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Introduction
This paper, prepared following discussions with the chairs of the five regional ConFor groups in England, as well as the board of ConFor and processor members, provides background to a proposal for a Joint Venture (JV) or Lease of the larger commercial forest blocks on the public forest estate (PFE) in England. Members are asked to provide their thoughts to Stuart Goodall on stuart.goodall@confor.org.uk or by post to 59 George Street, Edinburgh, EH2 2JG by Friday, 22nd January 2010.
ConFor apologises for the short notice of this consultation, but unless a position is taken quickly there will be little opportunity to shape the development of the proposal.
Context of current ConFor activity
Public finances are under exceptional and increasing pressure, and this is likely to remain the case for at least the next five years. This will drive consideration of how to reduce the cost of delivering public services and what opportunities exist to raise money from publicly owned assets through sales or other mechanisms.
This comes at a time when ConFor has been working hard to promote proposals that would make a fundamental difference to forestry and wood-using businesses in England. Anticipating the impact of recent economic and financial developments on the public purse and the need to take action on carbon, ConFor has explored a range of issues with politicians ahead of the next general election.
Feedback from this exercise is leading to a focus on a future government working to support successful forestry and wood-using businesses through growing high-value, enduring markets (delivering more for a low-carbon economy), securing "better regulation" of forestry, and taking action to increase the supply of wood from sustainably managed forests, both hardwood and softwood.
In that context there is also an urgent need to understand the impact of the potentially fast-developing large-scale electricity-from-wood sector. This sector has the potential to divert significant supplies of wood from current markets to carbon-inefficient and time-limited markets. This is at odds with using wood to maximise jobs, business growth and carbon mitigation.
Forestry, and the use of wood, has secured a much-increased profile in 2009 and there is the potential to build on this in 2010. It is imperative that the JV/Lease issue is considered in this context - supporting efforts to promote the long-term success of the whole supply chain.
Background to Joint Venture or Lease proposal
The Government has included the possibility of a JV or Lease of some forests on the English PFE as part of the Frontline First initiative that the Prime Minister launched on 7th December. The reference to the PFE can be found on page 50 in the Operational Efficiency Programme document - available on this weblink http://www.hmg.gov.uk/frontlinefirst.aspx A background brief to the Operational Efficiency Programme is at Annex A. It is expected that a JV or Lease would apply to the commercial element of a limited number of forests, primarily in the north of England.
The headlines for forestry are:
While there are no immediate implications (any action identified for the Budget next year would be subject to a necessary delay before implementation), it is vital that ConFor is able to influence developments by late January.
Inclusion of a Joint Venture or Lease option in Frontline First
Including the idea of a JV or Lease in the Frontline First initiative provides an opportunity for organisations to express an interest in entering into a JV or lease on the PFE, thereby enabling Treasury to judge the level of interest, and for politicians to ‘test the water' on the political acceptability of leasing or JV. This process does not constitute a formal consultation.
Issues for ConFor members
On the basis of the discussions highlighted above this paper has been put together to set out the key issues for the sector. Members are asked to consider these and submit their thoughts.
The long-term success of forestry and wood-using businesses
Forestry and wood-using businesses comprise one of the few sectors that can support the transition to a low-carbon economy, offering carbon reduction, business growth and green jobs. There is a strong imperative for government to focus on facilitating the growth of the sector.
Whatever course of action government may choose to take on JV/Lease it should not be distracted from the bigger picture of supporting the development of the sector. This requires immediate action on markets, on supply and on the competitiveness of businesses in the sector.
Current review of Forestry Commission England (FCE)
A group of members in England from across the sector has prepared a timely paper on how FCE could best support a successful sector. The group looked at a variety of options for FCE to support its analysis, including sales, leasing and JVs.
The group's suggested position was that FCE should not be significantly altered, but that it should have a clearer commercial remit with a greater role for the private sector in managing assets on behalf of FCE.
Lessons learnt from the leasing debate in Scotland
The recent leasing consultation in Scotland identified two key issues for members:
The member's view in Scotland was that leasing could not be supported unless there were clear and effective assurances that the major element, at least, of any money raised should be retained for forestry. Given the situation in England it is very likely that any money raised through a JV or Lease would be diverted outside of the sector or used to offset an increased reduction in support for forestry.
FCE is the major supplier of timber in England, in particular in the north, employing many private sector businesses. During the current economic downturn much of the private sector has withdrawn from supplying timber, waiting until prices improve, and leaving FCE to keep mills supplied. Different perspectives have been advanced on this subject - that private growers are disadvantaged by FCE being prepared to supply at the lower prices available, and that they are advantaged by being able to wait for prices to recover.
Linked to that issue is the question of how quickly the private sector could adapt to a situation where FCE was no longer responsible for marketing large amounts of timber on a continuous basis. With price levels set, in the main, by imports would the much more disparate private sector supply sufficient wood if prices fell back? In these circumstances there would be limits to the market's ability to pay.
Of concern also is the potential for new entrants into the wood-using sector, in particular large energy generators, who could seek to secure a lease or JV and divert wood away from the existing sector. It is not clear how this could be mitigated as part of any JV or Lease agreement.
Set against these issues is the possibility that a JV or Lease could prompt a greater focus on wood production on the commercial elements of the PFE leading to potential increases, if marginal, in wood supply.
Pressure to deliver environmental and social benefits
Across the public and private sectors there has been a push towards the provision of non-market ‘public benefits' beyond the ability of either sector to supply these on a sustainable basis without significant and increasing financial support. In the coming years this pressure will increase significantly.
A JV or Lease option is likely to reduce the public sector's ability to deliver these benefits either through a reduction in area managed directly by the FC and/or a reduction in ability to pay for this through a loss of income from the productive forest. This would put greater pressure on the private sector.
Impact on existing smaller scale sales and leasehold
There has been a trend in recent years for the FC to sell off its long-term (999 year) leaseholds back to the freeholder. This has allowed lowland estates to increase their woodland cover considerably, taking back commercial crops which can be managed with good infrastructure and past management from the FC. In many cases, this has allowed for unproductive, small-scale estate woodlands to be brought back into management as part of a bigger enterprise. There is concern that, if the JV/lease approach was implemented, these leasehold sales may reduce.
Generally speaking there has been support (or at least a lack of opposition) amongst ConFor members for small-scale sales of forest on the PFE that currently deliver little in terms of wood production or other services, and which could be disposed of in order to meet financial pressures.
ConFor
21 December 2009
Annex A
Background to the OEP
The OEP is an ongoing programme examining operational spending in the public sector. Government departments are challenged to demonstrate that they are managing assets effectively. Studies (involving Treasury) are undertaken, and asset disposals can be triggered from reviews.
In autumn 2009's pre-budget report the FC England estate was referred to, but not identified as a priority issue - feedback from contacts in Westminster was that the Secretary of State Hillary Benn resisted approaches by Treasury, referring back to the Labour manifesto commitment in 1997 to halt sales of FC land.
As part of the latest OEP report the FCE estate has been identified for review in a short-list of 9 with the following terms of reference:
"to consider how the Public Forest Estate in England can generate greater commercial benefit - including from new and innovative opportunities - while respecting the Government's continuing commitment to public sector ownership of and involvement in the management of England's woodlands and continuing to deliver environment and social benefits.
An initial report is expected in the 2009 pre-budget report, and potentially something could feed into the 2010 budget.
In September ConFor facilitated a presentation to a Treasury review group advising on how to generate greater commercial benefit from the public forest estate, while respecting the Government's continuing commitment to ‘public sector ownership' and to ‘deliver environmental and social benefits'.