The VicForests' model: A brief explainer

 

VicForests’ major assets are the trees that have been transferred from the Crown and are available to be harvested until 2030, the current end date for logging native forests in Victoria. There are a few plantations on its books, but these are of little significance.

The underlying forest land does not appear in VicForests’ books, only the trees.

When the trees were transferred to VicForests they were recorded as having a value equal to estimated future net harvest proceeds. The contribution/gift by the Crown represented the Crown’s equity in VicForests.

In theory, in a perfect world, when trees are harvested and sold, the net proceeds will be the same as the value on VicForests’ books. The book value of the asset will be realised. The book value of the trees will become an offsetting expense. Hence net profits from harvesting and sale will be zero.  VicForests will therefore be left with cash equal to the net proceeds, some of which will be used to regenerate felled forests, with the balance to be paid to the government as a return on its investment in VicForests. Regenerated forests once established are then transferred back to the Crown. That was the plan.

When trees are valued based on future harvest proceeds some costs aren’t included. Even though regeneration is mandatory, regeneration expenses were excluded when calculating future net proceeds. Accounting standards allow for this. This means that the book value of native forests is always overstated because not all expenses are included when calculating future net proceeds.

If all future harvest and related costs are included when valuing trees, the value would be a large negative number. Rather than having an asset value of $16 million (as per the 2021/22 financials), there would be a large negative number between $250 million and $400 million, a liability perhaps best described as a provision for future losses from native forest harvesting. The provision would represent the future contributions needed from the government until 2030. Blind Freddie would then be able to readily understand the predicament facing VicForests.

When native forests are harvested the reduction in the book value of trees is recorded. But the reduction in all the non-timber values of native forests, water, habitat and carbon to name three, are all but ignored, made easier in VicForests’ case as land is not included as an asset. Land is ignored. Arguably when a forest is felled there are far greater losses than just the value of the harvested timber. The non-timber losses are unquestionably real but harder to measure than direct financial losses.

Some of VicForests’ losses have resulted from additional legal costs ($10.5 million in 2021/22) following actions by environment interest groups. It’s not difficult to argue these additional costs represent a small offset against the wider benefits which will arguably flow from a reduction in the plethora of non-timber losses which accompany clear felling operations.

VicForests is facing the same dilemma as other State government entities involved with native forest harvesting. Harvestable coupes are becoming more remote, more costly to log and in some cases infringing upon areas which should never be logged. The costs to deliver contracted amounts of timber to mill doors is squeezing margins. These problems are greatly exacerbated in Victoria by recent bushfires which have devastated native forests.

However, the unalterable fact is that the major product of increasingly costly harvesting operations are low value woodchips. It makes little economic sense to encourage this with taxpayer subsidies.

Increasingly, the value of regenerated forests is falling well short of the money spent on regeneration, which when added to the non-timber losses from harvesting means the value of the State’s native forest assets is inexorably declining.

For years accounting standards have allowed native forest harvesters to hide their cash losses behind headline profit figures. VicForests is now being overwhelmed with a tsunami of cash losses which should finally demolish the myth of the financial sustainability of native forest harvesting.