Findings of the FLEGT/EUTR Fitness Check, which was to examine whether the two instruments “are fit for purpose to halt illegal logging and related trade” were published by the EU Commission on 17 November 2021, in conjunction with a new draft regulation on deforestation-free supply chains. The report highlights successes but also identifies shortcomings in the implementation and functioning of both Regulations. In summary, the report concludes that “A system based on due diligence (DD) such as the EUTR, could be better fit for purpose if improved and adapted to the new political context. Regarding the FLEGT Regulation, the main instrument for its operationalisation, i.e. the Voluntary Partnership Agreements (VPAs), has not delivered”.

Success in Indonesia acknowledged

With respect to the VPAs, it is acknowledged that “the implementation of the FLEGT licensing scheme with Indonesia has worked well”, a fact which is attributed to “the Indonesian SVLK [being] fully integrated in a wider reform of the national forest governance system and not seen as an ‘add-on’ only inspired by trade concerns”. The Fitness Check notes that many elements of FLEGT licencing “have been implemented successfully both by Indonesia and EU member States, and processes and systems are continuously updated and improved”.

More widely with regard to the FLEGT VPAs, the Report notes that a “great amount of learning can be drawn from the Indonesian experience” and that that “VPAs have led to enhanced stakeholder participation and positive results in terms of forest governance in some countries”.

Despite these positives, the Fitness Check concludes that, overall, the FLEGT VPAs have “not delivered” and their “effect has been limited, with only one country issuing FLEGT licences and no evidence that the VPAs have contributed to reduced illegal logging”. A number of factors are identified as having constrained the FLEGT VPA process. It is noted that “negotiating, concluding and implementing VPAs proved to be a long and complex process” and that “such processes are fraught with challenges in many partner countries such as the required high standards of a TLAS (weak overall governance, lack of institutional capacity, absence of political willingness, often widespread corruption), difficulties in gaining agreement from multiple regions in partner countries, insufficiently effective measures and weak law enforcement”.

The Fitness Check also claims that the VPAs have suffered from a “high focus on process (strengthening governance elements such as stakeholders’ participation, etc.) to the detriment of the main objective: stopping illegal logging and associated trade”. This, it is alleged, “may have led to disincentives for VPA countries to bring the preparatory processes to an end, since they continue to receive the EU economic support for activities while at the same time selling the majority of their timber to less discerning markets, such as China”.

The Fitness Check goes on to suggest that “the VPA processes as designed by the EU provide funding to establish participatory forest governance processes, but do not address the economic drivers of illegal logging in the forest sector, nor the underlying corruption in the administrations and at the political levels that are benefitting from illegal logging”. “These factors prevented VPA processes from creating the expected improved transparency in all financial transactions related to the forest industry, the processing industries directly linked to it and the export volumes of goods sourced from forests”.

Another weakness of the VPAs, according to the Fitness Check, is that “many important exporters to the EU, which are considered to be high-risk countries regarding illegal logging, have never shown interest in engaging in the VPA process, e.g. Russia, Ukraine and Brazil”. It is suggested this is due to several factors: “a perception that VPAs are designed solely for developing tropical countries, a ‘demand-driven’ approach for the selection of partner countries, doubts about the economic benefits of VPAs in terms of greater EU market access, and the potential reputational damage of withdrawing from negotiations once started”.

The Fitness Check includes a critical cost-benefit analysis of the FLEGT VPA process, suggesting that “Considering that timber and derived products followed by FLEGT- licenses cover only 3% of timber imports into the EU, the costs and administrative burdens seem immense (….. ) its benefits may not seem to justify its costs”.

The total investments by the EU and Member States in the preparation, negotiation and implementation of FLEGT VPAs since 2004 is estimated in the Fitness Check at €1.5 billion shared between the EU and the Member States (much of it apparently spent on preparation and negotiation rather than actual implementation). This excludes the amount invested by VPA partner countries the level of which “has been proven difficult to quantify as this was partly in the kind i.e. time and effort invested by authorities and stakeholders”.

The annual costs of running a FLEGT licensing system are estimated in the Fitness Check using data from Indonesia as the only country that has reached that stage. “The total costs for Indonesia, MS [EU Member States] customs and importing operators in handling the approximately 35000 licenses per year are in total €11.5 million”, according to the Fitness Check. This includes the support and costs for certification of forest areas in Indonesia but excludes costs related to support to SMEs and family holdings. On this basis, cost per license issued is estimated at approximately €330 and the cost per tonne of import into the EU about €336-338.

The Fitness Check argues that “there is limited potential to reduce the costs of the VPA system”. This is because the “FLEGT/VPA system makes it necessary for the VPA countries to develop and implement a licencing scheme, undertake inland and border inspections, certify forests and plantations, as well as control and verify transports and traders, warehouses and processing industry, which leads to complex enforcement systems with high administrative costs that exceed the capacities of some partner countries”.

On the positive side, the Fitness Check notes that “there is evidence that FLEGT licences are reducing the costs of timber import for those EU operators mainly or fully sourcing their products from Indonesia, as they do not need to exercise DD [due diligence] under the EUTR”, although the value of this saving is not quantified in the Fitness Check. It is also noted that “there is some evidence that once the FLEGT licencing starts, exporters experience a benefit. But overall the benefit to Indonesian exporters has been limited to date. The trade data shows that Indonesian exports to the EU increased by only 3.6% from 2015-18 (relative to a 10% growth in all [EU] imports) and by only 0.4% between 2016-18 (relative to a 12% growth in all imports)”.

Challenges of EUTR implementation

The Fitness Check verdict on the effectiveness of the EUTR is equally mixed, suggesting it has had only a limited impact on illegal flows globally, although this partly reflects the inherent difficulties of measuring such flows, but that it has focused efforts by European traders on removing illegal wood from trade and has equipped the EU to work closely together with other consumer countries implementing similar legal frameworks.

The Fitness Check notes that “most stakeholders consider that the EUTR has led to a positive change in transparency and the availability of information and documentation around timber supply chains (in particular regarding species and origin) and as such has put pressure on the supply chains to ensure legality of the wood-based products being exported to the EU”.

On the other hand, “a number of implementation and enforcement challenges have been identified regarding the functioning and effectiveness of the due diligence system, in particular the way the EUTR has been enforced in MS”. These would include:

• The subjectiveness of the concept of “negligible risk” and related difficulties in challenging inadequate DD in court.
• Smaller operators face a number of challenges in establishing DD systems, partly due to limited awareness and understanding of the obligations.
• The transposition of DD requirements into national law is said to have been difficult for some MS.
• The lack of a mechanism to prohibit trade from high-risk sources, species or supply chains.
• Variations in product scope between the EUTR and FLEGT VPAs, which could “create additional complexity and challenges for CAs, EU customs and importers”

It is noted that “the trade data also presents mixed signals. Intra-EU trade (lower risk generally than extra-EU imports) grew less over the period of implementation relative to imports as a whole, as did imports from ‘lower risk’ countries. Furthermore, there was an absence of significant changes in trade patterns towards more transparent countries (…..) looking specifically at imports from countries where issues were specifically identified over the implementation period (Ukraine and Myanmar), [these] continued and actually grew in the case of the latter”.

The total costs of EUTR implementation per year are very uncertain and estimated to be between €71 million (low estimate) and €1071 million (high estimate) with a central estimate of €714 million. This draws on a range of studies undertaken between 2015 and 2021 – all reliant on only a small sample of operators – indicating average annual costs per operator between €1000 and €15000. The Fitness Check notes these costs “need to be seen in the light of the total import value of products under the scope of EUTR, which was €24.5 billion on average between 2015-2019 giving a range of estimated costs between 0.29% and 4.3% of the import value before customs and taxes”.

The closing statement in the Fitness Check essentially sets out the EU’s rationale for the new deforestation legal proposal: “If the EUTR were to be repealed without a system to replace it, the risk of illegal timber entering the EU market would considerably increase. However, by covering a wider commodity range in a new legislation, this issue could be addressed while also covering important elements of sustainability.

“In contrast, if the FLEGT Regulation were to be repealed, it would free considerable resources – not only financial but also human – currently dedicated to negotiating VPAs or monitoring their implementation. Those could be used in the context of a different, new approach that addresses the issue more effectively and more efficiently “.

A similar version of this report first appeared in the ITTO Market Information Service

The regulatory proposal and report on the Fitness Check are available here.