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Is the state ready for introducing a land market?

Adair Turner’s book “Between Debt and the Devil: Money, Credit and Fixing Global Finance” states that since the middle of the ХХ century, a very small number of countries have been able to achieve convergence with advanced economies.

The author singles out only three countries with large populations that have reached at least 70% of the living standards of advanced countries: Japan, Korea and Taiwan.

The success story of each of these countries had its own features. The common denominator, however, was a basic set of key elements: successful land reform with intensive stimulation of small farming, active industrial policy and balanced regulation of the financial system to stimulate investment in the real sector of the economy.

In Ukraine we have a complete failure with the second and third elements, but as for land reform, 2020 gave reason for cautious optimism.

Let us find out if this optimism is justified and if land reform will add to the long list of wasted chances of success.

Law. On March 31, 2020, the Verkhovna Rada adopted the Law of Ukraine “On Amendments to Certain Legislative Acts of Ukraine Concerning the Circulation of Agricultural Land” (No. 552-IX, Bill No. 2178-10), which launches the introduction of the land market.

The law enters into force on July 1, 2021 and contains, in particular, the following provisions:

1) from July 1, 2021, the moratorium on the sale of agricultural land will be lifted;

2) from July 1, 2021 to January 1, 2024, only individuals-citizens of Ukraine will have the right to purchase land plots, legal entities will receive such right from January 1, 2024;

3) from July 1, 2021 to January 1, 2024 there will be restrictions on the purchase of land as one person will be able to buy only up to 100 hectares of agricultural land. From 2024, the limit will be set up at 10,000 hectares for one person;

4) the issue of granting the right to buy land to foreigners should be decided by referendum;

5) legal entities whose shareholders or owners are foreign citizens are prohibited from buying land plots located closer than 50 km from the state border of Ukraine (despite the results of the referendum). The ban on the purchase of land plots also applies to legal entities owned by citizens of the Russian Federation, persons who belong to/belonged to terrorist organizations, foreign countries, offshore companies;

6) pre-emptive right of the lessee to purchase: lessee who work on the land and have the right to use no later than 2010, can purchase the land in the installment of up to 10 years at the cost of normative monetary valuation of such plots without land auction. The buyer receives the right of ownership after the first payment;

7) banks will be able to become owners of land plots, provided that the land plot is received by them as collateral for the outstanding loan. Banks must sell such plots at a land auction within two years of acquiring ownership;

8) the sale of state and municipal lands is prohibited;

9) the agricultural land price cannot be lower than their normative monetary valuations. This norm will be valid until January 1, 2030.

 “Land package”. Adoption of the law No. 552-IX is a necessary but not sufficient condition for the introduction of the land market. The priority tasks of land reform at the present stage include:

• “land” decentralization and giving communities the opportunity to fully manage land within their territory;

• deregulation of land management and land valuation, integrated planning of the rural communityе territory;

• ensuring publicity and openness of cadastral systems through the development of a national infrastructure of geospatial data;

• introduction of electronic land auctions;

• solving the problem of land raiding.

In solving these tasks, in addition to Law No. 552-IX, the Verkhovna Rada adopted the following laws:

  • Law of Ukraine “On Amendments to Certain Legislative Acts of Ukraine on Combating Raiding” (No.340-IX), which provides for the creation of additional opportunities to protect the property rights of land owners and users, prevention of illegal takeovers and seizure of enterprises in the agricultural sector through information exchange between the register of real rights to real estate and land cadastre;
  • Law of Ukraine “On National Infrastructure of Geospatial Data” (No. 554-IX), which provides for the creation of a national geoportal NIGD, which will publish all the characteristics of land plot available to various authorities, in particular, data from sectoral and departmental cadastres: land, urban planning, forest, water, deposits and manifestations of minerals, resorts, protected areas, etc.;
  • Law of Ukraine “On Amendments to Certain Legislative Acts of Ukraine Concerning Land Use Planning” (No. 711-IX), which regulates the establishment of community boundaries, simplifies topographic, geodetic and cartographic works and provides for the improvement of procedures in the field of urban planning and land management;
  • Law of Ukraine “On Amendments to Certain Laws of Ukraine on the Functioning of the State Agrarian Register and Improvement of State Support to Agricultural Producers” (No. 985-IX), which provides for improvement of the mechanism of distribution of subsidies and provision of state support in certain priority areas.

In addition to the already adopted laws, the “land package” provides for the adoption of several other draft laws:

• No. 2194 – a comprehensive draft law that “absorbed” about 30 initiatives for decentralization and deregulation of land relations: at the legislative level it fixes the transfer of land to communities, decentralizes the process of land management, transfers control functions from the State Geocadastre to communities.

Approved in the first reading on November 14, 2019, but on December 2, 2020 the draft law was sent for a second reading (despite the positive conclusion of the Committee on Agrarian and Land Policy).

According to the recently appointed Minister of Agriculture Roman Leshchenko, without the adoption of this draft law it is impossible to implement land reform in a timely manner;

  • No. 2195 – provides for the introduction of mandatory sale of state and municipal land plots or rights to them through electronic auctions (approved in first reading on November 14, 2019);
  • No. 3012-2 – determines the mechanism of land privatization by employees of state agricultural enterprises (it is about 750 000 hectares). The draft law was adopted in the first reading on July 13, 2020;
  • a draft law on the establishment of a Fund for partial credit guarantee in agriculture to ensure access to loans for small farmers, in particular for the purchase of land. The Verkhovna Rada rejected several draft laws (No. 3205, No. 3205-1), and the government draft law No. 3047 was withdrawn. The parliamentary draft law No. 3205-2 is currently being considered by the Verkhovna Rada.

Several more draft laws are under development: on land consolidation, on the transformation of the institution of permanent land use, and on the unification of water users.

However, the adoption of these draft laws alone is not enough.

In early September, the World Bank’s Director for Eastern Europe, Arup Banerji in his article stated that the process of creating the necessary regulations, institutions and implementation could take at least nine months.

Therefore, taking into account the date of the land market opening from July 1, 2021, it is very important to adopt the relevant laws no later than the end of September 2020.

As we can see, the above draft laws remain unapproved even at the end of 2020

Transfer of land to communities. On October 15, the President issued Decree No. 449 “On Some Measures to Accelerate Reforms in the Sphere of Land Relations”, which obliged the Cabinet of Ministers, among other things, to intensify the transfer of state-owned agricultural land to communal ownership.

It is unclear, however, why these issues are attended to by the President?

In pursuance of this decree, the Cabinet of Ministers adopted a resolution of November 16, 2020 No. 1113, which, in particular, instructed the State Geocadastre to accelerate the inventory of agricultural lands of state ownership and the transfer of agricultural lands of state ownership to communal ownership.

As of December 17, 1.5 million hectares out of the planned 2 million hectares was transferred to communities.

Land cadastre. According to the State GeoCadastre, as of mid-December, the land cadastre included information on 15 million agricultural land plots with a total area of ​​32 million hectares.

While at the time of the adoption of the law No. 552-IX, the corresponding figures were 14.3 million and 31.2 million (as of March 30, 2020).

That is, over the past eight months, the occupancy rate of the land cadastre has increased from 75% to 77% (the total area of ​​agricultural land is 41.4 million hectares).

On the other hand, about 10 million hectares of agricultural land are not in the cadastre. In particular, according to Roman Leshchenko, 40% of more than 500,000 hectares of land of the Ministry of Defense are not included in the land cadastre.

In fairness, only half of the EU member states have more than 80% inventories.

On October 10, 2020, the Cabinet of Ministers adopted Resolution No. 948, which obliged the State Geocadastre to conduct an inventory of land management documentation by January 1, 2022.

That is, within six months the land market should operate without a clear idea of ​​the state of the status of land plots, property rights to which were registered before 2013.

In view of all the above, the level of preparation of the state for the introduction of the land market should be recognised unsatisfactory.

Ensuring that small farmers have access to financial resources to purchase land is critical to the creation of a full-fledged market.

This is recognised not only by officials, but even by representatives of medium and large agrarian businesses.

However, in spring, shortly after the adoption of Law No. 552-IX, the executive director of the Independent Association of Banks of Ukraine (NABU) Olena Korobkova openly admitted that during 2021 – 2023 banks would not be interested in lending to small farmers secured by land.

NABU expects significant progress in this regard only from 2024, after increasing the limit for the purchase of land to 10 thousand hectares and entering the market of legal entities.

That is, without the state support, a small farmer will be unable to compete for land with large players.

According to the authors of the reform, the Fund for partial credit guarantee in agriculture has the opportunity to equalize the chances of small agricultural producers.

However, the draft law on the establishment of this fund (No. 3205-2), which has been under consideration in the Verkhovna Rada since the end of May, was not submitted even to the first reading (despite the positive conclusion of the Agrarian Committee).

And if in the budget of 2020 UAH 240 million was initially provided for the formation of the authorized capital of the Fund for partial credit guarantee, in the budget of 2021 there is not even such a line.

Currently, financial support for agricultural producers by partially reducing the cost of loans is carried out on the basis of resolution of the Cabinet of Ministers No.300 of April 2015, according to which the state can reimburse agrarian borrowers up to 1.5 key policy rates of the NBU.

In 2020, UAH 1.2 billion was provided for this purpose. Given that the total amount of financial support for agricultural producers in the 2021 budget has increased compared to 2020 by only UAH 0.5 billion (up to UAH 4.5 billion), we can assume that the amount of interest compensation on loans will be close to the amount of 2020.

In addition to the issue of the adequacy of state support for small farmers to purchase land, a question of the criteria by which the state will provide support remains open.

That is, whether such support will be provided only in view of the size of the farm, or the specialization of production will also be taken into account.

According to Deputy Minister of Economic Development, Trade and Agriculture Taras Vysotskyi, the above-mentioned draft laws can be considered in the Verkhovna Rada no earlier than February (the meeting of the Agrarian Committee is to take place in late January).

And in addition to laws, as already mentioned, it is necessary to adopt a large number of bylaws.

During the round table “The future of land reform – a roadmap for 2021”, held on December 17 by the Kyiv School of Economics, it was repeatedly reported that to launch land market the government should adopt about 50 resolutions, that is 2 resolutions per week for the first half 2021.

Surprisingly, there is, in fact, no more precise roadmap for preparing the state for the introduction of the land market than these “2 resolutions per week”. However, it is obvious that such “roadmap” is very difficult or even impossible to perform, especially given the unpredictable epidemic situation.

Special attention should be paid to failure of information support of the land reform: six months before the opening of the land market (literally, a fateful event in the life of the country), this topic is, in fact, absent in the media.

Given all these obstacles, it is highly probable that on July 1, 2021, the “land market” will be fully operational only for those who are accustomed to benefiting from the imperfection of the legislation. Unless, of course, the moratorium is extended, which seems like a less-than-fantastic scenario.

In the above-mentioned article, the World Bank Director for Eastern Europe warns that there is a danger that opening up the land market without strict legal and regulatory guarantees will lead to a repeat of the 1990s privatization process, that is, will make the market vulnerable to powerful players and in fact will deepen the corruption associated with the land market and social inequality.

Therefore, we must do everything possible for this warning not to become a prophecy.

Mykhailo Dzhus, Head of Money Markets Department, the Growford Institute for