The European Green Deal may affect the volumes and methods of timber harvesting in Latvia, which could set the stage for changes in wood processing and the entire forestry sector
2021 will be a kind of watershed year in which concrete decisions will be taken at the European Union level that will directly or indirectly affect forestry in Latvia. Furthermore, we must bear in mind that we will also see data from the natural values census in Latvia this year, and decisions are possible in this context as well. In the opinion of several of those interviewed, the cocktail of the aforementioned facts and the coronavirus pandemic creates a thick fog when looking to the future.
Auditors' conclusions
Timber buyers are most interested in the activities of Latvia's biggest player – the state forest manager AS Latvijas valsts meži (LVM), especially the volume of timber being sold, sales procedures, and the requirements set for potential buyers. In the summer of 2020, after the compliance of the sale of roundwood – industrial wood – with regulations was questioned, the council of AS Latvijas valsts meži began evaluating the company's roundwood sales process for compliance with internal and external regulations, forestry sector guidelines, LVM's medium-term strategy, and the economic interests of the company's owner, as well as good business practice. The audit/evaluation engaged external assessors – the law firm Sorainen, SIA Deloitte Latvia, and Jānis Kārkliņš, a law expert from the Latvian Council of Science, specifically to conduct the legal expertise. “The independent auditors, having evaluated 2760 documents, concluded that the LVM roundwood assortment sales process complies with both external and internal company legislation, and that this process has been economically efficient and in line with the shareholder's interests, as it allowed for additional profit of 14.5 million euros between 2016 and 2020,” says Jurģis Jansons, Chairman of the Council of AS Latvijas valsts meži, regarding the auditors' conclusion. He recalls that LVM gained a much higher economic benefit by selling industrial wood than by not doing so, and furthermore, buyers purchased industrial wood even during times when the pulpwood market had come to a standstill.
In turn, this evaluation and the proposals received from timber buyers served as a basis for developing an action plan to further improve the roundwood assortment sales process, which would make the sales process even more transparent and predictable for market participants while simultaneously reducing any potential future competition risks.
“The action plan includes 19 potential risks, for which we expect action from the company's management to mitigate them, so that production and sales would be much clearer for everyone – not just for potential buyers, but also for external assessors,” points out J. Jansons. He illustrates his point with an example: it is necessary to review and strengthen the LVM debtor control process by supplementing the principles for assessing the cooperation period, financial risk analysis, and terms for payment extensions. “There is a recommendation to clarify the definition of what a manufacturing company is – is it a factory with a smoking chimney, or is it a company that is developing a facility, or is it at some stage of formation,” explains J. Jansons.
Observers could be involved
“The external audit confirms that every timber buyer has participated in the procurement under equal conditions – in an open procurement procedure – and purchased timber at the price they bid themselves,” is how Edvīns Zakovics, member of the board of AS LVM, assesses the situation. He points out that the auditors primarily evaluated the economic expediency and legality of the sales, but that reputation is very important in business today. “Following the accusations made in the public sphere, until the moment the external assessors provided their opinions, one of LVM's foreign partners, to whom wood chips for burning were supplied, froze the signed supply contract, but now we hope that its operation will be restored,” notes E. Zakovics.
He believes that the aspect regarding the sale of timber at the maximum possible highest price in connection with its delivery costs will be very important. Specifically, to avoid situations where a conditional unit of timber located by the roadside near Cēsis is bought for 10 euros in Valmiera, for example, but for 11.5 euros in Ventspils, and the company has to recognise the one who promises to pay more as the winner, even though the transport costs essentially reduce the company's profit. Therefore, looking through the norms of the Competition Law and their interlocking with economic expediency, intellectual capital will be required so that, in time, it could be clearly stated to everyone that the most important thing was not to get the highest price, but profit from each specific sales transaction. “It is possible that independent observers will need to be invited to sales procedures, so that there is no need to explain these specific situations several years later,” says E. Zakovics.
Accusations with consequences
“Unfortunately, in today's public environment, it is very easy to make unfounded accusations and cast a shadow of doubt over a company, and this can have far-reaching and severe consequences. In this case, misleading information about the industrial wood sales process appeared in the public sphere simultaneously with information about the possible privatisation of strategic state companies. We could observe that it began to be used both to ruin LVM's reputation and as an argument to justify the potential privatisation of the company,” explains Kristaps Klauss, Executive Director of the Latvian Forest Industry Federation. He emphasises: the audit results prove that this privatisation argument has turned out to be completely unfounded. “It must also be taken into account that ruining the reputation of companies that work in the international market with international partners can cause severe consequences and cost the entire Latvian economy very dearly,” says K. Klauss. He stresses that the auditors confirmed once again: the conditions for timber sales at Latvia's largest industry company are the same for all interested parties. The audits also repeatedly showed that LVM's practice of producing the types of wood products that are in demand and necessary for local manufacturers has promoted the development of the Latvian economy and increased the industry's and Latvia's overall export capacity. For this very reason, several of the timber industrialists interviewed believe that questioning the existing roundwood sales order, or even more so, a potential change of its basic elements, or worse, dismantling it, would essentially mean weakening the competitiveness of local manufacturers, because predictable access to wood resources would be lost, which in turn raises questions about investments in wood processing in Latvia, as well as about jobs and the amounts of tax payments. Timber buyers are most interested in predictability and stability regarding timber supplies and their purchase conditions.
Higher harvesting volumes
Timber industrialists had more good news last year. Namely, the maximum permissible wood harvesting volume for 2021–2025 in state forests for final felling was already accepted by the government in mid-August 2020, and the timber harvesting volumes set therein are higher than what was permitted in 2016–2020. Thus, in the forests managed by the state forest manager AS Latvijas valsts meži, it will be possible to harvest 24.111 million m3 of timber in final felling over the next five years, which is about 0.6 million m3 more than was permitted to be harvested in the previous five years (23.432 million m3).
At the same time, it must be taken into account that the timber harvesting volume in the next five years by area will be smaller (85,675.7 ha), which is less than it was in the previous five years (88,135.1 ha). According to foresters, the mentioned figures indicate more efficient forestry, because more m3 will be harvested from smaller areas. However, not only the total maximum amount of timber to be harvested is important, but also its distribution by dominant tree species. Thus, between 2021 and 2025, it will be possible to harvest 9 million m3 of pine, while in the previous five years the volume was 8.79 million m3; spruce correspondingly 3.96 million m3, while in the previous period it was only 3.33 million m3; in turn, for birch it is 7.81 million m3, whereas between 2016 and 2020 it was possible to harvest 8.55 million m3.
The maximum permissible wood harvesting volume in final felling is determined for each state forest manager separately – LVM, the Nature Conservation Agency, state scientific research forests, the National Armed Forces, and professional education institutions, broken down by dominant tree species in hectares and informatively in cubic metres derived from the area.
The distant future – foggy
“Nothing will be as stable as change in the future,” expresses Mārtiņš Gaigals, head of the strategy committee of the state forest management company AS Latvijas valsts meži. In his opinion, wandering in the fog characterises the current era. “The goal – productivity and income – forms the basis for sustainable growth; it is formulated in Latvia's National Development Plan 2021–2027,” emphasises M. Gaigals. In his view, good and valuable things do not always have to be bright and loud.
“Latvia's forest policy states what the state wants from its forest – that the value of the capital does not decrease and that the state receives profit (dividends) from this property, which is why the LVM strategy also envisions the company being a careful forest steward,” says M. Gaigals. He shows the results of LVM's previous 20 years of management: the increase in forest value from 1.76 billion euros in 2000 to 2.61 billion euros in 2020; more than 1.1 billion euros paid in dividends and taxes; about one billion euros in salaries for the company's and service providers' employees, not forgetting about nature. The unutilised potential of encumbrances is worth almost 100 million euros, a 50 million euro investment in social development, and 12 million euros in science and education.
“This same strategy for LVM is also envisaged for the next five years, earning an average of 40 to 50 million euros annually and paying dividends to the owner – the Latvian state,” says M. Gaigals. He reminds: forestry guidelines dictate that forestry and wood processing are manufacturing. “One can argue that non-material production is beautiful, refreshing, charming, but only as far as someone is willing to pay for it,” says M. Gaigals.
The goal of LVM's operation is sustainable – economically profitable, environmentally friendly, socially responsible – management, and the company has a plan for the next 120 years on how to manage the 2.6 billion euro property and increase its value, steadily supply timber, and, without changing the proportion of tree species in the forests, continue to increase the wood stock in the forest. “But there is another definition of sustainable development – it is development that ensures the satisfaction of today's needs without creating threats to the satisfaction of future generations' needs,” emphasises M. Gaigals. He points out that it is essential for the company to think not only about profit but also about issues relevant to society. “Society is not waiting for money, because 57% of those surveyed consider health to be the most important, 37% – reduction of inequality, education, but in 2020 additional funds had to be found for these important areas,” says M. Gaigals. He points out that 63% of those surveyed consider care for environmental protection important, but only half of them are prepared to pay for it.
Few options for manoeuvre
“Even though LVM is increasing the proportion of 70-year-old forests in its forests and continues to manage significant habitat territories, as well as conducts environmental monitoring and funds research, LVM continues to buy land because, due to growing distrust, the company is left with less and less space to exercise its responsibility towards the environment. We grow timber on 83% of the entrusted forest land, and we manage the rest with the goal of nature conservation – preservation of biological diversity, without interference or by carrying out biotechnical measures,” M. Gaigals shows the situation.
At the same time, a protection plan for woodpeckers and owls is currently being developed, but the area of EU-significance habitats in the forests managed by LVM is already 276,790 ha, which means 4.5 million m3 less timber realisation over five years, almost 73 million euros less in dividends for the state, and the loss of 8600 jobs in Latvia. “Is Europe the place where forest areas are shrinking? No, in Europe they grew by 1.2% in 2000–2010, and by another 0.3% in 2010–2020, but there will be a green deal in Europe. What this will mean, we will find out when we define it. What do primary old forests mean, what does strict protection mean, what does biological diversity and forestry friendly to it mean; what is that network of protected territories that needs to be improved and expanded. However, we are in a time crunch, because 2021 is the moment when there must be clarity,” analyses M. Gaigals. He reminds that forest areas have decreased by 7.3% in Africa over twenty years, and by 7.8% in South America. He points to the conclusion of a German institute's study: EU roundwood production volumes will be only 69%.
“I think that this forecast – 30% less roundwood – is also very close to the potential situation in Latvia, only this shortfall in the EU will be compensated by supplies from Brazil, Russia. But will the world's climate benefit from such actions? I doubt it, because these countries are already intensively losing their forest areas and the risk of species extinction in them is higher than in Europe, where countries invest much more in the restoration of biological diversity,” says M. Gaigals. In his opinion, the preservation of biological diversity must be based on scientific research, balancing all interests with concrete indicators. The European Green Deal creates great opportunities – to live in a cleaner environment, to use resources more rationally, to make the transition from fossil to renewable resources, to use more wood products in construction. “There have never been such productive forests, with such a large wood stock, as there are in Latvia currently, but the risks are in our own heads – to run after someone, to save the world by finishing ourselves off, and also distrust is to blame,” says M. Gaigals. He points out that LVM, in cooperation with scientists, is trying both to understand the opportunities and also to identify the potential risks that could be associated with forestry.
“LVM will continue to increase its contribution to mitigating climate change – by increasing carbon sequestration from forest cultivation (up to 11.5 million t CO2) and from supplied wood products (5.9 million t CO2), by creating a careful attitude towards the forest environment, by increasing productivity and efficiency, thereby reducing resource consumption,” says M. Gaigals. He points out that LVM will continue cost optimisation within the company in 2021–2025 and will also invite cooperation partners to reduce their costs. A new investment programme has also been developed, which provides for the development of forest roads (94.8% of forests within 800 m of a road by 2025) and also the creation of a fourth strategic tree nursery, so that in 2024 it would be possible to sell 68.2 million seedlings (56 million were sold last year). LVM will also support social responsibility programmes (0.5–1.0% annually of turnover), invest in research and innovation programmes (0.6–1.2% annually of the average net turnover of the previous five years), and donate (in the amount of 5–10% of the average planned annual profit before corporate income tax in a five-year period).