The National Audit Office has recommended that the State Forest Management Center (RMK) promote competition in timber sales and establish long-term contracts through public auctions. The system for entering into and modifying contracts should be clearer and more transparent than it currently is.

Although the Forest Act and the corresponding government regulation require RMK to ensure timber is sold at market prices, the audit revealed that the prices agreed upon in long-term contracts during the audited period of 2017–2022 were significantly lower than public auction prices. RMK sold timber under long-term contracts at prices up to 30 percent lower than those obtained through public auctions. The price difference was not due to the volume sold, as the analysis showed that larger volume buyers did not generally receive lower prices, nor did smaller volume buyers generally receive higher prices.

The audit also found that RMK did not, during the audited period nor currently, favor companies offering better prices in long-term contract negotiations. Bids that exceed the average weighted bid price by more than 15 percent are either rejected or reduced by RMK by 15 percent. The National Audit Office noted that the long-term contract process is further obscured by RMK's failure to set a starting price for timber during negotiations, which should be based on its usual value or market price and known to all bidders at the time of bidding.

The National Audit Office highlighted that during the audit, the Ministry of Climate and RMK presented three conflicting versions of how to consider the market price for timber sales. There is no unified understanding of how to account for the market price of timber between the Ministry of Climate and RMK. Initially, RMK deemed it impossible to determine the market price of timber, but by the end of the audit, it concluded that the market price is the price offered in the conditional quantity round of long-term contracts, which is only one component of the contract price and generally lower than it.

The Ministry of Climate, however, expressed that it is possible to achieve a price reflecting the usual value regardless of the sales method. The audit showed that the price of timber sales strongly depended on whether it was sold under long-term contracts at agreed prices or through public auctions.

For example, in 2022, prices under long-term contracts for pine logs up to six meters long and 18+ cm in diameter ranged from €98-130 per cubic meter, small pine logs from €50-108, firwood from €28–€82 and birch veneer logs from €141-252. The lower prices were not due to larger volumes or shorter transport distances to the buyer's warehouse.

The National Audit Office found that RMK has treated long-term contract partners unjustifiably differently and entered into pre-agreements with at least three companies for timber sales. The audit revealed that RMK entered into three confidential pre-agreements with two companies from 2011-2014, which were later formalized as long-term contracts, guaranteeing the companies consistently low prices for five years compared to other clients buying the same assortments during the same period. One company had a 15-year agreement based on a government cabinet decision, allowing the purchase of timber at low prices over that period.

Such practices result in unequal treatment, risk of corruption, provision of prohibited state aid and potential reduction in profitability, stated the National Audit Office.

Additionally, the audit showed that monitoring the fulfillment of timber sales contracts based on sales reports is challenging. For instance, sales reports contained prices not agreed upon in contracts; showed negative prices in intermediate warehouses, indicating financial loss for RMK from timber sales; and inconsistently recorded assortment information.

Therefore, the National Audit Office recommends that the Ministry of Climate direct RMK to refrain from entering into long-term contracts under competition-restricting conditions and instead conduct long-term contract establishment through public auctions.

Alternatively, the National Audit Office suggests that the Ministry of Climate initiate amendments to the government regulation to mandate RMK to set a starting price for timber sold under long-term contracts and describe a methodology ensuring market price is achieved for timber sales.

RMK: Long-term contracts system can be improved

The State Forest Management Center (RMK) agrees with the National Audit Office's recommendations to make the long-term contract process more transparent but maintains that long-term contracts have their place in Estonia's timber market and have not caused financial harm to the state.

RMK CEO Mikk Marran confirmed that all companies purchase timber from RMK at market prices. RMK requests written bids from nearly 100 long-term contract clients three times a year, and the market price is determined through the competition between these bids. Timber is sold in stages through the long-term contract process, and in each round, the timber is sold at the highest offered price, Marran explained.

Timber sales have been profitable for RMK throughout its 25-year history.

RMK also noted that significant changes have been made to the long-term contract system over the past year and a half.

"This year, we decided to make the contracts public and end timber sales to intermediaries. Only companies that process timber in Estonia and those that produce long-lasting products can buy timber from RMK under long-term contracts. This ensures that the processing of timber harvested from state forests brings broader benefits to the state," Marran listed.

Following the recommendations of the National Audit Office, RMK will prepare an analysis for the development of an electronic bidding environment for long-term contracts by July 2025. Additionally, possibilities for changing the conditions of the long-term contract process will be analyzed.

RMK accounts for about one-third of the entire Estonian timber market. In 2023, RMK earned €303.5 million in revenue from timber sales, from which it paid a total of €75 million in dividends to the state treasury.

According to RMK's sales reports, in 2022, the center sold a total of 3.5 million cubic meters of timber (excluding trunks and logging residues), with over 81 percent sold at agreed prices through long-term contracts to 102 clients, at an average price of approximately €80 per cubic meter. In 2022, the average price of timber at RMK's public auctions, attended by 91 clients, was €106.76 per cubic meter.

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