Ian Duncan: Politics, the Budget and a business

Out of the Woods
Reg Birchfield and lan Grant
GP Publications, $34.95

The subject of restructuring and sale of state trading enterprises in New Zealand has attracted a number of writers from a variety of professional backgrounds. It is not an easy subject to research satisfactorily, as so much knowledge has been lost as staff and management have come and gone and documentation has been fragmented. However, Out of the Woods, the story of the shortlived Forestry Corporation is unusual. This is because, in the words of the introduction, the book was written “with full access to all relevant governmental, Treasury and corporation documents ‑ a very rare occurrence in New Zealand”.

Without such access the authors would have been dependent on a fairly narrow range of published information about the corporation, for example, annual reports, ministerial press statements and Budget statements, to establish the major milestones in the organisation’s history. The recollections of those involved in the business and politics of the organisation would have been the main source of information to fill in some of the detail and put some interpretation on events. The risk in such a narrowly‑based approach is that perspectives given, with the best will in the world, might be incomplete, slanted or distorted by the application of hindsight. Importantly, the authors had the opportunity to “research in depth and sort through conflicting versions of events and strategies”.

The book tells the story of the transformation of a government department, the New Zealand Forest Service, into the New Zealand Forestry Corporation, and the break up and sale of that organisation, which ceased operations in November 1990. The story is told from the perspectives of those most closely involved with the short but turbulent life of the organisation ‑ including cabinet ministers, corporation staff and directors, government officials and advisers. Its fabric has been woven from thousands of reports, briefing papers, letters and file notes.

The story starts in 1985 with Andy Kirkland, at that time Director‑General of the Forest Service boarding a flight to Auckland, under instructions from Finance Minister Roger Douglas and Forestry Minister Koro Wetere. His task is to invite Auckland businessmen Alan Gibbs and John Fernyhough to join the establishment board of a commercially driven trading corporation based on the Government’s forestry interests.

The political background to this event is then fleshed out in detail, including the history of political interference in the Forest Service, the difficulties facing an organisation with multiple and sometimes conflicting objectives and the sustained acrimony between the Forest Service and conservation groups. By the mid‑1980s the service was under siege, not only from its longstanding enemies and rivals, but also from a Government looking for ways to attack the country’s chronic fiscal position.

The authors then adopt a different angle of attack, looking at the economic and political options facing the 1984 Labour Government and in particular its Minister of Finance and the genesis of the idea of corporatisation (the state‑owned enterprise (SOE) programme) in discussions between Finance Ministers Douglas, Prebble and Caygill and Treasury officials in 1985. According to this account, once the concept was floated it was vigorously opposed by senior officials in the State Services Commission (SSC). Much of the early part of the book, for example, chapter 4, “Battling the Bureaucrats”, is devoted to description of attempts to block or slow the process by the SSC and Public Service Association (PSA).

The implementation or mechanics of the corporatisation process was to be left to private sector executives and the earliest application was to be the Forest Service. On September 16 1985, it was announced that this would be replaced with a commercial forestry entity, a department of conservation and a land enterprise.

An establishment board chaired by Gibbs with Fernyhough as deputy was announced in February 1986. In the book this leads into analysis of some of the critical manoeuvrings between the board, which wanted the corporation removed from the constraints of the state services conditions of employment, and the PSA which wanted to maintain as big an involvement as possible with the new organisation(s). From the board’s viewpoint, it was critical that the corporation commence operations with a cost structure in line with immediate cashflows. This had to be achieved without incurring all the redundancy costs that could have ensued.

About two‑thirds of the staff were made redundant in the transition from Forest Service to the Forestry Corporation. According to the book, “with such massive staff and wage worker cuts there was bound to be widespread bitterness. Inevitably the anger and bitterness was particularly aimed at those who made the transition from department to corporatisation most successfully.” Chapter 7, “The Outfoxing of the PSA”, provides a blow‑by‑blow description of the siege warfare between the PSA and the establishment board that continued for most of the 18 months between the Douglas announcement and the commencement of the Corporation’s operations on April 1, 1987.

One of the principal reasons for the short life of and abrupt end to the corporation was the failure to reach agreement, between the corporation and the Government, on the value of the assets to be taken over by the corporation and included in its balance sheet. Although ultimate ownership would still be with the Government, this valuation was a critical part of the SOE concept for several reasons. One was that the value of the assets would be critical to the role of rate of return objectives in providing incentives for managers to achieve gains in productive efficiency. The value of the assets had to be high enough to maintain pressure on managers and to remove any cushion relative to equivalent private sector organisation. However, in eight out of nine of the SOEs that came into being on April 1 1987, an asset value had been agreed. A major part of Out of the Woods is devoted to trying to explain how and why the Forestry Corporation came to be the exception and the ultimate consequences of that.

Many technical reasons particular to the economics of forestry can be put forward for the wide range of valuations proposed at various stages by the parties to the negotiations. These are interesting and instructive in themselves and, in my view, well expounded in the book. However, in this account the more fundamental problems in negotiation were seen to grow out of mutual suspicion between the corporation and the Treasury and serious breakdowns in communications between key individuals. One of the most interesting revelations is that at the time of the protracted and ultimately fruitless negotiations, Gibbs did not see the valuation issue as important. A presumably more recent reflection of his was, as quoted on page 161, “The issue of valuation was irrelevant to the Forestry Corporation’s outcome, but it is an important issue for the process of corporatisation.” It was certainly seen as important by both the Treasury and Roger Douglas.

As it turned out the time to close the huge valuation gap ran out and not much more than a year after the corporation’s life started, its assets were on the sale block. The difficulties facing this process are detailed in chapter 12, “The Three Obstacles”. Two of these involved long-term log sale commitments to Tasman Forestry and Carter Holt Harvey and the rights of Maori claimants. In my recollection the negotiations concerning the third and the eventual decision to sell cutting rights rather than the land on which the forest stood were fairly well covered in the media at the time. The standoff with the private sector forestry companies may be less well known.

The problem facing the Government wishing to sell the forests in 1989, was that in 1955 the Crown had entered into very long-term and open‑ended commitments to supply logs to the pioneering timber processing company, Tasman Forestry. The first contract was for 25 years with rights of renewal extending it out another 50 years, and with very little detail on price adjustments. Hence, the negotiations that took place from 1988, complicated as they were by these historical commitments, involved some dramatic examples of standover tactics and brinkmanship.

Out of the Woods provides the reader with a rare opportunity to go behind the scenes into a series of major and complicated negotiations and transactions. Probably only about a dozen individuals had sustained involvement with the process. They and a few others are the only ones in a position to dispute the research and the interpretation put on events. As an “outsider” all I can say is that the story at the broad level coincides with the conclusions of our much more limited insights (Duncan and Bollard, chapter 9) into this particular example of corporatisation.

The book contains a reasonably detailed contents index and a chronology of key dates in the history of the corporation, running from 1984 to 1990. There are no graphs or tables but a few black and white photographs.

The main problem I found as a reader was that because it was not practical to reference quotations (the narrative is built on these) it is sometimes difficult to know whether one is reading a comment made at the time the events were happening, or much later, when the book was being researched. The structure of introducing a new set of issues then fleshing out the detail involves a fair amount of jumping back and forth through time. In general, though, these stylistic issues do not detract from its readability.

Ian Duncan is a research economist at the New Zealand Institute of Economic Research. He co‑authored, with Alan Bollard, Corporatisation and Privatisation ‑ Lessons from New Zealand.

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