Doing agribusiness: Land Market
Land Relations in Ukraine
Ukraine owns vast areas of arable land featuring high fertility; over half of the national territory is qualified as “land of agricultural use”.
The land reform was one of the most important reforms, which took place in Ukraine. The reform, in fact, eliminated collective and state ownership to farmland. It is necessary to point out that land reform was transitory and is not completed yet.
The main feature of the Ukrainian land reform was the division of arable lands into socalled pai (a share). A land share (pai) in the legal sense shall not be identified with a land parcel. A land share is only a right to be allocated a piece of land of a certain area. Conversion of land shares into real land parcels with registered ownership is currently going on, though the bulk of land shares were converted into land parcels by the end of 2008. the primary reasons restraining complete conversion are death of landowners, lack of funds to cover necessary land surveying works and services etc.
Upon completion of major stages of the land reform most landowners were not prepared to farm their land on their own and were reluctant to unite for joint cultivation of their plots. therefore, in most cases companies leasing land as parcels or land shares from landowners cultivate farmland. Among such companies there are also foreign investors. It should be noted that leasehold is the only tool for securing rights to land available for legal entities, including those with foreign investments.
The President of Ukraine Victor Yanukovych at the beginning of his office in 2010 declared the establishment of an open and civilized farmland market to be one of his priorities.
It is well known that Ukraine in 2000 imposed a moratorium on alienation of any productive farmland. Under the provisions of the Land Code that was in force until 2012, the moratorium should have been lifted upon adoption of two laws, namely on the state land cadaster and on the land market, but not earlier than January 1, 2012. At present, the moratorium is formally prolonged till January 1, 2013.
The Parliament of Ukraine adopted the Law of Ukraine on the State Land Cadaster on July 7, 2011, but entering into force of the Law was postponed till January 1, 2012 (except for some provisions). At the moment, the state land cadaster as it is described in the Law has not been formed, only certain works were completed, for example, aerial mapping of Ukraine. the draft law on the land market was adopted by the Parliament in the first reading, but later on it was taken for further elaboration. thus, for moratorium to be lifted, it is necessary to adopt the Law of Ukraine on the Land Market.
The newer version of the mentioned draft law has recently been published for political and public discussion. But the current political situation, first of all, the forthcoming election of the Parliament of Ukraine (october 2012), strongly suggests that the Law of Ukraine “on Land Market”, as it stands at the moment, is not going to be adopted in 2012. Statements of the Speaker of the Parliament and the President of Ukraine pointing at social and political significance of the law “on Land Market” and necessity of considerate ap- proach are also suggesting that this law will be dealt with after the elections.
It is worth to mention that the last available reading of the draft law “on Land Market” (as of January 25, 2012) imposes several restric- tions regarding ownership to farmland. the draft law, just like the effective Land Code, directly forbids foreign companies, as well as companies incorporated under Ukrainian law with participation of foreigners, to own agricultural land in Ukraine. Moreover, the draft law goes further and restricts the right to own farmland to citizens of Ukraine, local territorial communities, the state and the land bank. thus, all kinds of legal entities, regardless of the place of incorpora- tion, are excluded from the list of potential owners of farmland.
Similar to all preceding readings of the draft law on the land mar- ket, there is an obvious desire to protect Ukrainian farmland from being acquired by foreigners. But it is unclear why the legislator eliminates from the list of potential landowners all sorts and kinds of legal entities. this is an approach that may decrease investment attractiveness of Ukraine drastically.
The draft law “on Land Market” also limits the area of farmland in possession of one person setting the upper threshold at the level of 100 ha. this is an essential restriction because the profitable conduc- tion of agricultural business requires larger area of cultivated land.
Another negative aspect of the draft is the imposition of ceiling on the area of farmland in leasehold of one person. this area shall not exceed 10% of agricultural land within one district (rayon) and 100 thousand ha on the territory of Ukraine. this restriction represents a threat to the activities of existing holdings and reduces investment attractiveness of Ukraine for foreign investors for whom leasehold is the only available access to the Ukrainian land market.
Current reading of the draft law “on Land Market” also contains rules on consolidation of land and on long-expected rules on land auctions and land tenders.
Under the provisions of the current Land Code, sale of land parcels of state and municipal ownership, as well as leasehold rights there- to, shall be performed at auctions only. this presupposes that law should establish rules of the land sales. this provision was included in the Code in late 2007, but there is no law governing the procedure for land sales so far.
There is a probability that the procedure of land auctions will be defined by a separate law (there have already been published several draft laws on land auctions, one of which was recommended by the profile Committee for the adoption in the first reading); therefore some of issues included in the draft law on the land market may be dealt with in another law, and the draft law “on Land Market” will have to be withdrawn and re-drafted. the same is very possible regarding rules on consolidation of land. the above said confirms a high probability that by the end of 2012 the law “on Land Market” will not be adopted and the existing moratorium will be prolonged.
A public and predictable market of agricultural land shall facilitate the development of agriculture in Ukraine and attract investors, although the latter may have very few options for entering the market in view of the restrictions and limitations embodied in the draft law “on Land Market”. Most likely, different varieties of leasehold will be the only available option for foreign investments.
Senior Associate with international law fim BEITEN BURKHARDT
State Support to Agrarian Sector
Agriculture is a high-priority sector of Ukraine’s economy. this statement is confirmed by declarations of every Ukrainian government with no exception; moreover, the very dynamics of the sector speak for itself. Agriculture was nearly the only sector of Ukraine’s economy, which showed growth during the economic crisis; in this sense the growth of crop production is the most remarkable one since it lasts already since 1990. nevertheless, without the state support, agriculture doesn’t get the necessary vectors and impulses for development.
Besides purely fiscal stimuli, there is also a special Law of Ukraine on measures of state support provided to agriculture; the effective reading of this Law was adopted in 2004 under # 1877, later on it was amended on several occasions (hereinafter referred to as Law 1877).Law 1877 covers all the main directions and tools of state support and stimulation of production of agricultural commodities and development of agricultural markets.
Law 1877 provides the state with the following competences:
- regulation of prices for some kinds of agricultural goods;
- regulation of market of agricultural insurance;
- introduction, upon decision of the Cabinet of Ministers of Ukraine, of security purchases of cereals subject to state price regulation;
- provision of credit subsidies and reimbursement of leasing payments;
- provision of budget subsidies to producers of animal products.
In total, state budget 2012 allocates UAH 822,3 million for funding measures of state support to the sector; these funds may be used for:
- establishment and keeping of reserve stock of certified seed and hybrid seed;
- selection in crop growing;
- development of livestock breeding;
- partial reimbursement of the cost of heavy agricultural machinery of domestic origin;
- implementation of financial support through the mechanisms of cheaper loans and compensation of lease payments;
- provision of support to the establishment of agricultural wholesale markets;
- partial refund of the cost of construction and reconstruction of animal farms and feed plants;
- funding of measures for protection, restoration and improvement of soil fertility;
- support to agricultural service cooperatives;
- partial reimbursement of the cost of construction of new greenhouses; 43
- realization of selection programs in livestock breeding;
- subsidies paid per unit of cultivated area etc.
Below some types of state support are described.
Reduction of cost of borrowings for enterprises of the agricultural sector and reimbursement of leasing payments
Agro-industrial enterprises have an opportunity to claim, on a competitive basis, the partial compensation of current interest rates on loans and borrowings in national and foreign currencies. the procedure for use of budget funds meant for the purpose is regulated by the Resolution of the Cabinet of Ministers of Ukraine # 794 of August 11, 2010 (with subsequent changes and amendments). this act provides for the subsidies limited by:
- maximum double interest rate of nBU effective as of the moment of calculation of the interest on loans issued in Hryvnia. Starting from March 2012, nBU interest rate is 7.5%;
- 10% a year on loans issued in foreign currencies.
It is necessary to note, that reimbursement of interest rates on loans issued in 2007-2009 is performed regardless of effective interest rates provided by loan contracts. At the same time reimbursement of interest on loans issued in 2010-2011 and in the current year is granted within the described above limits.
Loans to which the above-mentioned provisions apply are qualified as follows:
- short-term (up to 12 months);
- mid-term (up to 36 months);
- long-term (longer than 36 months).
It is important that loans eligible for state support also include borrowings restructured in 2010 and 2011. the list of agricultural enterprises and agriculture-related institutions, along with farms of agricultural higher educational establishments, eligible for interest reimbursement, includes:
- livestock and poultry farms;
- fisheries and fish processing factories;
- sugar refineries;
- grain elevators and canneries;
- national Joint-Stock Company “Hlib Ukrainy ” and its branches;
- wholesale markets of agricultural products.
Resolution #794 also describes the priority areas of expenditures (compensable) for agricultural enterprises.
Reimbursement of leasing installments is provided in respect of payments made for agricultural machinery and equipment purchased on conditions of financial leasing, according to the list approved by the Interdepartmental expert Council and tender commission, and covers:
- up to 40% of the cost of machinery and equipment of domestic origin;
- commission fee of a leasing company equal to 1.5 interest rate of nBU.
Decision on reimbursement is taken by a tender board at MAPF; preliminary selection is performed by tender boards in every region (i.e. in Regions, Crimea, cities of Kyiv and Sevastopol).
It should be noted that the state budget of Ukraine for 2012 provides only for the reimbursement of leasing installments and does not presuppose any special funding for partial compensation of interest rates on loans and borrowings.
The Special Fund of the state budget for 2012 provides UAH 732 million for paying subsidies to enterprises producing animal products. When this brochure was submitted for printing, the procedure for distribution of this sum in the current year was yet to be adopted. But due to the crisis situation with milk procurement prices, Russian embargo on import of cheese of Ukrainian production and high concern of the Government with the problem, we may expect that the procedure will be passed soon. one of possible options is subsidizing of cattle owners on a “per head” basis.
Renewal of fixed assets of agricultural cooperatives
Agricultural cooperatives received UAH 5 million from the state budget in 2011; procedure for utilization of this sum was defined by the Resolution of the Government #272 of March 9, 2011. the Law of Ukraine on State Budget of Ukraine for 2012 did not provide support to coops as a separate expense item, but such support is meant to be realized within overall state funding of agro-industrial complex.
According to Resolution # 272, funds shall be directed to financial support (on a competitive basis) of agricultural service cooperatives consisting exclusively of households, family farms and entrepreneurs for the purpose of acquiring of agricultural machinery and equipment for domestic manufacture.
A coop that has successfully passed through the tender may count on reimbursement up to 90% of cost incurred when purchasing machinery (equipment), provided the coop has already paid to the machinery (equipment) supplier 10% of the cost and concluded an agreement with the respective local department for agro-industrial development.
Compensation of cost of agricultural machinery
Resolution of the Cabinet of Ministers № 647 of July 28, 2010 (with further changes and amendments) establishes a procedure for the use of funds for partial reimbursement of costs for the purchase of agricultural machinery of domestic manufacture with partial compensation of up to 30% of the cost of agricultural machinery, excluding VAt. Bidders for compensation are selected on a competitive basis by specially set up commissions.
Senior Associate with nternational law fim BEITEN BURKHARDT