processing. Rayonier New Zealand, for example, has established an MDF plant. This is significant, as when the company first bought forests it had no intention to engage in processing; it was open about its plans to export logs. Of the NZ$1 600 million of intended investments in the period 1990 to 2005, 90 percent is attributable to the purchasers of State forest assets (Ministry of Forestry, various years).
While processing increased in the late 1980s, a large and increasing volume of logs continues to be exported. As New Zealand's wood supply grows, it is very likely that log exports will continue to increase. The investment necessary to process the wood within New Zealand has been estimated at NZ$4 000 million to NZ$6 000 million (Ministry of Forestry, 1995). Investment intentions are nowhere near these levels. The debate continues as to why this is so: is this the optimal market outcome, or are there market failures (such as investment information gaps) standing in the way of more domestic processing?
Privatization was a natural and logical change in the way New Zealand managed its planted forestry resources, consistent with the maturing of the industry. Changes in political sentiment and the commercial operating environment have shaped the outcomes:
– The right of New Zealand's indigenous people to claim land that is rightfully theirs is preserved in legislation. However, the process of advancing these rights has been slow to develop.
– The profitability and competitiveness of forestry has been positively influenced. Devolution can claim part, but certainly not all, of the credit for this.
– Whether devolution has led to a net gain or loss in employment levels remains unclear. However, given the very low labour intensity of forestry in New Zealand, this is more of a perceived than real issue.
– Market fundamentals rather than policy prescriptions have seen investment in afforestation surge to new historical highs.
– On-shore processing has been facilitated. However, the level of investment is a long way from the supply-determined potential. Whether it accords with the market potential is debatable.
Brown, C.L. & Valentine, J. 1994. The process and implications of privatization for forestry institutions: focus on New Zealand. Unasylva, 178: 11-19.
Clarke, M. 1996. Corporatization, privatization and beyond. Wellington, New Zealand, Ministry of Forestry (Internal paper).
Clarke, M. 1998. Foreign direct investment in New Zealand forestry. Speech to the New Zealand Institute of Forestry Investment Conference, Wanganui, New Zealand, February.
Crown Forestry Rental Trust. 1997. Report to Appointors. Wellington, New Zealand.
Forestry Working Group. 1988. Sale of the Crown's commercial assets. Report to the Minister of Finance and the Minister of State-Owned Enterprises. Wellington, New Zealand.
Kirkland, A. 1996. A century of state-owned enterprise: 100 years of State plantation forestry in New Zealand (Unpublished draft).
Ministry of Forestry. 1995. Processing investment options in the New Zealand forest industry. Wellington, New Zealand.
Ministry of Forestry. Various years. Investment
Update.
JAMES GRIFFITHS
Chief Executive, New Zealand Forest Industries
Council
In 1984, the Government's influence on the economy was all-pervasive; there were 400 Acts of Parliament and 1 000 associated regulations with potential regulatory effects, and 127 tribunals and 400 official advisory committees and boards strongly influenced the running of many commercial enterprises. Government influence in the forest industry was especially strong, through ownership of half the exotic plantation resource, subsidies, incentives, regulations, import controls and tariffs; there was as a result little competition, a cosy environment, and a static and narrow view of production, investment, innovation and marketing.
Economy-wide reforms included:
– floating the currency, and de-regulating financial markets;
– the labour market, especially the Employment Contracts Act;
– transport - road, rail and ports;
– energy, especially electricity and oil;
– open international investment regime.
In addition, some reforms related particularly to the sector:
– privatization of the plantation resource through international tender (in 1989/90);
– forestry taxation;
– removal of protective barriers (import licensing and tariffs).
These reforms have had a positive effect on the business environment in general, through:
– Improved global competitiveness; the Swiss-based World Economic Forum ranked New Zealand fifth of 53 countries in 1997. By 1999, however, the Forum dropped New Zealand's ranking to 13th place because of a lack of progress on further economic reforms.
– A low inflationary environment; one of the lowest inflation rates in the OECD in 1998, and below the OECD average 1991-98.
– Lower transport costs; road and rail charges have dropped by half since 1984, and New Zealand now has the lowest port charges for log exports.
– A more efficient labour market; labour costs dropped 30 percent, 1992-98, and are below 1984 levels, while labour costs in other countries are increasing.
– Competitive energy pricing; electricity costs are now at the lower end of the international range, coal and gas in the middle.
– Internationalization of the forest industry with investors from the United States, Japan, China, Malaysia, China Hong Kong and Indonesia.
Figure 1: Port charges (including marshalling and stevedoring)
Figure 2: International labour cost comparisons, 1997
Major rationalization of the forestry industry took place in response to the new competitive environment. There were mill closures and job losses. Short-term costs were adversely affected by the volatility of the dollar. But productivity improved, and investment began to flow back into the industry by 1992/93.
Over the past 15 years, the forest industry has increased significantly in size. From 1990 to 1998, NZ$2.2 billion was invested in expanding existing or developing new processing facilities. During the same period, the size of the plantation resource increased from 1.2 to 1.7 million ha.
Overall contribution to New Zealand's economy has, however, been uneven with forestry and logging, and pulp and paper maintaining their relative positions, while wood and wood products have not kept up with the pace of expansion in the economy. The industry's contribution to GDP is around 4 percent.
Forest product trade has increased since 1984; export value grew fourfold (to NZ$2.6 billion) 1984-96, while contribution to total merchandise trade rose from 7.8 percent to 13.1 percent. This is equivalent to an annual growth rate of 14 percent. A slight decline since then is attributable to external market conditions, not erosion of competitiveness, half since 1984, and New Zealand now has the lowest port charges for log exports.
Over the same period New Zealand's share of global forestry trade has grown from 0.7 percent to 1.1 percent; in the Asia-Pacific region the figures are 6.6 percent to 8.8 percent, though the Asian crisis has produced a recent slight decline. The prospects for a new peak are good as the Asian economies recover, and currency advantages are realized. However, the export product mix has changed - logs, for example, are up from 3 percent to 14 percent, 1984-97, a trend that will have to reverse to enhance overall forestry contribution to the economy. The export share of pulp and paper has fallen, and there has been a rise in that share of panels, and to some extent lumber; the diversification of product mix towards more processing is progressing, though at a slow pace.
Figure 3: New Zealand's forestry trade
Figure 4: New Zealand's export product mix
Statistics are incomplete, but the number of export markets for lumber has increased from two (Australia and Japan) in 1984, to seven in 1999. Greatest development has been in the United States and Taiwanese market, 37 percent of our lumber exports by value in 1999.
The diversification of markets for the forest industry as a whole, however, is less impressive; from 1989 to 1999, our dependence on three markets (Australia, Japan and Korea) remained relatively constant.
Figure 5: New Zealand's major lumber markets
Productivity has improved considerably (65 percent in sawmilling 1988-97, and 75 percent in paper manufacturing 1987-97), largely because of significantly increased operational flexibility based on the Employment Contracts Act (introduced in 1991). Gains have slowed since 1992, however, and the next step in productivity growth will have to come from investment in new plant and machinery.
Figure 6: Labour productivity in paper mills
Energy intensities per unit have fallen (13 percent for lumber and 45 percent for panel processing, 1987-97); the actual reduction may be greater because of the change in product mix - smaller-dimension timber requires more energy per cubic metre than larger.
Conversion efficiency has improved; wood recovery in lumber processing is up by 6.7 percent points, a 14 percent increase, 1984-97.
Figure 7: New Zealand Sawmill Conversion Efficiency
The competitive position of forestry and logging improved significantly during the period 1984-93; since 1993 there has been a slight erosion because of the decline in log prices.
From 1984 to 1988, deregulation adversely affected the competitive position of wood and wood products. There have been improvements since 1992, but the index is under pressure from higher cost logs.
In paper, printing and packaging, early gains appear to have been lost, but deregulation has had a positive effect on the cost side, as companies have gained better control of their cost structure.
Overall, deregulation has enhanced the competitiveness of the forest industry, particularly from the cost perspective. The greatest gains are in forestry and logging, because New Zealand has a competitive advantage in plantation forestry.
Rationalization was hastened in the late 1980s by the downturn in the Australian market and the strengthening dollar, but production began a slow recovery in 1989 and by 1997 both production and exports recovered to be significantly higher. The industry eliminated uneconomical capacity, while contending with log prices 40 percent higher than in 1989. The improved efficiency led to improving international competitiveness.
The industry began in the 1980s, and was able to take advantage of the new efficiencies and expand to become an international leader. Subsequent over-investment and over-supply around the Pacific Rim, and the Asian crisis, have reduced production, but the medium-term outlook is good as the Asian economies recover, particularly as radiata pine MDF is considered a premium product.
The industry responded to the removal of protection by rationalizing its core business by acquisitions and mergers, diversifying overseas, substantially reducing its range of products, and exploiting the advantages inherent in radiata pine fibre.
Nevertheless, global over-capacity led to declining rates of return worldwide, and New Zealand export increases 1984-97 did not keep pace with increased production, though there are signs of recent improvement. The Asian crisis may have forced the global industry to address the over-capacity problem, and with demand forecasts remaining positive, the New Zealand industry is well poised to capitalize on opportunities.
In 1989 the resource was dominated by the State and a few large companies, a decade later ownership was dispersed, and two-thirds of the estate was owned/managed by internationalized firms. While it is not possible to quantify how privatization increased competitiveness, it did create a market for plantation forests, and transform New Zealand forestry into a globalized industry through new inflows of capital, technology, management expertise, as well as enhanced distribution and export market linkages. Clearly privatization has also removed New Zealand Government and taxpayer exposure to the intensely competitive global forest products market and allowed the repayment of national debt.
New planting slowed in the early stages of deregulation in response to privatization and changes of ownership, the withdrawal of subsidies, and an unfavourable tax regime (1986).
It recovered after a change in tax law (1992), and the new planting boom is market-driven and unsubsidized; small forest growers account for 70-80 percent of new plantings. Over the past four to five years average new plantings have been between 70 000 ha and 75 000 ha per annum.
In the mid-1980s, log exports were less than 5 percent of total roundwood production, by 1999 they had risen to 18 percent. Contributing factors were a shortage of investment funds after the purchases from the State, the need to rely on revenue from log exports to fund processing expansions and major company restructuring, the maturing profile of the resource, the log price `spike', and most recently, delays to investment in new processing brought about by the Asian crisis.
Low import tariffs for forestry commodities in markets like Japan, China, India and Korea ensure that logs and other items like wood pulp and newsprint have developed as significant proportions of New Zealand's total production and exports. Higher tariffs (15-50 percent) for value added products in many Asian economies, as well as non-tariff measures such a prescriptive building codes, continues to distort the development of further on-shore processing and export mix. Achieving trade liberalization, particularly in Asian-Pacific markets, is a critical development need of the industry and will be an important determinant of further investment in on-shore processing.
The economic reforms have produced an economic platform, which is favourable for the development of an internationally competitive forest products manufacturing and exporting industry. The costs of key inputs, such as energy, labour and transport now compare favourably with those in other countries, and the privatization of State forest assets has turned New Zealand forestry into one of the most globalized industries in the world.
Internal competitiveness, labour productivity, and contribution to regional trade are all up, but perhaps the greatest benefits come from the removal of market distortions so that domestic producers have been able to take a rational approach to capacity growth in a mature industry. This has meant that the sector has not taken part in the international rush to build new capacity. This factor, plus the enhanced distribution and marketing linkages of the industry's internationalized companies, has minimized the impact of the Asian crisis.
While the industry is mature and the opportunities for spectacular growth are not necessarily comparable to high technology or services sectors, a number of factors favour the New Zealand forest industry:
– The restructuring and rationalization have placed the domestic industry in good shape to progress to the next development phase as a location for internationally competitive forest products manufacturing.
– Proximity to Asia - the world's fastest growing forest product markets. Over the medium-term prospects for the Asian economy are good, with consequent market opportunities.
– The Asian crisis and environmental concerns are likely to force governments to adopt more rational development programmes, reducing over-capacity of competitor suppliers.
– There is a growing international recognition of the need for plantation, as opposed to natural, forest resources. This means demand for New Zealand's plantation-based forest industry services and technology will also increase.
In this kind of international environment, New Zealand's forest industry should become an increasingly important contributor to New Zealand's economic growth and a significant force in the regional forest product markets providing:
– Progress is made on improving the international competitiveness of New Zealand manufacturing.
– Trade liberalization developments within APEC and WTO have real impact over the next five years, thereby improving opportunities for value-added processing and new products and technology development in New Zealand.
11 Editor's note: Readers are referred to an article by C.L. Brown and J. Valentine in Unasylva 178 (1994), "The process and implications of privatization for forestry institutions: Focus on New Zealand" for details on the earlier stages of the privatization.
12 NZ$ 1.92 = USD 1.00 (December 1998)
13 Forest Research Executive Brief No. 8, September 1999. Summary of a report prepared by Dennis Lee for the New Zealand Forest Industries Council.