Source document: https://docs-lawep.s3.us-east-2.amazonaws.com/1697628486022.pdf (Australia)
15th December 2014 Our ref: 112 Attention: Dr Kathleen Dermody The Committee Secretary Senate Economics Reference Committee Economics.Sen@aph.gov.au Dear Madam, Re: ENQUIRY INTO FORESTRY MANAGED INVESTMENT SCHEMES Introduction I refer to your invitation of 15th July 2014 to prepare a submission.

I have noted the terms of reference in this enquiry under points (a) to (h) and will attempt to respond accordingly.

Firstly, may I formally introduce myself as the Principal of Agribusiness Valuations Australia.
As my appended C.V. indicates, I am a Certified Practising Valuer and a Consultant Agricultural Economist.

I have been in private practice since 1983, specialising in high end agribusiness analysis across various industry sectors.

I am a Fellow of the Australian Property Institute (API).

I am a Fellow of the Royal Institution of Chartered Surveyors (RICS).
I am a member of the Australian Agricultural & Resource Economics Society Inc. a) The motivation and drivers that established the framework for the schemes initially It appears that the genesis of this entrenched public policy failure embodied in the Managed Investments Act legislation of circa 1988 or thereabouts, was a push by Wilson Tuckey in the then Howard government to promote “self-sufficiency” in Australian wood and paper products.
In 1999 ABARE produced a booklet which talked in terms of the economics of conversion of farmland into plantation forestry for both Pinus radiata and E. globulus (Australian Blue Gum).

This document was very much an academic desktop style manifesto based on a ridiculously low discount rate of approximately 7%, which was identified inexplicably way up the back on about page 219 of this document.
The fact was, following my analysis of some 10-12 years of transactions in both New Zealand and Australia for long rotation forestry, the implied discount rate was always double digit and often as high as 11.5%.
Forestry managed investment schemesSubmission 149 Therefore, it begs the question as to why ABARE thought it was valid to utilise such a low discount rate at 7%, however it did produce results which apparently encouraged Tuckey, Howard et al, to promote government assistance via creation of upfront deductibility for investments in MIS products.
Years later in 2005, when it was already clear to me that the whole structure of these schemes (which had already by now morphed from purely forestry into olives, almonds, grapes, citrus, cattle, etc.)

was doomed to fail and produce very poor outcomes for government (in terms of balance of payments offsets), investors, taxpayers, etc.
I was invited by then Treasurer Peter Costello to participate in a telephone hook-up with Treasury officials, members of Fishery & Forestry and one of the authors of this ABARE document, Mr Alan Hansard.

I asked Hansard during the telephone hook-up as to where he had obtained the 7% discount rate that drove the economic modelling.

He could not answer categorically what the basis was.
Subsequently also, in the new millennium, in addition to Tuckey, Senator Eric Abetz was a strong advocate for the Gunns’ Tasmanian pulp mill, along with most of his State and Federal colleagues, despite the fact that in or about 2001/2, the only major Australian Blue Gum producer of pulp, Kimberly Clark at Millicent, South Australia, had shut down their Blue Gum line because of the marginal economics and the opportunity to import cheap pulp from various supplier countries.
In fact, nothing has changed to this day whereby cheap paper pulp is widely available to processors on-shore in Australia.

It’s almost as if Tuckey, Abetz et al, and all the other bureaucrats and Ministers who promoted this self-sufficiency theme in terms of wood and paper products, were operating in some policy vacuum totally divorced from reality.
As an economist and then subsequently, an Agricultural Economist, we were taught much about the time honoured concept known as the “Law of Comparative Advantage”.

Clearly Australia never had any comparative advantage in terms of producing vast tracts of medium to low volume E. globulus from plantations, nor producing paper pulp cost effectively.

This didn’t seem to matter.


b) The role of governments in administering and regulating forestry MIS I think it is by now, 16 years after the creation of this flawed legislation, clear that, with the successive collapses of major forestry schemes including Wilmott Forests, Great Southern Plantations, Timbercorp, Environinvest, etc.
plus all the collateral fall-out in terms of bankrupted investors, complete lack of any rebate to government in return for upfront tax deductibility, that there has been a manifest policy failure on behalf of, in particular, the coalition government that created this mess, and successive Labour and now coalition governments which have still failed to cauterise the problem and remove the legislation.
It is notable that no private individual in the Australian agribusiness sector can obtain upfront tax deductibility as could this special class of agribusiness investor which the MIS legislation catered to.

When you compare the scrutiny that I, for example, as the Trustee of an SMSF must submit to, from the ATO, etc.
compared to the completely lax and absent audit processes, accountability and scrutiny from successive Federal governments, it is simply outrageous to me that the billions of taxpayers’ money lost in these schemes was never subject to any coherent regulatory or administrative process.
Agribusiness Valuations Australia Page 2 Forestry managed investment schemesSubmission 149 Surely the promoters of these schemes, as the so-called “responsible entities” by their PDS’s, were in fact were also custodians or “trustees” of public money.
That is, if the Federal government allowed an investor to claim upfront deductibility of as much as 99% or thereabouts, which, at the marginal tax rate would mean the Australian taxpayer was funding this at the rate of some 46c in the dollar, you would assume that there would have been some unprecedented amount of research to establish a clear public benefits test in allocating this money in such a way.
In Menzies’ day, there would have been what is known as a comprehensive ‘White Paper’ prepared, which Treasury and other bureaucrats would work through with government before any monies would be committed in such a way as in MIS.
When one considers the uproar following the huge waste of money committed with Julia Gillard’s Building Education Revolution with vast sums wasted on overpriced school accommodation and structures, it is amazing that the waste and loss of billions of taxpayer dollars that the MIS legislation has caused, that there has not been more community outrage?
c) The current policy and regulatory framework of forestry MIS When one examines the recent press coverage of the class actions and Senate hearings in relation to failed schemes, it is clear that vast areas of Australian land were committed to Blue Gums which were totally unsuited.
As a further example of the failure of government administration, as early as 2001, the Canberra based Rural Investment Research Development Corporation (RIRDC), had produced a very detailed document covering plot trials for various Eucalypt species in various parts of Australia.
This clearly indicated that unless specific criteria were met in terms of minimal rainfall (700mm or greater), appropriate soil types, micro-climate, etc., sub-economic outcomes would be achieved in terms of plantation forestry schemes.
ABARE also alluded to the same point in its document in 1999, whereby it stated clearly that of the large Green Triangle area sitting astride western Victoria and south-eastern South Australia, only some 40% was considered suitable for production of viable E. globulus plantations.
Even then, the modelling indicated that unless you had 700mm of rainfall, you would be lucky to achieve clearfall yields of greater than 165 cubic metres per hectare, vastly lower than the ludicrous forecasts which appeared regularly in the PDS’s produced by the scheme promoters.

In lay terms, the Timbercorps and Great Southerns, etc.
and the so-called agribusiness investment houses, who were paid to promote their schemes, were never subject to any independent government audit as to the veracity of the claims that were being made in their promotional literature and their ASIC and ATO sanctioned PDS’s.

The reality was in terms of an ATO Product Ruling, that all it really said was ‘ the product was compliant with the regulations of the Tax Act’.
Unfortunately, the hapless lay investor who was putty in the hands of the unscrupulous financial planners, receiving 10% commissions from the promoters, assumed the ATO Ruling was a “tick” for scheme viability.

In short, I would submit that since the departure of the former ASIC chairman, David Knott, neither ASIC, ABARE, the ATO, Fishers & Forestry, or any other government department, have ever properly scrutinised these schemes via independent audit.
I worked with David Knott when an olive scheme promoted by a company known as Barkworth in the Darling Downs was launched.

If one checks the coordinates for the Darling Downs, you will see, it is so far north of the 32nd parallel, which is where olives grow in the northern hemisphere, it was a farce, and yet this scheme was launched with the blessing of all the above departments, Federal government, etc.
Agribusiness Valuations Australia Page 3 Forestry managed investment schemesSubmission 149 To his great credit, David Knott provided a small grant for my company to set up a checklist for “mums and dads” investors who were considering committing funds to this scheme.

It probably had little impact, however it was an example of some form of intervention which has been absent ever since.
To his very great credit, former Treasurer, Peter Costello, attempted to rid the Australian taxpayer of the burden of this legislation prior to the 2007 Federal election, with the assistance of input from myself and others.

I also recall that Peter Dutton may have been the then Finance Minister, and he also went public about the huge disparity between the real cost of commencing a horticultural scheme and the charges promoters were levying on investors.
Once Howard lost the 2007 election, of course, the issue of legislative removal has sat there ever since.

d) The role of some in the financial services industry in promoting and selling forestry MIS The whole saga of financial services industry companies such as AMP, Axa, the Bank owned financial advisory units, etc.

promoting these schemes, screams - conflict of interest.
It also involved obviously many high profile accountancy firms across the country who were promoting the schemes in return for commissions as well.

Can you imagine that if it had been prohibited for example, for a promoter to engage and pay an advisory (Standard & Poor’s type) research house to rate their product, and then pass this information on to a financial planner with a further inducement of a 10% commission?

I personally believe that not one of these schemes would have ever got off the ground.
The genuine interests of individual investors, governments promoting the schemes in anticipation of some tax rebates, and the Australian taxpayer at large, all came a bad last.

It also seems a very cynical sequel to all this that in the current government, Sinodines and then Cormann were seeking to wind back the Labour government’s FOFA reforms which sought to protect investors to some extent.
I know of no other area of activity in the capitalist economy where financial advisors could in fact act as some “protected species” in not having to act in their client’s best interest?

You could count on one mangled hand the number of financial planners who would know anything about agribusiness, let alone the negligent nature of touting these schemes, which promised either robust annuity incomes or end of rotation lump sum windfalls.
The whole process of course was supply driven and not demand driven, so again it was operating in a policy vacuum totally devoid from the real world.

It simply defied all the laws of economics.


e) Compensation arrangements for small investors in forestry MIS who have lost life savings and their homes in the face of the collapse of forestry MIS In some respects it is difficult to have any sympathy for investors who are so naïve as to think that: a) Some third party could solve their taxation problem and simultaneously; b) Offer them some pot of gold at the end of the rainbow?

The world does not work like that.


I cannot really comment further on this particular issue.
Agribusiness Valuations Australia Page 4 Forestry managed investment schemesSubmission 149 f) The burden on farmers and other agricultural producers who haven left with the uncertainty of timber plantations linked to forestry MIS on their land My experience was this was a major problem in Tasmania, where Gunns left landholders in such situations with long arrears in rental payments and legal tangles in terms of encumbering the fee simple rights of the landholder who had rented his land in good faith.
Again, however, I would add that if a landholder had decided that they would rent their land to Gunns or Great Southern at virtually double the rent that the market was paying for other uses, you have to wonder about the wisdom of that decision to enter into such an arrangement.

It was simply too good to be true, and I think some landholders in retrospect would accept responsibility for their naivety in this regard.
g) The options for reforming forestry MIS to protect investors and rural communities Can someone please tell me where else in Western economies do governments get involved such as in Australia, and artificially manufacture such a situation via tax legislation as has emerged with forestry and agribusiness MIS schemes?

If there is a business case for new investment in any industry, capital will find its way there.
Governments should keep out of this, and particularly not artificially manipulate the Tax Act to facilitate one particular class of investor’s deductibility which is not available to the wider primary producer community in any event.
Let us quickly summarise the 16 year by-products of forestry MIS and related schemes facilitated by this Howard government legislation: • Vast tracts of land in Western Australia, Vic and S.A. now converted back to pasture because of failed plantations • Huge kangaroo plagues in the Albany, Great Southern region of W.A.

and the Green Triangle region in Victoria/S.A.


• Local community dislocation in townships such as Hamilton, where huge flurries of investment activity initially occurred, distorting land values, artificially ratcheting farm rentals and taking high value farmland out of production into passive monocultures such as Blue Gums.
• No dividend whatsoever to the Federal government or Australian taxpayers after 16 years of support of these schemes • Huge collateral fall-out in terms of a new underclass of bankrupted former MIS investor, who will now need to survive on a pension when they cease work • Continuing lack of scrutiny or accountability for those promoting and selling these schemes, particularly when it involves such large sums of taxpayer funds Agribusiness Valuations Australia Page 5 Forestry managed investment schemesSubmission 149 Conclusion I submit that agribusiness MIS schemes should be shut down once and for all in every respect, covering every aspect of agribusiness.
Given the huge budget deficit that this government faces, how on earth can it justify continuing support for such schemes with no control over how much public money is inadvertently committed, particularly if the schemes were to reactivate in other more exotic guises such as, for example, “Northern Australian cattle station schemes”, etc.
The bipartisan support for these schemes since 1998 is a total public policy disgrace, with Peter Costello, Dan Tehan, Bill Heffernan, The Greens and a handful of coalition members’ lone voices in attempting to rid Australia of these schemes.

Yours faithfully SAMUEL JAMES PATON, FRICS, FAPI Certified Practising Valuer, B.Ag.Econ., API (Vic Division) Member No.
62063 Member Australian Agricultural Resource Economics Society (MAARES) Agribusiness Valuations Australia Page 6 Forestry managed investment schemesSubmission 149