She knew … and most probably so did her deputy … Premier Lara Giddings and Deputy Bryan Green
Senator Whish-Wilson ( Julia Gillard Needs to Come Clean on Duplicitous Pulp Mill Stance ) not unreasonably accuses others of duplicitous behaviour in their lack of support for Clause 42 of the IGA .
Clause 42 says:
“The Commonwealth’s position is that no Commonwealth funds will be paid to progress the Bell Bay pulp mill project.”
What are ‘funds’? Cash outlays? Other non cash assistance?
The Weekend Australian article ( Contracts and Collusion: The Underbelly of Forestry Tasmania. Julia pledge on pulp mill ) raising the spectre of Government assistance to the pulp mill mentions other forms of assistance – tax credits and possibly non-cash amounts.
Arguably the IGA was loosely worded and deliberately so. Ms Gillard and Ms Giddings are both lawyers (or trained in law) as I understand.
However on the other hand if one examines what has happened and reads some of the comments of Gunns’ Voluntary Administrator in his extensive recent report it seems duplicity was de rigueur.
It’s a little difficult to criticise duplicitous behaviour when the whole IGA was based on duplicity. I’m not suggesting that all participants were duplicitous far from it – most deserve a medal – but Gunns and government acolytes were.
The IGA assistance was divided into 3 streams as per clause 8:
To give effect to this common policy intent, the Governments agree to the following three Streams of activity all of which will commence now:
i. Stream One: Support for Workers, Contractors and Communities;
ii. Stream Two: Protecting High Conservation Forests and Ensuring Sustainable Wood Supply; and
iii. Stream Three: Economic Diversification.
The money for Stream Two was detailed in clause 34:
The Commonwealth will provide $43 million to the Tasmanian Government to assist the State to facilitate the implementation of this Agreement. At least $15 million of this funding will be used by the State to support voluntary compensable exits by sawmillers wishing to exit the industry (as set out in Clause 23), and $5 million is to be used in accordance with purposes and conditions to be agreed with the Commonwealth to support provision of information and consultation with affected communities.
Reducing the $43 million by the $15 million and $5 million leaves … that’s right … $23 million – the amount earmarked to be paid to Gunns for Contracts 917 and 918 even though it had earlier (in April 2011) offered to terminate the contracts on a “full release and indemnity basis”.
However when Gunns realised there was a bucket of money with the IGA, it changed its stance to one of negotiation rather than a unilateral withdrawal.
Fine, said the Government, we’ll give you $23 million provided you pay $11.5 million to FT to partly cover amounts due ‘cos they’re hopelessly insolvent as well.
Pinch the Fed money and kill two birds with the one stone.
Use $23 million from IGA to pay Gunns to get them off the scene. Gunns then splits half the booty with FT and both insolvent companies limp on to face another day.
Gunns thought, hang on, the whole IGA process may fall over unless we agree. Why not screw the Government for the full $23 million … it’s the last chance we have … bugger FT … the Government will be able to find another $11.5 million from somewhere else.
And that’s what happened.
Gunns got the whole $23 million of unallocated amounts from Stream Two of the IGA.
What did they do with it?
Remember the time was August/September of 2011 and 31st August was the deadline for substantial commencement of earthworks at Longreach.
But Gunns didn’t have any money.
It was insolvent.
Asset sales were slow, prices were continually dropping and the banks were insisting on retaining some on the proceeds. Any spare cash was used to make redundancy payments.
And the entire bank debt was repayable in 4 months.
Gunns was by any measure insolvent.
If one reads the report of the Voluntary Administrator (VA) to be submitted to the Second meeting of Gunns’ creditors it is quite clear that insolvency occurred well before the VA’s appointment.
Clearly Gunns was insolvent when it approached the banks in September 2012 on bended knees and asked to be able to retain a little more from asset sales and also “that a debt compromise of a material portion of their debt was required to remain viable” to quote the VA.
Gunns was probably insolvent when it received a significant downward revaluation of plantation assets early in July 2012 making sale of assets pointless and raising capital impossible.
Gunns may have been insolvent in March 2012 when White Knight Richard Chandler Corporation exited the data lock up after half an hour and galloped back to Singapore.
Gunns’ insolvency may have been earlier because of tardiness in revaluing assets as noted by the VA, in possible breach of accounting and auditing standards.
Hence it may not have been reasonable to conclude, as the Directors always did, that a combination of asset sales, new equity and accommodation from lenders would always ensure survival.
Gunns was probably insolvent in August/September 2011 when it negotiated with Ms Giddings and Ms Gillard. Remember insolvency is not a balance sheet test requiring assets to exceed liabilities; it’s being able to pay debts when they’re due.
Which Gunns couldn’t do?
If Gunns hadn’t substantially commenced the earthworks by 31st August 2011, it would have been all over red rover.
Clause 42 might say “(t)he Commonwealth’s position is that no Commonwealth funds will be paid to progress the Bell Bay pulp mill project”, but the simple reality is clause 34 covered payments to Gunns that were without doubt used to progress the pulp mill.
These payments were made in September 2011 one month after the signing of the IGA.
The terms of the IGA were breached within a month of signing.
Ms Giddings knew Gunns was insolvent at the time. Less than 2 weeks before she signed the IGA Bob Gordon from FT said in a briefing note that FT “had formed the view that Gunns’ financial problems are overwhelming and may soon lead to the appointment of a receiver by its secured creditors.”
This was from Gunns’ largest supplier.
The whole IGA funding process was duplicitous, and dare I say it, supported by the Greens at the time, who if one is to believe reports in the Mercury of 15th September 2011 took the view that the settlement with Gunns was reasonable and would allow the rest of IGA to proceed.
Pragmatism trumps duplicity any day.
John Lawrence trained and worked as an economist and accountant and “still retains a vestige of economic rationalism as rationalism is preferable to the alternative. Am interested in broadening the understanding of finance and economic issues that confront the State of Tasmania”. His regular analyses are published on his blog, Tasfintalk, here
• Lucy Landon-Lane, No Pulp Mill Alliance: ANZ first target
• ABC Online: Gunns faces liquidation vote
• ABC Online: Gunns, going going GONE
• Kim Booth: Warnings over Gunns collapse kept quiet by Labor and Liberal
• John Lawrence on Crikey today: How your taxes bailed out insolvent timber giant Gunns
JOHN LAWRENCE
Economist, accountant and Tasmanian political observer
GUNNS, LARA GIDDINGS, STATE OF TASMANIA, TAMAR VALLEY PULP MILL, TASMANIAN FORESTS
The federal election scheduled for September means it’s a double header over the next 12 months for Tasmanian voters, with a state election due in March 2014. That means lots of Canberra visitors, lots of promises and at least a few presents, and this might be one: according to The Weekend Australian, Julia Gillard is yet to rule out assistance to get the Tamar Valley pulp mill off the ground.
Coincidentally, Gunns’ voluntary administrator also recently circulated his detailed report to creditors (Gunns planned to build the original pulp mill).
The pattern of behaviour of the Gunns Group over its last 12 months suggests it was insolvent for a while. Maybe it was insolvent as far back as August 2011, when Gillard and Premier Lara Giddings signed the inter-government agreement on forestry, promising $276 million in funding — some of which was used to save Gunns.
Unsurprisingly, the administrator has recommended liquidating the Gunns Group. A further period of administration won’t revive the patient. Even before the administrator was appointed, Gunns had disclosed that liabilities exceeded assets. But it gets worse.
Employees’ benefits of $10 million will be paid, but secured creditors won’t be paid the full $636 million they are owed — including $446 million owed to the banks. Unsecured creditors, collectively owed $135 million, will remain penniless.
Once liquidation is the chosen path, voluntary administrators often produce a perfunctory report to discharge their statutory obligation. The task of pursuing miscreant directors is one for the liquidator. In this instance the administrator has shone the torch in a few dark corners requiring closer inspection by a liquidator.
Gunns, true to form for any company trying to scrape up enough to keep the wolves at bay, managed to mix up its own funds with funds belonging to others, possibly as much as $50 million.
As responsible entity for 18 managed investment schemes, the Gunns Group receives growers’ harvest proceeds and also insurance amounts from growers that need to be remitted to the relevant insurer. The Gunns Group used these amounts as working capital.
But more significant was the use by Gunns of funds from the sale of Green Triangle land and trees. Some of the trees belonged to others and were secured by a covenant. Covenant holders have already obtained a preliminary court judgment that certain amounts belong to them and shouldn’t form part of Gunns’ kitty to be split between creditors. At this stage the list of unsecured creditors contains an amount of $39 million owing to Australian Executor Trustees, the trustees for the covenant holders.
The voluntary administrator also identified a number of voidable transactions, or payments by Gunns that might be reversible depending on the crucial date of insolvency.
“The cavalier way Tasmania begs for federal funds then absolutely wastes so much without the slightest concern for due diligence is an embarrassment.”
Clearly Gunns was insolvent when it approached the banks in September 2012 on bended knees and asked to be able to retain a little more from asset sales and also “that a debt compromise of a material portion of their debt was required to remain viable”, to quote the administrator.
Gunns was probably insolvent when it received a significant downward revaluation of plantation assets early in July 2012, making asset sales pointless and raising capital almost impossible. And it might have been insolvent in March 2012 when white knight Richard Chandler Corporation exited the data lock-up after half an hour and headed back to Singapore.
But Gunns might have been insolvent as early as September 2011, when it received $23 million of inter-government agreement cash. There was $23 million earmarked in the agreement to compensate Gunns, even though it had previously relinquished its contracts, a decision it quickly reversed when a bucket of money loomed as a possibility. The original plan was to pay Gunns $23 million provided the company agreed to pay half to state-owned Forestry Tasmania for amounts owing, as Forestry Tasmania was also insolvent.
Gunns dug its heels in, knowing it was in a good bargaining position as the IGA might fall over, and demanded the full $23 million. Funds for Forestry Tasmania had to be found from elsewhere.
Gunns needed the money pronto to make a $10 million loan repayment to banks and to start pulp mill earthworks, or else the mill permit would become null and void. It couldn’t borrow or raise more equity, asset sales were slow with prices continually falling and bank loans of $340 million were repayable in a few months.
If Tom Waterhouse was running a book on the date of insolvency, August 2011 would be well in the market.
Gillard and Giddings bailed out an insolvent company. Industry policy is indeed quite accommodating. It proved to be a postponement of the inevitable.
The postponement has meant a delay in the restructure of the forest industry and a continuation of mutual mistrust, as inevitably many see the inter-government agreement as simply a front for getting the pulp mill started.
Even now the state’s upper house is still deciding whether to pass the Tasmanian Forests Agreement Bill, 18 months after the first tranche of cash disappeared into a sinkhole.
The cavalier way Tasmania begs for federal funds then absolutely wastes so much without the slightest concern for due diligence is an embarrassment. Hinting that pie-in-the-sky projects are still possible when the Tasmanian forest industry has just suffered balance sheet losses in excess of $2.5 billion — and 150,000 hectares of plantations are looking for new owners after existing owners have lost 90% — is mischievous stupidity.
