pulp mill invalid, page-68

TRANSCRIPT
Interview with Naomi Edwards
Actuary Naomi Edwards discusses the financial side of Tasmanian logging.

Reporter: Ticky Fullerton

Date: 16/02/2004

Reporter Ticky Fullerton interviewed actuary Naomi Edwards on 14 January, 2004.

TICKY FULLERTON: How on earth did you get into what seems to be quite a stand off position between the forestry industry and yourself?

NAOMI EDWARDS: I was never interested in the environment until we moved to Tasmania two years ago, and at that stage, some green groups heard that I had moved down and I had a financial background, and they said look we know that Forestry Tasmania's trashing the forests but how much money are they making out of it? They must be making a lot; so I did some basic research into the financials and said "they don't seem to be making any money on it", and that was a surprise to them and I suppose to me, and that's how I got involved in it.

TICKY FULLERTON: What in your reports would shock the average member of the public most, do you think?

NAOMI EDWARDS: The last five years have seen a doubling in the rate of native forest clearing in the state forests in Tasmania, so volumes of pulp being produced have doubled in the last five years. Over the same period the dividends being paid to the Tasmanian public have halved, and over the last 10-year period the jobs in the industry have halved. So what we have is a really strange combination of forestry clearing more and more of the state forest faster and faster, and the returns to the public just falling terribly. So there's a real discrepancy. It seems that higher volumes of clearing are not producing the goods for Tasmania.

TICKY FULLERTON: How does the main private company, Gunns measure up versus Forestry Tasmania in performance terms?

NAOMI EDWARDS: Gunns is Forestry Tasmania's biggest customer. It's practically its only customer, and its returns are fantastic. They've been growing - Gunns share price is skyrocketing. Gunns is doing very well out of the relationship and that's a problem for Tasmania because most of Gunns shareholders are offshore - they're on the mainland, so basically profits are being transferred from Tasmania to the mainland.

TICKY FULLERTON: Just how different is the performance between Gunns and Forestry Tasmania?

NAOMI EDWARDS: Well Forestry Tasmania has never made a return on equity higher than two and a half per cent. It has never returned more than two and a half per cent on its operations to the Tasmanian public. Now by contrast Gunns returns are huge - you know nine per cent, ten per cent, and growing - so there's a really big gap there. The Tasmanian public are doing very badly out of the relationship.

TICKY FULLERTON: Why does Forestry Tasmania make so little from these extraordinary assets that it has?

NAOMI EDWARDS: Forestry Tasmania's operating in a real fools business, which is they are at the very bottom of a very long commodity chain. So the part of their business that they're growing is pulp sales - pulpwood. Over the past five years the volume of pulp they're selling has doubled from 1.5 million tonnes a year to 3 million tonnes a year. Now in the last 10 years we know that the real price for export woodchips has fallen by 26 per cent, and forestry as the bottom producer just are always going do badly out of a loser's market - you know a commodity market with falling prices.

TICKY FULLERTON: So they're growing a business in which the prices are falling?

NAOMI EDWARDS: Forestry's number one strategic objective, it says, it to increase its volumes of sales. Now they have been increasing their volumes of pulp enormously over the past five years, but it's not delivering the goods. It's not actually making any profit. The more they increase the volumes, the more returns full because the prices of pulp are falling, and Forestry has no control over their return because they're at the very bottom of the supply chain.

TICKY FULLERTON: How do Forestry Tasmania explain their performance?

NAOMI EDWARDS: Forestry Tasmania tell people that they don't understand their returns. They say we're in a terribly complicated business, which is forestry. We can't be judged on normal commercial indicators - we do a lot of special stuff, and it's true that they have some community service obligations. Forestry spend about $5 million a year on the upkeep of tracks and things for tourist attractions; but even if you strip that number out of their returns, they still have a terrible performance, but it makes it very easy for them to explain away their returns. I guess my question is why isn't the government doing something about this? You know you have the forests disappearing, jobs falling, dividends to the return falling - where's the Labor government saying hang on - you've gotta do something different Forestry?

TICKY FULLERTON: You say that you can't understand why government doesn't do something about this extraordinary situation - what's your view as to why they aren't doing anything about it?

NAOMI EDWARDS: I think a Royal Commission really needs to ask why would a government let this terrible situation happen to its own state with destruction of the environment, of financial returns, and of jobs.

TICKY FULLERTON: Forestry Tasmania say they've had their best year ever in sales.

NAOMI EDWARDS: They have. They've sold more pulp - they've exported more pulp than they ever exported before and they had their worst ever profit figure, so chopping down the trees faster if you're gonna pulp them doesn't produce more returns, but it's certainly true they've cleared more native forest in 2003 than ever before.

TICKY FULLERTON: Now they say they've also made a good profit - they quote this figure of 24 million dollars this year.

NAOMI EDWARDS: Forestry when they talk about their returns, selectively adjust the accounting profit, depending on how the year's gone, and what Forestry have done this year is actually strip out the impact of the Australian accounting standard, which is called SGARA (self generating and regenerating assets), which is that forestry companies have to account for any fallen value of the asset, and so the number that Forestry are quoting of 24 million - you won't find that number in the accounts under their profit statement. You'll find a loss of 11 million dollars, and what Forestry are doing are just playing with the accounting standards.

TICKY FULLERTON: Forestry Tasmania say they had a fabulous year this year; how does this compare for instance with how the auditor general sees it? Because these are not just your own figures - these negative returns that you're quoting?

NAOMI EDWARDS: The number of 24 million dollars is nowhere in their published accounts, and in the Auditor General's report on Forestry Tasmania he quotes the figure of a loss of 11 million dollars, which is also the number in their accounts. So that's just a matter of fact that they made a loss last year. They have actually returned a dividend to the state of around 3 million dollars, and that's their lowest ever dividend paid back to the public.

TICKY FULLERTON: You've got quite a graph that shows the dividend return - can you explain it?

NAOMI EDWARDS: Over the last five years the rate of native forests clearing has done this [gestures up] - basically it's doubled in five years, and over the last five years the dividend paid to the Tasmanian public has halved. So it's gone like this [gestures down], so we have clearing going like this and dividend to the public going down like this. It's just a terrible position. It basically shows that doing more of the same does not work. It doesn't pay dividends to the people and we know it doesn't help the environment.

TICKY FULLERTON: But again, that 24 million profit figure quoted by Forestry Tasmania that you argue is actually negative 11 million - where do you get these figures?

NAOMI EDWARDS: The Auditor General in his report in Forestry Tasmania quotes a loss of 11 million dollars. In his performance indicators for Forestry Tasmania 14 out of the 19 performance indicators were the worst ever for 2003, so it's very strange that Forestry are saying they had a great year. These enormous volumes of clearing and pulp just aren't paying dividends to the state. There are two parts to Forestry Tasmania's returns. One is the cash flow profits that it gets when it actually cuts down trees, and the other part is what's it doing to its asset long term... the forests base, and what happened last year was that Forestry Tasmania got a lot of cash in the door because they chopped down a lot of forest, but they really damaged the value of the forest they left behind for future generations, and that's why their net profit was negative - because they were actually taking from tomorrow's profit bringing it forward to today. But the accounting standards say look - if you're gonna trash the forests you have to actually reflect that in your bottom line, and so that's where the bottom line loss of 11 million dollars comes from.

TICKY FULLERTON: What does this loss of 11 million reflect?

NAOMI EDWARDS: If a company is showing that its forest assets are falling in value, what that means is they're taking a quick profit now but they're actually making less money than they would if over the long term they used the forest in some other way. So it's a very low return on the forest if you take a 10 or 20 year horizon.

TICKY FULLERTON: So that explains why you've got one line of a 24 million profit and yet the real number in terms of today's value is probably minus 11 million?

NAOMI EDWARDS: Correct - that's why the accounting standard is what it is.

TICKY FULLERTON: What's wrong with Forestry Tasmania's strategy?

NAOMI EDWARDS: The basic problem with the strategy is that they're playing at the very bottom of a commodity heap. There's a lot of things you can do with a forest. The highest return you can get from a forest is to use it for tourism, so we know that Forestry Tasmania is making a nine per cent return on its forest air walk, and there's plenty of room in Tasmania for more tourist activities because tourists are flooding in. So the best return you can get is to leave the trees standing, do tourism, make a nine per cent return.

TICKY FULLERTON: You couldn't have three or four hundred Air Walks though. They wouldn't all be making the big returns that the one air walk is making today.

NAOMI EDWARDS: You will only need three or four Air Walks and you would be making more than we're making from 3 million tonnes of chipped native forest.

TICKY FULLERTON: What are the alternatives to cutting down a tree?

NAOMI EDWARDS: OK you can use it for tourism and you can make a nine per cent return. You can get environmental certification in Europe - not some dodgy Australian forestry standard certification but some real certification and you can sell it as a high quality blackwood tabletop for thousands of Euros, and at the very bottom of the return chain you can chip it and get $15 a tonne.

TICKY FULLERTON: Why do you think that Forestry Tasmania is only getting $15 a ton from Gunns?

NAOMI EDWARDS: Well that's a very good deal for Gunns. It's a poor market for everybody. It's a volume-driven market - prices will always be low and prices have fallen for the last 20 years. The government has a very close relationship with Gunns and I think that the belief in Tasmania has always been what's good for Gunns is good for the state, and with over 80 per cent of Gunns owned outside of the state, I think the government can no longer say that what's good for Gunns is good for us.

TICKY FULLERTON: What's happened to the bargaining power, and why is that surprising?

NAOMI EDWARDS: You would think that given that Forestry are such a major supplier to Gunns that they would have better bargaining power with them, but at the moment Forestry behaves to Gunns as if they were some tiny potato grower negotiating with Woolworths. They do terribly out of the relationship.

TICKY FULLERTON: There's some excitement, of course, about new markets. I know Evan Rolley has been up to China a few times.

NAOMI EDWARDS: Forestry Tasmania's very excited about selling even more volumes of pulp through to China. Now no one does well out of being a basic commodity supplier selling off their long-term resource at incredibly low prices to China. What it means is that we are exporting jobs from Australia to China where all of the value-adding, all of the profits and all the jobs will be made.

TICKY FULLERTON: Forestry Tasmania don't appear to like your analysis very much. Does that surprise you?

NAOMI EDWARDS: Forestry Tasmania have usually only dealt with Greenies, and I think they're very angry that somebody is actually looking at their finances other than the government, who seems very relaxed about the whole thing.

TICKY FULLERTON: They say that you should come and talk to them - that you haven't been to talk to them.

NAOMI EDWARDS: We've rung Forestry many times asking to talk, and always we've been told I'm sorry - Evan Rolley's away, he's busy - we'll call you back. It's been impossible for us to actually get through to them.

TICKY FULLERTON: How have you personally been portrayed by Forestry Tasmania?

NAOMI EDWARDS: Forestry Tasmania's very good at running smear campaigns, and pretty much everyone who has tried to criticise any aspect of their operation - be it their environmental record, their financial record, their jobs record, their corporate governments record has been smeared, and it's incredible the extent to which that happens in Tasmania at the moment.

TICKY FULLERTON: And what have they said about you?

NAOMI EDWARDS: Forestry Tasmania have said I don't understand accounting or valuations, and as an actuary that's my bread and butter. You know I've had ten years training doing that. I've been the signing out Valuer for companies with billions of dollars of assets on their balance sheet, and it's amusing to me that Forestry Tasmania say that I don't understand accounting.

TICKY FULLERTON: I understand that Evan Rolley told parliament that he'd made a complaint about you.

NAOMI EDWARDS: Evan said that he'd complained to the Institute of Actuaries about me, but when I asked the Institute about this, they had never received any complaint from Forestry Tasmania at all.

TICKY FULLERTON: Did he suggest that he was going to ask to get you struck off?

NAOMI EDWARDS: He said that he had made a complaint about my professionalism and in fact he hadn't. So that's the kind of way in which professionals and experts are intimidated in Tasmania.

TICKY FULLERTON: What about the amount of disclosure that Forestry Tasmania in general gives, for example its exemption from the Freedom of Information Act.

NAOMI EDWARDS: Forestry Tasmania has an enormous amount of secrecy around so much of its operations. So for example the basic question you know - prove to us what stumpage returns you are getting from your main customer, Gunns - you know; explain to us why the dividend is going down when you're clearfelling more and more. We basically get told this is all secret. What is the nature of your contract with Gunns? Why are their profits going up when returns to the Tasmanian public are going down? Sorry that's commercial in confidence.

TICKY FULLERTON: It must be very frustrating for you.

NAOMI EDWARDS: I think it should be very frustrating for the government and it astounds me that the government doesn't care that its jobs and its money are going out of the state.

TICKY FULLERTON: We don't have a figure, do we, on woodchips being exported out of the state. Why is that?

NAOMI EDWARDS: Well Gunns is basically operating as a monopoly export woodchipper now, and so they've told the ABS "Don't publish any statistics because that would be giving away our own volumes of export woodchips". But we're pretty sure that it's now seven million tons, which is a huge proportion even in terms of the world pulp market - just coming out of this tiny little state.

TICKY FULLERTON: If Forestry Tasmania was a publicly listed company, what type of a company would it be in performance terms?

NAOMI EDWARDS: It would be a very poor performer, and I think that by now the shareholders would be baying for the managing director's blood; and I also think that if you say that the governor of Tasmania is like the board of the company, then I think they would be baying for the board's blood, and the shareholders are basically the public.

TICKY FULLERTON: Are volumes of pulpwood currently being logged sustainably?

NAOMI EDWARDS: The basic problem in Tasmania is that forestry has moved to a pulp-driven strategy. It used to focus on saw logs and pulpwood was a by-product. But now pulp to Japan is the main game, so over the past five years pulp volumes have doubled, but saw log volumes have stayed quite stable. Now that's certainly not sustainable because if you're pulping 500-year-old trees, they don't grow back that quickly. If you want to turn all of Tasmania into a monoculture plantation then sure, it's sustainable; but you destroy the state's value as a tourism destination and there are more jobs in tourism than in forestry, and there's more profits in tourism than in forestry. So I think that the government needs to think very hard about what it's actually doing.

TICKY FULLERTON: What about the argument that 40 per cent of this state is locked up against development - that's more than any other state in Australia.

NAOMI EDWARDS: It's true, there's a huge proportion of National Parks in Tasmania and by and large those park lines have been drawn up to exclude the tall timbers which are currently being chopped down and pulped. So the issue is not over the existing national parks, it's over the fantastic old growth forests - the very tall trees that exist outside of the national park which are unique all over the world, and the absolute terrible returns we're getting for those trees. You actually get paid more if you pulp up a plantation tree than if you pulp up a 500 year old eucalyptus regnans - in other words Japanese buyers will pay more for a 13 year old tree than a 500 year old tree.

TICKY FULLERTON: That's surprising to hear - that an old growth tree - if cut down won't fetch as much money as a plantation tree.

NAOMI EDWARDS: It might amaze people to know that you actually get less money if you chop down and pulp a 500 year old tree, than if you pulp a 13 year old tree. The market will pay more for plantation wood than for old growth. So in other words we're giving away our old growth forests for a terrible return. Pulp is the worst possible use of an old growth forest. Best use: tourism. Second best use: specialty high quality, small volume timbers. Worst use: pulpwood - when you're competing with plantation timber which actually attracts a bigger price.

TICKY FULLERTON: Why is that? Why is there a difference in price?

NAOMI EDWARDS: It's better quality wood for pulp purposes, for making toilet paper or cardboard boxes, if you have a clean plantation wood, than if you have a gnarly beautiful tall old growth tree.

TICKY FULLERTON: Why does Forestry Tasmania say it's not appropriate for it to be compared with a public company?

NAOMI EDWARDS: Forestry Tasmania has certain obligations that public companies don't have, and they have stated that those obligations cost them about $5 million a year. Now even if we add $5 million back to their $11 million loss last year, that's still a $6 million loss. So it is true you should adjust it, but it certainly doesn't fix the problem with their finances.

TICKY FULLERTON: When we talk about a transfer of wealth from Forestry Tasmania and the taxpayer through to Gunns, Forestry Tasmania says it gets about $15 a tonne for its trees and Gunns at the other end ends up selling it for about $60 a tonne. Forestry Tasmania says there are enormous costs for Gunns, and that's a completely unfair comparison. Is that fair?

NAOMI EDWARDS: Gunns is value-adding to the process by actually chipping up the trees and shipping them off to Japan - that's true.

TICKY FULLERTON: What's your view on Gunn's Woodlot prospectus investments, and the tax benefits they provide?

NAOMI EDWARDS: I think that the thing that no one really picked when they came up with the idea of tax incentives was that there would be so much volume kicking around in Australia and overseas, that being in the plantation business is not necessarily the best thing for the country because plantation pulp prices are falling every year in real terms. The tax incentive schemes are driving the conversion of native forests to plantation, so companies like Gunns can make enormous returns from their shareholders from selling woodlots, and that's part of what's driving the clearing of native forests in Tasmania, and the conversion of that land into plantation, which is a monoculture.

TICKY FULLERTON: So if I'm an investor in one of these woodlot prospectuses, am I driving clearfelling of native forests?

NAOMI EDWARDS: The other states are doing much better at protecting their native forests and it's a different situation. If you're an investor in a woodlot and you invest in a ruined paddock and plant trees, that's a very good thing. It's only in Tasmania where you might not realize you're actually driving the destruction of old growth for your plantation.

TICKY FULLERTON: If you have a pension and you invested in some of the big pension funds in Australia, in what way might you be driving the felling of forests in Tasmania?

NAOMI EDWARDS: Well a lot of pension funds have stakes in Gunns and obviously Gunns is the company who is exporting all of the woodchips out of Tasmania, and recently when a resolution was put for Gunns to stop its clearfelling, some of the big institutional investors did actually abstain from that vote because they were concerned about the activities.

TICKY FULLERTON: Commonwealth Bank has dropped its investment in Gunns from 16 per cent per cent to 6 per cent in the last 12 months, roughly. They claim that that is profit taking. Do you believe that's why they've dropped their share holding that much?

NAOMI EDWARDS: I do.

TICKY FULLERTON: It's alleged that there is a very close relationship between government, the opposition and Gunns - have you ever seen this in operation?

NAOMI EDWARDS: I was very surprised when I sat in at a parliamentary committee hearing into Forestry Tasmania's returns, and yet again they'd had a poor year, and there was a lot of hearty back slapping and congratulations from both Labor and Liberal, and the only party which seemed to be quizzing Forestry about its poor financial returns, was the Greens, which is probably not what people would expect from the Greens to be the only party interested in the bottom line, and what was happening to the money in the situation. Minister Lennon seemed more interested in abusing the leader of the Greens, Peg Putt than in actually questioning Forestry Tasmania about why the clearing was producing so little returns and so few jobs.

TICKY FULLERTON: You've done a study on what would happen if old growth felling was stopped and what impact it would have on Gunns. What did your study show?

NAOMI EDWARDS: Suppose you lopped up around 150,000 hectares of the best old growth forest, then there's still plenty of state forest available to supply Gunns pulp operations, which is the biggest part of their business. Gunns woodchipping is 60 per cent or more of their business and growing; the thing is there would be less supply of category one saw logs, which are the very high quality saw logs. So there would be some small impact on Gunns profits, and I've estimated it would be around an 8 per cent fall. But they can very easily compensate for that by growing other parts of their business faster and diversifying - as they're doing now.

TICKY FULLERTON: I guess what Forestry Tasmania might come back and say is that look they are not in a situation yet where they have got enough plantation wood coming on stream to be cut to stop clearfelling of old growth forests.

NAOMI EDWARDS: Forestry Tasmania have about 800,000 hectares available for cutting down, and I understand that the Green groups want to preserve around 200,000 - and that still leaves 600,000 available for them to cut down, so we're not talking about coming out of all of the state native forest - only that very precious high quality old growth part.

TICKY FULLERTON: I think they'd say that if you leave them only with that amount there would be a shortfall before their major plantations are up and running.

NAOMI EDWARDS: Well last year they chopped down 16,000 hectares. They have 600,000 hectares still available and plantation wood takes 13 years to grow. If you do the sums there's plenty of wood available for them outside of the old growth.

TICKY FULLERTON: Are you branded a Greenie in Tasmania?

NAOMI EDWARDS: Absolutely. If you do any work that's critical of the Labor government or the forestry industry, you're branded as some kind of weirdo Greenie, whereas in fact when we lived in Sydney we didn't even do our recycling.

TICKY FULLERTON: But don't you have to take your hat off to Gunns and John Gay for such a spectacular performance to date.

NAOMI EDWARDS: Gunns is doing nothing wrong if the government will allow it to buy its wood cheap, to trash the state, to sell it overseas, to move jobs overseas - then why wouldn't it? It's got an obligation to its shareholders to maximise returns. The problem is not with Gunns. The problem is with Forestry Tasmania and the state government.

TICKY FULLERTON: Do you think that Forestry Tasmania has breached accounting standards?

NAOMI EDWARDS: Forestry Tasmania follows accounting standards in its actual published accounts, but it then ignores those numbers when it's doing press releases or information sheets.

TICKY FULLERTON: What is it like to be within the industry or working anywhere in Tasmania and speaking out against the industry?

NAOMI EDWARDS: The only people who can speak out in Tasmania are the people who don't have to work here, so it's people who are self-funded retirees because if you criticise the performance of Forestry Tasmania you would not get a job here as a consultant.

TICKY FULLERTON: In or out of forestry?

NAOMI EDWARDS: The only people trying to stop this destruction of the states finances, jobs and forests are the conservation groups, and they certainly don't have any money to pay my fees.

TICKY FULLERTON: Why aren't there people in the tourism industry who will speak out against the forestry industry?

NAOMI EDWARDS: There are small tourism operators who speak out very loudly, but the very large tourism operators I think have insulated their businesses from forestry and they have agreements about where the logging routes will go to actually protect the very large operators. But the small tourism operators are hurting badly.

TICKY FULLERTON: But Naomi, aren't your critics going to say oh well this is Naomi Edwards either not understanding or somehow massaging the numbers to suit her own argument?

NAOMI EDWARDS: All of the numbers I've ever used are from Forestry Tasmania's audited accounts. They're Forestry's figures. They're agreed by the Auditor General. It's a very factual situation. Dividends halved; volumes of pulp doubled; native forests cleared doubled - those are the facts from their accounts.