I am happy to entertain questions after the presentation, if the Chairman wishes. The purpose of this report was to review existing strategy incorporating in particular an assessment of whether it was providing value for money; to examine market developments, including in particular non-timber aspects of the sector; to identify the impact of reform of the Common Agricultural Policy and to examine funding methods and structures for the future. In a ten minute presentation I will not try to summarise the complete report but will address the key conclusions under each of those headings.
The first question is whether the programme provides value for money. It does so provided one compares the expenditure of the Exchequer with other forms of agricultural support expenditure. For example, it costs approximately €140 to deliver €100 of income to a dry stock beef farmer. In forestry the cost is approximately €114 to deliver the same amount of income. Compared with other forms of agriculture support, the spending on the forestry programme represents value for money. Whether or not it does so when compared with any other use of Exchequer funding is another day's work, one which was not addressed within the terms of reference of the assignment.
In reviewing the existing strategy, the consultants found a number of significant shortcomings, the principal one of which was that the annual rate of planting achieved consistently since the programme was put in place, at about 13,000 to 14,000 hectares per annum, fell well short of what the target for that strategy was, namely 20,000 hectares per annum. The consultants went on to examine what the target ought to be, and whether it mattered that the planting fell well short of the target. Obviously it would matter if the planting figure of 20,000 hectares per annum was a relevant target.
To address this question, the consultants carried out a set of projections — the first time such an action was taken — for 50 years from now, to gauge what would happen to timber production given different scenarios for planting. The key conclusion to emerge was that unless a target of 20,000 hectares was achieved it would not be possible to realise the potential of the sector in the medium to long term. The reason is that even at the current rate of planting, production of timber will rise over the next 12 to 15 years but then fall because of changes in planting practice requirements for biodiversity and increased provision of broadleaved trees. Factors already in the mix will cause output to rise and then fall back.
The nub of the problem is that as output rises, processing capacity will have to be expanded. Investment will have to be made in order to process what is to come on stream. However, any investor looking at capacity is going to look at what will happen to production in the medium to long term. The consultants take the view that if investors see output going like that, but then falling back, it will be difficult for any of them to carry out that kind of investment. The only way of overcoming this hump in production is by achieving a rate of planting somewhere in the region of 20,000 hectares per annum. From the point of view of achieving the economic potential of timber production, that level of annual planting is needed. Otherwise the sector will probably not realise its potential in terms of timber. That is a fairly fundamental conclusion.
The other conclusion to emerge is the increasing importance of non-timber benefits. These are by and large environmental benefits, which primarily arise under two headings. Amenity leisure and recreation is one. The other potentially more significant one is the contribution the sector can make to the mitigation of greenhouse gases through the carbon sequestration features of the forest estate.
While a planting target of 20,000 hectares per annum is required to realise the commercial potential of the sector, because there are significant other benefits arising, primarily under an environmental heading, it makes sense in the view of the consultants to sustain a strategy even at the current level of planting, even though that would not realise the full commercial potential. The proviso is that all this is fine provided Government explicitly takes these environmental benefits into account in an economic way. Taking non-timber benefits into account provides an additional rationale for continuing with a strategy even if the full commercial potential of the sector is not realised.
I mentioned at the outset that we were asked to address the implications of the reform of the CAP. It has become very clear to the consultants that the thrust of EU policy in this sector in the future will be much more to underpin and realise these environmental benefits over and above the benefits from timber production. The brute fact of the matter is that when one considers that there are 25 countries in the EU, there is a lot of timber out there. Ireland is distinctively different in having a small area of afforestation, and strategy to date has been focused on achieving planting to build up that forest estate. Most other European countries are not in that category, and EU policy, to the extent that it was supportive of an expansion in planting, is becoming much more concerned with the quality rather than the quantity of timber estates, particularly when an environmental point of view is taken.
The other area which has probably achieved more notice in the reportage on this report concerns future funding methods and structures. When one looks at the projections and at the Exchequer implications of continuing to support annual premia in the medium to long term, one comes up with staggeringly high Exchequer commitments of the order of €7.5 billion. Looking at this, the consultants noted that while we have achieved a planting rate of 14,000 hectares per annum, which can be justified, we really ought to have a rate of 20,000 hectares per annum, yet when one looks at the Exchequer implication — because this is a financial issue rather than an economic one, with implications for taxpayers' money — the bill looks enormous.
The consultants therefore made a number of recommendations. The recommendations have been misunderstood, to use the most charitable description. I will take a moment to explain them. The consultants have recommended that, instead of the premia being paid over a 20-year period, they should be paid over ten. They recommend that the value that would have been paid over 20 years should be paid over ten. From the point of view of the farmer planting, there would be no change in what he would receive, because he would receive it over ten years, there would be a saving for the Exchequer from that shift.
It has been represented that the money will run out after ten years, with no incentive. The consultants' point is that the grower will receive over ten years what he would have received over 20. If he chooses to spend it all in ten years, that is his business. He need not do that; he could manage the premia. The change in the time structure of those payments does not adversely affect the grower in any way.
A second recommendation with which the consultants have come forward is that there ought to be a mechanism to enable the full value of the forest estate to be achieved. The difficulty we are trying to address is that planting is a 40-year decision. In no sector can any private individual properly discount income 40 years out, by and large because of Keynes's famous remark that, in the medium term, we are all dead. Institutions can take a longer-term view, very often because they are in the business of matching liabilities that will arise in the medium to long term. Therefore they require assets and incomes to arise in that distant future. That means that the value those kinds of organisations, which will be around for a very long time, can make on future income is usually higher than any individual can make in any sector. In the jargon of economics, institutions can have a lower discount rate than individuals.
To take advantage of that fact, the consultants came forward with the idea that the Government could take a facilitatory role by enabling a planter of trees to sell at the same rate of return as they would have received had they retained the plantation. They would sell them to the kind of institutional investor who can value that future income higher. This recommendation enables value to be created.
No doubt members are aware of the argument in the press that the advantage ought to accrue to the grower. The consultants' position is that the basis of their recommendation is that the grower has been protected regarding what he would receive over the 40-year view and that the extra value should accrue to its creator, who is, in effect, the Exchequer. The effect of those recommendations has been to mitigate the very substantial bill that would arise for the Exchequer and taxpayer by introducing those measures. It would reduce by over a quarter the Exchequer exposure over a 40-year period.
I think I have summarised all the main headings. The key messages are that the target of 20,000 that was in place is relevant. The fact that it has not been achieved is significant. Value for money has been achieved by expenditure to date, and that is enhanced when one takes account of environmental benefits. With the way in which EU policy is moving, much greater emphasis and support will be available by concentrating to a greater extent than in the past on realising and maximising such environmental gains. If value for money is to be maximised and that planting target of 20,000 realised, significant scope exists through reforming payment structures to allow growers to be as well off as at present but make significant savings to the Exchequer, something that in the consultants' view is required for the Government to commit to such an additional strategy in the medium term.
