In search of balance: Is the forest a source of income or social value?

Recently, unfair comments on anti-corruption mechanisms implemented in the timber market and allowing to clearly understand what is happening in this sector for the first time in three decades of Ukrainian independence have appeared in the media.  

In particular, we are talking about the introduction of the application “Forest in a smartphone” that serves as an interactive map of Ukraine showing areas of deforestation based on logging cards. This map allows you to distinguish whether the deforestation you found out while walking in the forest is unauthorized or permitted by a special document, as well as notify the State Forest Resources Agency if the legality of this felling is questionable.

But there is one catch.

The online map only reflects realities (felling based on logging cards), but it does not work as a law enforcement agency or regulator. Many legal conflicts are creating the potential for abuse in the forest sector. One of them is related to the logging cards. These are documents that allow you to cut down a certain amount of forest in a certain area; they are the basis for paying rent for forest use.

The problem is that Ukrainian legislation gives the authority to issue logging cards to both the State Forest Resources Agency (for principal use felling) and logging companies. That is, the latter give logging permits to themselves for sanitary and other types of felling. This is one of the keys to Pandora’s box in the forest sector.

Also, there is another significant conflict. The Forest Code stipulates that the logging card issued free of charge based on scientific standards and calculated felling rates (felling rates for each forest user based on the principles of continuity and inexhaustibility of forest resources) approved by the Ministry of Ecology and Natural Resources provides forest users with the right to harvest timber.

At the same time, the Law “On Environmental Impact Assessment” stipulating that logging operators should undergo a paid mechanism for environmental impact assessment following the standards approved by the Ministry of Ecology and Natural Resources was adopted. Thus, these two laws create two parallel procedures for obtaining the right to harvest timber (the logging card, which is a permit document, and a conclusion on environmental impact assessment), while the standards for them are approved by the same line ministry.

Forest experts who have analyzed this year’s large-scale forest fires indicate the lack of thinning in debris-strewn forests, nature reserves, and exclusion zone among the fire reasons, in addition to fire setting and careless handling of fire. The environmental legislation, in particular, the laws of Ukraine “On Fauna”, “On Environmental Impact Assessment” and “On Nature Reserve Fund” prohibit, in particular, fire prevention felling due to the possible adverse effects on animals during the breeding season (season of silence from April 1 to June 1), which, of course, are considered very important rules.

Additionally, any felling is prohibited at any time in protected areas. However, the lack of thinning in the woods does not allow firefighters to bring the fire under control efficiently and quickly. According to the State Forest Resources Agency and the State Emergency Service, the losses from one week of fires amounted to more than 1.5 billion hryvnias in the Zhytomyr region alone, and this is equivalent to ten years of losses from illegal deforestation. And this problem should also be solved.

In general, due to the lack of sound forest policy and ambiguous legislation, Ukraine has suffered a billion hryvnias in losses from illegal felling in the last few years. Of course, several important steps have recently been taken to significantly narrow the problems in the timber market. For example, an electronic timber management system involving the chipping of harvested timber with special tags was introduced. First of all, this allows combating the shadow trade. Moreover, the system of selling timber through auctions instead of direct contracts from loggers to buyers, which created a lot of corruption risks, was finally introduced. However, the reform of the sector, which has been conducive to illegal schemes for years, should be comprehensive, structured, and ensured at the legislative level.

Experts of the Better Regulation Delivery Office (BRDO) propose to supplement the system of electronic anti-corruption tools and mechanisms (already mentioned “Forest in a smartphone”, electronic timber management and forest auctions) with amendments to the relevant laws for the following purposes:

to take the right to issue permits for felling from logging companies and give this right to the State Forest Resources Agency as a single institution responsible for forest policy;

  • to introduce criminal and administrative liability for the use of illegal timber (imposing liability not only on those who illegally cut and sell timber but also those who agreed to buy it without proper documents and tags);
  • to introduce certification of the origin of timber for export making it impossible to sell illegal timber abroad;
  • to resolve a conflict involving the existence of parallel procedures for obtaining a logging permit;
  • to propose a mechanism for identifying certain areas in protected areas and in the exclusion zone, where controlled thinning of trees can be carried out at a given time under specific conditions.

Special attention should be paid to forest restoration and the implementation of fire prevention measures by forest users. It turns out that fire-fighting measures have not been financed from the state budget of Ukraine since 2016, although this is a European practice applied before. Additionally, state logging companies do not have the resources to purchase fire-fighting equipment. According to Ukrainian legislation, forestry enterprises should pay the following contributions to the budget:

  • rent for forest use (based on logging cards; in 2019, the total rent was 185 million hryvnias);
  • income tax;
  • compulsory taxes (unified social taxes for employees);
  • land tax (because the forest grows on this land; in 2019, it totaled 108 million hryvnias);
  • 80% of dividends (until May 2020, it was as much as 90%, which amounted to 255.8 million hryvnias in 2019).

The Forest Resources Agency estimated that 314 state-owned logging companies have an average of UAH 90,000 remained to upgrade their main fire-fighting equipment last year. For example, an HTZ-150K tractor designed for fire-fighting works costs 1.5 million hryvnias, an MTZ-892 tractor costs half a million hryvnias, and a fire-fighting vehicle costs from 4 to 10 million hryvnias.

This problem exists due to the ambiguous understanding of forest relations. On the one hand, the forest has a socio-economic component: state forestry enterprises are designed to make a profit and send it to the state budget. On the other hand, the forest is also regulated in terms of environmental legislation aimed at preserving green planting and reducing damage from economic activities.

At the same time, the government requires the income from forestry enterprises, but does not invest money in reforestation: in 2019, the state budget received more than six billion hryvnias in profits from logging companies, while only 280 million hryvnias were provided for salaries and other expenses.

For comparison, in Germany, where more than 60% of forests are private, all reforestation and pest management measures are funded by the state, and state-owned logging companies pay only national taxes, keeping dividends. However, companies do not pocket this income: they use dividends to form a reserve, which is spent exclusively on the equipment purchase, reforestation, and so on. Expenditure items are regulated by law.

In this context, we propose to consider the idea of ​​developing a sectoral law on the management of the publicly owned property in the field of forestry that will introduce some other form of taxation implying that 30% of dividends should go to the state budget and 70% of them should form an enterprise development fund instead of privatization or shareholding.

At the same time, following the example of German colleagues, the fund’s resources should be used for an exhaustive list of expenditure items, including reforestation and equipment upgrades. In addition to raising funds for ensuring tree planting and purchasing fire-fighting equipment, this will stimulate enterprises to carry out efficient economic activities: now state-owned forestry enterprises are not interested in profitability, as the state takes all the money earned.

If such a mechanism is introduced, low-resource enterprises (in Odesa, Kherson, and other regions, where there are not many forests) should be funded from the state budget. Additionally, the cancelation of the land tax for state forestry enterprises should be considered, as the government imposes a felling rent on companies. In such a way, we will be able to balance the social and economic component of forestry activities.

Summing up, I will say that it is necessary to develop a comprehensive document (a forest policy) and enshrine it in the form of the Law of Ukraine to ensure the irreversible, clear, and effective development of the forest industry. The public policy developed in cooperation with stakeholders and taking into account the interests of entrepreneurs, environmentalists, the state (filling the budget) and citizens will outline the direction for the forestry industry to move over the next five or even ten years.

It is impossible to talk about the sustainable development of the industry without such a global vision of the state. Therefore, we encourage the relevant ministry and stakeholders to start such a dialogue as soon as possible.