Tuesday, 10 December 2013

Forestry Tasmania's challenges

It’s a sad commentary on the democratic process that impending elections and the accompanying sloganeering and posturing actually retards discussion and implementation of sensible public policy.

Watching last week’s parliamentary hearing into Forestry Tasmania (FT) one could be excused for thinking that FT’s major problem was not the large losses incurred in 2012/13 and likely to continue into the foreseeable future, but the treatment afforded users of special species timber.

FT reckoned its loss for the year was $6.5 million. The Auditor General introduced a concept of underlying profit designed to exclude one off and capital amounts and he reckoned the loss was $12 million.

But Government handouts of $37 million were included as part of underlying profit. Exclude them and the loss becomes $49 million.

Even that is misleading because it attributes no cost to the trees chopped down and sold. If including the proceeds as revenue but attributing a nil cost to them when calculating underlying profit sounds like nonsense that’s because it is.

Just because attributing a cost to native forest involves a subjective judgement doesn’t mean it shouldn’t be attempted. Accounting statements are full of subjective estimates.

Furthermore the simple reality is that 25% of the 1 million tonnes of timber sold by FT came from plantations. Attributing a cost to them should be easy. Even if it’s not easy it should be attempted.

FT made forest sales of $56 million for the year, the mill door/wharf value of one million cubic metres of timber.

The cost of sales including payments to contractors to get the timber to the mill door/wharf was $58 million.

In other words a gross loss of $2 million, before employee costs ($28 million), depreciation ($10 million), other expenses/overheads ($19 million), and as noted already, before any cost is attributed to the timber sold.

Road costs aren’t included as direct costs as are other contractor expenses. Instead they’re capitalised and depreciated over a long period. With long rotation native forests arguably roads should be expensed when a crop is harvested.

Also not all employee costs are overheads. Many are costs directly attributable to the cost of sales and should be included as such in a meaningful set of accounts.

Therefore the true direct costs of timber sold by FT are far in excess of revenue received, and will be for a few years at least.

If the cost of sales exceeds revenue any accounting 101 student who attended more than one lecture will confirm that increased revenue will lead to increased losses (without price increases and/or a reduction in contractor rates).

The Auditor General attempted to point out this dilemma but his gentle self effacing style meant it was probably lost on the few who bothered to read his report.

It must be stressed this is not an esoteric accounting matter. It goes to the very heart of what the alternative government proposes. Savings from abandoning the TFA agreement, part of Mr Hodgman’s plan for a brighter future will be anything but that for FT. FT cannot survive without the proposed $25 million injection from government each year.

To idly assert that growing the industry will suffice ignores the reality that with the current cost and price structure, the more timber FT sells the greater losses it will incur. It is staggering that almost everyone chooses to ignore this inalienable reality.

Born again Liberal Paul Harriss had a golden chance at the GBE hearing to enlighten the Minister, CEO and Chairman about how to grow the business and run FT without government support as the Liberals intend, but he passed up the opportunity.

Tearing up the TFA and unlocking World Heritage areas are nothing but symbolic gestures which will do nothing to assist either FT or the wider industry to profitability.

Instead much of the time at the GBE hearing was spent on special timbers.

To get things into perspective special timbers accounted for 10,427 cubic metres of log sales (about 1% of FT’s sales) which contributed $1.3 million or about 2.5% of the forest revenue. Special timber sales comprised about 70% blackwood, almost 20% myrtle with less than 10% celery top, sassafras and huon pine.

Rather than devote any time analysing FT’s financials which described an entity perilously close to insolvency and reliant on the good grace of government to survive, most members of the committee came armed with briefing notes and questions prepared by the Salad Bowl and Cigar Box Manufacturers Cooperative who provide FT with scarcely any revenue, simply increase its losses, are disinterested in FSC certification because their customers don’t require it, and similar to people cloaking themselves in the national flag when on a soap box, assert their simple motivation is to promote Tasmania’s iconic timbers to the world.

The reality is the salad bowlers are just a bunch of shameless rent seekers who have completely hijacked the debate, are indifferent to FT’s unprofitability and disingenuous in their concerns for the wider industry which they are quite happy to see in turmoil once again just so long as they get the timber they want at fixed prices.

Yet parliament panders to them, even amending legislation just to please them.

Apart from forest sales, FT received government grants of $6.5 million to implement the TFA, $20 million to reimburse non-commercial activity costs, $15 million to help fund the deficit, not to mention $4.5 million for extra firefighting costs for the January 2013 bushfires.

It also received an equity injection of $10 million which it used to reduce loans to Tascorp and lease commitments to Transend.

Grants of about $25 million are expected yearly henceforth, about the same as assistance received by the racing industry.

Looking at its balance sheet, FT has virtually no debt but there is still a liability of $35 million labelled ‘revenue in advance’, money received via TFA and TCFA, mostly spent on ordinary operations but which will need to be found from future cash flow (or government grants) to spend as intended.

FT has continued to act as a financier for the industry with almost 25% of $30 million worth of debtors listed as impaired and the average overdue period for amounts owed out to 154 days. This indicates the woeful levels of working capital in the industry. To imagine ripping up the TFA will be the trigger for an industry growth spurt is delusional. Maybe the latest proposal to lock up protesters is designed to distract attention from the Liberals’ ill conceived, completely unworkable, forest industry plan?

The current FT Board contains only one Director from Bob Gordon’s era. Knowledge as to where skeletons are buried is usually the reason for an element of Board continuity?

It is not clear from FT’s annual report what the future holds revenue wise, apart from more government handouts. The path pursued under the reign of Bob Gordon with no Plan B has left the Board with a task that would have daunted Houdini. Even with perfect foresight Bob would have been hard pressed to stuff it up more than he did.

FT could have been a little more forthcoming as to how Gunns’ insolvency will affect it. There are 14,400 hectares of private plantations on State forest which FT’s chairman said were Gunns’ MIS schemes and a further 7,200 hectare of joint venture trees on State forest and crown land in which FT has an unknown interest. Given that almost all private plantations are likely to revert to landowners given the massive shakeup underway in the Tasmanian plantation industry it is quite possible FT will assume ownership of more hardwood plantations in addition to its current estate of 32,000 hectares in the not too distant future. How it will pay for them (if anything) and how it will pay to upkeep them is not certain.

Still plenty of challenges ahead for both FT and the industry

Meanwhile the salad bowlers are ensuring the squeaky wheel gets the oil. They must think the salad days will last forever.

1 comment:

  1. Absolute gem!!

    Thank you John.

    I'm now mailing off boxes of Bandaids to my forest industry peers to help staunch the bleeding from this razor sharp analysis. Ouch!!!

    Nothing left unsaid. Every sentence, every comma armed and dangerous.

    And as for the bread boarders and salad bowlers, and don't forget the wooden boaters, the Government Businesses Scrutiny Committee was just pure theatre. Designed, staged and managed to smoke-screen and dodge the bullets.

    What a sad pathetic joke the forest industry has become.

    2014 is not looking good at all.

    To think that this charade will soon get FSC certification.