Much of the information contained in the "Industry on the Brink" presentation was derived from a financial survey of selected forest companies conducted by Price Waterhouse on behalf of the forest industry in late 1996. Other information was derived from published sources, including the Price Waterhouse report "The Forest Industry in B.C. -- 1995."
Our methodology for Phase I was to:
The presentation material contained information inferring that in the period 1992 to 1996 the increase in delivered wood costs over an inflation level of 3% per annum was substantially due to stumpage and royalties and Forest Practice Code related costs; the material did not comment on other possible delivered wood cost drivers.
Our analysis of the increases in B.C. delivered wood costs and cost drivers in the period follows in Section IV of this report.
The first two questions can be answered quantitatively, based on data existing in corporate information systems (see Collection of delivered log cost data for 1992 and 1996 below). However, to address the factors responsible for increases in delivered wood costs it was necessary to rely on qualitative data, as this type of information is not generally captured within corporate information systems (see Analysis of logging cost drivers below).
1. Definitions of logging costs and cost drivers
The logging cost categories and the cost drivers used in this study are defined in Appendix D and E respectively.
2. Collection of delivered log cost data for 1992 and 1996
Delivered log cost data was collected separately for 94 operations within B.C., of which 36 were Coastal operations and 58 were Interior-based operations (see Appendix C for a list of the operations for which data was collected). The study sample included primarily operations with a cut of 250,000 m3 or more and is therefore representative of major licensee operations. The data includes log costs for harvesting operations carried out by both company crews and phase contractors. For phase contractors, the cost was taken as the cost charged to the company by the contractor. No attempt was made to determine the actual cost of logging to the contractor.
Coastal log cost data for calendar 1996 was collected using the annual logging cost survey compiled for the Ministry of Forests by Price Waterhouse. The comparative information for 1992 is the data submitted in respect of the calendar 1992 logging cost survey. This survey is carried out for a sample of major licensee Coastal logging operations and the Coastal data used in this study was collected from the same sample as has been traditionally used. The survey results have been compiled by Price Waterhouse since the survey was instituted and Price Waterhouse compiled the 1996 results as well, using the same methodology as in previous years. For the purposes of this report, certain costs have been re-allocated between phases. However, total logging cost remains identical to that calculated using the Price Waterhouse compilation method.
In order to present Interior log cost data on a consistent basis to the Coastal data, an Interior log cost questionnaire was developed for these operations and filled in by each operation for both calendar 1992 and 1996 log costs. There was no existing source of consistent, detailed historical logging cost data for the Interior, requiring that both 1992 and 1996 results be collected at the same time.
The Interior cost data has been split on a geographical basis between Northern Interior and Southern Interior for the purposes of this analysis. The dividing line between North and South runs east to west from immediately north of Valemount to immediately south of Quesnel.
Provincial and regional average log cost data were compiled based solely on the data submissions. Although a detailed review of the accuracy of the submissions was not carried out, some adjustments were made to the data for purposes of consistency, after discussion with the appropriate company staff.
The compilation of cost data at the Northern Interior, Southern Interior and Coastal level was weighted by production volume for each operation. The total annual production volume for the participating operations was 52.0 million m3: 33.8 million m3 for the Interior operations (20.4 million m3 in the North and 13.4 million m3 in the South) and 18.2 million m3 for Coastal operations.
In order to avoid sampling bias, compilation of combined Interior and provincial average costs was weighted using a representative percentage for the relative total cut levels in these regions. The weighting was based on the actual provincial cut levels in 1995 and was as shown in Figure II-1.
Figure II-1
Weightings used in compilation of provincial and combined Interior data
Total of Cut
%Northern Interior 35.2% Southern Interior 30.9% Combined Interior 66.1% Coast 33.9% Total province 100.0% 3. Analysis of logging cost drivers
The methodology for the analysis of logging cost increases reflects the fact that the quantitative information available relates primarily to cost increases and that any determination of the cause for such cost increases can only be based on informed qualitative data or professional judgment.
As required in the Terms of Reference (Appendix A), the methodology for analyzing cost drivers and the list of potential cost drivers (Appendix E) was developed with input from representatives of the B.C. Ministries of Forests and Environment, Lands and Parks, and participating companies. The questionnaires and sample design were also reviewed and agreed upon by both government and industry representatives.
A total of 27 operations were selected for analysis of logging cost increases, of which 9 were Coastal operations and 18 were Interior-based operations. The sample of operations chosen was designed to provide as wide as possible a spread of operations on a geographical basis while ensuring that all participating major licensees had at least one operation included within the analysis.
To provide adequate structure to the analysis, a questionnaire was developed to identify the major cost drivers for individual logging phases. In this context, a cost driver can be defined as a factor which is the root cause for some or all of the increase in a specific cost element (such as hauling or silviculture). See the section "What is a Cost Driver" in Appendix E for further discussion.
The questionnaire was completed by woodlands staff at selected operations. They were asked to complete the questionnaire within the context of the financial information for their particular operation and to return the questionnaires to KPMG (see Appendix G for a completed example of this questionnaire). However, the data was actually collected from each operation during the course of a visit by a team from KPMG. The purpose of having the questionnaires completed in advance was to ensure that thought had been given to the cost drivers in advance and to give the KPMG teams a chance to prepare questions. The purpose of actually collecting the data during site visits was to ensure a consistent interpretation of individual cost driver definitions and to provide a reasonableness check on the resulting data.
The analysis of the logging cost drivers was conducted to address non-Code-related and Code-related cost driver groupings as required by our Terms of Reference. Section I.B. of this report describes the evolution of the Forest Practices Code during the 1992-1996 period under analysis. This evolution resulted in certain regulations, standards and guidelines which became key aspects of the Code actually being implemented in some areas of the province before the Code was proclaimed on June 15, 1995. This practical reality resulted in delivered wood cost increases attributable to parts of the Code being felt by industry before the Code actually became law.
Within the context of this study we have adopted the following working definition for the term "Code-related cost driver" to reflect the evolution of the forest practices regulatory environment which was eventually given the force of law within the statutory framework of the FPC Act (see Section I.B. of this report).
"Code-related cost driver" refers to cost drivers which correspond to provisions of the Code and to costs associated with implementing and administering the Code. As explained below, these cost drivers have been used to capture the increased costs associated with the set of regulatory provisions which have been gathered under the statutory framework of the Code, regardless of when the provision first took effect. For the purpose of our analysis, it was not considered relevant whether any given provision affected costs only after the Code took effect in June, 1995 or began to influence costs earlier in the study period.
Throughout this report, "Code" is used to refer to the FPC Act and the associated Regulations and guidebooks (where specifically referenced in the FPC Act or approved operational plans).
"Non-Code-related cost driver" is used to refer to all other factors which affected costs during the 1992-1996 period.
Within the "Non-Code-related cost driver" category, there is a cost driver labeled as "Impact of pre-Code guidelines" or "pre-Code". For our analysis we have differentiated "Code-related" and "pre-Code" cost drivers as follows:
Code-related cost drivers: If the 1992-1996 cost increase was related to guidelines, standards or regulations which were incorporated substantially unchanged into the Code when it came into effect, then that cost increase was allocated to a "Code-related" cost driver corresponding to the relevant provision of the Code. For example, the Silviculture Practices Regulation came into force in 1994 and has now been incorporated into the Code. The cost drivers associated with this regulation such as soil conservation requirements and the penalties related to issues governed by the Silviculture Practices Regulation were deemed to be "Code-related" cost drivers.
Pre-Code cost drivers: If the 1992-1996 cost increase was related to guidelines, standards or regulations which were changed substantially before being incorporated into the Code, then that cost driver was deemed to be a pre-Code cost driver. Examples of pre-Code cost drivers include parts of the Coastal Fisheries Forestry Guidelines, the Kamloops Regional Road Standards and the Okanagan Timber Harvesting Guidelines. The pre-Code cost driver was compiled in the "non-Code-related" cost driver category.
See Appendix E for more information regarding the Code-related/pre-Code cost driver differentiation and the definitions of the various cost drivers.
Based on the questionnaire responses and the results of discussions during site visits, a final cost driver analysis was prepared for each operation by the KPMG staff responsible for the site visit. These analyses were then compiled to form regional and provincial averages. The compilation was weighted on the same basis as the log cost data.
The analysis of the results presented in this report is a synthesis of the discussions during the various site visits, informed by the professional judgement, knowledge, skills and experience of the interviewers. The KPMG staff involved in the site visits included Registered Professional Foresters, Chartered Accountants, a Forest Engineer and a Registered Professional Biologist.
