The following was a background paper prepared as part of a series of articles on Regional Forest Agreements by Gregg Borschmann published by The Guardian. An overview can be found HERE.
The Guardian asked the Tasmanian minister responsible for forestry a series of questions about the RFA. The questions and the Minister's responses are included at the end of this blog.
The Guardian asked the Tasmanian minister responsible for forestry a series of questions about the RFA. The questions and the Minister's responses are included at the end of this blog.
The
Tasmanian Regional Forest Agreement (RFA) signed in 1997, was supposed to
provide a framework for the sustainable management of Tasmania’s forests.
If
financial sustainability was the aim, the outcome has been a complete failure.
Since 1997 the state-owned Forestry Tasmania (FT) has suffered cash operating losses
of $94 million. In simple terms it was selling timber far too cheaply.
But
the overall picture is even worse. Capital spending of $368 million on plant and
equipment, roads and plantations, most sourced from government funds, failed to
add anything to FT’s asset base. FT’s
total operating cash loss over 20 years was therefore $454 million.
That’s just the cash losses.
Not only did new capital spending fail
to increase FT’s asset base, there were huge non-cash losses as forests under
its trusteeship
lost $750 million or 90 per cent of their value.
In
1997 almost all FT‘s income was from native forests. from 1998 to 2000 it received
a total of $72 million from the RFA as compensation at market value for native
forests transferred into reserves.
Native forest production mainly woodchips kept
growing grow from around 1.8 million m3 in 1997 to 3.3 million m3 in 2004
before steadily falling below one million m3 in 2012 where it has since remained.
The pattern closely followed the fortunes of FT’s major customer Gunns which went
into administration in October 2012.The following chart paints the picture.
Operating surpluses
The increased haul from native
forests didn’t flow through to FT’s bottom line. Gross profit from forest
operations persistently declined after 1998 as evidenced by the following
chart.
Gross profit is forest revenue less
direct costs of harvesting, cartage, freight and in the later years chipping
and wharf costs when FT assumed some of those tasks after Gunns’ demise. In
2013 and 2014 gross profit was negative. This simply means revenue failed to
cover the cost of taking the product to market. There was nothing left to cover
FT wage costs and other overheads, nor the capital costs of roads needed for
harvest operations. The pickup in the past three years was due to FT cutting
out the middleman after Gunns’ departure, for both native forest and increasingly,
plantation woodchips. This won’t last as most of the chippable plantations have
just been sold and FT’s Board proposes to get out of value adding activities,
instead selling its timber on a stumpage basis.
By deducting overheads and borrowing
costs from gross profits, cash operating surpluses are derived.
Cash operating surpluses persistently
declined over the period with the last 10 years showing deficits. Quite simply
FT failed to generate enough from operations to cover all its operating costs. Since
2007 cash deficits totalling $217 million have been recorded. These are just
the operating deficits. Excluded are specific deficit funding from the State government
and the funds from the RFA, from 1998 to 2000, the
Tasmanian Community Forest Agreement (TCFA) from 2005 to 2010, and the
Intergovernmental Agreement (IGA)from 2012 to 2017. Included are government
grants for firefighting and other community service obligations.
Capital spending
Capital spending is also excluded
from the calculation of operating deficits. In FT’s case these amounts included
spending on property plant and equipment (PPE), plantation establishment and
roads. The basic accounting rule is that capital amounts have enduring benefits
and are depreciated over their useful lives rather than immediately expensed. However,
as the State’s Auditor General commented in a
draft report on FT’s performance issued April 2009: “.......without stronger
financial performance, investment in roads and plantations over the past 15
years will not yield future benefits to Forestry and arguably should be
expensed rather than capitalised. On that basis, it can be argued that ordinary
operations from 1994 to 2008 have yielded little profit.”
The Auditor General put forward a
simple common-sense proposition that amounts normally considered as capital
should be immediately expensed if they‘re not expected to produce future
benefits.
When one looks at FT’s financials
over the 20-year period from 1998 the value of PPE on the balance sheet has
declined from $31 million in 1998 to $14 million in 2017. Property here is land/office
buildings or other industrial land and does not include any part of the forest
estate. Given the decline in the balance sheet value of PPE it is therefore
reasonable, pursuant to the Auditor General’s dictum, to include PPE cash outlays
to operating deficits.
Similarly, the value of roads as per
the balance sheet is considerably less in 2017 than in 1998. Hence any spending
on roads can be expensed and also included in an adjusted operating cash deficit
calculation.
In the case of hardwood plantations
FT owned approximately 18,000 hectares in 1999. In 2017 FT only had 18,000
hectares of plantations that it had established. This followed the 2017 sale of
29,000 hectares of plantations needed to discharge the line of credit that had
allowed FT to operate for the past two years, Hence no change in 20 years. FT however
now owns a further 3,200 hectares of plantations established by Gunns’ managed
investment scheme (MIS) growers on FT’s land that it inherited after the windup
of those schemes. FT, or Sustainable Timbers Tasmania (STT) as it is now
called, therefore has about 21,000 hectares of hardwood plantations on its
books as at today.
Spending on plantations over 20 years
has increased neither the size nor the value of the forest estate (see further comments
below on the value of the forest estate) and therefore should be expensed.
Adjusted losses
Therefore since 1998, $368 million
spent on PPE, roads and plantations will yield zero future benefits for FT and should
be included in any measure of operating surpluses/(deficits).
The adjusted operating surpluses for
FT over the past 20 years looks like this:
Three years experienced very small
surpluses, $4 million in 1998 and 2002, and $2 million in 2004. The rest of the
years produced deficits. Over 20 years the net cash deficits totalled $454
million.
In the early years despite the
underlying deficits, the financial statements showed accounting profits on the
bottom line which meant income tax equivalents as well as dividend payments to
the government as owner. These amounted to $68 million. In addition, the
government took an equity withdrawal of $40 million in 1999 when a 50% share of
most of the State’s softwoods were sold.
The payments to government when added
to operating cash losses resulted in overall cash losses of $562 million.
Cash funding
How were the cash deficits funded?
The RFA, TCFA and IGA were programs
designed for the whole forest industry. FT received less than half, $72 million
from TFA, $146 million from TCFA and $87 million from IGA. The State government
contributed a further $80 million and plantation sales totalled $193 million.
The latter comprised $133 million of softwood plantations and $60 million for
the recent hardwood plantation sale.
That’s it in a nutshell. Twenty years
of cash deficits totalling $562 million were funded by both the Australian and
the State government plus proceeds from the sale of 75,000 hectares of
plantation assets. The hardwood plantation assets which were fulsomely promoted
and funded by governments and which were supposed to lay the foundations for a
sustainable FT have now mostly been sold, to cover the cash deficits which they
were eventually supposed to fix. Ninety per cent of the softwood assets have
also been sold. The continuous losses were principally due to native forest
operations. FT was grossly negligent in not addressing these losses much, much
earlier. It’s been a monumental failure.
The forest estate and how its valued
Maybe however, despite the cash
deficits and the sale of plantation assets the total value of the forest estate
may have been increasing? Alas the reverse is the case as this chart shows.
The forest estate is valued as one,
then subjectively split between the three components, land, roads and forests.
For a while, land was allocated a value based on the Valuer-General’s
assessment, roads given their depreciated value, with forests ending up with the
balance.
FT is always keen to attribute its
problems, or some of them at least, to the loss of productive forests. However,
the value of the estate in 1998 of $852 million already excluded the value of
forests for which the RFA provided compensation equal to market value.
When a forest estate is valued,
future yields are estimated, as are future prices and holding costs over the
period until harvest, plus harvesting and other costs to get the product to
market. The resultant future net proceeds are then converted into a lump sum
present value using a discount factor, essentially an expected rate of return
weighted for risk. In 1999 the discount factor rose leading to a sudden fall in
value. In 2010 the discount factor actually fell slightly. The precipitous fall
in the value of the forest estate in that year was due to a change of valuer
who reviewed the inputs into the valuation model, costs, yields etc and came up
with a sharply reduced figure.
With the overall forest estate value plummeting
after 2009, it was decided to allocate land a zero value. Had that not occurred
the value of native forests, being the residual amount after land and roads,
would have been zero.
However, the overall value of the
forest estate kept falling to a point where the forest roads were worth more
than the trees in the forest. Both were located on land deemed worthless. How
can sensible public policy decisions be made based on models with such
ridiculous assumptions? Another change was made. Roads were allocated a value based
on the road tolls earned, which is negligible, rather than their written down
value. This left more for forests. But it’s such an arbitrary approach, lacking
any scientific rigour which foresters are always keen to stress underpins their
profession.
The above chart, in respect of 2017,
reflects the sale of the plantation estate completed after June 2017. While the
plantation sale was the sale of a forestry right which gives the holder the
right to the existing crop plus the right, indeed obligation, to use the land
for forestry purposes for 99 years, it is likely the value of this forestry
right will differ from the balance sheet value of a forest which only values
the current crop.
If we reduce the balance sheet value
by the full value of the hardwood plantation disposal after June 2017, the
forest estate falls to $101 million. From
$852 million in 1998 to $101 million today.
That’s a balance sheet loss of $751 million.
FT experienced further balance sheet
losses with a blowout in its unfunded superannuation liability. The government
took over the liability relating to past employees in 2017, leaving FT with a
liability relating only to current employees of $20 million at the end of 2017.
The balance sheet loss, in this case the increase in liability, for the 20-year
period was $89 million. Adding this to the fall in forest value of $751 million
gives FT’s total balance sheet or non-cash losses of $840 million.
The current public production forest estate
of almost 800,000 hectares, about 40% of which is set aside in informal
reserves or other non-productions, includes the remaining 21,000 odd hectares
of hardwood plantations most of which have been pruned and thinned. Let’s say
the remaining hardwood plantations are worth $50 million which incidentally is
far less than the establishment costs. If the whole forest estate is worth $101
million, subtracting the plantation value of $50 million and roads value of $7
million only leaves $44 million as the value of native production forests.
Even if the figure is not quite that
low, say it is unreasonable to reduce forest value by the full amount of the
$60 million obtained for the forestry right after June 2017, the current value
of native forest will certainly be much less than $100 million. FT hasn’t
publicly advised the split up of forest values between plantations and native
forest since 2008.
Native forests financial sustainability
Two conclusions are now possible.
First, it is completely reasonable to
do as the Auditor General suggested and expense outlays on PPE, plantations and
roads to arrive at a true operating cash deficit figure. The assets acquired
have either been sold or won’t yield future benefits.
Second expensing the cost of roads to
harvest native timber means future net harvest proceeds will be less resulting
in most native forest harvesting being unprofitable. Even if there are positive
net harvest proceeds they are unlikely to cover overheads. A corollary is the
value of forests will also fall.
Any valuation methodology suffers
from the necessary assumptions that need to be made. A forest is valued as an
income producing forest and hence non-timber values that may attach to forested
land are ignored. There is little doubt that there are environmental values
that even most hardnosed bean counters would acknowledge.
Furthermore, as outlined above holding
costs are included to calculate net harvest proceeds. In the case of leased
land this would include any rent payable. In the case of FT’s land an imputed
rent is not included in holding costs because, FT argues, land is assigned a
value once the overall forest estate value is calculated. But since 2010 land
has been assigned a zero value. The valuation methodology effectively ignores
land. It is not given a value, nor is an imputed rent figure included in
holding costs used to calculated net harvest proceeds. Any loss of non-timber
values at harvest time are forgotten. If rents were imputed to FT’s land,
native forests would likely have zero value. Or if the non-timber value of land
is considered, which conservationists essentially argue is severely impaired at
harvest time then balance sheet losses would be even greater.
Even so, had FT’s financial accounts
expensed PPE, plantation and road expenses over the last 20 years as we have
done above, the unprofitability of native forest logging would have been
obvious much earlier.
Things are unlikely to turn around in
a hurry. Coupes for harvest are increasingly remote. Harvest cartage and road
costs are rising much faster than prices. Price rises are restrained by the
existence of long term supply contracts negligently agreed to by FT in the past
and by the culture of the industry that FT is there to clear the market providing
industry with an inherent subsidy if necessary even if that means FT making
losses.
Reporting FT’s performance
Every year from 2008 onwards the
Auditor General in his reports to Parliament warned that something needed to be
done about FT’s operating cash deficits which were barely disguised by, at the
time, TCFA grants from government.
Nothing happened.
The Auditor General commenced a more
detailed look at FT’s financial performance in 2009. When he finally released
his report in 2011, he also released earlier drafts which had been submitted to
FT for comment. The 2009 draft contained the damning assessment that money
spent on roads and plantations ought to be immediately expensed because it was
unlikely to produce future benefits as capital expenditure should.
FT had quarantined itself from
reality. In 2011, then CEO Bob Gordon made the extraordinary statement to a
parliamentary hearing that “...........we are
still in a position where we can return a profit, a dividend, pay taxes and
maintain a cash balance necessary to have some capacity for investment in new
activities and to pay our way.” Six months later the government included $100
million worth of bail out funds in the 2013 Budget to be spent over the ensuing
four years.
It wasn’t until 2014 when the
Treasury Secretary elbowed his way onto FT’s Board that we have seen any
semblance of realism. The Board’s report to the Government in 2016, effectively
the report of a voluntary administrator to shareholders, outlined how FT was
not viable if it had to supply its mandated level of high quality sawlogs of
137,000 m3. This level agreed to by all parties to the IGA process as a
sustainable level for production from native forest each year may have been
ecologically sustainable, but it was far from being financially sustainable for
FT. The five-year IGA process which led to FT receiving $87 million and over
$300 million to other industry participants, didn’t address FT’s financial
sustainability. What was the point of the grant? Other than just another
handout?
The effects on State finances
In the early years the State
government removed $108 million in cash from FT but since then $80 million has
been recontributed. Of that $40 million was extracted from TasNetworks, the
government’s electricity business involved in transmission and distribution. The
overall impact on State government finances has therefore been relatively
small.
The government also assumed $113
million of FT’s unfunded superannuation liability, which will be paid over the
next forty years or so, which spreads the burden over a long period.
Grants received from the Australian
government pursuant to the TFA, TCFA and IGA have been quarantined when
calculating Tasmania’s GST share. As part of the Commonwealth Grants Commission
methodology for calculating states’ GST entitlements, most specific purpose
grants, say national partnership payments, are taken into account. But some one-off
grants are excluded. Rather than Tasmania’s GST share being reduced, the
forestry grants have been additional. If forestry grants had impacted on
Tasmania’s GST share, behaviour of politicians and other participants might have
been different. Senator Harradine also made Tasmanians acutely aware of the put
option that can be used to get money from the Australian government. Nowhere
has moral hazard flourished as well as within the Tasmanian forest industry.
In conclusion…
Since 1998 FT’s operations have produced
cash and non-cash losses of $1,306 million or an average of $65 million per
year. The Auditor General sounded the alert in 2008. FT insiders must have
known about the inherent flaws in its model when woodchipping starting declining
after 2004. FT’s financial reporting may have adhered to prevailing accounting
standards but so often those standards are used to obfuscate rather than
explain. This has allowed the Tasmanian native forest industry to perpetrate a
giant fraud on taxpayers. The relentless pattern of losses since 1998 can’t
simply be attributed to the Global Financial Crisis, locking up a few forests or
the actions of a few greenies as conventional wisdom would have us believe.
One thing missing from the sorry saga
of an insolvent FT was because it’s publicly owned we missed out on the golden
opportunity that comes when private companies go belly up. Schumpeter’s
creative destruction quickly moves to find a more sustainable model. Instead
we’ve limped along to who knows where, bound by non-viable contracts and
coerced by the sovereign risk argument.
QUESTIONS FOR RESOURCES
MINISTER, Guy Barnett
The Guardian, 26 March,
2018
- What evidence is there that the Tasmanian RFA 1997-2017 delivered an 'internationally competitive forest products industries which are economically sustainable'?
- Over the course of the Tasmanian RFA 1997-2017, Forestry Tasmania/STT operations produced cash and non-cash loses of more than $1.3 billion, according to Tasmanian economist and accountant John Lawrence. Does the Minister agree with that figure?
… [$454m of total adjusted operating deficits + $751m write down
in asset base + 89m blow-out in the unfunded superannuation liability]
- Is native forest logging profitable if all costs of harvesting are included, as well as roading and regeneration costs?
- Does the Minister acknowledge that increasingly remote coupes cause native forest logging costs to rise faster than revenue?
- If land were valued based on its best possible use - the benchmark that valuers use when given a block of land to value - is the Minister confident the value of STTs’ land will be zero in all cases as it currently is? Does valuing land at zero raise the risks that incorrect resource allocation decisions are more likely?
- FT have not advised the split of forest values between plantations and native forests since 2008. What are those respective valuations as at 30 June 2017?
- Has the govt taken a dividend from the proceeds of the $60m hardwood plantation sale earlier by STT this financial year?
- How long does the Minister anticipate the proceeds will be able to fund on-going operations for STT?
- Is there a Plan B when the proceeds are spent? What is it? When is that likely?
- Has the Minister seen STT’s latest business plan? Does it reveal any more cash deficits in the near future?
- Can the Minister guarantee that if all costs of harvesting are accounted for (including road and regeneration costs) that native forest logging – including the current contracts for sawlogs and peeler billets – will be profitable?
Response from Minister
Barnett
27 March, 2018
“The Tasmanian RFA provides a balanced framework for
sustainable management of production forests.
“Over 20 years of operation so far, the RFA has the runs on the
board - enabling forest industries to operate responsibly and competitively in
global markets and supporting thousands of jobs in regional communities.
“Over the same period there have been significant environmental
outcomes. The State of the Forests Report 2017 shows that in 1996 just 55
percent of Tasmania’s old growth forests were protected in reserves.
Today that figure has grown by more 300,000 hectares to 87 percent, or more than
one million hectares in total.
“The Government has been working with Sustainable Timber Tasmania
to improve the bottom line and looks forward to significantly better results
for the year to June.”
WA is just as bad, if not worse.The forests are losing value,resilience,health and lifespan.Every negative is extraction driven.
ReplyDeleteThe global "de-afforestation" industry is only second to the military machine when it comes to reach, power and blank cheques.
Neo cons 'simply' hate nature.In effect that means they hate leaving anything to their own descendants, which they cannot pillage today.
Excellent articles John, both this one and the one in The Guardian. And charts at last. Hooray!!
ReplyDeleteNothing will change but at least you are helping us understand just how terrible the situation is.
And what does this say about the Parliamentary GBE Oversight Committees which are supposed to keep the GBEs on the straight and narrow?
Decades of Parliamentary "oversight" has been completely useless.
What other Parliamentary processes do we have that are completely useless?
Parliament itself perhaps?
As a professional forester I find the decades of lies and deceptions utterly reprehensible. People should be in prison for this!
Keep up the great work.