Stumpage System Betrays B.C. Forests' True Worth

By Neville Judd

VANCOUVER, Canada, January 30, 2001 (ENS) - Forest companies are abusing British Columbia's timber appraisal system to boost their profits at the expense of the taxpayer, said a report published Monday.

The report, Stumpage Sellout, claims that since 1998, forest companies operating on mainland Canada's west coast have avoided paying C$224 million (US$149 million) to the provincial government.

trees

British Columbia is blessed with the richest forest diversity in North America. (Photo courtesy Western Canada Wilderness Committee)
Vancouver based International Forest Products (Interfor) accounted for nearly C$100 million (US$66.6 million) of that amount, said the Sierra Legal Defence Fund, the non-profit environmental law organization which produced the report.

"The companies have logged a fortune out of the woods and British Columbians, who own the forest, are paying the price," said Karen Wristen, Sierra Legal executive director.

"The millions lost in revenue in those years could nearly have doubled B.C. Environment's annual budget, revenue that could have been channeled back into much needed field work and enforcement."

The Western Canada Wilderness Committee (WCWC) referred to yesterday's report as "Timbergate" and joined Sierra Legal in calling for B.C.'s Attorney General Graeme Bowbrick to investigate the province's timber appraisal system.

"It appears that the Ministry of Forests under the direction of past forest ministers has set up a stumpage appraisal system that clearly violates the Ministry of Forests Actís Section 4 requirements to collect stumpage revenues in a fair and equitable manner," said Paul George, WCWC executive director.

Bowbrick

B.C.'s Attorney General Graeme Bowbrick. (Photo courtesy B.C. Attorney General's Office)
"This opened up the door for companies to misrepresent the quality of wood they have been logging to get lower stumpage rates and cheat the public purse out of millions and millions of tax dollars."

B.C. has the greatest forest diversity in North America, with lush fir, spruce and cedar growing to sizes unparalleled elsewhere. About two thirds of B.C.'s forests - roughly 59 million hectares - are public land, sometimes called Crown land.

Charged with overseeing the management of this public forest land is the B.C. Forest Service, part of the province's Ministry of Forests.

The Forest Service manages about one quarter of public forest land for revenue opportunities, including commercial timber harvesting. The other three quarters is managed for non-commercial timber values, such as recreation and cultural uses.

Each year, about one per cent - between 160,000 and 190,000 hectares - of provincial forest land is harvested.

To generate revenue from the trees cut by private companies on public land, the provincial government uses a stumpage system.

Before a company can log wood from Crown land it must obtain a cutting permit from the Forest Service. To do this it must provide information about the area it proposes to log, including the species and volume of timber found there, an estimate of the logging costs and the going market rate for the wood.

Terrain stability assessments, road layout and design plans, fish and wildlife inventory information and silviculture prescriptions must also be submitted.

The Forest Service uses this information to calculate the relative value of the stand based on the quantity and quality of wood, current market conditions and the costs of logging.

tree

This red cedar, 3.5 meters (11 feet) in width and estimated to be over 1,000 years old, was felled by Interfor in the upper Elaho Valley last year. (Photo courtesy Western Canada Wilderness Committee)
Then it sets a stumpage rate - the amount of money the licensee must pay per cubic meter to the Crown for the right to log timber. The rate is set out in the cutting permit, which is usually awarded for between two and five years.

The initial stumpage rate can be revisited and adjusted, either quarterly or annually, to account for changes in market conditions or environmental factors, such as windstorms or forest fires.

Using data obtained from B.C.'s Ministry of Forests under the Freedom of Information and Protection of Privacy Act, Sierra Legal contends that forestry companies are abusing the stumpage appraisal system by employing a technique called "grade setting."

Put simply, companies are scaling a disproportionate amount of low value wood in the samples used by the government to set the stumpage fees. A disproportionate amount of low value wood in the sample means stumpage fees will be set low, allowing companies to then log higher quality wood while paying for it at the artificially low rate.

Interfor has used grade setting with impressive results for its profit margins, said the report.

"After analyzing coastal stumpage information, it is clear that one company appears to be getting a comparative sweet deal in relation to other licensees," said the report of the Vancouver based company.

"Since 1998, Interfor appears to have paid stumpage rates considerably below those of its competitors on the Coast."

The report claims Interfor's return to profitability from early 1998, when it posted a three month loss of $14.2 million (all figures in Canadian dollars), corresponds with a sharp fall in the stumpage rates it pays.

For example, in the third quarter of 1998, Interfor paid an initial stumpage rate of $36.55 per cubic meter in the cutting permit granted for Tree Farm Licence 38 in the Elaho Valley, about 170 kilometers (105 miles) north of Vancouver.

Over the course of the first year of the permit, the stumpage rate varied between $36.55/m3 and $40.72/m3. During this period, Interfor harvested a total of 3,419.5 cubic meters of wood.

In the fourth quarter of 1999, the stumpage rate dropped dramatically to $8.43/m3 and logging rates immediately escalated.

The report claims that on 37 cutting permits, Interfor used the grade setting technique to achieve an overall reduction in average stumpage rates from $29.16/m3 to $5.36/m3 between the first quarter of 1998 and ending the second quarter of 2000.

This resulted in an overall saving to the company of more than $60 million in stumpage during that period.

Interfor showed well above the regional average for the volume of wood for which a legal minimum of 25 cents per cubic meter was paid. In the fourth quarter of 1999, this rate applied to 53 percent of the wood cut by Interfor, said the report.

This amount is roughly equivalent to $10 per logging truck of wood.

On a broader scale, the report says Interfor paid considerably less stumpage from 1998 to the second quarter of 2000 than its major competitors on the B.C. coast. During this period, Interfor paid almost $100 million less in provincial stumpage than the provincial government projected should have been paid, based on target stumpage rates.

In total, the report claims that the B.C. taxpayer was shortchanged more than $224 million by coastal logging companies from 1998 to the second quarter of 2000 because of grade setting.

To end grade setting and other potential abuses of the stumpage system, the report recommends the following:

The last recommendation is possibly the only sentence contained within Sierra Legal's 36 page report that Interfor agrees with.

"Sierra Legal's report is as flawed as the stumpage system itself," said Interfor spokesman Steve Crombie.

"It purports to talk about the industry and the problems with stumpage, but there are so many, many references to Interfor it becomes another 'bash Interfor' exercise disguised as something broader.

"The one area we agree upon is that stumpage is horrendously flawed and needs to be fixed. If this report is what gets it done, then good.

Wilson

Minister of Forests, Gordon Wilson. (Photo courtesy B.C. Ministry of Forests)
"We need a system that changes with market conditions and that is based on market prices instead of the government setting revenue targets."

A tax on the value of the product that goes to market might be one way of addressing this, said Crombie.

All B.C. forestry companies resort to grade setting, said Crombie, adding that its effects are open to interpretation.

"Grade setting may sound bad but it provides the flexibility companies need to keep their costs down. Without it I suspect many companies would be shutting down, which is probably what Sierra Legal wants.

Crombie admitted that since 1998, when Interfor was in dire financial straits, the company had become proficient at cutting costs, including within the stumpage system. It had also benefited from the allowances given under the stumpage system to companies like Interfor logging in remote areas.

"We operate within the rules and with the blessing of the Ministry of Forests, and it's been this way for many, many years," he added.

Following publication of yesterday's report, B.C. Forests Minister Gordon Wilson announced government will meet with representatives from the coastal forest industry to address concerns about grade setting.

"Last November I asked ministry staff to monitor how well coastal licensees were adapting to changes made to provincial appraisal policy introduced in April 2000," said Wilson.

"The ministryís preliminary information suggests that while most licensees are operating within the policy and legislation, others continue to manipulate the stumpage system.

"This practice must stop."

Ministry staff introduced new scaling practices this month to improve the accuracy of scaling and have started a series of field audits to make sure companies are scaling or measuring and reporting the volume and grade of cut timber soon after they are cut.

"These measures to curtail stumpage management are in place, but other action may also be needed," said Wilson.

"I am prepared to allow industry input into further changes to halt these practices while avoiding unnecessary financial burdens for those companies who are playing by the rules."

But there are some who would argue that the ministry does not have sufficient staff to enforce the rules.

"Clearly, there are not enough front line workers in the Ministry of Forests to ensure that the wood the companies present for assessment fairly represents what's out there," said George Heyman, president of the B.C. Government and Services Employees' Union (BCGEU), which represents front line workers in the Ministry of Forests.

"Without adequate staffing levels, companies are left to decide for themselves what they pay without proper monitoring."

To read Stumpage Sellout, visit: http://www.sierralegal.org/reports/SLDF_stumpage3.pdf