Select Committee on Agriculture Minutes of Evidence

Examination of witnesses (Questions 20 - 39)



  20. The Woodland Trust says, "The Forestry Commission is seriously constrained in terms of its working practice and ability to deliver current overall policy objectives by the detail contained within the Forestry Act (1967)." Is there some justification for that, would you say?
  (Mr Bills) I think there is some justification. It is not just 1967, much of it will go back to 1919, and I suppose the truth is that as legislation it could be combed over in the light of modern circumstances. Having said that, I think that the Forestry Commission has done well with the various amendments throughout the years to adjust to the changing needs of forestry in the community.

Mr Opik

  21. I have just one question about Wales. How autonomous is the Welsh element of the operation? For example, if they wanted to pursue an explicitly ecological agenda, for example, bio-diversity within Wales, would they be able to do that?
  (Mr Bills) Yes, they would.

  22. Would they have to get the approval of the Forestry Commission?
  (Mr Bills) No, it would be up to the direction of the Assembly to do that. Our role would be to make sure that they understood the consequences, good and bad, and, of course, I think we would look to see that it would fit in the broad framework of the UK Forest Standard, which is really about sustainability. In our discussions with the Welsh, they have had no argument with that at all.

Mr Todd

  23. Your paper refers a good deal to partnership. When I looked at the objectives and what you had written, one of the difficulties I sometimes had was apparent incoherence with a number of different agencies in Government sponsorship pursuing objectives towards woodlands and forestry, of which you were the largest, but by no means the only, provider or mechanism for supporting others to provide. Is that a reasonable perception, that there is a good deal of joining-up required to achieve the objectives that you have set down here?
  (Mr Bills) Absolutely right. I think, when I arrived in the post five years ago I was astounded by the amount of people you seem to have to get on side to do what everybody agreed was a good thing to do.

  24. That is the British way. I do not know what it is like in Australia, but that is what we do here.
  (Mr Bills) We work very hard at that. We recognise this is the thing to do and I think the general Government encouragement for joined-up or cross-sector approaches is sound. We followed those and we think that compared to where we were four or five years ago, we have made significant progress. We are just doing a quinquennial review of the Forest Enterprise as an agency and we have generally been congratulated on our ability to make better engagement for the whole range of stakeholders than we were able to some years ago. Coming back to the Woodland Trust, as you were concerned about the Act, one area where we do find ourselves limited because of the nature of the Act is in our ability always to enter into financial partnerships. Bob McIntosh has been looking at this, he might like to express a view about that.
  (Dr McIntosh) I am Bob McIntosh, Chief Executive of the Forest Enterprise. We are a little constrained in entering into true partnerships with people in the PPP area, just because of the way the Forestry Act was worded when it was done in 1919. It was not intended to prevent us doing that, but because of the way it is worded it is very difficult for us to do it, and really we need a bit of legislation—probably primary legislation—to change the Forestry Act before we can really, truly engage in productive partnerships.

  25. Could I draw out one example of that? The National Forest covers a large chunk of my constituency and is able to enter into a tender scheme, a process in which they receive bids for partnership with farmers to extend forest cover within the area. I do not think you have a tender scheme mechanism within your armoury of the same kind, am I right in that?
  (Mr Bills) I will give it to Paul to deal with. He works with the National Forest.
  (Mr Hill-Tout) I am Paul Hill-Tout, Chief Conservator, Forestry Commission for England. We do operate tender schemes of our own.

  26. Do they work in the same way?
  (Mr Hill-Tout) No, slightly differently. We have established, actually, in the grants area—which is rather different to the question of the management of the Forestry Commission estate—a partnership funding mechanism which runs at a level of about £1 million per year, where we align some of our own funds along side the funds of other organisations such as the National Forest and such as the Woodland Trust, to try and draw in a range of streams of funding to achieve more than each of us could do individually.

  Mr Todd: It does occur to me, Chairman, that perhaps we could draw out a little, probably not in this discussion, and produce a short paper which summarises the point you have just made of the legislative constraints, which make it a little bit more difficult than you would like to enter into partnership arrangements with other bodies. That should help.


  27. Have you actually asked the Government for legislative changes?
  (Dr McIntosh) No. We have sought legal advice on how to do this. The fact is, it will need probably primary legislation. We are looking at the whole application of the Forestry Act and we are thinking that if we were to ask for changes, we ought to look at all the implications first. I can, perhaps, give an example of what I mean. We have a very good business where we run cabins and camp sites around the country, which is very popular and it is a good little business, but it suffers from lack of investment. We had wanted to do a partnership with the private sector to reinvest in those cabins, to refurbish them and, perhaps, to build some new sites, which was very much in tune with the Government's PPP initiative, but because of the wording in the Forestry Act it prevents us from getting into a genuine partnership agreement which brought in private sector funds to help develop this.

  Chairman: It might even lend itself to a Private Members' Bill, but I think what Mark said would be very helpful—if you could let us have a paper specifically on that subject, because that is one of the things these sessions here tend to tease out.

Mr Todd

  28. We are going to come on later to talk about the Rural Development Programme and your part in that. There are a number of other initiatives which are designed to foster forestry—the millennium grants some of which the Woodland Trust have received, and the energy crops initiative, ERDP, as well. As I said at the start of this, one gets the impression of a number of different hands in this particular pot, not necessarily all quite agreeing with how to deliver the goods, and without an overall executive responsibility for delivering the objectives. Experience shows that that is a lot easier to say than to do in British Government culture, and, perhaps, some restructuring may be sensible to achieve the goals we are after.
  (Mr Bills) Yes, it could be. If I think about our particular role in these partnership, what we have to offer apart from grants, which gets people at least to the table, is that we are one of the few people that are not only engaged in the sort of research and policy side, but also manage forests. We do have people on the ground. We have 80 offices throughout the GB. So we are very much involved in the delivery and we have found that we have been welcomed in all partnerships because of that very much hands-on role of being able to deliver.

  29. Some of these partnerships are rather complex: entities with three or four sizeable players around the table having to work out how best to proceed?
  (Mr Bills) Yes, that is right.

  30. Again, not wishing to put you to more work, but I think some concrete examples of both the advantages and the disadvantages of this mode of working together to deliver your goals would be helpful, because part of the purpose of a hearing like this is that it is supposed to draw out the legislative constraints, and also, to some extent, the organisational constraints that may exist which make it a little bit harder to do what you are trying to do.
  (Mr Bills) Sure.
  (Mr Hill-Tout) If I can just give one example of what we are doing at present, we are engaged in some major building partnerships related to economic regeneration programmes, Objective 1 and Objective 2.

  31. Which should be working with the RDAs and the others?
  (Mr Hill-Tout) We are in partnership with the RDAs, various others of the Government body structure for the regions and other key players, and we are actually looking at restructuring our grants packages so that we can come to the table with a block grant entity, which helps to bring in other partners to the table and bring in a major increase in the range of funds available for dealing with these very, very complex situations. That is looking extremely promising at the moment, but we are having to take more very innovative approaches to the way we handle grants.

Dr Turner

  32. Your memorandum to us makes it very clear and emphasises the changes in your role since the 1980s, and the much more involvement you now have. The question I wanted to briefly explore is, now that you are basically adviser, regulator, as well as the longer standing role of producing commercial timber, is there a conflict between those? It certainly has been suggested to us by fountains plc, in their memorandum to us, that they believe that there is a potential conflict between having those three different roles, and the fact that you are still the largest commercial producer of timber, could you comment?
  (Mr Bills) I understand very much the tensions that exist and, of course, there is a potential, but our job is to avoid that potential becoming a reality. I think we have structures in the way the Board operates itself, in the way we have an arms-length relationship between our regulatory and grant aid processes, which, for example, Paul runs in England and the way that Forest Enterprise operates. We do make sure that we expect no more from the private sector. Indeed, I have been happy to say we expect more from Dr McIntosh and what he does on the public lands than we do from the private lands. The potential is there. I cannot deny it. It is a structure that has that potential, but we are determined to have the safeguards to be quite open and transparent in what we do.

  33. What would you say to the very specific point that fountains make to us when they say, "There may slowly be emerging a realisation that may have affected timber markets over the last two to three years, not only to them actively, but also to the structure of this issue of the timber grower as a whole." Elsewhere in the memorandum they make much of that comment. What would your response be to people in the private sector who make that sort of comment?
  (Mr Bills) It is a difficult area. Basically we are dominant, we are selling around 5.5 million cubic metres of the 7.5 million that hits the market. We, of course, sell on the open market by way of auction, and there will often be private lots sold on that same auction. We also have medium and long-term arrangements. We sell both standing, where we sell it on the stumps so that people can cover their own harvesting costs, and we sell on the roadside, where people only have to worry about the haulage on lorries. All of this means that we have a mix of ways of selling, and I think that that open market operates quite well there. What they will be drawing attention to is a situation when the market is down, when we are actually selling a greater volume, and that deserves some explanation. Our targets for sales are expressed as a number, 5.5 million, plus or minus 5 per cent. What we will do under these circumstances, because of the way we are funded—you will appreciate we are net funded and we have to forecast timber prices—clearly under that circumstance we are encouraged, motivated, indeed, to harvest that extra 5 per cent, but we do not go beyond that, because then we would be in breach of one of our fundamental objectives for that year. So at the margins we will increase harvest up to 5 per cent. That is rational thing to do anyway, because so much of the private sector has taken their timber right off the market until the prices go up. I might also add that you will still find in many places that we are under-cut by the private sector too. Economic rationalists might say, on a short run anyway, "Just lock the doors. Just drive the price up." Frankly, if you do that, then the processing industry, which we need to stay in this country and which is suffering—three or four saw mills have gone out of business in the last six months or year—do not consider they are getting their timber too cheap. The real danger is that if we play the game where we shut up shop, the processors in the industry would leave and then it would be very hard to get them back again, even if their prices did improve.

  34. Given that there are these difficulties and you have to take steps to avoid them, what are the counter-balancing advantages which outweigh the negatives of you having a mixed role?
  (Mr Bills) It is very important during an industry development stage, which the UK processing industry is—it was nearly gone in the early 1980s, and since then there has been significant investment in pulp and paper and panels and modern saw mills, world class capital equipment—what drives them is a notion of resource security. They do not want to have to buy on the open market, month by month, their supplies. They need to have some long-term positions as well as buying short-term. They also need to be able to deal with at least one or two suppliers which are sizeable, because these are heavy fixed capital assets and they cannot just move them to another place—it is not like the silicon chip industry, for example. Once you have a pulp mill built, it does not move around very easily and it has no other use. So I think there has been an advantage in our ability to drive the downstream processing and manufacturing, which is very important for the sustainability of the industry.

  35. Do you think there will be support for you maintaining that role?
  (Mr Bills) I know there is the support. It does not always come from some elements of the growers, but there are other stakeholders who are strongly supportive of that position.

  36. You have already referred to one problem you have experienced, which was what I think you called "an unprecedented drop in price." In your memorandum you explain some of it is due to exchange rate problems, but 45 per cent is an amplification of any exchange rate problems, it would seem to me. I just wondered if you could help us by saying a little bit about how you actually forecast timber prices. It has hit your budget very badly. How far out were you in recent years? How far out have you been in forecasting? How do you try to forecast that, given that it is such a huge portion of your income?
  (Mr Bills) I will hand over to Bob to give you a bit of detail. Let me just talk a little bit about the exchange situation. We came off 1996 at a time when timber prices had peaked and we are talking about a 45 per cent decline since then. We went into Treasury with a CSR forecast of income which was probably, because we knew this was a peak, around about 20 per cent down. We would probably try a little less, but Treasury would have driven it up a little bit. So the 45 per cent is off the peak. Nevertheless, the comparator we use is the Swedish Krona and the Scandinavians are the major exporters into this country. Today I think it was running at around 13.5-13.8 to the pound. In 1996 it was under 10. So the currency has had a huge impact. It still is, I suspect, 80 per cent of the cause of the decline in prices. There have been other issues like the Baltic states. The freeing up of that operation has meant that a new source of timber has been able to be put on this market. Bob can talk a little bit about the forecasting of timber prices.
  (Dr McIntosh) Timber prices have always cycled quite high up in the cycle, so that has been the way for the last 20 or 30 years and we are accustomed to that.

  37. You said the 40 per cent was unprecedented. How big is the normal trough?
  (Dr McIntosh) The depth of the trough we are in just now, they can move plus or minus 20 per cent over one year. That is not unusual. What we have seen over two or three years is a 45 per cent reduction. The trough we are in just now is the deepest one we have been in, and it is lasting longer than the previous one, but we are accustomed to the ups and downs of peaks and troughs. This one is special, there is no doubt about that. I think it important to remember that the industry as a whole is very import exposed. The home production of timber is the smallest part of the industry. Therefore, timber prices are almost totally driven by import prices. Producers in this country have very little ability to influence that one way or the other. We ride the waves which are determined by international practice. At the moment we are dealing with a very strong pound which is making the import of timber very cheap, therefore our own producers compete with that and that is when the prices fall. That has been the position for some time. There is the fact, as David said, of the Baltic states; since the collapse of the Soviet Union, they have become big players. Whether they are a permanent feature that will still impact once the pound weakens remains to be seen.

  38. If this is a cycle where you can make some sort of predictions, you have not said anything about how you predict.
  (Dr McIntosh) We can predict timber prices as well as the Treasury can predict GDP and the strength of the pound, is the straight answer to that. It is very difficult to look more than six months to a year ahead. We can look just now and think it is going to sit on the bottom of the market for probably another six to 12 months. Beyond that it really relies entirely on what the pound does.

  39. As I recall your memorandum, you are discussing with the Treasury changing the figure. Earlier on, Mr Bills, you made a comment about making sure that you produce competitively. I thought that in the appendix to your document you were actually telling us that you were, in fact, only now setting up a study to make sure that you could benchmark against the private sector forests. I was a bit surprised at your comment and I understand that the terms have not actually been finalised. How can you be telling me confidently the result when you are still setting up a benchmark?
  (Mr Bills) There has been continual benchmarking with other countries. There are consultants who keep us on the ball and tell us where we are falling behind. The study that is referred to there is benchmarking with organisations who are beginning to produce timber in this country, and hitherto there has not been significant private sector timber on the market. In the next 10 years there will probably be more private sector timber and we will become a minor player, but right now, because we are still dominant, it has been difficult to get a serious benchmarking exercise going within the United Kingdom economy.[2]
  (Dr McIntosh) One thing we do know a lot about this is how we compare in terms of producing timber, the cost of production and the market prices that we get. We are in the same market as the private sector, we are using the same contract and precisely the same customers, and we sell half of our timber to the private sector who then harvest and market it, and do a direct comparison with our own operations, so we know how well we are competing with the private sector in terms of costs and prices achieved.

2   Note by Witness: Yield predictions for maturing forests show that the private estate will potentially yield more than the public sector during the period 2010-15. This will depend on further expansion of domestic processing. Back

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