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Forest Bulletin
Issue 16, Dec. 2000

The World Bank Pilot Project for Sustainable Forest Management in the Russian Federation


E. Petrova

The World Bank Pilot Project for Sustainable Forest Management is another example of multilateral international organizations granting loans to the Russian Federation. Unfortunately, very often the money granted is used for purposes different from those declared for implementation within a project. For example, the so-called coal loan of the WB became so notorious in Russia as its realization was abundant with scandals in relation to illegal spending and blatant stealing of the money. Lots of other loans from the World Bank and International Monetary Fund shared the same fate. At the same time some of the World Bank loans granted to Russia were never used by the Russian part that only had to pay off the interest with no good or profit to itself. In general, when you look at the loaning process, you get a strong impression that it only resulted in growing national debt payments that amount to one fourth of the national budget, and deteriorating situation in the industries where the loans should have been used. All this makes us take a closer look an the idea of the world Bank loaning of the forestry industry – where any mistake might have long-term consequences extending to decades and even hundreds of years.

It was the World Bank itself that offered Russia this pilot forest loan. The history of its 'promotion' began back in 1995 when the World Bank offered the Russian Government a loan for rationalization of forest industry. However, at that time the Government rejected the offer. At that time the Federal Forestry Service (Rosleskhoz) used to receive good money from the budget (over 300 million USD annually) and the 'small' loan was apparently not so interesting for it.

After that the WB initiated a research in the Russian forestry policy, which resulted in that in December 1995 a solid (over 300 pages) survey 'Russia: Forest Policy During Transition' was published. The analysis of the problems of Russian forestry sector that the survey contained, as well as analysis of its ecological, economical and social importance, peculiarities of forest management, key challenges the sector faces now during the transition period and suggestions for its reformation were developed by World Bank experts including Russians. Representatives of NGOs were officially invited to take part in the discussion of the final version of the survey. However, in fact, they had neither an opportunity to suggest any improvements to the survey, nor even time to read it carefully through. For example, Greenpeace received an English version (300 pages) the last evening before the discussion. After this the WB experts thought it appropriate to supply the final version of the survey with an acknowledgement to the Executive Director of Greenpeace Russia for 'valuable contributions' to the preparation of the Survey. In fact, there weren't and couldn't be any such contributions at all.

During the discussion the Russian Federation Government and the World Bank succeeded in pressing through the Government the idea to launch a minor Pilot project for sustainable forests management as the first stage of the World Bank's aid to Russia. The forest loan was to be 60 million USD, and the pay-off conditions seemed very attractive: the loan was granted for 17 years with a favorable interest rate, LIBOR, plus 0.5%; the grace period was 7 years and first 3 years Russia was to pay only the interest. Besides that, the parties also mentioned that the money could be loaned up to private companies. It was mentioned that 70% of the loan would go to forest industry enterprises, which after all would return the loan proceeds to the Bank. Moreover, the World Bank representatives also said that, if the pilot project proved to be successful, the Bank would allot larger financial resources (several hundred million dollars) to further implementation of the project.

This was quite profitable for the provinces. 15 Russian regions declared their will to participate in the project on such terms. They had to go through a contest and based on the amount of credits received, the Leningrad Region, Krasnoyarsky and Khabarovsky Krays (regions) were selected as pilot regions.

The decision to include the project into the Program of Cooperation between the Russian Federation and the International Bank for Reconstruction and Development (IBRD) in 1997-2002 was taken on 26th May 1997 at a session of the Russian Federation Interdepartmental Commission for cooperation with international financial and business organizations and G7; and on 6 May 1997 this decision was approved by the Russian Prime Minister. At that time it was not yet clear what the loan would be allotted to, and, moreover, the concept of the project was not yet worked out.

On 1 July - 22 August 1997 a WB preparation mission worked in Russia. At the same time foreign consulting companies from Norway, Finland and Sweden were hired for the money of the WB owned Norwegian, Luxembourg and Finnish Trust Foundations, as well as money of the British Know-How Foundation. The situation was paradoxical: the development of the project, identification of what the loaned money should be used for was not in charge of the Russian party or borrower regions (which would have been logical), but the World Bank, i.e. the creditor. From the very beginning it was obvious that foreign experts and consultants could not understand a cope with Russian problems. However, the trust fund application rules envisage nothing else instead of hiring foreign specialists. In total the honorarium of these experts reached $1,000,000, while their calculations and estimates, naturally, appeared to be useless for the project and were simply thrown away. As it was said in the memo written on 22 August 1997 after the work of the preparation mission was accomplished: 'Even taking into account the tough time schedule, the Expert Council and the Mission have come to the conclusion that the consultants with their preliminary calculations have failed to identify possible fields of activity and measures in the framework of the Project and its components. They also failed to appropriately take into consideration the provisions of the new Forest Code and the Russian Federation Constitution and did not give appropriate attention to the identification of loan pay-off mechanisms. Besides that the work of consultants (both Russian and foreign) of trust funds and regional coordinators lacked coordination'.

In August 1997 the Project Preparation Team (CPRP) decided to hire Russian experts from the pilot regions to improve the current situation. They had about 100 experts whose work was paid for from the Russian debt for the realization of the forest loan. To pay the debt each of the pilot regions signed an agreement about a subloan (by 150,000 USD to each region). Along with the consultant honorarium this money was to be spent on every day data processing for the project and coordination of the activities in Moscow and in the regions, as well as to fund the expert assessment of the project documentation by the temporary Expert Council. So, even before the Project was actually launched the regions owed 450,000 USD to the World Bank each without ever getting any help from it. However, even the calculations of the Russian expert failed to do much good for the development of the project. A part of the documentation was obviously prepared earlier for some other projects and wasn't even adjusted to the project; so their use for our work actually appeared as being on the zero level. Besides that the recommendations given by the experts to a large extent contradicted the conceptions of the Federal Forestry Service of the Russian Federation, which, consequently, opposed these recommendations. In fact the Project Preparation Team (CPRP) in cooperation with the Federal Forestry Service developed the project omitting almost everything achieved at the previous stages, including very prospective ideas that did not match the opinion of the Rosleskhoz top management.

From 12 October till 7 November 1997 a World Bank Pre-assessment Mission visited Russia. It visited the pilot regions where public hearings of the project were organized. These hearings were one of the WB prerequisites, but as the Russian party was not really interested in them, these hearings were very formal and attended only by representatives from trade unions, forestry science and business associations. Lots of people interested in the hearings, for instance, non-governmental organizations, were not informed about the hearings at all or learned about them only when it was too late to do anything. Besides, as there was no procedure to note the recommendations given at the hearings, the recommendations were simply left 'dangling in mid-air', which was apparently fine with both the organizers of the hearings and the WB.

The Mission determined that the preparation of the project would be delayed (first estimates were 2-3 months) because 'owing to the complex character of the challenges the Project will have to face, the Russian Federation Government and the World Bank will need more time to analyze the project documentation that it was expected before'. The Mission determined that the loan might become effective in August - September 1998.

On 3-20 February 1998 a second WB Pre-assessment mission worked in Moscow. By the end of the mission tenure in Moscow a session of the interdepartmental Project Supervision Committee took place. It was chaired by the Ministry of Economy of the Russian Federation and considered and approved the revised draft concept of the project.

On 3rd of February 1998 the Project was officially included into the WB loaning program for 1998 approved by the Government. It was noted that should the project prove successful, a larger project ($300 - 350 million) might be launched.

Each of the World Bank missions coming to Moscow met at tea with non-governmental environmental organizations. The long and informative conversations they had, never influenced the project but were carefully mentioned in every memoranda published after each mission's work was over.

In the framework of the World Bank organized 'CEO ad hoc' forum, on April 22 and June 23, 1998 Russian Forestry Sector Working Group #3i, which included Federal authorities, forestry and forest industry, representatives of foreign forest companies and NGOs, had two sessions. They discussed issues of investment activity development in Russian forestry sector and, in particular, foreign investments. The World Bank used these sessions as a forum to discuss the Pilot project for sustainable forest management.

On 23rd of April 1998 the Pilot Project Development Supervision Committee adopted the concept of the project. After that the concept was adjusted and revised several times. The concept included two components: the Federal component (Component A) and the regional component (Component B). The Federal component envisaged funding of the following activities as they were to be organized in the pilot regions to:

  • develop a forest management system that would facilitate economic, social and ecological sustainability of the forest complex; develop and put into operation modern information systems for the forest complex;

  • develop a system of complex forest resources inventory and data bases for economically available forests;

  • provide potential forest managers (together with authorities of the pilot regions) with an open and transparent procedure of access to forest resources;

  • improve the mechanism of implementation of the Russian Federation Law 'On Insolvency (bankruptcy)' in its part on forest fund lease agreements;

  • develop a system of voluntary certification of forest resources;

  • conduct an intersectoral analysis of economic, social and ecological indicators of forestry and forest industry operation;

  • improve the system of financing of forestry and forest management;

  • create investment-friendly conditions at forest industry enterprises;

  • develop appropriate legislation in the field of loaning, taxation, tariffs and etc. with regard to the forest complex;

  • facilitate innovation in the forest complex;

  • develop a network of specially protected natural areas on the lands of the forest fund in the pilot regions.

Regional pilot programs compose a part of forest complex development and restructuring plans in the pilot regions. Measures to be taken in the framework of these components should address complex challenges like a more efficient operation of the forest complex in the regions, more investment-friendly climate, ecological sustainability of forest ecosystems, social support of the population (the Concept of the Pilot Project for Sustainable Forest Management in the Russian Federation, approved by Protocol #3 of the session of the Supervision Committee for preparation of the pilot project, dated 23 April 1998).

Unfortunately, the Concept is a document of a very general character. What exactly each of the above points implied never received actual consideration in the Concept.

At this stage the World Bank revised the conditions of the loan and its application. The period of grace was cut to 5 years. The money of the subloans cannot be loaned up to private companies. Since these conditions could not satisfy the regions two of them, the Krasnoyarsk and Leningrad regions, began to question the necessity of the loan. Then the project developers paid another visit to the regions trying to convince them not to abandon the project. Apparently, they tried to say that the World Bank would wink at the money loaned up to private companies. The Krasnoyarsk region remained in the project, but in the Leningrad region rumors would say that the region was in favor of the staying in the project but the Ministry of Finance thought the region insolvent and opposed the participation of the Leningrad region in the project. As a result, the Component B in the Leningrad region was suspended.

By that time a thorough revision of the project components had been more or less completed. The revision, as it was expected, disclosed a whole lot of interesting interpretations of the Concept. But it's not the main point, though. The key drawback of almost all activities planned within the project was that they were obviously impracticable without external funding; and neither the project in general, nor its main components could pay off, let alone bring any profit, to the extent of recovering the loan and its interest. Even the planned fire prevention measures could not pay off because given the low rate of yield logging site exploitation, a better fire prevention could not increase profits of the sector. Especially taking into account that the project designers planned to only buy fire-fighting equipment and machinery without appropriate reorganization of the fire prevention system and additional funds to protection of forests from fires. As a result, the only way to recover the loan proceeds was to increase forest fees and rent. It is a usual practice around here when one group of people receives and spends the money, and the other has to pay the money back…

By the middle of 1999 the preparatory stage of the project was accomplished. The next stage that began was approval of the project by the WB. But it became known that the question of what the loan should be spent on had not been solved (after 3 years of preparation). In the beginning and in the middle of 2000 the project developers had to hold three workshops dedicated to the implementation of the project where they invited representatives of the regions and NGOs. These workshops were held to finally decide what the money would be spent on. This proved the uselessness of the whole preparatory phase that was to have given the answer to this question. It so happened that the 1.5 million USD (excluding the money of the trust funds) spent on the development of the project were simply wasted.

The WB Board on 24th of May 2000 gave the preliminary approval of the project. The total value of the project was estimated at 74.5 million USD, 60 million of which would come from the World Bank and the rest - from the Russian Federation Government. In fact, the World Bank didn't know whom they were going to give their money to, because by that time the Federal Forestry Service - the main loan recipient - had been dissolved by a presidential order.

On July 10, 2000 Russian and American environmentalists called on the World Bank not to grant any loans to Russia for any ecological programs until a new or the old environmental protection committee was restored. On July 20 the Federal Forestry Service representatives claimed that the World Bank sent a letter to the Russian Federation Government where it indicated its intention to suspend the allocation of the 60 million USD approved for the pilot project in May. Later on, however, (on 25 August 2000) this information was refuted by the Head of the Forestry Service, Deputy Minister of Natural Resources Yuri Kukuyev who claimed that the WB had not frozen the loan. However, it is known that some, no matter how formal, changes in the organization of the state ecological assessment after the dissolution of the Environmental Protection Committee became possible only after the World Bank insisted on them warning that it might suspend some of the credit lines.

On September 12, 2000 the pilot loan passed the last approval of the WB. However, the practicability of this loan to Russia at the present time is very questionable.

First of all, it remains unknown what the money will be used on. The loan agreement indicates only the general value of the loan and general distribution by the following categories: consulting services ($9 million), goods ($41 million), activities ($1.7 million), management expenses ($3 million), service fees ($592 thousand) and non-allocated amount (4 million USD). There is no detailed description of these categories in the agreement. The purchase plan that should be based on the project description, which had been under preparation for 3 years, is very general. In fact the major part of the money will be spent on buying equipment from foreign companies and will never reach Russia at all.

Besides, nobody can be sure that the Ministry of Natural Resources, which is now in charge of forests and ecology in the country, will be able to efficiently use the 'blessing' it has so unexpectedly received while the very structure of forest sector management has not yet been defined.

It is also unclear how the loan will be managed, who will supervise the money allocation. Under the loan agreement 'the Supervision Committee, which consists of representatives of the Ministry of Economy, Federal Forestry Service, Ministry of Finance, State Committee for Environmental Protection and the regions, shall be responsible for general guidance and strategic supervision over the project'. The NGO representatives' inclusion to its structure was not intended. As soon as actually the Federal Forestry Service and Environmental Protection Committee are abolished, it became rather doubtful that the Supervision Committee exists at all. Since the Russian bureaucracy curbed all the Supervision Committee's attempts to include some constructive elements into the project on a preparation stage, there couldn't be any confidence that the credit means will not be simply stolen by bureaucrats.

According to the law the Pilot Forest Project has to pass the ecological expertise on the Federal level before the release of any credit means, because it must be fulfilled on the territory of more than one Russian Federation member. Up to now in spite of the WB approval of the project such an expertise hadn't been conducted. The World Bank presented for consideration of the State Environmental Protection Committee not the project itself but only several pages that didn't give any specific information. As a result the expertise commission gave an answer that there is nothing to examine in the presented text. The above answer had been passed off as a positive expertise decision.

As a whole during the process of a pilot credit release research one can notice that a considerable part of credit means is used for the purposes not connected with a forest sector.

The considerable money spent at the preparatory stage practically for nothing makes the preparedness of the project as a whole questionable. Moreover, no matter how good or bad the pilot project of 1997-1999 might have been, it was prepared in completely different organizational and legal conditions that irreparable disappeared on 17 May 2000. This was actually enough to make everything that had been done before May 2000 useless and fit only for the trash can and to start the whole preparation process anew. Neither the new borrower (the Ministry of Natural Resources) nor the money-lender (WB) got confused by such a situation. Both parties made it absolutely clear that they don't care what they lend and borrow money for. Only one thing remains unclear - what all these years of fuss around the 'pilot project' preparation and huge money were spent for.

As far as the project itself is concerned, it is undergoing a full revision within the Ministry of Natural Resources (as they like to call it in official papers - it's getting filled up with content). What kind of project will this one be and what will it result in? No one has answers to these questions. However, judging by how this 'backstage' process is getting along, you realize that you have got but one hope: you hope that it won't make things worse both for forests, forest management and ecology.



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Editorial: Vladimir Zakharov, Olga Zakharova
Internet-version: Forest.RU


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