Oireachtas Joint and Select Committees
Tuesday, 2 October 2012
Joint Oireachtas Committee on Agriculture, Food and the Marine
Foresty Industry: Discussion with Coillte
From Coillte I welcome Mr. David Gunning, chief executive, and Mr. Gerry Egan, group director of strategy and corporate affairs. I thank them for coming before the joint committee to discuss Coillte’s annual report for 2011 and brief it on the future direction of the forestry industry, as they see it.
Witnesses are protected by absolute privilege in respect of their evidence to the committee. However, if they are directed by it to cease giving evidence on a particular matter and continue to do so, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against a person, persons or an entity by name or in such a way as to make him, her or it identifiable. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official by name or in such a way as to make him or her identifiable.
Mr. David Gunning:
I thank the Chairman and members of the committee for giving me the opportunity to present the Coillte story. This is our first time to engage with the new committee and we are delighted and very grateful for the opportunity to tell the positive story of Coillte.
Coillte is the country’s largest natural resources company. As is stated on the advertisement shown in the presentation, “Trees are just the start of it”. We see our purpose as enriching lives locally, nationally and globally through innovative and sustainable management of natural resources. That is a purpose we take seriously in everything we do. We thought it might be useful to give a short overview of Coillte’s current position. We will deal with our performance in 2011, sectoral issues and the recent Government decision on the sale of harvesting rights.
Coillte is, first and foremost, a business. We and our customers, the companies which buy our logs and the timber produced in Coillte’s forests, are competing in a global competitive market. We are competing against competitors from all around the world in every market in which we operate. Our mission is to pursue the full commercial development of the company in every aspect. We have a clear strategy focused on the two themes of innovative and sustainable management of natural resources. We see our role as being to add value to the forest and land assets that we manage on behalf of the State.
We have made a considerable transformation in Coillte in recent years. In 2006 we were very dependent on the domestic market, the sale of logs to Irish processors and the construction sector, from which we have all learned the difficult lessons. I hasten to add that we identified the gap in our strategy before the major downturn, but it did not make us feel all that much better when it happened and we were exposed. However, we have made considerable progress in the intervening period. We now focus on four key business areas. Forestry is the sector in which Coillte originated. Our wood panel business involves the processing of some of the timber into value-added products, primarily for export. I will talk about these aspects in a little more detail. Another business area is land management - managing the 7% of the land area of the country that we manage on behalf of the State. We also engage in activities in renewable energy in both wind and biomass energy projects.
We employ approximately 1,000 people, the majority of them in this country. We have a number of sales and marketing operations in the United Kingdom. Mr. Egan and I will visit that office tomorrow to meet with our sales staff in the UK. The UK is our biggest market and, increasingly, we spend more of our time in that area. We also have a sales office in the Netherlands that deals with all our activities on the European Continent.
Regarding Coillte, many members will have seen some of the images on the slide advertising our brand building activities. The one on the left is a photograph of Dubai International Airport to which we have shipped significant quantities of Coillte's MDF product manufactured in Clonmel. The image on the right is a red squirrel, and we are working closely with the National Parks and Wildlife Service to bring red squirrels back into Ireland's forests. On the page members can see the breadth of activities in which Coillte is involved. It is very much a commercial entity, export oriented and delivering on our business objectives while at the same time providing a range of public goods. I will provide more detail on that later.
We have three operating divisions. Coillte Forest is the legacy of the company. It manages the forestry business, the planting, harvesting and supply of logs to the Irish saw mill sector. We have a large number of customers in that sector, but approximately ten of them account for almost 90% of our total volume. This is a €100 million business. That is the scale of this forestry piece of Coillte's business. Seventy per cent of that €100 million derives from exports by Coillte or in the forestry area where we sell logs to our large customers who are exporting to the UK, France and other locations.
Some interesting customers have come on board recently. Members can see the dark horse in the picture. It was not an Arthur's Day stunt to have anything black in Coillte's advertising. We sell timber to a company called Blue Frog which manufactures high quality animal bedding for sale to the thoroughbred sector. The Middle East is one of its target markets. I emphasise the breadth of activities in which we are involved.
We are very well known for the photograph on the right: "A short stroll for walkers, and a long haul for Coillte." That is very much a part of what we do. We are Ireland's largest outdoor recreation provider. We are very conscious of our responsibilities in terms of delivering public goods, and we take that responsibility seriously. As I stated to this committee previously, with almost 6,500 properties in the country we are everybody's neighbour and we take that responsibility seriously. Approximately 20% of our estate is managed for nature conservation. That allows me to mention our three equal goals: an economic return, providing a social return and an environmental return. That is what Coillte is all about.
There have been many great achievements in the agrifood sector which this committee will be well aware of, but proportionately, in terms of the success in the timber sector here, 80% of domestically produced timber was consumed in Ireland in the 2006-07 period. Today, we export 80% of everything we produce to markets that are providing us with a reasonable income. I am not just talking about Coillte. Our saw mill customers have done an outstanding job in terms of addressing markets in the UK and further afield.
Coillte Panel Products is a €150 million business with two brands in the stable, so to speak. We have SmartPly OSB, which is a manufacturing business with sales throughout Europe based in Waterford Port, south Kilkenny - I had to get that right, I have been here previously and I am aware of the sensitivities with these particular issue - and Clonmel, where we have our large medite plant next door to the big Bulmers operation in Clonmel. These are big businesses which export 90% of their products. The UK is a big target market for us but, increasingly, we are shipping product to Turkey, Israel and parts of the Middle East. The photograph on the right is the Islamic Museum of Art in Qatar. I included it especially for Deputy McGrath who was unable to attend today because I had a discussion with him previously about advertising and the various activities taking place in terms of exports from his particular area.
Product from each of these companies was used in the recent Olympics and Paralympics. The sub-floor of the velodrome that we all thought was so fantastic was made with OSB from SmartPly. The roof contained OSB from SmartPly, and MDF from Clonmel was used for much of the finish around the velodrome. The press centre was made entirely of MDF from Clonmel. The corporate hospitality suites in the main stadium were made from MDF from Clonmel, and the archery arena was enclosed in a new SmartPly product made in Waterford Port. I had a different view from other people watching the Olympics in that I was looking for opportunities to spot our products on the various activities in the various locations. I thought members would be interested in those points.
The Coillte Enterprise side is our third operating division. Coillte Enterprise is primarily about the development and the provision of infrastructure. That is what we do in that particular area and under that label we have a significant activity in the renewable energy area. We are a developer of wind farms. We have nine projects currently across a range of counties. We have development partnerships with a range of public and private organisations and approximately 55 separate projects are under way within the wind area ranging from wind farm development through to joint ventures and other activities with other partners.
We are also in the land sales and land development area. Last year, Coillte did just under 50 land transactions ranging from selling a small piece of land to an abutting farmer to supporting compulsory purchase orders, CPOs, of different kinds from local authorities. We finalised a large sale last year to Irish Distillers to provide it with a location to build warehousing, as it had run out of warehousing in the Midleton plant, to provide whiskey to the world markets in the future.
On the telecommunications infrastructure, we provide approximately 17% of Ireland's telecommunications mast structures on the Coillte estate. These are used for the regular telecommunications services on which we have all become dependent but we also built 100 masts specifically to support the rural broadband scheme. Quite a significant number of rural areas are receiving broadband from infrastructure invested in by Coillte, which is delivering a commercial return.
The next slide, Coillte by numbers, is to try to pull together the last slides. In round numbers we export about 100 truck loads of timber through Irish ports every day. We employ approximately 70 harvesting contractors and 30 haulage contractors. The reason we need 30 haulage contractors is that we move about 100,000 truck loads of logs every year. We have a 50% market share in the UK and Ireland for oriented strand board, which is a fantastic product and a replacement for plywood. As plywood becomes more scarce in the market, which will happen because of certification issues, there is an opportunity for this area to grow significantly from Coillte's perspective.
In any year we spend approximately €150 million on procuring goods and services to keep the company going.
Coillte has 420 telecommunications mast sites and ten wind farm projects in nine counties. Some 20% of the wind energy currently in production is on lands formerly owned by Coillte. Coillte continues to make significant inroads in and give support to many Government initiatives and priorities in this area.
According to the Irish Forestry and Forest Products Association, the forestry sector employs up to 12,000 people, which does not include 14,000 private farm foresters. The estimated economic value of the sector is €2.2 billion and accounted for €286 million in exports in 2011. We are producing as much timber from Coillte’s forests today as we did at the peak of the construction boom in 2006 and 2007 and we have managed to find other markets for it. It is a positive story.
In 2011, profit after tax was €19.9 million, primarily from strong log prices in Ireland and improved prices for our panel products in the UK and other export markets. We successfully renegotiated and refinanced the group debt, a significant achievement in the current banking environment. We are happy to have a syndicate of five banks supporting Coillte’s debt for the next five years which gives much certainty to all our operations and future investments. A dividend of €10 million was paid to shareholders. We are very focused on cost savings with a saving of €4.4 million achieved as a result of implementing a transformation programme. One must remember, however, this transformation programme is not just about cost saving. One cannot be in the manufacturing business if one does not have control of the cost base. Since 2008, we have taken 20% out of our overall cost base.
In 2011, Coillte planted approximately 14 million trees on 5,641 ha and built and upgraded 375 km of forest roads, representing an investment of €34.5 million in renewing and developing the forest infrastructure. We launched Medite Tricoya, a product of which I am particularly proud, the world’s first fully weatherproof medium-density fibreboard, MDF, wood panel product. More of this type of innovation will be seen from Coillte and it will secure the company’s future. This was developed in partnership with Accsys Technologies which has the intellectual property that we have licensed from it. Our expertise is to make large panel products out of this. For those interested in UK politics, the chief executive of Accsys Technologies is Paul Clegg, brother of Nick Clegg.
SmartPly Europe Limited was nominated in the export category in the HSBC European business awards, largely due to improvements in exports and market attraction. We have achieved planning permissions granted for wind farms for phase two in Cloosh Valley in County Galway and Sliabh Bawn in County Roscommon.
Coillte is delighted it has been certified with the Forest Stewardship Council, FSC, for ten years, one of the first forestry companies in western Europe to achieve this. It is a seal of approval that states our forests are responsibly managed. This is an important point for our customers too. There will be a FSC logo on any wood product in Woodies or B&Q, even the wooden handle on a hammer, stating it has come from a sustainable managed forest.
This year we signed our first biomass supply contract signed with Astellas Pharmaceuticals in County Kerry, a company that produces medicines that prevent the rejection of body organs after transplants. The biomass will power all of its process heat and manufacturing activities. Coillte’s LIFE native woodland restoration project was recognised by the European Commission as being in the top six projects in Europe. We are embarking on other applications which will make it the fifth LIFE project in which we have been involved. We are proud of the statement this makes concerning our environmental credentials and our commitment to protecting the environment in all we do.
Coillte extended the network of mountain bike trails by adding Ticknock to it. It now comprises Ballyhoura, Ballinastoe, Derroura, Portumna and Ticknock. Coillte is a successful commercial business but is also very much aware of its responsibilities in delivering a range of social and environmental benefits. It is getting this balance right on which we are focused.
As for performance in 2012, I do not need to advertise how challenging the economic environment is. The growth projections across Europe have not delivered as expected but we are proving to ourselves that we are getting better at dealing with uncertainty and volatility in our markets. There is some restricted investment in construction, hence prices are somewhat reduced. We have reached a floor at this stage and expect some uplift between now and the end of the year. Coillte sees continued good progress securing planning for wind farm projects, adding value to those assets. There will be an ongoing focus on cost reduction and the transformation of the business. Last year, Coillte delivered over €12.5 million of revenue from products that did not exist four years ago. We are setting ourselves challenging targets to increase revenue from new products. It would be very easy to continue with current activities. The challenge has to be to find higher margin and higher contribution revenues.
We have heard much about reluctance to change. I am happy to report Coillte has had significant engagement with its larger unions, IMPACT and SIPTU, over the past several years around transforming our business and on the reward models of what and how people get paid.
Again, IMPACT voted earlier this year to engage in a full transformation of the business but, more importantly, to opt for a reward model, which is very different to what would have been in placed when Coillte transferred out of the Civil Service. This reward model is based on market-related pay and pay for performance. We are putting an end to any kind of incremental or service-related pay within Coillte and IMPACT should be recognised for that. SIPTU has also engaged in this discussion and voted to engage in a full transformation of the business. I use this opportunity to pay tribute to the employees of Coillte - the employee representatives - in respect of this, which we need to do to continue to be competitive at a global level. We are taking on companies from Scotland, Latvia and Latin and North America in terms of our products in a global market. We need to be free to do that in such a way that we can be competitive.
I will turn to the slide dealing with the Government decision on the sale of harvesting rights. Committee members will be aware that the Government made a decision in principle on 26 June to sell the harvesting rights to Coillte's forest for a period of between 50 and 80 years. The board and management of Coillte have been fully engaged with our shareholders and NewERA, the shareholder representative which is acting on behalf of the shareholder, to implement or give effect to this decision. We are working very closely with NewERA on a range of detailed reviews, examining financial and other implications of this Government decision to ensure we can realise the maximum value for our shareholders and contribute to the Government's €3 billion target for asset disposal. I can indicate that there is a lot of work and a significant effort going in between now and the end of this year on all aspects of this activity.
The last slide says it all. Trees are just the start of it. I thank the committee for its attention, will be happy to have a discussion and will try to answer any questions people may have.
I welcome David Gunning and Gerry Egan to the meeting this afternoon. I have, in various guises, had quite a bit of contact with Coillte over the years. Coillte encapsulates what a State company is about. Mr. Gunning put it in one sentence. It is about a successful commercial operation with a social role and seeing that the shareholder is the State on behalf of the people. Therefore, the ultimate measure of its success is not just the bottom line, which is important and to which we will come, but the good it does in Irish society. I had direct contact with Coillte in respect of its rural recreation role, which we will come to shortly.
It is fair to say that from the time the forests were planted to the time that they were transferred to Coillte, there was a dramatic shift in the way our forestry industry was run. We should never forget the first planters or re-planters of forests in Ireland who put the forests there because it was a long-term project from the outset and much good work was done in the earlier years of this State. It is very significant that Coillte owns 7% of the land mass of the country because, as it has proved, where it was initially just trees, that land mass in itself has many other values now that were never foreseen by the initial developers.
Mr. Gunning said that 70% of the products of forests is exported either directly or indirectly. He said that 80% of the product during the height of the boom was being used in the Irish construction industry. However, if we roll back about ten or 15 years from there to just before and during the Celtic Tiger era in Irish industry, we can see that the amount of Irish timber being used in the construction industry had gone from being of a very low quality and quantity - Mr. Gunning might be able to give us the figure - to being the dominant player in construction in Ireland. That took a technical revolution to compete with Scandinavian timber in terms of stress testing, kiln drying and all those very dramatic developments that took place. So the figure of 80% was the result of years of basically taking over the Irish market and displacing imports. Within two years, it has all turned around because the local market closed and Coillte and the timber mills managed to get 70% of the product on to the export market.
One of the most extraordinary untold stories of the collapse of the construction industry has been that none of the major timber operations in the country have closed. The big mills are all intact, as are Coillte's factories. If one had predicted the collapse in the construction industry, one would have also predicted the collapse of our native timber manufacturing industry but that did not happen. It did not happen because there was huge co-operation - I know there were tough debates - between Coillte as the biggest supplier of saw log and the milling industry and because they were able to break into the British construction market and replace all their lost local sales through sales abroad.
We have seen the figures for the employment involved here. There is huge employment which is spread around the country in places that do not have any other employment. It is fair to say that we must examine how this happened and how it could have been different if a different approach had been taken to the crisis. My knowledge is that most of the major mills were on short working weeks for a short time in 2010, although I may have the wrong year, but very quickly returned to full production and many can sell all their products at the moment. That is very important because it could have been a disaster. When we are looking at selling the crop, we need to look at whether it would have been different if Coillte did not own the crop.
Wearing my other hat, I had a huge connection with Coillte through Mr. Gunning with regard to rural recreation and with Bill Murphy who did an outstanding job on this issue. It is worth noting that 45% of the waymarked ways around the country are on Coillte properties. If rural recreation was fully developed, we could create 3,000 jobs. A fair amount of work was done and Coillte was central to this work but much more could be done. Coillte started with walking, including long-distance walks, and rambling and then got into mountain cycling where one has the five tracks. That is in its infancy and there are all kinds of world championships to be bid for in the future if we can develop the right quality product. There are many other things that can be done because Coillte owns Mountain Top. I know Mr. Gunning spoke about a big wind farm in this area in north Mayo. Anything that would interfere with that work and the availability of that land to people would not only be an economic disaster but would also have a huge effect on the quality of life within the country. That is very much where the social side of Coillte comes in.
We used to have debates on how much money Coillte was putting into rural recreational amenities and we did try to help a little. I know that a significant part of the Estimate was allocated to wildlife and rural recreational amenities to achieve a national economic return, but there was no direct economic return to Coillte. However, since the taxpayer is the shareholder, that is no harm. It is important, however, that we be informed of the amount of money being invested in wildlife and rural recreational amenities, given that it does not generate a commercial return for Coillte but a social return to the nation.
I will now deal with the issues of renewable energy and telecommunications masts. What has struck me in recent years is that with the changing nature of business, both in Coillte and much more so in Bord na Móna - a big landowner in the country - there are synergies to ensure greater co-operation and a joint effort in providing comprehensive State packages for various telecom companies and also renewable energy projects, in respect of which I understand Bord na Móna has plans. Do the delegates have an opinion on how they might be best managed to ensure the significant areas owned by the State, in the case of both Colllte and Bord na Móna, are used in a co-ordinated fashion for the benefit of the taxpayer?
I have serious reservations about the sale of the crop. In the Dáil last week the Minister mentioned a figure of €700 million. It is the equivalent of receiving €700 if one has an annual income of €50,000. It would be the same as giving a person with an income of €50,000 a once off payment of €700, thinking it would make a significant long-term difference. In the greater scheme of things, the figure is quite modest. I have the following reservations about such a sale. It appears from a quick perusal of the Coillte accounts that it has made a profit each year for the past five years, despite the downturn in the economy and primarily selling into the construction industry. How would this proposal affect the profits of Coillte into the future and its ability to pay a dividend to the State? Second, this is harder to measure, but I am really concerned about it. My belief is that if it had been sold to a private pension fund, even if Coillte was managing it for it, and ownership of the crop had rested with private interests during the period 2008 to 2011, the national outlook would not have take precedence and the approach would not have obtained that the national interest was wider than just the pure profit figures. I do not believe all of our timber mills would still be standing today. The greatest non-story of the past five years which should have been the greatest is that none of the major timber mills went down and that they are all thriving businesses today. Coillte took a pragmatic approach to pricing the saw log that allowed it to displace other players in the British market and thus sustain its position. It was then able to get its price up again. An industry approach was taken which was very successful. Both the timber miller and Coillte took a very pragmatic view that they had to change tack very fast and that they had to be competitive in the British market to get a toe hold in it to displace others. I am not sure if a private company owned those interests that it would take the same view, which worries me very much. If one sells the trees standing in a forest, who will meet the cost of replanting? I understand that as Coillte sells off the timber to the various millers, it factors in to the transaction the reuse of the land, unless it has been decided for some reason not to replant it, but in the vast majority of instances, it replants the forest and starts the cycle all over again. The cost of this is built into the sales price. I would like to know if the new arrangement was to be agreed to, if there would be an obligation to replant and who would bear the cost of replanting. If one sells now and ends up with the cost of replanting, one is effectively taking out a short-term loan, but one must bear the costs into the future.
In all of my discussions and interactions with Coillte, when it is harvesting, there is always significant consideration given to how the interruptions in terms of rural recreation and so on can be minimised. One does not suddenly find strategic mountain passes blocked; walkers do not suddenly find half way through a trek that they can go no further. How could one ensure in practice that private operators would have the same respect for the need to keep the non-core business going? If the crop is to be sold, will it affect the profitability of Coillte into the future? If the Government had not come to Coillte to state it wanted to sell it, would the chief executive sell the crop up front? Is it in the company's interest to sell the crop upfront, or would it have continued as it had always done and held on to the most important part of the industry - ownership of the crop? Is this coming from the Government rather than from the board and the executive in terms of what they would have recommended had they not been asked to do this by the Government?
I will call Deputy Martin Ferris and Senator Pat O'Neill before we break for questions. I have given everybody time because this is not a matter the discussion of which can be limited to three to five minutes. If everybody is prepared to agree, I will give everybody the same amount of time.
I thank Mr. Gunning for his presentation which was very informative. I have serious political reservations about the sale of Coillte. My party considers it politically irresponsible to sell off an enterprise such as Coillte which has performed so well and made a profit of €19.9 million in 2011 when the outlay included the €34 million spent on the road infrastructure. The profits made were absolutely fantastic in the times we were in. We must acknowledge and commend everybody associated with such a good performance.
Everybody would like answers to many of the questions Deputy Ó Cuív asked. I do not want to go over old ground. Concerns about the environmental and social consequences of this proposal have been highlighted. The consequences for nature conservation should be mentioned in that context. Who is responsible for the management of Coillte lands with regard to environmental protection, nature conservation and social and recreational uses of these lands?
I am concerned about access to lands that will be leased for between 50 and 80 years. In addition to timber, certain minerals may be found within those lands. If there is a lease of 80 years, who will own those minerals? Has anybody carried out a geological survey to ascertain whether there are any mineral assets under Coillte lands? If not, is it intended to conduct any such surveys before any lands are sold or leased?
Given that Coillte has performed so well in recent years, when everything else has been going belly-up, it does not make any sense for its lands to be sold or leased. If this goes ahead, what will the consequences be for those who are currently employed by Coillte? Will there be job losses? Has all of that been factored into the proposed sales? Mr. Gunning informed us that "7% of the land area of the country" is currently under plantations and so forth.
I would like to raise another issue that I recall somebody mentioning. What is the current position with regard to the grant procedure for replanting that has been in place in the past? If my understanding is correct, the only person who can apply for a replanting grant is the person who harvested the product. If it is the case that the land will revert back to the State, that will have serious consequences for the cost of replanting given that the State will not have harvested the product initially. Who is responsible for the management of harvesting? I am particularly concerned about the state the land is left in after harvesting.
Some significant questions need to be asked. As Mr. Gunning said, "approximately 17% of Ireland's telecommunications" infrastructure is located on Coillte lands. That includes the masts that are being put in place to facilitate the expansion of broadband throughout Ireland. We are familiar with the important role that is playing. What will happen to all of the things that are in place? What will happen if Coillte lands that have been sold need to be accessed as part of the roll-out of broadband in areas that do not currently have it? Will all of that be protected? I will leave it at that for now.
I thank Mr. Gunning for his informative presentation, which has raised serious questions. On behalf of my party, I reiterate that I absolutely oppose the sale or leasing of Coillte lands to any foreign or national speculator who would be able to reap the benefits of the taxpayers' money that has been spent to bring this resource to where it is today. It is arguable that the manner in which Coillte has been able to diversify is the reason the indications for its future are so good. All the good things that have been done, including the tremendous work of management to turn Coillte into a very profitable organisation, should not be given away to multinational speculators to enable them to reap the benefits of the hard-earned investment of Irish taxpayers.
Some of the points I wanted to make have been dealt with. I thank Mr. Gunning and Mr. Egan for appearing before the joint committee. I thank Mr. Gunning for his presentation and for noting that SmartPly is based in south Kilkenny. I would like to begin by asking about outdoor recreation. Coillte provides enormous pleasure to those who avail of the access to forests that is provided. Does Coillte get any monetary return from the outdoor recreational activities that take place in its forests and on its lands?
My second question relates to wind farms. Coillte is one of the biggest providers of wind energy in the country. I would like to get its view on a Bill that has been introduced in the Seanad, which provides that wind farms will have to be positioned at least 1 km from the nearest dwelling. I appreciate that Coillte lands tend to be a little more remote than Bord na Móna lands, for example. Will the company issue a policy statement on wind farms, with specific reference to the proposed new legislation? I apologise because I am a little hoarse after Sunday.
My final question relates to SmartPly and medite. When I visited the SmartPly plant during the summer, I was impressed by the facility and by the product innovation being shown by the company. Mr. Gunning mentioned a new product - Medite Tricoya - which reminds me of the word "troika". The product innovation is something else. SmartPly's plan to invest in a new plant has been approved at all levels other than the board of Coillte. I know it was put on hold while a decision was being made on the proposed sale of State assets. Perhaps that is why a final decision has not been made. Over 300 people are employed at the two factories in south Kilkenny and in Clonmel, County Tipperary. In 2008, the company was supplying the domestic building market but it is now export-led as a result of its innovative new products. I would appreciate it if Mr. Gunning could make a statement on the current position with regard to investment in the SmartPly plant.
Mr. Gerry Egan:
Deputy Ferris asked whether geological surveys have been conducted to ascertain what levels of minerals are to be found on the Coillte estate. The first thing to be said is that if there are minerals on the Coillte estate, the rights to them are reserved to the Minister in any event. If the land were sold, it would not have any implications for the ownership of, or access to, minerals on the estate. On the other hand, the deposits of sand and gravel, etc., that exist on the estate belong to the company. When there was a big demand for such materials from the construction sector, we actively marketed our sand, gravel and stone deposits and whatever else. There is a distinction to be drawn. The legal position is that the minerals belong to the State regardless of who owns the land on the surface.
Mr. Gerry Egan:
We have a fairly good handle on the extent of the deposits of stone, sand and gravel, etc. across the estate. We were involved in an active campaign of marketing them four or five years ago.
Clearly, with the reduction in the level of road building and construction, demand for that had softened in a big way and we have effectively stepped back from that. Hopefully, the day will come again when they will become significant.
With regard to other deposits, such as precious metals, we have done no work in that area. However, the geological survey may have a broad understanding of where such deposits might be.
The problem is that the afforestation part is being sold off. If the lands are sold on afterwards by the Government, without a geological survey having been carried out, this could benefit a private buyer rather than the people. This is a concern.
That is true. To be clear on the proposal, it is to auction the harvesting rights to the timber for a 50 to 80 year lease period and that is what we are discussing now. This applies to what is growing over the ground. The ground itself is not being sold.
Mr. David Gunning:
I will try to deal as comprehensively as I can in my response with the comprehensive set of questions asked.
I will begin with the issue of exports. The export story is a great tribute to the resilience of our customers, the sawmills, and to their entrepreneurial spirit. They have gone out and put sales teams in place in the UK and managed to land business and displace others. Ours has been a whole-industry approach, yet we have maintained the competitive nature of what we do. We have been significantly supported by Enterprise Ireland in everything we have done. The week before last we had a large presence at the timber expo in Birmingham. We will continue to do these things in order to build the brand for Irish timber, for Coillte's products and for Ireland in general in this fantastic product. Some 20 years ago, sawmills had not invested in modern technology. Now Irish sawmills are among the most modern in the world and this is the reason we can be competitive on an international basis. Investment in sawing and kiln technology provides modern, high-quality products and is a great attestation to the spirit and resilience of sawmill owners and the investments they have made.
We have employment in the industry from seed to sawdust, right from the plantation of the forest through to the processing of sawdust or whatever into pellets, MDF or particle board. There are 12,000 people employed, which is a significant number. Long may that continue. We cannot stop now. We must continue to invest. We must develop new innovative products and keep developing new market opportunities and filling the needs people do not even know they have. Much of our product goes next door to the UK. The United Kingdom now leads Europe in terms of zero carbon homes, but to build such homes it needs more timber. We are ideally positioned to fill that need.
On the issue of rural recreation, there is no monetary return. However, this is one of Coillte's core values. We see connecting people with nature as part of what we do. We are a commercial body, but we have other responsibilities under that umbrella. We know, for example, the United Kingdom forestry commission gets £1 for every individual visit to its lands and there is a significant transfer of funds from the UK Treasury to the forestry commission in order to provide services. This happens also in other countries throughout Europe with state forestry companies. We are not on another planet and are very attuned to the current realities. We are getting on with providing facilities, with great co-operation from local authorities. A great example of this is the Dublin mountains partnership between Coillte, Dublin City Council, South Dublin County Council, Fingal County Council, the National Parks and Wildlife Service and other landowners in the Dublin mountains. These all work closely together to provide an excellent recreation service on the doorstep of the nation's capital.
This is a model for other initiatives we have under way. Mention was made of north Mayo and the possible wilderness area in the early stage of development. We are also working with Cavan County Council on a forest site near the Marble Arch caves which are north of the Border. This will attract additional funding, possibly even EU funding. Lough Key forest park is another great example. We have a fantastic site there on the edge of the lake with some wonderful resources. Perhaps we could invite the committee to pay a visit to our zip wire attractions there. The Chairman can bring members up and we would be happy to provide training and harnesses, at least for some of them.
Rural recreation is important. This leads us to the issue of the public good, which does not just concern people walking in the forest. Coillte provides significant biodiversity. Some 15% of our land is protected for nature conservation, a value in itself. There is also a landscape value. We are moving away from harsh landscapes with straight edges on forests. Members will notice over time that as we replant our forests, there will be much softer edges and the forests will sit better in their natural environment. This is how it should be and is how the industry is evolving. We are very conscious of these responsibilities.
The nation's challenge with regard to wind farms and renewable energy is significant. We are doing whatever we can to support the achievement of the 2020 objectives, which are now required under an EU directive. We must ensure we get 40% of our power from renewable resources by 2020. I encourage all elements of government to work together to try to bring this about and not to put further obstacles in the way of achieving that target. There is a positive stimulus possibility that by proceeding aggressively with this programme, we can bring about positive outcomes.
Mr. David Gunning:
I will not comment on that particular topic. We will engage in the consultation process. The bigger issue concerns how we will achieve the targets. It is very important that we look at this at the top level. We have a big target to achieve. We need to get on with achieving it so let us not put any further obstacles in the way. That is my approach.
There have been comments on the sale of harvesting rights, the sale of the crop and so on. There has been much loose language in this regard. The Chairman brought the focus back to what exactly the Government has decided. We are talking about the sale of harvesting rights of Coillte's estate for a period of 50 to 80 years. We have already mentioned the issue of minerals. There has been no mention of land sales. These have been excluded in terms of the decision.
Since the end of 2011, I as board member and chief executive, and other senior executives and members of staff in Coillte have been engaged in an intensive process with NewERA and the Departments of Agriculture, Food and the Marine and the Department of Public Expenditure and Reform. There has been significant dialogue and discussion. We provided a significant input into the process which resulted in the Government decision at the end of June. We were involved in works on valuations and various other activity. More important, we were involved in identifying issues associated with this transaction or form of transaction.
I want to make sure that members are aware of the fact that we are right in the middle of this particular activity.
There are executives in all companies but the shareholders actually own the business. They have certain liberties as well as responsibilities and are allowed to make decisions. The Government, as the shareholder in this case, has made a decision, in principle at least, in relation to Coillte. The responsibility of the board and management is to give effect to that decision. We are doing that currently by working very closely with NewERA. At present, a broad range of issues is being discussed and analysed by us in conjunction with the Department of Agriculture, Food and the Marine, primarily, and NewERA. One such issue is the potential impact of a transaction on the timber processing sector. In that context, we are analysing timber supply to the sector and the central role that Coillte plays in that regard.
Another important issue concerns the viability of the remaining entity, should the transaction happen. Employee issues are also being discussed, including the pension fund liabilities. There are also issues concerning employment, transfer of undertakings to new owners and so forth, that need to be taken into account. The Coillte pension fund has a deficit of €122 million, as detailed in our annual report and that is one of the work streams we are looking at in partnership with NewERA.
In terms of the replanting obligation, like any other landlord in Ireland, Coillte must apply for a felling licence. One of the conditions of that licence, which is granted by the forest service, is that we must replant the area within a specified period, generally within 12 months of the felling being completed. A key item being examined at the moment is who will have the responsibility and who will incur the cost of such replanting. We are also discussing Coillte's debt and bank commitments. In round figures, by the end of this year, Coillte's debt will be approximately €180 million. The providers of that debt, namely, the banks, have reasonable expectations that, in the event of a transaction, this debt will be repaid.
Another item of concern is the issue of recreation and public good, which is currently being examined to ascertain how it will be addressed. The SmartPly reinvestment decision is also under discussion with NewERA, the Department of Agriculture, Food and the Marine and the Department of Public Expenditure and Reform. That is the breadth of the issues that have been identified jointly by all of the parties concerned.
Mr. David Gunning:
Thank you, Chairman. I am keen to get back around this particular topic. I have listed the issues as they have been discussed, analysed and researched. It is interesting to note that as the questions came up they related to the same set of issues that had already come up. These are the same issues I have heard the Minister for Agriculture, Fisheries and Food, Deputy Coveney, raise several times at several public events. There is alignment and agreement on the issues. The challenge is to devise a solution whereby Coillte can deliver on Government's objectives while addressing these issues to the satisfaction of the broad range of stakeholders in Coillte. We try to frame our challenge in this process.
They are going for a flight but they will take the tunnel. I thank Mr. Gunning for coming in and I congratulate him on the presentation and superb level of innovation both in products and strategy. In particular I congratulate Mr. Gunning on the successful negotiation with IMPACT, SIPTU and the employees. Coillte has a culture to be envied.
Some of my questions will help all of us understand the business in more detail. Coillte's export sales are going well. Mr. Gunning renegotiated the rewards system of the sales team. Who sets the targets? What margin targets do they work to? What margin target does the Coillte sales machine work to? I am interested in the company's turnover. In 2010 turnover was €250 million and in 2011 it was €259 million. Curiously, Coillte's profit in 2010 was €32 million but in 2011 it was €19.9 million. I am suggesting that there was a good margin in 2010 of approximately 12.5% but the company almost halved its margin subsequently. I imagine there was a good reason for this but I would be interested to know it. How are the sales people rewarded? How are their margins set and how are they set for the entire company? The transformation programme is impressive as are the savings. Is this done through a lean manufacturing practice?
The Deputies who spoke before me covered most of my other questions. I agree with Deputy Ferris. Although it is only the harvesting rights, it is profoundly depressing that the Government has decided to instruct Coillte to sell. A total of €3 billion was the price referred to in the presentation. How was that calculation reached? The profits in 2007-----
To be fair, the figure of €3 billion is the overall target set. Let us consider the seven issues discussed.
The restrictions or conditions - or lack thereof - possibly determine the position with regard to the high and the low prices. A clear unrestricted auction of the assets for an 80 year period, without obligations, would probably realise a higher up-front price. We must work back from there to a point where, if the Government's targets are to be achieved, an amount of between €600 million and €700 million must be realised. At the same time, adequate conditions and controls along the lines of those indicated in the seven points highlighted by our guests must be put in place in order that what occurs will be in the best interests of the State. When he tabled parliamentary questions on this matter last week, Deputy Éamon Ó Cuív was informed that the amount it was hoped to realise was between €600 million and €700 million.
With respect, the profit realised in 2011 was €32 million. If one multiplies this by ten, the amount realised is €320 million. If it is multiplied by 20, the amount is €640 million. Given that we are discussing a period of between 50 and 80 years, it is profoundly depressing that we are only seeking to realise €600 million or €700 million. I would much prefer if Mr. Gunning were allowed to proceed as he is in driving the business back to a profitable position.
I welcome Mr. Gunning and Mr. Egan and thank them for their very comprehensive presentation. As a farmer who first planted commercial forestry on his land in 1995, I understand its importance. I am glad to hear our guests refer to Coillte as a business operating in a global market. I have a number of questions to ask and if our guests do not have time to answer all of them, I will forward the balance, in writing, to Mr. Gunning and Mr. Egan.
What has been the payback from forestry to the Government during the past ten years? Will our guests identify all the stakeholders to whom the €10 million is paid?
Okay. It was stated Coillte was involved in approximately 50 land sale transactions a year. Does that figure include all transactions, large and small? Is it the case that all transactions of two acres or less are not included?
Our guests referred to land transferred to local authorities. I am very familiar with such land, particularly the parcel known as Bottle Hill dump which is now a €50 million white elephant. Coillte was paid handsomely for this land by Cork County Council; therefore, there was no fairy godmother operating in that instance. I stand to be corrected, but I understand Coillte's payback on this land was in the region of €15 million. It may only have been €14 million, but we will not argue about the difference.
In the context of social responsibility, I encountered an issue a number of years ago about which I am concerned. This probably relates to what Deputy Éamon Ó Cuív stated. In the instance to which I refer, a person's farm and house were on an island of land that was literally surrounded by forest. There was a need to run electricity cables into the property, but on foot of an agreement in place between Coillte and ESB Networks, the individual involved, the pensioner involved, was asked to pay €80,000 for the privilege. That was an absolutely crazy sum of money. Coillte refused to move in the matter, but, in fairness, ESB Networks absorbed the cost. Mr. Gunning can disagree strongly, if he so wishes.
However, the net effect was that it was extremely difficult to run an electricity cable up to the man's house. This was only a small job. What will be the implications in the context of broadband development if the lands we are discussing are sold? I am opposed to the standing agreement because it is too costly. However, our guests can educate me on the matter later. If a new entity comes into play, what will this do in respect of the amount consumers will be obliged to pay for broadband, etc., in the future? There is no doubt that consumers will pick up the tab.
I am aware that Coillte receives grants for first-time planting. I presume, however, that it does not receive such grants for replanting. A figure of €35 million was mentioned. How much of this took the form of grants?
Our guests referred to their re-financing debt. Coillte is responsible for 7% of the country's landmass, namely, 5,641 ha or approximately 14,000 acres. If one assumes a cost of €1,000 per acre for planting, paying €55,000 per kilometre for the 375 km to which reference was made seems high for a large-scale company. Coillte could probably plant forestry for less than €1,000 an acre.
Has Coillte's poor financial return to the Government in recent years led to the troika and, possibly, the Government stating forestry has not yielded massive amounts to the State? This is particularly relevant given the fact that the company is responsible for 7% of the country's landmass. I am not sure how many acres this represents, but perhaps our guests could enlighten me.
This means that there was a return of €10 million or less on 1.2 million acres. Perhaps the rate of return could be better. The low rate of return may be prompting the sale of the crop.
I wish to mention a matter that is in the public domain. Are our guests in a position to confirm whether Helvetia Wealth AG has made approaches in respect of purchasing Coillte lands? In its press release of 26 November 2009, Coillte indicated that "The Fund [the International Forestry Fund] invests in forestry in Ireland" and that it was there to buy either existing forests or lands which would then be afforested. It also stated that its strategy was to acquire the title to all properties for the benefit and protection of its investors. This means that it would not be done for the good of the people. This mirrors the position on many of the issues with which we are dealing. Helvetia Wealth AG has made great capital of the fact that the chairperson of the International Forestry Fund is the former Taoiseach, Bertie Ahern, and stated he laid the foundations for a renewed Ireland that will benefit future generations of Irish people. I tend to think that is over-exaggerating it a little in this regard. Have our guests or any of the other members of Coillte's management team met Mr. Bertie Ahern, in either a public or private capacity, to discuss the sale of Coillte lands to his company?
I thank the Chairman. How much of the land will it be recommending should be sold to Helvetia Wealth AG and the International Forestry Fund? Helvetia Wealth AG describes itself as an international finance company which offers offshore banking services to clients. Is this company one of Coillte's financiers or would it be one of them if Coillte were to recommend a part sale in respect of the balance of lands it holds?
If all of our forests are sold, what will be the consequences? In fairness, our guests have provided information on many of these consequences. I am concerned about some of the knock-on consequences for some of Coillte's ancillary companies which are highly successful. I fear that selling off the valuable assets to which I refer would hinder the initiative and innovation which Coillte has displayed to date. I am also concerned about the issue of carbon emissions, which is a major factor in forestry. This is an issue around which we have only skirted to date. It would be terrible if 7% of the country's landmass could be removed from calculations relating to carbon sequestration. What would be the position if an 80 year lease were granted and a dispute arose about the felling licence? What would happen if the owner of the lease refused to plant and the Government informed it that it was obliged to do so? In such circumstances, a great deal of land could be left lying idle until the dispute was resolved. This matter must be dealt with now because production could otherwise be delayed until the legal eagles resolve it.
Our guests referred to Coillte's debt of €180 million. Does this include the company's pension deficit?
I again thank our guests for their presentation. I realise that I have posed a large number of questions and will provide our guests with written copies of them. These questions are pertinent and, like members, the public will want answers to them.
I compliment our guests on their presentation and on summing matters up in seven very precise points.
I have a couple of brief questions on Coillte's financial performance in 2011 and previous years. The company's profit after taxation in recent years has fluctuated considerably. In 2011 it was €19.9 million, in 2010 it was €32 million, and it was €4.2 million in 2009. In those years the turnover has remained more or less the same and capital expenditure has been consistent. Could Mr. Gunning explain the drop in profits?
SmartPly appears to be the linchpin of the business. It will determine whether the company moves backwards or forwards. Perhaps I am not correct in my assertion. Mr. Gunning could clarify the position. SmartPly appears to be waiting for clearance for take-off in terms of investment. The product is ready to roll and many jobs are at stake. Is there a timescale envisaged for whether the company can take off or will it depend on the outcome of deliberations based on the seven areas Mr. Gunning outlined?
The pension deficit is €122 million and bank debt is €180 million, which amounts to approximately €300 million. It is potentially half the amount we are talking about, as Senator O’Keeffe mentioned previously. If those amounts were added together and the target of €600 million or €700 million is not achievable because of outstanding issues, will the sale be hampered or will it progress in either case?
I thank both Mr. Gunning and Mr. Egan for the presentation. I have a couple of queries. I appreciate that many questions have been asked.
Reference was made on page 11 of the presentation to securing planning for wind farm projects. I am interested in Coillte’s strategy on wind farms. It is not the case of one getting out of bed and deciding to have one wind farm today and another wind farm tomorrow. I am sure a strategy is in place. Because there is much debate about who ought to be involved in wind farming there is a concern that we will end up with a glut of wind farms. Senator Pat O’Neill spoke about the positioning of wind turbines. We agree with Mr. Gunning. The directive specifies that we ought to achieve a target of 30% of energy from renewable sources by 2020. We do not want to throw the baby out with the bath water. I would have thought that it would be something close to Coillte’s heart and that it might have a view on the siting of turbines, albeit as CEO of Coillte that is not perhaps in Mr. Gunning’s direct remit, but I am sure he has a view.
The most important aspect of this meeting is what will happen in the future. I am reluctant to say it but I must point out to Mr. Gunning that we have not heard anything today about the future of Coillte. He has outlined seven work streams, as he called them, but each of the seven areas has another 70 questions attached to it. It is an extraordinarily complex business and I appreciate that it is not just about keeping Coillte going; Mr. Gunning also has to calculate how to create the change, how to deal with the main shareholder, namely, the Government and how to incorporate the direction that has been given. Mr. Gunning mentioned that he fed into the decision that was taken by the Government. I would be delighted to know, as I suspect would my fellow committee members, what Mr. Gunning fed into the decision taken by Government.
Mr. Gunning is right to be proud of the achievements of Coillte. That is not at issue. We know Coillte has done a lot of good things but what will exercise the committee today and in future is what is going to happen. Each of the seven work streams has 70 more questions attached to it. For example, who decides ultimately on the sale and how will it happen. Deputy Ferris inquired about the employees. Major issues surround them, in addition to the pension liability and the company’s debt. We have not had a presentation that reflects the current situation relating to where Coillte is going in the future. I agree with Senator Mary Ann O’Brien, I am not particularly happy at the prospect that we have to dispose of any of Coillte’s assets. They should stay in the ownership of the Irish people. I understand the troika and the deal that was done on the €3 billion we have to find from various disposals but I wish to hear more from Mr. Gunning. I accept much of it is work in progress and he is not able to tell us all of what will happen. If he is unable to do so, I am sure he can tell us about what input he had into the decision taken by Government. Given all the questions and the time constraints, it might be more appropriate to return to the issue. I am appreciative of the fact that the Chairman took a break in order for Seanad members to vote.
I thank Mr. Gunning and Mr. Egan for attending today. At this stage many of the questions have been raised. I am very much in favour of wind farming. Where Coillte has low-lying land or commonage land attached to forestry, where the commonage is not planted could farmers be allowed to buy or lease the commonage? There is a great deal of such land in my area.
In cases where reasonably good farm land was planted approximately 40 or more years ago, if a farmer wanted to do a deal with Coillte would it be possible or does the land have to be replanted? Is it possible to take it out of forestry and if it is reasonably good land to sell it back to farmers?
I spent some time on Comhairle na Tuaithe. We were appreciative of the work Coillte did on walks but in some parts of the country walkways have fallen into disrepair. There might not be enough money to develop them or keep them in a good state of repair. In some cases trees have fallen across paths or debris has collected on them. I am aware of a few walks that have such problems and I would like to see them developed.
That completes the questions. I invite Mr. Gunning to outline the timeframe to which he is working in terms of the current process. It would be helpful to us in our work schedule in terms of formulating a report or submission.
Mr. David Gunning:
Thank you Chairman. I will answer that question upfront before I deal with the many questions that have been raised. The understanding is that the work streams I have identified will be substantially complete by the end of this year. That is the timeframe to which the working group is operating. It is in line with the timeframe communicated to us by the Minister for Public Expenditure and Reform, Deputy Howlin, in terms of moving to the next stage. He announced in the Dáil that a transaction would be possible by Q4 of 2013, which is approximately 12 months from now.
I will respond to the questions in the order they were asked. Senator Mary Ann O’Brien inquired about sales teams, margins, products and strategy. We have spent much time in recent years getting into the detail of which products were selling and understanding the margins. We have killed off product lines we discovered were not delivering the types of returns we needed. Our whole thrust is into higher margin-type products. It is difficult to run a commodities manufacturing business in this country. We want to be involved with a value-added type product. In essence, we want to increase the number of value-added products within our portfolio and as other products come to maturity to exit from those. We are trying to get into products. There is a commercial sensitivity because this is a competitive space and we have competitors based in Scotland, Latvia and Latin America. We will not discuss the detail of our products now but in essence we are looking towards a much higher margin-type product mix within the family of Coillte products.
We do not intend to discuss the details of that now but in essence we are looking towards a much higher margin product mix within the family of Coillte products.
On our sales teams, we do not operate aggressive sales incentive type schemes. We pay our people market-based salaries whether they are in the Netherlands, the United Kingdom or Ireland, with some limited incentives to deliver on margin and overall revenue targets. In terms of the challenge, it would be easy to manufacture commodity product and run the factory 24 hours a day, seven days a week but that does not give us the optimal type return. We want our factories running to give us high margin products. Our philosophy is to add value to fibre that comes out of our forest and our responsibility is to add the maximum value we can to do that. That is the area in which we are working.
Mr. David Gunning:
To be clear, 2011 also includes a €9 million provision for a pension funding issue and, therefore, the actual outturn is nearer to the 2010 number. There will always be fluctuations in prices from year to year and on mix type issues but in general our thrust is in targeting higher margin type products, hence the innovation where we are investing significantly in a range of other activities.
On the lean manufacturing, we have made top end investments in our products. I am convinced we have the best minds in terms of panel manufacturing worldwide. We have excellent people in both Clonmel and in Waterford. We take a whole company approach, however, to the way we do things. We do not take the approach that innovation and research and development is the responsibility of a small team in a particular building. Everyone is engaged in coming up with the process improvements and other ideas that will give rise to every little step of the battle in terms of how we can get an extra cent or margin. Everybody is engaged in that challenge and I am glad to report that it is showing significant improvement but whether it is SmartPly or medite, I would hold up these plants as being among the best in the world and we benchmark exceptionally well against those.
On the other issues, a question was asked about stakeholders or shareholders. Coillte has two shareholders in terms of who we pay our dividend to, namely, the Minister for Agriculture, Food and the Marine and the Minister for Public Expenditure and Reform. The Minister for Public Expenditure and Reform, who is the company secretary, owns all the shares bar one, which is owned by the Minister, Deputy Coveney. That is the legal position on Coillte's shareholding. However, we talk about stakeholders but every citizen in this country is a stakeholder in Coillte. Every walker and mountain biker or everyone who takes a bicycle or a quad bike, illegally, into our forests is also a stakeholder. We are trying to find ways to section off areas where these people can also get access to the forest in a safe manner to ensure that everybody is protected.
The question arose about land sales and €2 million represents Coillte's entire land sales whether it is one or two acres up to a large amount. We have taken our need to make a commercial return to our shareholder very seriously and we are on a journey of improvement. Every day of every year we are trying to improve the commercial nature of Coillte. That requires us to work with the cost base, be more efficient in everything we do and invest in good products and good IT and manufacturing systems which do everything for Coillte. We see us getting to a point where we can make a significant return to our shareholder, but we started life 25 years ago with almost 3,000 staff, which was the transfer of the existing forest department - Mr. Egan was around at the time; I was not - and we have been making progress on that ever since. The journey's end is in sight in terms of getting to a particular point.
The last time I was here we had a lengthy discussion about the ESB topic. We have a nationwide agreement with the ESB on how we deliver services and price. We are required to make a commercial return and, therefore, we charge a commercial price in the market for the services we provide. Solutions are found in those extreme circumstances and I am glad a solution was found in that situation, which was not just a case of the ESB volunteering, to be absolutely clear about that. Mr. Egan might deal with the grants for planting.
Mr. Gerry Egan:
There were two sets of questions from Deputy Ferris earlier about replanting and so on. There are two aspects to this. First, Coillte is not in receipt of any grants for afforestation and, second, there were never any grants for reforestation. As somebody else correctly pointed out, the replanting is funded from the proceeds of the sale of the original crop which is why the issue of the funding of the replanting obligation in the future is one of the seven issues Mr. Gunning identified earlier.
To return to Senator O'Brien's question about the margins and the level of dividends the company pays, the company is in a very capital intensive long-term business. Essentially, every euro of free cash the company generates is reinvested in the business for the future but last year we were able to pay a dividend of €10 million. This year, we have already paid a dividend of €2 million. In response to Deputy Barry's question, the total dividend paid by Coillte to date has been €12.6 million.
Mr. David Gunning:
I commented on the financial return on various aspects. We are on a path to enhance that whole area, and that is a company-wide activity.
There were a number of questions on the Helvetia Wealth company. To be clear, there is a protocol in place between Coillte and NewERA so that in any companies expressing an interest in even a discussion around this particular transaction, the first port of call is with the NewERA staff. In terms of my knowledge, I have no knowledge of any meeting, certainly from my point of view or any of the Coillte staff, with the organisation named. There may be other interfaces such as NewERA, which has the responsibility, as agreed by all the parties, to deal with those topics. I hope that addresses that question.
I dealt with the fluctuation in revenues and profitability. It is flatter than it looks because of the provision that the board felt it prudent to make. We mentioned SmartPly specifically and as I said, the SmartPly question of reinvestment, and ministerial approval for that reinvestment, is now within the scope of the work being done in co-operation with NewERA and others. In terms of timescale, to address Deputy Deering's question, we would anticipate that this should be completed substantially by the end of the year, if not beforehand.
To be clear, the number on the pension in the annual report is the financial reporting standards deficit. There is an actuarial deficit which is different. We do tri-annual evaluations. The last time we did this it was a deficit of approximately €92 million. The actual deficit that will need to be closed will have to be determined closer to the time but it is of that order.
Mr. Gerry Egan:
It is worth making the point also that the way the pension legislation operates there is a requirement on every company to have a plan in place to address the pension funding deficit. As things stand, we have a plan which has been agreed and approved by the Pensions Board as to how the deficit in our scheme is going to be closed. We are working on the implementation of that plan as we speak. It is not as if we have this significant deficit and no plan to deal with that. That is a current topic in the discussions we are having with NewERA as part of that.
In the course of today’s meeting, NewERA has been referred to many times. Perhaps the Chairman could give us some guidance as to the level of understanding at committee level of the respective roles of the Department, NewERA and Coillte. We would be happy to elaborate on that if there is not much knowledge about the issue.
Yes, but I am conscious of the time restraints. We will also have to see about inviting in the relevant people involved in this process from NewERA. Mr. Egan can give us a quick overview of Coillte’s position.
Mr. Gerry Egan:
Yes, clearly we do not purport to speak on behalf of NewERA.
Last November, the Government made a decision to establish within the National Treasury Management Agency a division called NewERA, the New Economy and Recovery Authority. The central thesis behind this was that sectorial policy function exercised by different Departments should be separated from the shareholder function as performed by these Departments. Heretofore, the Department of Agriculture, Food and the Marine was Coillte's shareholder, responsible for policy for the forestry sector and for licensing and regulating forest owners in the area of felling licences.
The first decision was about separating the policy function from the shareholder-executive function. As of now, NewERA will perform the shareholder responsibility for Coillte. Its second role will be advising the Government, when requested, on the restructuring of companies or the disposal of State assets. That is a process in which we are heavily involved.
The other area that NewERA is concerned with is in promoting investment in key economy sectors such as energy, water, telecommunications and forestry. There is a government working group made up of the relevant Departments which is overseeing this process. It will ultimately bring those results to the Government. NewERA is overseeing this process on a day-to-day basis while Coillte is doing much of the analysis in accordance with the scope agreed with NewERA. We are using independent advisers as part of that process so that whatever work that emerges, NewERA and the joint working group will be able to rely on the independence of that work.
It is worth making the point that while Coillte has a lead role, there are several steps between the company and the Government around the decision-making process, as well as quite a number of actors in the field. For the purposes of clarification it was worth elaborating a little on this.
Mr. David Gunning:
Regarding the strategy for wind farms, Coillte sees itself primarily as a developer of wind farm infrastructure, not an energy company pumping power into the grid. We are approaching this as a landowner and enhancing the value of our land. As one goes through the process of planning permissions, grid connections, partnership agreements and other ways of adding value to the land, the value of the land increases. We have developed one wind farm in partnership with the ESB but sold our stake after development to the ESB. We have partnership agreements with Scottish and Southern Energy, the owners of Airtricity, Viridian Group plc, the ESB and SWS Natural Resources, before it was bought by Bord Gáis Éireann.
The work streams with NewERA are very complex and much work must be done on them. I spelled out the company’s position. There is nothing else in which we are involved that I have not indicated today. This work is really taking off. We fed into earlier work with NewERA. In turn, NewERA has prepared a report for the Government. I cannot say I have fed into the Government’s decision but we fed into the shareholder-executive side which, in turn, has fed into that process. We were asked to feed into areas such as estate valuation – it was preliminary and not fully-formed at the time – and the identification of issues to which I referred earlier.
The board and management of Coillte are fully engaged in the process of giving effect to the Government’s decision. We are working closely with NewERA to review all the implications involved, as well as fulfilling the board’s legal duty to act in the best interests of Coillte and its responsibilities to other stakeholders including employees and creditors. It is a complex process. However, rather than adding to speculation I have given a picture of where we are in it.
We have stayed out of any discussions on value. In the past, I was involved in €2 billion worth of mergers and acquisitions, so I have some experience of this area. From the company point of view, we do not seek to add into the discussion around what Coillte is worth. It is not appropriate that we would contribute to that which may, in turn, may influence a bid.
The McCarthy report identified that 500,000 acres of this was unviable for forestry. That leaves 720,000 acres viable. No one is going to buy unviable land. Depending on what the company sells off, it could be left with 500,000 unviable acres, making it unviable itself.
Has Coillte factored that into its deliberations?
Mr. Gunning said that he was asked to give an evaluation and heard from a team of expert consultants. I presume that gave parameters factoring restrictions and conditions on the sale of it, for example, with or without the board mills and with the viable and unviable land. I presume it produced more than one bottom line price at the time. I understand if Mr. Gunning cannot divulge this information but I would speculate it produced one figure, depending on which permutation one looked at.
I would like to let Mr. Gunning finish as it is 5 p.m. If we have a minute, I will allow a comment from the Deputy. In respect of Senator Comiskey's questions on commonage and adjoining land, if we could just let everybody's first set of questions be answered, that would be fair.
Mr. Gerry Egan:
There are many areas of commonage on Coillte land. There are situations where we facilitate sheep grazing and so on. The perennial difficulty in respect of commonage is that it is owned by many people. Therefore, trying to reach agreement where one might have 25 people who own areas in common can be problematic. If there are specific examples the Senator would like to bring to us, we would be more than happy to look at those.
Senator Comiskey also spoke about walks being in a state of disrepair. One of the partnerships we established was one with the Irish Sports Council. Three regional trails officers have been funded through that scheme. Their full-time job is to investigate these areas and make sure they are kept open all the time, particularly in the case of long-distance waymarked ways. Again, if the Senator is concerned about specifics, I would be more than happy to get the details and we will make sure those problems get sorted out.
In respect of good land and the opportunity for a farmer to buy the land back - getting the land back might be a better expression.
Mr. Gerry Egan:
The Forestry Act 1946 is the legislation governing felling. The central principle of the legislation is that there is a replanting obligation attaching to every felling licence. However, there are circumstances where it is possible to get a limited felling licence rather than a general one. In the case of a limited licence, the Minister has the power to give a derogation and to waive the replanting obligation in those cases. Again, if the Senator has specific examples, he can talk to us and we will see if something can be done.
I will take up half a minute. When is Coillte's year end? In respect of its budget for 2012, is it in the delegation's power to tell us about its latest estimate? I am trying to clarify Coillte's gross margin target for 2012.
My question relates to hiring experts to give Coillte a company valuation. What did it cost but, more to the point, how could Coillte not know the value of the company when it has borrowings and will look for future investment? The key in any investment is that one knows one's leverage position. Is the company leveraged to 20% or 30% of its value? That ongoing valuation should have been done each year. I do not understand the reason for hiring a company to tell Coillte what it already knew.
Senator Mary Ann O'Brien raised the question earlier about the period of between 50 to 80 years in respect of the harvesting rights. Is that in place because we do not know who makes the decision about the 50 to 80 years and when? As the Senator rightly pointed out, this is extremely important.
Mr. David Gunning:
In respect of the gross margin, we have three divisions, all of them operating in different areas. I do not know how many products are in our log sales and panels businesses. We do not operate an overall gross margin figure as one of the metrics for the business. We are looking for an overall return from each of the operating units. It is not one of the things on which we focused, other than wanting to increase the overall gross margin, and we know how we are going to do that. This is a relatively tough year. We are not seeing the growth predictions that were talked about towards the end of last year right across our target market. So it is proving to be very competitive and prices are somewhat depressed. We are in reasonably good shape in terms of our target and budget but it is no bonanza. We will be able to give members more information on that in three months' time.
In respect of the valuation, it is standard practice in a mergers and acquisitions position to use professional advisers to give guidance to the company and the board in respect of what the company is worth. Certainly, the company knows from its cashflow, five-year numbers and ten-year projections what we see. That is an internal consideration. However, it would be unusual for a board to proceed in this situation without relying on the good advice of experts in a particular area.
When one looks at the seven issues being discussed, part of the permutations is the size of the parcels and the length of the lease. That probably underpins much of the considerations. As the Senator noted, this is very complex. Those seven issues feed many other concerns.
I will bring the discussion to a close. I thank Mr. Gunning and Mr. Egan for their open and frank engagement with the committee. The committee has been intrigued by and very interested in getting detailed information and we got the first taste of it today. There is a lot of work to be done and if we are going to have any input into what is happening through an all-party forum like this, we need to keep moving on with regard to it.
One point I would make because I have plugged myself a little bit on this, relates to the fact that in the last Dáil, the Joint Committee on Climate Change and Energy Security commissioned a report on protecting forestry from climate change, which was endorsed by the Joint Committee on Communications, Natural Resources and Agriculture. This report considered the use of the forest estate after 1990 for forest sequestration. It was with the help and great co-operation from members of staff at Coillte headquarters that we were able to formulate a tabulation of value.
Mr. David Gunning mentioned in his submission the 2020 emissions target. We also have Food Harvest 2020. At present these objectives are on a collision course. What might help to mitigate the impact is that people get serious about the carbon value of forestry post 1990. This would involve both private forestry and Coillte. There has been considerable investment in private forestry. There are, as Mr. Gunning stated, 14,000 private farm foresters. A significant number of those were done in conjunction and in partnership with Coillte. That is a factor. I am mentioning it because nobody else has. Senator O'Keeffe mentioned the seven streams of work but the eighth point is the position of Coillte post whatever decision is taken and where it sits in the whole structure of the forest management structure of the country. I have no doubt that Coillte will continue and in those seven considerations, Coillte's role and positioning is very important. At the end of the day somebody will have to manage the overall resource, whether it is leased or not on behalf of the people of this country. It is most likely it will be Coillte in some format.
Mr. David Gunning:
May I finish with a short plug? My colleague, Mr. Gerry Egan, has just reminded me that next Sunday, 7 October, is National Trails Day, where all of the nation's trails, Coillte's own trails and a range of others will be open to the public. All members, including the members of the joint committee are more than welcome. The purpose is to try to entice people who are not frequent users of the forest to come out and see it. There is a website nationaltrailsday.ie. It has all the information of what is going on in local areas.
I have used the website. The coillteoutdoors.ie page is very informative and there is a weekly documentary called "A Road Less Travelled". It is very good. I walk on many of the Coillte trails in County Wicklow as well as in other counties. I have to plug Wicklow as well. As I walk in to Leinster House through the Merrion Street entrance every day, I see the bust of Charles Stewart Parnell in the garden room. Parnell of Avondale House was a Member of Parliament and in many ways was the founder of the Irish forestry industry, turning tree planing into the planting of a crop of trees that had a value added. I feel justified in giving it a plug.
I thank the delegates for coming before the joint committee. I know they were under serious time constraints. I appreciate that they were able to remain after we suspending the sitting to allow Senators to vote.