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Compensation

Current proposals to privatise public (Crown) forest lands are closely linked to the issue of appropriate compensation for timber tenure holders whose cutting rights are affected by government decisions that advance other important public values, such as park designation. For example, the recent privatisation deal between the province and MacMillan Bloedel (MB) was negotiated on the basis of MB’s alleged entitlement to multi-million dollar compensation for park creation on Vancouver Island.

Compensation Principles

Fully informed public debate about the compensation issue is essential. This debate should be informed by the following principles about compensation:

  • In Canadian law there is no absolute legal right to compensation when government interferes with property rights. Unlike the USA, property rights are not entrenched in our constitution. Legislation can take away, or provide for, entitlement to compensation at any time.

  • A government policy change about the allocation and disposition of public resources is legally very different from expropriation of residential property.

  • In Canadian law, only those rights that are "vested" and proprietary are compensable. A vested interest is one that is absolute in the sense that it does not depend on some future event such as government approvals.

  • Timber tenures such as tree farm licences (TFLs), forest licences (FLs) and timber licences are not private property or a "fee simple" interest in land. They are a licence coupled with certain rights to enter on Crown land and exploit the forest resource. TFL and FL licensees do not own the trees on the Crown land that they manage until they are cut. Furthermore, licensees have no legal right to harvest timber until all relevant government approvals are obtained.

  • Absent the statutory provisions in the Forest Act, in Canadian common law timber tenure holders’ legal entitlement to compensation is weak. It is weak because timber tenures are licences, and not private property or Crown grants, because governments are legally entitled to regulate land uses without compensating those negatively affected, and because park creation will rarely reduce the value of the tenure to zero.

The Forest Act

  • The Forest Act compensation provisions should not apply in the case of most recent park creation. For example, most recent park creation on Vancouver Island did not involve any "deletions" made under the Forest Act. Instead the province used the Park Act, which does not provide for statutory compensation.

  • The BC Forest Act, section 60 provides for limited compensation where land is "deleted" from a TFL according to a procedure outlined in the Act, if the deletion has the effect of reducing the approved annual allowable cut (AAC) for Crown lands in the licence by more than 5%. Compensation may also be paid where volume deleted from a FL or timber sale licence exceeds 5% of the AAC authorised when the licence was granted. For a timber license the relevant threshold is deletion of greater than 5% of the area described in the license.

  • Nothing in the Forest Act authorises the government to compensate licensees by giving them private land.

  • No compensation is available when the AAC of all FL holders in a timber supply

area is proportionally reduced according to a formula in the Act.

Government is not the Insurer of Licensees’ Profits

  • Even of the Forest Act provisions apply, this does not mean that the government becomes the insurer for the licensees’ profits for the next 20 to 25 years. Licensees must be compensated only for the value of what they actually lost.

  • Legally, no compensation is available for areas that could not have been logged anyway, because of visual quality objectives, environmentally sensitive areas and other Ministry of Forests policies. This is in addition to the 5% threshold.

  • In the 1992 Report of the Commission of Inquiry into Compensation for the Taking of Resource Interests, Commissioner Richard Schwindt recommended that licensees should not be compensated for uncertain future profits.

No Compensation for Lost Subsidies

  • Much of what licensees claim they should be compensated for amounts to lost government subsidies.

  • Compensation payments should assume that full market value for the trees would have been paid to the government through royalties or stumpage. When trees on Crown land are cut, the licensee must pay the government a stumpage fee. Stumpage is supposed to capture the value of the standing tree, before any effort is expended by the licensee in harvesting and processing it. Stumpage flows to the government because our forests are publicly owned. In the past, the government has often failed to recover the full value of our forests and licensees have made windfall profits. Compensation should not assume that government will fail to get full value for our forests.

How do we determine fair compensation?

In the 1992 Commissioner Richard Schwindt concluded that:

We Should Not use an income, or discounted cash flow approach to compensation in resource industries, as this approach is based on speculation about future costs, revenues and unforeseen events. For example, it requires the valuator to estimate uncertainties such as future prices, production levels, cost of production, periodic adjustments to AAC, risk of fire etc. Minor variation in assumptions about these things could result in huge distortions to fair value. Due to the nature of resource industries, if market value is the standard, valuators usually rely on this problematic approach.

We Should Use, if necessary, a cost-based or reliance approach to compensation, based on out-of-pocket costs. This approach is often used in contract law when lost profits are uncertain or speculative. The reliance approach does not include lost profits. It includes only those expenses incurred by the plaintiff as a result of entering the contract. An example in the forestry context would be the cost of a road built to log an area that is now a park. This approach ensures fair compensation by reimbursing the tenure holder for reasonable investments directly related to the area deleted, but not for speculative future profits. This approach also expects the licensee to mitigate its losses. Where out-of-pocket costs exceed lost profits (indicating that the venture would not have been profitable in the first place) they are excluded.

  • Based on information provided by the provincial government, an income

approach appears to have been used in valuing what MB "lost" through park creation on Vancouver Island.

What’s Fair?

The wording in the Forest Act – government must compensate the tenure holder "in respect of" the amount of the AAC reduction – is very vague. The Act does not set out the specific considerations that must be addressed "in respect of" the reduction. It does not specify that a market value approach must be taken. Fairness may require considerations such as the following to be taken into account:

  • These licences were assumed with full knowledge that government approval might not be forthcoming to log a particular area, and investment expectations should have reflected this.

  • No assumption should be made that government will continue to approve unsustainable cut levels.

  • Compensation payments should be reduced to reflect degradation of the forest and failure to live up to obligations by the licensee.

  • No compensation should be paid for investments in processing facilities not required by a clause in the licence, nor where the value of the investment has not actually been reduced by the AAC reductions. For example, if timber can be obtained elsewhere on the open market. Compensation should be paid for only for the depreciated value of investments.

For More Information

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