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.
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.
It is difficult to understand how VicForests’ can describe its latest loss of $4.7 million as ‘a sound result’.
A closer look at the VicForests’ Annual Report for 2020/21 suggests a different description may be warranted. Forest revenue of $85 million was similar to the previous year, but after production costs of $70 million the stumpage value of harvested timber was the lowest ever at 17.9 per cent of revenue or $15.3 million, which was scarcely enough to cover roading and regeneration costs of $13.5 million, let alone employee costs of $19 million and overheads of $12 million. A lifeline of $21 million from the Government was needed for VicForests to continue as a going concern.
