Risk management
The Government needs to minimise its fiscal risks in situations where participants default on payments. For example, there is the risk that a participant may clear-fell a forest and abscond, leaving the Government with the liability from carbon emissions. Standard forestry insurance will not cover the risk of the participant clear-felling and absconding. This is a key risk that the Crown wishes to cover.
The Government has the regulation-making power to prescribe requirements for a participant to provide a guarantor or insurer, or any other risk management arrangement that the Minister considers appropriate, to meet any obligations of the participant under Part 3B of the Forests Act 1949 or the forest sink covenant in the event of the participant’s default.
MAF is proposing that one method of meeting this regulatory requirement is for the covenant to contain a default risk management provision relating to the permanent retention of 5 percent of the units by the Government. In the event of liabilities, landholders would still be liable for 100 percent of the liabilities.
The proposed covenant is in Appendix 1. Risk management is covered in clause 8.1 (c).
If the Government retains a proportion of the units:
- the administrators of PFSI would not have to continually monitor risk management arrangements;
- the cost of participating in the PFSI could be lower, as the lack of certainty of the potential liability and the long-term nature of the obligation would mean that insurance, if available, would probably be expensive;
- participants would avoid the difficulty of renewal of insurance arrangements.
Participants should still manage their risks through standard forestry insurance and/or other risk management strategies.
Questions about risk management
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Contact for Enquiries
Indigenous Forestry Unit
Ministry of Agriculture and Forestry
14 Sir William Pickering Drive
PO Box 20 280
Bishopdale
Christchurch 8053
NEW ZEALAND
Tel: 64 3 943 3700
Fax: 64 3 943 3701
Te Papa Tipu Innovation Park
99 Sala Street
PO Box 1340
Rotorua
NEW ZEALAND
Tel: 64 7 921 3400
Fax: 64 7 921 3402
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