Rent seeking on land

rent-seekingHow the status of land in Ukraine affects its owners and big agribusinesses

The issue of the land reform, especially of lifting the moratorium on the sale of farmland, remains one of the fetishes of Ukrainian political life. Politicians and experts reiterate the threat of land being “bought up dirt-cheap” from farmers in case the moratorium on its sale is lifted. However, in reality, for the second decade in the row the moratorium has served the interests of big agribusinesses: their owners can appropriate the lion’s share of land income, while the real owners of the plots get next to nothing.

The lack of the land market puts the owners of land plots on uneven playing field compared to agricultural firms in terms of access to bank loans for machinery, seeds, or fertilizers. The farmers, who own the plots, cannot take a loan secured by land, and therefore usually cannot get the money necessary to cultivate it properly on their own. They also have no chance to sell their plots due to the moratorium. That leaves them with the only option: to lease out the land on discriminatory terms to big agricultural firms, which are usually monopolists on the land lease market in some areas. Otherwise, if farmland stays idle for a long time, the plot owner may lose the right to it through the misuse of land.

The data of the State Statistics Bureau’s Bulletin “Basic Economic Indicators of Agricultural Production by Agribusinesses” indicate that out of the overall costs incurred by agricultural companies for crop production (the total of UAH 156bn in 2015), only UAH 18.24bn was spent on the lease of land plots. The same year, the net income of profitable agribusinesses involved only in crop farming, amounted to UAH 109.4bn. In this way, out of UAH 127.7bn of income earned from the cultivation of Ukrainian land, its owners received only 14.3%, while 85.7% went to the holders of leasing rights — large agricultural companies.

Unregulated market of land lease rights

The right to lease today costs much more than the rent fee itself. This is not normal and suggests that the money is being plundered from peasants — the land owners. Land lease rights are assigned through the sale of corporate rights (i.e. the sale of the company that holds the lease rights under the relevant contract). The situation is so favorable of agribusinesses that for the last 15 years they have been actively opposing the introduction of the land market, which could undermine their monopoly and make them pay several times more to the owners of land plots. As is traditionally the case in many other areas of life in Ukraine, their own money-focused interests were covered by the pumping up of phobias amongst farmers and the population in general, as well as by lobbying the delay of the land reform at the legislative and executive branches, on the level of institutional capacity building and the launch of necessary instruments, especially the single state electronic land registry, in full scope.

As a result, the changes that could have been accomplished within three to five years, if such was the will of the lobby and elites, have never been realized till this day. Recent comments of officials in charge suggest that they are unlikely to become reality even by 2019–2020.

Truth be said, there has been some progress in terms of the land register. In 2013, its electronic version was launched. In 2015 users obtained access the e-database of land plot owners, the Public Cadastre Map.

This gives a number of benefits: one can find how accurate the information about a given land plot is; use the feedback function to enquire about inaccuracies. This year, the State Land Committee developed software to automatically exchange information on land plots between itself and the Ministry of Justice. With the human factor extracted, the process could become more accurate and less vulnerable to corruption. Also, disclosure of 100% of orders on management of lands has been introduced at the Public Cadastre Map to enable full public control over it.

Yet, it is yet not enough for the state land register to fully perform its function. A number of mistakes have been made in the process of building it: the information on all land plots is not full; land cadastre information has not been uniformed; and new evaluation of farmland is badly needed.

The state land register is filled with data very slowly. In February 2016, the then Agriculture Minister Oleksiy Pavlenko said that the e-database was only 20%-full. According to the land geological cadastre, all lacking information on land plots can be gathered no sooner than in “2-3 years”.

Whatever the hurdles, 15 years after the first moratorium on land sale the head of the land geological cadastre claims that the state is not ready for the land market. The Minister of Agriculture says that there will be no votes in Parliament to support full launch of it. Instead, both offer alternatives.

The state geological cadastre department has suggested lifting the moratorium on the land that remains in public ownership first. Then, a few years later, do so with privately owned land plots, unless reasons come up to postpone it again.

The Ministry of Agriculture went further and offered a surrogate market instead of a full-fledged one: trading in lease rights and emphyteusis, instead of trading in land.

Redundant owners of land plots

A closer look at the arguments offered by the Ministry of Agriculture in favor of the surrogate land market leaves an impression that the initiative is rather a desperate attempt to adjust the imperative IMF requirements on launching the sales of agricultural land to the pressure from Ukrainian agribusiness lobbyists to preserve their monopoly on rent-seeking from land.

Ukraine’s effective land legislation does not allow free circulation of land leasing rights on farmland owned by someone else. Sublease by an initial lease holder is also only possible when the owner does not object that, and the contract specifically states so.

As a result, agricultural companies that hold leasing rights (after imposing long-term lease contrats on land owners on discriminatory terms) are unable to sell, exchange or donate these rights to anyone else. This limits their opportunities to monetize land and convert their ownership of leasing rights into hard currency.

The Ministry of Agriculture proposes to change this with a series of amendments in the Land and Civil Codes, and the Laws on Land Lease, State Registration of Immovable Property Rights and Their Encumbrances.

Art. 25 of the Law On Land Lease is to be complemented with the clause on leaseholder’s right “to sell his land leasing right or to sublease the land plot.” The clause on the compulsory mention of this in the lease contract is to be eliminated from Art. 8.

Further on, agricultural companies will be able to resell their land leasing rights to one another within the timeframe of the lease contract. For that, they will not have to seel the entire companies. Also, the leasing rights will be used as collateral for a bank loan.

When doing so, they will have to notify the owner of the deed (for instance, that his or her land has been subleased to a different company at a far hight price): The subleasee shall notify the land owner about his newly-gained subleasing rights within 14 working days after getting such rights registered with the state regulator.

If that happens, the law leaves virtually no opportunities for the land owner to terminate the inconvenient initial lease contract. Art. 30 of the Law On Land Lease mandates that the contract is only changed upon mutual agreement. If the agreement is impossible to achieve, the dispute is taken to court. Yet, Art. 32 of this law allows the lease rigts holder to terminate contracts unilaterally, but gives no such opportunity to the owner – even through court (unless the lease rights holder violates contract terms).

This means that the land owner may have no chance to take his or her land back before the lease contract terminates – even through court and with the compensation of losses. In this case, the Law On Land Lease stands fully to the benefit of the land rights leasee.

Changes proposed to Art. 102-1 of the Land Code will make it impossible for the owner to transfer to anyone the land plot which is being leased based on the emphyteusis, i.e. the right to use agricultural land. This means that current land leasees will be able to impose on the owners emphyteusis with them and on their terms exclusively. Thus, agricultural companies will be secured from competition on the land shares that are currently leased out.

Emphyteusis, even though slightly different from land leasing right, is also subject to some of the changes, proposed by the Agriculture Ministry. The core remains unchanged, i.e. emphyteusis can be put out on tenders, sold, signed away and used as collateral in banks. Emphyteusis owner can lease out land plots. The agreement on sale of leasing rights and emphyteusis will be limited to the 50-year term. Every resale of emphyteusis will bring the land owner a “bonus” of 10% of the price at which the land plot was initially leased out.

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International practices show that sales of land leasing rights or emphyteusis are used only in those countries, where land sales are banned. Yet, where there is no full-fledged free trade in agricultural land, there can be no proper trade in leasing rights.

The moratorium on land sales has created the environment for pushing down lease payment rates and redistribution of rent revenues from the use of land in favor of leaseholders.

The land market in Ukraine, even under its current conditions, would definitely be far more competitive than the lease market is. For instance, businesses could buy land for further rleasing out in packs of plots. By contrast, leasees are only interested in huge amounts of it.

If the moratorium is abolished some day, land rental rates might increase sharply, while costs of land leasing rights might fall due to increased competition. Thus, if the trade in leasing rights in introduced now, agribusinesses, bansk which lend to them, and political forces will find every way to lobby the moratorium on land sale for good: this is a matter of huge money.

Agribusiness and even banks, as well as the IMF, could well be satisfied with the introduction of the market of leasing rights and emphyteusis. 50 years, i.e. the maximum term of emphyteusis, will be enough to reassure investors and loan providers about profitability of the project. The right to sell leasing rights allows withdrawing the money invested into the project at any convenient moment, should the business situation or priorities change.

The benefit such a quasimarket for land use offers huge agriholdings is the lack of virtually any limits on the floor of rented plots. If the proper land market were created and launched, it would most likely face size restrictions (100, 500 or 10 mn hectares), thus preventing the emergence of latifundias. Now, one can buy leasing rights for 1 or 10 million hectares for 50 years.

At the same time, trade in land use rights gives magnates an opportunity to earn hefty sums on acting as mediators between Ukrainian owners and foreign ultimate buyers of long-term leasing rights.

For Ukraine’s future, however, it is important that land reform ends to serve the interests of land plot owners rather than a narrow circle of magnates or banks, as current initiatives from the Agriculture Ministry entail.

Meanwhile, most owners of land in Ukraine (they are often pensioners who received it after Ukraine got independence) know nothing of the nuances of market economy, stock market quotations or leasing right pricing. Therefore, this sector needs strict state regulation.

The Anti-Monopoly Committee should stop turning a blind eye to the fact that the market of land plots within every town or village is either monopolized or oligopolized by a handful of players. This means that the available regulator must interfere, or a new one must be created: a specialized one to set up minimum rent rates and the price of land tied to it in every administrative unit.

Otherwise, the lion’s share of revenues will still be appropriated by a dozen or a hundred of families and agriholdings whose flourishing, helped by tax evasion and taking money offshore, will result in the impoverishment of more and more Ukrainians.

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