Gerely Ferenc
Abstract
In the 1980's, at the end of plan economy system in Hungary the state owned about 1.2 million hectares, 70 % of Hungary's forest land. 22 state owned and regulated forest enterprises were in charge of managing this forest area. In order to avoid the limitation of private property, and to equalise the social function losses of private forestry, the State has to organise his forests to provide the non wood benefits in a higher level.
The new system of Hungarian economy has been carried out from the end of the 80's. In 1992 an act was passed about the business asset of the State, its management and utilisation on a long run the basis of which Hungarian State Holding Company was founded. Its main task is managing the strategic assets of the State. The Hungarian State Holding Company is a private, single-person company limited by shares held by the State.
The former forest enterprises were formed to share limited companies. Forest management and utilisation is not only for production of wood and other wood based products, but rather to improve the forests and the value of the companies. This was formulated in the policy of the Forestry Portfolio.
The essential forest policy issues determine the mission of the portfolio and the included forest companies, the organisation and economic environment. A long term sustainable forest management could be fulfilled on high level only by such organisations, which are strong, efficient and have enough capital to guarantee the unbroken keeping of forests in any situation. The financial stabilisation of the forestry companies was successfully solved. Beside the successful business, the quality of silvicultural activities and other forestry operations were implemented on a high level. The main questions are: improvement of the companies, the dividend policy of HSHC, the contractors' relationship and relation to private forest owners.
The results of present state forestry organisation underline, that the long term sustainable forest management is not inconsistent with the market model of business.
State Forestry Background in Hungary
Since 1969 the economy in Hungary have involved some elements of market economy with strictly centralised decision making. The state owned all the enterprises, except the ones belonging to the co-operatives. Private economy had practically no role on larger scale. The management of state owned enterprises was the responsibility of the director (general director) and the workers' committee under a very hard ministerial ownership. The autocrat socialist party not only determined the general decisions, but the tactical stage of management too, including employment. In the 1980's, at the end of plan economy system in Hungary the state owned about 1.2 million hectares, 70 % of Hungary's forest land. 22 state owned and regulated forest enterprises were in charge of managing this forest area. The enterprises were under the direct control of the Ministry of Agriculture (MOA) and the Ministry of Defence. The managed forests were owned by the state, under the responsibility of the minister of agriculture.
The new system of Hungarian economy has been carried out from the end of the 80's keeping the laws passed by the Parliament i.e. the law on accountancy, and company law. This way the basic fiscal elements were available to introduce more of market economy.
Basic Questions of Forest Policy in the Transition Period
The Joint FAO/ECE/ILO Committee on Forest Technology, Management and Training, at its eighteenth session in July 1990, decided to initiate activities in support of the countries of Central and Eastern Europe being in transition towards more market-oriented economy. In 1991 a workshop was held, in Budapest, on the organisation and management of forestry under market conditions. The conclusions and recommendations of the workshop reflect the problems and necessary activities of forestry in these countries.
The main conclusions are as follows:
"All countries in transition are facing major tasks of reorganisation while ensuring the continued provision of forestry outputs during the current process of change. Although these tasks differ from country to country, the organisation of the forestry sector must always be considered in the context of the legal framework established or to be established to promote and facilitate the working of the market economy ...
... Appropriate forest laws are necessary for the forest authority to
exert the control
needed to ensure that policy objectives are achieved ...
... The State is likely to remain a large forest owner in countries in transition for the foreseeable future. Privatisation of forest land does not absolve the State Forest Service from reorganising its own management in order to act in a business-oriented market economy ...
... The most appropriate organisation of the forest service for management of State forests will differ with circumstances but certain principles may be considered in decisions on this point; among them are the need to identify the objectives of different managers, the desirability of decentralisation, and the number of management levels ...
... An essential requirement in a business oriented approach to forestry is that the supply of roundwood should be completely organised and managed ...
... The State Forest Service can gain certain advantages of the market economy almost immediately and at relatively little cost by encouraging contracting firms to undertake a wide range of operations extending, ...
... Insufficient attention appears to be paid in countries in transition to the appraisal of management practices in such areas of activity as staffing, silvicultural methods, thinning and felling regimes, and the marketing of materials ...
... It is clear, that a major training effort will be needed to establish the attitudes, skills and procedures required to take advantage of the new conditions ...
... Increasing the mutual understanding between the public and foresters ..."
Looking back today to the conclusions of the Workshop it is evident, that the main tasks of transition were put down. It must be investigated, how the task has been fulfilled. One of the main questions is the model of State Forestry Service. What is the appropriate model which can follow and influence the dramatic changes.
In Hungary the State has had a definite impact on forestry for about 200 years. Since the middle of last century the direction of forestry has been based on laws including the basic elements of general public requirements. For this reason forestry authorities have always had strong influence on forest economy. The most centralised model has been carried out in the last 40 years. All the main tasks were decided by the Ministry of Agriculture: policy making and regulation, enforcement of law, immediate direction of forest management on 70 % of the forest area, direct command of state owned forestry enterprises, centralised compulsory forest management planning, cross financing by autocrat decisions of forest authorities etc. The scheduled system in the centralised planning economy provided very high level forestry, first of all in sylviculture. During this period the forest asset of Hungary has raised and the quality of raw material has been getting better.
The above scheduled centralisation doesn't fit in a democratic market directed model. The different functions and tasks must be decentralised in a new horizontal and vertical structure. Policy making and regulation must not be dependent on enforcement, forest management must be set in a business way and independent of the direct influence of authorities. This requirement is the basic point in the structure building. The success of modernisation and harmonisation of forestry depends on how it could be rebuilt the centralised system, how the still existing autocrat organisations are able to take a new way giving up their exclusive position including ownership.
State Property Management
At the time of the political change Hungarian ownership structure followed the communist model. The main target of transition was to demolish the state ownership. At the first stage the state property was divided in two main parts, the first was the asset which remains stately owned on a long run, the second part was marked for privatisation.
In 1992 an act was passed about the business asset of the State, its management and utilisation on a long run the basis of which Hungarian State Holding Company was founded. Its main task is managing the strategic assets of the State. It is to exercise the long-term ownership functions of the State in a businesslike manner adjusted to market. HSHC implements the economic strategy objectives of the Government on the basis of the above principles.
The Hungarian State Holding Company is a private, single-person company limited by shares held by the State, founded by the Government of the Republic of Hungary.
The primary activities of HSHC are:
- control of property management companies (holdings)
- other property management activity and planning, organisation improvement and controlling-type service,
- preparation and sale of the state assets to be privatised.
A Government Decree listed 163 business organisations under the management of HSHC.
19 of the State owned big forest enterprises were also transferred. The purpose of this transformation was to establish a stable basis for managing the state owned forest land on a long run according to public demands. 0.9 million hectares of the State owned 1.0 million hectar forest belong to the asset of the HSHC too. Three of enterprises with most of the remaining 0.1 million hectares are under the management of the Ministry of Defence.
The Role of State Forests in the Forestry Sector
The forest property due to its long term public and environmental purposes is more or less a limited form of ownership. Europe lost most of its forest land in the past centuries. Because of the growing industrial activity and public consumption the environmental role of forestry is an ever more important policy making issue, and it is in focus.
Despite the above mentioned aspects, the private forest property and ownership in general is not able to provide the desirable service for the public. The main reasons of this limitation are:
- the small scale of private forestry ,
- in most of the cases the absence of knowledge and tools of private forest owners for managing special forestry functions
- the regulation (limitation) and control of forestry actions can't be as strict as in state owned forests.
In order to avoid the limitation of private property, and to equalise the social function losses of private forestry, the State has to organise his forests to provide the non wood benefits in a higher level.
At the beginning of privatisation process this basic principle has been approved. Apart from 104,000 hectares, which was given to private persons as compensation for nationalised asset, the state forest property remained decisive to an extent of 50 % of the whole forest area.
Forest Management in the Frame of Hungarian State Holding Company
The former forest enterprises were formed to share limited companies. The owner of these companies is exclusively the HSHC. Forest management and utilisation is not only for production of wood and other wood based products, but rather to improve the forests and the value of the companies. This was formulated in the policy of the Forestry Portfolio.
The Hungarian State Holding Company owns 900,000 hectar forest land which constitutes the part of HSHC asset. The problem of transition of forestry companies was caused by the fact that certain facilities on the forested area (i.e. roads, railways, hunting cottages) although belong to the forest, are itemised in the balance sheet of the companies. Because of this, the properties were transformed to the ownership of the companies, nevertheless, their permanent segregation from the forest area is not desirable.
Owing to the lack of the Laws on Treasury and Forests, the relationship between the joint stock companies and the state forest is suspended, making long term planning, of particular importance in forest management, rather difficult. It is necessary to unambiguously separate the tasks of the public functions of forests and forest management for HSHC to be able to meet the prescribed dividend expectations and privatisation obligations. This is turn necessitates a review of the present system of forest regeneration (regulated within the Forestry Fund) as that is not harmonised with shareholders' control within a joint stock company.
In spite of the above mentioned problems, the financial stabilisation of the forestry companies was successfully solved and modest profit of HUF 392 million was made, resulting also from the nature of forestry management in 1994, and HUF 471 million is expected in 1995. Beside the successful business, the quality of silvicultural activities and other forestry operations were implemented on a high level suited to the general forest policy and ownership of Hungarian State Holding Company. These activities were highly appreciated by forestry authorities.
Coming from the deficiencies of legal regulations, privatisation is presently pursued only in the form of decentralised sales. Under the supervision of HSHC, declared in foundation of the companies, so far industrial plants and real property have been sold. The revenues collected were applied by the companies to their public purpose basic activities and to reducing their debts. These revenues also improved the liquidity of the firms concerned and supplemented the budgetary funding only partly available in a limited form for public purpose tasks; it should, however, also be seen that the capital of the forestry companies was essentially reduced by the same amount.
Harmonisation of Public Demands and Effectiveness of Forest Management
How is it possible to fulfil the three basic requirements of forestry, wood production, protection and social functions, in a basically profit oriented environment? How is it possible to stimulate forest companies and to fit their economy to the public demands and at the same time to avoid the violation of their autonomy? These are the main questions of property management policy of Hungarian State Holding Company.
Because of the HSHC owns the companies and at the same time the forest asset the responsibility of state forest management appears on both sides: on the side of forest property improvement, and the side of company improvement.
In this respect the essential forest policy issues determine the mission of the portfolio and the included forest companies, the organisation and economic environment. On the other hand on a long term sustainable forest management could be fulfilled on high level only by such organisations, which are strong, efficient and have enough capital to guarantee the unbroken keeping of forests in any situation.
Following is a brief summary of how it exists in Hungary.
Organisation
Hungarian State Holding Company has a
functional structure. It is directed by the Board of Directors and controlled
by the Board of Supervisors. The head of management is the General Director.
Among general functional compartments (directorates such as general, administrative,
economic, legal, accountancy, financial etc.) there is the General Directorate
of Asset Management. The Forestry Portfolio which is in charge of the forestry
companies and the 900 thousand hectare state forests is organised in the
Agrarian Directorate. The staff consists of two managers and a secretary
altogether. The efficiently organised Portfolio is supported by the relevant
departments of HSHC.
Forestry enterprises as share holder companies are managed by the Board of Directors and supervised by the Board of Supervisors. The owner HSHC has only indirect contact with the management as it is put down in the deed of foundation. The organisation of companies depends on the local requirements, basically following the traditional type of middle European forestry organisations. The staff has been reduced to a high extent in the recent years. Most of the forest workers became contractors of the companies.
Improvement of the Companies
The owner HSHC slightly limited the responsibility of the Boards of Directors of the companies. Its duty is to select and appoint the general director. This way, following a systematic tender process, the general directors of forestry companies are trained specialists. Their income depends on the successful management activities including the quality of forest asset management as well.
The asset management work needs some financial background, first of all in the case of companies which have financial problems. The HSHC provided credit guarantee for those companies which went near bankrupt. Besides this there was a strong effort to improve the economy, structure, business etc. of these companies. Due to this effort all the companies of the Portfolio are stable at present.
In some cases the financial basis of transformation and stabilisation of liquidity was the privatisation of asset which is not very close to forestry, its management is not efficient or produces losses (some industrial parts of companies, real estates etc.).
Information system is the most important tool to follow the success of management. The HSHC Controlling built up direct contact with the companies and collect the most important balance sheet and liquidity data for monthly analysis. The assessment system provides sufficient data for the owner to interact if required.
Some activities are harmonised in the frame of the Portfolio, for example negotiations with the Railway Company on transport prises.
The Dividend Policy of HSHC
HSHC's policy is concerned with the requirements of Parliament, determined the amount of dividend the companies should pay. In general 50 to 100 % of the profit is the amount of dividend. Considering the nature of forestry portfolio, the public purposes, forest investment is the first goal of asset management, the rate of dividend in case of forestry companies is between 0 to 30 %. In 1994. the companies paid HUF 57 million dividend after a profit HUF 326 million. This amount doesn't cover the costs of asset management of HSHC.
Contractors
In the majority of companies the most important workforce at present are the contractors. In most cases they are the former forest workers employed by the forestry enterprises. They have bought or leased the machines of the enterprises/companies. It is a very important question how to treat them in the future (education, assistance etc.).
Relation to Private Forest Owners
The State Forest System in Hungary is different from forestry services, which are real governmental bodies and have such duties as improvement and management of private forests. The overwhelming majority of new forest owners has no idea how to manage forest and they are in the lack of tools they need. In Hungary the Forest Supervisory and the Forest Management Planning Office of Ministry of Agriculture has the mission to improve private forestry. But this activity doesn't cover all the fields of forestry.
The forest companies make an effort to establish partnership with private forest owners, first of all in education and training, forestry operations, and marketing wood material.
A Possible Way for the Future, Concept
How to follow the present state forestry system basically depends on the intention of the Parliament. The new Law on Privatisation was passed in May. It declared, that the forest asset will belong in the future to the treasury, and the forestry companies remained exclusively in State hands. On this basis the Forestry Portfolio has the duty to plan for a long term.
The most important task is to influence the decision makers to improve the economic regulation of forest management in a way which suits the long term purposes and business requirements as well.
The management of companies must also be improved. A harmonised information system is required along with training and education of staff. The costs of actions must be reduced.
As one of the most important elements of business the trade activities must be improved with employing high trained specialists.
The basic contractors must be selected out and the companies must assist at their technical development. It remains in the interest of companies to assist in private forestry, This activity must be harmonised with forest authority activities suited to general market requirements.
The PR activity must also be improved. The goal is to win the public's acceptance for state forestry conception. It must be clarified, the results of present state forestry organisation underline, that the long term sustainable forest management is not inconsistent with the market model of business.
OE Nov 21, 1996