MORATORIUM ON FARMLAND SALES: 10 LETTERS AND 15 YEARS OF A PENT-UP ECONOMIC FREEDOM

Page 1

MORATORIUM ON FARMLAND SALES: 10 LETTERS AND 15 YEARS OF A PENT-UP ECONOMIC FREEDOM

Facts and figures

ЗЕМЕЛЬНА РЕФОРМА ЗА ОДНУ ГОДИНУ: ГОЛОВНІ ЦИФРИ І ФАКТИ

EasyBusiness | Moratorium on farmland sales: 10 letters and 15 years of a pent-up economic freedom

1


EasyBusiness | Moratorium on farmland sales: 10 letters and 15 years of a pent-up economic freedom

2


From the authors The moratorium on th e sal e of f arml and in Ukrain e p reserves all sh adow sch emes and m anipul ation s that have reign ed in th e f ield of l and rel ation s for o ver 20 years. Desp it e th e requ irement s of th e IM F, in 2017 th e land reform has n ever been carried out. Probabl y, everyon e is h appy with th e situat ion, wh en 6 million s of U krain ian l andown ers cannot dispose of th eir prop erty, and th e stat e budg et does not rec eive huge potential funds. Ukraine is in the sam e list with Ven ezu ela, the D emocrat ic P eople's Republ ic of Korea, Cuba and Tajikistan among the countries without a land market. The situ at ion for the ordin ary lando wner rem ain s unpleasant: t enant s offer own ers extrem ely lo w rent , whil e p eopl e th emselves cannot sell their plots. It is impo ssibl e to est ablish th e real value of l and without a land market, so owners do not know what assets they possess. The most important ch alleng e to t he land reform is th e l ack of a common vision formul at ed in th e governm ent conc ept. Lando wners, sm all & med ium-sized bu sin esses and government structures are th e main stakehold ers of th e reform, but common vision s, po ints of cont act, publ ic dialogues on the c hoic e of an optim al model of th e land m arket op erat ion usual ly do not mat erial ize. Most l andown ers, th e m ain benef iciaries of the reform , are passive in def ending th eir viol ated constitut ional rights, wh ich l eads to the activation and tang ible predom inance of other soc ial groups po sit ions, wh ich are not directl y affected by the reform. Myths and st ereot ypes, used by populist p art ies th at h ave al ready taken root for over 15 years of th e moratorium , as well as th e weaken ing influ ence of int ern ation al inst itut ions signif ic antly reduc e th e probability of a balanced land reform. Against th e bac kground of increasingl y polit ic izing the top ic of l and reform in Ukraine, it is evid ent th at the so vereign assessm ent of all risks and challeng es with in th e exp ert c ircles, go vernm ent off icials, landowners themselves and the reduction of the level of politicization of the topic are needed. The consolid at ion of lando wners around th e id ea of creating m arkets, as well as th e dissem in ation of a short reform guid e for rep resent atives of vill age and to wnsh ip councils, is a prerequ isite for th e implem ent ation of th e land reform, sinc e its implem ent ation mu st take into account posit ions of th e main stakeholders and beneficiaries.

Andrii Shpakov Executive Director, EasyBusiness

Dmytro Lyvch Head of Analytics, EasyBusiness

Artem Nykonovych Head of Comunications, EasyBusiness

EasyBusiness | Moratorium on farmland sales: 10 letters and 15 years of a pent-up economic freedom

3


Introduction The land reform is perhap s the most contrad ictory among all the rec ent high -profil e reforms. Ho wever, the f act that th e m ajorit y of Ukrainian populat ion f alls under its influ enc e do es not allow l eaving th is issu e asid e. Th at is wh y the key in itiat ives of chang e, th eir influenc e on the stat e economy and incom es of key populat ion groups were an alyzed in Ukraine for the allocat ion of th e most advant ageous sc enario of land reform in Ukraine.

The current state of the agricultural sector in Ukraine Ukraine is rich in n atural resources. In particul ar, U krain e ran ks first in th e area of arabl e land in Europe (32.5 mln h ectares or the equival ent of 30% of all agricultural l and in th e EU), with th e reserves of bl ack soil comprising 2 5% of th e glob al. Due to this, U krain e is th e l eader in the export of agricultural crops and annuall y provides more th an 100 countries with food. Thus, th e agricultu ral sector g enerat es 12% of GDP and provides jobs for every sixth employee in Ukraine. Figure 1.The current state of the agricultural sector The area of arable land is 32.5 million hectares, which is larger than Italy (30.1 million hectares)

Sunflower oil

Barley

Corn

#1

#3

#4

Leading the position of world exports with: sunflower oil, barley, corn

1 place in the area of arable land in Europe

Agricultural sector of Ukraine is A quarter of the world's black soil, or 40% of the territory of Ukraine

GDP

12%

12% of GDP

Every 6 people are employed

The area of Ukrainian black soil is equal to the territory of Great Britain

The growth of glob al d emand for food products open s n ew opportunit ies for Ukrain e. However, there are several threat s to their implem ent ation : obsolet e equipm ent & technologies, ineff icient use of land and especially the existence of a moratorium on the sale of farmland. It is the b an on the sal e of farm land to be t he m ain ob stacl e to signif icant econom ic growth. On th e contrary, its abolition will contribute to the realization of Ukraine's agricultural potential. EasyBusiness | Moratorium on farmland sales: 10 letters and 15 years of a pent-up economic freedom

4


SWOT analysis of Ukrainian agricultural sector Strengths § Favorable climate & weather conditions: the absence of significant natural disasters on the territory of Ukraine. Over the period 20002017, the world's losses reached > USD $80 billion § Large land fund (the arable land is 32.5 million hectares, after Ukraine the second country in terms of arable land France - 18.3 million hectares)

Weaknesses § Underdeveloped infrastructure - annual grain and livestock shortages in ports restrain export potential of Ukraine § Despite the high fertility of soils, in Ukraine yields are lower by 45% -55%, comparing with countries-leaders (depending on agricultural crop)

§ High fertility of soils - about 40% of all agricultural land is black soil

§ Only 20% of all elevators are modern, with the shortage of storage grain capacities comprising 10 million tons in 2016

§ Favorable economic and geographical position - access to the Black and Azov seas and common border with European markets

§ Limitation of land ownership - it is impossible for a landowner to sell land and receive a worthy reward

Ukraine is the leader in the export of a number of agricultural crops (top 1 in sunflower oil, top 3 in corn, top 5 in cereals)

Weaknesses reduce the investment attractiveness of the agricultural sector, while the amount of investment required to cover the needs of agricultural infrastructure is about USD $3 billion

Opportunities

Threats

§ The increase in demand for traditional crops by 10% for 2017-2025, caused by the growth of the world population by 9% during this period

§ The extension of the moratorium on the sale of agricultural land will not allow the creation of the market, and therefore the realization of opportunities

§ Cancellation of the moratorium on the sale of agricultural land can launch the farmland market

§ Aggravation of political and economic instability will reduce the attractiveness of the sector for investors

§ The introduction of modern technologies will reduce the productivity gap with the leading countries by 45-55% (depending on the culture)

§ The drop in world food prices, as it was already in 2008-2009 and 2014-2015

§ Using the potential for the development of river and rail connections to Europe will provide access to new markets

§ Unfavorable weather conditions can reduce yields, and hence incomes of agricultural incomes

In 10 years, Ukraine will be able to: export grain up to USD $10 billion more than in 2016 (USD $7 billion) and to obtain an increase in GDP from the agriculture sector of USD $100 billion

Ukraine may not realize its potential in the agricultural sector, and thus will not receive GDP growth and incomes

EasyBusiness | Moratorium on farmland sales: 10 letters and 15 years of a pent-up economic freedom

5


Land reform in Ukraine Evolution of the land market Since U krain e g ain ed indep endenc e in 1991 , ongoing discu ssions h ave been h eld on th e import ance of th e land reform. Thus, on Dec ember 18, 1990, th e Verkhovn a Rad a of the Ukrain ian SSR adopt ed th e Resolut ion ‘On th e Land Reform ’, accord ing to wh ich all the l ands of the republ ic were decl ared an objec t of th e reform. Th e purpose of this reform was to recogn ize the redistribut ion of land whil e providing c it izen s, enterprises, institutions and organizations with its lifetime inherited or permanent possession. In March 1992, th e Verkhovn a Rad a of Ukrain e adopted a th en-p rogressive Land Code and the Resolut ion ‘On the Accel eration of th e Land Reform and Land P rivat izat ion’. Th e adoption of these acts allo wed u s to begin the p rocesses of den ation alizat ion, d ivision and privat izat ion of land with in agrarian enterprises. However, unt il the end 1990's these positive achievem ents in th e impl ementat ion of th e l and reform d id not lead neither to a rad ic al and eff ective mod ern ization of agricultural product ion, nor to the revival of investm ent p rocesses in other sectors of production and increasing welfare of th e populat ion. Adopt ion of the Land Code of Ukraine in October 2001 has signif ic antly contributed to the developm ent of the l and reform. The norms of this Code have formed the legal basis to establish the land market. The fin al st age of Ukrain ian l and reform should be the introduction of a full -fl edged land m arket for agricultural l and and mortgages, wh ich will m ean the full implement ation of m arket economy rules in land rel ations in U kraine, but on November 20, 2012, the Verkho vna Rad a of Ukrain e adopted the Law #11315, which extended the moratorium on the sale of farmland till January 1, 2016 However, on October 6, 2016, th e Verkhovn a Rada ag ain ext ended th e moratorium on th e sal e of land for a year - until January 1, 2018.

18/12/1990

30/01/1992

The legal regime of transferring land to citizens, agricultural enterprises, establishments and organizations is determined

The Law of Ukraine ‘On Land Ownership’ - Three Equal Forms of Ownership: State, Collective and Private

18/12/1990

26/12/1992

The Resolution ‘On the Land Reform’ (Verkhovna Rada of the Ukrainian SSR) is the start of the land reform

Decree ‘On privatization of land plots’ - free transfer of private land ownership

Figure 2. The track of Ukrainian land reform

6/10/2016

2001-2006

The Verkhovna Rada has prolonged the moratorium on the sale of land for a year - until January 1, 2018

Laws of Ukraine on extension of the moratorium on the estrangement of land plots are adopted

1995

1996-2009

Separate monetary evaluation of land plots, depending on their purpose

More than 2/3 of the farmland was transferred to the private property of citizens and legal entities

EasyBusiness | Moratorium on farmland sales: 10 letters and 15 years of a pent-up economic freedom

6


The position of Ukrainian political parties and international organizations on the moratorium GRADATION OF SUPPORT

Support level from highest to lowest

IMF

16/01/2017 The requirement to pass the land market law by March 2017

4/04/2017 “Creating a land market today is more important than ever, given that the challenges of the conflict in the East are growing"

THE WORLD BANK

PETRO POROSHENKO

6/09/2016 Calls on the Verkhovna Rada to lift the moratorium

VOLODYMYR HROISMAN

3/06/2016 Introduction of the land market is possible after all the nuances

AGRARIAN PARTY

23/03/2017 Starts collecting signatures for a referendum against the farmland market

RADICAL PARTY

FATHERLAND

The timeline of 2016 the comments

27/04/2017 “The land reform will lead to additional growth of Ukrainian agrarian sector, which has a huge potential ... Ukraine has to launch the land market as soon as possible”

28/10/2016 Extends the moratorium for one more year

03

05

05/04/2017 Advocates for the protection of the rights of landowners

30/05/2017 Advocates for a competent land reform without introducing the land market

16/12/2016 Advocates to abolish the Free Farmland Exchange Bill (# 5535)

28/10/2016 Registers Bill #5123 on the extension of the moratorium

07

09

11

3/07/2017 Asks to remove the land market issue from the current agenda

24/05/2017 Advocates lifting the moratorium on land sales

5/01/2017 Declares that will not allow buying all the land in Ukraine in 3 months

6/10/2016 “We demand urgent consideration of the bill on the extension of the moratorium on the sale of farmland to the year 2020”

13/07/2017 Calls on the Ukrainian government to lift the moratorium on the sale of farmland from January 2018

6/07/2017 Strikes under the Parliament against the introduction of the land market

7/04/2017 The Radical Party's parliament faction sharply criticizes attempts to lift the moratorium

7/04/2017 Collects signatures for the referendum against lifting the moratorium 2017

03

1/05/2017 Claims to protest against lifting the moratorium

05

EasyBusiness | Moratorium on farmland sales: 10 letters and 15 years of a pent-up economic freedom

07

09

11

7


Social & economic implications of the moratorium The ‘t emporary’ moratorium on th e sal e of farmland , adopt ed in 2001 , has been alread y in progress for more than 15 years and, thus, has a number of negative consequences: § agricultural potent ial is u sed only partiall y (l ack of effect ive o wners du e to lack of m arket comp etit ive conditions) § lack of investment in rural economy § low living standards in rural areas Figure 3. Consequences of the moratorium

THE LACK OF A TRANSPARENT LAND MARKET IN UKRAINE

ISSUE

SELL

RENT

STATE REGULATION

§ Shadow land market prevails

§ Concentration of large volumes of land

§ Incomplete Land Cadastre

§ Estrangement of ownership in arbitration courts

§ Lack of consolidation opportunities

§ Manipulations in statutory documents

§ Tenants' pressure from landowners (lack of alternatives)

§ Lack of effective methodology to complete Normative Monetary Evaluation of the plot § Ineffective normative legal acts regulating land issues

CONSEQUENCES § Low rent price (due to pressure from tenants, lack of exchange and consolidation) § Predominance of agroholdings (due to the concentration of land resources) § Ineffective structure of ownership (due to the lack of a transparent land market and the ability to sell land at its real price)

EasyBusiness | Moratorium on farmland sales: 10 letters and 15 years of a pent-up economic freedom

8


The moratorium on the sal e of f arml and is not onl y a f actor inhib iting th e d evelopment of busin ess activity of SMEs in rural areas. It al so d irectly viol ates th e const itution al rights of 7 mill ions of Ukrain ian landown ers, who rec eived l and from th e st ate in 2001. Each year the numb er of l andown ers d ecreases, with 6 million landowners living by now.

FOR 6 MILLIONS OF UKRAINIAN LANDOWNERS THE MORATORIUM MEANS THE LEGAL RIGHT :

To inherit land plots

To lease the plot at least at 3% of its normative monetary evaluation

A MISSED OPPORTUNITY: ZZ To give their property for bail and use the fee for farming or any other activities

To get a fair rent

To exchange plots if you want to move to another part of the country

To sell your stake and invest in other assets

Agricultural l ands are d istributed bet ween th e l andown ers and the st ate. If th e agricultural land do es not have an assign ee, it is t ran sferred to the local territorial commun ity. Th erefore, the sh are of stat eowned land increases every year. Figure 4. Ukrainian arable land by type of ownership,% In 2001, 74% of the arable land was distributed among 7 million landowners About 80% of agricultural arable land is controlled by small agricultural enterprises or individual farmers with a land bank of up to 10 000 ha. Top 100 largest companies cover ~20% (6.3 million hectares) of the total area of arable land. At the same time, the 12 largest Ukrainian companies control the total land bank in the amount of 3.2 million hectares.

74%

26%

State-owned EasyBusiness | Moratorium on farmland sales: 10 letters and 15 years of a pent-up economic freedom

Private 9


The l ack of a free l and m arket l ead s to th e fac t that the no rmat ive mon etary evalu ation of agricultural land p er h ectare is one of the lowest in Europ e (there are no f arml and prices in Ukraine, but th ere is a normative monetary value, which amounts USD $1,196 per hectare in 2016). Figure 5. Normative monetary evaluation of agricultural land, USD $ / ha -57% 2 579

1 811

1 874 1 562

2005

2 579

2006

2007

1 376

2008

1 387

2009

1 469

2010

1 469

2011

1 376

2012

2013

2014

1 121

1 176

2015

2016

The small numb er of ten ant s and th e lim it ed abil it y of landown ers to use their agricultural l and have caused a low ren tal cost in U krain e, with an average bet ween USD $35 and USD $ 70 (depend s on th e region), comp ared with USD $195 in Franc e, USD $219 in German y, USD $279 in Bulg aria and USD $672 in The Netherlands. Despit e th e fact th at most l and o wners want to lease th eir agricultural l and, onl y 51% of l ando wners are happy with the price of renting land in their contract. Figure 6. Comparison of average land prices and rental prices in Ukraine and other countries The price of land, USD $ / ha

Rent, USD $ / ha

63,7

The Netherlands

670

Ireland

39,3

590

Germany

32,3

Belgium

28,0 7,7

Poland

7,5

France

5,6

Romania

4,6

Bulgaria

1,2

Ukraine

220 125 350 195 315 270 35

Such numerous consequenc es of the moratorium h ighlight th e need to reform f arml and market relations. EasyBusiness | Moratorium on farmland sales: 10 letters and 15 years of a pent-up economic freedom

10


Land reform suggestions There are several m ajor suggest ions for the l and reform in Ukraine, wh ich c an b e grouped accord ing to the level of m arket openn ess (includ ing those th at creat e full y lib eralized market , open market with restrictions, restricted to foreigners and fully restricted market). Figure 7. Methodology for the types of market

PRIVATE OWNERSHIP ALLOWED?

yes

no

FULLY RESTRICTED MARKET

yes

OTHER RESTRICTIONS?

FOREIGNERS ALLOWED?

PRICE REGULATION?

no

QUANTITATIVE RESTRICTIONS?

yes

no

OPEN MARKET WITH RESTRICTIONS

FULLY LIBERALIZED MARKET

RESTRICTED TO FOREIGNERS

FULLY LIBERALIZED MARKET One of the most ben efic ial proposal s is to create a free land m arket without an y quant it ative or price restrictions. This offer brings Ukraine the largest economic effect of USD $121.9 billion. OPEN MARKET WITH RESTRICTIONS This m arket model corresponds to t he Draft Law ‘On Agricultural Land Turnover’ #5535, wh ich partiall y l imit s access to the m arket for foreigners, est ablishes the min imum pric e, and also spec ifies restrict ions on the maximum amount of l and in p erson al possession . Th e result of stat e int ervent ion in m arket proc esses reduces the econom ic eff ect to USD $81.3 bi llion , wh ich is USD $40.6 billion less than in a fully liberalized market. RESTRICTED TO FOREIGNERS The govern ment mod el* represents such t ype of th e market , but does not provide for acc ess to foreign c apit al , wh il e pricing and quant it ative rest rict ions are establ ish ed. Adoption of th is model will creat e an add ition al USD $6 8.7 bi llion economic eff ect, wh ich is almost h alf less th an in the model of a fully liberalized market. FULLY RESTRICTED MARKET The alternat ive is to leave the situat ion unch anged , which m ean s a full y restrict ed market . By imposing a b an on the f arml and sales, th e st ate sub stant ially l im its opportunities for economic development . According to prelim in ary estim at es, the exten sion of th e moratorium will gen erate only USD $30.5 billion of econom ic b enef its, which is USD $90.4 b ill ion l ess th an the introduction of a fully liberalized land market model.

* - the model proposed by the Cabinet of Ministers of Ukraine EasyBusiness | Moratorium on farmland sales: 10 letters and 15 years of a pent-up economic freedom

11


Figure 8. Comparison of land reform options and their economic effect Fully liberalized market

Economic effect Restricted to foreigners

$121,9 billion Open market with restrictions

$81,3 billion

Fully restricted market

NO MORATORIUM

DRAFT BILL #5535

$68,7 billion $30,5 billion

FOREIGN CAPITAL

AREA

PRICE

OTHER

GOVERNMENT MODEL STATUS QUO (NO CHANGE)

Restrictions on foreign Foreigners can acquire Foreigners can only inherit the land capital (land estrange land only from January 1, 2030 within 1 year)

Yes, there are limits to 500 ha for individuals and 33% of the the maximum and farmland area for minimum area legal entities

200 ha for individuals and 35% of the agricultural area of the territorial unit for lease

A fully liberalized land market is introduced

There is no limit to the maximum and minimum area

The price is determined by expert valuation

The price is determined by expert valuation

The price is determined by expert valuation

The price is set by the market

There are any other restrictions

Fine: 50% of the land There are any other monetary evaluation restrictions for selling the plot in a 3-year period from its acquisition

EasyBusiness | Moratorium on farmland sales: 10 letters and 15 years of a pent-up economic freedom

The price is set by the market

12


In addition to assessing th e economic effect , wh ich includes GDP growth , in vestm ent growth and tax revenues, th e u se of int ern ation al pract ices is an import ant m ethod of id entif ying a p rofit able sc enario for market development. Comparing position s of countries in th e Glob al Compet itiven ess Index and th eir models of the l and market, it is po ssible to d etermin e what chang es U krain e will rec eive from the impl em entat ion of different scenarios. One should point out, more open ed land m arkets co rrespond to h igher posit ions in the Glob al Competit iveness Index. Countries with a full y lib eralized t ype of market are among the top 30, whil e those with a restricted market are in the top 80. Figure 9. Position in the Global Competitiveness Index correlates to the type of a land market Position in the Index 10

30

50

70

90

110

130 0

5.000 Fully liberalized

10.000

15.000

30.000

Open market with restrictions

35.000

40.000

70.000

Restricted to foreigners Price (USD $)

As estim ated above, a fully l iberal ized l and market is th e most favorable opt ion for Ukraine. The gen eral economic effect, wh ich includes GDP growth , growth of investm ents and t ax revenues, will be the high est with a fully liberalized type of farmland market. Also, the f easib ilit y of th is scen ario corroborates with the results of int ern ation al experience anal ysis, in which countries with a fully lib eralized land market occupy high er po sit ions in the Glob al Competit iveness Index in comp arison with countries where the l and m arket is restrict ed or fully restricted.

EasyBusiness | Moratorium on farmland sales: 10 letters and 15 years of a pent-up economic freedom

13


Банки (фінансові установи)

37% Agricultural exports as a percentage of total exports of Ukraine

EasyBusiness | Moratorium on farmland sales: 10 letters and 15 years of a pent-up economic freedom

14


Analysis of main stakeholders Internat ional exp erience sho ws, an open ed l and market brings th e greatest b enef its both to the st ate and the society. A det ail ed anal ysis of pot ential cost s and b enef its of a full y lib eralized m arket sc en ario was conducted for 6 possible stakeholder groups:

LANDOWNERS people who obtained land plots after the elimination of the collective farms system

FARMERS (SME) who process their own and/or leased land plots

AGROHOLDINGS with significant financial resources, which lease ~63 thousand hectares

INTERNATIONAL INVESTORS individuals and legal entities investing in the industry development

BANKS & FINANCIAL INSTITUTIONS which can provide loans to entrepreneurs for their business

GOVERNMENT & LOCAL COMMUNITIES are responsible to create the best conditions for the industry development

For each group, th e situat ion was comp ared ‘b efore’ and ‘after’ the introduct ion of th e l and m arket, including evaluation of tangible and intangible benefits, possible risks and proposals to avoid them. As a result, lifting the moratorium is beneficial for most stakeholder groups, since it: ensures observance of constitutional property rights; creates new revenue opportunities; improves land use efficiency; provides access to financial resources; contributes to GDP growth.

EasyBusiness | Moratorium on farmland sales: 10 letters and 15 years of a pent-up economic freedom

15


Landowners About 6 million Ukrainian landowners own more than 70% of farmland. This fact emphasizes the importance of their interests, in particular while choosing a land market model.

55+ 3-4 hа Current situation

Average age of a landowner Average amount of land in possession

No right to exchange land plots in different regions

Sale of agricultural land is impossible

Rental price – USD $50-70 per hа

Exchange of land plots in different places is possible

Land price is USD >$4000/ha in 5-7 years after the introduction of the market

Rental price – USD $90-130 per hа

Liberalization

Possible situation

Under conditions of liberalization of the land market, an increase in land prices and rental costs will take place on. Figure 10. Estimated cost of land in 2025, USD $ / ha

4 361 An amount equivalent to USD $13-17 thousand may be owned by one landowner in 2025

2 113 1 415

2018

2020

2025

Probability

Figure 11. Risk matrix (landowners) 3

Low cost of land. The probability of an offensive is low. According to forecasts, the price of land will increase with each subsequent year after market introduction.

2

Raidering. The probability of an offensive is low: after the liberalization of the land market an effective mechanism for the protection of property rights will be created.

1 1

2

Influence

3

Ultimat el y, l andown ers will fully b enef it from the land m arket introduction, sin ce th ey receive add ition al incom e with th e rise of l and pric e and th e possibil ity to take loan s from banks on a collateral basis. EasyBusiness | Moratorium on farmland sales: 10 letters and 15 years of a pent-up economic freedom

16


Farmers (SME) Farmers, the total number of which in Ukraine is 48.1 thousand, have the slightest interest in liberalization, as increased competition for land purchase and lack of working capital will complicate their situation in the future.

48.1 thousand USD $250 Current situation

Number of farmers in Ukraine Average profit from crop production per one hectare before taxation

Lack of working capital…

…which leads to inefficient land use

It is impossible to buy land legally

Ability to borrow on land collateral …

…which will allow to receive additional resources for innovations

The right to buy land legally

Liberalization

Possible situation

Given the liberalization of the land market, farmers will be able to buy land and will be interested in effective and long-term land cultivation. Figure 12. Average yield of main crops among farms, t / ha 5,5 3,8

Corn

3,1

Wheat

Barley

2,2

Productivity among farmers is on average lower by 44% (in yields) in comparison to agricultural holdings

Sunflower

Probability

Figure 13. Risk matrix (farmers) 3

Growth of expenses. The probability of an offensive is average, but the risk can be offset through increasing the land use efficiency.

2

Unfair conditions for foreigners. The probability of an offensive is low, because the market will provide equal conditions for all possible buyers.

1 1

2

Influence

3

Low competitiveness with agroholdings. The probability of an offensive is low, since SMEs will receive new financial resources with the introduction of the land market, which will contribute to their development.

Shortly aft er th e reform, farm ers will b e in a more d ifficult posit ion th an no w, but increasing compet ition will l ead to the effect ive use of l and and will inc rease rent al rat es in the long run. EasyBusiness | Moratorium on farmland sales: 10 letters and 15 years of a pent-up economic freedom

17


Agroholdings Agroholdings, which attract significant foreign investments, are important players in the agricultural sector, since only 10 largest businesses own more than 7% of total arable land in Ukraine. Many owners are not interested in liberalizing the land market.

100 $400

Number of agroholdings in Ukraine Average profit before taxation of one hectare of crop production

Raider attacks on the land plots

Current situation

Deficit of working force and investment

It is impossible to buy land legally

Liberalization

Easier to attract financial resources

Ability to protect land ownership

Possible situation

The right to buy land legally

Introducing the open market model will open the opportunity to buy land in a favorable location to consolidate the land bank. Figure 14. Average yield of main crops among agroholdings, t / ha

8,2 5,2

4,6 3,0

Corn

Wheat

Barley

20% of the arable land under the control of agroholdings collect the highest yields in Ukraine

Sunflower

Figure 15. Risk matrix (agroholdings) Increased costs. Probability of onset is average, but can be offset through increasing the land use efficiency.

Probability

3

Strengthening competition. The probability of an offensive is average, but can be offset by improving product quality and reorienting on regular customers.

2

Unfair conditions for foreigners. The probability of an offensive is low, as the market will provide equal conditions for all possible buyers.

1 1

2

Influence

3

Agroholdings are not int erested in lib eralizing th e l and market , b ecause t hey are currently profitabl e to p ay a lo w rent . Ho wever, the l iberal ization of th e land m arket will lead to increased competition, which can increase the quality of products and rent. EasyBusiness | Moratorium on farmland sales: 10 letters and 15 years of a pent-up economic freedom

18


International investors The lack of a land market negatively affects the investment climate in the agricultural sector and Ukraine's position in international indexes. A comprehensive reform can stimulate the growth of foreign investment in the industry and provide equal opportunities for attracting capital to all market players.

2.9% 167 Current situation

The share of foreign investment in the total amount of investment in the agricultural sector Ukraine's position in the Index of Economic Freedom

Low volume of foreign direct investments

Unattractive investment climate

Insecurity of land ownership

Increase in foreign direct investment

Better performance in international ratings

Legal protection of land ownership

Liberalization

Possible situation

The introduction of an open market model implies an increase in the number of investment projects for foreign investors. Consequently, the volume of foreign investment will increase. Figure 16. Additional annual investments in agriculture and related industries, USD $ million

973 USD $142 million in 2020 - the amount of investment sufficient to implement IT technologies by almost 1 million hectares of cultivated land

142

40 2018

2020

2025

Figure 17. Risk matrix (international organizations) Land price mismatch. The probability of an offensive is low and offset through the introduction of transparent pricing, based on demand and supply model and qualitative properties of the soil.

Probability

3

2

Barriers for foreign companies to enter the market. The probability of an offset in the fully liberalized market is low, as equal conditions for all market participants will be established.

1 1

2

Influence

3

The l iberal ization of the l and m arket is a complet el y po sit ive phenom enon for intern at ional org anizat ions, in part icul ar in vestors, as n ew opportun ities for effective investment and development of Ukrainian agriculture are opening up. EasyBusiness | Moratorium on farmland sales: 10 letters and 15 years of a pent-up economic freedom

19


Government & local communities The introduction of the land market largely depends on the governm ent decision. That is why the costs and benefits for the state play a significant role in lifting the moratorium.

26% 2018 Current situation

The share of state-owned land in Ukraine Expected year of the land reform

Inefficient use of land

Weak positions in international ratings

Lack of funds to the budget

Improving the use of land

Increase in international ratings

Additional budget revenues and increase in investment and GDP

Liberalization

Possible situation

Given the liberalization of the land market based on the open market model, the government will receive from the increased tax revenues. Figure 18. Additional annual tax revenues from agriculture, USD $ million 737

477

394

2018

Almost 1,500 km of roads can be renovated for additional tax revenues from agriculture

2020

2025

Probability

Figure 19. Risk matrix (state) 3

Dissatisfaction with the population. The probability of an offensive is high, but the negative effects can be leveled through effective communication with the society.

2

Development of the shadow market. The probability of an offensive is very low, because abolition of the moratorium destroys corruption mechanisms and establishes transparent rules in the market.

1 1

2

Influence

3

Land market l iberal ization is a positive ph enomenon for the st at e, as it creat es addit ional opportunities for replen ish ing the st ate budget , inc reasing in vestment , GDP gro wth, and, consequently, increasing positions in international ratings. EasyBusiness | Moratorium on farmland sales: 10 letters and 15 years of a pent-up economic freedom

20


Banks & financial institutions The introduction of the land market opens new opportunities not only for its players, but also for intermediaries, including financial institutions. The possibility to sell land and receive loans under its collateral creates additional financial flows and, accordingly, additional tasks for financial institutions. The potential benefits of the land reform for financial institutions are provided in the table below.

$2.2 billion Current situation

The volume of loans granted to agricultural companies

Failure to reach the potential number of customers

Limited investment instruments

Insufficient liquidity

The right to buy land legally

Activities expansion: new beneficial financial operations

Decrease the risk of bankruptcy

Liberalization

Possible situation

Given the liberalization of the land market, people will be able to take out a land plot secured by a bank that will issue them a loan and earn on credit interest. Figure 20. Volume of loans issued by banks, under the land collateral, USD $ million 19 498

9 466

9 663

2018

2020

Possible amount of collateralized loans in 2018 is an amount equivalent to 48-64 thousand JOHN DEERE tractors.

2025

Figure 21. Risk matrix (banks) The additional costs of attracting qualified specialists in the new field can be offset by an increase in profits.

Probability

3

Aggravation of the problem of asymmetry of information the risk of exposure can be reduced by introducing collateral as a necessary condition for obtaining a loan.

2

The growth of competition is offset through improving the quality of services provided and through concentrating on regular customers.

1 1

2

Influence

3

The l iberalizat ion of th e l and m arket c an posit ively aff ect th e activit ies of b anks in Ukraine. Du e to th e f act th at o wners of l and plots will be able to take lo ans, as collateral, leaving the rights for land plots, banks will be able to increase liquidity. EasyBusiness | Moratorium on farmland sales: 10 letters and 15 years of a pent-up economic freedom

21


EB INFO@EASYBUSINESS.IN.UA

WWW.EASYBUSINESS.IN.UA

FB.COM/EASYBUSINESS.IN.UA

LINKEDIN.COM/COMPANY/4792478