2020

The Assessment of the LVM Round Timber Assortment Sales Process Confirms Its Economic Justification and Compliance with Legal Acts

The Supervisory Board of JSC “Latvia’s State Forests” (LVM) has concluded a comprehensive evaluation of the round timber assortment sales process. Based on compliance, financial, economic and legal examination performed by independent experts, the Supervisory Board concludes that the process of selling round timber assortments organized by LVM complies with the requirements of legislation and internal regulations, as well as has been economically justified, providing the company with an additional profit of 14.5 million euros during the period between 2016 and 2020. As a result of the assessment, the company has developed and the Supervisory Board has approved an Action Plan for further improvement of the sales process.

Taking into account the statements made in the media, as well as the importance of the round timber sales process in achieving LVM's strategic goals, on 10 June 2020, LVM Supervisory Board launched a comprehensive audit of the sales process, by inviting independent experts. It engaged law firm “Sorainen” for the compliance assessment, professional service company SIA “Deloitte Latvia” for performing financial analysis and economic evaluation, as well as Dr. Iur. Prof. Jānis Kārkliņš, legal science expert at the Latvian Council of Science, for legal expertise.

“As part of the comprehensive assessment, the goal of the LVM Supervisory Board was to find answers to the following key questions: whether the LVM process of selling round timber assortments complies with internal and external legislation and whether its implementation was cost-effective and in the shareholder's interest. As a result of the work of experts, we have received affirmative answers to these questions,” says Jurģis Jansons, Chairman of the LVM Supervisory Board.

The in-depth assessment confirms that the process of selling round timber assortments implemented by LVM complies with strategy documents, internal regulatory documents, external regulatory documents and good business practice, whereas financial analysis and economic evaluation show that it has been economically justified, in line with the company's financial objectives and implemented in the interests of the shareholder. In its turn, the opinion of the legal expertise confirms that the process of sale at LVM complies with the Law on Prevention of Squandering of the Financial Resources and Property of a Public Entity (Publiskās personas finanšu līdzekļu un mantas izšķērdēšanas novēršanas likums), the Law on Alienation of Assets of a Public Entity (Publiskas personas mantas atsavināšanas likums) and the Competition Law (Konkurences likums).

The financial analysis and economic evaluation confirm that, from the point of view of the situation in 2015 (ex-ante analysis), LVM would gain a higher economic benefit from the introduction of the technological wood product than in the scenario without the technological wood product. LVM could objectively expect such an effect, taking into account the benefits from the increase in revenue by selling technological wood in the amount corresponding to the demand at a price adjusted to the value of the product, as well as from the reduction of technological wood transportation and other costs. Assessing the additional profit gained from today's point of view (ex-post), the analysis confirms that the sales of the technological wood product in the analysed period of less than five years were profitable, despite the fact that the pulpwood used for comparison showed a sharp increase in prices in 2017 and 2018. Taking into account the decline of its market in 2019 and 2020 (until the situation when pulpwood products were not demanded on the market at all), the actual additional profit from the sale of technological wood amounted to 14.5 million euros in 2016–2020.

“In the opinion of the LVM Supervisory Board, the almost six-month-long audit process and its results can be assessed as very important and useful: they strengthened confidence in the adequacy of the company's work and provided independent insights and recommendations that will facilitate company's operations and management,” Jurģis Jansons continues.

As a result of the assessment, LVM has also developed an Action Plan for further improvement of the round timber assortment sales process in order to make it even more transparent, more predictable for market participants and to prevent possible risks of competition law requirements in the future. The Action Plan is based on the conclusions and recommendation of the external experts, as well as on more than 400 recommendations of almost 100 companies working in the sector received in the course of the assessment. It also includes LVM's previously planned activities and takes into account company's economic indicators and the overall indicators of the forest sector.

The shareholder – the Ministry of Agriculture – thanked the LVM Supervisory Board and company’s Board for their work done in evaluating the complex round timber sales system. “I would like to emphasize that one, but certainly not the most important, thing was to gain confidence in the (un)truthfulness of the public accusations, but the other thing, which I think is even more important, is an in-depth evaluation of the round timber sales system, which provides us with conclusions and recommendations for further improvement of this system and prevention of possible risks in the future. This is the most significant added value to the assessment, in respect to which the LVM Supervisory Board has made its proposals to the company's Board. The shareholder will follow the company's progress in resolving these issues,” says Arvīds Ozols, Director of the Forest Department at the Ministry of Agriculture.