Monday, 17 March 2014

Winning was easy

Winning was easy.

Henceforth it gets a whole lot harder, addressing the issues conveniently overlooked by all parties during the election campaign, not just looming problems with Hydro Tasmania, Forestry Tasmania and TT Line but the overwhelmingly crucial matter of government budgetary sustainability without a fallback position on the horizon.

Hydro Tasmania (HT)

HT was saddled with unwanted additional borrowings of $205 million in June 2013 when the government burdened HT with Aurora Energy’s badly managed Tamar Valley power station.

The Midyear update released by the government in February revised downwards expected dividends and tax equivalent payments from HT due to the changes to carbon pricing. (HT is a government business and as such does not pay tax to the ATO. Instead pursuant to National Competition policy it makes tax equivalent payments to the State government. It also pays 70% of its after tax profits to the government).

The Midyear update implies payments from HT all but dry up from 2014/15 onwards suggesting virtually nil income by HT.

Nil income almost certainly implies HT will struggle to service its borrowings which stood at $900 million as at 30th June 2013.

The government undertook to review HT’s capital structure when it flicked Aurora’s mess to HT.

That can only mean additional government equity to help HT retire some debt. HT had just reduced debt by selling down its interest in the Woolnorth wind farm, but then found itself burdened with another $205 million in debt plus $100 million in extra liabilities incurred by Aurora.

Just the job for the new Treasurer.

Forestry Tasmania (FT)

The Libs have been allowed to get away with claiming that FT will survive without government assistance.

Parliamentary Secretary to the Minister for Agriculture, Senator Richard Colbeck in a post election statement stated “the time has come to restore common-sense to forest policy.”

If that’s the case how will FT fund its continuing cash losses?

Even if the Tasmanian Forest Agreement is ripped up and logging once again returns to disputed forest areas .....even if......the simple inalienable fact is that every time FT chops down native forests it incurs cash losses.  It has been that way for a few years. The forest revenue is dwarfed by harvest and cartage costs, other direct costs of sales and costs of access roads and replanting.

How will FT pay for native forest logging? If it increases so too will the cash required by FT.

Native forest woodchipping and MIS schemes provided 90% of profits and cash flow before the downturn. Balance sheets in aggregate across the industry have lost 90% of their value.

Strong balance sheets underpin growth.

To grow the industry and free FT of the need for government assistance will require the help of banks and credit providers.

Right now there is more chance of a bank granting a non-recourse loan for an apartment building in down town Damascus than lending to the Tasmanian forest industry especially if the TFA is ripped up.

It’s a war zone.

FT’s 2013 balance sheet gives a clue as to the state of the industry. Almost 50% of its record low annual income was still owing at the end of the year. Its debtors were on average 154 days overdue. That means FT is providing much needed working capital to the industry. Why? Because other credit providers won’t.

In other words the only thing that has kept much of the industry afloat was credit provided by FT which in turn only trades because of government assistance.

FT has about 40,000 hectares of plantations, almost all on crown land. Recently it gave notice to PPB Advisory, Liquidator of Gunns’ MIS schemes, that it was taking over 14,000 hectares of trees belonging to MIS growers on crown land due to rental arrears and other breaches. The Liquidator is disputing this course of action.

At some stage FT will settle with PPB. It may have to pay PPB for the trees? In any event it will have another 14,000 hectares to look after.

What funds will FT use to tend these crops?

As at 30th June 2013 FT had spent almost all of the $35 million recorded in its books as ‘revenue in advance’. This mainly relates to TCFA grants received from the Feds for plantation establishment, pruning and thinning.

Most of the unspent grants have been used to fund ordinary operations. At some stage FT will have to put the money back in the jar so it can be spent as intended. From where will FT get the funds to do this?

If FT can’t meet its TCFA commitments are we to believe that the Feds won’t insist the State government puts its hand into its pockets?

What about FT payments for accrued employee entitlements? And benefit payments for FT employees who are members of the old unfunded defined benefits superannuation fund? FT has the second highest unfunded liability amongst GBEs (behind HT) so there’s probably a few old guys owed a bit.

It’s not going to be easy for the new Treasurer.

TT Line

In rough terms TT Line made $18 million profit in 2012/13. It generated a cash surplus of $15 million which it added to its cash tin to help buy replacement ferries. As at 30th June 2013 there was about $60 million in the tin.

The Libs have indicated they will reduce TT Line’s fares by 20%. This will inevitably mean less will be added to the cash tin each year (unless the TT Line directors were grossly remiss and failed to realise that lower prices will produce greater profits).

TT Line can only afford loan servicing costs of about $10 million per year, even less if the Libs’ fare reductions erode profits.

Another task for the incoming Treasurer?

The Libs’ contrasting attitudes to various GBEs will be interesting.

TT Line, it appears won’t have to worry too much about the bottom line. A bit like Tas Racing, the leisure pursuit masquerading as a business which doesn’t have to bother about loan servicing for its $10+ million loan to upgrade the Spreyton racecourse as Treasury pays it on its behalf.

FT on the other hand is being asked to stand on its own two feet immediately. Understandable with a transition period, but immediately?

How will HT be treated?

A sustainable budget

The plan for a brighter future even if fully implemented on time and as promised will still leave the government’s fiscal position in an unsustainable position in 4 years time.

As a bare minimum most people would expect the government to organise itself so that it was able to fund operations, to replace and update infrastructure faster than it was deteriorating, to pay borrowings and past liabilities and still have a little something for a rainy day or to service borrowings should future loans be required to help the State out of a tight spot.

We are nowhere near such a model and the Libs show no inclination to even talk about what constitutes sustainability. The only talk is about a surplus at some indeterminate time in the future. Their fiscal strategy released as required during the campaign was vague.

The last four years has seen one year of timid reform and three years of blaming the GFC. The Libs, if their plan is any guide will attempt one year of timid reform and no doubt a few years of blaming the previous government and conducting an ideological assault on opponents using the mandate argument as justification.

There’s little time left for such adversarial triumphalism.

The challenges facing the government have been obvious to anyone prepared to have a close look at government financial statements. Treasury, as part of its Charter of Budget responsibility role confirmed that the Midyear report accurately presented the true state of government finances.

The incoming Treasurer will soon hear first hand from Treasury that the Libs plan is little more than a continuation of the past four years hand to mouth existence vainly waiting for the good old days to return.

Plan C?

The last government fully used Plan B.

For 4 years the government spent on average $1.05 for every $1 of operating revenue. Given we have a $5 billion budget that means spending has been almost $1 billion more than operating revenue.

Plan B sourced the extra spending from all of the special deposits and trust accounts held by Treasury rather than borrow externally.

A good idea at the time?

Except when the time come to repay the funds? 

If the government is still spending each $1 it receives, the government needs to rob Paul to repay Peter the funds owed. And in practice that means cutting and deferring infrastructure spending, the most vulnerable area in the budget as we’ve seen in the past two years.

Even with scrimping in another 4 years time there will still be almost $800 million owing to special deposits and trust accounts.  

The State is very vulnerable. Further future shocks will be difficult for Tasmanian government finances to withstand.

The Libs will be forever trying to repay amount spent from special deposit and trust funds.

The incoming Treasurer needs to find a Plan C.

Toss the superficial plan for a brighter future in the bin and start again.

It might have won them an election but it won’t solve any problems.

In fact it might make matters worse by giving them a deluded view that winning an election gives the plan a credible imprimatur.




  1. Do you think Senator-elect Lambie was originally correct in her call to the Federal Government for a $1 billion one-off transfer to repay special deposit and trust funds?
    Excuse me for raising it after the PUP flogging on Saturday. It would be tragic if that were the solution obscured by the dislike of Clive Palmer in Tasmania and Lambie's lack of credibility.
    I believe the ACT Government needs a similar bailout for different reasons.

    1. I’d be surprised if Ms Lambie has read and understood Tasmanian government financial statements.

      Every state to a certain extent borrows idle funds internally, but Tassie has done it without simultaneously working to put the State on a more sustainable footing to enable payment of such amounts when required.

      Other states have slightly more flexibility. Their own source revenue is higher and external borrowings are more likely to be able to be serviced.

      The chances of Tassie getting special treatment in the current climate are remote. We already get compensated via the GST pool. A $1 billion handout for us implies a $50 billion if other states insist on equal treatment.


  2. who is gunna be hit up by higher & new government charges, fees & taxes, to remediate the looted tassie treasury & to look after the libs cronies with special deals, grants & non-repayable unsecured loans at special mates rates.

    if any one invests on non-movable assets in tassie , they are likely to be the bunny hit up.- safer to continue to hold cash or invest outside tassie where investments made cannot be taken hostage by the problems of the looted tassie treasury.

  3. I wish there was a way to get politicians incoming, outgoing or whatever to actually READ and UNDERSTAND stuff like this. We seemed to be doomed to endless tedious repetition of past mistakes without some new thinking infecting those who would "lead" us.

  4. Do you think there is any chance that the Libs might now buy the pulp mill permits? I've heard a few mutterings along those lines - seems very unlikely to me, but I'd appreciate you take on it.

    1. That hadn’t crossed my mind but it would certainly be an easy way to keep the dream alive.

      And cheap too.

      Anyone who buys them at this stage will only do so on spec.

      I very much doubt there’s a proponent ready to turn the first sod.

    2. Thanks, John - I thought as much.

  5. Well John it is easy to see why the government don't ring you up for advice. The Labor party must have known a great shock was coming in the next election cycle and decided not to waste any money on trying to get re-elected. Better for them to leave the mess for the Libs to flounder with then blame them for the mess in 4 years time.

    1. There's a fair bit of truth in what you say Pete.

  6. Thanks for your magic's that permit you to see through the financial diabolic straits of our State government.
    Are you able to suggest a particular year when the State's Labor Treasurer placed the Tasmanian economy of spend-spend-spend, into its now reverse thrust of ducking, weaving, IOU writing, then begging and borrowing?

    1. Check the blog 'Missing millions and the law of triviality' posted on 31st Dec 2013.

  7. Deluded views indeed. About sums up the State election doesn't it?

    So will the Hydro sell a 49% share of itself to raise funds and pay down debt? That way the Government can claim that its not selling the Hydro (only 49% of it).

    Ditto for the TT Line. Sell one ship excluding one of the lifeboats, and help raise some cash. Should bring in a million or two!!

    It is certainly generous how the Treasurer sponsors the racing industry. Those horses don't know how lucky they are.

    There you are John. Plan C is almost finished!!;)

    1. They might try that, but seriously, who would buy it?! They'd be better of selling 51% and then allowing private enterprise to kick it into gear and then the Govt can simply receive the dividends.

  8. HT itself is reasonably efficient. It's the bailing out of a failing investment bank, Babcock & Brown, that ultimately lead to the big HT debt increase. B&B to Aurora and then to HT and all for a power station we didn't need in an engineering sense and which is unprofitable now and likely to become even less viable as fuel costs rise. That's what happens when you have economists making decisions on matters of engineering, foolishly believing that the plant was actually needed and sending the state broke.