Round table July 16: Abstracts and presentations

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On Thursday, July 16th, the Independent Group for Macroeconomic Analysis and Forecast (IMF Group) under the aegis of the State Service of Ukraine for Geodesy, Cartography and Cadaster, headed by Maksym Martyniuk, continued to hold round tables on agriculture and agricultural issues. This time, the expert community focused on a number of issues on the topic “International experience: History of reforms and transformations on the land markets of Eastern Europe”.

The event was opened by Mr. Stefan Verbunt, permanent advisor to the “Twinning” project, who offered the audience an overview of the principles of the EU land market (presentation).

The Twinning project has been long and successfully assisting in the development of an open and transparent market of agricultural land in Ukraine, and Mr. Verbunt stressed the importance of a functioning land market for active business development.

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The EU adheres to the principle of so-called “open market”, which applies to all markets, including land and includes such components as equal treatment of different subjects of the market, non-discrimination, proportionality, transparency, openness and ensuring competition.

Among the main areas of reform the land sector in Ukraine Mr. Verbunt named, firstly, good governance; secondly, the creation of an updated inventory (cadaster), and, thirdly, land consolidation.

These measures, according to him, will be able to mitigate the impact of land сapture, which is due to urbanization. Also, it will help to ensure food security and stimulate the production of, and in the long term – to limit the shadow economy. These steps would require fundamental changes in technical approaches within organizations as well.

The expert dedicated a significant part of his speech to the concept of effective control: in fact, it defines governance as “decision-making and the process by which decisions are either implemented or remain at the stage of planning”. The concept of “good governance” is based on the responsibility of governments and authorities to meet the needs of the general public rather than individual groups of society.

The principles of good governance consist of the following elements: accountability, transparency, rule of law, the proper response, impartiality to the process, productivity and efficiency, and, finally, the opportunity to participate in decision-making.

In turn, poor management immediately raises a number of problems and troubles: lack of confidence in the possession of the land associated with this conflict, the high costs of operations on land, increasing the number of shady land transactions, problems with the registration areas, a decrease in investments in the private sector. It may also lead to the seizure of land and facilitate the illegal transfer of state-owned lands.

Clear cadastral system can be implemented by financing agricultural activities through the reimbursement, as well as by the introduction of fees for users of the land. It is important to ensure the accuracy of the information about the property, to guarantee transparency of the error correction (which would not be able to avoid completely).

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To create a functioning land market (in order to encourage its consolidation) we need a long-term plan for the development of rural areas, the funding (if not the government, then by private partners), involvement of various stakeholders, that is, diversification of participants, quality and content of Cadastre and transparent management process. In addition, land consolidation should be regulated by law.

According to experts, the process of agricultural land consolidation is carried out to improve the structure, the land composition, the configuration and size of the agricultural land and the use of land areas to ensure effective land use.

So, summing up his speech, Mr. Verbunt listed the following recommendations for agrarian reform in Ukraine: first, the need to clearly define the objectives, and secondly, to ensure open and transparent process involving stakeholders. In addition, at the local level it is necessary to ensure careful management and to have a successful pilot project, which later can be used as an example.

Richard Rozwadowski, head of DANIDA project (Neighbourhood Programme of the Ministry of Foreign Affairs of Denmark), presented his report called “The development of the land market in Ukraine based on the Polish experience” (presentation). Mr. Rozwadowski started with the fact that Ukraine is certainly a major exporter of agricultural products, but however, has a problem with the competitive field. Besides, Ukraine, like most post-Soviet states, inherited the principle of “dividing the land”, which led to a certain fragmentation of the market. In Poland, they created more sustainable agricultural entities to a maximum size of 2 hectares. About 25% of state-owned land has been sold or leased. Anyone who was recently in Poland, could see that agriculture is on the rise in the country – partly, of course, thanks to subsidies from the EU, but mainly due to the still relatively high competitiveness of Polish products.

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The average size of the land, of course, varies in different countries: for example, in Poland it is 8 hectares; in other EU countries it is 45 hectares, and in the US it is 95 hectares. The biggest farm that the expert had to work with was a farm area of 60 000 hectares, which is, according to him, is particularly difficult to control. At the same time there is a separate category of “large farms”, which in Poland reach from 100 to 1000 hectares; in the EU they can be from 200 to 500, while in the US – from 1000 to 2000 hectares.

It is necessary to take into account that the cost of labor in many European countries (even, for example, in the UK) is lower than in Ukraine – due to a higher average efficiency of each individual or a team of employees.

According to statistics, in 2014, the main agricultural holdings showed unprofitable results: among them are Raiz, Agrogeneration, IMC, MHP, Mriya, LandCom etc. It should be noted that not all large agricultural holdings are in such a troubled situation, but the trend in the accumulation of debt and loss persists.

Ukraine really needs a strong agricultural market, but how to build it is not clear for everyone. According to Mr. Rozwadowski, private farming is too weak now, so we need to create a system of financial contributions to small and medium-sized enterprises, provide them with a system of rent, to auction land for public ownership of the existing private farmers from the surrounding areas, with sale restrictions. The price in this case should be set at the higher rate, with up to three years for payment.

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In turn, the agricultural holdings should, according to the expert, make records of their activities as transparent as possible, hiring private companies to assess them on the basis of the tender, to promote the development of small and medium-sized enterprises, which, contrary to stereotypes, will not hurt most agricultural holdings, but on the contrary, lead to recovery of the market and create more favorable conditions for them.

Pavlo Koval, the independent expert in the field of finance and economy, Deputy Director of the Institute of Economics and Management of agricultural sphere of Kyiv National Economic University, wondered when the well-known principle of sustainable development has become a major one in the functioning of the EU agricultural market.

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Mr. Verbunt replied with a short remark about the concept of sustainable development. He called it almost the only way of development, which has a right to exist. The country we leave behind should be in the form in which we received it from our ancestors. The right steps in the medium term will ensure the rights of owners and a favorable investment climate. It is necessary to take into account the demographic component, in particular, the process of rapid urbanization, particularly among young people. Young people should have a real incentive to remain in rural areas and work on the land, and not destructive-scale plans to move to the cities “whatever it takes”, leaving or cheaply selling land in the countryside.

Pavlo Kulinich, legal advisor to the USAID “Agroinvest” project, inquired about the land consolidation, in particular one, when the consolidation is compulsory: what difficulties and pitfalls it may contain.

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Based on the experts’ answers, the process of consolidation in the Netherlands really is a must – the relevant decisions taken by the Government and the land owners receive adequate financial compensation according to the level of market prices at the time of consolidation. A similar mechanism operates in Germany and France, and, of course, it is not met enthusiastically among landowners, but proves to be effective in the long term perspective.

In Poland, the concentration of farms is localized in the northwestern part of the country, so the issue of consolidation is most acute one in this part of the state. There is no special program that implements mandatory consolidation, while pilot programs of voluntary land exchange, active for certain time, did not justify themselves.

The question from Mr. Alexander Zhemoyda, the executive head of the “Ukrainian Club of Agrarian Business” association, concerned the contradictions of the land market and the attitude towards the major agrarian formations. On the one hand, big agricultural companies are allegedly willing to buy the land, but almost all of them suffer huge losses and will not be able to actively participate in market processes. Which part of the Ukrainian agricultural production should remain with large companies, and which must be redistributed?

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Mr Rozwadowski said that it is necessary to ensure that the rules are the same for everyone. Now the situation is in this sense is not equal, because small companies do not have sufficient access to funding, but that does not mean that absolutely all the major companies have no financial difficulties. If you remove the moratorium, some of the agricultural holdings will find the opportunity to obtain funding, they will be able to profitably invest in the purchase of land.

Mr. Zhemoyda noted that the large agricultural companies are not dominant in the structure of Ukrainian agrarian market and do not represent a threat; most of the market is occupied by medium-sized companies and and we pay insufficient attention to them. They can buy about 4 million hectares of land, accounting for 10% of the market. On the one hand, we want a high price for the land, but at the same time we want the development of small and medium-sized businesses that will not pay such a high price.

Mykhaylo Kukhar, the moderator of the event, made reference to the international practice, which demonstrates that smaller farms are paying a high price for the land, so there is no contradiction.

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A question from Mr. Andrii Martyn, Head of Department for Land Use and Planning at National University of Environmental Sciences of Ukraine, concerned the role of the agricultural sector in the economic structure of each country discussed. What is the purpose of the agricultural business in these countries, and how big is their social component?

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Stefan Verbunt: Netherlands is one of the most densely populated countries in Europe (one square kilometer area accounts for up to 250 people), and this fact has a direct impact on the rules for the development of agriculture. Of course, the Netherlands move in the direction of improving the performance and development of innovations in the industry. The average price of land in the country is EUR 40 000 per hectare, while the maximum rate can be up to EUR 120 000. In this situation, population density in the Netherlands is different from the Ukrainian, and so there is much stiffer legislation on the use of chemicals, fertilizers, pesticides, etc., making conditions for conducting agricultural business much more demanding. However, the Dutch government pays much attention to the social aspect of rural areas, in contrast to the Ukrainian establishment.

Another difference between the conditions of the two countries is in the fact that the territory of the Netherlands is located in the delta of several rivers: there is a great threat of flood, and agriculture needs to be addressed at a very high technological level.

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