Local Versus Foreign Ownership in Forestry

by Stephen Zdunich*

               

                To maximize the benefits to the people of Saskatchewan, and to the provincial economy, ownership of and access to Saskatchewan’s’ natural resources must be restricted to the people of Saskatchewan.

                This is the argument that I will explore in the context of the forest industry.  The purpose of this paper is not to examine the Saskatchewan Forestry Industry as it currently exists, but to examine the possibility of restricting land ownership and the leasing and licensing of Saskatchewan’s’ natural resources to foreign companies.  Using some simple analytical tools, I will hypothesize and analyze the differences between a Saskatchewan based firm and a foreign firm based and owned outside of the country.  I intend to demonstrate the following points:

1) A 100% Saskatchewan owned industry will allocate production and extraction closer to a social optimum if the Social Costs exceed the Private Cost.

2) A 100% Saskatchewan owned industry will return more revenue to Saskatchewan residents and to the Provincial Government.

3) A 100% Saskatchewan owned industry will mean a stronger provincial economy.

                The basis for the hypothesized firms will be the based on data from the forest industry in this province in 1996.  All of the data was retrieved from the National Forestry Data Base program from the Natural Resources Canada web site.

 

 

 

 

 

COSTS OF PRODUCTION.  Saskatchewan Forest Industry, 1996: :

 

SOURCE

VALUE

TOTAL PAYMENT TO GOVERNMENT :

$ 5,467,000

Stumpage charges (payments made to the crown for timber harvested)

$ 2,928,000

Reforestation levies (payments based on rate of timber harvested to help cover costs of silviculture)

$ 1,046,000

Fees for permits and licenses (for permits and licenses of loggers)

$ 184,000

Sales and rentals (Fees for cutting rights transferred between companies, sales of maps, data and equipment rentals)

$ 1,284,000

Bonuses, Penalties and Interest charges (includes bonus bids, fines and late payment charges)

$ 25,000

 

 

TOTAL WAGES AND SALARIES[1]

$ 148,000,000

Logging

$ 21,000,000

Wood industries

$ 58,000,000

Paper and related industries

$ 69,000,000

 

 

CAPITAL AND REPAIR COSTS[2]:

$ 275,000,000

INFRASTRUCTURE, TRANSPORT, COMMUNICATIONS1:

$ 25,000,000

REINVESTMENT (including reforestation, public relations and advertising)1

$ 35,000,000

 

 

TOTAL COSTS

$488,467,000[3]

 

 

VALUE OF SHIPMENTS (the net market value of goods produced by the industry)

$867,000,000

 

 

OPERATING PROFIT (NET BENEFITS)

$378,533,000

               

 

 

                This is data for the entire forestry industry in Saskatchewan for 1996 and will be the basis for my cost/benefit assumptions following. This data is used as a guide only.  Model values will not equate absolutely with this industry data.

 

MODEL:

I will now divide segments of the industry between two hypothetical firms:

·         Firm A is a large volume transnational owned by foreign shareholders. 

·         Firm B is a local joint venture (local to Northern Saskatchewan). 50% of it is owned and controlled by a Northern Indian band and 50% by private investors. 

 

Firm A, as a result of greater financial power, will control 50% of the timber industry in the province and Firm B will control 5%. 

 

ASSUMPTIONS:

·         I assume that all commercial shares in the international corporation, Firm A, are held outside of the country.

·         Firm B, the local firm, is owned entirely by Saskatchewan residents.

·         Firms will operate with comparable values for costs and benefits with respect to its’ share of the industry.

·         Because Firm B is much smaller, it will perform less favorably than the larger firm in some areas such as cost of development.  To illustrate this I will mark up its respective share of the capital expenditures by 50%[4].

 

Firm A, with 50% of the industry, incurs $244.23 million in costs.  The total market value of its product is $433.5 million. The net benefit for the firm in this period is $189.27 million.  These are taxable earnings and, as the corporation is traded on the public market, the taxes would be reported.  I look at taxes because, as government revenue, they play a role in the economy.  For the sake of simplicity I assume the taxes paid are $39.75 million. (at a rate of 21%).  The remaining balance of $149.52 million is the net benefit to Firm A for this period.

Firm B, with 5% of the industry, markets its total product for $43.35 million. It incurs $31.3 million in total costs. The taxable earnings of the firm are $12.05 million.  Taxes paid would not be disclosed but we will assume the same rate as Firm A of 21%.  Taxes paid are $2.53 million.  The net benefit for the firm in this period is $9.52 million.

 

ANALYSIS:

Assume that the social cost of forest extraction is greater than the private cost for the industry.  This would result from imperfect internalization of all social costs.  Firm B would, in this case, allocate closer to the socially optimal level.  This is because of Firm B’s higher cost of production.  One other point that might be made is that the people most affected by a misallocation in this industry would be those living closest to the deforested area.  If the owners and directors of a firm are those local people rather than shareholders in Washington, for example, then it is reasonable to assume that they would factor, in part, their own personal loss as part of the cost of production.  This reassessment of cost would result in a level of production that is closer to the social optimum.  That in turn would result in a lower social loss.

 

 

FIGURE 1: ILLUSTRATION OF POSSIBLE SOCIAL LOSS REDUCTION

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


                           

TIMBER PRODUCTION

 
 

 


               The greatest difference between the two firms, besides their size, is in the profits. In this model, Firm B is only slightly less efficient that Firm A.  But due to the high market value of its product, Firm B is still able to generate impressive profits.  If the market was not able to return profits this high, then Firm B might not be able to compete in the industry.  This does illustrate that, because Firm B has a narrower profit margin, it is more vulnerable.  The vulnerability of smaller firms would however be balanced by the fact that more of them would be at work in the industry, thus adding diversity and making the industry less vulnerable in the event of market shift or failure.

 

 

 

 

 

 

 

 

 

TABLE 1:       PROFIT MARGIN

 

                                                                                                                                                  

 

*The smaller potion of each graph represents the profit returned from total expenditures before taxes (the entire circle represents total expenditures).

 

More importantly it is where the profits are going.  When a company earns profits, they are paid out to the owners of that company.  Firm A is a transnational with a head office outside of the country.  Its’ owners are shareholders who also reside outside of the country.  The profits obtained by the firm are paid out as dividends, and therefore leave the province.  No resident of Saskatchewan shares in these profits.  Further, the government is unable to collect tax on these earnings.

Firm B is owned in part by a Native band, and in part by private investors.  All of the owners are residents of Northern Saskatchewan.  Profits returned to the Indian Band cover administration and program costs which could range from housing to education to further economic development.  For example the Kitsaki Management Limited Partnership owned by the LaRonge Indian Band handles businesses and ventures ranging from commercial food services to transport companies to environmental services.[5] 

Profits of Firm B returned to its private investors remain in the province.  Taxes are paid on these earnings and Government revenue is increased.  This helps cover costs of government programs.  The new earnings in the private sector of the province will enhance the distribution of wealth as it is reinvested or simply spent in local businesses.

 

FIGURE 2: DIVISION OF MARKET RETURNS

 

·         Wages and salaries are returned to the local economy directly

·         Production costs are returned to the local economy in part. For example foreign technology may be used in a plant but locally trained millwrights will handle installation and service.

·         Corporate profits are paid out to owners of the firm. If those owners are shareholders who reside beyond the extent of the provincial economy, then those profits bypass the economy all together.  We can see that the profit generated from the production of the resource is much larger than the net income earned as wages.  The economy benefits greatly from this capital recirculating.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


It is easy to see that the provincial economy would be better with locally owned businesses at work in the timber industry than if the industry was dominated by foreign ownership.  More money changing hands in the province means local businesses fare better.  More money is available to Saskatchewan residents to reinvest in local ventures.  More money changing hands means that more taxes can be collected and social programs are more secure, or could be expanded.  Another option is that taxes could be lowered if the tax revenue were to increase, thus freeing up more income inside of the province.

From FIGURE 2 we can see that wages are a small factor compared to the rest of the industry.  To simply rely on labor and trade jobs to return wealth to the province in exchange for allowing foreign companies to harvest timber is only beneficial in the short term.  As the people of Saskatchewan, we must invest in our own industries to achieve the greatest returns. Then we must reinvest those profits to broaden our economy so that, when our non-sustainable resources run out, we will have new industries to sustain us.  Perhaps we can even save some of our nonrenewable resources by seeking more profitable ventures and investing in our own economic development with sustainable industries.  Simply working as a labor force for those who harvest and profit from our resources is not sustainable.  We earn money for the day’s work, but the work will be gone when the resource runs out.  And then the profits of both our labor and our resources that we traded off for those jobs will have passed beyond our reach.

 

REFERENCES

 

Natural Resources Canada, National Forestry Data Base Program:

http ://www. nrcan . gc. ca/cf s/proj/i epb/nf dp/cp95/

 

Kitsaki Management Limited Partnership, Profile Publication

This booklet is published by the KMLP and is available from their Saskatoon office at: 100-600 Spadina Crescent, Saskatoon, SK.

 

Weyerhaeuser Canada home page: http ://www. wy. corn/canada!

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



* An earlier version of this paper was prepared for J. Bruneau  (Economics 275.3) at the University of Saskatchewan

[1] Total employment is 6000 with equal shares across the three sectors.

[2]  Hypothesized for industry as no hard data is available.

[3]  Corporate income tax is a further deduction from benefits, but privately owned firms do not disclose, so industry total is unavailable. Taxes are dealt with in the models.

[4]  In a related example, the NFDP table 8.1 B, found on its web site, shows that smaller firms in the province pay higher stumpage charges than does Weyerhaeuser.

 

[5] From the Kitsaki Management Limited Partnership profile publication.