Sustainable Forestry Pilot Project

Loan No. 4552 RU

Pursuant to the Loan Agreement between the Russian Federation and the International Bank for Reconstruction and Development (the IBRD) No. 4552 RU, dated March 30, 2001, the Russian Federation has received from the IBRD financial resources in the amount of $60,000,000 to finance the Sustainable Forestry Pilot Project (the Project). The text of the Loan Agreement, major parameters of the Project, and agencies responsible for Project implementation were determined by the Government Decree No. 152, dated March 1, 2001, On the Loan Agreement between the Russian Federation and the International Bank for Reconstruction and Development for Financing of the Sustainable Forestry Pilot Project. 

Pursuant to the Decree of the Government of the Russian Federation No. 152, dated March 1, 2001, the Ministry of Natural Resources (the MNR) was assigned responsibility for the implementation of Part A of the Project.

The Ministry of Finance of the Russian Federation (the MOF) charged the Noncommercial Foundation for Enterprise Restructuring and Financial Institutions Development (the FER) with the responsibility for proper use of funds granted for financing of the Project in accordance with the provisions of the Agency Agreement No. 01-01-06/27-201 dated May 25, 2001, between the Ministry of Finance and the FER.

On February 28, 2002, the MNR and FER entered into the Project Implementation Support Agreement (as amended October 31, 2005).

Initially, Leningrad Oblast, Krasnoyarsk Kray, and Khabarovsk Kray were selected as the Participating Regions. In 2003, by the decisions of the Supervisory Committee Arkhangelsk Oblast was also included in this list. 

Pursuant to the Decree of the Government of the Russian Federation No. 340, dated May 27, 2005, On Implementation of the Sustainable Forestry Pilot Project Financed out of the Proceeds of the Loan of the International Bank for Reconstruction and Development, a new scheme for implementing Part B of the Project via an authorized agent bank was confirmed.  Following the provisions of said Decree, the World Bank and MOF made Amendments in the Loan Agreement, dated June 21, 2005, and October 3, 2005, to extend the Project implementation period for 2 years until September 30, 2007 (the initial Project implementation period was set from 2002 to 2005);  increase the budget of Part A of the Project through the Russian part of co-financing for implementation of results achieved by the Project in additional Participating Regions (Irkutsk Oblast, Republic of Buryatia, and Chita Oblast); and specify the implementation scheme for Part B of the Project.

The Project consists of 2 content-driven parts:

Part A - Sustainable Public Forest Management, is focused on development of forest policy reforms and implementation of an improved legal and regulatory framework in the forest sector, improvement in the collection, organization and dissemination of forest-related information and forest management planning techniques, improvement in forest fire and pest management techniques, and regeneration of forests in the Participating Regions, and dissemination of best practices and information outside of the Participating Regions, through the financing of goods, works and services.

Part B - Institutional Strengthening of Forest Enterprises is focused on financing of subprojects carried out by forest industry enterprises in the Participating Regions for the purpose of enhancing their potential in the use of modern equipment for forest harvesting, timber processing and non-wood forest products processing, and testing and implementation of modern forest utilization and forest enterprise management techniques.

Part A - Sustainable Public Forest Management (composed of 5 subcomponents):

 (A1) Improved forest policy (the objective is to promote forest policy reforms, an improved legal and regulatory framework, systems of financing and administering forest payments):

Main results:

·        Execution of Contract “Forest Certification and Sustainable Forest Management” is underway.

·        The following contract have been implemented: “Development of Methodology of Defining Payments for the Established Types of Forest Use”; “Development of Normative Documentation on Establishing and Application of Prices on Goods, Works and Services in Forestry”; “Development of a System for Administering Forest Use Payments Including Procedures of Establishing and Collecting Payments”;“Development of Normative and Methodological Documentation on Leasing Forest Parcels in Conditions of Reforming the Forest Management System”;“Development of a Concept and Program for Reforming the System of Forest Management under Separate Execution of Public (Administrative) and Management Functions”.

·        Contract “Development of a Long-Term Strategy and Forest Use Development Plan for Arkhangelsk Oblast” is under preparation.

(A2)             Improved forest land-use and information management(the objective is to improve forest information management systems, including wood tracking systems, and forest inventory and management systems):   

Main results:

• Execution of Contract “Testing and Implementation of a Pilot Log Tracking System in Chain-of-Custody; Development of Software, Databases, Integrated Information Systems, Including Preparation of Methodological Documents and Regulations” is underway.
• Procurement of “Computer Equipment and Peripherals for Forest Inventory Enterprises, the Center for Forest Protection and the Far Eastern Coordination Center” is underway.
• Contract “Training of MNR Staff in Basic Computer Skills” has been completed. The total of 638 specialists from territorial forestry agencies of the Participating Regions received training under the contract.  
• Procurement under contracts “Forest Surveying Instrument Sets” and “Software for Imagery Processing” has been conducted to forest inventory enterprises of the Participating Regions.

(A3) Improved fire and pest management (the objective is to improve forest fire and pest management techniques, primarily through upgrading systems of preventive measures and early warning):

Main results:

• Procurement of radio communication system and delivery of accessories and supplies was completed. The total of 3755 sets of up-to-date radio stations for different purposes was procured.

• Contract “Radio Equipment for Arkhangelsk Oblast” has been completed. The total of 1734 radio stations of various ranges and purposes was delivered.

On the whole, radio communication equipment was upgraded in 134 leskhozes and 52 forest protection aviation departments operating on an area of 201 million hectares in 4 Participating Regions.

• Procurement under Contracts “HF Radio Stations and Antenna Masts” and “VHF Radio Stations and Service Laboratories” is underway in 3 additional Regions.
• Delivery under contracts for the procurement of heavy equipment for mobile crews involved in combating large-scale forest fires were completed to 4 Pilot Regions, including:

“Heavy Transporters (Semi-trailers)”, “Fire Engine Vehicles”, “Track-type Cross-country Vehicles for Firefighting Crews”, “Tractors with Auxiliary Equipment”, “Forest Firefighting Mobile Modules”, and “Fuel Tanker Trucks”.

·        Delivery of heavy equipment to 3 Pilot Regions is underway, including:

“Bulldozers” (7 Regions), “Caterpillar Cross-Country Vehicles”, “Forestry Patrolling Fire Cross-Country Vehicle”, “Fire Tank Vehicles”, “Saddle Truck-Tractors with Trailers”, and “Forest Firefighting Tractors”.

·        Delivery under Contract “Chainsaws with Sets of Protective Clothing” has been completed. The total of 300 chainsaws with sets of protective clothing was delivered to 3 Participating Regions.

·        Contract “Safety Apparel for Forest Firefighters” has been completed. The total of 942 sets was delivered to 4 Participating Regions.

• Contracts “Portable Fire Extinguishers” and “Portable Water Fire Extinguishers” have been completed. The total of 6048 fire extinguishes has been delivered to 7 Participating Regions. 
• Antenna masts have been delivered to 4 Pilot Regions under contracts “Antenna Mast with a Mounting Complex for VHF Radio Stations” and “Antenna Mast with a Mounting Complex for IW-HF Radio Stations”.
• A school textbook/CD “Outreach Activities for Forest Fire Prevention” (10000 copies) was published.
• Execution of Contract “Training of Personnel of FFA Territorial Bodies and Branches of FGU ‘Roslesozaschita’” is near completion. 150 specialists received training.
• Execution of Contract “Improved Forest Protection in Krasnoyarsk Kray: Development of Collections of Forest Pests and Diseases; Development of Training Programs in Forest Pest and Disease Protection; Planning of a Network of Permanent Plots for Pest Dynamics Monitoring” is underway.

 (A4)            Improved forest regeneration (the objective is to improve the system of forest regeneration, including establishment of automated complexes for growingball-rooted planting stock):

Main results:

The FFA included in the 2006 Procurement Plan procurement packages intended to establish automated lines for growing ball-rooted coniferous seedlings (in substrate pots) in Leningrad Oblast and set up a laboratory for quality evaluation of forest seeds. 

(A5)            Replication of forest policy and management reforms to other regions (the objective is to conduct personnel training to ensure support for institutional development and establishment of a distance learning system; provide training to technical specialists for achieving the Project’s major objectives):  

Main results:

• Stage I of the contract for providing methodological services in preparation and conducting of training under the program “Public Administration in the Area of Forest Management and Market-Based Forest Use” aiming to retrain leskhoz managers and forest industry specialists has been completed. Stage I was carried out under the program developed by the All-Russian Institute for Continuous Education in Forestry; 464 specialists received training.
• For the purpose of reforming forest policy and forest management within the framework of Project implementation the FFA organizes a series of thematic workshops (5 workshops) on reforming the forest sector of the Russian Federation. The first workshop in this series “Management of State Forests: Experience of Countries with Market-Based Economy, East-European Countries and the Baltic States” was conducted in May 2004. To implement this cycle of workshops, Contract “Methodological Support for a Series of Workshops, and Development of Workshop Programs” was signed.
• Training of instructors from forestry colleges is underway in Russia to be followed by a traineeship program in European countries (the startup is schedules for December 2006).
• Bidding was conducted and contract was awarded for providing technical support with the organization of the second workshop: “Federative Relations in the Forest Sector: Balance of Interests of the Federation, Subjects of the Federation, and Municipal Entities”.

Part B - Institutional Strengthening of Forest Enterprises

The startup of implementing Part B of the Project was several times postponed. A number of alternative options for on-lending of the loan proceeds through the Administrations of the Participating Regions or an authorized agent bank were considered at various stages of Project implementation. At a meeting of the Joint Government-World Bank Working Group in December 2004 a decision was taken to get back to the implementation scheme for Part B of the Project using an onlending mechanism on a repayment basis through intermediary of an agent bank. In February 2005, the Administrations of the Pilot Regions confirmed relevance of implementing Part B in their regions.  

The MOF initiated the Government Decree On Implementation of the Sustainable Forestry Pilot Project Financed out of the Proceeds of the Loan of the International Bank for Reconstruction and Development which was signed on May 27, 2005, under reference No. 340 and which confirmed a new scheme for implementing Part B of the Project via an authorized agent bank of the Government of the Russian Federation. This scheme was secured by Amendments to the Loan Agreement, dated June 23, 2005. In August-October 2005, the MOF, the authorized agent bank of the RF Government, and the FER made arrangements for launching this part of the Project and signed necessary documents.

I. Background information:

1. Russia has the largest forest resource of any country, comprising 22 percent of world forest area, or 764 million ha (an area fifteen times the size of France). Russian forests account for 21 percent of the world’s standing timber volume and provide the largest land-based carbon storage in the world. In 1990, forests and forest products account for 3 percent of GDP, 5 percent of industrial output and 9 percent of employment. Much of the resource is located in remote areas with slow biological growth and fragile environments, especially in Siberia and the Far East. Russia’s forests contain unique biodiversity; 85 percent of the 605 million ha east of the Urals are covered with closed-stand forests, much of it still unaffected by industrial harvesting.
   
2. Russia is a recognized leader in many areas of conservation, research and development. The Federal Forest Service has overall responsibility for forest management in Russia. It has a well established federal, regional and local structure and over 200 years experience in forest management. There are also regional agencies for specialized areas of forest management, including inventory, pest and fire management. Russia also has a well established forest industry, although some of the technologies, especially in pulp and paper manufacture were recognized as environmentally damaging and inefficient even before 1990.
   
3. The Federal Forest Service, Ministry of Economy and Regional Administrations have been working on reform of the sector for several years. Central planning policies led to management practices which could not be sustained with the introduction of a market economy. As a result, many wood-based industries are now isolated from economically accessible forests and overall roundwood harvesting levels have fallen dramatically. This has brought economic and social hardship and increased pressure for utilization of the more accessible forests which are cheaper to exploit. In addition, harvesting practices including clear-cutting over blocks of 1,000 ha or more have led to soil erosion and loss of biodiversity.
   
4. The sector has been affected by the economic downturn and confusion surrounding the transition. Harvesting levels have declined drastically as domestic demand for wood products has fallen, from 300 million m³ in 1989-90 to 80 million m³ in 1997. Output from wood industries has also fallen dramatically, especially in the pulp and paper sub-sectors. While data are unreliable, harvesting of non-wood forest products by local communities has increased during the period.
   
5. Forest industrial enterprises can be divided into two groups: logging enterprises, usually in small communities of 5,000 to 10,000 people which are directly dependent on the enterprise for their existence; and processing enterprises, in larger settlements, but also directly or indirectly dependent on the industry for their economic life. Most have now been privatized but are facing severe financial difficulties. Some have the potential to be viable, with restructuring and new investment; others are poorly located and are unlikely to be viable under market conditions.

II. Sector Issues to be addressed by the Project

6. The World Bank completed the Russian Forest Policy Review whose conclusions were endorsed by the Russian Government. This study, and further analytical work undertaken by the Russian authorities since, identify several key constraints to recovery of the sector. These include issues of (a) financial viability of forest management; (ii) further development of the regulatory framework, including clarifications on leasing; (iii) improvement of forest management and ecosystem planning; (iv) forest fire and pest protection; (v) approaches to regeneration; and (vi) the need to upgrade technical and management skills in forest industries.
   
7. Implementing improved forest management practices throughout Russia’s vast forest area will take many years. In order to achieve results on the ground over a three to five year period it was decided to limit interventions initially to three representative pilot regions. Provision has also been made to support improved forest management in additional regions, should initial progress with implementation so warrant. The three regions summarized below were selected because they are representative of Russian ecosystems, and of the different problems faced by the forest sector in the transition. In all three regions forestry has the potential to contribute significantly to economic recovery. The regions also face different problems in penetrating international markets, which can provide lessons for other regions. The pilot regions are:

• Leningrad Oblast in European Russia
• Krasnoyarsk Kray in Central Siberia
• Khabarovsk Kray in the Far East

III. Project Objectives

The project development objectives are:

• Improved public sector management of Russia’s forests, a key natural resource in three pilot regions through policy reform, improved land-use management, protection and regeneration.
• An improved enabling environment for private sector investment in forest utilization through training in processing and business practices and demonstration in improved technologies.
• Replication of the reforms to other regions.