Ukraine’s land reform: success within reach but Rada needs to act

On the eve of 100 days of the land market, the last legislative cornerstone is making affordable loans available to small and medium-size farmers. To ensure that the benefits of land reform reach all Ukrainians, the Verkhovna Rada needs to pass the draft law On the Partial Credit Guarantee Fund in Agriculture.

Mykola and his family have been growing vegetables in the Kyiv region for almost twenty years. He cultivates more than 400 hectares of land shares leased from farmers. The farm has a modern warehouse, automated sorting and packaging facilities and all necessary equipment. Mykola is proud that he has made most of his investments on his own, never requesting subsidies from the state or ever withholding salaries to workers. Having invested heavily in the restoration of the irrigation system, he annually spends considerable resources on its maintenance and protection.

But if he loses the land, he will lose everything.

Now, with the land market opening, Mykola finally has the opportunity to secure his family’s future. He can buy out the land, invest unconditionally in the production infrastructure, and finally hand over the business to his two sons, who work on the farm with their father.

During the visit of Anna Bjerde, Vice President of the World Bank, to Ukraine last month, she and I had the opportunity to visit Mykola’s vegetable farm and meet him and several other farmers from the Kyiv region. Their farms ranged in size. One farmer cultivates 2 hectares, another 20; Mykola’s 400 hectares are less than the 700 hectares cultivated by a compatriot. However, as we discussed their challenges with them, they all spoke of their major concern: how to protect the investments they have made in infrastructure and/or provide funding for developing their business.

Ukrainian Prime Minister Denys Shmyhal meets with World Bank Vice President for Europe and Central Asia Anna Bjerde

The opening of the land market on July 1 this year gave hundreds of thousands of small and medium-sized farmers in Ukraine a new type of asset - land. Now one can sell land, buy it with a mortgage, or take a business loan secured by land they own. This is without exaggeration a historic event, made possible by the leadership of the President of Ukraine, the will of the parliament and the hard work of the government. But there is a last, but essential task - to ensure the rapid provision of loans to small and medium-sized farmers on affordable terms. To this end, the Verkhovna Rada needs to adopt as soon as possible the law on the Partial Credit Guarantee Fund, which is included in the agenda of the current session.

Limited access to finance, including bank loans, has long been a barrier for small and medium-sized agricultural producers, who produce more than 50% of Ukraine's total agricultural output. According to a World Bank study, most of them do not have access even to basic banking services. Banks mostly work with farmers whose farms are larger than 500 hectares and who grow grain and oilseeds. Moreover, interest rates on loans for SMEs are on average 5-7% per annum higher than those available for large enterprises. If loans are attracted, they are short-term to cover current expenses. Lack of long-term loans, as well as adequate collateral and credit history, have long deprived small and medium-sized agricultural businesses of the opportunity to invest in development.

Partial credit guarantee (PCG) funds operate successfully in many countries around the world. Such funds allow banks to cover part of their losses in the event of a borrower's default. The Draft Law now being considered by the Parliament proposes to create a PCG fund in the form of a non-bank financial institution with the participation of the state, under the supervision of the National Bank of Ukraine. A special law is needed for the Fund to have an independent management structure and be separated from political influence. This will allow the fund to effectively cooperate with international financial institutions and foreign companies in order to raise funds for its activities - and allow for over 20 billion hryvnas in loans to farmers, with a maximum term of 10 years.

In the context of today’s land market in Ukraine, when prices have not yet formed and the liquidity ratio of land as collateral is one of the lowest, the PCG Fund will make lending to small and medium agricultural producers for banks less risky and more attractive, result in more affordable interest rates for borrowers, and longer times allowed to repay loans.

October 9th will mark 100 days since the opening of the land market. The government has managed to create the basic conditions for its launch, introduce a system of restrictions and safeguards against significant abuses and speculations, and provide publicly available information on land transactions. The adoption of the Law on the Partial Credit Guarantee Fund in Agriculture is the last cornerstone of the legislative foundation of land reform. Subject to the prompt adoption of the Law, the World Bank will be happy to support Ukraine in the rapid establishment of the Fund, as well as the earliest possible implementation of a temporary government program to provide portfolio guarantors to those farmers who need them now.

Mykola is one of more than 30,000 officially registered individual farms and more than 4 million sole proprietors who work in Ukraine’s agriculture. Increasing their financial capacity will significantly expand opportunities for private investment in infrastructure and processing, increase efficiency and competitiveness, create value chains – and help bring about prosperity for them and for all Ukrainians.

Arup Banerji, World Bank Regional Country Director for Eastern Europe

*The author’s views and opinions do not necessarily reflect the position of the agency.