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Report No: AUS0001305.South Caucasus: Armenia, Azerbaijan and GeorgiaPrivate Enterprises in the Forest Sector A Survey of the Private Sector in Wood Production and Processing .January 14, 2020.ENB..? 2020 The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: HYPERLINK "" Some rights reservedThis work is a product of the staff of The World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and PermissionsThe material in this work is subject to copyright. 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Table of Contents TOC \o "1-3" \h \z \u ACKNOWLEDGEMENTS PAGEREF _Toc29910106 \h vEXECUTIVE SUMMARY PAGEREF _Toc29910107 \h vi1.The Wood Processing Industry in the South Caucasus PAGEREF _Toc29910108 \h 11.1General Context PAGEREF _Toc29910109 \h 11.2Current State and Forest Sector Reform PAGEREF _Toc29910110 \h 11.3Wood-based Industry as an Economic Sector PAGEREF _Toc29910111 \h 31.4Report PAGEREF _Toc29910112 \h 62.Armenia PAGEREF _Toc29910113 \h 72.1Country Context PAGEREF _Toc29910114 \h 72.2National Forest Policies and Legal Framework PAGEREF _Toc29910115 \h 92.3Wood Industry PAGEREF _Toc29910116 \h 92.4Export and Import of Timber Products in Armenia PAGEREF _Toc29910117 \h 112.5Medium-term Development Options PAGEREF _Toc29910118 \h 113.Azerbaijan PAGEREF _Toc29910119 \h 143.1Country Context of Azerbaijan PAGEREF _Toc29910120 \h 143.2Export and Import of Timber Products PAGEREF _Toc29910121 \h 163.3National Forest Policies and Legal Framework PAGEREF _Toc29910122 \h 183.4Wood Industry PAGEREF _Toc29910123 \h 193.5Medium-term Development Options PAGEREF _Toc29910124 \h 204.Georgia PAGEREF _Toc29910125 \h 234.1Country Context PAGEREF _Toc29910126 \h 234.2Special Timber Production Licenses in Georgia PAGEREF _Toc29910127 \h 274.3Structure of the Wood Production and Processing Industries in Georgia PAGEREF _Toc29910128 \h 294.3.1Logging PAGEREF _Toc29910129 \h 294.3.2Processing PAGEREF _Toc29910130 \h 304.4Markets, Prices, Cost of Production, and Profitability PAGEREF _Toc29910131 \h 314.5Export and Import of Timber Products in Georgia PAGEREF _Toc29910132 \h 344.6Medium-term Development Options PAGEREF _Toc29910133 \h 384.7Economic Implications of the Sector Reform and Production Potential PAGEREF _Toc29910134 \h 435.Policy and Public Investment Recommendations PAGEREF _Toc29910135 \h 465.1Recommendations for All Countries PAGEREF _Toc29910136 \h 485.2Armenia PAGEREF _Toc29910137 \h 505.3Azerbaijan PAGEREF _Toc29910138 \h 515.4Georgia PAGEREF _Toc29910139 \h 516.Conclusions PAGEREF _Toc29910140 \h 53References PAGEREF _Toc29910141 \h 58Annex PAGEREF _Toc29910142 \h iList of Tables TOC \h \z \c "Table" Table 1.1Main Differences and Similarities of Firms of Different Sizes PAGEREF _Toc29910143 \h 5Table 2.1Wood Consumption in Armenia (2016-2018) PAGEREF _Toc29910144 \h 10Table 2.2Prices of Timber Products PAGEREF _Toc29910145 \h 11Table 2.3Import and Export of Wood Products in Armenia (2016–2018; by volume) PAGEREF _Toc29910146 \h 11Table 3.1 Land Area of Azerbaijan by Type (2017) PAGEREF _Toc29910147 \h 14Table 3.2 The Distribution of Forest Reserves by Forest Land Categories in Azerbaijan (2017) PAGEREF _Toc29910148 \h 14Table 3.3Growing Stock (2000–2015) PAGEREF _Toc29910149 \h 15Table 3.4Forest Land by Species and Age Class PAGEREF _Toc29910150 \h 15Table 3.5Harvesting Areas and Fuelwood Production (2000–2016) PAGEREF _Toc29910151 \h 16Table 3.6Total Imports of Wood and Wood Products (2015–2017, US$ 1000) PAGEREF _Toc29910152 \h 16Table 3.7Exports of Wood and Wood Products (2015–17, US$ 1000) PAGEREF _Toc29910153 \h 17Table 3.8Forest Restoration in the Forest Fund (2000–2017, hectares) PAGEREF _Toc29910154 \h 17Table 3.9Timber Used by Furniture and Parquet Factories (source and price) PAGEREF _Toc29910155 \h 20Table 4.1 Forest Area in Georgia by Region (2017, thousand hectares) PAGEREF _Toc29910156 \h 23Table 4.2 Timber Harvesting and Recorded Illegal Logging (m3) PAGEREF _Toc29910157 \h 26Table 4.3 Forest/Wildfires PAGEREF _Toc29910158 \h 26Table 4.4 Forest Restoration by Method (1995–2017, ha) PAGEREF _Toc29910159 \h 27Table 4.5 Commercial Harvesting Licenses for of Forests by Region and Expiration Year PAGEREF _Toc29910160 \h 28Table 4.6 Retail sawnwood prices (US$/m3) PAGEREF _Toc29910161 \h 32Table 4.7 Costs and Prices of Primary Sawnwood Products (beams and planks; beech) PAGEREF _Toc29910162 \h 32Table 4.8 Price Calculations Based on Various Qualities of Dry Beams and Planks (beech) PAGEREF _Toc29910163 \h 33Table 4.9 Producers’ Costs and Prices for Selling Primary Conifer Sawnwood Products PAGEREF _Toc29910164 \h 33Table 4.10 Stumpage Fees (GEL/m3) PAGEREF _Toc29910165 \h 34Table 4.11 Export of Wood Products (HS code 4401-4421, in US$, tons and roundwood equivalent) PAGEREF _Toc29910166 \h 35Table 4.12Wood Product Exports by Country (2016–2017, HS code 4401-21, 10 largest) PAGEREF _Toc29910167 \h 36Table 4.13Wood Products Imported by Country (2016–2017) PAGEREF _Toc29910168 \h 36Table 4.14Trade Balance in Wood Products (2017, HS: 4401–21) PAGEREF _Toc29910169 \h 37Table 5.1General Business Environment (Doing Business -score, 2019–2020) PAGEREF _Toc29910170 \h 46List of Figures TOC \h \z \c "Figure" Figure 3.1Illegal Logging in Azerbaijan (2010-2018, m3) PAGEREF _Toc29910171 \h 18Figure 4.1Forest Area of Georgia by Region (2017, %) PAGEREF _Toc29910172 \h 24Figure 4.2Distribution of Dominant Species of Trees in Georgian Forest by Area (%) PAGEREF _Toc29910173 \h 25Figure 4.3Exports of Sawnwood by Species (HS: 4407, 2009-2017; 1,000 US$) PAGEREF _Toc29910174 \h 35Figure 4.4Fiscal Impact of Sector Reform (taxes and fees, 2019-2023, GEL, million) PAGEREF _Toc29910175 \h 44List of Text Boxes TOC \h \z \c "Text box" Text Box 1Wood Industry Hubs Using Imported Raw Material – The Case of Vietnam PAGEREF _Toc29910176 \h 13Text Box 2Social Cut System in Georgia PAGEREF _Toc29910177 \h 26Text Box 3Forest Policy Reforms in Georgia - National Forest Concept and Onwards PAGEREF _Toc29910178 \h 38Text Box 4Being Mountainous does not Necessarily Mean that Forests Cannot be Utilized PAGEREF _Toc29910179 \h 40Text Box 5Sustainability Certification and Private Standards PAGEREF _Toc29910180 \h 42Text Box 6Georgia – A Zero-Action Scenario PAGEREF _Toc29910181 \h 44Text Box 7 Forest and Landscape Restoration Commitments in NDCs PAGEREF _Toc29910182 \h 47Text Box 8State as a Dominant Market Player – Finding the Right Balance PAGEREF _Toc29910183 \h 49Text Box 9Gender and Inclusion in Wood Sector Development PAGEREF _Toc29910184 \h 55Text Box 10Barriers to Private Financing and Potential Solutions PAGEREF _Toc29910185 \h 56AbbreviationsAA/DCFTAAssociation Agreement and Deep and Comprehensive Free Trade AreaAPAAgency of Protected Areas (Georgia)BAUBusiness-As-UsualCIFCost Insurance FreightDESDepartment of Environmental Supervision (Georgia)DFIDevelopment Finance InstitutionENPI-FLEGEuropean Neighbourhood and Partnership Instrument East – Forest Law Enforcement and Governance ProgramEUEuropean UnionFAOFood and Agriculture Organization of the United NationsFSCForest Stewardship CouncilFSRSForest Sector Reform Strategy HaHectareHayantar SNCONational Forest Agency of ArmeniaHSHarmonized Commodity Description and Coding SystemsGELGeorgian LariIFCInternational Finance CorporationINDCIntended Nationally Determined ContributionIUCNInternational Union for Conservation of Nature MDFMedium Density FiberboardMEPAMinistry of Environmental Protection and AgricultureMENRMinistry of Energy and Natural Resources (Georgia)NAWMNational Agency for Wildlife ManagementNDCNationally Determined ContributionNFANational Forestry Agency (Georgia)NFCNational Forest ConceptNFINational Forest InventoryNFACForestry Advisory Committee (Azerbaijan)NFPNational Forest Program NFPSNational Forest Policy and Strategy NGONongovernmental OrganizationNRMPRPNational Resource Management and Poverty Reduction ProjectNWFPNon-wood Forest ProductsOSBOriented Strand BoardPEFCProgramme for the Endorsement of Forest CertificationRARepublic of ArmeniaSFM Sustainable Forest ManagementSMESmall- and Medium-Sized EnterpriseSNCOState Non-Commercial Organization (Armenia) UNFCCCUnited Nations Framework Convention on Climate ChangeUS$United States DollarVATValue Added Tax WWFWorld Wildlife Fund ACKNOWLEDGEMENTS This study has benefited from the contributions of a large number of forestry and wood industry specialists both inside and outside the World Bank. The work was done under the general guidance of Mercy Tembon and Sebastian-A. Molineus, Country Directors for Armenia, Azerbaijan, and Georgia at the World Bank, and Kseniya Lvovsky, Practice Manager at the World Bank’s Environment, Natural Resources, and Blue Economy Global Practice. The task team leader was Tuukka Castrén (Senior Forestry Specialist). The field survey was conducted by a consultant team from Know How Training Center in Tbilisi, Georgia led by Davit Darsavelidze. Other team members included Malkhaz Rogava, Azer Garayev, and Nazeli Vardanyan.The project team received tremendous advice and support from Sarah Michael and Abdulaziz Faghi (Program Leaders), Darejan Kapanadze (Senior Environmental Specialist), Gulana Enar Hajiyeva (Senior Environmental Specialist), and Hmayak Avagyan (Environmental Specialist) at the World Bank country offices in the region. The team also wishes to thank peer reviewers Garo Batmanian (Lead Environment Specialist), Ahmad Slaibi (Senior Operations Officer), and Blair Edward Lapres (Economist) as well as all the other colleagues who provided comments and advice during the study. Madhavi Pillai (Senior Natural Resources Management Specialist) and Klas Sander (Senior Environmental Economist) reviewed the report and Thanh Phuong Ha (Program Analyst) supported its finalization. Linh Van Nguyen (Senior Program Assistant) and Grace Aguilar (Program Assistant) supported project management and report finalization.Achieving the results would have been impossible without the active and valuable contribution from colleagues from both various public agencies and the private sector in Armenia, Azerbaijan, and Georgia. The team is particularly grateful to the private sector representatives that contributed their time and provided responses to the team’s questionnaire and interviews. The data collection was confidential and no reference to individual firms is made. Disclaimer: All omissions or inaccuracies in this document are the responsibility of the Team. The views expressed do not necessarily represent those of the institutions involved, nor do necessarily represent official policies of the World Bank. EXECUTIVE SUMMARYIn all three countries of the South Caucasus region – Armenia, Azerbaijan, and Georgia – forests are a key natural resource and source of wealth for the nation and the global community. Forest sectors differ from country to country, but also have common characteristics. Each country has its own unique wood processing industry, regulations, and involvement of stakeholders. In Georgia, 38.5 percent of the country is covered with forest. In Armenia and Azerbaijan, forest cover is much lower at approximately 11.2 and 11.8 percent, respectively. The most important forest product across the three countries is fuelwood for local communities. In all three countries, high consumption of fuelwood, combined with poor access to affordable alternative energy resources and considerable illegal logging, have resulted in forest loss, forest degradation, and ecosystem alteration. Different resource endowments have created variation in wood utilization patterns across the countries. While fuelwood production remains by far the most common type of forest use in all three countries, production forestry and wood processing differ. In Georgia, long-term licenses for commercial wood harvesting, the Special Timber Production Licenses (i.e. concessions), were issued to private business from 2006 to 2012 and have allowed the establishment of an active, yet relatively small, commercial wood sector. Since 2014, the National Forestry Agency (NFA) also started limited harvesting operations of its own. In Armenia and Azerbaijan, forest cover is significantly lower than in Georgia and the resource bases are inadequate for large-scale harvesting operations. Armenia does not currently allow any industrial harvesting and is not planning to introduce harvesting to improve the quality of its forests or to increase forest cover. In Azerbaijan, there are plans to increase the official harvesting, including for industrial wood, from mature forests. The objective is to introduce sustainable forest management and prevent illegal logging while also partially satisfying the wood industry’s need for wood from domestic supply resources to discourage illegal logging. Wood processing industries have a different role in each country. In part thanks to its remaining forest resource, Georgia has a modest wood industry. In Armenia and Azerbaijan, the current industries use imported raw material as there is a very limited volume of domestic wood that is available from sanitary harvesting and thinnings. In all countries, illegal and “gray” logging play a role in industrial wood supply. This study aimed to generate regional knowledge on the private sector’s role in the forest sector and to enhance opportunities for public–private collaboration to improve forest-based job creation and economic development. In the medium to long-term, this knowledge is expected to inform the countries, the World Bank, and other development partners when they develop interventions and policies that help to exploit forest resources sustainably for national development. The report focuses on wood production, harvesting, and processing but not on other forest-based direct and indirect economic activities such as tourism.Table 1: Selected Forest Sector IndicatorsArmeniaAzerbaijanGeorgiaForest cover, official estimate11.2%11.8%38.5%Annual increment, million m3 0.45*1.04.5Harvesting, official, million m3 0.04 (2018)0.05 (2016)0.63 (2017)Wood use, informal estimate, million m3 0.8n/a**2.8-3.5Legal commercial harvestingno no selected areasReforestation area, ha423 (2017)10,700 (2017)156 (2017)Wood product exports (US$ million)negligible1.1 (2017)37.5 (2017)* outdated information, likely notably lower** qualitative estimate 'well above sustainable level'CONCLUSIONS AND RECOMMENDATIONSThis work addresses four key questions that allow for an informed analysis of the sector and for informed decision-making:What is the status of wood processing industries in the South Caucasus and how has it changed?Do forest-based value chains have development potential, and which sub-sectors could be most promising for private sector participation?What public actions would be needed to support the development of forest-based value chains and private sector development? How could development partners and regional collaboration support the process?What is the status of wood processing industries in South Caucasus and how has it changed?Even though there is no recent inventory data on the current state of the forests in the South Caucasus, some commercial or sanitary logging is taking place in all three countries. In both Armenia and Azerbaijan, forest cover is much less than in Georgia and only sanitary felling is allowed. In all three countries, sanitary felling was outsourced to the private sector. However, some reports suggest that this caused an increase in illegal logging. It also required specific skills from fellers to harvest in a sustainable manner to avoid forest degradation. Therefore, the three countries are currently considering conducting sanitary felling services by public agencies or have made the change already. The aim is to improve both technical quality and governance in sanitary felling.None of the countries have up-to-date information on their forest resources, and trade statistics are incomplete as is industrial data. Firms themselves operate often in a “gray zone” between legality and illegality and raw materials are often sourced from dubious sources. This was demonstrated by the extraordinarily high conversion rates in the Georgian sawmilling industry despite the use of outdated machinery. Even modern sawmill operators in the Nordic countries do not reach such efficiency. Private sector participation in forest activities is largest in Georgia. Georgia has much a bigger forest area as well as export of wood products. Unlike Armenia and Azerbaijan, it has a number of Special Timber Production Licenses (concession) issued, through which private sector actors are actively harvestings wood for domestic as well as international markets.In Armenia and Azerbaijan, wood processing is a small, marginal industry that uses imported – and possibly also illegal domestic – raw material. It is unlikely that the industry will grow in the short to medium term due to extremely limited domestic raw material supply.Do forest-based value chains have development potential and which sub-sectors could be most promising for private sector participation?All three countries have notable potential to expand private sector participation, even if the potential differs from country to country. Georgia will have potential for a functioning wood processing industry and harvesting contractor business only when there is adequate information on the resource base through a national forest inventory (NFI) and the ongoing reorganization of the harvesting system has been completed. In Armenia and Azerbaijan, the most potential can be found in woodlots and plantation for both fuelwood and industrial wood if the regulatory framework becomes conducive. Even if this potential is fully tapped, wood industry will likely remain a small specialty industry mainly focusing on local markets. Developing private plantations and woodlots would require new solutions to ensure access to land, much of which is still owned by the state, and to ensure property rights. For example, in Azerbaijan, forests are defined as public property, which prevents private investments in wood production. Expanding production forests would serve several purposes. It would increase stocking to act as a carbon sink, increase forest cover to restore degraded landscapes with erosion control externalities, and fuel the development of both the wood processing industry and the wood energy sector. The resource base will not be adequate for the industry to become a major part of the national economy in any of the countries. However, much of the economic activity and job creation would be rural thus helping to bridge the rural–urban divide. Establishing private woodlots would also help the countries to address the changing climate both through mitigation (carbon sequestration, sustainable renewable energy provision) and adaptation (improved land management).What public actions would be needed to support the development of forest-based value chains and private sector development? Forest sector development is a slow process and decisions made today, such as those on wood production and forest management, will bear fruit only after a long period of time. Therefore, if governments aim to address development challenges in the coming decades, decisions need to be made today to yield tangible results in the medium term. Georgia has already identified several steps in its reform process. With current reform, the NFA will become the only institution fully in control of harvesting operations once the current Special Timber Production Licenses expire. Once the reform is complete, NFA will be the institution selling logs, and private operators will have to opportunity to provide harvesting services as contractors. Logs for industrial production will be sold through auction and fuelwood will be sold directly with fixed price to target groups such as households, public schools, kindergartens, etc. Active wood markets for industrial wood will allow the development of an independent processing industry. For this structural reform to be successful, NFA has highlighted the need for investment in harvesting technology as well as the need to develop the institutional capacity to implement various new regulations, including timber and fuelwood sales and price setting. In Armenia, as well as in Azerbaijan, the main focus should be in re/afforestation to increase the forest area. These countries are less likely to consider private sector involvement in harvesting operations. Facilitating private sector engagement in other activities could support the development forest-based economic activity. These activities could include eco- and agro-tourism, fast-growing plantations for timber and fuelwood, and domestic wood processing based on imported raw material. The main focus for Armenia is to stop forest degradation and the resulting economic losses, to improve forest cover through afforestation and reforestation, and to improve the standard of living for local communities. All these activities can contribute considerably to meeting Armenia’s international climate obligations. To achieve this vision, several actions will be needed. First, the demand for timber must be reduced through improved energy efficiency, awareness raising, etc. Second, private and community forests and plantations must be established. Third, the import of wood products should be promoted. Fourth, ecotourism and non-timber forest products use should be explored and developed. Finally, sustainable forest management needs to be improved. In Azerbaijan, developing the forest sector is linked with the development of sustainable forest management and the support of local forest-depended communities. Forest sector development highlights the need to respond to climate change and to link private sector participation with the development of sustainable agriculture, tourism, and recreation. As in all countries with low forest cover and high fuelwood demand, the creation of fast-growing plantations and functioning markets for fuelwood can lessen the pressure on natural forests. This would require that fuelwood remain affordable either through subsidies or through social transfers to vulnerable population.When private wood production is promoted, it is essential that land rights are clearly defined and that intra-household equity is ensured. Secured land rights by women are one essential element in advancing economic security for women. Smallholder woodlots, if managed by women, can also provide women with additional income with the added benefit of providing employment in off-peak times in agriculture. How could development partners and regional collaboration support the process?Forest certification will increase consumer trust in the wood coming from the three countries. Certification provides independent third-party verification on the quality of forest management. Currently, there are no sustainable forest management (SFM)-certified forests in the region. Therefore, it is important to launch national processes to establish certification schemes either through the Program for the Endorsement of Forest Certification (PEFC) or through the Forest Stewardship Council (FSC). All of the South Caucasus countries have relatively small forest sectors and therefore regional initiatives could provide economy of scale. Development partners’ engagement in the South Caucasus region emphasizes the diversification of national economies, job creation, and market development. Other key areas are the sustainable management of natural resources and the building of climate resilience. Forests are publicly-owned valuable resource that provides wood and non-wood products as well as environmental services. Public investment in improved forest management and information systems, and the sustainable wood supply to end-users require public financing from domestic and external resources. Wood processing itself is a commercial, profit-seeking activity and therefore needs to be financed through commercial channels including international development finance institutions (DFIs) like the International Finance Corporation (IFC). Public policies and investments create an enabling environment that is necessary for a sustainable private sector. Public funding and support structures are also needed for private plantations and woodlots to reduce the inherent high risks due to the long incubation periods before plantations generate revenue. Private plantations and woodlots also require that land tenure and land rights are clear and that private investors, including smallholder farmers, can operate in a predictable policy environment. The World Bank and other development partners have a role to play in supporting the development of an enabling institutional framework.The South Caucasus countries are recommended to continue the recently initiated sector reforms both in policy development and implementation. The main proposed policies and public investments are:For all countries in the region:Introduce a system of NFIs to provide basic information on forests and development trends. These inventories will provide information, improve strategic planning, and monitor international commitments such as the Nationally Determined Contributions (NDCs) under the United Nations Framework Convention on Climate Change (UNFCCC);Establish and maintain consultative bodies to foster open and constructive national dialogue towards sector development and to reduce conflict; andStrengthen cross-sectoral coordination to reduce pressure from other land uses such as mining and infrastructure development and to address conflicting interests from energy and other economic sectors. This coordination will also support other forest-related economic activities such as tourism.Country-specific recommendations include:ArmeniaProvide support for private woodlot development through incentives and reduced regulatory burden; andEnsure that forest and energy policies are coherent and support each other.AzerbaijanProvide support for private woodlot development through incentives and reduced regulatory burden; andUpdate forest legislation to refine legal definitions, to provide clarity to all stakeholders, and to enable the Government to set priorities and objectives for the sector.GeorgiaMaintain the current reform process that is based on the 2013 National Forest Concept;Develop SFM certification schemes for production forests;Restructure harvesting contracts in state-owned production forests to be market-based and structured in a way that favors efficiency and professionalism in the industry;Increase public investment in relevant training, research, and product development services; andRecognize the limitation of forest resources in rural energy development.The Wood Processing Industry in the South CaucasusGeneral ContextIn all three countries of the South Caucasus region – Armenia, Azerbaijan, and Georgia – forests are a key natural resource and source of wealth for the nation and the global community. Forest sectors in the three countries differ from country to country, but also have some common characteristics. Armenia, Azerbaijan, and Georgia each have unique wood processing industries, regulations, and stakeholders. For centuries, even before the Soviet era, forests were strictly managed and controlled by the state. Significant changes began after the economic transition of the 1990s when a market economy started to replace the centrally planned economies in the three countries. Through slow steps, this economic change led to the growth of private wood processing industries. Despite the reforms in the past 25 to 30 years, commercial use of forest resources and community self-organization for their sustainable management remain insufficiently developed.In Georgia, 38.5 percent of the country is covered with forest. In Armenia and Azerbaijan, forest cover is much lower at approximately 11.2 and 11.8 percent, respectively. In all three countries, forests provide important social and environmental services as well as wood and non-wood products. The most important product is fuelwood for local communities. Fuelwood is the primary energy source for cooking and heating in rural areas and a substantial portion of the wood harvest is for fuelwood production. For rural communities, alternative heating resources such as gas are often expensive, which puts pressure on the forests. All three countries have regulations that allocate a limited amount of wood to the local communities for energy through preferential arrangements. However, the current sustainable wood supply is inadequate to satisfy the demand. Neither Armenia nor Azerbaijan provide private industry with licenses to harvest wood for commercial purposes. Georgia provides licenses for commercial wood harvesting through Special Timber Production Licenses (concessions) that were issued to private businesses from 2006 to 2012. The duration of these licenses varied from 1 to 20 years. The majority of these licenses were allocated through open bid auction process. The process of issuing licenses was discontinued in 2012. At its peak, all licenses together covered 5.9 percent (166,654 ha) of the national forest area, with the authorization to harvest approximately 2.8 million m3 of timber over the whole concession period through to the expiration of the last license in 2028. Unfortunately, several private operators violate license terms and conditions by exceeding harvesting limits or even by engaging in logging outside license areas. Current State and Forest Sector ReformIn all three countries, the high consumption of fuelwood and private forest operators’ considerable illegal logging have resulted in forest loss, forest degradation, and ecosystem alteration. This trend across the region has been highlighted in widespread environmental concerns. In response, the governments in Georgia, Armenia, and Azerbaijan have taken various actions to address the challenges. Georgia is currently conducting a complex reform process for the forest sector to change unsustainable industrial and non-industrial harvesting practices. The reform fundamentally changes forest management policy and introduces new regulations, enforcement, and supervision mechanisms to enhance sustainable management of forests to avoid forest degradation. The new National Forest Concept which lays out the forest policy, various strategies and action plans, international obligations such as the Association Agreement and Deep and Comprehensive Free Trade Area (AA/DCFTA) agreement with the European Union (EU), and new regulations related to forest sector through the proposed new forest code provide an important base for these reforms. Among other things, the reform separates timber harvesting and processing operations to allow state authorities to regain full oversight on harvesting operations, to improve adherence to sustainable harvesting practices , to ensure proper sanitary care of the forest, and to advance the efficient use of forest residues. As a result, the National Forest Agency (NFA) of Georgia is currently being reorganized and moving towards a new forest management model with a clear separation of supervision and forest management operations. The NFA is also getting wider rights to harvest forest resources and to conduct industrial log production. Private operators will continue to harvest forests within their concessions until these expire. After that, the NFA will control all harvesting. However, it is also considering outsourcing more than half of its harvesting to private service providers and selling logs through auction. After 2021, no fuelwood harvest for social purposes will be allowed. The NFA itself, or contracted private operators, will supply the fuelwood necessary for local communities. Households, as well as public institutions such as schools, kindergartens, etc. will have the opportunity to buy fuelwood from the NFA warehouses. As a part of the forest sector reform, the Ministry of Environmental Protection and Agriculture’s (MEPA) Department of Environmental Supervision (DES) will conduct supervision functions, which gives it wider authority for law enforcement in forests, for oversight of harvesting operations, for processing, and for transportation. This allows for the separation of supervision by the DES and management by the NFA as is recommended by good global practice.In all three countries, sanitary felling is provided by public entities or outsourced to the private sector. However, sanitary felling can be used as a cover for unsustainable practices if not monitored properly. Operators with permission to enter the forest for sanitary felling were often found to violate the law and engage in wider illegal logging. In response, countries have decided to put sanitary logging under direct government control. In Azerbaijan, state forest agencies obtained forest harvesting machinery, optimized a number of regional centers, discontinued the outsourcing of sanitary felling services, and started providing the service themselves. In Armenia, sanitary felling by private entities was also discontinued and the processing operators are subject to strict inspections. After the current sector reform, Georgia’s NFA will directly provide sanitary felling services. In both Armenia and Azerbaijan, forest cover is significantly lower than in Georgia. As a consequence, their resource bases are inadequate for large-scale harvesting operations. In both countries, the high demand for wood products, particularly fuelwood, exceeds the forest growth rate by wide margins. The wood processing industries are small, and there are no official industrial logging operations. Raw material used by the industry often comes from illegal logging or imports. This creates uncertainty in business operations, and companies sourcing imported materials cannot compete with businesses using illegal timber. It is also difficult for local wood processing industries to compete with imported goods in terms of both quality and price.Armenia does not currently allow any industrial harvesting in its natural forests and is not planning to introduce it in order to improve the quality of its forests and to increase forest cover. The forest cover in Armenia is declining due to overconsumption and environmental degradation. Industrial wood processing operators have gone through detailed inspections. As a result, most of their operations have been halted. This has had a particularly significant impact on charcoal producers and sawmills. In the first Nationally Determined Contribution (NDC) under the United Nations Framework Convention on Climate Change (UNFCCC), Armenia has committed to increasing its forest cover to 20.1 percent by 2050 from the current level that has unofficially been estimated to be as low as 8.4 percent. In Azerbaijan, there are plans to increase officially harvested volumes of timber, including industrial wood, from mature forests. Under the new plans, all operations will be provided by state entities and no private operator will have the right to enter the forest for harvesting. The objective of this reform is to introduce sustainable forest management and to prevent illegal logging while also partially satisfying the wood industry’s need for domestic supply. Wood-based Industry as an Economic SectorThis report discusses the structure, role, and development potential of the commercial wood production and processing sectors in the South Caucasus. Forest-based production activities can be grouped in four broad categories:Wood production or forestry that can be based either on natural forests or planted forests (woodlots, plantations). This includes harvesting activities that produce roundwood raw material and its transportation to the end user.Wood industry or mechanical wood industry includes processing of such wood products as sawnwood, veneer sheets, and wood-based panels. Depending on the industry structure in a given country, this also partly includes the next stage of processing such as basic furniture manufacturing.Pulp and paper industry that produces wood pulp, paper, and paperboard. These can be based either on recycled fiber or virgin wood fiber. In the South Caucasus, there are no pulp or paper mills using virgin fiber. Wood energy production includes both the informal production, collection, and trade of fuelwood and charcoal or modern industrial production of such wood products as charcoal, chips and particles, residues, pellets and briquettes on an industrial scale for commercial, institutional, or formal household use.As a source of economic growth, forests and trees can contribute to the development of a diverse economic base, especially when markets for forest products can be tapped at scale. Local markets for timber, woodfuel, and wood products are driving the development of small-, medium-, and large-scale forest industries in many parts of developing world. These industries create jobs and income and their long-term success depends on the sustainable management of forests. Forest-based industries have characteristics that make them particularly suitable as economic development interventions:Forests are a renewable resource and, if managed sustainably, provide a basis for a growing economy. If managed unsustainably, a forest resource can be exhausted, which leads to notable damage to both the environment and the sector itself;Forest production, and to a large extent wood processing, are rural industries providing off-farm employment. Many forest activities can be conducted outside agricultural peak seasons. However, with the increased mechanization and professionalization of the industry, forest sector employment is increasingly becoming a full-time profession;Forest-based industries are scalable and barriers for initial entry are low. These allow small, local entrepreneurs to start wood-based business for local markets and then move up the value chain towards more challenging products and markets. Further, investment and technical knowledge are relatively modest at initial stages of industrial development. However, these low entry barriers can contribute to overcapacity in processing and illegal harvesting and production, particularly where state monitoring is weak; and, Many primary forest products have low unit value with high transport costs. Markets are often localized. Primary forest products including various energy biomass products and rough sawnwood are basic commodities with little or no branding or product differentiation. This allows local producers to hold good market position in relation to importers.In the South Caucasus countries, wood-based production activities are dominated by microenterprises and small and medium enterprises (SMEs) and there are no large commercial operators. These SMEs are often vulnerable to external and regulatory risks, have low productivity, often operate informally or semi-formally, and often procure their raw material, at least in part, illegally. The lack of large wood processing industries is characteristic of low- and middle-income countries with small or modest forest resources. For example, pulp and paper industry is extremely capital intensive which requires that raw material supply is guaranteed at a competitive cost level. REF _Ref367977865 \h Table 1.1 summarizes the similarities and differences between forest enterprises of different sizes Table STYLEREF 1 \s 1. SEQ Table \* ARABIC \s 1 1Main Differences and Similarities of Firms of Different SizesCharacterMicro-enterprisesSMEsLarge-scale*Typical number of workers5 to 1010 to 100> 100Level of FormalityInformalIn most cases registered, in rural areas sometimes informalRegistered; sometimes ratedDecision- making processOpportunistic, often linked to livelihoods, very risk averseOpportunistic but business-orientedSystematic, higher appetite for risk Risk assessmentNot systematic and analyticalOpportunisticSystematicTechnologyLowLowHigh/appropriateAccess to financeNo beyond informal financingLimitedGoodPermits/licenseCan act as barriers to entryManagedLegal complianceOften weak – e.g. taxes are not paid. On the other hand, micro-enterprises are usually beyond regulating Higher requirements but better resources for complianceEnvironmental complianceSMEs often in a weak position to address environmental regulation. On the other hand, micro-enterprises are usually beyond regulatingGood complianceAccess to information LimitedBetter access than what SMEs haveAccess to marketsOften only local marketsAccess both to domestic and international markers is importantInfrastructureSame in principle, but since markets for micro-entrepreneurs are local, needs are more constrainedLand issuesSame but small operators have to often deal in an informal environment and are in a weaker position to secure or enforce rights crucial for investing in landCosts of inputsSame in principle but unit costs can be higher to smaller operatorsRegulations, enforcementSame but the ?burden can feel heavier for very small operatorsAccess to support servicesVery little or no services to micro-entrepreneurs; rural SMEs have weaker access than urban SMEsGood access * not found in South CaucasusSource: Castrén, T. et als. 2014bReportWorld Bank’s engagement in the South Caucasus emphasizes the diversification of national economies, job creation, and market development. Other key emphases are the sustainable management of natural resources and building climate resilience. Promoting sustainable, legal, and well-regulated wood processing industries supports all of these objectives. However, in all three countries, wood-processing is a relatively small and marginal industry, and little is known about its structure and activities. Additionally, a number of studies have indicated that some, if not most, businesses use illegal and irregular sources of raw material. As a result, reliable information is not easily and widely available. Also, general forest, trade, and production statistics are often lacking or unreliable. Forest and wood processing sectors in the South Caucasus region are characterized by data scarcity. This also applies to social data as well. General information on labor is not readily available, not to mention detailed gender-specific data.This study aims to generate regional knowledge on the private sector’s role in the forest sector and to identify opportunities for public-private collaboration around improving forest-based job creation and economic development. The study also aims to provide an up-to-date picture on the status of wood production and processing industries in each of the three countries. The long-term objective is to support the development of diversified rural economies, job creation, rural poverty reduction, and sustainable natural resource management. The analysis allows national governments, the World Bank, and other development partners to construct interventions and policies to help countries use their forest resources more effectively and sustainably for national development. The work focused on four key investigative questions that allow informed analysis of the sector and decision making on future steps. These four questions are:What is the status of wood processing industries in South Caucasus and how has it changed?Do forest-based value chains have development potential and which sub-sectors could be most promising for private sector participation?What public actions would be needed to support the development of forest-based value chains and private sector development? How could development partners and regional collaboration support the process?The study was conducted in two phases. The first phase was a desk review and mapping of key stakeholders to identify interested parties and processes. A brief study of the status of forests, regulatory frameworks, industry specific business settings (licensing, key regulations, requirements and enforcement, public institutions, etc.), and the number of private operators in the wood processing industries was conducted. All secondary information was obtained from public institutions and international organizations involved in the forest sector. The desk review identified further research areas in the wood processing industry for study.The second phase focused on primary data collection and filled the gaps found during the desk review through interviews with key stakeholders in the private industry/wood processing establishments. In addition, separate meetings were organized with regulatory bodies such as state bodies developing and enforcing forest policy, including commercial use as well as those issuing licenses. Based on face-to-face in-depth interviews, the team collected basic information on the structure, production technology, productivity, and profitability of many primary and secondary wood processing industries in all three countries. This data included information of perceptions and attitudes of stakeholders. This research primarily targeted medium- to large- size operators and did not cover microbusinesses or individual entrepreneurs producing fuelwood in small quantities. The interviews were conducted on-site in regions where wood processing takes place. Finally, the report presents a summary of the current situation and development options for the industry through the four questions mentioned above and proposes public investments and policies.Armenia Country Context The energy and economic crises, the drastic socio-economic conditions of the 1990s, and insufficient forest management and monitoring over the past 30 years have resulted in deforestation and forest degradation in Armenia. According to the last forest inventory in 1993, the total forest land was 459,900 ha, of which over 73 percent (334,100?ha) was covered with forest. Overall, the inventory gave a forest cover of 11.2 percent for the country. However, the inventory was done before the economic turmoil in the 1990s. Since then, there have been notable changes to the forest cover. NGOs and international organizations have made more recent estimates which are lower. An estimate from a Global Forest Watch study in 2010 pegs Armenia’s tree cover at 249,000 ha which is 8.4 percent of total land area and an FAO assessment from the same year estimated forest cover at 262,000 ha. These are unofficial estimates and the Government of Armenia still refers to the 1993 estimate in official statistics and policies. According to the 1993 inventory, the total standing forest volume was about 42 million m3 with an annual average growth of 0.45 million m3. Currently, these figures are lower as the forest cover has reduced by 20 to 40 percent. The volume of illegally logged wood reveals that the consumption of wood in Armenia is higher than the forest growth rate, resulting in a gradual loss of forest stock. The main forest species are oak, beech, hornbeam, and pine.While legislation allows for private forests, effectively all forests in Armenia are under state ownership and not subject to transfer to local communities, private firms, or individual citizens. In some regions, NGOs have developed forest areas on community lands, but these cannot be officially referred to as forests according to the local regulations. There are no productive forest plantations. Forests are classified as protective (i.e., water preservation, soil stabilization, climate regulation, etc.) or special purpose forests (i.e., specially protected areas, urban and recreational forests, etc.), where only sanitary felling is allowed. In some forest reserves even sanitary felling is not allowed. There is no formal production harvesting, only sanitary felling that is intended to prevent damage from pests and disease or that is justified for other forest protection reasons. In Armenia, sanitary felling also includes regular thinning. From 2005 to 2018, the state non-commercial organization (SNCO) “Hayantar” permitted sanitary felling for 30,000 to 35,000 m3 annually. At the same time, illegal logging was estimated to be 20 to 30 times more than the official records. Based on implied wood consumption and other monitoring data, the estimated volumes of annual fuelwood demand were approximately 625,030 m3 in 2007/08, 977,010 m3 in 2013/14, and 842,480 m3 in 2017/18. There are other estimates for wood consumption that include industrial roundwood use. The estimated Armenian domestic demand for solid wood ranges from 700,000 to 980,000 m? per annum, from which 30 percent is for commercial use such as construction materials, charcoal, furniture production and export. The high demand for fuelwood is due to the high poverty rate and the high prices of gas and electricity. Rural households consume as much as 15 m? of fuelwood annually in mountainous areas, while the national average consumption is estimated at 6.8 m?. While the estimates for actual harvesting volumes vary widely depending on the data sources and methodology used, they all show harvesting volumes that are by an order of magnitude higher than the officially sanctioned harvesting. This demonstrates severe challenges to the sustainability of forest use and governance of the forest sector. The demand for wood far exceeds official supply, and forest growth is lower than the current official estimates. Armenia’s current forest resources are too small to allow for a commercial logging industry of any reasonable size. Industrial logging is currently prohibited in Armenia and there are no licenses issued for commercial timber harvesting. The annual allowable sanitary cut (including thinnings) is determined by the forest management plans and is low. As a result, the demand for industrial wood is met either through the shadow market, illegal logging, or imports. The state is not able to capture the revenues generated by the shadow market. Armenia’s wood processing has decreased considerably and has become more fragmented in the past years. During the Soviet era, the forest processing industry was developed with large capacity and relied heavily on imported raw material. Now, the industry is fragmented, relies on old and inefficient equipment, and faces multiple constraints. The wood processing industry is mainly comprised of small companies with two to five employees. These wood processing enterprises can be subdivided into two main groups:Sawmills engaged in the primary processing of logs; andProcessing firms engaged in the production of secondary or value-added products from wood including furniture, parquet, barrels and boxes, coffins, doors, window frames, and other products.Most operators face similar issues including a lack of raw materials, increasing costs, stricter state controls, and intensified competition with imported goods. These constraints make competition in the domestic market difficult and export unlikely. Actual demand for raw products is difficult to ascertain due to poor data and the reluctance of industry actors to supply information. There is likely an insufficient volume of raw material – particularly legal raw material – to sustain a viable forestry industry. This, combined with outdated equipment, years of underinvestment, and the lack of finance, has made much of the forest industry in Armenia unproductive and unprofitable. It is highly likely that many operators keep costs down by hiding actual production and use of raw materials. This may be the only way of maintaining profitability for those who are still operating. Businesses are not motivated to source from sustainably managed forests, and even if they were, they have no mechanism for distinguishing sustainable from unsustainable sources. Despite the high volume of wood use and forest loss and degradation, re/afforestation areas have been small. For example, in 2017, “Hayantar” carried out 423.3 ha of reforestation, of which only 58.4 ha were planted. The remaining hectares were reforested through assisted natural regeneration. An additional 61.9 ha of forest were planted with various programs and grants on non-forest fund lands.National Forest Policies and Legal FrameworkThe most recent policy documents adopted in Armenia are the National Forest Policy and Strategy (NFPS, 2004), the National Forest Program (NFP, 2005), and the Forest Code (2005). All these documents were prepared during the World Bank financed National Resource Management and Poverty Reduction Project (2002–2009; NRMPRP). Overall, these documents aim to develop a framework for long-term, sustainable forest management through institutional and legal reforms and to introduce international forest management and certification standards. Both the NFPS and the Forest Code set the groundwork for an illegal logging and timber removal monitoring system. The Forest Code defines and classifies forests and their functions and uses, provides for longer-term leases (up to 60 years, though none have been issued), and strengthens forest monitoring. It also gives special attention to community ownership of forests. Each of the three policy documents had its own objectives as outlined below.National Forest Policy and Strategy of the Republic of Armenia defines activities to ensure the restoration and sustainable use of degraded forest ecosystems and the development of the forests. National Forest Program of the Republic of Armenia emphasizes: (a) conservation and protection of forest ecosystems, (b) rehabilitation of degraded forests, (c) sustainable and continuous use of forest resources, and (d) ensuring the sustainable management of forests. Action Plan for Mitigating Actions to Help Address the Problems Associated with Illegal Logging emphasizes the importance of reduction of the volume of illegal logging while also taking into consideration the economic and social aspects. Since the majority of illegal logging is due to poverty among rural populations, prevention of illegal logging includes poverty reduction measures. A National Coordinating Council was created to secure the implementation of the NFPS. The Council membership includes the ministries of agriculture, environment, finance, economy, and territorial administration; relevant scientific and non-governmental organizations, as well as international development partners, and other interested actors. Wood Industry Official data from “Hayantar” shows that, 29,500 m3 wood was harvested on average annually from 2005 to 2018. Of that, only 10 percent (3,000 m3) was used for construction material ( REF _Ref18069145 \h Table 2.1). The state authorities detect only an insignificant level of illegal logging. For example, in 2017 the state authorities detected 19,285 illegally logged trees. According to the estimates of the Armenian Forest Monitoring Center, the actual firewood used in the same year amounted to 842,477 m3. Table STYLEREF 1 \s 2. SEQ Table \* ARABIC \s 1 1Wood Consumption in Armenia (2016-2018)YearHarvested legally*Harvested legally (construction material)*Illegal wood detected by the state authorities *Firewood used (estimate)**– m3 –– no. trees –– m3 –201525,9773,174 1,972201625,6462,595 1,107201730,1112,33019,285842,477201836,0983,75411,506Source: * Hayantar SNCO ** Forest Monitoring CenterAfter the revolution of 2018, control over the protection of forests was tightened. Earlier, "Hayantar" had signed contracts with private companies for wood harvesting. Having received permission for wood harvesting, these companies often harvested more wood than was allocated by the contracts. Currently, "Hayantar” has decided to carry out all sanitary felling with its own resources. This will put sanitary logging under direct control of “Hayantar” as no more permits will be issued to outside companies.Forest protection in Armenia is now under strict formal control. The prosecutor's office and the inspectorate scrutinize organizations operating in the forest sector. As a result, criminal cases have been instituted and high penalties issued. This has led to improved monitoring with many wood processing enterprises having been closed. All six enterprises in Tashir (Tashir marz) and 11 in Ijevan (Tavush marz) were closed. In Stepanavan (Lori marz), only one out of 12 enterprises remains in operation. This remaining enterprise consists of a small family business, with two workers at a minimum salary of US$150. The enterprise works on imported material, which is not profitable, and they are planning to close their operations.Charcoal producing enterprises continue to operate, but inspections are underway at these enterprises as well. These companies are expected to use large amounts of wood. Seven cubic meters of wood is required for one ton of charcoal. The main consumers of charcoal are large restaurants that use a traditional method of grilling over wood fire. One restaurant consumes about four to five tons of charcoal per year on average. About half of the 4000 restaurants in Armenia serve barbecue as their main dish. The annual fuelwood consumption by restaurants is estimated at 100,000 to 140,000 m3.There is additional demand for wood coming from authorized household use. According to the decree of the Government of the Republic of Armenia, each family living in forest-covered area is permitted to harvest 8 m3 of deadwood. The households themselves collect wood from the forest with limited oversight from the forest authorities.Based on the information provided by “Hayantar”, new prices for firewood and construction materials were approved in 2016 ( REF _Ref17818610 \h Table 2.2). Mainly imported wood is sold in Yerevan’s stores at very high prices. Cheaper construction materials from local wood such as beech and linden can be purchased from individual sellers, and demand for local wood material is higher compared to imported material.Table STYLEREF 1 \s 2. SEQ Table \* ARABIC \s 1 2Prices of Timber Products Type of wood productHarvesting fee, stumpage*Harvested (road side) *Price after transportation to storage *Price in the Yerevan wood market/stores **– US$/m3 –Fuelwood223045Roundwood79Construction material; board170–240Beech board (local)412Linden board (local)330Pine board (imported)825Larch board (imported)618Source: *Hayantar SNCO, **based on the information received from study visit at wood marketplaces, 2019 Export and Import of Timber Products in ArmeniaArmenia is a net importer of wood products. In most product categories, excluding wooden boards, imports are much higher than exports. The traded volumes have fluctuated widely according to official statistics ( REF _Ref14709677 \h \* MERGEFORMAT Table 2.3). A noticeable decrease in export volumes in all products occurred in 2018 when enforcement by the state was improved. Due to the lack of publicly available research, it is difficult to indicate whether this export is based on re-exports or if the charcoal is produced from imported or local wood. Table STYLEREF 1 \s 2. SEQ Table \* ARABIC \s 1 3Import and Export of Wood Products in Armenia (2016–2018; by volume)Name of productImportExport201620172018201620172018Fuelwood (1000 kg)6012735–––Charcoal (1000 kg)4515438 127113Wooden boards (construction material, m3)27,000 1,074485,0534,5781,881Sawnwood (1000 kg)270542162121FloorboardParquet (m2)12,00016,129.3 1,7521,985.8–144.1Logs (m3)–1,436.7704.1–––Slats (m)10,00048,998.6773.2–––Source: Development Options The Government of Armenia has set a forest cover target of 20.1 percent by the year 2050. This was also confirmed in the country’s NDC. Depending on how the baseline is established (see paragraph REF _Ref14710346 \r \p \h 19 above), this would mean close to doubling or tripling the current forest cover in the next 30 years. Achieving this target would require the participation of all stakeholders and it is not realistic to assume that public sector activities alone will be adequate to reach the goal.The forest sector in Armenia is at a crossroads. The current situation of unsustainable forest use is well recognized by all stakeholders, but a clear road ahead has yet to be developed. The table below lists concerns and observations raised by key stakeholders in the industry including private operators, state officials, and independent experts. Creating a growth path for the Armenian forest sector requires participation by all interested parties from the public and private sector as well as from the civil society. However, the recommended actions below are targeted to the public sector to create a conducive environment for multistakeholder participation. ChallengeRecommended interventionThere is no current data on the state of the forests of Armenia.Conduct a NFI to provide accurate information on the resource base and sustainable yield. This would allow for informed strategic planning of the sector. The inventory needs to be repeated (e.g., by having a 10-year NFI cycle). Demand for wood and wood products exceeds sustainable production capacity. Illegal logging is almost 20 to 30 times higher than the legal felling.Subsidies to switch to other renewable energy sources (e.g. solar, biogas, wind) and to energy saving projects.Alternative livelihoods and income (e.g. ecosystem services, ecotourism, agro-tourism, non-timber forest products) to create new jobs and alleviate social problems.Forests are destroyed by other economic activities (mining, hydropower, roads, power lines, etc.) and responsible entities do not provide compensation for the loss (financial or offsets). Amend the legislation to stipulate provisions requiring businesses to offset/compensate forest loss due to development projects. Ensure strict enforcement. Lack of proper forest protection and control.Strengthen forest law enforcement (clear mandates for officials, instituting fines and confiscation of illegal logging tools and logs, investment in technical equipment, transport, uniform, etc.).Apply new technologies for forest protection.Reforestation is not sufficiently carried out.Involve foreign and domestic private businesses in re/afforestation. Involve local communities and individuals in re/afforestation. Support community/private nurseries and plantations. There is a lack of public participation in forest sector decision-making. Involve community members and civil society representatives in forest management planning. Inform the public about the current condition of the forest and planned projects.As discussed in the above sections, the domestic raw material base for wood processing in Armenia is very small and does not allow the development of a major industry. In fact, the improved enforcement of forest regulations has led to the closing of many of the mills. If the industry is to develop in the short term, it will require increased imports of raw material. ( REF _Ref26538232 \h \* MERGEFORMAT Text Box 1) The Government of Armenia has ambitious plans to expand the forest cover in the country, and it has also made related commitments in its NDC. While some of the landscape restoration will be financed by both domestic and international public resources, private investments can also play a role. This would include both fast-growing plantations to increase sustainable fuelwood supply and the production of industrial wood with longer rotations. Particularly fast-growing fuelwood plantations could be an option for rural land owners to diversify their incomes by off-farm income. This would also help Armenia reduce the pressure on its natural forests that is caused by excessive fuelwood demand. The promotion of private wood lots will require both regulatory reforms and financial support as well as technical extension, particularly if smallholders and private non-industrial forest managers are involved. Text Box SEQ Text_box \* ARABIC 1Wood Industry Hubs Using Imported Raw Material – The Case of VietnamThe wood product industry in the South Caucasus is largely defined by the domestic resource base. For example, the Georgian industry is largely based on processing timber from the private concessions, and many industries have indicated that once the concession period is over, they will cease processing. In Armenia, domestic industry has serious difficulties as access to domestic raw material has become more difficult. However, there are also cases of expanding wood industries that are based on imported raw material. One such case is Vietnamese wood processing, particularly the furniture industry.Vietnamese industry has seen a rapid increase in production and exports in the past years. In particular, the furniture industry has grown rapidly. The country has moved from the 15th position in 2009 to become the 7th largest furniture producer worldwide. After China, Vietnam is the second-largest Asian furniture exporter and the fifth worldwide. The increase in production is driven both by exports and an increased domestic demand as the country’s economy grows and moves towards middle-income status.The growth in the wood industry has been driven by the increased competitiveness of the industry since 2001. The increase was particularly rapid in the 2000s, but slowed down somewhat after the global financial crises in 2008. The main advantages can be found in abundant natural resources, a favorable geographic location for import and export logistics, and cheap labor. Even if relatively low productivity gains and added industry value have led to a gradual decline in the international competitiveness growth rate, the industry has remained a major production hub serving both Asian, North American, and European markets. While the industry was originally based on local raw material and often illegal or poorly regulated imports from neighboring countries, the Vietnamese industry has now become a major global importer of raw material. For example, both coniferous and non-coniferous roundwood imports grew four-fold from 2010 to 2018 from 0.9 million m3 to 3.5 million m3. In comparison, imports were only 0.008 million m3 in 2000. Imports are not only from the South-East Asian region, but from the global supply chain. Vietnam has entered into a Voluntary Partnership Agreement with the EU to demonstrate the legality of its raw material sourcing in order to be compliant to the EU Timber Regulation. However, there are still concerns that some imports remain illegal and include corrupt practices. AzerbaijanCountry Context of Azerbaijan In the early 20th century, the present area of Azerbaijan had 35 percent forest cover. Currently, the forests of Azerbaijan constitute only 11.8 percent of the territory. Forests in Azerbaijan are state property. According to the Department of Forest Development, the total area of state forest fund is 1,213,700 ha, out of which 1,021,300 ha is covered by forests ( REF _Ref17819943 \h Table 3.1 and REF _Ref27651507 \h Table 3.2). The forests in Azerbaijan have important water protection, soil protection, and climate regulation functions. The decrease in forest cover has reduced the environmental services provided by forests. The country is rich in biodiversity and natural resources. As a result, forest preservation and restoration have become key national priorities in recent years. Table STYLEREF 1 \s 3. SEQ Table \* ARABIC \s 1 1 Land Area of Azerbaijan by Type (2017)– 1000 ha –– % –Arable land for agriculture 4,757.255Land of Forest Fund 1,039.912Land under the water 397.85Other lands 2,465.129Total land 8,660.0 100Source: Report of the MENR, Forest Development DepartmentTable STYLEREF 1 \s 3. SEQ Table \* ARABIC \s 1 2 The Distribution of Forest Reserves by Forest Land Categories in Azerbaijan (2017) Forest land categoriesAreaTotal– 1000 ha –– % –Area covered with forest 1,021.0 84.1 Recreation area 23.1 1.9 Forest areas, total 1,044.2 86.0 Forest land with non-forest area*169.5 14.0 General forest fund 1,213.7 100.0 Source: Department of Forestry Development, Ministry of Ecology and Natural Resources,*Non-forest areas include deforested areas zone, wastelands, ploughed land, pastures, gardens, areas of defunct woodlands, etc.The great diversity of the soil and climatic conditions of Azerbaijan has resulted in diverse forests with rich species compositions. More than 450 tree and shrub species grow in the Azerbaijani forests. Main tree species in Azerbaijan are beech (Fagus orientalis), oak (Quercus iberica), and hornbeam (Carpinus spp.) ( REF _Ref17820388 \h Table 3.3). Besides these main species, other species such as wild nut and fruit trees grow in the mountain forests. Table STYLEREF 1 \s 3. SEQ Table \* ARABIC \s 1 3Growing Stock (2000–2015)200020092015Areas of forest and other wooded land (1000 ha)927928.2962Growing stock, 1000 m3 :???Coniferous350350370Broadleaved127,090128,240129,530- by species???Oak 30,17030,43030,390Beech64,30064,52064,740Hornbeam28,19028,28028,370Alder1,2501,5001,750Other3,1803,5104,280Regeneration area (1000 ha)4.79.710.8Source: State Statistics Committee reportMiddle-aged forests are dominant, constituting 62 percent of total forest cover. Young forests represent 12 percent and mature, and over-mature forests cover 26 percent. There has been a decrease in the area covered by mature and over mature forests. This reduction in the higher age classes, particularly in the foothill areas, demonstrates intensive forest felling in the past, which has led to the replacement of valuable hard-leaved species by less valuable species and shrubs. Forest age differs depending on the territory. In the mountains, the average forest age is 86 years while, in the lowlands it is 40 to 60 years. ( REF _Ref26539213 \h Table 3.4)Table STYLEREF 1 \s 3. SEQ Table \* ARABIC \s 1 4Forest Land by Species and Age ClassForest speciesTotalBy age classYoungMiddle agedMatureOver mature– hectare –Coniferous 13.73.16.31.62.7Oak, birch, hornbeam868.389.5564.8114.599.5Other broadleaved61.96.023. 716.316.0Other types and shrubs 77.023.840.25.97.1Total1,020.9122.4634.9138.3125.3Source: Department of Forest DevelopmentAll the forests are state property and are managed with a special focus on watershed services, soil protection, and climate-regulating functions. Accordingly, the main forestry activities are concentrated on forest protection and reproduction. Logging is conducted mainly for sanitary care of the forests as well as plantation management. Until 2000, the production association “Azermesha” approved an annual allowable cut of 72,000 m3. The association was abolished in 2001, and the logging volumes in Azerbaijani forests were reduced to 64,000 m3. According to the Department of Forest Development, the logging volumes have declined further since then. Wood production consists mainly of fuelwood. Logging areas have also declined. In 2016, the logging area was less than a tenth of that in 2000 ( REF _Ref17883240 \h Table 3.5).Table STYLEREF 1 \s 3. SEQ Table \* ARABIC \s 1 5Harvesting Areas and Fuelwood Production (2000–2016) YearCleaning of dead wood and sanitary fellingFuelwood producedTotal… of which cleaned– ha –– m3 –20005,5034,72573,406200530824434,890200835028834,24720101,09299253,737201322721840,678201632230846,495Source: State Statistic Committee of AzerbaijanExport and Import of Timber Products The country imports wood to the sum of 96 million AZN (US$56 million) as the domestic supply cannot meet domestic demand. The prices of forest products increased six-fold from 1998 to 2018. Pine, ash, fir, and spruce are widely used in private furniture production, construction, and other wood processing industry and are imported. In all product categories, the main sources of imports were Russia, Belarus, and Ukraine. In recent years, Georgia and Turkey have also contributed to imports. ( REF _Ref17884058 \h Table 3.6) Table STYLEREF 1 \s 3. SEQ Table \* ARABIC \s 1 6Total Imports of Wood and Wood Products (2015–2017, US$ 1000)201520162017– US$ 1000 –Wood and articles of wood, plaiting materials230,448.3190,228.9213,768.7Wood and articles of wood; wood charcoal (HS: 44)229,777.2189,425.8212,848.9Cork and articles of cork (HS: 45)500.1621.5664.8Manufactures of straw, and other plaiting metal (HS: 46)171.0181.6255.0Pulp of wood; paper, paperboard and articles thereof90,517.9116,241.3144,296.1Wood and wood nature and scraps (HS: 47)1,112.6367.7115.0Paper and paperboard; articles of paper or of paperboard (HS: 48)62,798.5105,644.7118,855.5Printed books, newspaper and other products of the printing industry (HS: 49)26,606.810,228.925,325.6Source: State Statistic Committee of AzerbaijanHS: Harmonized Commodity Description and Coding SystemsImports are much higher, and export value is less than 2 percent of imports. Exports mainly consist of paper and paperboard and articles of paper or of paperboard. Based on the available data, it is not possible to distinguish which part of the exported goods are produced from imported roundwood or intermediate products. Re-export is likely included in the total value. ( REF _Ref17891857 \h Table 3.7)Table STYLEREF 1 \s 3. SEQ Table \* ARABIC \s 1 7Exports of Wood and Wood Products (2015–17, US$ 1000)201520162017– US$ 1000 –Wood and articles of wood, plaiting materials919.51?197.41?129.6Wood and articles of wood; wood charcoal (HS: 44)919.51?197.11?129.4Manufactures of straw, and other plaiting metal (HS: 46)-0.30.0Pulp of wood; paper, paperboard and articles thereof4?736.14?512.95?443.6Wood and wood nature and scraps (HS: 47)4.02.3-Paper and paperboard; articles of paper or of paperboard (HS: 48)4?632.54?394.64?147.4Printed books, newspaper and other products of the printing industry (HS: 49)99.6116.01?296.2Source: State Statistic Committee of AzerbaijanThe current Forest Code allows leasing State Forest Fund lands to private operators. However, these leases are generally for uses other than wood production. The lease period of the Forest Fund lands for hayfield and apiary purposes are usually short-term with use up to one year. The long-term leases last up to 10 years with the condition that 20 percent of leased land will be planted with trees at the lessee’s expense. The leased Forest Fund lands are also used for recreation and tourism. Most of the leased land is used for agricultural purposes, and the share of agriculture has increased in the past 10 years.One of the main tasks of the forest authorities is reforestation and particularly the promotion of natural regeneration. In 2017, the total area reforested was 10,700 ha. In 2003, the President of Azerbaijan launched a special program to restore and increase forest area in the country. The program became a major focal area for the Department of Forest Development in the Ministry of Ecology and Natural Resources (MENR) and was successfully completed by 2008. One of the main objectives of the program was strengthening the mountain forests of the Greater and Lesser Caucasus. In total, 3,925 ha of oak, beech, walnut, and hazelnut were planted on denuded mountain slopes. One component under Azerbaijan’s forest restoration policy is the strengthening of seed collection and nurseries. A number of international corporations operating in Azerbaijan in other sectors such as oil exploration have also financed reforestation as part of their corporate social responsibility efforts. ( REF _Ref17885313 \h Table 3.8)Table STYLEREF 1 \s 3. SEQ Table \* ARABIC \s 1 8Forest Restoration in the Forest Fund (2000–2017, hectares)200020052008201120132017– hectares –Forest restoration in the Forest Fund5,3009,70010,10010,50010,90010,700of which - artificial regeneration2,0003,9003,8003,9003,9003,500- forest plantation in ravines, gorges, sandy places and other non-arable lands26565665284984Area of sanitary felling5,5002,0001,7004,7002,4004,000 Source: State Committee of the RepublicDespite recent controls over crimes and forest protection, the level of reported illegal logging in Azerbaijan is still high. Data in REF _Ref17885648 \h Figure 3.1 demonstrates the development of officially recorded illegal logging from 2010 to 2017, and it shows wide annual fluctuations: in 2017, there was a sharp jump in recorded illegal logging, the total amount of which was 55,437 m3 of wood, almost twice to the previous years. However, it needs to be recognized that only a small share of illegal logging cases is recorded, and the changes in the number of cases may be due to changes in crime level or in enforcement activities. Some key factors that have been recognized as leading to poor governance and corruption in the sector include: (i) low salaries of local forest officials and of local populations; (ii) insufficient funding for forestry works and the use of outdated standards, technology, maps, and regulations; (iii) under-qualified staff; (iv) an inconsistent regulatory framework; and (v) poor cooperation between government organizations and the private sector due to a high level of bureaucracy.Figure STYLEREF 1 \s 3. SEQ Figure \* ARABIC \s 1 1Illegal Logging in Azerbaijan (2010-2018, m3)Source: Forest Development Department of the Ministry of Ecology and Natural ResourcesNational Forest Policies and Legal Framework The national forest legislation focuses on the rational use of forests and their protection, preservation, and reproduction. It covers the preservation of biodiversity of forest ecosystems as well as the increase of values of the forests. The Forest Fund in Azerbaijan is state property. State management of the Fund and its use in preservation, protection, and reproduction of forests and the land is vested in the Cabinet of Ministers, particularly in MENR, its Department of Forest Development/Forest Development Service, and local authorities. The management, protection, and sustainable use of forests and natural resources in Azerbaijan is strictly separated among various governing structures. The functional roles and the public management in the use, preservation, and protection of forest funds and the reproduction of forests are based on the following principles: (i) development of the economy; (ii) the protection of natural environment; and (iii) the rational use of forest fund according to the interests of the country. The Government of Azerbaijan has recently launched new initiatives to revitalize the forest sector. It has also expanded its engagement with various stakeholder groups, including the private sector. One such initiative is the newly established National Forestry Advisory Committee (NFAC), which includes government, scientific, business, and relevant public stakeholders. The NFAC’s role is to provide advisory support for decision making on key issues of the forest sector. The main objectives are sustainable use, conservation and regeneration of forest areas, the development of the sector through the prevention of illegal logging, providing reliable information on the status of forests, attracting investments from the private sector, and re/afforestation. The National Forest Program (NFP) recognizes the role of the private sector as a key actor in the forest sector development of the country particularly in reforestation and land restoration. The NFP is being updated by the MENR in 2019. In the update process, the main roles of the private sector are identified as:Restoration: focusing on afforestation activities in small towns and provinces to ensure the development of wood processing industries; Ecotourism: environmentally responsible tourism in natural areas to enjoy nature to promote conservation and to develop market-driven businesses in state owned forests through public-private partnerships; andNon-timber forest products: linked to the development in the agricultural sector.Wood IndustryMENR began large-scale reforms in the forest sector of Azerbaijan in 2018. In 2019, the Department of Forest Development was reorganized into the State Forest Development Service. The regional administration was restructured when 15 regional forest service centers were established to consolidate more than 40 forest administrations. After the reorganization, MENR decided to restart sanitary logging and other types of management logging such as thinning, but not clearcuts. The regional forestry development offices procured modern, cost-effective, and high-performance sawmills. From 2019 onwards, logging volume is expected to be roughly 62,000 m3 annually. This figure will be adjusted on a yearly basis. The volume to be harvested will be included in the regional forest management plans. Most of the wood will be sold to the business sector for industrial purposes. An economic department was established to account for and sell the harvested wood. Centralized sales of products at market prices will be organized.The current production potential of the natural forests in Azerbaijan is low, and there has been increasing interest from the authorities in establishing fast-growing tree plantations on farmland to meet the demand for wood products. However, due to a lack of supporting provisions in the Azerbaijan Republic Forest Code (Forest Code of 1997), forest plantations would have ambiguous legal status. In most cases, forests would be expected to be created on non-forest private land and would be commercial production forests. By law, all forests are protection forests and belong to the State. Establishing new forests will require changes of the land use category. Wood processing is a small and undeveloped sector in Azerbaijan. All forests in Azerbaijan are classified as protected or protection forests (Forest Group 1), and the law prohibits any type of felling except for sanitary logging and thinning. In 1999, Azerbaijan had practically stopped the commercial production and industrial use of local roundwood. As a result, there are no local companies engaging in wood harvesting. Woodworking and furniture factories use only imported raw materials but can also purchase limited quantities of wood confiscated from illegal logging. The amount of fuelwood harvested by the state is not enough. Most of it is distributed among public institutions such as schools, kindergartens, hospitals, etc., and villagers are compelled to fell trees without authorization or to buy illegally harvested wood from third parties. The interviews with local residents revealed that every family needs 8 to 9 m3 of timber in the winters. Some respondents indicated that they use tree branches for both heating and cooking in special clay stoves (tandirs) instead of fuelwood, because the law does not prohibit the use of tree branches. Some households also use pressed nutshells as an alternative source of heating. However, there is not enough of this resource to satisfy the communities’ needs for heating energy. Access to alternative energy supplies would be relatively easy to establish, as 94 percent of villages have access to gas supply.Ten furniture and woodworking enterprises in the country were interviewed to determine the situation in the business sector. Most of the factories used imported raw roundwood and intermediate goods from Russia and Ukraine. Some 85 percent of the furniture production market uses furniture panels such as laminated chipboard and laminated medium density fiberboard (MDF). The key raw materials and their prices are presented in REF _Ref18071219 \h Table 3.9 REF _Ref18071237 \p \h below. The main products of the industry are parquet, joinery and building components, doors, furniture, and musical instruments.Table STYLEREF 1 \s 3. SEQ Table \* ARABIC \s 1 9Timber Used by Furniture and Parquet Factories (source and price)Timber species:Source according to official documentPrice (CIF* at mill gate)Oak importedUS$ 1,450AshimportedUS$ 800-850BeechimportedUS$ 450-500HornbeamimportedUS$ 850-900PineimportedUS$ 250-270Linderimportedn/aChestnutimportedUS$ 800-850Laminated MDF importedn/aLaminated chipboardimportedn/aBirch US$ 200-250LarchUS$ 250-300*Cost Insurance FreightSource: Results of interview and sources of wholesale tradeMedium-term Development OptionsThe forests of Azerbaijan have gone through notable changes and their quality has declined in the past decades: the area of mature oak and beech stands has reduced considerably, and their regeneration is insufficient. Addressing this negative trend and creating an enabling environment for private sector development would require action in several areas. In production forests, Azerbaijan would benefit from strengthening forest regeneration activities, ensuring natural regeneration and planting valuable wood species. There is also a need for regulatory reforms to provide more clarity to forest sector operators.Forest legislation needs to be improved in three different areas. First, normative acts that regulate the use of forest should be more precise and detailed. Second, forest legislation should be subject to amendments that provide small and medium businesses with better operating conditions. Third, it is important to have laws that guarantee effective action against illegal logging. There is also a need for targeted programs that aim to raise the awareness of the local populations about forest resources. Local communities must also be actively involved in the sustainable use and management of forests. Currently, there is lack of clarity in key forest management concepts. Legislation does not provide clear definitions for such important concepts as ‘illegal logging’, ‘sustainable use of forest’, ‘sustainable forest management’, or ‘inefficient’ or ‘unsustainable methods of forest management’. Defining these terms more clearly can contribute to better forest management. There is a need to amend the forest legislation with the introduction of definitions of key terms to promote the creation of sustainable plantations, to develop enforcement mechanisms, and to enhance the capacity of the supervising bodies to meet new requirements. Many different stakeholders are involved in forest sector development in Azerbaijan. The table below list concerns, observations and recommendations for the public sector raised by key stakeholders in the industry including private operators, state officials, and independent experts. ChallengeRecommended interventionDifficulty in differentiating imported and illegal local timber products in wood processing factories.No certification to prove legal source and sustainable harvesting practices.Facilitation of dialogue between the government and the private sector for the application of a national system of voluntary forest certification and technical assistance in helping Azerbaijan adopt internationally recognized certification initiatives. Develop and apply anti-corruption mechanisms in the forest sector. Demand for timber exceeds the ability of the forest to regenerate leading to degradation and illegal anization of Model Forests to demonstrate sustainable and legal use of forest resources widely implemented in the country.Creation of modern sustainable standards of forest harvesting and forest restoration. Lack of collaboration among timber producers and ineffective cross-sectoral cooperation.Establishment of national association of timber producers for collaboration among different stakeholders. This should be led by the private sector.Lack of mechanisms for stakeholder (community, local government, industry, etc.) involvement in reforestation and sustainable forest management.Active involvement of stakeholders (communities and self-governing bodies) in forest management. The barriers preventing their involvement should be analyzed in more depth and appropriate measures implemented.Lack of economic incentives to renew machinery with modern, efficient technologies.Improvement of financial and technical mechanisms to finance reforestation and sustainable management of forests with the provision of modern technical equipment and introduction of new industrial technologies. Mechanisms to support the collection and use of logging residues and the promotion of use of alternative energy sources (chips, briquettes, or other biofuel from wood waste).Much like in Armenia, the domestic raw material base for wood processing in Azerbaijan is very small and does not allow the development of a large-scale forest industry. The Government has recently decided to increase harvesting in the country moderately. However, the available volumes of domestic raw material will remain small. If the industry is to develop in the short term, it will require a significant increase of import of raw material. The Government of Azerbaijan recognizes the need to increase forest cover in the country, and this can provide opportunities for private sector engagement. While some of these new forest landscapes will be financed by both domestic and international public resources, private investments can also play a role. This would include both fast-growing plantations to increase sustainable fuelwood supply and the production of industrial wood with longer rotations. In particular, fast-growing fuelwood plantations could be an option for rural land owners to diversify their incomes by off-farm income. This would also help Azerbaijan to reduce the pressure on its natural forests, which is mainly a result of excessive fuelwood demand. The promotion of private woodlots would require both regulatory reforms and financial support as well as extension services, particularly if smallholders and private non-industrial forest managers are involved. One specific example is resolving the current legal ambiguity related to private forests (see paragraph REF _Ref17990546 \r \p \h 55 above) to ensure that private investors including smallholder woodlot owners have full legal rights to the wood they produce on their land.Georgia Country ContextGeorgia is a rich country in terms of the diversity of its forest ecosystems and forest cover. In 2017, 44.8 percent of the country territory was classified as forest land (3,124,200 ha), while the area with actual forest cover accounts for 2,690,000 ha (38.5 percent) ( REF _Ref13674892 \h Table 4.1). The total volume of forest is 454.5 million m3 and the annual average increment is around 4.5 million m3. Currently, 22.6 percent of the forest fund is located in occupied territories not under Government control (507,000 ha in the Autonomous Republic of Abkhazeti and 173,600 ha in the Samachablo/Tskhinvali regions). Table STYLEREF 1 \s 4. SEQ Table \* ARABIC \s 1 1 Forest Area in Georgia by Region (2017, thousand hectares)Forest areaOf which covered by forest– 1000 ha –Forest area under the Agency of Protected Areas* 596,2 317,2Forest area under the Forestry Agency of Adjara150,1141,8Forest Area of Abkhazeti AR ** 369,0 346,0Forest area under the National Forestry Agency***2 008,91 885,0- of whichGuria85,982,5Imereti312,4299,9Kakheti288,4268,2Mtskheta-Mtianeti250,5235,4Racha-Lechkhumi and Kvemo Svaneti281,9267,8Samegrelo-Zemo Svaneti272,3256,0Samtskhe-Javakheti133,4128,1Kvemo Kartli146,7133,5Shida Kartli237,3213,6Total3 124,22 690,0*Including Autonomous Republic of Abkhazeti and Samachablo/Tskhinvali region. **On January 1, 2003. *** Including Tskhinvali/Samachablo region.Source: Ministry of Environment Protection and Agriculture of Georgia. Forestry Agency of Adjara. Agency of Protected Areas. National Forestry Agency.Effectively all (95 to 98 percent) Georgian forests have natural origins and represent a globally important habitat. Georgia boasts up to 400 species of trees and shrubs, of which 61 are endemic to the country and an additional 43 which are endemic to the Caucasus region. Georgian forests represent not only a unique and very wealthy habitat for fauna, but also an important migration corridor for various bird species. These factors endow the Georgian forest with the crucial function of preserving genetic biodiversity. The Georgian forest has been ranked among globally valuable areas for its biodiversity by the World Wildlife Foundation (WWF) and the International Union for Conservation of Nature (IUCN). Forests in Georgia are all publicly owned, and there have been no initiatives to have them privatized. However, some state forests have been leased out under long-term concessions to private operators. The main management agency is the NFA while the Agency of Protected Areas (APA) is in charge of the protected areas. Some areas are managed by the Tbilisi municipal administration and Adjara Forest Agency. The NFA manages 64 percent of total forest area with the largest forest areas in Imereti (16 percent of NFA lands), Kakheti (14 percent), Racha-Lechkhumi and Kvemo Svaneti (14 percent), and Samegrelo-Zemo Svaneti (14 percent). NFA managed lands (‘State Forest Fund’) are mostly under forest cover with only 6 percent under other land uses. Protected areas under APA cover 596,100 ha or 19 percent of the forest area. ( REF _Ref15317429 \h Figure 4.1.) Figure STYLEREF 1 \s 4. SEQ Figure \* ARABIC \s 1 1Forest Area of Georgia by Region (2017, %)Source: Prepared based on data from National Statistics Office of Georgia, geostat.geThe most common tree species in Georgia is beech (Fagus spp.) with 52 percent of total stocking or 43 percent of forest area. This is followed by firs (Abies spp.; 17 percent of stocking; 7 percent of area) and spruce (Picea spp.; 8 percent of stocking; 5 percent of area). Valuable hardwoods like oaks (Quercus spp.) and hornbeam (Carpinus spp.) each covers 10 percent of the forest area, while their share of stocking is lower at 5 percent each ( REF _Ref15317542 \h \* MERGEFORMAT Figure 4.2). One third (33.4 percent) is medium age (852,300 ha), and another 35.5 percent is mature and over-mature (904,400 ha). Figure STYLEREF 1 \s 4. SEQ Figure \* ARABIC \s 1 2Distribution of Dominant Species of Trees in Georgian Forest by Area (%) Source: prepared based on data retrieved from National Forest Agency website ’s forests have poor accessibility, which has been an impediment to their commercial utilization. Eighty percent of forests are located on mountains with slopes steeper than 20°. Seventy percent are located 1000 m or more above sea level, with only 7 percent below 500 m. One-third (31 percent) of forests can be found at altitudes of 1,500 to 2,000 m above sea level. Moreover, 43 percent are located on 31° or steeper slopes.The official firewood production estimate in 2017 was 630,000 m3, which is close to the levels across the previous four years ( REF _Ref13836908 \h Table 4.2). Much of this firewood is obtained through the soon-to-be-discontinued social cut system ( REF _Ref29558404 \h \* MERGEFORMAT Text Box 2). However, independent studies indicate that the actual numbers are much greater. For example, the Georgia Wood Market Study estimates that, in 2014, the volume of timber harvested for fuelwood and industrial use was around 2.7 to 3 million m3 or four to five times the officially recorded harvest. The study found that at least 75 percent of timber (2 to 2.3 million m3) was harvested illegally, while illegal logging was only 45,915 m3 in 2017 according to official statistics. While there are variations in logging volumes over the years, it is evident that logging estimates based on implicit consumption are by an order of magnitude higher than the legal harvesting and illegal logging detected and officially recorded by law enforcement. The problem of illegal logging has its roots in the 1990s, when Georgia faced severe economic crisis. Limited stocks and increasing prices of heating resources led to the unsustainable use of fuelwood. Considerable amounts of forest were cleared to produce fuelwood, resulting in increasing pressure on forests. Table STYLEREF 1 \s 4. SEQ Table \* ARABIC \s 1 2 Timber Harvesting and Recorded Illegal Logging (m3)?20132014201520162017Felled timber723,030687,171712,336628,035630,462Illegal logging6,03945,91544,61228,58635,022Source: Ministry of Environment Protection and Agriculture of Georgia. Forestry Agency of Adjara. Agency of Protected Areas. National Forestry Agency.Text Box SEQ Text_Box \* ARABIC 2Social Cut System in GeorgiaWood energy is by far the most important type of forest use. Georgia has a system of social forest management or social cut through which rural communities are entitled to subsidized fuelwood from state forests (i.e., forests and forest authorities provide social services without financing from formal social programs). Wood energy covers some 50% of the population’s energy needs. Current forest use is considered unsustainable almost entirely due to fuelwood extraction. Recent official estimates put annual fuelwood use at about 3.5 million m3, while the sustainable yield is estimated at 0.6 million m3. Another estimate from the Caucasus Environmental NGO Network in 2016 approximated that the sustainable supply would be only 0.3 million m3, while estimated use is 2.8 million m3. This demonstrates that supply estimates are somewhat inaccurate due to the lack of detailed data. In any case, there are strong indications from Global Forest Watch, that forests are being degraded and deforestation is happening in parts of the country.The proposed new Forest Code discontinues the social harvesting system as one of the key measures to enhance the sustainability of the forestry sector. This was recommended in 2016 when the State Audit Office concluded in its audit on social use of timber resources that social cutting activity is not sustainable. The present social cutting system provides 600,000 families with the right to harvest fuelwood, under the NFA supervision, directly from the forest against a small payment. While contributing positively to meeting energy needs of rural poor and public institutions such as schools, the harvest levels appear to be above sustainable levels and the system also encourages and hides illegal logging. The system diminishes the potential of the state management organizations to sustainably finance their operations. The State Audit Office (2016b) recommended that it is necessary to gradually reduce the demand for firewood, reduce the market for illegal timber, and ensure legal supply of firewood in order to achieve sustainability.In addition to unsustainable commercial and household harvesting, insufficient resources and attention have greatly increased the risks associated with diseases, pests, and fire. The impact of various diseases and wild fires have increased and caused forest degradation. In particular, attention should to be paid to the negative impacts of diseases on unique boxwood (Buxus colchica) and chestnut (Castanea spp.) forests. In addition, illegal logging has also caused considerable harm to chestnuts forests. Special actions were taken by the NFA and the international community to fight various diseases. Fire is another factor with an adverse impact on forests. The number of fire events and area affected fluctuate widely. In 2017, as many as 87 forest and wild fires were recorded impacting 1,582 ha of forest ( REF _Ref13837861 \h Table 4.3). After the devastating forest fires in Borjomi in 2008 and 2017, the Government has paid increasing attention to forest fires.Table STYLEREF 1 \s 4. SEQ Table \* ARABIC \s 1 3 Forest/Wildfires?20132014201520162017Number of fires (unit)4869835187Area covered by fire (hectare)2,6821,723 216 3981,582Source: Ministry of Environment Protection and Agriculture of Georgia. Forestry Agency of Adjara. Agency of Protected Areas. National Forestry Agency.The annual area of forest restoration has declined in the past years. In the past 15 to 20 years, only small areas have been restored. The restoration activities have been constrained by the limited financial resources available after the breakup of Soviet Union. In addition, Georgia’s legislation prefers natural regeneration. Accordingly, restoration is conducted mainly through assisted natural regeneration and the current restored area are only a small fraction of the total areas in the 1990s ( REF _Ref13838641 \h Table 4.4). Replanting or seeding is used on about one-third of the restoration area. Due to a lack of resources, these efforts have not been sufficient to compensate for the losses and degradation caused by illegal logging, diseases, or wildfires. Table STYLEREF 1 \s 4. SEQ Table \* ARABIC \s 1 4 Forest Restoration by Method (1995–2017, ha)?1995200020052010201520162017– hectare –Forest restoration13,9121,15874165142178156 - of whichseeding and planting 1,00225810111215044assisted natural regeneration12,9109006454121128112Source: Ministry of Environment Protection and Agriculture of Georgia. Forestry Agency of Adjara. Agency of Protected Areas. National Forestry Agency.Special Timber Production Licenses in GeorgiaAccording to Georgia’s legislation, timber harvesting licenses (concession) may be issued for short (one year) and long (maximum of 49 years) periods. When these licenses were issued from 2006 to 2012, the common practice was to issue timber production licenses for a maximum of 20 years. Some licenses were issued for even shorter duration of 5 or 10 years. New forest areas for commercial felling were not allocated after 2012. The licenses are transferable and new operators can enter the sector if they had access to another firm’s license. The licenses were issued through auctions to ensure transparency and equal opportunities for various firms. However, as the State Audit Office indicated that this did not really happen, and the process was not truly competitive for several reasons. First, the auctions on the forest areas were announced based on the demand from private sector representatives using unreliable data of outdated inventory. Harvestable resources indicated in the licenses were overestimated. Second, usually only one bidder took part in each auction. After winning the auction, the license holder was required to provide an inventory of the forest as well as a forest management plan, based on which the annual allowable felling was defined and approved by the competent public authority, the NFA. Often, the total allowable felling for the whole harvesting period was considerably less than that indicated in the license.In 2009, private operators were no longer required to provide a pre-harvest inventories, and only management plans were required. Most management plans focused purely on harvesting and provided very limited or no forest management or protection measures. Even with these undemanding management plans, license holders in many cases violated timber production regulations and did not meet the obligations under the license or the management plans. There were occasional inspections by authorities. However, even if violations were detected, the licenses were not canceled based on inspection results. As the State Audit Office highlighted, this meant that violations of the license terms and conditions did not lead to termination of the license. Moreover, the license documentation was generic and provided little information. The documents contained only one page with the following information: (a) the name of the license, (b) the date of issue, and (c) the size of forest area and harvestable resources. Further, the section on terms and conditions usually only included relevant decrees or resolutions or simply required the license holder to “comply with terms and condition under the law”. The requirement to “comply with terms and conditions under law” referred to all relevant laws and regulations. The legislative framework concerning the use of forest resources was often changed, resulting in unclear requirements for license holders.Currently, 28 business entities have 34 active timber production/harvesting licenses. Business operators are allowed to hold multiple licenses for timber production and several companies operate more than one license. The duration of current licenses varies: half of the licenses will expire in 2019 and 2020 (9 licenses in 2019 and 8 licenses in 2020), 5 licenses will expire in 2021, one in 2026/27, and 10 licenses in 2028 ( REF _Ref14102295 \h Table 4.5). Broadleaved beech (Fagus orientalis) and alder (Alnus spp.), as well as coniferous species including spruce (Picea spp.), fir (Abies spp.), and pine (Pinus spp.) are harvested under these licenses.The State Audit office report indicated that, during their audit in 2016, there were 38 active licenses with a total area of 166,654 ha and with the allowed stock for harvesting of 2,827,698 m3. However, only approximately 35 percent of the licensed area was fit for commercial use. Most of the area under the licenses could not be harvested due to restricting factors like steep mountain slopes, land erosion issues, or other reasons. Table STYLEREF 1 \s 4. SEQ Table \* ARABIC \s 1 5 Commercial Harvesting Licenses for of Forests by Region and Expiration YearRegionLicense expiration year Total201920202021202620272028Guria113%Imereti121412%Kakheti112412%Mtkheta-mtianeti23515%Racha-Lechkhumi Kvemo Svaneti122515%Samegrelo-Zemo Svaneti1126%Samtskhe-Javakheti23515%Shida Kartli413 824%Total9851110343%26%24%15%3%3%29%Source: based on the data received from the NFA.Soon after the 2016 audit report finding that violations do not lead to cancellations, violators received more attention and several licenses were terminated before their expiration. One particular reason was the high volume of illegal felling by other parties reported by the license holders. As operators indicated, local community members and small wood harvesting groups enter forests and conduct illegal felling to obtain fuelwood. Even though operators have forest rangers to prevent illegal felling, sometimes these rangers are not able to identify illegal cutting soon enough to stop the violators. The rangers are not able to provide efficient prevention of illegal cutting as they can only notify responsible state institutions. The rangers are not equipped to restrain illegal harvesters until competent authorities arrive on site. Despite these limitations, they are held liable for all illegal activities in their concession areas. Structure of the Wood Production and Processing Industries in GeorgiaRoundwood export from Georgia is prohibited. Accordingly, logs go through processing to produce sawnwood and other products for exports and use in domestic markets. This has led to the vertical integration of the industry in Georgia. Logging (felling, skidding, haulage) and processing (mainly sawmilling) are vertically integrated in companies that hold a wood harvesting license. As a result, many firms produce primary (i.e., low- and high-quality sawnwood, sawn boards/beams, planks, etc.) as well as some secondary industrial products (i.e., builders’ joinery, unassembled flooring, wood packaging, etc.) for construction and woodworking industries. Some license holders also have the capacity to produce furniture and plan to expand their production by introducing new production lines to manufacture high quality furniture. LoggingWhen the wood harvest licensing system was introduced in 2006, logging was the main focus for private operators. Companies mainly employed local resources that were easily available and relatively cheap to deploy. New harvesting technologies, especially new heavy machinery, were not introduced at all or their use in the harvesting process was limited. Most, if not all, logging machinery that operators use is outdated. The machinery used is from the pre-1990s with an average age of more than 30 years. These machines require constant repair. Obtaining spare parts is challenging and results in high operational costs. In the firms sampled, some 20 percent of revenues from logging operations is spent on maintenance of machinery. In addition to repair costs, unreliable machinery leads to forgone revenues due to frequent interruptions in logging and serious challenges to timely operations and logistics such as meeting log transportation time limits and harvesting as much timber as allocated by annual plans. Harvesting season usually starts in June and lasts until late November. Adverse weather conditions may reduce the season to less than even six months. Logging is commonly conducted by one or several small wood harvesting brigades of five to six persons with one person in charge of leading the brigade and reporting directly to the operator. One brigade may harvest from 500 to 1,500 m3 of logs in a month depending on the harvest area location (e.g. availability of roads and their conditions), the available technology and methods to use for harvesting and transport (e.g. machinery or animals), and weather conditions. The brigades are often hired externally, while larger operators may also have brigades employed directly by the firm. If logging is outsourced, subcontractors performing the logging are responsible for covering operating costs (including machinery) and managing the taxation of their incomes. This allows license holders to avoid administrative controls by the authorities, to reduce costs, and to transfer compliance risks to the subcontractors. There is little vocational training in the forest sector. Employees are usually self-trained, and operators consider them professional if they have significant practical wood-harvesting experience. The firms interviewed highlighted that their employees do not need additional training with the old technologies they currently use. However, the situation will change if the firms invest in new machinery. The employees will need additional capacity development if new technologies are introduced. ProcessingLogging operations were the primary businesses for license holders at the beginning of the system in the early 2000s. However, after the introduction of restrictions on export of logs and the decision to stop issuing new licenses, operators focused their attention on increasing value added and processing logs themselves. This allowed them to export and increase the value and profit from their products. Some operators moved from primary processing to secondary processing and started furniture production. Almost all business operators interviewed had their own wood processing units. Compared to logging, most processing machinery is somewhat newer with the average age of 10 to 15 years, and very few machines are from the Soviet era. On average, daily production for operators that employ a small-sized horizontal bandsaws process is 15 m3 of sawnwood, while operators with big vertical bandsaws produce 40 to 60 m3. The machinery used by small sawnwood producers was relatively new, less than 10 years old, as it is usually not as sophisticated and durable as machinery used by larger companies. Variable production cost is on average is GEL 5 to 10 to produce 1 m3 of sawnwood. The yield of sawnwood from both conifer and broadleaf logs was reported to be, on average, 75 percent. This seems exceptionally high compared to international practice and local experts’ opinions. Based on information from the operators, sawnwood conversion (i.e. beams, boards, and planks) is 68 percent of hardwood sawing, while five to seven percent goes to other secondary wood products (i.e. unassembled flooring, wood packaging, etc.), and the remaining is wood waste. In softwood production, the approximate sawnwood yield was 72 percent, and the rest is used for secondary small wood product production as well as biomass waste. Respondents indicated that the technologies they had for processing were adequate to produce the products and quality required by the market. The on-site visits revealed that, while some license holders’ sawmill factory buildings required fundamental rehabilitation, most of them were in satisfactory condition. Also, new regulation linked with the processing of logs now oblige operators to organize wood processing in buildings with special requirements. These requirements cover not only safety and environmental factors, but also strengthen oversight/control mechanisms such as cameras for capturing the whole production process for better supervision in case an audit or investigation requires more detail information. The limited remaining licensing periods have stalled investment. Most firms are not considering renewing their processing lines as their harvesting licenses will expire soon. However, some firms are in the business with a longer vision and consider continuing operations even after license expiration. They are planning to invest in furniture production and are considering buying logs from the state after the NFA starts supplying all roundwood in the country (see discussion below in paragraphs REF _Ref18067980 \r \h 107 and REF _Ref18067983 \r \h 108).The factories producing in the range of 1,000 to 2,000 m3 of sawnwood employ on average 20 persons. Firms with a production volume of 2000 to 5000 m3 employ 30 to 40 persons, and firms with over 5,000 m3 production employ over 50 persons. Operators indicated that the technical workforce employed in the factory is well-qualified. The staff is generally professional as they have many years of experience in the industry. The firms also highlighted that their employees do not necessarily need formal training in using the technologies they exploit in daily operations. However, they will need training when new technologies are introduced.The mills usually produce beams/boards and planks. Coniferous products are produced for the local market, while broadleaf species, mainly beech, are used for furniture production and produced for export. Unlike coniferous products, broadleaf species are kiln dried using energy from by-product biomass residues.Harvesting residues produced in the forest are not used but are left in the forest due to the wood harvesting requirements set for operators. This includes cutting residues into smaller pieces and spreading them in the forest area or collecting and putting them together according to regulations. The residues produced in the processing factories are used as biomass for on-site heat production. Markets, Prices, Cost of Production, and ProfitabilityThe domestic market in Georgia is dominated by coniferous wood, while products from broadleaf species are mainly exported. There is little centralized price data available. The price information collected specifically for this study was based on visits to retail markets, information reported by wood harvesting license holders, and expert opinions. The prices collected were both wholesale (“ex-gate prices”) and retail. The retail market for broadleaf wood products is very small. The furniture industry uses very little solid wood. The price data was mainly collected from the Eliava Market in Tbilisi, which is the largest market for primary and secondary processed wood products in the capital and where both local and imported coniferous wood products are sold. The main sources of imports are Russia and Ukraine, and the average prices of the conifer product is GEL 550 per m3. The highest quality conifer products are imported from Russia and their price can be as high as GEL 800. As sellers highlighted, differences in prices are mainly driven by the quality of the sawnwood. They noted that sawnwood imported from Russia was of significantly higher quality compared to locally produced products. There were no broadleaf primary wood products found in Eliava other than a small number of secondary products used for flooring or other decorative purposes. The prices for domestic hardwoods were considerably high compared to imported softwoods. The cost for 1m3 of conifer sawnwood ranged from GEL 1,150 to 1,250, or US$400 to 440. A similar piece of broadleaf sawnwood ranged from US$700 to US$1,200 ( REF _Ref14108567 \h Table 4.6). There is not a high demand for broadleaf species because of their high prices, and shops are not willing to hold broadleaf wood in stock. If shops still have it in stock, they often have the superb quality sawnwood and sell it at much higher prices than it is sold for export or at the gate by its producer.Most of the furniture sold in Georgia is produced from MDF, oriented strand board (OSB) or other non-hardwood materials. These materials are cheaper and more affordable for local consumers. Furniture produced with hardwood is considered expensive and the number of buyers is limited. Local consumers willing to buy hardwood furniture are looking for high quality, well-designed products which are often imported. It is hard to find furniture shops in Georgia selling locally produced high quality hardwood furniture. The limited amount of high-quality furniture produced locally is often made to order with long wait periods. As a result, consumers prefer imported furniture. Table STYLEREF 1 \s 4. SEQ Table \* ARABIC \s 1 6 Retail sawnwood prices (US$/m3)Wood speciesRetail PriceLocally produced:Beech US$ 700 Lime US$ 700 Maple US$ 1,150 Chestnut US$ 1,150 Acacia US$ 1,200 Imported:Larch (Russian) US$ 950 Ash (Russian) US$ 1,150 Conifer (Russian) GEL 1,150–1,250 (~US$400–440)Source: based on prices reported while visiting the Lumber Base (a local wood retailer).As for production costs, in the sample enterprises, the weighted average variable cost of sawnwood production for beech is GEL 406 with a range of GEL 153 between minimum and maximum costs. The weighted average ex-mill gate sales price is GEL 763 with a range of GEL 56 between minimum and maximum costs. ( REF _Ref14168018 \h Table 4.7) The market price for medium grade domestic quality products ranges from GEL 780–800, excluding premium quality and value added tax (VAT). There is a wide variation in the prices of primary wood products based on the quality of individual items. These differences are caused by natural factors such as coloring, knots, other imperfections, etc. Table STYLEREF 1 \s 4. SEQ Table \* ARABIC \s 1 7 Costs and Prices of Primary Sawnwood Products (beams and planks; beech)Costs of production* Mill gate price range Weighted average mill gate price Market price weighted averagemaximumminimum– GEL/m3 –406520367728-784763780-800 * excluding capital costSource: based on prices reported while visiting the Lumber BaseSawmills generally maximize the share of premium quality products and sort their products accordingly. If wood is sold unsorted, it is usually priced based on the lowest qualities in the batch. Certain firms indicated that they try to sell their sawnwood based on quality: however some big buyers do not differentiate between quality categories I, II and III and pay the same amount, up to US$410, for all three categories. Only category IV quality products have a lower price of US$200. This factor plays a significant role in price formation for these wood producers and prices with weighted average is as much as US$336 ( REF _Ref26540438 \h Table 4.8).Table STYLEREF 1 \s 4. SEQ Table \* ARABIC \s 1 8 Price Calculations Based on Various Qualities of Dry Beams and Planks (beech)Yield in %Mill gate price in US$Mill gate price in GELWeighted average price I quality154101,128GEL 925/US$ 336II quality20III quality30IV quality35200550Source: based on prices reported while visiting the Lumber Base.For coniferous species, the weighted average cost of production is GEL 355, with a range of GEL 131 between the minimum and maximum average costs of different producers. The weighted average price of conifer products at gate is GEL 440, while the market price is approximately GEL 550 including VAT. ( REF _Ref14445972 \h Table 4.9) Table STYLEREF 1 \s 4. SEQ Table \* ARABIC \s 1 9 Producers’ Costs and Prices for Selling Primary Conifer Sawnwood Products Costs of productionMax-min gate price weighted average gate price Market price weighted averagemaximumminimum– GEL/m3 –355454323420-550440550Source: based on prices reported while visiting the Lumber Base.The stumpage fees paid by the operators to the Government depend on the category of the timber (I or III). For one m3 of beech, license holders pay GEL 47 for industrial wood or GEL 19 for fuelwood. For conifer species, license holders pay GEL 22 for industrial wood or GEL 9 for fuelwood. ( REF _Ref14172888 \h Table 4.10) The average stumpage for 1m3 of beech log, when taking into account the amount of both categories, is GEL 43. These fees are set by legislation and are the same for all commercial operators. The license holders are obliged to also pay fees for the license. This fee is the price over the list price that the operators bid on when the concessions were awarded and varies depending on the bidding price that the operator won in the public auction. In addition to these two payments, the operators also pay 18 percent VAT for the sawnwood sold on the local market, which is around GEL 50 for conifers. Analyses revealed that timber production in Georgia is quite profitable. Broadleaf timber production is more profitable than conifer timber production. The domestic market for hardwood products is small due to high prices. Local consumer demand is mainly concentrated on relatively cheap furniture or other goods made of less expensive coniferous wood or other material (MDF, OSB, etc.). Export agents/intermediaries are few, local consumption is minimal, and some harvesting operators find it difficult to sell their hardwood timber products. However, those operators focusing on export sell their products at considerably high prices and receive a higher profit margin than the operators harvesting coniferous products for local market. Table STYLEREF 1 \s 4. SEQ Table \* ARABIC \s 1 10 Stumpage Fees (GEL/m3)Groups and types of wood speciesCategory I (industrial wood)Category III (fuelwood)– GEL/m3 –Group I: Yew, boxwood, juniper, Caucasian-elm, walnut10241Group II: Oak, chestnut, ash, elm, mulberry, maple, linden, common pear, wild pistachio tree6024Group III: Beech, hornbeam, acacia, Caucasian hackberry, hop hornbeam4719Group IV: Pine, spruce, fir, cedar, cypress, Japanese cedar229Group V: Oriental hornbeam, plane-tree, other forest wood species135Source: Law of Georgia on fees for the use of natural resourcesExport and Import of Timber Products in GeorgiaDespite its relatively modest industrial roundwood production, Georgia has notable wood product exports. The total export of wood products totaled US$37.5 million in 2017. Of the total export, almost three quarters came from two product categories. Wood sawn or chipped lengthwise, sliced or peeled, sanded or finger-jointed (HS: 4407; 45 percent of total) and Other articles of wood (HS: 4421; 28 percent). Other notable product categories were Particle board and similar board of wood or other ligneous materials (HS: 4410). Builders' joinery and carpentry of wood (HS: 4418), and Fiberboard of wood or other ligneous materials (HS: 4411). ( REF _Ref14181431 \h Table 4.11)The total wood product export volume in 2017 was 38,000 tons, of which the largest share (56 percent) came from Wood sawn or chipped lengthwise, sliced or peeled, sanded or finger-jointed (HS: 4407) and Particle board and similar board of wood or other ligneous materials (HS: 4410; 25 percent). If converted to roundwood equivalents, these export volumes present a notable wood flow out of the country. On average, the equivalent wood volume needed to produce the export products is in the range of 174,500 m3(). Compared to the 630,000 m3 of legal harvest, exports represent close to 30 percent of all wood use. However, this may overestimate the share as the statistics do not separate re-exports of imported wood products and which share of roundwood use is imported. Table STYLEREF 1 \s 4. SEQ Table \* ARABIC \s 1 11 Export of Wood Products (HS code 4401-4421, in US$, tons and roundwood equivalent) 2016201720162017– 1,000 US$ –– tons –Wood sawn or chipped lengthwise, sliced or peeled, sanded or finger-jointed13,61316,80834,88543,516Particle board and similar board of wood or other ligneous materials3,3707,1998,96719,713Builders' joinery and carpentry of wood2531,3242641,072Fiberboard of wood or other ligneous materials8041,0421,3532,418Fuel wood, wood waste and scrap, briquettes, pellets or similar forms3633865,4186,352Other articles of wood8,15010,3402,9784,115Other wood product categories combined319383552687Total 26,87337,54554,41777,873Roundwood equivalent, m3--------122,009174,600Source: based on National Statistics Office of Georgia.Further analyses of the biggest wood export category, Wood sawn or chipped lengthwise, sliced or peeled, sanded or finger-jointed (HS: 4407), by species indicates that beech is the most commonly exported species. Its share has also grown in the past years while that of oak and conifers has declined. The share of beech grew from 55 percent of total sawnwood exports in 2009 to 89 percent in 2017, while the share of conifers reduced from 32 percent to one percent in the same period. ( REF _Ref14184534 \h Figure 4.3)Figure STYLEREF 1 \s 4. SEQ Figure \* ARABIC \s 1 3Exports of Sawnwood by Species (HS: 4407, 2009-2017; 1,000 US$)Source: based on National Statistics Office of Georgia.The most important export destination is Iran with 41 percent of total exports in value terms followed by neighboring Armenia (12 percent) and Azerbaijan (11 percent). Other developed and EU- countries have relatively small shares, under 10 percent, i.e., Germany (9 percent), Belgium (7 percent), the Netherlands (5 percent), Poland (5 percent), and Italy (3 percent). Countries import different categories of products. While neighboring countries import large quantities of wood products and are the main clients for Georgian exporters, their products are of lower value. The unit value of exports to Iran, Armenia, and Azerbaijan is roughly only 15 percent of the average unit value of exports to the EU. The lowest value products are destined for Turkey where the unit value is less than half of the exports to other neighboring countries. ( REF _Ref14185240 \h \* MERGEFORMAT Table 4.12)Table STYLEREF 1 \s 4. SEQ Table \* ARABIC \s 1 12Wood Product Exports by Country (2016–2017, HS code 4401-21, 10 largest)20162017Share (2017) 20162017Unit value (2017)– 1,000 US$ –– % –– tons –– US$/ton –Iran11,08715,42041%31,41241,651370Armenia4,1284,32812%10,91011,880364Azerbaijan2463,99811%35610,511380Germany4,1633,4289%1,5841,3642,513Belgium1082,5827%379572,698Netherlands3,4991,8695%1,2817542,479Poland3931,8625%1387472,493Italy1,5581,3083%6686112,141Turkey1,3411,1473%7,4777,929145France746392%332502,556Source: Prepared based on National Statistics Office of Georgia.Wood product imports totaled to US$113.9 million in 2017. The largest imports were for Fiberboard of wood or other ligneous materials with 27 percent share and Particle board and similar board of wood or other ligneous materials with 25 percent share. These were followed by Builders' joinery and carpentry of wood at 15 percent and Plywood, veneered panels and similar laminated wood at 12 percent. The leading sources of wood product imports to Georgia by value include Turkey (35%), China (20%), and Russia (16%). The total import value amounts to more than US$ 10 million ( REF _Ref14446052 \h Table 4.13). Countries with import volume in the range of US$2 million to 10 million include Ukraine (6%), Germany (4%), Belarus (4%), Poland (3%), and Italy (2%). Other countries (mainly EU member states) have an import share of 1% or less.Table STYLEREF 1 \s 4. SEQ Table \* ARABIC \s 1 13Wood Products Imported by Country (2016–2017)Country20162017Share (2017)– 1,000 US$ –– % –Turkey 31,503 39,298 35%China 18,123 22,488 20%Russia 17,587 18,587 16%Ukraine 7,717 6,716 6%Germany 3,321 4,779 4%Belarus 2,775 4,764 4%Poland 2,095 2,972 3%Italy 1,917 2,518 2%Source: prepared based on database on import statistics, National Statistics Office of Georgia.Georgia’s trade balance in wood products is negative. The country imports roughly three times the value of exports with a net negative trade balance of US$76.3 million The only product categories where trade balance is positive are Wood sawn or chipped lengthwise, sliced or peeled, sanded or finger-jointed and the generic Other articles of wood ( REF _Ref14187651 \h Table 4.14). The negative trade balance can be explained by the natural endowment of forest, harvesting potential, and current structure of the industry. It also indicates that there is room for expanding wood product supply to the domestic market and that domestically produced wood products in Georgia could replace certain types of imported goods. Moreover, several imported products are produced from industry residues and byproducts left after primary timber production. Local production could support more efficient use of local wood raw material rather than burning it or sending it to landfills. Table STYLEREF 1 \s 4. SEQ Table \* ARABIC \s 1 14Trade Balance in Wood Products (2017, HS: 4401–21)Import 2017Export 2017Export-importExport/Import– 1,000 US$ –– % –Fiberboard of wood or other ligneous materials 30,882 1,042 - 29,839 3%Particle board and similar board of wood or other ligneous materials 28,592 7,199 - 21,393 25%Builders' joinery and carpentry of wood 17,018 1,324 - 15,694 8%Plywood, veneered panels and similar laminated wood 13,914 37 - 13,877 0%Wood sawn or chipped lengthwise, sliced or peeled, sanded or finger-jointed 6,002 16,808 10,806 280%Wood in the rough, whether or not stripped of bark or sapwood 4,019 16 - 4,004 0%Planed (shaved) wood 3,881 165 - 3,717 4%Other articles of wood 1,985 10,340 8,355 521%Hoopwood; split poles; piles, pickets and stakes of wood 1,933 19 - 1,914 1%Marquetry and inlaid wood; caskets, cases and other articles, of wood 1,274 5 - 1,270 0%Casks, tubs and other coopers' products and parts thereof, of wood1,150 16 - 1,133 1%Packing cases, boxes, drums and similar packings, cable-drums, pallets of wood 746 28 - 718 4%Tableware and kitchenware, of wood 561 1 - 560 0%Railway or tramway sleepers of wood 523 53 - 471 10%Veneer sheets and sheets for plywood and other wood sawn lengthwise 423 - - 423 0%Fuel wood, wood waste and scrap, briquettes, pellets or similar forms 382 386 4 101%Wooden frames 165 4 - 161 2%Densified wood 160 0 - 160 0%Wood charcoal 159 43 - 116 27%Tools, tool bodies, tool handles, broom or brush bodies, of wood 82 59 - 22 73%Wood wool; wood flour 2 - 2 0%Total 113,853 37,545- 76,308 33%Source: Prepared based on National Statistics Office of Georgia.Medium-term Development OptionsGeorgia has been building a new and modern approach to its forest management, including wood harvesting and processing, through a comprehensive reform process over the past 10 to 15 years. ( REF _Ref14190910 \h \* MERGEFORMAT Text Box 3) The creation of sustainable forest management systems, improvements to the conditions of forests, increased protection and preservation of biodiversity, the more effective use of the economic potential of forests, equal provision of forest use by communities, and the active involvement of all stakeholders are the key drivers of the current forest reform in Georgia.Various sector-specific projects and studies have improved the understanding of the forestry challenges and have contributed to improved knowledge base and planning. Based on the studies and support from the international community, considerable work has been made to improve the regulatory framework. Several forest-related strategic documents, action plans, concept papers, and legislation have been developed and adopted. Text Box SEQ Text_box \* ARABIC 3Forest Policy Reforms in Georgia - National Forest Concept and OnwardsGeorgia has developed a new institutional framework for the forest sector in the past few years. A major breakthrough came when the National Forest Concept (NFC) was approved by the Parliament in 2013 after a multi-year, participatory process. Some of the challenges identified in the concept include a weak legal framework, a lack of proper consideration of forest values and functions in the decision-making process, rural poverty, insufficient awareness, and inadequate financing. The NFC also promotes short-rotation plantations and suggests that fuelwood from sustainably-managed forests could be cut and collected by professional (state) forest management bodies, instead of by the local population. It addresses energy efficiency and improving access to other sources of energy for rural households. A comprehensive Forest Sector Reform Strategy (FSRS), based on the NFC, has been recently formulated. A draft Forest Code is based on the NFC and FSRS and was submitted for parliamentary approval in February 2019. This code is based on modern, multipurpose management of forests to sustainably benefit a broad range of stakeholders. The code includes the principle of dividing the nation’s forests into four functional categories: protected forests, protective forests, resort and recreation forests, and utilization/production forests. It also establishes a new and improved institutional set- up with forest policy, management, and supervision functions clearly separated. The principle of sustainable forest management, including protection functions, cuts across these functional categories and across newly defined ownership categories.The new code importantly discontinues the social harvesting system as one of the key measures to enhance the sustainability of forestry. This was recommended in 2016 when the State Audit Office concluded in its audit on the social use of timber resources that social cutting activities are not sustainable. The new forest code also includes institutional changes. The main change is that management, policy and supervision functions are to be separated more clearly. The NFA will be in charge of management of state production forests (i.e. forests that are not protected areas) and remain 100% state owned. The strengthened DES in the MEPA will be in charge of supervision and law enforcement, while the Department for Biodiversity and Forests will be in charge of policy. The Government has also decided to establish a National Agency for Wildlife Management (NAWM, the former National Nursery) responsible for the development and implementation of biodiversity conservation measures outside protected areas as well as for wildlife management including hunting and fishing. The Agency will support genetic material and nursery development. Together, the NFC, the FSRS, and the Forest Code provide an enabling framework for a more strategic allocation of public and external resources as well as of non-state sector investment to improve the performance of the Georgia’s forest sector and its contribution to national economic, social, and environmental objectives. There is still a strong need to develop supporting by-laws and implementing guidance, but, overall, significant progress has already been made in terms of developing a modern, comprehensive policy and legal framework for promoting sustainable forest management.Georgia and the EU signed an Association Agreement in 2014 that entered in to force in July 2016. The agreement covers collaboration in the forest sector (articles 233, 239 and 302) and includes commitments to forest conservation and the promotion of improved forest legality and governance. Legal and sustainable timber trade, including appropriate listings from the Convention on International Trade and Endangered Species, are also to be promoted. These recent policy, strategy and legal developments have significantly improved the environment for the promotion of a modern concept of sustainable forest management nationwide. They also provide concrete guidance to promote sustainable forest management and conservation of forest-related biodiversity, soil, and water resources. However, the implementation of these new policy directions will require notable international support.As a result of the reform process, at the end of 2018, the NFA became a purely forest management body with the authority to allocate wood resources for various purposes (commercial, special, and social use) and, to take measures to ensure the health of the nation’s forests. The function of the physical protection of the forest has been transferred to the DES. With these reforms, the NFA received more flexibility to introduce SFM in Georgia and to manage the supply of roundwood from state forests, which cover the vast majority of all forests in the country. The new, restructured NFA will notably change the structure of the roundwood markets in Georgia. Some of the envisioned changes include:The NFA becomes the only institution to perform harvesting. Some private operators will still have the right to perform felling until their licenses expire. Even though the NFA will have right to perform 100 percent of the operations, the NFA itself will provide a relatively small part of the logging operations in the forest (around 30 percent) and the rest will be implemented via outsourcing to the private sector. The agency will harvest in the areas of the forest where commercial operators are not willing to operate due to various challenging factors and will also provide sanitary and other types of special harvesting;All harvested logs, no matter by whom they are harvested, will be delivered to the NFA regional warehouses, where the logs will be sorted by their quality and types. Fuelwood will be sold directly to interested stakeholders such as households, public institutions, etc. and through public auctions;By 2022, all social cutting is expected to be discontinued and the only institution selling fuelwood will be the NFA and perhaps intermediaries buying from the NFA;The NFA will also require the collection and removal of logging residues, promote their use in a sustainable manner, and promote the use of alternative wood energy resources (chips, briquettes, or other biofuel from wood waste); Logs will be sold by auction to wood processing industries; The NFA plans to introduce a new electronic system that will better account for logging activities. Information recorded by the system may include all possible forest activities, inventories, management plans, forest areas allocated for logging, and the information necessary to track log transportation and processing; andThe NFA is considering the introduction of a special formula for starting prices for the auctions. The formula will take into account all fixed and variable logging costs (felling, skidding, loading, transportation, access to the forest areas, taxes, and fees). Georgia is undergoing a notable sectoral reform which could improve the conditions and enabling environment for the wood industry. The country has a considerable resource base, though the exact extent is not known due to a lack of recent inventory data. Accessibility to forests remains a challenge due to the country’s mountainous topography (see REF _Ref27652346 \h \* MERGEFORMAT Text Box 4 for international comparison). Notwithstanding these limitations, there is potential to develop a private wood processing industry in the country. The existing industry already supplies to neighboring countries. Georgia is also a net importer of wood products, indicating that the domestic market could also be tapped. The potential size of the industry can only be estimated once the results from the ongoing NFI are available in 2020/21. Some wood industries use imported raw material, and the detailed breakdown of raw material sources by country of origin is not available. However, the total official imports of roundwood indicate that imports are not a major roundwood source for the industry.Text Box SEQ Text_box \* ARABIC 4Being Mountainous does not Necessarily Mean that Forests Cannot be UtilizedOne of the main issues in developing production forestry in Georgia is the mountainous landscape of the country. However, being mountainous does not mean that forestry cannot be developed. For example, in Austria, annual roundwood production from 2018 to 2020 is estimated to be in the range from 14 to 15 million m3 from a forest area of 3.9 million ha, and in Switzerland 3.3 to 3.7 million m3 from a forest area of 1.3 million ha. Forestry and wood processing also employed 36,000 and 48,000, respectively, in 2010. Obviously, countries are different, and these countries have invested heavily in accessibility and other forest infrastructure. Different stakeholders have diverging views on how to advance the wood industries and private sector participation in Georgia. Data on the industry and forest resources is lacking. As a result, operational and policy recommendation need to be made in a data-poor environment. The tables below list concerns and observations raised by key stakeholders in the industry including private operators, state officials, and independent experts. Meeting the challenges presented below may enhance private sector participation in forest sector development and start a new dialogue for effective public-private partnerships for sustainable management of forest resources in Georgia. Private sector operators highlighted the following challenges and recommended interventions by the state authorities that would help their operations.ChallengeRecommended interventionNo extension of harvesting licenses (concessions), even if firms have not been able to harvest the amount of timber as indicated and paid for in the license.Extension of the license period to allow for completing the removal of the harvestable resources indicated in the license.Staff of oversight bodies have insufficient knowledge of the specific characteristics of the sector.Staff capacity building in relevant agencies (environmental supervision, financial audit, etc.).Forest harvesting operation reporting system are inappropriate. This causes disputes and unnecessary legal actions bringing license holders’ operation to a halt resulting in considerable foregone revenue.Introduction of improved electronic systems with flexibility of making corrections.Harvesting machinery is outdated. Old harvesting technology causes unnecessary business operation interruptions and poor output quality. Due to poor perspectives for continuation of forest harvesting operations and poor access to finance, private operators are not able to update machinery. Most operators noted the need to diversify their business e.g. towards furniture production. They highlighted their lack of capacity to buy furniture production machinery.Access to affordable finance to obtain or lease new technologies for harvesting as well as furniture production. State forest policy and enforcement entities (MEPA, Biodiversity and Forest Policy Department, NFA, and DES) indicated the following challenges that require action by relevant state agencies. ChallengeRecommended interventionNeed for capacity development of the NFA and DES due to the agencies’ new and revised mandates and requalification of employees transferred from NFA to DES. Investment in capacity development for public institutions involved in oversight and supervision.Need for technical support to develop institutional capacity for enforcement in light of the restructuring of agencies, their changed mandates, and the introduction of the new forest code and related regulationsInvestments in technical capacity, knowledge, data, and information management.NFA uses old heavy machinery, which is ineffective as well as inefficient and it needs investments in new technology.Introduction of new logging machinery and affordable credit lines for buying or leasing new machinery.High consumption of fuelwood due to cheap, inefficient stoves. The use of fuelwood without drying.Promoting the private sector’s capacity in production of fuel-efficient stoves. Supporting communities to receive loans for the purchase of energy efficient stoves. Supply of dried fuelwood.Another challenge and possible intervention area identified by sector experts is forest certification. This would require the collaboration by all key groups: NFA (main forest manager), the private processing industry (users of roundwood), communities and civil society (consultations), and international certification bodies (standard setting).ChallengeRecommended interventionVoluntary forest certification has not been introduced in Georgia.Supporting the process of voluntary forest certification and provision of technical assistance to involve Georgia in the FSC or PEFC initiatives. (see REF _Ref27662023 \h Text Box 5)In summary, Georgia has the potential to develop its wood and forest-based value chains to generate income and diversify rural economies. The country has a notable forest resource, though large areas have poor accessibility. While there is no accurate information on the sustainable yield or annual allowable cut, Georgia may have the potential to expand forest production sustainably if SFM is properly implemented, and particularly if the area of planted forests is increased. Text Box SEQ Text_box \* ARABIC 5Sustainability Certification and Private StandardsSFM certification confirms that the certified forest management unit is being managed in a way that preserves the natural ecosystem and benefits the lives of local people and workers, all while ensuring that the unit remains economically viable. Certification is based on a set of criteria that forest managers have to meet. The compliance with the criteria is verified by independent third-party auditors. Closely linked to SFM certification, chain-of-custody -certification is obtained by wood processing industries and traders to verify that the SFM-certified material they have purchased has been identified and separated from other, non-certified material as it makes its way along the supply chain.?This ensures that the final product (paper, furniture etc.) only has certified material in it.Forest certification is a voluntary commitment. Originally it was expected that certified products would have a price premium over non-certified products. This premium was thought to cover the increased management and auditing costs of the certification process. Currently, there is little evidence that certified products have price premiums over non-certified products. However, in environmentally sensitive markets such as the EU, certified products have much better market access. Some large retail chains and public procurement rules give strong preference to certified wood products.There are two global organizations leading forest certification work, the Forest Stewardship Council (FSC) and Programme for the Endorsement of Forest Certification (PEFC). These two organizations have some differences in their approaches and compositions. However, for all practical purposes, both schemes provide the same level of assurance for sustainable forest management. Forest certification does not, in a strict legal sense, verify compliance with the EU Timber Regulation (EUTR). Certification requires robust monitoring and good governance at the forest management unit level and certified wood likely meets EUTR requirements. However, certification is not formally linked to EUTR.Forest certification involves costs due to changes in management practices, reduced production (e.g. due to buffer zones around streams and waterways), and actual certification and auditing costs. These costs may be prohibitively high for small forest owners. Group certification allows likeminded smallholders and non-industrial private forest owners to obtain certification at reasonable unit costs. This approach has been applied for both natural and planted forests in such diverse forest countries as Finland, Nepal, South Africa, and Vietnam. None of the South Caucas countries have either FSC or PEFC certified forests. A study supported by the European Neighbourhood and Partnership Instrument East – Forest Law Enforcement and Governance (ENPI-FLEG) Program assessed that there is a potential demand for certified forest product in Georgia. The certifiability of Georgia’s forests is also dependent on the national legislation and NFA management practices.Forest certification is an example of various labels and certification schemes that have proliferated in recent years to answer consumers’ demands for more information about the origin and sustainability of the products they use. In addition, several public procurements rules – particularly in EU countries – require or give preference to certified products. , a global directory of ecolabels, currently lists?463 ecolabels?in?199 countries. These ecolabels cover twenty-five industry sectors ranging from global programs like FSC, PEFC, the Round Table on Responsible Soy (RTRS), and the Roundtable on Sustainable Palm Oil (RSPIO) to national standards like the U.S. Department of Agriculture’s Organic- label. Standards have become a tool increasingly used by multilateral finance institutions to assess sustainability. The International Finance Corporation’s (IFC) uses them in its Performance Standards on Social & Environmental Sustainability. The World Bank, in its Environmental and Social Framework (ESF, Standard 6: Biodiversity Conservation and Sustainable Management of Living Natural Resources) requires that [emphasis added]“For projects involving industrial-scale commercial forest harvesting operations, the Borrower will ensure such operations are certified under an independent forest certification system or adhere to a time-bound phased action plan acceptable to the Bank for achieving certification to such a system.” and “Where a Borrower is purchasing natural resource commodities,[…] the Borrower’s environmental and social assessment will include an evaluation of the systems and verification practices used by the primary suppliers.” [in a footnote, the ESF mentions that compliance with independent certification systems would satisfy the condition]Economic Implications of the Sector Reform and Production PotentialThe lack of recent inventory data does not allow for reliable estimates on the overall production potential of the wood industry in Georgia. However, the data does allow for estimates of the economic losses due to the inefficiencies of the current use pattern as well as estimates of the potential fiscal impact of the current reforms. According to a 2016 study, GEL 446 million of stumpage value is lost annually due to the production of low-priced products such as firewood instead of higher value products. In many cases, firewood is produced from relatively high-quality logs rather than from small diameter wood, thinnings, deadwood, or harvesting and processing residues. The high consumption of firewood has not changed significantly since 2016. Based on the 2016 assessment, the 2019 value of revenue loss can be estimated at GEL 586 million due to increased wood prices. This downgrading of wood assortments leads to considerable economic losses further along the value chain. The 2016 study was based on the annual firewood consumption of 2.4 million m3. If this amount were produced from commercial dimension timber, it would convert to the production of roughly 1.1 million m3 of sawnwood. The estimated total production value of this firewood ranges from GEL 164 to 331 million with an estimated price range for firewood from GEL 67 to 135 per m3 (). As a comparison, the export of the 1.1 mill m3 of sawnwood would result in export value of GEL 917 million This rough model demonstrates that the more efficient allocation of wood raw materials to their most appropriate economic uses would generate significant economic growth potential leading to an almost threefold increase in contribution to GDP. However, as discussed in Chapter REF _Ref26448315 \w \p \h 4.6 above, the current analysis of the wood sector in Georgia is done in a data-poor environment where even basic data on the resource base is lacking and many firms operate in a regulatory gray zone, if not entirely illegally, and in which the current production volume is estimated to be highly unsustainable. Based on current available data on the forest stock, the sustainable level of commercial wood production may be as low as 0.132 million m3. Even with a sustainable industrial harvesting volume of only 0.132 million m3 annually, sales of sawn timber can reach approximately GEL 94.8 million and state income via taxes/fees can exceed GEL 21 million with 316 jobs created. The proposed sector reform will also have a sizeable fiscal impact. At the moment, the state budget receives GEL 3 per m3 firewood. In the case of NFA producing firewood, the stumpage fee will be GEL 9 for category IV (coniferous species), and GEL 19 and higher for category I, II, III (beech and other wood species). With reforms to the NFA, the budget revenue is expected to increase almost 35% in from 2020 to 2023 and be over eight times as high as without the reform. ( REF _Ref26448165 \h Figure 4.4)Figure STYLEREF 1 \s 4. SEQ Figure \* ARABIC \s 1 4Fiscal Impact of Sector Reform (taxes and fees, 2019-2023, GEL, million) Source: The New Forest Code Bill Justification – submitted to the Parliament () The reforms will improve the environmental footprint of forest operations compared to a scenario where the reforms are not implemented ( REF _Ref27661752 \h \* MERGEFORMAT Text Box 6). The more efficient utilization of wood material and the introduction of market pricing will also influence the availability and affordability of fuelwood. The NFA has indicated that after the reform, when harvesting operations are under their control, harvesting residues will be utilized better. The NFA and private wood harvesting operators will be obliged to collect harvesting residues and bring them to NFA warehouses to be used for producing energy products (briquettes, pellets, woodchips, etc.) to reduce demand for round, unseasoned firewood. Incentives to use alternative biomass products (briquettes, pellets, woodchips, etc.), financial support to purchase biomass processing machinery, and the creation of sufficient demand for this type of biomass through awareness rising for potential consumers will also be needed. Text Box SEQ Text_box \* ARABIC 6Georgia – A Zero-Action Scenario Georgia is reforming the legal and institutional framework for its forest sector. The reforms are timely, and if compared to a counterfactual “zero-action scenario,” highly needed. A business-as-usual (BAU) scenario, assuming no reform in forest sector, would lead to continued and accelerated degradation. The current fuelwood consumption (unsustainable use by communities and businesses) of approximately 3.5 million m3 causes deforestation and forest degradation, particularly in close proximity of rural population centers where much of the consumption takes place. Additionally, illegal commercial harvesting and forest fires and diseases add to the environmental damage. Forest increment, though based on outdated inventory data, has been estimated at 4.5 million m3. However, after the latest NFI in the 1990s, overharvesting of the forests was rampant leading to damage to the quality and quantity of Georgia’s forests. As a result, current increment in the forests is expected to be much lower. A notable share of mature forest is located in remote and inaccessible areas,and most of the harvesting is taking place near settlements, which further increases pressure on accessible forests. Under a BAU scenario, fuelwood consumption is not expected to decline. A large share, about one third, of harvesting residues are left in the forest and households are consuming mostly newly harvested, unseasoned fuelwood with high moisture content resulting in energy content loss. In addition, the local communities do not have energy efficient stoves and houses are often poorly insulated. Most of the population cannot afford heating with alternative energy sources as gas and electricity prices are high. Without the proposed reforms, it would be likely that consumption patterns would not change. Rural households and businesses would continuously create demand for fuelwood, and small wood harvesting groups would continue providing fuelwood, by illegal means if needed. They would violate not only the law, but would also harvest in places where it is unsustainable, cause degradation, and speed the loss of its ecosystem services. The BAU scenario expects continued unsustainable practices in industrial harvesting and processing as well. Wood harvesting operators report unrealistically high yields in sawnwood production signaling that, in fact, raw material use is much higher than official logging volume. As logging and processing are integrated under the same industrial production license holder, it is difficult to monitor the volume of harvesting operations. Some firms holding licenses have very small allowable cut quotas, which indicates that they are more likely to cover their illegal operations by harvesting under current licenses. Due to outdated technologies, some business operators find it difficult to harvest in remote areas, in areas that are severely damaged, or in areas with no access roads. As a result, operators are conducting felling mainly in conveniently located sites were harvesting may not be allowed for environmental reasons.The recent policy decisions will put the NFA in charge of all wood production in the country, even if a large part of harvesting will be outsourced to private operators. Wood products will be sold through the markets to the private sector for processing. This will create opportunities for two types of private enterprises:Harvesting contractors who will specialize in wood harvesting of behalf of the NFA. As mentioned above, much of the current machinery in the country is old and inefficient. Therefore, building an efficient subcontractor business will require investment in modern harvesting machinery that is more efficient and environment friendly. This on-site environmental impact would be particularly important in Georgia where much of the harvesting is on slopes due to the country’s mountainous topography. Sufficiently long-term contracts from the NFA will facilitate investment by providing operators adequate business certainty to invest in the purchase of modern machinery; and Wood processing industries that obtain their raw material from the NFA auctions or imports. The new system will no longer require an integration of harvesting and processing. The creation of roundwood markets through the NFA auctions will allow specialized wood processing businesses. The general tendency in European wood processing is a higher level of specialization, and vertical integration of the industry is becoming less common. The reformed Georgian wood market model could follow the same path.Policy and Public Investment RecommendationsAll three South Caucasus countries have been addressing challenges in their forest sectors in the past years. Georgia is going through a major sector reform while Armenia and Azerbaijan have been making partial reforms towards improved sustainability and governance in the sector. In Armenia, this has led to all but closing the domestic wood processing industry, while in Azerbaijan there have been efforts to reinitiate commercial harvesting on a small scale. In all countries, there is potential for private sector participation in wood production. In Georgia, there is potential for service contracts in forest operations and wood processing as well. Realizing the development opportunities identified in this report will require continued commitment to develop the sector to ensure sustainable management of this valuable resource. All three countries have made commitments in their NDCs to maintain and expand their forest cover ( REF _Ref27662295 \h \* MERGEFORMAT Text Box 7).Successful development in wood-based economic sectors requires the appropriate policies and public investments. As for general operating environment for SMEs, all South Caucasus countries have enacted reforms and legislative changes making operating private business easier as is demonstrated by their relatively good positions in the annual Doing Business survey by the World Bank. All countries are in the top 25 percent and are above several EU member states. Georgia has been particularly effective in reforming its general business environment. ( REF _Ref25588684 \h \* MERGEFORMAT Table 5.1) Table STYLEREF 1 \s 5. SEQ Table \* ARABIC \s 1 1General Business Environment (Doing Business -score, 2019–2020)CountryRanking 2020Score 2020Score 2019Change in score, %-pointsArmenia4774.573.2+1.3Azerbaijan3476.773.6+3.1Georgia783.783.5+0.2Ranking: out of 190 countries surveyedScore: out of max. 100Source: (retrieved 11/25/2019).The Doing Business survey measures the general business climate, while both wood production and processing forest sectors have special characteristics that require attention and targeted policies to allow this particular sector to flourish. These nuanced issues are not readily captured by general business development policies. In summary, one could argue that while a conducive general business climate as demonstrated by a Doing Business score is necessary for forest businesses to be successful, it alone is not an adequate. Sector-specific policies and operating environments need to be supportive as well. However, there are no comparable sector-specific indicators for forest sector business environment to be analyzed.Text Box SEQ Text_box \* ARABIC 7 Forest and Landscape Restoration Commitments in NDCsArmenia “Consider 20.1 per cent as an optimal forest cover indicator of the territory of the Republic of Armenia according to the Armenia`s First National Communication to UNFCCC (1998) and Government Decision No 1232 of 21 July 2005 “On Adoption of the National Forest Program of the Republic of Armenia”. To achieve that indicator by 2050 and consider the obtained organic carbon absorptions and accumulations in the INDC and expand the impact period up that measure till 2100. Ensure organic carbon conservation, accumulation and storage in all categories of lands through comprehensive measures and include achieved balance in the INDC.”Azerbaijan“Land Use, Land-Use Change, and Forestry (LULUCF) sector: Plant new forest areas, water and land protecting forest strips (windbreaks), urban and roadside greenery as well as further improve the management of pastures and agricultural lands.“Georgia[…]“The Georgian Government prioritizes three options for climate change mitigation activities in forestry sector: (a) establish Sustainable Forest Management (SFM) practices; (b) conduct afforestation/reforestation and assist natural regeneration; and (c) expand the protected area.Unconditional commitment Georgia is committed to: Strongly support CO2 reduction in one pilot area, the Borjomi-Bakuriani Forest district (currently the only forest district where carbon emissions have been quantified) by at least 70% between 2020 and 2030, by strengthening law enforcement and introducing SFM practices. It is estimated that this measure will lead to an overall emission reduction of at least 1 million tonnes of CO2 over a period of 10 years in this district covering 45,000 hectares; Implement afforestation/reforestation activities on already identified 1,500 ha of degraded lands by 2030; Assist natural regeneration of forests through different silvicultural methods on 7,500 ha by 2030 in order to restore natural forest cover. Conditional commitment In case of external financial and technical support, the country commits itself to afforest/reforest up to a total of 35,000 hectares, as well as supporting relevant activities to assist natural regeneration in identified areas needing afforestation / reforestation until 2030; If Georgia receives substantial financial and technical support for the development of forest inventories and remote sensing, as well as the development of internationally recognized practices for SFM and carbon monitoring for the identified forest districts 8 (covering up to 250,000 ha of forest lands) the country commits itself to support the sustainable management of forests with estimating measures leading to an overall carbon sequestration up to 6 million tons of CO2 on these lands over a period 2020-2030. These forest lands include the forest district of Akhmeta (covering up to 70,000 ha) where the first set of locality/site-specific criteria and indicators (C&I) for SFM will be selected/tested and implemented. The objective is to gain relevant expertise for further development of the C&I for SFM in the rest of identified forest lands to achieve the nation-wide development of SFM practices, thereby support the carbon sequestration; With financial support from international sources to set up an adequate infrastructure and assure effective planning for management of the additional protected areas during 2020-2030, country commits itself to expand the protected area from 0.52 million ha to 1.3 million ha (about 20% of Georgia’s territory) comprising at least 1 million ha of forests.”Source: all three countries have been reforming their forest sectors, this momentum needs to be maintained to improve sustainability of forest and land use in the South Caucasus. Investment in wood production has a long time horizon. For example, in beech production, the optimal rotation age for saw log production can be up to 85 to 100 years. Fuelwood rotation is shorter, and it varies by species and growing conditions. Therefore, any attempts to revitalize the wood processing sector through increased (private) woodlots will require a conducive and predictable investment climate. It will also require good silvicultural practices in the existing forests and high-quality information on the resource base to allow sustainable management and utilization of the existing forests. Recommendations for All CountriesNational forest inventories are required to provide basic information on forests and development trends. These provide information for strategic planning and the monitoring of international commitments such as NDCs. Information from inventories needs to be publicly available. All South Caucasus countries have outdated inventory information from decades ago. All three countries had severe economic crises after the dissolution of the Soviet Union when forests were harvested unsustainably to provide subsistence wood energy when formal energy supply structures had collapsed. As a result, reliable information about forest resources is lacking and consequently, strategic forest policy and industrial development decisions have a weak information base.All countries are recommended to launch a NFI using modern, sample-based methods. These national inventories are different processes from forest management planning inventories conducted at forest management unit level. The objectives are different, as is sampling methodology. The inventory data also needs to be updated. Previously, many European countries had conducted inventories at regular intervals, often every 10 years. Nowadays, it is common to have rolling inventories where every year approximately 10 percent of the forests are resurveyed meaning that no data is more than 10 years old. For a NFI, 10 years is acceptable frequency.An NFI needs to be nationally led by a public forest management or research organization. General European practice differs. In some countries, NFIs are conducted by national forest research institutions, while in others the relevant ministries are in charge. Also, practical arrangements may differ. In some countries, inventory fieldwork is conducted by the state, while in others, it has been contracted to the private sector. If fieldwork is contracted to the private sector, it is essential that the methodology is known by the agency leading the process and that all data and measurements become public property. Public disclosure and dissemination of the inventory results is an essential part of the process.Consultative bodies should be supported to foster open and constructive national dialogue towards sector development and to reduce conflict. The forest sector has many stakeholder groups, each with its own priorities and objectives. International practice has demonstrated that inclusive and participatory dialogue can help to resolve conflicts in the sector. For example, the ENPI-FLEG program established national coordination bodies with members from forest administration, academia, civil society, and the private sector. These bodies became national platforms for sector dialogue beyond the project issues themselves.Building and maintaining multistakeholder consultative bodies with strong mandates could bring together officials, private sector, civil society, and academia as well as other interested parties including parliamentarians and development partners. Creating platforms for interested parties allows for the opportunity to address and solve potential conflicts early. These platforms also provide feedback to policy makers when new policies are developed. All countries in the sub-region are developing new forest policies, and active participation by key stakeholder groups can support inclusive policy development. These platforms could take advantage of any existing coordination bodies. One particular function for the multi-stakeholder dialogue platform is to ensure that the state authorities, while being dominant market operators, do not create impediments to private sector development. ( REF _Ref26542567 \h \* MERGEFORMAT Text Box 8)Text Box SEQ Text_box \* ARABIC 8State as a Dominant Market Player – Finding the Right BalanceIn all three countries, effectively all forests are state-owned, even if legislation allows for private ownership as well. Land reforms after independence have covered only non-forest land, and forests have remained publicly owned. This is not uncommon. In many countries in Europe and North America, the state remains a major forest owner. The dominant role of the public sector needs to be considered when designing policies to promote private sector participation. Three particular policy challenges can be identified:Wood sales for industrial wood need to be transparent and based on market mechanisms to ensure that raw material is allocated to competitive industries and that the Government is able to capture the true economic value of timber being sold. This is an issue mainly in Georgia, since commercial harvesting has all but stopped in Armenia and Azerbaijan. Currently, most commercial harvesting happens through concessions. However, after the NFA takes control of all timber sales and harvesting, it needs to develop a system for transparent and efficient timber sales. Particularly in relatively small markets, the system needs to address two somewhat conflicting demands. On the one hand, conducting all timber sales through spot auctions can yield market-based solution, though there is always a risk of thin markets and buyer collusion. On the other hand, serious investors will need to have confidence of raw material supply and an over-reliance on only spot sales would not encourage investments in value added production.Fuelwood sales have much higher volume and can be based on a combination of auctions and list prices. However, as fuelwood is a basic necessity, social aspects and affordability by the rural poor need to be considered in its pricing. If and when private woodlots are established, the state may end up competing with the private sector in at least some segments of the market. The cost structure of fuelwood production may be entirely different. The state might sell at marginal production cost (i.e. harvesting), while the private producer might need to cover all costs, including land and tree growing.The forest services and contractor industries need development. In Georgia, the NFA plans to have most forest operations done by private contractors through outsourcing contracts. This can be an efficient way of promoting the establishment of an SME service provider industry. The challenge is in building a market model that allows for economies of scale in contracting business, investments in modern efficient and environmentally friendly machinery, and staff training. Commercial logging is emerging in Azerbaijan, and the Government needs to consider how private operators should be contracted to do the work. In most European countries, even in state forests, the actual forest work is done by private operators and the contract terms are negotiated. Cross-sector coordination and policy coherence need to be ensured. Forests are under pressure from other land uses including mining and infrastructure development and, addressing conflicting interests from different economic sectors requires cross-sectoral coordination. Coordination between forest and (rural) energy policies is essential. Coordination can also help linking forest development with economic opportunities in other sectors such as tourism and non-timber forest products. Improved land use planning and efficient environmental impact assessments can help to resolve land use conflicts and to mitigate adverse impacts. For this to happen, it is essential that land use data is updated, that information is made available, and that monitoring systems are efficient. In the three countries, wood energy is by far the most important use of wood. Therefore, any forest policy development needs to be coordinated with (rural) energy policies and support efficient wood energy use (e.g. fuel-efficient stoves, building insulation, etc.). Concurrently, rural energy access policies need to take in to consideration the importance of wood-based fuels and the limitations of sustainable yields from forests.Cross-sectoral coordination between forestry and tourism and harvesting of non-timber forest products, for example, is needed to ensure that all forest-based services are included in land use planning. Tourism, particularly nature-based tourism, is a growing industry in all the countries and non-timber forest products may have notable local importance. ArmeniaPrivate woodlot investments need to be supported and facilitated. The limited raw material base does not allow for the development of a viable wood processing industry based on domestic raw material. The main private sector opportunities can be found in establishing private woodlots on private agricultural land or leased state lands. The current legislation allows for private forests. However, in practice, all forests are still state-owned and there are hardly any privately owned forests. As discussed in Chapter REF _Ref26542754 \w \h 2.5, national reforestation and landscape restoration targets are high, and participation from the private sector can help to meet these goals. However, the private sector will need to have access to sites that have favorable growing and operating conditions, such as access to markets and easy topography to achieve the necessary rates of return to be viable.In its reforestation and landscape restoration policy, the Government of Armenia should find ways to provide the appropriate incentives for private actors to establish woodlots. These incentives can include predictable access to land (private lands or long-term, transferable leases of state land) and the right to harvest and sell the planted trees as agreed in management plans without excessive administrative processes. The public sector should also establish a system of extension services for woodlot establishment and link it to existing agricultural support services. It is likely that many private woodlots can be established by farmers. Farmer woodlots on agricultural land can provide multifunctional benefits such as soil protection, agroforestry, non-timber forest products, and fuelwood. These woodlots can involve local communities and individuals in re/afforestation as well as support community/private nurseries and plantations.Improving sustainability of rural energy supply and use requires that forest and energy policies are conducive to sustainable biomass energy. Wood energy uses small diameter wood to provide low carbon energy to institutions and households. The current forest use and lack of commercial logging produces little harvesting residues that could be used for energy. Sanitary logging produces some wood, but the volumes are well below the national wood use for energy. As Armenia reforms its forest management systems, it will be necessary to ensure that all timber assortments are utilized in an efficient and appropriate way. When Armenia develops it wood energy sector through public or private woodlots, these will first supply fuelwood rather than industrial timber. This will include promoting fast growing wood production for energy. Currently, most fuelwood is not dried (seasoned). However, the net heating value of seasoned fuelwood with moisture content of 20 percent can be up to 80 percent higher than green fuelwood with a moisture content of 50 percent. Dry fuelwood also has benefits for indoor air quality. AzerbaijanPrivate woodlot investments need to be supported and facilitated. In terms of forestry and wood production, the main private sector opportunities can be found in establishing private woodlots on private agricultural land or leased state lands. In its reforestation and landscape restoration policy, the Government of Azerbaijan should find ways to provide the appropriate incentives for private actors to establish woodlots. These incentives can include predictable access to land (private lands or long-term transferable leases of state land) and the right to harvest and sell the planted trees as agreed in management plans without excessive administrative processes. The public sector should also establish a system of extension services for woodlot establishment and link it to existing agricultural support services. It is likely that many private woodlots can be established by farmers. Farmer woodlots on agricultural land can provide multifunctional benefits such as soil protection, agroforestry, non-timber forest products, and fuelwood. These woodlots can involve local communities and individuals in re/afforestation as well as support community/private nurseries and plantations.Clarification of legal definitions and a revision of forest legislation can provide clarity to all stakeholders and enable the Government to set priorities and objectives for the sector. The development of the forest sector – particularly if the private sector is expected is to be involved – requires a stable and predictable operating and regulatory environment. The current legislation in Azerbaijan is outdated and reformed forest legislation is needed. The main elements of the new legislation must clarify the roles and rights of the non-state sector such as the commercial private sector, farmers, communities etc. GeorgiaGeorgia is going through a significant institutional and legal reform in the forest sector and these reforms need to be maintained. Once completed, the Georgian forest administration will follow a proven European model ensuring the separation of policy, enforcement/supervision, and management functions. The new forest policy will also introduce systematic management planning across the state forest estates. Maintaining the reform process is essential to introduce sustainable forest management, including sustainable fuelwood production. Many details of the reform need to be designed and agreed upon in subsidiary implementation regulations. It is important that these regulations are based on consultations with key stakeholders, solid technical design, and impact assessment. Certification of sustainable forest management can be developed to provide independent verification that forests are managed in ways that are environmentally, socially, and economically sustainable. Developing a national forest certification framework based on either FSC or PEFC standards would provide a framework for certifying production forestry in Georgia. Many countries with large state-owned forests such as Belarus, Bosnia and Herzegovina, and Croatia have certified their state forests. Independent third-party certification serves two purposes. First, it demonstrates for MEPA and the Georgian civil society that the NFA manages its forests in a sustainable way. Second, it provides consumer confidence that wood products come from sustainable sources. Georgia’s current exports consist mainly of lower value products exported to neighboring markets. Certification could, however, assist innovative exporters in accessing European niche markets. Harvesting contracts in NFA forests need to be market-based and structured in a way that favors efficiency and professionalism in the industry. The relatively small size of Georgia’s forest sector and difficult, mountainous harvesting conditions create particularly challenging conditions for contracting. On the one hand, many small, local contracts can create a competitive market and can develop local businesses. However, these small firms would likely have few resources to invest in the required machinery. Contracts also need to be of sufficient length to allow private operators the confidence to invest in modern machinery. Public investments in training, research, and product development services can build the basis for a modern wood industry. Currently, most wood industries train their own staff mostly through informal on-the-job training. Technical support and vocational training will allow firms to become competitive. One option is to develop public-private partnerships through which public institutions support firms in product development and entering new markets. Product development is risky and small and medium size wood industries in particular do not often have the technical and financial resources required. Many small firms also lack knowledge about new markets, particularly high-end niche markets, outside the traditional markets. Public support and collaboration with other firms will be needed to help small firms identify and take advantage of new market opportunities.Forest and energy policies need to be coherent and supportive of sustainable biomass energy. Wood energy uses small diameter wood as well as logging and processing residues to provide low carbon energy to institutions and households. As Georgia reforms its forest management systems, it will be necessary to ensure that all timber assortments are utilized in an efficient and appropriate way. This includes utilizing logging residues for energy or other uses where small diameter wood and residues can be used (e.g. certain board products). Building the private wood energy industry may also require targeted support such as financing for pellet production. The proposed new model for centralized woodfuel supply through the NFA has the potential to improve the efficiency of wood energy use in Georgia. Currently, most fuelwood is not dried (seasoned). However, the net heating value of seasoned fuelwood with moisture content of 20 percent can be up to 80 percent higher compared to green fuelwood with a moisture content of 50 percent. Dry fuelwood also has benefits for indoor air quality. When the new fuelwood system in Georgia is developed, it will be essential that it promotes efficient fuelwood use and that that NFA or its contractors supply the appropriately dried wood for energy. Conclusions Forest and landscape management need improvements to alleviate forest degradation and forest loss caused by the overconsumption of forest resources, especially the intensive use of fuelwood in all three South Caucasus countries. Many ecosystem services from forests have declined in recent years, and in many areas, forests are no longer able to provide protection against environmental hazards. In addition, the conditions necessary for economic productivity have deteriorated. This study identified four research questions (see paragraph REF _Ref25762985 \r \p \h 16 above) to guide the assessment of the potential for the private sector’s role in wood-based value chains in the South Caucasus. These questions and their answers provide a way forward for developing sustainable, wood-based industries in the region.Research question 1: What is the status of wood processing industries in the South Caucasus and how has it changed?Some commercial or sanitary logging is taking place in all three countries. Commercial harvesting is officially allowed only in Georgia. In Armenia and Azerbaijan, sanitary felling and thinning provide only marginal marketable wood products. In Georgia, Special Timber Production Licenses were auctioned from 2006 to 2012 for durations ranging from 1 to 20 years. In both Armenia and Azerbaijan, forest cover is much less than in Georgia, and only sanitary felling is allowed. In all three countries, sanitary felling was outsourced to the private sector. However, this outsourcing became an opportunity and cover for illegal logging. It also required special knowledge to avoid forest degradation. As a result, all countries are currently considering conducting sanitary felling services by public agencies or have made the change already. The aim is to improve both the technical quality and governance in sanitary felling.All findings are based on information from a data-poor environment. None of the countries have up-to-date information on their forest resource. Trade statistics are incomplete and industrial data is flawed. Firms themselves often operate in a gray zone between legality and illegality, and raw materials are often sourced from dubious sources. Notwithstanding the shortcomings in data, the study highlighted that Georgia’s private forest sector participation rates are above those in Armenia and Azerbaijan. Georgia has a much larger forest area and even exports wood products. Georgia has a wood processing industry that can be maintained with right policies, but in Armenia and Azerbaijan the industry has been suffering from lack of raw material. Wood processing is currently a small, marginal industry that uses domestic (legal and likely also illegal) and to some extent imported wood. Due to the extremely limited domestic raw material supply, industries in Armenia and Azerbaijan will remain small. Particularly in Armenia, many of the processing industries have closed due to poor access to raw material, and the few remaining ones are struggling.Research question 2: Do forest-based value chain have development potential and which sub-sectors could be most promising for private sector participation?All three countries have potential to expand private sector participation, even if the potential differs from country to country. Georgia has the potential for a functioning wood processing industry and a harvesting contractor business. However, the expansion of these industries will only be possible when there is adequate information on the resource base through a NFI and the reorganization of the harvesting system has been completed. In Armenia and Azerbaijan, the greatest potential can be found in woodlots and plantations, both fuelwood and industrial wood, if the regulatory framework becomes conducive. Even if this potential is fully tapped, the wood industries will likely remain a small, specialty industries. The resource base will not be adequate for the industry to become a major part of the national economy in any of the countries. However, much of the economic activity and job creation would be rural, which could to bridge the rural–urban divide. Developing private plantations and woodlots will require new solutions to ensure access to land, much of that still owned by the state, and to ensure property rights. For example, in Azerbaijan forests are defined as public property, which prevents private investment in wood production. Expanding production forests has the potential to serve several purposes. Increased stocking could act as a carbon sink. Even commercial fast-growing species could restore degraded landscapes with erosion control externalities. In addition, increased forest cover could become feedstock for both wood processing industries and the wood energy sector. Research question 3: What public actions would be needed to support the development of forest-based value chains and private sector development? Forest sector development is a long-term investment, and decisions made in wood production and forest management today will bear fruit only after a long period of time. Therefore, if governments aim to address development challenges in next decades, decisions need to be made today to yield tangible results in the medium term. Some detailed recommendations for policies and public investments are discussed in Chapter REF _Ref26370154 \r \h 5 REF _Ref26370162 \p \h above.Georgia has already identified several steps in its sector reform process. A key element is the separation of logging and wood processing operations to promote sustainable forest use. Under the current proposed reforms, the NFA is expected to become the only institution fully in control of harvesting operations after expiration of the current Special Timber Production Licenses. Private operators will have the opportunity to provide harvesting services as subcontractors to the NFA. Logs for industrial production will be sold through auction to private wood processing industries and fuelwood will be sold directly to end users. For this structural reform to be successful, the NFA has highlighted the need for investment in harvesting technology as well as the development of institutional capacity to implement the new regulations. This will require staff training and the development of new information systems for reporting harvesting and wood processing. In Armenia, as well as in Azerbaijan, the main focus should be on re/afforestation to increase the forest area. These countries are less likely to consider private sector involvement in harvesting operations. Facilitating private sector engagement in various activities could support the development forest-based economic activity. These could include eco- and agro-tourism, fast-growing plantations for timber and fuelwood, and the advancement of domestic wood processing based on imported raw material. Armenia’s main focuses are to stop forest degradation and increase forest cover. This can happen through the afforestation and reforestation on state forest land. In addition to environmental benefits, it will improve the standard of living of local communities. Each of these actions can contribute considerably to meeting Armenia’s international climate obligations. To achieve this vision, the following actions will be needed: a reduction of the demand on timber through improved energy efficiency and awareness raising; the establishment of private and community forests and plantations; the promotion of wood product imports; the development of eco-tourism and non-timber forest products use; and sustainable forest management. In Azerbaijan, developing the forest sector is linked with the development of sustainable forest management and support for communities that are dependent on local forests. Azerbaijan highlights the need to respond to climate change and to link private sector participation with the development of sustainable agriculture, tourism, and recreation. As in all countries with low forest cover and high fuelwood demand, creation of fast-growing plantations and functioning markets for fuelwood can alleviate pressure on natural forests. This will require that fuelwood remains affordable either through subsidies or social transfers to vulnerable populations.When private wood production is promoted, it is essential that land rights are clearly defined and that intra-household equity is ensured. Secured land rights for women are one essential element in ensuring economic security. Smallholder woodlots, if managed by women, could also provide them with additional income with the additional benefit of providing employment in off-peak times in agriculture. ( REF _Ref29909405 \h \* MERGEFORMAT Text Box 9) Text Box SEQ Text_box \* ARABIC 9Gender and Inclusion in Wood Sector DevelopmentThe available data does not allow for a detailed gender-disaggregated assessment of the distribution of forest benefits in the region. A separate household survey conducted in Georgia in 2016 indicated that fuelwood collection from the forest is conducted mainly by men, while women collected more non-timber forest products. Generally, very few people reported wage income from forest sector activities.The impact of forest policies and policy changes are widespread and go well beyond industrial development. Increasing the wood energy supply by private woodlots and fast-growing plantations as well as reducing demand by providing dried fuelwood and fuel-efficient stoves will reduce pressure on the existing forests. These advances will also have a positive social impact as they will reduce time dedicated to collecting fuel. This will have a particular impact on women, who are the main users of fuelwood for cooking and would have more ready access to fuelwood. When private wood production is promoted, it is essential that land rights are clearly defined and that intra-household equity is ensured. Secured land rights by women are one essential element in ensuring their economic security. In addition to reducing the threat of forest degradation from illegal logging, targeting investment to improve household access to modern and more efficiency biomass energy sources can generate multiple benefits. These benefits include a reduction in the double burden of income and energy poverty among the poor, and reduced exposure to indoor air pollution. Promoting participation by women and other marginalized groups (e.g. youth) in forest sector development requires activities targeted and specifically designed for these groups. These could include: business collectives offering a sustainable entry into employment;customized skill development;innovative enterprise development ecosystem (targeted business support services); and synergies with business development activities in other, closely related and relevant sectors such as agriculture, community-based tourism, and digital literacy.Research question 4: How could development partners and regional collaboration support the process?Forest certification can increase consumer trust in the wood coming from the three countries. This will ultimately become necessary as well managed production forests are reintroduced in the South Caucasus, either through the improved management of natural forests or fast-growing plantations. Certification can provide independent, third-party verification of the quality of forest management. Currently, there are no SFM-certified forests in the region. It is important to launch national processes to establish certification schemes either through PEFC or FSC. All three countries have relatively small forest sectors and regional initiatives could provide economies of scale. Another area for potential regional collaboration is trade facilitation that encourage regional networks in which firms collaborate to create value added.Development partners’ engagement in the South Caucasus is focused on the diversification of national economies, job creation, and market development. Other key emphases include the sustainable management of natural resources and the building of climate resilience. These are also World Bank’s priority areas. Wood processing itself is a commercial, profit-seeking activity and needs to be financed through conventional commercial channels including financing from international DFIs such as the IFC or national DFIs. The development of forest-based economic activities should be part of wider private sector and entrepreneurship development programs. These could include improving access to finance for emerging rural businesses. Investment in private plantations and woodlots are risky and take long time to generate revenue, thus requiring “patient capital”. Therefore, targeted support is often needed through risk mitigation facilities, improving information, concessional finance, or direct subsidies. ( REF _Ref18506813 \h \* MERGEFORMAT Text Box 10)Text Box SEQ Text_box \* ARABIC 10Barriers to Private Financing and Potential SolutionsA World Bank study Private Financing for Sustainable Forest Management and Forest Products in Developing Countries: Trends and drivers from 2014 identified a number of reasons why forests, and in particular emerging market plantations, have difficulties in attracting domestic and international private investment. The study also identified potential solutions. The main barriers to financing private investments in SFM in developing countries are: Higher real and perceived risks in developing and emerging countries compared to industrialized countries. These include political risks, unsecure land tenure, currency risks, social and environmental risks, and reputational risks. Reputational risks can play a major role in deterring the mobilization of institutional finance. Weak availability of both domestic and foreign equity and loan financing. This applies particularly to forestry investments, where a scarcity of capital is combined with a limited understanding of forestry sector investments within financial institutions. International equity financing is particularly difficult to secure for projects under US$20 or 25 million. Unfavorable terms for financing. Forestry businesses, except those interested in short-term returns irrespective of sustainability, have difficulties raising financing. If domestic debt financing is available, the interest rates can be excessively high (in local currency), and loan payback periods very short (from six months to three years). Furthermore, debt finance is often made available only after sufficient equity is in place, so the scarcity of equity and the availability of debt financing are often linked. Higher up-front costs of preparing investment projects in the forestry sector. This results from a number of factors, including the shortage of information on forest resources and investment opportunities and related risks, and higher transaction costs throughout the investment cycle for small- and medium-size projects.SolutionsImprove conditions for private financing. Investors are mainly interested in maximizing risk-adjusted returns. Among other factors, they assess: i) growth potential and access to growth markets, which are linked to the location of the country and potential investment sites; ii) political, regulatory, and economic stability; iii) investment environment and level of governance, of which the single most important factor is perhaps secure and risk-free land tenure; and iv) physical and institutional infrastructure such as roads, ports, electricity, labor markets.Improve availability of information and governance to reduce (perceived) risk. Weak national reporting systems and institutions need financial and capacity building inputs. Such inputs could be supported by development partners and international financing institutions. Capacity building would need to include training and technical assistance. Efficient and transparent institutions – including judiciary – and law enforcement reduce actual and perceived risks to investors.Source: based on Castrén et als. 2014aPublic investments in resource management, information, market systems, and a reliable wood supply to industries and end-users require public financing from domestic and international resources. These upstream investments create the enabling environment and functional sector infrastructure that are a necessary, though alone not entirely sufficient condition for sustainable private sector job growth. Public funding and support structures are also needed to reduce the inherent high risks largely due to long incubation periods before planted forests generate revenue. Private plantations also require that land tenure and rights are clear and that private investors, including smallholder farmers, face a predictable policy environment. The World Bank and other development partners have a role to play in supporting the building of national enabling institutions. This could happen through various development finance instruments and technical assistance. In most cases, a combination of investment finance to support institutional strengthening in planning capacity, inventories, training, mobility, roads and other physical infrastructure, combined with targeted technical assistance, will be needed.Improving forest management has notable climate benefits both locally for adaptation and globally for climate change mitigation. Climate funds can be one source of support for country action and countries could approach global climate funds that support climate-smart investments and technical assistance. Establishing private and public planted forests will help all three countries to address the changing climate through both mitigation (carbon sequestration, sustainable renewable energy provision) and adaptation (improved land management).ReferencesCastrén, Tuukka, Marko Katila, Karoliina Lindroos, and Jyrki Salmi. 2014a. Private Financing for Sustainable Forest Management and Forest Products in Developing Countries: Trends and drivers. Washington, DC: Program on Forests (PROFOR).Castrén, Tuukka, Marko Katila, and Petri Lehtonen. 2014b. Business Climate for Forest Investments: A Survey. Washington, DC: Program on Forests (PROFOR).Economy and Values Research Center (EV). 2007. The Economics of Armenia’s Forest Industry, financed by British Embassy of Armenia and EcoArmenia Consortium. ENPI-FLEG. 2010. Wood-Processing Sector Survey. Report prepared by AM Partners Consulting Company.ENPI-FLEG. 2011a. Assessment of the Economic and Social Impact of Unsustainable Forest Practices and Illegal Logging on Rural Population of Armenia. Report prepared by ICARE.ENPI-FLEG. 2011b. Understanding the Forestry Sector of Armenia: Current Conditions and Choices Report. Report prepared by Nils Junge and Emily Fripp.ENPI-FLEG. 2016a. Feasibility Study for Alternative Livelihood of Forest-Depending Rural Population in Georgia – challenges and prospects. Final draft by TBSC Consulting.ENPI-FLEG. 2016b. Economic Effects of households’ firewood consumption and cost-benefit analyses of use of alternative heating resources”. Study prepared by CENN/Davit Darsavelidze (in Georgian).ENPI-FLEG. 2017. Strategic Environmental and Social Assessment of Draft Forest Code of Georgia. Report prepared by PEM Consult. European Union. 2014. Association Agreement between the European Union and the European Atomic Energy Community and their Member States, of the one part, and Georgia, of the other part FAO. 2010. Global Forest Resources Assessment 2010. Rome.FAO. 2015. Global Forest Resources Assessment 2015. Desk Reference. Rome.Garforth, Michael; Nilsson, Sten and Torchinava, Paata (2016). Wood Market Study – final report. Integrated Biodiversity Management – South Caucasus. GIZ (Consultant report by GFA Consulting Group).Global Forest Resource Assessment 2015. 2014a. Country Report – Austria. Rome.?Global Forest Resource Assessment 2015. 2014b. Country Report – Switzerland. Rome.??IUCN. 2012. Assessment of economic and social impact of illegal logging and unsustainable forest management on the local population of Azerbaijan. Baku.Machavariani, Merab. 2014. Analysis of Voluntary Forest Certification Potential within Forestry Sector of Georgia. ENPI-FLEG II Program.MENR. 2011. Forest sector information bulk on 2002-2010. Baku.Ministry of Economy and Sustainable Development and Georgian National Tourism Administration. 2016. Georgia National Tourism Strategy 2025. Volume 2: Vision, Guiding Principles, Strategic Objectives, Priority Actions and Performance Indicators.Ministry of Environment and Natural Resources Protection. 2015. National Forest Concept for Georgia.Molenaar, Jan Willem; Jan Joost Kessler; Marai El Fassi; Jonas Dallinger; Emma Blackmore; Bill Vorley; Joost Gorter; Lucas Simons; Sophie Buchel; Bart Vollaard; and Laure Heilbron. 2014. Building a roadmap to sustainability in agro-commodity production. Report commissioned by IFC – International Finance Corporation. Washington, DC.?Parliament of Georgia. 2018. The New Forest Code Bill Justification submitted to the Parliament Xuan and Sango Mahanty. 2019. Vietnam's cross-border timber crackdown and the quest for state legitimacy. Political Geography Volume 75,?November 2019.?Popadi? R., ?o?ki? B., Mili? G., Todorovi? N., Furtula M. 2014. Influence of the Sawing Method on Yield of Beech Logs with Red Heartwood. doi:10.5552/drind.2014.1312. Republic of Azerbaijan. 2013. National Forest Program (Forest Policy Statement and The Action Plan) 2015–2030 (final draft). Baku.Romero, Claudia; Tuukka Castrén. 2013. Approaches to measuring the conservation impact of forest management certification. Washington DC; World Bank.?Sayadyan, H. 2011. Valuation of Mountain Forests: Case Study Armenia, Audit Office of Georgia. 2016a. Performance Audit Report of Forest Commercial Resource Management. The State Audit Office of Georgia.State Audit Office of Georgia, 2016b. Performance Audit Report of Social Use of Timber Resources. The State Audit Office of Georgia.Thi Thanh Huyen Vu;? Gang Tian; Naveed Khan; Muhammad Zada; Bin Zhang and Thanh Van Nguyen.2019. Evaluating the International Competitiveness of Vietnam Wood Processing Industry by Combining the Variation Coefficient and the Entropy Method. Forests 2019, vol. 10.UNECE. 2015. Joint Forest Europe / UNECE / FAO Questionnaire on Pan-European Indicators for Sustainable Forest Management. ()UNECE 2019. Timber Forecast. Production and Data for 2018–2020. Report presented? in the Committee on Forests and Forest Industries November 4–7, 2019. Geneva.?WEG. 2014. Assessment of Wood and Agricultural Residue Biomass Energy Potential in Georgia. WEG. Prepared for UNDP.World Bank. 2005. National Resource Management and Poverty Reduction Project. Report by SAVCOR. World Bank. 2016. “World Bank Environmental and Social Framework.” World Bank, Washington, DC.?World Bank. 2018. Georgia: Household Surveys on Forest Use, Poverty and Vulnerability to Natural Hazards. Washington. DC. Annual report of the State Customs Committee of Azerbaijan, 2019.Database on export-import statistics, National Statistics Office of Georgia.Georgian forests. National Forest Agency web-site: in Georgian. Global Forest Watch. Armenia. Monitoring Center of RA on licenses received from the National Forest Agency of Georgia. National Forest Agency of Georgia, Resources of Georgia and Environmental Protection, Statistical Publication. 2017, geostat.ge.Reports of Forest Development Department of MENR (2002–2018), Azerbaijan.Law of Georgia on the management of forest fund; N 4419 of 11 March 2011Government decree of Georgia N 132 of 11 August, 2005, art. 8 Decree of the Georgian Parliament, N1742-IS, 11.12. December,2013; Protocol decision N38 of the Government of Armenia session of September 30, 2004;AnnexQuestionnaire for study wood processing operators in the South CaucasusRespondent’s name: location: date: General info Wood harvesting/Processing Operators Operator/license holder:license/registration #: License/other start date: expiration date: Forest location: area (ha): Annual amount of timber for cutting/harvesting (m3) by types, license and management plan. #Timber species:According license/other official documentAccording to forest management/use plan 1. Products You have accumulated substantial experience in wood processing business 1.1. What do you produce now? (logs, boards, ...) (present)1. 2. 3. ... 1.2. What did you produce before? (past)1.3. Do you plan to produce other additional new products in coming days? (future)2. Logging/Harvesting timberYou are one of the key employers in the region, 2.1. How many working units/team do you have for logging? 2.2. How many persons are in a one working unit/team? 2.3. Do you use only your own working units? yes; no, we recruit additional teams (outsource)2.3.1. if “no”, specify, how many additional teams you recruit ? 2.4. Do you use only your company trucks and other machinery for logging (cutting, transporting from woods to processing factory)? yes; no, we hire (100 percent outsource); we use our own and others’ services ( percent partial outsource ).2.5. What trucks or machineries does a team use ? Bulldozer haul (“tiagach”) Crane log truck other, specify: 2.6.What is the average age of the machinery? 2.7How much do you invest in machinery annually; how did you finance these investments (self, family members, other businesses, bank loan, etc.)? 2.8. How much timber did you process by timber species (m3, 2016-2018 yy)#Timber species2016201720182.9. How do you use waste produced by logging in forest?3. Processing timber3.1. How many working units/team do you have for processing? 3.2. How many persons are in a one working unit/team? 3.3. What technologies do you use for processing? a technology cycle? chainsaw (small size) chainsaw mill board boiling dryer other, specify: 3.4What is the average age of the machinery? 3.5How much do you invest in machinery annually; how did you finance these investments (self, family members, other businesses, bank loan, etc.)? 3.6. How do you use waste produced by processing? 3.7. What is the ready timber products output in percentage from the round log?#Timber species:output %Comments/notes:3.4. What does the company need to improve the technological line and what are the results expected? 3.5.Do you have access to competent labor; do your employees have appropriate training or do you need to train them yourself? 4. Commercialization 4.1. What is the cost of 1 m3 log logging (cutting, skidding, on-site processing, and loading of trees or logs, transportation to the processing factory), sawing, boiling, drying, other technological steps of a product creation goes through? What is the cost of creating one unit of the product? 4.2. Product produced, amount produced and cost:#Name of the productVolume (m3)Costs:4.3 Product sales location and markets: For Georgia on production site Tbilisi other cities of Georgia , specify: other country, specify: For Armenia on production site Erevan other cities of Armenia , specify: other country, specify: For Azerbaijan on production site Baku other cities of Azerbaijan , specify: other country, specify: 5. Management 5.1. Number of management positions: 5.2. Number of persons involved in Security (guards securing forest and factory): 6. Legislative environment and supervision bodies Current changes in legislation and following supervision may create a new set of rules. 6.1. What kind of regulatory changes would help your firm to grow and become more competitive; what impacts expect in the future from the acting or coming regulations?6.2. What kind of collaboration you face and would like to see while interacting with supervision bodies?6.3. What modifications or changes would you wish for having better outcomes for doing business?7. Producers’ sale prices, competition & growth limitations7.1. For how much ($) do you sell your products locally on domestic market and/or for export? #Product Unit domestic marketexport7.2. Where does the main competition come from? 7.3. Which factors limit your growth (e.g. access to raw material, high costs, labor shortage, weak demand etc.)? Other notes: ................
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