Source document: https://docs-lawep.s3.us-east-2.amazonaws.com/1697627937966.pdf (Australia)
The Institute of Foresters of Australia SUBMISSION TO THE SENATE STANDING COMMITTEE ON ECONOMICS INQUIRY INTO THE STRUCTURE AND DEVELOPMENT OF FORESTRY MANAGED INVESTMENT SCHEMES Forestry managed investment schemesSubmission 127 CONTENTS Key messages .......................................................................................................................................................... 3 delineation of financial product and forest assets .................................................................................................. 3 Forestry and foresters ............................................................................................................................................. 3 the role of foresters in MIS structures .................................................................................................................... 3 The basis of our submission .................................................................................................................................... 5 A.
The motivation and drivers that established the framework for the schemes .................................................. 6 A need for resources ........................................................................................................................................... 6 The plantation estate .......................................................................................................................................... 7 The MIS business model ..................................................................................................................................... 7 G. The options for reforming forestry MIS .............................................................................................................. 8 Overarching statement ....................................................................................................................................... 8 The forestry expert ............................................................................................................................................. 8 Plantation management and reporting............................................................................................................... 9 The role of foresters .......................................................................................................................................... 10 The expert forester ....................................................................................................................................... 10 The forest manager ....................................................................................................................................... 10 A proposed accreditation system ..................................................................................................................... 10 Code of practice ................................................................................................................................................ 11 IFA submission on MIS 15 December 2014 2 Forestry managed investment schemesSubmission 127 KEY MESSAGES 1.
The role of managed investment schemes (MIS) as a mechanism to secure investment in greenfield forestry development was successful in developing approximately 1,000,000 hectares of new plantations that now support export industries.

2.

The potential of MIS as a vehicle in the future after the reforms introduced in 2012 was not adequately tested prior to the collapse of the sector.

3.
3.

The IFA welcomes ASICs requirements under RG232 for technical experts to be professionally trained and appropriately experienced to underpin the confidence by providing professional management of projects and independent advice to investors; 4.
The IFA’s Registered Professional Foresters (RPFs) and membership of the Association of Consulting Foresters of Australia (ACFA) requires members to abide by a Code of Ethics and to maintain technical knowledge underpinned by a continuing professional development program; this system provides a basis to ensure that forestry MIS projects are compliant with RG232.
DELINEATION OF FINANCIAL PRODUCT AN D FOREST ASSETS There is a clear and fundamental distinction between the financial product (the Managed Investment Scheme [MIS] offer) and the underlying assets developed by the combined investment (funds) of those investing via MIS products.

MIS vehicles are used to invest in a broad range of assets: agribusiness, charitable and educational schemes, direct real property1.
In considering this distinction, there is a need to direct attention and focus on the two key parties: the scheme promoters of the financial product and those who undertake the technical and commercial aspects of management of the resulting assets e.g.

forest managers.

In the past this distinction was blurred with the forest management entities linked to the MIS promoters.

MIS projects are now regulated by Chapter 5C of the Corporations Act 2001 and this section applies to all MIS, not just forestry MIS.
The following outlines the views of The Institute of Foresters of Australia, the peak body representing the profession in Australia.

FORESTRY AND FORESTERS Forestry is the science of forest development and management and is a long established profession throughout the world dating back for centuries.

Within Australia, forestry science is taught at a range of tertiary institutions and the subjects studied include plantation silviculture and other social, economic and environmental aspects of plantations.
The Institute of Foresters of Australia 2 is the peak body representing professional foresters and other specialists in forest science and management in Australia established in 1935.

The IFA has more than 1,100 members engaged in all areas of forest management and conservation.
THE ROLE OF FORESTERS IN MIS STRUCTURES Given that the underlying investment of an MIS structure is a technical crop, expert advice is required and ASIC RG 232 requires that: RG 232.66 Where the responsible entity engages an expert to provide a professional or expert opinion on the agribusiness scheme, and the expert opinion is disclosed to retail investors in a way that may 1 See: http://www.asic.gov.au/regulatory-resources/regulatory-index/managed-investment-schemes accessed on the 14/12/2014.
2 See http://www.forestry.org.au/.

IFA submission on MIS 15 December 2014 3 Forestry managed investment schemesSubmission 127 lead them to place reliance on the expert’s expertise, the responsible entity only engages an expert that is independent.
In terms of the individuals providing the advice, ASIC 3 RG 232 requires that: RG 232.67 In addition to disclosing against this benchmark, the responsible entity should disclose, with equal prominence to any expert opinion provided on the agribusiness scheme: a) b) a summary of the instructions to the expert; the qualifications held by the expert and the relevance of these to the opinion; c) whether the expert has experience in the commodity in the geographical location being considered or proposed, or in any other subject matter of the opinion; d) the proportion of the expert’s work with the responsible entity; and e) whether the responsible entity requires the expert to maintain professional indemnity insurance.
The role of the expert advice is noted by ASIC RG232: RG 232.72 Robust and objective expert opinions on the agribusiness scheme are needed to ensure that information about the agribusiness scheme is correctly stated in the PDS and ongoing disclosure.

It is important for investor confidence that independent experts provide the opinion and that the process is transparent.

Where the expert is not independent, responsible entities should explain why.
Note: We have published guidance on the independence of experts: see Regulatory Guide 112 Independence of experts (RG 112).

RG 232.73 Retail investors need to understand the qualifications of experts who provide opinions in the PDS and on an ongoing basis to enable them to assess the level of reliance that they can place on the opinion.
Note: We have published guidance on the need for experts to have sufficient expertise in the relevant field: see Regulatory Guide 111 Content of expert reports (RG 111) at RG 111.117–RG 111.122.

Figure 1 below presents a generic forestry based MIS project and indicates the various points in the structure where expert forestry input is required.

Many IFA members have been are either directly or indirectly involved MIS projects.

There are three broad roles: 1.


Project development: The development of the product on offer by the provision of expert advice in the design of the technical aspects of the project; 2.
Project implementation: The selection of land and the development and management of the planted trees through to marketing of the wood products (including the harvest and haulage of logs to market); Independent review: At many stages of the project there is the need for independent expert review and “opinion” of the state of the project.

3.

3 ASIC Regulatory Guide 232: Agribusiness managed investment schemes: Improving disclosure for retail investors.

January 2012.
IFA submission on MIS 15 December 2014 4 Forestry managed investment schemesSubmission 127 Project offer document review The rating houses The custodial role Compliance Plan Auditor Compliance committee The financier The investor The Project Responsible entity The land owning entity Land selection Independent forester reports The product offer documents The product developer and promoter with an AFS Licence The Project Independent forester reviews Technical aspects of Product designs Wood sales and revenue Wood products marketing The plantation asset manager Plantation development Plantation management Figure 1: A generic structure of the forestry MIS project.
The green cells highlight the inputs from forestry experts.

THE BASIS OF OUR SUBMISSION In providing the views of the IFA, we are mindful that a number of inquiries have been conducted into most aspects of the other terms of reference of this latest inquiry.

These included inquiries by Treasury in 2005 and 2006, and the Ripoll Inquiry in 2009, which considered “aspects of agribusiness managed investment schemes” following the collapse of Great Southern Plantations and Timbercorp.
The Ripoll Inquiry recommended regulatory improvements to improve the level of investor protection, but that the tax arrangements for forestry MIS should remain in place and be allowed to work.

In 2012, ASIC released two new Regulatory Guides, with one guide setting out disclosure benchmarks for the structure and operation of an agribusiness MIS (RG 323 quoted above) and the other imposing more restrictive finance requirements on all MIS Responsible Entities (not just agribusiness) (see RG 1834).
Based on the experience and expertise noted above, the IFA submits against the following items in the Inquiry’s terms of reference: a. the motivation and drivers that established the framework for the schemes g. the options for reforming forestry MIS.

4 ASIC Regulatory Guide 183: Approval of financial services sector codes of conduct.

March 2013.

IFA submission on MIS 15 December 2014 5 Forestry managed investment schemesSubmission 127 A.
THE MOTIVATION AND DR IVERS THAT ESTABLISHED THE FRAMEWORK FOR THE SCHEMES A NEED FOR RESOURCES The Institute believes that investment in development of plantations to produce wood and other products and environmental services in Australia provides many environmental, economic and social benefits5.
Reported concerns about ‘food security’ are often reported in the media and Australia should be equally conscious of the benefits of producing a reasonable proportion of the wood and paper products we use and of the value of tree cover in protecting land, supporting biodiversity and sequestering carbon dioxide.

Figure 2 and Figure 3 present quarterly wood import statistics – Australia is a net importer of sawn timber and panel boards.
While governments are continually pressured by the environmental lobby to curtail timber production from native forests, the other options are to increase wood and paper product imports (which may result in externalities: environmental and social risks in the country of origin), to increase use of more energy-intensive products (e.g.

plastics and metals) and/or to produce more wood and paper products from plantations.
The Institute believes that the latter option should be given due emphasis, and that well managed and compliant MIS structures can play an on-going role in providing the necessary investment to underpin the supply of wood products to Australian consumers. )
Q / $ ( s l e n a p d e s a b - d o o w d e t r o p m I $60,000,000 $50,000,000 $40,000,000 $30,000,000 $20,000,000 $10,000,000 $0 $140,000,000 $120,000,000 ) Q / $ ( $100,000,000 $80,000,000 $60,000,000 $40,000,000 $20,000,000 $ Figure 2: The quarterly value of imported panels (based on ABARES data).
Figure 3: The quarterly value of imported sawn timbers (based on ABARES data).

Veneers Plywood Particleboard Hardboard Medium density fibreboard SW roughsawn SW dressed HW roughsawn HW dressed 5 The copious research evidence showing these benefits and countering misconceptions about effects on agricultural land use is already on the public record and has been presented to previous inquiries.
If the current inquiry is unaware of it, it should contact Forest and Wood Products Australia, the Australian Bureau of Agricultural Resource Economics and Sciences and other public agencies active in this area.

Forestry managed investment schemesSubmission 127 THE PLANTATION ESTATE There has been private investment in plantation development through pooled structures similar to managed investment schemes in Australia since the 1920s.
These plantations are now the basis of successful regional industries that supply domestic and export wood products markets.

The upturn in MIS investment in the 1990s and into the 2000s structure was also successful in attracting funding to establish substantial areas of greenfield short rotation plantations (crop life of 10 to 12 years for woodchip production).
It is important to recognise the long term nature of sawlog production (crop life of 25 to 35 years), which tends to deter other sources of investment.

This is one of the major reasons why Governments at State and Federal levels became involved in softwood plantation development last century.

Softwood plantations established by State governments, assisted in the late 1960s and 1970s through the Federally funded Softwood Loan Agreements, are now the resource base for successful wood products industries.
Figure 4 presents a summary of the Australian plantation estate: the softwood plantations are generally managed for sawlog production and the hardwood estate is predominantly aimed at woodchip production.

The significant development of the hardwood estate from the mid 1990’s was the direct result of MIS investment vehicles.
At the peak of the MIS development phase prior to the global financial crisis, MIS accounted for 36% of the plantation estate6 and this has significantly reduced due to the failure of many of the entities developing the financial products and subsequent investment by institutional funds.

Recommendation: Consider ways to encourage the development of longer rotation plantations to produce sawn timber.

Figure 4: The Australian plantation estate (based on ABARES data).
2,500,000 2,000,000 1,500,000 1,000,000 ) a h ( a e r A 500,000 0 Others Hardwood Softwood THE MIS BUSINESS MODEL The MIS business models, the ability to attract investors and availability of lending facilities to the major MIS (funds management) companies were affected by the GFC and other external factors.

This in turn affected the funding of the underlying plantation assets.
The attractiveness of the developed forest assets attracted large scale institutional investment and due to the failure of the MIS structures, it is unfortunate for the many Australian investors that the beneficiaries of many of their plantations will now be contributors to overseas pension funds and other mainly North American fund managers.

Similarly to other MIS investments, plantation 6 Gavran, M. & Parsons, M. (2011) Australian plantation statistics 2011.
Australian Bureau of Agricultural and Resource Economics and Science, Canberra.

IFA submission on MIS 15 December 2014 7 Forestry managed investment schemesSubmission 127 Managed Investment Schemes must be properly structured, managed and regulated to safeguard the investors’ interests and to ensure that the plantations are developed and managed in accordance with sound professional practice.

The forestry profession’s role is fundamental, and is outlined below.
Recommendation: Consider why many managed investment scheme operators failed in the past several years, and whether the Australian Securities and Investments Commission and the banks played a role in those failures through poor regulation or financial stewardship.

An outcome of the plantation developed under MIS arrangements was a shift of ownership to institutional investors.
Institutional investors generally do not invest in greenfield plantations, whereas MIS is a model that has achieved greenfield plantation development.

Recommendation: Consider the “natural fit” between an investment vehicle to develop greenfield plantations and its subsequent sale to institutional investors as a “going concern” brownfield development.

This model could also be applied to the development of longer rotation sawlog crops.
G. THE OPTIONS FOR REFOR MING FORESTRY MIS OVERARCHING STATEMENT The reforms already implemented specific to agribusiness MIS projects (e.g.

RG 232) did not have adequate time to fully impact the MIS sector, and it is felt that such reforms were a significant improvement in governance for MIS projects.

A key outcome of RG 232 was a definition of experts: see RG 232.66; RG232.67 b&c; RG232.72; RG232.73.

In a similar manner, improved regulation of the financial services sector (e.g.
RG 183) have not had time to be fully effective in regard to agribusiness MIS projects (noting that RG 183 is more broad and covers the whole of the financial services sector).

Recommendation: Allow the recent range of reforms to the MIS sector time to “bed down” and take full effect.
THE FORESTRY EXPERT The IFA considers that MIS structures investing in forestry must be regulated and supervised properly to ensure that the underlying investments can produce the intended outcomes and products and bring lasting benefits to regional communities and the Australian environment and economy: hence we strongly support RG232.
The role of the forestry experts is outlined in Figure 1: a key point is that we support the requirement that the development and supervision of projects supervision must include involvement of suitably accredited professional foresters e.g.

in site selection, tree establishment, stand management, fire protection, including the seasonal timing of operations.
IFA submission on MIS 15 December 2014 8 Forestry managed investment schemesSubmission 127 Recommendation: Require that experts involved in MIS projects are suitably qualified.
PLANTATION MANAGEMENT AND REPORTING While experts are required to be involved in MIS agribusiness projects and under RG 232.62 &RG232.63 detailed reports must be produced for investors, there is a need to specify the supporting management documents required to underpin the plantation development and management, as noted by ASIC: RG 232.62 As a result, we consider that it is important for responsible entities to commit to providing detailed reports to investors so they can effectively monitor their investment.
RG 232.63 We are not mandating the information that should be provided to investors.

However, we do expect the responsible entity to provide relevant information to members annually.

Information that we would expect to be disclosed to members may include: a) b) ̶ this refers to the money held separately by the responsible the cash position of the scheme ̶ entity for the purposes of operating the scheme; the annual expenses incurred by the responsible entity in operating the scheme (e.g.
the amount invoiced) compared with expected expenses ̶ by the responsible entity on behalf of members; ̶ this refers to those expenses incurred c) how the scheme is performing relative to expectations, as disclosed to investors in the scheme’s PDS, periodic disclosure, advertising or other promotional disclosure material (including a comparison of growth, yield, sales information or any revisions to expected project length); the current prices and conditions in the underlying markets for the finished product and changes from the last report provided to members; d) e) an update on the financial position of the responsible entity (including any risks with the responsible entity’s financial position); f) a summary balance sheet for the responsible entity and cash flow statement; g) the impact of any regulatory changes on the scheme (e.g.
the impact of any carbon reduction initiatives); h) where relevant, the access to and usage rates of water compared with water allocation; i) where relevant, the status of any leases or licences required to operate the scheme or secure j) k) l) tenure over land or property; the levels of defaults and arrears for annual fees, the impact of these on the scheme and the responsible entity (if any), and the strategies in place to deal with this impact; the number of interests held by the responsible entity or related party, any changes from the last report provided to members, and the ability of the responsible entity or related party to meet the obligations associated with these interests; and the details of any forward sales agreements executed for the sale of scheme assets, including variances to current market prices and/or any shortfalls in expected production yields/volumes.
RG 232.64 We understand that the information disclosed by the responsible entity about the agribusiness scheme may differ from year to year and from scheme to scheme, depending on the information available and the status of the scheme.

RG 232.65 Responsible entities may provide this information to investors using the most efficient and effective method of communication.

For example, this could be through a website used for updating investors.
Note: Responsible entities should also refer to RG 198 for guidance on their continuous disclosure obligations under the Corporations Act, including how responsible entities can provide continuous IFA submission on MIS 15 December 2014 9 Forestry managed investment schemesSubmission 127 disclosure information.

The provision of a report to members annually may not be sufficient for the responsible entity to rely on to meet its continuous disclosure obligations.
Recommendation: Ensure that MIS operators work be planned, supervised and independently audited by appropriately qualified professionals.

THE ROLE OF FORESTERS THE EXPERT FORESTER While there is a requirement to include forestry experts and in more detail RG232.67 b & c, there is a need to underpin the confidence in the qualifications and experience of the expert forester.

A key issue is the stated expected performance of a project.
It is noted that RG232.69 refers to potential yield – there is a need to ensure that the basis of the state expectation is robust.

Recommendation: Ensure that the expert foresters are suitably qualified and experienced.

THE FOREST MANAGER While RG232 has a focus on the expert foresters involved in the financial product, there is a need to ensure that the foresters providing the day to day management of the estates are suitably qualified and experienced to help reduce the inherent risk in any project.
Recommendation: Ensure that forest managers are suitably qualified and experienced.

A PROPOSED ACCREDITATION SYSTEM The Registered Professional Forester™ (RPF™) scheme was developed by IFA with government assistance7.

Achieving RPF status requires a professional peer review of applications, demonstration of a high level of competence, commitment to continuing professional development and adherence to a strong code of ethics.
The program is currently undergoing further development so as to broaden and strengthen it.

This approach is based on the protocols of the Association of Consulting Foresters of Australia (AGFA), which is a Division of IFA.

The IFA believes that mandatory use of appropriately accredited RPFs in MIS structures (e.g.

by MIS Responsible Entities and plantation managers) would demonstrate compliance with RG323.66 to RG232.75.
Further that the foresters providing independent advice to MIS project should also be members of the ACFA Division of the IFA.

7 See http://www.forestry.org.au/registered-foresters.
IFA submission on MIS 15 December 2014 10 Forestry managed investment schemesSubmission 127 Recommendation: Adopt the IFA’s RPF scheme as a mechanism to ensure compliance with the requirements of RG323 and as a basis of ensuring that the forestry experts and forest managers are suitably qualified and experienced to underpin the forest asset developed.

CODE OF PRACTICE The Australian Forest Growers developed and administered an industry Code of Practice for Reafforestation Companies drafted.
This Code formed part of disclosure for most MIS forestry companies from the early 2000s.

However, the Code did not have a high degree of support or acknowledgement from ASIC.

This Code covered most of the financial aspects from a forestry investment point of view.

More recently, ASIC has published RG183 for approval of financial sector codes of conduct: therefore ASIC has a statutory power to approve voluntary industry codes of conduct.
There is scope to revisit the previous Code of Practice for Reafforestation Companies, review the relevance of the document and re-draft the document under the RPF framework and make compliance with the code once approved by ASIC mandatory for all RPFs™.

Recommendation: That the IFA under the RFP program re-draft a code of conduct for all foresters involved with investment plantations and that the code seek approval from ASIC under RG183.
IFA submission on MIS 15 December 2014 11 Forestry managed investment schemesSubmission 127