3. Farm Restructuring Outcomes: Evidence from the Field

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Ukraine Reviewof Farm RestructuringExperiences Public Disclosure Authorized

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Zvi Lerman

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Ukraine Review of Farm Restructuring Experiences

Zvi Lerman Csaba Csaki

Technical Papers are published to communicate the results of the Bank's work to the development community with the least possible delay. The typescript of this paper therefore has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. Some sources cited in this paper may be informal documents that are not readily available. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. The World Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. The boundaries, colors, denominations, and other information shown on any map in this volume do not imply on the part of the World Bank Group any judgment on the legal status of any territory or the endorsement or acceptance of such boundaries. The material in this publication is copyrighted. The World Bank encourages dissemination of its work and will normally grant permission promptly. Permission to photocopy items for internal or personal use, for the internal or personal use of specific clients, or for educational classroom use, is granted by the World Bank, provided that the appropriate fee is paid directly to Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923,U.S.A., telephone 978-750-8400,fax 978-750-4470.Please contact the Copyright Clearance Center before photocopying items. For permission to reprint individual articles or chapters, please fax your request with complete information to the Republication Department, Copyright Clearance Center, fax 978-750-4470. All other queries on rights and licenses should be addressed to the World Bank at the address above or faxed to 202-522-2422.

ISBN: 0-8213-4666-0 ISSN: 0253-7494

Cover photo: "Corn harvest in Central Ukraine," F. Studiya, Kiev,Ukraine (1998).

Zvi Lerman is a professor at the Hebrew University of Jerusalem and consultant at the World Bank's Development Economics Research Group. Csaba Csaki is lead agricultural adviser in the Environmen- tally and SociallySustainable Development unit of the World Bank's Europe and Central Asia Region.

Library of Congress Cataloging-in-Publication Data has been applied for. Contents

Foreword ...... v Preface ...... vii Abstract ...... ix Summary and Conclusions ...... xi Introduction .. 1...... 1. Framework for Farm Restructuring in Ukraine ...... 3 2. Farm Restructuring Projects Administered by International Donors ...... 7 3. Farm Restructuring Outcomes: Evidence from the Field ...... 17 4. Financial Performance of Reorganized Farm Enterprises ...... 27 S. Social Infrastructure and Standard of Living ...... 33 6. Production and Productivity: Farm Enterprises and Private Farmers ...... 39 7. Reorganized and Non-Reorganized Farms Compared ...... 43 Selected References on Land Reform and Farm Restructuring in Transition Economies . 51

Figures in Text A. Negative Evaluation of Workers's Behavior .xii B. Average Size of Family Farms with and without Leased Land .xv C. Structure of Family Income .xvi 2.1 Distribution of Successor Farms in Donor Projects .11 2.2 Farm Reorganization and Reallocation of Land .13 2.3 Inequality of Land Distribution in the KHF Odessa Project .15 3.1 Distribution of the Number of Founding Members .19 3.2 Structure of Land Tenure in Private Farms .24 4.1 Breakeven Analysis for Reorganized Farms .31 5.1 Structure of Private Farmers' Family Income .37 5.2 Assessment of the Families' Standard of Living by Private Farmers .37 5.3 Changes in the Families' Economic Situation: Past and Future .38 6.1 Product Mix in Enterprises and Individual Farms .39 7.1 Negative Evaluation of Workers' Behavior .45 7.2 Negative Evaluation of Business Environment .45 7.3 Stochastic Frontier: Sales vs. Animals Plane .49 7.4 Data Envelopment Frontier: Sales vs. Animals Plane .49

Tables in Text A. Break-up of Large Farms in International Donor Projects in Ukraine .xii B. Margin of Sales by Reorganization Category: 1997 and 1998 .xiii C. Median Yields in Farms of Different Categories .xiii D. Number of Shares Used by Single-Founder and Multi-Founder Farms .xv 1.1 Sample Design: Number of Farms by Oblast and by Reorganization Strategy. 4

iii 1.2 Characterization of Organizational Forms ...... 5 2.1 International Farm Restructuring Projects in Ukraine: March 1999 ...... 7 2.2 Main Activity Stages as Implemented in Three Farm-Restructuring Projects ...... 9 2.3 Farm Restructuring in International Donor Projects in Ukraine ...... 10 2.4 Multiple Fragmentation of Ronco Farms During Restructuring ...... 11 2.5 Distribution of Organizational Forms Among Restructured Farms ...... 12 2.6 Distribution of Land and Average Farm Size in Ronco and IFC Project Farms ...... 13 2.7 Reallocation of Land to Asset Farms in the KHF Odessa Project ...... 14 2.8 Titling in Ronco Farms: Status as of February 1999 ...... 16 3.1 Distribution of Farms by Organizational Form ...... 17 3.2 Division of Parent Collective Farms in the Process of Reorganization ...... 18 3.3 Mean Farm Sizes for Different Groups of Enterprises ...... 18 3.4 Distribution of the Number of Founding Members and Average Farm Size ...... 19 3.5 Number of Shares Used by Single-Founder and Multi-Founder Farms ...... 20 3.6 What Shareowners Did with Their Land Shares ...... 21 3.7 Functions of Central Management ...... 22 3.8 Subdivision Independence ...... 22 3.9 Reasons for Becoming a Private Farmer ...... 23 3.10 What Private Farmers Received on Exit from Collective Enterprise ...... 23 3.11 Land Leasing Among Private Farmers ...... 25 4.1 Average Balance Sheet Structure of Reorganized Farms 1996-98 ...... 27 4.2 Current Ratios: 1996-1998 ...... 28 4.3 Structure of Accounts Payable: 1996-1998 ...... 28 4.4 Turnover Ratios: 1997-1998 ...... 29 4.5 Profit and Loss Account of Reorganized Farms ...... 29 4.6 Profitability Measured by Margin of Sales: Ratio of Profit/Loss to Sales ...... 30 4.7 Structure of Costs: 1997-1998 ...... 30 4.8 Structure of Input Costs:1997-1998 ...... 31 5.1 Household Services Provided by Farm Enterprises ...... 33 5.2 Support of Public Facilities in Farm Enterprise ...... 34 5.3 Transfer of Social Assets by Farm Enterprises ...... 34 5.4 Structure of Family Income Under Various Assumptions ...... 35 6.1 Diversification and Product Mix in Farm Enterprises and Individual Farms ...... 40 6.2 Cropping Patterns for Different Categories of Farms ...... 40 6.3 Production Volumes for Different Categories of Farms ...... 41 6.4 Yields in Farms of Different Categories ...... 41 6.5 Non-Agricultural Activities Reported by Farm Enterprises and Private Farmers ...... 42 7.1 Evaluation of Workers' Behavior and the Business Environment ...... 44 7.2 Basic Characteristics of Reorganized and Non-Reorganized Farms ...... 46 7.3 Margin of Sales by Reorganization Category: 1997 and 1998 ...... 47 7.4 Estimated Production Function for Reorganized and Non-Reorganized Farms ...... 48 7.5 Mean Technical Efficiency Index of Reorganized and Non-Reorganized Farms ...... 48

iv Foreword

Agriculture remains the main source of employment and livelihood for the large rural population of many transition countries, especially among the former Soviet republics. Accordingly, the World Bank continuously monitors the progress of land reform and farm restructuring in the region because of the potential impact of these processes on rural development and poverty alleviation in rural areas.

The present study on Ukraine is the latest addition to a long and growing series of World Bank publications on land reform and farm restructuring in the former socialist countries of Europe and Central Asia. The unique feature of all these publications is their reliance on first-hand empirical information collected through extensive farm surveys of various rural constituencies. Farm surveys have been conducted by the World Bank in many countries of the CIS (Russia, Ukraine, Moldova, Armenia, Georgia, Turkmenistan, Belarus) and Central and Eastern Europe (Poland, Romania, Bulgaria, Hungary, Albania). Analysis of survey findings enables the World Bank to base its policy dialogue with governments in the region on solid empirical facts, making the Bank's recommendation much more credible and relevant. The new findings for Ukraine will similarly provide a platform for useful policy discussions with this country's government and supply the many international donors active on the local scene with essential information for the design of their strategic programs.

Kevin Cleaver Director Environmentally and Socially Sustainable Rural Development Europe and Central Asia

Preface

The present report is based on a joint study of the progress and impact of farm restructuring in Ukraine undertaken by the World Bank in cooperation with USAID. The study was conducted during the period October-December 1998 and consisted of two main components. The first component involved an overview of the farm-restructuring programs implemented by international donors (IFC, Ronco/USAID, and Cargill/KHF). The second component involved a series of case studies and a questionnaire-based survey covering a sample of managers and individual shareholders of large farm enterprises, as well as independent private farmers operating outside the collectivist framework.

The study was managed by Csaba Csaki for the World Bank and Don Van Atta for USAID. The study-related activities in Ukraine were coordinated by CPER - Center for Privatization and Economic Reform in Agriculture, established in Kiev by Iowa State University and the Ukrainian Institute of Agrarian Economics with USAID funding. Aleksander Kaliberda, Oleg Balash, and Anna Musakova of the World Bank Resident Mission in Kiev liaised between CPER in Kiev and the World Bank team in Washington.

Valuable information on international donor projects was provided by Eric Howell and Conrad Fritsch, the respective heads of IFC and Ronco farm-restructuring programs in Ukraine. IFC and Ronco staff in Kiev made important contributions to the study. Yevgenii Orel of the Ronco monitoring team in Kiev was particularly instrumental in putting together a comprehensive database of organizational information for over 300 farms restructured within the Ronco project. Background information on the Cargill/KHF farm-restructuring project in Odessa was provided by Mark Heywood (Lapeco, UK) and Jonathan Simon (Consult-Agro, Odessa).

The survey questionnaires were developed by Zvi Lerman and Louise Perrotta based on instruments used in previous World Bank surveys. The field work was conducted by several local teams organized by the Center for Socio-Economic Projects (CSEP) in Kiev, the IFC and Ronco resident missions in Kiev, CPER, and Consult-Agro/Cargill in Odessa. Data entry and database development were the responsibility of CSEP under the direction of Yurii Privalov.

Data analysis was carried out by Zvi Lerman and Louise Perrotta. Anja Crommelynck, a research assistant from the Catholic University in Leuven, Belgium, funded by FAO/TCD, helped with the efficiency analysis of Ukrainian farms. The present report was written by Zvi Lerman with inputs from Csaba Csaki. Alan Zuschlag prepared the report for publication. The report was cleared in an internal peer review process at the World Bank. Additional reports focusing on sociological, demographic, and economic aspects of rural households were written by Louise Perrotta and Yurii Privalov and are available from CPER in Kiev (http://www.cper.kiev.ua).

vii Some technical results of the study were presented at the conference of the American Society for Nationalities held at Columbia University in New York in April 1999. A Russian-language version of the study is being prepared for dissemination in Ukraine and other parts of the former Soviet Union. A special seminar will be organized in Kiev for decision makers from all over the CIS to discuss the findings of the study.

The present report starts with an overall evaluation of the process of farm restructuring in Ukraine and a summary of policy conclusions drawn from the empirical findings. The summary is followed by an introductory chapter on the framework for farm restructuring and a review of the three international donor projects operating in Ukraine since 1995-96. Then we present the survey findings for the restructured farms and independent family farms established as spin-offs in the process of large farm restructuring. The analysis focuses on issues of productivity, profitability, and farm organization. Changes in the social sphere and the standard of living of the rural population are examined. Some comparisons with non-restructured farms are attempted.

Monetary values are given in Ukrainian hryvnia (UAH). Dollar equivalents are calculated for orientation purposes at the average exchange rate for 1998 (2.50 UAH per $ 1). The exchange rate remained around 2.00 UAH per $1 between January and August 1998, when the hryvnia began its rapid decline, dropping to nearly 4.00 UAH per $1 by the end of December 1998. The exchange rate during the survey (October-November 1998) exceeded 3.50 UAH per $1, but the 1998 average rate of 2.50 UAH per $1 is probably more representative for the purposes of this report.

All tables and figures in this report are based on the authors' field work and the data collected in the survey of Ukrainian farms in October-December 1998.

viii Abstract

A study conducted in the autumn of 1998 took stock of various farm restructuring initiatives in Ukraine, including projects managed and financed by international donors and spontaneous local- level restructuring initiatives. The results based on a survey of managers and member-employees in large farms, supplemented by field visits and interviews with donor representatives, fail to reveal major breakthroughs in large-farm restructuring. While farm enterprises have changed their registered legal form and distributed land and asset shares to individual members, the internal farm structure largely remains that of the former collective. As a result, only limited improvements in profitability and efficiency have been achieved, and physical yields mostly remain at pre-reform levels. Despite the disappointing overall accomplishments, both workers and managers are responding positively to the attempted reforms through improved work discipline and confidence in better future performance.

Buying and selling of land is virtually nonexistent in Ukraine, and yet the legal framework allows transactions in land shares among individuals and between individuals and enterprises, thus creating a mechanism for adjustment of farm sizes. Individual farms grow mainly by leasing, and the state is no longer the sole source of leased land. Contrary to earlier concerns, the individual leasing practice has not resulted in massive rural unemployment: the large individual leaseholders employ on their farms the same proportion of shareowners as the corporate farm enterprises (about one-half; the other half are pensioners and passive shareholders).

Private farms established by individuals and families outside large farm enterprises report encouraging economic results. Yet at the present stage exit from former collective structures and transition to independent private farming appear to be an option only for the bravest. The majority of the rural population prefer the safety umbrella of former collectives, but for these families salaries already account for a smaller share of family income than household plot production.

The major reason for limited accomplishments of agrarian reforms in Ukraine appears to be the lack of improvements in the country's overall economic and policy environment. The continuous decline in the macro economy and the stagnation of the non-agricultural components of the rural sector have further limited the scope for any meaningful achievements of farm privatization and restructuring.

Summaryand Conclusions

The process of land reform and farm restructuring in Ukraine legally began in March 1991, six months before the declaration of independence from the Soviet Union. The World Bank has been closely monitoring the progress of Ukrainian land reform since the very beginning, and two large farm-level surveys were conducted in 1994 and 1996 with the objective of evaluating the achievements of agrarian transition. While the two previous studies revealed a certain measure of progress with the agenda of land reform and farm restructuring, they both, and particularly the 1996 survey, highlighted the general slowness of the process and found definite signs of stagnation. The only major accomplishment was the transfer of state land to collective ownership, and even this undertaking remained uncompleted. Taken on a national average, farm restructuring has been "skin deep," merely changing the sign on the door, with minimal changes behind the formally new facade.

Yet there are pockets of change-oriented activity across the country: some of these pockets are the farm-restructuring programs financed and managed by international donors (as of today, 620 farms participate in these projects); some are grass-roots efforts - spontaneous local initiatives in which farm managers and regional authorities join forces to accomplish deeper and more authentic restructuring with the objective of saving the local rural commnunityfrom economic and social deterioration. The number of spontaneously restructured farms is estimated to be around 500. To put these impressive numbers in perspective, however, we have to note that there are 16,000 large farm enterprises in Ukraine. Thus, the international donor projects and the spontaneously restructured farms represent only 7% of Ukrainian large-scale farms. The World Bank launched a new study in the autumn of 1998 to take stock of these extended farm restructuring initiatives in Ukraine and to develop a comparative analysis of the various farm restructuring efforts. The objectives were to construct a realistic picture of what has been accomplished so far, assess the outcomes, examine future potential developments in this area, and highlight critical issues. The study was designed to focus on change in farmnsthat go through an intentional process of restructuring rather than on a country-wide average as the previous studies did.

Breakthrough in Large-Scale Farm Restructuring Yet to Occur

The present investigationrevealed considerablediversity among restructured farm enterprises in Ukraine, both in terms of innovative approaches to internal organization and in terms of managerial attitudes of the new generation of farm managers. On the whole, however, the intentional farm restructuring efforts so far have failed to produce significantly improved performance and have not resulted in significant breakthroughs in the transformation of Ukrainian farming structures.

xi xii Ukraine: Review of Farm Restructuring Experiences

Limited Break-up of Large Farms. Farm enterprises have changed their registered legal form and have taken over the ownership of their land from the state. Moreover, these privatized farm enterprises have distributed land and asset shares to their individual members. Yet the internal structure has largely remained that of the former collective, with very few instances of imaginative and creative efforts to reorganize the former collective into smaller, functionally independent, units. Even in international donor projects, the predominant mode is farm restructuring on a one-to-one basis. Among the 300 farm enterprises participating in the Ronco project, 90% have reorganized into a single legal entity, another 8 % have divided into two legal entities, and only 2% have split into more than two legal entities. The much smaller IFC project has managed so far to produce a somewhat higher frequency of large farm break-ups: here the 40 parent farms split on average into 2 successor enterprises each (Table A).

Table A. Break-up of Large Farms in International Donor Projects in Ukraine IFC Ronco/USAID All projects Parent farms (restructured) 47 304 351 Successor farms Enterprises 102 354 456 Family farms 253 2,390 2,643 Average number of successor enterprises per parent farm 2.2 1.2 1.3 Average number of family farms per parent farm 5.4 7.9 7.5

In international donor projects, the creation of new legal, or corporate entities is typically accompanied by the emergence of clusters of family farms. Thus, 350 base farms in the IFC and Ronco projects have produced more than 2,500 family farms based on land and assets withdrawn by shareowners from the former collective (Table A). This process contributes to overall diversification of farm structures in Ukraine and to a certain downsizing of the large farm enterprises. Unfortunately, it is not yet widely practiced outside the international farm-restructuring projects. NegativeEvaluation of Workers'Behavior Improved Workers Behavior and (percentof managersassessing deterioration of each behavioralvariable) Business Outlook. Restructuring has produced a definite favorable impact on percentof managers labor relations and workers' behavior in ° the reorganized farms. Managers of reorganized farm enterprises give a much more positive assessment of the 60 behavioral patterns of their workers than lReorganized managers of non-reorganized farms. 40 lNon-reorganized Significant deterioration of basic behavioral variables of farm workers is 20 reported much more frequently by managers of non-reorganized farms than °Satisfactio Motivation Theft by managers of reorganized farms Figure A. Summary and Conclusions xiii

(Figure A). Managers of reorganized farm enterprises believe in what they are doing; nearly 50% are convinced that the situation of their farms will improve as a result of reorganization. Managers of non-reorganized farms are much more pessimistic on this point, and most expect their situations to deteriorate, or at best, remain unchanged.

Limited Improvements in Profitability and Efficiency. Ukrainian farm enterprises so far have failed to make significant labor force adjustments, and the restructured farms continue to employ roughly the same number of workers per hectare of land as before the reforms. Lack of labor adjustment depresses profits, which in turn prevents inflow of new investments. Because of the reluctance to shed excess labor and shortage of investment funds, restructuring has not led to breakthroughs in productivity or efficiency improvements.

Table B. Mar in of Salesb Reor anizationCate or: 1997and 1998 (in ercent of sales) 1997 1998 (3rd quarter)

Number of farms Median margin Number of farms Median margin of sales of sales Non-reorganized farms 9 -53 8 -34 Reorganized farms 76 -25 73 -21

Table B presents a comparison of the margins of sales for reorganized and non-reorganized farms in the survey for 1997 and the third quarter of 1998. The margins are all negative, because the farms predominantly reported losses for these periods. The non-reorganized farms, however, had more negative profit margins (higher loss rates) than the reorganized farms both in 1997 and in 1998. Other findings of this study also suggest that restructured farms are more efficient than non- restructured farms (with efficiency measured by the relationship among all inputs employed and all outputs produced). Regression estimates indicate that reorganized farms on average generate 40% more sales at each level of resource use than non-reorganized farms (the relevant resources include lancl, labor, livestock, and purchased farm inputs, such as fertilizers, chemicals, and fuel). Production-frontier analysis by two different techniques produces measures of technical efficiency that are significantly higher for restructured than non-restructured farms. Yet the measure of technical efficiency of restructured farms is very low: about 0.7 out of the maximum achievable value of 1. Thus, even the restructured farms lie far from the potentially attainable efficiency frontier, and much remains to be done in increasing the efficiency of Ukrainian farms

Table C. Median Yields in Farms of Different Categories (kg/ha for crop products; kg/cow/year for milk) Reorganized Non-reorganized Farnily farms Wheat 3,000 2,800 2,500 Vegetables 8,400 7,300 5,000 Potatoes 7,300 7,200 14,000 Sugar beet 15,600 12,400 27,000 Sunflower 1,100 1,400 1,200 Milk 1,850 1,500 3,500 xiv Ukraine: Review of Farm Restructuring Experiences

Modest Impact on Yields. Crop yields show a mixed picture across farms of different categories, including non-restructured collectives, restructured corporate farms, and family farms (Table C). Overall, it is impossible to state at this stage that the productivity of land in reorganized enterprises is significantly higher than in non-reorganized ones, or that it is higher in individual farms than in enterprises. A clearer restructuring effect is observed in the productivity of livestock (Table C): milk yields are much higher for individual farms than for enterprises (3,500 kg per cow per year compared with less than 2,000 kg per cow per year), and they tend to be somewhat higher for reorganized enterprises than for non-reorganized ones (about 2,000 kg per cow per year compared with 1,500 kg per cow per year).

Land Leasing Gaining in Inportance in the Absence of Buy-and-Sell Transactions

One specific level where significant changes are being observed is probably that of leasing relations. Land leasing has two different connotations in Ukraine. In addition to conventional leasing, which implies transfer of use rights to a specific plot of land for a specific term, leasing may also involve transfer of land shares from individual shareholders to farm enterprises or other individuals. Currently this is the dominant form of land leasing in Ukraine, although the practice of leasing physical plots is growing. Leasing of land shares is a paper transaction that does not entail specific, well-demarcated plots of land. A farm enterprise, by leasing land shares from individual shareholders, simply assumes the legal right for using the area of land represented by the sum total of the leased land shares - land that has always been cultivated by that farm enterprise and is in effect recorded as a kind of privatized collective property on its books. A private farmer leasing land shares from other individuals has to negotiate the allocation of specific land plots with the local farm enterprise, which acts as an administrator and guardian of all undistributed farm land.

Thanks to the educational efforts of international donor programs, individuals are beginning to recognize their legal rights as shareholders in farm enterprises. Leasing of land shares by individuals to the enterprises is formalized on an increasing scale through legal contracts that specify the terms of the lease and spell out the distributions (in cash or in kind) that the shareholder can expect from the lessor. However, the end result in most cases merely ensures the survival of the traditional large farm enterprise under traditional centralized management: the shareholders tend to lease their land shares to their farm enterprise, and the manager of the formnercollective continues to control most of the original land through a formally restructured successor entity. This is perhaps an unavoidable outcome of the specific methodology prescribed by Ukrainian legislation and advocated by international donors: much emphasis is given to the technical stages of initial distribution of land shares and too little attention is paid to the substantive stages of regrouping of shareholders in smaller market-oriented units.

Buying and selling of farm land is virtually nonexistent in Ukraine, and yet the legal possibility of transactions in land shares among individuals and between individuals and enterprises provides a working mechanism for adjustment of farm sizes. As throughout the rest of the ECA region, farms grow mainly by leasing, not by accumulation of private land through purchase transactions. Private farmers increase their limited holdings from 25 hectare to 60 hectare on average Summary and Conclusions xv by leasing land (Figure B), and half the AverageSize of FamilyFarms With and Without Leased Land land in private farms is leased, not privately owned. Some 45% of private farmers in this study report that they lease land, and, moreover, 20% report that they lease land from private Farmswith leasedland 14 individuals - a phenomenon never observed previously. Although there is no information on how much land private farmers lease through land Farmswithout leased land shares and how much in the form of physical plots, it is clear that the state is no longer the sole source of leased land 0 10 20 30 40 50 60 70 in Ukraine. averagefarm size, ha FigureB. Some enterprising individuals lease large blocks of land shares from former collective members (both active workers and pensioners), thus competing as lessors with the former collective farms. In this way they accumulate enough land for an individually operated farm of viable commercial size. In the present survey, such individual leaseholder farms (generally registered as legal entities) control on average 1,800 ha compared with 40 ha for the conventional family farm in Ukraine. The number of shares actually used by the large single founder farms (especially those participating in the Ronco/USAID farm restructuring project) is thus substantially greater than the number of shares contributed just by the founders: in the survey, these farms employ 60 land shares per founder, while the multi-founder farms (created by over 50 founders) employ basically one share per founder (Table D).

Table D. Number of Shares Used by Single-Founder and Multi-Founder Farms* Type of farm Percent of farms Average size, ha Total number of Percent of in the sample shares used per shareowners actively founder employed on farm

Single-founder farms 20 1,800 60 50

Multi-founder farms 80 3,000 1.1 52 *Multi-founder farms have more than 50 founders; most farms in the single-founder category have 1-2 founders.

Contrary to earlier concerns, the individual leasing practice has not resulted in massive rural unemployment. The large individual leaseholders employ on their farms the same proportion of shareowners as the corporate farm enterprises: about half the shareholders are actively employed, while the remaining half are pensioners and other passive players (Table D). Differences between individual leasehold farms and corporate successors of former collectives will begin to be felt to the extent that the founders of the large leasehold farms indeed behave as owner-operators, and not as managers of assets entrusted to their care by fortner employees. Without a real ownership-driven change in incentives, the large leasehold farms may potentially deteriorate into the same mold as the former collectives. xvi Ukraine: Review of Farm Restructuring Experiences

Household Plots Remain the Basis for Individual Agricultural Activity

The distribution of land shares has created a working mechanism for exit of individuals and families from collectives and establishment of private family farms. The operation of this mechanism is clearly observed in the international donor projects, where farm restructuring efforts are producing hundreds of individual farms despite the overall retention of large farmS structures. On average, however, only seven new private farms were created in each restructuring effort (see Table A). At the Salaryin kind Salaryin cash 33% present stage, private farming appears to be 9% for the bravest only, although some of the economic results reported by private farms are quite encouraging. Plotsales- 16%. Household plots continue to maintain their critically important role for rural Other families. Household plot production accounts for nearly 45% of rural family income Plot consumption (Figure C) (product sales plus value of own 27% production consumed), and begins to exceed Figure C. the share of salaries (in cash and in kind) in family income. Household farming appears to be developing beyond the traditional subsistence mode: 60% of households in the 1998 survey report sales of farm products from household plots, and these household sell on average, about half of their output.

Lack of Conducive Environment

While farm restructuring has the potential for improving productivity and efficiency of agriculture, the accomplishments have been very modest. The major reason for this is that the overall economic and policy environment has not improved - quite the contrary- it has remained the major impediment to creating market-based agriculture enterprises. Additionally, the continuous decline in the overall economy and the lack of a recovery in the non-agricultural parts of the rural economy have further limited the scope of any meaningful restructuring in the farming sector.

Comparative analysis of all ECA countries suggests that genuine macro-economic and political reforms and overall economic recovery are the driving forces for reform and economic recovery in the agricultural sector. Countries in the advanced stages of overall economic reforms with healthy GDP growth also show respectable agricultural performance. General economic recovery is closely correlated with market-oriented policy and institutional reforms. Thus, it is hard to expect significant recovery in Ukrainian agriculture despite restructuring efforts as long as economic decline continues and as long as policy and institutional reforms remain sluggish. Under the current overall economic and policy environment in Ukraine, even the international donor- Sumnmaryand Conclusions xvii sponsored farm restructuring projects backed by significant resources lead to only limited results, and therefore cannot serve as a basis for nation-wide farm restructuring program.

Critical Issues for the Future

The prospects for meaningful farm restructuring, and for Ukrainian agriculture in general, will largely be determined by a willingness to adopt a number of basic policy measures:

* drastic reduction of government intervention in agriculture (including intervention in grain marketing and farm exports); * radical change in the inimical attitude of local bureaucracy to rural reform and relaxation of the inflexible bureaucratic procedures inherited from the administrative command regime; * introduction of hard budget constraints and imposition of strict financial discipline on farm enterprises (to be implemented in conjunction with a comprehensive program of old debt restructuring and a tangible threat of bankruptcy proceedings for farms that default on new debt); * revision and simplification of the complex and onerous tax system for agriculture; * development of alternative employment opportunities in rural areas to allow shedding of agricultural labor as a prerequisite for productivity improvement; * speedy resolution of the impasse with maintenance and development of rural social infrastructure through allocation of necessary budgets to local governments.

Farm-restructuring projects implemented by international donors unquestionably make an important contribution to Ukraine on the level of technical assistance: people participating in these projects are much better informed about their options and much more motivated to stand on their rights than the average rural resident. They have accumulated significant positive experience and a substantial knowledge base for further work. Yet the long-term success of these rural initiatives and their country-wide acceptance depend on the emergence of a supportive policy and institutional environment, and the ability of the Ukrainian government to achieve the beginning of an overall economic recovery as well as a real reform and restructuring of the food and agricultural sector.

Introduction

The process of land reform and farm restructuring in Ukraine legally began in March 1991, six months before the declaration of independence from the Soviet Union. The World Bank has been closely monitoring the progress of Ukrainian land reform since the very beginning, and two large farm-level surveys were conducted in 1994 and 1996 with the objective of evaluating the achievements of agrarian transition.' While previous studies revealed a certain measure of progress with the agenda of land reform and farm restructuring, they both, and the 1996 survey particularly, highlighted the general slowness of the process and revealed definite signs of stagnation. The only major accomplishment was the transfer of state land to collective ownership, and even this undertaking remained uncompleted. Distribution of land shares to individuals in collective farm enterprises was less than half complete after five years, and internal restructuring of the formally reorganized farm enterprises had hardly begun. Farm employees reported that the overall situation in their enterprise had remained largely unchanged after reorganization. In the few cases where farms had reorganized into smaller structural subunits, the autonomy of the new subunits was extremely limited and the enterprises in effect continued to be run by central management.

Two encouraging signs were the increasingly commercial orientation of household plots in collectives and the generally profitable situation of independent private farms established outside the collectivist framework. Yet despite the generally favorable well-being of private farmers, farm employees did not show much enthusiasm to exit collectives and start private farming. Farm employees preferred to stay in collectives, at least for the time being, although they were highly dissatisfied with the standard of living and income of their families. In this respect, Ukrainian peasants are no different from peasants the world over, who are notoriously conservative and do not like exposing themselves to new risks.

As the first decade of agricultural reforms draws to a close, only 15% of farm land in Ukraine is cultivated by the individual sector (household plots and family farms), and most Ukrainian agriculture remains effectively collectivized, despite the diversity of organizational forms that have emerged since 1992. Moreover, the growth of private farming has slowed down considerably since 1994, and the number of private family farms appears to have stabilized, at least temporarily, at 38,000, with 2% of agricultural land and about the same share of agricultural product. Field evidence suggests that the privatization of Ukrainian agriculture has been strictly formal, a mere "changing of the sign on the door," without any internal restructuring that could lead to efficiency improvements and move the sector toward market-oriented operation. The new joint-stock

lThe findingsof these surveyswere discussedin severalconferences in Kievand publishedin two World Bank DiscussionPapers in both Englishand Russian:Land Reformand FarmRestructuring in Ukraine(World Bank DiscussionPapers 270 [English]and 270R [Russian],1994 and 1995 respectively)and Land Reforn in Ukraine:The First Five Years(World Bank Discussion Papers 371 [English]and 371R [Russian],1997 and 1998 respectively). 2 Ukraine: Review of Farm Restructuring Experiences companies, limited liability partnerships, collective enterprises, and agricultural cooperatives continue to function like the old collectives, retaining most of the original land and labor resources. The changes in Ukrainian farms appear to be skin-deep, and this has led to the assessment that the process of land reform and farm restructuring in Ukraine has lost its momentum and is stagnating.

Yet there are pockets of change-oriented activity across the country: some of these pockets are farm-restructuring programs financed and managed by international donors; some are grass-roots efforts that involve spontaneous local initiatives, in which farm managers and regional authorities join forces to accomplish deeper and more authentic restructuring with the objective of saving the local rural community from economic and social deterioration. The World Bank accordingly launched a new study in the last quarter of 1998 to take stock of the diverse farm restructuring initiatives in Ukraine and to develop a comparative analysis of the various farm restructuring efforts. The objectives were to construct a realistic picture of what has been accomplished so far, assess the outcomes, examine future potential developments in this area, and highlight critical issues. The study was designed to focus on change in farms that go through an intentional process of restructuring rather than on a country-wide average as the previous studies did. 1. Frameworkfor Farm Restructuringin Ukraine

Prior to 1991 the agricultural sector consisted of kolkhozes and sovkhozes (collective and state farms). Registration of the former kolkhozes and sovkhozes in one of the new legally recognized organizational forms is a prerequisite for transfer of land ownership from the state to farm workers. Basically all 16,000 large farm enterprises in Ukraine have registered in compliance with the new laws and have thus become entitled to receive their land in ownership. This first stage, however important from fundamental considerations, constitutes a mere "changing of the sign on the door", and farms have to implement at least two additional stages: the land and assets privatized to the whole collective should be distributed to individuals, initially in the form of certificates of entitlement (so-called land and asset shares); the new shareholders should be allowed to regroup with their shares in smaller functional units more consistent with market principles than the traditional collectives. For more details of the farm restructuring procedures, see the references in footnote 1 on page 1.

The legal framework for meaningful farm restructuring has been in place since 1992-1993, and the slow overall progress therefore is not necessarily attributable to objective external constraints. Instead, it may be due to lack of managerial expertise and other behavioral factors associated with the internal environment in farm enterprises and the regions. To get around these constraints, several international donors, including InternationalFinance Corporation (IFC), USAID, UK Know-How Fund (KHF), and others, have launched farm restructuring projects with a two-fold aim: (a) to demonstrate to Ukrainian farm managers and local authorities how meaningful restructuring procedures can be implemented; and (b) to develop farm restructuring models appropriate for roll-out on a national scale in the future.

As of today, some 620 farms participate in international donor projects, and most of them are assisted by Ronco/USAID. To put this impressive number in perspective, however, we have to note that there are 16,000 large farm enterprises in Ukraine, all of which are potential candidates for restructuring. Thus, after nearly 4 years of operation, the international donor projects cover a mere 4% of the target population. The main push for restructuring must therefore come through local initiatives, imitating the procedures developed by international donor projects or pursuing original procedures of their own. Indeed, field visits indicate that, in addition to farms participating in international donor project, each province has at least 10-20 farm enterprises that have made an intentional effort to restructure along new operating lines. We estimate that there are some 500 spontaneously restructured farms in Ukraine that have made the decision to reorganize without guidance and assistance from international donor projects and have moved beyond a mere change of name, implementing a variety of internal restructuring measures.

The present study covered 86 intentionally restructured farms in 12 oblasts. Of these 86 farms, 35 farms were participants in international-donor restructuring projects (about 5% of project

3 4 Ukraine: Review of Farm Restructuring Experiences farms) and 51 farms were identified by local expert judgment as restructuring pioneers in their districts that have progressed beyond the formal registration as a new legal form (about 10% of the estimated number of spontaneously restructured farms). Table 1.1 presents the structure of the sample and the distribution of the farms by restructuring strategies. In addition to the restructured farms, we also surveyed nine farms that, again by local expert judgment, had not undergone significant internal restructuring beyond a fornal change of legal status. These non-restructured farms were located in the same districts with restructured farms, and we thus had an opportunity (albeit fairly limited) for a comparative analysis of restructured and non-restructured farms.

Table 1.1. SampleDesign: Number of Farmsby Oblastand b ReorganizationStrate Oblast Sampled Farm-restructuring project Spontaneous farms reorganization USAID IFC KHF 1 Lviv 11 2 - - 9 2 Donetsk 10 - 3 - 7 3 Dnepropetrovsk 9 - - - 9 4 Poltava 12 3 - - 9 5 Sumy 10 2 - - 8 6 Kherson 8 1 - - 7 7 Zhitomir 2 - - - 2 8 Odessa 7 - - 7 - 9 Temopil 4 4 - - - 10 Kirovograd 7 7 - - 11 Mikolaev l I - - - 12 Chemovtsy 5 - 5 - - Total 86 20 8 7 51

The standard organizational forms among Ukrainian farms include collective farm enterprise (CAE, or KSP in Ukrainian; a direct successor of the Soviet kolkhoz),joint-stock company (typically closed, with non-tradable shares), limited-liability company, unlimited-liability partnership, agricultural cooperative, individual enterprise, and private (family) farm. Household plots are not included in this classification, as they are not functionally independent operations: household plots exist only within larger farming units and have no independent legal standing. Table 1.2 summarizes the main legal features of the various organizational forms.

Individual farms that exist as functionally independent units outside large farm enterprises fall into two categories: registered individual farms are classified as individual enterprises, while the unregistered ones are classified as private farms. The registration status is the only distinction between these two forms: both are farms operated by the owner or the owner's family, possibly with some reliance on hired labor and leased resources. However, individual enterprises are formally registered legal entities, with a name, a stamp, and a bank account. The term "private farm" is used for convenience to designate those individual entities that are not legally registered and are thus treated as "physical bodies". 1. Frameworkfor Farm Restructuring in Ukraine 5

Table 1.2. Characterization of Organizational Forms Joint Stock Company: A business entity created by investors (physical or legal bodies) who acquire shares in the company by contributing funds or assets to its equity capital. A shareholder wishing to leave a joint-stock company has to find a buyer for his share. The company has no obligation to redeem the shares for cash or assets in kind. The shareholder's liability for the company's debt is limited to the investment in share capital. The voting power is proportional to the number of shares held by the shareholder. In a closed joint-stock company, shares are transferrable only among members. In an open joint-stock company, shares can be bought by outsiders. * Limited Liability Company: Simnilarto a joint-stock company, except that when a member chooses to leave, the other members redeem his share of investment for cash. * Partnership: The partners bear full, unlimited liability for the obligations assumed by the partnership. When a partner decides to leave, the partnership is usually dissolved and the assets are divided in kind among the partners. The voting power is proportional to the investment of each partner. * Agricultural Cooperative: An voluntary association of members (individuals or legal bodies) established for the pursuit of a common agricultural activity (production or services). Each member makes a contribution to the statutory equity capital of the cooperative in the form of cash, land, or assets. The ownership of the contributed capital passes to the cooperative, as in a joint-stock company. On exit, members receive their share of investment in cash or in kind, as prescribed by the cooperative charter. The members bear an unlimited liability for the obligations of the cooperative. The voting power is "one man, one vote", and is not proportional to the invested capital. * Collective Farm Enterprise: A variety of agricultural production cooperative. Typically the successor of a former kolkhoz or sovkhoz with ownership of land and assets transferred from the state to the workers. Workers become shareholders through distribution of certificates of entitlement to land and assets. Exit of members with land and assets usually requires approval of the general assembly. * Peasant Farm: An entity created by a family or a group of families on the basis of jointly owned land and assets. Peasant farms by assumption rely mainly on family labor and family owned resources, although they may employ hired labor and leased resources within reasonable limits. Peasant farms may register as legal entities (in which case they are known as private or individual enterprises), or operate as unregistered physical bodies (private farms). * Individual (Private) Lease Enterprise: An informal organizational category, generally a large individual enterprise established by one founding shareholder with a high proportion of resources leased from outsiders. Typically created when one enterprising individual leases the land and asset shares of a large number of former collective farm members in the village. * Peasant Union: An agricultural association basically identical with collective farm enterprise or agricultural cooperative. Mainly observed in the westem provinces of Ukraine. * LandCo, FarmCo: Accepted shorthand terms for the two organizational forms in the CargilltKHF project: LandCo is the legal entity that controls all the original land holdings of the parent farm; FarmCo is one of several asset-holding companies that own all the original assets and lease land from the LandCo. Legally organized as limited-liability companies.

This terminological distinction has been introduced because the 1993 Law of Peasant Farms allows a peasant farm to register as a legal entity, but does not make registration mandatory, while the Law on Enterprises and Entrepreneurship explicitly allows entrepreneurs to operate as physical bodies, without registration. Unregistered private farmers are legally not exempt from any of the taxes that registered farmers and other legal entities must pay. In practice, however, unregistered farmers probably find it easier to avoid taxation and scrutiny. As a result, a large proportion of 6 Ukraine: Review of Farm Restructuring Experiences individual farming operations remain unregistered physical bodies and deserve a separate category in the overall classification of farm structures.

Farms of all organizational forms may lease land and assets in addition to their privately owned resources. Enterprises of all organizational forms have two main sources for land and assets. One source is provided by land and asset shares invested by individuals in the equity capital of the enterprise. By investing their land and asset shares in the equity capital, the individuals exchange their ownership of these assets for a promise of a stream of dividends from the profits of the enterprise. The second source consists of land and asset shares that individuals lease to the enterprise for a specified term in return for a contractual lease payment. At the end of the lease term, the individual may reconsider the leasing arrangements and decide on a different disposition of the assets.

A so-called "private lease enterprise" is an organizational form often mentioned in the Ukrainian context. This is not a legally recognized form, but it usually signifies a registered owner- operated farm ("individual enterprise") which, in addition to owner's land, employs a substantial amount of land leased from other rural shareholders. An individual farm is called informally a private lease enterprise if its reliance on leased resources is significant. Private lease enterprises are an interesting feature of Ukrainian farm restructuring, as they are not frequently observed in other FSU countries. 2. Farm Restructuring Projects Administered by International Donors

Three international organizations - IEFC,USAID, and KHF - are currently involved on a large scale in farm restructuring projects in Ukraine. USAID and KHF are basically financial donors who employ consulting firms to implement the restructuring. USAID has been working with a single agent, the US consulting firm Ronco, since 1995. KHF has financed the operation of several different agents, including the Cargill project in Odessa and the IFC project in Donetsk, while IFC has never financed its own farm-restructuring efforts but has instead actively solicited financing from various international sources. These different combinations of funding and implementing agencies have resulted in four major farm restructuring projects, three of which are established projects operating since 1995 and one (DAR) is a new project funded by KHIFas a replacement to the IFC operation in Donetsk. The basic descriptors of the four projects are presented in Table 2.1 (as of March 1999).

Table 2.1. International Farm Restructuring Projects in Ukraine: March 1999 Implementing Financing organization Oblasts Number of organization participating farms Cargill KHF Odessa 5 DAR KHF Donetsk 15 (new starts) IFC KHF Donetsk 41 (completed) Scandinavian countries and Japan Chernovtsy 21 KHF Kiev 2 CIDA - Canadian International Volyn 3 Development Agency Ronco USAID 15 oblasts 533 Cherkasy 20 Dnipropetrovsk 28 Kharkiv 22 Kherson 45 Khmelnytsky 20 Kirovohrad 26 Lugansk 16 Lviv 69 Mykolaiv 32 Poltava 18 Rivne 62 Sumy 89 Temopil 42 Vinnitsa 1 Volyn 43

7 8 Ukraine: Review of Farm Restructuring Experiences

The situation is highly dynamic, so that both the range of oblasts and the number of farms are changing rapidly. Ronco has achieved a very broad territorial coverage with presence in 15 out of 25 oblasts, and it is adding new farms to its projects practically every day. Most of the participating farms, however, entered the project in 1998 and some 450 out of 533 farms are still in very early stages of the restructuring process (see the bottom map on p. xiv). IFC has recently negotiated a new financing package with the Canadian Government and is expanding its project to Volyn, while at the same time quintupling its presence in Chernovtsy. The termination of the KHF-IFC cooperation in Donetsk has resulted in the transfer of activity in this reform-minded oblast to a new KHF-funded organization, DAR - Donetsk Agrarian Reform, which is adding 15 new farms to IFC's previous 41 farms, using the established IFC methodology.

Farm Restructuring Principles

All farm restructuring projects in Ukraine start with distribution of land and property shares to farm members in accordance with existing laws and regulations. The preparatory work for share distribution work involves painstaking land surveying and careful revaluation of capital assets as a basis for determination of individual shares. Distribution of shares is a prerequisite for ultimate allocation of plots of land and physical assets to individuals and groups of individuals, but it does not necessarily lead to such physical distribution "in kind". Shares may remain paper certificates of entitlement, and they are transformed into physical assets only for individuals who decide to leave the former collective. Since shares are not necessarily converted into plots of land, a land share does not automatically confer a legal title to a well-defined parcel of land. The Ronco project differs in this respect from the other farm-restructuring projects, and it has recently begun taking the restructured farms all the way from distribution of land shares to assignment of physical plots and issue of legal ownership titles to individuals. Titling of individual plots, however, does not automatically imply separation of individual farms and breakup of the collective structure. Table 2.2 presents a comparative description of the main stages of the farm-restructuring process as implemented by the three main projects.

After the share-distribution stage, Ronco and IFC encourage internal regrouping of shareholders into new operating units with their land and asset shares, or alternatively exit of individuals and families with land and assets for the purpose of establishing a private farm. The Odessa KHF model is different in that, after share distribution, it divides the original farm enterprise into one land-holding entity and one or several asset-managing entities that lease land from the land- holding entity. The restructuring phase in all projects is accompanied by an intensive public relations campaign designed to increase the awareness of the individual shareholders as to the various options available to them.

In accordance with existing legislation, property shares are calculated net of total enterprise debt. Thus, only debt-free assets are divided to shareholders, and an accounting reserve is created with sufficient assets to match the outstanding debt. The main question is who remains legally responsible for the outstanding debt (and the matching assets) after reorganization. One possibility is to divide the debt (and the matching assets) in proportion to the shares assigned to each shareholder. Each individual shareholders remains responsible for a share of debt. Although 2. Farm Restructuring Projects Administered by International Donors 9

individuals may exit the former collective "without debt", the value of property that they receive is calculated after subtracting all outstanding debt, so that in effect a part of their assets is retained in the matching reserve. Another possibility is to keep the debt and the matching asset reserve in a "shell enterprise", which then liquidates the assets to pay off the debt or, alternatively, declares bankruptcy and writes off the unsettled debt. IFC favors the procedure that distributes the outstanding debt in proportion to the value of asset shares. Ronco uses this method in some farms, while other farms adopt the "shell" approach. The KHF Odessa project from the start sets aside a part of the assets for liquidation and debt repayment. The survey highlights the diversity of approaches to debt resolution that are practiced in Ukraine.

Table 2.2. Main Activity Stages as Implemented in the Three Farm-Restructuring Projects Activity stage Farm-restructuring project

IFC Ronco/USAID I Cargill/KHF

Pre- Approval of reorganization proposal by general assembly, establishment of reorganization reorganization committee

Calculation of Based on prevailing legislation: shares - land shares of equal cadastral value (quality-adjusted hectares) - asset shares based on seniority and cumulative salary

Internal Individuals regroup land and asset shares in three Creation of one land-holding reorganization distinct modes: company (LandCo) and one or - shares pooled in new legal entities; several asset-holding companies - shares leased to entrepreneurs; (FarmCos) - shares withdrawn to establish family farm

Distribution of Land auctioned to new groupings and individuals All land transferred to one land based on number of land shares LandCo; FarmCos lease land from LandCo as required

Distribution of Asset auctioned to new groupings and individuals Assets transferred to FarmCos assets based on value of asset shares based on functional preferences of Ishareholders

Debt restructuring Debt distributed to new - Debt distributed to new entities in proportion to value of entities in proportion to assets value of assets - Debt and matching assets retained in a residual shell enterprise

Titling of land Titles issued to Titles issued to all No individuals separating individuals in one with a physical plot of restructured farm at a land from the collective time

Registration New legal entities (corporate or individual) registered in accordance with prevailing laws 10 Ukraine: Review of Farm Restructuring Experiences

Achievements

Creation of New Entities. The pervasive inefficiency of Soviet agriculture was basically attributable to the economic deficiencies of the administrative command system. However, beyond the intrinsic economic limitations of the political regime, Soviet-style farms suffered from two organizational features that are empirically incompatible with market-oriented operation: they were too large by the accepted yardsticks of market economy; they were organized as collectives, while the prevailing farm structures in market-oriented economies are owner-operated farms and to a certain extent investor-owned corporations. With the elimination or relaxation of the administrative command system after 1991, farm restructuring was meant to correct these two organizational flaws: farms were expected to downsize, and collective organization was expected to change into owner- operated structure. Such at least were the expectations of Western experts, who anticipated that such structural changes, combined with market-oriented changes in the environment, would lead to efficiency and productivity improvements. Evaluation of land reform in the ECA region therefore always includes examination of changes in farm sizes and restructuring toward owner-operated organization.

Table 2.3. Farm Restructuringin InternationalDonor Projects in Ukraine IFC Ronco/USAID Cargill/KHF Parent farms(restructured) 47 304 5 Successorfarms Enterprises 102 354 25* Familyfarms 253 2,390 0 Fragmentationratio basedon entefprises 2.2 1.2 5 Fragmentationratio includingprivate farmers 7.6 9.0 5 *Assetcompanies created in additionto 5 land companies.

In the two major farm restructuring projects in Ukraine (Ronco and IFC), the process results in modest fragmentation of parent farms into smaller successor enterprises, as well as significant separation of families from collectives and establishment of individual farms. Table 2.3 shows that in the IFC project each parent farm splits on average into 2 successor enterprises and produces 5 independent private farms. The Ronco project has produced less than 1.2 successor enterprises and about 8 private farms per parent farm. Ronco farms predominantly transform one-to-one: 90% of the base farms have reorganized into a single legal entity, another 8% have divided into two legal entities, and only 2% of the base farms have split into more than two legal entities (up to 9). Thus, in the initial phase, the IFC project has produced more significant downsizing of large farms than the Ronco project.

Both projects have spawned a fairly high proportion of independent family farms. In fact, such individual farms account for 85% of all successor entities produced by the two international donor projects (Figure 2.1). Yet not every large farm produces seven or eight private farms in the process of reorganization, as suggested by the averages in Table 2.3. In the Ronco project, most reorganizing farms (83%) produced only legal entities (enterprises), and at that mainly a single enterprise. Additional clusters of individual units were produced by only 17% of base farms, each 2. Farm Restructuring Projects Administered by International Donors 11

Distribution of Successor Farms in Donor Projects

Ronco/USAID IFC

Enterprises Enterprises 13% 29%

Individual Individual 87% 71% Figure 2.1. spawning on average 42 individual units (compared with the average of 8 in the entire Ronco project). It is interesting to note that farms surrounded by clusters of individual units on average split into a larger number of legal entities than farms without any individual units (1.4 legal entities for base farms that produced individual units compared with 1.1 legal entities for base farms without individual units). There is thus a kind of restructuring dichotomy, probably dictated by behavioral or psychological factors: either there is a total resistance to fragmentation, in which case the base farms produces a single legal entity, or there is a readiness to try new organizational approaches, in which case the base farm will split into multiple legal entities and also create a cluster of individual farms. This pattern of multiple fragmentation versus one-to-one transformation is demonstrated in Table 2.4.

Table 2.4. Multiple Fragmentation of Ronco Farms During Restructuring* Farns producing legal entities Farms producing legal entities only and individual units Base farms 248 51 New legal entities 267 71 New individual entities - 2050 Fragmentation ratio based on legal entities 1.1 1.4 Fragmentation ratio based on all units 1.1 42 *Based on 299 farms with complete information.

The principle of the Cargill/KHF project is to divide each parent farm into one "land company" that holds all the land and none of the assets and one or several "asset companies" that hold all the assets and none of the land. Land is then leased from land companies to asset companies for cultivation. The five Cargill/KHF farms in Odessa Oblast were reorganized into 5 land companies and 25 asset companies, of which 16 are primary agricultural businesses and 9 specialize 12 Ukraine:Review of Farm RestructuringExperiences in processing or farm services. There has been no creation of independent individual farmnsin significant numbers in the Odessa project. The overall fragmentation ratio is thus 5; the fragmentation ratio based on asset companies that specialize in primary agriculture (the only ones that actually use land) is still relatively high 3.2. These average figures, however, are misleading: most asset companies (20 out of 25) are the result of fragmentation of just two parent farms, and the remaining three parent farms produced only 5 asset companies in total (see Table 2.7 below for more details).

Legal Forms. The IFC and Ronco farm restructuring projects have produced a mix of enterprises (legal entities) and private farrns (physical bodies), while the CargillVKHFproject in Odessa has produced only legal entities, without any individual private farms. While the base farms were primarily collective agricultural enterprises (CAEs) prior to reorganization (e.g., 85% in the Ronco project), the most popular organizational form among successor enterprises in international donor projects is the limited liability company. This legal form accounts for 87% of successor enterprises in the IFC project and 57% in the Ronco project (Table 2.5). The Cargill/KHF project seems to have focused on the limited liability company as the exclusive organizational forms for restructured entities: all land-holding and asset-holding companies in this project are registered as limited liability companies. The limited liability company is much less popular among spontaneously restructuring farms, where only 12% are registered in this legal form. None of the international donor projects has produced CAEs in significant numbers, and yet CAE is the preferred organizational form among spontaneously restructuring farms (51%, see Table 2.5). The 1996 survey moreover showed that over 50% of large farms in Ukraine were CAEs (see reference in footnote 1 on page 1).

The Ronco project has produced a high proportion of private enterprises (20%), which are one-owner legal entities. Some of these private enterprises may be similar to private farms, with the only difference that the latter are physical and not legal bodies. Yet some of these private enterprises are classified as "private lease enterprises", i.e., one-owner enterprises in which the owner, in addition to cultivating his privately owned land, also leases substantial amounts of land from other individuals and enterprises. In the IFC statistics, private enterprises are not shown separately: they are divided among private farms and other legal forns.

Table 2.5. Distributionof OrganizationalForms Among RestructuredFarms Organizational form IFC Ronco/USAID Spontaneous restructuring

Total successor enterprises 102 354 51 Joint stock company 3% 12% 24% Limited liability company/partnership 87% 57% 12% Private enterprise - 20% 2% Collective agricultural enterprise - 8% 51% Agricultural cooperative 8% 3% - Other legal forms 2% - 11% 2. Farm Restructuring Projects Administered by IntemnationalDonors 13

Farm Reorganizationand Reallocationof Land (Roncoand IFC)

100% -

80%

60% - rlindividual M-Corporate

40% -

20% -

0% Farms Land Figure2.2. Reallocation of Land. Both the IFC and Ronco projects create individual farms in substantial numbers, but these farms are very small, because a very small proportion of land is transferred from the enterprise sector to the individual sector. While individual farms represent 85% of all organizational units in these projects, they control a mere 2% of land (Figure 2.2). The original land endowment thus remains practically in its entirety in the restructured enterprises, and the downsizing effect is simply determined by the fragmentation of the base farm into successor enterprises. This outcome of the international donor projects is unfortunately a reflection of the overall situation in Ukraine, where most agricultural land remains under the control of large farm enterprises. The international donor projects have not managed to cross the threshold of collectivist tradition and trigger massive transfer of land from enterprises to individual farms.

Table 2.6. Distributionof Land and AverageFarm Size in Ronco and IFC ProjectFarms: March 1999 Ronco/USAID IFC Numberof Total land Average Numberof Total land Average farms per farm farms per farm Parentfarms (restructured) 304 812,062 2,670 47 142,346 3,400 Successorenterprises 354 756,771 2,140 102 135,946 1,350 Individualfarms 2,390 13,613 6 253 6,400 25

The modest fragmentation ratio of base farms into new legal entities in all farm restructuring projects implies relatively minor downsizing of the traditional large farms. The successor farms in the IFC project are on average less than half the size of the base farm, but at nearly 1,500 hectare they are remain very large by the benchmark of market economies (Table 2.6). In the Ronco project, the number of successor enterprises is only 15% higher than the number of the original parent farms, and the observed downsizing is minimal (2,140 hectare per farm today compared with 2,670 ha 14 Ukraine: Review of Farm Restructuring Experiences before reorganization). The Ronco farms transform practically one-to-one, and retain virtually all the original land.

The restructured enterprises typically acquire their land through the shares of their founding shareholders. Thus, an enterprise with 3,000 hectare of land would typically have around 200-300 founders leasing their land shares to the enterprise. A large proportion of the shareholders would also actively work in the enterprise, while the remainder would generally be elderly and retired. An interesting phenomenon in the Ronco project is the creation of successor farms with one single founding shareholder. The one-shareholder farm has a very limited initial land endowment (about 10-20 ha, the equivalent of one land share), but it takes over practically all the land of the original collective farm by leasing the land shares of the former collective members. About 20% of Ronco farms have reorganized in this way. Under this mode, the original collective reorganizes one-to-one, but the outcome is a large private farm owned and managed by the single founding shareholder. Since these large private farms are based primarily on land leased from outsiders, they can be properly characterized by the term "private lease enterprises". This reorganization mode does not preclude the creation of additional individual farms from the original collective. In fact, 10%-20% of the total land of collectives transforming into one-shareholder farms in the Ronco project was syphoned off to small individual farms.

Table 2.7. Reallocation of Land to Asset Farns in the KHF Odessa Project Parent Size of parent Number of asset companies Land farmed by asset Average size of farm farm, ha companies, ha agricultural asset total primary company, ha agriculture 1 3,400 13 6 4,078 680 2 1,250 7 5 1,082 216 3 6,400 3 3 6,400 2,133 4 3,300 1 1 3,300 3,300 5 2,900 1 1 2,900 2,900 Totals average 3,450 ha 25 16 17,760 1,100

In the Cargill/KHF project in Odessa, one land-holding company (LandCo) is created for each base farm, so that by definition there is no change in size. The land, however, is leased from LandCo by the asset-holding companies (FarmCos), and the actual amount of land in use by a single farm depends on the number of FarmCos and their specialization. Table 2.7 shows the allocation of land to the 16 asset-holding companies associated with the five land-holding companies in Odessa (the remaining 9 asset companies are service operations that do not use any land). The average farm size in the Odessa project declined by two-thirds, from 3,450 hectare to 1,100 hectare. The downsizing is particularly remarkable in the two cases where the parent farm split into 5 and 6 asset- holding companies specializing in primary agriculture (lines 1 and 2 in Table 2.7). At the other extreme, the two cases where a single asset-holding company was created from the parent farm (lines 2. Farm Restructuring Projects Administered by International Donors 15

4 and 5 in Table 2.7) show no downsizing whatsoever: the new asset-holding companies continue to cultivate around 3,000 hectare taken over from the original collective farm.

Inequality of Land Distribution in the KHF Odessa Project

cumulativedistribution of farms0%

0 0 20 40 60 80 100 cumulativedistribution of land, % Figure 2.3.

The average farm sizes, however, are misleading, because the distribution of land among the asset companies is highly uneven: 8 of the 16 agricultural asset companies in the project cultivate over 80% of project land. Each of these large farms retains more than half the land from the original parent farm before reorganization. Their average size is 1,800 hectare and they specialize in field crops (mainly grain). The remaining 8 farms specialize in fruits and vegetables, and each averages less than 400 hectare, about one-tenth of the parent farm. Overall, 80% of the 25 asset companies (16 agricultural companies plus 9 processing and service companies) manage 20% of land in the project, and the remaining 20% of asset companies manage 80% of land. The Lorentz curve in Figure 2.3 shows the strong inequality of land distribution among the asset companies in the Odessa project.

'Titling. An important achievement of the Ronco project is the recent transition to financial support of individual land titling in selected farms. While the IFC project provides only administrative assistance with titling, and at that only to individuals who leave the former collective with a physical plot of land, Ronco/USAID has begun to extend financial support with the purpose of titling all individual shareholders in a farm enterprise at one time. Over 20,000 titles covering 76,000 ha of land have been issued to all shareholders in 48 Ronco-restructured farms in 10 oblasts. An additional 3,600 titles were issues on an individual basis, without the project's financial support, to peasants and families leaving the former collective. Table 2.8 summarizes the results of the Ronco titling effort as of February 1999, and compares the current status to the situation in October 1998. There has been a substantial increase in the scope of the titling program since October 1998: 16 Ukraine: Review of Farm Restructuring Experiences the number of farms with titles distributed increased from 12 in eight oblasts to 48 in ten oblasts (Khmelnitsky and Kharkiv have recently joined the titling program). Current plans call for further acceleration of titling.

Table 2.8. Titling in Ronco Farns: Status as of February 1999 State deeds issued

with Ronco financial support without Ronico issuedAll state on deedsRonco Oblast financial support farms farms hectares number of state deeds Sumy 1 1,930 319 1,193 1,512 Lviv 12 16,887 5,990 - 5,990 Lutsk (Volyn) 2 2,451 846 297 1,143 Temopil 8 7,510 2,978 355 3,333 Dnepropetrovsk - - - 715 715 Mykolaev 1 1,427 203 145 348 Kherson - - - 406 406 Rivne - - - 140 140 Khmelnitsky 7 9,325 3,514 - 3,514 Cherkasy - - - 40 40 Kirovohrad 11 25,984 3,817 81 3,898 Poltava 4 7,292 2,241 19 2,260 Kharkiv 1 2,116 132 70 202 Lugansk - - - 185 185 Vinnytsa 1 1,287 568 - 568 Total Feb. 1999 48 76,209 20,608 3,646 24,254 Total Oct. 1998 13 22,101 5,768 2,210 7.978

The IFC farm-restructuring project does not emphasize titling as a separate activity. Administrative assistance is extended without any charge to farmers separating with their land share from the restructured farm enterprise. Unlike Ronco, however, IFC does not subsidize the titling costs, and these remain the responsibility of the land owner. Thus, individuals in IFC-restructured farms receive a land title only when they leave with the purpose of establishing a private farm, whereas the Ronco strategy is to title all shareholders in each farm enterprise at one time. 3. Farm RestructuringOutcomes: Evidence from the Field

Following the general overview of farm-restructuring efforts in Ukraine, Chapters 3-7 present the findings of the farm survey conducted in the last quarter of 1998. The survey covered 86 reorganized farm enterprises in 12 oblasts across Ukraine (the sample design is given in Table 1.1). For purposes of comparison, the survey also included nine non-reorganized farms and about 100 independent private farmers.

Organizational Forms and Restructuring Patterns

Over 60% of the farms in the survey were registered as collective agricultural enterprises (CAE, the legal successor form of the Soviet kolkhoz) and limited-liability partnerships (Table 3.1). Another 30% of the farms identified themselves as joint-stock companies and "private lease enterprises". Although "private lease enterprise" is not a legally recognized organizational form, this concept is popularly used to denote a new farm run by an individual farmer who supplements his own land with land leased from other individuals or farms. All private lease enterprises were participants of the USAID/Ronco farm-restructuring project, which creates the preconditions for this organizational form.

Table 3.1. Distribution of Farms by Organizational Form (percent of farms in each category) I All sample "'Splinter" farms* T"Unsplintered"farms* Collective agricultural enterprise 31 6 45 Limited-liability partnership 31 55 18 Joint-stock company 15 3 21 Private lease enterprise 13 19 9 Agrofirm 6 13 2 Other forms 4 4 5 * "Splinter" farms are created when a larger former enterprise splits into several entities during restructuring; "unsplintered" farms are successor entities created from the original farm enterprise through one-to-one restructuring.

Some farms reported that they were created when a larger former enterprise split into several entities, and we refer to them as "splinter" farms. This group includes farms that may have downsized significantly during reorganization. The "splinter" farms (one third of the sample) generally reorganized as limited-liability partnerships, private lease enterprises, and agrofirms (90% of the group). Practically none of the "splinter" farms were registered as joint-stock companies or collective agricultural enterprises. Yet these were the most popular organizational forms among the remaining "unsplintered" farms, which had reorganized in a one-to-one manner without substantial downsizing. Two-thirds of the "unsplintered" farms were collective agriculturalenterprises andjoint- stock companies; another 20% were limited-liability partnerships. Limited-liability partnership is

17 18 Ukraine: Review of Farm Restructuring Experiences thus a popular form both among the "unsplintered" farms that followed one-to-one reorganization and among the downsized "splinter" farms, although it is much more prevalent among the latter. While all "unsplintered" farms were obviously the outcome of one-to-one reorganization, one-third of the "splinter" farms also reported that their parent collective actually had produced only one relatively large entity. Yet it was a downsized entity because its creation was accompanied by a cluster of new individual farms separating from the former collective (between 3 and 17). Thus, the parent farm in effect split into one corporate entity and several individual units. The remaining two-thirds of the "splinter" farms reported that they had formed from a parent collective dividing into 2-6 smaller parts, with some individual units also emerging in the process (Table 3.2). Based on the overall responses in the survey, we estimate that on average each parent farm split into 1.5 corporate entities plus 3 individual farms.

Table 3.2. Division of Parent Collective Farms in the Process of Reorganization Percent of Number of large Frequency Mean number of respondents (out of parts created from additional 86) parent farm individual units "Unpslintered" farms 64 1 100% 1.5 "Splinter" farms 36 1 32% 5 2 35% 3 3-6 29% 9

Farm Size: Land and Shareholders

The average farm size in the sample is 3.000 ha, which is comparable by order of magnitude with the collective farms during the Soviet period. "Splinter" farms that formed as a part of a larger parent farm are indeed smaller than the "unsplintered" farms: 2,250 ha compared with 3,500 ha (Table 3.3). Among various organizational forms, collective agricultural enterprises are the largest at over 4,000 ha; the private lease enterprises are the smallest (less than 2,000 ha), while limited- liability partnerships and joint-stock companies occupy an intermediate position with nearly 3,000 ha per farm.

Table 3.3. Mean Farm Sizes for Different Groups of Enterprises All ~"Splinter""Unsplintered" CAE Limited- Joint- Private lease sample farms farms liability stock enterprise

Farm size, ha 3,000 2,250 3,500 4,300 2,650 2,700 1,700

Three-quarters of the holdings on average is classified as the farm's own land: approximately half is leased from member-shareholders, and the remainder is collectively owned land. About 20% of holdings is land in permanent use rights from the state - a carryover of the traditional Soviet system, and the remaining 5% is leased from the state (two-thirds) or from other farm enterprises (one-third). There is no leasing of land from private individuals other than the shareholders. Private lease enterprises report substantially greater reliance on leased land: 75% of their holdings is leased 3. Farm Restructuring Outcomes: Evidence from the Field 19 from shareholders and 10% is leased from the state. Land is leased from shareholders mainly for a period of 5 years (60% of respondents), although some fanns report both shorter (1-3 years) and

Distributionof the Numberof FoundingMembers

percentof farms

30 - -

25-

0 1 2-100 100-250 250-500 500-750 750-1000 >1000 numberof founders Figure3.1. longer (6-10 years) lease terms. Leasing out of land is not a common phenomenon: less than 20% of the surveyed farms lease out land (primarily to households plots of their members and to private farmers). The average amount leased out is between 300-400 ha, mostly for 5 years.

The number of founding members responsible for establishing the reorganized farms ranges from I to more than 3,000. The most frequently occurring number of founding members is between 250-500, which is reported by 35% of farms (Figure 3.1). Yet 15% of farms are established by a single founder: these are individual enterprises managed by a single owner. At the other extreme, 13% of farms report more than 750 founding shareholders, and three farms (out of 86) report more than 1,000 founders. There is a fairly high correlation between the number of founders and the land endowment of the farm: the amount of land increases as the number of founders increases (Table 3.4).

Table 3.4. Distribution of the Number of Founding Members and Average Farm Size Number of founders Percentage of farms Average farm size, ha 1 15 1,800 2-100 13 1,900 101-250 13 2.600 25 1-500 33 2,400 501-750 13 3,600 751-1,000 9 4,200 over 1,000 4 6,900

Farms with a large number of founding shareholders rely almost exclusively on the land contributed by their founders. Farms with up to 50 shareholders, on the other hand, rely on leasing 20 Ukraine: Review of Farm Restructuring Experiences

of land shares from shareowners who are not founding members. As a result, the number of shares actually used by these "individual" farms is substantially higher than the number of shares contributed just by the founders: these farms employ 60 land shares for each founder, while the "multi-founder" farms employ basically one share per founder (Table 3.5). Yet regardless of the founding structure, whether established by a single founder or by hundreds of founders, the farms actively employ 50% of the individuals whose shares they use, while the other 50% are inactive agents (pensioners, social-sphere employees, and others). The main difference is that in multi- founder farms the workers are generally also the founders, whereas in "individual" farms established by one founder or a small number of founders the workers are outsiders leasing their land shares to somebody else's farm.

Table3.5. Numberof SharesUsed by Single-Founderand Multi-FounderFarms Number of founders Total number of shares Percent of shares Percent of shares used per founder contributed by active contributes by pensioners workers and other inactive agents

1-50 60 50 50

over 50 founders 1.1 52 48

Virtually all shareholders have an official document that specifies their property rights in land, and the document is generally in the hands of the shareholder. Over 70% have a land-share certificate, and another 20% are reported to have a title document issued by the state. All farms with ownership titles are Ronco farms, as this is the only farm-restructuring project that emphasizes actual titling of land in Ukraine. Contrary to the advanced status of distribution of land share certificates, the household plots are actually privatized to their owners only in 55% of the farms. Delays with privatization of household plots are observed in all the 12 oblasts, but the highest concentration of farms with non-privatized household plots occurs in Sumy and Kirovograd. This is quite surprising, as in other respects these two oblasts are progressive reformers that have warmly welcomed the Ronco farm-restructuring project.

In three-quarters of the farms all shareholders (and not only the founders) have rights to dividends. However, practically none of the farms has determined the dividend payout. The whole issue of dividends is irrelevant (according to 50% of respondents), because the farms did not make any profit in 1997 or 1998.

In farms with more than 50 founders, 50% of shareowners lease their land shares to the enterprise, 30% invest their land shares in the farm's equity capital, and 13% of shares are vaguely identified as "transferred to the farm enterprise". Shareholders investing their land shares in the farm's equity capital legally forgo their right to a physical plot of land: the land represented by their share is now the property of the corporation. Shareholders leasing their land shares to the farm enterprise in principle retain their ownership of the underlying plots of land, including the right of ultimate withdrawal. The status of those who "transferred" their land shares to the enterprise is not clear. Table 3.6 shows clear differences in the pattern of land share disposition among different farm-restructuring projects. In the IFC project and the Cargill/KHF project in Odessa, land shares 3. Farm Restructuring Outcomes: Evidencefrom the Field 21 are overwhelmingly leased to the enterprise (in IFC farms this includes the special "forbearance" contracts that IFC legal experts recommend instead of standard leasing contracts in situations where land is not really individual property). Among spontaneously reorganizing farms, a substantially higher percentage of land shares is invested in the farm's equity capital. This higher prominence of leasing as the mode of land-share disposition in the international-donor projects is probably the result of well thought-out legal strategies and intensive information campaigns, none of which are available to farms that reorganize spontaneously without international assistance.

Table 3.6. What Shareowners Did with Their Land Shares? (Percent of shareholders in farms with more than 40 founders) I All farms Cargill/KHF I IFC Ronco/USAID I Spontaneous Invested in equity capital 31 3 0 31 45 Leased to farm enterprise 50 85 64+34 65 21 Sold to enterprise 0 0 0 0 0 Transferred to enterprise 13 12 2 0 17 Other 6 0 -- 3 3

Farms report on average paying about 170 UAH ($70) for the use of one 5 ha land share. Only one-third of this amount was paid in cash, and the remaining two-thirds in kind. Wheat is the main commodity used for payment in kind to shareholders: it is reported by the highest number of respondents (30%) and it accounts for half the total payments in kind per shareholder. All other commodities (including flour, sugar, vegetable oil, livestock products) are reported as a medium for payment in kind by fewer than 10 respondents in the sample.

Farm Management

Distribution of land and asset shares to individuals is a prerequisite for internal regrouping of productive resources in units more closely tuned to market operation. Transition to autonomously operating functional subdivisions is therefore one of the primary measures of internal reorganization of former collectives as the next stage of restructuring after share distribution. In the sample, 70% of farms retain a central management body patterned on the former collective; 30% of farms, on the other hand, report that they do not have a central management and the responsibility apparently has shifted to a greater extent to the subdivision level.

In farms with central management, production planning and subdivision control are the main functions of central management (Table 3.7). But beyond this basic function, central management has a high degree of involvement in all facets of farm operation, including input purchasing, product marketing, relations with banks and financial institutions, and labor management. The pervasive involvement of central management in operations is of course a feature carried over from the collective organization, and it probably indicates that not much has changed internally in these farms and their reorganization is still superficial. In farms without central managements, the subdivisions have a much greater degree of independence in various areas of farm operation than in farms that retain central management (Table 3.8). The difference between the two groups of farms is 22 Ukraine: Review of Farm Restructuring Experiences particularly pronounced in financial transactions (own bank account, access to credit) and in purchase of farm inputs.

Table 3.7. Functions of Central Management (percent of 61 farms - 71% of sample - reporting central management) Production planning and subdivision control 90 Coordination of production in subdivisions 49 Provision of farm services to subdivisions 41 Provision of expert services to subdivisions 43 Provision of adninistrative services 39 Purchase of farm inputs for subdivisions 54 Product marketing 53 Relations with banks and financial institutions 46 Labor management, incl. Hiring/firing 49

Table 3.8. Subdivision Independence (percent of respondents in each category) Areas of farm operation in which All farms Farms with central Farns w/out central subdivisions have independence management (7 1%) management (29%) Production planning and management 52 62 41 Input purchase 9 7 24 Product marketing 16 15 29 Own bank account 11 8 24 Access to credit 8 5 24 Own admin staff 15 15 24 Hiring/firing 20 20 29

Managers clearly report that definite changes have taken place in labor relations since reorganization. Thus, 69% of managers report a certain reduction in the labor force, which is of course consistent with the general downsizing during reorganization. Also 50% of managers identify certain positive changes in the behavior of their workers-shareholders (as aggregated over five behavioral variables, including labor discipline, workers' motivation, pilfering, on-the-job drinking, and workers' satisfaction). More detailed information on these changes is presented in Chapter 7.

Private Farms Outside Collectivist Frameworks

The survey covered about 100 private farms in the same districts with the farm enterprises. The private farms were generally created between 1992 and 1995 (nearly 80% of respondents). Practically all farms are registered, with the registration undertaken in the same year when the farm was formed (only the earliest farms created in 1991-1992 registered a year or two later, as no formal registration procedures were available at the very beginning of the process).

Creation of Private Farms. The private farms are typically created by a single family, although 10% of the farms are operated by two or three families. In this sense, private farms in 3. Farn Restructuring Outcomes: Evidence from the Field 23

Ukraine can be characterized as family farms. The average farmer's household has 4 people, with 70% of households in the sample reporting families of between 3 and 5. Only 20% of families live on their farm, but two-thirds live in the village where the farm is located. Distance from the farm is thus not a major problem. Virtually all families live in their own private house, and one-third indicate that they have plans to build a new house within the next two years. All farmers' families have a household plot, in addition to their private farm.

Table 3.9. Reasons for Becoming a Private Farmer (percent of respondents) All respondents Single answer Desire to work independently, without managers 45% 38% Forced by inadequate income from collective farm 32% 35% Desire to ensure the children's future 28% 16% Desire to earn more 22% 6%

The main reasons for becoming a private farmer are shown in Table 3.9. Multiple reasons were given by one-third of respondents, and the answers therefore add up to more than 100%. The distribution of reasons provided by the two-thirds of respondents who gave a single answer is shown in the last column in Table 3.9. Although the percentages are different, the most important reasons remain the same: inadequate income from the collective farm and desire for independence.

Two-thirds of the farmers previously worked on a collective farm. The rest worked in services or industry. People come to farming from relatively high positions in their formerjobs: only 10% of respondents were unskilled workers or junior administrative staff; the rest had managerial, professional, or other skilled positions. The respondents are equally divided between these three categories, so there is no predominance of former collective farm managers among private farmers.

Table 3.10. What Private Farmers Received on Exit from Collective Enterprise (percent of respondents) Received nothing 55% Shares owed by farm enterprise 14% Distribution of shares not completed 10% Received shares in land or assets 19% Received land shares 10% Cash value 0% Plot of land 10% Received asset shares 13% Cash value 1% Physical assets 12% No response 26%

The majority of farmers (55% and probably many of the 26% of no responses in Table 3.10) received nothing when they left the collective farm enterprise. This is consistent with the finding that about half the private farmers actually do not own any land: their entire farm is a leasehold at the present stage. About one-quarter of respondents indicate that they expect to receive their land and 24 Ukraine: Review of Farm Restructuring Experiences asset shares when the distribution process in their former farm enterprise is completed. Only 19% positively state that they received land or asset shares from the former enterprise. The distribution was universally in kind; cash redemption of shares is practically not reported in the sample. The median land share among the few respondents who provided this information is 8 hectare. The median asset share is about 500 UAH ($250).

Exit from the collective farm with a land or asset share apparently requires the approval of the general assembly of shareholders. No other approvals by management or authorities are required. This is the view voiced by practically all the respondents who answered the question, although more than half did not express an opinion.

While most private farms are established by a single family, nearly half the farmers report that their private farm is part of an association. The number of association members ranges from 3 to nearly 900. The median association size is 50 farms, and 50% of associations have between 40 and 200 farms. These associations are primarily service cooperatives: 90% of the members in the sample report using the associations for purchase of inputs and sale of farm products. The associations are far from the traditional format of production cooperative represented by former collective farms: 85% of association members report that they manage their production independently, and another 10% report mixed production arrangements, where the independent role of the farmer is supported byjoint production activities in the association. Practically all respondents feel that they have complete freedom in making production and sales decisions, and that they are masters of the results of their labor and their farm earnings.

Land in Private Farms. The median farm size in the sample is 40 hectare, with half the farms between 10 hectare and 50 hectare in size. The land in private farms is predominantly arable (90% of holdings). The number of parcels is between 1 and 8, with median of 2. There is no clear relationship between the number of parcels and the size of holdings.

Structureof LandTenure in PrivateFarms

Leased 48%

Possession 18/o Privately owned 34%

Figure 3.2. 3. FarmzRestructuring Outcomes: Evidence from the Field 25

The land in private farms derives from two main sources: about one-third is privately owned land and almost half is leased (the rest is held in the old tenurial form of vladenie, or inheritable possession). This is the average structure of land tenure in the sample (Figure 3.2), but more than 40% of private farms surveyed actually do not own any land: all their land is in leasehold. As in previous surveys throughout the ECA region, leasing of land is widely used as a tool for enlarging the farm. The farms with leased land (45% of the sample) are on average larger than farms that do not lease land (60 hectare for farms that lease land and 25 hectare for farms without leased land; the size difference is statistically significant). There is a very strong correlation between farm size and the amount of leased land, and a much weaker correlation between farm size and the privately owned land component. This supports the conclusion that farms grow mainly by leasing, not by accumulation of private land through purchase transactions (only one respondent reported that he had bought land: the purchase involved 1.50 hectare for 600 UAH, or about $240; there were no reports of sale of land by respondents).

Traditionally, land in Ukraine was leased from the state reserve or from the local collective farm. In the survey, however, nearly 20% of private farmers report that they lease land from other private individuals - a phenomenon never observed in previous surveys (Table 3.11). Some 20% of respondents use the traditional channel of leasing from the state and another 10% lease from the collective farm (as well as some other sources). Development of leasing markets for privately owned land, as opposed to state and collective land, is a new dramatic development that emerges from the present survey.

Table 3.11. Land Leasing Among Private Farmers Total Source of leased land

private individuals the state collective farm Respondents leasing land 45% 17% 18% 12% Percent of leased land 48% 19% 16% 13% Leasing termi 3-5 years 1-5 years 10-15 years

Leasing is predominantly medium term (Table 3.11): lease contracts are up to 5 years, although a very small number of contracts with the state are for 10 and 50 years. It is the leasing from collective farms that surprisingly ensures the longest term, between 10 and 15 years, but the access to this source appears to be more restricted than to the other two sources. The feeling of security of tenure is not particularly strong among private farmers. Less than half the respondents believe that they will keep their privately owned land in the future, and one-third of respondents are undecided on this issue.

4. Financial Performance of Reorganized Farm Enterprises

Liquidity and Indebtedness

The balance sheet of Ukrainian farm enterprises consists mainly of fixed assets and equity, which account for around 90% of the total (Table 4.1). In a normal market setting, this would be regarded as a very healthy balance sheet, but in Ukraine (as in all other FSU countries) this is merely the result of periodic indexation of fixed assets in inflationary years. The high component of fixed assets and equity in the balance sheet bears absolutely no relation to the economic value of these assets, and it is mostly a hefty revaluation reserve created by automatic indexing of the historical value of assets to the general price index. In such situations, it is preferable to focus on the current components of the balance sheet, which are not affected by revaluation and represent actual monetary values.

Table 4.1. Average Balance Sheet Structure of Reorganized Farms 1996-1998 (in percent of total assets)

1996 1 997 1998 Total assets, rmil.UAH 11.1 10.1 10.1 Assets Fixed assets 88% 86% 83% Current assets 12% 14% 17% Inventories 10% 12% 15% Financial current assets 2% 2% 2% Accounts receivable 1% 1% 2% Equity and Liabilities Equity 92% 89% 87% Long-tenn debt 1% 0% 0% Current liabilities 7% 11% 13% Accounts payable 6% 10% 11%

On the whole (Table 4.2), the current assets of the average farm exceed the current liabilities (the long-term debt component is negligible, less than 1% of the total, and current liabilities effectively represent the farm's total liabilities). In a market environment, this usually means that the farm has sufficient liquidity to repay its liabilities. Yet a closer look at the composition of current assets shows that they are mostly inventories, with very little financial liquid assets, such as accounts receivable (see Table 4.1). Moreover, the share of inventories in current assets increased substantially between 1996 and 1997. Inventories are not easily converted into cash, and especially in Ukrainian agriculture there is more than just a shadow of suspicion that these inventories may be

27 28 Ukraine: Review of Farm Restructuring Experiences unsaleable and should in fact be written off. If we exclude the potentially illiquid inventories from the analysis and calculate the ratio of financial, and hopefully more liquid current assets to current liabilities, we end up with so-called "quick" or "acid" ratios of around 0.20 (Table 4.2), which is well below any accepted benchmark of liquidity. An additional sign of unsatisfactory liquidity is provided by the clearly downward trend of the acid ratio over time: it declined from 0.25 in 1996 to 0.16 in 1998 (Table 4.2). Less than one-fifth of the average farm's current liabilities can be repaid from its financial assets.

Table 4.2. Current Ratios: 1996-1998 1 1996 1997 1998

Current assets-to-current liabilities 1.7 1.2 1.3

Receivables-to-payables 0.25 0.19 0.16

The deteriorating liquidity of Ukrainian farms is also evident from the changing structure of accounts payable between 1996 and 1998 (Table 4.3). While payables to suppliers of goods and services remained on the level of 45%-50% of total accounts payable, the share of the past-due component increased markedly. It should be noted, however, that although the past-due amounts increased, the frequency of respondents reporting past-due obligations remained at around 75% of the sample over time, without any sign of systematic increase. Tax and payroll arrears combined account for a steady 30% of payables, which does not point to a critical increase in the burden of obligations to the government and the workers.

Table 4.3. Structure of Accounts Payable: 1996-1998 1996 1997 1998 Total accounts payable (mil. UAH) 0.7 1.0 1.2 Goods and services 20% 20% 17% Past-due accounts 27% 25% 31% Taxes 21% 15% 16% Payroll 13% 16% 15% Other payables 19% 24% 21%

One of the reasons for the increasingly illiquid position of the Ukrainian farms is apparently their inability to generate enough sales. Even ignoring the dead weight of unrealistically valued fixed assets, we find that each unit of current assets generated only 0.78 units of sales in 1997 and 0.42 units of sales in 1998 (Table 4.4). Typically, the ratio of sales to current assets is well over 2, and such low and decreasing ratios reveal significant problems with the ability of farms to generate sales from their asset base.

Increasing inventories are just one symptom of this difficulty. It also inevitably leads to a growing burden of debt, as measured relative to the annual volume of sales. Since obligations are ultimately repaid from sales revenue, the ratio of debt to sales (so-called "credit years") is a useful 4. Financial Perftormance of Reorganized Farm Eniterprises 29 measure of indebtedness, especially in situations where standard leverage indicators are meaningless because of overvalued fixed assets. The debt-to-sales ratio for the average Ukrainian farm increased from 1.1 in 1997 to 2.0 in 1998 (Table 4.4). In 1997, it took the sales volume of just over one year to repay the farm debt; in 1998, it would take two years of sales to repay the debt. By this measure of ability to repay, the indebtedness in 1998 was substantially higher than in 1997.

Table 4.4. Turnover Ratios: 1997-1998 1 1997 1998 Sales-to-total assets 0.10 0.07 Sales-to-current assets 0.78 0.42 Debt-to-sales (credit years) 1.1 2.0

Projitabilit

Because of unavoidable fixed operating costs, anemic sales almost automatically lead to operating losses. For an average farm in the survey, total revenue (including price supports, which ran at a negligible level of around 1% of sales) was insufficient to cover the cost of goods sold. The average farm reported losses even before allocation for value-added tax (13%-14% of sales), and in the end result the losses reached 24% of sales revenue in 1997 (Table 4.5). The results for 1998 are still preliminary, and it is too early to judge if they indicate lower losses.

Table 4.5. Profit and Loss Account of Reorganized Farms 1 1997 1998(third quarter) Total revenue (including price support) 1,100 thou. UAH 720 thou. UAH Sales revenue 100% 100% Price support 2% 1% Value-added tax 14% 13% Cost oftgoods sold 111% 103% Gross profit -24% -15%

Among 76 farms reporting costs and revenues in the survey, only 12 farms had accounting profits in 1997 and the remaining 64 farms registered accounting losses (Table 4.6). The profit margin for farms with positive earnings was substantially lower than the "loss margin" for farms with negative earnings. This naturally resulted in negative average per-farm earnings in the sample. Moreover, there was no continuity of profitable history in the sample: of the 12 farms reporting profits in 1997 and 1998, only 3 were profitable in both periods.

In an attempt to overcome the lack of liquidity in the system, caused by pervasive losses and the inability to generate sufficient turnover, farm enterprises are moving to extensive barter arrangements with both buyers and workers. The survey reveals substantial demonetization of sales, with barter representing about 40% of sales revenue in 1997 and 1998. Labor relations are also 30 Ukraine: Review of Farm Restructuring Experiences becoming substantially demonetized, with about 60% of salaries (which average 90 UAH, or about $36 per person per month) paid in kind. Overall, two-thirds of farm managers report that the frequency of barter transactions and the frequency of wage paid in kind has increased during transition.

Table 4.6. Profitability Measured by Margin of Sales: Ratio of Profit/Loss to Sales (in percent of sales) 1997 1998

Profit/loss in Number of Profit/loss in Number of percent of sales farms percent of sales farms Farms reporting profits 11% 12 15% 12 Farms reporting losses -36% 64 -26% 61 Farms reporting profits in both periods 6% 3 16% 3 Farms reporting losses in both periods -39% 55 -29% 53 Overall in the sample -24% 76 -17% 73

Cost Structure and Breakeven Point

Purchased inputs and labor are the main components of farm production costs, accounting jointly for about 75% of the total (Table 4.7). Among purchased inputs, three items - animal feed, fuel, and outside services - account for the bulk of input costs (over 60%; see Table 4.8).

Table 4.7. Structure of Costs: 1997-1998 (in percent of total production costs) 1997 1998 (3rd quarter) Inputs 61 62 Labor 14 13 Social services 6 6 Depreciation 14 11 Other costs 6 7 Total cost (thou. UAH) 2,300 1,600

While purchased inputs are a variable cost, labor in the Ukrainian setting is essentially a fixed cost, as farm enterprises are traditionally reluctant to shed labor, even if suffering from obvious redundancies. Thus, 90% of managers reported that, if unable to meet the payroll, they would simply delay payment of salaries or send some of the workers on leave. Only about 20% of managers were willing to consider the two drastic options of reducing the labor force or slashing the salaries.

In addition to the fixity of labor, another 15%-20% representing the expenditure on social services and depreciation charges are also essentially fixed costs. Thus, Ukrainian farm enterprises operated in 1997-1998 with a cost structure in which around 30% were fixed costs and 70% variable costs. 4. Financial Perfortmance of Reorganized Farm Enterprises 31

Table 4.8. Structure of Input Costs: 1997-1998 (in percent of costs of purchased inputs) 1997 1998 Seeds and seedlings 11 11 Animal feed 27 26 Intermediate products 7 4 Fertilizer 6 6 Fuel 16 16 Electric power 5 5 Heating 1 2 Spare parts 10 9 Outside services 16 21 Total input costs 100 100

At the actual level of operations, the farms reported losses amounting to about 20% of sales (see Table 4.5). By how much should the volume of sales increase for the farms to break even? A simple breakeven analysis based on the observed structure of costs and the actual loss margin indicates that to cover their operating costs the farms should more than double their level of sales compared with 1997 (see box and Figure 4.1). The transition from losses to profits is thus not easily attainable, and radical adjustments are required before farms will become profitable.

BreakevenAnalysis for ReorganizedFarms

Thousands 4

1< Z Vreakvensalea=l,25

0 / 2 Breakevensales = 2,250 0 l 2 3 4 Thousands Parameters:achieved sales 1,000;loss 200; fixed costs360: variablecost 0.84of sales Figure 4.1. 32 Ukraine: Review of Farm Restructuring Experiences

If R(97) is the 1997 sales volume and the farms report a loss of -0.2R(97) (i.e., 20% of sales), then the 1997 total cost is TC(97)=1.2R(97). Of this amount, 0.3TC(97)=0.3 x 1.2R(97) are fixed costs and 0.7TC(97) = 0.7 x 1.2R(97) are variable costs. The factor v = 0.7 x 1.2 is interpreted as the variable cost per unit of sales, based on the actual situation. The standard breakeven relationship (seeking zero profit) thus can be written in the form

0 = R - 0.3 x 1.2R(97) - 0.7 x 1.2R = (I - 0.7 x 1.2)R - 0.3 x 1.2R(97)

where R(97) are the actual 1997 sales (defining the fixed cost component) and R is the sought breakeven sales volume (defining the revenue and the variable costs). Solving this equation for R/R(97), we obtain

R/R(97) = 0.3 x 1.2/(1 - 0.7 x 1.2) = 2.25 (*)

In other words, to break even the average farm should achieve sales equal to 2.25 times the 1997 revenue.

Relationship (*) for R/R(97) can be easily adjusted to simulate alternative cost structures and loss margins. The ratio of fixed costs to variable costs (in 1997) is expressed by the numbers 0.3 and 0.7, respectively, whereas the factor 1.2 indicates that the 1997 total cost was 20% higher than the 1997 sales revenue, resulting in a 20% loss margin on sales. In parametrized form, (*) can be written as

R/R(97) = p(FC) x (I - prof/(I - p(VC) x (1 - prof) (**)

Here p(FC), p(VC) represent the shares of fixed and variable costs in total cost (these two shares naturally add to 1) and prof is the profit margin (positive in case of reported profit, negative in case of reported loss). Changing these parameters in (**), we can repeat the breakeven calculations for any desired cost structure and any given level of losses. 5. Social Infrastructureand Standardof Living

Rural Social Services

Reorganized farm enterprises continue to provide a wide range of social services and benefits to their members. Thus, 60% of farms provide direct financial benefits, which primarily include child allowances to families (50% of respondents), and also stipends to students (20%), subsidized vacations (10%), and even compensation for inflationary price increases (10%). Other than direct financial benefits, farm enterprises universally provide assistance with the cultivation of the household plots in the village (85% of enterprises), and continue to be an important source of food products and transport services (provided by nearly three-quarters of enterprises). The range of non- financial services and benefits provided by farm enterprises to households is shown in Table 5.1.

Free services to members are not widespread anymore (Table 5.1). Basically the only free service is burial. Mechanical assistance with the household plot, a very important component of the rural social sphere, is now free in only one-quarter of the enterprises, and more than half of farm enterprises charge for this essential service, although at a subsidized rate. Over 80% of farm enterprises charge for other services, including food and transport, but also mainly at subsidized riates.

Table 5.1. Household Services Provided by Farm Enterprises (percent of farm enterprises in the sample) Service provided Free Subsidized rates Market rates Ploughing the household plots 85 27 56 2 Burial services 84 55 29 -- Food products 73 9 57 7 Transport 71 8 58 5 Housing construction and repairs 49 4 31 14 Use of enterprise housing 31 3 22 6 Central heating, heating fuel 29 - 22 7 Water 29 9 14 6 Gas 9 - 3 6 Electricity 9 1 2 6 Manufactured goods 8 - - 8

Farm managers are of the opinion that private farmers in their area enjoy equal access with farm employees to all basic services (including kindergartens, schools, transport, medical care, housing and utilities). Indeed, private farmers in their responses generally did not complain of difficulties with daycare, schooling, medical care, and municipal services. Difficulties with transport, supply of heating fuel, house construction and repairs - all of which are services typically provided

33 34 Ukraine: Review of Farm Restructuring Experiences by the farm enterprise to its employees - are reported by less than 20% of private farmers. Overall, private farmers report that they no longer enjoy the benefits received in the past from the farm enterprise, and yet there are no major complaints of difficulties with social services.

Most farm enterprises continue to support the schools and the kindergartens. Other public facilities (including clinics, clubs, and libraries) receive substantially reduced support. The farm enterprise generally does not pay the wages of the workers in these public facilities, nor does it provide any cash support. The main assistance comes through subsidized maintenance and utilities, as well as supply of food products (Table 5.2).

Table 5.2. Support of Public Facilities in Farm Enterprises (percent of enterprises) Enterprises providing Form of support support to facility Pay wages I Maintenance, utilities | Supply food School 73 7 34 33 Kindergarten 64 9 19 36 Medical facilities 48 6 30 12 Club, cultural facility 45 14 28 3 Library 20 4 14 2 Restaurant, cafeteria 42 15 13 14

Table 5.3. Transfer of Social Assets by Farm Enterprises (percent of enterprises) No action Transferred to Transferred to Privatized successor enterprise village council Housing 47 16 7 30 Pre-school facilities 54 19 21 2 School 66 6 27 - Club, cultural facility 45 15 31 Library 62 9 26 Medical facilities 65 13 21 1 Restaurant, cafeteria 54 35 6 4 Water mains 54 20 14 6 Roads 52 26 11 5

The involvement in social services and public facilities represents less than 10% of the enterprise's total volume of expenditure, and only one-quarter of the managers expect the burden of social costs to increase next year. Previous surveys indicate that the budgets available for social and public services were severely curtailed by farm enterprises. This, however, was the result of reduction in the level of services, and not transfer of social assets and services to the local council, as prescribed by law. Table 5.3 shows that at best 25%-30% of farm enterprises transferred some of their social assets to the village council, whereas most farms took no action (transfer to successor enterprise is basically also no action, as the successor enterprise continues to be responsible for these 5. Social Infrastructure and Standard of Living 35 assets out of its operating cash flows). Privatization is naturally a valid option for enterprise housing only, but even this option has been exercised by less than one-third of the farms.

No differences in patterns of provision and support of social services and facilities could be detected between reorganized and non-reorganized farm enterprises because of the smallness of the non-reorganized sample.

In half the farms, state pensions to village pensioners are from 3 to 6 months in arrears. Three-quarters of the farm enterprises in turn are behind in their payments to the social fund, with mean accrued liability of about 200,000 UAH ($80,000).

Family Income for Shareholders of Farm Enterprises

The average cash income of a household in the sample is 136 UAH per month ($55). This is based on actual cash inflows, including the salary component received in cash. The structure of cash family income is shown in the first column in Table 5.4: 46% of cash income is contributed by salaries and pensions and another 39% is sales revenue from the household plot. However, only a relatively small part of salaries is actually paid in cash: the cash-strapped enterprises largely rely on transfers in kind (of both food products and farm inputs) to pay their workers' salaries. The value of salaries received in kind nearly doubles the average monthly income, raising it from 136 UAH ($55) to 245 UAH (nearly $100) per month. In this interpretation of family income, salaries in kind account for 44% of the total (see second column in Table 5.4).

Table 5.4. Structure of Family Income Under Various Assumptions (based on 697 families in the sample) Cash income Cash income and Cash income and Cash income, only value of salaries value of salaries in kind. in kind consumption from and value of household plot consumption from household plot Monthly family income 136 UAH 245 UAH 225 UAH 334 UAH $55 $100 $90 $135 Salary - in kind 44% 33% Salary - cash 23% 13% 14% 9% Pension 23% 13% 14% 9% Other personal 5% 3% 3% 2% Sales from household plot 39% 22% 24% 16% Other business 11% 6% 7% 4% Imputed value of consumption 39% 27% from household plot

In addition to cash income and the value of salaries in kind, it is essential to consider the value of products consumed by the families from their household plots. Subsistence-oriented production is a substitute for purchase of food from commercial channels, and accordingly replaces a certain part of the family's demand for cash. The value of consumption from household production 36 Ukraine: Review of Farm Restructuring Experiences is estimated at 88 UAH per month for the average household in the sample (see box). The value of own consumption thus increases by 36% the family income including the value of salaries in kind (from 245 UAH, or $100, to 334 UAH, or $135, per month; see the last column in Table 5.4).

Allowing for salaries in kind and the value of own food consumption from the household plot, the average per-capita income in the survey was 83 UAH per month ($33). This figure was arrived at in a conservative setting, assuming a 50% gap between the production volume of households that sell and households that do not sell. A smaller gap between the two groups of households will only increase the imputed income from own consumption. In any event, even under our conservative assumption, the average per-capital income of 83 UAH per month is well above the poverty line of73 UAH per month set at the end of 1998.

Estimating the Value of Household Production To estimate the value of household production, we start with data on sales of products from the household plots. About 60% of households report sales from the household plot, and the sales revenue of these "commercial" households averages 88 UAH ($35) per month. Households reporting sales of products from the household plot sell about 50% of their output, and the rest is consumed by the family. Given average sales of 88 UAH per household, we estimate the total value of production for the "commercial" households at 176 UAH ($70) per month, half of which is the value of products from the household plot that the family consumes for its own subsistence. The remaining 40% of households in the sample do not report any sales, and we cannot estimate the value of their production in this direct way. Analysis of household profiles shows that households without sales are generally smaller than "commercial" households, as it is mainly surplus production that is sold. We may thus assume, in a fairly conservative approach, that the households without sales produce on average 50% of the volume of "commercial" households, or 88 UAH ($35) per month, all of which is consumed by the family. Under our assumptions, all households in the sample consume on average 88 UAH ($35) worth of products from their household plots, and this amount should be added to the income that the family draws from conventional sources, including salaries, pensions, and sales revenue.

Family Income for Private Farmers

The main source of income for private farmers' families is farming (76% of family income), augmented by income from other off-farm sources, such as salaries and pensions (16%). Income from farm activities outside primary agriculture still contributes less than 10% to the household budget (Figure 5.1). Remittances from family members abroad are a negligible factor in the sample: only 5% of private farmers report family members working abroad, and none receive financial support from this source. Delays of up to 5 months with pensions are reported by nearly half the families. 5. Social Infrastructure and Standard of Living 37

Structure of Private Farmers' Family Income

Farming 76%

Off-farm 16%

Business 8% Figure 5.1.

Respondents report that their households need on average 1,400 UAH, or $560, per month to maintain a normal standard of living. This figure should be compared with the estimate of less than 350 UAH, or $140, per month obtained in the previous subsection for the actual income of shareholder families in farm enterprises (see Table 5.4).

The respondents' assessment provides a fairly positive picture of the standard of living in private farmers' households (Figure 5.2). Nearly 60% evaluate their standard of living as adequate (in the sense that they can afford to purchase food, clothing, and other household items after satisfying their daily necessities) or even comfortable (in the sense that the family does not

Assessment of the Families' Standard of Living by Private Farmers

Belowsubsistence

Subsistence

Adequate .

Comfortable

0 10 20 30 40 50 Figure 5.2. experience any material difficulties). Another 40% of respondents indicate that their income is sufficient to buy food and daily necessities. Only three respondents complained that they could not 38 Ukraine: Review of Farm Restructuring Experiences afford to buy all the food their families needed. These findings probably point even to an improvement in the economic situation of private farmers compared with the 1996 World Bank survey, in which 70% of respondents characterized their family standard of living as satisfactory or good and 30% described it as poor.

Consistently with the generally positive assessment of the standard of living, 40% of respondents report that the economic situation of their family improved after the establishment of the private farm and only 12% report a deterioration in the economic situation (Figure 5.3). Similarly, 40% of respondents anticipate that their economic situation in the future will improve or at least remain unchanged, and only 12% expect deterioration in the future (these are basically the same respondents who report deterioration since the establishment of the private farm, so in effect the pessimists expect deterioration to continue). Changesin the Families'Economic Situation: Past and Future

Better

Unchanged m Past EAFuture Worse

Undecided

0 10 20 30 40 50 Figure5.3.

The generally favorable assessment of the family standard of living is of course an indication of satisfactory farm performance. Consistently with this conclusion, 85% of farmers indicate that they intend to make some farm investments within the next two years, and most respondents actually have plans for more than just one investment project. The most popular investment is purchase of farm machinery (70% of respondents); it is followed by construction (50%), purchase of processing equipment (30%), purchase of livestock (25%), and planting of new perennials (20%). The projected need for investment funds is around 100,000 UAH ($40,000), and the anticipated rate of return is 30%. The majority of farmers are planning to finance these investments from own savings (55%) and less than 25% propose to use bank credits and other loans. 6. Production and Productivity: Farm Enterprises and Private Farmers

Primary Agriculture

The farm enterprises in Ukraine have always been diversified producers. Continuing this tradition, about 90% of farm enterprises in the sample report mixed production including livestock, crops, and in some cases orchards and vineyards. The product mix of farm enterprises is largely similar to the practice of the pre-reform period, showing a very slight bias in favor of crop production: over 60% of the value of agricultural output in farm enterprises is crop production, while livestock accounts for less than 40% (Figure 6.1). ProductMix in Enterprisesand IndividualFarms (percentof total value of production)

100%

80%

60% riiLivestock *Crops 40%

20%

0% Enterprises Individualfarms Figure 6.1.

The specialization profile of private farmers is fundamentally different from that of large farm enterprises. All private farmers in the sample grow crops, but only 30% are diversified crop and livestock producers, while the remaining 70% specializein crops, without any livestock. The product mix of the average private farm in the survey is over 90% crops and 10% livestock (Figure 6.1). Even the diversified farms with both crop and livestock production (less than one-third of the sample) strongly emphasize crops: their product mix is 75% crops and only 25% livestock (Table 6.1).

The main reason that respondents give for avoiding livestock is lack of profitability (40% of respondents). It thus seems that private farmers have adjusted their product mix in response to market signals to a much greater extent than managers of large farms. Another possible factor, of course, may be lack of startup capital for livestock operation: while the large enterprises have

39 40 Ukraine: Review of Farm Restructuring Experiences inherited the capital infrastructure of the former collective farms, the new independent farmers lack the funds necessary to acquire animals and erect the essential farm buildings. Shortage of capital, however, is not reported as an overriding concern by the respondents.

Table 6.1. Diversification and Product Mix in Farm Enterprises and Individual Farms Specialization profile

Farm enterprises Individual farms

Diversified crops-livestock 90% 30%

Crops only 9% 70% Product mix

Farm enterprises All individual Diversified crop- farms livestock farms Crops 62% 91% 77% Livestock 38% 9% 23%

The main crops for all agricultural producers (both enterprises and individual farms) are grain, sunflower, sugar beet, and feed crops (including hay, annual and perennial grasses, silage corn, and various roots). There are practically no differences in the cropping pattern of reorganized enterprises, non-reorganized enterprises, and individual farms (Table 6.2). About 60% of the cropped area is sown to grain (mostly wheat) and another 20% is under feed crops. Vegetables, potatoes, grapes, or fruit account for a very small fraction of the cultivated area: these crops are primarily produced by household plots, not by commercial farms.

Table 6.2. Cro in Pattern for Different Cate ories of Farms ( ercent of total cro ed area) Reorganized farms Non-reorganized farms IndividLualfarms Grain 59 62 59 Wheat 35 33 44 Sunflower 12 14 12 Sugar beet 6 1 6 Hay, grasses, other feed crops 21 18 21 Other crops 2 5 2 Total cropped area 100 100 100

Although the overall cropping pattern is identical for all producers, there is a difference of a whole order of magnitude between the production volumes of enterprises and individual farms (Table 6.3). This difference in harvest is naturally attributable to the substantial size differential between the two groups of producers: the average cropped area in farm enterprises is close to 2,000 ha, while private farms average less than 100 ha under crops. 6. Production and Productivity: Farrn Enterprises and Private Farmers 41

Reorganization so far has not significantly affected the productivity of land, as crop yields do not reveal clear performance differencesacross farm categories (reorganized and non-reorganized; enterprises and individual farmers). For some crops the mean and median yields of reorganized farms are higher than those of non-reorganized farms, while for other crops the situation is reversed (Table 6.4). But in all cases the differences (in either direction) are not statistically significant, and thus do not support the conjecture that reorganized farms use their land more productively than non- reorganized farms. The only exception is sunflower, for which it is the non-reorganized farms that achieve higher yields, and the difference is statistically significant, but in the "wrong" direction.

Table 6.3. Production Volumes for Different Categories of Farms (ton per farm) Reorganized farms Non-reorganized farms IIndividual farms Grain 2,400 2,900 175 Wheat 1,700 2,600 130 Sunflower 350 850 55 Sugar beet 2,400 1,200 350 Hay, grasses 1,800 500 320 Average cropped area 1,700 ha 2,300 ha 85 ha

Statistically sharper differences emerge when the large farm enterprises (both reorganized and non-reorganized) are compared with independent private farmers, but the situation remains inconclusive. Private farmers achieve significantly higher yields for sugar beet, feed roots, and potatoes; while for wheat and hay it is the large farm enterprises that achieve significantly higher yielcds;for sunflower and vegetables the differences are not statistically significant, and their direction varies. Given the dominance of wheat and hay in the cropping mix of all farms, we cannot conclude that individual farmers are beginning to enjoy a yield advantage relative to enterprises.

Table 6.4. Yields in Farms of Different Categories (kg/ha for crop products; kg/cow/year for milk) Mean Median

Reorganized Non- Private Reorganized Non- Private reorganized farms reorganized farms Grain (aggregate) 2,600 2,300 2,300 2,500 1,800 2,500 Wheat 3,100 2,900 2,500 3,000 2,800 2,500 Sugar beet 17,000 13,700 26,000 15,600 12,400 27,000 Hay 6,700 3,200 4,750 3,400 2,400 1,350 Potatoes 9,000 6,500 14,300 7,300 7,200 14,000 Vegetables 10,000 9,100 12,500 8,400 7,300 5,000 Sunflower 1,100 1,500 3,900 1,100 1,400 1.200 Silage corn 14,000 16,400 - 11,000 16,000 - Milk 1,950 1,600 3,400 1,850 1,500 3,500

A clearer reorganization effect is observed in the productivity of livestock. Milk yields are much higher for individual farms than for enterprises: 3,500 kg per cow per year for individual farms 42 Ukraine: Review of Farm Restructuring Experiences with livestock compared with less than 2,000 kg per cow per year for enterprises (the difference is statistically significant). Milk yields also tend to be somewhat higher for reorganized enterprises: nearly 2,000 kg per cow per year compared with 1,500-1,600 kg per cow per year for non- reorganized enterprises (although here the difference is not statistically significant because of the small number of non-reorganized farms). Thus, livestock productivity on the whole shows an improvement as a result of reorganization. The clearer picture for livestock may be due to measurement problems with crops: milk yields are typically logged almost daily by livestock producers, whereas crop yields per hectare are much more difficult to estimate. Perhaps as more data are collected on crop production and crop yields in farms of different categories we will similarly observe a positive effect in the productivity of land. The best that can be said at this stage is that reorganization appears to boost the productivity of livestock, while the impact of reorganization on crop productivity is still unclear.

Activities Outside Primary Agriculture

All producers, including farm enterprises and private farmers, report some farm services among their activities (Table 6.5). One-quarter of farm enterprises and fully 40% of private farmers engage in provision of services (mechanized field works, transport, processing, marketing, etc.). In most cases farm services are in addition to primary agriculture, not instead. Sale of farm services accounts for 10% of the sales revenue of private farmers (the remaining 90% of sales revenue is derived from primary agriculture).

Table 6.5. Non-Agricultural Activities Reported by Farm Enterprises and Private Farnmers Activity Percent of respondents engaged in corresponding activity

farm enterprises | private farmers Services (of any kind) 26 40 Mechanized field works 11 18 Transport 6 11 Processing 15 9 Marketing and supply 14 9 Construction 6 NA Other small business NA 6

Among private farmers, 23% are engaged in mechanical farm services, which include both provision of mechanized field works (ploughing with tractors, for instance) and transport. Farmers with mechanical equipment and vehicles obviously use their assets to sell services to farmers who do not have machinery. Rental of mechanical services substantially alleviates the widely advertised difficulties with access to machinery among individual producers. 7. Reorganizedand Non-ReorganizedFarms Compared

In addition to 86 reorganized farms, the sample contained 9 non-reorganized farms in the sarne districts, which were selected by local "expert judgment" in contrast to farms generally recognized as reform-minded. The inclusion of a small number of non-reorganized farms in the sample provided a limited opportunity for comparison between farms of two fundamentally different categories. The non-reorganized farms averaged 4,000 ha in 1998, and their size basically remained unchanged since 1995. They were thus comparable in size to the "unsplintered" farms that had undergone one-to-one reorganization without substantial downsizing (see Table 3.3). Similarly to the reorganized farms, all the non-reorganized farms are mixed crop-livestock producers; some of them also have processing facilities and engage in product marketing and input purchasing.

The non-reorganized farms have completed the basic preliminary work for reorganization. Half the non-reorganized farms have already passed the decision to reorganize, and most of these have actually changed their status from collective farm to limited-liability partnership in preparation for reorganization. All the non-reorganized farms, even those that have not yet passed a decision to reorganize, have determined the land shares for their members (an average land share of 4 ha with about 750 shareholders per farm), and half of them have calculated the property shares. Moreover, the determination of land and property shares has not been restricted to accounting calculations. The farms have actually distributed certificates of entitlement in land and property to their members, and these certificates are now in the hands of the members.

Yet so far these farms have not formulated any legal agreements for the use of individual land and property shares, and all resources remain in collective use. Nor have any arrangements been made for future disposition of shares by individual shareholders (whether invest in the equity capital, lease to the enterprise, or establish an independent farm). Despite the lack of formal agreements, the prevailing opinion is that future exit from the enterprise with land and property in kind will require the consent of the general meeting of shareholders.

Workers' Behavior and Evaluation of the Business Environment

Although the land holdings of the non-reorganized farms have not decreased, practically all of them report a decrease in their membership (Table 7.1). This may be more the result of general dissatisfaction than a planned labor-shedding strategy. Thus, managers of non-reorganized farms report a significant deterioration in the behavioral variables of their workers (workers' satisfaction, motivation, pilfering of enterprise resources) much more frequently than managers of reorganized farms do (Table 7.1, Figure 7.1).

Managers of non-reorganized farms give an extremely negative evaluation of the changes in the business environment (worse access to input supply and product marketing channels, worse

43 44 Ukraine: Revievwof Farm Restructuring Experiences

availability of credit), again with much higher frequency than managers of reorganized farms (Table 7.1, Figure 7.2). In line with their negative assessment of workers' behavior and relationships with the business environment, practically all the managers of non-reorganized farms report a decline in output, compared to less than half the managers in reorganized farms (Table 7.1).

Table 7.1. Evaluation of Workers' Behavior and the Business Environment by Managers of Reorganized and Non-Reorganized Farms (percentage of managers in each category) Reorganized fanns J Non-reorganized farms A. Labor Decrease of labor force 64 80 Decline in workers satisfaction 24 67 Decline in workers motivation I1 44 Increase in incidence of theft 44 80 B. Business Environment Deterioration of supply channels 49 100 Deterioration of marketing channels 54 100 Deterioration of access to credit 52 100 C. Far m Operations Decline in farim output 47 90 Economic freedom: Greater 59 22 Unimproved 25 55 Expect improvement following reorganization 45 1 1

Another striking difference between managers of non-reorganized and reorganized farms is observed in their evaluation of the economic freedom of the farm in the new environment (Table 7.1). While 60% of managers of reorganized farms report that their economic freedom has increased in the process of reform, the corresponding percentage among managers of non-reorganized farms is only 20%: in the assessment of fully 55% of managers of non-reorganized farms the economic freedom of their farms today is not better (or actually worse) than in the past.

Managers of reorganized farm enterprises believe in what they are doing: nearly 50% are convinced that the situation of their farms will improve as a result of reorganization (Table 5.1). Managers of non-reorganized farms are much more pessimistic on this count: most of them expect the situation to deteriorate or at best to remain unchanged, while only 10% expect a real improvement as a result of the immediate steps that they are taking toward reorganization (such as distribution of land and asset shares).

We sometimes speculate that reorganized farms are led by managers of a new breed, who infuse new enthusiasm in their member-shareholders. The evidence in the sample does not bear out 7. Reorganized and Non-Reorganized Farms Compared 45

Negative Evaluation of Workers' Behavior (percentof managersassessing deterioration of each behavioralvariable)

percent of managers

60 E3Reorganized 2 Non-reorganized 40

0 Satisfaction Motivation Theft Figure 7.1.

Negative Evaluation of Business Environment (percentof managersassessing deterioration of each factor)

percentof managers

0 Inputs Sales Credit Economicfreedom Output ICIReorganized MNon-reorganized Figure 7.2. this conjecture. To the extent that the very small sample of non-reorganized farms makes it possible to reach any conclusions, the managers appear to be largely individuals of the same profile. In both groups of farms, the managers are 40-45 years old, with higher education, over 10 years of seniority in their current farm enterprise, and over 20 years of experience in agriculture. We were expecting to find the non-reorganized farms managed by old-guard types of advanced age, who naturally would not be receptive to reforms. And yet, the managers of non-reorganized farms are actually slightly younger (42 compared with 47 for managers of reorganized farms; the difference is statistically significant at 10% level) and have been for a shorter time at their present position (3.5 years cormparedwith 8 years for managers of reorganized farms; the difference is statistically significant at 10% level). Perhaps it takes maturity and experience to launch the reorganization, and the relatively new managers of the non-reorganized farms in the sample are still getting ready for the big effort. 46 Ukraine: Review of Farm Restructuring Experiences

Basic Characteristics of Reorganized and Non-Reorganized Farms

Reorganized farms generate more sales on a smaller resource base than non-reorganized farms. This conclusion may be valid only in the sample of farms surveyed, and in the absence of historical performance data it does not allow for the possibility that the farms included in the reorganized sample were better than the non-reorganized farms even before the beginning of reforms. And yet the conclusion is fairly robust in the sample of 72 reorganized farms and 9 non-reorganized, as we shall demonstrate by various performance and efficiency measures in the sections that follow.

Table 7.2 presents the basic characteristics of reorganized and non-reorganized farms (averages per farm). The non-reorganized farms use more land, more labor, and more animals than the reorganized farms, and yet they generate a smaller volume of sales. As a result, the two standard partial productivity measures (sales per hectare and sales per worker) are worse for non-reorganized farms than for their reorganized counterparts. The non-reorganized farms utilize their land and labor resources less productively than the reorganized farms in the sample.

Table 7.2. Basic Characteristics of Reorganized and Non-Reorganized Farms Reorganized (72 farms) Non-reorganized (9 farms) Averages per farm: Sales (thou. UAH) 1,067 902 Land, ha 3,311 3,974 Workers 262 291 Salaries HIGHER LOWER Animals (standard head) 850 864 Purchased inputs, thou. UAH 1,396 1,260 Partial productivity measures: Sales per hectare, UAH 322 227 Sales per worker, UAH 4,073 3,100 Purchased inputs per hectare, UAH 422 317

Purchased inputs are the only resource that reorganized farms use with greater intensity than the non-reorganized farms. Reorganized farms spend more on purchased inputs both in absolute terms and per hectare of land. Perhaps this greater use of purchased inputs, which include fertilizers and plant-protection chemicals, is responsible for greater productivity of land in reorganized farms.

Profitability Measured by Margin of Sales

Having examined the basic input and output characteristics of the reorganized and non- reorganized farms, we can now turn to consider their profitability, or margin of sales (the ratio of profits or losses to sales, expressed in percentage of sales). Table 7.3 presents a comparison of the estimated margins of sales for reorganized and non-reorganized farms in the survey for 1997 and the 7. Reorganized and Non-Reorganized Farms Compared 47 third quarter of 1998. The margins are all negative, because the farms predominantly reported losses for these periods. The non-reorganized farms had more negative profit margins (higher loss rates) than the reorganized farms both in 1997 and in 1998 (only the difference in 1997 was statistically significant, however).

There are fairly large differences in Table 7.3 between the 1997 margins for reorganized farms in different projects. In 1998, on the other hand, we observe convergence among the projects. Yet, none of the differences across projects are statistically significant: the number of farms in any two categories is so small that even the difference between - 3% and - 46% in 1997 does not come out statistically significant.

Table 7.3. Margin of Sales by Reorganization Category: 199 and 1998 (in percent of sales) 1997 1998 (3rd quarter)

Numberof Mean Median Number of Mean |Median farms farms l Non-reorganized farms 9 -83* -53 8 -53 -34 Reorganized farms 76 -36* -25 73 -30 -21 CTS/KHF 7 -3 -8 5 -34 -23 IFC 7 -20 -15 7 -24 -25 Ronco 20 -27 -28 19 -24 -11 Own initiative 45 -46 -32 42 -34 -21 * The percentage losses for non-reorganized farms in 1997 are significantly greater than for reorganized farms; the difference in 1998 is in the same direction, but it is not statistically significant.

Productive Efficiency: Production Function Approach

We have previously noted that the partial productivities of land and labor (i.e., sales per hectare and sales per worker) are higher in reorganized than in non-reorganized farms (Table 7.2). Farms use land and labor as part of a whole bundle of inputs, which are applied simultaneously to generate a certain output. The total or overall productivity is a measure of output produced by a given combination inputs, and not just by land or labor taken separately. One of the standard techniques for comparing the total productivity of two groups of producers is by estimating their respective production functions and examining the incremental output produced by farms of one group relative to farms of another group for each combination of inputs. The regression method used to estimate the production function allows for the covariate impact on sales of all inputs taken jointly.

A Cobb-Douglas production function was estimated by the ordinary least-squares regression method for the set of non-reorganized and reorganized farms. The total revenue from farm sales (combining sales of crop and livestock products) was used as the output variable in the production function; the input variables were land (in hectare), labor (as measured by salaries), costs of purchased inputs, and the number of animals (properly standardized). The choice of the output and the five inputs for production function estimation was determined by the data available in the survey. 48 Ukraine: Review of Farm Restructuring Experiences

Table 7.4 shows the regression estimators of the contribution of all five inputs to farm sales (the regression was run with logged variables). The variable 'reorganization' in the table represents the impact of reorganization on the production function: for each combination of inputs, reorganized farms produce 0.340 units of logged sales more than non-reorganized farms. This translates into a 40% advantage in sales of reorganized farms compared with non-reorganized farms at each level of input use. The productive advantage of reorganized farms is statistically significant.

Table 7.4. Estimated Production Function for Reorganized and Non-Reorganized Farms Regression coefficients Significance level Intercept 0.421 0.524 Land 0.022 0.791 Purchased inputs 0.612 0.000 Animals 0.107 0.192 Labor 0.152 0.253 Reorganization 0.340 0.020 R-square 0.61

Technical Efficiency: Production Frontier Approach

The impact of reorganization also can be assessed by comparing the so-called technical efficiency of reorganized and non-reorganized farms. The technical efficiency of a productive unit is usually measured by its relative distance from the production frontier, which is the locus of maximum attainable outputs for each given combination of inputs. The technical efficiency attains the highest value of 1 for points on the frontier, and decreases for points at greater distances from the frontier. In the absence of a theoretical production frontier, an empirical frontier is estimated from the actually observed bundles of inputs and outputs. Two standard techniques are used for estimation of technical efficiency. These are: (a) stochastic frontier analysis, a regression-like econometric method that assumes constant returns to scale and stochastic errors in observed input-output combinations, and (b) data envelopment analysis, a non-parametric linear-programming technique that constructs a deterministic production frontier allowing variable returns to scale

.Table 7.5. Mean Technical Efficiency Index of Reorganized and Non-Reorganized Farms: Stochastic Frontier and Data Envelopment Analysis Reorganized Non-reorganized F-test significance of (68 farms) (9 farms) difference

Stochastic Frontier 0.73 0.62 0.014

Data Envelopment Analysis 0.66 0.49 0.045

Both methods were applied to estimate the technical efficiency of reorganized and non- reorganized farms in the survey from their reported inputs and outputs (using the same variables as in production function estimation; see Table 7.4 above). Table 7.5 presents the mean technical 7. Reorganized and Non-Reorganized Farms Compared 49 efficiency indices obtained for the two categories of farms. The mean technical efficiency of reorganized farms is higher than that of non-reorganized farms by both methods (the difference is statistically significant by the parametric ANOVA test and by the non-parametric Wilcoxon test). Yet it should be noted that the average technical efficiency index is quite low even for the reorganized farms (0.7 out of the maximum achievable value of 1), which implies that very few reorganized farms actually attain the efficient frontier and most of them lie at a considerable distance from the frontier. StochasticFrontier: Sales vs AnimalsPlane

10 logsales

8 - r------C

n~~~~~~~~~~~~~~~ ;

4 --- c C -Sp uc b

0~~~~~~~0

4 5 6 7 8 loganimals Figure 7.3. Reorganized farms - white; non-reorganized farms - black.

DataEnvelopment Frontier: Sales vs AnimalsPlane

sales (million UAH))

4 ------

0 0 500 1000 1500 2000 2500 number of animals Figure 7.4. Reorganized farms - white; non-reorganized farms - black. 50 Ukraine: Review of Fann Restructuring Experiences

In all these models, the output is a function of four inputs, and its representation requires a five-dimensional space. To visualize the production frontier and the location of the reorganized and non-reorganized farms relative to the frontier, we created a two-dimensional projection of the observation points, plotting the sales as a function of one input (instead of four), while the other inputs were held constant at their mean values. Such two-dimensional projections of sales as a function of the size of the livestock herd are shown in Figure 7.3 (stochastic frontier model) and Figure 7.4 (data envelopment model). The production frontiers are drawn as a solid line. The stochastic frontier in Figure 7.3 is a straight line fitted by a special regression technique to logged observations. The data envelopment frontier in Figure 7.4 is a piecewise-convex hull traced by the extreme points in the input-output plane. In both diagrams, the non-reorganized farms (shown by black squares) are located on average farther away from the frontier than the reorganized farms (white circles), and not a single observation from the non-reorganized farms lies on the non- parametric production frontier in Figure 7.4. This explains why the mean technical efficiency of the reorganized farms is higher.

* * *

Comparison of reorganized and non-reorganized farm enterprises by various measures, both qualitative and quantitative, seems to indicate that, in the present sample, reorganized enterprises are performing better than the non-reorganized ones. Despite the observed advantage, the absolute performance level of the reorganized farm enterprises is very low: managers often give negative evaluations of workers' behavior and the business environment (although less frequently than in non- reorganized enterprises), profit margins are generally negative (although less so than in non- reorganized enterprises), and technical efficiency measures are on the whole inadequate (although higher than in non-reorganized enterprises). Nevertheless, this finding is certainly an encouraging sign in our evaluation of the outcomes of farm restructuring in Ukraine, but even the restructured farms still have a long way to go before they will be judged profitable and efficient by market standards. SelectedReferences on Land Reformand Farm Restructuring in TransitionEconomies

World Bank Country Reports and Agricultural Sector Reviews

Food and Agricultural Policy Reforms in the Former USSR: An Agenda for the Transition, Studies in Economics of Transformation, Vol. 1, The World Bank, Washington, DC (1992). An Agricultural Strategy for Albania, The World Bank and the European Community, Washington, DC (1992). Albania: Building a New Economy, Report No. 12342-ALB, The World Bank, Washington, DC (1994). Armenia: The Challenge of Reform in the Agricultural Sector, The World Bank, Washington, DC (1995). Azerbaijan: Agricultural Sector Review, Report No. 14541-AZ, The World Bank, Washington, DC (1995). Belarus: Agriculture and Food Sector Review, Report No. 12576-BY, The World Bank, Washington, DC (1994). Estonia: Agriculture and Forestry Sector Review, Report No. 13316-EE, The World Bank, Washington, DC (1995). Georgia: Agriculture and Food Sector Review, Report No. 14659-GE, The World Bank, Washington, DC (1995). Hungary: Review ofAgricultural Policy, Report No. 13475 HU, The World Bank, Washington, DC (1994). Kazakhstan: Agricultural Sector Review, Report No. 13334-KZ, The World Bank, Washington, DC (1994). The Kyrgyz Republic: Agricultural Sector Review, Report No. 12989-KG, The World Bank, Washington, DC (1994). Latvia: Agricultural Sector Review, Report No. 12401-LV, The World Bank, Washington, DC (1994). Lithuania: Agriculture and Food Sector Review, Report No. 13111-LT, The World Bank, Washington, DC (1995). Moldova: Moving to a Market Economy, World Bank Country Study, The World Bank, Washington, DC (1994). Moldova: Agriculture Sector Review, Report No. 12581-MD, The World Bank, Washington, DC (1995). An Agricultural Strategy for Poland, The World Bank and the European Community, Washington, DC (1990). Romania: A Strategy for the Transition in Agriculture, Main Report, The World Bank, Washington, DC (1993). Turkmenistan, World Bank, Washington, DC (1994). Turkmenistan: Review of the Agrarian Sector, Report No. 15621-TM (draft), The World Bank, Washington, DC (1996). Ukraine: The Agriculture Sector in Transition, The World Bank, Washington, DC (1994). Uzbekistan: An Agendafor Economic Reform, The World Bank, Washington, DC (1993). Uzbekistan Economic Memorandum: Subsidies and Transfers, Report No. 12934-UZ, The World Bank, Washington, DC (1994).

51 52 Ukraine: Review of Farm Restructuring Experiences

World Bank Farm Surveys

K. Brooks and Z. Lerman. Land Refonn and Farm Restructuring in Russia, World Bank Discussion Paper 233, The World Bank, Washington, DC (1994). K. Brooks, E. Krylatykh, Z. Lerman, A. Petrikov, and V. Uzun. Agricultural Reform in Russia: A View from the Farm Level, World Bank Discussion Paper 327, The World Bank, Washington, DC (1996). Euroconsult. Fann Restructuring and Land Tenure in Reforming Socialist Economies: A Comparative Analysis of Eastern and Central Europe, World Bank Discussion Paper 268, The World Bank, Washington, DC (1994). Euroconsult. Regional Study: Farm Restructuring and Land Tenure in Reforming Socialist Economies, Annex V.:Report on Land Market Issues, Arnhem, The Netherlands (1994). Z. Lerman, K. Brooks, and C. Csaki. Land Reform and Farm Restructuring in Ukraine, World Bank Discussion Paper 270, The World Bank, Washington, DC (1994). Z. Lerman and C. Csaki, Land Reform in Ukraine: The First Five Years, World Bank Discussion Paper 371, The World Bank, Washington, DC (1997). Z. Lerman, C. Csaki, and V. Moroz, Land Reform and Farm Restructuring in Moldova: Progress and Prospects, World Bank Discussion Paper 398, The World Bank, Washington, DC (1998). Z. Lerman, M. Lundell, A. Mirzakhanian, P. Asatrian, and A. Kakosian, Armenia's Private Agriculture: 1998 Survey of Family Farms, Environmentally and Socially Sustainable Development Working Paper No. 17, The World Bank, Washington, DC (1999). Land Reform and Private Farms in Armenia: 1996 Status, EC4NR Agriculture Policy Note No. 8, Natural Resources Management Division, Europe and Central Asia Region, The World Bank, Washington, DC (1996). Land Reform and Private Fanns in Georgia: 1996 Status, EC4NR Agriculture Policy Note No. 6, Natural Resources Management Division, Europe and Central Asia Region, The World Bank, Washington, DC (1966). Private Agriculture in Romania: Farm Survey, Romanian Ministry of Agriculture and Food, European Commission, and The World Bank, Bucharest (1997).

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J. Aves. Georgia: From Chaos to Stability, The Royal Institute of International Affairs, London (1996). H. Binswanger, K. Deininger, and G. Feder. "Power, Distortions, Revolt and Reform in Agricultural Land Relations," in: J. Behrman and T. N. Srinivasan, eds., Handbook of Development Economics, vol. III, chapter 42, pp. 2659-2772, Elsevier Science (1995) . K. Brooks and Z. Lerman. "Farm Reform in the Transition Economies," Finance and Development, 31(4): 25-28 (1994). K. Brooks and Z. Lerman. "Restructuring of Traditional Farms and New Land Relations in Russia," Agricultural Economics, 13: 11-25 (1995). P. Craumer. Rural andAgricultural Development in Uzbekistan, The Royal Institute of International Affairs, London (1995). C. Csaki. "Where is Agriculture Heading in Central and Eastern Europe?" Presidential Address, XXII International Congress of Agricultural Economists, Harare, Zimbabwe, Aug. 22-28, 1994. C. Csaki, M. Debatisse, and 0. Honisch. Food and Agriculture in the Czech Republic: From a "Velvet" Transition to the Challenges ofEUAccession, World Bank Technical Paper 437, Europe and Central Asia Environmentally and Socially Sustainable Rural Development Series; The World Bank, Washington, DC (1999). SelectedReferences on LandReform and FarmRestructuring 53

C. Csaki, K. Gray, Z. Lerman, and W. Thiesenhusen. "Land Reform and the Restructuring of Kolkhozes and Sovkhozes," in: Food and Agricultural Policy Reforms in the Fortner USSR: An Agenda for Transition, Background Working Papers, Vol. I, The World Bank, Washington, DC (1992). C. Csaki and Z. Lerman. "Land reform and the future role of cooperatives in agriculture in the former socialist countries in Europe," in: C. Csaki and Y. Kislev, Eds., Agricultural Cooperatives in Transition, Westview, Boulder, CO (1993). C. Csaki and Z. Lerman. "Land Reform and Farm Sector Restructuring in the Former Socialist Countries in Europe," European Review of Agricultural Economics, 21(3/4): 555-578 (1994). C. Csaki and Z. Lerman. "Agricultural transition revisited: issues of land reform and farm restructuring in East Central Europe and the Former USSR," Quarterly Journal of International Agriculture, 35(3):211-240 (1996). C. Csaki and Z. Lerman. "Land Reform and Farm Restructuring in East Central Europe and the CIS in the 1990s: Expectations and Achievements after the First Five Years," European Review ofAgricultural Economics, 24(3/4):428-452 (1997). C. Csaki and Z. Lerman. "Land Reform in Ukraine: Slow Progress," Society and Economy in Central and Eastern Europe, 19(4):46-70 (1997). C. Csaki and Z. Lerman. "Land Reform and Farm Restructuring in Hungary during the 1990s," in: S. Wegren, Ed., Land Reform in the Former Soviet Union and Eastern Europe, Routledge, London- New York (1998). C. Csaki and J. Nash. The Agrarian Economies of Central and Eastern Europe and the Commonwealth of Independent States: Situation and Perspectives, World Bank Discussion Paper 387, The World Bank, Washington, DC (1997). K. Deininger. Cooperatives and the Breakup of Large Mechanized Farms: Theoretical Perspectives and Empirical Evidence, World BankDiscussion Paper 218, The World Bank, Washington, DC (1993). J. Delehanty and J. Rasmussen. "Land reform and farm restructuring in the Kyrgyz Republic," Post-Soviet Geography, 36(9): 565-586 (1995). European Commission. Agricultural Situation and Prospects in the Central and Eastern European Countries, Summary Report and Country Reports, Directorate-General for Agriculture (July 1995). D. Gavrilescu. "Romania Facing the European Agrifood Integration: The Shock of Transition," VIIth EAAE Congress, Stresa, Italy, Contributed Papers, Volume F: Agricultural Development and Transition, pp. 15-28 (1993). I. Jeffries. Socialist Economies and the Transition to the Market, Routledge, London (1993). Hungary. Hungarian Land Reform and Farm Restructuring, EC2AU Agriculture Policy Note, Agriculture and Urban Development Operations Divisions, Europe and Central Asia Region, The World Bank, Washington, DC (1997). N. Kazlauskiene and W. Meyers. "Preprint for accession to the EU: Transition policies for transition economies," Report 96-BR 23, Center for Agricultural and Rural Development, Iowa State University (July 1996). S. Kodderitzsch. Reforms in Albanian Agriculture: Assessing a Sector in Transition, World Bank Technical Paper 431, Europe and Central Asia Environmentally and Socially Sustainable Rural Development Series, The World Bank, Washington, DC (1999). U. Koester and K. Brooks. Agriculture and German Reunification, World Bank Discussion Paper No. 355, The World Bank, Washington, DC (1997). Z. Lerman. "Changing land relations and farming structures in formerly socialist countries," in: G. Wunderlich, Ed., Agricultural Landownership in Transitional Economies, University Press of America, Lanham, MD (1995). Z. Lerman. "Land Reform in Uzbekistan," in: S. Wegren, Ed., Land Reform in the Former Soviet Union and Eastern Europe, Routledge, London-New York (1998). 54 Ukraine: Review of Farm Restructuring Experiences

Z. Lerman. "Experience with Land Reform and Farm Restructuring in the Former Soviet Union," in: J. Swinnen, A. Buckwell, and E. Mathijs, Eds., Agricultural Privatisation, Land Reform and Farm Restructuring in Central and Eastern Europe, Avebury, Aldershot, UK (1998). Z. Lerman. "Does Land Reform Matter? Some Experiences from the Former Soviet Union," European Review ofAgricultural Economics, 25: 307-330 (1998). Z. Lerman. "Land Reform and Farm Restructuring: What Has Been Accomplished to Date?" American Economic Review, 89(2): 271-275 (1999). Z. Lerman. "Land Reform and Farm Restructuring in Ukraine," Problems of Post-Communism, 46(3): 42-55 (1999). Z. Lerman and K. Brooks. "Russia's legal framework for land reform and farm restructuring," Problems of Post-Communism, 43(6): 48-58 (1996). Z. Lerman and K. Brooks. "Land reform in Turkmenistan," in: S. Wegren, Ed., Land Reform in the Former Soviet Union and Eastern Europe, Routledge, London-New York (1998). Z. Lerman, K. Brooks, and C. Csaki. "Restructuring of Traditional Farms and New Land Relations in Ukraine," Agricultural Economics, 13: 27-37 (1995). Z. Lermnan,J. Garcia-Garcia, and D. Wichelns. "Land and water policies in Uzbekistan," Post-Soviet Geography and Economics, 37(3): 145-174 (1996). L. Lueschen. "Problems of Agricultural Policy in East Germany," Agriculture and Human Values, Winter, pp. 27-39 (1993). E. Mathijs and J. Swinnen, "The Economics of Agricultural Decollectivization in East Central Europe and the Former Soviet Union," Economic Development and Cultural Change, 47(1): 1-26 (1998). W. Meyers, N. Kazlauskiene, I. Feiferis, and V. Loko. "Agricultural Transformation and Privatization in the Baltics," Report 92-BR 7, Center for Agricultural and Rural Development, Iowa State University (December 1992). P. Mishev, ed. Nature, Evolution and Efficiency of Farm Structures in CEE Countries and FSU, 58th EAAE Seminar, Sofia, May 1998, in: Bulgarian Journal ofAgricultural Science, Vol.5, special issue (April 1999). Moldova. Moldova Agriculture Policy Update, EC4NR Agriculture Policy Note #5, Natural Resources Management Division, Europe and Central Asia Region, The World Bank, Washington, DC (September 1996). Moldova. With Farmer's Eyes: A Grassroots Perspective on Land Privatization in Moldova, EC4NR Agriculture Policy Note #7, Natural Resources Management Division, Europe and Central Asia Region, The World Bank, Washington, DC (October 1996). Moldova. Land Reform and Private Farming in Moldova EC4NR Agriculture Policy Note #9, Natural Resources Management Division, Europe and Central Asia Region, The World Bank, Washington, DC (January 1997). M. Mudahar. Kyrgyz Republic: StrategyforRural Growth and PovertyAlleviation, World Bank Discussion Paper 394, The World Bank, Washington, DC (1998). R. Prosterman and T. Hanstad, eds. Legal Impediments to Effective Rural Land Relations in Eastern Europe and Central Asia: A Comparative Perspective, World Bank Technical Paper 436, Europe and Central Asia Environmentally and Socially Sustainable Rural Development Series, The World Bank, Washington, DC (1999). G. Schmitt. "Why Collectivization of Agriculture in Socialist Countries Has Failed: A Transaction Cost Approach," in: C. Csaki and Y. Kislev, Agricultural Cooperatives in Transition, Westview, Boulder, Co. (1993). A. Schmitz, K. Moulton, A. Buckwell, and S. Davidova, Eds., Privatization ofAgriculture in New Market Economies: Lessonsfrom Bulgaria, Kluwer, Dordrecht (1994). SelectedReferences on Land Reformand FarmRestructuring 55

J. Swinnen, Ed. Political Economy ofAgrarian Reform in Central and Eastern Europe, Ashgate, Aldershot, UK (1998). J. Swinnen, A. Buckwell, and E. Mathijs, Eds., Agricultural Privatisation, Land Reform and Farm Restructuring in Central and Eastern Europe, Avebury, Aldershot, UK (1998). R. Trendafilov and V. Ivanova-Gidikova. "Reform and Market Adjustment of the Bulgarian Agricultural Sector," Vllth EAAE Congress, Stresa, Italy, Contributed Papers, Volume F: Agricultural Development and Transition, pp. 1-14 (1993). S. Wegren. The development of market relations in agricultural land: the case of Kostroma Oblast, Post- Soviet Geography, 34(8): 496-512 (1995). S. Wegren, Ed., Land Reform in the Former Soviet Union and Eastern Europe, Routledge, London-New York (1998). G. Wunderlich, ed., Agricultural Landownership in Transitional Economies, University Press of America, Lanham, MD (1995). R. Zile. "The Development of Privatization in Latvian Agriculture," Report 93-BR 14, Center for Agricultural and Rural Development, Iowa State University (October 1993).

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Recent World Bank Technical Papers (continued)

No. 415 Feitelson and Haddad, Identification of Joint Management Structuresfor Shared Aquifers: A Cooperative Palestinian-Israeli Effort No. 416 Miller and Reidinger, eds., Comprehensive River Basin Development: The Tennessee Valley Authority No. 417 Rutkowski, Welfare and the Labor Market in Poland: Social Policy during Economic Transition No. 418 Okidegbe and Associates, Agriculture Sector Programs: Sourcebook No. 420 Francis and others, Hard Lessons: Primary Schools, Community, and Social Capital in Nigeria No. 421 Gert Jan Bom, Robert Foster, Ebel Dijkstra, and Marja Tummers, Evaporative Air-Conditioninlg: Applications for Environmentally Friendly Cooling No. 422 Peter Quaak, Harrie Knoef, and Huber Stassen, Energy from Biomass: A Review of Combustion and Gasifica- tion Technologies No. 423 Energy Sector Unit, Europe and Central Asia Region, World Bank, Non-Payment in the Electricity Sector in1 Eastern Europe and the Former Soviet Union No. 424 Jaffee, ed., Southern African Agribusiness: Gaininlgtlhrouglh Regional Collaboration No. 42.5 Mohan, ed., Bibliography of Publications: Africa Region, 1993-98 No. 426 Rushbrook and Pugh, Solid Waste Landfills in Middle- and Lower-Income Countries: A Technical Guide to Planning, Design, and Operation No. 427 Mariilo and Kemper, Institutional Frameworks in Successful Water Markets: Brazil, Spain, and Colorado, USA No. 428 C. Mark Blackden and Chitra Bhanu, Gender, Growth, and Poverty Reduction: Special Program of Assistance for Africa, 1998 Status Report on Poverty in Sub-Saharan Africa No. 429 Gary McMahon, Jose Luis Evia, Alberto Pasc6-Font, and Jose Miguel Sanchez, An Environmental Study of Artisanal, Small, and Medium Mining in Bolivia, Chile, and Peru No. 430 Maria Dakolias, Court Performance around the World: A Comparative Perspective No. 431 Severin Kodderitzsch, Reforms in Albanian Agriculture: Assessing a Sector in Transition No. 432 Luiz Gabriel Azevedo, Musa Asad, and Larry D. Simpson, Management of Water Resources: Bulk Water Pricing in Brazil No. 4:33 Malcolm Rowat and Jose Astigarraga, Latin American Insolvency Systems: A Comparative Assessment No. 4'34 Csaba Csaki and John Nash, eds., Regional and International Trade Policy: Lessonsfor the EU Accession in the Rural Sector-World Bank/FAO Workshop, June 20-23, 1998 No. 4:36 Roy Prosterman and Tim Hanstad, ed., Legal Impediments to Effective Rural Land Relations in Eastern Europe and Central Asia: A Comparative Perspective No. 437 Csaba Csaki, Michel Dabatisse, and Oskar Honisch, Food and Agriculture in the Czech Republic: From a "Velvet" Transition to the Challenges of EU Accession No. 443 Luc Lecuit, John Elder, Christian Hurtado, Francois Rantrua, Kamal Siblini, and Maurizia Tovo, DeMIStifying MIS: Guidelines for Management Information Systems in Social Funds No. 444 Robert F. Townsend, Agricultural Incentives in Sub-Saharan Africa: Policy Challenges No. 445 Ian Hill, Forest Management in Nepal: Economics of Ecology No. 446 Gordon Hughes and Magda Lovei, Economic Reform and Environmental Performance in Transition Economies No. 447 R. Maria Saleth and Ariel Dinar, Evaluating Water Institutions and Water Sector Performance No. 449 Keith Oblitas and J. Raymond Peter in association with Gautam Pingle, Halla M. Qaddumi, and Jayantha Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 And res Rigo Sureda and Waleed Haider Malik, eds., Judicial Challenges in the New Millennium: Proceedings of the Second Summit of the Ibero-AmericaniSupreme Courts No. 451 World Bank, Privatization of the Power and Natural Gas Industries in1Hun1gary and Kazakhstan No. 452 Lev Freinkman, Daniel Treisman, and Stephen Titov, Subnational Budgeting in Russia: Preempting a Potential Crisis No. 454 Julia Bucknall, Poland: Complying with EU Environmental Legislature No. 455 Dale F. Gray, Assessment of Corporate Sector Value and Vulnerability: Links to Exchange Rate and Finanicial Crises No. 456 Salman M.A. Salman, ed., Groundwater: Legal and Policy Perspectives: Proceedings of a World Bank Seminar No. 457 Mary Canning, Peter Moock, and Timothy Heleniak, Reforming Education in the Regions of Russia THE WORLD BANK

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