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ABN: 55 928 023 315 Committee Secretary Senate Economics References Committee PO Box 6100, Parliament House CANBERRA ACT 2600 15 December 2015 Secretary Trees Victoria 8 Upland Road Strathmore Vic 3041 Submission to Senate Inquiry into forestry managed investment schemes Introduction Trees Victoria is an incorporated body representing many organisations and individuals who are interested in tree growing, be it for commercial, environmental or landscape purposes.
The organisation is a grass roots organisation, predominantly regionally based in direct contact with rural communities.

Consequently the experience of those involved in the organisation is invaluable for this Senate inquiry.
Further background on Trees Victoria can be found on our website http://www.treesvictoria.com.au It is quite disappointing to Trees Victoria to see that the majority of companies who were active with forestry managed investments have failed in one way or another, leaving many investors in those schemes in serious financial hardship.

However it is the belief of Trees Victoria that the model still has merit and it should not be case of “throw the baby out with the bath water”.
Why MIS should be retained Australia’s need to expand its commercial forest plantation estate to meet the forecast future demand for timber and related products is the key driver for new plantations.

The need for new plantations was documented in the “Plantations for Australia: The 2020 Vision” which was launched in 1997 and revised in 2004.
This strategy has as its target the establishment of 3 million hectares of plantation by 2020.This required some 85,000 hectares of new plantation development per annum to be undertaken to achieve that goal.

The current plantation estate is understood to be around 2 million hectares with one half hardwood and the other half softwood.
Since the demise of the majority of MIS companies in around 2010, the rate of new planting has fallen from 75,000 hectares per year to near zero and the goal of 3 million hectares by 2020 is a distant dream.

According to AFPA chief executive Ross Hampton, “we now have 2.1 Million hectares of plantation with about 25% of that likely not to be replaced after harvest”.
Most of the new entrants in the wake of the MIS collapse are not interested in establishing new plantations, their reasoning being that it is too risky and does not have sufficiently high enough 1 Forestry managed investment schemesSubmission 137 return.

They are more interested in purchasing and managing the established MIS estate and reaping the rewards of picking up a distressed asset.
Likewise State Government agencies that were previously responsible for the expansion of the plantation estate do not have the capital to expand the estate as they come under increasing pressure from their Government owners to provide a short term dividend rather than a long term return.

The concept that private funding, in the absence of Government funding, should be used for developing new plantations led to the development of the MIS legislation.
Investors were offered the opportunity to become investors in forestry plantations with the incentive of up-front tax deductions for the forestry plantation development and management.

Members of Trees Victoria having had many years’ experience in the forestry business, clearly understand the difficulty of having any organisation invest in the establishment of new plantations, without a tangible incentive.
Government plantation owners seem to have difficulty finding the funds to re-establish harvested plantations, let alone expand into new plantations.

The larger privately owned plantation managers have a similar issue, the scarcity of funds for the initial period of a long term investment.

It is also quite clear that the new entrant TIMO organisations with long horizons are prepared to invest in forestry plantations once they are established and past the early difficult years.
The evidence for this includes the major purchases of several failed MIS scheme plantations by Global Forest Partners and New Forests.

Where State Governments have sold timber rights to their plantations particularly in Victoria, Queensland and South Australia there have been large corporate pension fund buyers, including Hancocks and Campbell Group.

As mentioned earlier the vast majority of the funds for these purchases have been from overseas.
The “missing link” is investment in the creation of the plantation and development in the early years.

MIS is and must remain one of the mechanisms for creating new forestry managed investments in Australia.

Trees Victoria believes that basic MIS concept, with development of improvements to procedures and better targeting of appropriate investors has a valid and important role to play in the future development of new plantations.
Comments on MIS failures in Australia There have been a number of inquiries into the failures of the major MIS companies prior to this inquiry.

There are many reasons for the failures which have already been documented.

From recent media reporting it appears that additional information about the failure of MIS projects and companies is coming to light.
Trees Victoria do not wish to make additional comment on the reasons for failures but rather to concentrate on the opportunities for improving what Trees Victoria believe is a necessary facility for getting plantations established in Australia.
2 Forestry managed investment schemesSubmission 137 Possible improvements to MIS structures The original intent of the MIS legislation was to stimulate the development of plantations in Australia to meet the nation’s future timber needs as documented in the “Plantations for Australia: The 2020 Vision”.

The development of plantations which would produce solid wood products for house construction and commercial buildings was the main driver.
There are many advantages in developing such plantations including rural employment in the plantations themselves, the rural based timber industries process logs into timber products, and then the distribution of those products to largely domestic city markets.

Market studies have indicated that Australia is unlikely to be a successful exporter of large volumes of timber products, other than logs, due to exchange rates and cost structures for manufacturing.
However, Australian softwood plantations and associated timber industries have shown to be quite successful as a domestic industry.

The plantations which produce such building timber are primarily softwood plantations designed to produce sawlogs over long rotations in the order of 25 plus years.

These long rotation plantations are thinned usually twice after age 13 to produce smaller timbers suited to pulp and paper and panel boards and some small sawlogs.
Demand for solid timber products such as sawn timber, plywood and panel boards (MDF, particleboard) is cyclical and has increased in the last 12 months.

The long term demand for timber trends upward with a key driver being population growth.

There is a very positive outlook for solid timber products in the future with new developments in engineered timber products to produce multi-story buildings.

The 9 story Forte building in Docklands Melbourne built from cross-laminated timber is a good example.
There is considerable research and development being done overseas on the use of wood for renewable energy and biofuels.

This is an emerging market which Australia can adopt if the basic resources are developed.

This all reinforces the work done to produce the “Plantations for Australia: The 2020 Vision”.
MIS legislation should be carefully targeted to developing plantations which will produce the timber products which the nation needs over the longer time horizons, mainly softwood products grown in long rotation plantations.

Our members experience has shown that wholesale investors, who are generally high net worth individuals, have identified that long rotation plantations as described above are attractive as part of an investment mix.
However, there is only a small proportion of retail investors who have the knowledge and the experience to manage such long term investments and they should be discouraged from participating in this form of investment The taxation incentive is very important and consideration should be given to fine tuning such incentives to increase the pool of sophisticated investors who will invest in the long rotation plantations.
This could include additional incentives such as those used for research and development projects.

It is important that the legislation does not generate unintended consequences.

The initial focus of MIS on short rotation eucalypt timbers largely for export has been shown to be the wrong direction.
3 Forestry managed investment schemesSubmission 137 For long term (25 years plus) forestry investments, such as softwood plantations being grown for sawlogs, the missing link may be the first 15 years of the plantation.
Once a softwood plantation is around 15 years old and been thinned, and is a well -managed plantation in a location where there are stable long term timber markets, then those plantations become attractive to the kind of companies which have purchased the large scale forestry plantation assets in Australia over the past 10 years or so.
There is no guarantee of sale and it is subject to the market, and there may be difficulty getting all the investors to sell their investments in a way that companies wish to buy, but the desirability of an established plantation is very much higher than a property about to be planted.

Our members experience has shown that investors take some comfort in the potential for selling their immature plantations before final harvest.
The type of MIS forestry which Trees Victoria supports is one of the few forms of decentralisation being practiced in Australia, it takes funds from wealthy wholesale investors located primarily in the capital cities and invests it in Rural Australia bringing scarce jobs for rural contractors and rural industries including sawmills and pulp mills.

Without the sort of resource expansion that Trees Victoria is supporting, these rural industries would not be able to plan for expansion.
It takes 25 years to grow a pine tree but a matter of seconds to cut it down.

You cannot expand a timber processing industry today if the timber has not been planted 25 years ago.

Lyn Coulston, Chairperson Trees Victoria 4 Forestry managed investment schemesSubmission 137