its long......

its long...
http://business.theage.com.au/business/once-upon-a-time-in-the-woods-20090523-bigl.html?page=-1


Ruth Williams and Philip Hopkins
May 23, 2009 - 12:31AM
THIS week, the phrase "Ponzi scheme" was attached to collapsed managed investment spruiker Great Southern. It was merely the latest, but clearly the worst, label attached to the company in its 20-year history.

In its time, Great Southern was accused of destroying rural communities, of driving up the cost of prime agricultural land, of flogging tax write-offs and spruiking dud investments.

But, along with its peers in the plantation forestry business, it was also praised - by the one-time federal forestry minister, no less - as "vital" to a plan to treble Australia's timber plantations, of having a "legitimate and important role to play" in the timber industry, and of yielding significant economic, environmental and social benefits.

By the time the company collapsed a week ago, 47,000 investors had ploughed money into tax-effective managed investment scheme (MIS) products - derived from timber and horticultural plantations - 300 accountants and financial planners had signed on to sell the products, 240,000 hectares of trees had been planted, and hundreds of farmers had sold land to Great Southern.

When Great Southern entered administration last Sunday, it was following the fate suffered just weeks before by its agribusiness rival Timbercorp. Great Southern has an estimated $600 million in debt; its main bankers, ANZ, Commonwealth, BankWest and the Japanese bank Mizuho, are owed $376 million. They called in receivers on Tuesday.

It is an ignominious fate for a company that once boasted a $5 share price, market capitalisation of more than $700 million and that was one of the top-performing stocks on the S&P/ASX 200 in the early 2000s. Its shares are now frozen at 12, its market cap at $77 million.

Great Southern's expansion capitalised on the Howard government's Plantation 2020 policy, released in 1997, that aimed to treble plantations in Australia by 2020.

Great Southern Limited derived its name from WA's Great Southern region - it was here that Great Southern's first blue gums were planted in 1994 and where, when the company listed in 1999, the vast majority of its plantations were located.

Virtually all the Great Southern region falls within the federal electorate of O'Connor - a seat held by maverick Liberal MP Wilson Tuckey since 1980.

Tuckey, as minister for forestry for three years from 1998, was a prominent advocate of the industry and of Plantations 2020 - to the point that a letter from Tuckey denying a MIS-negative newspaper article was reprinted in Great Southern's 2000 annual report. The letter underscored the government's commitment to forestry tax breaks - a 100 per cent deduction for investors in the year they bought the products.

This was important because although Great Southern grew trees, this was not how it made most of its money. Its main business was agribusiness-based, tax-effective managed investment schemes - a business that was about to boom on the back of favourable tax treatment.

From 2003 to 2008, Great Southern raised $1.8 billion from investors, almost two-thirds of which was in sales of blue gum MIS. Each year, Great Southern packaged and released new schemes - initially in forestry, but expanding to olives, vineyards, cattle and more. Its MIS sales grew from $56 million in 1999 to $314 million in 2008.

What exactly was it selling? Great Southern's prospectus for its 2002 and 2003 blue gum MIS showed investors paid $3300 to Great Southern, or $3000 before GST, to lease one or more woodlots of a third of a hectare.

If ready money was a problem for a potential "grower", Great Southern could arrange finance (with loans that would later be securitised and sold).

Great Southern selected, bought and prepared the land, planted the trees, monitored them and harvested them in "approximately" 10 years. In return, the grower got a handy tax deduction of $2900 in the year the grower bought the investment.

The tax write-off was the main inducement, but there was also the promise of a return when the trees were harvested in 10 or so years - at which point Great Southern would take a portion of the yield in management fees.

How much of a return was coming? The prospectus makes clear that Great Southern could not make a "definitive" statement on the size of the return growers could expect. But it was happy to give a "reasonable" estimate of net returns of between $1923 and $4569 per woodlot for its 2002 project - after an investor's initial outlay of $3000 was recouped. The company was banking on yields of 250 tonnes per hectare.

The trees planted for the 2002 scheme are not yet mature, so investors will not receive their returns for some years. What is certain is that their returns will not be subsidised by company money, as earlier distributions were.

Great Southern Plantations 1996 was one of the company's earliest projects. Based on company documents, the 783 investors in GSP 1996 paid $3000 each for the almost 4000 woodlots they collectively owned.

After investors paid their upfront fees, GSP 1996 sat dormant as the trees grew. There was little to be done until the harvest began in 2007, at which time Great Southern would again earn money from the project, and investors could anticipate a return on that decade-old outlay.

In 2008 - 12 years after the scheme was launched - the project generated $16 million for investors to share, meaning each woodlot returned about $4100. This gave investors a net return of $1100 per woodlot, after recouping the $3000 paid in 1996.

But what was not immediately apparent was that a Great Southern subsidiary, Great Southern Export, bought all the timber from the 1996 project - and paid up to $10 million of the company's money to improve returns.

In its 2007 half-year accounts for the scheme, the company explains in the account notes that GSE would set its price after taking into account factors like the "actual yields" and the "prevailing woodchip price". While no "final decision" had been made by the Great Southern board, it was expected that GSE would pay investors a premium "over and above the return they would otherwise have achieved".

The premium would be "up to" $9.6 million. This means that, of the $16 million returned to investors, as little as $6 million to $7 million may have been recouped from the sale of timber. If investors had only this money to share, they would have taken home between $1500 and $1750 per woodlot - nowhere near their original outlay. This document starkly illustrates two problems with Great Southern. Firstly, the lengthy gap in earnings from the sale of the MIS products to the harvest, forcing the company to survive in the meantime on sales of new MIS products.

The other problem was that the yields were much lower than expected.

TASMANIAN accountant John Lawrence, who lives near Burnie, has kept an eye on the MIS industry since the MIS forestry companies came searching for properties in his region and his clients approached him for advice.

Lawrence claims Great Southern's yields were kept hidden for a long time. "The first crop was 1994, which they would have harvested in 2005," he says. "The yield there was about 123 tonnes per hectare, whereas they were projecting 250 tonnes, and the next year was similarly bad, about 160 tonnes."

Lawrence, and others, noticed a telling change in Great Southern's accounting practices in the months before it folded.

Great Southern's long-standing accounting policy was not to recognise the plantation management and property rental fees it would reap at harvest - "until the value of the project's net harvest proceeds can be measured reliably", as it stated in its 2007 accounts.

But four months later, a supplementary explanatory document showed a change in policy - a change repeated in its annual accounts.

Great Southern had now decided to "update" its valuation model on the basis that "reliable measurement" of the proceeds of a plantation harvest could be made after four years of timber growth.

This meant it was recognising $17 million in fees for management services performed on trees planted from 1998 to 2003 in its current accounts - even though it would not physically get this money until the trees were harvested in up to three or four years.

Lawrence argues that this proves the company knew it had been overstating projected yields for years. "That was such a damning admission," he says. "It means that Great Southern have known all along how poor the yields have been because they can assess them at four years - and they never ever told the market."

It was Great Southern's continued reliance on drawing in money from new investors, coupled with its practice of beefing up investor returns, that has sparked the "Ponzi" accusations. A classic Ponzi scheme involves investors being paid "returns" out of funds drawn in from new investors. It relies on new money constantly coming in.

Lawrence, for one, is convinced that Great Southern was a Ponzi scheme. On his advice, Greens senator Christine Milne wrote to the Australian Securities and Investments Commission late last year.

Her letter points to what "appears" to be a pattern of misrepresentation, deceptive behaviour and misreporting by Great Southern Plantations, on the basis that its product disclosure statements consistently overstated the yields investors could expect.

ASIC responded that there was "insufficient evidence" to conclude that Great Southern was a Ponzi scheme. "A general indicator of such a scheme is a lack of assets," ASIC said, pointing to Great Southern's reported net assets of $329 million at September 30, and its audited accounts.

Although ASIC noted that yields had fallen short of projected outcomes, it was not "necessarily" misleading or deceptive if the company had disclosed potential risks to investors, ASIC said.

If the fundamental purpose of the company - to grow trees - was not going so well, lots of other problems were also creeping up on the company.

Its growing debt, for a start. Great Southern's policy was to own the land on which the plantations grew, meaning that if it wanted to launch more MIS products, it had to buy more land. And along the way, it bought or established new businesses - rural funds management, cattle stations - in an attempt to diversify from blue gum-based products.

The acquisitions were funded by equity raisings and bank loans. Its debt facilities were extended in 2007, to $350 million from $245 million, at which point the company admitted it had "fully drawn down on the facility to its limit".

Meanwhile, it was battling high costs - especially the cost of its distribution model. Great Southern spent almost $137 million on commissions, marketing and promotion in two years to 2008. To help convince accountants and planners to sell its MIS products, Great Southern paid commissions of up to 10 per cent.

Late last year, the company unveiled a radical restructure, dubbed "Project Transform". It involved selling assets to reduce debt, reducing costs and, crucially, buying out tens of thousands of MIS investors - giving them Great Southern shares instead of the harvest proceeds.

The offer was between 3500 and 6000 Great Southern shares per woodlot - working out at a return of $700 to $1200, based on the 20 that Great Southern shares were wallowing at by the end of the year.

Investors who bought on the basis of that 2002 and 2003 prospectus - who were tempted with possible returns of up to $4569 per lot - were among those approached to convert their holdings into shares. To help them decide, they were given an independent expert report prepared by KPMG. That report included projected yields for the 2003 scheme, calculated by forestry assessor GHD.

In that 2002 and 2003 prospectus, Great Southern said it could "reasonably expect" its trees to yield 250 tonnes, or cubic metres, per hectare. But the GHD projections show that, although a small number of trees were expected to over-deliver at 311 cubic metres, most were falling drastically short, with yields of just 107 to 167 cubic metres.

Why? The trees were growing in a period of drought, for one thing. And Great Southern had, in the past, acknowledged problems with earlier plantings, such as lower-quality seeds and poor choice of sites.

Whatever the reason, the plantation investors overwhelmingly rejected Great Southern's proposal to swap their trees for shares.

The company released an update to the market in April. The tone was upbeat, but the content was telling. Great Southern could not borrow more money. It was slashing costs, but "cash flows (remained) dependent on the sale of assets and continued reliance on MIS sales".

Great Southern's shares were frozen on May 7, and the board appointed administrators on May 16. Receivers are now picking over the company.

Meanwhile, thousands of hectares of blue gums keep growing, awaiting harvest. Just who will maintain the trees and harvest the timber is unclear.