Funny finance fails farmers

Pascoes Piece as reproduced in The Land

So ANZ has a $500 million exposure to the failed Timbercorp tax deduction empire. What fools.

It’s hard to know for whom to feel the most scorn – bankers stupid enough to back inherently flawed businesses or the mugs suckered into buying products on the lure of tax deductions – and the salesmanship that tends to come with particularly fat commissions.

And then there’s Great Southern Plantations, trading presently suspended pending some further attempt at rescue. Ditto the scorn for all involved. Oh, and the various “independent” expert reports that have been purchased by management at various times, never mind alleged “investment recommendations”.

But maybe I should tell you what’s really my opinion of the rural managed investment scheme industry: it’s the biggest single scam in Australian financial history, probably losing more money than HIH and Bond combined. And some parts of the MIS mob have been nearly as flagrantly dodgy as Firepower.

What’s worse is that it’s been wilfully helped along by Australia’s leading banks, law and accounting firms – never mind the dullard politicians who allowed the disease to fester and spread, only belatedly attempting to limit it in 2007. Mind you, I suppose much the same could be said of HIH and Bond.

How much has been blown? A lot. There’s a number floating around that we taxpayers have dropped $4.6 billion on rural MIS this decade – our little donation to the promoters, marketeers and mug punters.

Investors in the schemes will have had opportunity costs of at least that much – what they could have earned putting their funds into mainstream investments not flogged on their “tax effectiveness”. And then add on the value of the various schemes that have or will fail outright. There’s no shortage.

There are some rural MIS that are legitimate. Perhaps not outstanding investments, but at least legitimate and not based on rip-off commissions and promoters’ profits. They are in a minority.

At the other end of the game, there have been schemes so dodgy that they admitted in their prospectus fine print that only 20 cents in the investor’s dollar was actually going to go into the ground. An investment ratio of 50pc was common.

It’s hard enough to make money out of the land at the best of times, but throw 80pc of your capital up against a wall to begin with and, well, you’d have to be stupid not to work that out.

And plenty have been stupid. The belated limits on the rural MIS industry – limiting the game to forestry and insisting a minimum of 70 cents in the invested dollar actually went into growing trees – stopped the worst of it in its tracks but it’s also shown how unsustainable key players were.

There will be investors feeling pain here wanting to blame everyone but themselves, particularly the government for curtailing the spread of tax-driven rural schemes that threatened genuine farmers.

Of course the failing members of the industry – after overpricing their questionable products and ripping off customers – will point fingers in every direction other than admit the fundamental flaws of a game that required an unending and growing source of mugs desperate for immediate tax deductions and, perhaps, some feel-good factor about growing trees. Save the planet.

Or maybe it was just solidarity with the bush, a desire to lose money on the land like so many real farmers, that helped keep the game rolling, the punters coming. Certainly the commission structure and marketing incentives helped.

Remember when Westpoint and its peers were going under? Sales commission of 10pc was cited as a factor in the dubious marketing of those mezzanine finance houses by some financial advisers – but commission of 10pc has been common for rural MIS. And there has often been more over the years – bonus payments, “marketing” assistance payments, the occasional conference and junket.

Sometimes a window on the racket has been opened by the more legitimate outfits. For instance, on the same June day last year that he “resigned” as Futuris CEO, Les Wozniczka was asked in an interview why Futuris’ MIS operation, ITC, was having trouble increasing MIS sales when other tree scheme floggers were doing much better. He answered:

“This year’s MIS product from ITC is more highly rated than in previous years and is one of the most highly rated in the market. Feedback we have had is that notwithstanding our ratings, this year has seen increased competition from ‘low-doc’ and ‘no-doc’ packages. Sales can also be highly sensitive to commissions paid. ITC has a conservative policy in relation to the financing of MIS investment, with the result that it has had minimal defaults from investors/borrowers. ITC has not moved away from rigorous application of its policy.”

It’s not hard to read between those lines and form the opinion that Les might have thought the Timbercorps and Great Southerns were, well, less rigorous.

ITC is still plugging away, not particularly successfully from an investment point of view, but it has a business.

Similarly, Gunns still has an MIS business. Like ITC, it doesn’t run on the sort of numbers that made Timbercorp and Great Southern such cash machines during more trusting, less thinking times.

In an interview two years ago, Gunns executive chairman John Gay was asked why his company sold its timber MIS so much more cheaply than the competitors – $6000 a hectare. Gay answered:

“Well, we started off with a reasonably low price because our view was that we wanted to get a large amount of trees in the ground to develop a pulp mill and we set the prices with a very reasonable margin for Gunns and a good investment for the investors and we’ve stayed on that line.”

By comparison, Great Southern Plantations’ current project was charging $10,000 a hectare, 66pc more than Gunns.

The extent of the profiteering in the industry before the Howard Government finally acted in 2007 was astounding.

In June 2006, an Australian Financial Review feature on the rural tax schemes cited the example of a genuine listed agribusiness company, Tandou, selling its Millewa vineyard to Great Southern for $10 million.

“Tandou got about $45,000 a hectare for the property, which included 178 hectares of developed vineyard and valuable water rights, a pretty good price in the current climate,” the AFR reported.

“In June, Great Southern took Millewa and three other vineyards and sold the package to the public for about $78,000 a hectare as the 2006 Wine Grape Income Project… The $78,000 doesn’t buy investors any land, but covers the cost of running the vineyard for the next 20 years plus a profit margin.”

Yes, folks, as incredible as it seems to a rational soul, the scheme operators kept the land.

One of the ways the scam lasted for so long is the time it took for tree investors to find out the product was a dud. You can sell a lot of other schemes while waiting for the first rotations of blue gums to yield less money than promised.

Great Southern’s first rotation infamously proved to be such a poor deal that the company kicked in cash to dress up what the wood was actually worth. Hey, there were other investors out there to be harvested – better keep the faith.

Timbercorp had told the 1999 crop of investors that they would start to see money from some of their trees this year – but before Timbercorp fell over, it seemed the gums were taking 12 years rather than 10. No surprise.

For those suckered into Timbercorp schemes, they are left with the most appalling legal mess – owning the trees, but not the land, with great uncertainty about who, how and for how much someone else might tend and harvest the crop over several years to get back, well, not a great deal.

I suppose punters who went into it wanting a tax deduction certainly had their wish granted.

As we wait for Great Southern to unveil whatever their latest rescue plan might be, lest their clients find themselves in the same boat as the Timbercorp victims, I have a question: will KPMG partners band together to make a takeover bid for the company?

That would seem a reasonable thing to do if said KPMG partners still stand behind the wit and wisdom of the “independent expert reports” prepared by their firm for Great Southern’s attempt at restructuring earlier this year.

For an example of the reality of “independent expert reports”, the January 12 KPMG effort on Great Southern’s proposal for investors in the 1998 hardwood timber plantation project to swap their forestry lots for Great Southern shares is as good as any.

KPMG managed to come to the recommendation that the offer was in the best interests of the growers as a whole and that it was both fair and reasonable – an amazing effort given the major and many qualifications KPMG itself then placed on its own recommendation.

Gee, KPMG said, this is a fair and reasonable offer. Really? As the KPMG report itself notes, the Great Southern share price the day before (the report was published) was 17.5 cents, the swap was on the basis of shares being worth 28.45 cents, they’d have to be trading at 44 cents in August for the growers to break even on the deal and the company had just suspended the paying of dividends. And it says this as well:

“The opinion of the company’s auditor, Ernst & Young, in relation to Great Southern’s financial statements for the year ended 30 September 2008 is unqualified but includes an emphasis of matter in relation to inherent uncertainty regarding Great Southern’s ability to continue as a going concern in its current form and, therefore, whether it will be able to pay its debts as and when they become due and payable and realise its assets and extinguish its liabilities in the normal course of operations and at the amounts stated in the financial report.”

So in January 2009, a participant in the 1998 scheme with half a brain might have had an opinion that differed somewhat from KPMG’s “fair and reasonable”.

I am not suggesting KPMG are unethical or dishonest but in my opinion, a genuinely independent expert report would find that Great Southern looked like a basket case and a 1998 grower would have to be completely stupid to swap trees that were worth something for shares that might well be worth nothing at all.

Instead, KPMG’s report kept using a net tangible asset figure for Great Southern of 85 cents a share and suggesting that at some stage, barring any number of bad things happening, the shares were likely to trade at more than 44 cents. Hence my wild erratic fancy that KPMG partners will happily buy all of Great Southern at its last traded price of 12 cents. Then again, they probably won’t.

KPMG did eight separate “independent expert reports” (no, I can’t type that phrase without quotation marks) for Great Southern’s attempted restructuring. The 1998 timber example I’ve quoted is the best of this particular eight as it does heavily suggest growers ignore the recommendation as they are close to harvesting their trees. I’ve seen much worse such reports.

Great Southern is a company that used to pull in the thick end of half a billion dollars a year from punters seeking the up-front tax deduction and whatever story was told about agricultural returns. The rural MIS industry overall used to take between $1.3 billion and $1.5 billion a year and most of it – Great Southern and Timbercorp have been the Big Two – doesn’t look too flash.

This should be absolutely no surprise. Corporations with highly questionable business models have this habit of eventually failing. At some point the greed gets to them. However many millions the boys at the top have pulled out, the structure finally proves unsustainable.

As for the ANZ Bank, there’s another touch of the cultural failure here that marked its involvement in Opes Prime.

Leave a Comment

You must be logged in to post a comment.

This site uses Akismet to reduce spam. Learn how your comment data is processed.