June 21, 2000

Introduction

Recent amendments to the Forests Act made provision to establish a Sustainable Forestry Fund (Appendix A). An initial version of this paper was part of the material released for Public Review along with draft regulations in June, 1999. This revised edition contains material responding to the comments received, subsequent considerations and finalization of regulations.

It was the opinion of the Department of Natural Resources that separate regulations governing the operation of the Fund were not essential at this time to achieve the objectives of the Forests Act and any regulatory needs have been addressed by the Forest Sustainablity Regulations. The amended Act and the FS Regulations were proclaimed April 12, 2000 (Appendix B).

On the Nature of the Sustainable Forestry Fund . . .

19A (1) There is hereby established a fund to be known as the Sustainable Forestry Fund for the purpose of funding programs to encourage the sustainable use of privately owned forest land.

Forests Act

The new Section 19(A) of the Forests Act makes provision for a Sustainable Forestry Fund (Appendix A). The rationale for establishing the Fund is to provide at least one universal method for Registered Buyers to satisfy one of the requirements under the Forest Sustainability Regulations. The Fund is not the Department's preferred method to ensure adequate levels of silviculture activity on private land. The preferred method is that wood suppliers and Buyers have arranged for mutually satisfactory self-implementation of appropriate harvest methods and for treatments through the Wood Acquisition Plan process. In recognition that this will not always be possible or practical for every Buyer, the Fund provides an alternative means of regulatory compliance. A Buyer has the discretion of choosing a program, the Fund or a mixture of both.

The Fund acts as a general bank account and will be used by the Department to finance replacement silviculture activity that would have otherwise been performed. Deposits will be made by virtue of approval of the annual Wood Acquisition Plan. The Forests Act does not create any requirement or means for a mandatory levy or checkoff from prices paid to landowners or suppliers or any other income stream that must be automatically deposited into the fund. Payment into the Fund does not give Buyers or suppliers any individual privilege or priority to subsequently use the Fund. Neither does it necessarily exclude them from possible benefiting from the fund, see the following discussion on how the Fund can be used.

The Sustainable Forestry Fund is a Special Fund under the provisions of the Provincial Finance Act ( Appendix C) for a special purpose, and will be managed in accordance with the Finance Act's provisions. It has been established by an Order in Council dated May 17, 2000. The money in the Fund itself is under the custody of the Minister of Finance.

2(n) "special fund" means money received or held by or on behalf of the Province in trust for or on account of any person or in trust for or on account of any special purpose and includes the Public Service Superannuation Fund, the Nova Scotia Teachers Pension Fund, sinking funds, Public Debt Retirement Fund, together with the income earned on the investment of such funds, and includes any other fund or money which the Governor in Council from time to time designates as a special fund and includes the authority to make payments including interest out of special funds in accordance with the terms and conditions of any trust, contract, undertaking, statute or order in council establishing the special fund.

Finance Act R.S., C. 365, S. 2; 1994, c. 29, s. 1.

Money in the Fund is held distinct from all other public money received by the Government and may only be used for the purpose for which it was received.

(l) "public money" means all money held or received by any person for or on behalf of Her Majesty in right of the Province, excluding all special funds, except sinking funds and the Public Debt Retirement Fund; Finance Act R.S., C. 365, S. 2; 1994

On Deposits into the Fund . . .

19A (2) There shall be paid into the Sustainable Forestry Fund

(a) contributions for silviculture programs on privately owned forest lands from buyers of forest products or producers where an agreement providing for a contribution has been entered into with the Minister in accordance with an approved wood acquisition plan; .... Forests Act

The origins of the deposited money will be from Registered Buyers for each approved wood acquisition plan which has chosen this option. Deposits may only be made with the consent of the Minister of Natural Resources, evidenced by approval of the Plan. This could be both upon initial approval of an annual Wood Acquisition Plan where the Buyer has chosen the Fund option for any portion of their acquisitions or possibly subsequent default payments for failure to fully implement a silviculture treatment program required under a wood acquisition plan. The Minister's approval of a Wood Acquisition Plan which proposes to make a payment into the Fund constitutes the agreement to make the contribution.

All of the monies collected by the Minister of Natural Resources under the Forest Sustainability (FS) Regulations will be immediately deposited into the Fund. The FS regulations include provisions to charge and collect interest against any amounts that are owed but unpaid. When collected, these interest penalties will also be deposited into the Fund.

Responses to draft FS Regulations have also suggested the possibility that Buyers may wish to match the expense of making payments more closely to the time when the wood has been actually acquired. There would be strong cash flow and tax reasons to do so. Accordingly the Department will receive and hold in the Fund any advance payments pending the final approval of the Plan. These payments would be entirely at the discretion of the Buyers and subject to a final reconciliation upon approval of each Plan.

19A (2) There shall be paid into the Sustainable Forestry Fund . . . (b) income accruing to the Fund; .... Forests Act

The only income anticipated will be investment income earned on the deposits. Should the balance in the fund exceed immediate cash requirements for a current year, the surpluses may be invested by the Province and carried forward for future years.

Investment standards

35 .... the Minister [of Finance] shall, for the sound and efficient management of . . . any special funds, establish and adhere to investment policies, standards and procedures that a reasonable and prudent person would apply in respect of a portfolio of investments and loans to avoid undue risk of loss and to obtain a reasonable return. .......Finance Act 1994, C. 29, S. 14.

The investment standards are as established and administered by the Treasury Division of the Department of Finance. In discussion with the Department of Natural Resources the immediate cash flow requirements would be established and any surplus funds would be invested in high quality interest earning bonds of appropriate ( likely short) terms. No high risk investments will be made.

Although it is expected that deposits arising from Wood Acquisition Plans will be the normal source of deposits, the Forests Act enables other potential depositors or mechanisms to be established in the future.

19A(2) There shall be paid into the Sustainable Forestry Fund . . . (c) in accordance with the Provincial Finance Act, money that accrues from any programs of the Province, including programs conducted under agreements with other governments, entered into for any of the purposes for which the Fund is established. ... Forests Act

Where might any such 'other deposits' come from? There is no immediate expectation that there will be any, but some possibilities might be:

• Other levels of government who wish to incrementally or jointly fund forestry activity to stimulate employment through established silviculture programming.

• Other business's that might not otherwise be captured under the Wood Acquisition Plan provisions. Suppose it became advantageous for utility companies to fund forest treatments as a means to earn Carbon Credits; using the Fund may simplify administration.

• Buyers or suppliers might for a time operate their own program, establish a separate, private account and accumulate a cash balance. At some point they may mutually wish to end that program to enable a business to be wound-up or reorganized. The Minister could agree to receive the balance of the private fund into the Sustainable Forestry Fund.

• The Government might decide at some future date that certain fines, recoveries or forfeitures could be directed into the fund.

On whether there will be any Government money in the Fund . . .

Payments into the Fund by a Buyer satisfies an obligation from the FS Regulations. It is held in the Fund for a special purpose, not in trust for a special person. As a result the Government is the sole administrator of the fund. The Department of Natural Resources has no expectation that the Government will provide funding to cost-share this expense when a Buyer chooses to meet the regulations by contributing to the Fund. The regular budget funding provided to the Department will be used to contribute to joint management programs being operated in the current year by Buyers and landowners, not to 'park' in a separate fund for use later.

On how the money in the Fund may be used . . .

19A(3) Money may only be expended from the Sustainable Forestry Fund in accordance with the Provincial Finance Act and only for the purpose of funding silviculture programs on privately owned lands. ...Forests Act

The money may only be used to fund silviculture on privately owned lands within the Province.

It may not be used for Crown or federal public lands. The money received may be in relation to harvests from both woodlot or industrial private lands. If so, it will be used in the same proportions.

The value of contributions into the Fund will have been based on estimates and forecasts of the minimum amounts of silviculture that must be completed, on certain private land tenures, to ensure that wood harvest levels are sustainable. If the funds were used for any other purpose, then those forecast outcomes cannot be accomplished.

If, by the end of any fiscal year, the Department of Natural Resources has not expended money removed from the Fund for these specified purposes, the surplus will be returned to the Fund. This provision does not apply to the Ordinary Estimates for the Department which may be budgeted to the same or similar activity as a government contribution to silviculture programs on private land but cannot be carried forward if unused.

By choosing the Fund option, Buyers reduce or eliminate the need to operate their own private land silviculture program, and create an obligation for the Minister of Natural Resources to either operate a program or make other provisions for silviculture treatments. To meet our objective of ensuring that the harvest remains' sustainable, it is incumbent on the Province to complete the required silvicultural treatments as soon as possible. Therefore, unless supported by other analysis or information, if the balance in the Fund were to continuously increase over time, it would be suggestive that the policy is not meeting its objectives (of having treatments conducted) or it might also be indicative of a need to reassess that rate at which the required deposits are calculated.

If the Province is not prompt in using the money in the fund, costs might rise beyond the rates assumed when the assessment rate was calculated and the required area of treatment will not be accomplished.

While the money in the Fund will be managed by the Minister of Finance, the 'silviculture program for private lands' will be managed by the Minister of Natural Resources. The Department of Natural Resources does not wish to perpetuate the past model of administering a program one job at a time, directly with landowners or their contractors. Instead, some methods of delivery could be either contracting for blocks of work or considering proposals for silviculture programs.

The normal scheduling to establish the regular budget and spending authority of the Department has long been a problem for silviculture programming, as it does not match the desired operating cycle which is driven by the seasons and weather. As the amount of money actually in the fund at any time will be known with great certainty and it can be used only for limited purposes, the seasonal problems can be overcome. It would be advantageous to manage the fund deliberately out-of-sync with the regular budget, possibly on the calender year, as it could add some stability and certainty for contractors.

For example in a normal year (after phase in) and assuming that the bulk of activity is in fact occurring through joint management programs the following schedule might be used.

Feb 28 - New Wood Acquisition Plans must be submitted and amounts being paid into fund received and deposited. Reports on actual accomplishments from previous year received.

April 30 - Plans must be approved/disapproved by Minister, new deposits finalized and the planned program activity levels under Buyer's programs for the year will be established.

May - Assess any treatment or geographic deficiencies and the money available in the Fund.

June - Call for tenders for additional lots of treatment areas to be completed in the next 12-14 months, including planting the following spring. Bidders would be responsible to find the eligible sites, which must be new and incremental to any sites claimed or planned for under the Buyer's programs.

July-next May- award tender contracts. Contract holders complete and claim for the work with the assurance that they have a contractual commitment and that the Department has the cash-in-hand and authority to spend it regardless of when in the budget cycle the work is completed.

We should fully anticipate that due to market conditions, weather or the fact that much of the readily accessible land was committed to other JMP's, some contracts issued for the Fund will not be fully completed. In that circumstance, the money remains in the Fund and can be re-tendered the following year. Some caution may be required to avoid 'strategic bidding' for competitive purposes. Nor must the Fund contracts become 'last priority' for those holding them, by having weak performance expectations. If silviculture prices are rising, the work must be completed soon after the funds have been collected.

The public review of the draft regulations identified concerns about the possibility of the Fund financed work distorting the market prices for the privately run programs, particularly if it set 'list prices' that it was prepared to pay and which are difficult to ensure are accurate for every region and site condition.

Conducting competitive tenders for blocks of work on the same specifications and 'outcome based' approach, as will be applied to the JMP's, is one way to overcome this issue. The size of contracts will be structured so that small businesses, groups or contractors can be competitive.

A second method of establishing through an agreement whereby an organization would administer a much broader program as if they were themselves a Buyer. Landowner or sector based associations could be given exclusive or priority privilege for such arrangements. The fund would pay for completed treatments at rates negotiated.

It is possible that some of the money paid into the Fund will be on behalf of wood acquired from industrial private land. In this instance there will be an onus to use that money for extra activity on industrial owned land. For these contracts, Registered Buyers should be considered priority Bidders.

The Forestry Division of Renewable Resources Branch in concert with the Regional Services Branch would be responsible to analyse buyers Plans and Reports and recommend the type, amounts and regional location where extra treatments should be conducted.

Bidders are expected to be operating as competitive, for profit concerns, offering a fixed per unit price for the term of the contract. They will be responsible to locate eligible woodlot owners and sites, conduct the treatments to the required standards and provide required documentation. Once the work is 'sold' to the Fund it cannot be claimed for the credit of any other Registered Buyer's program. Work purchased under the Fund will be paid in full from the fund and no cost sharing with any other person will be necessary.

Can the Fund be used for administration?

Many have asked whether the fund can be used to finance the administration of silviculture programs and not just on-the-ground costs. Any silviculture program must have some element of administrative overhead. If it is not provided for, the program may become inoperable, ineffectual or subject to abuses. There is equal concern that administrative costs can become excessive. Administrative costs can reasonably be considered part of the incremental costs of a 'program'. But sufficient money will only be there to pay for them, if administrative expenses are part of the original estimates, forecasts and agreement when the deposits are first made.

The required contribution rates established under the FS Regulations do include an allowance of 10% for the direct administration overhead expenses required to properly plan and operate a self -run silviculture treatment program. The Department of Natural Resources could charge against the Fund, the same administration allowance that it will recognize for privately operated treatment programs. If it incurs costs beyond that limit, they must be funded from its regular budget. As shown in the sample reports in Appendix D, the Department would report any of its administrative expenses paid from the Fund.

Where silviculture suppliers are bidding on additional contract parcels financed from the Fund, or should an organization be established to operate a program,they are expected to set their bid prices to cover all costs and profits. These prices are not necessarily limited by the treatment values established under the FS regulations. The contract would not specify or limit how a contractor must use their revenue. There would be no separate payments made for administration only.

On how much money might there be in the Fund . . .

There is no right answer to this question. The Fund is intended to be one option available to Buyers under the FS Regulations. If many Buyers/Producers choose this option, the Fund might receive millions of dollars in annual deposits. If none of the Buyers/Producers choose this option, there will be no money in the Fund nor would there need to be, as those Buyers and Producers will have made other provisions for silvicultural treatments.

On obtaining information about the Fund . . .

The money in a special fund must be accounted for by the Government.

Public Accounts

9 (1) The Deputy Minister [of Finance] shall prepare an annual statement, called the "Public Accounts", as soon as practicable after the termination of each fiscal year and shall submit it to the Minister [of Finance].

Content of Public Accounts

(2) The Public Accounts shall show . . . (b) the state of the Consolidated Fund and the various special funds under the control and management of the Province; . . .

Finance Act R.S., C. 365, S. 9; 1994

However, neither the annual reports of the Department of Finance nor the Public Accounts Book reveal the itemized balance for each of the many small funds administered by Finance. They are reported as an aggregate for all funds.

This is not considered sufficient. To improve the accountability for the Sustainable Forestry Fund, the Department of Natural Resources must publish its own annual report. This was clearly identified in the Public review and is now a requirement on the Department under the Regulations.

The Minister shall report periodically on the silviculture completed in association with approved plans and in association with the Fund.

FS Reg 3(9)

Attached to this edition is an Appendix (D) containing a sample report layout..

Payments and costs from individual Buyers is considered commercially sensitive information by them and is protected under Freedom of Information and Protection of Privacy Act, whether or not it is stated in the regulations. Any requests for such itemized information may need to be reviewed by the Province in accordance with that Act, its policies, procedures. The annual report format will make public only summary data of payments into the Fund and identify the names of those Buyers which are represented by that data.

Information concerning payments by the Government to Buyers, landowners, contractors or other service providers for the silviculture program financed by the fund [and for JMP's] would be governed by the standard policies for the Department. All payments to persons of more than $5,000 are published in the Supplement to the Public Accounts of the Province. Where the Fund tenders for work, tender and bid information is available under the policies of the Public Tender Office.