Private Property Rights:
A Solution for BC’s Faltering Forest Industry

By Satinder Chera, BA Honours Political Science, University of Toronto

Governments are inherently likely to make concessions with various interest groups in order to prolong their term in office rather than to consider the long-term benefits of sound policy choices. To illustrate this point we need only look as far as British Columbia’s forest industry. Rather than considering long-term solutions to solving the decline in the industry, the provincial government has instead implemented short-term, band-aid solutions which may appease the special interest groups for now, but in the long-run will further add to the province’s forestry crisis.

Evidence suggests
that the forest industry is in serious financial trouble.

British Columbia’s forest industry plays a pivotal role in creating economic wealth and employment in the province. In 1996, the forest industry accounted for 19.8 percent of all the goods and services (GDP) produced in the province (The Chancellor Partners, 1997). The industry directly employs close to 100,000 workers and is the largest industrial employer in the province, generating an additional 195,000 indirect jobs. The average forestry worker earns $46,130; $14,180 more than the average salary in British Columbia. In 1997, industry exports totalling $14.5 billion accounted for 55 percent of the province’s total exports. In the last 5 years, the industry’s capital expenditures have totalled almost $6 billion, while payments (i.e., taxes and stumpage fees) to all levels of government have amounted to more than $20 billion (Price Waterhouse, 1998). Indeed, the forest industry’s health is crucial to the overall performance of the provincial economy. Considering the economic importance of the forest industry, all British Columbians should be concerned by the decline in the industry.

An industry in crisis

Evidence suggests that the forest industry is in serious financial trouble. During the past two years, the forest industry has experienced over 4,500 job losses. In 1995, the industry posted net earnings totalling $1.2 billion. Last year, 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. Capital expenditures subsequently declined by almost 17 percent between 1996 and 1997 (Price Waterhouse, 1998).

While the BC government is quick to place blame for the forest industry’s financial difficulties on the “Asian Flu,” the industry began to incur losses long before the outbreak of the Asian economic crisis in 1997. Beginning in 1995, despite rising lumber prices, output from the forestry sector began to decline (Hajdu, 1998; Chu, 1998). This decline has been fuelled by policies that have been adopted by the BC government during the past seven years.

A rash of bad policies

Since coming to power in the fall of 1991, the government of British Columbia has pursued a natural resources policy that has largely been guided by environmental concerns. Increases in environmental regulation, due largely to the implementation of the 1995 Forest Practices Code, have increased the cost of production in the forest industry by 50 percent (Smyth 1998). The Code places restrictions on Crown land that is not listed as a designated park or a 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 benefit (Van Kooten and Wang, 1998). Stumpage fees have increased by almost 200 percent since 1992, partly because of the government’s introduction of the Forest Renewal Act. This increase has contributed to an 83 percent rise in the cost of logging on Crown land (Smyth, 1998; Price Waterhouse, 1998). The passage of the 1993 Protected Areas Strategy arbitrarily set aside 12 percent of provincial land for non-commercial development without a cost-benefit analysis. This policy has resulted in increased uncertainty about land-use in British Columbia. This has, in turn, had an adverse affect on investment. In addition, a reduction in the Allowable Annual Cut (AAC), an annual limit set by the province on the number of trees individual forest companies are permitted to harvest, is expected to result in the loss of thousands of jobs in the industry (Haley, 1996).

These policies have severely threatened forestry jobs in British Columbia. Instead of creating the 40,000 new jobs that Premier Glen Clark promised in his 1996 Jobs and Timber Accord, policies implemented by the BC government, including the Forest Practices Code, the Forest Renewal Act, and higher stumpage rates, have, in part, resulted in the loss of 4,500 direct jobs. Indirect job losses could be much higher. A study conducted for the BC government in 1996 concluded that decreases in direct forestry expenditures can have a negative impact on the indirect contributions that the industry generates. For instance, a $127 million decrease in fibre expenditures by the forest industry can cost up to 43 indirect transportation jobs (Horne, Riley, Ransom, and Kosempel, 1996). Since there is less fibre to haul, there is less demand for workers to transport it. Hence, when the forest industry begins to decline, the effects are widespread. In order to ensure the survival of BC’s forest industry, clearly a new forest policy is required. To achieve this, the provincial government should get out of the business of managing and regulating the industry, and instead, transfer ownership of the province’s forests to private hands.

The solution: less government, more private ownership of BC’s forests

Governments suffer from what is known as “short-termism” (Brubaker, 1998). That is, governments tend to place short-term considerations, such as political ambitions, ahead of sound public policy choices that look to the future. For instance, government mismanagement of the East Coast fishing industry has reduced cod stocks, consequently placing tens of thousands of people out of work. Similarly, the West Coast fishery now finds itself in the same dilemma. These cases call into question government’s ability to manage natural resources through regulation and/or direct ownership. While cutting stumpage fees and reducing unnecessary environmental regulations would go a long way to addressing the forest industry’s concerns in BC, turning the province’s forests over to private ownership is the optimal solution.

Incentives do matter. Unlike governments, private owners have financial incentives to protect the long-term value of their property since doing otherwise would have an adverse impact on the long-term profitability of their investment. In fact, there are many examples of private owners who have succeeded in adding to the value of their land, primarily through using their properties for varied purposes. For instance, in 1991, Abitibi Price began cleaning up its half-million acres of land near Thunder Bay, Ontario. Three years

Incentives do matter. Unlike governments, private owners have financial incentives to protect the long-term value of their property since doing otherwise would have an adverse impact on the long-term profitability of their investment.

later it turned one section of the land into a money-making park and made plans to lease cottages around some remote lakes. The company stated that, “We can market our product—our forests and lakes—better and get more value from them.” 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 also succeeded in preserving the natural beauty of the region (Brubaker, 1998). As Lawrence Solomon, executive director of Environment Probe, once 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).

Governments, on the other hand, given the incentives that are inherent in the political process, are more likely to make concessions and to compromise with various interest groups in order to prolong their term in office. In doing so, however, the benefits of sound policy choices are unfairly discounted. Turning British Columbia’s forests over to private hands would provide the incentives for private firms to cut in a sustainable manner and implement replantation programs while providing economic benefits to society. Hence, private ownership of British Columbia’s forests is the best solution to solving the province’s forestry crisis.

Bibliography

Brubaker, Elizabeth (1998). “Property Rights: Creating Incentives and Tools for Sustainable Fisheries Management.” Fraser Forum (April): pp. 9-14.

Chu, Doris, Economic Services, The Conference Board of Canada (1998). Special Report for The Fraser Institute on Forestry Output Data for British Columbia (July 31).

Francis, Diane (1996). “The vital industry that is largely ignored.” Maclean’s (November 11): p. 15.

Hajdu, Csaba, Forest Industrial Relations Ltd. (1998). Special Report for The Fraser Institute on Lumber Prices (July 27).

Haley, David (1996). “Regulating the Forest Sector in British Columbia: Costs, Benefits and Alternatives.” Paper Presented at The Fraser Institute Conference: What is the Future of the B.C. Forest Industry, on December 13, 1996 in Vancouver.

Horne, Garry, David Riley, Lisa Ransom, and Stephen Kosempel, BC Ministry of Finance and Corporate Relations (1996). A Provincial Impact Estimation Procedure for the British Columbia Forest Sector. (February): pp. 6-8.

Price Waterhouse (1998). The Forest Industry in British Columbia 1997. Vancouver: Price Waterhouse.

Smyth, Michael (1998). “Premier’s saviour act wearing thin.” The Province (May 29).

The Chancellor Partners (1997). The Economic Impact of the Forest Industry on British Columbia and Metropolitan Vancouver. Special Report (December 1997).

Van Kooten, Cornelis G., and Sen Wang (1998). “Estimating Economic Costs of Nature Protection: British Columbia’s Forest Regulations,” in Canadian Public Policy (May): pp. S63.

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