FT's coming of age?

In a few weeks Forestry Tasmania will celebrate its 21st birthday.

It’s likely to be a subdued coming-of-age bash as the future looks murky. That it has lasted this long may be the only reason for merriment for some.

Liabilities now exceed assets. It can’t pay its way. If it was liquidated, the Tasmanian Government would be faced with a shortfall it would meet by taking over the unfunded superannuation liability.

Adjusting for the way we now value trees, $566 million in net assets were transferred in 1994 to establish Forestry Tasmania. Since then Forestry Tasmania has received $340 million in cash grants from governments and has spent $400 million on new assets, roads and plantations.

Roughly $140 million of grants have been for operating, funds to reimburse community service obligations, and funding to cover recent trading deficits.

The balance of $200 million of grants has been to establish plantations to build an asset base to provide future revenue.

About $20 million is yet to be spent as intended, the cash went to pay other expenses.

Despite all the grants, net assets are now zero.

In the early years, Forestry Tasmania was profitable and returned $140 million to state coffers, including a special dividend of $40 million when the first half of its softwood plantations were sold in 1999.

Peak profit year was 2004. Since, it has been a downhill slide, quite rapid since 2008. The past three years has seen cash trading losses running at $30 million per annum.

The loss in value of trees plus the blowout in the unfunded superannuation liability have also greatly contributed to the current net asset position of zero.

While a paper loss, the fall in value of trees reflects that future expected profits from tree harvesting is declining — the crux of the problem.

If Forestry Tasmania makes a profit after delivering to the mill door and paying all contractors, there is hardly anything left to cover wages, overheads, the capital cost of roads and regeneration and pensions to retired foresters.

It has been that way for a few years. The Auditor-General spent a frustrating three years before his revealing Special Report into Forestry Tasmania finally emerged in 2011. Four years later, little has happened.

Resources Minister Paul Harriss’s plan to sell Forestry Tasmania’s hardwood plantations does not address the losses from native forests. They haven’t caused cash flow problems as they have mostly been funded by grants.

Selling plantation simply raises cash to fund operations while it conducts due diligence on the rest of its loss-making activities, which have been obvious for many years.

Due diligence has become a refuge for the clueless.

When Forestry Tasmania emerges from its transition in two years’ time, its negative net assets won’t be any different.

It will have fewer assets with the sale of the plantations and a lower bank overdraft as a consequence.

Worse still, it will emerge without the plantations it has spent over $200 million to acquire, hoping to transform its operations on to a sustainable basis and to supplement the mandated future supply of sawlogs.

It is completely bizarre.

We have spent years trying to establish the sustainable harvestable levels from native forests and plantations owned in the public interest.

We are now trying to confirm whether this implies a financially sustainable Forestry Tasmania. There is no prima facie reason why the two should coincide.

Forestry industry policy-makers should have been able to walk and chew gum at the same time.

It is a bad time to be selling plantations. Ten-year-old plantations sell for a fraction of their establishment cost.

Forestry Tasmania chairman Bob Annells has suggested sale proceeds of $40 million. That won’t cover trading losses.

Rebuilding the industry, as Premier Will Hodgman and Minister Harriss promised Tasmanian voters, implies the problem is a lack of scale.

It is not.

The problem is low prices to a cosseted industry, in some cases via long-term contracts that sell native forests at close to cost.

Forestry Tasmania appears to be in de facto administration with a Treasury representative proposed to sit on the board.

Treasury is probably wary of Forestry Tasmania’s decision-making ability, having seen at close quarters the hare-brained scheme hatched with the former state development department to lend state funds to a heavily geared, loss-making private consortium to buy the Gunns’ Triabunna woodchip mill in 2011, fully underwritten by an insolvent Forestry Tasmania.

Tasmania is fortunate that federal forestry grants have not been accounted for when calculating our GST share.

In the noble Brian Harradine tradition, our over-representation in Canberra has procured an over- allocation of federal funds.

With no hard budget constraint on the State Government, poor public-policy prioritisation and implementation has led to poor outcomes.

The last $100 million of grants sourced from our own funds is finally slowing down the gravy train.

Just how will Forestry Tasmania’s post-2025 sawlog requirements be supplied as mandated when the plantations funded by the Commonwealth for this very purpose no longer belong to the government business?

The unforgivable delays in reforming Forestry Tasmania mean change to achieve positive cash flows and growing net assets, required for a sustainable forest company, is nigh impossible. Future options are vanishing, and the loss of hardwood plantations will weaken it.

Competing with the private sector is fraught with danger, lest national competition rules are breached.

Outsourcing functions is limited. Most of its operations are already contracted out.

Privatising planning and supervision may save a few dollars but will make gaining Forest Stewardship Council certification harder, and in turn keep a lid on revenues.

The industry and its cheerleaders have been too ready to blame greens for their woes and mistakenly believed their commercial problems have political solutions.

Without quick commercial solutions there won’t be many more birthday celebrations for Forestry Tasmania.

(Published in The Mercury 16th June 2015)