 |
|||
 |
|||
  |
|||||
 |
 |
 |
 |
 |
 |
 |
|
| Reports & Publications |  |
|
Home > Reports & Publications > Public Sector Agencies/Ministerial Portfolios reports |
 |
|
Report on Public Sector Agencies, June 2002 Part 7 - Natural Resources and Environment
VICTORIAN FOREST INDUSTRY STRUCTURAL ADJUSTMENT PACKAGE 7.1 One third of Victoria's land mass is Crown land, with 3.5 million hectares (40 per cent) of this land in State forest. These forests are managed by the Department of Natural Resources and Environment (the Department), which aims to ensure the conservation of flora and fauna, the protection of water catchments and water quality, the provision of timber and other forest products on a sustainable basis, the protection of landscape, archaeological and historic values, and the provision of recreational and educational opportunities. 7.2 The State’s forest resources are managed through the Forest Act 1958, which establishes the sustainable rates for the continued logging of State forests and the Regional Forest Agreements (RFAs), entered into by the Commonwealth and State Governments, which establish the land available to the native forest timber industry. The aim of these agreements is to provide the industry with security of supply. In establishing these agreements, consideration was also given to other commercial and non-commercial uses of forests, such as bee keeping, preservation of environmental assets, water catchments, tourism and recreation. 7.3 The RFAs, which cover a period of 20 years aim to establish:
7.4 The CAR system was designed to establish a national reserve system, which will safeguard biodiversity, old growth, wilderness and other natural and cultural values of forests. Forests outside the reserves will be available for wood production, subject to codes of practice that will ensure long-term sustainability and contribute to the conservation of these natural and cultural values. In order to establish the national reserve system, the State Governments and Territories have agreed to preserve:
7.5 By March 2000, all 5 RFAs – had been established, namely:
7.6 The Department enters into licences with individuals for around 15 years to access timber within specified areas outlined in the RFAs. The licences stipulates the quality and quantity of logs that can be harvested, and the amount that must be paid in rents, fees, royalties and charges.
Timber harvesting. Victorian Forest Industry Structural Adjustment Package 7.7 In December 1998 the State Government announced a funding initiative designed to facilitate the re-structure of the forestry industry, titled the Victorian Forest Industry Structural Adjustment Package (VIC FISAP). This initiative, which was initially called the Hardwood Timber Industry Development and Restructuring Program (HTIDRP), resulted from a Memorandum of Understanding signed by the Victorian and Commonwealth Governments in August 1998. 7.8 According to the Memorandum of Understanding, the objectives of VIC FISAP (HTIDRP) are to:
7.9 Commonwealth and State Government funding initially allocated to this initiative was $27.6 million. Of this amount, $8.8 million was directed towards industry positioning and research, and $1.3 million towards restructuring during the Interim Forest Agreement process. The balance of $17.5 million was available to assist businesses, workers and industry organisations whose jobs and businesses had been affected by the RFA process. In 2000, VIC FISAP funding was increased to $42.6 million. VIC FISAP planning 7.10 Under the FISAP Memorandum of Understanding, a Forest Industry Development and Adjustment Committee (FIDAC) was established to assess, prioritise and present applications for assistance. This committee comprised representatives from the Commonwealth Department of Agriculture, Fisheries and Forestry (AFFA), the Department of Natural Resources and Environment (the Department) and Business Victoria (within the Department of Innovation, Industry and Regional Development). An Industry Advisory Panel was also established to provide advice to both Governments, through FIDAC, on the progress and direction of the package. The Industry Advisory Committee has remained inactive since early 2000. 7.11 In order to assist FIDAC in developing guidelines for the assistance package, a Hardwood Industry Development Strategy was commissioned through forestry consultants. This strategy suggested that development opportunities were most significant in the sawmilling sector and in the greater utilisation of residual logs. The strategy also outlined the types of assistance that should be considered, including funding principles and priorities. 7.12 The guidelines, which were released in June 1999, provided for assistance under four components, namely: Industry Development Assistance; Rescheduling Assistance; Business Exit Assistance; and Worker Assistance. Industry Development Assistance guidelines 7.13 The Industry Development Assistance component of the package provided financial assistance for initiatives to develop the Victorian native forest timber industry. The objective of development assistance was to support initiatives which:
7.14 Development Assistance was available through 3 sub-packages:
7.15 To be eligible for assistance, businesses had to show that their investments pertained to the native forest timber industry, they were financially sound and had competent management. Further, the proposal had to meet one or more of the industry development objectives such as value-adding, increasing the use of residual logs, creating employment opportunities and enhancing occupational health and safety. Applications under this program were assessed by an independent assessor who made recommendations to the Forest Industry Development and Adjustment Committee (FIDAC), which is a joint Victorian and Commonwealth Government committee. 7.16 We identified that, while Industry Development Assistance applications closed on 31 October 2000, later applications have been accepted. 7.17 While we acknowledge the right of FIDAC to set or extend deadlines for the receipt of applications for assistance, we believe that in the interest of natural justice any extension of the deadlines should have been made public. Where applications are accepted beyond the deadline without a public announcement, others within the industry who had no knowledge of the changed deadline, may have been disadvantaged. Rescheduling assistance 7.18 The rescheduling assistance component of the package was designed to compensate existing businesses whose operations had been adversely affected by a newly declared Deferred Forest Area. These areas, which restrict access to commercial logging, were established as part of the Interim Forest Agreements in January 1996 and were a precursor to the CAR reserve system. Applicants requesting rescheduling assistance had to prove an ongoing involvement in the native forest industry and that their businesses had suffered financially as a result of changes to either the:
7.19 Applications were initially assessed by FIDAC against a broad set of criteria. Applications meeting the criteria were referred to the Independent Assessor, who assessed the applicants’ eligibility for assistance and made recommendations to the Committee. Business exit assistance 7.20 The business exit assistance component of the package was designed to assist businesses in, or dependent on, the native forest timber industry, to completely or partially leave the industry where:
7.21 This component of FISAP was effectively a licence buy-back scheme. 7.22 Once a decision on the applicant’s eligibility for funding and the amount of assistance considered appropriate, if any, was determined this information was conveyed to the applicant. If an application was deemed ineligible by FIDAC, the applicant could lodge an objection, which was referred to the responsible State and Federal Ministers for consideration. Decisions on the provision of assistance were made by FIDAC, following receipt of evaluations from the independent assessor, who assessed each application against the funding guidelines. If an applicant considered the assistance offered by FIDAC was inadequate, the different amount of assistance requested by the applicant and the amount recommended by FIDAC were passed on to the Ministers for a decision. Worker assistance 7.23 The worker assistance component of the package was designed to assist employees made redundant when businesses exited the industry. Again, any compensation paid had to be linked to an adverse financial impact resulting from the declaration of a Deferred Forest Area or from the Regional Forest Agreement processes. The worker assistance provided consisted of 5 types of support:
7.24 The support offered to individuals employed in the industry was provided for a period of up to two years, following their loss of employment. 7.25 Rescheduling assistance remained open for a 12 month period after the signing of a RFA, while the business exit and worker assistance components remained open for an 18 month period. Allocation of funding between components 7.26 Given that the first 3 Regional Forest Agreements had little or no impact on the resources available to the Victorian timber industry, it was envisaged that as much as $15 million of the initial $17.5 million FISAP funding would be directed towards industry development. According to a joint media release by the State and Federal Ministers in June 1999, this was due to the fact that Victoria’s timber industry had already undergone considerable structural adjustment in the past. Specifically, the media release stated that: “… Because of this, we do not expect that the RFA process will lead to a great demand for the Business Exit Assistance, Worker Assistance and Rescheduling Assistance elements of the assistance package. Any unused funds set aside for structural adjustment will be redirected to Industry Development Assistance”. 7.27 When the final 2 Regional Forest Agreements were signed in March 2000 (Gippsland and West Victoria), the associated reduction in the sustainable rates for continued logging changed the overall direction of FISAP. The reduction in timber available to the industry resulted in FIDAC allocating a greater proportion of assistance funding to business exits and worker assistance. 7.28 In March 2000, the total funding provided for VIC FISAP was increased to $42.6 million. Table 7A details the funding provided for each component. TABLE 7A
Source: Department of Natural Resources and Environment. 7.29 Of the $42.6 million in funding made available, the Victorian Government provided $23.8 million and the Commonwealth Government $18.8 million. 7.30 Following the signing of the final 2 RFAs in 2000, the State Government agreed to provide a further $20 million, separate from FISAP funding, to assist timber industry initiatives, increasing total support available to the native forestry industry to $62.6 million. Licence Renewal Project 7.31 In March 2001, the Victorian Minister for Environment and Conservation commissioned an independent expert group to investigate the methodology and information used in the Department’s calculations of sustainable yields. The report was part of the Department’s Licence Renewal Project, and is often referred to as the ‘Vanclay Report’ after one of the authors. The report was finalised in October 2001, but was not released by the Department until February 2002. The report found that the Department, through the 7.32 As part of the licence renewal project, the Government announced in February 2002 that, if logging licences were renewed at current levels, the reserves of suitable timber in some areas could be exhausted by as early as 2011. Consequently, the Government decided to reduce the volume of sawlogs annually available to the logging industry by 30 per cent across the State, from 855 900 to 567 500 cubic metres. 7.33 This decision had the greatest impact in the Midlands Forest Management Area 7.34 In order to compensate businesses and individuals for the impact of these decisions, the Government announced an additional $80 million package named VIC FISAP implementation 7.35 Implementation of the VIC FISAP package began in June 1999. FIDAC’s ability to assess applications and make decisions on assistance in a timely manner has been impacted by:
Industry Development Assistance 7.36 Applicants for Industry Development Assistance were assessed using a 2 stage approach. The first stage required the submission of an initial application (Stage A) that provided:
7.37 An initial assessment was undertaken by FIDAC to determine whether applications broadly meet the eligibility criteria, with successful applicants progressing to Stage B of the evaluation process. In that stage, applicants were requested to provide more detailed project and financial information to support their application. This information was reviewed by the independent assessor, who made recommendations to FIDAC on the level of funding to be provided. In turn, FIDAC made a recommendation on each application, outlining the level of assistance it considered to be appropriate and provided this information to both Ministers for final approval. The assistance process involved the payment of grants by instalment following the successful completion of pre-established milestones. 7.38 Applications for development assistance have been processed in two separate rounds. As at 30 June 2000, the closing date for the first round of applications, 21 applications had been received. The second round of applications, closed on 31 October 2000, with 27 applications received. A further 12 applications were received after the closing date, as a result of the Federal Minister encouraging companies to submit late applications. 7.39 As at the date of preparation of this report, the status of all the applications received was as follows:
7.40 While we did not review all applications for development assistance, from the sample of applications examined we concluded that the assessment guidelines were generally adhered to. However, we were concerned about the length of time taken to finalise the processing of applications. While acknowledging that some of the reasons for the delay were outside the control of the Department, we still consider a 2 year assessment period to be excessive and unnecessarily onerous on the industry. 7.41 In the course of our audit review, we identified an issue relating to the approval of development assistance to businesses with outstanding royalty payments to Forestry Victoria, in breach of their licensing agreements. In particular, five of the applicants that have been offered development funding owed significant amounts in overdue royalties at the time development assistance was offered. Table 7B shows the value of outstanding debt as at 31 June 2001, which was around the time the offers were made. TABLE 7B
(a) Prior to the issue of grants funding for development purposes, applicants were required to enter into debt repayment arrangements. 7.42 One of the objectives of FISAP is to assist in a continuing efficient, competitive and environmentally sound native hardwood industry. In order to do this, it would be reasonable to expect that development moneys would only be provided to businesses that could demonstrate the greatest potential to be successful. Where businesses are unable to meet their royalty payments on a timely basis, it could be argued that this is one indicator of poor management and therefore the provision of public money to these businesses is placed in a higher risk context. 7.43 Other issues identified during our detailed examination of individual applications, included cases where:
7.44 Applicants were required to provide assurance to FIDAC in respect of their regulatory compliance with the Code of Forest Practices, and environmental and Workcover requirements. We considered FIDAC’s acceptance of this assurance without further verification was insufficient to identify and adequately address breaches of the above requirements. Rescheduling assistance 7.45 Only two applications were made for rescheduling assistance under the package - one from a sawmill and the other from the main logging transporter attached to that mill. The sawmill had sourced the majority of its log supply from an area which was subsequently declared a Deferred Forest Area in 1996 as part of the RFA process. As a consequence, the mill had to find alternative log supplies, which increased the costs and reduced the profitability of both companies. 7.46 These applications for assistance were also subject to a two-tiered assessment process, where FISAP vetted the initial applications and an independent assessor evaluated the detailed submissions. In the information provided to the assessor, both companies estimated the impact on their businesses resulting from the RFA process for the 4 year period between the signing of the Deferred Forest Area (DFA) and the signing of the RFA. 7.47 Negotiations over the amount of compensation were again drawn out. Of the 2 applications received, one was still subject to negotiation at the date of preparation of the report, while the other took 17 months to complete. According to the Department, the delay in processing the applications was due to:
Business exit assistance 7.48 The assessment process followed for business exit assistance involved an initial assessment of the application by FIDAC and, if the application met the eligibility criteria, it was passed onto an independent assessor who determined the applicant’s compensation entitlement. Assistance under this component of the package provides compensation for:
7.49 In determining the value of the business prior to the impacts of the RFA process, the guidelines require the business to be assessed as a going concern. In calculating this value, the assessor first determined the average earnings of the business before interest costs but after tax over the last 3 years. This balance was then multiplied by a capitalisation rate to determine the gross business valuation. From this amount was deducted the net realisable value of the tangible assets to determine a net business valuation. 7.50 As at the date of the preparation of this report, 22 applications for business exit assistance had been received, with 16 from West Victoria, 3 from North East Victoria, one from Central Highlands, one from East Gippsland, and one from Gippsland. Of the applications received, 11 were deemed ineligible for assistance, 6 were successful and have received assistance, 4 were requested to provide more information but this information was never provided, and one was still under consideration. 7.51 Our examination of the assessment process associated with this type of assistance also identified delays in the processing and finalisation of applications. In relation to the capitalisation multiples used by the assessor, we found that these ranged between 5.5 and 6.8. In the cases where the companies had calculated the multiple themselves, they ranged from 10 to 15.9. It would have been easier to reach agreement with the companies, and the assessment process would have been shortened had indicative multiples been included in the guidelines. 7.52 Finally, the majority of applicants for this form of assistance were in debt to Forestry Victoria for unpaid fees and royalties, ranging from $108 000 to just under to $1 million, which had to be repaid to the Department before assistance payments were made, or in some cases deducted from the assistance payments. Worker assistance 7.53 Essentially, the worker assistance component of FISAP covered those workers made redundant as a result of companies accepting the business exit assistance. To be eligible, workers had to have worked for a minimum of 19 hours per week and commenced their employment at least 9 months prior to the relevant RFA being signed. 7.54 As soon as a company applied for business exit assistance, the worker assistance component of the package was activated. Contractors from the Forest and Forest Products Employment Skills Company (FAFPESC), which is part of the National Training Advisory Board for the Forest Industry, were engaged by FIDAC to assist it in providing most of the non-cash compensation component of the worker assistance package. 7.55 Prior to the closure of a company, the FAFPESC contractors would hold meetings with all employees to outline the details of the package, interview each worker, calculate their redundancy amount owed and assist them in filling out the application forms. Further, an industrial psychologist, a financial planner and a Commonwealth Employment Service representative conducted information sessions at the mill prior to its closure. Every employee was required to participate in a skills assessment conducted by FAFPESC contractors. 7.56 In all business exit cases, a special redundancy payment was provided to all eligible workers on the day the mills closed, consisting of:
7.57 On the closure of a company, each worker is also entitled to access up to $5 000 over 2 years in training assistance. The FAFPESC contractors have also organised a voluntary pre-vocational training course open to all redundant employees, which consists of a 6 week, nationally accredited course, comprising literacy, numeracy, basic computer skilling and telephone skills. Participants were paid during the course, with the training provider acting as the employer. 7.58 Claimants can also access up to $20 000 over 2 years in relocation assistance, including:
7.59 Eligible workers were also given preference as applicants for the environmental and silvicultural positions established under the Government’s Growing Victoria program. Seven of these positions were filled by workers accessing the worker assistance component of the package. 7.60 One aspect of the worker assistance package is an employer incentive of up to $5 000 for one year that can be paid to an employer who engages on an eligible worker. Under this part of the package, before the employer receives the assistance, the organisation is required to sign a contract with FIDAC to assure award wages are paid, and occupational health and safety measures in the workplace are adequate. If the employment extends for less than one year, the employee can transfer any unused money to the next employer. 7.61 While this component of the program has been successful overall, it has encountered some problems in implementation, mainly related to some aspects of the guidelines which allow a fair amount of discretion in the approval of funding. Monitoring and evaluation 7.62 Monitoring of the VIC FISAP program has been provided through a milestone arrangement in the case of industry development assistance, and through the regular reporting from FAFPESC contractors for the worker assistance component. In the case of business exits and the rescheduling components, monitoring has been through on-going checking of the progress of applicants while negotiations were still underway. 7.63 The FISAP Secretariat has indicated to audit that an evaluation of the implementation and effectiveness of the program has not been conducted by the Department. Given that the Department is about to embark on a Voluntary Licence Reduction Program, which will provide significant assistance to businesses and employees, an evaluation of VIC FISAP would provide useful information for this new initiative. Future considerations 7.64 Forty per cent of FISAP funding has been directed towards industry development. When making decisions on the availability and provision of development funding to businesses to improve their efficiency and value adding, reliance was placed on the sustainable yield calculations as part of the RFA process. 7.65 Based on recent Government assessments, it now appears that many of those sustainable yield calculations were overstated, which may have resulted in businesses receiving development money and now having to downsize or exit the industry. As a result, public funds could have been wasted on development grants. Following the licence renewal project, the Department now finds itself in a situation where a considerable part of the $80 million made available under the “Our Forests, Our Future” package has to be spent on a Voluntary Licence Reduction Program. 7.66 A particular concern with the program has been the lengthy delays in finalising the processing of applications. In relation to development assistance, this can be partly explained by FIDAC deliberately delaying the processing of applications when it became apparent that the sustainable yields were likely to be further reduced. The Department advised that in early 2002, FIDAC intended to send letters to all applicants whose applications were still being processed, giving them four options to progress their applications, namely:
7.67 We recommend that prior to making any Voluntary Licence Reduction Program payment under the $80 million Our Forests, Our Future policy announced in February 2002, the Department should ensure that the sustainable yield calculations are accurate, so that the available funding is appropriately allocated to make the most effective use of public funds. RESPONSE provided by Secretary, Department of Natural Resources and Environment Industry development assistance The Department accepts that placing tighter timeframes on applicants for responses would have improved the time taken to finalise an application. Where applicants provided timely responses to each stage and to requests for information, applications were progressed at a satisfactory rate. During the past 7 years, the efficiency of a number of companies in the native forest hardwood sawlog industry was affected by changes in resource type and quality resulting from Deferred Forest Areas and Regional Forest Agreement processes. In addition, the introduction of the GST on 1/7/00 resulted in a significant downturn in demand and price for hardwood products. Forestry Victoria's D+ sawlog sales fell 15% as a consequence of this downturn. This downturn affected the short term cash flow of a number of businesses. Where necessary, Forestry Victoria negotiated debt repayment plans to ensure a prompt return to normal trading terms. Where invoices are outstanding more than 30 days, penalty interest is charged at a rate of 12.25 per cent. A number of Forestry Victoria customers pay their accounts under royalty averaging arrangements. These agreements commence on 1st October and end on 30th September in the following year. The accounting process for invoiced logs does not strictly match the payments made under the royalty averaging agreement. Consequently, it is possible, as has occurred in one case, that at the end of the financial year the customer may have overdue amounts showing and still be meeting the terms of the royalty averaging agreement. It should be noted that as a result of review processes only 2 of the 5 companies listed in Table 7B have progressed to the Funding Agreement stage. Voluntary disclosure was considered a valid means of assessing statutory compliance in these matters. It is not normally a requirement of industry development funding agreements with government departments to seek assurances on compliance with statutory environmental and Work Cover requirements. The Victorian Work Cover Authority was unable to provide Vic FISAP with information on individual company compliance. This avenue continues to be explored with the Victorian Work Cover Authority. The best prospect may be for a company to gain a third, independent party assessment of occupational health safety performance. Code of Forest Practice compliance is the responsibility of individuals with Forest Operator Licences, not companies. Monitoring and evaluation In developing the Our Forest Our Future policy statement, consultants were employed by NRE to do a desktop assessment of a range of industry restructure programs, which included FISAP, and dairy and scallop industry programs. The Industry Transition Taskforce appointed recently to advise the Minister for Environment and Conservation on a number of aspects of timber industry reform, has been consulting closely with the FISAP Secretariat on their experience with business exit and worker assistance programs. Future considerations While it is possible that businesses that have received development funds may downsize or exit the industry as a result of the Voluntary Licence Reduction Program, recommendations were made to Ministers only for companies that were financially sound, had strong and capable management, and were committed to developing markets for native forest timber and the industry’s international competitiveness. Our Forests Our Future draws on a thorough review outlined in the Expert Data Reference Group Report by Prof J van Clay for the development of estimates of sawlog resource. In addition, in Our Forests Our Future, the Government commits to continue to refine the current resource estimates and give high priority to the completion of the State Forest Resource Inventory. A comprehensive system of annual monitoring and reporting of the extent of harvesting and its impact on sawlog resource estimates will also be developed. The Government will not take undue risks in setting new timber supply levels while data is being further refined and upgraded. Part 7 - Natural Resources and Environment, continued: |
