Once popular forestry managed investment schemes have collapsed under the weight of government policy and tax office crack downs.
WHEN governments start thinking about interfering in the way markets work, they could do themselves a big favour and look at the havoc wreaked through the forestry industry by the rise and fall of managed investment schemes.
With forestry products operator Willmott Forest being placed in receivership this week, a once sizeable and healthy niche in the Australian share market has all but disappeared.
TFS Corporation, which has totally changed its model and is focused on the most niche of the forestry areas – sandalwood – appears to be one of few survivors.
The list of casualties is topped in scale and early departure times by Timbercorp and Great Southern. They have been followed by Environinvest, Forest Enterprises and the Rewards Group/ARK Fund.
These firms – and a few earlier failures – rode a wave of hype and promotion fuelled on by tax incentives and a ludicrous example of government egging on investors with a 1997 industry plan called the 2020 Vision to treble the area of commercial tree crops to around 3 million hectares by the end of the next decade.
The policy has had some success. In the 10 years to 2008, the total plantation area increased by about 55 per cent. The increase is almost entirely hardwood plantations, the area of which nearly trebled. The softwood plantation area increased by 8 per cent.
Much of this hardwood expansion, though, was through investment in bluegum plantations by MIS investors (or their predecessors), individuals who bought leaseholds on the basis of an upfront tax deduction for the long-term costs in bringing these trees to harvest.
Investors’ good sense was the first casualty of this policy.
Most paid inflated retail prices on spurious claims, with huge amounts siphoned off to promoters. The only positive side to the bluegum experience was the rorts and costs were moderate compared to some shocking examples in other areas – especially wine.
The tax break orientation of this strategy meant that the development of Australia’s plantation estate was heavily distorted towards retail investors and wrongly competed with other less tax-effective rural investment options.
The success of this policy pitted it against the government’s own revenue objectives and, inevitably, the tax office cracked down on the sector despite the 2020 Vision driving it.
The uncertainty created by this schizophrenic state behaviour was the start of the rot which ultimately brought the industry to its knees.
The vision had encouraged a breakneck, go-for-growth attitude but the financial engineering it spawned was, in reality, a house of cards, especially in a period of cheap credit.
Furthermore, the ASX-listed forestry companies were rated by the market on the sales they brought in rather than their prowess at acquiring suitable land cost-effectively or efficiently.
Their success seemed to be based on rising sales growth each year to cover the costs of ongoing operations. This required investors that were confident of the market, including tax issues, and who had made enough profit to have a tax problem.
When the uncertainty of tax treatment hurt the market it struggled to recover before the GFC blew away the option of wasting thousands of dollars on earning a tax refund.
A further cause of concern was the maturity of the earliest plantings. There appear to be few examples of investors reaping the rewards promised in the first prospectuses.
When the first big troubles emerged, there was another component that further soured this market.
The complicated structure of these investments, combined with huge doubts about what people have actually bought into, have added to the doubt about the future. In the early days it was round robin investment schemes and non-recourse loans which attracted the tax office – creating a new regime of investment structures under the banner of agricultural MIS.
This led to the ridiculous notion of the promoters getting a stamp of approval from the tax office, which they then marketed to investors like an investment guide. This was dangerous territory for any government to be in.
From that period, bigger and seemingly sturdier companies survived. Most listed on the ASX, especially as they had sold shares in themselves to plantation investors as a form of stapled security. This not only exposed investors to the risks of their tree growing prowess but also their marketing ability.
The news is now filled with the failure of these companies.
These days, investors are left to fight for their rights as leaseholders against banks, with vulture funds and external administrators further complicating matters.
Many business observers would have watched the process earlier this year as various parties pitched their offers to investors in Great Southern’s plantations.
There will no doubt be more like this as more recent collapses are unwound or unravelled.
In the end someone will gain control of the assets of this extravagant effort to direct Australia’s wood production, but I doubt the original investors will end up with much. Many of them have given up, if they were ever chasing more than the tax deduction in the first place.
Then again, what do they say? “If a forest policy fails and no one is around to hear it, does it make a sound?”
Prime Minister Julia Gillard may thank the Greens for her election win, but climate change will be a real issue that will trouble her leadership.
I hope she considers the point raised by an astute letter writer whose view was published in The Australian newspaper at the weekend.
“It would be informative if Bob Brown could specify what effect an Australian carbon tax of say, $10, $100 or even $1,000 per tonne will have on Australia’s climate, in tangible terms like reduction in temperature in tenths of a degree Celsius or drop in sea levels in millimetres,” the letter writer asks.
This is the clearest way of highlighting the danger of accepting visions which are offered on a whim and a prayer. Everyone talks about accountability but it is hard to see sometimes.