On February 1, a government resolution launched a pilot project allowing to sell virtually all unprocessed timber traded in Ukraine through electronic auctions.
This change is the second integral component of making the Ukrainian timber market legal along with applying the electronic timber management system throughout the country.
Both changes are recommendations of the Better Regulation Delivery Office (BRDO), which experts have drafted relevant resolutions together with the State Forest Resources Agency and Prozorro.Sales.
The way it was before: some timber was sold by logging companies under so-called “direct contracts”.
This is when forestry directors directly agree with buyers to sell the timber they harvest without going through transparent electronic auctions, but at a price and volumes that they themselves agree to. There were many corruption schemes in this case.
For example, forestry directors offered buyers to purchase timber at a below-market price by using kick-back schemes.
Or, say, directors put up the timber for auction at an inflated price and then informally offered buyers to do without the auction, offering a lower price, but with a “kick-back”.
In these and other schemes, such purchase and sale transactions were not accounted for at fair value, and both the price and the volume of timber sold was not included in the electronic timber management system when sold by communal forestry farms.
As a result, the logging company did not receive the profit it would have received in the case of selling timber at the market price and with no corruption component and reduced its profitability.
As a result, all Ukrainian citizens lose money from such schemes in the form of forgone dividends and taxes to the state budget.
If we add the volume of the illegal timber market, which, according to experts, accounts for about 12,000 illegal sawmills, or 20% of the total market, the Ukrainians lost about 200 million hryvnias of state budget revenues annually from non-transparent activities and corruption in the timber market.
And that’s even not taking into account the fact that till now, the state did not have information about the sale of about 25% of the forest fund, since not all forest users introduced electronic timber management – counting and chipping of every fell tree, which should increase the risk of illegal logging. Therefore, this is a rough estimate of losses.
The way it will be now: all forest users are obliged to sell timber through electronic auctions and use the electronic timber management system to monitor the circulation of the available resource, i.e. the sales.
It will be impossible to do without the auction, as all timber transactions will be recorded in the electronic system.
If the resource “disappears” from the asset list of a certain forestry, the reason for this can be only the result of an open electronic auction. Otherwise, they will deal with law enforcement officers.
Auctions will be held on several marketplaces: Prozorro.Sales for large lots of large forestry companies with a volume of 150 cubic meters of timber or more than 200 thousand hryvnias (about 25% of all transactions in the timber market) and other electronic auction systems (such as the LIAC known for many forestry farms), if the volume is smaller.
Participation in auctions in the Prozorro.Sales system will cost the registration fee for participants (from 340 to 1,700 hryvnias).
In addition, auction participants should pay a guarantee fee of 5% of the starting price confirming their serious intentions.
The guarantee payment is refunded if the auction participant loses, or is included in the amount to pay for the lot.
In case of winning the lot, the participant should pay 1.5% of the lot price in the form of a service fee, which is distributed as follows: 30% of the amount for the Prozorro.Sales system operation and 70% – for marketplaces providing participants with technological, legal and other support in the auction.
According to the Prozorro.Sales calculations, the percentage of the service fee can be reduced by half in case of complete transition of all timber auctions to the Prozorro.Sales system.
However, the system needs to be upgraded for the further specialized work with large volumes of timber auctions.
Such changes introduce clear trade mechanisms with competitive but not “contractual” timber pricing, while leading to market unshadowing, systematic filling of the state budget instead of private pockets of administrators of the forest, which is our common exhaustive resource.
The transparent rules of the game will allow logging companies to sell timber at higher and competitive prices.
Since it is the pilot project, it will allow the government to currently eliminate the barriers to the activities of both honest forest users and transparent businesses.
What changes should be made. Objectively, we should not only increase the profitability of logging companies, but also systematically invest in restoration and protection of forests as our shared, vulnerable ad limited resource.
Our position is that the government and parliament should provide funding for the forest protection and restoration, including planting of forests on new lands, fire prevention, combating illegal logging and pests.
Such funding can be envisaged by resuming state targeted programs or reducing the rate on payment of state forestry dividends.
Conclusion. Obviously, those who made money from non-competitive timber sales and are not ready to compete on transparent rules with other market participants will oppose to fill the state budget with about a quarter of a million hryvnias annually.
Including competing with foreign entrepreneurs who are ready to pay a competitive price and fill the Ukrainian budget.
However, even under these conditions, domestic forest processing companies will not remain without timber, because they have a much better understanding of the domestic market.
And if there is the real opposition, it will be a sure signal that changes are working for the benefit of all citizens.