Friday, 17 November 2017

Forestry Tasmania's demise in detail


Forestry Tasmania’s slide from its peak in 2004 has seen it lose $1 billion. Almost half have been cash losses. The rest have resulted from the loss in value of the trees entrusted to it. FT entered commercial arrangements with customers, particularly major customer Gunns, which effectively forfeited its commercial advantages as a monopoly supplier. As a consequence it fortunes closely tracked those of the industry particularly Gunns, and since the latter’s demise has only survived courtesy of government patronage.

After numerous inquiries, reports and years of procrastination, the government appointed Treasury Secretary to the Board in May 2015 to act as de facto Voluntary Administrator to see if FT could be resuscitated. An interim report was presented to government on 29th September 2016.His tenure lasted until February 2017, FT was restructured as much as its political masters would allow before being handed back for directors to run under the new name of Sustainable Timbers Tasmania (STT).

The following is a more detailed report on FT’s demise following the period of administration. It covers the events leading to insolvency, the actions taken and the prospects for the future.



CONTENTS

The 2016/17 year

The plantation sale

The superannuation transfer

Overview since 2004

Other assistance to the forest industry

The Ta Ann deception

Insolvency signs

Problems with the current model

The future









The 2016/17 year

The biggest thing to happen to Forestry Tasmania (FT) in the past year was the change of name to Sustainable Timbers Tasmania (STT). Apart from that it was the same old story. Bleeding cash. The government tipped in $14 million. A further $14 million was borrowed from Tascorp. Nevertheless cash went backwards by $1 million.

If STT was really more sustainable it would’ve been evident from the figures. It wasn’t. Revenue may have risen by $14 million but the costs of harvesting and carting the timber to the mill door/wharf were up by $17 million. Not a sign of the turnaround suggested in the Minister’s Media Release which accompanied the release of STT’s annual report.

Wood production was roughly the same in quantity terms. Revenue rose because FT added a little more value by exporting more woodchips than the previous year, both native forests and plantation woodchips. But this won’t continue. STT has said it will quit the export game, and all the chippable plantations have just been sold. Those remaining will be held for sawlog production, more specifically supplied to Ta Ann at a loss in a few years time to meet contractual commitments.

In 2016/17 FT clearfelled 476 hectares of plantations but only 64 hectares proceeded to a second rotation and this was as a result of coppicing where stumps start sending out new shoots.

The Minister mentioned a $41 million turnaround from the previous year. The fact the bottom line still showed a loss was ignored. Half of reduced loss arose from changes in the value of unfunded super liability. But most of this was in respect of ex employees whose liabilities were transferred to the government during the year. Writing back the liability before transfer and including the write back amount in the profit/loss calculation is completely misleading. No cash changed hands.The transfer was done by book entry. Had the book entry occurred at the beginning of the year on 1st July there would have been no effect on profit/loss. Timing is everything.

Half of the plantation proceeds of $60 million will be needed to pay off the trading debt built up over the past two years while FT has been trying to sell the plantations. A further $21 million received as part of the TFA and the TCFA processes but spent elsewhere to help FT keep the wolf from the door, will need to be found when the time comes to spend the amount as intended, for thinning plantations destined for Ta Ann mill door. There won’t be much cash left to fund the future.

The plantation sale

The Minister has been adamant the sale price of $60 million for 29,000 hectares is a good deal, and has been at pains to point out that the land hasn’t been sold, only the timber.

But that’s grossly misleading.

What has been sold is a 99 year forestry right. That gives the rights owner virtually all the same rights as a freehold owner occupying a property. The rights owner will pay the rates and use the land for 99 years to grow trees. It’s the same as owning the land on a freehold basis and growing trees. No rent is payable. If anything it’s similar to a situation where a piece of freehold land, may, as a result of a deceased person’s last will and testament, give a life interest to, let’s say, a surviving spouse, but the remainder interest to the kids. Depending on the age of the surviving spouse the life interest may be worth say 10% of the land’s value, with the remainder interest being worth 90%. In the case of a 99 year forestry right, it would be safe to say the rights holder’s interest in the freehold land would be pretty close to 100% with the balance, the remainder interest which will revert in 99 years time owned by us, the people of Tasmania. An actuary could calculate the exact %.

Hence for all intents and purposes a very large interest in freehold land has been sold. The balance of the sale price represents the standing timber. At a rough guess, the split between land and trees is likely to be 50:50. In other words $1,000 per hectare for the land and $1,000 per hectare for the trees. On average there may have been say 140 tonnes of standing timber per hectare at sale date which puts the price of the trees at $7 per tonne. That appears to be the going rate. When Gunns’ plantations were sold by KordaMentha to New Forests in April 2014, part of the sale price had to be remitted to the PPB Advisory as Liquidator for Gunns’ MIS schemes because it was agreed that whilst Gunns owned the land some of the trees belonged to the MIS growers. As a result $40.5 million was paid to PPB for 54,000 hectares of trees. That’s about $750 per hectare for the trees. That’s not much different to the price of the current FT plantation sale to Global Forest Partners as per the previous paragraph, given an extra couple of year’s growth.

So when the Minister says he sold the trees for $2,000 per hectare he’s stretching things a fair bit. He sold the trees for about $1,000 per hectare and sold a 99 year interest in freehold land for $1,000 per hectare. There is no return on the land for 99 years. It is effectively a disposal. 

Only 4,100 hectares of land was owned by FT, the rest by the Crown. Hence when the Minister hinted that $15 million of the $60 million sale price would be paid into government coffers to fund health and education, it wasn’t a sign of FT’s generosity, rather a reflection of the reality that the land that was ‘sold’ belonged to the Crown not FT, and for FT to retain any proceeds would be yet another subsidy to FT, again violating the government’s iron clad commitment not to subsidise FT.

Of the plantations that were sold about 18,000 hectares were planted using grants from Helsham RFA and TCFA funding programs. FT has claimed to have lost the historical cost information, but the best guess is that the largely unpruned and unthinned plantations cost about $3,000 per hectare to establish. That makes the loss on sale of $2,000 per hectare.

The balance of 10,800 hectares sold were from the 14,000 hectares of Gunns’ MIS schemes established on FT/Crown land. These all reverted to FT in September 2016.  How much was paid to finally settle with Gunns’ Liquidator is not known but is not thought to be much. There doesn’t appear to be any large outgoings for trees in the 2016/17 year that can’t be otherwise explained.

The superannuation transfer

The Government agreed to take over most of FT’s unfunded liability.

Over the years FT had failed to set aside a single $ in employer contributions for members of the defined benefit scheme, and that includes amounts payable as a consequence of the Superannuation Guarantee Levy which is currently 9.25% of wages.

The State government and all government businesses don’t set aside super for members of the defined benefits scheme as they are required to do with all the other employees who are members of the more common accumulation schemes. They defer any payments of amounts due for as long as possible. We are told how the government has righted the fiscal ship. But they still don’t set aside any super for current employees if they’re members of the old defined benefits scheme. The burden is instead shifted to the future. The amount of the unfunded liability bounces around a bit depending what assumptions are made about interest rates used to convert future expected payments once members retire, into a single lump sum liability that appears in the financial statements.  The actual amounts due in the future are reasonably easy to estimate and are reasonably stable. It’s just that converting the future amounts into a single lump sum leads to variations each year in the liability which appears in the financials. The changes in the lump sum don’t impact on sustainability as the Minister appears to think.

Actually there hasn’t been a year in the last ten when FT has had enough left over from chopping down trees to pay super for current employees let alone the growing amounts due in respect on the increasing number of ex employees drawing pensions. Crunch time. The government agreed to take over the liability of all ex employees. No cash changed hands. A large chunk of FT’s liability was shifted to the government. It was just a book entry.

As mentioned above, before the transfer FT wrote back the liability and booked the write down as profit. Had the transfer occurred at the beginning of the year on 1st July there would have been no effect on profit/loss. Taking over the liability was a de facto equity contribution into FT. Imagine if you agree to take aver someone’s debts, you are in effect lending them money. In this instance the chance of FT repaying the loan is somewhere between Buckley’s and bugger-all so it becomes an equity injection into FT.

Overview since 2004

Since its peak in 2004 FT has lost over $1 billion from forestry activities.

During that time cash outlays were $439 million more than trading revenue. Furthermore the value of FT’s forest estate fell by over $600 million. Add the two figures together give the aggregate loss over the last 13 years of $1 billion. Equal to $40 for each tonne harvested.

Cash operating expenses exceeded trading revenue by $195 million. This doesn’t include any amounts spent on roads and plant needed to operate.

Property and plant outlays ($33 million) and roads ($105 million) added nothing to FT’s asset base.  Nor did spending on plantations of $106 million. These need to be added to ordinary trading losses of $195 million to calculate FT’s cash losses at $439 million over the last 13 years.

When the current plantation sale is completed there will be just over 20,000 hectares of plantations, roughly the same at there were back in 2004. Hence the $106 million spent on plantations since then had nil effect on the size of the plantation estate.

The book value of property plant and equipment too hasn’t changed. The $33 million spent over the period is a net amount, in other words new property and plant less the proceeds of any old stuff sold. The amount spent forms part of the cash loss.

Spending on new roads principally to harvest native forests is treated as capital. In other words it is not an expense to be offset against revenue from native forests but a capital outlay with supposed enduring benefits. Roads together with land and trees are the components of a forest estate. Over the years the way the estate has been valued has varied. This is not merely an esoteric accounting question. If the value of the forest keeps falling then any loss of value need to be taken into account when assessing the profitability of forestry operations.

A few years ago it was decided to value the estate as a whole based on an estimate of future net income and then split the value between the three components, land, roads and trees. Land was allocated a zero value. Roads were allocated their book value, in other words the cost of the roads originally capitalised, less a small amount of depreciation. The residual amount became the value of the trees.

Following an overall downward trend in the value of the forest estate, it wasn’t long before roads were worth more than trees which meant driving on roads over worthless land to harvest trees valued less than the roads themselves.

Why bother making roads to harvest trees worth less than the costs of the roads?

 Well, one of the reasons you do it is once there, if you ignore the costs of getting there, and you turn a blind eye to the loss of any environmental values that may attach to the forested land, there may be a bit of cash to be made. Cash, not profit.  Most foresters confuse cash with profits, A lot of people do.

 That’s the native forest dilemma in a nutshell.

To spare embarrassment FT adopted a different basis for valuing the road component of a forest estate. Road tolls are believed to form part of mill door prices. The income earned by an asset is the usual basis for valuing that asset. Forests are an example. Road tolls were used to determine the value of the roads. The meagre road tolls have meant the value of roads has suffered massive write downs. The $105 million spent on roads since 2004 is therefore included as part of the overall cash loss.

Then there are non-cash losses, often called book losses, principally the fall in the value of the forest estate. This has occurred because a lot of trees have been chopped down and sold, some shifted into reserves, but mainly because, as maintenance and harvest costs rise faster than prices for forest products, the value of remaining forests consequently falls. Over the last 13 years the value of FT’s forests has fallen by over $600 million. Trees entrusted to FT are now worth a fraction of their former value.

So how did FT cover its cash losses?

Governments have provided cash of $331 million since 2004. Assets sales contributed a further $165 million.

Grants pursuant to the Tasmanian Community Forest Agreement, mainly capital grants for plantations from 2005 to 2010 totalled $146 million. Other operating grants of $85 million principally from the more recent IGA process were received. The previous Labor government gave further operating grants of $38 million described as deficit funding and $20 million as a lump for Community Service Obligation reimbursement. Finally $42 million was contributed as equity, the most recent being the $30 million by the Hodgman Government obtained from a raid on Tas Networks. All up that’s $331 million in cash from governments since 2004.

Asset sales of $165 million include the $78 million for the remaining 50 per cent interest in the State’s softwood plantations sold in 2012 and $60 million from the recent plantation hardwood sale. In addition an investment account of over $20 million which had been set aside to help fund future superannuation liabilities was spent on survival when the going got tough. This has been included here as an asset sale.

Total cash received, other than from ordinary trading, has therefore been $496 million. That’s just the cash.That’s a lot of money in the context of the Tasmanian economy.

The State ‘contributed’ a further $113 million by taking over the unfunded superannuation liabilities of past employees. FT was unable to set aside super for existing employees let alone the growing number of ex employees drawing pensions.

For a government which claimed it would end public subsidies to FT, the Hodgman government has actually provided $161 million in three years.

Then again the so called transition has been grossly mis-characterised. It’s more of a wind-up than a rebuild. Not quite the full wind-up. A Clayton’s rebuild is possibly the best description. Or maybe a Clayton’s wind-up? The jury’s still out. Years of indecision, intractable self interest and institutional inertia left no alternative but to sell assets to cover the debts that accrued whilst everyone prevaricated.  It was a pre-ordained outcome. The legacy of bad management over a long period. Even so it’s doubtful whether Harry Houdini could have survived the challenges left by Bob Gordon.

Other assistance to the forest industry

The government grant gravy train actually started back in 1994/95 with $12 million received by FT as part of the Helsham agreement. A further $71 million was received from 1997 to 2000 as part of the RFA as compensation for increasing forests in reserves.  FT always bellyached that the compensation amounts weren’t sufficient but if you’re harvesting timber at a loss it is hardly an overwhelming proposition.  In any event FT failed to adapt to a changing world. Harvest and cartage costs would have increased as a consequence, not immediately but gradually. However prices, exchange rates and Gunns’ trials and tribulations were more significant factors which squeezed margins and impacted FT.

Adding the pre 2004 assistance from governments listed in the last paragraph to the previously detailed post 2004 contributions, makes the total cash and non cash contributions from governments to FT $527 million.

Governments have also provided cash and non-cash assistance to others in the Tasmanian forest industry. Helsham grants in the 1990’s were followed by funds from the TCFA from 2005 to 2010. Then came the Tasmanian Forest Contractor Exit Assistance Program and the Intergovernmental Agreement (IGA). A total of $410 million in cash has been paid for various restructure, buyout and exit programs over the years.

One of the largest amount of government assistance came during the MIS madness when approximately 145,000 hectares of trees, almost all hardwoods were planted in Tasmania. Gunns planted 106,000 hectares, FEA about 35,000 with the balance principally Great Southern. At an average of around $7,000 per hectare, growers tipped in over $1 billion. After tax the contribution by growers was about $600 million. They ended up, or will end up with about $20 million. The Australian government provided a subsidy of $400 million to grow the trees, much more than they’ll ever be worth.

The indirect tax subsidies bring the total assistance from government to industry (excluding FT) to $810 million. Including the cash and non-cash subsidies to FT makes total government assistance to the forestry industry $1.4 billion over the past 20 years.

The Ta Ann deception

Ta Ann commenced the processing of logs at its rotary veneer mills in 2007/08. The Auditor General commented in his 2007/08 report into FT:

Logs are predominantly sourced from native forest pulpwood grades that would previously have been processed into woodchips for export.”

We now know, to borrow the famous words of Richard Nixon’s press secretary, that was an inoperative statement. A big fat lie. The Auditor-General wasn’t necessarily to blame. That’s what FT must have told him.

It’s true Ta Ann logs don’t attract much more than woodchip prices. But they are not the arisings, as foresters call them, from sawlogs production, rather they are becoming the raison d’etre for the clearfelling of native forests.

We also know that native forests grow somewhere between half a tonne per hectare per year on colder higher sites to maybe four and a half tonnes per hectare on an ideal site. Which is slow growing compared to plantations. Even at 15 tonnes per hectare per year, there’s no money in plantations. Which gives a hint of the premium that needs to be charged for native forests.

The Ta Ann mill door price is barely above, if at all, the mill door price for native forest logs destined for the chipper. Not only that, the size restriction on logs that can be processed by Ta Ann has meant that far from Ta Ann logs being the top of the range chip logs, they have increasingly become potential saw logs harvested before their prime for woodchip prices.

FT under the tutelage of Evan Rolley signed the original wood supply agreement with Ta Ann in 2006 to supply 150,000 tonnes of timber per year. The government made a $2.4 million equity contribution into FT which in turn invested the amount into Ta Ann. Ta Ann in turn paid $100,000 back to FT as an option fee for a further 115,000 tonnes of peeler logs. The option was exercised and the quota increased accordingly.

In 2013 Ta Ann was paid $26 million for surrendering 108,000 of the timber quota.

Just to reiterate, FT made an equity contribution of $2.4 million to Ta Ann, $100,000 of which was paid back to FT for an option to secure more timber. The option was subsequently exercised, but later surrendered in exchange for government compensation of $26 million as part of the IGA process. FT wouldn’t have been able to supply the contracted timber neither sustainably nor profitably. Ta Ann were compensated for $26 million for a quota that was virtually given to them and which only ever made losses.

In total Ta Ann has received $44 million in government hand outs. This occurred when it was part of a much larger group of companies, far bigger than FT .Yet the latter deemed it was a sound commercial arrangement to start chopping down potential higher quality sawlogs for little more than woodchip prices,  depending on cartage costs,  and sacrifice its future just when cash flow pressures were starting to build within FT.

FT has complained over the years that locking timber away in reserves will restrict its ability to source future timber supplies. Which is exactly what it did by chopping down sawlogs for supply to Ta Ann before their prime.

Insolvency signs

Storm clouds were gathering on the horizon for the forest industry from 2005 onwards. The 2005/06 was a difficult trading year for FT. Revenue declined as volumes fell and prices also fell due mainly to exchange rate movement for its principal product woodchips. Harvest and cartage costs showed no sign of falling. The trends have continued to the present day.

At the same time the fraudulent activities of MIS were starting to become apparent. Forestry insiders knew about the atrocious growth rate for Timbercorp and Great Southern schemes. The consequent losses for growers were kept hidden for a while but by 2007 word was spreading in the financial markets and by 2008 the dogs were barking.

Whilst FT had only passing involvement with MISs via its Tassie Tree Trusts the looming problems across the forest industry were such that it was inevitable there would be flow on effects for the rest of the industry particularly given FT’s close relationship with Gunns which was a significant MIS player.

FT found itself a passenger on a double luge conveyance piloted downhill at breakneck speed by John Gay. It was only a question of when the inevitable crash happened.

The 2007/08 financials started to reveal the problems confronting FT. Cash from grants were propping up the company and after taking into account a fall in value of trees, a significant loss was recorded.  Yet the Chairman Mr Kloeden was unperturbed. At the Estimates hearing for that year he said:

“Much has been made of the …. loss recorded by Forestry Tasmania, and it is worth explaining in layman’s terms how that figure came about when the operational profit was $8.5 million. In any business accounting, accountants calculate the value of the physical assets held in that business……. it is my view that this valuation number is a somewhat theoretical number. In financial terms, a better measure of how we are travelling is the operating profit or loss.”

This was quite an extraordinary statement. It is included here to highlight FT’s view of profits. At that time FT, unlike every other government business, didn’t even include an amount for the amount of superannuation accruing of behalf of its defined benefit employees. None was paid but at least an accrued amount should have been included. Nor were the costs of roads included. The operational (sic) profit didn’t include the cost of any timber sold. This meant that you could ignore the cost of building a road to get to the harvest point, and as long as revenue was $1 more than the costs of chopping down and carting away a tree, then FT was making a profit.

That view of profits is still common 10 years later.

Commenting on the 2007/08 financials, the Auditor General found:

“In summary, cash generated from operating activites is tight.  Management are keenly aware of this position and are monitoring operations closely.  I am advised that management is developing longer term strategies to maintain long term sustainability.” 

A year later the comment from the Auditor General was:

“Cash from operations remained tight with investing activities having been funded primarily through short term funding from the TCFA funds. Management are keenly aware of this position and are monitoring operations closely. We are advised that management is developing longer term strategies to maintain future cash flows. “

A further year elapsed before the Auditor General observed:

“It is not sustainable for Forestry to generate negative cash from its operating activities, a situation management and the Board must address. Management are keenly aware of this position and are monitoring operations closely. We are advised that management is developing longer term  strategies to maintain future cash flows.”

During the 2008/09 year FT breached it lending covenants with Tascorp. In other words its loans were out of order. A letter of Comfort from the Treasurer was required to remedy the situation. FT hadn’t noticed the breach. Tascorp when reviewing FT financials spotted it. Such was the switched-on awareness FT management brought to the table.

In July 2011 the Auditor-General released his report into the Financial and Economic Performance of FT which had been 3 years in preparation, mainly because the first two drafts each spent a year in FT’s in-tray whilst FT dithered with providing feedback. It was a pretty damning report. Essentially the Auditor General found FT’s business and funding model hadn’t kept pace with the fundamental changes that had occurred in the industry since 1994.

FT’s 2010/11 financial statements issued a few months later in October 2011 noted the following:

‘Forestry Tasmania’s operating result together with the ongoing uncertainty around the Tasmanian Forests Intergovernmental Agreement and the Statement of Principles and their possible impact on the business, have caused the directors to review the appropriateness of continuing to prepare the accounts on a going concern basis. The current trading outlook presents significant challenges in terms of sales volume and pricing and in these circumstances there are material uncertainties over future trading results and cash flows. In addition, the effect on the business of the Agreement and Principles is yet to be finalised, but it is possible that they will lead to a significant reduction in the resource available for harvest and sale.

Taking into account all the above factors the directors have concluded that it is appropriate to continue to adopt the going concern basis in preparing the financial report.’

Barely two months later in December 2011 Mr Gordon, FT’s Managing Director gave his view of FT’s situation at a parliamentary estimates hearing :

“So we said, ‘Okay, let us model a scenario where the future looks like the volumes in the IGA.’ We then ran a series of scenarios to sell the softwood joint venture and we assumed that we would get our reserve price for it or keep the softwood joint venture. We also looked at a series of other scenarios about when we could harvest our plantation assets. Again that depends on basically whether they end up being sliced, peeled or sawn. Under those scenarios FT has an operating profit and retained earnings sufficient to retain cash in the business, pay tax and a dividend for each of the next 25 years.
We also included the very significant reductions in operating costs that we have done in the last three years, from 540 staff to 340-something today. We have factored in the other savings we have made in terms of roading costs and a whole range of other things. When you take into account substantially reduced income, as we have modelled, compared with cutting 300 000 cubic meters of sawlog we are still in a position where we can return a profit, a dividend, pay taxes and maintain a cash balance necessary to have some capacity for investment in new activities and to pay our way.”

To repeat  Mr Gordon’s assurances:“...........we are still in a position where we can return a profit, a dividend, pay taxes and maintain a cash balance necessary to have some capacity for investment in new activities and to pay our way.”

Six months later the government budgeted for $100 million of bailout funds over four years.

What or who to believe? Imagine if Bob Gordon was a CEO of a listed company saying what he did. Imagine shareholders buying shares after Mr Gordon’s rosy prognosis only to find out six months later he was dreaming and shareholders needed to chip in another $100 million. He probably would have found himself in the dock answering questions from Messrs Maurice Blackburn.

At the same time as FT was comforting itself by modelling future scenarios it was also trying to help the Aprin group secure a $6 million loan through what is now called Department of State Growth.

Based on a prepared paper, FT believed the continuing operation of the chip mill was “crucial to the viability of the local economy of Triabunna and the southern Tasmanian native forest industry”.

Treasury found this assertion was “not robustly supported by rigorous evidence in the Board paper.....(and)...........it is not clear the industry will be viable on an ongoing basis even if the mill is retained.”

But the Aprin Group, after ten of the best years clearfelling native forests, was not exactly in a state of robust financial health.

As Treasury commented:“The parent company, Aprin Group, has been the recipient of around $2.6 million in financial assistance from the State and Australian Governments since 2007. It has also produced operating losses over the last four years and is highly geared.”

Bob Gordon had negotiated an agreement with Aprin which “would effectively result(ed) in Forestry Tasmania underwriting the proposed loan by providing a guaranteed level of revenue....... (however) the risk of adverse fluctuations ......would be fully borne by Forestry Tasmania.” “......in the event of default, very limited security is available to the Government to recoup its loan.”

A highly geared loss making private company with limited backup security being propped up by an insolvent GBE epitomised FT’s approach to management of its significant public assets.

Enough was enough. Bob had to go. He lasted a bit more than a year. But it was not until May 2015 when the new government realised rebuilding the forest industry was not going to happen as they had promised during the 2014 election campaign, that Treasury managed to get the Treasury Secretary appointed to the FT board to oversee management. 

 The letter from the FT Board dated 29th September 2016 addressed to the Shareholder Ministers was the first real sign that FT had come to grips with its problems. Unfortunately eight year too late. 

Minister Barnett’s detailed response  on 26th October did not accept all the Board’s recommendations. 

The government’s compromise approach however is just another betwixt and between solution, failing to fix the underlying problems. Selling plantations to pay off latest tranche of debt is a pattern that keeps repeating every two years or so.

During the 2011/12 year FT sold its remaining 50% interest in the State’s 46,000 hectares softwood estate for $78 million. Some of those proceeds, $40 million, were used to pay off its debt at the time.

The previous government then tipped in more but despite this by 2015 FT owed another $30 million which was repaid using $30 million from TasNetworks.

Two years later, by June 2017, there’s another $30 million of debt on FT’s books which is be paid by selling over half our hardwood plantation.

Previous plans haven’t worked. What’s next?

Without government backing FT has been hopelessly insolvent for at least eight years. But being government backed meant we missed the golden opportunity of Schumpeter’s creative destruction whereby companies go broke and from the ashes a more viable industry may emerge.

Problems with the current model

Recognising spending on roads and new plantations as immediate expenses is something the Auditor General recommended in a draft report on FT’s performance issued April 2009: “.......without stronger financial performance, investment in roads and plantations over the past 15 years will not yield future benefits to Forestry and arguably should be expensed rather than capitalised. On that basis, it can be argued that ordinary operations from 1994 to 2008 have yielded little profit.” After the statement things got worse.

Yet FT kept pretending that spending on roads and plantations was helping to make its asset base more sustainable. The rationale was to establish plantations to gradually replace timber from native forests before the ever increasing costs of roads to harvest the increasingly remote native forests became obvious even to Blind Freddie.

FT and its political supporters responded to the impending train wreck with typical torpor. They did little more than blame others for FT’s woes.

The current government now pretends that selling plantation assets will form the basis for a sustainable future. At best  it will pay off debt and fund transition costs.

Transition to where?

FT has struggled to simultaneously assess the financial and ecological sustainability of native forest operations.

After literally years of talking and finally many hundreds of million of dollars in IGA grants, the legislated minimum quantity of high quality saw logs to be supplied from State forests, was reduced from 300,000 tonnes to 137,000 tonnes. One would have just presumed this was an financially sustainable harvest as well as a ecologically sustainable one. CEO Bob Gordon assured a parliamentary hearing about the latter in December 2011. It turns out it isn’t. FT’s September 2016 letter to shareholders ministers clearly state that if the legislated minimum quantity was harvested, which incidentally hasn’t occurred for five years, FT/STT couldn’t make any money because prices are only half those in other States.

There is little doubt spending on roads to harvest native forests should be immediately expensed.  Treating post harvest make-good expenses as capital is misleading as they too should be expensed. Balance sheet losses which occur when trees are harvested or otherwise lose value are glossed over. Future harvest proceeds and hence forest values are overstated because the costs of roads to harvest the trees are excluded. And when forests are valued as a whole to be then split between land, roads and trees, land is arbitrarily allocated a zero value. Few others regard native forest land as being worthless.

The crux of disagreements over native forestry relate to the loss of value when forests are clearfelled. FT doesn’t assign any value whatsoever to its native forest land and hardly even acknowledges the almost universal belief that land loses value with clearfelling. FT’s financials implicitly assumes all value is with the trees. They grow again, so what’s the problem...?

FT’s reporting of profits is wrong. Their measures of financial sustainability are wrong. Their business models are wrong. In FT’s case it was made even worse by recklessly imprudent long term timber supply contracts.

Industry models are based on subsidised prices from FT underwritten by Tasmanians. FT noted, in its September 2016 letter, that “while there is an obligation to make the wood available, it does not require Forestry Tasmania to make it available to industry with an inherent subsidy or on a non-commercial (loss making) basis.” The industry hasn’t been prepared to assist too much with paying higher prices necessary to make STT live up to its name.

Industry have different views . The noisy Special Species lobby’s view on timber prices is instructive. The following is from a media release issued after STT’s 2016/17 Annual Report:

“Since 2011, the annual supply of special timbers from Sustainable Timbers Tasmania (Forestry Tasmania) has been unreliable and problematic resulting in industry uncertainty and significant price increases.........For some years now there has been substantial unmet demand  (my emphasis) for special timbers, and unless remedied, this situation will continue to damage special timbers related businesses throughout Tasmania.”

If crayfish sold for $10 per kg there’d be huge unmet demand as well. I guess the government should lift restrictions on the rock lobster industry to help supply more to the market. That would appear to be where logic is taking us.

Who should pay? The government should. This is what the Special Species lobby told the LegCo back in February 2013. Again it’s presented here as an indication of how some in the industry think FT should price its products:

“As I have said before .... about pricing, there is a perception amongst some people, be they users or non-users, that the resource is precious and we should be paying more for it.  But who should be paying more for it?  Should the mills be paying more so that Forestry is getting more royalty, or is it the value-adder who should be paying more?  ....., I think we are paying more than a reasonable price for timber at the moment, particularly seeing the large increases we have had over the last couple years since the agreement has come in. ..... I don't think we are paying too much for the timber, or not enough.  It is obviously what value the people in society place on it.  It's a bit like asking how long is a piece of string?   .....  It should be revolving around the cost of production.  It is a production and resource issue.  ..... so why should the price be dictated just because something is old?  Why should the price go up just because there is a perception amongst a few people? ........... It is all about perception and I don't think you can say that one person's perception is more right than another person's.”

Completely oblivious to the damage done to FT by pricing and contractual arrangements over the years, FT should be required to supply the necessary timber to clear the market at ‘reasonable’ prices.  Presumably the special species industry charges their customers on the same basis? Allowing the market to dictate prices may lead to one person being willing to pay more than another? Heaven forbid. Why should one’s perception of value intervene? An old special species log doesn’t cost any more to produce than any other logs. They grow all by themselves. They may take a little longer to grow but it doesn’t cost any more. Why should FT charge more?

It’s a radical view of the role of prices in a market economy. To each according to their wants. Not their needs or their means but their wants.

It’s also a scary view of the way many in the industry view their entitlement to public assets. 

Even scarier is that the Ministers Advisory Council (MAC), a firebreak of insiders representing bodies whose blinkered view of the world is responsible, in part at least, for most of the problems in the forestry industry and who now have the ear of the Minister at the very time he needs fresh thinking from persons who have a better understanding of the financial issues facing STT.

The danger of the relentless pursuit of intransigent self interest is the double agent effect. The entire house of cards may collapse.

The future

There’s a lot of activity lately in the forest industry .One can’t travel the roads without encountering dozens of log trucks each day, most of them seemingly on a mission to deliver loads to a Bryant and May factory.

But does it represent a new beginning or a short term spike in activity?

The three major consortia, New Forests which bought Gunns’ plantations, Resources Management Services which bought FEA trees and Global Forest Partners which are buying plantations from FT, who together now own almost all the private plantations here in Tasmania, are quickly harvesting all the timber they’ve acquired at bargain basement prices from the distressed sellers, for as much as a 200% return.

The consortia acquired timber between $5 and $8 per tonne. The timber has a stumpage value twice the cost. That’s why there’s so many trucks on the road. It’s not a vote of confidence in the government or the inspired guidance of the Minister. It’s a reflection of the market reality that the bargain priced timber is being cashed  in order to recoup purchase prices as soon as possible.

It’s not necessarily a vote of confidence in the future of the industry either. It’s too early to tell. The future will hinge on how much is being replanted, with what varieties, and with what management objectives.

At this stage all we can conclude is that the new owners have decided cash in the bank is better than trees in the ground.

In the case of the sale of plantations by FT they were probably a pretty crappy lot of trees. But STT could have harvested them. But they’ve been sold to pay off debt and transition to who knows where? How can you argue that’s not a wind-up? It may allow STT to breathe more easily, but it’s only a brief respite.

Observations in the September 2016 letter may well decide the fate of remaining plantations as part of STT future. There was a lack of “empirical evidence around plantation sawlog production in Tasmania which has led to attendant uncertainty and risk around volume and price likely to be available, and the current markets in Tasmania are immature and the price for plantation sawlogs remains untested.” Far from plantation forestry being a science based activity it appears a wing and a prayer have been the principal drivers.

This coupled with the lack of resolution of the inherent problems with native forest activities means the transition to a new forest industry is very much a work-in-progress. With reduced assets, STT’s few remaining plantations are years away from providing positive cash flows .Native forest loss making will persist for a while. STT will need more cash injections in the near future. There’s no evidence the newly branded STT is any more sustainable than its predecessor FT.




2 comments:

  1. John! What can I say? You have excelled yourself!!

    If this was written into a book it would make a wonderful sequel volume to Quentin Beresford's "The Rise and Fall of Gunns Ltd".

    And all of this was/is legal??

    That says a great deal about our accounting "standards", and our legal system. Never mind our corrupt political system in Tasmania.

    Just how stupid, corrupt and greedy can humans be?

    "how long is a piece of string..."

    Whatsmore there is no end in sight. Another State election. More lies and deception. And a political system corrupt to the core.

    As a forester I'm just mortified.

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  2. Dear John

    Do those at the wheel of STT orthe Minister Barnett ever ring or ask your advice?

    I suggest they desperately need your input.

    Or are you the enemy they do not know how to attack.

    I am guessing that you are ignored.

    All I can say is we all owe you a great debt for the insights you have given us into the lunacy which is forestry in Tasmania.

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