Archaic and costly contracts governing the supply of timber to the South African market are being overhauled, writes Lael Bethlehem
Over the past 100 years, the state has played a classic developmental role in industrial forestry by stepping in to avert market failure. It has done its job.
Today there is a thriving private sector in forest plantation management. Now the state can step back from the management of industrial forests.
New legislation will come into effect at the beginning of next month. While there have been several areas of heated debate, one issue stands out: the changes to the system of timber supply to sawmills.
The Cape colonial authorities realised 120 years ago that the fledgling South African economy was short of a strategic resource – timber. The country is naturally short of forests, and the growing economy was placing the existing forests under strain. The Cape authorities started a dual process of developing timber plantations on the one hand, and protecting indigenous forests on the other. So began a long process of state involvement in the supply of timber to industry.
It made sense for the state rather than the private sector to grow commercial forests because they are such a long-term business. The private sector was unwilling to accept the long lead times and was poorly equipped to manage the risks. As the plantations grew, the state was able to move timber to the market. But it encountered problems getting investors to buy the timber and turn it into products for the building industry and consumers.
Investors were not keen to invest in sawmills, usually in rural areas where little infrastructure existed. They played hard to get and the state needed to offer them strong incentives.
So it came up with a package deal for investors: a long-term contract for the supply of timber; a piece of land on which to erect a sawmill; and a set of contract provisions that had the effect of keeping prices predictable and low. The state also undertook to provide the sawmills with a minimum quantity of timber.
This was the genesis of the state timber contract. It usually took the form of an “evergreen” contract: sawmillers were given the right to state timber on an indefinite basis.
In many instances, the sawmillers were guaranteed that they would be supplied with timber in virtual perpetuity – and if the state ever decided to terminate the contract, it would have to offer compensation.
It was an absurd arrangement, seen in the light of a modern market economy. And yet there was a logic to the system, considering the sawmillers were small- to medium-sized companies relying on a single supplier.
The contracts reflected the conditions of the developing economy of the time. They were designed to suit the conditions of the 1950s, 1960s and early 1970s. But they put in place a system that is still with us today.
The contract system now has a number of drawbacks. The long-term contracts have effectively closed the market, which in turn means there are few incentives for outside investment. Some of the contracts promise huge volumes of timber, which cannot be supplied on a sustainable basis. In some areas trees have been planted in an environmentally unacceptable manner in an attempt to fulfil the contract obligations.
A third problem is that the “evergreen” contracts are not subject to competitive pricing. Some millers are currently paying 1995 prices for their timber, while others have had several increases since then – leading to intervention by the Competition Board.
The new law changes all this by laying down ground rules for state contracts. All contracts for the supply of timber from state forests – existing as well as new – will have to abide by certain basic conditions.
All contracts will have a five-year termination period, and longer or shorter notice periods will have to be approved by the minister of water affairs and forestry.
The state will not be obliged to supply a quantity of timber that cannot be provided in a sustainable manner, unless the shortfall is due to negligence.
These provisions introduce market principles into the supply of timber from state forests. Some of the old “evergreen” contracts have already been renegotiated and many sawmillers have come to realise that the old closed system cannot be supported. Safcol, the forestry company owned by the Department of Public Enterprises, has been able to sign new contracts with all but a few customers.
The Department of Water Affairs and Forestry has been able to renegotiate the terms on which more than 50% of its timber is sold, and more new contracts are expected once the law is passed in April. Those sawmillers who have resisted new contracts will now have to consider the effect of the new law in their dealings with the state forests.
Whereas in the past the state has planted, tended and sold trees, it will increasingly turn its attention to promoting and regulating forestry. It will concentrate more on other pressing problems such as the management of indigenous forests and the use of trees in community development projects.
The restructuring of the state’s commercial forestry assets will draw the private sector in to grow and sell trees. The land will not be sold, but will be leased with strict provisions for environmental controls, community rights and public access.
Lael Bethlehem is chief director (forestry) in the Department of Water Affairs and Forestry