Tuesday, 9 May 2023

UTAS borrowings

 

This is an additional submission to the Legislative Council’s Inquiry into the Provisions of the University of Tasmania Act 1992 supplementing submission # 93, evidence given on 12th December 2022 and a further submission made 19th December 2022.

The supplementary submission was prompted by the lack of transparency and scrutiny surrounding UTAS’ borrowing arrangements as it pushes on with its move into the centre of Hobart.

The discussion is widened to include the raising of funds other than by traditional borrowings and whether Sec 7(2) of UTAS’ governing Act which requires the Treasurer’s approval to borrow, needs to be broadened to include other borrowing-like arrangements.

This is followed by comments on other arrangements that impact of UTAS’ financial position.

UTAS: The need to redefine who are members

 

This was an additional submission made on 19th December 2022 to the Legislative Council’s Inquiry into the Provisions of the University of Tasmania Act 1992, supplementing submission #93 and evidence given on 12th December 2022, all of which are available on the committee’s website.

The supplementary submission was prompted by the lack of a coherent discussion as to who are UTAS’ members, to whom should UTAS report and what role should members have in selecting board members (the University Council).

The need for the exact legal status of UTAS to be clarified was highlighted by Premier Rockcliff’s October 2022 assertion that UTAS was a private company and Vice Chancellor Black’s recent contention at the May 4th 2023 hearing that UTAS is an instrumentality of the State.

Hopefully the Committee will be able to address this crucial issue. Most people are unaware if they're members of UTAS. Being a member does bestow any particular rights or obligations to receive information and very little by way a right to determine who should be elected to Council.

VicForests: The ongoing disaster

 

The 2021/22 VicForests’ loss of $54 million was a disaster. In one fell swoop VicForests’ equity of $45 million funded by the gift of trees from the Crown, was totally wiped out.

To end up with a loss of $54 million after timber sales of $80 million is a staggering achievement. 955,000 cubic metres of timber were sold at an average price of $85 per m3. The cash loss was a mind boggling $58 per m3.

The stumpage value of harvested timber (sales less harvesting and haulage costs) slumped to less than 4 per cent of revenue or $3.1 million. The stumpage value was $3 per m3. On a per hectare basis this is less than the costs to regenerate. Regeneration costs were $3.2 million. A government lifeline was needed to pay employee costs ($20.3 million), roading costs ($6.4 million) and overheads of $21.6 million. 

Harvesting 80-year-old trees for a stumpage value of $3 per m3 is the height of absurdity especially when it is accompanied by all the unrecorded non-timber losses.

Plantations grow at least four to five faster than native forests. This makes clear-felling native forests to essentially create the same woodchip product as plantations little more than State sponsored vandalism.

VicForests’ equity at June 2022 was negative $3 million. But for a letter of comfort from the Treasurer, VicForests would have been forced to cease trading.

The VicForests' model: A brief explainer

 

VicForests’ major assets are the trees that have been transferred from the Crown and are available to be harvested until 2030, the current end date for logging native forests in Victoria. There are a few plantations on its books, but these are of little significance.

The underlying forest land does not appear in VicForests’ books, only the trees.

When the trees were transferred to VicForests they were recorded as having a value equal to estimated future net harvest proceeds. The contribution/gift by the Crown represented the Crown’s equity in VicForests.

In theory, in a perfect world, when trees are harvested and sold, the net proceeds will be the same as the value on VicForests’ books. The book value of the asset will be realised. The book value of the trees will become an offsetting expense. Hence net profits from harvesting and sale will be zero.  VicForests will therefore be left with cash equal to the net proceeds, some of which will be used to regenerate felled forests, with the balance to be paid to the government as a return on its investment in VicForests. Regenerated forests once established are then transferred back to the Crown. That was the plan.

Sunday, 29 January 2023

Pokies in transition

 

Licenses to allow pubs and clubs to own and operate electronic gaming machines (EGMs) passed through Parliament in October/November of 2021 after the Labor party abandoned its brief flirtation with a principles based policy approach.

It was a watershed moment for the gambling industry. Years of funding and lobbying the government were finally about to yield a jumbo jackpot with net profits from EGMs estimated to rise by an average of 50 per cent for EGM pubs.

Federal Hotels lost its monopoly ownership of EGMs but was compensated by the slashing of taxes on EGMs at its two casinos and the knowledge that its twelve Vantage pubs with EGMs were about to be become even more lucrative. Federal was also considered as the front runner in the process to select a Licensed Monitoring Operator (LMO) to replace its own Network Gaming which has been running the monopoly network.

However subsequent events have put a dampener on the industry’s euphoria. Federal failed to win the LMO tender. Maxgaming a wholly owned subsidiary of the listed gambling behemoth Tabcorp was awarded the job in August 2022.

 Shortly thereafter the government announced the introduction of mandatory pre commitment cards as a way to limit player losses as part of a revised harm reduction strategy.

The outrage from pub owners was predictable. For years they have been telling us that problem gamblers were only 0.4 per cent of the population and the bleeding hearts in the welfare lobby just wanted to rob the overwhelming majority of a bit of harmless fun.

Private mutterings are now telling a different tale. Without obsessives playing the machines, bottom lines will be severely impacted. Federal Hotels in its 2022 Annual Report issued late October 2022 confessed it was unable to assess the impact “at this point in time”.

This is a far cry from a year earlier when Federal Hotels was able to independently value eleven of its twelve Vantage pubs as part of a sale and leaseback arrangement with various associated parties. This was disclosed in it 2022 Annual Report.

Thursday, 25 August 2022

Basslink for Sale Chapter Four

 

The APA Group have long been interested in acquiring the Basslink interconnector.

With the release of APA’s financials for the 21/22 year on Wednesday 24th August, we now have a rough idea of what APA thinks the cable is worth.

Monday, 1 August 2022

The Future of the Federation : Lessons from the pandemic

There’s been a wealth of lessons to be learned as economies try to recover from the pandemic.

Most are being ignored.

A return to pre-pandemic days is what most policy makers appear to want.

Back to the days which have produced the mess we are now in.

The pandemic has brought all our problems into sharp focus.

We have a lopsided economy.

Capital and profits have increased their share of the national pie at the expense of wages. The trickle down effects haven’t eventuated. Asset prices have risen instead.  Owners want a return on their capital and to that end the financial sector  has been tasked with extracting more and more from the real economy leading to a more unbalanced economy. Government spending has been unable to keep up with the needs of the economy.

Are we going to rely on tax reform to help rebalance the economy?

We might be waiting a long time.

This note is intended to review the state of play and look for other ways to relieve the pressure on services delivery, particularly for State governments, the engine rooms for so many services that are crucial to our well-being.

Post pandemic policies have shown how government spending, borrowing and the role of the Reserve Bank interact.

As a rule most focus is either on the role of the General Government or the RBA. They are rarely considered as a consolidated Group.

Only when they are treated as one, does a realistic picture emerge of what is happening. Peer at the economy through an accountant’s lens and the view looks awfully like what Modern Monetary Theory (MMT) adherents see when they view the economy.

Government spending creates private assets. Budget repair will reduce private assets. Do those promoting budget repair understand this simple iron law of accounting?

Banks are intermediaries in the settlement process, interposed between the government (RBA) and the people. If instead of having a/cs at various banks for settlement purposes, everyone had an a/c at the RBA, then government spending would be directly credited to peoples’ a/cs. The balance of peoples’ a/c at the RBA would appear as a liability of the RBA just as notes and coins do. 

But they’re not debts that the government need to repay. This is one of the fundamental points most commentators and scaremongers fail to grasp.

With banks as intermediaries, reserves are created each time the government spends. Convention dictates that some of the reserves need to be swapped for government bonds should the government wish to spend and finds itself without any money.

It’s a convention not a necessity.

A recent development that eventually made it to Australian shores, has seen the central bank, the RBA, purchasing some of the government’s issued bonds.

A close look at effect of spending on the consolidated government (which includes the RBA) shows it makes no difference if the government spends what’s in its RBA a/c, or whether it runs an overdraft at the RBA or whether it raises funds by issuing bonds which are bought by the RBA and subsequently written off.

A government borrowing from itself doesn’t impose a burden. The reverse is more likely. Private assets are boosted when spending occurs.

Looking at the consolidated government, gives a more realistic view than focusing on just one of the members of the consolidated group, the General Government.

It is instructive to look at the Australian government’s financials, which aren’t included with the Annual Budget, but do appear 5 months after year’s end usually in November.

When RBA Governor Lowe tells us RBA bond buying is not supposed to indicate a new way to finance government spending is he saying net government borrowings of $684 billion at June 2021 compared to gross borrowings of $888 billion, the difference being those bonds bought by the RBA, is a figure without meaning. 

What does it mean then?

Surely it must mean the government only owes $684 billion to third parties.

Then why does everyone parrot on about a trillion dollars of debt?

Is it a rounding problem or a lack of understanding of what consolidated accounts mean?

As to where RBA got the money to purchase bonds, and how it was recorded in its accounts, this can be answered by having a look at RBA’s cash flow statement. It reveals how money is created in a modern economy.

The means to create money isn’t confined to the RBA. Most is created by private banks.  Outsourcing money creation to banks is an enormous privilege.

 ‘Creation’ is the operative word here. As the Bank of England reminded us in 2014, loans are not made from existing deposits. Loans create deposits. The Commonwealth Bank’s cash flow statement reveals this reality, with operating activities divided between income and expenses on one hand, and new loans and deposits on the other. It is a tell tale snapshot of how banking in a modern economy works as opposed to how most people imagine it to work.

The pandemic and the subsequent response have emphasised the crucial role State governments play in service delivery in a wide variety of important areas. Compared to the measures enacted to help banks by the RBA, much more could have been done.

If the Tasmanian experience is any guide, reporting income on a profit and loss basis by State governments, has helped disguise the cash flow losses that are likely to persist for quite a while, with the supply of services likely to fall further behind what’s needed.

Tasmania’s looming fiscal sustainability problems have been well documented but largely ignored by politicians. Admitting to problems always prompts questions about what the proposed solutions are and why has it taken so long to confess.

At this stage there are no firm solutions. The progress of tax reform is glacial, and like glaciers in the era of climate change are just as likely to melt before much progress is made.

The prospect of Stage 3 tax cuts and possible budget repair which will reduce Australian Government coffers even more, suggests States aren’t a priority for the Australian government/RBA.

We need a backup plan to assist them.

The RBA needs to be given an enhanced role in the Federation, not just as banker to the private banks but helping States and Territories as the pre-eminent deliverers of services to the people.

When the Federation is viewed as a consolidated whole, government financing and spending by the States can be carried out in the same way as the activities of the Australian government since March 2020.

All government spending increases private assets.

But the key to the future is grasping the fact that government liabilities created by spending aren’t necessarily debts which must be repaid.

They only become debts if we so choose.

We need to run the show for the benefit of the people not the banks.