1998/99 Legislative Session: 3rd Session, 36th Parliament
HANSARD

The following electronic version is for informational purposes only.
The printed version remains the official version.

Official Report of

DEBATES OF THE LEGISLATIVE ASSEMBLY

(Hansard)

THURSDAY, JUNE 17, 1999

Volume 16, Number 5

[ Page 13773 ]

The House met at 10:06 a.m.

Prayers.

Hon. D. Streifel: This is a busy time of the year for constituents of Mission-Kent to come visiting the precincts. I have two introductions this morning. One is Ms. E. Wieczorek, a teacher from Fraserview Elementary School, and she's here with her grades 6 and 7 students and adult visitors. There are 26 visitors altogether. I would bid the House make them welcome. In that welcome, would they please share it with Mrs. S. Wardell, a teacher from West Heights Elementary. She's here with grade 7 students and ten adults; there are maybe 50 visitors altogether. They're touring the precincts; they expect them in the House this morning. Would the House make these folks welcome.

Orders of the Day

The House in Committee of Supply B; W. Hartley in the chair.

ESTIMATES: MINISTRY OF FORESTS

Hon. D. Zirnhelt: I'm pleased to introduce this fiscal year's budget for the Ministry of Forests. It has been a difficult year for all segments of the forest sector in British Columbia, but there are some signs of positive change where government and industry -- taking action, working together and on their own -- have helped to position the forest industry for some recovery.

[1010]

Major forest companies like Slocan and Canfor are making capital upgrades. Tembec came in and took over Crestbrook's operations and built a value-added plant. Louisiana-Pacific is planning major investments in the northeast of the province. Share prices are up.

This is welcome news, but I think the best news is that the key stakeholders are more readily recognizing the contributions that they can make to the recovery. Industry recognizes the need to add value and protect the environment if they want to stay competitive. Communities recognize the need to diversify their local economies. And government recognizes the need to change the way we do business to better facilitate the move to a new forest economy.

Now, more than ever, we're working together to build that new forest economy -- one in which we get more value and more jobs from every tree that we cut. British Columbians expect the province's forests to be sustainable in a forest economy that meets the needs of all stakeholders. I remind everyone in the House that the public is the major stakeholder in the forest industry. The Ministry of Forests is successfully meeting those expectations. This province has made great strides in forest management practices and environmental protection, which ensure sustainability as well as helping to secure international markets. The Ministry of Forests has broadened beyond harvesting, revenues and forest stewardship to include an emphasis on biodiversity, habitat values, visual quality, managing for other values such as recreation and considering all stakeholders' needs -- forest workers, environmental groups, first nations communities and all British Columbians.

We have also acted quickly to support the forest industry in these difficult times. We've continued to reduce red tape associated with the Forest Practices Code. Stumpage is down $575 million, with $200 million from a government policy change and the rest from quarterly market adjustments. We're getting more wood than ever before to the value-added industries. In 1998-99 we delivered 83 percent more wood to value-added businesses through our small business program than we did in the previous year.

We're implementing the forest action plan built in consultation with industry and communities, which includes actions to give forest companies some breathing room, such as monthly stumpage payment plans and the utilization standards that let professional foresters choose how much uneconomic timber is left behind; actions to better assist forest workers and communities facing job losses due to industry restructuring by dedicating $100 million over two years through Forest Renewal B.C. and the Ministry of Forests; and actions to support the growth of small business and value-added operations, including a new market-based pricing system for the small business program. By the end of 1999 these actions will bring about $1 billion in savings to the forest industry and give forest communities, workers and industries some breathing room as we build a new forest economy.

I'll mention a few of the preliminary results of the short-term forest action plan. In the first quarter of the new small business pricing system, 98 percent of the sales offered have been sold. That's above the last three quarters under the old pricing system. In the period of April to November 1998, sales averaged only 86 percent of the tendered volume. Now we're working to make changes suggested by industry to make the pricing system more responsive to the current market. We've announced four community forest pilot projects, and in the next week or so we'll be making further announcements. All these actions show the government's ongoing commitment to protect the environment and the future of one of B.C.'s most important economic sectors.

[1015]

The government is reviewing a number of options for holding a review of long-term forest policy on issues like tenure, stumpage and other major policy areas. We expect to

[ Page 13774 ]

This year's budget is $495,076,000, which is about $8 million -- or 2 percent -- higher than last year's budget. The funding has been directed toward the following key areas: Forest Service roads maintenance, to protect public safety; forest health activities, to reduce revenue losses from infestation of insects and disease and to reforest areas destroyed by infestations and fires; Forest Service campsites, to make sure they remain open and in good condition for public enjoyment; and the forest community transition team, to assist forest-dependent communities facing mill closures and to work with those same communities on diversification strategies.

In conclusion, the Ministry of Forests has accomplished a great deal in the past year. The budget I'm presenting shows our commitment to supporting and refocusing our forest economy in the interests of forest companies, workers, communities and all British Columbians, because we know that the structure and culture of our province, the economy and society in B.C. depend on it.

G. Abbott: It's a pleasure to rise and commence the Forests estimates with the minister here today. I guess I should note at the outset, as I did last year, that I have prepared a list of the topics which we intend to canvass during the Forests estimates this year, and that has been provided to the minister. Hopefully, we can proceed in a systematic and useful fashion through these topics.

The first area that we propose to canvass -- and I'll just briefly outline here each of the areas that we will be pursuing in the hours ahead -- is the state of the forest industry in British Columbia. As the minister acknowledged, 1998 was a very tough year for the B.C. forest industry and for the many people that are employed directly in the industry and certainly for many of the people who survive in businesses which are dependent on the forest industry. Depending on whose description you'd like, the situation with the forest industry in 1998 was that it was one of the worst years in decades in terms of industry performance, financial losses, job losses, revenues to government and pretty much any area that one would wish to canvass around the performance of the forest industry. It was a very bad year indeed.

What we will be looking at initially here are some of the challenges that are facing the forest industry. Notwithstanding what I believe are certainly some modest changes in the right direction in the forest action plan, I believe that there are still some enormous challenges that are facing the forest industry and the Ministry of Forests, as they attempt to adjust the forest policy framework in British Columbia to meet the demands of the twenty-first century.

[1020]

There has been discussion, I guess for a few months now, about the need for a public forest policy review in British Columbia. That has, it seems, been imminent for months but has not yet been undertaken, for reasons which I'm sure the minister will provide in due course. But I think that discussion can be a very useful one in terms of adjusting the forest policy framework to meet the challenges of the twenty-first century.

We will want to talk about the forest action plan and its components and the relationship between that forest action plan and the 30-day plan which was put forward by the forest industry to the Forests minister some months ago. Many, or at least some, of the elements in the 30-day plan have certainly been incorporated into the forest action plan. Some have yet to be delivered, although they have been promised. So we'll want to have a close look at the performance of the forest action plan to date in relation to that issue.

In terms of opportunities and challenges, I don't think there are any that loom on the horizon larger than the issue of the renegotiation and possible renewal of the U.S.-Canada softwood lumber agreement in 2001. As I recall, the expiry date of the U.S.-Canada SLA is April 30, 2001. The implications of that agreement for British Columbia have been enormous. Obviously, depending on what is going to be included in the next agreement -- what reforms we'll find, what improvements we'll find, whether we should have an agreement at all -- these are enormously important questions for British Columbia and for Canada. We'll be looking forward to discussing what's happening in the Ministry of Forests as we attempt to position ourselves as well as we can for that inevitable date of April 2001 -- an agreement which will have enormous implications for our principle employer and our most important industry here in British Columbia.

A very important part of that negotiation around the U.S. softwood lumber agreement is obviously going to be in the area of tenure reform and stumpage or timber pricing reform. There has been a good deal of discussion in the past year in the area of stumpage and tenure reform. We are seeing and hearing new ideas from the Ministry of Forests, from the forest industry, from the IWA -- from a host of stakeholders involved in the forest industry in British Columbia. We are seeing some unprecedented ideas about stumpage and tenure reform. Again, all of these have enormous implications for the future of the forest industry. Obviously they are issues, for that reason, which must be debated and decided upon with enormous caution and a lot of thought. But again, they are also exciting opportunities which may go some distance to resolving some of the long-term impediments to a friendly trade relationship with the United States in softwood lumber.

[1025]

[ Page 13775 ]

In terms of other issues that we'll want to be discussing, the jobs and timber accord obviously is an area which we propose to canvass after we've completed our discussion of the softwood lumber agreement. The jobs and timber accord was, of course, signed in June 1997, almost exactly two years ago now. It has been, to say the least, a disappointment -- to put it in its mildest form. There were very substantial and large promises made with respect to the creation of jobs in British Columbia. Those have not come to fulfilment; we'll talk about that. We'll talk about some of the other commitments that were made in the jobs and timber accord and discuss the extent to which those have been fulfilled.

The fourth area we propose to canvass is fibre costs. What we have seen over the course of the 1990s is a dramatic increase in fibre costs in British Columbia. The government opposite was, in my view, careless in imposing a range of new costs on the industry through the 1990s. Frankly, what we have seen in recent years, particularly in 1998, are the consequences of costs that were systematically piled on the forest industry in British Columbia and which, at a time when it needed to be keenly competitive, were in fact rendered largely uncompetitive as a result of the cost structure that was imposed on them.

If we look at the forest industry from a global perspective, we have seen in the 1990s the rise of a host of new players that weren't there previously. We know that for a long time Scandinavia, eastern Canada, the United States and so on have been there. But now there is a host of new players here -- the Baltics in eastern Europe and Indonesia and so on, a whole bunch of new players. The world, as some say, is awash in wood, and for that reason the 1990s are a time when we need to be keenly competitive, flexible and able to adjust quickly to changes in the marketplace. When we are one of the high-cost producers of forest products in the world, we don't have that opportunity.

[1030]

Are things better? Have we turned around? I hope that we have. I think everyone in British Columbia hopes that we have. We are certainly seeing more promising returns in the first quarter of 1999, and I hope, as the minister suggests, that we'll see even better returns in the second quarter of 1999. Have we come out of the woods, so to speak? Perhaps we have.

But I would again submit that as we remain one of the high-cost producers of forest products in the world, we're still vulnerable. There are possibilities. For example, a dramatically strengthened Canadian dollar would very quickly have negative consequences for the B.C. forest industry. If we see the Canadian dollar going to 73 cents or even higher in the next year or two, that is going to have a dramatic effect on the competitiveness of the B.C. forest industry in the American marketplace.

Other factors which can very quickly turn on our industry. . . . Hopefully they won't. In fact, there is no indication in the short term that they will. The American housing market is obviously a critical factor here. If we see a cooling-off in the American housing construction area, that will have a dramatic impact. Last year, 1998, when the B.C. forest industry lost over a billion dollars, was a record year for American housing construction. We had a record loss in British Columbia in our forest industry at a time when they had record housing starts in the United States and records for housing renovation as well. So there was a big market for our product there. We were, as the minister noted, limited to some extent by the quota provisions of the U.S. softwood lumber agreement, but nevertheless, I think it is again a reflection on our competitive position in the world that we were suffering the losses we did at a time when the American housing market was hot.

If that marketplace cools down, it's going to have consequences for us. I am not going to pretend to be hoping for doom here, because I'm not. I hope the American housing market remains strong. I hope the Canadian dollar doesn't grow in value in an extraordinary way and bring chaos to the industry. I hope that Japan firms up; I hope that Japan strengthens, as hopefully it is going to do, at least marginally. I hope everything works out well for the B.C. forest industry. But I think the lesson we've got to learn from the mid- to late-1990s is that we need to have an industry which can survive in any marketplace. To do that, we have to be as competitive as we possibly can be with respect to the cost of our forest products and the costs of the raw materials which form those forest products.

That's a long way of saying that I hope we have turned it around, but if those bright hopes fade for other reasons, let's have an industry that is as competitive as it possibly can be. That is the only way we can ensure that we'll have jobs for the future and that we'll have the continued flow of revenues to government coffers, which are a critical part of maintaining health and education services. It's also the only way that we can have the hope of continued investment in the forest sector in the future.

I think we have to be keenly aware of fibre costs. We have to be looking at ways in which we can make ourselves more competitive by reducing those fibre costs. I'll acknowledge, obviously, at this point that there have been at least some modest gains made in that in the last year. We want to see more gains in that direction in the year to come.

[1035]

Annual allowable cut is an area that we will be canvassing again, but, I think, relatively briefly. The annual allowable cut actually hasn't been achieved for. . . . I don't know. For a couple or three years now we've fallen below the cut. But one can certainly anticipate that as the fortunes of the forest indus-

[ Page 13776 ]

Forest health and inventory issues are something we will want to spend a little time on as well. Forest health is an area that has been a very critical challenge for the Ministry of Forests in recent years. There was, in the glory days of Forests in recent years. There was, in the glory days of Forest Renewal B.C., something of a tendency to try to shift the cost of those programs off to FRBC. FRBC doesn't have the cash now -- as everybody knows, I guess -- to deal with that anymore, and it's an ongoing challenge to find the funds today to deal with the important issues of forest health.

Here, I guess, we're running up against natural factors as well as any that may flow from government. As I understand it, we've had relatively mild winters throughout the province. That has produced, in many areas of the province, record growth in some of the forest health areas that we're keenly concerned with. I guess the mountain pine beetle will be the most prominent example. I know the ministry has found $10 million, I think, to deal with that this year. Hopefully, that will go a considerable distance to dealing with the problem. That is an area we will be wanting to canvass.

Fire protection issues are timely perhaps. We encountered in 1998. . . . I don't know if it was a record bad year for forest fires, but it had to be pretty darn close, if it wasn't. It was a very difficult time for a number of communities across British Columbia that were faced with fire threats, including communities within my own constituency of Shuswap. I will be canvassing with the minister the recommendations of the ombudsman in his Silver Creek fire review.

Many important recommendations have been made there, I think, which may have application certainly beyond Silver Creek and across the province. British Columbia has historically been hardest hit by forest fire threats. I'll be exploring with the minister whether there is any way in which we can improve our forest fire fighting response as we head into the twenty-first century. Certainly others have made suggestions as to how that might be done, and we will be looking at some of those suggestions when we talk about forest fires.

[1040]

There have been some very considerable challenges there in terms of first nations involvement and community neighbourhood involvement with things. To their credit, rather than trying to slide away from some of the criticisms and challenges they were faced with, they have been very forthright in coming to grips with them and dealing with people firsthand in resolving those problems. Because we may not come back to that particular area of the post-fire treatment, I do want to pass along to the minister my compliments to the minister and particularly to the ministry's staff in Salmon Arm for the exceptional job they have done in dealing with the post-fire issues.

The other areas we propose to canvass here, hon. Chair, are stumpage and related issues. I guess that to some extent, the stumpage issue is bound up with the tenure-reform issue at this point in time, but we'll want to break it out and just talk about what the government is thinking in terms of its experience with what is termed the value-pricing system that's been in place since 1987, and compare that to what happened with the Rothery system prior to '87 and hopefully get into some discussion around some of the ideas coming out of people like the IWA and so on about how the stumpage system might be improved for the future and made more market-sensitive and defensible in the eyes of the Americans, who we're going to be dealing with in the softwood lumber agreement negotiations.

Other final areas. We'll be talking about the small business forest enterprise program. The discussion is probably going to be relatively brief, but we want to have a discussion on how the changes that were put in place last year around the small business forest enterprise program have worked out, so we'll follow up on that. We'll follow up on the issue of certification of sustainable forestry. There have been some recent developments with respect to that, with some companies attempting to get certification now from the Forest Stewardship Council. Obviously we're all kind of walking into some unknown territory there, and I'd be curious to hear what the ministry's view is with respect to some of those issues today.

We will want to talk about expropriation and compensation issues. That, of course, is a very big issue in British Columbia today, I guess, largely because we are going into a new model for dealing with expropriation and compensation issues with the package that was recently announced with MacMillan Bloedel. We have, as I'm sure everyone in British Columbia knows now. . . The settlement was an agreement that the value of the M&B expropriated lands and cutting rights was $83.75 million. The government has agreed with M&B to embark now on a public process which will hear the public in different locations on the lower mainland and Vancouver Island and discuss the roughly 30,000 hectares of land which could potentially form a part of the settlement with MacMillan Bloedel. Obviously that is a new model in terms of dealing with the issue of compensation.

[1045]

[ Page 13777 ]

Hon. D. Zirnhelt: To keep it short, the short-term challenge is to continue to work to drive costs down. The industry has made considerable cost savings. We've addressed the cost issues for the short term. We did that together. I think there's a recognition on the part of both government and industry that they have a responsibility with respect to this. So we've taken action. It remains a short-term challenge.

For the long term, I think that market access, whether it's into an increasingly environmentally conscious consumer marketplace or it's a challenge to have cost-effective forest practices that meet the standards of British Columbians -- which are very high indeed when you deal with their visual preferences with respect to the landscape -- remains a huge challenge. I would have to say that we have been assisted by that with respect to the efforts on the part of changing forest practices and companies willing to understand that they do have social responsibilities. There are long-term challenges around community stability, because some of the old appurtenancy provisions have been eliminated previous to our government. They no longer work just in terms of getting the right log to the right mill.

We will continue to have a challenge on a worldwide basis around industry competitiveness, because our industry does like to have a rate of return, our workers do want to have decent pay and British Columbians do want high environmental standards. So we will have to face the fact that we will be one of the high-cost jurisdictions as long as we have high labour, community, social and environmental standards.

G. Abbott: The minister notes that the short-term challenge is to drive costs down, and that, I think, is certainly the case. How we can do that is another issue. The government has in the past few months been announcing different pieces of the forest action plan. Some, I think, have immediately assisted in terms of costs; with others, we are still awaiting the benefits of that.

[1050]

Hon. D. Zirnhelt: Well, the current emphasis is on identifying with industry on the ground. There's an exercise called the cost-driver initiative. We have some 800 suggestions from industry and their operations. So there's a very long list of small and detailed operational items, and we will take each and every one of those suggestions and see if there's something we can do about it. A lot of them amount to pennies per cubic metre, but many pennies add up to many dollars. So that's where the emphasis is now: on operational things that the companies can do, that the ministry can do, to save costs.

G. Abbott: We will explore some of those in due course as we talk about the 30-day plan and the forest action plan.

The issue of how to measure cost drivers is, I think, an important one as well. The government engaged KPMG Inc. to do a study back in '96 -- perhaps it was '97, but I think it was '96 -- to look at what had been happening with delivered wood costs for the previous five-year period. That study showed that there had been pretty much a doubling of delivered wood costs in British Columbia over that five-year period as a consequence of increased stumpage rates and increased regulatory costs primarily associated with the Forest Practices Code.

Is there any initiative underway or contemplated by government which would provide us with the equivalent sort of information that came to us through the KPMG cost-driver study? Is there anything underway or coming that will give us the same sort of analysis that was provided in that study?

Hon. D. Zirnhelt: The answer is no, but the Pricewaterhouse data has shown that the costs are trending down. The explanation of that is that you get very uneven data. Companies are loath to give out this confidential information. We know there's a problem, and the emphasis is on getting it down. Quite often industry itself doesn't collect the data, and we would be dependent on them to get it.

G. Abbott: It's commendable that the government is putting emphasis on trying to get log costs down. I have no quarrel with that at all. There is, however -- I'm sure the minister is aware of this, and I'm sure he's confronted with it pretty much constantly -- an ongoing debate as to how much has been delivered in terms of savings in wood costs. We'll talk here shortly about the PricewaterhouseCoopers figure which shows -- and it's a happy figure -- a reduction in the average cost of logging on Crown lands from $88 a cubic metre in '97 down to $79. That's certainly a happy figure.

There's certainly debate about where we are achieving gains and where we are losing ground, if indeed we are. I think it might be useful, actually, to have KPMG do a follow-up to see where we sit in terms of those delivered wood costs, because I think it's helpful in terms of where we can look in the future to achieve other gains. I'd be interested in the minister's comment on that.

[1055]

[ Page 13778 ]

It's all over the place, but by having set some targets, we have gone beyond the simple debate about the need to reduce it to the question of how we reduce it. That's why I say we've looked for suggestions. We have 800-some suggestions. We've actively pursuing it, as we did with the wood ahead challenge. We did get our two years of wood ahead to any company that wants it. For any company that wants to address cost drivers, we will deal with it. It's very company- and location-specific. So to roll these up into averages, we can only wait and see the results. We're focusing on measuring the results on an aggregate basis as companies report out their costs.

G. Abbott: In fairness to the forest companies in the province, I have not heard from any of them that they propose or are requesting a relaxation of environmental standards. What I do hear from them is that they would like to see a very process-oriented Forest Practices Code replaced or, over time, evolved into a results-based code, which would be simpler and which would put more accountability and responsibility into the hands of the companies and, in particular, into the hands of their professional foresters.

As the minister noted, we have in the past week or ten days seen the introduction of a private lands forest practices code, though it's not entitled as such. I guess the intention is for that to be the private lands code. It offers a simple, results-based code. Whether that would be sufficient for Crown lands is another question. But at least it's going to provide us with a model of how a results-based code could work, and we'll look forward to seeing that.

Let's talk about the cost of logging on Crown lands. To review where we have come from and where we are going in terms of delivered-wood costs, in 1994 delivered-wood costs were at. . . . The average cost of logging on Crown land. . . . I don't know whether that's equivalent to delivered-wood costs or not; I expect they're pretty much the same, although perhaps not identical. But in 1994 we were talking $70 a cubic metre. It's up to $82 in '95, $83 in '96, peaking at $88 a cubic metre in 1997 and then the welcome reduction to $79 a cubic metre in 1998.

[1100]

Hon. D. Zirnhelt: There is no detailed breakdown. As I say, it would vary. I can tell you what the components are, but let me start by saying that when you talk about the stumpage reduction on June 1, that's partway through the year, so it's going to be only partially reflected in the savings.

The $9 is made up of red-tape reductions, some of the companies' own efforts to reduce their costs, the market reduction on stumpage and the one-time reduction that came in on June 1. So it's made up of those four components, and it varies depending on where the company is -- the coast or interior, type of stumpage. . . . When 30 percent of your cut is beetle wood in the interior, you're not going to see much of a saving on the stumpage, because you're at minimums already. So it will be less of a component there.

G. Abbott: Sorry, hon. Chair. There was a bit of a noise in the House, and the first part of the minister's answer. . . . Could he just quickly run through the four components?

Hon. D. Zirnhelt: The June 1 permanent reduction, the quarterly market-related stumpage adjustments, the red-tape initiatives and the companies' own initiatives to reduce their costs.

G. Abbott: Does the ministry have a goal with respect to reducing the cost of logging for 1999? What would be the objective of the ministry in trying to reduce the cost? Are we hoping for another $9 reduction, or is the figure that the ministry has in mind what would be welcome for 1999?

Hon. D. Zirnhelt: We have a goal, and the goal from the cost-driver initiative is another $5.

G. Abbott: We hope, when we're looking at PricewaterhouseCoopers' numbers for 1999, that we'll see a further reduction from $79 to $74. Is that correct?

Hon. D. Zirnhelt: I'm sure the member realizes that some of the previous efforts are being phased in. So if you saw new numbers, some of that would include the reduction in the red tape and the reduction in the planning requirements, because it would take a full generation of planning to show the results. The next figures that come should reflect continued savings there.

Some of the short-term measures that we announced in November should be coming to fruition. It'll be affecting a company's bottom lines as the quarters go on, as they achieve the savings on their cash costs because of the stumpage payment plans, so all of that would be built in. We wouldn't see the full $5 from the cost drivers show up now. We're already in June. Some of them are already implemented; some of them will be implemented over the next year or so. I don't expect the $5 to be achieved in one fiscal year.

G. Abbott: The next area or next measure of the state of the industry in '98 would be the log harvest across British Columbia. As one might expect, in '98 the harvest was down, reflecting the fact that pretty much everything else was down as well. The harvest has gone -- on Crown lands, at least -- from 75 million cubic metres in 1996 to 68 million cubic metres in '97 and down to 64.8 million cubic metres in 1998.

[1105]

[ Page 13779 ]

Hon. D. Zirnhelt: We do expect an increased harvest responding to our short-term action plan, but there are still limits to the marketplace. That would include Asia, because most of the logging reductions have been on the coast, where they still have ongoing market problems. Baby squares at $560 to $580 pale in comparison to the $800 or $900 price. So the demand isn't as robust as it needs to be to get the harvesting up.

I remind the member that at this point in time, we still have snow at high elevations of the coast. Why? Because we're logging at high elevations on the coast, so we've got a problem. There are serious constraints that have accumulated over time. Before we had land use planning, we had avoidance of a lot of areas, but land use planning has opened up some areas. But there's no question in my mind that we will ever see a return to anything above the long-run sustained yield. We're going to continue to move towards a long-run sustained yield of slightly less than 60 million, unless we can find ways of getting productivity on a smaller land base. I think that's the challenge to government -- and industry as well.

We will expect some short-term harvest response, because the AAC is still being undercut in some areas. Wherever that's the case -- and provided that they have a market and operable timber at today's prices -- we expect a response. So we expect a bit of a bounce-back.

G. Abbott: I just want to ask a couple of questions here, and I'll try to roll them into one for the sake of expediency. At 64.8 million cubic metres, we have about five million in undercut, I think, and we would have had a smaller undercut, perhaps one or two million cubic metres, in '97. Is that about the magnitude of the undercut that occurred in '97 and '98? To what extent do we expect it to rebound in 1999?

Hon. D. Zirnhelt: Basically what you're asking me is: what is in our forecast, and has that forecast changed? We haven't changed our forecast. We have basically said that harvest will be flat, with modest increases. I'll get the figures. I've asked to have the figures brought up. As I say, we have conservative estimates. It's our hope to exceed the rate of cut that we predicted, but no one predicted that we would be at these prices at this quarter when we made our projections.

G. Abbott: I'll look forward to receiving that.

The other areas in terms of the state of the industry, and obviously one of the important considerations in looking at '98 and what occurred there, is employment. Obviously there's always some sort of political debate around what numbers should be included and what should not. The PricewaterhouseCoopers numbers for employment show a decline from the '96 level in direct employment of 99,100 down to 97,250 in '97 and a substantial drop in '98 to 91,400. Are these the figures which would reflect what the ministry is working with as well? Or would they disagree with the outline of direct employment in the forest industry that PricewaterhouseCoopers has?

[1110]

G. Abbott: What is the expectation of the government for 1999? Again, I probably deduce from the discussion that we've had around log harvest that, presumably, if log harvest is going to be up modestly, we might expect that employment would be up modestly as well, unless there were other factors at work in terms of jobs per cubic metre of wood cut or something along that line. That's not something I would expect. I guess I'll ask the minister this: does the minister anticipate that there will be a modest improvement in direct employment in the forest industry, reflecting a modest improvement in the log harvest level anticipated?

Hon. D. Zirnhelt: I don't want to predict an employment bounce, but I want to go back a step and tell you the figures that we are working with. The '97-98 actual was 58.6 million in harvest on Crown timber. The revised forecast for '98-99 was 58.2 million, so it's down 400,000 cubic metres. But the forecast for '99-2000 is flat -- 58.2 million -- and we haven't changed the forecast at this point. We will take all of the billings, all of the facts we have and, if necessary, revise the forecast. But I have said in the past that if our cut is down and it bounces back up, there will be proportionate return in employment, as the member has alluded to.

G. Abbott: That is probably, if nothing else, politically sensible on the part of the ministry to do some conservative estimates around the level of the cut and presumably around government revenues as well, given the problems that occurred a couple or three years ago when there was a little bit of a problem in terms of forecasting and the implications of that for the budget.

The minister is suggesting that direct employment is probably going to stay about the same unless we see a particular bounce in the level of log harvest. In terms of the indirect employment numbers that are put forward by COFI, again we see a considerable reduction from '96 through '98, from 198,000 indirect employment to 182,800. Does the ministry make projections with respect to indirect employment as well? Again, are the PricewaterhouseCoopers numbers consistent with those that the ministry has?

[1115]

It's my feeling that quite often the indirect effects are muted by other things that happen in the economy. For our projections for the federal government, we use a multiplier of less than one; COFI uses a multiplier of two. I think it serves the forest industry to show the size of their employment, but

[ Page 13780 ]

As I say, the industry uses a multiplier of two; we use just slightly less than one.

G. Abbott: As I recall, that was the multiplier that was used in the jobs and timber accord. Is that correct?

Hon. D. Zirnhelt: I don't have the exact figures with me, but as I recall, it was slightly less than a multiplier of one.

G. Abbott: We may revisit that whole issue as we go through the jobs and timber accord, where we have a whole other discussion around the projections that are contained in that.

In terms of payments to governments, the PricewaterhouseCoopers analysis shows a reduction from $2.336 billion in 1997 to $1.904 billion in 1998. Is the anticipation of the government that that will again be pretty much flat in '99, or is some improvement anticipated?

Hon. D. Zirnhelt: Well, I'd say to the member that I can really only speak to the stumpage numbers. But if the activity in the sector is flat, then I would anticipate that the revenues would be flat. So in general terms, yes, that's probably true. But the Minister of Finance has to speak to income tax and other sales taxes. Our actual stumpage revenue. . . . We are expecting a forecast of $1.1 billion this year, and that compares with the actual in 1997-98 of $1.8 billion. The revised '98-99 forecast was $1.2 billion, so we see a $100 million drop from last year to this year in stumpage forecasts.

G. Abbott: Just so I get this right, the predicted revenue from stumpage in '98-99 was $1.1 billion. The revenue was actually a little bit higher than that, at $1.2 billion. The ministry is predicting '99-2000 stumpage revenue of $1.9 billion or $1.8 billion.

[1120]

G. Abbott: We are now in the sixth month of 1999. I gather that returns to this point are in excess of the prediction. In short, the revenue predictions for stumpage have been conservative to date. Is that correct?

Hon. D. Zirnhelt: We're right on track so far. But we are really only in the first quarter, and we only have preliminary data for the first quarter, because it starts with the fiscal year. But bear in mind that while stumpage is high now, this is the point where we have the lowest logging activity, because of breakup and snow on the coast. As a result, there may be some supply and demand on the log side that's affecting things.

G. Abbott: Are we just entering into, then, the quarter in which we expect to have the best stumpage returns?

Hon. D. Zirnhelt: The stumpage system has a chance to pick up the lag between low stumpage and higher prices, so we expect in July that there will be a stumpage increase based on the market adjustment. So no, the last quarter wouldn't be the highest in revenue. Because prices have been high for several months, we expect stumpage to go up. But again, in terms of revenue to government, while stumpage may be high, we are not currently in the quarter of the highest harvest. But if it's a good season and people get back to work by the end of June or early July, then that quarter will show a substantial improvement. All that depends a bit on how people manage their quota and how the Asian market comes back.

G. Abbott: The other areas that I guess we need to canvass in terms of the state of the forest industry are the earnings and the performance of forest companies in British Columbia. What we see in the PricewaterhouseCoopers analysis is a loss from operations of $336 million in 1998, which I think is probably the most substantial loss from operations we have seen for some time. As well, we see the remarkable and probably unprecedented loss in write-offs and so on of $721 million, for a total net loss among publicly traded companies -- and I suspect this doesn't include Skeena Cellulose -- of $1.57 billion.

Does the minister anticipate that the grave difficulties which affected many forest companies in 1998 are going to be repeated in 1999?

[1125]

G. Abbott: It's good that the minister can still see the bright side of all this and find comparisons that make the best of a bad situation. One of the problems we have here is that we have now seen three years of continuous losses on the operating side: $150 million in '96; $192 million in '97; and then, of course, $336 million in '98. Over the course of the last three years we have seen operational losses getting up into the $700 million range. So it's obviously going to be more difficult for companies to make ends meet, find capital and maintain operations -- never mind to find capital to expand their operations. What can be done to reverse this apparently destructive spiral that companies are caught up in? I guess that's a big question. We've talked about some of the things. We do have here what appears to be a destructive cycle. Will it be reversed, and how can it be reversed?

Hon. D. Zirnhelt: The spiral can be addressed if there's a response in the marketplace, which we've seen for the first quarter. It looks like it's carrying into the second quarter. If prices are up, then these losses will be reduced considerably. We can, and have, taken action to reduce stumpage and to find operating cost savings. I think I would remind the member, though, that going back a few years, you're only looking

[ Page 13781 ]

I would argue that they were beginning to deal with the results that we wanted to get out of the code. So we did have net earnings of $1.2 billion in '95 and in '94, $1.3 billion. So we had two very good years, and then it's gone down. We expect, though, that if the cost savings continue to be realized and prices go up, they will pull out of it. But we are entering an era where competition around the world is very strong, and that is a new factor. So we've gone from being major price-setters on pulp to price-takers. We're incremental to the world's supply and demand on pulp, and that's quite different. So there are still going to be very difficult times for industry.

G. Abbott: On that point we certainly agree. The world is highly competitive in forest products today. The signal of that to me is that we have to equip our forest industry in British Columbia to be competitive with the industry in other jurisdictions -- in Canada, in North America and indeed around the world. If we handicap our industry with a level of tax or a level of regulation which is out of step with other jurisdictions in Canada or around the world, we're not going to have that competitive position, despite some of the natural advantages which British Columbia confers on its forest industry by having good growing sites and favourable climate and all the rest. So there is -- and I'm hoping we're agreeing here -- a critical need to continue to make our forest industry more competitive year after year, because I think that's the only way in which we are going to meet the challenge of a world marketplace that is more competitive year after year.

In the minister's view -- and obviously the minister gets to deal with these situations, where the opposition doesn't -- how many of our major producers in British Columbia are on secure and sound financial ground at this point in time? In short, is there any reason to expect that we are going to see closures or problems of the magnitude that we saw in 1998?

[1130]

We expect to see more closures. We expect to see some of the temporary closures turn into permanent closures; we're not sure which ones. We work with the companies mill by mill, situation by situation, but it would be completely reasonable to expect, in the kind of economy that we have, where we aren't prepared for massive subsidies, that some companies will have difficult times in the world market, depending on where they are placed. I think there are companies today with problems that they didn't expect they'd be in three years ago. They diversified into a market that has collapsed. I expect that at any given time there will be companies that will have competitiveness problems regardless of what the cost structure is in British Columbia.

G. Abbott: One thing I won't ask the minister for is which companies. That's not something that I think we would properly want to canvass in estimates and make the situation even more difficult for some of the operations that are currently challenged in terms of keeping their heads above water.

Of those operations in British Columbia that are struggling at this point, how many would the minister characterize as being a product of timber supply problems? How many would be experiencing problems because of cash flow and ongoing capital loss issues? What are the factors that come into play? I appreciate that in some cases all of these things may come into play. Has the ministry done any analysis -- or can it do any sort of analysis -- with respect to why companies are in grave difficulty in some cases in British Columbia?

Hon. D. Zirnhelt: I think that generally it's safe to say that it's all of the factors, but in some companies some of those factors are more dramatic. Some of them have to do with past business decisions in purchasing other companies. In some cases they have a very difficult market situation, and some of them are impacted by the nature of the operations they're in. If they're operating in high-profile areas where the eyes of the world are, where there's a focus of protest that's being played back into the marketplace, all of that affects them. Some companies -- those that are in the most difficulty -- probably have a significant number of all of those that you mentioned: there's a timber supply problem, there's an operating cost problem, there are problems in marketing and in matching marketing to harvesting practices. All of those play a factor. The amount of private wood they have is also a factor. But it varies -- the percentage of the problem that the factor is varies company by company.

[1135]

Hon. D. Zirnhelt: I think it is safe to say that the lower-than-expected prices on pulp mean that those companies that have a significant pulp component to their operations are experiencing amongst the most difficult times. That's why some of them have written-down pulp mills. There are some solid-wood-only companies that are struggling, but as I say, the list of companies that are struggling has varied dramatically over the year.

G. Abbott: Some forest policy analysts suggest that because of the volume or the character of supply in British Columbia, we have more pulp mills than we can sustain in the long term. Is that what the analysis of the Ministry of Forests would suggest as well, or is the view of those analysts off the mark?

Hon. D. Zirnhelt: I think it's true to say that on the pulp side, as on the solid-wood side, there is tremendous overcapacity. The capacity was built up in the heyday of harvesting. About 1987 they were pumping through a lot of fibre, so

[ Page 13782 ]

[1140]

I agree with what the minister said: as utilization on the solid-wood side improves, there are fewer chips. When harvest is down, as it currently is, obviously there's less pulp, pulp logs, chips and so on. I agree, as well, that there is an overcapacity there.

Does all that add up to us having, in reality, too many pulp mills in our marketplace? Is it anticipated that in the end somehow the marketplace is going to decide which of those mills is going to be shut down?

Hon. D. Zirnhelt: No, it won't be entirely a marketplace decision, probably, because if you have a situation in a region in the province where the fibre supply is to a large degree pulp supply, then it's in the interests of the province to have economic activity related to the nature of the supply. People in communities are saying to us: "We want the fibre and the natural resources in our area, in our region, in our communities, to be used to benefit people here." So that is a factor.

But if you want me to answer the question, "Is there going to be a market-determined shutdown of pulp mills?" I don't know. At current prices, there may be. We've seen one. We've seen Gold River go down, and it was rumoured there should be another one. The question is that government doesn't want to pick which one that is.

G. Abbott: I wasn't necessarily leading into a discussion of Skeena Cellulose, because I had that with the Minister of Employment and Investment a day or two ago. I don't want to relive that, although it wasn't unpleasant. But I don't want to relive it here -- there's no need to. Clearly, in the case of Skeena Cellulose, the government did intervene in the marketplace. I think the gist of the minister's answer is probably that the government responded to communities that said: "We want to see the natural resource processed here." I presume that's the character of that answer.

I'm also deducing -- and the minister can correct me here if I'm wrong -- that the minister is saying that this government has no intention of getting involved again in the marketplace to determine whether any additional pulp mill beyond Gold River. . . . Should it get into trouble, the government's not going to step in and keep it operating. Is that a fair deduction from what was said?

Hon. D. Zirnhelt: No, it isn't. We're saying that we're going to allow market factors and businesses to make the decisions they want to make. If a company comes to us and says, "Will you help us restructure through job protection processes or any other process?" we will do what we can. We did it in the case of Chetwynd; we did it in the case of Taylor. This isn't pulp, but we did it in the case of Evans Forest Products. I think the member has to agree that at the appropriate time, the government can be of assistance in restructuring. We will always do that, and we do that in the interests of the communities that are there and because we would like to keep as many operations up and running as possible.

The prediction for pulp prices is just under $600 in the year 2000-2001. If we hit that, all the pulp mills should be able to operate.

[1145]

There is a critical distinction, though -- and I think, for the record, we have to make it -- between a responsible government assisting with restructuring -- we can use the Evans example as one, and there are others that the minister cited -- and a government stepping in and actually acquiring majority ownership of a corporation or company in order to sustain it. That is the distinction between what should be done and what, in the case of Skeena Cellulose, was done. In the case of Skeena Cellulose, it went beyond restructuring and job assistance packages and all of that kind of stuff. We have actual government ownership of an operation, which I think is a distinct difference from what has been done elsewhere.

One part of the minister's previous response to a question really brought into focus the appurtenancy issue: communities saying that they want to see forest resources processed in the communities in which they are produced. Now that, on one level, is a fine and commendable goal. I guess, taken to an extreme, it would be destructive of the industry as we know it in British Columbia. There's a real difficult debate that goes on around the principle of appurtenancy.

It seems to me that what we've seen in the last year or two are some changes in that debate. I was surprised, to say the least, when Doug Smyth of the IWA made his comments about appurtenancy at the Northern Forest Products Association. I know that the minister was part of the panel that included Mr. Smyth, and perhaps he wasn't surprised at all. Maybe he fully expected the comments. But there appears to be some move away -- at least in the IWA -- from the strict views about appurtenancy that they have pushed in the past. Is that the view of the government as well -- that our views around appurtenancy are changing and need to be revised to meet the challenges of the twenty-first century?

Hon. D. Zirnhelt: I think it's true that people are questioning appurtenancy. I think that with respect to the IWA view, you'll have a view local by local, because some locals are logger-dependent and others are mill-dependent and not dependent on logging at all. It depends, region by region, on what people want. I think it's true to say that the public and the workers -- and certainly companies -- want to examine the relevancy of appurtenancy clauses.

I think it's safe to say that there is a danger of being too definitive in directing fibre to a particular facility, because in the interests of economic efficiency, which will ultimately provide an optimum level of employment in various communities, we have to get the right log to the right facility. That's

[ Page 13783 ]

Suffice it to say that the way people used to define the social contract around who gets to use the wood was based on a direct link between more primitive primary breakdown facilities and a more general timber supply. But as timber supply changes -- we've cut a lot of the biggest logs; we're getting to small logs -- not everybody can run an efficient small-log mill. So we are now looking at specialized primary breakdown facilities, and not every community is going to have every specialty.

[1150]

G. Abbott: I'm in agreement with much, if not all, of what the minister has said with respect to the importance -- in the future, particularly -- of ensuring that in the interests of efficiency and competitiveness for the B.C. forest industry, we find ways to get the right logs to the right mill and maximize the value.

When I was a kid in Sicamous, there was a mill, employing probably 50 people, that operated right next to the farm I lived on. That mill shut down in the early 1960s and has never been reopened. I guess if appurtenancy was to be pushed to an extreme point, one would say that any trees that are cut down in the Sicamous area should be going through a mill in Sicamous. But it seems to me that over time, if one really wants to constrain the movement of logs that much, it simply doesn't lend itself to the development of an efficient and a competitive industry in this province.

So that, I guess, leads to the next question around appurtenancy, and that is the minister's potential use of section 71, I believe it is, of the Forest Act. It allows the minister to remove cutting rights, to remove cutting volumes or cutting areas from companies, that in the short term or the longer term, shut down mills which -- for whatever reasons -- they don't find operationally viable at the time. Can the minister provide some comment on that?

Hon. D. Zirnhelt: Section 71 of the Forest Act has never been used, in the sense of implementing it, but I have used it in the sense that I've said I'm prepared to use it if I'm not satisfied that we have rearranged the social contract.

When determining what approach to take with respect to whether or not companies live up to the appurtenancy requirements, we look at whether or not the community and the workforce have been taken care of in their considerations. We look, of course, at broad provincial objectives. I have been flexible around the appurtenancy issue in terms of allowing companies to tie different facilities than they were before, but generally we do this when we have a high degree of consensus amongst the workers, the community and the company. Indeed, the company understands that approach and has spoken openly about the need to reconstruct the social contract. MacMillan Bloedel talks about social licences; they understand they have obligations to communities and citizens of British Columbia.

So I think the operative word is that we use flexibility when we're dealing with the appurtenancy issue. On section 71, we are prepared to use it should we not find ourselves satisfied that. . . . Again, I'd look at the view of communities and workers to determine whether or not we collectively are satisfied as to whether the company is living up to its obligations.

G. Abbott: I want to move into a new area involving market and market access. But noting the hour, I move that the committee rise, report progress and ask leave to sit again.

[1155]

The House resumed; the Speaker in the chair.

Committee of Supply B, having reported progress, was granted leave to sit again.

Hon. P. Ramsey moved adjournment of the House.

Motion approved.

The House adjourned at 11:56 a.m.

[ Return to: Legislative Assembly Home Page ]

Copyright © 1999: Queen's Printer, Victoria, British Columbia, Canada