Natural resources policy

The importance of natural resources

In Canada, the natural resources sector is an important contributor to economic output and consequently to employment growth. The natural resources sector contributed close to $33.2 billion to GDP in 1997, and provided direct employment to almost 470,000 individuals.1 These figures, however, underestimate the sector's real economic importance because they fail to account for its large indirect contributions. A 1997 study conducted by Price Waterhouse on the economic impact of the forest industry in British Columbia found, for example, that while the industry directly employs close to 100,000 workers, as the largest industrial employer in the province it generates an additional 195,000 indirect jobs.2 The average forestry worker earns $46,130, $14,180 more than the average wage in British Columbia. In 1996, the forest industry as a whole accounted for 19.8 percent of the provincial GDP (Chancellor Partners 1997). In 1997, industry exports totaling $14.5 billion accounted for 55 percent of provincial exports. In the last five years, the industry's capital expenditures totaled almost $6 billion, while payments (i.e. taxes and stumpage fees) to all levels of government amounted to more than $20 billion (Price Waterhouse 1998a).

Despite these impressive figures, there is evidence to suggest that the forest industry along with the mining industry, both major contributors to the British Columbia economy (see figure 19 )3, are in trouble. For instance, during the past two years the forest industry has incurred over 4,500 job losses. In 1995, the industry posted net earnings of $1.2 billion. In 1997, however, the industry reported a net loss of $132 million. The rate of return on capital investments has steadily declined from 10.3 percent in 1994 to 1.4 percent in 1997. Furthermore, capital expenditures made by the industry declined by almost 17 percent between 1996 and 1997 (Price Waterhouse 1998a). The mining industry in British Columbia, which accounts for thousands of jobs and directly accounts for about 3 percent of provincial GDP (BCMinFinCorpRel 1998b), is also in decline. A 1997 survey of almost 20 mines and one smelter plant in British Columbia reported that employment declined by 4 percent and profits decreased by 26 percent. Capital expenditures by the industry have also declined as have after-tax returns on shareholders' investments (Price Waterhouse 1998b). So what are the reasons for the lackluster performance of these important industries? Part of the answer is government mismanagement.4

Through hundreds of regulations, command and control environmental policies, a rigid labour code, and a high levels of taxation, the government has seriously eroded the economic performance of the natural resources sector.

Managing natural resources:
Why the state is incapable
of meeting the challenge

Governments tend to place political considerations ahead of good public-policy decisions. They do so by discounting the negative economic consequences that might arise from their actions, and rarely rely on empirical evidence to support their policy decisions. Elizabeth Brubaker, executive director of Environment Probe, once suggested that the "perverse incentive" structure in government might explain why the state is incapable of managing natural resources efficiently and so as to maintain sustainable yields. Using over-fishing in Canada as an example, Brubaker outlined four problems associated with the system of government that renders it incapable of making sound policy choices (Brubaker 1998).

Problem 1: "short-termism"
Politicians suffer from "short-termism." Governments tend to look only far enough into the future to see the next election campaign. They tend to choose policy options that will result in immediate political pay-offs, even if they result in negative long term economic consequences.

Problem 2: agency
Often times, politicians are forced to make compromises between competing interests in order to maximize their vote potential. The compromises that are reached rarely serve the majority of the population's welfare.

Problem 3: special interests
Special interest groups often exert enough political pressure to force the government to back, for political considerations, a policy choice that might ultimately prove to be the wrong one.

Problem 4: government accountability
Governments are not held accountable for the decisions they make. Since they gain no financial benefits from making good policy decisions, they do not pay the costs of the bad decisions that they make. Hence, no rewards, punishments, or incentives exist to encourage good public-policy decisions.

In short, Brubaker argues that all of these problems have contributed to the progressive deterioration of the East-coast fishing industry, and now threaten the West-coast industry as well.

The state of the natural resources
sector in British Columbia

Since coming to power in 1991, the NDP government has pursued a natural resource policy that has largely been guided by environmental concerns that have very little to do with facts.5 As a result, the province's two largest employers in the natural resources sector, the forest and mining industries, have suffered big losses. In forestry, for example, an almost 200 percent increase in stumpage fees since 1992, arising partly from the government's introduction of the Forest Renewal Act, has contributed to an 83 percent increase in the cost of logging on Crown land (Smyth 1998; Price Waterhouse 1998a). Instead of creating the 40,000 new jobs that Premier Glen Clark promised in his 1996 Jobs and Timber Accord, the forest industry has suffered 4,500 job losses since the accord was first announced (Price Waterhouse 1998a).

Increases in environmental regulations, due in large part to the government's 1995 Forest Practices Code, have increased the cost of production in the industry by 50 percent (Smyth 1998). The Code unfairly places restrictions even on Crown land that is not listed as a designated park or protected area. Through complex harvesting rules, private firms are required to "maintain certain structural features of the forest in order to ensure the maintenance of biological diversity and a sustained flow of non-timber values such as wildlife and fish habitat, visual quality, water quality, and recreation" (Haley 1996). This policy is costing the industry over $400 million a year to implement with little or no social benefits in return (Van Kooten and Wang 1998). In addition, future cuts to the Allowable Annual Cut (AAC), an annual limit set by the province on the number of trees individual forest companies are permitted to harvest, are expected to result in the loss of thousands of jobs in the industry (Haley 1996).

These measures have been taken in spite of the fact that the industry continues to harvest efficiently and maintain sustainable yields. As figure 20 suggests, even as stumpage fees have dramatically risen since 1991, the number of trees that has been harvested by the industry has remained constant throughout the period. Moreover, as stumpage fees and the regulatory burden on the industry have continued to increase, evidence shows that the forest industry in British Columbia has continued to make large investments in protecting the environment. For example, the industry has increased spending on environmental maintenance of the province's forests by almost $100 million since 1994 (Price Waterhouse 1998a). Instead of acknowledging the responsible practices of the forest companies, the provincial government has been quick to accept the argument from special interest groups that British Columbia's forests are recklessly being depleted by the forest companies. The facts show that in designated replanting areas of the province, there are now three trees planted for every one harvested. This increases the survival rate to maturity for these trees to 87 percent, compared with 60 percent 10 years ago (Francis 1996). In spite of all this evidence, the government is expected to lower the AAC by 17 percent sometime between year 2000 and 2005, a move that is expected to cost around 45,000 jobs in the industry over the next 5 to 10 years (MacCallum 1996). Indeed, even a study commissioned by the government concluded that a 11.2 percent harvest reduction would have the effect of closing one pulp mill, one plywood mill, between three and five sawmills and seven shingle mills, resulting in some 4,000 direct job losses in the logging and manufacturing sectors of the provincial economy (MacCallum 1996)

Like the forest industry, the mining industry in British Columbia has also suffered big losses. For instance, while direct employment in the mining industry has declined by 35 percent since 1988, the industry reported net earnings of $154 million in 1997, a 70 percent decline since 1995. Furthermore, during the same period, expenditures on environmental initiatives increased by 14 percent (Price Waterhouse 1998b). According to The Fraser Institute Survey of Mining Companies Operating in Canada: Fall 1997, British Columbia was rated by mining companies as the least attractive province in Canada in which to invest (Jones and Arman 1997). As figure 21 shows, policies adopted by the government of British Columbia have significantly contributed to the poor investment climate for mining exploration in British Columbia. A coal mine operating in British Columbia pays almost $14.7 million more in taxes than it would if it were operating in Alberta. A gold mine operating in British Columbia pays almost $7.6 million more in taxes than it would if it were operating a similar mine in the Yukon (Mining Association of British Columbia 1998). Therefore, it is not difficult to understand why investments in primary mining exploration in British Columbia have continued to decline since 1992 (see figure 22).

The practice of the government of turning Crown land into provincial parks or heritage sites without any consultation or a cost-benefit analysis, is also partly to blame for this poor investment climate. For instance, after Geology Geddes Resources Limited had invested almost $50 million to discover one of the biggest mineral finds ever found in North America, the government turned the location of the discovery, commonly called Windy Craggy, into a "World Heritage Site" without any public consultation or legislative hearings. Geology Geddes was not compensated for their loss. Few benefits have been realized from the creation of the park: no one lives in the area and those wishing to visit the site can do so only by helicopter and only after applying for a permit. The costs have been almost $550 million in capital investments, and 2,000 direct and indirect jobs. In short, "This taking without fair process and without good reason has led mining company managers, who are responsible to their shareholders, to shift the bulk of their exploration planning and budgets out of British Columbia" (Webster 1998).

The Clark government's response

In response, the Clark government has rethought its policy on natural resources management. For example, the government recently announced it was cutting stumpage fees by $639 million over the next three years. Early indications from the industry suggest that the government is finally on the right track (Hunter and Hogben 1998). With regard to the mining industry, the province recently passed the Mining Rights Amendment Act, which clarifies the right of access to prospective lands. Claim holders, according to the new law, can expect to be compensated if their claims are expropriated by the government. Furthermore, the government has promised to introduce a more efficient permitting process (Financial Post 1998a). In addition, the oil and gas industry recently received good news from the government when it announced that it was cutting royalty payments between 20 and 40 percent on all new oil wells and moving to reduce the regulatory burden on the industry (Nutt 1998). While these are important first steps toward revitalizing the natural resources sector in British Columbia, there is still much to be done.

Recommendations

In light of the earlier discussion on the government's inability to manage the natural resources sector efficiently, we suggest that the government of British Columbia adopt the following policy recommendations.

1. Privatize the forests that are currently owned and managed by the Crown
   Given the evidence presented on the negative impact government policies have had on the British Columbia forest industry, the best solution to managing the industry efficiently and so as to maintain sustainable yields would be to privatize Crown-owned forests in British Columbia. One of the biggest problems with state ownership of forests is that neither government nor private companies logging on Crown lands have any incentive to operate efficiently, to replant, or to harvest prudently. Governments have little incentive to replant since the main beneficiary of this initiative will be the government in power in 40 or 80 years when the trees mature. Since private companies harvest on land that they themselves do not own, they see no direct benefit or economic incentive to invest in costly long-term "forest enhancement" through advanced silviculture. In short, both see short-term benefits in harvesting but no long-term value in replanting and forest enhancement programs.6
        Rather, as Lawrence Solomon, executive director of Environment Probe pointed out: "Private owners don't cut at a loss, they don't cut for employment reasons, and they manage their forests not as an undifferentiated commodity but as multi-purpose properties with timber being but one asset" (Solomon 1989). Since "the long-term value of an asset is the present value of the long-term stream of income from it, a private owner with secure property rights will act to preserve that long-term income stream" (Robson 1992: 39) Hence, private ownership would put an end to lumber disputes between Canada and the United States,7 and provide economic incentives for implementing replanting programs and harvesting for sustainable yield while also providing economic benefits (i.e. employment) to the rest of society.
        For instance, in 1991 Abitibi Price began cleaning up its half-million acres of land near Thunder Bay, Ontario. Three years later, it turned one section of the land into a money-making park and made plans for the leasing of cottages around some remote lakes. The company stated: "We can market our products--our forest and lakes--better and get more value from them" (Brubaker 1997). Canadian Pacific made a similar decision with its game reserve near Montebello, Quebec. The company manages the property for forestry and tourism purposes. In the process, it has not only created jobs but has also succeeded in preserving the natural beauty of the region. In short, private owners have financial incentives to protect the long-term value of their property because to do otherwise would have an adverse impact upon the long term profitability of their enterprises.
2. Repeal the Forest Practices Code and the Forest Renewal Act
   Both the Forest Practices Code and the Forest Renewal Act have more to do with increasing the regulatory burden on the forest industry than generating positive environmental outcomes. Professor David Haley from the Department of Forest Resources Management at the University of British Columbia, has estimated that the Forest Practices Code will cost the provincial economy $1.4 billion per year in lost economic activity but will fail to reach even its own objective of sustainable forest resources development (Haley 1996). Like the Forest Practices Code, the Forest Renewal Act is also more oriented towards process than towards outcomes. Its operations are paid for by a special stumpage fee called the "super stumpage" that is levied on the industry (Haley 1996). The government should repeal these bills and rely on common-law remedies and private ownership of the forests to protect the environment.
3. Eliminate the minimum stumpage fee
   Since coming to power in 1991, the NDP government has increased stumpage fees by nearly 200 percent. These payments are now part of the cost of production. As a result, British Columbia forest companies have become costly producers of lumber and other forest products, a situation that has led to lower levels of economic output and reduced employment. Given that world lumber prices fluctuate constantly, in order to allow companies to remain profitable and viable well into the future, the provincial government should put in place a mechanism for linking stumpage fees to the price of lumber.
4. Eliminate the British Columbia Environmental Assessment Act
   British Columbia's Environmental Assessment Act is a cumbersome and time-consuming process that leads to allocative inefficiencies. The government should repeal this act and rely on common-law remedies to ensure protection of the environment. Its one-size-fits-all process of assessing the environmental impact of projects around the province fails to take into account the uniqueness of each project and the possible negative externalities arising from each. The assessment mechanism over-estimates the impact of certain projects and, thereby, deprives the provincial economy of higher levels of economic activity.
5. Subject the setting aside of Crown land for parks and heritage sites to cost/benefit analysis
   The government must immediately cease the practice of turning Crown lands into provincial parks or heritage sites without any cost-benefit analysis. This move would ease the uncertainty over land use in the province and lead to a more stable investment climate.

Conclusion

The British Columbia government's natural resources policy has hurt the province's forest and mining industries by increasing red tape, penalizing innovation, discouraging investment, and reducing employment. By attempting to micro-manage the environment, the government has hurt a vital sector of the provincial economy. Recently, however, the government has changed course. By reducing stumpage fees and the uncertainty over land use and implementing reductions in royalty payments to boost the oil and gas industry in the province, the government has finally recognized the importance of the natural resources sector. There is still much to do. Therefore, for taking these important first steps towards revitalizing British Columbia's natural resources sector, the British Columbia government deserves a D.

1. See Statistics Canada 1998b. Please note that the figures on GDP contributions are taken from the following columns in table 4: Fishing, trapping, logging, and forestry; Mining (include contributions from quarrying and oil wells). Figures on employment are taken from the following columns in table 8: Other primary; Mining, quarrying, and oil wells.
2. Please see Horne, Riley, Ransom, and Kosempel 1996 for a more detailed analysis of the large indirect contributions that the forest industry makes to the British Columbia economy.
3. Note that the figures in this chart do not reflect the large indirect contributions that the forest and mining industries make to the British Columbia economy.
4. While financial problems in Asia have had an impact on British Columbia's forestry industry, it is important to note that the majority of the problems associated with the industry resulted from the provincial government's policies and materialized well before the appearance of the "Asian Flu."
5. Evidence shows that environmental conditions are already fairly good and improving in Canada, including British Columbia. Please see Hayward and Jones 1998.
6. Private ownership would eliminate the need for the Forest Renewal Board, established under the Forest Renewal Act, since private owners would have a vested interest in establishing their own forest enhancement programs without direction from the government. Moreover, since the operations of the Board are funded by the "super stumpage fee" placed on the industry, the elimination of the Board would eliminate the super stumpage fee and allow the industry to spend these scarce dollars on forest renewal and employment. For an analysis in more depth of the debate surrounding public versus private ownership of forests, please see Deacon and Johnson 1985.
7. Currently, the United States views any reductions in stumpage fees as a form of subsidy to the forest industry. This is because the trees that are cut down by the forest companies are from lands owned by the government. As a result, the United States usually places countervailing duties on any lumber imports from Canada, particularly from British Columbia, if stumpage fees are reduced. If the land was privatized, however, both stumpage fees and trade wars with the United States over lumber exports might come to a halt.

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Last Modified: Wednesday, October 20, 1999.