Investors who were burned in the demise of Australian Plantation Timber Ltd can take some small revenge by closing their accounts with the Commonwealth Bank. As an extra, they can stick a nice big picture of John Ralph on the most appropriate door of their house and throw darts at it. Investors subscribed $70 million to APL's float in February last year. The shares were issued at $2.10 and touched $3.50 on their first day. Those who stagged were the smart ones because it was all downhill from there. The shares held around issue price until October and then slid to 40¢, before the administrators walked in last Monday. Almost all APL's income was derived from selling tax-deductible timberlots. Until a couple of years ago, APL could have sold a forestry scheme to a customer and then had 13 months to actually buy the land and plant the trees. Customers typically invested in June and got their deductions for that tax year but the trees were not actually planted until the following July and August the best season for blue gums. This entailed some risk to the Australian Taxation Office's revenue if an unscrupulous promoter failed to plant the trees. The Ralph Committee changed all that by recommending that tax deductions should only be allowable if the forestry company already held the land. When that recommendation became law last November, it changed the risk profile of the forestry company - and the direction of its cash flow. Under the new rules, APL had to borrow from the CBA to buy the land and recoup the costs from its tax-minimising customers when they rolled up next June. This meant that when APL was buying the land it had to guess how many trees customers would want to buy at the end of the financial year. In 1999-00, APL's salesmen went into overdrive. From planting a modest couple of thousand hectares of blue gums a year, APL suddenly became Australia's biggest operator, planting 24,000 hectares. But in 2000-01, APL got it wrong. They embarked on an ambitious land-buying program but the customers got cold feet late in the financial year when the ATO began lowering the boom on various agricultural tax minimisation schemes. (APL's schemes had the backing of a product ruling from the ATO and so should have been safe or as safe as anything is likely to be these days with the ATO.) Anyhow, APL didn't sell as many timberlots as it had anticipated and was left in June with a surplus of 7,000ha of bushland, which was financed by $30 million borrowed from the CBA. The loan was due to be rolled over on June 30. But the CBA dragged its feet (they didn't tell APL until 7.15pm on Friday, June 29 that the rollover was on hold). By July 30, the APL board decided it was in danger of trading insolvently and so called in the administrators. As a further wound, the CBA has so far declined to securitise $32 million in loans which APL has advanced to its customers. All this left APL facing a bill of $2 million, which it didn't have, for seedlings that are due to be planted now. Understandably, APL's descent into administration started a stampede for the exit, with shares of similar forestry companies such as Great Southern Plantations, Timbercorp and Forest Enterprises all going into a tailspin. A layman may well be a little puzzled by the fact that APL went into administration at a time when its 2000-01 revenue was expected to be about $80 million, its profit about $20 million and its net assets about $200 million. The balance sheet and profit and loss account looked OK but the profit was only an accounting profit. Because APL had spent more money than it had received and was operating on bank loans, its cash flow was negative. In fact, as long as it continued to expand, its cash flow was bound to be negative. The situation would be ameliorated when harvesting began because APL would receive a 10 per cent royalty on sales. However, the blue gums will not be mature enough to sell until they are 11 years old, so it will be another two years before the company can sell its first plantings, which are relatively small anyway. David Marshall of the agribusiness consultancy, van Eyk, said APL had managed its forestry operations well but its money badly. He said: "They effectively overgeared on the expectation of high sales but did not drive through the securitisation of their loan book in time. They bought the land before they securitised the receivables; or to put it another way, they bought illiquid assets against short-term debt." The other structural problem was that APL was not getting recurring income. Its future income depended on what the financial planners could flog to customers, and that depended on what emanated from the ATO. How the CBA gets out of this mess is unclear. It can move in receivers and maybe grab the loan book but the main asset of APL is nearly $200 million worth of land which is illiquid because it is (a) leased, (b) under management contracts and (c) covered with trees that belong to the customers. A workout should be the best solution, but the CBA is understood to be quite negative about APL. That means it probably won't provide $2 million to honour outstanding planting contracts for about 7,000ha, so those customers will lose their tax deductions and maybe their investments as well. Another wound will be inflicted on the 2020 Vision policy of the federal and State governments. That policy had aimed at trebling the area of Australia's plantations by the year 2020. That target was to have been achieved by planting an average of 80,000ha a year over 24 years. The policy airily assumed that $3 billion would be invested in forests (mostly by the private sector) over that period. However, the policy was never much more than a motherhood statement. It never stated just what incentives would be introduced to induce such an investment. In the absence of any specific incentives (and some specific assurances signed in blood by the ATO), that policy is now a dead duck.