Back to the drawing board

Alex Wadsley
By derailing the RPDC, Gunns and the government derailed their own prospects of getting the project financed. The plantations are still growing, so rather than flogging a dead horse, Gunns and the Department of Economic Development should go back to the drawing board. The project in its current form was only likely to get financing in the euphoric period prior to the crash, when companies were able to access ‘covenant-lite’ loans. These were the corporate equivalent of the sub-prime ‘liar’ loans that caused the housing mess in America. These sorts of loans are unlikely to ever be available again in our working careers, so rather than cutting corners; Gunns needs to do the job properly. To stand a good chance of getting project finance Gunns needs to: move the mill out of the Tamar valley; go through the RPDC process with public hearings; negotiate a fixed price construction contract (or a significant joint-venture partnership); and plan to only use plantation grown pulp wood. This was actually the original proposal that Gunns announced back in June 2004 and is the only one that is likely to generate broad community and financial support.
EVEN Paul Lennon now admits that the Tamar valley is the wrong place for a pulp mill. This should give Bartlett all the cover he needs to honour his ‘line in the sand’ commitment and end the farcical approval process.

The fact is the Pulp Mill Assessment Act has not helped the project, it instead confirms that the project has more political support than credible due diligence, a clear sign of danger for any competent financier. Finance is a sector where you should never say ‘never’. Projects can sometimes access dumb money, and there are plenty of financial disasters to prove it. However, at this point, not helped by Garrett’s pseudo-approval without hydrodynamic studies, it would take the dumbest of dumb money to support the project. The sort of money you really don’t want.

This comes down to the essence of the Equator Principles. The objectives of the Equator Principles was to avoid banks competing in a ‘race to the bottom’ on environmental and community standards, as well as discourage kleptocratic arrangements between businesses and politicians. Smart financiers realised the Equator Principles made better projects. Gunns may get ‘experts’ to opine that the project is compliant, but this simply turns the principles into green-wash. While the project was independently reviewed by the Resource Planning and Development Commission, with community input through public hearings, the Equator Principles were met. The project would have been improved by following the advice of experts such as Dr Warwick Raverty and increased public acceptance. By derailing the RPDC, Gunns and the government derailed their own prospects of getting the project financed.

The plantations are still growing, so rather than flogging a dead horse, Gunns and the Department of Economic Development should go back to the drawing board. The project in its current form was only likely to get financing in the euphoric period prior to the crash, when companies were able to access ‘covenant-lite’ loans. These were the corporate equivalent of the sub-prime ‘liar’ loans that caused the housing mess in America. These sorts of loans are unlikely to ever be available again in our working careers, so rather than cutting corners; Gunns needs to do the job properly.

To stand a good chance of getting project finance Gunns needs to: move the mill out of the Tamar valley; go through the RPDC process with public hearings; negotiate a fixed price construction contract (or a significant joint-venture partnership); and plan to only use plantation grown pulp wood. This was actually the original proposal that Gunns announced back in June 2004 and is the only one that is likely to generate broad community and financial support.

The RPDC process is not simply about community consultation; it also identified risks to make a better project and creates the transparent justification for public funding support for transport infrastructure. Public funding should require the proponent to ‘lift their skirts’ on the private financial feasibility of the project, at least in camera, because this is the only way to determine whether public support is necessary, or simply a large corporation free-riding on the public purse.

While Gunns is revisiting the project they should also be looking at the product mix. Is kraft pulp the best product to produce? What other products could be produced in conjunction with pulp, particularly liquid fuels to provide energy security. Producing liquid fuels from wood is emerging technology that would preclude project finance. Project financiers only finance projects with proven technology or technology guarantees. This may be a case where commonwealth public support in the form of a technology guarantee would be appropriate. Assuming the project passes proper environment and community scrutiny, the development of sustainable fuels technology is an important public policy goal.

It is likely that re-casting the project for a different location and reconsidering technology would take some time. However in the context of the financial crisis, and the fact that the current project is unacceptably risky, time is something Gunns has. If Gunns plan to repay their shareholders recent investments they should start using their time more wisely.

Properly managed, a project re-scope could be undertaken in a year, with financing and RPDC assessment then proceeding concurrently over 2010. Assuming a 3-year construction phase this would then have production starting at the beginning of 2014, when plantations would be able to supply all the requirement of a mill, without reliance on controversial public native forests. This is something financiers could support.

Alex Wadsley is a consultant and contract lecturer in economics and finance at the University of Tasmania. He has worked previously for BOS International in Sydney arranging finance for major resource projects, as well as for Woodside Petroleum in business analysis, gas marketing and business development. The author holds an MBA from the University of Western Australia and has submitted a PhD for examination at the University of Tasmania.

Alex Wadsley