Tuesday, 31 December 2013

Missing millions and the law of triviality

Parkinson’s law of triviality briefly states says the time spent on any agenda item is inversely proportional to the sum involved.

Since 2007/08 cash deficits have been recorded in every year, totalling $1 billion, deficits that have been funded by plundering amounts set aside for other purposes.

Whilst it is commendable to boost aggregate demand by running deficits, the reality has meant Tasmania has been spending all available cash because it’s wedded to the idea that debt is undesirable while at the same time refusing to reform the unsustainable model to allow borrowings, which might provide scope to achieve more desirable economic and social outcomes in the future.

It’s a model we’ve been following for years. It’s about to reach its used by date.

Monday, 23 December 2013

A happy new year is unlikely

One lesson from the recent Federal election is that the successful campaign relied more on dissatisfaction with the incumbents than the alternative policies offered.

The State election campaign seems to be following a similar pattern.

When it comes to describing the State government’s position and prescribing alternative solutions we are yet to proceed beyond a few slogans.

The final State accounts for 2012/13 were issued at the end of October to an underwhelming response from the media and the alternative government. Talking about the State government’s financial position for a few days once a year at budget time in May is scarcely enough to run an informed discussion, a necessary prerequisite if ever we are to reverse our lemming like progress over the precipice.

Sunday, 15 December 2013

The last gasp

If ever confirmation was needed we are governed by idiots then look no further than a recommendation of the Ferguson Review of the Tasmanian Private Hardwood Plantation Estate.

After what was little more than a school project trying to determine the extent of private hardwood plantations in Tasmania and describing the problems that have arisen in unravelling the complexities of MIS schemes the review panel concluded, inter alia, we should “promote ongoing expansion of the plantation estate by revisiting incentive schemes”.


Nowhere in the entire report is there any mention of dollars.

The reviewers concluded further assistance to the plantation industry was needed without any reference to any dollar figures?

It’s not unusual to see recommendations based on false assumptions and sophist arguments leading to erroneous often predetermined conclusions but Martin Ferguson and his fellow reviewers, Tom Fisk from Private Forests Tasmania, Jan Davis from TFGA and Norm McIlfatrick, secretary of the Department of Infrastructure, Energy and Resources take the cake.

Tuesday, 10 December 2013

Forestry Tasmania's challenges

It’s a sad commentary on the democratic process that impending elections and the accompanying sloganeering and posturing actually retards discussion and implementation of sensible public policy.

Watching last week’s parliamentary hearing into Forestry Tasmania (FT) one could be excused for thinking that FT’s major problem was not the large losses incurred in 2012/13 and likely to continue into the foreseeable future, but the treatment afforded users of special species timber.

FT reckoned its loss for the year was $6.5 million. The Auditor General introduced a concept of underlying profit designed to exclude one off and capital amounts and he reckoned the loss was $12 million.

Thursday, 5 December 2013

A new forest way?

Reconstruction of the forest plantation industry continues at a lawyerly pace largely away from media glare.

What happens in the next six months or so will determine a future framework for tree plantations.

Liquidator PPB Advisory is in the final stages of terminating all Great Southern MIS schemes with the recent signing of a contract for the sale of most of the growers’ trees.

Sunday, 17 November 2013

Federal Hotels: End of a chapter

Federal Hotels’ 2012/13 financials confirm its cash flow struggles highlighted the previous year have continued and will only be resolved by a selloff of most of the regional tourist assets.

Revenue fell by $23 million to $497 million. An estimated 50% comes from gamblers.

In inflation adjusted terms revenue has shown little or no growth since 2006 as shown in the following graph.

Thursday, 31 October 2013

Airport disaster averted

The Hobart Airport consortium (TGC) has survived another year, avoiding looming disaster by injecting more equity and offloading a sizable chunk of debt. The recently released 2012/13 financial statements have revealed how consortium members, including RBF with a 49.9% interest had to find another $121 million to refinance and reduce debt. Finance costs and management fees have strangled the consortium since inception. Dividends have been conspicuously absent in the past three years and capital expenditure dependent on more borrowings.

Tuesday, 22 October 2013

Hydro Tasmania: The fall guy?

Imagine a company taking over another company with a book value of $89 million ($346 million worth of assets less $257 million worth of liabilities) and just a few weeks later the Directors revaluing the assets downwards by $227 million and the liabilities upwards by $108 million and announcing the CEO was leaving as “the time was right for a change to take the business through its next phase and to provide long-term stability to the organisation”.

That’s what happened in June 2013 when Hydro Tasmania (HT) took over the Tamar Valley Power Station from its sister company Aurora Energy and CEO Roy Adair left shortly thereafter.

Sunday, 29 September 2013

MIS scams uncovered

Legendary bank robber Willie Sutton was a clear thinking sort of guy. When quizzed as to why he robbed banks, he replied that’s where the money is.

Had he been born 80 years later Willie could well have become a MIS promoter.

The ATO’s first attempt to impose civil penalties on tax scheme promoters has seen two taxpayers, Ludekens and Van de Steeg, hauled before the courts.

The tax scheme involved Gunns’ 2006 MIS woodlot scheme. Normally the MIS company is considered to be the promoter but in this instance the scammers interposed themselves between Gunns and the grower/investors. This is what made the case slightly unusual. The complexity of the alleged scheme makes the court decisions inaccessible for a lot of readers. The first hearing in Sept/Aug of 2012 before Justice Middleton of the Federal Court who handed down his decision in March 2013 found against the ATO but before a full Federal Court, in August 2013 the ATO successfully appealed.

Tuesday, 24 September 2013

Debt money and QE:Lessons from the GFC

The Debt fallacy examined the question of government debt and the budget surplus mantra from an accountant’s perspective.... where there’s government debt there must be a corresponding asset in private hands and if governments run surpluses then the non government or private sector has no option but to run deficits implying more private borrowings or a rundown of private financial assets. Debt (specifically borrowings of the Australian government) is issued via IOUs or government securities and appears as liabilities on the Australian government’s balance sheet. Notes and coins are also government IOUs but these appear as liabilities on the Reserve Bank (RBAs) balance sheet. Since our currency is now longer convertible (into gold say) the only payment one will get for a note is another note.

The aim of this blog is to have a closer look at debt and how it reconciles with the money supply. We are constantly bombarded with concerns about ‘money printing’, but how exactly is money created and by whom? If one were to take a quick street poll as to who creates most of the money in our economy, the answer would be the government does, and it’s delivered round the community in Armaguard trucks. However it doesn’t work like that and it hasn’t for quite a while.

Sunday, 1 September 2013

The debt fallacy

It’s not only refugees who are about to swamp us but also governments debt. The need to return the federal budget to a surplus is an article of faith by every politician running for office, all of the mainstream media and most economists. It’s only a question of how quick we proceed.

Are we being told the truth, the whole truth and nothing but the truth?

The alleged problem

A recent report on tax reform by PwC one of the leading accounting firms Protecting prosperity contained a preamble about why we needed tax reform, essentially to avoid mounting government debt. Australia’s challenge was summarised as follows.

After 22 years of continuous economic growth, Australia now faces the risk of falling incomes and increasing government debt. PwC estimates that the combined annual deficits of Australian governments will rise:

·        from $27.4bn (1.9% of gross domestic product [GDP]) in 2011-12 to $213.5bn (3.5%) by 2039-40and to $583.1bn (5.9%)by 2049-50.

And our governments’ debt levels as a proportion of GDP will rise:

·        from 12.1% in 2011-12 to 32.9% by 2039-40 and to 77.9% by 2049-50.

These trends are unsustainable as the population ages. Australian governments risk not being able to meet the key needs of our community and a further slide into debt.

Sunday, 25 August 2013

Airport gravy train

As we saw with the Hobart Airport HERE, the Macquarie syndicate which included RBF with a 49.5% interest paid too much, which meant after locking in interest rates there was insufficient cash to fund capital upgrades.

Hence Abbott’s offer of a bailout.

Sydney Airport’s spare cash, $700 million was the latest annual figure (this compares to Hobart’s $20 million) was similarly diverted to financiers and managers. Were it not privatised in 2002, by now it would have tipped $1 billion into Commonwealth coffers. Michael West in The Age has posted two excellent articles on how the Macquarie privatisation model has worked to shift money to the rent seekers.

The benefits of privatisation were ostensibly to reduce public debt. Instead we have even larger amount of private debt and returns to governments diverted to rent seekers. The practice also highlights the distortion resulting from the preferential taxation treatment given to debt financing vs equity financing. It is difficult to see why, in the case of acquisition of existing assets, this is desirable public policy.

Michael West’s articles can be found HERE and HERE.



Saturday, 24 August 2013

Gay's fall from grace

Tasmanian timber baron John Gay was this morning fined $50,000 for insider trading in a Launceston court. It's been a serious fall from grace for a businessman who was once highly influential and seemed poised to build a controversial pulp mill in northern Tasmania.

Gay is the former chairman and managing director of failed Tasmanian timber company Gunns Limited. His cavalier disregard for conventions and processes culminated with the insider trading charge; he changed his plea to guilty at the 11th hour and admitted he sold 3.4 million Gunns shares based on inside information which he ought to have known would affect the share price. Gunns, once a top 100 ASX company, is the highest profile insider trader snared by the Australian Securities and Investments Corporation. And it’s not as if Gay was a back-office clerk.

Sunday, 18 August 2013

Abbott's infrastructure vision

The election ritual certainly reinforces a belief in cargo cultism. On his latest flying visit to Hobart Tony Abbott promised $38 million to help upgrade the Hobart Airport, sold as a much needed upgrade of a public facility, but in reality a bail out of a badly managed private consortium.

Friday, 26 July 2013

Ta Ann --- the supreme beggar

Ta Ann Tasmania Pty Limited (TAT), the current leading light of the Tasmanian timber industry finally revealed the extent of its accumulated losses with the belated lodgement of its 2012 annual financial report with ASIC in late June 2013.

The losses of $10.2 million on revenue of $28 million means losses now total $26.8 million. TAT doesn’t have bank borrowing. Its losses have been financed by its parent which is now owed $28.2 million.

It’s probably just a coincidence that the compensation from the IGA of $26 million resulting from the proposed reduction in wood supply from public native forests, is almost the same as the amount owed to the parent company. It was thought that some of the compensation might be used to build value adding production facilities like a plywood mill but Mr Rudd has just committed a further $7.5 million from IGA funds for that purpose.

Tuesday, 23 July 2013

FBT hysteria

Hysteria from interest groups whenever governments announce plans to trim handouts usually indicates an absence of suitable contra arguments. Government plans to change the fringe benefits tax treatment of motor vehicles is a case in point.

How dare the government contemplate reducing allowable claims for motor vehicle expenses to amounts actually incurred in earning assessable income?

It’s reminiscent of the outrage that accompanied the curtailing of entertainment expenses, which critics said would destroy the restaurant industry. Before the changes, a little imagination combined with few scruples made it possible to categorise many social engagements as deductible entertainment events when they were really just mutually agreed taxpayer-funded piss-ups.

Sunday, 30 June 2013

MIS class action makes slow progress

What did directors know and when did they know is the question at the core of class actions by grower investors against MIS companies and directors.

The ABC website carried a story this past week Class action against agribusiness digs deeper about the closing stages of a class action against failed MIS company Great Southern which has been running for months and was due to hear closing argument in July. A further 10,000 documents” have been uncovered that provide further evidence that the company misled investors.”

Sunday, 16 June 2013

Tassie's debt and liabilities : a comparison

Hardly a day goes by without some reference to the levels of public debt engulfing us all, here in Tasmania, in Australia as a whole , in Greece and the Euro zone, just about everywhere.

There’s lots of scaremongering, loads of misunderstandings, heaps of inappropriate comparisons and deliberately misleading use of figures.

Sunday, 9 June 2013

A better way

The previous posting Stop telling lies Barry tried to highlight the lack of understanding of budgetary issues confronting Tasmania, by drawing attention to a particular main stream media contribution. The website tasmaniantimes.com linked to the posting. The subsequent response, reproduced at the end of this note, certainly confirmed the lack of understanding.

Two issues arising are worth further comment.

Wednesday, 5 June 2013

Stop telling lies Barry

Bashing politicians and public servants is like shooting goldfish in a bowl. Whatever else it diverts attention away from any useful analysis of where we are and what are our future options.
Barry Prismall in The Examiner was at it again the other day 

Friday, 31 May 2013

Budget highlights structural woes

(Published in Crikey 31st May 2013)

The month of May is budget time for most jurisdictions. Most attention focuses on the Federal Budget but State Budgets help complete the fiscal mosaic.

On a State by State comparison it’s pretty easy to have a cheap shot at Tasmania for being a basket case, but adjusted for scale and rural location factors Tasmania is little different from other areas in Australia.

The budgetary problems facing Tasmania throws into stark relief the problems facing all States.

Tuesday, 28 May 2013

A brighter future?

Will Hodgman’s Plan for a Brighter Future, includes even shonkier savings than was included in last year’s Roadmap to Recovery.

Saturday, 25 May 2013

Debt deficits and the State Budget

The preoccupation with debt and deficits that afflicted much of the discussion about the Federal Budget has carried over into the discussion following the Tasmanian State Budget.

The doctrine of surpluses being good and deficits bad as adopted by both major political parties and spruiked by 95% of the main stream media means that as we are forced  from deficits to surpluses as soon as politically possible, notwithstanding any adverse economic consequences that will almost certainly widen the output gap caused by unemployed labour and capital,  each budget will be contractionary relative to its predecessor and when Government surpluses eventuate the iron law of sectoral balances means the private sector (including the overseas sector) will inevitably be in deficit.

That’s the backdrop to the Tasmanian economy as it attempts to move forward.

Thursday, 16 May 2013

Austerity pitfalls and alternatives

Austerity measures are very much part of economic policy discussions around the world, more so in Euro land but also in the US as part of the recent so called fiscal cliff stand-off.

The recent uncovering of some shoddy research by two prominent Harvard economists, Reinhart and Rogoff used to justify austerity measure has also reverberated around the economics blogsphere.

Friday, 12 April 2013

The Tasmanian Forest Gravy Train

What started as government funding to compensate for native forest areas lost to the Tasmanian timber industry has become a gravy train on a circuit returning regularly to reload before setting forth to deliver more spoils.

Sunday, 31 March 2013

Tasmania the ungovernable State

There was a touch of irony during last week’s tortuously long deliberations by Tasmania’s Upper House on the contentious Tasmanian Forests Agreement Bill when it paused for a moment to consider the Mental Health Bill. Many Tasmanians would have been happy to see the latter Bill amended to make Parliament a proscribed organisation and closed.

Friday, 22 March 2013

The MIS phoenix

The MIS phoenix has risen.

AgriWealth’s 2012 Softwood Timber Project demonstrates memories are indeed short. The MIS industry pronounced dead after the disastrous insolvencies of Timbercorp, Great Southern, Willmott Forests, FEA and Gunns still has a pulse.

It is sometimes said we aren't predisposed to philanthropy but AgriWealth's latest offering suggests it too is alive and well. There is no other reason than philanthropy for becoming a AgriWealth grower. The massive upfront fees mean there is little chance of return on a before tax basis.

The tax driven Project differs from failed MISs in that it relies on Div 394 of the Tax Act which was enacted to overcome increasing problems with MISs prior to 2008.

But Div 394 has made it worse as prepaid expenses, some not due for 26 years are allowable deductions.

The upfront fees due to the loading of all prepaid expenses are ten times those charged by the old MIS projects.

Policy makers have taken their eyes of the ball probably thinking the MIS industry is dead.

Alas it’s not dead, as AgriWealth uses its cash to once again distort the pattern of agriculture in areas such as the beautiful Tallangatta Valley in northern Victoria as described in a recent Weekly Times article.

A closer look at the AgriWealth project follows but first a quick overview of how MISs used to operate, the issues and pitfalls.

Tuesday, 5 March 2013

How your taxes bailed out an insolvent Gunns

The federal election scheduled for September means it's a double header over the next 12 months for Tasmanian voters, with a state election due in March 2014. That means lots of Canberra visitors, lots of promises and at least a few presents, and this might be one: according to The Weekend Australian, Julia Gillard is yet to rule out assistance to get the Tamar Valley pulp mill off the ground.

Coincidentally, Gunns' voluntary administrator also recently circulated his detailed report to creditors (Gunns planned to build the original pulp mill).

The pattern of behaviour of the Gunns Group over its last 12 months suggests it was insolvent for a while. Maybe it was insolvent as far back as August 2011, when Gillard and Premier Lara Giddings signed the inter-government agreement on forestry, promising $276 million in funding -- some of which was used to save Gunns.

Saturday, 2 March 2013

Costello's privatisation propaganda

Peter Costello’s Queensland Commission of Audit inquiry is recommending large scale privatisation of public assets especially electricity and port assets.

Something similar in Tasmania would not surprise as the ideologues in the Liberal Party ponder the possibility of majority government.

Cameron Murray who posts as Rumplestatskin on the macrobusiness.com site has a short discussion of the issues and a few interesting comments follow.

If the exercise was genuine we would see some public discussion about the merits of public debt and the financial benefits to the State from privatisation.

Would you decide to sell your business simply because you had debt, even if that business was profitable and had solid future prospects? No. The best thing is to keep the debt and the business, as the returns from the equity in the business outweigh the cost of debt.

By definition the price the government would receive for any asset sales is a price that reflects a market level of return on equity, which would surely be higher than the rate of interest on the debt that is being repaid. Thus, by definition the government is in a financially better position to own the assets.

And in Comments

All you are doing as a State is selling assets to pay debts when there is no reason to do so, and the net public financial position will be worse for it. Imagine that the government raises $10 billion from all these asset sales. If the private sector thinks these assets are worth $10 billion, they probably expect an annual return in the order of $800 million. The cost to government from $10 billion in debt is probably about $600 million. So they are making the budget position worse by $200 million per year by privatising.

Wednesday, 27 February 2013

Gunns lurches into liquidation

It was not surprising Gunns’ Voluntary Administrator recommended all companies in the Gunns group be placed in Liquidation.

The second alternative of passing control back to a Board was never a possibility as Gunns had already disclosed in August 2012 that liabilities exceeded assets and as everyone knows liabilities are rarely understated whilst the reverse is invariably true of assets.

The third alternative of a Deed of Company Arrangement to allow for an extended period of administration so that all parties could achieve a better result was never a possibility because

·        the unsecured creditors aren’t going to get anything  in an orderly administration.

·        The best chance unsecured creditors have of getting a return is if a Liquidator can successfully establish that Directors allowed Gunns to trade whilst insolvent.

·        Grower/investors need a new Responsible Entity (RE) for their MIS projects if they are to continue until harvest and this can occur even if a Liquidator is appointed.

·        If a replacement RE cannot be found for the MIS projects then the growers will vote to liquidate the schemes at the same time as companies in the Gunns Group are liquidated.

·        Grower/ investors hopes for a return may be boosted if breaches by Gunns Plantations of its RE duties can be upheld.

·        The banks’ returns are likely to diminish with every passing day so they just want to get on with the liquidation. Gunns has well and truly tested their patience and forbearance over a considerable period of time.

·        The banks as secured creditors will claw back some amounts from MIS growers if and when the schemes are liquidated for amounts owing to the RE.

·        The Gunns Group structure has been made incredibly complicated with the overlaying of 49,000 MIS growers each with a leasehold interest in land owned in some cases by Gunns and in other instances by third parties. Even if there was a will to keep the structure under Administration there is not the money.

Tuesday, 19 February 2013

Mid year report: pass or fail?

Election dates are now circled on the calendar.

The countdown has started.

The May Budgets will set the scene for some of the economic and fiscal issues that will be canvassed in both State and Federal elections.

An important lead up set of figures was released by the State Government on Friday 15th Feb via its Mid Year results for 2012/13.

The updated expected Budget outcomes for the full year 2012/13 were released in December but the latest figures are the actual figures for the six months ended 31st December 2012.

It is sometimes difficult to draw too many conclusions from six months figures. Other times warning bells sound.

Revenue and/or expenses might not necessarily be evenly spread throughout the year so one can’t be too sure what in store for the next six months.

Both the Finance Minister and the Greens Treasury spokesman have given their brief interpretation of the results.

Mr Bacon said “the Mid-Year outcome contained in the report was consistent with budget forecasts, with a Net Operating Deficit of $201.3 million, in line with the revised Budget estimate of a $326.8 million deficit.”

There’s no basis for that assertion.

He’s reading tea leaves again.

He then says “We continue to be net debt free, with a negative net debt of $212.9 million”.

That not only is a dumb thing to say, it’s deliberating misleading.

It only occurred as we shall see, because the Government spent very little on new assets, plant and equipment and equity injections into GBEs, far less than what was expected in the Budget.

A cause for celebration?

Mr Morris agrees however: “The good news here is that the state’s financial position has stabilised, we are net debt free”.

Thursday, 14 February 2013

The astonishing ineptitude of the policy elites.

Excruciating details of how the Gillard government completely failed to discharge their fiduciary duty to the Australian people by securing a higher ‘rental’ fee for our mineral resources are revealed by David Llewellyn-Smith who writes as Houses and Holes on the macrobusiness.com site  HERE

An interesting quick read about the horrendous outcomes which ensue when politicians put politics way ahead of sensible public policy.
The alternative is probably worse. Houses and Holes critiques the latest offering from the Opposition  at Abbott's Recession Risk. The last sentence says it all:

"If this speech captures the state of the nation then we are a sausage stuffed with risk, broken ideology, dated growth hopes and empty promises"

What have we done to deserve this?

Sunday, 10 February 2013

Federal Hotels: the turning point?

It is difficult to escape the conclusion Federal Hotels’ problems are largely of its own making as a consequence of the path chosen, the capital structure and dividend policy pursued.

Thursday, 7 February 2013

Something had to give

Something had to give.

In a capital hungry business with falling profits, ageing assets and demanding shareholders, something had to give.

Monday, 4 February 2013

Tassie's unfunded superannuation liability

The state’s largest liability and the least understood is the liability for unfunded superannuation.

The liability arises because the employer (ie the State and its associated entities) does not set aside employer contributions as is customary for most superannuation schemes.

Instead the employer pays amounts as and when the benefits fall due, upon retirement or resignation, either in a lump sum or as a pension.

Wednesday, 30 January 2013

Tassie's balance sheet Part 3

The State’s net debt?

What is it?

Apart from being a measure  thrown into Government media releases whenever convenient?

Premier Giddings was at it again the other day reassuring us that the $15 million to be spent at Blundstone Arena (nee Bellerive Oval) would be responsible adding it “is not until the 2014-15 year after we've come out of net debt”.

Let’s have a look again at the latest Treasurer’s Annual Report for 2011/12.

Sunday, 20 January 2013

Tassie's balance sheet Part 2

We are often assured that the State Government itself is net debt free.

Is this of any comfort when Governments enterprises are loaded with debt?

Any discussion about net debt or the broader measure of net financial liabilities is pointless without looking at both the Government itself and all its subsidiaries.

Tassie's balance sheet Part 1

On matters of financial management of the State’s finances almost all attention focuses on the Budget circus now programmed for May each year.

The political and media cycle ignores the Treasurer’s Annual Financial Report (TAFR) tabled in October each year. Whereas the Budget contains Estimated Outcomes for the almost completed year, the TAFR contains the actuals for both the General Government (GG) and the Total State Sector (TSS) which includes the GG plus all wholly owned subsidiaries – the Government Business Enterprises (GBEs) and State Owned Corporations (SOCs).

The TAFR is the equivalent of a listed company’s Annual Report which at least is scrutinised by shareholders at an AGM. No such attention is given to the TAFR which is a pity because it a comprehensive outline of the State’s situation based on actuals, free of the hype and nonsense that accompanies Budget papers.

Whilst spasmodic attention is given to GBEs and SOCs, there is a noticeable lack of understanding of the financial role these entities play as part of the TSS and their life saving contribution to their parent company, the GG.

The aim of this and the next few posts is to have a closer look at the Balance Sheets for both GG and TSS....... the statement of assets and liabilities for both......  and try to explain the important bits........ cash, loans, net debt and net financial liabilities and the fiscal strategy measures that relate to the balance sheet.

After all accounting is just a series of plusses and minuses.