A leaked briefing by Victoria's Department of Treasury and Finance to the former Napthine government says East Gippsland logging is being cross-subsidised by profitable harvesting in the state's Central Highlands.
The Highlands logging has come under growing public attention because of the impact it has on the critically endangered Leadbeater's possum.
To address the problems in East Gippsland, the briefing canvasses different options such as the state government ending logging in the region; continuing with business as usual despite the drag on the profitability of the state-owned timber company VicForests; or developing a new business model with less logging, though Treasury was unsure if that would be feasible.
It also floats the idea of the government subsidising VicForests to continue East Gippsland logging. A separate internal VicForests corporate plan for 2013-14 to 2015-16 characterises the last option as treating logging operations in East Gippsland as a "Community Service Obligation."
The Treasury brief says VicForests had undertaken to provide the former government with options to address the problems.
YEARS OF DECLINE
The East Gippsland logging industry has been under significant financial pressure over the last decade. Mills have closed, jobs have dried up and the major buyer of woodchipping logs ended its contract last year.
"VicForests states its East Gippsland business is not commercially viable, mainly due to timber quality, access and economy of scale issues," the briefing says.
VicForests general manager for planning, Nathan Trushell, confirmed East Gippsland logging is not currently profitable, but recent work had improved the situation from the $5.5 million loss expected in 2013-14. He blamed the financial problems on significant reductions in the available resource.
"[East Gippsland] operations are expected to cost approximately $1 million this year with this expense covered by profitable operations elsewhere in the state," he said.
Mr Trushell said VicForests was reviewing the business model for East Gippsland operations beyond current contracts that end in 2017.
A spokeswoman for Agriculture Minister Jaala Pulford said no reform plans for East Gippsland had been presented to the government. She said overall VicForests had remained profitable in 2013-14 and the industry supported jobs in Melbourne and regional Victoria.
The brief says with a range of issues facing VicForests' harvest of native forests, there may be potential to transition the timber industry to plantation timber over the long-term.
But there would be issues to work through, the brief says, including the long lead-in time and the significant up-front costs of establishing plantations and harvesting them.
Logging in the Central Highlands turns a profit because of a long-term contract with the Maryvale Paper Mill run by Australia Paper.
But harvesting in the Central Highlands has attracted significant public scrutiny in recent times because of the worsening status of the Leadbeater's possum, which is Victoria's faunal emblem. A recent decision to increase the conservation status of the possum to critically endangered - one step before extinct - came with advice from the federal government's scientific advisors on threatened species that the most effective way to save the creature was to end clearfell logging in the Highlands.
VicForests' corporate plan also reveals that it came under significant pressure from Australian Paper to obtain green credentials for its operations - known as Forest Stewardship Council certification - to counter the campaign and try to win back sales for its Reflex paper brand.
Despite recent focus on the Central Highlands, logging in East Gippsland has also been heavily contested by environmentalists and scientists for decades.
The Goongerah Environment Centre recently alleged that VicForests contractors had illegally logged rainforest. A departmental inquiry found the complaint could not be conclusively determined, while the state government is now prosecuting the activists for entering a timber harvest zone.
Environment East Gippsland is also suing the state government for failing to look after threatened owl species in key logging areas.
The VicForests' internal corporate plan also suggests the company is considering selling low quality wood so it can be burnt for power or turning them into wood chips or pellets to be used in brown coal power stations. The Abbott government is currently moving to allow the burning of native timber under Australia's renewable energy target.