I would Like all investors in schemes to keep a printed copy of...

I would Like all investors in schemes to keep a printed copy of this and pin it in a place that you will see all the time.
The reason?. because a certain character who works for CBA,is doing a sale and spin pitch right now in the Kunnanarra area of WA on the Ord river scheme and it is being driven by witch bank!
I thank J.Laurence and the Tasmanian Times for this article




Where did all the money go?


17.08.09 6:53 am

JOHN LAWRENCE
Where did the money go? The perennial question every time a company heads into bankruptcy.



It is of particular interest in cases of failed MIS companies for anyone trying to assess the effectiveness of the MIS model and the efficacy of Government policy in the important area of land use.

The recently fallen Great Southern Limited (GSL) represented 30% to 35% of the MIS industry in turnover terms. Whilst it has operated since 1987 it didn’t list on the ASX until 1999. There’s reasonably good data available from 1st July 1998 until 30th September 2008 which may shed some light on how the MIS industry has operated.

Profit and loss statements (P&Ls) only tell part of the story. In GSL’s case it was profitable. Very profitable at times. All Ponzi schemes are, by their very nature. If not, they die. And quickly. GSL’s profitability woes became starkly apparent in August 2008. Six months later it was gone.

But P&Ls only cover income and expenses and hence don’t reveal what is happening with assets and liabilities and how the show is being financed. And most lay persons struggle to make much sense of a balance sheet.

Companies also produce a statement of cash flows. These detail all cash movements not only operating income and expenses but loans to and from lenders, proceeds from share issues and dividend payment, income tax payments, purchases of assets, in fact all cash transactions. If one is interested in following the money trail that is the place to start.

A summary of GSL’s cash flow statements from 1st July 1998 to 30th September 2008 outlines all the cash in and out of GSL.

In 1998 GSL was a profitable little shell, with no tangible assets of substance, nor any loans owing. It had paid up capital of $50,000 and retained earnings of $30 million. But within 12 months, 28% of GSL was sold for $33 million and the Company was floated. It sailed the high seas for 10 eventful years before meeting Titanic’s fate.

The summary of cash flows indicates, needless to say, most inflows emanating from grower/ investors. But from where did they source their funds? Some investors paid cash invariably late in June. A few weeks later they were rewarded with an extra tax refund of say 40% of their contributions. In cash flow terms, the exercise had cost them 60%. Other investors borrowed the full amount of their grower contribution and too received a 40% tax refund of the contributed amounts. In their case the result was a bonanza. The immediate cash flow effect was a boost (when the tax refund arrived), because all contributions were borrowed. This latter select group of tax recalcitrants warrant a special mention. Usually cash strapped, they were easily persuaded to borrow say $100,000 to invest in a MIS and gain a tax refund of $40,000 rather than merely borrow $40,000 to fully discharge their tax obligations.

They viewed their financial planners as modern day alchemists who could remove a possible tax bill of $40,000 without outlaying a cent. The only requirement was to pay back a $100,000 loan with after tax dollars. Each subsequent monthly loan payment becomes a nagging reminder than the alchemist sold them fool’s gold, as the value of their ‘investment’ continues to remain underwater. A few years ago a financial planner selling MIS products was viewed as a Warren Buffet figure. Alas, the Sage from Omaha turned out to be The Artful Dodger in a suit.

Collectively investor loans were about 60% of total grower contributions. The remaining 40% was sourced from tax refunds to investors. Hence, collectively investor/growers did not contribute any of their own equity. The sources of their funds were loans and tax refunds. Over time however they have ‘contributed’ equity as they gradually paid off their investor loans.

The amount of tax assistance given via tax refunds to investors has been offset against the tax paid by GSL over the 10 year period ($295 million) to give a net subsidy to GSL over the period of $689 million.







By way of further explanation.

1. Investor loans are 60% of MIS contributions. The total receipts from grower/ investors via loan securitisation as per the cash flow statements is $1,373 million but this only dates from the 2005 year. Some investors also organised their own lines of credit.
2. Bank loans (net of repayments) of $350 million have been lent to GSL. This was the amount due as at 30th Sept 2008.
3. Included in proceeds from equity holders of $771 million are proceeds from the issue of debentures ($210 m), hybrid securities ($201m), and shares ($335 m). There is also an amount re the repayment of related party loans prior to the IPO in June 1999. All amounts are net of issue costs.
4. Other income includes interest ($60m) and the sale of land and plant ($23.5m).
5. Tax subsidies have already been explained, being assistance to investors less tax paid by GSL over the period.
6. Forest plantation costs are $2,000 per hectare.
7. Other overheads of $1,302 million include all commissions and legals, all employee costs, interest, all running costs such as rates etc. A detailed breakup is not available with the cash flow statements, but some detail can be gleaned from the P&Ls. Commissions, marketing and promotion expenses were $356 million, finance costs were $166 million and admin costs were $161 million.
8. Other biological assets of $226 million include expenditure on cattle (50%) with the balance being split evenly between horticulture crops and trees owned by GSL.
9. Land and plant of $1,052 million consists mainly of land.
10. Company acquisitions of $127 million relates to complementary businesses acquired by GSL,
11. Other of $75 million relates to a sinking fund amount to provide security of interest payments to debenture holders.
12. Dividends of $166 million are self explanatory. All dividends were fully franked. Franking credits were also used to subsidise interest payment to hybrid security holders.
That’s where all GSL’s money came from and where it all went.

What’s the current situation?

1. GSL investor loans are still approximately $500 million. Investor/growers have used their own hard earned to repay approximately $1 billion of their loans.
2. Their trees are only worth possibly $600 million.
3. GSL’s land is worth maybe $600 million to $750 million.
4. Other assets e.g. cattle, horticultural crops are worth maybe $100 million.
5. Banks are owed $350 million plus interest and debenture holders about $250 million. (These guys are the secured creditors).
6. Receivers and administrators will take most of the rest leaving little if any for unsecured creditors, hybrid security holders and shareholders.
Who benefited? Only those who managed to realise capital gains and dividends from GSL shares in the good times, and those employees and related parties who shared some of the GSL spoils.

What’s to show for the $689 million in taxpayer funded assistance? Not much. Could it have been spent more wisely elsewhere? And is it possible to encourage the planting of trees without MIS’s. Are MIS’s necessary? Does anyone really understand how they work, from the viewpoint of their actual impacts?

It now transpires that no one ever understood how Allco worked? And very few understood Babcock and Brown. And a lot could never understand how with the Macquarie model it was continually possible to pay income distributions using increased borrowing.

Of course the day of reckoning had to come, for all the contrived structures that have grown during the last 15 years.
In case anyone is in any doubt, if a structure is unduly complex then it is bound to be hiding something. Martin Conlon, head of Australian equities at Schroders recently observed in the AFR that “we have almost never found a business in which undue complexity and lack of transparency are positive signs”.

Planting 175,000 hectares over 10 years only cost $350 million. Suppose the Government offered a grant for approved plantings of 40% of costs up to $2,000 per hectare. That would have cost $140 million. The tax subsidy on the balance of the planting costs at 30% tax rate(for farmers) would have been $63 million, giving total Government assistance at $203 million, a far cry from $689 million. We would now have plantations on approved sites at a 70% savings to Government.

Just to reiterate.

The same 175,000 hectares of trees could have easily been encouraged at considerable savings to Governments and investors with a directly targeted system of grants to growers rather than the carte blanche application of the MIS system.

The tumultuous history of plantation forestry included an inquiry by the Federal Treasury initiated in May 2005. One of the terms of reference was what assistance was required to encourage investment in longer rotation plantation crops. One of the interim recommendations in May 2006, at a time when Senator Abetz was still in charge of the Forestry ministry, was that “deductibility (of MIS expenditures) would also be conditional on the certification of the MIS company to ensure best practice in forestry, regional planning, land use and natural resource management, under arrangements to be developed by the Department of Agriculture, Fisheries and Forestry”.
This recommendation needs to be reconsidered. The distortions created by current MIS operations have resulted in perverse site selections. Temma for goodness sake! Not to mention all the plantations in Mr Bartlett’s preferred food bowl of SE Tasmania.

With more directly applied assistance we could have hundreds of woodlots owned and managed by woodlot owners, mostly farmers probably and others with a closer affinity to the land than remote paper shufflers. An industry like our current farming industry. Isn’t this the preferred model, Will? Jeremy? René?

Why isn’t this sort of approach embraced by forestry companies? The answer is simple when one looks at the above table. With the current MIS structure, where a forest company manages and controls trees, a Government subsidy of $689 million is in effect a cash flow subsidy to that company. Whereas in the absence of MIS’s, if any grant or subsidy is paid to a grower, then arguably it is not a subsidy to the company which may eventually buy the trees, but rather to the industry generally.

TTimes readers may well remember the recent opuscule by Dr Felmingham http://www.forestrytas.com.au/uploads/File/pdf/pdf2009/fiat_forestry_110609.pdf when he said on page 12 “(t)ax concessions or other forms of favourable tax treatment are not included because they are not necessarily paid to the industry directly or indirectly. In some cases tax havens are not designed to facilitate the operations of an industry, they are designed to attract investors to the industry. Investors and operators are not usually one and the same, so it is quite appropriate to disregard tax havens as a subsidy paid to industry when they benefit investors only”.

The industry view quite clearly is to deny that MIS assistance directly assists forest companies, but rather the investors themselves. This view is sophist nonsense. If grants were paid directly to growers in the absence of a MIS structure, this may be the case. But with MIS’s, the cash flow effects of the tax subsidy clearly benefits the forestry company. Which MIS forestry company wishes to forgo subsidies of $689 million over 10 years? That’s $2 billion for the entire MIS industry, as GSL represented approximately one third of the MIS industry. Other MIS companies differ in some respects from GSL, but broadly the similarities far outweigh the differences so it is not unreasonable to extrapolate GSL’s data to obtain a picture of the whole industry.

Without MIS’s how do forest companies survive? And build a mill? And finance the planting of feedstock for the mill?

As always, follow the money trail and the raison d’être for MIS’s soon becomes apparent.

We need to move on. The silence from policy makers and politicians as to the way forward is deafening. What don’t they understand?





Writers | John Lawrence | Politics | Local | National | State | Forestry | Gunns | Economy | Environment
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Comments (12)

1.Thanks for the review John.

Could we also contemplate a model where tax subsidies were available for the integrated management of public native forests and the willing investors become party to the outcome?

Some time ago, I was shown an example of regenerated native forest, which had been progressively thinned to optimise sawlog production. The exact location eludes me but it was somewhere in the Florentine.

It was an impressive forest - diverse, majestic and sodden. However, my guide explained that the process of progressive thinning was not economically viable. The original work has been undertaken using public funds flowing after the Helsham enquiry.

How much does such integrated management cost? Given the economic opportunities now present in carbon and water, as well as premium sawlogs, firewood and woodchip residues, what multiplier could we have achieved for investors with the squandered MIS subsidies by taking this alternative approach?

Ben Quin

Posted by Ben Quin on 17/08/09 at 03:08 PM
2.Magnificent work John. I guess the bad guys will stay very quiet on this one and there will be no rational refutation of your excellent forensic accounting.

I fear that the catastrophic mess created by Howard’s 20/20 Vision of 3.3 million hectares of tree plantations will be as nothing compared with what Rudd will unleash with his 35million hectares of the same. Prepare yourselves for a continental disaster similar to the Soviet schemes of planting cotton in central Asia that led to the draining of the Aral and Caspian seas and the resultant desertification.

Ruddsky’s carbon offset con is so similar to the huge social engineering schemes of the old Soviet Union, and it will, of course, be financed by the long-suffering taxpayer of this nation. It will be a massive transfer of wealth from the public purse into corporate hands. It’s like being raped and then receiving a tax invoice for services rendered.

Posted by Bob McMahon on 17/08/09 at 04:39 PM
3.The question that bothers me is “why?”. It’s a bizarre system of governance when the trustees of public assets, namely our parliaments, can flog them off to entrepreneurs for insultingly paltry returns to little other than party coffers.

As stupid as many of them are, our pollies were quite aware that MIS were never anything close to value for public money, as John Lawrence points out. They have given this industry the legislative keys to both our agricultural land and privately owned native forest for essentially nothing. It is left to us to ponder “why?”.

Our next state and federal elections should be fought out on the issue of how many of us can really see our emperors’ new clothes, and how many can’t.

John Hayward

Posted by john hayward on 17/08/09 at 06:12 PM
4.Ben (#1) there’s any number of ways to achieve alternative outcomes. It only requires a will.

Your forest guide may have confused the cash flow burden of thinning with its economic viability. In the whole forestry debate I think there is one thing with which all parties agree and that is the economic benefits of thinning production forests. If cash flow doesn’t permit this, then there’s probably some market failure which as you’ve indicated may require Government intervention.

Before MIS’s, Governments used to provide loans and grants for approved forest operations. They became unfashionable with indirect assistance via MIS’s the preferred approach. But they haven’t worked. They’ve been a disaster. So much public money has been wasted.

I think it might be best for Governments to provide direct measurable assistance. That’s what COAG is supposed to cover. Have a look at Statement No 3 with the Federal Budget to get some idea of the range and scope of National Partnerships (NPs). The States and the Feds need to agree on an alternative to the wasteful extravagance of MIS’s and NPs are a solution.

The spoils from NP payments can be directed for use by State Forestry agencies or provided to private landowners via loans grants with covenants used where applicable.

There’s plenty of money about. Take the case of water and the Bartlett Plan. $80 million is the State’s money but the last State Budget indicated the Feds would chip in another $140 million. But now Mr Bartlett is talking about a $400 million Plan, in other words an extra $180 million which I believe will also come from the Feds.

We have the opportunity to set up the forest industry in a way that can achieve much broader community agreement,if only there was a will.

Or a Will?

Posted by john lawrence on 17/08/09 at 08:38 PM
5.Excellent work John.

The beneficiaries of the forestry MIS schemes are the promoters of the schemes, the same people who keep telling us how sustainable their industry is and who keep demanding more favours from government.

Exemptions from laws that apply to everyone else, suubsidies like MIS, road and bridge installation and repairs, free plantation water, subsidised water for their pulp mills.

How much money do these people need to continue their sustainable world best practices?

Posted by Mike Bolan on 17/08/09 at 08:51 PM
6.John the numbers are spot on and thank you - however I think there is an issue of context to be factored into the story.

The entire community has shifted remarkably in the past few years on these kinds of schemes.

There is also a couple of points which in a sense dont really serve the argument well. Not all who participated were tax recalcitrants who were so ignorant that they saw their accountants as alchemists. Im sure a lot were - however a substantial amount participated on the basis that they needed eventual tax losses to offset other substantive gain elsewhere, and others simply went in and were better timed than most.

Any investment scheme as these (and there were many in the dawn of listed IT enterprises where there were in excess of 110-120% deductability in the mid/ late 1990s) attracts a wide group of individuals and strategies, and not every one is a dolt.

I recall some discussion about 8 years ago where some Melbourne money was going in big - blocks of .5M and so on, but on the basis that it was shorter term. They got in and out OK as I recall. But then again some Melbourne money can be tight lipped.

Im not criticising the work in your fine article - but I dont think its correct that everyone was a blind lemming.

Its also fortuitous to some extent that Madoff et al have recently been brought to light - as it enables the term Ponzi to be used and along with it the assignment of a certain subjective response. It supports our overall collective views on MIS.

But I wonder if it is REALLY a ponzi scheme - which as I understand is typically the work of an individual and not necessarily one of entire industries. Ponzi’s are beautfully/ elegantly organised and as we learned from Madoff, if large enough do not collapse. Ponzi’s are secretive, MIS was sponsored by government - etc….MIS kind of blurs the edges and definition - but is used as I suspect because in one word (Ponzi) the user polarises opinion.

But - this is an important and informative article and thank you for the effort and clarity. And - Im sure with these comments Ill be well corrected !

Posted by Richard Butler on 17/08/09 at 10:50 PM
7.#3 the reason is that the ABARE group of industries see climate change as an opportunity to consolidate their position.

If the fossil fuel industry grows trees to ‘offset’ their carbon emissions, then they don’t need to do anything to respond to government carbon prices, in fact they can make money on their ‘tree’ investment which will grow over their industry’s capacity to emit. They fancy they need forestry to grow and manage the trees, and forestry can cut the trees down for pulp and grow more trees, while the paper ‘locks up the carbon.’

The amount of money they see as possible from their 35 million ha of trees, already approved, at even 10 tonnes/ha/yr at $30 tonne carbon is massive and would deliver major benefits to them and in taxes. OF course it’ll take all of Australia’s water and farmland but you can’t make an omelette etc etc.

If you check the ETS supporters, banks and finance companies support it, as does the fossil fuel and forestry industries.

ABARE does all the climate modelling for the government. What else do you need to know?

Posted by Mike Bolan on 17/08/09 at 10:58 PM
8.John, in post #4 you have introduced the issue of Premier Bartlett’s water plan. There is of course a tangible connection with this MIS debate which you have commenced.

As an adjunct to the general debate on MIS, I would like to see some analysis of the cost/benefit of optimising the water holding capacity of expanded, long rotation native forests in Tasmania’s upper catchments, (even minor catchments) compared with the development of new dams and pipe-lines under the Bartlett plan.

Do you have any leads? Perhaps Premier Bartlett or Mr. Hodgman can assist?

Ben Quin

Posted by Ben Quin on 18/08/09 at 12:59 AM
9.Thanks for editing tips Richard (#6).

I didn’t imply all participants were dolts. I referred to some who borrowed 100% as a select group of tax recalitrants. I didn’t say all growers were in that category.

Your view of a Ponzi scheme is a little narrow. Nothing presupposes the scheme must be carried on by an individual. And at times it was secretive. Interposing an associated entry to purchase GSL’s 1994 and 1995 crops referred to in the Notes to Accounts in 2005 and 2006 and which led to the resignation of 2 Directors in disgust, as revealed in evidence recently to Bill Heffernan’s committee, is prima facie evidence of the existence of a Ponzi scheme.

These shenanigans occurred right at the time that GSL’s MIS income was set to explode, as can be readily seen if one examines the cash flow statements for each year.

If it became widely known that the initial yields were awful, then MIS growth would have been much lower.

And the fact that MIS’s had the Government’s imprimatur is irrelevant to whether or not a Ponzi scheme operated.

Posted by john lawrence on 18/08/09 at 09:04 AM
10.Ah thanks - Good to have that advice.

Posted by Richard Butler on 18/08/09 at 09:54 PM
11.We shall remember him:
14 July 2006 News
Great Southern Limited: The Australian Forestry Minister, Senator Eric Abetz, has planted the 100 millionth tree on behalf of Great Southern Plantations Limited. ...
http://www.great-southern.com.au/News.aspx

- MEDIA RELEASE -
SENATOR THE HON. ERIC ABETZ
Minister for Fisheries, Forestry and Conservation

13 July 2006
100 millionth tree planting
The Australian Forestry Minister, Senator Eric Abetz, today planted the 100 millionth tree on
behalf of plantation manager Great Southern Plantations Limited.
At a ceremony held on a property near Albany, Western Australia, Senator Abetz placed the
seedling in the ground, marking a major milestone for the hardwood plantation industry.
“100 million trees represents the largest commercial hardwood forestry planting in Australia’s
history undertaken by a single company,” the Minister said.
“Once harvested, 100 million trees will result in the production of more than 10 million bone
dry tonnes of woodchip – all of which is destined to be exported to south-east Asia.
“This is worth in excess of $1.8 billion of exports at today’s figures and will create 29 billion
reams of paper.
“In addition, over the course of their life, 100 million Eucalypt trees will process some 20
million tonnes of carbon dioxide.”
The Minister said the scale of Great Southern’s achievements could not be under-estimated.
“It would take one person, working five days per week, 77 years to plant 100 million
seedlings.
“If 100 million seedlings were planted in a row they would cover a distance of 200,000
kilometres. This would represent planting five rows all the way around the world, or a single
row a little over halfway to the moon.”
Senator Abetz said the large-scale establishment of plantations was creating employment in
regional areas as well as generating export dollars which were reducing Australia’s trade
deficit in forest products of around $2 billion per annum.
“The Howard Government strongly supports our plantation industry.
“It is pleasing to see that companies such as Great Southern are working hard to fulfil the
targets set out in Vision 2020, the framework for the expansion of the nation’s plantation
estate to 3 million hectares by the year 2020.
“Without this renewable resource, we would be forced to source even more of our timber and
timber products from overseas.”

MEDIA PLEASE NOTE: Great Southern Plantations has been exporting woodchip from the
Port of Albany since February 2005. To date, the company has harvested 342,065 tonnes of
logs and has exported has exported 144,000 bone dry metric tonnes of woodchip.
In the Albany region alone, Great Southern provides direct and indirect employment for some
200 people within its forestry operations. Employment opportunities are expected to increase
as harvesting activity intensifies in the future
Through its projects, Great Southern has already injected some $1 billion into the economy,
most of it into regional Australia.
Great Southern Plantations has established hardwood plantations around Australia over the
past 12 years, in regions stretching from Tasmania in the south to the Tiwi Islands in the
north, and from the south west of Western Australia to the eastern most points of northern
New South Wales.

Posted by Factfinder on 19/08/09 at 10:18 AM
12.#11. Can anyone explain to me, why, after the complete collapse of the MIS schemes, the fallout and the subsequent costs to the taxpayers, do we still have a Senator Abetz?

Posted by Barnaby Drake on 21/08/09 at 02:46 PM