How many companies in the Czech Republic can be found that thrash their Bavarian counterparts in almost all performance indicators? How many in recent years have become better at turning a profit with respect to both production levels and employee numbers? The Mladá Boleslav auto company Škoda certainly cannot in all seriousness be compared with BMW.
But there is one company about which Czechs can rightfully boast to their German neighbours. Incessant media portrayals
depict an archetypal state- owned juggernaut; a nest of corruption; a place from which insiders suggest as much as a billion crowns is siphoned off annually; a producer of game meat cookbooks; exorbitantly overpriced IT tenders; legal advisers hired for more than CZK 100m annually; codes of ethics written for “two mega” by controversial lobbyist Ivo Rittig; an issuer of a contract for SUVs furnished with such luxurious necessities as heated seats. The firm has also repeatedly found itself in the crosshairs of the Supreme Audit Office, has been monitored by the Czech intelligence services and has been investigated by the Czech police’s Corruption and Financial Crimes Unit and other similar bodies. Welcome to Lesy ČR.
Last year, at the request of its supervisory board, stateowned Lesy ČR generated a detailed analysis of its various activities according to a precise “balanced scorecard” comparison with Bavarian State Forests. Surprisingly, Lesy ČR actually ended up faring better in many economic and other metrics – often considerably so – than its German counterpart. But there was one
notable exception. While even BSF has battled tough scrutiny, particularly from Greenpeace, in the Czech Republic, no stateowned company has suffered from so much bad press as Lesy ČR.
While Lesy ČR operates as a state-owned company, BSF is a public enterprise. Among other things, this means that BSF is not directly obliged to pay income taxes, but at the same time, the Bavarian state government deducts a share of the firm’s profits. Since last year, the principal of earnings deductions has also been incorporated into the Czech tax code system too. In 2013, Lesy ČR contributed CZK 6bn to the state, while this year that figure is expected to rise by half a billion. In other words, this state company has become an important source of revenue for the Czech public purse. Indeed, next year, these very profit deductions will enable an increase in state pensions.
But Lesy ČR can hardly hope to be able to “buy” a better image. It’s been trying for some time now to beat back negative perceptions. Even the characteristically pedantic Bavarians don’t bother to inform the public about such details as BSF’s savings in financial institutions – something that Lesy ČR has been doing for years. Never mind providing Transparency International with advance copies of commissioning documentation, as was done by Lesy ČR in the case of its so-called “complex orders” (pertaining to logging, tree cultivation and the selling of timber), or in the case of a mega-tender for legal services.
It is quite possible that Lesy ČR would not find itself the subject of so much media scrutiny if timber (not subject to public procurement legislation) continued to be sold under “general contract” terms. So long as this system, abolished after 2010, covered about half the entire firm’s business, timber prices could be negotiated differently via individual contracts. And
profits reflected this. But as of 2011 – with the exception of a handful of forestry companies covering about five percent of the logging market – the system was changed to the aforementioned “complex orders” system.
„Since shifting to selling timber to the highest bidder, Lesy ČR has been showing dramatically greater profits. Over the last four years, they have made more money than in the previous 20 years combined“
This structure factors the difference between logging and cultivation costs against the monetisation of timber product. In other words, not only logging and tree cultivation and care fall under public procurement laws, but also the final sales of timber too. And for the remainder, where monetisation is managed by the firm directly, the system has now changed to that of auctions – meaning selling to the highest bidder. Since that shift, the company has been demonstrating dramatically greater profits. Over the last four years, Lesy ČR has made more money than in the previous 20 years combined.
Naturally, many people and companies oppose having the highest bidder being the sole criteria. Under the previous model, “selling via contract”, the financial interests of Lesy ČR could be partially subjugated in order to protect both smaller and larger buyers, with all partners essentially happy.
The only issue was Lesy ČR’s own profits. Shifting to the new model, in which Lesy ČR simply takes the top asking price has not been without side-effects. Timber buyers have seen a concurrent, perhaps unavoidable, dive in profitability.
Today, Czechs understand that price is a determining factor. No-one believes that a small baker should be able to buy cheaper flour than a large baker. Higher costs mandated by higher purchase prices must instead be overcome by small bakers through better quality products. If this better quality does not exist, there is no point in subsidising in the first place.
And if it applies to bakers, then it applies to lumberjacks too. However, timber producers find themselves in a complex bind: on the one hand, so-called “input prices” (of extracted timber) are on the rise, while on the other hand, prices are being pulled down by decreased demand for lumber mills from a weakening construction sector. If family homes are not being built, then no-one needs the products offered by small lumber mills. And from this, the journey to harsh criticism of Lesy ČR is not hard to map.
An easy target
But a lack of love from small lumber mills alone is hardly going to ruin the reputation of a state-owned company. Rather,
much of this was achieved through a systematic leeching conducted by the kind of people accustomed to “tunnelling”
banks and companies in the post- coupon privatisation Czech Republic. For such crooks, new opportunities for personal
profit were found in public property, public procurement contracts, and also in European grant monies. All of these resources
were pounced upon. In the case of state-owned companies, they were a particularly easy target.
Followers of Lesy ČR may have noticed that the company’s woes started to pile up towards the end of the 2000s. It was around this time that a criminal alliance of suppliers, often connected to “political entrepreneurs”, discovered the potential of IT commissions. This served as an ideal alternative to the former methods of draining seemingly endless reservoirs of profit in the form of developer activities, which following the financial crisis, largely dried up.
Lesy ČR certainly was not the only, or even largest, object of interest for such groups. But the company secured disproportionate media attention thanks to a combination of an extraordinary growth in profits, suspicious IT investments, excessive marketing and legal services costs, and other similar woes. Some of these flames of controversy have since been extinguished – but others continue to smoulder.
„The company’s woes started to pile up towards then end of the 2000s. It was around this time that a criminal alliance of suppliers, often connected to “political entrepreneurs”, discovered the potential of IT commissions“
So what can the company’s new CEO Daniel Szórád do to improve matters? Primarily, he will have to pore over each and every suspicious-sounding line in the company’s books, and that includes documents pertaining to each and every aspect of this complex company’s business dealings. What might this yield?
For example, Szórád will learn that he has inherited a remarkably profitable and debt-free company, in which a majority of the archetypal nests of corruption have long since been swept away (Lesy ČR’s marketing budget has been reduced from CZK
140m in 2010 to CZK 55m in 2013).
Furthermore: IT contracts remain a bottomless pit and a source of considerable woes. The subject will require considerable
attention and intervention from above.
The number of plots where forestry work is undertaken could be increased by as much as three times, but this will only serve to decrease profits and will not increase employment.
Guarantees requested by suppliers cannot be decreased without harming the performance of the company. The despised lawyers are necessary because the company is entangled in more than one-thousand legal disputes. Weakening this realm will lead to defeat, which in turn could significantly lower profits, which would then weaken Szórád’s position.
Timber must not be sold for any sum other than the market price, which means the price offered by the highest bidder (and not prices stated by regional purchasers’ clubs).
Stability for the entire sector can only be fomented via long-term contracts.
Long-term contracts demand some kind of price indexing (even though Szórád previously criticised this).
In order to make price indexing objective, the figures cannot be determined by both contracting parties alone – a third party, likely the Czech Statistical Office, is crucial.
Finally, Szórád will realise he is really but a nominal CEO, with the minister of agriculture (not the supervisory board) the real power behind the throne.