The untold story of the role of government in the rise and fall of Gunns

Gunns enjoyed fabulous profits, but the seeds of its collapse were planted from the outset. AAP

The spotlight is shining on the collapsed Gunns, its former chairman John Gay, and the Tasmanian Government’s machinations to secure a pulpmill at all costs.

But the pivotal role of successive Commonwealth Governments remains in darkness. Unravelling the part the Commonwealth Government has played in the saga is essential for resolving Tasmania’s forest conflict and – because there is nothing unique about Gunns or Tasmania – Australia’s forest conflict.

Aiming that spotlight on the Commonwealth Government’s role will illuminate why the entire Australian forestry industry remains in crisis and the policy framework needed to resolve the mess.

John Gay likes collecting. From the mid 1980s, as managing director of the newly ASX listed Gunns, Gay took the company through near-exhaustive Tasmanian sawmill acquisitions.

Gay bought into native forest (hardwood) sawmilling just as large areas of Commonwealth Government-subsidised softwood sawlog plantations came on stream Australia-wide.

Out-competed by an economically superior product, Australian native forest sawmilling went into terminal decline; today producing around one-third the amount when Gay started buying up big. In every state, rather than hearing a normal good news industry structural change story, environmentalists were blamed for the native forest job losses.

Neither the Commonwealth Government nor the foresters and industry players (who had so adroitly lobbied Prime Minister Robert Menzies for the plantation subsidies in the late 1950s) have claimed the glory of Australia’s softwood plantation program.

Today, softwood plantations account for 85% of Australia’s sawn timber production, 95% of its wood panels production and 80% of the wood used to make Australian paper. (For more information, read here and here).

While jobs-laden sawmilling dominated the public debate in Australia’s forest wars, from a business perspective the profits lay elsewhere, in native forest woodchip exporting.

The exporters rarely reported their profits but we can gauge them from the financial reports of the Nippon-owned operation at Eden NSW. Leaving aside the losses the company made in the first few years after start-up in 1970, its after-tax profit on equity (the money it invested in the business) averaged 34% per annumfor the next 30 years.

Engineering such fabulously high and durable profits requires the facilitating hand of government. They depended on the Japanese paper industry’s preference for resource security over cheap wood; the willingness of Australian state governments to let their forestry agencies sell cheap wood from public native forests (thus creating a huge chasm between the wood chip selling price and the cost of production); and an indifferent Commonwealth Government.

Gay found a way into the native forest woodchip honey pot in the mid 1990s. Under controversial circumstances, Gunns received its first Commonwealth woodchip export licence from the Keating Government in 1994 and proceeded to acquire every Tasmanian native forest woodchip export operation.

From then on, Gunns was cemented in conflict, joining the rest of Australia’s native forest woodchipping sector.

The push-pull factors of softwood plantation sawmill competition and high woodchip export profits drove Australian forestry into ever more intensive woodchip-driven logging.

By the early 2000s, Tasmania, East Gippsland and NSW’s Eden region were export-woodchipping between 80 to 90% of the public native forest log cut under the imprimatur of the Commonwealth Government via Regional Forest Agreements that outsourced environmental standards to financially pressured and fundamentally conflicted State Governments.

State governments barely cover their native forest wood production costs and regularly make losses on these “businesses”. This is the context for understanding Australia’s forest conflict.

Gunns enjoyed slightly over a decade of fabulous profits exporting native forest woodchips, but the seeds for its collapse were planted from the start. By the early 1990s, government funding to expand Australia’s softwood plantation estate effectively ended. There was, however, nothing stopping industry from planting more if they believed their own lobbyists’ upbeat market rhetoric. The industry and its lobbyists keep advancing all sorts of arguments to keep the plantation investment risk glued to the public purse.

The Commonwealth facilitated tax-minimising plantation managed investment schemes (MIS) to fill the planting vacuum. The schemes were backed by a coalition of interests: opportunistic accountants, financial service providers and ratings agencies; forestry industry lobbyists, wood buyers and forestry consultancies; and local governments and individual state and federal members of Parliament.

Driven by the demand for tax minimisation (not wood market realities) and reassured by the Commonwealth Government’s policy of tripling Australia’s plantation estate by 2020, investment in forestry plantations soared.

Planting was concentrated on short-rotation hardwoods for woodchips, the quickest to generate income. Crucially for Gunns, the planting started not in Tasmania, but in Western Australia, Victoria, and South Australia. Every warning – there were many – fell on government ears made deaf by the dedicated plantation MIS lobbyist (Treefarm Investment Management Association) and the coalition of beneficiaries.

The first plantings, from Western Australia, came on stream in the late 1990s with a deluge of hardwood plantation chiplogs hitting the market since the mid-2000s. Japan’s printing and writing paper consumption and therefore production had stopped growing since the late 1990s.

Gunns was caught, heavily exposed to the no-growth Japanese market with low quality native forest chips, not the superior hardwood plantation chips which the Japanese paper industry and the environmentalists were demanding. Repeating its johnny-come-lately behaviour, Gunns started offering plantation MIS opportunities to the public in 2000.

With hardwood chip markets in serious oversupply, it seemed sensible for Gunns to switch their proposed native forest pulpmill to plantations. But thorny commercial realities were drowned out in the continuing pulpmill conflict.

Australia has never built an export oriented pulpmill, for good economic reasons. The global pulp market is a dumping ground in bad economic times and survival requires extraordinary cost-competitiveness.

Furthermore, electronic technology appears to be dampening printing and writing paper consumption which is trending below GDP in major economies. Once the flush of the mill construction phase passed, Tasmania, and ultimately the Commonwealth Government, would have faced decades of lobbying from a company needing to find new ways to cut pulpmill costs. Is this what Tasmanians really want to hitch their small island state economy onto?

Gunns collapsed well before its final announcement. Government and opposition parties are struggling to come to grips with the giant’s fall. For too long, they have succumbed to the coalition of beneficiaries who lobby for government-created market distortions to create super profits, first woodchipping then plantation MIS.

It’s unsustainable and creates intense public opposition, be it from environmentalists, food farmers or those wanting to see less waste of public money and governments leading with sensible policies.

So what should the Commonwealth Government do about forestry?

First, they should understand that forestry, in Australia and globally, is not a high growth industry with unrealised potential if those pesky environmentalists would just go away. It’s time to put a ring around Australia’s plantation sector and build a strategy of consolidation and processing industry competitiveness based on market reality.

Fundamentally, this requires the Commonwealth Government resisting industry lobbying for yet another round of plantation subsidies, this time requiring $600 million for a “pilot phase” for up-front carbon sequestration payments. Without market discipline, the plantation industry will never settle into providing sustainable wealth and jobs in rural manufacturing centres.

The ongoing contraction in native forest logging, borne from the plantation competition, is much more than a good news industry structural change story. It presents Australia with a major opportunity to offer our native forests to the global climate change challenge. Old and unlogged forests are significant carbon stores and letting previously logged native forests regrow without logging them again is a highly efficient strategy with a multitude of interrelated benefits for biodiversity, water and carbon sequestration.

Opposing this are proposals, waiting in the wings, to again intensify native forest logging for bioenergy, wood pellets for domestic electricity production or export to feed overseas power stations.

So far, the Commonwealth Government has successfully steered Australia away from this woodchip “round 2” future for native forests. While this gives some hope that a native forest conflict-free Australia can soon become a reality, such a reachable outcome is unimaginable without Commonwealth Government intent.