Czech Prime Minister Andrej Babis is the king of the woods

Czech Prime Minister Andrej Babis is the king of the woods
Czech Prime Minister Andej Babis has made a fortune from forestry, but critics say he has also caused an environmental disaster.
By Filip Brokes in Prague December 3, 2018

In 2010, an array of environmental NGOs and small business owners lined up to protest against the adoption of the new commercial policy of the state-owned company Czech Forests, the largest owner of forestlands in the Czech Republic. They feared that the proposed new system for subcontracting forestry work would lead to market domination by a few large companies, with potentially devastating implications for Czech forests.

They were right to be worried. A mere eight years later, the single largest subcontractor of work in state-owned forests is a daughter company of the Agrofert holding, controlled by the current Prime Minister of the Czech Republic Andrej Babis. And the forests? They are now in the worst shape since the 19th century, according to experts.

Babis is a billionaire tycoon, who in part built his fortune in the agro-sector. The Czech Republic’s second-richest man, Babis has long been known as one of the most influential people in Central European agriculture. Until 2017, he was the sole owner of the Prague-headquartered Agrofert holding, a massive enterprise controlling 230 companies in multiple countries across Central Europe.

Although Babis is formally no longer the owner of the company — he was forced to transfer ownership of Agrofert to trust funds controlled by family members and lawyers when he became prime minister to comply with new conflict of interest laws — the nature of his informal relationship with the company has become the object of investigation. Babis himself vehemently denies any wrongdoing.

Whatever Babis’ current role at the company, the business is still up and running. Although it is best known for its presence in agriculture and media, Agrofert is a major player in a number of other fields, including forestry since 2011.

Likely incentivised by the modified tendering rules of the state-owned Czech Forests — a move that handed all the trump cards to the biggest players — Agrofert bought two forestry companies: Uniles and Wotan Forest. In just seven years, Uniles grew from a small, regional company to one of the largest forestry firms in the country. Receiving more than $90mn worth of state contracts, it more than quadrupled its revenues.

For every winner there is a loser. In this case, apart from small and medium-sized businesses, it was the trees themselves that perhaps paid the highest price. Today the Czech Republic’s mainly coniferous forests are facing the worst bark beetle infestation in at least 200 years. According to a number of experts interviewed by bne IntelliNews, the new tendering rules for work in state-owned forests, which brought quick riches to companies like Uniles, have been one of the problems along with the extreme droughts that have led to the ecological catastrophe the country currently faces. The origins of the story go back a decade.

Money comes first

On January 1, 2009, Svatopluk Sykora, the former CEO of Aliachem, an Agrofert-controlled chemical company, was appointed the new director of the state-owned Czech Forests. Founded in 1992 by the Czech Ministry of Agriculture, the company’s primary responsibility is to manage more than 1.2mn hectares of forestland owned by the state, around 50% of all forestland in the country.

Prior to Sykora’s appointment, the company wasn’t particularly preoccupied with profitability; its primary business was to ensure that forests remained a sustainable resource for future generations. Since the founding of the company in 1992 until 2009, the average yearly gross profit was a mere $28.2mn.

Within a couple of months of Sykora’s leadership, this number shot up beyond any reasonable expectations. After just a year in office, the former Babis’ employee brought more than $137mn in profits to the company, adding another $92mn in 2011.

According the renowned Czech agricultural expert Petr Havel, that extra money was needed to fill some holes in the state budget.

“Czech Forests used to keep their profits on their own accounts. But, under Sykora, part of it went to the state budget. That’s why the need to increase the profits of the company; it went straight to the state coffers,” Havel told bne in an interview.

How to quadruple profits in one year?

Since its foundation until 2010, Czech Forests was the principal manager of the forests it owned. It did most of the forestry work with its own limited manpower. The work beyond its capacities was subcontracted. The contracts were awarded to private companies for two basic types of work: tree harvesting and tree planting. The subcontracted companies were chosen on the basis of a multi-criteria tendering process and received remuneration upon delivery of the trees they harvested. It was then left to Czech Forest to inspect, store, and sell the wood on its own terms.

This system, widely applied to state-owned forests across Europe, began to change in 2010. According to the new rules, there was no longer a separation between harvesting, planting, and selling of the trees. Instead, private forestry companies compete for the so called “complex forestry tenders.” These are giant, five-year-long contracts worth millions of dollars that let private companies do all the work: harvesting, planting, and selling.

The change in rules was made permanent by the adoption of the so-called “Wooden Book” order by the government of the Czech Republic in early 2011. Although officially implemented in 2012, the new “long-term strategy for the management of state-owned forests” has been tested since 2010.

Arguably the most important change concerns the selection criteria for awarding the forestry contracts to private companies. In essence, all  the criteria were dumbed down, except for one — price. According to the new rules, contracts are awarded to companies that offer forestry work for the lowest price and sell the wood for the highest price. The growing difference between these two prices is what made possible the exponential increase in profits for the state forest owner.

“Unfortunately, the new tendering system was designed in a way that there really is only one criteria — price. Who ended up paying for it were the forests themselves, as the quality of the care for them went down significantly,” Havel told bne.

The new rules have also effectively excluded the vast majority of Czech forestry companies from the competition. Only the largest companies, with sufficient bank guarantees and the ability to offer the lowest price, are able to compete for state contracts.

“There are no longer many smaller forestry companies in the Czech Republic; the capital-rich market leaders have swallowed them. Most companies simply weren’t able to compete with such low prices. If there were criteria for awarding state contracts other than price, there would be more diversity and higher employment in the regions,” Havel said.

Forestry lures the sharks

Before the rules were changed for tenders for working with the state forestry company, Babis and his Agrofert holding had nothing to do with forests. On more than one occasion, he publicly denied his interest in a field he didn’t understand. But that soon changed. Witnessing the effective takeover of the state-owned forests by private companies, Babis would not be Babis if he didn’t try to get a piece of the pie.

After some intentionally misleading public announcements, in 2011, Agrofert bought Wotan Forest, the second largest forestry company in the Czech Republic at the time. Later the same year, it added Uniles, a small forestry company from the north of the country, to its portfolio. It is this small, regional company that soon proved to be the biggest winner of Czech Forests’ new tendering system.

Before the takeover by Agrofert, Uniles wasn’t a particularly large subcontractor for the state.

From 2008 until 2012, Uniles received an annual average of $4mn worth of contracts from Czech Forests. In 2013, that number grew to almost $10mn. This year, Uniles has become the single largest subcontractor of Czech Forests with contracts worth nearly $30mn.

Propped up by the financial and administrative might of one of the Czech Republic’s largest companies, Uniles suddenly found itself in a perfect position to take advantage of the new tendering system. It could afford to offer the lowest price for its services, receiving an abundance of state contracts in return. Uniles has quickly become one of the leading forestry companies in the Czech Republic. The average yearly revenue of the company since its foundation until 2010 was just below $18mn. In 2015, it was almost $123mn.

According to the company’s CEO Petr Jelinek, who until his resignation in March this year also worked as an adviser to the former minister of agriculture Jiri Milek from Babis’ party ANO, the notion that Uniles has somehow profited from the new tendering system of Czech Forests is misinformed.

What actually happened, he claims, is that the company reshaped its business model after the consolidation of Agrofert’s forestry holding. This resulted, according to Jelinek, not in an increase of state contracts awarded to the company, but a decrease.

“In 2011, Agrofert bought two forestry companies that were doing the exact same thing. After the takeover by our parent company, the decision was made to divide business operations between the two companies. Uniles took over the complex forestry contracts, and Wotan Forest focused on forest nursery and sawmill production,” Jelinek explained during an interview with bne.

“If you look at the data about our contracts from Czech Forests, you will see that Uniles has less state contracts now than the two companies had before the consolidation in 2011. It’s simply not true that we have somehow profited from the new system.”

Although Jelinek is right about the consolidation and the “division of labour” between the two companies, the information concerning the amount of contracts is less accurate.

According to the data provided to bne by Czech Forests, the combined value of contracts awarded to both companies in 2011 was $6.8mn. In 2018, Uniles received contracts worth nearly $30mn, more than the two companies combined have received in any previous year.

The wood market on the verge of collapse

Although it is undeniable that the Agrofert-owned Uniles has profited from the new tendering system, it is equally true that it has suffered, as much as any other forestry company in the country, from the recent fall in wood prices caused by the bark beetle infestation.

The growth reached its limit in 2016, when most forestry companies in the Czech Republic, including Czech Forests and Uniles, reported significant revenue decreases compared to the previous years. The bark beetle overgrowth in Czech forests meant that more trees had to be cut down in order to prevent further infestation, which led to a growing supply over stagnant demand and pushed down prices. This price fall hasn’t stopped since.

Archbishop’s forests and farms Olomouc, the largest private owner of forestland in the Czech Republic, has already lost over $8mn in revenues this year.

“The price of wood fell by 50% year-on-year, so we lost half of revenues. Another problem is that the wood infested by bark beetle is automatically put into a lower-quality category, which reduces the price even more,” the director of the company Petr Skocdopole told bne in an interview. “Since you are forced to cut down more trees, you need to do more planting, which you also have to pay for,” he added.

An ecological catastrophe

Back in 2011, there were two main concerns about the new tendering system for forestry work. Many experts warned that an effective takeover of the state-owned forests by private companies would lead to a significant deterioration of the quality of the care for the forests, which would debilitate its basic functions: oxygen creation, water retention, etc. Similarly, many experts cautioned against a system designed for only a handful of large companies that would end up dominating the forestry market.

“When the rules changed, making price the only criteria considered in the tendering process, these large companies killed each other. They lowered their prices to such a degree that it led to a mass departure of people from the sector,” Petr Bik, forest administrator of the state-owned Czech Forests told bne.

“To fill the positions left by skillful workers, the companies became more and more reliant on agency workers, and the quality of the care went down,” Bik added.

Today, the forests in the Czech Republic are facing the worst bark beetle infestation in 200 years, according to the Czech Environment Minister Richard Brabec. The amount of wood infested by the beetle has risen from 2mn cubic metres in 2015 to over 5.5mn in 2017.

“If you take a good care of the forest, the trees can defend themselves against the beetle on their own. The overgrowth of the bark beetle occurred as a consequence of an insufficient forest care. The trees are no longer able to defend themselves,” Skocdopole told bne.

Although a bark beetle infestation is nothing new in the Czech Republic, the current crisis has reached a whole new level.

“We were dealing with a bark beetle infestation in the 90s, which we were able to manage. But that was nothing compared to the current situation. We have had dry brooks for two years already. There is water only two months a year: in January and February. We no longer have any underground water,” Richard Podstatzky Thonsern, one of the large private forest holders in the country, told bne in an interview.

Business vs. nature

Virtually everyone bne spoke to believes that Czech Forests’ new tendering system largely contributed to the current crisis.

“Besides the drought, it is one of the reasons why the bark beetle infestation erupted. That’s why it is important to pay attention not only to the monetary side, but also to provide a proper care. These large companies go to places far away from where they are based, harvest the trees, plant new ones, and leave again. The price you pay for a cheap service is a bad forest care,” the agrarian analyst Petr Havel told bne.

According to Podstatzky-Thonsern, who is also the first deputy of the Association of Municipal and Private Forest Owners, the large companies, who received the biggest share of state contracts for forestry work, such as the companies in the Agrofert holding, actually profit from the bark beetle infestation. They are getting even more contracts now, as more infested trees have to be cut down.

“Maybe that’s why it is so hard to change the tendering system. The criteria are set by the state; if Agrofert has its people in all the important places, the rules will never change.”

The Agrofert-controlled Uniles actually views the possibility of the change in the tendering system as a major threat to its business.

“We have invested a lot of money, bought new equipment, employed a large number of people. We need a long-term partnership with the state. If the tendering system changes, our business structure will be threatened,” Uniles’ Jelinek told bne.

Babis’s conflict of interest

Although it is hard to prove that Babis can actually — directly or indirectly — influence the policy of state-owned Czech Forests, at the end of the day he still is the prime minister of the country and the leader of the strongest political party. Some may argue that this fact is immaterial, as he no longer officially has any ties to Agrofert. However, that remains in dispute. According to the Czech chapter of watchdog group Transparency International, Babis still in de facto control of the company, since he is “the founder and 100% end-user of benefits” of the two trusts overseeing the firm.

Certainly Babis’ political opponents, such as the members of the Czech Pirate Party, are convinced that Babis is breaking the law.

“There are two separate laws: one is the so called ‘Lex Babis’, an amendment to the existing conflict of interest legislation from February 2017, which is still in force. Then there is the new EU directive from August 2018. We say that Andrej Babis is breaking both of these laws. This means that Agrofert is receiving both EU subsidies and state contracts illegally,” Petr Fojtik from the analytical team of the Czech Pirate Party told bne.

The leader of the Czech Pirate Party Ivan Bartos accused Babis in a recent TV debate of being too greedy. “There is a risk that because of your greediness the EU will stop all subsidies for the Czech Republic,” Bartos cried on Czech state TV.  Babis’ conflict of interest is currently being investigated by the European Parliament’s budget committee.

Babis described the initiative of Transparency International as being “politically motivated.” According to him, the organisation is a “corrupted NGO”, and its director David Ondracka is “a liar who takes money from politicians.”

As for the Czech Pirate Party, the third largest party in the parliament, Babis doesn’t have anything nice to say either.

“That is one lie after another. I’ve complied with all the rules; I have nothing to do with the company. You are denouncers. You are harming the Czech Republic. You are willing to harm the state just because of me.”

This article was written and researched with the support of Elvis