Vancouver Sun, Copyright 2000
November 21, 2000
Gordon Hamilton Vancouver Sun  

By using a loophole in provincial regulations, three of British Columbia's largest forest companies paid next to nothing for 115,000 truckloads of timber harvested from the coastal rainforest.

And the provincial government let them do it, fearing it would push small companies out of business if it tried to collect the lost revenues the only way it could -- by raising the price of logs for everybody else.

To get the money back, the government was faced with raising prices for all loggers by up to $2 a cubic metre for the entire coastal harvest, which in 1999 was 19.5 million cubic metres.

"There was a reasonable chance in our estimation that a number of the small guys might have shut down entirely," said Julian Paine, executive director of management services for the forests ministry, in justifying the decision to forgo the revenues.

The three companies brought the wood out of public forests at rock-bottom prices by convincing forest service staff that they were harvesting mostly low-valued timber.

In fact, they were using a scheme called grade-setting -- cutting nothing but low-valued timber in a cutblock to demonstrate that the entire cutblock needed to be re-appraised at the lower rate. Having received a re-appraisal they then brought out the good wood at the new junk-wood rate.

The three companies, International Forest Products, TimberWest Forest Ltd. and Weyerhaeuser, were identified in a 1999 computer search by the forests ministry after anecdotal information was received that companies were avoiding stumpage payments through grade-setting.

The search turned up 36 instances since the spring of 1998 where the three companies had received at least a 50-per-cent drop in their stumpage rates. A fourth company, Terminal Forest Products, was identified once for a total of 37 instances. The ministry released the information in response to a request from The Vancouver Sun on the coast-wide impact of grade-setting.

In each of the 37 cases the drop in stumpage was greater than $20 a cubic metre. (A cubic metre is about the equivalent of a telephone pole.) The amount of timber at stake was 4,017,000 cubic metres, about 115,000 heavily loaded logging trucks.

Paine said it is impossible to estimate how much money the government lost because of variables such as market prices and how stumpage rates affect harvesting decisions. The companies may have simply stopped harvesting if they did not get the stumpage break, he said.

However, in one case, a TimberWest Forest cutting permit at Call Inlet on the central coast, the stumpage was knocked down from $40.34 a cubic metre -- the price paid for prime Douglas fir and cedar -- to 25 cents a cubic metre, the price paid for salvage wood. TimberWest paid 25 cents on 91,000 cubic metres of wood, getting timber the government had originally valued at $3.7 million for $22,700.

Forest companies view the issue of grade-setting as a symptom of the mess surrounding B.C.'s system of collecting revenues from public forest lands.

"If you could equate grade-setting to windfall forest profits, maybe that's an issue, but in fact you have companies that are barely able to stay afloat," said Steve Crombie, director of public affairs at Interfor.

"Until we improve competitiveness in this industry, you are going to have companies teetering on the brink. Companies are being driven by economic necessity to do what they can to stay alive."

Weyerhaeuser said it actually sought ministry advice on grade-setting before it began doing it two years ago.

"We wanted clarification that we were doing everything above-board" representative Sarah Goodman said. "The whole system needs to be overhauled and that's the bottom line."

The fact the government let the grade-setting companies off the hook adds further proof that even the government recognizes it's own system is a failure, said Les Kiss of the Coast Forest & Lumber Association. He called the decision to remove the 37 permits from stumpage calculations as unprecedented.

"We are dealing with a broken stumpage system that is not reflective of the markets in which we are operating and I think even government agrees stumpage rates are too high for current market conditions," said Kiss. "The licensees, big and small are basically looking at ways to reduce operating costs any way they can -- which includes stumpage."

Kiss said the CFLA has proposed the government adopt a market-based stumpage system that would restore public confidence in the revenue side of forest management by providing a return for the resource that accurately reflects market values.

New Forests Minister Gordon Wilson has acknowledged the stumpage system is a problem, the third forests minister within a year to say so.

But Wilson faces obstacles in making needed changes: The Americans could use anything that favors companies as an excuse to cry subsidy. Also, Wilson said his own treasury board is reluctant to give up the regular revenue flow the current stumpage system provides.

In March of this year the province tried to stop grade-setting by raising the minimum threshold companies must log before they can receive a re-appraisal from 2,000 cubic metres to 25 per cent of the entire cutblock.

But loggers report they are still being asked to grade set. In fact, because of the additional costs in logging according to timber quality, some logging contractors confirmed they are asking for and receiving higher rates from the licensees.

"It's still going on. They are taking the best and paying the least," said Cal Hartnell, a log grader at Interfor's Squamish log sort.