Saturday, 30 April 2022

Debt deficits and the new Federation

What happened to the spring of hope we hoped would follow the Covid winter of despair?

The shortcomings of the existing system have become glaringly obvious. There was much talk about life on the other side of the pandemic, a place where we could build a better and fairer future on more secure foundations.  

However, two weeks of electioneering has confirmed that a move to a better place is too bigger task for our bickering political class. We are back to the same old ways of policy free mudslinging scaremongering and pork barrelling. We have learnt nothing.

There is a conspiracy of bipartisanship not to delve too deeply into important issues.

For instance, consider government debt and deficits and the all-important question of where money comes from. There has been so much to learn from how we managed the Covid crisis that should be front and centre of any election campaign. But discussion is conspicuously absent.

Most Federal government debt is not repaid. It is rolled over at maturity, replaced by new debt. As any Accounting 101 student knows debt may appear on the liability side of a balance sheet but so does owner’s equity. Debt that doesn’t have to be paid represents additional equity in the nation. Government debt is mostly owned by banks and large funds and are analogous to redeemable preference shares in Australia Inc. Interest gives the holder a regular return. The holdings can be sold at any time or redeemable at the end of the term, usually replaced with new borrowings. Debt may be owned by foreigners. But the interest on those borrowings is still paid into Australian bank accounts. If the owner wishes to repatriate the funds the Australian dollars are swapped for whatever currency is needed, so the interest always remains in Australia. Government borrowings should not be used an excuse for austerity by constantly raising the spectre of burdening our heirs and successors.

The Covid response required massive new borrowings. However, most of the new debt is owned by the Reserve Bank (RBA), our bank. We owe the debt to ourselves. The RBA now owns $288 billion of government debt. One third of government debt which is approaching $900 billion is now owned by ourselves. How is this a burden? Interest is paid to us. If bonds are ever redeemed the proceeds are returned to the government as dividends by the RBA.  This is the new reality. Central banks around the world are doing the same.

Sunday, 13 February 2022

Basslink: Turning a blind eye to its lessons


A compulsive obsessive desire to ignore the lessons of history is slowly choking us.

If Tasmania is to become a renewable energy powerhouse, shouldn’t we have some understanding how existing wind farms and the Basslink interconnector work, who profits and who pays?

What’s the difference between regulated and unregulated interconnectors and what are the ramifications of the termination of the Basslink Services Agreement announced on 10th February, an agreement covering an interconnector that was supposed to have a life of 60+ years but is falling apart after only 15 years.

Without stopping to analyse what went wrong with Basslink we seem to be careering ahead to build an even more expensive one, whilst the State refuses to face up the underlying fiscal sustainability of a government  which is gradually falling behind in attending to its core functions.

At the centre of energy policy is a Minister who is the shareholder minister in charge of Hydro, TasNetworks and the retailer Aurora Energy, and who pretends he is able to seamlessly resolve any conflict between competing parties whilst also looking after the interest of renewable energy proponents, consumers and Tasmanian taxpayers.

If it sounds too good to be true that's because it is.

Saturday, 5 February 2022

Native forest logging mythology


THE fact that trees may regrow does not make native-forest logging industry sustainable.

Dorset Mayor Greg Howard was reported (Mercury, February 2) as slamming people who do not accept his reality that because forests regenerate, forestry is one of the only truly sustainable industries.

It’s a non sequitur that is easily shown to be such by a close examination of Sustainable Timber Tasmania’s financial statements.

Over the past 20 years net contributions by governments to STT have been about $500 million.

Over that period the value of STT’s forest estate has plummeted by 75 per cent.

The latest financials show the estate is worth $186 million.

Despite all the assistance, it still lost most of its value. Ipso facto STT is financially unsustainable. No other conclusion is possible.

If that sounds bad, the reality is worse.

STT’s forest estate is based on expected future net proceeds. That is, future harvest revenue less future expected costs. But STT only values standing timber. The costs of regenerating the forest are ignored.

“All coupes regenerate,” claimed Mr Howard. Maybe, but if regeneration costs are not counted when valuing forests, how can Mr Howard claim they are sustainably managed? This is the fundamental flaw in arguments peddled by the native-forest harvest lobby.

Were regeneration costs included when calculating future expected proceeds, almost all native forests would have a negative value.

Standing timber may have a value. Most native forests don’t, if one includes the mandatory regeneration costs when calculating future net harvest proceeds.

It gets even worse if one attributes a value to all the other non-timber losses that occur when forests are harvested and which bean counters preparing financial statements overlook.

There are habitat, water catchment and carbon losses and, in the case of Blue Derby Mountain Bike Trails, clear spillover costs that affect tourism.

Harvesting trees generates cash, but that does not make it sustainable.

(published in The Mercury 5th Feb 2022)

Thursday, 25 November 2021

Basslink for Sale Chapter Two


The Basslink sale saga continues.

Since the Basslink for Sale post back in September the mooted sale to APA has been abandoned, and Basslink P/L (BL) is now under the control of Receivers and Managers (KPMG) appointed by BL’s banks.

Back in late October BL still hadn’t managed to refinance its existing bank loans as required. The sale to APA had fallen through. The final straw was when Hydro Tasmania (HT) and the State government finally ran out of patience with BL for non-payment of amounts awarded against them following legal action in the wake of 2016 interconnector outage and announced they were going to start legal action to recover amounts owed.

It was a Mexican standoff. The banks wanted their money. Creditors were getting impatient. BL’s owners didn’t want to contribute any more. BL was insolvent.

Tuesday, 23 November 2021

STT and the unsustainable sustainability myth


Tasmania’s forestry industry is world-class and sustainable “said Resources Minister Barnett when releasing the 2020/21 Annual Report for Sustainable Timbers Tasmania (STT),

There’s a useful rule when trying to assess the financial sustainability of any company: Beware if profits are only achieved with book entries.

That’s certainly the case for STT, our publicly owned forest company. It reported another small profit for the 2020/21 year, the fourth in succession. Without book entries and government grants however it would have been another loss, a pattern that has been occurring for a long time.

Another useful rule says beware if there aren’t underlying cash surpluses from operations. STT claim there are but that’s only because it doesn’t include all relevant ones. Replanting and roading costs are treated as capital outlays. For three of the past six years, including 2020/21 net operating cash including roading and regeneration costs has been negative.

As a general proposition for most businesses operating cash is usually more than book profits. Most of the difference is usually explained by book entries such as depreciation.  If the opposite is occurring, where book profits exceed operating cash as it often does with STT, alarm bells should be sounding.

Friday, 19 November 2021

VicForests heading downhill fast

 It is difficult to understand how VicForests’ can describe its latest loss of $4.7 million as ‘a sound result’.

A closer look at the VicForests’ Annual Report for 2020/21 suggests a different description may be warranted.  Forest revenue of $85 million was similar to the previous year, but after production costs of $70 million the stumpage value of harvested timber was the lowest ever at 17.9 per cent of revenue or $15.3 million, which was scarcely enough to cover roading and regeneration costs of $13.5 million, let alone employee costs of $19 million and overheads of $12 million. A lifeline of $21 million from the Government was needed for VicForests to continue as a going concern.

Thursday, 2 September 2021

Basslink for sale?


By any measure 2020 was annus horribilis for Basslink P/L, the owner of the existing Bass Strait interconnector, currently operated by Hydro Tasmania.

Basslink’s recently released annual financial report for the calendar year 2020 revealed its battle-scarred balance sheet after unsuccessful legal battles arising from the 2015/16 cable outage.

In December 2020 Basslink was forced to write off $30.8m which it claimed Hydro owed. The debt write-off related to whether the cable outage was a force majeure event. After taking six months to repair the cable, Hydro maintained because it was unavailable for half the year, the agreed monthly fee upon resumption should be reduced by the availability adjustment factor. Basslink argued the cable fault was an Act of God, a force majeure event, and hence the adjustment factor didn’t apply, and the full fee was payable. The arbitrator didn’t accept God was involved and found in Hydro’s favour. 

The arbitrator was also needed to resolve other disputes between Basslink and Hydro and between Basslink and the State government in respect of the cable failure. In the latter case the arbitrator awarded the State government $46.7 m including costs and interest. In the former case Hydro was awarded $26m, with costs yet to be decided. Basslink has raised a provision account which suggest another $30.9m may become payable. That’s a total of $103.6m Basslink will have to pay Hydro and the government.