The state aid analysis conducted by the law firm Cobalt focused on three so-called long-term contracts that the State Forest Management Center (RMK) had signed in 2001, 2013 and 2014. In 2001, RMK signed a timber supply contract with Estonian Cell, followed by a contract with Osula Graanul in 2013 and a spruce and pine supply contract with Graanul Invest in 2014. The agreements concerned low-quality wood, specifically pulpwood and firewood.

Cobalt analyzed whether these agreements could constitute prohibited state aid under European Union law — that is, whether the prices and other conditions stipulated in the contracts aligned with market conditions and standard business practices.

The analysis concluded that the contract terms were in accordance with standard business practices and that the pricing of timber in the contracts was consistent with market conditions.

Cobalt also determined that the confidentiality of these agreements was not unusual, as confidentiality clauses are a standard part of business practices. Moreover, the European Commission has considered confidentiality obligations essential for the successful execution of transactions, depending on the circumstances of the deal.

Additionally, the analysis found that the volumes of timber specified in the contracts were not exceptionally large and that the distribution of risks was consistent with standard business practices in light of pricing considerations.

The most critical factor in determining whether the transactions constituted state aid was whether any of the companies had received an advantage. The analysis did not identify any evidence that the companies had obtained an economic benefit from RMK that they would not have achieved under normal market conditions — one that would have placed them in a more favorable position compared to competitors.

Furthermore, the analysis found no indication that timber was in short supply on the market at the time the agreements were signed, which could have supported the argument of an unfair advantage. Instead, the economic assessment suggested that RMK was able to increase its total timber sales, stimulate the market and thereby boost its revenue thanks to the long-term contracts.

"In other words, the analysis indicated that the existence of these agreements allowed RMK to generate revenue that it likely would not have been able to earn in the absence of such agreements, making it probable that their conclusion was beneficial to the state," RMK stated in a press release.

RMK commissioned the analysis following a report by the National Audit Office last summer, which found that the negotiation and pricing rules for RMK's long-term contracts did not ensure that timber was sold at market prices, as required by the Forestry Act. As a result, the report argued that the opportunity to earn higher revenues from timber sales was being missed. The National Audit Office also identified a risk that companies benefiting from special conditions in long-term contracts may have been granted prohibited state aid.

The National Audit Office further recommended that RMK promote competition in timber sales and enter into long-term contracts through public auctions. The three analyzed long-term contracts had been concluded without a public tender.

No ordinary transactions

The analysis noted that all three examined transactions differed from standard timber sales contracts because they were also intended to facilitate the establishment of large wood-consuming factories.

For example, the contract signed with Estonian Cell preceded the construction of a factory with a consumption capacity of up to 350,000 cubic meters of aspen wood. Under this contract, RMK committed to supplying 140,000 cubic meters of aspen over ten years at a fixed price. The factory began operations in 2006.

The contracts with Osula Graanul and Graanul Invest were signed before the establishment of two pellet plants in Võru County and Järva County.

The analysis highlighted that, at the time, the local wood industry lacked sufficient demand for fuelwood and pulpwood, leading to a significant portion of such timber being exported in unprocessed form. As a result, timber prices in Estonia were highly volatile and essentially unpredictable, which was a concern for Estonian timber sellers, including RMK.

Additionally, RMK commissioned a separate economic analysis conducted by Juhan Põldroos, former head of the Competition Authority's supervisory division and chief economist at JP Economics.

According to this analysis, the prices in RMK's long-term contract with Estonian Cell aligned with market conditions, as did the agreements with Osula Graanul and Graanul Invest.

--

Follow ERR News on Facebook and Twitter and never miss an update!