5% from the needs are allocated for forest reserves restoration

01-05-2017

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Photos of bare Carpathians or trucks with the round timber from southern regions became symbols of the disaster in forestry. And the argument to continue the moratorium on timber export. But will the ban save the forest?

– The moratorium was imposed to protect our nature. How effective is this tool?

– When the state protects its resources including the forest it can choose different types of restrictions. For example, licensing, quotas, export taxes or export bans. The ban is a tool that restricts the most. Although, it can be used in accordance with WTO standards but only in the case when there is a threat to national security or with the aim to save natural resources. The moratorium was imposed exactly with this argument. And now before its removing or continuing, the state must answer a range of important questions.

What did the state get from the moratorium – incomes or expenses, and how many. Did we succeed to achieve the effect of redistribution between domestic producers? Woodworkers claimed that the moratorium would allow effectively attract investments and create new quality production. But their amount does not grow for some reason.

– But why? Ukrainian Sawmills began to work last year attracting about 20 million euro investment in Rivne region…

– There are single examples, but we did not see the system growth of the sector that had to be observed after moratorium imposing. We need to find out the reason why it had happened.

 There are another two important aspects. In general, the moratorium provides the strong protection effect for domestic producers, and grades the costs of these producers, which increased because of other economic reasons. But the main moment is the consumer’s effect. whether the moratorium was useful for final consumers.

The biggest consumer is the timber industry. We need to realize how much timber it consumes, which one, we need to figure out how the access to the resource will influence the sector’s growth for at least 5 or even 10 years. There are no answers to these questions just like to the questions about the moratorium impact to this! There are no figures, so what analysis and forecast we can speak about? And this is the basis to take any decisions.

– But there is an export statistics…

– It is not all that fine there. We compared the statistics of industrial timber export, our and European one, and found out significant differences. In 2015, when the moratorium on round timber export first was introduced, Ukraine declared much more firewood (fireplace log pieces) export data than Europe. But the export of raw timber is lower according to the European statistics data. And the difference between the firewood and industrial timber are those 0.55 million cubic meters, but according to another data, we had exported more firewood, according to another one it was the industrial wood… This is a raw export.

– How can these “loopholes” be possible at the border?

– The problem is that we do not still have clear definition of timber product categories. 50% from 100 commodity items do not have clear definitions… Economic entities often determine qualitative and technical characteristics of the transaction subject (timber) in their certificates. There is even no description of processed timber! Till this year, even integrally-processed timber had got into the “timber” classification until the State Forestry Agency’s Decree has been enacted. There are limits of two meters in length now. As a result, people cut industrial timber to two meters or make the cut on a beam and export like “firewood”

By the way, we can explain growing losses from illegal logging just with the uncertainty of the forest as a commodity. Compared to 2011, losses increased by 77.5%, from 49 to 87 million UAH. And only 5-7% of these cases of such poaching are reviewed by law enforcement bodies. In most cases, they even do not reach the court due to the inability to prove the crime. For the entire 2016, as many as 15 cases of illegal loggings as administrative violations were brought to court in Ukraine. Seven cases of them were returned because of wrong protocols, eight cases were considered. But nobody was brought to administrative responsibility in every case! And in 2015, punitive sanctions up to 185 UAH were accrued by results of reviewed cases. Such loggings are not considered as criminal offenses at all as articles of the Criminal Code do not determine the essential damage amount. This problem requires to adopt legislative amendments as soon as possible; impunity will only lead to the increasing number of illegal loggings.

– Did the introduction of the timber chipping system improve the situation in the sector?

– First, we need to understand that we just began to develop this system. Timber inventory was introduced only in enterprises of the State Forestry Agency, it is 73% of forest reserves. Other enterprises including state-owned defence enterprises, public utility companies, Chernobyl still do not use labels.

– Is chip compulsive for exports?

– Unfortunately, it is not. According to EU directives, certificates of conformity are necessary, but while there is no single system of timber inventory implemented in Ukraine, chips are not prescribed by laws. Although there is the draft resolution of the Cabinet of Ministers on this topic.

Inventory systems are vital for the sector’s efficient operation in Ukraine. Forest and timber inventory. Forest inventory as a kind of census was last conducted in 1996. This work must be financed from the budget by the decision of the Cabinet of Ministers. But the funds have not been allocated all over these years. However, this inventory is the basis of a forest cadaster. And any investor we would like to engage in this sector must understand resource amounts and quality and have an access to open and checked information…

There is another severe problem related to the financing – forest reserves recovery. Forests age in most forestry enterprises is such that it must actively be “reduced” to 60 years. But de facto there is no budgeting to plant, especially in southern regions where forestry enterprises have less income than in northern regions.

– Are forestry enterprises so unprofitable?

– Every year forestry enterprises replenish the budgets of all levels with 3.2 billion UAH. However, the amounts allocated from the state budget to recover forest reserves are constantly decreasing. For example, in 2015, about 53% of funds were allocated, in 2016, this figure dropped significantly – to 8.5% of the demand, and this amount is even less in the budget of 2017 – about 5%.

– But the problem will only increase in future. What solutions are proposed?

– We consider the idea to unite 312 forestry enterprises – both rich northern enterprises and poor southern ones, then to finance new plantings in Ukraine from the general budget. But a format of this new organization is also discussed. For example, there can be difficulties when creating the corporation. Our legislation has not yet proscribed a mechanism to establish such organizations based on state enterprises, so, there can be management risks, income redistribution, dividends payment, etc. In addition, there are about 70 institutions, for example, research institutes, and 40 forestry enterprises are financed directly from the state budget. How to include them in the corporation? We believe that a public joint-stock company is the most prescribed corporation format today.

We propose to create a special state fund as a possible option to finance the forest restoration. If the forest sector brings 3.2 billion UAH in the budget annually, and it is required 1 billion UAH for the restoration, then it should be given – it makes sense.

Time will show what option – whether the forestry association or the fund creation – will be adopted.

– Are there examples of private capital desire to participate in forest plantations?

– The Forest Code recognizes private property, and we will come to that sooner or later. But now it is early to speak about it. Now there is less than 0.1% of the total area of private forests. In most countries, forest is a resource like subsoil and water, it is national one. As for the option of public-private partnership when business assumes the cost of planting and areas protection? It is hardly probable that private investors will choose such projects, which reward they will see in 50 years. Probably, it will be more interesting for investors to engage in timber processing, furniture manufacturing and so on.

And as the forest is a resource, then the government’s task is to create a system with free and clear access to this resource, from the use of which the taxes would be received. Imperfections of our legislation now lead to the fact that the forest is only a resource for certain groups of people…

What aims does the state have? To encourage the development of domestic production? Whether should the preferences be provided for domestic investors only or for everyone? The state must determine the volume produced in the market and the access for certain categories of investors.

The model with unlimited access to the resource was used in that types of businesses, which have been created over the last years. We admit that it was not improvident from the state’s side. The good news is that the access to the resource is already provided through auctions.

– Let us return to the export. Is the timber for such supplies being bought at auctions?

– Not always. The timber is prepared and then it goes to auctions. Who and with what aim buys it there – to produce or to export – is not being monitored. But the main thing is that only 30-40% are bought out from the amount offered for auctions. And then it is legislatively prescribed that the timber, which was not sold at auctions, is given to state-owned enterprises by direct agreements. In most cases, the bidders consciously increase prices to ensure that timber is not bought up, so the auction would not take place, and they can buy it independently and directly.

– So, the auctions are not an effective tool?

– It requires to be improved. It is necessary to sell all unprocessed timber through auctions. And it is essentially important to register wood as the commodity category. Now our forest is just a resource needed to be protected.

And no document prescribes what the forest is, when it was cut, in what moment it becomes a commodity, how to determine its price and how to consider it. There was the same problem in most of post-Soviet countries. But, for example, Russia solved the problem in 2014, when it prescribed timber as a commodity in the Forest Code and introduced the electronic inventory of both forests (that grow) and forests (commodity). Now the resolution of the Cabinet of Ministers on improving the timber trade is being prepared. The work on the creation of a single system of electronic inventory is being continued. It is also necessary to amend the Criminal and Forest Codes. We started the dialogue with regulators and market participants as part of the roundtable “Regulatory jungles: Is the forest a commodity or resource?”, during which we presented the analytical research of market issues and possible solutions, on Thursday. Details are on our website, join us.

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