Managed investment schemes, tax deductibility and future plantation wood supply

Who invests in trees is largely about who is prepared to take the risk of investing in a product that generates profits at the mid to lower end — like most other agricultural raw materials — and where income follows between one to three decades after the initial investment. Few wood processors or unprocessed-wood exporters have plantation assets and most that did have divested. In the past the public, through State and Commonwealth funding, bore most of the softwood-plantation risk. Today, managed investment schemes are the dominant vehicle for tree planting. But the risk-takers are still the public, whose purse has provided around $2 billion in tax deductions to thousands of tax-minimising, passive, plantation investors. In June 2008, the Australian Parliament enacted legislation to broaden the tax provisions for growers with a new tax deduction for tree planting for carbon sequestration (Tax Laws Amendment (2008 Measures No. 2) Act 2008) —without ruling out their future logging, which would add even more to the wood supply and remove most of the benefits of carbon sequestration.

While planting continues apace, prospectus expectations of market opportunities for woodchips have not yet materialised. Most of the now-maturing hardwood-plantation resource competes against low-priced native-forest chiplogs (Ajani 2007: 265) in the stagnant global hardwood-chip market. Domestic processing opportunities, namely pulp and paper mills and wood panel plants, lie dormant, hindered by high plantation stumpage prices. These prices, together with arguably high assumed wood yields, offset the high investment cost averaging $9300 per hectare in 2001 (Lonsec Agribusiness Research 2001), which generates a bigger tax deduction and bigger up-front profits to the prospectus company for each hectare planted. The all-up actual cost of buying a hectare of land, planting it with trees and managing them over the rotation is around $4500 a hectare (Ajani 2007: 255). From experience, we know that investment driven by the demand for tax minimisation, and not market realities, is associated with collapse.

The optimal allocation of water and agricultural land for food and fibre production requires final product demand to set the rate of new planting, not artificially driven plantation investment or incentives for inefficient ‘carbon sink forests’. Evidence of market failure justifying these plantation assistance measures is not compelling. There appears to be no evidence of capital-market failure resulting in plantation investors not being able to access finance. Higher interest rates may be attached to finance for planting, but this is normal for any long-term and therefore more risky investment. Similarly, evidence appears to be lacking of market failure justifying government intervention in plantation wood growing. Competition in the Australian plantation industry has increased, with increased private-sector investment breaking up state government dominance and it is difficult to claim information asymmetry between wood buyers and sellers. Other possible public goods associated with plantations, such as landcare and water-catchment benefits, should be investigated on a site-specific basis to justify government intervention. Plantation water use has emerged as a major disbenefit in many catchments.

Finally, as discussed in the next section, the carbon-sequestration public-good argument of plantations falls short when assessed against other land-use options.