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 30^th 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 30^th 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 30^th 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.