Until the beginning of the next year, the market for agricultural land should start operating in Ukraine. The land sale moratorium that has been lasting for twenty years, will be lifted. But as we think about the fact that all these years the moratorium kept being extended because of the unpreparedness for the open market, moreover, no action was taken to prepare for its opening, a reasonable question arises: is the current haste of the new government justified? The government should prepare a bill on the land market by the beginning of October, and the parliament plans to approve it by the beginning of December. Time is short even for discussing different models of the future market, not to mention the implementation of the best of them. It is already obvious that the completion of land reform which began during Kuchma’s presidency will be a real challenge for the state.
Now the owners of agricultural shares cannot officially sell them or use them as bank collateral. This is one of the factors that has been significantly inhibiting the development of small-scale farming in Ukraine for many years but contribute to the welfare of large agricultural producers who rent these units at fairly low prices and, as a rule, for a considerable period. Often, they rent entire villages for the term of “50 +” years. It is not uncommon when people’s shares are processed even without paying rent, and landowners do not know about it. In addition, during the moratorium, about a million shareowners died and did not pass them as the inheritance and now these lands are no one’s. Of course, if the legal land market existed, the cost of renting would be higher because the owners would have the choice of either selling the land or using it as collateral, which would reduce the supply, add alternatives to renting and increase the price of the land. In fact, in recent years, the parliament has not taken any steps to launch the land market because of the powerful lobby of agro-industrialists who benefited from the land moratorium, despite numerous calls for the introduction of a free market.
In addition, the land market would cease the existence of the current shadow market of agricultural land because shares are actually actively bought and sold, changing the use of land, or disposed as the property of fictionally bankrupt tenant companies. But if the free market of agricultural land is not regulated, the abuse of shares will not stop but rather multiply.
Now, little is known about the land market concept the newly appointed government is working on. In addition to the fact that together with the launch of the market the ban on the alienation of agricultural land of all forms of ownership (that is, private and public) will be simultaneously lifted, it is also known that the land will be sold only through electronic auctions. This is a good practice, which does not guarantee the absence of abuses but minimizes their number. In addition, the sale of land through electronic auctions will allow to track all transactions, save, organize and further analyze the data about old and new owners, the cost of land, the volume of land in one hand and the like. Price registration for purchase and sale transactions will also be mandatory. This information can be extremely important for the development of further market regulation and control over the processes that will occur in the land market.
Also, most likely, the right to purchase agricultural land will only be obtained by the citizens of Ukraine and legal entities that are the residents of Ukraine. Of course, this is not an absolute guarantee that foreigners will not be able to buy our land. But if a foreign company wants to participate in a land auction, it must open an official representative office in Ukraine, create jobs here and immediately pay taxes. According to the average experts’ estimates, the creation of the land market will add 1-1.5% to the national GDP annually but the main rate will be placed on large business owners.
The concentration of land in one hand will be limited but the limitations will be loyal enough: no more than 35% of the land area of the territorial community, or 15% of the region, or 0.5% of the country. But the development of farming is planned to be the main stake.
The World Bank, which is actively involved in the preparation of the reform, is convinced that together with the launch of the open market, a special fund that will guarantee small farmers the opportunity to buy shares should be launched in Ukraine. The World Bank estimates show that in the first years after the launch of the market about two and a half thousand farmers will be interested in buying land shares. Unfortunately, not all of them have the necessary money for this. And bank loans with extremely high-interest rates will not help them. This is why we need a special fund of partial credit guarantee, the volume of which is estimated at $500 million by the World Bank. The fund will guarantee up to 50% of the loan amount for up to seven years. The Finance Ministry welcomed this idea but noted that they expect that international partners will not only help Ukraine with their advice but will also agree to partially fill this fund. The National Bank also supports the idea of creating a partial guarantee fund, moreover, it has already evaluated the implementation of a similar support model and considers it effective. However, the Ukrainian officials are very sceptical about the possibility of creating and launching the fund before the end of this year. Especially when you consider that the opening of the agricultural land market will not be limited by this.
The inventory of all land with a clear definition of the boundaries and owners of certain shares is up next. Now the State Land Cadastre is filled with information by 65-70%, the information on many shares is either partial or absent, somewhere it does not coincide with reality at all. The government hopes that it will be possible to fill the cadastre by 100% by the beginning of 2021 because it is a long and expensive process that often requires the experts’ visits to the shares. It is unknown how the market will work with a partially filled inventory and how to avoid abuse and fraud in the first year.
It would be desirable to introduce mechanisms that would limit the appetites of speculators, for example, increased taxation in case of selling land more than once per 3, 5, 10 years. The land market itself cannot be a full-fledged commodity market because land is primarily a means of production or earnings, not a commodity for its owner. There will not be the need for frequent sale of land in the circle of real owners but speculators will be deterred by the increased tax rate.
In addition to creating reliable legal safeguards against possible speculation in the market, mechanisms are also needed for the protection of the shareowners from fraud because most of them are elderly people who are easily misled, who find it difficult to master electronic auctions, and sometimes it is an impossible task to read the fine print in the agreement.
To relieve tension among agricultural entrepreneurs, it is also necessary to create a mechanism that could provide the privilege to previous tenants of the land, so as not to destroy the production potential of those companies that have long been working in the market. And the most important thing is the creation of a state regulator, which would be engaged in the work of the land market, and an independent institute of land valuation.
Finally, we must not forget that the state must become a full-fledged participant in the land market, the same as other potential sellers and buyers, and therefore the government must have a clear plan of what the state will do with the land at its disposal. How to use the available shares owned by numerous public agroinstitutes and sericultures, should they be contained or sold? Or maybe we should group state land into a land bank and become a landlord for large producers? There are many options but so far, we have not heard from any official at least a hint of what will happen with the state agricultural lands, which will also be sold on the land market.
Now it is obvious that the number of tasks that need to be performed before the launch of the land market is immense. This is the main and very significant risk that the market will not work properly at the initial stage. It is impossible to avoid mistakes if the market is launched literally at random. Problems will not be prevented, they will be solved in the process of launching the market and its operating in the first years. According to the most optimistic estimates, we will approach an acceptable and working option in five or seven years in the best case, having stuffed a lot of bumps on the forehead.
Text by Valentyna Yushchenko