Round table July 2: Abstracts and presentations

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On Thursday, July 2nd, the State Land Agency of Ukraine hosted another, the third round table in the series of these events. This time the topic of discussion was: “The future reform of the land market from the viewpoint of big business”. Participants were invited from among the big landowners, representatives of agricultural holdings, representatives of relevant committees and organizations as well as scientists – with mass media present too. The Chairman of the State Land Agency Maksym Martyniuk also participated in the discussion; moderation was traditionally performed by IMF Group senior economist Mykhaylo Kukhar.

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The meeting was opened with a report presented by Pavlo Koval, an independent financial economics and management consultant, Deputy Director at the Institute of Economics and Management of agricultural sector at Kyiv National Economic University (presentation). Mr Koval presented a report entitled “Current state and prospects of development of land market in Ukraine: the view of the big agricultural business,” and during his presentation he gave an overview of the latest trends on the market, its institutional structure and solution for land reform problems.

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The expert began his speech with a brief tour into the history of the issue and outlined the four phases of land reform in Ukraine.

The first step was the adoption in 1990 of the Land Code of the Ukrainian Soviet Republic, which confirmed the right to own land in the form of inheritable possession, permanent possession, permanent and temporary use. Later, in March 1991, the Supreme Council decree “On land reform” assigned to transmit the land to private ownership. Until this, of course, for nearly 70 years no one could imagine ownership of land whatsoever.

The second stage was marked by the adoption in 1992 of the Law “On ownership of land”, which introduced three main forms of land ownership: private, public and collective. Almost immediately afterwards, private ownership of land was implemented by means of the law “On farm economic facilities”. Actually, these steps introduced the theoretical background of the reform process.

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After two quite decisive steps, the third stage was not so lucky: during the years 1994-1997, the President issued a series of decrees on measures to accelerate land reform, on land sharing, land lease, on the fixed tax and so on.

Finally, according to Mr. Koval, the fourth phase of land reform was the Decree of the President of Ukraine “On urgent measures to accelerate reform of the agricultural sector” that abolished communal land proprietorship in 1999. Today we are at the fourth stage of development, and it is still not complete.

Moving from the key events of the past to the present situation, the expert briefly described the structure of agricultural land ownership in Ukraine, and gave an overview analysis of land distribution for land users, as well as the structure of the distributed lands depending on the income they bring. According to the 2014 data, average lease payments amounted to 2.9% of the normative monetary value of the land.

According to Mr. Koval, farmers make up to about 14% of land tenants; more than one third are entities at the place of location of land units, and more than half are entities not at the place of location of units. In general, Ukraine signed nearly 4.8 million contracts with various business entities. It is important to analyze in terms of income tax the deductions to the budget.

The expert paid particular attention to macroeconomic trends in the agricultural market. The infographics presented in the report illustrated the GDP to agricultural products ratio, the gross value added structure of Ukrainian exports, employment in the agricultural production and so on.

The report highlighted the following facts:

  • the average land bank of an agricultural holding is 75 thousand hectares;
  • the share of rent paid by the ten largest agricultural holdings is 21% of the total amount paid;
  • the 2013 rates of concentration of land agricultural holdings banks accounted for about 10% per year.

Mr. Koval also provided statistics for the largest shares of production of agricultural holdings, which determines their place and role of agricultural holdings in the agricultural industry of Ukraine, then estimated capitalization of public agricultural companies of Ukrainian origin in world markets.

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Mr. Koval not only offered the colleagues a quintessence of his experience and analysis, but also turned to them with an urgent matter – whether it is appropriate to lift the moratorium on land sales, which is scheduled for January 1st, 2016? Of course, this issue is complex and multi-aspect, so the expert asked to start thinking about such influential factors as the average price per hectare of land in U.S. dollars, the proportion of land to be sold, the problem of fragmentation and the existence of easements and potential buyers for the land. Actually, these questions became an invitation to discussion.

There was a clarifying question about fragmentation and easements from Sergei Kubakh, a specialist in land management of project on “Reforms in agriculture and land relations in Ukraine”, Mr. Koval said: the question is, whether the availability of the land market can contribute to avoiding excessive fragmentation. This problem can be avoided if the legislation, in the Land Code, the laws and regulations there is an easement concept, which allows partial land use. There may be different approaches: at the level agreements, at the level of legislation and so on. This can be useful for large farmers – from the perspective of tracts of land and the efficient use of new technologies and machinery.

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Pavlo Kulinich, advisor of USAID “Agroinvest” project asked a question based on the facts presented in the report. It concerned the results of the agricultural management mainly based on the forms of management, and on land lease. Mr. Kulinich wondered whether this means the complete exclusion of the share of agricultural production which is manufactured at private farms (which produce the major bulk of agricultural products) and whether the small facilities have economic prospects in our agricultural sector.

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Pavlo Koval replied that “he has never been an advocate of agricultural holdings” and will not become it in the future, but the topic of the Round Table forces one to focus on the analysis of the conditions in which big business is supposed to work nowadays. Those 17% of the land used within individual farms can be more effectively used by specialized companies, mechanized and automated in a proper manner. Institutional structure is one of the basic issues of further development, as was made clear by the expert who votes for stratification in the institutional structure. If we rely on any single institution, either the organizational and legal or institutional one, it will be a great mistake for Ukraine. According to Mr. Koval, we should not focus solely on farmers (as in Poland, where it is even laid down in the Constitution), or only agriholdings, since experience shows that it is not the best way. We need stratification, whereas the market, with the participation of state institutions, will adjust its proportions according to the scale and to the ownership of the means of production. Also, the nature of income distribution, and the organizational, legal and organizational forms will be taken into account.

Head of State Land Agency Maksym Martyniuk immediately mentioned that our government is simply “doomed” to witness the important role of agricultural holdings in agricultural production structure.

First, their activities and development in recent years have proved their effectiveness and the right to exist. Of course, this occurred, inter alia, thanks to certain tax preferences, but nevertheless, there is a result. Secondly, as for today there is a large number of agricultural holdings that did their IPO and their shares are present on world markets and in the composition of their shareholders, there is foreign capital – a form of management that proved to be highly effective. At the same time, the benefits of agricultural holdings are somewhat spoiled by negative details in the social sphere in rural areas.

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The situation is catastrophic in the sphere of employment in the places where agricultural holdings rule the parade. If their production structure does not change, it will be detrimental to the villages and rural areas – the settlements simply disappear. At the same time, Europe’s countryside has its own sustainable development strategy and is functioning properly, including in terms of engineering and social infrastructure. If agricultural holdings do not change its production structure and does not return its gaze towards cattle farming, for instance, to other more labor-intensive sectors of agriculture, our rural social situation will only worsen.

According to Mr. Martyniuk, Ukraine needs to ensure – including through market mechanisms – the effective circulation of agricultural land, and provide stratification in agricultural production.

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Finally, Mr. Martyniuk warned not to believe the myth that agricultural holdings are not ready financially to buy their land banks. They expect that the first wave of those who want to buy the land will be approximately 20% of holders of shares and the agricultural holdings have enough resources to purchase of 20% of agricultural lands. The holdings can become fully-fledged players in the market, if the market begins to work when the moratorium is lifted.

Stefan Verbunt, the Twinning project Permanent Advisor, agreed with Mr. Martyniuk almost at all points of his speech, however, revealed differences of opinion with the chief speaker.

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Mr. Verbunt disagreed that agricultural holdings have such importance for the land market in Ukraine. The main question is where Ukraine is heading or wants to head in terms of agricultural production. The expert also noted that an incomplete agrarian reform in Ukraine is a pity and he believes that in the agricultural holdings lies the future of the agricultural sector for our country. They do not solve the unemployment problem and are not making efforts to preserve the fertility of the land. In fact, many agricultural holdings today are in huge debts, and their work performance is quite low, and they work mainly on the world market, but in Ukraine they can enliven the processing and increase of added value. This would give a very strong boost to employment in rural areas, and labor would cease to flow away to the big cities. Hence the question – what policy should the government choose to achieve their goals in 5-10 years.

The comment made by Mr. Pavlo Kulinich and his subsequent question resonated with the question from Mr Verbunt. The expert said that Ukraine is suffering because of oligarchy, and the growing influence of agricultural holdings is a part of this process, but negatively colored, so the same precaution should apply.

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Mr. Koval commented as follows: the economy of our country did not create the agricultural holdings artificially, there were corresponding economic conditions. If we analyze the creation of agricultural holdings within the last ten years, we will see that about 90% of them brought financial capital from other sectors (metallurgy, power engineering, the financial sector) – because Ukraine is known to have a mineral-extractive nature of the economy. Within the nearest year or two we will see agriculture with very weak holdings, and this can result in quite a sad sight. Institutional structural changes are very bad for the economy. Regarding jobs – there is a tendency that a large number of them is creating small and medium-sized manufacturers. But if you ask what or who creates the most competitive jobs, it appears that the agricultural holdings did – those upgraded, capital-intensive, innovative holdings. They attracted the most investment, including technology matters. According to the 2014 data, the capitalization of the agricultural sector decreased by 14% – hence, we failed to receive a number of investments and loans, have not created a certain number of jobs.

The vector of future development has a number of models. There are basic things that should be the principles of development, and we have to decide whether to develop agrarian business sphere as a social project or how to combine agrarian business and rural development. To do this, neither the organizational structure nor financial capabilities are available.

There are global trends that over decades, including in the US and countries in Western Europe – there is a tendency to increase medium-sized farms and to reduce the number of individual farms, accompanied by increased efficiency. There is a unification process among small producers in professional and semi-pro organizations, cooperatives and others. In view of such processes, so-called strategy of “grinding” may be an unnecessary “step backwards” for Ukraine and a repeat of mistakes for others.

Concerning this, Maksym Martyniuk briefly commented that big agricultural business is one of the few major businesses in Ukrainethat is built relatively transparently. This is a business which rose partly due to certain circumstances in the global food market, partly due to the already mentioned tax preferences. Agrarian lobby of the 1990s was represented by “Soviet directors” who manipulated the subsidies for their own profit, but modern agrarian lobby is people for whom it is pretty easy to explain the origin of their first million.

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Michael Mishov, Head of “Ernst&Young” Advisory Services to agricultural business companies in Ukraine, took the floor and said that he did not consider determining the scale of production; the main thing is how the company rebuilt its production processes, and how it manages land resources. There are small farms that use the land and work in an extensive manner, so it is important to look at the efficiency of production, not the size of the enterprise. Large agricultural holdings have their advantages – for example, the advantage of lower production costs and better access to adequate financing. They can have discounts for buying fertilizer, seeds, and pesticides and so on. Some agricultural holdings understand that you need to invest in the local community because they have a long-term strategy of presence in a particular region, and they should have normal relations with the local community.

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Roman Leonov, a representative of the Kharkiv regional public organization “Union of Land Surveyors of Kharkov” again, during the discussion, turned the attention to lifting the moratorium. In his opinion, the problem has mostly political nature, and this card is just played in order to manipulate the electorate. We should lift the moratorium, but gradually – in order not to split society. We remember that in Ukraine 74% of land is owned by citizens and it should be explained that the moratorium, in the first place, is removed from the agricultural land belonging to them. Regarding the land that is in state ownership, the position of the expert is the following: during the first year or two, it is not necessary to withdraw the moratorium, because there is no economic justification for the cost of land. Citizens need to be reassured that public land is not “sold to foreigners”; and when the market develops, when the state understands at what price it is advisable to sell the land – then you can consider the option of renting it out for auction.

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Discussion moderator Mykhaylo Kukhar turned to the experts on whether or not the government should underline that state-owned lands and private ownership should sold under different initial conditions. Mr. Leonov answered persuasively that it is a bad idea to prohibit the sale of the land for the citizens. If the state wants to protect villagers, it should act otherwise. When it was allowed to issue certificates, the land was purchased from the peasants for a penny. You can, for example, introduce a limit:  ban the sale at a price that is cheaper than a normative monetary value. As for public lands, it is not just a matter of pricing, and the issue of corruption at State Land Agency must be minimized. Only by defeating corruption, we can manage resources cost-effectively.

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Mr. Oleg Gonchar, representative of the NGO “PR Land Center for design technologies” once more returned to the issue of social responsibility of agricultural holdings, urgent problems of providing village infrastructure and roads. The greatest risk to agricultural holdings is that they will lose their land, and any abrupt changes will lead to the fact that the market will “shake”. There are system-based problems – such as how the land was distributed in the past. This is a risk and agricultural holdings are not ready to a situation of lifting the moratorium. The most motivated ones to sell the land, in theory, should be the individual land owners, but they are rather afraid of “the unknown”, i.e. of the consequences of the sale of his land.

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Mr. Oleg Gonchar, representative of the NGO “PR Land Center for design technologies” once more returned to the issue of social responsibility of agricultural holdings, urgent problems of providing village infrastructure and roads. The greatest risk to agricultural holdings is that they will lose their land, and any abrupt changes will lead to the fact that the market will “shake”. There are system-based problems – such as how the land was distributed in the past. This is a risk and agricultural holdings are not ready to a situation of lifting the moratorium. The most motivated ones to sell the land, in theory, should be the individual land owners, but they are rather afraid of “the unknown”, i.e. of the consequences of land sale.

Olga Khodakivska, Ph.D., Head of Land Relations of the “Institute of Agrarian Economics” National Scientific Center, agreed with the opinion expressed in the course of the discussion – that large agricultural holdings were created naturally by means of transfusion of capital into agriculture. 37% of cost return, according to the expert, is quite a good result, which indicates a certain volume of agricultural production. The peculiarity of the current situation is that basically production goes to foreign markets, towards the world market. The holdings import currency in the country, but the volume of the currency is not that large, and the amounts of money remain on offshore accounts. At the request of Mykhaylo Kukhar to specify the sources of statistical data, Mrs. Khodakivska named the State Statistics Committee and the National Bank of Ukraine. She also supported the expert opinion that companies are not required to fund the development of social infrastructure; rather they should in full and timely manner pay taxes to the budget, which would then be used for social needs. At the same time, there are companies that take over from the budget, more than they return to it in taxes.

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The meeting ended with a brief preview of the next round table that will be dedicated to the land market analysis and the experience of land reform in the United States and Western Europe. Representatives of foreign expert circles will share their experience, which can enable Ukrainian farmers to evaluate what experience should be borrowed, and which, on the contrary, should be avoided.

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