Resources Minister Barnett’s recent statement following the release of Forestry Tasmania’s 2015/16 annual report was by no means the first attempt to report on problems in the forest industry.
Another report summed it up pretty well:
“I received from the Hobart Chamber of Commerce a statement on “The hardship suffered by the timber industry in Tasmania,” in which it is stated “For the past few years....... the sawmilling industry has been in a very bad state, until now, with the added effect of the general depression, the position is really desperate.”
“While the Chamber of Commerce of Hobart considers “there is every justification, nay, necessity, for assistance and relief being granted by the Commonwealth to this State,” no useful information is afforded in the shape of any practical proposal for the betterment of the methods of production.”
That’s from a Report of an Inquiry into the Financial Position of Tasmania as Affected by Federation. Its author was Sir Nicholas Lockyer.
The date of the report? April 1926.
Here we are ninety years later.
Here we are ninety years later.
The current government whilst in opposition didn’t appear to realise that the margins on forest sales were still failing to cover overheads, not dissimilar to problems in1926. For some dumb reason they thought they could grow the industry and reduce the losses, and as a consequence went to an election saying no more handouts. No more budget funding for FT.
When things didn’t work as they told us they would, $30 million was slipped in the back door from Tas Networks on 1st July 2015. That was quickly seen for what it clearly was, viz a less than honest continuation of the same sins condemned when committed by political opponents.
Since then FT has received further cash of $26.5 million from government, the latest amount on 30th June 2016 being another $4.4 million from Tas Networks, this time for a transmission network at the Southwood plant.
Now Minister Barnett has announced the government will take over FT’s superannuation liability of $158 million. The 2015/16 mill door sales after contractor payments barely provided enough to cover payments to retired foresters of $12.5 million. Only $4.5 million remained to cover remaining cash operating costs of $30 million and capex payments of $8.5 million.
Whether it’s a budget appropriation, a back door injection, an arranged asset transfer or the takeover of a huge liability, it is still a government handout. If it looks and walks like a duck there’s little doubt what it is.
FT has been able to trade only because of government guarantees. Cash flow statements rather than profit and loss statements, give the best view of insolvent companies. Excluding handouts FT had an operating cash loss in 2015/16 of $33 million. In the previous year the loss was $28 million. Things aren’t improving. Payments for roads and replanting are additional. FT is never going to make a profit. It sells its products too cheaply and is locked into too many loss making contracts. It even makes losses from supplying high quality sawlogs. It’s locked into contracts supplying peeler logs to Ta Ann, an arrangement ostensibly designed to add value to logs otherwise headed for the chipper but which limit the future quantity of high quality sawlogs adding nothing to the bottom line.
The past year is best described as a continuation of the de facto wind-up of FT commenced under the watchful eye of Treasury boss Tony Ferrall once he was appointed in May 2015. A complying Board is now in place, stacked with directors whose post nominals as long as your arm indicate academic forestry knowledge. Their insolvency experience however looks a little thin That is the prime challenge facing the company. FT is not turning the corner. That’s yet to be found. There is no plan to build the forest industry. It’s an insolvency operation. Presumably Mr Ferrall is acting on instructions from Mr Gutwein, which makes the government a two faced outfit.
After the sale of the transmission line, remaining plant has a book value of only $1.6 million, not much more than a family farm. The sale of Hollybank, Maydena and Tahune tourist assets and the Southwood mill will clean out most of FT’s other land, building and plant assets. Most vehicles were sold a few years ago to raise cash and subsequently leased back.
Borrowings from Tascorp was less than expected with only $14.4 million owing at year end. The sale of the transmission line to Tas Networks at the death knock assisted. There are however other liabilities that need cash. Revenue in advance, mainly grants for plantation management, of $18 million have been spent elsewhere so cash will have to be found when the need arises. Also another $5 million has to be found to re-establish recent clearfelled areas. These are only small amounts but for a charade like FT it’s equal to a few years’ mill door margins. Which are not available due to other demands for the scarce cash.
The build up in cleared areas waiting replanting may have occurred due to a wet autumn but it’s only a deferral. It’s illusory to pretend otherwise. And little was spent on intensive plantation management in the latest year leaving $18 million yet to be found. Even when spent what will those 16,000 hectares, once labelled by Gunns CEO Greg L’Estrange as “the most expensive plantations in the world”, be worth? One thing for sure it will be less than $6,000 per hectare originally gifted to FT to establish them.
FT’s largest remaining asset needless to say, is its forest estate, native forests plus a total of 57,000 hectares of hardwood plantations. When FT values its forest each year it converts future expected net income into a present day lump sum amount. That value is then split between land, roads and trees. It’s an arbitrary split. Land is given a nil value and roads their book value. The balance is assigned to trees. It was quite possible that if forest values fell further particularly if some plantations were sold, then FT’s forest estate would have consisted entirely of roads.
Imagine driving along roads over worthless land to harvest trees with no value just to raise a bit of cash but all the time slowly running down business assets? That was the future staring FT in the face.
Two years ago roads were worth as much as the trees. FT has now reassigned the value of its roads to trees rather than risk ridicule.
But the split should be between land and trees. Else we are in danger of making crucial public policy decisions based on erroneous assumptions.
This encapsulates the entire forestry debate here in Tasmania. To couch it in accounting terms, native forest logging supporters say forest value is with trees and roads whereas those with a broader view regard logging, especially when practiced on an industrial scale, as an event that at best generates cash but further lessens land and environmental values which foresters don’t bother with because land has no value. Or so they say.
Just to reinforce this crucial point consider this. Try to understand it because it’s important. When assessing future net returns from harvesting, a figure for rent would normally be included if trees were growing on leased land. FT doesn’t do this because it says land is allocated a value from the value of the forest estate thus obtained. But then it allocates a zero value, saving everything for a split between land and roads. If however land had a value, which almost everyone believes to be the case, even though that value may vary according to how one assesses the non-timber values of land, when a forest is clearfelled and proceeds received, part of the proceeds would be de facto compensation for the reduced value of the land and adjacent environment, the destruction of environmental values as the conservationist may describe it, and part would be for the sale of timber. Clearfelling would become even more unprofitable. A harvest being a cashing event would see some return for timber with the balance being compensation for the loss in value of the underlying land. That’s the forest debate in an accounting nutshell.
Foresters frequently allege selected science is used to promote conservation. There may be some truth? But one thing we do know for sure is that logging as practised produces losses. The alleged application of selected science doesn’t necessarily lead to bad public policy. If one is demanding rigour one can’t simply ignore other relevant aspects, like selling high quality timber below cost as finally admitted by the Minister. It’s disingenuous to accuse others of intellectual dishonesty when one chooses to remain pig-ignorant of the financial accounting realities of native forest operations. It’s lamentable all parties don’t try harder to get their heads round the difference between cash flows and profits and what exactly is a balance sheet. Even if timber is sold at prices greater than mill door delivered costs that doesn’t mean it is profitable. Far from it. One cannot simply dismiss what’s happening with FT’s balance sheet. If the government isn’t putting in extra, dividends aren’t being paid and the balance sheet keeps falling in value, native forestry logging is unprofitable. Ipso facto. Nothing else can be true. A bit of cash at harvest time is a red herring. Like selling a shed full of Queen Anne furniture left by an aunt, piece by piece. It might produce cash but the balance sheet keeps shrinking.
Foresters pay lip service to non-timber values of forests but if they were assigned a value, we would end up with a clearer picture of forest operations particularly at harvest time. There’s little doubt FT chooses a valuation method to suit its purposes, but it still can’t produce financial statements to justify its existence.
As an alternative justification FT is fond of placing a value on payments made into the Tasmanian economy. That’s either dumb or dishonest, or more likely both. It’s short termism at best. After major natural disasters such as cyclones, floods and bushfires it is common for economic activity to pick up. But the measures of ensuing economic activity ignore the massive balance sheet losses that have just occurred. Industrial scale native forest clearfelling is not dissimilar.
FT is selling off Queen Anne pieces and replacing it with Harvey Norman stuff. The balance sheet isn’t shrinking just because of lockups. Mr Ferrall is addressing the problem. He’s winding it up.
Minister Barnett made one correct observation. The previous government’s plan was little more than an expensive wish. But he is being dishonest if he pretends what he is doing is anything but a FT wind-up. As usual the partisan political slanging is obscuring reality, hiding the wood from the trees.
There’s little evidence that the Greens were responsible for selling timber below cost transferring profits to others leaving a legacy of losses and unfunded employee superannuation. Yet they are being blamed for FT’s predicament.
One cannot blame lack of supply for the lack of profits if sales are made below cost. In these circumstances lack of supply will actually reduce losses. Overcutting and undercharging is the problem. To repeat the point: if the balance sheet keeps shrinking it is clearly unprofitable. And it’s been that way for a long time.
Sir Nicholas Lockyer in 1926 repeated a statement by the then Premier “that the forests of Tasmania are capable of yielding sawn timber at the present rate of 60,000,000 feet per annum for a period of 90 years”. That’s 142,000m3 of sawn timber. NB Sawmill production not feedstock, considerably more than what is occurring today. Sir Nick probably didn’t envisage the invention of the chain saw, the development of the bulldozer and the myopic greed of a rampaging John Gay.
We have just witnessed an extremely painful TFA process where a minimum sustainable level of high quality sawlogs from public land was agreed at 137,000 tonnes per annum. FT has a colourful graph in its Annual Reports showing how it will do this. We are now told by Minister Barnett a sustainable harvest doesn’t imply a sustainable FT. If ever evidence was needed that forest policy makers can’t walk and chew gum simultaneously, this was it.
If we can’t believe them about Ta Ann saving logs from the chipper and we can’t believe them about what constitutes a sustainable harvest and it takes 10 years to confess they’re selling high quality sawlogs below cost why should we believe them that granting earlier access to other production areas is going to solve anything. Show us the figures. From the time sawmillers had to venture beyond the back paddocks to get sawlogs mill delivered prices have kept rising. Unlocking a few areas might slow the inexorable increases, then what?
If FT were a private business it would have disappeared years ago. All the loss making contracts would have gone and we would have started afresh and built an industry able to pay for timber at prices free of public subsidies. Schumpeter’s creative destruction stage has been sorely missed.
The slight increase in margins by FT in 2015/16 was due to woodchip exports from the north of the State made possible after the demise of Gunns with greater quantities and a more favourable exchange rate. This isn’t going to last very long because a government subsidised business competing with the private sector is in breach of national competition rules.
That’s the reason why FT is to be split into two divisions: one to supposedly sell wood profitably which it can only do by shifting costs to the private sector and the other to do the community service stuff which will probably end up with Parks and Wildlife at some stage. A bit more detail on what’s in what division would be useful. Which of the remaining 150 staff go where?
Missing from the Minister’s announcement was the fact, according to court documents, that FT has finally settled the ownership of managed investment scheme trees growing on 14,000 hectares of FT’s land. At one stage Gunns’ Liquidator was demanding $40 million from FT. Whether the agreed tree value is more than the current rental arrears of $6 million we shall soon know. If it was good news I suspect we would have heard already.
Full ownership of the trees is crucial to FT as the sale proceeds from these chip plantations is the only way FT can cover its trading deficits and it can’t sell something it doesn’t own. Selling trees funded by Federal grants at a considerable discount to cost, retaining the land but granting a forest right for 75 years, making it effectively a rent free arrangement, represents yet another massive handout.
The Minister suggests intensively managed plantations needed to help meet mandated high quality sawlog supply in the next 10 years may be retained. In that event the pretence of FT as a log producer will stagger on for a few more years.
When discussion turns to the southern residue problem which is supposedly choking the industry, my thoughts wander to London’s Great Horse Manure Crisis of 1894. In the city at the time there were 50,000 horses catering for urban transport needs, each horse producing 25 lbs of residue per day. That’s 4 tonnes per horse per year or 200,000 tonnes for the city as a whole. And that was just London. The cities of the world were being covered in horse shit. In 50 years time it was estimated the streets of London would be covered by nine feet of the stuff and life as it was known would cease. They managed to solve the problem. The car was invented.
So it may cost a few $s per tonne to solve the problem of southern residues. Stop whingeing guys, other industries face far bigger dilemmas which make your problems little more than, let’s say, horseshit.
Mr Barnett has made faltering progress since becoming a Minister, although he needed to be dragged kicking and screaming to a confrontation with reality. His pathetic witch-hunt into the sale of the Triabunna chip mill when as a backbencher he didn’t even bother to drill down to get any $ figures, content to accept the shaky assertions that we’re doomed without a nearby port facility when the real issue was the industry was doomed unless products and margins change. At least this is now acknowledged.
Any optimism in the forest industry is not due to FT’s resurgence but rather private operators like New Forests reaping quick returns from bargain basement purchases during the ongoing forest industry clearance sale.
FT is indeed transitioning to a new commercial footing. However it’s not as portrayed. It’s an insolvency operation.
Will it work?
Sir Nicholas Lockyer summed up the challenges in 1926:
“The ultimate success of any assistance which the Commonwealth may extend to Tasmania in relief of its present financial difficulties and to further the development of its natural resources will not, however, be possible unless it be accompanied .......by a far wiser Government administration than has been characteristic of past years.”
(An abridged version of this blog was published by The Mercury HERE)
(An abridged version of this blog was published by The Mercury HERE)