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Scale back: the corporate lessons of Tasmania’s forestry debacle

Tasmania’s forest industry is experiencing its worst downturn in a decade, prompting a much-needed restructuring. While analysts focus on factors like exchange rates, the key lesson really has to do with…

Sometimes size is the biggest problem. Pat Allen

Tasmania’s forest industry is experiencing its worst downturn in a decade, prompting a much-needed restructuring. While analysts focus on factors like exchange rates, the key lesson really has to do with corporate scale. The larger the company the greater the impact, for good and bad. Given this equation, large companies need to be held to much tougher accountability, transparency and sustainability requirements than they currently are.

The losses

These are tough times for the Tasmanian forest industry. Almost everywhere one confronts a sea of red ink, failed investments, lost contracts and redundancies. The losses do not discriminate. The private and public sectors are affected as are large and small companies and cities and rural areas.

The once-mighty Gunns Ltd’s recent end-of-year accounts illustrate the problem. At the end of August, the company announced a $904M loss for 2011-12. This followed a loss of $356M the year before. The red ink has forced the company to announce that its much-vaunted Bell Bay pulp mill is no longer “probable to proceed”. They’ve expensed the $255M spent to date instead of treating it as an investment.

Gunns is not the only company doing it tough. Forestry Tasmania, a government business enterprise (GBE), is also in trouble. Designed to pay a divided to the state, the company has incurred two years of losses following several years of anaemic returns. Its poor performance has been independently reviewed by URS Forestry, which recommends that the GBE be downsized and restructured to more narrowly focus on commercial operations.

URS predicts that Forestry Tasmania — either in its current or restructured form — will continue to incur losses of around $25 million per annum for the next five years.

The reasons

Given the scale of the crisis, a small industry has emerged to explain it. Simplistic mono-causal accounts abound. Business pundits predictably sheet blame home to “greenies” and the market campaigns conducted in Japan and elsewhere against Gunns, Ta Ann and Forestry Tasmania.

More thoughtful analysts recognise that market campaigns, while effective, are not the sole reason. Structural factors are at work. These include a historically high Australian dollar; a decline in per capita paper demand thanks to computerised workplaces; the superiority of plantation over native hardwood woodchips coupled with a significant increase in plantation woodchip volumes; and the growth of third-party, Forest Stewardship Council, certification.

Environmental campaigns against forestry have been effective, but aren’t the only cause of the crisis. Neal Jennings

There can be much debate over the relative importance of these factors. But they have collectively placed a greater load on Tasmania’s forestry model than it can bear.

There is an instructive ecological political economic lesson about corporate size and scale that needs to be teased out and understood if the state is to avoid lurching from one unsustainable industry structure to another.

The issue of scale

The issue of corporate scale and impact has recently reappeared on the global agenda. Appalled by the ramifications of the collapse of Lehman Brothers that signalled the existence of a global financial crisis, governments suddenly recognise that some businesses were “too big to fail”.

News Corporation’s phone-hacking scandal in the UK has highlighted the power of big media and its no-holds barred ethics.

Closer to home, many Australians are concerned that mining companies are too big to be responsible. The machinations of mining magnates Gina Rinehart and Clive Palmer have been the subject of much recent public comment.

To these concerns can be added protests over Seafish Tasmania’s decision to bring a giant super trawler, the FK Margiris, from Europe to fish Australian waters.

And then there are the pressures confronting farmers from Australia’s supermarket duopoly.

In short, corporate scale and size matter: the larger the scale, the greater the power and impact - for good and bad.

Interdependencies

Tasmania’s forestry sector offers a salutary lesson in what can go wrong when a company grows too large.

Through the 1990s and into the 2000s, Gunns Ltd expanded its operations with a series of strategic acquisitions. They bought Boral’s forest operations (2000), North Forest Products (2001), Auspine (2007) and ITC Timber (2009). Much of the later acquisition was debt-financed.

In the 1990s and 2000s, logging was going gangbusters. Ta Ann Truths/Flickr

Gunns’ growth enabled Forestry Tasmania to expand. More logging plans, more logging roads, and more logging ensued.

With Gunns and FT going gangbusters, contracts were signed with logging contractors to harvest and transport pulpwood for chipping at Triabunna, Bell Bay, and Burnie. As these companies grew their operations, they took on more debt and employed more workers to meet demand.

The great unravelling

When the global financial crisis struck, these interdependencies operated in reverse. Japanese importers, facing a glut of certified plantation fibre, a declining demand for paper, and pressure from environmentalists, confronted an easy choice. By purchasing superior, FSC-certified plantation-based woodchips at little extra cost they could enhance productive efficiency, meet their corporate social responsibility goals, and get the pesky environmentalists off their backs.

Gunns, trapped in a failed business model, decided its own salvation lay in becoming a plantation-based producer of pulp. However, it bungled the effort to obtain planning permission by sidelining the Resource Planning and Development Commission’s environmental assessment of the Bell Bay pulp mill. Instead, it sought and obtained special treatment from Government in the shape of a Pulp Mill Assessment Act.

With no social license to build and operate the mill, its efforts to secure a joint-venture partner became increasingly desperate. The project’s practical demise occurred when its new-found financial angel, the Richard Chandler Corporation, suddenly announced in March this year it was withdrawing its support.

Gunns is now a zombie company. It lurches from one dire financial announcement to another, leaving a trail of red ink in its wake. It is currently being kept alive by the banks, notably ANZ, which are seeking to recoup as much of the outstanding $526 million debt as possible. The ASX is also doing its bit by liberally interpreting its suspension rules to provide the needed time to “restructure”.

Scaling back

The idea that limits cannot be placed on corporate size is of relatively recent vintage and belongs to the era of neo-liberal globalisation. If we look back at economic history, we see numerous instances of large monopolies being broken up before they got into trouble because they were deemed to be not in the public interest.

From an ecological political economy perspective, large businesses are a key public policy issue. Put simply, corporate size matters. The larger the corporation, the more significant its economic, social, environmental and political effects.

While these can be positive, there is no reason to believe they necessarily are or will be. Thus, the larger the corporation, the more transparent, accountable, regulated and sustainable its operations need to be.

This is the hard lesson taught by the Tasmanian forestry debacle.

Join the conversation

11 Comments sorted by

  1. Mal Adapted

    Primate

    Unfortunately Tasmania has a history of corporate or state sponsored behemoths dominating the economic landscape.
    The problem as I see it is that trees, though renewable, are still finite in terms of rate of clearing. If the rate of clearing exceeds the rate of new growth an inevitable shortage occurs. Forestry Tasmania cannot approve cutting of further old growth forests which potentiates the supply problem.
    Unfortunately, good arable land has been replaced with mono cultural eucalypt plantings and hundreds of blue collar workers are staring down the barrel of unemployment, not to mention the timber towns, retail etc.

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  2. Philip Harrington

    Principal Consultant - Climate Change

    Nicely observed. Scale is a fundamental flaw in our current economic system. Over the last 30 years or so, we have witnessed the collapse of competition in virtually every sector the economy as a result of takeovers and mergers, with regulators and politicians standing by nodding in approval. They, like Gunns and FT and the standard MBA model, see being 'biggered' (Dr Seuss) as a good thing, indeed, the very goal of their enterprises. Not people, not planet, not even profits, but biggery.

    At…

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    1. Dennis Alexander

      logged in via LinkedIn

      In reply to Philip Harrington

      I agree Phil,
      "Gunns is now a zombie company. It lurches from one dire financial announcement to another, leaving a trail of red ink in its wake." ... "Thus, the larger the corporation, the more transparent, accountable, regulated and sustainable its operations need to be."

      Some economists might disagree, but the evidence from "too big to fail" taxpayer hits around the world is beginning to support the latter statement.

      Unfortunately, many of my relatives (and others) in the Apple Isle would…

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    2. Peter Davies

      Bio-refinery technology developer

      In reply to Philip Harrington

      I agree Phil, this is the basis for our own business model. Not because our tech is not useful to large corporates (it is). We declined the approach from an agent of Gunns a couple of years back to acquire our systems because we believed their management model was not only doomed to fail it was doing immense long term harm to genuine forestry businesses and communities (let alone the forest itself) in the meantime.

      Large corporates seem to feel that the "legitimate demands of shareholders for maximum profit" somehow abrogates them from social and environmental responsibility and to a disappointingly large extent they seem to get away with it (just who are these shareholders?). Yet it is in truth a fragile existence and "too big to fail" is not an excuse to continue bad governance.

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    3. Tim Connors

      System Administrator / Public Serf

      In reply to Philip Harrington

      'course, you can have too many little operators with modest ambitions, too. Too many small scale fishermen saying they're not the problem because they, and a million other fishermen, are only catching a small handful of Murray Cod per day.

      But I've heard Cubby Station say they can't possible be the problem, because they only take 1% of the Murray Darling basin's water.

      Heck, Australia as a nation says this with carbon. We're in 17th spot, only outputting 1.3% of the world's carbon, with us and the other 16 accounting for 66% of the world's carbon - we can't possible be the problem, everyone else (the other 199 countries) must act first.

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  3. David Leigh

    logged in via Facebook

    Fred, an excellent analogy of the past and present problems, not just in forestry, but also in every walk of Australian life. Small business has been and will always be the engine room for job creation. Value adding timber and other commodities, on a small scale and aimed at local markets, will create jobs and push wealth into local economies. Using hemp for fibre, fuel and food will nullify the wood chip market and satisfy fibre demands. It will also create many new opportunities for small business…

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  4. Michael Bolan

    Systems practicioner

    I couldn't help but note that Gunns went to considerable lengths from the outset to attempt to convince outsiders that there were no risks with the pulp mill - it was a sure thing. In fact John Gay at one AGM stated that there were no risks. The consequence was a company that took no action to protect itself from the many risks of committing to a high volume/low value commodity (pulp) at a time of global decline in pulp prices, greater respect for the value of standing forests, increasing constraints…

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  5. Mark Poynter

    Forester

    As a former employee of one of the smaller forestry companies that was subsequently acquired by Gunns, I agree with the article's thrust about the problems of increasing corporate scale. At the time I was working in Tas, several companies were doing essentially the same volume of native forest harvesting that Gunns subsequently did, but were smaller targets and simply didn't attract the sort of attention that Gunns did.

    I am only talking about the social rather than financial implications of large…

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  6. Rover lance

    logged in via Twitter

    Environmental change and global warming are real, and they are threatening our whole existence on this earth. We are destroying our beautiful landscape and forests by digging indiscriminately into them just so we are able to our unlimited greed. However the good thing is people are becoming more and more aware about their environment these days, and many environmental consultancy firms like Seran (Pty) ltd are coming forward to help large infrastructural projects that can be made eco-friendly.

    For more information on how environmental consultants help minimise the impact of large infrastructural projects on our environment, please visit http://www.seran.com.au. Seran pty ltd, an environmental consultancy, is helping melbourne and entire Australia to preserve its environment for sometime by putting proper environmental planning for large infrastructural projects.

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  7. Russell Camel Wattie

    logged in via Facebook

    Gunn’s were very much wrong footed on the environmental debate over the Bells Bay Pulp Mill. I recall the original intent was to develop the two Chipping plants then value adding by building the Pulp Mill. The Greenies argued that there would be X amount more trucks, NO the same trucks because chip was to be diverted from the boats to the Pulp Mill, and then shipped. From memory the original figures were that Chip was $70-$80 per tonne and pulp was $800-$900 per tonne, obviously production costs…

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    1. Mark Poynter

      Forester

      In reply to Russell Camel Wattie

      Russell
      I completely agree with you that the failure of the media to objectively report rather than act as virtual mouthpieces for environmental activism has had profound implications for forestry in particular.

      In fact the wood chipping facilities had been operating near Bell Bay since the early 1970s, so building a pulp mill next door was hardly a threat to a 'pristine' valley, yet the Tamar valley was consistently referred to as such by the ABC when the pulp mill proposal was first aired in…

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