Saturday, 6 December 2014

A breach of competition policy?

The Forestry Tasmania scrutiny hearing left no doubt that its survival depends on selling more native forest woodchips at higher prices.

Filling the void left by Gunns’ departure and venturing into the space currently occupied by private woodchippers and exporters is not without public policy problems, notably a need to adhere to national competition principles.

Getting government funds into Forestry Tasmania is more than simply a question of a choice between deficit funding and equity transfers.

The principle of competitive neutrality applies to government businesses competing with the private sector, and ensures that any advantage arising solely from their government ownership be removed unless it’s in the public interest, and prices need to be set as if they were privately owned and are fully cost reflective.

The  1995 Competition Principles Agreement(as amended) is between the Australian and State governments.

Competitive neutrality policy and principles are set out in Clause 3(1):

“The objective of competitive neutrality policy is the elimination of resource allocation distortions arising out of the public ownership of entities engaged in significant business activities: Government businesses should not enjoy any net competitive advantage simply as a result of their public sector ownership. These principles only apply to the business activities of publicly owned entities, not to the non-business, non-profit activities of these entities.”

In the past this clause hasn’t had much application to Forestry Tasmania because it wasn’t engaged in competitive activities, and by no stretch of the imagination could it ever be accused of engaging in profit making activities.

Now things are different.

Or at least they will need to be if Forestry Tasmania is to survive.

Profitable native forest woodchips is Forestry Tasmania’s only chance of salvation.

Minister Harris and Forestry Tasmania don’t talk in such blunt terms. They use the less pejorative term ‘residues’ giving the impression they are referring to sawmill residues rather than the bulk of native forests that head straight for the chipper.

Providing deficit funding would be a clear breach of competitive neutrality given the other players in the chip industry.

Hence any assistance needs to be structured differently.

Forestry Tasmania will be permitted to use its existing line of credit with Tascorp of $31 million to fund its 2014/15 loss which will then be discharged in 2015/16 with an equity transfer from TasNetworks.

The long suffering public are growing weary of the increasing guile, half truths and ambiguities to avoid what looks for all intents and purposes like a blatant lie.......’it’s not a cut it’s an efficiency dividend’........ and the latest ......’its not a subsidy, it’s an equity transfer’ was thought to be a continuation of the unfortunate trend.

But it’s more than just semantics.

As Minister Harriss said “This is just a sensible way of doing business”.

Forestry Tasmania’s only path is to compete in the private sector which it can only do if not propped up.

So we have this charade of running an overdraft and then raiding another government business to clear it when it reaches the limit, just so as to comply with the letter of competitive policy.

Hardly in keeping with the spirit of the principle, especially seeing the overdraft is secured by a letter of comfort from the Treasurer.

TasNetworks’ performance agreement with the government contains no more equity withdrawals after 2015/16, and that is probably because the Australian Energy Regulator will be making a fresh determination of the prices that TasNetworks can charge its customers for the next 5 year period, and while it is not expected to be anything like the recent draft reductions proposed for NSW, there is unlikely to be enough spare cash to prop up Forestry Tasmania.

What then?

‘‘I’m convinced we’re on the right track,’’ Mr Harriss said.

To close down in two years time perhaps? This is increasingly likely. Already one retiring board member is not being replaced.

It was disappointing the Auditor General didn’t draw attention to the growing woodchip component of sales and the attendant problems.

It wasn’t obvious when Forestry Tasmania released its 2014 Annual report as the usual detail splitting up the mill door value of timber types was not included.

Its subsequent release suggested the mill door value of timber was $ 14 million less than revenue in the 2014 year, which after the revelations of the scrutiny hearing was probably due to Forestry Tasmania’s increasing foray into chipping rather than as a supplier of logs to others.

Forestry Tasmania as presently constituted will never be profitable as a log supplier.

It can only survive if native forest woodchip demand and prices return to the days when John Gay had a smile on his face, and it can only do that by competing with privateers.

Displaced public servants have a right to know the Government has chosen to use the resources of the State sector to assist Forestry Tasmania compete with private companies contrary to the principles of competitive neutrality and national competition, using subterfuge to inject funds via the back door and weasel words to disguise the deed.



  1. Falling Aussie Dollar will probably help?
    I understood one of the GBE's is also transferring money to Tas Rail or am I mistaken?

    1. Yep the falling $ should help.

      The government has been taking $20m of equity out of Transend each year to put into Tas Rail.
      TasNetworks formed from the merger of Transend and the poles and wires from Aurora will continue the pattern this year but next year will have an extra $30 m removed to fund FT.

  2. "Forestry Tasmania because it wasn’t engaged in competitive activities". I'm confused by this statement John. I have always regarded FT as being in direct competition with private growers. That was one of the reasons that PFT was made a separate organisation - conflict of interest! Surely now that private forest growers are helping to subsidise FT must be classed as a breach of the Corporations Act!!

    1. Gordon you’re right I could have put it better.

      In the past FT was principally a log supplier.

      It is only in the last few years that FT has started to cop a bit of flak with its market activities, Greg L’Estrange for instance accusing FT of stealing its customers.

      FT used to subsidise Gunns for instance via favourable wood supply agreement but it was probably still able to claim it wasn’t in breach of competition guidelines.

      But now being completely reliant on government support it’s a different story.

      Incidentally FT is a GBE and operates pursuant to the GBE Act not Corporations Law altho’ in practice there’s not much difference.

  3. So could the fact that private forest growers are helping to subsidise FT be classed as a breach of the GBE Act?

  4. john there is news that crown is looking to increase sawlog royalties by 30% in new year but the sawmillers are crying poor . That's good news as at last the products will get a fairer return for those sawlogs ; the bad news is that after this and the $20M equity swap the forecast is still a loss of $16M for this current fin year . So when will FT get out of processing ie sell its Southwood sawmill and and get out of its terrible toll chipping contracts( ghost of of what was proposed for Triabunna where all service provider fixed costs are covered irrespective of volume ) they are not toll chipping but a feather bedding exercise . ?? appreciate if you can see what information is about them