By the end of the year in Ukraine, most likely, the land market will be launched. At least, President Volodymyr Zelensky and the new government have such plans. The market structure itself will not be what the past government expected. Land will be able to buy, in particular, legal entities.
Large agricultural companies have begun the process of preparing for big sales - they are negotiating to attract financing, reduce investments in other areas, and some have already found money.
The main critic of the opening of the land market today is Russia. Recently, the propaganda resource of this country, Russia Today, published an article in which it accused the chairman of the state "Agrarian Fund" Andriy Radchenko of lobbying for the introduction of the land market in Ukraine in the United States.
THE PAGE asked Radchenko, chairman of a profitable state agricultural company, about what would open the land market, how the “Agrarian Fund” works, and what would happen to him next.
– President Volodymyr Zelensky announced last week that he intends to open the land market by the end of this year. Large agricultural companies are now opposed to the discovery. Against are also industry associations, for example, the All-Ukrainian Agrarian Council. So why do we need land reform?
– We have the Constitution of Ukraine and this is the constitutional right of citizens of Ukraine to own and dispose of their land. A moratorium is nothing more than a violation of the constitutional rights of citizens. It was introduced by people who were formed under the Soviet regime, and this, sort of, is a Soviet relic. Opening the land market and lifting this moratorium is the restoration of the constitutional rights of citizens.
Let's look at countries where there is no land market. There are only six of them: Congo, Tajikistan, North Korea, Ukraine, Venezuela and Cuba. Even in Russia, an open land market. And no speculation is taking place on the Russian market. Foreigners who buy large chernozem do not come. So the question is: why should this happen in Ukraine? In all countries that remained from the USSR, except for Tajikistan and Ukraine, the land market was open.
Obviously, the lack of legal land turnover for the past 17 years has led to a number of imbalances that impede the development of the industry. For example, farmers are forced to rent land instead of acquiring the necessary arrays. I note that for certain types of activities with a long investment horizon - gardening, berry crops, viticulture, flowers - the purchase of land is an obligatory component. Since in the Ukrainian legal system, any lease can be easily terminated, and the farmer will incur significant losses, having lost all investments in the plantings.
By the way, 50% of our land bank in processing is leased, of which 65% - in short-term leases up to 7 years. Accordingly, the Ukrainian agricultural sector is degrading to crops with a minimum added value and a high level of land depletion (rapeseed, soybeans, sunflowers). So, a number of artificially created barriers hinder the development of agriculture in Ukraine. It’s unpleasant for me to talk about this, but Ukraine lags behind in productivity even from Bulgaria and the Czech Republic.
– Recently, the Russian propaganda channel Russia Today called you the main lobbyist for agrarian reform in the United States. What are they all about? Are you really lobbying for agrarian reform in the States?
– For five years now, at the “Agrarian Fund”, we have been directly confronted with the problems of farms in which there is insufficient funding and which cannot attract loans and dispose of land. A similar situation in the banking sector. Banks cannot borrow land to provide financing. This creates problems. It is impossible to attract investment, even having a land plot. Working with farmers, we are well aware of this.
I came to Washington to find partners and raise funds for the work of the “Agrarian Fund”, but I began to receive questions from American partners about my attitude to the opening of the land market. And I was forced to comment on this reform, which is a priority for President Zelensky and the new government.
Imagine my surprise when exactly the Russian media reacted to this the fastest. On the next day, Russia Today published an article about the visit, that we are lobbying for the opening of the land market. Ukraine really appreciates our partnership with the United States of America, and we see this country as a strategic partner for the development of the agricultural sector.
– How is Ukraine perceived in the USA?
– There is very little information about what is happening in Ukraine. Perhaps the European partners know more, but it is in Washington that they know little about us. In particular, about the problems that the agricultural sector is experiencing. There are many questions, I answer them.
– Why did publications appear against you? And why were you called the “lobbyist” of USA land reform?
– For some reason, the word “lobbyism” has a negative connotation. In fact, this is pretty normal practice when you carry an idea and want to promote it. Do you call it lobbyism? Well, I lobbied the interests of Ukraine in relation to our partners. Therefore, I repeat, we see in the person of the USA and in the face of American companies truly strategic partners in the development of business and the agricultural industry in Ukraine. I have a certain vision of the land reform format. Because any market involves infrastructure, regulatory standards and phasing. It is impossible to adopt and build an effective land market by passing one law.
– Large agricultural companies are very important for the Ukrainian economy. And most of them are against the opening of the land market. What can you oppose to this?
– If we take large agricultural holdings, our large barons, then, probably, they are against the opening of the land market and in every way resist this through public organizations, politicians. Now the question. How much land do large landowners own? Their share is approximately 18% of the total land bank that is being processed. That is, it turns out that 18% dictates to others how to live.
In 2017-2018, most farmers asked if they supported land market openings. The survey was conducted as part of a project organized by USAID. So, support for the opening of the land market for farmers reached 79%. That is, if we remove associations, politicians and go directly to farmers, we will get the maximum support for opening the market.
– What will the opening of the Ukrainian market give?
– Ukraine is economically in a deep hole. We went down quite hard. And the tasks set by the Cabinet of Ministers - to ensure 7% of economic growth per year - cannot be achieved without opening the land market. Removing restrictions on the sale of land is one of the drivers of economic growth. In addition, Americans are interested in Ukraine as a partner in the more global issue of food security. We are the leading positions in sunflower oil, export of corn, wheat, soy. But the opening of the land market can increase productivity, and, accordingly, Ukraine will reach top positions, the second or third place in the world in many other crops and agricultural products.
– You said that if the land market opened, the Agrarian Fund could have taken on some kind of land bank function. How do you see this model?
– Many consider the land and the owner separately, and the financial institution separately. And if you lend, then later it's all pledged. But there are other models. For example, how American institutions work with mortgages and real estate. When a mortgage is initially owned by a financial institution, and the subject has the opportunity to redeem it ahead of schedule or overtime.
Therefore, when the question is, for example, about financing farmers for the purchase of land, the state can help with a resource. That is, to allocate money for the purchase of land, and the land itself with installment payment. So that then an individual repays its price and interest. But if an individual has money, then there is an opportunity to repay ahead of schedule. "Agrarian Fund", without fixed assets, is actually a bank. That is, we can be compared with a bank. If we are talking about creating a new bank, the question here is, you need to create another new bank, if there is already such a structure. And it works successfully.
– Let's move on to the work of the “Agrarian Fund”. What is the purpose of your company?
– The “Agrarian Fund” today is the most successful state agrarian company. Our main function is to support agricultural producers. We finance agricultural producers at the stage of concluding grain purchase and sale agreements and finance forward contracts. Our main mission is to support the medium and small farmer.
– At the time, the “Agrarian Fund” had financial problems. What were they connected with?
– We need to take the whole history of the “Agrarian Fund” in order to understand the scale of the tragedy: in what condition it was when our team arrived. The fund was established at the end of 2013. In 2014, when the team of Viktor Yanukovych left the territory of Ukraine, 2.6 billion hryvnias were withdrawn from the Agrarian Fund through Brokbusinessbank. Other assets were also frozen. These were deposits, shredded and placed in other banks, assets located in the ATO zone — we were talking about 90,000 tons of grain that lay on elevators, which were difficult to get to.
For four years, we have made a lot of efforts to unfreeze assets and bring the company into working condition. Working assets at the beginning of the year amounted to 6.3 billion hryvnias. This is 2.5 billion borrowed capital of state-owned banks and 3,8 billion - the company's own working capital. The company has been showing profitable activity for all four years, it always exceeds the financial plan approved by the Cabinet of Ministers.
– Well, if you compare with “Energoatom” or the same “Ukrnafta”, what position are you in?
– We are among the top 20 state-owned companies in terms of profit, taxes and dividends paid. And in the top 100 private sector companies in terms of taxes paid. Our average salary increased from 5 to 50 thousand hryvnias in four years. Our employees value their work.
– What now with those two billion hryvnias that were withdrawn through Brokbusinessbank?
– The authorized fund of the “Agrarian Fund” was formed by bonds of an internal state loan with a certain coupon - this is 14.25%. And in October last year, the state completely paid off all its obligations on bonds and coupons. If we look together at the working capital of the current company and at those percentages, dividends, taxes, value-added tax, we paid in favor of the state, then this amount covers all liabilities. That is, from this point of view, after 2.5 billion hryvnias of working assets were stolen, for four and a half years we worked out all the obligations that the state bears. But, of course, this money fell on our balance by burdens, losses.
– You blame the previous management of the “Agrarian Fund” for corruption. Withdraw 2 billion hryvnias or 40% of the capital in 2014 through Brokbusinessbank is beyond the bounds. But do you really want to say that today there is no corruption? Grain does not disappear, unprofitable for the company and profitable for individual companies operations are not carried out?
– Exactly. True, the total overcoming of corruption was not possible for us by force, but by an economic approach. After I won the personnel competition (to be honest, there was no corruption during the competition), I managed to form a new team. First, of course, keyframes. These were mainly people associated with financial management, management, risk management, qualified lawyers and executives who had a readiness for such challenges and a margin of safety.
After some time, when it was possible to change the system of labor motivation, we turned our attention to the whole team, being able to select qualified personnel in the competitive labor market and create decent working conditions for those workers whom we respect and who value the company's values.
Since 2015, the company has been working with a payment system based on KPI, a medical insurance system for employees, a social security system, a staff training system, internships and a personnel reserve, and a loyalty system. But these are only fragments of changes in the overall architecture of the enterprise. The “Agrarian Fund” was rebuilt following the example of a classic American trading company.
– Can you name the concrete steps that, as you say, allowed to rebuild the enterprise? Because we hear the same phrases every day from the directors of “Ukrzaliznytsia”, “Ukrspirt”, and state mines.
– “I understand your skepticism very well.” But let's look at the current system of corporate standards in the "Agrarian Fund". First, we segmented our customers, and, accordingly, approaches and standards for the sale of products, their service. For medium and small businesses in the regions, these are standard procedures and agreements that are not subject to change. There is a standard for customer assessment and monitoring (scoring). With large customers - a personal approach, study and understanding of customer needs, individual relationships and solutions, increased attention of services when negotiating conditions and agreements.
Secondly, we changed the organizational structure of the company, which provided for a modern distribution of the functions of the front, middle and back-office divisions, divisions that administer and support operations, control operations and monitor risks.
Thirdly, they developed a system of delegation of authority in decision-making, personal and collective, a system for monitoring compliance with authority. Fourth, we have implemented the existing collegial decision-making bodies: a risk management committee, a budget committee, and a personnel commission. Fifthly, they introduced preventive measures to prevent corruption in the form of a system of provisions, regulations and standards.
Sixthly, we have developed and implemented a system of regular reports and monitoring. Seventhly, strengthened control and audit. Today, the “Agrarian Fund” undergoes both internal audit for the board, which is conducted by the internal audit service, and external - for the shareholder. I also want to note that we are the only agrarian state-owned company that conducts external audits of international audit companies and this was solely thanks to our initiative. So, in 2015, the audit was conducted by BDO, in 2016-2018 – Backer Tilly.
Eighthly, on the recommendations of anti-corruption bodies, we have developed an internal anti-corruption policy. In particular, the company’s structure includes a specially authorized person to identify and combat corruption. Functionally, this anti-corruption is subordinate to me, as the chairman of the board, formally - to the shareholder represented by the Ministry of Agriculture.
So, in the four years that I lead the company, our management has developed zero tolerance for corruption. Therefore, the five anti-corruption bodies had nothing to do in our company. Our internal audit service and economic security service itself identifies cases of theft. And where we recorded cases of theft, we ourselves formed the evidence base and passed it to law enforcement agencies. So, today, in 2019, we get higher wages than the average civil servant in Ukraine, but thanks to this we have the motivation that allows us to set ambitious goals and achieve results.
By the way, consider an example of the same eternally inherent in state-owned companies stockpile loss. Over the past three years, “Agrarian Fund” wrote off just 4.2 thousand tons of grain. In fact, only 0.1% of the total grain contracted by the state company in 2018 was lost, provided that the average loss in our region is from 7 to 10%, including by private operators.
– It sounds beautiful, but tell us better about the financial results of your work? Did your corporate reforms affect them?
– We have been profitable for four years in a row. Last year, we ended with a profit of 146 million hryvnias. This is a little more than 101% of the implementation of the financial plan. We paid the state this year; this is an unprecedented indicator, which the Cabinet of Ministers of Ukraine set for us - 90% of dividends on profits. That is, in fact, the government left nothing for the development of the company. We have paid more than 130 million hryvnias of dividends to the state. This is not counting all the taxes paid. In just 4 years, we brought the state 550 million hryvnias of profit and paid 480 million hryvnias of taxes. Since 2015, the company's net assets have almost doubled: from 3.7 billion hryvnias up to 6.3 billion hryvnias.
In order to correctly evaluate at least these results, one should remember that the macroeconomic environment that has been in our country for the past 4 years. There is a war in Ukraine, high inflation has been overcome and not everyone still believes in exchange rate stability. Accordingly, the volume of lending to the Agricultural sector for four years actually stands still. One of the main reasons is the level of interest rates. Even we, a large company and a first-class borrower, are forced to take loans from commercial banks at an average rate of 23.5% per annum! The weighted average cost of capital for our company is 19.9%. It consists of a cost of authorized capital of 14.3% for government bonds and an average effective rate of 23.5 for bank loans. And in such circumstances, we return this money to our lender and more generate profits for the budget. I think this is success.
– What is the reason for the investigation of NABU against the "Agrarian Fund"?
– The National Anti-Corruption Bureau, in my opinion, should, first of all, investigate corruption of top officials, and not the activities of profitable corporations. Well, the nature of the matter itself did not understand. As far as I understand, the essence of the case is commercial activities in 2017-2018 related to the purchase of fertilizers. And also with the fact that we attracted loans for the purchase of fertilizers. NABU believes that these fertilizers could be sold at a certain point in time. I note that in the end we made a profit on this operation, and considerable. I just realized that even if there is not a single statement, and the company is profitable and successful and still belongs to the state, it naturally arouses interest among law enforcement agencies. I concluded for myself that you just need to be calm about this.
– And how did it turn out that prices do not converge so much?
– We have a market overview at the stage when we decide whether to buy or not to buy fertilizers. We discussed from the very beginning with suppliers, if we do not have a product sold (and it has its own expiration date), then we can make a rotation. Because it is a matter of storage, and we do not have warehouses, we keep it with contractors. In this regard, questions have arisen in NABU. That is, these are not standard commercial conditions that the “Agrarian Fund” agreed on the rotation of fertilizers in case the expiration date has expired. Let them understand. We definitely have a market price, transactions were made on exchanges, we did not make any market conditions, the products we bought, the balances are on the balance sheet. Moreover, verified by survey companies are insured and mortgaged in state-owned banks, which also monitor them.
– How do you feel about the idea of creating a company that, instead of the Cabinet of Ministers, will manage all state enterprises?
– On the one hand, this is a normal idea, since it solves all the political risks that may arise. Managing enterprises in privatization with the help of professional managers is a great idea. Another question, how this company, in principle, will manage assets, is not clear. Even in the structure of the Ministry of Agrarian Policy and Food, there were six hundred state enterprises. And if you add here “Naftogaz of Ukraine”, Odesa Port Plant and other large assets, it is not clear how such a monster will cope with the tasks. It seems to me that it would be more correct to manage assets in the cluster way.
– The current Prime Minister said that he intends to privatize all the largest state-owned companies in the country in the coming years. What do you think of it?
– I believe that the vector is absolutely correct. But then we need to look at each enterprise separately. For example, selling the “Agrarian Fund” is useless, if only on the grounds that we have no property. We are de facto traders. By the way, highly profitable traders.
– Recently, in a study by Ukraine Economic Outlook, it was proposed to create a concession on the basis of your company. What do you think about this?
– We considered three models - privatization, concession and liquidation. What will happen for the company, for the state, the pros and cons of a particular case. And they came to the conclusion that the concession agreement and the transfer to the management of the "Agrarian Fund" would be much more interesting to the state. And the company itself would give a serious impetus. In addition, to sell in our case is practically nothing. The Agrarian Fund has a building, tables, chairs. Our main asset is a number of key people and the experience that has been accumulated over these five years.
Therefore, from the point of view of privatization, no matter how much we talk with similar companies or interests, they still voice one thought. By and large, you can invite 10 key employees. They stood up and went away - and that’s all. There is another option to liquidate the company. But why kill something that brings good profit? It is pointless. This company can be used in many important projects for the state in the future. Tell me, if I am mistaken, but the state does not have so many successful examples and management teams like ours, with a super-successful reputation and international relations. Companies those are able to implement important projects and bring budget revenues in the same size as us.
Despite the significant success of the last three years, due to the high average weighted cost of capital at 18% (taking into account the 14.25% interest rate on government bonds entered into the authorized capital and 22% of the cost of commercial loans), reserve provisions for losses associated with unlawful actions of the previous management, so far we have not succeeded. After the loss in 2014 during the liquidation of Brokbusinessbank and Radical Bank, 2.5 billion hryvnias the uncovered loss stored to this day is about 2.0 billion hryvnias.
– So what do you stand for?
– I am for the idea of a concession. But, you must understand that I have been working in this company for almost five years. And it’s a pity, to be honest, all that we did is to take and eliminate. What can be the format for transferring the “Agrarian Fund” to concession? Management with new powers and flexibility, no less than in the private sector, is obliged not only to generate profit for investors (in certain proportions - the Ministry of Finance and the concessionaire) but also to maintain stable prices for flour products and provide agriculturists with fertilizers and sowing loans. I consider it important to note that when transferring to a concession the social functions of the "Agrarian Fund", as defined by the charter, can in no way be reformatted.
Regarding the future investor who will acquire a concession for the “Agrarian Fund”, the most optimal format for cooperation, in my opinion, may be closing a hole in the fund balance sheet for the concession period. We have already paid out the payment of “amortization losses”, and now we need to think about how to develop the company further. I have already said above about my vision of concession as the optimal scenario for the development of the campaign, and the use of its accumulated goodwill.
– So you have your own format of land reform? How does it coincide with the government?
– It is extremely important to allow the agricultural industry to develop freely and organically, as well as to avoid a possible short-term collapse of production, which is possible with the mass formation of land banks by non-residents after lifting the moratorium (which is inevitable when users change). To this end, the Ukrainian government will ensure the operation of a special fund that can lend to Ukrainian farmers at low rates and temporarily limit the admission of non-residents and large businesses to the land market.
I think the transition period can be up to 5 years. Today, by the way, it is proposed to transfer the agro-subsidy fund, about 7 billion hryvnias to loans to farmers. But these funds are clearly not enough, given that today farmers do not have enough of their own money even for sowing. In fact, there are a lot of details on the functioning of the market. For example, how should tenders be held? I absolutely support Goncharuk in that the best solution is an electronic platform. As far as I know, I mean the reformatted StateGeoCadastre site, which is used today for leasing state land. This will protect the owners from any criminal intentions of raiders and "dealers". At the same time, I would limit the maximum lot size put up for auction, for example, to 50 hectares.
It is also extremely important to provide concentration limits. Unlike the government, I would increase the maximum land bank in the same hands in the country from 0.5% to 1% and reduce the norms in the region to 15% and society to 35%. But these are the details that will still be discussed. I am sure we will come to the best option. As with many technical details.
For example, use state land at the start of a market launch to indicate price levels by region? Of course, small arrays will be cheaper than solid arms but will be fixed in approximately the same order. The same price indicators can be used for compulsory redemption of land by the state, adjusted for bonitet. In a “chess” situation, for example, when someone buys a plot in the center of a foreign field and tries to blackmail the owner at a sky-high price. Do we need a separate state land regulator with the right to buy land first priority, following the example of the EU? In fact, there are dozens of such details and all of them need to be discussed.