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Ukraines Land Reforms Risk Going Wrong

August 11, 2011

Martin Raiser, World Bank Country Director for Ukraine, Belarus and Moldova

Soon the Verkhovna Rada will commence the first hearing of the “Law on Land Market,” whose passage would permit lifting the moratorium on agricultural land sales. The World Bank among other organizations has long supported the development of a land market in Ukraine. But we now see a risk that the moratorium may be lifted before the conditions for a proper land market are right. Our concerns are related both to the current draft “Law on Land Market” and to the supporting institutions needed to make it work.

With respect to the draft Law, two main shortcomings should be addressed during the forthcoming parliamentary debate. First, the draft Law imposes too many restrictions on the types of owners who can purchase land. For instance, the exclusion of legal entities and the complete ban on land purchases by non-nationals will reduce demand, thereby keeping land prices low and investment into agriculture, much needed to increase its productivity, away. The restrictions may be hard to enforce and are not in the interest of current land owners. Preemptive buying rights for the state are no protection – instead they create the risk that land reform in Ukraine may ironically lead to the renationalization of farm land; quite the opposite of what was intended.

Second, the draft Law does not as is often claimed create conditions that would facilitate the flow on financing to agriculture. Banks cannot hold on to land taken as collateral because as legal entities they need to sell it on within six months. Moreover, land re-sales within five years of purchase are to be heavily taxed, further discouraging the development of a land mortgage market. The proposal to create a state-owned land mortgage bank is a poor substitute for creating conditions in which commercial banks would be prepared to lend against land as collateral. Financing mechanisms such as staggered payment contracts to allow credit constrained farmers to purchase land, underwritten by commercial agri-financing companies could also be envisaged. The point is this: an asset that is highly restricted in who can own and who can purchase it is worth little as collateral and establishing a market in it is unlikely to unlock much private financing. 

Assuming these issues can be addressed, a good legal framework alone is not sufficient to make sure Ukraine gets a functioning land market. This is why the World Bank has supported the development of a new computerized cadastral information system which is now being installed in land offices across the country.  This system holds the data on land parcel location and ownership. We expect the system to be ready by mid-2012. But to protect land rights and create a transparent system, the cadastre needs to be linked to the land rights registry held in the Ministry of Justice. These links are not ready, creating significant risks. Moreover, to make the land market work effectively all market participants should have access to information concerning their rights but also concerning land quality and land valuation. Buyers and sellers should have a right of appeal.  

A survey of farmers, conducted with our financial assistance, suggests the majority are not yet ready for the opening of the land market. We agree Ukraine is not ready. With concerted efforts by all interested stakeholders, the legal and institutional conditions for an effective land market in Ukraine can be created in the course of next year. Ukrainian legislators and policy makers should not rush this reform. The risks of getting it wrong are too high.