Tuesday, 2 March 2010

Bartlett and the new forests plan

Mr Bartlett announced funds would be made available “for the implementation of the new Forest Industry Plan, released in January by the Forests and Forest Industry Council of Tasmania” HERE.

One doesn’t need to be a graduate of Dave’s much acclaimed Tasmania Tomorrow, for the merest cursory examination to raise doubts about the Plan.

Dave’s blind acceptance of the Plan is quite staggering. He couldn’t possibly have read the document.

It wasn’t a reasoned Business Plan. It was designed as a political document, as is evident by his reference to the Plan at a time in the campaign when the divisive forestry issue was needed to lift his flagging fortunes.

I’m sure the Liberals and Greens would have been happy for the issue to remain away from the spotlight.

The report’s reliance on unsubstantiated statements manifested itself early on p.3 when it was stated “(t)he industry’s continuing success has been achieved by focusing on maximising value”. I kid you not, that’s what the Report stated.

On page 7 the “plan identifies $2.5 billion in value adding opportunities for a range of new approaches”. Now let’s be clear about this, ‘value adding’ means just that. It’s not measured by ‘turnover’ but by totaling ‘value added’.

As part of the $2.5 billion, the report continued on page 7 by identifying a collection of projects (including a pulp mill) capable of “directly generating an extra $1.26 billion annually to the state’s economy.”

However when one looks at the Table on page 23, what we see is simply $1.26 billion in income, it’s not $1.26 billion in value added nor is it $1.26 billion in extra income. There’s a big difference. That’s one flaw in the approach used in the FFIC report. Deliberate obfuscation. Income? Value added? Extra income? The value added and/or income from previous uses of the timber was never mentioned.

So we have $1.26 billion that is variously described as value added or extra income when it is neither, it is simply the total income.

Page 7 identifies additional revenues of $240 million annually from new harvesting equipment, stating “(t)hese new opportunities will provide security for forest contractors”. Fair dinkum, that’s what is said. Buy more gear and you’ll be secure.

That’s what they told the last lot.

The aforementioned Table on page 23 lists $240 million as income from harvesting and transport. But it is also included in the “$2.5 billion in value adding opportunities”. The output of the end product industry (a pulp mill for instance) is added to the output of an intermediate industry and the total is passed off as increased value added and/or increased income for the forest sector. It is neither. This is a second flaw in the FFIC report. The report double counts.

Take another example. Suppose a new milk processing plant will have output of $1 billion but it will require new bulk milk freight contractors to buy new gear. The latter will have income of $200 million. What is the new value added by the dairy sector? Ask Dave or FFIC and the answer will be $1.2million.But this of course double counts the contractors’ income. Dave would probably spruik it as an extra $1.2 billion to the State. But even $1 billion may be an over estimate, if say existing farmers merely changed milk supply companies causing a reduction in output of existing processors.

And the FFIC methodology also presupposes no alternative uses for existing resources and no negative effects on other industries, both fairly bold assumptions.

So FFIC gradually builds up the value of their Plan by confusing the reader, by interchanging the term ‘value added’ with ‘income’, and by double counting

But the piece de resistance comes when FFIC ventures into the use of partial multipliers.

Bear with me for a minute.

Partial multipliers are an attempt, in the case of employment multipliers to estimate the likely employment effects from a particular project or projects, usually the number of indirect jobs created by one direct job. In the case of FFIC’s Plan the new harvesting and contracting jobs are identified although double counting their income is, as mentioned, deliberately misleading.

Partial multipliers are sometimes used if there are to be flow on effects to other sectors. Say if a mine, may lead to steel mill and then to a car plant etc etc.

No likely positive flow on effects to other sectors is identified by FFIC’s Plan. In fact anecdotal evidence suggests the opposite.

But the Plan still threw in an extra 1,000 jobs producing value added and total income of $1 billion, merely “by applying standard forestry employment and income multipliers” (page 8). At the risk of being labeled a skeptic, that looks like an awfully round number!! Not one skerrick of evidence was presented in support of this assertion.

But let’s proceed. There’s another 1,000 indirect jobs, on top of the 650 harvesting and contracting jobs which flow from the 880 direct jobs. Almost 2 indirect jobs for every 1 direct job. Even if it were true on average it is hardly likely to be true at the margin. There may currently be 2 indirect jobs for each direct job, but one new direct job won’t necessarily produce 2 more indirect jobs. And new harvesting plant and equipment might even lead to a loss of jobs, not a 2 for 1 increase.

The Plan, using standard forestry multipliers forecasts income of $1 billion from the extra 1,000 indirect jobs. But is this income outside the sector? No it’s income (and value added) from “additional support and service investments” (page 8). Presumably this means additional support and service to the identified projects within the forest sector.

But if the support and service is within the forest sector then it is misleading to add the income of $1 billion to the $1.26 billion from the projects, and the $240 million from harvesting to achieve total income of $2.5 billion and $2.5 billion in value added.

It’s double counting.

In fact that’s precisely it.

$2.5 billion in value adding opportunities, or direct income, according to the Plan, is only $1.26 billion when double counting is eliminated. And that is before taking into account the value created from existing resources by existing processes.

But the accounting implication of all this is that if final income is only $1.26 billion and the intermediate support and service income is $1.24 billion, and the latter is an expense of the former, then the profit before interest and tax and depreciation (EBITDA) of the new projects is only $20 million.

TT readers who follow the fortunes of FEA and Gunns will know that an EBITDA of $20 million will severely restrict the amount that can be borrowed to fund the projects. So how is the New Forestry Plan to be financed, Dave? The State Government?

So what’s Dave got in mind for the forest industry? Does he unreservedly accept FFIC’s Plan? Has he read the report? I know it a difficult time in caretaker mode, being surrounded by a firebreak of bouncers whose interest in policy is not paramount.

But Dave, the forest issue is tearing us apart and you as a savvy Gen Xer by stoically and uncritically accepting the deliberately misleading claims the FFIC spinners have presented as standard economic policy, have further extended the time during which we will all have to endure more pain.

Dave, please have at least a passing look at why FEA and Gunns are travelling so close to the wind with their banks.

And Dave, ask yourself why this is so when the industry has just experienced the never to be repeated cash flow joys of MISs and open slather woodchipping.

And then, Dave, tell us why the New Forest Plan will work when the existing policies have failed.

Thanks Dave.

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