Governments’ Forgotten Role: Fix Business Conditions

To say that times are tough in the Canadian forestry sector is a gross understatement. With the U.S. housing collapse and global financial services meltdown, the sector has lost 50,000 jobs and more than 250 mills over the past two years.

In situations like this, people look to government for the fix. And governments grapple with what they can come up with that won’t jeopardize delicate trade relations. Providing safety nets and economic stimulus is part of the answer but there is more – improve business conditions.

Both the provinces and the federal government have taken steps in the right direction. Some provinces, like British Columbia, are modernizing their tenure and forest management policies to make them more flexible and market-oriented. Federally, the recent budget showed that the Harper government sees the industry’s promise and accepts a role in helping achieve that potential by doing such things as strengthening the powers of the Export Development Bank.

But the needed sense of urgency and ambition is still missing. If governments wait too long to improve business conditions, many more thousands of jobs will be needlessly lost. Here’s what has to be done:

Combat U.S. pulp subsidies
The U.S. government is providing billions of dollars of subsidies to the pulp industry for the renewable fuel that they produce and use in their mills (“black liquor”). As a result, U.S. mills are receiving $200-300 per ton on pulp that costs $500 per ton to produce. This is a huge subsidy that will cause Canadian mills to shut down and less-competitive U.S. mills to re-open.

Ottawa must quickly level the playing field by offsetting this subsidy before more Canadian mills close and thousands more jobs unnecessarily lost.

Modernize provincial policies
Provinces own most of the wood used in the industry’s mills. For too long, they have managed the forest resource with an eye to short term politics rather than long term economic growth.

A number of provinces, including Quebec, retain the antiquated policy of “appurtenancy”, whereby the government, instead of the market, decides where wood will be processed on a mill-by-mill basis. And provincial governments have regularly prevented companies from merging and expanding their operations so they aren’t able to withstand an economic crisis.

Where governments have modernized their policies the result has been more investment and stronger companies that can go the distance.

Reward investment and research and development
The forest products industry is a major investor in innovation. Ottawa’s main incentive for industrial R&D is through the Scientific Research & Experimental Development (SR&ED) tax credit. But as hard as this is to believe, companies can’t take advantage of it when they’re not profitable - so it’s useless during an economic downturn. And to make matters worse, when companies are in financial difficulty the government withholds tax credits they’re owed just to be on the safe side. This needs to change.

Countries that aggressively favour investment get more of it which is why France and the U.S. have included this approach to investment as part of their response to the recession. Canadian governments have made progress on this front by eliminating capital taxes and harmonizing the GST and PST. But Canada can do better. Governments must extend the accelerated depreciation rates on capital investment and the loss carry-back provisions.

Bust rail monopoly powers
Canada’s two national railways have monopoly power over many rural communities and provide poor service and inflated prices that make mills less competitive. It’s estimated that forest companies pay almost $300-million dollars in excess rail costs because they don’t have access to competition.

We have seen how competition in telecommunications in this country has resulted in dramatically improved service and much lower rates for customers. The same sort of change is needed in the rail system. Federal law creates the monopoly power and only changes to federal law can fix it.

Help us get greener
The forest products industry is by far the largest generator of renewable energy in Canada producing enough to power the city of Vancouver. The future of the industry is even greater with its potential to contribute to Canada’s overall energy balance.

But to achieve this, the right policies must be in place. Right now, investments by industry in renewable energy production are not recognized. Instead governments offer perverse incentives to create new facilities to generate power from wood fibre, a move that will dramatically reduce the competitiveness of existing producers.

To add insult to injury, federal and provincial policies often don’t treat renewable energy created from pulp, paper or solid wood production as favourably as other sources of renewable energy.

There are many exciting new opportunities to create green fuels and chemicals using forest products. Governments should be pursuing these with the help of industry, while offering greater incentives for green production efforts already underway.


Avrim Lazar is the President and CEO of the Forest Products Association of Canada.