VicForests: The ongoing disaster

 

The 2021/22 VicForests’ loss of $54 million was a disaster. In one fell swoop VicForests’ equity of $45 million funded by the gift of trees from the Crown, was totally wiped out.

To end up with a loss of $54 million after timber sales of $80 million is a staggering achievement. 955,000 cubic metres of timber were sold at an average price of $85 per m3. The cash loss was a mind boggling $58 per m3.

The stumpage value of harvested timber (sales less harvesting and haulage costs) slumped to less than 4 per cent of revenue or $3.1 million. The stumpage value was $3 per m3. On a per hectare basis this is less than the costs to regenerate. Regeneration costs were $3.2 million. A government lifeline was needed to pay employee costs ($20.3 million), roading costs ($6.4 million) and overheads of $21.6 million. 

Harvesting 80-year-old trees for a stumpage value of $3 per m3 is the height of absurdity especially when it is accompanied by all the unrecorded non-timber losses.

Plantations grow at least four to five faster than native forests. This makes clear-felling native forests to essentially create the same woodchip product as plantations little more than State sponsored vandalism.

VicForests’ equity at June 2022 was negative $3 million. But for a letter of comfort from the Treasurer, VicForests would have been forced to cease trading.

Included as an asset was $7 million which is the tax benefit of the carried forward losses which VicForests posted in 2021/22, and which can be offset against a future tax liability. But the chances of that happening are zero as VicForests will never make future profits. Hence the asset representing a future tax benefit needs to be written off. This would give VicForest a negative equity if $10 million at June 2022.

If trees were given a value which represented future losses from harvesting assuming native forest logging continues until 2030, VicForests’ equity position would be catastrophic. Cash losses over the next seven years are likely to be between $250 and $400 million based on recent loss patterns.  When future net proceeds fall, forest values fall. This means a worsening equity position. For a while VicForests’ headline profit figure disguised the precarious state of the business. The following graph presents the headline profit figures compared to the net cash outcomes before government cash injections since 2016. For an entity in its death throes the only relevant measure is the cash outcome before government handouts.

The 2015/16 cash profit of $3.9 million was followed by a steady deterioration reaching reached $30.6 in losses in 2020/21 before plummeting to $55.2 million in 2021/22. The 2021/22 losses were mainly funded by government handouts and loans. The loans will never be repaid. In effect they’re handouts. In the government’s books loans don’t impact the budget bottom line whereas grants and handouts do. When the loans are eventually written off, it will be recorded below the budget bottom line so as not to frighten the faithful. At the end of 2021/22 the loan was $23 million. It won’t be that low for long. Future losses will soon boost that amount.

VicForests’ problems with supplying contracted amounts of timber, whether due to legal action from environment groups or the effects of recent bushfires are starting to reflect in the financial accounts.

In 2021/22 VicForests paid $7.5 million in compensation to customers for failure to supply contracted volumes. This was netted off against timber sales.  Even though volumes rose slightly net timber sales fell as a consequence. No detail was provided as to how compensation was calculated.

VicForests also paid contractors stand down expenses of $6.3 million when due to injunctions minimum contractual obligations to the contractors could not be met. The payments were included in harvesting and haulage costs which rose much faster than the slight rise in volumes would otherwise suggest.

The compensation amounts paid to customers and contractors accounted for all the fall in the stumpage value of the 2021/22 harvest. The stumpage value has been in continuous decline since 2017/18.

VicForests must have billed the government for the contractor reimbursements because they’re included alongside other income from the government. It’s likely however the government refused to pay. In the Notes to Accounts (specifically Notes 8.1 and 8.4) it was disclosed that “a related public service entity” disputed an amount almost identical in size to the compensation claim. It’s reasonably certain the disputed transaction is the compensation reimbursement. The resultant impairment charge contributed $6 million to VicForests’ $54 million loss for the year. A cut and paste from Note 8.4 confirms what happened:

An expense was recognised during the year ended 30 June 2022 in respect of loss allowances on receivables due from related parties of $6,173,127 (2021: $Nil). This amount has been impaired because the related public service entity has disputed the transaction. (Loss allowance 30 June 2022 : $6,173,127; 2021: $Nil).

This doesn’t augur well for the current year 2022/23. Miki Perkins of The Age wrote here on March 8^th that Vic Forests has been sending more invoices to the government for reimbursement of compensation paid to contractors and customers. Specifically:

Victorian taxpayers will fork out more than $38 million after state-owned logging agency VicForests was forced to compensate customers and contractors it could not supply with timber.

VicForests chief executive Monique Dawson told a Supreme Court hearing on Friday it had paid out more than $12 million to contractors and $25 million to customers, and sent the invoice to the government.

If the government doesn’t come to the party VicForests will have to cease trading. There’s no alternative. It’s difficult to see how the 2022/23 losses will be less than the 2021/22 effort. There won’t be much opportunity to hide cash losses as has happened in the past. Headline losses will be similar to the actual cash losses.

Victorian taxpayers are set to be lumbered with loads of pain if VicForests continues down its current path. A cash loss of $58 per m3, as posted in the 2021/22 year, leads to a hefty amount if the recent pattern of annual timber sales of roughly one million m3 is maintained for the next seven years. $58 million per year for seven years equals $406 million.