Round table June 18: Abstracts and presentations

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On Thursday, June 18th, Kyiv saw a round table dedicated to the topic “The four stages of the land reform in Ukraine: the expected and actual results. Generalized experience and analysis of the consequences”. This is the first event of a series of meetings planned for the next two months by the Independent Group of Macroeconomic Analysis and Forecasting (IMF Group) under the aegis of the State Service of Ukraine for Geodesy, Cartography and Cadastre of Ukraine.

The Chairman of the State Land Agency of Ukraine, Maksym Martynyuk, made an appearance at the event. The discussion was moderated by Mykhaylo Kukhar. The topic of discussion this week was the retrospective review of land reform in Ukraine, because before proceeding further, it is necessary to analyze today’s mistakes and achievements.

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The problems, contradictions and consequences

Pavlo Haydutskyy, Head of Institute for Strategic Assessment, member of the Academy of Sciences of Ukraine and Doctor of Economics, was the first to express his expert opinion on the land reform in Ukraine. It was a lucky coincidence for the participants of the talks that Mr. Haydutskyy had presented several days prior to the round table his new book called “Kuchma agrarian reforms in Ukraine”, which is devoted, in fact, to the history of Ukrainian land reform for the past 20 years.

Professor Haydutskyy noted that the process of privatization (sharing) of land in Ukraine faced significant resistance – both from the radical forces of either direction (left and right), and from the heads of collective farms, village and district councils, heads of state farms and from the peasants themselves . Each of these interest groups had their own reasons to resist this process of privatization: it destroyed the ideological foundations of the radicals; it did not allow the state authorities manage the land at their discretion, and the peasants were full of envy that they did not become shareholders themselves.

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With this in view, in March 1995, the Cabinet issued a decree according to which it was necessary to first estimate the cost of land parcels and then to add those to the certificate papers. Afterwards, it was decided to determine the amount of rent as a ratio of the share value (since 1998), then to define a fixed tax (imposed by a decree in 1999) and to determine the amount of payment for the land, i.e. land tax. This amount was developed based on the economic value of land, so it can be easily adjusted index or factor method.

Next, Mr. Haydutskyy outlined the basic problem of land sharing process: incorrect definition of the Land Code of March 13, the provisions for potential sharing of land areas, potential investors, average land share, conditions of sharing, documentation, booking 10% of the land for the farmers and 15% for the social sphere. To solve this problem, the President issued on August 8, 1995 a Decree “On land parceling”, but it was extremely difficult to correct the existing distortions.

Mr. Haydutskyy also noted that the experience of other countries was extremely useful for Ukraine, and it can still be useful: for example, the experience of Japan in 1946, of Sweden in the 1920s and 1930s, certificate privatization in the industry sphere of  post-socialist countries, even reforms of Russian Tsarist times.

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Documenting of the privatization process included the use of certificates as a transitional stage to land ownership, government acts (key element of ownership evidence) and the cadastral register (it was the guarantee of protection of the property).

We cannot, in his opinion, over-emphasize property; this is an age-old problem: the relationship between owners and leaseholders. Not the owner of the land but the one who works on it should be in charge, while the land is important as a means of production, as a tool for providing food security. Legislative and contractual regulation of relations, introduction of servitude agreements and contractual clauses and sanctions can be helpful in this situation. But the most important is that we got ourselves a category of leaseholder peasants.

Responding to a question what Ukraine would have gained if the moratorium had been lifted before 2008 (when Ukraine was on the stage of recovery and economic growth), Mr. Haydutskyy, first of all, noted that he had never considered and does not consider the country’s land market with foreign involvement. One should never absolutize the land market, but based on the fact that the market is dead without the property, the moratorium could be removed even in 2008, moreover, in 2004, but under the condition of adoption of the full package of necessary regulations. Only with a regulated land market, lifting the moratorium would have positive consequences. Not focusing on issues of non-residents’ activity, the expert stressed once again that Ukraine’s losses from failure to lift the moratorium is not so much of purely economic loss as but rather the time lag that could have been used for development of land market relations and, again, for the adoption of relevant legal acts – first of all, to regulate the land market. For instance, the countries of Eastern Europe managed to do this.

Finalizing the reform – what’s next?

Legal Advisor of USAID “AgroInvest” project, Pavlo Kulinich spoke on the completion of land reform in Ukraine and on the interim results of land privatization.

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Mr. Kulinich emphasized that Ukraine lost much for the failure to cancel the moratorium on alienation of agricultural land in 2008. Since 2005, we saw the process of so-called “agricultural holding consolidation” and the concentration of land resources in the hands of several owners. Formula of lease rights that prevented the redistribution of land through ownership strongly contributed to this process.

According to the experts, to help farms be efficient, it is necessary, first of all, to remove the ideological, the so-called psychological fear of lifting the moratorium, but completing it during the adaptation phase to limit the number of agricultural land buyers. It will take three to five years. “The land market should be introduced step by step”, Mr. Kulinich said. He says farm owners fear that literally the day after the moratorium is lifted their farms will deteriorate and decline. Such concerns should be dispelled by providing the necessary assistance and a “safety net” to prevent the destruction of land estates that have already been formed on the basis of lease rights.

Then Mr. Kulinich stated that it is necessary to consider the restoration of the limitations that lost effect on January 1st, 2015. He refered to the restrictions on property acquisition by a single owner of a certain area of land. According to him, there were effective restrictions on the acquisition of 100 hectares of land – perhaps it’s sensible to think about larger areas of land that may be acquired as property. The expert also stressed the importance of monitoring the use of agricultural land, and then expanding the circle of such lands – it depends on the dynamics of the agricultural land market. In short, fear of the market will not result in any positive changes in the land sector.

The consequences of the land reform

Andriy Martyn, Doctor of Economics, Head of the Department of Land Management of National University of Life and Environmental Sciences of Ukraine, delivered the last speech by Ukrainian experts at this round table and covered the main consequences of land reform in Ukraine.

“Land Reform has been carried out in our country for over 18 years”, he said. The basic principle which determined the directions of the reform was to overcome the state monopoly on land ownership and establishing a system of multiple land owners. Priority task for the land reform was to create land market relations, which would ensure the further efficient reallocation of land resources based on market self-regulation.

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Separate system failures made by the authors of the land reform and the lack of resources brought us to a situation when the primary objectives are still not reached, and the introduction of market land relations still gives no guarantee of sustainable land use. This means, inter alia:

– there was no improvement of land relations in agricultural production sphere, while the total commodity parcellation of agricultural land has been introduced. We have already created an inefficient land ownership system – by banning the sale of agricultural lands;

– further land reform in cities and other settlements is mainly aimed towards land privatization at local communities, which are often carried out in as a “collective irresponsibility” act by the local authorities. This is bound to cause complications such as haphazard urbanization and conditions for spatial development of urban systems;

– we legally blocked the largest segment of the land market – the market turnover of agricultural lands that constitute 45.7% of the overall area of the state.

Moreover, the limited nature is characteristic for loan provision, including mortgage, which was carried out exclusively on non-agricultural land and was substantially limited due to the financial and economic crisis that started in 2008.

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Unfortunately, the expert remarked, the ineffective mechanism for charging for the land remains: it was introduced back in 1992 and was kept intact in the Tax Code of 2011, based on simplified approaches to determining the tax base and involves a significant number of exceptions to the general tax regime that does not approach land tax as a fully-fledged financial basis of local government and regional development.

In addition to the aforementioned facts, the lands are not being monitored. The system of the state land cadastre causes many complaints, which hinders effective guarantee of rights and effective state control over land use and protection.

Land management activities of this land reform are also far from perfect. The process came down to land allotment during provision of lands and registration of land entitlement documents, resulting in a virtually lost scientific and technical potential of the land organization, and a degraded land management science.

Finally, the system of land management that primarily focuses on redistribution of land as the property does not solve the problems of land, whereas it is the core of fundamental national wealth, Mr. Martyn emphasizes.

Mass violations of land laws and regulations of environmental management demonstrate the inadequacy of organizational and legal mechanisms of control over land use and protection. Also, regulatory and methodical development of land relations is still not completed.

In general, summing up, it should be noted that the state land reform in our country mainly resulted in making the land broadly available – we mean its redistribution among the population. During the reform we neglected the importance of land as a resource of territorial development of the productive forces and the basic component of the environment. In its turn, this negligence, in modern conditions was the cause of a number of crises in economic and environmental land use. Overly complicated property relations have made it even harder to settle these issues.

Answering the question what would be awaiting the Ukrainian agricultural land market if the moratorium had been cancelled in 2008, the speaker, first of all, focused on the loss of human capital in rural areas. Instead of stimulating employment, during the last 15 years we, in fact, have turned people into mere consumers of income from leasing and land renting. That is the main loss in this context – the loss of business activity in rural areas.

In the extended talks, Alexander Kovaliv, Head of Intellectual property and marketing innovations Institute of Agroecology and Environmental Use of the Academy of Sciences of Ukraine, took the floor. He reminded the experts of particular milestones towards land reform: establishing the State Committee for Land Reform and the Agency of Geodesy, Cartography and Cadastre. However, these state structures immediately engaged into conflicts, which obviously did not contribute to the success of the pre-planned reforms. For example, today we have no precise geodetic data even for the existing land parcels. People say “think before you do”; instead, we have given away “27 million hectares divided into 7 million parcels”, apparently not having contemplated it well enough.

Mr AntonTretiak, Head of Educational and Research Institute of Economy and Ecology of the State Environmental Academy of Postgraduate Education and Management, gave a detailed commentary to the three reports submitted during the round table, emphasizing certain key issues.

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First of all, in his opinion, one of the worst mistakes in the Ukrainian land reform  is the lack of differentiated land register. There was no separate allocation of degraded lands, lands of special purpose and so on. Secondly, Mr. Tretiak said that the Parliament intended to fulfil different tasks at the beginning of the reform: to add ownership options, to increase economic efficiency and to improve the efficiency of agricultural lands as well. Unfortunately, not all tasks received enough attention – this especially applies to the latter task. Third, the expert emphasized the importance of sustainable development in land reform. There must be a conceptual long-term thinking for the future. Depletion of land ihappens partly because the land is used not by actual owners but by temporary landholders such as classical agricultural holdings; they “come to manage the land for a maximum of five years, deplete it totally and leave for other villages”. This also concerns the issues of environmental sustainability, timely mentioned by Mr. Tretiak.

Mr. Tretiak also briefly mentioned that he has a ten-step program to overcome the negative effects of the already implemented reforms and promised to share his experience during the coming round tables.

Nikolai Fedoriv, Doctor of Economic sciences (professor at Department of Land Relations of the National Scientific Center “Institute of agrarian economy”) referred to the Ukrainian model of land reform and stressed that the ultimate goal of the model was establishing a land market – it was, oddly enough, the ultimate stumbling block. The problem was not scientific and methodological support of land management, not disposal of land shares without issuance of state acts on the basis of certificates: it is important to remember this. The whole process is slowed down and complicated by imperfect legal framework for reforms. At the end of his speech, Mr. Fedoriv said that, according to the Land Code of Ukraine, the land moratorium can be lifted only after the adoption of the Law on circulation of agricultural land, but not earlier than January 1st, 2016.

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Chairman of State Land Agency of Ukraine, Maksym Martyniuk took the floor and reminded the experts that during land division we used a variety of methodological approaches to parcellation. This led to a certain diversity of situations in the regions of Ukraine, for example, in Transcarpathia a land parcel consists of seven separate land pieces – some of them are more productive, some are less favorable in terms of management. Thus, the average size of a land piece merely reaches one hectare. In Western regions of Polissya, a large number of village councils own very unproductive land with a high percentage of forestation, which de facto makes lands useless and unlikely to be used in the near future.

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Mr. Martyniuk also outlined the problematic situation with reclaimed land: with drained  ones as well as irrigated ones. At certain time, these factors, along with several others, were not taken into account. But we must admit: in the period from 1995 to 2005, when the respective concept of land reform was effective, we still managed to evolve from a state-owned monopoly to diversity of ownership; Mr. Martyniuk called this a “truly titanic work”. But now the question lingers: what was the purpose of all of that? We currently have a large number of land owners, but the paradox is that they do not have full right to dispose of the property. Obviously, since 2005 in the country at least lost its formalized vision of further development of land relations, although land reform still cannot be considered complete. This is due to the fact that since the new Land Code became effective, so did the moratorium.

Therefore, Mr. Martyniuk evaluates the land reform in the following manner: we have almost reached the point of purpose, but nowadays the need to plan the development of land relations on until 2020 is long overdue. We should have clear and defined mechanisms of work, so that we don’t end up “once every six months before the end of the moratorium pulling up round tables and thinking how to proceed”. You need to decide what legislation we need to approve to create conditions for sale of agricultural land.

Finally, Mr. Martyniuk supported the idea of gradual launch of differentiated land market, as well as the algorithm “to limit the sale of land rights – the right to limit the purchase of land.” Perhaps in the future we will be able to lift the ban on selling state-owned agricultural lands. But such sales should be made only through open tenders and auctions. Thus, we can get “beta mode” assessment of the prospects for agricultural land market in Ukraine. Before establishing the market will need to think about possibilities and ways to concentrate land parcels, because today a land parcel is not a matter of economic use in the full sense for agricultural production.

Arkadiy Kornatsky, Chairman of the Subcommittee on Land Relations of the Parliament’s Committee on Agrarian Policy and Land Relations, offered his vision of historical periods of land reform in Ukraine. He spoke about the three stages. The cornerstone was the Declaration of sovereignty of Ukraine and adoption of the Constitution of Ukraine in 1996. We currently are at the third stage of reforms, which brings so much responsibility. The main stage of land reform, according to Mr. Kornatsky, was simply wasted with such criminal negligence. Currently, we have concentrate on improving our legislation.

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Mr. Mesel-Veselyak, professor, Doctor of Economics, deputy director of the National Scientific Center “Institute of Agrarian Economics”, member of the National Academy of Sciences of Ukraine, noted that until 1990, agriculture was unprofitable, and it was vital to change this situation, overcoming the negative trends. This has been done partly; for example, in 2014, compared to 2000, Ukraine increased its gross agricultural production by half. He also expressed solidarity with several colleagues who earlier during the discussion emphasized the need to reform legislation in the land sector.

Mr. Alexander Kaliberda, deputy head of the “Agroinvest” of the US Agency for International Development (USAID), offered his vision of the reform process based on his own experience in this field, According to him, he has been watching the land reform in Ukraine since the year 1995. Based on the unique experience he has, he noted that Ukraine, in fact, had no other way besides reform that took place. That is, in theory it could be otherwise, but turned out as it is today.

Mr. Kaliberda recalled the mechanism of restitution (restoration of previous owners’ rights), which was more or less successfully used in other countries, but in Ukraine there was virtually no opportunity to do the same (except some Western regions). Another potential mechanism is the sale of land, but the question is – to whom? Moreover, society does not seem to perceive this idea. A third possible scenario is leaving the land in state ownership, but that option, according to experts, is not too effective: for example, the experience of Belarus, proves this. However, this decision will have an impact on democracy in the country and on other socially important areas as well. Therefore, Mr. Kaliberda summarized that it is more important now to look forward and not slow down the reform process and development. Answering the question about effects of land reform from the moderator, Mr Kaliberda explained that the transfer of state agriculture into the market dimension is a fact that we should evaluate as a positive one.

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According to the experts, the unique advantage of Ukrainian land reform was a relatively small number of conflicts accompanying the process. Yes, its course is still imperfect, but now we must focus more on the trends and gradually try to sell state-owned lands, carefully analyzing what the consequences might be. Let the state be the first seller of the land – and we will see how the market will behave and whether we can manage this system.

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Commenting on the statement by Mr Kornatsky, Alexander Kaliberda also mentioned on the rent issue. He suggested a scheme where a farmer does not get his money after selling the land at once, not in full amount, at least, but in parts. For example, the first half would be paid immediately and the other half will sit on hold for a while. It is quite simple to do. The idea is to avoid the situation when a farmer sells the land and spends the money, then returns and wants to buy the land again. The purpose is to avoid conflict in the process of land reform. Such mechanisms exist, and “postponed rent” is a good option.

Mr. Kaliberda emphasized that he considers a key objective of diversification of Ukrainian agricultural production. It is necessary to increase economic activity in rural areas. Without it, we lose a great foundation for our economy. It’s not enough to aim to grow, say, one hundred million tons of grain, or one hundred and twenty tons – this kind of activity should be considered in a broader context: what will it give the country and the economy as a whole. We must introduce reform proactively, or the land can return to being state-owned again.

Anatoly Miroshnichenko, professor, Doctor of law, Head of Land and Agrarian Law Faculty of Kiev National University spoke about the paradoxical situation in Ukraine. We have a market of agricultural land and other types of land, although there is no adequate legislature on these lands. He expressed confidence that the land moratorium should be lifted.

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Doctor of Economics, professor, Yosyp Dorosh, Head of Kyiv Research and Design Institute of Land Management drew attention to the need to create not just a land market but a market of land parcels. Also, he underlined the importance of creating a family-type farming pattern.

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Retrospective of foreign experience

At the end of the discussion, the participants of the round table had the chance to learn from the experience of Germany in the sphere of land reforms. With short but highly informative speech, Mr. Detlev Kuchar took the floor. He is an expert of the Society for the management and implementation of lands in Germany.

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Mr. Kuchar immediately pointed out that the reform process was launched over 15 years ago, still cannot be considered complete – it will take more than several more decades. Definitely positive was, of course, the fact that German reforms were not implemented in a hurry – they had enough time for all of it.

For a clearer understanding of the process of privatization, the expert roughly divided German reforms into three chronological periods:

– 1992 – 1996: The first stage was the lease of agricultural lands and sustainable management thereof. Farmers were given time to get used to the new principles of management, to improve the legal system and to reach a common ground concerning the land markets of the former Eastern and Western Germany;

– 2006-2010 – the period of selling agricultural land at favorable prices according to the law on compensation. A typical characteristic of this period is the consolidation of farms and the development of a new culture of forest usage. The market finally began to work;

– Since 2010, the sale of agricultural land has been performed at actual value.

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German public authorities took quite some time to clearly define which land should remain in state ownership, and which should be privatized. But, as the expert said, Germany tried in every way to avoid conflicts while distributing the land and to avoid trials between former and future owners.

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Thus, at this round table the experts reviewed and analyzed the history of land reform in Ukraine, its successful and questionable aspects and discussed the implications of this process. During the events to come in the weeks ahead, we will see further expert discussions on other aspects of foreign experience.

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