CHALLENGES
FOR TASMANIAN PUBLIC FOREST MANAGEMENT: THE CURRENT POSITION
This paper
was written for the Forest Economics Conference held at Mona from 28th
to 30th November 2023.
CONTENTS
Background
Tasmania’s forests: A snapshot
Sustainable Timber Tasmania (STT): An overview
Issues
Tragedy of the commons
STT: A business, a guardian, or a godfather
STT in transition
Current markets
Information asymmetry
Summary
Forestry facts
Less popular forestry facts
Challenges
Vic Forests’
disaster brings to mind the familiar Hemingway quote: “How did you go
bankrupt?"
“Two ways.
Gradually, then suddenly.”
The 2021/22 bottom line of $54 million was
followed by a $61 million loss in 2022/23, according to Vic Forests’ recently
tabled Annual Report.
However a close reading of the financials reveals the picture was far worse.
This note is an addendum to the blog
STT's forest valuation charade following the release of STT’s Annual Report for
2022/23 on 31st October 2023.
STT has admitted making errors with its financial statement since 2010. It has restated prior year financials and provided an extensive note.
(Co-written with Graeme Wells, Adjunct Senior Researcher at the University of Tasmania).
The public discussion re
the proposed AFL stadium at Macquarie Point has become a bit of a shouting
match where the pro and cons of an AFL side and the manoeuvrings of politicians
and AFL managers have taken centre stage.
In our view it is important we don’t lose sight of the fundamentals which must underpin sensible public policy. It is for this reason we have chosen to comment on a recent study given prominence in the media which essentially ridiculed expert reports about the economic case for the stadium.
Mr Hanson’s recent contribution to the economic case for the proposed AFL stadium has received extensive coverage in the Mercury. It has been described as uncovering a gold mine for Tasmania. He claims to identify deficiencies in the expert analysis provided to the government. Unfortunately, his creative adjustments to the government business case, which included a benefit cost analysis (BCA), are misleading and based on a misunderstanding of BCAs. This article is intended to correct the record.
Publicly
owned commercial native forests as operated by Sustainable Timber Tasmania P/L
(STT) are perpetual assets managed for the benefit of future generations.
Yet when STT
values its forests every year it values the estate as a single rotation crop.
Which is a patently absurd assumption for a perpetual asset where replanting is
mandatory.
This is the loophole that allows STT to pretend to be sustainable. Replanting costs are excluded when determining the expected net proceeds which forms the basis for a forest’s value.
Power
Purchase Agreements have been used to assist developers of renewable energy
projects. These notes explain how Hydro Tasmania and Aurora Energy
account for these agreements and how accounting standards allow much of the relevant
detail to escape the reporting net.
Included also
is a closer look at how Hydro’s sale of a majority share in its windfarms was
only possible due to a generous Power Purchase Agreement by Hydro effectively guaranteeing
to pay the purchaser’s debt over the term of the agreement.
Finally there’s a note outlining how the assumption of sunk costs are used by renewable energy promoters to give a rosy view of individual projects. For instance, a windfarm developer needn’t consider the costs of Marinus because it’s a sunk cost however large. A recent article is cited describing how sunk cost trickery understates the costs of renewable energy projects.
Most people hoped we’d heard and seen the last of them.
But then a bell rang, and out they came, like the travelling
troupers from Harry Paulsen’s Touring Stadium.
The forest fighters were back, determined as always to ignore
recent events if it didn’t suit their narrative.
The spark that re- ignited the fire was the decision of the Victorian government to halt native forest logging. It was described as a Dan Andrews stuff up, as the actions of an anti-forestry government, but that shows a wilful ignorance of the financial unsustainability of native forest harvesting in general and VicForests in particular, where the final nail in its coffin were the massive 2020 bushfires.
La Trobe
University (LU) today announced its intention to raise funds via a Green Bond
issue following in the footsteps of UTAS Green Bond raising of $350 million in
the 2022 year.
The amount
to be raised is not known at this stage and is irrelevant for the purpose of
this note which is to have a quick look at the requirements/restrictions for LU
to raise money in this manner and provide the current Leg Co Committee looking
into UTAS with information which may assist their deliberations.
What lessons are there for UTAS?
UTAS is in
more trouble than Burke and Wills.
The UTAS Council
meeting on 27th April 2023 discussed the 2023 financial forecast.
The minutes, reproduced below, make bleak reading.
The Council “discussed
the challenging conditions facing the University in 2023” and proceeded to
discuss ways “to generate a positive EBITDA in the coming years.” What
that implies is that current projections must show negative EBITDAs.
The acronym
EBITDA stands for Earnings Before Interest Tax Depreciation and Amortisation, essentially
the cash earnings before interest and depreciation (NB UTAS doesn’t pay tax). It’s
a standard measure of the cash available to service borrowings and to pay for capex
amounts (new buildings say).
UTAS’ EBITDA
in 2022 was $30.9 million. To be in negative territory in 2023 reveals an
alarming downturn.
A business
might break even from a profit perspective, but adding back depreciation and
interest gives a figure for cash earnings.
If UTAS has
negative cash earnings, it can only survive by running down its investments or
borrowing more. Even if capex spending is zero, it means UTAS is borrowing to
pay interest. Ouch.
Running down
investment and borrowing more was the plan for financing the Hobart move.
Without that UTAS survival changes would be greater as universities traditionally
have a larger buffer of cash and investments than most in the private sector.
The minutes suggest
future challenges will start to be addressed in October. This highlights the
nature of UTAS’ business. Whilst others might be able to implement changes
more rapidly, UTAS is tied to the cycle of the academic year. It’s going to
have to live with cash haemorrhaging for the rest of 2023 and hope things can
be put into place post October to take effect before the 2024 academic year.
The 2022
Annual Report reflected “(t)hese past three years have been among the most
challenging our University has ever faced.”
It’s going to get worse. Far worse.
(Apart from the three introductory paragraphs, this blog was sent as a
supplementary sumission to the Legislative Council’s Inquiry into Provisions of
the University of Tasmania Act 1992.)
Maybe it was a coincidence or maybe it was intended. UTAS dumped a huge
cache of documents and minutes on its website which related to its intended
move into the Hobart CDB just days after the Legislative Council inquiry met
with Treasurer Michael Ferguson on the 6th July 2023, thereby resticting
the sorts of question he would otherwise have faced, essentially about the role of the State government in UTAS’
affairs.
The data dump can be found HERE.
Pursuant to sec 7(2) of the UTAS Act the Treasurer needs to give UTAS
approval before it undertakes any borrowings.
The previous blog on this site explored some of the issues around UTAS’
borrowings following the Treasurer’s brief appearance, what it means for the
State governemnt and we as Tasmanians, and what the Treasurer knew/didn’t know/should
have known/ignored about UTAS.
This blog attempts to fill in some of the missing pieces of the puzzle gleaned from the new information in the public domain.
The following are comments which
formed part of a supplementary submission to the Legislative Council Inquiry into the Provisions of the University of Tasmania Act 1992 following
Treasurer Michael Ferguson’s
appearance before the Committee on 6th July 2023
The Treasurer’s brief appearance highlighted
some of the relevant issues relating to the State Government’s role. The issues
canvassed here include:
·
Ownership and/or
control of UTAS’s assets
·
The reason for
Sec 7(2), the need for UTAS to obtain the Treasurer’s approval before borrowing.
·
Borrowing like
arrangements: service
concession deals.
·
Borrowing like
arrangements: other.
·
The
University of Wollongong (UOW) experience: A cautionary tale.
The notes were prepared to assist the Committee understand the financial issues facing UTAS. They were prepared before the massive data dump by UTAS of documents, Council minutes etc relating to UTAS proposed relocation to Hobart CDB which occurred after the Treasurer’s Committee hearing, which conveniently meant the Committee was unable to chase up some interesting leads about funding the CDB move and what it may mean for UTAS, the state government and for all Tasmanians. An up coming blog will cover the more interesting revelations.
The
financial overview in UTAS’s recently released annual report for the calendar
year 2022, although much more extensive than in past years, did little to
explain UTAS’s current financial position.
Detailing
what went up and what went down is a mind-numbing exercise, which does little
to explain the financial challenges or “how we will approach the years ahead as
we enter ever more variations of the new normal”, as UTAS noted in its report.
At
a guess that’s “PR speak’’ for “We’re not sure where we’re going, but we’ll
give it a go.”
Blessed
with gifted land, funded by capital grants for buildings and endowed with
bequests and other amounts for education and research purposes, UTAS has
gradually built its net assets position.
Apart from capital grants and investment income, UTAS makes losses every year, losses from the core activities of teaching and research, and losses caused by a relentless pattern of what is described as restructuring costs. We aren’t told what these are, whether they’re consultants’ fees, or whether they relate to the Hobart relocation. All we know is, at $55m over the past eight years, they’re much greater than the deficits from teaching and research.
(This is a note prepared for the Legislative Council's Inquiry into the Provisions of the University of Tasmania Act 1992)
Introduction
The recent
tabling of UTAS’ 2022 Annual Report is an opportune time to have a close look at
UTAS’ current situation.
Rather than
just a snapshot of one year’s financials, a few past years will provide a
better basis to form a view of how UTAS has arrived at where it is now, and
what this means for the future.
The
following note is based on UTAS’ financial statements since 2015. It is not a
management accounting exercise looking at costs, revenues and student numbers
etc, for that is outside the Committee’s Terms of Reference, rather an
explanation of UTAS’ overall financial situation.
UTAS’ net profits are very volatile.
Stripping away capital grants and
investment income however leaves a more sedate picture.
Unfortunately, all that’s left are
losses, losses from the core activities of teaching and research, and losses
caused by a relentless pattern of what UTAS describes as restructuring costs.
It’s not so much that UTAS’s buildings
may no longer be suitable, but its current financial model is not fit for
purpose.
The gobsmacking reality which UTAS
has kept hidden, is that deficits from core activities have been funded by
investment income, which inevitably will fall as investments are redeemed to
fund the Hobart CDB move.
If as UTAS has suggested, the prize at the end of the day is only $200 million once the Sandy Bay assets are monetised (as consultants term it) and the development costs in the Hobart CDB paid for, how will deficits from UTAS’ core activities be funded?
This is an additional submission to the Legislative Council’s Inquiry
into the Provisions of the University of Tasmania Act 1992 supplementing submission # 93, evidence given on 12th December
2022 and a further submission made 19th December 2022.
The supplementary submission was prompted by
the lack of transparency and scrutiny surrounding UTAS’ borrowing arrangements
as it pushes on with its move into the centre of Hobart.
The discussion is widened to include the
raising of funds other than by traditional borrowings and whether Sec 7(2) of
UTAS’ governing Act which requires the Treasurer’s approval to borrow, needs to
be broadened to include other borrowing-like arrangements.
This is followed by comments on other arrangements that impact of UTAS’ financial position.
This was an additional submission made on 19th December 2022 to
the Legislative Council’s Inquiry into the Provisions of the University of
Tasmania Act 1992, supplementing submission #93 and
evidence given on 12th December 2022, all of which are available on the
committee’s website.
The supplementary submission was prompted by the
lack of a coherent discussion as to who are UTAS’ members, to whom should UTAS
report and what role should members have in selecting board members (the University Council).
The need for the exact legal status of UTAS to be
clarified was highlighted by Premier Rockcliff’s October 2022 assertion that
UTAS was a private company and Vice Chancellor Black’s recent contention at the
May 4th 2023 hearing that UTAS is an instrumentality of the State.
Hopefully the Committee will be able to address this crucial issue. Most people are unaware if they're members of UTAS. Being a member does bestow any particular rights or obligations to receive information and very little by way a right to determine who should be elected to Council.
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.
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.
Licenses to
allow pubs and clubs to own and operate electronic gaming machines (EGMs)
passed through Parliament in October/November of 2021 after the Labor party
abandoned its brief flirtation with a principles based policy approach.
It was a
watershed moment for the gambling industry. Years of funding and lobbying the
government were finally about to yield a jumbo jackpot with net profits from
EGMs estimated to rise by an average of 50 per cent for EGM pubs.
Federal
Hotels lost its monopoly ownership of EGMs but was compensated by the slashing
of taxes on EGMs at its two casinos and the knowledge that its twelve Vantage
pubs with EGMs were about to be become even more lucrative. Federal was also considered
as the front runner in the process to select a Licensed Monitoring Operator
(LMO) to replace its own Network Gaming which has been running the monopoly
network.
However
subsequent events have put a dampener on the industry’s euphoria. Federal
failed to win the LMO tender. Maxgaming a wholly owned subsidiary of the listed
gambling behemoth Tabcorp was awarded the job in August 2022.
Shortly thereafter the government announced
the introduction of mandatory pre commitment cards as a way to limit player
losses as part of a revised harm reduction strategy.
The outrage
from pub owners was predictable. For years they have been telling us that
problem gamblers were only 0.4 per cent of the population and the bleeding
hearts in the welfare lobby just wanted to rob the overwhelming majority of a
bit of harmless fun.
Private
mutterings are now telling a different tale. Without obsessives playing the
machines, bottom lines will be severely impacted. Federal Hotels in its 2022
Annual Report issued late October 2022 confessed it was unable to assess the
impact “at this point in time”.
This is a far cry from a year earlier when Federal Hotels was able to independently value eleven of its twelve Vantage pubs as part of a sale and leaseback arrangement with various associated parties. This was disclosed in it 2022 Annual Report.