Department of Treasury and Finance

South Australian Asset Sales – Learnings from Forestry SA and SA Lotteries

Key Parameters – Forestry SA (FSA)

Forward Rotations

• Announced in the 2008/09 MYBR (December 2008)

• Developed a model to maximise price, transfer risk and meet

various forestry / public policy commitments

• Cabinet approval to proceed (May 2011) – following a RIS

process and extensive pre-sales analysis

• 3 stage competitive process (EOI, Indicative Bids and Final Bids /

negotiation with preferred bidder)

• Role of the South East Forestry Industry Round Table (SEFIR)

• Treasurer’s conditions: – Forestry (rotation length, domestic supply, annual reporting and contract

extensions); and

– Policy (fire protection, FSA’s future role and carbon, water and land

ownership).

FSA – Key Outcomes

• Financial close (October 2012) – $670 million (incl. stamp duty)

• Purchaser was One-Forty-One Plantations (consortium incl. the

Campbell Group and Australia’s Future Fund)

• Purchased three rotations (of plantations) and rights to use the

plantation land for commercial forestry (via a 100+ year lease)

• State retains land, water and carbon rights and FSA remains (as

a planation manager on a 5 + 5 years basis)

• Treasurer’s conditions met – contractual obligations (i.e. on

rotation length, domestic supply and a reporting / penalty regime)

• Significant de-risking of the State (e.g. in terms of the impacts of

commercial, silvercultural and natural disaster events)

• A-G’s findings (October 2013) – acknowledged that “DTF

implemented sound processes and controls …”

FSA – Key Challenges

• Stakeholder management (e.g. S-E region concerns with industry

and employment impacts, RIS process and SEFIR)

• Target entity co-operation – esp. board and senior management

• Commerciality of sales model (e.g. nature of property rights and

FSA’s plantation management role)

• Policy complexities (e.g. forestry conditions, water policy and fire

protection)

• Business conditions (esp. for structural grade timber and pulp)

• CHH / CFMEU applying pressure (in the final 3-4 months) – one

outcome was a commitment to a $27 million industry co-

investment fund in the S-E region

• Resourcing – balance of “in-house” versus “consultancy”

resources (difficulty in DTF recruiting the necessary skills)

• Project management – lots of moving parts …

FSA – Key Learnings

1. Retain control of the project – there are key policy and

legal questions as well as commercial issues …

2. Governance – DTF used a multi-agency Steering

Committee with a probity adviser (reporting direct to the

Treasurer) and a range of working groups / specialist

advisors

3. In-house team – need adequate resourcing, a diverse

skill set and avoid a standing start (planning) – better one

too many than one too few …

4. External advisors – prior sector and government asset

sales experience are key factors ...

5. Timing – be realistic and be prepared for a marathon and

not a sprint …

Key Parameters – SA Lotteries (SAL)

Master Agency Agreement

• Announced in the 2011/12 Budget (June 2011)

• A key objective was to position the SAL brands to grow in the

face of market changes (e.g. new technology and competition)

• Preserve (rate) and grow (volume of) gambling tax revenue (i.e.

for the hospitals and sport and rec. funds)

• Maintain a strong consumer protection regime

• Treasurer’s conditions: – Agents (agency fees kept stable at current rates, agency commissions

maintained and contracts reset on 5 + 5 years basis); and

– SAL staff (no redundancies for non-executive staff, staff entitlements

preserved and a new contract manager role for SAL).

• Developed a model to maximise price, protect the tax take,

transfer risk and meet various agents / policy commitments

SAL – Key Outcomes

• Financial close (December 2012) – $427 million (incl. stp. duty)

• Purchaser was Tatts Group

• Purchased the exclusive right to operate the SAL brands and

products for 40 years

• State retains ownership of the SAL brands and tax continues to

be paid (at existing rates) to hospitals and sport and rec. funds

• SAL will remain (in a revised capacity) to administer the master

agency agreement

• Treasurer’s conditions met – contractual obligations (e.g. on

agent’s fees, agency commissions and contract renewal)

• Significant de-risking of the State (e.g. in terms of future

commercial and technological impacts on dividends and tax take)

• A-G’s findings (October 2013) – acknowledged that “DTF

implemented sound processes and controls …”

SAL – Key Challenges

• Trade-off issues:

» upfront sale price vs. ongoing tax take;

» legislative vs. contractual model; and

» competitive process vs. small bidder field.

• Getting comfortable with sales price (rather than tax rates)

as the key variable …

• Getting comfortable with a contractual model (for

assignment of property rights) …

• Getting comfortable with a direct negotiation approach

(with a fall back competitive process) …

• Maintaining confidentiality …

• Stakeholder management (less so than FSA)

• Project management (less so than FSA)

SAL – Key Learnings

1. As per FSA (esp. retaining control and governance

through a multi-agency Steering Committee (reporting

direct to the Treasurer))

2. Be flexible – no two transactions are the same …

3. Listen to your advisors (but test their advice) …

4. Stakeholders – identify early, esp. those that could

disrupt the sales process …

5. It isn’t always over when the ink is dry – there can be

considerable post-transaction activity (i.e. 18 month

transition period for SAL / Tatts)

Key Reasons for Asset Sales

• A matter for the Government of the day

• Can include one, some or all of the following:

» Retire debt and improve the State’s credit rating

(protect or regain AAA rating or other fiscal targets);

» Recycle debt for key infrastructure investment;

» Risk transfer (e.g. reduce exposure to commercial,

natural disaster, capital cost events, etc.); and

» Recognition that the private sector may be able to

achieve greater efficiency and productivity gains.

Key Treasury Perspectives

• Selling income producing assets » need a robust retention / reserve price hurdle (to inform the trade-off between

operating and debt impacts)

• Treatment of embedded CSO / policy activities of Government

Business Enterprises being divested » either cease these activities, transfer or fund from budget

» if funded from budget, then need to include these (continuing) costs in the

reserve price hurdle

• Risk transfer aims » need to be clear about this and ensure these are put on the table (and priced)

as part of a structured sales process

• Infrastructure recycling » need to be clear about why asset sale proceeds are being recycled rather than

used to retire debt (e.g. a focus on priority assets / services and / or

overcoming barriers to private sector investment)

Questions ?