VicForest closed its doors on 30 June. Most people are in no doubt there will be efforts to reopen logging in the future so it’s highly instructive to understand what happened and how the crew that want to reopen forestry mucked up, says Michael Spencer is this must read long read.
VicForest, the Victorian government’s logging and wood sales business officially closed its doors on 30 June ending a 20 year experiment with a market-based approach to logging of state forests.
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Successive governments allowed timber in state forests to be run down. The forests ran out of accessible legally harvestable wood and the government lost interest in throwing good money after bad to protect a shrinking number of jobs.
VicForests knew it was out of wood more than a decade ago. But contractual obligations and logging industry pressure kept it going, to keep the cheap wood from public forests flowing even if it meant taking from other forest users.
Even as legislation to remove VicForests from the statute books was going through parliament, MPs were still jumping to their feet proclaiming that logging state forests was “sustainable”; a victim of “treachery” and caving-in to environmentalists.
As much as this argument suits various protagonists, it was a failure of management by successive governments and the inability of public policy to withstand the search for private profit from public goods – a classic tragedy of the commons.
Forestry politics trumps good policy
The idea that markets could manage forests better than government agencies was formed at the height of Australia’s love affair with neoliberal New Public Sector Management, at the turn of the century.
VicForests foresters probably just did what they thought the legislation asked them to do, cut down trees and flog the wood. But they shouldn’t get off too lightly
In theory, it could have worked but the institutional momentum of the logging industry ploughed right through it or, as then chief executive officer of VicForests told me in an interview a few years ago, the market approach is “totally checkmated by the politics of forestry”.
VicForests inherited a culture developed over more than a century by both its customers and the foresters who were drawn to the promise of an independent, market-based company managing forests professionally for wood production.
But foresters weren’t the only culprits. Customers behave as customers do and VicForests foresters probably just did what they thought the legislation asked them to do, cut down trees and flog the wood. But they shouldn’t get off too lightly.
There is another group that also needs to take responsibility; public servants who were supposed to be overseeing the forest assets, auditors who were supposed to audit the books and the ministers who continually wound back controls and requirements.
The onslaught that never ended
The “great onslaught of the forests” started in the gold rushes of the 1850s. By the turn of the 20th century, forestry in Victoria was still described as being in a backward state.
An inquiry in 1895 found the reasons “were political and centre on the disregard for the general public weal where this clashes with the monetary profits of individuals and classes who can exert a direct parliamentary influence.”
Things did start to change in the early years of the 20th century with acceptance of the need for a professional forestry service, built on legislation, to exercise control and management “of the immensely valuable property” in the forest domain.
The Forests Commission that emerged built a powerful culture. Camaraderie among foresters set them apart; they ran their own school, their own journal and, those trained in the school ran the commission – generally well – at arm’s length from politicians.
Foresters linked themselves to the economic development agenda of the 20th century. Post-war demand for wood saw more than 300 mills in Victoria harvesting millions of tonnes despite the 1939 Black Friday bushfires that devastated state forests.
Modernisation changed the relationship between foresters and forests. Advances in technology were part of this but an important development was the adaptation of the paper-making industry to the Australian eucalypt species.
What had previously been waste or residual became a valuable commodity as wood chips. Forests could be clear-felled, and value realised through integrated pulp and saw log harvesting. Clear felling became standard practice leaving large, denuded tracts.
International demand grew and soon Australia was exporting eucalypt chips to Japan. At the same time, efforts to expand Australia’s forest resource through the development of pine plantations became another driver for clear-fell of native forests.
Forest conflict
These scars in the forest became the focus for emerging environmental campaigns that valued forests for more than woodchips. Environmentalists questioned the competence of the foresters and their commitment to woodchip export projects.
Environmentalists were treated contemptuously by foresters, Peter Greig, himself a forester argued; as a “faction without substantive interest in forest resources, but also a city culture, undisciplined and impractical in the serious business of utilising forest resource”.
Under attack, foresters moved from being protectors of the forests to agents of industrial wood production.
Institute of Foresters (IFA) President Wallace told members in 1971, “we must be prepared at all times not only to defend the commercial use of this national asset but to explain in simple language the sustained yield principle under which we operate”.
Twenty years later, Hans Drielsma, then managing director of State Forests NSW said IFA members felt their future was being whittled away, eroded by increments and “it is time for us to take a firm grasp of the levers and create the future we want.”
In the face of growing political influence of environmentalists, foresters turned to secrecy with reports and data allegedly being withheld even from members of parliament.
Winds of change
A change of government in Victoria in 1982 saw the abolition of the Forest Commission due to lack of public confidence and a desire by government to pursue commercial principles. The arrival of New Public Sector Management created new challenges.
Government expected forestry operations to achieve a commercial rate of return, they were to be run along commercial lines, environmental controls were separated, an assistance package was provided to reduce demand on overharvested forests.
There had been concern about overharvesting in State forests since the 1930s. It grew in the wake of post-war demand and then Forest Commission secrecy. Following a Board of Inquiry in the 1980s, forestry began a program of modernisation.
The new Steve Bracks’ Labor government in late 1999 formed the view that institutional arrangements had been captured by industry. It identified a 20 per cent over-commitment of logs beyond what could be supplied sustainably and inherent under-pricing…Bracks reduced harvest levels, introduced an independent process to monitor sustainable yield and established VicForests to separate commercial and regulatory functions and put the industry on a path to being efficient and competitive.
Return of a conservative government in the 1990s saw commercial principles further embraced egged-on by the Victorian Auditor General. New accounting systems were developed, and the Victorian Plantations Corporation formed and then sold.
At this same time, a 30-year agreement was made with Maryvale pulp and paper to supply a fixed quantity of wood from a defined area around the mill. The price benchmark was the prevailing price of office paper in the Australian market.
Environmentalists were concerned about overharvesting and the loss of other forest services such as water and biodiversity. There was concern that in pursuing commercial returns foresters were high grading rather than managing sustainably.
The market as a control force
The new Steve Bracks’ Labor government in late 1999 formed the view that institutional arrangements had been captured by industry. It identified a 20 per cent over-commitment of logs beyond what could be supplied sustainably and inherent under-pricing.
“There were cosy relationships when we came to government that were not being market-tested,” he told me in 2020. These resulted “in over-commitment, subsidies and undervaluing of the forest estate”.
Economist David Pollard was appointed CEO of VicForests and saw the job as an opportunity to bring modern management to Victorian forestry; “to transform a clunky forest management system in the public sector to a modern market based system.”
But the challenge of achieving commercial return was immense. This was an industry accustomed to subsidy. Bracks who was aware that cosy relationships would attempt to reassert themselves retired four years after VicForests was created.
Bracks reduced harvest levels, introduced an independent process to monitor sustainable yield and established VicForests to separate commercial and regulatory functions and put the industry on a path to being efficient and competitive.
With logging and marketing operations central to VicForests, the department would focus on sustainable forest management through allocating areas for harvest, regulatory controls and reporting against sustainability criteria set out in the new act.
VicForests was to sell logs to the highest bidder through an auction system to ensure prices reflected supply and demand and the wood would go to the highest value use.
NSW forestry academic Jerry Vanclay’s initial evaluation of sustainable harvest volumes was turned into an annual review of logging against sustainable yield harvest levels and provided an additional check on over harvesting.
Markets meet politics
Economist David Pollard was appointed CEO of VicForests and saw the job as an opportunity to bring modern management to Victorian forestry; “to transform a clunky forest management system in the public sector to a modern market based system.”
But the challenge of achieving commercial return was immense. This was an industry accustomed to subsidy. Bracks who was aware that cosy relationships would attempt to reassert themselves retired four years after VicForests was created.
There was little follow through. As Pollard told me: “At some point they all argued for markets and changing the system but whenever there is a political problem, they will say … to much cost and we are not going to do it.”
Apart from the first few years under Pollard, VicForests never got close to commercial success and by the end of the decade (that included three significant bushfires), the idea of a market-based system had all but disappeared.
First the 4 per cent annual rate of return was dropped, then subsidies returned as grants and payments, separation between the department and VicForests dissolved, Vanclay’s annual review was cancelled and eventually the auction system was jettisoned.
None of this could patch over falling wood supply from overharvesting and successive bushfires in the latter half of the 2000s. In 2009, Pollard was quoted in the VicForests annual report saying that while existing contracts could be met“… overall, the industry in Victoria is on a vector of long-term contraction and there will be an increasing dependence on lower quality forest until regrowth forest mature to sufficient size in about 30 years.”
Auditor General missing in action
The decline in wood availability had been there for all to see in the annual reports of the department that was supposed to be managing these assets on behalf of Victorians. But no one, including the Victorian Auditor General, chose to look.
From the mid 1990s the value of standing timber in state forests had been tracked. From 2000, it was calculated as net present value based on discounted future cash flow. Between 2003 and 2008, the value fell from $258 million to $32 million.
The decline in wood availability had been there for all to see in the annual reports of the department that was supposed to be managing these assets on behalf of Victorians. But no one, including the Victorian Auditor General, chose to look.
Declining wood volumes, the Global Financial Crisis, growing competition, slow down in demand and the rise of substitutes saw government in 2010 replace the commercial imperative for VicForests with a vague requirement for long term economic benefits.
Return of a conservative government in 2011 saw a swathe of changes; power to make allocation orders removed from environment and handed to economic portfolios and the act was amended to insert the goal of long-term timber access to state forests. In 2013, the entire timber estate was allocated to VicForests. By then the net present value of the timber assets had fallen to a mere $10 million. Peter Walsh, a leader of the Nationals in Victorian and then Minister for Agriculture, either didn’t understand what this meant, didn’t believe it or didn’t care.
After he handed all the standing timber to VicForests, the time series on standing timber value disappears. VicForests mixed a shandy of accounting standards so the number was meaningless. For the next 10 years, the Auditor General waved this through.
No wood, just keep going
While creative accounting seems to have been de rigueur at times for VicForests, hiding numbers, huffing and puffing and all the regulatory changes did not create more wood.
VicForests 2014 Resource Outlook showed a decline in the area available and commercially suitable for harvesting. By 2017, VicForests was unable to meet commitments to its largest sawlog customer.
The mill at Heyfield accounted for two thirds of VicForest sawlog deliveries. Its owners said it would close if VicForests couldn’t meet commitments. Even though the government must have known the limitations of supply, it decided to buy the mill.
Reality finally hit in 2019. Government announced a $110 million plan to phase-out logging in state forests by 2030 and a 30-year plan to transition to plantations. Similar industry restructuring announcements had been made at least three times in the past.
As VicForests tried to push on to 2030 and others hoped a change of government would sweep the phase-out aside, it was being forced to harvest in more difficult areas.
Demand for Ash species from the Heyfield mill and for logs in the vicinity of its mill from the Maryvale pulp mill meant VicForests had to focus on marginal areas in the most hotly contested forest of the state where other forest users were well organised.
While the Department been weak in carrying out its regulatory role, environmentalists filled the gap and took on civil prosecution of cases against VicForests for harvesting areas that threatened endangered species.
Environmentalists didn’t win all their cases but fighting them increased the costs of doing business for VicForests and placed further restrictions on where it could harvest.
Nowhere left to go
Eventually the government was forced to set up an office of the Conservation Regulator to monitor compliance with environmental laws. Those mourning the demise of logging believe the government should have outlawed civil cases against VicForests.
When the Maryvale mill decided to close its office paper line – the main user of state forest logs – and the costs of keeping VicForests going were mounting while the state budget was in a mess, government decided to end logging almost immediately.
Cost to the taxpayer, $1.2 billion.
Logging ended on 1 January 2024. The bill to repeal the Sustainable Forests (Timber) Act (Vic) that created VicForests received assent on 26 June and the doors closed on 1 July. Just over 20 years after the market approach was launched.
Learn the lessons
There is a lot to learn about market-based approaches to natural resources management and how they are brought undone by politics.
It is also important to understand that while battles between environmentalists and loggers will get the headlines, management of natural resources requires respecting how ecosystems work and not seeing them as extensions of industrial production.
As economist Paul Samuelson observed “… standard managerial economics, and actual commercial practice, both tend to lead to an optimal cutting age of a forest that is much shorter than the 80 or even 100 years one often encounters in the forestry literature”. In other words, economics drives trees to be cut before forests regenerate.
Most people are in no doubt there will be efforts to reopen logging in the future. You can be sure the old team will try to get control. That is why all involved need to understand clearly what happened and how the crew that want to reopen forestry mucked up.
