Examination of witnesses (Questions 20
WEDNESDAY 22 NOVEMBER
and DR BOB
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.
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
(Mr Bills) Yes, they would.
22. Would they have to get the approval of the
(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.
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 legislationprobably primary legislationto
change the Forestry Act before we can really, truly engage in
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 areawhich is rather different to
the question of the management of the Forestry Commission estatea
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
(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 helpfulif
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.
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 forestrythe
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
(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.
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
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 fundedyou
will appreciate we are net funded and we have to forecast timber
pricesclearly 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 sufferingthree
or four saw mills have gone out of business in the last six months
or yeardo 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
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
(Mr Bills) It is very important during an industry
development stage, which the UK processing industry isit
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 equipmentwhat 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 placeit 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
(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
(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.
(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