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When David Meets Goliath: Help Us Support Your Community

The coastal forest industry needs to attract and train 4,700 men and women from BC’s coastal communities by 2022 in order to meet anticipated demand. But there’s something standing in our way. 
 
These jobs are steady, well-paying jobs that allow people in rural coastal communities to work where they live and be a part of their hometown. However, BC forest contractors are struggling to sustain themselves and as a result are struggling to support recruitment for these jobs.
 
This isn’t the sustainability story you usually hear about—environmental sustainability. This is business sustainability which is just as important but much less talked about. We urge you to read this editorial and understand the plight we, the community-based business owners, face. 

We all know the background now.  A global economic recession in 2008 led to contractors accepting lower rates in order to survive. Six year later, rates have not rebounded with markets. Everyone took a hit, but some say the hardest hit were BC’s logging contractors.
 
Market improvements and growing demand for forest products has led to significant profits for the major licensees in recent years.  Western Forest Products reported 2013 EBITDA (adjusted) of $129 million or an estimated $24 per cubic metre of log processed and sold. The trend continued into 2014 and Interfor saw similar results, with an estimated $19 per cubic metre of log processed and sold.
 
For coastal forest contactors, however, the story is much different.  Research done in late 2013 shows more than 25 logging contractors had to seek insolvency protection and/or were forced into bankruptcy in the last few years. More than 10 companies faced rate mediation or arbitration as a result of an inability to negotiate improved rates for work with the large tenure holders.  Both trends have continued into 2014.
 
Logging contractors employ a significant number of people in coastal communities and will need to hire many more as workers retire. If they cannot afford to hire and train people, it puts the entire strategy to attract workers and the industry as a whole at risk.
 
So what is really going on here? Many believe that the core of the issue rests with the coastal restructure in 2003 which allowed consolidation of licensees’ operations. It created an unequal playing field when it comes to contract rate negotiation because there are simply fewer companies with which to do business and those who control the resource are successfully keeping rates artificially low. 
 
A case in point is the unfortunate circumstances of Malaspina Enterprises, an otherwise hard working coastal contractor that was forced to seek insolvency protection and make a proposal to its creditors to keep from going bankrupt in the spring of 2014.  
 
In the Notice of Proposal to Creditors for Malaspina Enterprises it was stated by the trustee that: “The company began experiencing financial difficulty in 2008 with the decline of the forest industry in British Columbia. During that time, logging contractor rates plummeted as contractors struggled to obtain work and started to underbid jobs. Low bidding, high labour and operating costs have led to declining gross margins and negative cash flow. Although the company continued operating, they remained unprofitable for the last 4 years.” 
 
The Notice went on to detail the 49 unsecured debtors that were owed $2.5 million accrued by Malaspina, many of which were local community businesses that tried to support the Malaspina as it struggled with low rates.  A community-based traffic control firm, a wire rope firm, other logging contractors, equipment suppliers, fuel suppliers, tug boat service providers, truckers, an auto repair shop and a crane company all had to pay a price as the eventual settlement proposal agreed to by the debtors did not cover all debts.  Some were paid as little as $0.12 per dollar.
 
And there are similar stories across the coast.  Kip Brown Trucking’s low rate driven insolvency ($1.45 million in unsecured debts to 45 creditors) was compounded as noted by the trustee since: “In 2010 fuel prices soared and contracts the company previously bid on were non-negotiable for increasing fuel costs”. Clayoquot Forest Management Ltd. in their Notice of Proposal to Creditors owed close to $1.6 million to 51 creditors and Cold Stone Logging Ltd in their proposal listed 93 creditors who were owed $1.5 million. 
 
Upon reflection, one might suggest that  the continued use of contractors in this poor financial situation effectively transferred wealth from the contractors and small community businesses that tried to support the contractors to the major licence holders that used the contractor services. We now know many community-based businesses provided credit as they endeavoured to operate with low rates, only to get burned in the end.
 
To make matters worse, the licensees continue to try impose these types of rates on the remaining contractors by suggesting that they are the prevailing “market rate.”  One has to ask if rates that assume the need for ongoing losses that are inevitably borne by local community businesses via insolvency, should really reflect BC’s logging “market.”
 
Should we as a community be supportive of rates for work that will inevitably lead to contractor insolvency, to reflect “the market” and that all contractors should accept them?  If so, then it means that we must also accept that the contractors, and by extension the small community businesses who are inevitably damaged when they are caught in an insolvency proposal, will be burdened with funding licensee operations.

 

Utilization of public natural resources to create economic opportunities for the people of British Columbia should not be limited to those who achieve control of the resource.  It is a reasonable premise to suggest that there should be balance in the economic benefits that flow from provincial natural resource use and that the regulatory and operating environment that frames business operations should reflect this. 
 
As the TLA approaches its 75th anniversary of advocating for loggers issues, we can be sure that our members will adapt and survive in an effort to protect the personal investments they have in their companies. 
 
Without change to rates, however, the framework within which they are negotiated in the logging sector or the insolvency process that allows continued operation of insolvent companies after their debts have been absorbed by community businesses, it is now predicted that there will not be enough loggers to deliver logs, a trend already being acknowledged in the BC Interior by some licensees and for the same reasons. As the super cycle approaches, the entire forest industry may be at risk.
 
The TLA has long been an advocate for loggers and community-based business. All community-based businesses that support the logging sector should, however, be cautious when you are asked to extend credit to a logging contractor these days. Ask if they have been insolvent in the past (an indicator of the impact of low rates) and confirm for yourself the likelihood of you being paid.  The evidence to the contrary is mounting as low rates force more contractors to struggle. 

This is an edited version of a feature article, Logging Rate Negotiations: When David Meets Goliath which ran in Truck LoggerBC, Fall 2014