Municipal forestry firm skews the market, say auditors

A lumber company owned by the Riga Municipality distorts the market and is not doing what it was set up to do," Latvia's State Audist Office said December 20.

"By becoming involved in production of sawn timber, capital company of the Riga City Council “Rīgas meži” conducts business that is unjustified and distorts competition. It is not in compliance either with the goal for establishing the company or tasks delegated later by the local government; therefore, it does not correspond to the interests of society," auditors said.

Besides its original purpose managing Riga forests and the upscale Mežaparks neighborhood, public parks and gardens, Rigas Meži has set up a sawmill, Norupe, which participates in the market and has a distorting effect, it was discovered.

"Creation of the sawmill has a negative effect on competition in the timber market because it has a possibility to acquire raw material for a price three times lower than the price available at the free market to most of the private enterprises. Moreover, the auditors have discovered that without such an advantage sawmill of “Rīgas meži” would work with loss: instead of expected profit in 2015 and 2016 the operational costs of the sawmill have reduced the financing available for performance of direct tasks of the company to such extent that would allow to perform maintenance and development of city parks and gardens entrusted to “Rīgas meži” for a whole year without requesting financing for the purpose from the taxpayer money of the municipality."

"The sawmill has a negative effect on the lumber market as the cost of wood for the sawmill is three times lower than for most private companies on the free market. If not for this advantage, Rigas Meži's sawmill would actually operate with losses," the Audit Office concluded.

“Conclusions of the State Audit Office show inadequate management of “Rīgas meži” as performed by the Riga municipality, and good management is crucially important in order to provide for the needs of residents effectively and honestly, as well as in order to have a favourable effect on national economy,” said Elita Krūmiņa, Auditor General.

Skaidrīte Ābrama, Chairperson of the Competition Council, confirmed that the Competition Council also assessed involvement of the capital company of Riga local government in business as unjustified. 

“Involvement of state and local governments in business is permissible only in certain cases, including if there are imperfections in the market, and the private sector cannot provide enough goods and services. However, in this case the market has sufficient competition; therefore, the decision made by SIA “Rīgas meži” to create their own sawmill should be viewed in a very negative light," Ābrama said.

The State Audit Office has concluded that the wish to gain as much revenue as possible has been the guiding motivation for operation of “Rīgas meži” already for several years. As a result, planned management of forest areas of the local government has been sacrificed. During the audit, the company also indicated that felling sites are planned and cut in order to provide maximum capacity for the sawmill.

Annual grants from the Riga City Council to “Rīgas meži” for the purposes of management of parks and gardens in Riga exceeding 2 million euros in 2017 have been assigned to the company without indicating specific tasks the company should complete.

As a result, the Audit Office believes that the Riga City Council's supervision of Rigas Meži is insufficient.

The Competition Council also believes that Riga municipal company's sawmill business is unjustified.

Rigas Mezi manages 62,000 hectares of forests and is the second largest forest management company in Latvia after state-owned Latvijas Valsts Mezi (Latvian State Forests).

Last year, Rigas Mezi posted EUR 14.95 million in turnover and EUR 227,704 in profit. The company was registered in 2008, its share capital is EUR 115,156,021.

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