Land relations is the most significant component of your strategy. Agricultural land is the only remaining Ukrainian natural resource that still remains almost totally under government control and not under the control of people who own or farm it. However you do not answer the strategic question, will Ukrainian land relations be governed by market forces or government bureaucrats. Since the coalition ignores this strategic question, it is clear that the coalition’s lacks political consensus to change the status quo.
You are also completely silent about how you intend to make government, specifically the State Land Resources Agency accountable and transparent, and how you intend to deal with all the criminal land transactions of the past and prevent them from occuring in the future. The vast majority of bureacrats who committed these crimes remain in office and will be responsible for drafting and implementing your proposed reforms. The first step in your reform program should be a review of their actions and inclusion of public representatives in preparing reforms to land legislation and regulations. At a minimum, in the future, there should be annual external audits of government performance in managing land relations. Instead of concrete actions your future program consists of minor adjustments.
THE AGRICULTURAL STRATEGY
Policy statements 1.1 and 1.2, to demarcate boundaries of state, local community and private agricultural land and to transfer government owned agricultural land into local community control by the end of 2016 are sensible measures. Statement 1.3, to lease out government owned agricultural lands only on a competitive basis needs clarification. The government of Georgia, where agricultural land can be bought and sold, created a publicly accessible data base of all available agricultural land. Bidding for this land is through the internet and there is a minimum price. If the bidder meets the minimum price and there are two other bidders then the sale takes place. The auction is ongoing with no time limits. The highest bidder wins. The process is totally anonymous and without personalized control. Something similar should be done in Ukraine to ensure that government bureaucrats do not control or decide who wins.
Statement 1.4.1, that the majority of land owners in a given field can dictate what the minority does with their land is wrong and not needed. Each landowner should have full legal rights to do as he pleases with his property. If a landowner can make $200 per hectare by using the land himself rather than the current minimal lease of $100 per hectare he should be free to do so.
Statement 1.4.2 that registering leases needs to be simplified is good but should also allow private land companies and notaries the right to review and approve lease documentation. To enable competition you should make it mandatory that lease documentation approved by private land companies or notaries are registered within 24 hours of their submission to the State Land Resources Agency. The Agency should be required to accept lease documents for registration from Monday to Friday from 9:00 to 17:00 with only one hour break for lunch. Companies involved in preparation and certification that lease documents are ready for registration should have the right to serve clients from all of Ukraine and register the leases at the nearest office not just within the community where the lease is located. Any documents or information they or their clients require from the Agency should be supplied within 24 hours of the requrest. The land cadastre should be open to the public and its records available at any location in Ukraine, not just in specific raions or offices.
Statement 1.4.3 that parties to the leases have greater responsibility for the obligations in the lease makes sense, if accompanied by a measure to allow access to simple, enforceable and low cost local community arbitration procedures. If enforcement involves the courts and lawyers this measure tips the balance in favor of the lessors and limits capacity of poor land owners to challenge the lessors if they violate leases.
Statement 1.4.4 that there be a legal minimum length of time for land leases and that longer term leases be “encouraged” is unfair to land owners, and limits opportunity for new farmers. The question is who will be doing the encouraging? The proposal makes sense when we consider orchards, irrigation equipment, vineyards etc. But even in these cases there should be consideration of landowner rights. In cases where capital is invested into infrastructure such as fruit bearing trees it is up to the two sides to negotiate a long term lease and a ten year minimum is not enough. If the lessee does not negotiate with the lessor it is not the lessors fault if they decide to take the land back.
Statement 1.4.5 that their should be a review of cadastral land values in 2015, should also clearly state how often these reviews will take place, not simply suggest there will be another review within ten years. Also the cadastral value should be established by an independent and public organization, not the government agency.
Statement 1.4.6 that land leases should only be paid in cash is reasonable, but it is very often the case that landowners often ask and receive services and goods from the lessors. For example lessees have their gardens plowed, the lessors provide simple services such as vehicles for weddings and funerals etc. Making the lessors pay in cash will not stop landowners from requesting these and other services from the lessors. Further if the lessor does not provide these services, because he pays in cash, it will poison the relationship. This complex issue will not be resolved by requiring payment in cash and it will be impossible to monitor so in effect you will be creating a requirement for people to break the law if they wish to keep good relations with their lessees.
Your proposal to regulate use of communal lands or unclaimed lands after someone dies, 1.4.7, is reasonable. Also reasonable are 1.4.8 and 1.4.9.
However even if all the coalitions proposals are implemented Ukraine will be no closer to a land market and the Land Resources Agency will remain a law unto itself. Changing personnel in the agency will not change its power to decide land issues. Therefore the first priority must be to develop very strong regulations to control the Agency which if violated should bring immediate dismissal, or criminal or civic charges against the personnel.
Next the coalition addresses subsidies and regulatory issues.
Section 2.1 postpones to 2018 the issue of dealing with an ineffective indirect subsidy and the source of criminal abuse and corruption, the special treatment of VAT in agriculture. Special VAT treatment is ineffective because cash commodity sales by farmers to mid sized traders who sanitize the payment through short lived companies means that as much as 20 to 25 percent of grain and oilseed sales provide no tax benefit to farmers but to cash traders. It is also ineffective because large traders who know that chances of receiving VAT refunds on exports is often impossible without a bribe prefer to pay lower prices than expect to receive VAT refunds. It would be far more effective to exempt grain and oilseed sales from VAT and then there would be no need to hide production through cash sales and no need to worry about receiving a refund on export. This would in turn lead to higher farm gate prices. The Prime Ministers proposal that VAT will only be refunded to producers who conduct their own export operations will lead to further corruption. Only a limited number of producers can actually conduct export operations, no more than ten, the remainder operate through traders who will wait for their refunds or enrich tax officials to ensure they receive them.
Statement 2.2 on improving the transparency of farm subsidies by reducing the number of subsidies, and through simplifying the application and decision making process is a good start. I would add to this list that the only subsidies that should be approved are those which can be fully funded for every potential recipient. Given Ukraine’s real budget crisis and war, there be no subsidies until 2016.
Statement 2.3 on providing credit support to small and midsized farmers, and support for crop insurance to small and mid sized farmers cannot currently be fully funded and should be set aside. If this program was implemented then it would enable corruption because lack of adequate funds means that government officials would choose who will receive these benefits. More appropriate would be to provide interest rate subsidies on commercial bank loans to farms under 500 hectares. Given that farms of this size rarely receive commercial bank loans it is likely that even with a reduced budget the program can be fully funded. Also the applicant for the interest rate subsidy should be the commercial bank and not the farmer and the bank should be able to charge the government with a 2% administrative fee for providing the loan. There is no hope that the government can provide support for crop insurance in 2015 given the state of the budget and this should be put off for another year at least.
Statement 2.4 on enabling the use of financial instruments such as warehouse receipts, forward and futures contracts to hedge including on international exchanges currently occurs at a minimal level. The biggest problem in encouraging wide spread use of these instruments is that enforcing contracts in Ukraine is subject to a corrupt legal system, and that it entails foreign exchange risks. The government cannot legislate widespread use of these instruments until it completely reforms the courts and removes contradictions between the Civil and Administrative codes. This should be a priority for the agricultural lobby. Also the government cannot mitigate foreign exchange risks so should be careful in advising farmers to take this risk.
Statement 2.5 on encouraging small and micro agricultural producers to enter into formal market channels through legislative changes and encouraging cooperative development appears to be an empty promise. This section should have some concrete goals and and a concrete implementation mechanism such as an extension service. Further this segment has the greatest need for technology and support to adapt to European standards and is the least capable of doing so. Accomplishing this task by end of 2015 is completely unrealistic even if all Ukrainian and foreign technical assistance was directed at this goal.
Statement 2.6, on privatizing government enterprises is empty of substance as there is no concrete list of enterprises, does not provide a mechanism to make these enterprises attractive for investment and acquisition and has no time frame.
Statement 2.7 on encouraging Foreign Direct Investment into the agricultural is a sentence without substance.
Statement 2.8 on deregulation addresses issues related to obtaining government approval to use water, building intensive livestock facilities, phyto sanitary issues, building other production facilities, introducing self regulatory organizations and opening up certification and inspection services to private competition. These proposals are all very sensible but with one exception lack a time frame. In this respect the sooner the better.
Statement 2.9 on reforming the Ukrainian Academy of Agricultural Sciences, including the privatization of its vast landholdings is extremely needed as Ukraine lacks a functioning system to support and encourage implementing agriculture technology advances. This section should also include reforming the current system of agricultural education and agricultural educational institutes and raise the goal of integrating Ukraine’s agricultural research and technology establishment with commercial enterprises and with European and international institutes such as FAO.
The third broad area the coalition addresses is trade. Statement 3.1 suggests that the government ensures national security by creating reserves rather than through restricting trade. This is reasonable if the section also included a timeline for actually creating a definition of national food security and indicated that the actions of the food reserve would be fully transparent and in the public domain. If not then this proposal supports the continuation of current corrupt practices.
Statement 3.2 to lower the administrative paperwork requirements and therefore costs of export operations by the end of the first quarter is needed and can be achieved. Statement 3.3 to fully harmonize Ukraine’s food safety legislation and regulation with EU directives by the 2nd quarter of 2015 is difficult but possible. However there should also be a proposal to create a mechanism to assist Ukrainian food producers and processors to actually implement these standards.
Statement 3.4 to improve the legislative and regulatory framework for development of agricultural market infrastructure requires further definition and a timeline. For example the coalition could start with the grain and oilseed market and then move onto fruits and vegetables. Regardless of which product area comes first there should be a timeline for this change.
Statement 3.5 to provide trade facilitation is needed but also lacks definition. Will trade facilitation be conducted by the government or will government facilitate Ukrainian sector associations such as UKRMOLPROM to develop new markets? Will there be a joint effort? Without more definition this section provides no idea of what the government will actually do.
The next area is rural development. Section 4.1 indicates that the coalition will have a rural development program ready by the end of the first quarter of 2015. This is enough time to have a first draft of a program in place to begin a public discussion. This public discussion should be part of the overall coalition program discussion of devolution of powers to local communities.
Statement 4.2 that the coalition will have adapted the regulatory and legislative framework to implement its rural development program, including changes to taxation and government spending by the third quarter of 2015, indicates that the coalition intends to introduce this change without public debate. The notion of dictating democracy is completely backwards and should be rejected. Following creation of a draft rural development program the coalition should spend at least a year talking with the public about how to improve it and implement it.
Statement 4.3 on renewing rural housing subsidies should be included if it can be fully funded and applied universally and transparently. Until the means and mechanism are available the program should be postponed for at least a year.
Statement 4.4 on improving local community access to natural resources and improving regulatory control of their use by local communities is reasonable. However this proposal like others should also include a means of public input and review.
Statement 4.5 on harmonizing Ukraine’s legal and regulatory framework for land and natural resource use with EU standards would require a land market. The coalition must decide whether it is ready for European integration or does it intend to say that it wants European integration but at the same time maintain a semi Soviet system.
The last part of the agreement deals with forestry. Statement 5.1 proposes to separate policy and regulatory functions from management functions. Statement 5.2 proposes to adapt Ukraine’s forestry management system to the Polish or Latvian models. Both of these sections are perfectly reasonable and the time frame to complete this transformation, 1st quarter of 2016 appears reasonable. However, Ukraine’s government forestry service, just as most other parts of government is inefficient and corrupt. Therefore the mechanism to reform forestry should be public and private input into a process that starts with a draft document, followed by public discussion and ends with a concrete set of proposals and actions.
Statement 5.3 to review the possibility of erecting export tariffs on logs to protect domestic wood processors sounds reasonable but should not be implemented if it violates EU directives for a common market.
The coalition strategy requires further discussion with rural communities, agricultural associations and most important it needs to deal with reform of the government apparatus. The last issue, reforming government is more important than all the others.
Bohdan Chomiak is a Director and co-founder of Lapersa Enterprises.
