Part III—MIS as a commercially viable model and their marketing to retail
There were many shortcomings in the promotion of MIS to
retail investors from the financial advisers who gave poor advice, the
promoters of the schemes who appeared to downplay the risks inherent in the
investment, the research houses that rated the schemes and the unfortunate
lending practices which left many growers deeply in debt.
In this part of the report, the committee turns its
attention to the commercial viability of some of the schemes, the business
model and possible structural flaws, including whether they were Ponzi-like
enterprises. The committee seeks to determine whether such schemes should have
been marketed to retail investors in the first place.
Business model—commercial viability
To this point in the report, the committee has focused on the financial
advice aspect of MIS and particularly on the adequacy of the disclosure regime.
In this chapter, the committee is primarily concerned with the performance of
the schemes and the reasons for their ultimate failure. It considers factors
that may have undermined the commercial viability of MIS schemes including high
upfront expenses and the management and performance of the schemes.
Reasons for collapses
Some of the major organisations that gave evidence during the
committee's inquiry attributed the collapse of the high profile agribusiness MIS
to a number of reasons including:
the global financial crisis (GFC);
the 2007 taxation announcement (The ATO's change of
interpretation in 2008 of the taxation arrangement for investments in
non-forestry agribusiness MIS meant that investors in such schemes would no
longer be able to claim upfront deductions for their contributions to the MIS
on the basis that the investor was not 'carrying on a business'. In 2008, the
Federal Court found that expenses were not of a capital nature and were,
indeed, allowable deductions incurred in carrying on a business. Some claim
that the delay in settling the test case created uncertainty in the market);
prevailing weather conditions including drought; and
On the GFC, KordaMentha informed the committee that the effect of the
GFC, which severely limited the availability of funds from the capital markets,
and the higher than expected operating costs contributed significantly to the working
capital shortfall facing the liquidators.
Many investors, however, were of the view that the GFC exposed inherent flaws
in the structure of the schemes.
Notably, long before the MIS failures, people in the industry were
raising concerns about the commercial robustness of the schemes. Looking back,
many are now convinced that the schemes were flawed from the start. One
I suppose this outcome may not have been so hard to take
mentally if there was a particular event that caused this outside of
Timercorp's control but all of the evidence including Timbercorp's outsourced analysis
on their structure pointed to the fact that it was a doomed company and
investors would not see a return.
From the committee's perspective, it is important to detail some of the
concerns that were raised about the commercial viability of the MIS before
their collapse because such assessments could not be interpreted with the
benefit of hindsight. The committee has already touched on the poor performance
of some schemes in the context of the discrepancy between expected yield rates
given in prospectuses and PDSs and the actual poor returns. Importantly,
however, below expected yields may also have signalled fundamental flaws in the
business model and management of the schemes.
As early as the turn of the century concerns about the commercial
soundness of MIS were surfacing. A 2000 report from the Rural Industries
Research and Development Corporation (RIRDC), undertaken to assess the effect
of public investment ventures largely tax-driven, noted two main risks
associated with investment in agricultural investment ventures:
investors may not receive the benefits as specified by the
promoter—short-term taxation benefits are typically achieved by investors, but
long-term capital gains or income are not; and
the venture may collapse—cash flow problems are common among
agricultural investment ventures, usually as a result of the promoter making
inaccurate financial forecasts.
After analysing 39 ventures, the study assessed the financial performance
of most of these ventures as 'poor to average'. Among other things, it found:
the physical performance (yields etc) for 19 ventures was rated
with about 50 per cent of them rated very poorly—at least some physical
output was achieved by most ventures;
project management was assessed for 18 ventures, of which nearly
40 per cent were rated as being very poorly managed and the remainder as mainly
satisfactorily managed; and
the financial performance of 18 ventures was rated, with around
60 per cent rated as performing poorly financially—only three of 18 ventures
were noted as performing at least satisfactorily.
The committee reached similar conclusions about problems with overly optimistic
projections. In its 2001 interim report on mass marketed tax effective schemes,
the committee found that few schemes represented 'a good investment in the
ordinary meaning of the term', and without the 'tax deductibility' factor, very
few would have 'got off the ground'.
Cornish Consultancy maintained that policy makers were well aware of the
risks inherent in agribusiness MIS by 2006, yet, in its assessment, they 'chose
not to close down these schemes', resulting in the tax payer and investors
losing billions of dollars.
In 2005/06, two researchers found indications of plantations in some cases
achieving growth rates—Mean Annual Increments—less than the rates suggested in
the PDS for the hardwood plantation MIS. According to the research, in Victoria
at least, there were 'identifiable instances of MIS plantations being established
on land in rainfall areas of below 650mm p.a. which is the minimum feasible
rainfall indicated in the PDS of the largest MIS operator'.
Around the same time, researchers with RIRDC again questioned the
commercial viability of some agribusiness MIS. They reported that along with
other studies, their analysis suggested that the MIS sector (but not all MIS)
continued 'to perform poorly with respect to realistic or actual rates of
return versus projected rates'.
The researchers found that the performance of MIS could be expected to vary
considerably, producing good and poor performers but it was likely that returns
to investors would be 'less than satisfactory, with high commissions for
marketing and profits to promoters being important factors'.
Product Rulings may have provided greater tax certainty for
individual investors in projects but from the community's point of view,
resources are wasted if investors are being encouraged to invest in non-commercial
projects by optimistic forecasts and/or inadequate regulation. The beneficiaries,
in these cases, are the promoters and managers.
In its submission to the 2008 Review of Non-Forestry Managed Investment
Schemes, the NFF referred to the RIRDC's suggestion that the overall MIS sector
continued to perform poorly with respect to realistic or actual rates of return
versus projected rates.
Some submitters to this current inquiry also harboured serious doubts
about the viability of agribusiness MIS well before their downfall. For example,
CPA Australia informed the committee that it had long recognised the
potential risks investors took when investing in agribusiness MIS. It indicated
that it had been proactive in trying to ensure that investors were educated
about the risks so that they could make informed decisions. For example, since
early 2000 CPA Australia had issued a range of investor guidance, media
articles and advertisements encouraging potential investors to seek
professional advice on MIS before investing.
Mr Tom Ellison noted that around 2004 when plantings and land
acquisitions were at their peak:
At the basic, fundamental economic level, paying three or
four times the value of productive farmland to plant a commodity crop on should
send warning bells, because commodities are low price and subject to huge
variability and it is not normal to expect people to spend hundreds of millions
of dollars buying land to facilitate that.
Mr Sean Cadman from the Cadman and Norwood Environmental Consultancy
suggested that when Timbercorp and Great Southern harvested their first
plantations 'the unrealistic nature of the yield forecasts and returns to
investors became apparent'. He argued that despite the disappointing results
the schemes continued and additional changes to taxation arrangements 'actually
made things worse'.
Mr Samuel Paton, the Principal of Agribusiness Valuations Australia,
indicated that in 2005 it was already clear to him that the structure of the
schemes was 'doomed to fail and produce very poor outcomes for government (in
terms of balance of payments offsets), investors, taxpayers etc'.
Mr John Lawrence, an economist, tax accountant and more recently a
public policy researcher, noted that one of the principal reasons for the
failure was underperforming yields. He explained that 'the yields from crops
planted over a
15-year period from 1994 were, on average, only about 60% of what was predicted
by the respective PDS'. Mr Lawrence stated:
Price increases failed to eventuate as predicted. Instead
wood fibre followed the pattern experienced by every other bulk commodity over
time where real price decreases are the norm.
With regard to Great Southern, he noted that the projected yields for
55,000 hectares of trees from the 1998 to 2004 crops were predicted to be only 160
tonnes per hectare compared to the PDS predictions of 250 tonnes.
Referring to the suggestion that harvest yields could be reliably predicted
after 4 years, he noted:
If there was sufficient certainty that yields could be
predicted after 4 years, enough to bring future commissions to account, the
impending MIS crisis should have been obvious to insiders well before,
particularly to foresters responsible for site selection. These same foresters
however never wavered from their assessment that 250 tonnes was reasonably
achievable despite overwhelming evidence to the contrary based on past actuals.
In his words, the prediction 'was never downgraded despite repeated
evidence to the contrary' and there was 'never enough suitable ground to grow
what was promised'.
Importantly, he noted, however, that it was just not one project that fell
short of expectations—'there was a consistent pattern'.
In summary, according to Mr Lawrence, MIS failed principally because they
According to a report tabled by Mr Peterson during a public hearing,
returns from Timbercorp's 2006 and 2007 horticultural harvests were generally
falling short of expectations.
In some cases, poor management was held to contribute to the disappointing
performances. In 2011, the House of Representatives Standing Committee on
Agriculture, Resources, Fisheries and Forestry expressed concern about the
management of forestry MIS. At that time, a witness told the committee that the
MIS regime had worked to put trees in the ground but not 'the right trees in
the right ground' to meet actual needs.
A number of witnesses spoke of planting trees in the wrong locations—away from
processing plants that did not allow 'leverage on existing infrastructure'.
Others referred to planting the wrong species of tree.
As one witness stated:
The MIS tax incentives drove a lot of money into plantations
and it was like a gold rush. To get those trees in the ground by the end of June
meant that the wrong species were planted in the wrong place at the wrong time.
There was no prudent linkage to a productive outcome.
Citing the House of Representative committee's inquiry into the future
of the Australian Forestry Industry, the Department of Agriculture noted the
concerns about the suitability of the plantations established under MIS. The
There is evidence that some MIS plantations were established
in less than optimal locations. For example, in a few instances, there appears
to have been poor consideration of the suitability of the species to the
growing location, as well as the proximity of the wood resource to suitable
markets or processing facilities.
Planting trees and crops in unsuitable locations does not make
commercial sense, but the evidence strongly suggested that the use of tax
incentives drove this type of decision-making and the schemes ended up very
much supply rather than demand driven.
Tax incentive—driver of
Indeed, many commentators associated with the industry saw the failure of
the MIS industry as 'in some ways a reflection of the inherent problem of using
tax inducements to fund industry'.
A 2006 RIRDC study observed that investors were paying substantial
premiums through MIS marketing commissions and profits to be able to claim
taxation deductions for their investments in MIS.
In 2009, the PJC heard a number of complaints about the potentially market distorting
effects of the tax incentives available to agribusiness MIS investors. Evidence
suggested that rather than investment flowing to commercial activities on the
basis of profitability, tax incentives had generated an influx of investment to
agribusiness MIS that would have been directed elsewhere had they not been
available. Such incentives created an inefficient use of capital and an uneven
playing field for traditional agricultural enterprises competing for scarce land,
water and labour resources.
While the tax incentives may have diverted investment away from other
sectors in the economy into agribusiness MIS, they also had the potential of
skewing investment towards the front end of the schemes.
NewForests stated that the deductions became 'the goal', and the
underlying investments 'a kind of by-product of the tax deduction'.
It stated further:
While most of the MIS timber plantations in Australia were
professionally established, the drive for land and planting deadlines pushed
new plantations into areas of low rainfall, poor market access or areas of
limited historical forestry experience. As MIS companies acquired extensive
land banks with debt finance, the sector became overleveraged. The high costs
of managing large numbers of retail clients, packaging and selling the
products, and financing the whole cost base upfront, meant that the projects
were commercially non-viable. So while the calamitous end of the MIS was
unforeseen, many commentators felt it was overheated and due for some form of
correction. Ultimately, the stress of the financial crisis led to a complete
collapse of the industry.
Evidence before this current inquiry similarly supported the contention
that the tax deductions may have had unintended adverse consequences. The
Tasmanian Farmers and Graziers Association (TFGA) noted that MIS generated
investment was not based on sound long term strategic investment planning but primarily
motivated by tax incentives, which caused significant distortions within the
markets in which they operated.
The TFGA referred to the 'excessive haste' in implementing the schemes without
any overlying strategy, which was executed in an ad hoc and detrimental way.
In its view, the MIS arrangements 'have clearly demonstrated that attempting to
drive investment via tax incentives is a potentially risky strategy that often
has unintended negative consequences'.
Mr Richard Hooper, TFGA, informed the committee that the tax requirement
encouraged a lot of forestry companies to 'get the money spent' and 'so they
did unseasonal plantings and picked land that was never really suitable for
His colleague, Mr Nicholas Steel, acknowledged that the industry
needed to attract capital and, while noting that MIS was a good tool, agreed
with the view that the rules around it were not and had allowed the market to
be distorted—'too many trees were planted, and planted in some of the wrong
Also, referring to the tax incentive, Mr Michael Hirst observed:
...as soon as you introduce the incentive to plant out as much
as you can, because it emphasises the returns, you are going to run into
problems because it entices greed and bad practices. So, in some manner, we
have to have someone to say, 'No, the figures you quoted are not right,' or,
'No, that country is not suitable.' Maybe that is the way that there could be
ethical planting, because, like I say, if you are doing it on commissions and
on an amount of money per hectare, it is probably going to end in tears down
Similarly, Mr Lawrence drew attention to the effect of the tax incentives
Originally when managed investment scheme companies put out a
product disclosure statement and they might have only planned to plant 5,000
hectares, they probably could have managed that. But there were a couple of peak
years—2005–06 from memory—where sometimes they would be flooded with applications...I
think in one instance one of the companies might have had over 20,000 hectares.
There was a mad scramble for land, and that is when they started leasing land
from farmers—increasingly so—because they had all this money and they could not
hand it back. It was too good to be true, so they had to lease land from
ASIC also noted that the availability of tax incentives for investment
in forestry MIS 'may have encouraged levels of investment that may otherwise
not have been achieved'.
High upfront commissions and
The poor performance may also be linked to the high upfront costs of the
schemes that diverted funds away from the actual preparation for, and planting
of, the trees or crops.
Earlier the committee referred to the high commissions paid to advisers.
This practice not only had the potential to compromise the quality of advice
but to reduce the funds available for the actual investment. Again, there were
early warning signals of the risks that these high upfront expenses posed to
the success of the schemes.
Well before the collapse of the major agribusiness MIS, commentators
within the industry had voiced concerns about the tax incentive encouraging
high upfront fees and other expenses and the effect on the commercial viability
of agribusiness MIS. For example, such concerns were raised as early as 2001
during the committee's inquiry into tax effective schemes.
At that time, evidence before the committee noted, in regard to blue gum
plantations, that some plantation companies charged investors an upfront fee in
excess of over $9,090 per hectare. The Minority Report to the committee's final
2001 report observed that credible research from government agencies, such as
the Department of Conservation and Land Management in Western Australia and
academic departments such as ANU Forestry, showed that it should cost no more
than about $3,000 (maximum) to establish one hectare of blue gums on leased
land over a 10–12 year rotation period.
Van Eyk, an investment research, advice and funds management company, told
the committee in 2001 that it was inconceivable how any project, or any
business, could expect to be successful when between 70 and 80 per cent of the
funds invested were 'immediately diverted into what is basically non-productive
expenditure'. It stated further that it was difficult to understand how 'both
the ATO and ASIC rationalise such schemes to be "commercial ventures"
on a pre-tax basis when such a high proportion of the funds are not in fact utilised
in actually growing or producing the crop'.
In short, van Eyk argued that the majority of agribusiness schemes were likely to
fail commercially because not enough of the funds raised were 'going into the
ground'. It concluded that growers would 'gain no return on the investment and
a potentially viable industry sector will be brought into disrepute'.
At that time, witnesses from a range of agribusinesses disputed van Eyk's
assessment. In particular, they rejected the claim that the agribusiness sector
as a whole systematically overcharged for management fees and commissions. For example,
Great Southern Plantations Ltd suggested that van Eyk did not sufficiently
consider the whole life cycle of the businesses it criticised.
Mr John Young, then Chairman and Managing Director of Great Southern, said:
They look at certain issues such as stumpage, which they have
mentioned, and up-front establishment costs. What they do not look at is the
long-term viability of the businesses, the cash flows and liquidity, the
borrowing levels, the balance sheet, the whole box and dice. So we feel that
their research is flawed in that regard...
Again in 2005/06, two researchers felt the need to highlight the fact
that a substantial proportion of the initial investment in MIS went to
activities other than the establishment costs of the plantation. They found:
It costs around $1,600 per hectare to establish Blue Gums.
This is a robust figure. The remaining $7,400 of the original $9,000 per
hectare investment is devoted to other matters including prospectus costs, the
purchase of land by the Responsible Entity, sometimes payments of commissions
to the financial planners of the investors, and profit.
In 2006, Mr David Cornish, then with MS&A, advisers to Australian
agriculture, pointed to high upfront fees, noting:
The promoters, such as Timbercorp and Great Southern, charge
the investor (man in the street) substantial upfront fees to manage a timber
lot on their behalf.
In support of his argument, Mr Cornish cited evidence given by the ATO
in 2001 to this committee, which suggested that 'in some cases the
establishment and management fees may be artificially geared so that no matter
what happens to the business itself, investors are guaranteed at least a 'tax
profit' for their investment.
Moreover, he suggested that it was becoming obvious as the first schemes came
to fruition that the actual returns were 'well below market expectation'.
According to Mr Cornish, the tax policies at the time meant that the promoter's
...based purely on its ability to sell a scheme and capture
upfront fees, not on how profitable that scheme is. More importantly, the
risk of failure of these schemes is jointly owned by the investor and the
taxpayer. The promoter bears no financial risk if the project fails.
Mr Cornish argued that it was 'critical to understand that the investor
only owns the trees'—that 'the promoter buys the land from the surplus
generated from these massive upfront fees charged to other schemes'.
In 2006, he maintained that proposed policy changes must be able to resolve the
current failures of the MIS industry. In his assessment, these failures were:
profiteering by promoters at the expense of the Australian
asymmetric information—due to the lack of credible independent
and transparent information on the profitability of the project; and
the promoters' lack of accountability to achieve profitable
outcomes for their investor clients.
Concerns about the commercial viability of these schemes persisted. In
2008, Adviser Edge, an investment research house, referred to a review of many
MIS, which suggested that high profit margins were being earned by managers in
initial years. By 'high' Adviser Edge meant that the profit margins in some
cases were particularly excessive 'to indicate that profit margins had been
brought forward from later years into the initial year of the MIS project'.
Adviser Edge considered that this aspect of the MIS regime was potentially one
that needed to be addressed. Its research indicated that:
...on average, 42% of application fees were attributable to
agricultural operational expenses in FY 2007/08. This includes all non-forestry
MIS projects assessed by Adviser Edge in FY2007/08 for which managers provided
a break-down of the application fee. The median percentage of application fees
attributable to direct operational expenses is slightly higher, with a total of
45%. This implies that, on average, 58% of all application fees for
non-forestry MIS was attributed to adviser commissions, marketing, product
development costs, administration, corporate overheads and manager profits.
Referring to the upfront expenditure, Adviser Edge noted that the costs
associated with administration and product development of MIS projects and
adviser commissions were substantial:
MIS managers receive a significant proportion of their
profits as part of the initial application fee. The heavy weighting on the
application fee reduces the risk for the manager, and transfers the majority of
production risk to the investor.
Dr Judith Ajani submitted to the 2009 PJC's inquiry that an
investigation of late 1990s hardwood plantation prospectus documents revealed a
wide chasm between market outlook and actual market realities.
According to Dr Ajani:
Before the MIS approach to growing wood, it cost around $2,000
to plant and manage a hectare of trees over a ten year rotation. Managed
investment schemes more than quadrupled that cost. Neither wood prices nor
plantation yields have increased anywhere near sufficient to offset this cost
increase. The public purse is the biggest loser in this arrangement.
Based on her research, Dr Ajani contended that far from being an
attractive investment proposition, forestry MIS were 'never a commercially
viable arrangement from the perspective of the so-called "investor"'.
The NFF informed the PJC that the decisions to invest in MIS were largely based
on the tax deductibility of the investment rather than the promise of long term
profitability. It argued that as a result of this measure:
...MIS have traditionally been primarily focused on industries
with a high proportion of up-front expenses, with little regard given to the
output returns generated.
The same concerns were repeated during this current inquiry. For example,
Mr Bryant noted the high upfront fees including commissions paid to advisers (minimum
ten per cent) and the salaries paid to the company's back room support staff. In
regard to Timbercop, Mr Bryant noted that there were approximately 80 staff at
its peak, a number of whom were on performance bonuses, which would take their
six-figure base salaries even higher.
Mr Cornish, who had also registered his concerns in 2006, told the committee
...current taxation policy significantly reduces the likelihood
of the investor receiving an economic return, rather than if the taxation
advantage was not available. This is simply due to the promoter exploiting the
tax benefit and charging the investor well above the cost of operation, and the
investor accepting it, given he/she can write it off as a tax deduction.
In his view, taxation policy to support the forestry industry should be 'adjusted
to promote long term profitable timber production and efficiency within the
industry'. He referred to the UK industry, where the tax incentive was removed from
the upfront deduction to a tax break on the final product. In his assessment,
such a measure would produce several favourable consequences that, inter
removing the ability for an MIS promoter to profiteer at the
expense of the Australian taxpayer;
making schemes profit focused—currently MIS promoters make money
out of how many hectares they plant not on how profitable that is; and
encouraging 'best practice' forestry to ensure profitability is
Mr Lawrence was also critical of the corporate model. He explained that
in most instances the deferred fee model was used with varying upfront payments
combined with varying commissions at harvest time. He then noted that only a
small portion was spent on tree establishment with much of the remainder lent
by the RE to the parent company. He also drew attention to:
the ongoing costs, which required funds from the parent and,
because they were greater than expected, generated cash flow problems;
the requirement for new sales to replenish the cash tin; and
the back up cash inflow, which came from so called annuity income
from growers repaying loans, but the increasing loan defaults over time resulted
in a slowing of the cash inflow.
Overall, in his view, the
model was 'vulnerable'.
On reflection, some in the industry were of the view that the failure of
some MIS was inevitable. In 2010, researchers from the Department of Finance,
University of Melbourne, referred to Great Southern's decision 'to effectively
ex post underwrite projected returns to investors in early schemes'. In their
view, while this measure certainly placed the interests of the earlier investors
first, it did so at the expense of those in later schemes.
In principle, as long as the final year inflows are adequate,
any combination of sources of funds is acceptable, and the lowest cost funding
would appear optimal. However, if the approach used is that of creating new MIS
to not only fund expenses of, but also provide unwarranted returns to,
investors in earlier schemes, the structure has, at least, the appearance of a
Ponzi scheme. Any subsidization of returns to investors in old schemes,
motivated perhaps by a need to point to past investors returns to generate new
interest, is not only inconsistent with the principle of scheme investors
bearing the risk of their investment but exacerbates the risk of the RE
becoming dependent on increasing growth in new MIS for survival. While not a
Ponzi scheme per se, if promised returns to new scheme members are excessive,
and returns provided to old scheme members are inflated relative to actual
underlying returns, a Ponzi outcome of collapse is likely.
The researchers explained further the effects of a company operating
multiple schemes established at different points in time. In their assessment,
using Great Southern as an example, two significant consequences flowed
from this setup:
The assets of any individual MIS are not fully quarantined and so
are available for use in other schemes. The MIS investor has 'ownership' of a
particular lot of trees or other plants, established when the scheme is set up.
But the residual funds are deposited with the parent company GSL and thus, as a
claim on the company's assets, co-mingled with those of other MIS (and other
creditors) on the parent company. Indeed, GSL's revenue was dominated by new
Because the GSL business model was built on continuing and
increasing creation of new MIS for a revenue stream and finance source,
problems of attracting new investors could arise if returns on
existing/maturing schemes were inadequate. Hence, incentives may have existed
for GSL (or a subsidiary), as purchaser of harvests (for on-sale), to apply
some new investment inflows to subsidize returns to poorly performing old
schemes in a 'quasi'-Ponzi' type structure.
Some submitters shared this view that agribusiness MIS had the hallmarks
of a Ponzi scheme. One financial adviser, who also questioned the viability and
integrity of the schemes, stated that it was well known that many of the
projects failed to perform to prospectus forecasts. To his mind, it appeared
that there was no delineation of projects from one another with the result that
in terms of cash flow:
...the good subsidised the bad and the current subsidised the
Arguably, in his opinion, the company was trading while insolvent.
Mr Cornish explained the Ponzi-like arrangement another way:
The reality is that the whole structure of the business model
of the promoter was based on getting that lump sum principal up top, and not
how much money they make. The viability of Great Southern, Timbercorp and all
those companies fell over when they could no longer get the next person into
Only after the collapses, did investors come to suspect that later
schemes may well have been augmenting the returns of earlier underperforming ones.
Mr David Lorimer spoke of being unaware that the funds he invested in
one scheme were being used to prop up other schemes. In his words:
This screams Ponzi scheme to me. I was always under the
impression that each project was stand alone. I was obviously mistaken. (This
point alone would have warned me off the schemes).
One couple stated that the product disclosure statements/prospectuses
highlighted individual project returns, which suggested that each project was
independent. They argued, however, that in reality, 'if one project failed,
this deficit would flow over and affect the profitable projects'.
In their words:
We were also not aware that with this flawed business model,
the viability of OUR PROJECTS was dependent on subsequent year's
projects attracting sufficient investments. If not, then our yearly funds would
be directed to propping up other projects and keeping them above water.
Supporting this view, one grower stated simply that the financial
decision to use money from later projects to finance earlier ones was 'bad
financial management and hence undermined the later projects'.
Another suggested that Timbercorp Forestry appeared to be a vehicle created to
generate revenue for Timbercorp where the real money was in finance and
commissions. In other words, the MIS was 'a scam not a scheme for investors'.
A submitter, who wanted his name withheld, shared this same conviction. He argued
that, in effect, the directors were looking at ways to minimize 'harm to the
sales of woodlots in the 2005 project by covering for the returns to investors
in the 1994 project'. Put another way:
...funds from the new investments were required to top up some
of the early investments as the yields were not as advertised in the PDS. These
reduced yields were never ever communicated to prospective investors in the
2005 and 2006 schemes. In the end approximately 18,480 investors bought into
the two schemes, some made cash investments some borrowed to invest. Little did
they know that their funds were going to be used to top up earlier projects and
thus start the downward spiral.
Convinced that funds were being funnelled to prop up earlier projects,
he asked, was this not 'the modus operandi of a Ponzi scheme?'
Mr Mazzucato agreed, stating that from all appearance, Timbercorp was operating
a Ponzi scheme. Put simply:
The profits of the business did not cover the costs to the
business. They required new investors to pay their obligations to their older investors.
In his estimation, the financial planners and banks treated this 'as a
feeding frenzy preying on unsuspecting and unsophisticated investors'.
Another couple stated:
There was evidence that Great Southern was effectively a
Ponzi scheme whereby new investors were providing returns to old, plus there
were financial reports showing Great Southern was actually insolvent when the
last lot of 2008 Grapevines were sold. Two of the directors had resigned in
2006 following the surfacing of such Ponzi scheme information.
Also referring to Great Southern, Mr Lawrence noted:
Great Southern propped up the returns of the first three
crops that were harvested. They interposed a related entity to buy the crop at
an inflated price so that the growers would end up with the return they
promised. But, of the first crop Great Southern grew, they harvested only 123
tonnes when 250 was predicted. The next two were not as bad but they were well
below predictions, and they kept it under double wraps.
In his opinion, had the company not bolstered the returns of its early
schemes from 2005 until 2007 and had people been more aware of the yields, then
the schemes would have 'fallen over a lot earlier than they did'.
Mr Michael Galvin, who was Counsel for the plaintiffs in the Great
Southern proceedings, also commented on the subsidisation of earlier projects.
He referred to Great Southern's efforts to conceal the fact that its wood lots
from earlier schemes were not going to produce anywhere near the predicted 250
cubic metres per hectare and therefore not produce the anticipated returns for
growers. He cited the first forestry project, the 1994 eucalypt project, which was
due for harvest in 2004:
When it became apparent that the yield from this project
would fall well short of the expected yield, rather than declare that outcome
to the market and suffer the adverse publicity, the management of Great
Southern implemented a transaction by which a newly-formed entity—Great
Southern Export Company—purchased the woodchips at an inflated price equal to
the amount which would have been paid had the yield been as anticipated to
Plainly, the volume of yields in earlier projects was likely
to have a direct impact on sales in new forestry projects. It was not in the
interests of Great Southern's ongoing schemes and business for the investors in
the '94 project to receive a return which was substantially less than had been
anticipated. When it came to his attention, non-executive director Jeffrey Mews
was troubled by the apparent use of Great Southern's own money to top up
returns to the '94 project growers. He ultimately resigned over the issue. Similar
topping-up of the '95 and '96 project returns occurred, though a lesser sum was
paid to growers in the latter project.
In his words, Great Southern was 'putting off the inevitable'.
Many who invested in the later schemes were surprised to learn that
their funds were not being used to plant their vines or trees and had 'no
prospect of producing an income to repay loans'.
This was particularly evident to growers who were encouraged to invest in 2008
just before Timbercorp's fall. As one grower stated:
I invested mid to late 2008 which was shortly before the
complete collapse of the company when they knew that this was inevitable but continued
to dupe individuals into investing based on their lies.
A couple in their mid 60s were advised to invest in Timbercorp in June
2008 and by April 2009 it was in liquidation. In their view, they should not
have to pay back their loan as they were sold the investment 'when the company
was in difficulties'.
Along the same lines, Miles and Marion Blackwell were convinced that, although
Timbercorp took their money, their trees were never planted. They also labelled
the scheme 'a scam' meant to draw in more investors to help pay out the earlier
An older couple stated that they had received nothing for their
investments in 2006, 2007 and 2008, indicating further that in 2008 'the trees
were never even planted'.
Yet another grower stated:
I struggle to understand how a company can advertise an investment
with great return, then before there is even a crop in the ground the whole
project defaults but they still charge an annual management fee and interest
charges on a project that did not even exist. Timbercorp sold something to
people, they could not deliver the goods, so I see no reason why we should have
to pay for something that does not exist.
Investors who invested in Great Southern just before the company collapsed
gave similar accounts. With the benefit of hindsight, they also formed the view
that the schemes were flawed from the beginning, with some suggesting that it
was a Ponzi scheme which engaged in 'unethical, unconscionable conduct'.
One such investor remarked:
By purchasing some of the last vinelots in 2008 we may never know
if our grapes were actually planted or not, but the MIS as a whole was destined
to fail. GS was operating a Ponzi-like scheme, providing loans to investors and
using money (provided by Bendigo Bank) to continue trading and selling schemes
while never actually developing or in some cases even planting the vinelots. It
now seems that GS had sold such a loan to us and transferred it to Bendigo Bank
just prior to its collapse.
Two growers who also held positions in Timbercorp are well placed to
shed some light on the extent to which the companies relied on new investors to
keep earlier schemes afloat. Mr Bryant was one of growers who likened MIS to Ponzi
To his mind, the problems stemmed from the manner in which the products were
The corporate structures were built on revenue streams that
relied wholly on investor income at the front end. No other revenue would come
to that entity until they got a proportion of harvest proceeds at the back end.
Both those arrangements are commercially acceptable but it is the amount of
money that went to getting these products into the market, which was not
covered by anything other than investors' money.
According to Mr Bryant, Timbercorp and Great Southern's single, upfront
payment model meant that if you paid $3,000 for a wood lot:
...the money went into the company. There was no portion of
that put aside for future maintenance of the plantation in the case of timber
lots. When the music stopped there was no money left to continue the
plantations to the end.
Mr Byrant's reasoned that this reliance on a form of revenue, where the
company depended on investors' money going into the project, was 'basically
akin to a Ponzi scheme'.
He agreed that the signs of Timbercorp's failure were there and referred to
revenue streams and the need to continue to attract increasing sales. In
reference to Timbercorp, he observed:
They were getting decreasing sales before the GFC happened.
They had to achieve the yields on the crops to get the revenue streams that
they had budgeted on getting and they needed the recipients of loans to keep
paying the loans. Those three things were not happening. The yields were not
happening; they were not getting increasing sales—they were getting decreasing
sales; and they were getting an increasing number of people defaulting on their
loans. So it would have still happened.
Mr Peterson explained further that Timbercorp made its money through annuity
style income, which included annual rent, management fees, percentage share of crop,
interest on grower loans and other. He noted that at its height Timbercorp's
loan book was half a billion dollars. He surmised that if Timbercorp were making
three per cent on money they borrowed from ANZ, the amount would be substantial.
In his opinion:
The loan book, as with Great Southern, was a very, very
important revenue driver of the business.
According to Mr Peterson, however, in February 2007 the Timbercorp
default loan book, or loans in arrears—growers not paying their loans—was a
sizeable $24.5 million but on 12 July, five months later, it had doubled to $49
Mr Peterson drew together all the warning signs emanating from
Timbercorp—projects not performing to expectations; fall in annuity revenue;
the shrinking loan book; and the loans in arrears.
According to Mr Peterson, Timbercorp was in real trouble without being able to
sell annuity products in horticulture.
If the projects were not on track and you had used a cash
flow to get there to build your investment model, you were in real trouble.
Timbercorp did not give out adjusted cash flows on an annual basis to take into
account these results for clients already in projects. So when the clients
started seeing these results and emailing us asking what is going on, they
realised they could not afford to keep on paying the project, that they had
been misled in their view, and the default loan book increases but, worse for
Timbercorp, growers were saying: 'We don't want to invest in anymore projects...That
was reflected in 2008 when only $119 million of product was sold, but by that
stage the wheels were off—projects were not delivering, there was pressure from
the financiers, the government was saying, 'No more MIS....It was clear what was
happening in February 2008—you were in real trouble...these projects were not
delivering, growers were in default and annuity income was in trouble. What was
going to keep the company afloat?
Noting that no projects were being sold in 2009, Mr Peterson asked,
'where was the income coming from to feed this beast?'
No one disputed the proposition that the earlier schemes had failed to
perform as expected. In 2007, Australian Agribusiness Group (AAG) produced the
results of its research, which reported that Great Southern had completed harvests
from its 1994 and 1995 plantation projects achieving harvest volumes of 123 m3/ha
and 166 m3/ha respectively. At that time, Great Southern advised
that the lower than forecast yields were due to silvicultural issues, 'largely
caused by specific site issues combined with below average rainfall conditions'.
According to AAG's 2007 research report, Great Southern had, overtime, taken
substantial action to address the problem of low yields, including better land selection,
silvicultural practices and genetic improvements. It wrote that Great Southern
believed firmly that the prices likely to be achieved for the projects due to
be harvested over the coming few years were 'on track' to meet expectations.
Hearing the Great Southern proceedings, Justice Croft also understood
that in the ten years or so since the establishment of the 1994 plantations
there had been a pronounced evolution in knowledge and experience in the
forestry industry generally and in particular within Great Southern. According
to Justice Croft:
Much more was known empirically about the synergies and
effects of soil depth, soil quality and annual rainfall on plantation growth.
Consequently, in 2005 when Great Southern came to assess the productive
capabilities of the land used in the 1994 plantations, those lands scored
roughly half of the 250/m3 they had originally been assessed at in
1994. I accept that the disparity between these 'scores' is a ready reflection
of the significant evolution in the sophistication of plantation establishment
and maintenance that had occurred during the decade or so since the 1994
plantations were established.
Mr Galvin, who was Counsel for the plaintiffs in the Great Southern
proceedings, had a different interpretation:
I think, His Honour Justice Croft formed the view that there
was a sufficient basis for distinguishing the earlier projects from the later
projects, having regard to the improvements in silvicultural practices and
seedling genetics. That is a view that would be open to debate, and was debated
before His Honour. Ultimately, he determined that issue in favour of the
Having said that, the evidence as I saw it was plainly that,
if anything, the expected volumes were decreasing because the quality of the
land that was being acquired for later projects was lesser. Land was becoming
scarcer and it was becoming far more expensive. They simply could not get the
land they needed to meet the estimates that they had been promoting.
Evidence before the committee strongly suggests that during the peak
years of investment in agribusiness MIS, the need to spend money and the subsequent
drive for land meant that increasingly land with poorer soils and lower
rainfalls were being selected. Other management decisions such as planting the
wrong species would likewise affect productivity. Also, given the high upfront
costs—commissions, marketing, administration and corporate overheads—the
revenue from new schemes may well have been a critical element in maintaining
the earlier schemes.
In 2009, ASIC reasoned that, while agribusiness MIS did not share the
characteristics of a Ponzi scheme, a business model that relied on receipts
from application fees for revenue 'may be unstable if the flow of new MIS sales
Reflecting on the commercial viability of these schemes, ASIC, more recently,
informed the committee that:
The collapse of a number of responsible entities of forestry
schemes has highlighted issues with this type of investment and the way
forestry schemes were promoted to investors. While a small number of
responsible entities are still operating in this space, they do not appear to
be reliant on the sale of managed investment schemes to fund their business
operations in the same way as responsible entities such as Timbercorp Securities
Limited and others.
In ASIC's estimation:
Where a responsible entity of a forestry scheme is reliant on
scheme sales for a substantial part of revenue for working capital, an
interruption to scheme sales revenue could have significant implications for
the responsible entity, and its ability to fulfil its contractual obligations
owed to growers. We have seen that where scheme sales reduce suddenly, some
responsible entities have not had sufficient reserves to fulfil their
obligations to growers.
Interestingly, in respect of the commercial soundness of MIS, Justice
Judd found in December 2010 that:
Wherever ultimate responsibility for the collapses may
reside, it is difficult to overlook structural flaws in the design and
regulation of managed investment schemes. These flaws facilitated investment
strategies, management practices and decisions, regulatory attitudes and
revenue policies which together conspired to cause huge financial loss to
investors, the revenue, banks and other financial institutions, and the
communities in which the schemes were operated.
Whenever an enterprise is designed and structured to depend
upon third party financing of 'tax effective' investment as its primary source
of revenue, failure is almost inevitable. The generation of such revenue can
become the substitute business, with the primary production activity a mere
adjunct, undertaken in order to satisfy criteria for the deductibility of
invested funds. Such managed investment schemes should not be mistaken for real
As noted earlier, investors assumed that their funds were to be used for
their particular scheme, but this was not necessarily the case where the RE
operated a number of MIS. A reliance on new schemes to subsidise, or in effect
underwrite, earlier schemes where performance was below expectations showed a
clear weakness in the MIS model. This arrangement not only exposed the MIS to
cash flow problems and eventual failure but was inherently unfair to the newer
investors whose interests were compromised by preferring the interests of
earlier investors—not all investors were being treated equally.
There was not one single cause that led to the collapse of some high
profile agribusiness MIS. A range of factors combined that made some of these
schemes a high risk venture and prone to failure. They included high upfront
costs—generous commissions to financial advisers, funds diverted from operation
expenses into the general working capital of the parent company, excessive
overspending on corporate overheads and marketing—poor management decisions
regarding the planting and location of the schemes, a business structure that
depended on new sales for cash flow, and the lag time between initial
investment and dividends.
There is a compelling argument that such schemes should not have been
marketed to retail investors. The committee finds it difficult to justify the
expenses involved in some but not all schemes—overspending on commissions, administration
and marketing. Indeed, it would appear that investors paid way too much for
their agribusiness plot and too little of their initial outlay went on
productive expenditure. Also, despite the suggested improvements in silvicultural
practices and seedling genetics, the discrepancy between the projected rates of
return and the actual yields cannot be ignored.
In the following chapter, the committee looks at the marketing and
selling of high risk products to retail investors.
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