The Andrews Government is torn between helping a group of workers in a small country town fighting for their jobs and caving in to a group of Melbourne investors happy for taxpayers to relieve them of their responsibilities, writes Michael Spencer.

The problem for the Andrews Government is that if it caves in to pressure over the Heyfield sawmill, what is the precedent that will be set? Why shouldn’t it then help workers at milk factories in northern Victoria, or any other rural business facing closure?

Heyfield’s claims for government assistance are weaker than most. When Australian Sustainable Hardwoods (ASH) bought the Heyfield sawmill from Gunns Limited in 2012, it was already damaged goods.

The mill was sold in 2004 for approximately $80 million, then again for approximately $100 million to Tasmanian company Gunns in 2009. ASH bought the mill in 2012 for a knockdown price of $29 million. There was also the outstanding debt to VicForests that was paid, but it is not clear who settled the debt.

Gunns built its business on native forest logging in Tasmania and plantations for woodchip. But when woodchip prices dropped and markets turned away from controversial native forest products, Gunns, with its high gearing and exposure to woodchips, was in trouble.

The company hadn’t paid its bills for the log supply from VicForests, and decided to sell those parts of its business that were dependent on native forest logging.

It was a distress sale by Gunns. But anyone who spent a minute doing due diligence would have known that the resource the mill relied on was depleting, and depleting seriously.

Heyfield mill doesn’t use just any native hardwood. As the acronym implies, its business is built around the tallest of all flowering plants, Eucalyptus regnans, commonly known as mountain ash, found in the cool, high rainfall areas of Victoria’s Central Highlands.

Victoria’s ash forests were hammered during European settlement and many areas that remained were burnt in the 1939 bushfires. For the ash species, foresters specify a rotation time between harvesting as upwards of 80 years.

With 1939 bushfire areas not expected to be available until the 2020s, there was always going to be a gap in supply as existing stocks of ash depleted. The situation was made even worse by the 2003, 2006 and 2009 bushfires.

In a report for the Department of Primary Industries in 2007, consultants URS said: “The impact of the recent [2006] bushfires adds uncertainty to the sector with the likelihood of a substantial reduction in sustainable volumes”.

After the 2009 fires that hit the ash forests hard, VicForests CEO David Pollard wrote: “It is our view that while existing sawlog and pulp log contractual commitments can be met, overall, the industry in Victoria is on a vector of long term contraction and that there will be an increasing dependence on lower quality forest until regrowth forest matures to sufficient size in about 30 years. Employment will continue to be a concern of ours along with available log volumes and varying qualities” (Annual Report 2009).

By 2013, when Victoria’s state forests were largely handed over to Vicforests by the then Minister Peter Walsh, the valuation, based on the net present value of anticipated future income from the sale of timber (40 million m3) was only $10 million.

ASH recognised that new investment in the plant was required at acquisition. It was quick to access taxpayer funds with the then Liberal National Party Government contributing $650,000 to a $2.5 million re-tooling project only months later.

ASH is now apparently offering the business to taxpayers for $40–$50 million according to media reports. Such a purchase must be subjected to a transparent and rigorous costbenefit analysis that should also consider the opportunity/cost of native forest logging.

The forest industry has an unfortunate reputation for having its hand in the pockets of taxpayers. In 1895, an inquiry found forest management in Victoria was in “an extraordinary state of backwardness”. It said: “reasons for this [backwardness] were political and centre in the disregard of the general public weal where this clashes with the monetary profits of individuals and classes who can exert a direct Parliamentary influence”.

Let’s hope Victoria has progressed since then.

Michael Spencer is a Business, Law and Taxation research fellow at Monash University.