Basslink for Sale Chapter Two

 

The Basslink sale saga continues.

Since the Basslink for Sale post back in September the mooted sale to APA has been abandoned, and Basslink P/L (BL) is now under the control of Receivers and Managers (KPMG) appointed by BL’s banks.

Back in late October BL still hadn’t managed to refinance its existing bank loans as required. The sale to APA had fallen through. The final straw was when Hydro Tasmania (HT) and the State government finally ran out of patience with BL for non-payment of amounts awarded against them following legal action in the wake of 2016 interconnector outage and announced they were going to start legal action to recover amounts owed.

It was a Mexican standoff. The banks wanted their money. Creditors were getting impatient. BL’s owners didn’t want to contribute any more. BL was insolvent.

STT and the unsustainable sustainability myth

 

Tasmania’s forestry industry is world-class and sustainable “said Resources Minister Barnett when releasing the 2020/21 Annual Report for Sustainable Timbers Tasmania (STT),

There’s a useful rule when trying to assess the financial sustainability of any company: Beware if profits are only achieved with book entries.

That’s certainly the case for STT, our publicly owned forest company. It reported another small profit for the 2020/21 year, the fourth in succession. Without book entries and government grants however it would have been another loss, a pattern that has been occurring for a long time.

Another useful rule says beware if there aren’t underlying cash surpluses from operations. STT claim there are but that’s only because it doesn’t include all relevant ones. Replanting and roading costs are treated as capital outlays. For three of the past six years, including 2020/21 net operating cash including roading and regeneration costs has been negative.

As a general proposition for most businesses operating cash is usually more than book profits. Most of the difference is usually explained by book entries such as depreciation.  If the opposite is occurring, where book profits exceed operating cash as it often does with STT, alarm bells should be sounding.

VicForests heading downhill fast

 It is difficult to understand how VicForests’ can describe its latest loss of $4.7 million as ‘a sound result’.

A closer look at the VicForests’ Annual Report for 2020/21 suggests a different description may be warranted.  Forest revenue of $85 million was similar to the previous year, but after production costs of $70 million the stumpage value of harvested timber was the lowest ever at 17.9 per cent of revenue or $15.3 million, which was scarcely enough to cover roading and regeneration costs of $13.5 million, let alone employee costs of $19 million and overheads of $12 million. A lifeline of $21 million from the Government was needed for VicForests to continue as a going concern.

Basslink for sale?

 

By any measure 2020 was annus horribilis for Basslink P/L, the owner of the existing Bass Strait interconnector, currently operated by Hydro Tasmania.

Basslink’s recently released annual financial report for the calendar year 2020 revealed its battle-scarred balance sheet after unsuccessful legal battles arising from the 2015/16 cable outage.

In December 2020 Basslink was forced to write off $30.8m which it claimed Hydro owed. The debt write-off related to whether the cable outage was a force majeure event. After taking six months to repair the cable, Hydro maintained because it was unavailable for half the year, the agreed monthly fee upon resumption should be reduced by the availability adjustment factor. Basslink argued the cable fault was an Act of God, a force majeure event, and hence the adjustment factor didn’t apply, and the full fee was payable. The arbitrator didn’t accept God was involved and found in Hydro’s favour. 

The arbitrator was also needed to resolve other disputes between Basslink and Hydro and between Basslink and the State government in respect of the cable failure. In the latter case the arbitrator awarded the State government $46.7 m including costs and interest. In the former case Hydro was awarded $26m, with costs yet to be decided. Basslink has raised a provision account which suggest another $30.9m may become payable. That’s a total of $103.6m Basslink will have to pay Hydro and the government.

Gutwein's grand delusion

 

The Budget papers elicited a memory of an Irish joke which I’m sure you’ve all heard. In answer to a tourist seeking directions to Dublin, the local responded: ”Well Sir, if I were you, I wouldn’t start from here”.

If we are to move to a better place, we shouldn’t be starting with the latest budget delivered by Premier Gutwein. The narrative is awfully misleading. “Last year we leveraged our strong balance sheet to support our community and underpin our economy”, the Premier said. ‘Leveraged’ is right, we borrowed more. ‘Strong balance sheet’ is wrong ‘cos it’s not. The State government’s net assets are no greater than the combined net assets of local governments. Because government businesses are inextricably entwined with the rest of the government sector, one needs to look at total State sector when passing judgement on our supposed strength.  The State’s total assets, including those of government businesses will be $37 billion by 2025. There will be $9 billion of cash and investments (mainly Tascorp and MAIB) and $28 billion worth of land, buildings, infrastructure etc. But there will be $28 billion of liabilities including borrowings of $11 billion and unfunded superannuation of $10 billion Net financial liabilities therefore will be $19 billion. As Saul Eslake recently observed, relative to our size this is larger than all other States and territories except for Northern Territory. Premier Gutwein always likes to draw attention to our low borrowings, our net debt, compared to other states. This is deliberately misleading. It’s our total financial liabilities that’s the relevant metric.

Future Gaming Mega profits

 FUTURE OF GAMING IN TASMANIA

Stage 2 Public consultation August 2021

 

The inescapable nagging question that needs to be answered is why does an industry with as few redeeming features as the gaming industry receive gold star government assistance?

 

Future Gaming Market reform: A windfall for pubs.

 

Everyone including Federal Hotels accepted the reality that the days of its money making machine Network Gaming were numbered. With the exclusive license to run electronic gaming machines EGMs due to expire in 2023, assuming the government has given Federal Hotels the requisite 5 years notice, pubs and clubs were eying off a bigger share for themselves. Both parties, Federal Hotels and THA representing the pubs, cobbled together a proposal in 2017 for a new division of the spoils which the Government has adopted and rebranded as Future Gaming Market reform.

At the time, on 18^th August 2017 Federal Hotel’s boss Greg Farrell told a Parliamentary hearing:

“The Vantage Group's viability would be enhanced as a result of this, as would every other licensed hotel and club. The average value of a Tasmanian hotel and club, post 2023, on this basis, would improve by about $1.5 million. That has been our model and it has been independently verified.” (Note: The Vantage Group is part of Federal Hotels with 12 EGM pubs and 21 bottle shops under the 9/11 banner).

A couple of points. Greg talked about the ‘average value’ and how it will ‘improve’. That pre-empts the question, what is the current situation? And how will the proposed changes impact the value of pubs?

When breaking a monopoly is appalling public policy

 

AT least we now know the excuse for the delay with Future Gaming Markets reform.

Minister Michael Ferguson in Talking Point said the release of the reform package followed “an extensive body of work, with licence fees and tax rates that apply for Far North Queensland casinos (a comparable market) used as a benchmark” (“Delivering best policy on gaming,” July 9).

It might be a coincidence, but the concept of this benchmark to justify low tax rates for casinos was first floated by Federal Hotels in December 2016 and again jointly with the Tasmanian Hospitality Association in 2017. The nature of the extensive body of work undertaken since is not evident. Nothing has changed.

There are three principal reasons why governments fiddle with tax rates and tax concessions. Firstly to raise more revenue or hand some back if they’ve got too much. Secondly to encourage activity if desirable, or to discourage if deemed undesirable. And thirdly as a reward for services or deeds, past, present or future.

Clearly the first reason does not apply in this instance.

The government has tried to pretend the second reason is why the North Queensland benchmark is being adopted. Yet there is no sound public policy basis why casinos in regional areas currently need assistance. The benchmark rationale is a cut-and-paste from the Handbook of Self Interest. We don’t need to attract more capital for new casinos packed with electronic gaming machines as they’re prohibited. Tourists don’t come to Tassie to play the pokies. Even if they did, the tax rate is irrelevant. “Let’s go to Tassie ’cos the EGM rates are lower” is not a marketing slogan you’re likely to hear. It’s the locals who play casino EGMs. Any concessions to Federal Hotels simply gives them an unfair advantage over other accommodation providers.

Which leaves us with the third reason for granting a tax concession, namely an ex-gratia reward.

Who's picking up the tab for Marinus?

 

FEW would have been surprised, least of all blind Freddy, to hear that the Marinus Link will put downward pressure on wholesale electricity prices.

If there’s more produce for sale in a particular market, there’s usually downward pressure on prices. It doesn’t require extensive modelling by well remunerated consultants to make that call.

But that was the headline take from the recently released TasNetworks report as Minister Barnett’s media release trumpeted: Marinus Link confirmed to drive down power prices. All part of the blatant campaign to gain a social licence for Marinus.

The release went on to qualify the statement by referring to wholesale prices.

The key word here is “wholesale”. Wholesale prices comprise less than half of what consumers pay. The other half is mainly transmission and distribution costs. TasNetworks is the monopoly provider of those services in Tasmania.

Wholesale prices are normally of little concern for TasNetworks. Hydro as our publicly owned generator selling electricity into the national market is the entity with a deep abiding interest in wholesale prices. But won’t lower wholesale prices lower Hydro’s profits? They certainly will. We don’t need a consultant to tell us that.

Tasmania's fiscal problems laid bare

 

THE chickens came home to roost last week with the latest five yearly  report by Treasury into the state government’s fiscal sustainability.

Premier Gutwein knew they were heading his way and what they were bringing.

That’s probably one reason he called the election when he did, to avoid pesky questions about how under every likely scenario over the next 15 years spending will exceed income, in most cases without narrowing the gap between what’s needed and what’s delivered.

Mr Gutwein said “the report confirms our finances are strong”. The report did not say that. The adjective “strong” was not used to describe our position. That the report said was “for all scenarios analysed, the results show projected fiscal outcomes that are manageable in the short to medium-term. However, the size of corrective action required to maintain fiscal sustainability increases over the projection period”.

This is a polite way of saying if you don’t start organising a survival plan soon, you’ll be in more trouble than Burke and Wills.

Native forest logging is not sustainable

 

WHETHER or not we have a native forest industry and on what scale won’t be determined by economic sustainability.

Tassie’s AFL side will be playing away games on Mars before that occurs.

Yet the industry still pretends it is sustainable, judging by Nick Steel from the Tasmanian Forest Products Association (Talking Point, April 10).

In the 20 years of the Regional Forest Agreement (RFA) until 2017, the publicly owned Sustainable Timber Tasmania (STT) incurred cash deficits of $562m, including operating losses plus all the money spent on roads and plantations that failed to increase its assets base and are therefore expenses just like wages. Over the same period the value of native forests fell $752m and it suffered a huge increase in superannuation liabilities, which the government took over in 2017.

These balance sheet losses of $840m made overall losses over a 20-year period $1.3bn.

 

Federal government borrowings are the nation's equity

 

BUDGETS are a concoction of economics and politics with the mix depending on the electoral cycle.

The latest federal budget appears to have a heavy dose of politics given an election is on the horizon. But what of the economic aspects? What does this budget reveal?

The most welcoming change is the ready acceptance by the government of the need to continue with deficits. The reason there will be public deficits is because the private sector will continue to run surpluses. That’s the iron law of macro-accounting.

Pollies and the commentariat talk about the need for budget repair, implying the public sector needs fixing when the private sector’s predisposition to run surpluses is the flip side of the same problem.

It is normal for households and businesses to strive to be net savers over time, for a rainy day, say. This implies the normal position for a government is to run deficits, especially if the economy is growing. Bob Menzies ran 16 deficits in 17 years in the 1950s and 1960s.

However, over time, rising household indebtedness has increased the amounts required to repay loans. From a national income perspective, income is either consumed or saved or used to pay taxes.

Increased loan payments mean increased savings and therefore less consumption. Increasing house prices and associated mortgages suppresses consumption in the real economy.

Student indebtedness has similar effects. With little or no growth in real wages, paradoxically one of the boosts to consumption comes from borrowed funds made possible by increased home equity.

We are living in a Ponzi world.

At the same time, there has been a conspicuous fall in workers’ share of national income. The amount going to capital owners has increased. Not just old-fashioned capital like machines and buildings but the new variants — licences, permits, goodwill, intellectual property, franchises — all designed to clip the ticket and benefit paper shufflers at the expense of workers. Greater returns to the new capital owners have kept a cap on wage costs, which in turn has led to wage exploitation, insecure work regimes and the influx of workers from overseas which has created as many, if not more, problems as it has solved by extra strains on housing and infrastructure.

Our economy is out of whack. The financial economy is devouring its host, the real economy. There’s little point tackling so-called budget repair if the foundations need fixing.

Why doesn’t the private sector spend more rather than requiring the government to run deficits? There’s not enough demand for their goods and services partly due to the erosion of the workers’ share of the national pie and the system’s incentives to speculate in second-hand assets such as houses and shares rather than investment in the real economy.

Capital gains from shuffling paper are taxed at lower rates than personal exertion income. Share owners wallow in the illusion they are business owners rather than speculators and thus entitled to a refund of company tax via franking credits.

The common good is becoming an outdated concept.

The spectre of increasing government debt that has resulted from deficits has been used to scare the populace into believing that we can’t afford to employ our idle resources to perform much needed and demanded public tasks, and also as an excuse to offload public assets and outsource public services to the private sector, all in the cause of freeing our grandchildren from the burden of excessive debt.

The latest government spin has toned down the rhetoric without a full explanation. It’s easy, as the Labor Party and many commentators have done, to point to the hypocrisy of the government’s backflip, but unfortunately it strongly suggests there’s widespread belief that government debt remains a burden for future generations.

The breakthrough in understanding why government debt is not a problem has come with the move by the Reserve Bank, our bank, to buy much of the new debt. We owe money to ourselves. Accountants have a name for owner’s loans to their businesses. It’s called equity. Accounting 101 students learn about it in Week One.

Government borrowings held by the RBA represent equity in our nation. Even much of the debt held privately will be rolled over at maturity, implying this also is de facto equity in the nation.

A nation without borrowings is a nation with a pretty skinny balance sheet.

Japan’s government debt, relatively speaking, is five times the size of our debt and almost half is owned by the Bank of Japan, the government’s central bank. Nobody believes the debt will ever be paid. It will either be written off or rolled over. The same will apply here.

We are on the threshold of a better understanding of how government financing works.

However, with most other issues in our rapid changing world our political class is still at the remedial stage.

Election plans avoid the fundamental issues

 

THE Liberals swept to power in March 2014 with a proposal to solve Tasmania’s problems.

Someone in the party had discovered the wizardry of an Excel spreadsheet and had shuffled a few numbers in the then government’s four-year budget and pronounced the result a Plan for a Brighter Future.

The cornerstone savings were from a more efficient public service, which meant downsizing by 500 saving $155m over four years.

The Brighter Future was heralded by the proposal to spend $76m in elective surgery to “ensure that Tasmanians stuck on waiting lists for years can get their operations sooner, with up to 15,000 extra procedures”.

As Martyn Goddard observed in these pages on April 2, “When the present government came to power in 2014, there were 7610 people on the statewide elective surgery waiting list. The most recent figure was 12,086, an increase of 59 per cent.”

No doubt hoping that most people might have forgotten previous failed promises, Premier Gutwein has now pledged to spend another $154m over four years to deliver an additional 22,300 elective surgeries and endoscopies.

The more things change, the more they stay the same.