East Cape Independent Sawmillers Association: briefing

Water and Sanitation

18 February 2003
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Meeting report

WATER AFFAIRS AND FORESTRY PORTFOLIO COMMITTEE

WATER AFFAIRS AND FORESTRY PORTFOLIO COMMITTEE
19 February 2003

EAST CAPE INDEPENDENT SAWMILLERS ASSOCIATION: BRIEFING

Chairperson:
Ms B Sonjica (ANC)

Documents handed out:
Briefing by East Cape Independent Sawmillers Association on Timber Supply Problems (Appendix)

SUMMARY
The Committee was briefed by the East Cape Independent Sawmillers Association on timber supply problems in the Eastern Cape, specifically the Tzitsikamma-Port Elizabeth region. Some of the problems stem from changes being made within the South African Forestry Company's management in the region. The Association was concerned about effective privatisation of forestry in the region. Members of the Committee responded that the economic improvement of the Eastern Cape was a national priority. There was a need to compete in a globally competitive environment and the price of timber should be fixed at international prices. But at the same time the small sawmillers should not be abandoned. A report of the meeting should be given to the Department of Trade and Industry and the Department of Public Enterprises as their portfolios overlap with respect to the restructuring of state assets.

MINUTES
Briefing by East Cape Independent Sawmillers Association
Mr Peter Kennedy: Chairperson, East Cape Independent Sawmillers Association, briefed the Committee on timber supply problems in the Tzitsikamma-Port Elizabeth region. Small independent sawmills have started to experience supply problems, some of which stem from changes being made within the South African Forestry Company's management (SAFCOL) in the region. Earlier the region was transferred into a separate entity, MTO, which is still controlled by SAFCOL. Mr Kennedy pointed out that MTO seems to have been established primarily to effect the privatisation of these forests. He noted that, originally forestry was made national, since it was believed to be a renewable resource and therefore could not be left to private enterprise. While they understood that this has been reversed in the interests of job creation and empowerment they were concerned with the unintended consequences of this reversal.

Mr Kennedy drew attention to some of the changes which have occurred as a result of this process. For instance, SAFCOL/MTO have begun selling timber to small mills on a tendering or offer system instead of through a normal sale at a fixed price.

Mr Kennedy outlined a number of steps that he believed should be taken immediately. These include a reversal of the new method of selling timber by tendering and that an immediate hold be placed on the export of raw timber. (please see attached submission)

Discussion
Ms Sonjica (ANC) asked for clarity on who the individuals of Independent Sawmillers are and how legally binding the sale agreement between the South African Forestry Company (SAFCOL) and the Independent Sawmillers is.

Mr Kennedy replied that the Independent Sawmillers Association is comprised of members operating small sawmills or wood products companies. There was no legally binding document between the sawmillers and SAFCOL. The sawmillers would place an order for timber and SAFCOL would deliver it. He added that SAFCOL now has a tender process (called an "offer to purchase system" by SAFCOL) and that it was impossible for small sawmillers to survive in a tender system.

Ms Sonjica commented that the Committee could not influence any process such as tendering or bidding, but could ensure that all role-players in such a process be treated equally fair in a transparent process.

Mr G McIntosh (DP) commented that the economic improvement of the Eastern Cape was a national priority and that the Department of Trade and Industry sought to increase product value through exporting furniture, not just the export of the raw material. There is a need to compete in a globally competitive environment and the price of timber should be fixed at international prices. At the same time SAFCOL should not abandon the small sawmillers. He asked if Mr Kennedy has approached the Department of Trade and Industry and the Department of Public Enterprises and what were the outcomes of any such discussions.

Mr Kennedy replied that they have approached the Department of Public Enterprises, who assured him that the matter would be taken to Minister Radebe. They have not approached the Department of Trade and Industry. SAFCOL has not given the small sawmillers the opportunity to purchase the timber at international prices although the small sawmillers would welcome such an arrangement.

Mr D Maimane (ANC) asked for a description of the old system used by the small sawmillers to purchase timber.

Mr Kennedy replied that small sawmillers would pay SAFCOL a price for timber which was fixed for a period of six months. He explained that it was seen as a fair system because no individual small sawmiller would start production with a price advantage, as all would pay the same price. Under the new system SAFCOL would make timber available to the small sawmiller that could pay them the highest price.

Mr J van Wyk (ANC) asked for clarification of the final recommendation made in the submission given to the Committee.

Mr Kennedy replied that not all timber would be exported but that timber used for making furniture would be transported to the Western Cape, as Swartland Timbers is situated there. He expressed the small sawmillers view that the value of the timber should be enhanced in the Eastern Cape.

Mr S Phohlela (ANC) expressed concern that previously disadvantaged individuals would not have the opportunity to competitively enter the timber industry.

Mr Kennedy replied that one or two previously disadvantaged individuals have entered the sawmilling industry and that small sawmillers welcomed the entry of previously disadvantaged individuals. If SAFCOL went ahead with their plans there would be no involvement of previously disadvantaged or previously advantaged individuals.

Ms Sonjica reminded Members of the overlap between the Portfolio Committees of Water Affairs and Forestry and the Department of Public Enterprises in the restructuring of state assets. A report of the meeting should be given to the Department of Trade and Industry and the Department of Public Enterprises.

Mr S Simmons (NNP) asked what category of forest was under scrutiny and to explain why the sale of the forest was not advertised.

Mr Kennedy replied that the timber in question was Class A and B varieties of the common pine tree. He explained that the sale of the forest was advertised two and a half years ago; two previously preferred bidders withdrew and were replaced by Cape Sawmills.

Mr P Ditshetelo (UCDP) commented that the discussion should not raise high expectations with regard to solving the problem at hand and suggested that Mr Kennedy should get information on the consortium from the Deeds Register. He also asked what mechanisms Mr Kennedy thought should be built into future dealings with SAFCOL.

Mr Kennedy replied that the Deeds Register was consulted and that a more in-depth examination of the sale was needed. The main sale documents between SAFCOL and Cape Sawmills around the privatisation of MTO were to be signed on Friday 21 February 2003. He proposed that safeguards should include the examination of an alternative bid from the Eastern Cape made up of business, local communities and workers to allow them to plough back into the communities. Previously disadvantaged individuals need help to enter the sawmilling industry.

Mr van Wyk commented that privatisation should have certain outcomes and that it should be determined if the SAFCOL export process did not result in jobs at other levels.

Mr M Sibiya (IFP) expressed concern over job losses and requested that SAFCOL be given an opportunity to explain their position.

Mr Kennedy, expressing the view of the small sawmillers, said that the SAFCOL process would result in fewer jobs.

Mr Maimane asked on what basis Mr Kennedy was making such predictions.

Mr Kennedy replied that small sawmills are labour intensive and provide more jobs than larger automated sawmills; such automated equipment has already arrived at Port Elizabeth harbour.

Mr Maimane commented that Mr Kennedy could not speak for an organisation, Cape Sawmills, that he does not represent.

Mr Kennedy responded that his arguments were based on what he was told, as there are no written facts given to anyone, hence the concern over the lack of transparency. He expressed the view that if there was time then SAFCOL and Cape Sawmills could speak for themselves.

Mr. Ditshetelo proposed an end to the discussion.

Mr Maimane said that there was a crisis with respect to the small sawmillers. The Committee should mandate Ms Sonjica to urgently intervene with the Minister of Water Affairs and Forestry to ensure that some arrangement be made about the situation of the small sawmillers.

The meeting was adjourned.

Appendix:
TIMBER SUPPLY PROBLEMS IN THE TZITZIKAMMA - PORT ELIZABETH REGIONS

Background
Over the past number of years, small independent sawmills have obtained the bulk of their timber in log form from the SAFCOL forests in the Tzitzikamma region encompassing the forests of Longmore, outside Port Elizabeth, and Witelsbos, Bluelilliesbush and Lottering in Tzitzikamma.

In November last year these mills started to experience supply problems and in December this became worse. This appeared to stem from changes being made within SAFCOL's management in the region, after the transfer earlier of this region into a separate but SAFCOL controlled entity known as MTO. MTO itself seems to have been established primarily as the means by which privatisation of these forests would be effected. The only information given to the sawmillers was during December where the new management structure was detailed and it was made known that a certain amount of Umber would be made available, which would depend on an export contract which was presently being negotiated. This would be on a tender or offer to purchase basis from Witelsbos as well as a fixed amount from Longmore to certain mills in the vicinity of Longmore.

On return from the year-end shutdown, no timber was initially available as the allocations were still being made an Association called the East Cape lndependent Sawmillers Association was formed to attempt to protect the interests of sawmillers.

At a meeting with MTO management in January, the Association was informed that an export contract had been entered into by MTO, that the privatisation of MTQ was in an advanced stage with a consortium known as Cape Sawmills and that no safeguards for the continued supply of timber was being built into the Sale conditions, that a limited amount of timber was being made available to successful tenderers at Witelsbos and an allocation of timber from Longmore had been made. On enquiry, it was stated that the export programme was considered strategic because certain sections of Longmore were considered not viable with the type of timber planted there and needed to be replanted as soon as possible and exporting was the only quick way to achieve this. Please bear in mind that this decision was made last before privatisation but while the process was in an advanced stage.

We have also being told by a former employee of the former Boskor sawmill which has supply contracts with MTO and has been bought by Swartland Timbers that Swartland is in fact financing Cape Sawmills' purchase of MTO. This in spite of an application by the Association to the Competition Commission to place certain safeguards in any such sale document as we felt a total monopoly was possible should such a tie-in be factual. The Commission was informed by Swartland that no tie-in existed and our application was rejected on the basis that the Boskor contract allowed for no more timber of a small sawmill class than a small sawmill itself would take. We were further informed that the export of timber was essential to Swartland through Cape Sawnmills as Swartland owners had poured millions of Rands into the project already. We appreciate that this may only be rumour, but there has been no transparency in the whole matter and it therefore bears investigating.

Due to this situation some of the sawmills have been unable to obtain timber, whilst a few have been able to continue operations but with a limited supply of lesser quality logs. The result is that all of them, numbering about 15, face either total closure in the very near future or in a few cases cutting back of their operations. We are now in situation where it is likely that many small businesses will be going out of business, with job losses running into over 1500 direct jobs and thousands more having no further source of income. Indirectly, the impact on unemployment becomes even greater with the motor component (especially the catalytic converter and component sectors) and citrus industries being heavily dependent on these sawmills for timber pallets and crates for export of their products. This will affect the whole Government upliftment and economic growth initiatives for the whole region from storms River to Addo and the Nelson Mandela Metropolitan area leading to an increase in on crime and the impact of that on tourism is too terrible to contemplate.

Very briefly, the situation as we understand it, is as follows:

Originally forestry was made National in the belief that being a renewable resource, it could not be left to private enterprise. This has now been reversed In the interests of job creation and empowerment and we fully understand and support that reasoning, However, the unintended consequences are already taking a dangerous turn which was not anticipated. SAFCOL was entrusted with the privatisation of the State forests and they in turn created MTO which is specifically charged with handing over of the Tzitzikamma forests to private enterprise whilst still holding an interest of, we believe, 25%.

The make up and some of the detail emerging from the transaction mean that the end result will be catastrophic for local industries including smaller sawmills, low-cost housing suppliers, local motor component manufacturers agriculture, low cost furniture suppliers and a host of others, all of whom are mass employers of labour.

A survey done amongst our members shows that some are on the brink of closure and others are working short time, all due to shortages of raw material in log form caused by the recent changes in SAFCOL/MTO amongst which the following are the greatest danger:
1. Timber being in short supply due to the export order embarked on by MTO
2 A change in SAFCOL/MTO's method of selling timber to small mills from a normal sale at fixed price to a tendering or offer system
3. A shift from a 'benign' monopoly with its various State controls giving a certain
amount of protection to small sawmills to an 'aggressive' monopoly by an exclusive
private entity with no built in protection, which will Iead to job losses and a negative
impact on the economy of the region, contrary to Government's intentions of promoting job creation, reduction of crime and increasing tourism
4 The removal of raw material from the Eastern Cape to the Western Cape which will benefit from its processing to the exclusion of the Eastern Cape's people and
economy Worse still, the removal of raw material to overseas for processing there.

We believe that the following steps must be taken immediately;
1. Save job losses by placing an immediate hold on the export of raw timber
2. Reversal of SAFCOL/MTO's controversial policy of seIIing timber by tender or price offer and re-instatement of normal sales at fixed prices and the same for everyone
3. A delay in the sale process of MTO forests in the region to Cape Sawmills to enable entry of an alternative bid from an East Cape Consortium
4. A thorough examination of the terms of any sale of Tzitzikamma's forests to any party to ensure that the necessary safeguards are built in to allow Independent sawmills to continue in business and thus safeguarding the employment and economy of the region
5. A thorough investigation of the make up Cape SawmiiIls, and the involvement of Swartland in it

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