Austerity pitfalls and alternatives

Austerity measures are very much part of economic policy discussions around the world, more so in Euro land but also in the US as part of the recent so called fiscal cliff stand-off.

The recent uncovering of some shoddy research by two prominent Harvard economists, Reinhart and Rogoff used to justify austerity measure has also reverberated around the economics blogsphere.

The Tasmanian Forest Gravy Train

What started as government funding to compensate for native forest areas lost to the Tasmanian timber industry has become a gravy train on a circuit returning regularly to reload before setting forth to deliver more spoils.

Tasmania the ungovernable State

There was a touch of irony during last week’s tortuously long deliberations by Tasmania’s Upper House on the contentious Tasmanian Forests Agreement Bill when it paused for a moment to consider the Mental Health Bill. Many Tasmanians would have been happy to see the latter Bill amended to make Parliament a proscribed organisation and closed.

The MIS phoenix

The MIS phoenix has risen.

AgriWealth’s 2012 Softwood Timber Project demonstrates memories are indeed short. The MIS industry pronounced dead after the disastrous insolvencies of Timbercorp, Great Southern, Willmott Forests, FEA and Gunns still has a pulse.

It is sometimes said we aren't predisposed to philanthropy but AgriWealth's latest offering suggests it too is alive and well. There is no other reason than philanthropy for becoming a AgriWealth grower. The massive upfront fees mean there is little chance of return on a before tax basis.

The tax driven Project differs from failed MISs in that it relies on Div 394 of the Tax Act which was enacted to overcome increasing problems with MISs prior to 2008.

But Div 394 has made it worse as prepaid expenses, some not due for 26 years are allowable deductions.

The upfront fees due to the loading of all prepaid expenses are ten times those charged by the old MIS projects.

Policy makers have taken their eyes of the ball probably thinking the MIS industry is dead.

Alas it’s not dead, as AgriWealth uses its cash to once again distort the pattern of agriculture in areas such as the beautiful Tallangatta Valley in northern Victoria as described in a recent Weekly Times article.

A closer look at the AgriWealth project follows but first a quick overview of how MISs used to operate, the issues and pitfalls.

How your taxes bailed out an insolvent Gunns

The federal election scheduled for September means it's a double header over the next 12 months for Tasmanian voters, with a state election due in March 2014. That means lots of Canberra visitors, lots of promises and at least a few presents, and this might be one: according to The Weekend Australian, Julia Gillard is yet to rule out assistance to get the Tamar Valley pulp mill off the ground.

Coincidentally, Gunns' voluntary administrator also recently circulated his detailed report to creditors (Gunns planned to build the original pulp mill).

The pattern of behaviour of the Gunns Group over its last 12 months suggests it was insolvent for a while. Maybe it was insolvent as far back as August 2011, when Gillard and Premier Lara Giddings signed the inter-government agreement on forestry, promising $276 million in funding -- some of which was used to save Gunns.

Costello's privatisation propaganda

Peter Costello’s Queensland Commission of Audit inquiry is recommending large scale privatisation of public assets especially electricity and port assets.

Something similar in Tasmania would not surprise as the ideologues in the Liberal Party ponder the possibility of majority government.

Cameron Murray who posts as Rumplestatskin on the macrobusiness.com site has a short discussion of the issues and a few interesting comments follow.
 

If the exercise was genuine we would see some public discussion about the merits of public debt and the financial benefits to the State from privatisation.

Would you decide to sell your business simply because you had debt, even if that business was profitable and had solid future prospects? No. The best thing is to keep the debt and the business, as the returns from the equity in the business outweigh the cost of debt.

By definition the price the government would receive for any asset sales is a price that reflects a market level of return on equity, which would surely be higher than the rate of interest on the debt that is being repaid. Thus, by definition the government is in a financially better position to own the assets.

And in Comments
 

All you are doing as a State is selling assets to pay debts when there is no reason to do so, and the net public financial position will be worse for it. Imagine that the government raises $10 billion from all these asset sales. If the private sector thinks these assets are worth $10 billion, they probably expect an annual return in the order of $800 million. The cost to government from $10 billion in debt is probably about $600 million. So they are making the budget position worse by $200 million per year by privatising.

Read the blog Costello propaganda covers QLD asset sales 

Gunns lurches into liquidation

It was not surprising Gunns’ Voluntary Administrator recommended all companies in the Gunns group be placed in Liquidation.

The second alternative of passing control back to a Board was never a possibility as Gunns had already disclosed in August 2012 that liabilities exceeded assets and as everyone knows liabilities are rarely understated whilst overstatement is invariably true of assets.

The third alternative of a Deed of Company Arrangement to allow for an extended period of administration so that all parties could achieve a better result was never a possibility because

·       the unsecured creditors are unlikely to get anything  regardless.

·       The only chance unsecured creditors have of getting a return is if a Liquidator can successfully establish that Directors allowed Gunns to trade whilst insolvent.

·       Grower/investors need a new Responsible Entity (RE) for their MIS projects if they are to continue until harvest and this can occur even if a Liquidator is appointed.

·       If a replacement RE cannot be found for the MIS projects then the growers will vote to liquidate the schemes at the same time as companies in the Gunns Group are liquidated.

·       Grower/ investors hopes for a return may be boosted if breaches by Gunns Plantations of its RE duties can be upheld.

·       The banks’ returns are likely to diminish with every passing day so they just want to get on with the liquidation. Gunns has well and truly tested their patience and forbearance over a considerable period of time.

·       The banks as secured creditors will claw back some amounts from MIS growers if and when the schemes are liquidated for amounts owing to the RE.

·       The Gunns Group structure has been made incredibly complicated with the overlaying of 49,000 MIS growers each with a leasehold interest in land owned in some cases by Gunns and in other instances by third parties. Even if there was a will to keep the structure under Administration there is not the money.