Tuesday, 4 January 2011

Forestry tasmania's cover up

Sue Neales was on the right track with her story titled $22m in forest funds sit idle (HERE)

The story regarding unspent funds received by Forestry Tasmania as part of the Tasmanian Community Forest Agreement TCFA was immediately rebutted by FT’s Hans Drielsma (HERE) who denied any hoarding of funds saying a prudent plan was in place to spend the remaining $22 million, a figure from internal FT spreadsheets obtained under RTI and referred to by Sue Neales.

But the truth is much worse, if one chooses to believe Mike Blake, the Auditor General. The TCFA future commitments far exceed the available cash on hand. There is an eerie resemblance between FT’s use of TCFA funds to operate and Mr Aird’s use of the SPA account to fund current Government programs.
Let’s start at the beginning.

The TCFA was signed in May 2005 between the State and Federal Governments to supplement the provisions of the existing Regional Forest Agreement RFA.

Under the TCFA the Commonwealth agreed to contribute $131.2 million of funding for specific activities including the establishment of new hardwood plantations and research and development activities. The State agreed to contribute $90 million.

Not all funds were to be handed to FT. The Feds felt it necessary to draw a line in the sand and administer some of the money themselves, $42 million for the hardwood timber industry (68 grants given), support for country sawmillers ($4 million, 23 grants) and support for the softwood industry ($10 million, 17 grants).

The funds to be received by Forestry Tasmania were for the establishment of an additional 16,000 hectares of hardwood plantations ($96 million), thinning and pruning existing plantations ($19 million), support for special species and various other research related tasks such as alternatives to clearfelling.

FT has now received all funds as per the TCFA agreement, a total of $145 million. This is the amount recorded in the financials. RTI information suggest only $140 million was received.

TCFA funds were channelled through a Trust A/c run by Finance-General for the first year, thereafter by DPAC. The account is now closed. In total $173.7 million passed through the account, most of it going to FT. The balance ended up back with the State presumably for roads ($20 million was to be spent by the State) and $13 million to cover implementation expenses.

From an accounting viewpoint when TCFA funds are received by FT they are recorded as ‘revenue in advance’ and not recognised as income until the expenses have been incurred in relation to the specific projects for which funds have been received. Any remaining funds are held in revenue in advance until expenditures have been incurred. (Note the word ‘incurred’).

Also included in ‘revenue in advance’ were amounts spent on capital (excluding plantations) as yet unamortised. As plant is amortised so too is ‘revenue in advance’ reduced. Hence ‘revenue in advance’ included unamortised capital amounts or more correctly, deferred income amounts, as well as unspent amounts (mainly earmarked for plantations).

Mike Blake, the AG, wrote a bit in his 2009 Report about TCFA funds. He determined there was an unamortised amount of $11 million (funds spent on Newood and roads etc, but yet to be written off) which reduced the TCFA ‘revenue in advance’ from $51 million to a figure of $40 million as the unspent TCFA funds at 30th June 2009. But there was only $37 million in the bank so AG logically concluded that FT had used $3 million of TCFA funds to meet day to day operating costs.

AG further commented “cash from operations remained tight with investing activities having been funded primarily through short term funding from the TCFA funds”. This has been AG’s theme over the past few years, drawing attention to FT’s excessive reliance on TCFA funds to survive.

To recap, at 30th June 2009 there was $40 million in unspent TCFA funds.

The next year 2009/10 saw another $22 million received in TCFA funds. Revenue in advance rose to $60 million of which $52 million was TCFA funds. There was a change in the treatment of deferred income amounts in 2010 so it appears as if the $52 million revenue in advance for TCFA funds could well be the total of unspent TCFA funds at 30th June 2010. With $40 million at the beginning of 2010 plus new funds of $22 million less funds spent on new plantations of $8 million less a little on operating expenses equals about $52 million at the end of the year.

It’s difficult to completely reconcile the TCFA funds since 2005. FT’s cash flow statements reveal $145 million as being received. Only $82.5 million has been included as revenue to date, there’s $52 million still in ‘revenue in advance’ and there’s approx $10 million (guess) spent on capital items but as yet not recognised as income. That adds up to about $145 million so it seems roughly right.

In 2010 AG introduced the concept of ‘acquittal’ by saying:

• “TCFA funding is acquitted by Forestry at a rate of $6,000 per hectare of plantation established. However only $3,500 is recognised as ‘earned’ within Forestry’s financial statements upon cultivation, with $2,500 remaining as Unearned revenue until pruning and fertilisation costs have been incurred”. (note the word incurred)

• “As such despite the large balance of unearned revenue, $59,966m, only part of this balance, $15,000m, is yet to be acquitted”.

‘Acquittal’ is not a common accounting term. It doesn’t mean ‘spent’ or ‘incurred’. It seems funds can be ‘acquitted’ but ‘unspent’. Only $15 million in TCFA funds were yet to be acquitted but the unspent amount could well be $52 million.

Mr Green the Responsible Minister used the term ‘acquittal’ when answering a question from Mr Booth at the recent Government Business Scrutiny hearings.

Mr BOOTH - I would like to return to operating cashflows in the future. You talked about maybe having to bring in various different income flows but what will you do about the revenue in advance that has been used to fund operational matters? I am referring to the $60 million I think that is still outstanding through the Community Forest Agreement.

Mr GREEN- That has been looked through in great detail and the final position with respect to the acquittal is around $15 million….

Mr BOOTH - So there is only $15 million of the CFA that is still outstanding?

Mr GREEN- Yes.

It is clear Mr Booth was asking about unspent cash. Mr Green inferred there was only $15 million unspent. Considering the unspent cash was possibly $52 million Mr Green was a little economical with the truth.

There was a time when misleading Parliament required a Minister to correct the record with a subsequent explanation. Maybe that convention no longer applies.

AG in his 2010 Report went on to say:

“In summary, the closing cash position for 2009-10 of $29.546m included TCFA funding yet to be acquitted, $15.000m ... (and)......... Note 27 ‘Expenditure commitments’ within Forestry’s financial statements recognises Forestry’s intent to invest $42.559m in plantation establishment”.

Note 27 of the 2010 financials confirm FT has committed to spend over $42 million in plantation establishment. So there might be about $10 million in non capital amounts yet to be spent for a total of $52 million.

Again FT has been caught dipping into TCFA funds to help stay afloat.

Finding cash is becoming increasingly hard for FT. The 2010 year saw FT sell all its motor vehicles for $5 million on a sale and leaseback basis. A short term cash fix maybe, but the benefits will vanish over time as the lease repayments are made from cash flow.

Now that the glory days of cash from TCFA have finished, too many more years of negative operating cash flows will lead to insolvency. A few solid positive years are required to ‘pay back’ TCFA funds used for day to day operations. As AG said in his 2010 report “It is not sustainable for Forestry to generate negative cash from its operating activities”. AG writes in a deadpan matter-of-fact style which doesn’t always allow readers to pick up nuances, so when he makes an unequivocal statement like that, it’s a pretty damning criticism. At Scrutiny hearings this year FT was unable to provide any meaningful details of a revival plan.

Must still be a work in progress?

The Commonwealth Auditor General has written a detailed report on the administration of TCFA funds for which the Commonwealth was directly responsible, the grants to industry participants, mainly to acquire new plant and equipment. Numerous shortcomings with the process were found. Some recipients are already out of business. It won’t be recorded in history as a prudent use of public funds.

To date FT’s performance in administering TCFA funds has yet to be fully scrutinised. FT has certainly been slower than anticipated. Dr Drielsma blames lack of land availability for FT’s tardiness. But FT has had 5 years to plan the establishment of 16,000 hectares. That’s not a big task for an organisation of 500.

It is difficult to escape the possibility that FT has structured the use of TCFA funds to ensure its own survival, a situation that must give the Feds a little unease as the State lines up for another handout. This gives credence to the view that the recent Statement of Principles is more a precondition for joining the begging queue in Canberra than a result of deeply held principles or sincere beliefs in the best way forward for the forest industry.

An FT forester recently claimed on TT that ENGOs employ spin doctors and wordsmiths to hijack “the language of forestry and conservation” adding words to “our lexicon” which may not have “any scientific basis whatsoever”. I suggested FT mimics that approach with some of its accounting assertions. This current example offers prima facie evidence.

Mr Green and Dr Drielsma appear happy to peddle half-truths. Using the word ‘acquittal’ when every reasonable person will interpret it to mean ‘spent’ is a dubious practice.

Trying to cover up cash flow problems won’t prevent the truth from eventually emerging. If all is well with FT, spending some of the TCFA funds a little earlier when the entire industry was in turmoil might have helped more than the recently announced rescue/exit package for contractors.

At some stage a full review of what FT has achieved with the $145 million in TCFA funds will assist in future industry planning. To date 12,500 hectares of new plantations, a bit of pruning and thinning, a bit of Warra research doesn’t appear to be enough to induce the Feds to hand over more in a hurry.

Maybe AG’s long awaited report on the forest industry will answer a few questions.

Dr Drielsma assured us that FT has adopted a prudent approach. Perhaps, but fewer ambiguities from himself and Mr Green designed to exploit people’s inability to understand financial statements, would be more reassuring. Simply tell us in plain English what the Balance Sheet amount of TCFA ‘revenue in advance’ of $52 million represents and just what is the amount of $42.6 million in plantation expenditure noted in the financials as a future commitment.

Unspent TCFA funds perhaps?

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