I welcome Mr. David Gunning, chief executive officer, Coillte, and Mr. Gerry Egan, group director, corporate affairs, Coillte. I remind members of the committee that they should not comment on, criticise or make charges against a person outside the House, or an official by name or in such a way as to make him or her identifiable. Before I call on Mr. Gunning to make his opening statement, I also remind members and our guests that we must vacate this room at 1.30 p.m.
Annual Report 2008: Discussion with Coillte.
Mr. David Gunning
I thank the Chairman and the committee for the invitation to this meeting. We appreciate the opportunity. The committee's invitation referred to considering Coillte's results for 2008. In some ways, it is almost another time or era since we last appeared before the committee in June 2008. The world has changed significantly. In addition to credit crunch issues and the availability of credit, Coillte is currently significantly exposed to the collapse of the construction sector. Coillte is facing a new reality and, for the entire Irish economy, there is no going back to the way we were.
However, we see this as an opportunity. Coillte is now more relevant on a range of issues than it ever was. Climate change is the primary motivator for that statement. We will discuss that in more detail as we go through the presentation. Members of the committee have been given copies of the presentation. My objective is to refer to some of the key points, and not necessarily everything, in the document. We will be happy to reply to questions afterwards.
Coillte has been in existence for 20 years. It was founded 1 January 1989 and in the intervening 20 year period the forest estate owned and managed by Coillte has increased by 37,000 hectares, net of disposals made in the meantime, to a total of 440,000 hectares or over 1 million acres. Profits earned over that period are €301 million and the value of the group's assets today is approximately €1.4 billion. We have broadened the base of the company from the original concept of forestry to include land management, the production of panel products and early ventures into renewable energy. Coillte is an international business with 47% of its sales from exports.
Coillte has three divisions in the company. Coillte Forest manages the legacy forest business of the company. Coillte Enterprise is where new businesses are grown and is currently focused on land and renewable energy. Coillte Panel Products has two large manufacturing plants, SmartPly that manufactures OSB and Medite, in Clonmel, that manufactures MDF. Coillte has more than 1,100 staff. The majority are in Ireland. There is a sales office in the UK and some marketing activities there as well as a small number of sales staff in the Netherlands. We sell our products internationally.
With regard to the forestry sector, Coillte can make a contribution to a host of national agenda items, which we will discuss as we go through this presentation. Coillte is the anchor tenant or big player in the forestry and forest products sector in Ireland. Forestry accounts for approximately 10% of the country's total land area, which is significantly different from the European average of 44%. However, when one considers that in 1903 approximately 1.5% of our land area was afforested, we have made significant progress. There is a great opportunity to ramp up that progress further. The total economic value of the forest and forest products sector is approximately €1.8 billion, and it employs approximately 16,000 people, mainly in rural communities.
There is a mixture of businesses in the forestry sector ranging from family owned sawmills to multinational owned companies such as Masonite on the banks of the Shannon. In addition to the 16,000 people employed in the sector, there are now approximately 16,000 private forest owners, that is, farmers and investors who own forests. The big challenge is to bring the produce of these privately owned forests to market and we believe Coillte has a role in that regard. We envisage Coillte and the forestry sector delivering major economic benefits as well as environmental and social benefits, for example, with regard to climate change and public recreation. These are big issues in the current environment. Forestry is a key element in the renewed programme for Government. It is critical that funding is put in place to enable the level of afforestation to be brought up to 10,000 hectares per year, as provided for in the programme for Government. That is a challenge.
I will talk briefly about the different areas of our business. Coillte Forest manages 445,000 hectares of forest land, of which 79% is forested and 21% is open space, water, roads or land above the tree line. Its principal business is the supply of logs from Coillte forests to sawmills, panel board mills and, increasingly, emerging energy supply businesses, be they wood chip or wood pellet manufacturers that take our product and make wood chip or wood pellets, for which there is increasing demand. A total of 2.6 million cubic metres of wood, that is, approximately 100,000 truck loads of timber are delivered every year to processors in this country. Coillte Forest employs 620 direct staff and has approximately 75 harvesting contractors and 35 haulage contractors, which generates additional employment for approximately 1,500. The value of the contracts we put with those third parties is roughly €80 million. It is a big business.
Coillte Forest is certified by the Forest Stewardship Council, FSC, since 2001 and the FSC audit, which is conducted on an annual basis, is taking place this week. We wish our staff luck in that respect. The certification that we manage our forests responsibly is critically important to Coillte's wood supply and to the customers it supplies. A total of 15% of the estate is managed for nature conservation as its primary objective. As proof of this Coillte has received financial support from the EU for LIFE-Nature projects, where it has worked on bog restoration, both raised and blanket bog, and the restoration of priority woodlands throughout the country. Coillte Forest is in every county and almost every parish in the country. Consultation and engagement with the public is critical, as are species diversification and landscape management. The landscape and how the forest landscape looks are very important from an Ireland Inc. perspective in terms of rural recreation and a host of other issues that enrich the environment in which we live.
The Coillte Enterprise division deals with a number of areas. One of them is the sale and development of land in non-strategic properties. We sell 300 hectares to 600 hectares per year to a range of different applications. In 2008, and generally, approximately 60% of those go towards public or community type projects through sports clubs and recreational facilities of other types. Coillte has approximately 200 radio mast sites on its properties, delivering broadband and other telecommunications services, such as mobile telephone and emergency services. There are ten to 12 sand, stone and gravel deposits on the Coillte estate, a number of which have been of interest. However, the commercial interest in these has abated somewhat in the current environment.
With regard to nurseries, Coillte operates the largest conifer plant production in Europe, with approximately 38 million plants annually. Some 60% is for our own use, but it is also for the private sector, for the UK market and occasionally exports to Scandinavia. It is interesting to think about Coillte in Ireland delivering conifer plants to the Scandinavian market. We have nursery facilities in Carlow, Wicklow, Donegal and a sales facility in Scotland.
Our wood products focus primarily on Irish hardwoods. We take native Irish hardwoods from Coillte woods and private woods, and process them. We have a relatively small training sector but it is critically important in terms of training for the forest industry throughout the country — not just for safety but also a range of other issues.
The Government's target is to generate 40% of our electricity requirements from renewables by 2020. Coillte has its shoulder to the wheel in helping to achieve this target. About 25% of the wind capacity in Ireland today is on land previously owned by Coillte. Given the nature of our land holdings — Coillte owns approximately 7% of the land area of the country — we are in a unique position to make a contribution to wind energy. Also, because of the wood biomass that Coillte produces, there is a significant opportunity to contribute to biomass objectives.
As regards wind strategy, we have a number of co-developments with established players. We have a number of wind farms for which we have approval in our own right as Coillte. Early in 2010, we are due to complete our first wind farm in County Leitrim, which is a joint venture with the ESB's subsidiary Hibernian Wind Power. Last December, we received pre-approval for grid connections for about 400 MW. We were the second largest beneficiary of that decision by the energy regulator, after the ESB. We have a big role to play in terms of Ireland achieving its renewable energy targets.
On the biomass side, our focus is on putting together an end-to-end chain that can deliver wood from the forest in a cost-effective way to industrial users of heat energy. This is a complex area but one in which we have significant expertise. It is also an area in which we can help to bring material to market from the privately-owned forestry sector. We have markets today and will have markets in the future, so we are a significant enabler of that sector.
We have two large plants producing Coillte panel products, including sales of about 700,000 cubic metres of finished panels with 80% for export. Our markets are Ireland and the UK, as well as the western edge of Europe including Scandinavia. We have an FSC-certified product and our competitive advantage comes from the fact that we own the wood supply and we can supply wood cost-effectively to deliver these world class products. We have two strong brands: SmartPly in Waterford Port — south Kilkenny before Deputy Aylward points that out to me again — and Medite in Clonmel. We were pleased to have a visit from the Minister of State, Deputy Tony Killeen, accompanied by Deputy Aylward, last Friday, to the south Kilkenny-Waterford Port plant, and to Clonmel last week. These are world-class plants involving large industrial operations. We have our challenges in this sector at the moment and I will talk about that a bit more later.
Slide 9 shows our 2008 performance. There was a profit of €9.2 million last year from our all-time high of €40 million in 2007. The figure of €9.2 million does not include Coillte's first dividend of €2.6 million paid to the State in 2008. The gap in profitability comes from three main areas: in 2008, we had reduced demand; we had significantly lower prices; and we were affected by sterling in the same way as any exporting company in this country to the sterling market.
We have a very difficult construction market and there has been a knock-on effect in terms of price and demand. We scaled back production in our forests and manufacturing plants to match supply with short-term demand. We firmly believe, however, that our businesses are fundamentally sound. We need to make some investments to maintain the competitiveness of these facilities and we are continuing to do that to improve efficiency, reduce costs and position Coillte for the upturn when it comes.
What we have learned from 2008 and continuing in 2009 is that it is critical for Coillte to reduce its dependence on the cyclical construction sector and, even more so, the Irish construction sector which is in difficulty. We have put together a significant and robust response to the challenges we face. We have implemented a cost-reduction programme whereby we have taken €10 million annually out of the total group costs. We did this in 2009 and the effect will be about €8.3 million, but we cannot stop there. Part of that was done by payroll cost control measures. We have implemented a pay freeze across the company from top to bottom. With the support and agreement of the staff, we have introduced pension contributions where previously the staff in the main Coillte organisation would not have made pension contributions — not unlike what has gone on in the public sector. No bonuses or performance pay are planned for 2009 despite the fact that the people in Coillte are engaged in gearing up the company for the future. The payment of bonuses earned in 2008 has been deferred to a time to be determined by the board when it would be appropriate to pay them.
With regard to practical measures on cost reduction, we have reduced the cost of manufacturing our board, both in SmartPly and Medite, by 10% to 15% if we compare Q3 2008 with Q3 2009. Further energy savings will come through in Q4 as our energy prices come down. Those are some practical examples of what we have done to respond.
In Medite and SmartPly we have had a rolling programme of temporary shutdowns. When these plants operate they do so fully but if they did that all the time we would have too much supply going into the market. Therefore, we choose to shut them down for one week in every four or six weeks approximately. We have had great support from the staff in both manufacturing plants to allow us to do that.
With the support of the Minister for Agriculture, Fisheries and Food and the Minister for Finance, we implemented a voluntary early retirement scheme, under which 96 employees left this September. That will pay through into our 2010 numbers, but it was important for us to do that. They were people who had served the company diligently. We are delighted to be able to make those efficiencies.
We are re-financing our business. It is a tough market in terms of dealing with the banks but we are in the process of bringing the finishing touches to refinancing the group debt. We are grateful to the banks for their support. We are not there yet, but we hope to get those documents signed up in the not too distant future.
In this challenge, we have made it a high priority in the organisation to put more effort into dealing with our customers. We are a semi-State company but we are a commercial company and we must focus on ensuring that our customers are successful. If I were sitting here last February, it would be a story of our sawmill customers operating on a two or three-day week, and challenges across the sector. I am delighted to say, however, that as we sit here at the end of October, nine of our largest ten sawmills are exporting to the UK and are on full production. That is an achievement in the sector and a sign of Coillte's support for that sector, which has been very important. Equally, on our panel products side we have been very successful and have not lost a single customer in the UK or Ireland to our competitors in this difficult period.
Destination 2012 is an internal rallying cry for the people of Coillte. I recognise the support that the management team has received from Coillte staff. We recognise that we need to transform this organisation significantly. We have given ourselves a number of years to do that.
We must become a fully sustainable business with the ability to reduce our dependence on the construction sector, lower our cost base, but also identify a number of new products and opportunities which we can engage in and exploit to the benefit of the organisation. This is about ensuring Coillte is a relevant company. We have no intention of becoming an Irish Steel or like companies that have become irrelevant. We believe, now more than ever, Coillte is relevant.
The future for Coillte is addressed on the next slide. We updated our strategy in October 2007 and we think it is more relevant now. We have learned in the intervening period that the traditional forest management methodology is no longer valid. The new game in town is on mitigating climate change. The days of high fixed costs and commodity products, and trying to compete on that basis, are past. This committee has seen the agricultural sector and the food sector move up the value chain, and Coillte and the forest product sector in Ireland needs to exactly the same. Among the primary producers and those who are only focused on that, there needs to be a bigger contribution from Coillte in terms of addressing this opportunity.
We see as our new purpose the innovative and sustainable management of natural resources. Under that headline, we must lessen our dependence on construction and commodities. We look at all of the assets in the company, not only our forests but our land, the capabilities of our people and our entire environmental contribution. All must be brought to bear on the challenges before of us. Every business, asset and product is central to the national challenge of mitigating the effects and financial implications of climate change, and that is laid out in the programme for Government. We hope to see that realised and we have some contributions to make on how that can happen.
The key strategies for the company up to 2012 are laid out in the presentation. I would have gone through these in more detail with the committee on the last occasion and I will not dwell on that. The following is our progress in implementing this strategy. Our farm forestry investment schemes have been renewed. We have introduced new products. We have introduced some new schemes in this area which make it more attractive for farmers, and we are making those available. We have launched a new website called farmforestryinvestment.ie. We have received a significant increase in inquiries from farmers and from others who see the opportunity in afforestation.
We have developed a number of new afforestation proposals with a carbon theme. The purchase of carbon credits internationally — there is €270 million earmarked for that purpose — represents €270 million leaving Ireland to buy carbon off-set products in other countries such as India and China. Our proposals, which are still in development but are in an advanced stage, would see those moneys being recycled back into the Irish economy and at the same time fulfilling our carbon commitments and reducing what we need to buy internationally. We consider this to be important.
We have renewed our commitment to recreation and the environment. The second National Trails Day that took place on 4 October last was a considerable success. There were 120 events throughout the country. There was a doubling of events and of attendees from the first one in 2008. This is important. There is the Dublin Mountains Partnership; our co-operation with the Irish Sports Council; the forest recreation infrastructure that Fáilte Ireland has funded; and the LIFE projects. Coillte is the only company that has received approval for three LIFE projects under the EU's scheme. No other company has been successful in doing so. That is a statement of Coillte's commitment to the environment.
On the land side, 300 mast sites will be built in the national broadband scheme and 100 of them will be on Coillte land. We are making a major commitment here, again outside of our traditional forestry area but fulfilling a national agenda item of bringing broadband to the rural areas. We are delighted to be involved in that scheme with the telecommunications operator "3" and its infrastructure provider, BT.
On the renewable energy side completion of our Garvagh Glebe wind farm is on schedule for 2010. We recruited a new director of renewable energy, a well-known person from that area. We have ten wind farm applications underway in nine counties. We have the potential to be a big developer of wind farms, thus underpinning the 40% national target. Coillte has a significant role to play here.
On the supply of biomass, we have recently had two announcements in the newspapers. We are further along with Biomass 1, which was seeking technology partners, where we received 35 submissions from established players and relatively young players in this relatively early-stage business. This is about delivering heat to customers and our focus at this stage is on industrial-type customers.
Biomass 2, which was announced in last week's newspapers, is providing larger scale biomass supply to those who might be interested. We have had many people knocking on our door wanting to establish businesses. This is our way of engaging with that broad community on a transparent basis so that we can identify who are the runners and riders and give them an opportunity to compete for the biomass within the Coillte estate.
On the panel products business, we completed a €15 million investment in Medite which allows us enter new markets to reduce our energy utilisation. To reiterate that point, our electricity bill, at both SmartPly and Medite, is approximately €17 million — a significant cost.
We have also introduced new value-added products in this area. Our site protect product was on trial with B&Q last year and we just got notification from B&Q that the product will be taken in all of its 128 stores throughout the UK for 2010. This is another important achievement.
We have just introduced a new thick MDF panel from Medite which would be used for worktops. It is products such as this which are finishing out in various premises such as hotels. On one of our promotional slides there is a lovely picture of the inside of the Scottish Parliament which, the committee will be glad to hear, contains significant quantities of Medite MDF. Shortly, we will be undertaking an audit inside to see how much is in our own Parliament.
CARB 2, which is a Governor Schwarzenegger initiative from the California Air Resources Board, CARB, refers to the purity of the products supplied. One must be CARB 2 compliant to supply MDF to IKEA, for example, which is emerging as the largest producer of furniture in the world. Some of our third parties supply IKEA. We are acting to move Coillte up the value chain and make it more relevant in the future.
We are not just doing this in the panel products area. We have a trial underway in the forests which is about forest residues — the branches and tops of trees that would have been cut to waste and left on the forest floor. We are now bailing those and bringing them to roadside and we have a trial underway with our own energy users in Medite and SmartPly that use biomass energy, and also plans to deliver a small amount of that to Bord na Móna for energy purposes. These are new initiatives and we are proud of what we have been able to achieve in terms of new products and this area of innovation. We see that as being important for Coillte's future.
Current issues are addressed in slide 14 of the presentation. The national forestry programme is first up here. The afforestation programme run by the forest service has slowed dramatically to approximately 6,000 hectares per year. This is at a time when increased afforestation is so important to the national climate change strategy. It is important that we up our game here and achieve the 10,000 hectares per year target contained in the programme for Government. That will be underpinned by funding. It can also be enabled by what I spoke of earlier, the new carbon-related payment which Coillte proposes within that entire funding scheme. That is an important area for the future.
There are 16,000 private forest owners of varying size and scale. It is important, for a host of reasons — including those relating to the timber industry, wood for energy and carbon abatement or climate change — that the resource which exists should be brought to market. It is essential that incentives be put in place for farmers in order that this might happen. Coillte has access to markets that are significant and is of the view that it can assist in this area, particularly in the context of the fragmentation of the private forest estate to which I refer and it being a focal point in respect of that.
UK exports are important, particularly as a result of the current turbulence in the euro-sterling relationship. From Coillte's perspective, every 1p disimprovement in the exchange rate represents €1 million on its bottom line. We hedge our currencies as best we can but in light of the current level of turbulence, it is difficult to get ahead of what is happening. We support IBEC's call for a Government-backed scheme of export credit insurance which might provide assistance in this area. Export credit insurance is one of those elusive things which is very easy to obtain when one does not need it. Now that we need it, however, it is practically impossible to obtain. The provision of such insurance is extremely important.
I referred to the amount we spend on energy in the context of our operations. It is important that our energy costs, which represent our third largest input cost in the context of our manufacturing operations, are still approximately 23% higher than those of our competitors in Scotland. This is a difficult challenge to overcome but we must overcome it if we want to create a successful manufacturing base. We are encouraged by the reductions that are already coming about during the fourth quarter of this year. However, more must be done.
There is an opportunity for streamlining in the area of wind energy regulation and planning in order to facilitate the development of the renewables sector. There are some conflicts within the different areas. One of the other issues that arises is a lack of uniformity in the planning process from county to county. This is also quite a difficult challenge to overcome.
We are delighted that a green procurement aspect has been included in the new programme for Government. For a number of years we have been engaged in trying to bring this about. The importation of Chinese plywood, which can potentially come from unsustainable resources, is not just bad when we are trying to project an image of "green" Ireland, but it is critically important to realise that we can supply a better material, at the same price, from Irish forests and thereby support Irish jobs. That fact should not be lost on members. We are of the view that this is good rather than bad for business.
Coillte is extremely successful and embraces its commercial mandate in an aggressive manner. However, we balance this with our social and environmental concerns and the fact that Coillte is extremely important on a local basis. The output of the forest products industry, which supports 16,000 jobs, is valued at €1.8 billion. This is extremely important. We need to gear up for the next phase of the expansion not just in respect of forests, but also in the areas of land, panel products, renewable energy and exports.
Coillte is highly relevant across a range of Government initiatives, whether these be in the areas of renewable energy and climate change, the environment, infrastructure, the supply of water or recreation. The latter is particularly relevant in this era of declining gym memberships, particularly when one considers that the use of Coillte's recreation resources is increasing to a significant extent. Such resources continue to be available free of charge to those who use them.
More needs to be done. We must pursue a higher-value approach and do more with the resources available to us. We are of the view that commercial success can be achieved in tandem with responsible environmental management and the delivery of social benefits. I thank members for their attention and I look forward to answering any questions they may wish to pose.
I thank Mr. Gunning for his extremely comprehensive presentation. I call Deputy Creed.
I welcome Mr. Gunning and Mr. Egan. I thank the former for an extremely comprehensive report.
Commercial semi-State bodies such as Coillte have an important role to play at present. I noted with interest Mr. Gunning's assertion that the agricultural sector has moved up the value chain and that this is something which Coillte hopes to emulate. I do not believe Coillte should overstate the extent to which agriculture has moved up that chain because, regrettably, it remains very much a commodity-driven sector rather than a brand product sector. That is a matter which needs to be addressed.
I welcome the fact that Coillte recognises that even though it is important — particularly in the context of tackling climate change — growing trees will not be its exclusive pursuit in the future. Mr. Gunning referred to the programme for Government, which contains a target of 10,000 hectares in respect of the planting of new forests. The latter is almost a doubling of the 5,400 hectares planted in 2009 and presents a very significant challenge. Has consultation taken place with Coillte with regard to how this target might be achieved? Does this target relate to the private sector or to Coillte? What percentage of the target relates to replanting clear-felled land under a rolling programme?
One of the most alarming aspects of the 2008 annual report is the section relating to pensions. This shows that the pension fund was in deficit to the tune of €66 million in 2007 and to the tune of €82 million in 2008. Everyone is aware of what has happened in the markets but that is scant comfort for workers who might become the victims of any shortfall in the pension fund. I do not wish to be alarmist in any sense; I merely wish to discover how this issue is going to be addressed. There have been a number of high-profile casualties in this regard in recent times. I refer, for example, to the workers at Waterford Glass who were of the view that their pension provision was gilt-edged but who find themselves virtually penniless. Some of these individuals worked for 30 or 40 years for this blue chip company.
In many respects, Coillte is considered blue chip but there is an alarming gap in its pension fund. Will Mr. Gunning expand on what is stated on page 43 of the annual report in respect of employer contributions, contributions by plan participants and the changes that took place in this area in 2006, 2007 and 2008? Is there a defined benefit pension for all Coillte workers or is it a defined contribution pension? In the context of Coillte's legal obligation to hold a pot of money for people who retire, is it in compliance with whatever pension regulations are in place? In so far as these things can be predicted, where will the pension fund stand in the accounts for 2009 and future years? What steps are being taken to remedy the deficit to which I refer? The shortfall is significant and it has increased to quite an extent in the 12 months to the end of December 2008. How can that shortfall be addressed?
I accept that we are living in difficult times. I met outdoor staff of Coillte in my constituency who were being laid off or being asked to work part time. We had a rational debate about this in the context of the global difficulties engulfing all private and public companies, not just Coillte. People were not happy about their position but they understood they were not the only ones experiencing pain.
With regard to the capacity of organisations and the political establishment to bring people with them, we will have to lead by example from the top. I do not ask this question out of any prurience on my behalf or on behalf of the committee but I refer to the remuneration of Mr. Gunning and board members. What was the response to the invitation of the Minister for Finance to chief executives to reduce their own remuneration package? I acknowledge the statement in the report that the bonus paid in 2008 relates to 2007 and 2009 is an entirely different country but the culture of executive pay and bonuses is under the spotlight and there is a need for shared pain at all levels. It is not just the case that Coillte's outdoor staff must accept being laid off for a set number of weeks in the year or days in a week. They must see that all sectors are bearing a proportionate share. This is reflected in the changes in pay, remuneration and expenses of Oireachtas Members, which will be extended, but that must happen at all levels in the private and public sectors. How stands Coillte in this regard?
I refer to Medite and SmartPly. The presentation was upbeat about what these companies are managing to achieve, despite the current downturn in construction. I know little about them other than that they make panel boards from timber. Are the plants similar? Is there a fear that they may be surplus to requirements, given the downturn in construction, and that they may feature in a privatisation, sale, closure or amalgamation? What does the future hold for the two plants, which are close to each other? There is another plant in County Leitrim but these two plants are close to each other and there are fears about them because they have similar product lines. What does the future hold for them?
Mr. Gunning referred to export credit insurance. Has Coillte been burned in terms of product sold that has not been paid for? I have dealt with many private companies that are clamouring for export credit insurance but that are afraid to take orders from companies and outlets unknown. They are caught in a difficult position because those who provided insurance to them in the past will not do so now. Last April, the Tánaiste and Minister for Enterprise, Trade and Employment indicated she was about to remedy this but we have heard nothing since about it. What is Mr. Gunning's understanding of the current position? What exposure to bad debts has Coillte?
All politics is local and I refer to an issue I raised last year. I would like a progress report on the new regional headquarters the organisation proposes to build in Macroom.
I welcome Mr. Gunning and Mr. Egan to the meeting. My first question relates to the target of planting 15,000 hectares, which, if Government policy was being implemented, should be achieved every year. Why has that target not been reached? What is Coillte's response to the failure to do so if that is the supposedly sustainable target for the country per annum? COFORD's research indicates that if 15,000 hectares were planted per year, 490 jobs would be created to manage, harvest and process the timber. If the target is not reached, what influence has Coillte in the failure to do so?
I refer to by-products. Had we still been in a boom, Coillte's profits for 2008 would be significantly better and they would not have reduced by 77%. Has the organisation hedged too much of its resources in the construction industry and not enough in the bio-fuels sector, given the renewable targets that must be met by 2020? According to its annual report, Coillte is a long way from meeting these targets such as 12% renewable heat by 2020 and 5% by 2010. I accept those are national targets and Coillte does not have responsibility for the country in this regard. However, in the context of its product mix, the organisation has massive potential to exploit alternative energy sources. It has not operated at its potential for the past number of years to reach the targets or to maximise profit.
Mr. Gunning mentioned the projections for the annual report due in April 2010. Will the organisation operate at a loss for 2009 or will it still make a profit? Will the downturn in the construction industry be reflected in the returns for this year in the annual report?
The most important issue is the rate of afforestation. The output for 2009 will represent 1% of GDP, according to COFORD. The forestry sector is underperforming and perhaps there was too much hedging in the expansion of the construction industry. While Mr. Gunning referred to the two ancillary companies and Coillte had to enter that market, nobody could predict the rate of the crash and, therefore, the impact on the organisation's projects. Should it have a wider product mix and refer more to the renewables sector? This sector will be the jewel in the organisation's crown in the future and perhaps more should have been done in this regard over the past two years. While I am a layman and not a businessman, there are legitimate questions about this in the semi-State sector.
I am an absolute believer in Coillte's recreation policy because I have first-hand experience of the product it delivers, particularly in north Cork and the Ballyhoura Mountains. It is a fantastic product and I wish Coillte well with that. Coillte has underperformed in the renewable sector. Will the delegates comment on that?
Perhaps the delegation can explain something to me with regard to sequestering carbon and the pre-1990 targets. What is the potential for Coillte for offsetting carbon? Currently, must we rely on pre-1990 forestry growth rates in order to be included for offsetting? If we continue growing more trees, can we offset our CO2 emissions and can that offset be used in the accounting in terms of reaching our goals, for example the post-Copenhagen goals? If that is the case, will Coillte have a greater role to play?
The afforestation goal is approximately 300,000 hectares per annum over the next two decades and Forestry 2030 has a target of approximately 1 million hectares by 2030. Is that an achievable or realistic target? Given the product mix and corporate strategy being adopted by Coillte and given it has a virtual monopoly in the area, will we reach that target by then?
I welcome Mr. Gunning and Mr. Egan to this meeting. I would like to thank them for the pleasure last Friday of visiting SmartPly in my constituency area of Kilkenny-Waterford with the Minister of State, Deputy Tony Killeen. I thank them for the tour of the factory and premises and compliment them on what is being done there and thank them for the investment put into job creation there. I hope there will be further investment in the future. The commitment towards this is shown by investment in new products shown to us on our tour. I am aware some €15 million has been invested in Medite in Clonmel and am aware Coillte is considering investing more in SmartPly. I wish it well in that regard and know it is committed to future development.
There has been an almost unbelievable downturn in spending, from some €40 million in 2008 to €8.2 million in 2009. This shows how significant the recession has been and how dependent we are on exports. There have been many contributory factors to this downturn, one of the most significant being the exchange rate with sterling. There is a significant energy bill of over €17 million for the two factories. This is an area that must be tackled. Such a bill is excessive for one year.
Currently Coillte is achieving an afforestation rate of 6,000 hectares per annum and hopes to achieve a rate of 10,000 hectares per year. What can we do to encourage this? Is grant aid required or what encouragement can be given to promote private afforestation and get it up and running? Now that land prices have decreased by 50% since the good times, would Coillte consider purchasing land? This would not be easy, but Coillte became successful in the 1960s by purchasing land and growing trees itself. That is how it built itself up to where it is today. Is there potential now to purchase land more cheaply due to the downturn?
Perhaps my next question should be for a Minister rather than for Coillte. Premiums were cut last year. Did this have an effect or is it the reason for the decline in afforestation? There is a great future for forestry in the area of carbon emissions. I compliment Coillte on its diversification into this area. The nucleus of Coillte's business is forestry and timber, but it has been willing to diversify and look at new ways of creating profits. This is welcome, particularly where it contributes to employment.
Before Coillte came into this meeting, we had a discussion on job creation in the business sector. Coillte is playing its part in this regard and hopefully it can contribute to even further growth. We intend to have a debate on job creation and produce a report on it. I hope Coillte will play a part in that as there is great potential for job creation in it. I wish Coillte the best. It has proven itself and has submitted a comprehensive report on what it has done over the past 40 years. I see a bright future for Coillte but it must remain on guard against recession and the like.
With regard to the carbon credits we must purchase abroad, I see great potential for afforestation. Perhaps we should consider this to promote a greener image. We must promote our own products rather than bring in products from countries where we are unaware of the sources or how the products were produced. We must try to create our own competitive, green product.
I welcome Mr. Gunning and Mr. Egan. As a Deputy for County Wicklow I grew up in an area with forestries all around me which were harvested and regrown in my lifetime, which makes me feel old.
Coillte has identified the need for an increased planting programme, whether this would or would not include carbon benefits. Has it made specific proposals to the Minister for new schemes to achieve these goals? When schemes were initiated in the early 1990s, the number of private plantations increased rapidly, but figures for private plantations have now slowed down because of the lack of schemes. Coillte has said it hopes for a positive outcome from the Government in the Copenhagen negotiations. I presume it means it hopes forestry will be included as a carbon sink. Deputy Aylward and I are on the climate change committee, which will launch the heads of a Bill on this issue this afternoon. One of the major anomalies in the Irish context with regard to carbon emissions is agriculture. It creates a spike in the graph, but that must be taken in the context that Ireland is an agri-food producing country without heavy industry.
Coillte mentioned Bord na Móna and referred to a baled floor product or form of residue. I recall a presentation to a committee from Bord na Móna which envisaged a joint venture with Coillte in a bio-energy company. Both companies have huge tracts of land and Bord na Móna is keyed into the national grid and national infrastructure for energy production. Has there been any progress on that?
Some 96 employees of Coillte accepted the voluntary redundancy scheme. There was a deferral of the decision to put people on part-time summertime work. This was to be reviewed on foot of the numbers accepting voluntary redundancy. Does this mean the outdoor crew will not now be subject to the shorter working week? The pension fund figures are frightening and were mentioned in the chairman's report. What is the overall outlook for the pension fund? How does Coillte propose to resolve the issue? This is a huge figure which overhangs the whole balance sheet.
I will be brief as many issues have already been raised. I too am concerned about forest workers, who have been mentioned several times. I met a number of them earlier in the year who expected to be put on short time or laid off. Some of those people had been working for up to 30 years and I am glad a resolution was found and they were given the opportunity to take early retirement. I hope this has worked out but I have not heard any more news since to the contrary. I recognise the situation was dealt with in a fair manner and I hope this can continue to be the case. These people felt a little bit neglected and left out but they are happy enough at the moment.
On the issue of carbon, I note in page 14 of the report that Coillte has developed a new carbon afforestation concept. I ask for more information on what this means. We were told that currently Ireland is not receiving any carbon credits for its afforestation; why is this the case? It seems a little unfair as other countries receive them.
Over the past few months I have had inquiries from farmers who want to go into forestry. Last Friday, two farmers came to see me who are thinking about it. What is the trend across the country? I ask Mr. Gunning to reply to all those questions from members.
Mr. David Gunning
I will do my best to answer them. I will deal first with the issue of afforestation. This is an item in the programme for Government with the ambitious target of increasing from the current 5,000 to approximately 10,000. If one winds back the clock to the mid-1990s, Coillte was certainly in the business of buying land and putting it under forestry. We bought approximately 50,000 hectares, 57,000 hectares, in that period. Following a European Court case, Coillte was deemed to be no longer eligible for the various premia associated with that scheme, thereby making it uneconomical for Coillte to participate in that sector. Coillte was a main driving force in increasing afforestation in the country, as the committee can imagine, with 56,000 hectares approximately. Being ineligible for those grants means it is not economically viable for Coillte to be in that space.
In response to Deputy Aylward's question, land prices need to fall considerably more before we are at the point where it starts to look interesting. However, with regard to Government policy, the State owns 10% of the land area of the country, including Coillte's piece. The 90% which is owned by farmers is really where the focus has to be. This whole scheme of afforestation is run by the forest service of the Department of Agriculture, Fisheries and Food. Coillte's role is a very interested role but we are a beneficiary; we are a service provider to those farmers who want to put their land under forestry. We also believe we can offer markets to that product when it has matured or for thinnings or various items. We have more than a passing interest in it but we do not own the responsibility for driving the State's afforestation programme, just to make that point.
Looking at job creation and the various other opportunities, we asked what new impetus could be given. In the view of Coillte, carbon is the gold in this regard and it is very important. Our proposals are to do with finding a way to recycle this money that would go abroad by means of the purchase of carbon credits to bring that money back into the national economy. We have some proposals but they are not yet as specific as they need to be. We are engaged in a consultation process; we have had discussions with the Department of the Environment, Heritage and Local Government and we plan to talk to the Department of Agriculture, Fisheries and Food. We also need to talk to various other interested parties. One of the challenges is that one needs to talk to many people in order to achieve some focus on this issue, including the Joint Committee on Climate Change and Energy Security, among others. We published these proposals a number of weeks ago and we are currently in the consultation process. This is the means of getting that money to bear on this challenge.
The pre-1990 forests are deemed to be old pre-existing forests. What has been planted between 1990 and 2012 will be reckonable in the post-Kyoto Protocol period which is from 2012 onwards. Every country is treated the same. However, Ireland has more new forests since 1990 than, for instance, Germany with more than 40% of land covered with forest which does not receive the same benefit. It is a case of new forests in the period from 1990 to 2012 and more important, it is a case of what we can put in the ground from now up to 2025. If we do not achieve these targets — it is critical we do achieve them — then we will be facing a significant carbon bill by 2030 or 2035. We need to buy down the future cost of carbon. The benefit of this policy is not just that cost but also jobs today and for the future in this sector.
With regard to the importance of the Copenhagen 2009 climate change conference, other countries have less at stake in this area than Ireland because we have more new forests. It is very important that we are given full value for those forests in our negotiation, which is one of the reasons Coillte has engaged with the Department of the Environment, Heritage and Local Government on this sector.
Coillte regards the area of renewables as being tied in with this space. Coillte has approximately 3 million cubic metres of forests, of timber that comes to market every year. The amount in 2008 was 2.6 million and 2009 will be about the same. We have the ability to increase the amount somewhat in 2010. If we can bring to market all the currently privately owned forests, this will account for another 11.5 million cubic metres by 2015 or 2020. The inventory is more difficult to collate because it is so fragmented. We then have a significant biomass resource that needs to come to market in order to fuel — which may be the wrong word — this renewables space.
The renewables drive towards biomass has not been helped by the reduction in oil prices. When oil was more than €100 a barrel, everybody wanted to get into this sector. As the price of oil has decreased, the desire of companies such as large dairies or large manufacturing plants, to invest in infrastructure which burns woodchip as opposed to oil, has lessened. Some of them are still content to make that investment but it is more difficult to make that business case now. I do not see the relatively slow start in this area as being an indication that Coillte does not wish to engage in this area as it will really depend on the market.
I attended this committee more than a year ago and we discussed a Coillte biomass depot pilot scheme in the west of Ireland. We have learned a lot from that pilot scheme and it has led through to our biomass one and biomass two projects, engaging with heat energy suppliers and also larger users of volumes of biomass for woodchip, wood pellets or whatever. Good progress has been made in this regard and I am hopeful.
Members raised the issue of short-term working. The collapse in demand for forest products resulted in Coillte having no work for its workforce. We had two choices, either short-term working such as a three-day week or the alternative of voluntary severance. The response of the Coillte forestry staff, the forest workers as they are known, has been very positive in that there have been more than 90 exits. I am unable to make any statements about whether the remainder will have jobs for life because, to be frank, we do not know what 2010 will look like. We have some understanding so this is an area we keep under review in the same way we keep under review the rolling programme of short-term working at SmartPly Europe and Medite Europe because this is the prudent and appropriate business action. I wish to make it crystal clear it is not our intention to put people on short-term working if we do not have a very compelling reason.
Questions were raised about the pension fund. This has been an issue on the horizon for the Coillte board for some time. The performance in the equity space has increased the deficit significantly. When I was here the last time I indicated that in that situation companies are given an opportunity — at that time it was nine months but now that period has been somewhat extended by the Pensions Board — to put their specific proposals to the Pensions Board as to how we are going to correct that problem. We have a Coillte board meeting and we will put to our board the specific proposals we have in mind for its formal approval, which will in turn go on to the Pensions Board in the very near future. We would be very confident that the measures we have in mind will give the assurance to the Pensions Board that the deficit is being managed and can be closed over a period. I ask Mr. Egan to add some specifics on what people are doing.
Mr. Gerry Egan
I can give some of the specifics in that regard. We carry out an actuarial valuation every three years. At the end of last year the result of that valuation was that our pension fund did not meet what is called the minimum funding standard. If a fund does not meet the minimum funding standard it has a legal obligation to put a proposal to the Pensions Board as to how it will address the deficit. We have been working on that for the past number of months. As Mr. Gunning said, that proposal will go to our board tomorrow. In that we have done a number of things. The company has put some money directly into the fund. It has given commitments to give a certain amount of money into the fund for a number of years into the future, money that can be invested to close the deficit. We have also made arrangements whereby forests to a certain value will also be transferred into the fund.
One of the things that can be done as part of the scheme is to put assets into the fund as well as putting in some cash. The major breakthrough from a company point of view was that on the back of the introduction of the public service pensions levy we then had the opportunity by agreement with staff to introduce pension contributions in our defined benefit scheme where there were no contributions previously. As of 1 September we introduced pension contributions for all members of this defined benefit scheme. We would be confident that a combination of all those measures and assuming some recovery in equities — not necessarily getting back to the peaks they reached in 2006 or 2007 — will mean that by the time we carry out the next actuarial valuation in three years time, while the deficit may not have been closed fully we would expect that it would be tracking back towards closure and that the security of pensions in the future would be assured.
This has been a very big issue as far as the board has been concerned and considerable time has gone into it. We have been very fortunate that in trying to protect the sustainability of the scheme we have got outstanding employee co-operation and have been able to introduce the pension contribution, which has been a major breakthrough. It was a recognition by staff that contributing in that way was a way in which they could ensure the sustainability of their fund. That would have been a significant development.
Mr. David Gunning
There was a question on Medite and SmartPly regarding the similarity and risk. These are considerably different plants in terms of the end product. Medite produces medium density fibre board which is a finishing type product. It is used in furniture, doors and panelling of different kinds. It has no structural properties. It is often veneered as members will see in the furniture before them and used for various things. That is produced in Clonmel. The SmartPly plant produces oriented strand board, OSB, which is a structural product primarily used in timber frame construction and a whole host of other applications in the construction of buildings. I do not know if any of the members of the committee watched Duncan Stewart on the television last night. In the background there was a sheet of SmartPly behind him in one of the projects he featured. It is used in all kinds of products.
There is some similarity in the production process but we can wind it back even further to consider the supply. SmartPly uses virgin thinnings — pulp — from the forests. It takes in the small trees from places where we need to thin the forest to improve the forest quality. We use those thinnings and the tops of trees that are not merchantable to make OSB. Medite uses wood chip which is a residue from the sawmilling process. There are many connections. We go from the forest with construction timber. We go to the sawmillers. They take the square out of the centre of the log. The rest is a residue which is chipped, which Coillte buys back from the sawmillers to make MDF. They are two different functions within the entire value chain of forestry. Far from it being a threat to this, we see it as an opportunity to use the significant expertise. Medite has been in existence since 1983 and SmartPly since 1996. The combination of the expertise from both groups makes us very strong in this panel sector. We have invested €15 million in Medite. The SmartPly plant, which has been in existence since 1996, is severely limited as we pointed out to Deputy Aylward and the Minister of State, Deputy Killeen, last week. We have a job to do to come up with a justifiable business case to make an investment to continue to manufacture. That is on our slate for this year.
Does that mean there is a problem in SmartPly with regard to a market outlet for the product?
Mr. David Gunning
I will wind the clock back a bit. SmartPly was a joint venture between Louisiana Pacific and Coillte when it was created in 1996. It is an American-oriented plant that makes eight-by-four sheets that would be destined for the US market. For many years SmartPly availed of that market opportunity. With the current downturn in the US market and the dollar-euro exchange rate, there is absolutely no opportunity. Therefore we have developed markets in Ireland, UK, the Benelux countries and part of the Nordic sector. We could do more with a more flexible asset if we had a production facility that allowed us to be more flexible. Rather than doing imperial measurement products, if we could do metric we would open up a much larger section of the European market. We are somewhat constrained by the asset that was put in there in 1996. That is the challenge. What we are saying is that it is time for a new investment. In this difficult market the question is how we can make that justification, which is what we are wrestling with currently.
The 2009-10 issue is important. We are happy with the way that Coillte is embracing the challenges we have. However, these are real challenges. We came into 2008 with a good headwind of significant prices behind us. In the first half of 2008 we had the benefit of good prices. In the second half of 2008 that got worse and it did not get any better in 2009. In the fourth quarter of 2009 we are now seeing some improvement in prices across our product range. If I were giving guidance I would say that 2009 will not be as strong as 2008. We hope to be marginally profitable but our underlying businesses are in a difficult position. We can explain that in terms of volume, price and sterling exchange rates in every issue.
As a commercial company, pay is a big cost and is a matter we take very seriously. This morning I looked at the reduction we have managed in our payroll. This has a number of sources, including board leadership. The board members have taken a 10% cut in their fees. There has been a 25% reduction in expenses and expense rates across the company without significant pushback from the staff. We have implemented pensions contributions of up to 10% for employees who avail of the defined benefit scheme. There is no performance-related pay for 2009, we said we would not pay it. We have reached agreement with our staff, who are working extremely hard to transform Coillte and keep its businesses viable, not to pay performance-related pay this year. As a result, the staff affected will experience a pay cut of approximately 20% with the chief executive's pay cut rising to approximately 25%. The organisation is preparing its 2010 budget which will be presented to the board at a meeting at the end of November. Pay issues will be very much on the agenda of the meeting.
In light of the company's financial performance, the planned Macroom development has been put on hold, as has our plan to build a new eastern region headquarters in Portlaoise. We have been working in forestry for 100 years and our work in this area will no doubt continue for another 100 years. For this reason, while it is not possible to justify the investment in the current environment, Coillte will need the planned facilities. A further consideration is that rents for properties in which Coillte has been accommodated have become increasingly competitive. Notwithstanding this, we want to have our own network of high quality offices showcasing timber at its finest, as is the case with our headquarters building in Newtownmountkennedy.
Coillte has a number of touch points, as it were, with Bord na Móna. We are jointly engaged in the afforestation of 5,000 hectares of cutaway bog. This project in at an early stage and will depend on a number of factors, including the need to have appropriate equipment.
What species of tree can be grown in a bog?
Mr. David Gunning
A range of species can be grown depending on the type of bog. A three or five year study, which involved Coillte, Bord na Móna and University College Dublin's school of forestry, identified viable species for the bogs in question. The project to afforest 5,000 hectares of bog is an attempt to advance that agenda and will, we hope, commence in the next few months.
There are other touch points with Bord na Móna. For example, the supply of biomass was raised and there are a number of other issues. While a joint venture agreement is not yet on the table, I understand Deputy Coveney has some plans in that area.
I asked about export credit insurance.
Mr. David Gunning
Coillte has not been burned. The company manages its book aggressively, which is perhaps a matter of maturity. One avoids getting burned by not doing business with companies one believes will not be able to pay.
Does that include Medite and SmartPly?
Mr. David Gunning
Yes, in the absence of insurance we have had to take decisions to take this on our own account, which essentially means self-insuring. The position is not much different from ten years ago when credit insurance was not such a major issue. The Coillte book does not yet have any significant or insignificant bad debts and the company does not plan to have any.
I raised a question about farmers' interest in forestry.
Mr. David Gunning
We have had a significant increase in inquiries from farmers. While they do not always come to fruition, so far this year Coillte has, on behalf of third parties, submitted for Forest Service approval requests to afforest approximately 2,200 hectares. This is a significant increase on last year's figure when approximately 800 hectares were afforested. We expect the figure to be in excess of 1,000 hectares this year. Of the 2,200 hectares submitted, 1,700 hectares await approval by the Forest Service. I understand the reason is related to budgets and various other issues.
On the issue of carbon credits, will it be possible to supplement carbon credits purchased abroad by investing in forestry?
Mr. David Gunning
Yes.
In other words, we could obtain carbon credits through afforestation rather than purchasing them abroad.
Mr. David Gunning
Yes, that is our intention. There is a timing issue in this regard which goes back to the period 1990 to 2012. Trees do not always accumulate much carbon in the first few years of their lives. Essentially, we need to plant many more trees to reduce the carbon credits we must purchase.
If afforestation is being used for carbon sequestration purposes, will cutting not have an affect in the sense that it increases CO2 emissions?
Mr. David Gunning
This issue will be dealt with as part of the discussions at Copenhagen. All forests must be thinned but it is possible to manage and harvest forests while continuing the momentum of afforestation. If we have more forests, the issue identified by the Deputy will not be a problem and we will have sufficient timber supply for industry, bio-energy and the sectors we need to supply.
At what point do carbon credits apply? Are they effective as soon as planting is carried out or at a different stage?
Mr. David Gunning
That will be one of the details of the scheme. We are attempting to sponsor a dialogue on the concept of carbon credit money coming back in to support afforestation. These details need to be worked out and the appropriate body in this respect is the Forest Service, with which Coillte is engaged on the topic.
Will carbon credits be available for our forests from 2012 onwards?
Mr. David Gunning
That will depend on the outcome of the Copenhagen discussions. We hope it will be the case because it is important.
On behalf of the joint committee, I thank Mr. Gunning and Mr. Egan for their presentation and answers to members' questions. This has been a constructive meeting.
The joint committee adjourned at 1.35 p.m. until 11.30 a.m. on Wednesday, 11 November 2009.