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Case Study: Toropapa Joint Venture

Background

The Toropapa Joint Venture was founded by Te Awahohonu Forest Trust, GMO Renewable Resources, and Rayonier Limited.

Te Awahohonu Forest Trust is an Ahu Whenua Trust governed under Te Ture Whenua Māori Act 1993. The Trust was established in 1971 for forestry development, but remaining developed farmland was vested back into the Trust in 1987. When the Trust was first established there were 650 owners. This has now grown to approximately 850.

GMO Renewable Resources is a division of a globally diversified Investment Manager with approximately US $100 billion under management. The Head Office is in Boston, and clients include corporate pension funds, institutional investors and university endowment funds.

Rayonier Limited is a large USA forestry company, which is a global supplier of timber, performance fibres and wood products with customers in more than 50 countries. Its strategic focus and resources are concentrated on two global, non-integrated businesses: Performance Fibres and Timber, and Real Estate. Rayonier also owns and manages forests and markets timber. Rayonier is thought to be the third largest plantation forest owner in Aotearoa, according to the New Zealand Forest Owners Association. The emphasis of the Joint Venture is to maximise the commercial return from the radiata forest and to ensure maximum protection is afforded to the land and that all cultural and wāhi tapu values are strictly observed.

Structure Diagram

The Joint Venture

Te Awahohonu Forest, approximately 70 km northwest of Napier, was planted in pinus radiata by the Ministry of Forestry in conjunction with the Department of Māori Affairs in the 1970's and 1980's. It was offered back to the Trust to purchase in the mid-1990's.

The land that the forest was planted on was subject to a lease agreement with the Crown whereby the Te Awahohonu Forest Trust owned the land and was also the beneficial owner of a 25% interest in the pinus radiata plantation. The Trustees will always preserve the land as freehold to ensure they control access rights. Thus, to own the forest meant obtaining a surrender of the lease, then buying the Crown's interest in the timber.

The process for determining the Toropapa Joint Venture commenced with the Trust employing a forestry consultant to report on the key factors for deciding on the venture. This report covered, among other things, the assets it had in forestry, the resources available to manage those assets, the skills it had within the existing organisation, a forestry risk profile, risk management, the structure needed to manage a forestry harvest, access to the marketplace, experience in managing harvesting crews and the terrain the trees were to be harvested on.

The Trust used consultants to search for potential joint venture partners both nationally and internationally and specified a set of criteria for the potential partners.

After interviewing several parties, the Trust chose those that they felt best fitted to the criteria. The chosen partners both had extensive relevant experience. Rayonier could provide harvesting and marketing expertise and was able to access harvesting crews and the international market for radiata timber, either as a stand-alone venture, or by mixing sales with other forests they manage.

GMO has a long history in forestry investment. It offered insight into forestry returns and cycles. It has extensive contact with forestry harvesting and marketing managers and provides access to an extensive database which serves as a comparative analysis tool.

Extensive due diligence was carried out by Te Awahohonu Trust. It assessed the volume of timber, the future cash flows, the likely internal rate of return and the different methods of harvesting and marketing. GMO and Rayonier then carried out a similar exercise independently of the Trust. GMO and Rayonier's entry price was similar to that which the Trust's consultants had assessed. With the Trust's criteria on the table, and acceptable to GMO and Rayonier, the Trust on-sold a 50% interest in the forest and the project commenced.

The Trust carried out a number of consultation exercises before entering into the Toropapa Joint Venture. It consulted with its owners, bankers and solicitors and provided a report-back to owners and beneficiaries on the independent forestry consultant's review. The final step in the process was ensuring that proper legal documentation was prepared to protect the Trust and the other parties.

Toropapa is an unincorporated joint venture. It is governed by a comprehensive Joint Venture document that all parties have signed. This agreement sets out the processes and the safeguards the parties require, such as all individual parties being responsible for their own debt only.

Business Environment

The Trust sold an undivided 50% share of its interest in Te Awahohonu Forest's pinus radiata plantation to GMO and Rayonier and granted them both a forestry right in respect of that 50% share in the trees. GMO and Rayonier then formed an unincorporated joint venture with the Trust for the purpose of harvesting and marketing the trees. This joint venture included the acquisition of 5,537 hectares of forestry rights.

Rayonier has been appointed to manage the harvesting and marketing of forest products and associated administration activities for the first cropharvest. All other management, forest re-establishment, and future administration of the second crop will be performed by the Trust.

There are no New Zealand legislative encumbrances that currently hamper opportunity, but there are costs to comply with some overseas customer's requirements, such as cleaning shipments of wood for certain destinations.

Governance

The Joint Venture Agreement provides for six members on the Toropapa Board on a rotational basis for membership and the chairmanship. Six members is seen as optimal.

Each party to Toropapa has a right under the Agreement to appoint its own representatives. The Trust appoints three representatives, GMO appoints two and Rayonier appoints one. The process of appointment used to identify the skill-mix and representation includes interviewing the potential governors to assess their suitability and skills.

The Trust representatives consist of a Forestry Consultant, a Chartered Accountant and the Chairman of Te Awahohonu Trust. These appointments have brought a balanced management set and a strong sense of cultural value and land protection. The Trust also appoints an independent Forestry Consultant to report annually on the Joint Venture results.

GMO and Rayonier are governors with strong forest industry experience in marketing, harvesting and operations. They also have established networks in other forestry organisations. Although there is an induction programme for new governors, to date there have been no changes the Trust's  representatives to the Partnership. The main strategy is to ensure the governors broaden their particular skill base by getting to know the industry and the business of harvesting and marketing, attending seminars on forestry matters, reading forestry papers, and discussing forestry practices with other forestry owners and consultants.

The role of the Board is set out in the Joint Venture Agreement and is to essentially maximise the returns from the forest and to comply with all legislation relevant to the land, harvesting, with local authority requirements and to protect the land and cultural values. These aspects were set by discussion prior to signing the Joint Venture Agreement.

A formalised succession plan has not been considered necessary, but would be quickly implemented if the need arose. By having six representatives, there is sufficient depth to maintain the Joint Venture progress until a replacement is made.

The Board reviews itself quarterly and the three parent organisations in turn review the performance of their representatives. The performance is reviewed against marketplace benchmarks and industry key performance indicators to ensure that the Manager is leading the business appropriately.Information is provided in monthly and quarterly reports produced by the Harvesting & Marketing Manager. The reports include information on the marketplace and the market prices for the different types of timber being grown. The Board discusses the reports extensively and decides on increases or decreases to the forecast harvest volume.

Strategic Thinking

Economic planning is conducted by setting one and five-year business plans. The Partnership considers itself to be well informed and experienced to make the best decisions, and flexible enough to recognise when a change is required to stay on track.

The annual planning process is completed three months before the renewal of the business plan. The Harvesting & Marketing Manager supplies a draft of factors impacting upon the industry and the harvest. Recommendations based on these matters, and to maximise income in the environment, are discussed, modifications made, and the annual plan is signed off by the Board.

All areas of Toropapa are subject to contractual arrangements. These include:

• a Forestry Right between all parties;
• a Harvesting and Marketing Agreement between Toropapa and the Harvesting and Marketing Managers; and
• an Annual Management Plan forecasting productivity.

Risk Management

The initial internal analysis undertaken by the Trust, provided by forestry consultants, identified the strengths and weaknesses in the industry. The analysis included measurement of the prospective outcomes from this forest against the internal rate of return of general forestry ventures. This proved Toropapa to be a viable venture.

The external analysis carried out independently by all three partners prior to entering the Joint Venture indicated a number of factors required within the Joint Venture Agreement. These factors included:

• an analysis of the industry profile;
• triple bottom line reporting;
• compatibility and governance sharing to ensure Te Awahohonu Trust's voice was not lost or relegated to a backseat role.

These processes have assisted Toropapa to effectively manage any risks. For example, one criterion of the Partnership is that Te Awahohonu must always retain 50% shareholding, enough to retain control without incurring additional responsibility. The Joint Venture Agreement also contains safeguards for all parties, these include:

• the right to terminate the Joint Venture;
• an obligation upon members to first offer their shares to the other members in the event one party wishes to sell;
• no assignment of the parties' interests to others;
• restrictions on the capital items that can be purchased; and
• opportunities to discuss changes to the management plan.

Conflicts of interest are managed at the Board level. The joint venture requires each party to inform the Board of its position if it could come into conflict with Toropapa, and those involved withdraw from participation in the Board's discussion. A conflict of interest register is not kept.

Risk management policies require that up-to-date information be communicated as risk profiles can change. It is the Chairman's responsibility tocall the Board together to make risk related decisions. A sensitivity analysis will usually trigger an exception report giving the increased risk if a conflict eventuates.

The Board is provided with monthly reports on health and safety issues, near or actual incidents and audits on a regular basis. Regular training is provided for all working in the industry. An environmental audit is undertaken through inspection by the Regional Council.

Each individual Joint Venture Partner is responsible for its own insurance. Recommendations from forestry consultants and insurers enable Te Awahohonu Trust to make informed decisions regarding insurance needs.

The Joint Venture Agreement stipulates that there be recognition that the forest contains areas of cultural significance. All workers are required to be aware that there are sacred sites and to respect and report any that are discovered to enable an appropriate ceremony to be conducted.

Operations

Toropapa employs business contractors who employ their own staff. The forest itself employs about 35 people in this manner. To meet the expectations of the Board, all contractors are required to follow the management plan. This includes measuring performance against the management plan, ensuring the Trust's cultural criteria are observed, and options to change the contractors if performance slips. Measurement is by way of quarterly reporting against forecast, an annual audit, and a comparison of performance against the strategic plan. Contractors who tender for work must provide a health and safety policy, a work plan, and need to convince the Harvest Manager that they can add value at a competitive price.

Toropapa has no CEO. However, the Chairman of the Board performs a pseudo-CEO role. The Harvesting and Marketing Manager reports directly to the Board. Operational policy is set in the Annual Plan. The operational policy is adopted by a minute and is reviewed annually.

If a conflict arises between management and governance, the organisation resolves it by getting statements from all parties involved, considering these and consulting where necessary. The Board then issues a decision. Once the Board has made a decision, it is communicated to the parties involved and further opportunity is given to those involved to make statements before the issue is closed.