The Forests of the Czech Republic, state enterprise (Lesy ČR, s. p.) did not react fast enough to the bark beetle calamity and sold wood at a price which was not cost-effective

Press release to audit No 19/33 – 8 June 2020

The Supreme Audit Office (SAO) verified how the Forests of the Czech Republic (hereinafter “FoCR”) proceeded in addressing the bark beetle calamity. The SAO also focused on selected items in the financial management of the FoCR between the years 2016 and 2018. According to the auditors, the FoCR and the Ministry of Agriculture (MoA) began to comprehensively address the bark beetle calamity as late as 2019. Also, compared to previous years, the state enterprise sold wood at a price which was not cost-effective. However, the FoCR managed to rectify shortcomings discovered by the SAO during a previous audit, such as FoCR’s management of unnecessary property and the purchase of services.

The bark beetle calamity started to escalate in 2016. However, the FoCR responded to this situation only with partial measures, for example, by restricting deliberate logging or by transferring workers to processing wood affected by the bark beetle. The MoA did not force the FoCR to proceed with greater urgency in addressing the calamity. The FoCR adopted a systemic solution only in 2019 in its strategy for the years 2019 to 2024.

The FoCR sold timber based on two business models mainly. According to the first model, the FoCR bore all the costs of logging and sold wood under its own management. In 2018, it sold about 7% of wood with an average price of CZK 1,263/m³.

The second model consisted of transferring the costs of logging or parts thereof to the customer. This way, the FoCR sold about 93% of wood in 2018. The average sale price of “standing” wood amounted to CZK 613/m³ in an electronic auction; the sale price for entire felled trees reached CZK 786/m³.

Until 2017, the second business model was more cost-effective for the FoCR. However, in the context of a severe bark beetle calamity, it was not as effective, due to increased costs and lower sale prices of wood. For this type of sale, the FoCR concludes long-term, usually five-year, comprehensive contracts for forestry work with its customers. However, this approach is not flexible enough. At the time of the calamity, the FoCR was not able to respond in time to the situation, when random logging was on the rise, the prices of wood were falling, and there was a shortage of workforce and forestry equipment on the market.

In the time before the calamity, the FoCR maintained its financial self-sufficiency. Since 2013, the legislation has allowed the MoA to decide on the allocation of part of the profits to the FoCR founder’s fund. Between 2013 and 2018, the FoCR transferred almost CZK 32 billion to it. The funds were transferred on the basis of MoA’s decision, even though the bark beetle calamity was escalating, and it did so to a far greater extent than the neighbouring countries of the Czech Republic. The fund was then entered by a resolution of the government into the state budget. In 2019, the volume of free funds decreased to such an extent that the FoCR switched to operational financing through a loan. A positive economic outcome is expected as late as 2024.

The auditors also scrutinised FoCR’s management of unnecessary property and the purchase of legal, promotional and other services. The FoCR had no shortcomings in this area and it managed to rectify shortcomings identified in the SAO’s previous audit.

print the page