Can't see the forest for the trees

Whenever the issue of Council finances (and, by extension, Wanganui's finances) arise, reference is inevitably made to the forestry investments, how it seems they're not going to realise an instant cash bonanza, and how the how Diva-led Council have "exposed" this startling fact for the first time. As one anonymous commenter remarked:

On the forestry estimates, it's important to remember that the WDC went and got a special dividend from Wanganui Gas in 2004 to cover the shortfall in their forestry dividends that year. They didn't tell Wanganui that they had advice in March 2004 (according to the Mitchell Report) that there would be NO dividends that year, the two after that and that the $18m of estimated future revenue was now worth $4m. That's a lie that they were eventually caught out on and they should swing.

Several other anonymii have noted that Council minutes prove the above commenter, and others who accuse past Councils of a cover-up, wrong. From the 2004-5 annual plan:

Other revenue is lower than anticipated due to income from forestry. The LTCCP 2003-2013 had provision for forestry revenue of $1,700,000. This revenue is not now expected in this year due to the market conditions that surround the forestry industry.

That seems a pretty clear admission that revenue from forestry wasn't going to meet expectations.

Then there's the Minutes of an Extraordinary Meeting of the Wanganui District Council held immediately following the Meeting of the Strategy Committee on Thursday, 26 June 2003:

His Worship Mayor Poynter said that the Council's long term debt would be determined by returns from Forestry.

So there’s Chas, in 2003, clearly not attempting to quantify those returns or paint a prettier picture than reality suggested.

Further reading shows, from the June 2001 minutes:

Mr Foster, Finance and Information Groups Manager, said he was not sure that the Council would in fact reach a $37 million debt level. He explained that the debt programme would be beneficially affected by forestry harvesting and even if debt levels did reach $37 million they would be significantly reduced within two to three years of reaching that level. He did not believe a 'knee-jerk reaction' to a possible debt peak was appropriate. Mr Foster said due to forestry's impact he thought the debt level would reach only $30 million for two to three years.

Some Councillors queried the appropriateness of relying on forestry to reduce debt levels. It was thought unlikely that a ready buyer would be available even if the forest holdings were put up for sale now. However, it was noted that the Council was always open to considering offers. In discussion, it was suggested that the Council should accept the principle not to borrow when it had under-performing assets to sell. It was put forward that it be noted in the Annual Plan that the Council was always prepared to consider offers for its assets, including forestry.

This exchange, with the benefit of hindsight, does Dave Foster no favours. However, it shows, as do other minutes on Council’s website, that there has been ongoing and open debate on Council’s forestry asset, quite the contrary to the impression that our anonymous commenter, not to mention the Mayor, have been trying to create.

While Council was openly debating the likely worth of forestry assets in 2003, the NZ forestry industry website was being quite explicit, in an item headlined "Gloomy Outlook For New Year", dated 22nd December 2003:

Shipping costs and a rising New Zealand dollar are indicating a gloomy outlook for forestry exports in the short to medium term according to the latest report from the Ministry of Agriculture and Forestry. The report says the average price of logs fell by five percent in New Zealand dollar terms in the March 2003 year although prices in terms of US currency rose by 13 percent...

The log export sector is in the middle of a harsh market downturn and a number of New Zealand sawmills are in difficulties. In the case of both logs and lumber market difficulties have been made worse by the high New Zealand dollar, high energy prices and rising shipping costs. The report, which looks forward through to 2007, says that restructuring and reasonable market demand should see the situation improve through the middle of the outlook period...

Since ordinary citizens rarely follow Council debate in any detail - and we have the Diva (and LawsWatch) to thank for that changing of late - it's understandable why people were taken aback by the "shock, horror, probe" "revelation" of poorly performing forestry assests post-election. But not nearly as explicable is the supposed ignorance of a radio talkback host, newspaper columnist and wannabe mayor like the Diva.

It's a favourite gambit of incoming administrations anywhere in the world to make unaffordable promises and then express horror at the supposed "unknown" level of debt they find on coming into office. This Council is no different - "A horror inheritance" screamed the press release as early as November 2004, dutifully picked up by the Chron under the equally alarmist headline "Council forestry blow-out revealed", quoting the Mayor at length and making not even the most perfunctory attempt to examine the issue independently. But then what's new?

We note that the $4 million estimated asset value was from 2004 (At this time we have unable to find out exactly how much Council invested to create this $4 million asset for Wanganui). Monkeys throwing darts do better at predicting market fluctuations than economists, so investing in forestry was always going to be a risky business. But it seems the risks - and the gloomy predictions - were well known at least as far back as 2001 and the effects of market downturns on Council's assets was being openly questioned by Councillors.

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