Heyfield timber mill: rarely a good idea for government to buy a failing business

Friday, July 7, 2017

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Environmental concerns, planning for sustainable yield, uncertainty around future supply and myriad other inputs are weighed up in assigning timber volumes to private firms. Joe Armao

The Victorian government this week took the unusual step of buying the Australian Sustainable Hardwoods mill in Heyfield, east Gippsland.

The reality of our times is one in which many firms in many industries face uncertain and perilous futures. The role of government is to ensure the necessary corrections and support needed by the economy as a whole, and to navigate the uncertain future we collectively face.

In some cases, where markets fail, government intervention, and even ownership, is the optimal solution. But government intervention in the Heyfield mill case appears to be driven more by political reality (the case for "saving" 250 jobs) than economic reasoning.

It seem the Heyfield mill was deemed economically unviable due to a failure to secure sufficient timber supply from VicForests.

More likely, however, is that the problem is not one of market distortions, but the inevitable wind of change that is rendering some firms (and indeed entire industries of today) defunct. Joe Armao, Fairfax Media.

Environmental concerns, planning for sustainable yield, uncertainty around future supply and myriad other inputs are weighed up in assigning timber volumes to private firms. If there is a distortion here, which results in a market failure – rendering an otherwise viable firm uncompetitive – it's almost surely a product of government policy.

The best approach in such a setting would be to correct the policy: that is the process by which timber supply to the mills is evaluated, rather than for government to get into the business of owning and operating timber mills.

More likely, however, is that the problem is not one of market distortions, but the inevitable wind of change that is rendering some firms (and indeed entire industries of today) defunct.

The decision to intervene to "protect jobs" is particularly troubling as it puts the government in the invidious position of having to pick winners and losers in the changing business landscape.

Which failing firms should be rescued and which should be allowed to die? Is the calculus a function of the size of the firm? The impact its survival or failure has on the broader community? The cost associated with the implicit subsidy required for its continued survival?

Which failing firms should be rescued and which should be allowed to die? Justin McManus

Sometimes the value to society from supporting some industries, as the landscape changes, is worthwhile. But such decisions should be made after careful economic analysis and consideration and only go ahead if they satisfy the premise that competitive markets are failing and the cost of government intervention is warranted. In short, public policy should be set in a way that sees the forest for the trees.

by Vivek Chaudhri

Associate Professor Vivek Chaudhri is the academic director of Executive MBA programs at Melbourne Business School

 

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