Thursday, 29 January 2009

Forestry Tasmania's delusions

Ill informed claims and counter claims are by no means endangered species in the forestry debate. The interpretation of finance and economic statistics is often a cause for concern, even alarm. Usually one can safely turn a blind eye to the PR boys when they venture into areas of ‘benefits of Project A’ or ‘economic value of Industry B’. But when the executives involved in some of the decisions enter the public arena with similar fatuous claims, it is little wonder how confusing it is to interested observers.

Dr Hans Drielsma, the Executive GM of Forestry Tasmania (FT) in a letter published in the Mercury on 22nd January 2009 under the heading ‘True economic value’ attempted to argue that the true economic value of the State’s forestry industry can be measured by reference to its annual turnover.
The letter, in part, was as follows.

“…. the total annual value of forest products from state forests (is) $252 million, with a final product value, in Tasmanian hands, of $659 million. This latter value translates into about $170 per cubic metre or tonne of wood produced.

This value represents the wages and salaries to those Tasmanian workers and returns to the Tasmanian businesses involved, and providing services in the production of these products for domestic and international markets.

It also reflects tax payments and local government rates paid by all of these businesses, including FT.

This is the true measure of the economic value of wood production from the forests managed by Forestry Tasmania.

The production from state forests contributes to the $1.4-$1.6 billion of value attributed to the whole Tasmanian forest sector by a recent study released by the CRC. This study reported direct employment in the industry of 6000 people.”

Given the confines of space, a short response as follows was lodged with the Editor of the Mercury.

“Dr Drielsma of Forestry Tasmania (FT) in Your Voice column on 22nd Jan 2009 claimed turnover of $1.4b and the fact that most payments are made to Tasmanian businesses, were indicators of the true value of forestry in this State.

Dr Drielsma is confusing the cash flow benefits of FT practices with the true economic value.

In order to measure the true economic value of the State’s forestry industry, one needs to account for the value of the lost forests. Have we only lost $15 per tonne?

If however Dr Drielsma is correct with his thesis that turnover is a good proxy for a measure of the economic value of an industry to the State, then how about our poker machine industry.

In the 2007/08 year turnover was $2b. Player losses were $214m. They remained in Tassie. The major beneficiaries were Federal Hotels, the State Government and the hotel industry, in that order. Lots of direct jobs. Indirect jobs too, counsellors, divorce lawyers etc.

Using Dr Drielsma’s rationale perhaps we should scrap the cap on new pokies. Let’s have a poker machine led recovery. Turnover will increase. More jobs will be created. That must add to true economic value, surely? Why isn’t the State doing this? Are there hidden costs? As with the forestry industry?”

Clearly turnover is not necessarily an indicator of true economic value as Dr Drielsma asserts. Perhaps it may be useful to look at another example, say the Murray-Darling Basin (MDB). For years the economic value of MDB was emphasised by the value of its agricultural production. One thing was missing. There was a failure to assign a cost to the water used in operations. The environment was subsidising the agricultural industry, a fact that is now alarmingly apparent. It is clear that the true economic value for all those years was overstated.

Similarly it appears quite likely that FT is not ascribing a true value to the lost forests in their haste to assess the true economic value of the forestry industry.

Another FT officer, Mr Kloeden, the Chairman, has also put his views on the public record when he appeared before a House of Assembly scrutiny committee on 3rd December 2008

FT had just posted another shocker, a loss before tax of $55.2m.Without operating and capital grants pursuant to the Community Forests Agreement (CFA) the loss would have been $84.6m. Mr Kloeden pre-empted questions about the size of the loss with an opening statement that said, inter alia,

” 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”

It is important to understand what’s excluded from the calculation of operating profit. There is no value ascribed to the sold timber. Woolworths’ operating profit will of course include a very large figure for the cost of goods sold. But not FT. Mr Kloeden believes a better measure of FT’s financial health is the operating profit which ignores the costs of the goods sold. He really doesn’t want to be troubled by accounting standards. Too theoretical. This is scary stuff. The easiest way therefore to increase operating profit is to chop down a few more trees provided they’re sold for at least $1 more than the harvest costs.

FT’s operating profit for 2009 was $8.5m. Before a CFA operating grant of $3.8m, the operating profit was only $4.7m. This profit is calculated on an accruals basis. The cash flow statement which records the actual amounts received and paid was even worse, only $4.7m net cash was provided from operations. Excluding the CFA grant the net cash from operations was only $900 000. Not exactly the bottom line of a financial behemoth.

Dr Drielsma’s assessment that turnover is a proxy measure of the true economic value of the forestry industry and Mr Kloeden’s contention that net operating profit (which is in effect similar to the net cash flows from operations) is the better measure of financial performance are causes for worry. Surely they can’t be serious? Perhaps they’ve just spent too long in the bush without hard hats.

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