Head to Head: Opening of Land Market
Ukrainian President Volodymyr Zelensky has promised to start a land reform this year. The EU and the IMF have long insisted on opening the agricultural land market. Ukraine has undertaken this obligation both in the Association Agreement with the European Union and in the Memorandum of Cooperation with the IMF. To talk more about the upcoming land reform in Ukraine, Pavlo Kukhta, economic expert
— Hello and welcome I am Oles Gardzhuk and you’re watching Head to Head on UA|TV. Ukrainian president Volodymyr Zelensky has promised to start land reform this year. The EU and IMF have long insisted on opening the agricultural land market. Ukraine has undertaken this obligation both in the association agreement with the European Union and in the memorandum on cooperation with the IMF. To talk more about the upcoming land reform in Ukraine we welcome to our studio today Pavlo Kukhta, economic expert. So, hello and thank you for joining us today. So as I said Volodymyr Zelensky and his office promised to start lifting the moratorium on agricultural land sales. According to Oleksii Honcharuk, the deputy head of President’s office, the land sale moratorium may be canceled by the end of the year. What are your thoughts on opening the land market and on the abolition of the moratorium?
— This is one of those few reforms that are essentially a no brainer, right? So, the ban on selling or buying agricultural land is a very rare thing around the world right now. I think it only exists in five countries apart of Ukraine and these are something like Cuba, Venezuela, Congo, Tajikistan, generally undeveloped countries. Obviously, it is an easy and cheap way to stimulate economic growth. There are several models of how things will behave after the land market is opened. In general, the more liberal models imply less restrictions, access for foreigners, etc. The more economic growth and investments are generated.
— What are you rooting for? For so to say the more liberal approach?
— In general, modeling clearly shows that there are certain let’s say political-economic constraints or factors that have to be kept in mind, mainly not wanting to generate let’s say large land latifundia, kinda big quasi-oligarchy in the agricultural sector. In my personal opinion, this is a bit overrated. There is different danger, the effect of the land market is predicated on investment coming in the agricultural sector, into people buying land, creating long-term businesses, create more valuated chains in the agricultural sector so going to food processing, meat production, something that creates additional valuated over just simple plant and gather some wheat and sell it off each year. But this is predicated on the investment coming because the bottleneck of investments would be no longer in the inability to buy and sell land but something else. For example, the absence of properly functioning property production in the country, raiding, no proper court system. So, there is a certain risk that land reform is done and there doesn’t generate the effects that are expected because other things start kicking in, mainly related to the fact that rule of law essentially is not fully present in the country to the same extent that other European countries have.
— This means that if we want to avoid the risks, we have to be fully prepared for the opening of the land market. As I mentioned, the moratorium would be lifted probably as expected until the end of this year and then the president hopes to open the land market in 2020. What do you think about this time-frame? Do you think that this is a good pace and we can have an effective launch of the agricultural land market or is it too short? So that could be a possible threat that Ukraine might be left behind of some proper legislation or maybe with the adoption of some proper regulations of the land market. What are your thoughts?
— No, I don’t think that the time frame is an issue. Actually, it should be done as fast as possible because the experience shows us that if it’s delayed, it’s not done. I mean it hasn’t been done for twenty years, almost twenty years since 2001. So if you start prolonging it, you never do it. You should do it fast. The question is that there is something that you should do in parallel, related to the administration of land, etc, and you cannot fail there because otherwise, the land market would be problematic. You have to fix acute problems related to the rule of law as soon as possible. You cannot just do one thing and avoid doing the other thing. That’s the problem, right. Even if nothing else will be done, it would still be better to do land reform because it will generate at least some economic growth and have some effect, making the situation at least somewhat better in the rural areas in Ukraine. But, for making this effective, other things have accelerate the changes and that’s the point. So the point is not the time frame, the point is that things should be done quickly and simultaneously in various directions.
— I get your point. Let’s discuss the possible risks. I do know that some experts are very careful commenting this issue about the land reform, and they’re careful saying that maybe it is too fast to open to that market that Ukrainian have to prepare, as I mentioned in my previous question. So the outline the risks, food security and inability of local investors to have an access to the market, just because Ukrainian banking system doesn’t provide loans for buying an agricultural land, and also we know that local businesses don’t have this much money and this much financing that can make them possible competitors on the market to the foreign investors. That brings up the question about this liberal model as you mentioned, or having some restrictions and having some kind of regulations and unequal approach based on different factors. For example, like Poland, France, and Slovakia have some restrictions on their land market, based on company registration, address, nationality, or even the length of time in agricultural business. What are your thoughts?
— In general, the model shows us that the less restrictions, the better for the economy of the country. So, the less restriction you put in, the more economic growth you generate by open land market. If it is very restricted, it generates very little economic growth.
— But would it be possible to get a big flow of money at the very beginning, but then it could be involving some potential threat to market?
— There is this constant fear that someone will come in and buy up Ukrainian land. But what I would fear more is that no money comes. I would fear more because we should not really overestimate the value of this land. It is an asset, obviously a good asset, but it is not something unique. You know, it is not buying land on Mars, not a bonanza, it is just an agricultural land. It has lack of investments, low-quality infrastructure requires a lot of investments to make things work, requires good legal infrastructure, [so you would] not be afraid that your land ends up in someone else’s hands. Ukraine lacks that. There are huge risks associated with the country, huge distrust towards the country in the business circles around the world. I wouldn’t underestimate these risks. The main problem is financing and again model shows that solving the problem of financing, or even making some cheap loans available to farmers via state budget, or some other scheme like that — it would actually help a lot. So, that is a major factor. That’s one of the things that should be handled, that’s why it requires relatively good administration on part of the government because it is necessary once again to generate more effect from the land market.
— It needs to be done simultaneously.
— It needs to be done simultaneously and it means that it needs to be prepared fast enough and executed fast. No, it’s entirely possible to do it in a short timeframe. Someone should be doing it and [that] someone should be professional. Like the Minister of agriculture or whoever is doing that, should be professional enough team to actually prepare this work. But if it is botched, than the effect will be lost. Regardless of how the market is handled, opening the market is better, than not opening of the market. That is quite clear. At this point after 20 years of the prolonged sales moratorium, the situation is such that non-opening is, in any case, worse than opening. In any case, the concentration on land will happen. It will just happen via long-term loaning of this land. All the negative processes that the people are afraid of, like, foreigners entering the market, when the lands will be just taken again into a long-time lease instead of buying it, or using shady schemes more and more to buy off land, which is happening. This [moratorium] does not work and it was devised as a temporary solution for a couple of years back in 2000. It was just devised to give some breathing space to actually to draft a proper law on the land market and then launch it. It was supposed to be launched already in 2000. Then for 20 years it was prolonged and the situation morphed into this crazy thing we have now.
Yes basically they needed the time to work on the land code but then they actually refrained to this moratorium.
Which was 20 years ago.
As far as I understand the President’s office is thinking about launching a liberal model – issuing quite equal rights for all the buyers for the participation in the land market. And I would like to mention, that Head of the Office of the Effective Regulations Denys Maluskov believes, that in order to launch this land market, it is first necessary to adopt a bill to counter raiding and ensure equal access, as we already discussed, but also there is an idea. Actually, according to Maluskov, there is a necessity to create an institution that would provide equal access to financing for all market participants as well strengthen the work of the state service for geodesy, cartography, and cadaster, making the implementation of this procedures more efficient. Do you think that there is a reason to establish a new institution for that?
—Well possibly, but then something needs to be done with the state cadaster. I mean that their functions are, obviously, necessary. Someone has to do cadaster and other things like land management. But it is done very badly right now and in a very corrupt fashion. So either it’s reforming this institution or creating something new. That means transferring the functions and closing this thing down. In general, what we know from the experience of Ukraine, creating of new institutions is better, than trying to reform the other ones.
— But, first, we need to close the old ones.
— Yes, the old ones need to be closed.
— You said that regulations providing equal opportunities would not really pose a threat of losing agricultural land to foreign investors in the eyes of Ukrainian farmers. Could we talk about how much of agricultural land we have in Ukraine? Could you tell a possible price for one hectare and maybe revenue we could get annually?
— We have twenty-one million hectares are in private hands and about ten in public hand. But the problem is with public land, is that only one or two million hectares are… [properly registered]…, what happened during the 1990-es is that the land was given out to farmers or generally to the citizens. Usually, the best lands were given out. And the worst was left state-owned, which means that a lot of them is useless, but some part of it is relatively good.
— 31 million hectares in total?
— I think its 31 million hectares.
— But the President refers to 40 million hectares.
— You know, there are [different types of] agricultural land, [one that is] useful in growing crops, animal husbandry, some… not swamps… but let say waterlogged areas, that are also useful in agriculture, but they are not proper agriculture. And overall this is [more than] 40 million hectares, I think. And the 31 million hectares [are the lands], where you can actually plant crops.
— That could be potentially sold?
— State owns only about 10 million hectares. That is what can be sold. Large chunk of it is probably unsellable, because they are useless, the worst of the available lands. Best lands are concentrated in private hands that is 21 million hectares, and technically they are already sold, they are private. You can’t sell them; they are already sold. So essentially it will be sold among Ukrainian citizens or foreigners if foreigners are allowed to come in.
— Of course, the money will be circulating
— But it’s already privatized. If we are talking about land privatization because people sometimes mix these two issues. What can actually be privatized is a couple of million hectares of state-owned, properly [recorded] in cadaster and relatively good agricultural land. Not as much. It’s about only 10% of what the private sector owns.
— Can we refer to these 31 hectares?
— Generally, land market opens up to the private citizens. So it refers to the 21 million hectares. Private-owned. Everything else is a state policy. What will be done with the land — is a state policy, or, sometimes, [the policy of] local communities.
— What could be an approximate price for one hectare? I know it depends on the region, the fertility of the land, but still – what can be the forecast, how much revenue Ukraine could possibly get. How much Ukrainian businessman could get annually by selling the land?
— It depends. There are different forecasts. From one thousand dollars to several thousand dollars. It’s really hard to say, and I would be really careful with these assessments.
— There was even a version about ten thousand dollars, but that sounds pretty unrealistic?
— Yes, but in general the market will determine that. You know, you cannot estimate that. Before you have a market you cannot estimate what would be the market price of something. You need a market to actually determine how much it costs, taking into account everything in the country. Because again, I have to remind again that the absence of the land market in Ukraine is not the only bottleneck for investment. There are other bottlenecks for investment and development. Which, if unsolved, would leave this potential unrealized.
— What we are talking about is a strategic investment, not just fast money?
— Even more, for the strategic investor. You have to have a long term view, long term perspective, clear rules. Cause you are investing hundreds of millions or billions into the country. You should understand by what rules you are going to be working. If the rules don’t really work, chances are you will not invest. That’s the problem.
— The land market is open, the opportunities there, people invest. People will invest, but they have to be sure that these opportunities are actually there. That it’s not a fake. That they won’t be raided, confiscated, or something else would happen. So, they will have to have this long term perspective. Especially when we are talking about, essentially, an acquisition and big investment into agricultural lands. When it is done to launch some kind of big production there, which is always long term.
— So Ukraine, theoretically, would be awaiting some huge investments, if Ukraine opens the agricultural land market. But almost in all interview about the foreign investors and foreign investment, my guests outline the biggest problem in Ukraine – judicial reform. Could it be possible that Ukraine launches the opening of the land market, but the investments won’t come? Just because the judicial reform is not implemented yet.
— It could be possible. We should not underestimate the level of problem with the absence of the rule of law in the country. It doesn’t come to just some technical changes in the judicial system. It comes to the country’s culture. It’s really deeply rooted. Which is why I would be careful with any estimates of any reform effects. Because investment is really hampered by the absence of the rule of law. But that doesn’t mean that reforms don’t generate the result. It’s just not as big as maybe on paper. On paper, and in economic models I heard numbers up to 4% of GDP per year after the land reform. This will most likely not happen. Top-ups, in the best-case scenario, the most liberal reform, properly launched and properly handled will generate one and a half percent of additional growth. Which is huge. It’s essentially one third or half of the current economic growth. So a huge effect from just one reform if properly handled. And I would expect it to come in 2 or 3 years. Not earlier than that. It’s not going to be fast. There are no silver bullets, quick solutions for a country that has been failing for a quarter of a century. The management of expectations has to be done carefully. People in Ukraine often expect some unrealistic fantastic results, which are never going to happen.
— According to the World Bank, I know that you said that maybe it’s too early to foresee something for this land market. According to the World Bank, the lifting of the moratorium would bring to the Ukrainian economy from 700 million to 1.5 billion US dollars annually.
— Which is about from 0.5 to 1% of GDP growth per year. For one sequence of simple laws that is huge. This is a no-brainer, it should be done. But again we have to understand this is not the panacea. This is not what will make the poorest country in Europe one of the richest.