Reality bites

It was only a matter of time before the incoming State government started backing down on its forest policy promises such as ripping up the forests agreement and ceasing funding Forestry Tasmania (FT).

The emotive term ‘ripping up the TGA’ suggests the Tasmanian Forests Agreement Act will be repealed. This is, and always has been, unlikely.

Even the latest announcement of changes to the classification of 400,000 hectares doesn’t imply the Act is being repealed or ripped up.

Underpinning the Act are two agreements between the State and Federal governments, viz Tasmanian Forests Intergovernmental Agreement and the   National Partnership Agreement (NPP) covering its implementation, both signed in May 2013.

NPPs are the mechanisms that govern the distribution of specific purpose grants to States (as distinct from general purpose grants such as funds from the GST pool).

Whilst the IGA and the subsequent NPP aren’t intended to be ‘legally binding’ in the sense that the parties will not march off to court in the event of breaches, the parties specifically agreed that would not lessen their commitment to the Agreements. As with any agreement each party commits to do certain things.

To unilaterally ignore the provisions of a NPP signed by a previous government would signal the beginning of a radical new age in Federal-State financial relations.

It is most unlikely that Tasmania, the smallest most vulnerable State will be the first to go down that path.

It must be stressed that most NPPs are taken into account by the Commonwealth Grants Commission when assessing a State’s share of the GST pool. For instance Wilkie’s hospital agreement was, but the Macquarie Point redevelopment grant of $50 million wasn’t. Nor fortuitously for Tasmania, was the $338 million from the Feds being its agreed contribution to the TFA IGA (Tassie’s share was $56 million).

In any event the Feds have yet to deliver all the IGA funds. A further $9 million is due in each of the next two financial years for ongoing reserve management. A review of this base funding amount will occur before 30^th June 2016.

The intended reclassification of the 400,000 hectare of proposed reserves to be held in a Crown reserve with no logging for six years is obviously an attempt to hang on to the ongoing grants for reserve maintenance.

Minister Harriss described the six year moratorium as an “elegant” solution to growing the industry. Other adjectives spring to mind, disingenuous and devious to mention two.

A few things are apparent:

·       the government can’t unilaterally reject the NPP.

·       the government fervently promised to rip up the IGA to signify the dawn of a new era.

·       the industry is so cash strapped without markets that it couldn’t handle any more resource in the immediate future.

·        the government is so cash strapped it couldn’t afford to jeopardise ongoing funds from the Feds for reserve management.

Hence the shabby attempt by the government to save face by pretending to honour an election promise.

On the matter of ongoing funding for FT the ABC has recently reported:

There appears to be confusion within state cabinet over a key policy to scrap subsidies for Forestry Tasmania.

The Liberals have pledged to stop taxpayer subsidies to the state-owned forest company to save $95 million over four years.

That is despite warnings the move could leave Forestry Tasmania insolvent.

Mr Harriss was asked by journalists yesterday whether his government would continue to subsidise FT.

"I expect that to be the case. For the immediate future, depending on our ongoing negotiations with Forestry Tasmania," he said.

But the Premier was quick to disagree.

"Let's be clear, the subsidy goes. We want to invest that money into schools, into hospitals into the police service."

The Premier sidestepped a question about whether he had contradicted his Minister.

Minister Harriss has a slightly better understanding of financial matters than the Premier, maybe not quite as much as he attributes to himself, but nevertheless he is likely to closer to reality on this occasion.

The TFA IGA and the accompanying NPP agreement include an undertaking by the Tasmanian government that it funds FT’s non commercial activities.

In 2012/13 the government provided  FT with $20 million of funding to cover the costs of non commercial activities on top of $15 million described as deficit funding to help pay wages.

It was never clear whether the former was a one off grant or reimbursement of costs for more than one year.

In any event Schedule A to the IGA mandates the Tasmanian government continues to fund FT’s non commercial activities.

The 2013/14 budget and forward estimate contained deficit funding of $95 million over four years which Mr Hodgman planned to redirect to other areas.

Failure to prop up FT will see it cease trading. Surviving by growing the broader industry is not possible as everyone but Mr Hodgman now realise.

Whether funds given to FT are described as deficit funding as Labor planned or non commercial funding as is mandated by the IGA, whatever helps the Libs save face will occur.

It may even be as a loan as floated recently by the Treasurer but the fact that FT with negative cash flow can’t pay interest will almost certainly mean the government will have to pay interest to Tascorp on FT’s behalf as it does with the other cot case Tas Racing.

Even in recent rosier times FT struggled to pay interest on a $40 million loan from Tascorp. Sale of its 50% interest in 46,000 hectares of radiata was required to relieve FT of its loan servicing commitments.

Maybe removal of FT’s funding from the forward estimates (the three years beyond the budget year) could be another solution. Budgets and forward estimates aren’t audited. Forward estimates are habitually unreliable. Budgets usually contain sincere estimates, but forward estimates are a different kettle.

Whichever way the government chooses will no doubt be described as an elegant solution to honouring yet another election promise in the breach rather than the observance.