WORLD BANK TECHNICAL PAPER NO. 459

Europe and Central Asi Environmentally and Socially SustainableS Development Series

Work In progreT 4for public disculion WTP=459

UkraineReview of Farm Restructuring Experiences

1~~~~~~~~~~~ L< IU.z -.S.

Zvi LermanCsaba Csaki

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WORLD BANK TECHNICAL PAPER NO. 459

Europe and CentralAsia Environmentally and Socially SustainableDevelopment Series

UkraineReview of Farm Restructuring Experiences

Zvi LermanCsaba Csaki

The World BankWashington, D.C.

Copyright © 2000The International Bank for Reconstructionand Development/THE WORLD BANK1818 H Street, N.W.Washington, D.C. 20433, U.S.A.

All rights reservedManufactured in the United States of AmericaFirst printing January 2000

Technical Papers are published to communicate the results of the Bank's work to the developmentcommunity with the least possible delay. The typescript of this paper therefore has not been prepared inaccordance with the procedures appropriate to formal printed texts, and the World Bank accepts noresponsibility for errors. Some sources cited in this paper may be informal documents that are notreadily available.

The findings, interpretations, and conclusions expressed in this paper are entirely those of theauthor(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 doesnot guarantee the accuracy of the data included in this publication and accepts no responsibility for anyconsequence of their use. The boundaries, colors, denominations, and other information shown on anymap in this volume do not imply on the part of the World Bank Group any judgment on the legal statusof any territory or the endorsement or acceptance of such boundaries.

The material in this publication is copyrighted. The World Bank encourages dissemination of itswork and will normally grant permission promptly.

Permission to photocopy items for internal or personal use, for the internal or personal use ofspecific clients, or for educational classroom use, is granted by the World Bank, provided that theappropriate fee is paid directly to Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA01923, U.S.A., telephone 978-750-8400, fax 978-750-4470. Please contact the Copyright Clearance Centerbefore photocopying items.

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All other queries on rights and licenses should be addressed to the World Bank at the address aboveor faxed to 202-522-2422.

ISBN: 0-8213-4666-0ISSN: 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'sDevelopment Economics Research Group. Csaba Csaki is lead agricultural adviser in the Environmen-tally and Socially Sustainable 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 ........................................................ vPreface ...................................... viiAbstract ...................................... ixSummary and Conclusions .................................................... xiIntroduction .. 1................................... 1. Framework for Farm Restructuring in Ukraine ................................. 32. Farm Restructuring Projects Administered by International Donors ..... .......... 73. Farm Restructuring Outcomes: Evidence from the Field ......................... 174. Financial Performance of Reorganized Farm Enterprises ........................ 27S. Social Infrastructure and Standard of Living .................................. 336. Production and Productivity: Farm Enterprises and Private Farmers ..... ......... 397. Reorganized and Non-Reorganized Farms Compared ........................... 43Selected References on Land Reform and Farm Restructuring in Transition Economies . 51

Figures in TextA. Negative Evaluation of Workers's Behavior .xiiB. Average Size of Family Farms with and without Leased Land .xvC. Structure of Family Income .xvi2.1 Distribution of Successor Farms in Donor Projects .112.2 Farm Reorganization and Reallocation of Land .132.3 Inequality of Land Distribution in the KHF Odessa Project .153.1 Distribution of the Number of Founding Members .193.2 Structure of Land Tenure in Private Farms .244.1 Breakeven Analysis for Reorganized Farms .315.1 Structure of Private Farmers' Family Income .375.2 Assessment of the Families' Standard of Living by Private Farmers .375.3 Changes in the Families' Economic Situation: Past and Future .386.1 Product Mix in Enterprises and Individual Farms .397.1 Negative Evaluation of Workers' Behavior .457.2 Negative Evaluation of Business Environment .457.3 Stochastic Frontier: Sales vs. Animals Plane .497.4 Data Envelopment Frontier: Sales vs. Animals Plane .49

Tables in TextA. Break-up of Large Farms in International Donor Projects in Ukraine .xiiB. Margin of Sales by Reorganization Category: 1997 and 1998 .xiiiC. Median Yields in Farms of Different Categories .xiiiD. Number of Shares Used by Single-Founder and Multi-Founder Farms .xv1.1 Sample Design: Number of Farms by Oblast and by Reorganization Strategy. 4

iii

1.2 Characterization of Organizational Forms ..................................... 52.1 International Farm Restructuring Projects in Ukraine: March 1999 ................. 72.2 Main Activity Stages as Implemented in Three Farm-Restructuring Projects .... ..... 92.3 Farm Restructuring in International Donor Projects in Ukraine ................... 102.4 Multiple Fragmentation of Ronco Farms During Restructuring ................... 112.5 Distribution of Organizational Forms Among Restructured Farms ..... ........... 122.6 Distribution of Land and Average Farm Size in Ronco and IFC Project Farms .... ... 132.7 Reallocation of Land to Asset Farms in the KHF Odessa Project .................. 142.8 Titling in Ronco Farms: Status as of February 1999 ............................ 163.1 Distribution of Farms by Organizational Form ................................ 173.2 Division of Parent Collective Farms in the Process of Reorganization ..... ......... 183.3 Mean Farm Sizes for Different Groups of Enterprises .......................... 183.4 Distribution of the Number of Founding Members and Average Farm Size .... ...... 193.5 Number of Shares Used by Single-Founder and Multi-Founder Farms ..... ........ 203.6 What Shareowners Did with Their Land Shares ............................... 213.7 Functions of Central Management .......................................... 223.8 Subdivision Independence . ................................................ 223.9 Reasons for Becoming a Private Farmer ..................................... 233.10 What Private Farmers Received on Exit from Collective Enterprise ..... .......... 233.11 Land Leasing Among Private Farmers ...................................... 254.1 Average Balance Sheet Structure of Reorganized Farms 1996-98 ................. 274.2 Current Ratios: 1996-1998 . ............................................... 284.3 Structure of Accounts Payable: 1996-1998 ................................... 284.4 Turnover Ratios: 1997-1998 ............... ............................... 294.5 Profit and Loss Account of Reorganized Farms ............................... 294.6 Profitability Measured by Margin of Sales: Ratio of Profit/Loss to Sales .... ....... 304.7 Structure of Costs: 1997-1998 ............. ................................ 304.8 Structure of Input Costs:1997-1998 ......................................... 315.1 Household Services Provided by Farm Enterprises ............................. 335.2 Support of Public Facilities in Farm Enterprise ................................ 345.3 Transfer of Social Assets by Farm Enterprises ................................ 345.4 Structure of Family Income Under Various Assumptions ........................ 356.1 Diversification and Product Mix in Farm Enterprises and Individual Farms .... ..... 406.2 Cropping Patterns for Different Categories of Farms ........................... 406.3 Production Volumes for Different Categories of Farms ......................... 416.4 Yields in Farms of Different Categories ..................................... 416.5 Non-Agricultural Activities Reported by Farm Enterprises and Private Farmers ...... 427.1 Evaluation of Workers' Behavior and the Business Environment ..... ............ 447.2 Basic Characteristics of Reorganized and Non-Reorganized Farms ..... ........... 467.3 Margin of Sales by Reorganization Category: 1997 and 1998 .................... 477.4 Estimated Production Function for Reorganized and Non-Reorganized Farms .... ... 487.5 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 ruralpopulation 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 theregion because of the potential impact of these processes on rural development and povertyalleviation in rural areas.

The present study on Ukraine is the latest addition to a long and growing series of WorldBank publications on land reform and farm restructuring in the former socialist countries of Europeand Central Asia. The unique feature of all these publications is their reliance on first-hand empiricalinformation collected through extensive farm surveys of various rural constituencies. Farm surveyshave 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 policydialogue with governments in the region on solid empirical facts, making the Bank'srecommendation much more credible and relevant. The new findings for Ukraine will similarlyprovide a platform for useful policy discussions with this country's government and supply the manyinternational donors active on the local scene with essential information for the design of theirstrategic programs.

Kevin CleaverDirector

Environmentally and Socially Sustainable Rural DevelopmentEurope and Central Asia

v

Preface

The present report is based on a joint study of the progress and impact of farm restructuringin Ukraine undertaken by the World Bank in cooperation with USAID. The study was conductedduring the period October-December 1998 and consisted of two main components. The firstcomponent involved an overview of the farm-restructuring programs implemented by internationaldonors (IFC, Ronco/USAID, and Cargill/KHF). The second component involved a series of casestudies and a questionnaire-based survey covering a sample of managers and individual shareholdersof large farm enterprises, as well as independent private farmers operating outside the collectivistframework.

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 andEconomic Reform in Agriculture, established in Kiev by Iowa State University and the UkrainianInstitute of Agrarian Economics with USAID funding. Aleksander Kaliberda, Oleg Balash, and AnnaMusakova of the World Bank Resident Mission in Kiev liaised between CPER in Kiev and theWorld Bank team in Washington.

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

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

Data analysis was carried out by Zvi Lerman and Louise Perrotta. Anja Crommelynck, aresearch assistant from the Catholic University in Leuven, Belgium, funded by FAO/TCD, helpedwith the efficiency analysis of Ukrainian farms. The present report was written by Zvi Lerman withinputs from Csaba Csaki. Alan Zuschlag prepared the report for publication. The report was clearedin 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 YuriiPrivalov 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 Societyfor Nationalities held at Columbia University in New York in April 1999. A Russian-languageversion of the study is being prepared for dissemination in Ukraine and other parts of the formerSoviet Union. A special seminar will be organized in Kiev for decision makers from all over the CISto discuss the findings of the study.

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

Monetary values are given in Ukrainian hryvnia (UAH). Dollar equivalents are calculatedfor orientation purposes at the average exchange rate for 1998 (2.50 UAH per $ 1). The exchange rateremained around 2.00 UAH per $1 between January and August 1998, when the hryvnia began itsrapid decline, dropping to nearly 4.00 UAH per $1 by the end of December 1998. The exchange rateduring the survey (October-November 1998) exceeded 3.50 UAH per $1, but the 1998 average rateof 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 collectedin 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 initiativesin 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 inlarge farms, supplemented by field visits and interviews with donor representatives, fail to revealmajor breakthroughs in large-farm restructuring. While farm enterprises have changed theirregistered legal form and distributed land and asset shares to individual members, the internal farmstructure largely remains that of the former collective. As a result, only limited improvements inprofitability and efficiency have been achieved, and physical yields mostly remain at pre-reformlevels. Despite the disappointing overall accomplishments, both workers and managers areresponding positively to the attempted reforms through improved work discipline and confidencein better future performance.

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

Private farms established by individuals and families outside large farm enterprises reportencouraging economic results. Yet at the present stage exit from former collective structures andtransition to independent private farming appear to be an option only for the bravest. The majorityof the rural population prefer the safety umbrella of former collectives, but for these families salariesalready 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 bethe lack of improvements in the country's overall economic and policy environment. The continuousdecline in the macro economy and the stagnation of the non-agricultural components of the ruralsector have further limited the scope for any meaningful achievements of farm privatization andrestructuring.

ix

Summary and 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 beenclosely monitoring the progress of Ukrainian land reform since the very beginning, and two largefarm-level surveys were conducted in 1994 and 1996 with the objective of evaluating theachievements of agrarian transition. While the two previous studies revealed a certain measure ofprogress with the agenda of land reform and farm restructuring, they both, and particularly the 1996survey, highlighted the general slowness of the process and found definite signs of stagnation. Theonly major accomplishment was the transfer of state land to collective ownership, and even thisundertaking remained uncompleted. Taken on a national average, farm restructuring has been "skindeep," 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 pocketsare the farm-restructuring programs financed and managed by international donors (as of today, 620farms participate in these projects); some are grass-roots efforts - spontaneous local initiatives inwhich farm managers and regional authorities join forces to accomplish deeper and more authenticrestructuring with the objective of saving the local rural commnunity from economic and socialdeterioration. The number of spontaneously restructured farms is estimated to be around 500. Toput these impressive numbers in perspective, however, we have to note that there are 16,000 largefarm enterprises in Ukraine. Thus, the international donor projects and the spontaneouslyrestructured farms represent only 7% of Ukrainian large-scale farms. The World Bank launched anew study in the autumn of 1998 to take stock of these extended farm restructuring initiatives inUkraine and to develop a comparative analysis of the various farm restructuring efforts. Theobjectives were to construct a realistic picture of what has been accomplished so far, assess theoutcomes, examine future potential developments in this area, and highlight critical issues. The studywas designed to focus on change in farmns that go through an intentional process of restructuringrather than on a country-wide average as the previous studies did.

Breakthrough in Large-Scale Farm Restructuring Yet to Occur

The present investigation revealed considerable diversity among restructured farm enterprisesin Ukraine, both in terms of innovative approaches to internal organization and in terms ofmanagerial attitudes of the new generation of farm managers. On the whole, however, theintentional farm restructuring efforts so far have failed to produce significantly improvedperformance and have not resulted in significant breakthroughs in the transformation of Ukrainianfarming structures.

xi

xii Ukraine: Review of Farm Restructuring Experiences

Limited Break-up of Large Farms. Farm enterprises have changed their registered legal formand have taken over the ownership of their land from the state. Moreover, these privatized farmenterprises have distributed land and asset shares to their individual members. Yet the internalstructure has largely remained that of the former collective, with very few instances of imaginativeand 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-onebasis. Among the 300 farm enterprises participating in the Ronco project, 90% have reorganizedinto a single legal entity, another 8 % have divided into two legal entities, and only 2 % have split intomore than two legal entities. The much smaller IFC project has managed so far to produce asomewhat higher frequency of large farm break-ups: here the 40 parent farms split on average into2 successor enterprises each (Table A).

Table A. Break-up of Large Farms in International Donor Projects in UkraineIFC 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 typicallyaccompanied by the emergence of clusters of family farms. Thus, 350 base farms in the IFC andRonco projects have produced more than 2,500 family farms based on land and assets withdrawnby shareowners from the former collective (Table A). This process contributes to overalldiversification of farm structures in Ukraine and to a certain downsizing of the large farmenterprises. Unfortunately, it is not yet widely practiced outside the international farm-restructuringprojects.

Negative Evaluation of Workers' BehaviorImproved Workers Behavior and (percent of managers assessing deterioration of each behavioral variable)

Business Outlook. Restructuring hasproduced a definite favorable impact on percent of managers

labor relations and workers' behavior in °the reorganized farms. Managers ofreorganized farm enterprises give a muchmore positive assessment of the 60

behavioral patterns of their workers than lReorganizedmanagers of non-reorganized farms. 40 lNon-reorganized

Significant deterioration of basicbehavioral variables of farm workers is 20

reported much more frequently bymanagers of non-reorganized farms than °Satisfactio Motivation Theftby 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. Managersof non-reorganized farms are much more pessimistic on this point, and most expect their situationsto deteriorate, or at best, remain unchanged.

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

Table B. Mar in of Sales b Reor anization Cate or: 1997 and 1998 (in ercent of sales)

1997 1998 (3rd quarter)

Number of farms Median margin Number of farms Median marginof 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-reorganizedfarms in the survey for 1997 and the third quarter of 1998. The margins are all negative, because thefarms predominantly reported losses for these periods. The non-reorganized farms, however, hadmore 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 alloutputs 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 includelancl, labor, livestock, and purchased farm inputs, such as fertilizers, chemicals, and fuel).Production-frontier analysis by two different techniques produces measures of technical efficiencythat are significantly higher for restructured than non-restructured farms. Yet the measure oftechnical efficiency of restructured farms is very low: about 0.7 out of the maximum achievablevalue 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 differentcategories, 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 reorganizedenterprises is significantly higher than in non-reorganized ones, or that it is higher in individualfarms 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 cowper year compared with less than 2,000 kg per cow per year), and they tend to be somewhat higherfor reorganized enterprises than for non-reorganized ones (about 2,000 kg per cow per year comparedwith 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 leasingrelations. Land leasing has two different connotations in Ukraine. In addition to conventionalleasing, which implies transfer of use rights to a specific plot of land for a specific term, leasing mayalso involve transfer of land shares from individual shareholders to farm enterprises or otherindividuals. Currently this is the dominant form of land leasing in Ukraine, although the practice ofleasing physical plots is growing. Leasing of land shares is a paper transaction that does not entailspecific, well-demarcated plots of land. A farm enterprise, by leasing land shares from individualshareholders, simply assumes the legal right for using the area of land represented by the sum totalof the leased land shares - land that has always been cultivated by that farm enterprise and is ineffect recorded as a kind of privatized collective property on its books. A private farmer leasing landshares from other individuals has to negotiate the allocation of specific land plots with the local farmenterprise, which acts as an administrator and guardian of all undistributed farm land.

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

Buying and selling of farm land is virtually nonexistent in Ukraine, and yet the legalpossibility of transactions in land shares among individuals and between individuals and enterprisesprovides a working mechanism for adjustment of farm sizes. As throughout the rest of the ECAregion, farms grow mainly by leasing, not by accumulation of private land through purchasetransactions. 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 Average Size of Family Farms With and Without Leased Landland in private farms is leased, notprivately owned. Some 45% of privatefarmers in this study report that theylease land, and, moreover, 20% reportthat they lease land from private Farms with leased land 14

individuals - a phenomenon neverobserved previously. Although there isno information on how much landprivate farmers lease through land Farms without leased land

shares and how much in the form ofphysical plots, it is clear that the state isno longer the sole source of leased land 0 10 20 30 40 50 60 70

in Ukraine. average farm size, ha

Figure B.Some enterprising individuals

lease large blocks of land shares from former collective members (both active workers andpensioners), thus competing as lessors with the former collective farms. In this way they accumulateenough land for an individually operated farm of viable commercial size. In the present survey, suchindividual leaseholder farms (generally registered as legal entities) control on average 1,800 hacompared with 40 ha for the conventional family farm in Ukraine. The number of shares actuallyused by the large single founder farms (especially those participating in the Ronco/USAID farmrestructuring project) is thus substantially greater than the number of shares contributed just by thefounders: in the survey, these farms employ 60 land shares per founder, while the multi-founderfarms (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 ofin 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 ruralunemployment. The large individual leaseholders employ on their farms the same proportion ofshareowners 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 betweenindividual leasehold farms and corporate successors of former collectives will begin to be felt to theextent that the founders of the large leasehold farms indeed behave as owner-operators, and not asmanagers of assets entrusted to their care by fortner employees. Without a real ownership-drivenchange in incentives, the large leasehold farms may potentially deteriorate into the same mold as theformer 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 andfamilies from collectives and establishment of private family farms. The operation of thismechanism is clearly observed in the international donor projects, where farm restructuring effortsare producing hundreds of individual farmsdespite the overall retention of large farmSstructures. On average, however, only sevennew private farms were created in eachrestructuring effort (see Table A). At the Salary in kind

Salary in cash 33%present stage, private farming appears to be 9%

for the bravest only, although some of theeconomic results reported by private farmsare quite encouraging. Plot sales-

1 6%.

Household plots continue to maintaintheir critically important role for rural Otherfamilies. Household plot production accountsfor 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 bedeveloping beyond the traditional subsistence mode: 60% of households in the 1998 survey reportsales of farm products from household plots, and these household sell on average, about half of theiroutput.

Lack of Conducive Environment

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

Comparative analysis of all ECA countries suggests that genuine macro-economic andpolitical reforms and overall economic recovery are the driving forces for reform and economicrecovery in the agricultural sector. Countries in the advanced stages of overall economic reformswith healthy GDP growth also show respectable agricultural performance. General economicrecovery is closely correlated with market-oriented policy and institutional reforms. Thus, it is hardto expect significant recovery in Ukrainian agriculture despite restructuring efforts as long aseconomic decline continues and as long as policy and institutional reforms remain sluggish. Underthe current overall economic and policy environment in Ukraine, even the international donor-

Sumnmary and 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 grainmarketing and farm exports);

* radical change in the inimical attitude of local bureaucracy to rural reform and relaxation ofthe inflexible bureaucratic procedures inherited from the administrative command regime;

* introduction of hard budget constraints and imposition of strict financial discipline on farmenterprises (to be implemented in conjunction with a comprehensive program of old debtrestructuring and a tangible threat of bankruptcy proceedings for farms that default on newdebt);

* 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 animportant contribution to Ukraine on the level of technical assistance: people participating in theseprojects are much better informed about their options and much more motivated to stand on theirrights than the average rural resident. They have accumulated significant positive experience anda substantial knowledge base for further work. Yet the long-term success of these rural initiativesand their country-wide acceptance depend on the emergence of a supportive policy and institutionalenvironment, and the ability of the Ukrainian government to achieve the beginning of an overalleconomic 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 beenclosely monitoring the progress of Ukrainian land reform since the very beginning, and two largefarm-level surveys were conducted in 1994 and 1996 with the objective of evaluating theachievements of agrarian transition.' While previous studies revealed a certain measure of progresswith 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 onlymajor accomplishment was the transfer of state land to collective ownership, and even thisundertaking remained uncompleted. Distribution of land shares to individuals in collective farmenterprises was less than half complete after five years, and internal restructuring of the formallyreorganized farm enterprises had hardly begun. Farm employees reported that the overall situationin their enterprise had remained largely unchanged after reorganization. In the few cases where farmshad reorganized into smaller structural subunits, the autonomy of the new subunits was extremelylimited and the enterprises in effect continued to be run by central management.

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

As the first decade of agricultural reforms draws to a close, only 15% of farm land in Ukraineis cultivated by the individual sector (household plots and family farms), and most Ukrainianagriculture remains effectively collectivized, despite the diversity of organizational forms that haveemerged since 1992. Moreover, the growth of private farming has slowed down considerably since1994, and the number of private family farms appears to have stabilized, at least temporarily, at38,000, with 2% of agricultural land and about the same share of agricultural product. Field evidencesuggests that the privatization of Ukrainian agriculture has been strictly formal, a mere "changingof the sign on the door," without any internal restructuring that could lead to efficiencyimprovements and move the sector toward market-oriented operation. The new joint-stock

lThe findings of these surveys were discussed in several conferences in Kiev and published in two WorldBank Discussion Papers in both English and Russian: Land Reform and Farm Restructuring in Ukraine (WorldBank Discussion Papers 270 [English] and 270R [Russian], 1994 and 1995 respectively) and Land Reforn inUkraine: The First Five Years (World Bank Discussion Papers 371 [English] and 371R [Russian], 1997 and 1998respectively).

2 Ukraine: Review of Farm Restructuring Experiences

companies, limited liability partnerships, collective enterprises, and agricultural cooperativescontinue 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 theprocess 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 pocketsare farm-restructuring programs financed and managed by international donors; some are grass-rootsefforts that involve spontaneous local initiatives, in which farm managers and regional authoritiesjoin forces to accomplish deeper and more authentic restructuring with the objective of saving thelocal rural community from economic and social deterioration. The World Bank accordinglylaunched a new study in the last quarter of 1998 to take stock of the diverse farm restructuringinitiatives 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 theoutcomes, examine future potential developments in this area, and highlight critical issues. The studywas designed to focus on change in farms that go through an intentional process of restructuringrather than on a country-wide average as the previous studies did.

1. Framework for Farm Restructuring in Ukraine

Prior to 1991 the agricultural sector consisted of kolkhozes and sovkhozes (collective andstate farms). Registration of the former kolkhozes and sovkhozes in one of the new legallyrecognized organizational forms is a prerequisite for transfer of land ownership from the state tofarm workers. Basically all 16,000 large farm enterprises in Ukraine have registered in compliancewith 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 onthe door", and farms have to implement at least two additional stages: the land and assets privatizedto the whole collective should be distributed to individuals, initially in the form of certificates ofentitlement (so-called land and asset shares); the new shareholders should be allowed to regroup withtheir shares in smaller functional units more consistent with market principles than the traditionalcollectives. For more details of the farm restructuring procedures, see the references in footnote 1on 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 externalconstraints. Instead, it may be due to lack of managerial expertise and other behavioral factorsassociated with the internal environment in farm enterprises and the regions. To get around theseconstraints, several international donors, including International Finance Corporation (IFC), USAID,UK Know-How Fund (KHF), and others, have launched farm restructuring projects with a two-foldaim: (a) to demonstrate to Ukrainian farm managers and local authorities how meaningfulrestructuring procedures can be implemented; and (b) to develop farm restructuring modelsappropriate for roll-out on a national scale in the future.

As of today, some 620 farms participate in international donor projects, and most of themare assisted by Ronco/USAID. To put this impressive number in perspective, however, we have tonote that there are 16,000 large farm enterprises in Ukraine, all of which are potential candidates forrestructuring. Thus, after nearly 4 years of operation, the international donor projects cover a mere4% of the target population. The main push for restructuring must therefore come through localinitiatives, imitating the procedures developed by international donor projects or pursuing originalprocedures of their own. Indeed, field visits indicate that, in addition to farms participating ininternational donor project, each province has at least 10-20 farm enterprises that have made anintentional effort to restructure along new operating lines. We estimate that there are some 500spontaneously restructured farms in Ukraine that have made the decision to reorganize withoutguidance and assistance from international donor projects and have moved beyond a mere changeof name, implementing a variety of internal restructuring measures.

The present study covered 86 intentionally restructured farms in 12 oblasts. Of these 86farms, 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 theirdistricts that have progressed beyond the formal registration as a new legal form (about 10% of theestimated number of spontaneously restructured farms). Table 1.1 presents the structure of thesample and the distribution of the farms by restructuring strategies. In addition to the restructuredfarms, we also surveyed nine farms that, again by local expert judgment, had not undergonesignificant internal restructuring beyond a fornal change of legal status. These non-restructuredfarms 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. Sample Design: Number of Farms by Oblast and b Reorganization Strate

Oblast Sampled Farm-restructuring project Spontaneousfarms reorganization

USAID IFC KHF

1 Lviv 11 2 - - 92 Donetsk 10 - 3 - 73 Dnepropetrovsk 9 - - - 94 Poltava 12 3 - - 95 Sumy 10 2 - - 86 Kherson 8 1 - - 7

7 Zhitomir 2 - - - 28 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 (typicallyclosed, with non-tradable shares), limited-liability company, unlimited-liability partnership,agricultural cooperative, individual enterprise, and private (family) farm. Household plots are notincluded in this classification, as they are not functionally independent operations: household plotsexist only within larger farming units and have no independent legal standing. Table 1.2 summarizesthe main legal features of the various organizational forms.

Individual farms that exist as functionally independent units outside large farm enterprisesfall into two categories: registered individual farms are classified as individual enterprises, while theunregistered ones are classified as private farms. The registration status is the only distinctionbetween these two forms: both are farms operated by the owner or the owner's family, possibly withsome reliance on hired labor and leased resources. However, individual enterprises are formallyregistered legal entities, with a name, a stamp, and a bank account. The term "private farm" is usedfor convenience to designate those individual entities that are not legally registered and are thustreated as "physical bodies".

1. Frameworkfor Farm Restructuring in Ukraine 5

Table 1.2. Characterization of Organizational FormsJoint Stock Company: A business entity created by investors (physical or legal bodies) who acquireshares in the company by contributing funds or assets to its equity capital. A shareholder wishing to leavea joint-stock company has to find a buyer for his share. The company has no obligation to redeem theshares for cash or assets in kind. The shareholder's liability for the company's debt is limited to theinvestment in share capital. The voting power is proportional to the number of shares held by theshareholder. In a closed joint-stock company, shares are transferrable only among members. In an openjoint-stock company, shares can be bought by outsiders.

* Limited Liability Company: Simnilar to a joint-stock company, except that when a member chooses toleave, 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 kindamong the partners. The voting power is proportional to the investment of each partner.

* Agricultural Cooperative: An voluntary association of members (individuals or legal bodies) establishedfor the pursuit of a common agricultural activity (production or services). Each member makes acontribution to the statutory equity capital of the cooperative in the form of cash, land, or assets. Theownership 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. Themembers 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 successorof 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. Exitof 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 andassets. Peasant farms by assumption rely mainly on family labor and family owned resources, although theymay employ hired labor and leased resources within reasonable limits. Peasant farms may register as legalentities (in which case they are known as private or individual enterprises), or operate as unregisteredphysical bodies (private farms).

* Individual (Private) Lease Enterprise: An informal organizational category, generally a large individualenterprise established by one founding shareholder with a high proportion of resources leased fromoutsiders. Typically created when one enterprising individual leases the land and asset shares of a largenumber of former collective farm members in the village.

* Peasant Union: An agricultural association basically identical with collective farm enterprise oragricultural 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 ofseveral asset-holding companies that own all the original assets and lease land from the LandCo. Legallyorganized as limited-liability companies.

This terminological distinction has been introduced because the 1993 Law of Peasant Farmsallows a peasant farm to register as a legal entity, but does not make registration mandatory, whilethe Law on Enterprises and Entrepreneurship explicitly allows entrepreneurs to operate as physicalbodies, without registration. Unregistered private farmers are legally not exempt from any of thetaxes that registered farmers and other legal entities must pay. In practice, however, unregisteredfarmers 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 categoryin the overall classification of farm structures.

Farms of all organizational forms may lease land and assets in addition to their privatelyowned 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 theenterprise. By investing their land and asset shares in the equity capital, the individuals exchangetheir ownership of these assets for a promise of a stream of dividends from the profits of theenterprise. The second source consists of land and asset shares that individuals lease to the enterprisefor a specified term in return for a contractual lease payment. At the end of the lease term, theindividual may reconsider the leasing arrangements and decide on a different disposition of theassets.

A so-called "private lease enterprise" is an organizational form often mentioned in theUkrainian 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 substantialamount of land leased from other rural shareholders. An individual farm is called informally aprivate lease enterprise if its reliance on leased resources is significant. Private lease enterprises arean interesting feature of Ukrainian farm restructuring, as they are not frequently observed in otherFSU countries.

2. Farm Restructuring Projects Administered by International Donors

Three international organizations - IEFC, USAID, and KHF - are currently involved on a largescale in farm restructuring projects in Ukraine. USAID and KHF are basically financial donors whoemploy consulting firms to implement the restructuring. USAID has been working with a singleagent, the US consulting firm Ronco, since 1995. KHF has financed the operation of several differentagents, including the Cargill project in Odessa and the IFC project in Donetsk, while IFC has neverfinanced its own farm-restructuring efforts but has instead actively solicited financing from variousinternational sources. These different combinations of funding and implementing agencies haveresulted in four major farm restructuring projects, three of which are established projects operatingsince 1995 and one (DAR) is a new project funded by KHIF as a replacement to the IFC operationin 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 oforganization participating farms

Cargill KHF Odessa 5

DAR KHF Donetsk 15 (new starts)

IFC KHF Donetsk 41 (completed)Scandinavian countries and Japan Chernovtsy 21KHF Kiev 2CIDA - Canadian International Volyn 3Development Agency

Ronco USAID 15 oblasts 533Cherkasy 20Dnipropetrovsk 28Kharkiv 22Kherson 45Khmelnytsky 20Kirovohrad 26Lugansk 16Lviv 69Mykolaiv 32Poltava 18Rivne 62Sumy 89Temopil 42Vinnitsa 1Volyn 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 farmsare changing rapidly. Ronco has achieved a very broad territorial coverage with presence in 15 outof 25 oblasts, and it is adding new farms to its projects practically every day. Most of theparticipating farms, however, entered the project in 1998 and some 450 out of 533 farms are still invery early stages of the restructuring process (see the bottom map on p. xiv). IFC has recentlynegotiated a new financing package with the Canadian Government and is expanding its project toVolyn, while at the same time quintupling its presence in Chernovtsy. The termination of theKHF-IFC cooperation in Donetsk has resulted in the transfer of activity in this reform-minded oblastto a new KHF-funded organization, DAR - Donetsk Agrarian Reform, which is adding 15 new farmsto 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 sharesto farm members in accordance with existing laws and regulations. The preparatory work for sharedistribution work involves painstaking land surveying and careful revaluation of capital assets as abasis for determination of individual shares. Distribution of shares is a prerequisite for ultimateallocation of plots of land and physical assets to individuals and groups of individuals, but it doesnot necessarily lead to such physical distribution "in kind". Shares may remain paper certificates ofentitlement, and they are transformed into physical assets only for individuals who decide to leavethe former collective. Since shares are not necessarily converted into plots of land, a land share doesnot automatically confer a legal title to a well-defined parcel of land. The Ronco project differs inthis respect from the other farm-restructuring projects, and it has recently begun taking therestructured farms all the way from distribution of land shares to assignment of physical plots andissue of legal ownership titles to individuals. Titling of individual plots, however, does notautomatically imply separation of individual farms and breakup of the collective structure. Table 2.2presents a comparative description of the main stages of the farm-restructuring process asimplemented by the three main projects.

After the share-distribution stage, Ronco and IFC encourage internal regrouping ofshareholders into new operating units with their land and asset shares, or alternatively exit ofindividuals and families with land and assets for the purpose of establishing a private farm. TheOdessa KHF model is different in that, after share distribution, it divides the original farm enterpriseinto 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 relationscampaign designed to increase the awareness of the individual shareholders as to the various optionsavailable to them.

In accordance with existing legislation, property shares are calculated net of total enterprisedebt. Thus, only debt-free assets are divided to shareholders, and an accounting reserve is createdwith sufficient assets to match the outstanding debt. The main question is who remains legallyresponsible for the outstanding debt (and the matching assets) after reorganization. One possibilityis to divide the debt (and the matching assets) in proportion to the shares assigned to eachshareholder. 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 iscalculated after subtracting all outstanding debt, so that in effect a part of their assets is retained inthe 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, declaresbankruptcy and writes off the unsettled debt. IFC favors the procedure that distributes theoutstanding 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 partof the assets for liquidation and debt repayment. The survey highlights the diversity of approachesto 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 reorganizationreorganization 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-holdingreorganization 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 oneland 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 FarmCosassets 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 ofentities in proportion to assetsvalue of assets - Debt and matching assets retained in a residual shell enterprise

Titling of land Titles issued to Titles issued to all Noindividuals separating individuals in onewith a physical plot of restructured farm at aland 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 Restructuring in International Donor Projects in UkraineIFC Ronco/USAID Cargill/KHF

Parent farms (restructured) 47 304 5Successor farms

Enterprises 102 354 25*Family farms 253 2,390 0

Fragmentation ratio based on entefprises 2.2 1.2 5Fragmentation ratio including private farmers 7.6 9.0 5

*Asset companies created in addition to 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 thatin 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 andabout 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 legalentities, 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 Enterprises13% 29%

Individual Individual87% 71%

Figure 2.1.

spawning on average 42 individual units (compared with the average of 8 in the entire Roncoproject). It is interesting to note that farms surrounded by clusters of individual units on average splitinto a larger number of legal entities than farms without any individual units (1.4 legal entities forbase farms that produced individual units compared with 1.1 legal entities for base farms withoutindividual units). There is thus a kind of restructuring dichotomy, probably dictated by behavioralor 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, inwhich case the base farm will split into multiple legal entities and also create a cluster of individualfarms. This pattern of multiple fragmentation versus one-to-one transformation is demonstrated in

Table 2.4.

Table 2.4. Multiple Frag mentation of Ronco Farms During Restructuring*

Farns producing legal entities Farms producing legal entitiesonly 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" thathold all the assets and none of the land. Land is then leased from land companies to asset companiesfor 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 Restructuring Experiences

in processing or farm services. There has been no creation of independent individual farmns insignificant numbers in the Odessa project. The overall fragmentation ratio is thus 5; thefragmentation ratio based on asset companies that specialize in primary agriculture (the only onesthat 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 theremaining three parent farms produced only 5 asset companies in total (see Table 2.7 below for moredetails).

Legal Forms. The IFC and Ronco farm restructuring projects have produced a mix ofenterprises (legal entities) and private farrns (physical bodies), while the CargillVKHF project inOdessa has produced only legal entities, without any individual private farms. While the base farmswere primarily collective agricultural enterprises (CAEs) prior to reorganization (e.g., 85% in theRonco project), the most popular organizational form among successor enterprises in internationaldonor projects is the limited liability company. This legal form accounts for 87% of successorenterprises in the IFC project and 57% in the Ronco project (Table 2.5). The Cargill/KHF projectseems to have focused on the limited liability company as the exclusive organizational forms forrestructured entities: all land-holding and asset-holding companies in this project are registered aslimited liability companies. The limited liability company is much less popular among spontaneouslyrestructuring farms, where only 12% are registered in this legal form. None of the international donorprojects has produced CAEs in significant numbers, and yet CAE is the preferred organizationalform among spontaneously restructuring farms (51%, see Table 2.5). The 1996 survey moreovershowed 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 areone-owner legal entities. Some of these private enterprises may be similar to private farms, with theonly difference that the latter are physical and not legal bodies. Yet some of these private enterprisesare classified as "private lease enterprises", i.e., one-owner enterprises in which the owner, inaddition to cultivating his privately owned land, also leases substantial amounts of land from otherindividuals and enterprises. In the IFC statistics, private enterprises are not shown separately: theyare divided among private farms and other legal forns.

Table 2.5. Distribution of Organizational Forms Among Restructured Farms

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 Intemnational Donors 13

Farm Reorganization and Reallocation of Land (Ronco and IFC)

100% -

80%

60% -

rlindividualM-Corporate

40% -

20% -

0%Farms Land

Figure 2.2.

Reallocation of Land. Both the IFC and Ronco projects create individual farms in substantialnumbers, but these farms are very small, because a very small proportion of land is transferred fromthe enterprise sector to the individual sector. While individual farms represent 85% of allorganizational units in these projects, they control a mere 2% of land (Figure 2.2). The original landendowment thus remains practically in its entirety in the restructured enterprises, and the downsizingeffect is simply determined by the fragmentation of the base farm into successor enterprises. Thisoutcome of the international donor projects is unfortunately a reflection of the overall situation inUkraine, where most agricultural land remains under the control of large farm enterprises. Theinternational donor projects have not managed to cross the threshold of collectivist tradition andtrigger massive transfer of land from enterprises to individual farms.

Table 2.6. Distribution of Land and Average Farm Size in Ronco and IFC Project Farms: March 1999

Ronco/USAID IFC

Number of Total land Average Number of Total land Averagefarms per farm farms per farm

Parent farms (restructured) 304 812,062 2,670 47 142,346 3,400Successor enterprises 354 756,771 2,140 102 135,946 1,350Individual farms 2,390 13,613 6 253 6,400 25

The modest fragmentation ratio of base farms into new legal entities in all farm restructuringprojects implies relatively minor downsizing of the traditional large farms. The successor farms inthe IFC project are on average less than half the size of the base farm, but at nearly 1,500 hectarethey 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 allthe original land.

The restructured enterprises typically acquire their land through the shares of their foundingshareholders. Thus, an enterprise with 3,000 hectare of land would typically have around 200-300founders leasing their land shares to the enterprise. A large proportion of the shareholders wouldalso actively work in the enterprise, while the remainder would generally be elderly and retired. Aninteresting phenomenon in the Ronco project is the creation of successor farms with one singlefounding shareholder. The one-shareholder farm has a very limited initial land endowment (about10-20 ha, the equivalent of one land share), but it takes over practically all the land of the originalcollective farm by leasing the land shares of the former collective members. About 20% of Roncofarms 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 beproperly characterized by the term "private lease enterprises". This reorganization mode does notpreclude 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 wassyphoned 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 offarm farm, ha companies, ha agricultural asset

total primary company, haagriculture

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 foreach base farm, so that by definition there is no change in size. The land, however, is leased fromLandCo by the asset-holding companies (FarmCos), and the actual amount of land in use by a singlefarm depends on the number of FarmCos and their specialization. Table 2.7 shows the allocationof 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 farmsize in the Odessa project declined by two-thirds, from 3,450 hectare to 1,100 hectare. Thedownsizing 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 otherextreme, 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 continueto cultivate around 3,000 hectare taken over from the original collective farm.

Inequality of Land Distribution in the KHF Odessa Project

cumulative distribution of farms0 %

80

60

40

20

00 20 40 60 80 100

cumulative distribution of land, %

Figure 2.3.

The average farm sizes, however, are misleading, because the distribution of land among theasset companies is highly uneven: 8 of the 16 agricultural asset companies in the project cultivateover 80% of project land. Each of these large farms retains more than half the land from the originalparent farm before reorganization. Their average size is 1,800 hectare and they specialize in fieldcrops (mainly grain). The remaining 8 farms specialize in fruits and vegetables, and each averagesless 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 theproject, and the remaining 20% of asset companies manage 80% of land. The Lorentz curve inFigure 2.3 shows the strong inequality of land distribution among the asset companies in the Odessaproject.

'Titling. An important achievement of the Ronco project is the recent transition to financialsupport of individual land titling in selected farms. While the IFC project provides onlyadministrative assistance with titling, and at that only to individuals who leave the former collectivewith a physical plot of land, Ronco/USAID has begun to extend financial support with the purposeof titling all individual shareholders in a farm enterprise at one time. Over 20,000 titles covering76,000 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 theRonco titling effort as of February 1999, and compares the current status to the situation in October1998. 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 furtheracceleration of titling.

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

State deeds issued

All state deedswith Ronco financial support without Ronico issued on RoncoOblast financial support farms

farms hectares number of statedeeds

Sumy 1 1,930 319 1,193 1,512Lviv 12 16,887 5,990 - 5,990Lutsk (Volyn) 2 2,451 846 297 1,143Temopil 8 7,510 2,978 355 3,333Dnepropetrovsk - - - 715 715Mykolaev 1 1,427 203 145 348Kherson - - - 406 406Rivne - - - 140 140Khmelnitsky 7 9,325 3,514 - 3,514Cherkasy - - - 40 40Kirovohrad 11 25,984 3,817 81 3,898Poltava 4 7,292 2,241 19 2,260Kharkiv 1 2,116 132 70 202Lugansk - - - 185 185Vinnytsa 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 sharefrom the restructured farm enterprise. Unlike Ronco, however, IFC does not subsidize the titlingcosts, and these remain the responsibility of the land owner. Thus, individuals in IFC-restructuredfarms 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 Restructuring Outcomes: Evidence from the Field

Following the general overview of farm-restructuring efforts in Ukraine, Chapters 3-7 presentthe findings of the farm survey conducted in the last quarter of 1998. The survey covered 86reorganized 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 100independent 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 leaseenterprises". Although "private lease enterprise" is not a legally recognized organizational form, thisconcept is popularly used to denote a new farm run by an individual farmer who supplements hisown land with land leased from other individuals or farms. All private lease enterprises wereparticipants of the USAID/Ronco farm-restructuring project, which creates the preconditions for thisorganizational 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 1 3 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 severalentities, and we refer to them as "splinter" farms. This group includes farms that may havedownsized 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 orcollective agricultural enterprises. Yet these were the most popular organizational forms among theremaining "unsplintered" farms, which had reorganized in a one-to-one manner without substantialdownsizing. Two-thirds of the "unsplintered" farms were collective agricultural enterprises 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 reorganizationand 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 onlyone relatively large entity. Yet it was a downsized entity because its creation was accompanied bya 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 remainingtwo-thirds of the "splinter" farms reported that they had formed from a parent collective dividinginto 2-6 smaller parts, with some individual units also emerging in the process (Table 3.2). Basedon the overall responses in the survey, we estimate that on average each parent farm split into 1.5corporate 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 ofrespondents (out of parts created from additional86) 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 magnitudewith the collective farms during the Soviet period. "Splinter" farms that formed as a part of a largerparent 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 largestat 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 3,000ha per farm.

Table 3.3. Mean Farm Sizes for Different Groups of Enterprises

All ~"Splinter" "Unsplintered" CAE Limited- Joint- Private leasesample 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: approximatelyhalf 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 Sovietsystem, 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. Privatelease 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 aperiod of 5 years (60% of respondents), although some fanns report both shorter (1-3 years) and

Distribution of the Number of Founding Members

percent of farms

30 - -

25-

20

1 5

10

5

01 2-100 100-250 250-500 500-750 750-1000 >1000

number of founders

Figure 3.1.

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 privatefarmers). 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 rangesfrom I to more than 3,000. The most frequently occurring number of founding members is between250-500, which is reported by 35% of farms (Figure 3.1). Yet 15% of farms are established by asingle 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 morethan 1,000 founders. There is a fairly high correlation between the number of founders and the landendowment of the farm: the amount of land increases as the number of founders increases (Table3.4).

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 landcontributed 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 sharesactually used by these "individual" farms is substantially higher than the number of sharescontributed 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 thefounding structure, whether established by a single founder or by hundreds of founders, the farmsactively employ 50% of the individuals whose shares they use, while the other 50% are inactiveagents (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 establishedby one founder or a small number of founders the workers are outsiders leasing their land shares tosomebody else's farm.

Table 3.5. Number of Shares Used by Single-Founder and Multi-Founder Farms

Number of founders Total number of shares Percent of shares Percent of sharesused 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 inland, and the document is generally in the hands of the shareholder. Over 70% have a land-sharecertificate, and another 20% are reported to have a title document issued by the state. All farms withownership titles are Ronco farms, as this is the only farm-restructuring project that emphasizes actualtitling 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 withprivatization of household plots are observed in all the 12 oblasts, but the highest concentration offarms 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 theRonco farm-restructuring project.

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

In farms with more than 50 founders, 50% of shareowners lease their land shares to theenterprise, 30% invest their land shares in the farm's equity capital, and 13% of shares are vaguelyidentified as "transferred to the farm enterprise". Shareholders investing their land shares in thefarm's equity capital legally forgo their right to a physical plot of land: the land represented by theirshare is now the property of the corporation. Shareholders leasing their land shares to the farmenterprise in principle retain their ownership of the underlying plots of land, including the right ofultimate withdrawal. The status of those who "transferred" their land shares to the enterprise is notclear. Table 3.6 shows clear differences in the pattern of land share disposition among differentfarm-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 whereland is not really individual property). Among spontaneously reorganizing farms, a substantiallyhigher percentage of land shares is invested in the farm's equity capital. This higher prominence ofleasing as the mode of land-share disposition in the international-donor projects is probably the resultof well thought-out legal strategies and intensive information campaigns, none of which are availableto 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 themain commodity used for payment in kind to shareholders: it is reported by the highest number ofrespondents (30%) and it accounts for half the total payments in kind per shareholder. All othercommodities (including flour, sugar, vegetable oil, livestock products) are reported as a medium forpayment 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 regroupingof productive resources in units more closely tuned to market operation. Transition to autonomouslyoperating functional subdivisions is therefore one of the primary measures of internal reorganizationof 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 theother hand, report that they do not have a central management and the responsibility apparently hasshifted to a greater extent to the subdivision level.

In farms with central management, production planning and subdivision control are the mainfunctions of central management (Table 3.7). But beyond this basic function, central managementhas a high degree of involvement in all facets of farm operation, including input purchasing, productmarketing, relations with banks and financial institutions, and labor management. The pervasiveinvolvement of central management in operations is of course a feature carried over from thecollective organization, and it probably indicates that not much has changed internally in these farmsand their reorganization is still superficial. In farms without central managements, the subdivisionshave a much greater degree of independence in various areas of farm operation than in farms thatretain 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 inpurchase 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 cate gory)

Areas of farm operation in which All farms Farms with central Farns w/out centralsubdivisions 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 sincereorganization. Thus, 69% of managers report a certain reduction in the labor force, which is ofcourse consistent with the general downsizing during reorganization. Also 50% of managers identifycertain positive changes in the behavior of their workers-shareholders (as aggregated over fivebehavioral 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 farmwas formed (only the earliest farms created in 1991-1992 registered a year or two later, as no formalregistration 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, with70% of households in the sample reporting families of between 3 and 5. Only 20% of families liveon their farm, but two-thirds live in the village where the farm is located. Distance from the farm isthus not a major problem. Virtually all families live in their own private house, and one-thirdindicate that they have plans to build a new house within the next two years. All farmers' familieshave 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 reasonswere given by one-third of respondents, and the answers therefore add up to more than 100%. Thedistribution of reasons provided by the two-thirds of respondents who gave a single answer is shownin the last column in Table 3.9. Although the percentages are different, the most important reasonsremain 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 inservices or industry. People come to farming from relatively high positions in their formerjobs: only10% 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 threecategories, 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 thatabout half the private farmers actually do not own any land: their entire farm is a leasehold at thepresent 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 distributionwas universally in kind; cash redemption of shares is practically not reported in the sample. Themedian land share among the few respondents who provided this information is 8 hectare. Themedian asset share is about 500 UAH ($250).

Exit from the collective farm with a land or asset share apparently requires the approval ofthe 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 morethan half did not express an opinion.

While most private farms are established by a single family, nearly half the farmers reportthat their private farm is part of an association. The number of association members ranges from 3to nearly 900. The median association size is 50 farms, and 50% of associations have between 40and 200 farms. These associations are primarily service cooperatives: 90% of the members in thesample report using the associations for purchase of inputs and sale of farm products. Theassociations are far from the traditional format of production cooperative represented by formercollective farms: 85% of association members report that they manage their productionindependently, and another 10% report mixed production arrangements, where the independent roleof the farmer is supported byjoint production activities in the association. Practically all respondentsfeel that they have complete freedom in making production and sales decisions, and that they aremasters 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 farmsbetween 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 clearrelationship between the number of parcels and the size of holdings.

Structure of Land Tenure in Private Farms

Leased48%

Possession18/o

Privately owned34%

Figure 3.2.

3. Farmz Restructuring 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 accessto 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 thatthey 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 beregarded as a very healthy balance sheet, but in Ukraine (as in all other FSU countries) this is merelythe result of periodic indexation of fixed assets in inflationary years. The high component of fixedassets and equity in the balance sheet bears absolutely no relation to the economic value of theseassets, and it is mostly a hefty revaluation reserve created by automatic indexing of the historicalvalue of assets to the general price index. In such situations, it is preferable to focus on the currentcomponents of the balance sheet, which are not affected by revaluation and represent actual monetaryvalues.

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 liabilitieseffectively represent the farm's total liabilities). In a market environment, this usually means that thefarm has sufficient liquidity to repay its liabilities. Yet a closer look at the composition of currentassets shows that they are mostly inventories, with very little financial liquid assets, such as accountsreceivable (see Table 4.1). Moreover, the share of inventories in current assets increasedsubstantially between 1996 and 1997. Inventories are not easily converted into cash, and especiallyin 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 fromthe analysis and calculate the ratio of financial, and hopefully more liquid current assets to currentliabilities, we end up with so-called "quick" or "acid" ratios of around 0.20 (Table 4.2), which iswell below any accepted benchmark of liquidity. An additional sign of unsatisfactory liquidity isprovided by the clearly downward trend of the acid ratio over time: it declined from 0.25 in 1996 to0.16 in 1998 (Table 4.2). Less than one-fifth of the average farm's current liabilities can be repaidfrom 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 ofaccounts payable between 1996 and 1998 (Table 4.3). While payables to suppliers of goods andservices remained on the level of 45%-50% of total accounts payable, the share of the past-duecomponent increased markedly. It should be noted, however, that although the past-due amountsincreased, the frequency of respondents reporting past-due obligations remained at around 75% ofthe sample over time, without any sign of systematic increase. Tax and payroll arrears combinedaccount for a steady 30% of payables, which does not point to a critical increase in the burden ofobligations 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 apparentlytheir inability to generate enough sales. Even ignoring the dead weight of unrealistically valued fixedassets, we find that each unit of current assets generated only 0.78 units of sales in 1997 and 0.42units of sales in 1998 (Table 4.4). Typically, the ratio of sales to current assets is well over 2, andsuch low and decreasing ratios reveal significant problems with the ability of farms to generate salesfrom their asset base.

Increasing inventories are just one symptom of this difficulty. It also inevitably leads to agrowing burden of debt, as measured relative to the annual volume of sales. Since obligations areultimately 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 meaninglessbecause of overvalued fixed assets. The debt-to-sales ratio for the average Ukrainian farm increasedfrom 1.1 in 1997 to 2.0 in 1998 (Table 4.4). In 1997, it took the sales volume of just over one yearto repay the farm debt; in 1998, it would take two years of sales to repay the debt. By this measureof 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 tooperating losses. For an average farm in the survey, total revenue (including price supports, whichran at a negligible level of around 1% of sales) was insufficient to cover the cost of goods sold. Theaverage farm reported losses even before allocation for value-added tax (13%-14% of sales), and inthe end result the losses reached 24% of sales revenue in 1997 (Table 4.5). The results for 1998 arestill 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 accountingprofits in 1997 and the remaining 64 farms registered accounting losses (Table 4.6). The profitmargin for farms with positive earnings was substantially lower than the "loss margin" for farmswith 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 reportingprofits 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 andthe inability to generate sufficient turnover, farm enterprises are moving to extensive barterarrangements 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 thefrequency of barter transactions and the frequency of wage paid in kind has increased duringtransition.

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 ofpercent 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, accountingjointly 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 fixedcost, as farm enterprises are traditionally reluctant to shed labor, even if suffering from obviousredundancies. Thus, 90% of managers reported that, if unable to meet the payroll, they would simplydelay payment of salaries or send some of the workers on leave. Only about 20% of managers werewilling 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 socialservices and depreciation charges are also essentially fixed costs. Thus, Ukrainian farm enterprisesoperated in 1997-1998 with a cost structure in which around 30% were fixed costs and 70% variablecosts.

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.

Breakeven Analysis for Reorganized Farms

Thousands4

3

2

1 < Z Vreakvensalea=l,25

0 / 2 Breakeven sales = 2,2500 l 2 3 4

Thousands

Parameters: achieved sales 1,000; loss 200; fixed costs 360: variable cost 0.84 of 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% ofsales), then the 1997 total cost is TC(97)=1.2R(97). Of this amount, 0.3TC(97)=0.3 x 1.2R(97) arefixed costs and 0.7TC(97) = 0.7 x 1.2R(97) are variable costs. The factor v = 0.7 x 1.2 isinterpreted as the variable cost per unit of sales, based on the actual situation. The standardbreakeven 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 soughtbreakeven sales volume (defining the revenue and the variable costs). Solving this equation forR/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 1997revenue.

Relationship (*) for R/R(97) can be easily adjusted to simulate alternative cost structuresand loss margins. The ratio of fixed costs to variable costs (in 1997) is expressed by the numbers0.3 and 0.7, respectively, whereas the factor 1.2 indicates that the 1997 total cost was 20% higherthan the 1997 sales revenue, resulting in a 20% loss margin on sales. In parametrized form, (*) canbe 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 sharesnaturally add to 1) and prof is the profit margin (positive in case of reported profit, negative in caseof reported loss). Changing these parameters in (**), we can repeat the breakeven calculations forany desired cost structure and any given level of losses.

5. Social Infrastructure and Standard of Living

Rural Social Services

Reorganized farm enterprises continue to provide a wide range of social services and benefitsto their members. Thus, 60% of farms provide direct financial benefits, which primarily include childallowances to families (50% of respondents), and also stipends to students (20%), subsidizedvacations (10%), and even compensation for inflationary price increases (10%). Other than directfinancial benefits, farm enterprises universally provide assistance with the cultivation of thehousehold plots in the village (85% of enterprises), and continue to be an important source of foodproducts 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 freeservice is burial. Mechanical assistance with the household plot, a very important component of therural social sphere, is now free in only one-quarter of the enterprises, and more than half of farmenterprises charge for this essential service, although at a subsidized rate. Over 80% of farmenterprises charge for other services, including food and transport, but also mainly at subsidizedriates.

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 6Manufactured goods 8 - - 8

Farm managers are of the opinion that private farmers in their area enjoy equal access withfarm employees to all basic services (including kindergartens, schools, transport, medical care,housing and utilities). Indeed, private farmers in their responses generally did not complain ofdifficulties 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 farmenterprise, and yet there are no major complaints of difficulties with social services.

Most farm enterprises continue to support the schools and the kindergartens. Other publicfacilities (including clinics, clubs, and libraries) receive substantially reduced support. The farmenterprise generally does not pay the wages of the workers in these public facilities, nor does itprovide 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 supportsupport 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 Privatizedsuccessor 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 theenterprise's total volume of expenditure, and only one-quarter of the managers expect the burden ofsocial costs to increase next year. Previous surveys indicate that the budgets available for social andpublic services were severely curtailed by farm enterprises. This, however, was the result ofreduction 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 someof their social assets to the village council, whereas most farms took no action (transfer to successorenterprise 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 housingonly, 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 bedetected between reorganized and non-reorganized farm enterprises because of the smallness of thenon-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, withmean 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). Thisis based on actual cash inflows, including the salary component received in cash. The structure ofcash family income is shown in the first column in Table 5.4: 46% of cash income is contributedby salaries and pensions and another 39% is sales revenue from the household plot. However, onlya relatively small part of salaries is actually paid in cash: the cash-strapped enterprises largely relyon transfers in kind (of both food products and farm inputs) to pay their workers' salaries. The valueof 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 kindaccount 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 ofhousehold 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 thevalue of products consumed by the families from their household plots. Subsistence-orientedproduction is a substitute for purchase of food from commercial channels, and accordingly replacesa 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 ofown 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 householdplot, the average per-capita income in the survey was 83 UAH per month ($33). This figure wasarrived at in a conservative setting, assuming a 50% gap between the production volume ofhouseholds that sell and households that do not sell. A smaller gap between the two groups ofhouseholds will only increase the imputed income from own consumption. In any event, even underour conservative assumption, the average per-capital income of 83 UAH per month is well abovethe 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 ofproducts from the household plots. About 60% of households report sales from the householdplot, and the sales revenue of these "commercial" households averages 88 UAH ($35) permonth. Households reporting sales of products from the household plot sell about 50% oftheir output, and the rest is consumed by the family. Given average sales of 88 UAH perhousehold, we estimate the total value of production for the "commercial" households at 176UAH ($70) per month, half of which is the value of products from the household plot that thefamily consumes for its own subsistence.

The remaining 40% of households in the sample do not report any sales, and wecannot estimate the value of their production in this direct way. Analysis of householdprofiles 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 fairlyconservative approach, that the households without sales produce on average 50% of thevolume of "commercial" households, or 88 UAH ($35) per month, all of which is consumedby the family. Under our assumptions, all households in the sample consume on average 88UAH ($35) worth of products from their household plots, and this amount should be addedto 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%). Incomefrom farm activities outside primary agriculture still contributes less than 10% to the householdbudget (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 financialsupport from this source. Delays of up to 5 months with pensions are reported by nearly half thefamilies.

5. Social Infrastructure and Standard of Living 37

Structure of Private Farmers' Family Income

Farming76%

Off-farm16%

Business8%

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 PrivateFarmers

Below subsistence

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 animprovement in the economic situation of private farmers compared with the 1996 World Banksurvey, in which 70% of respondents characterized their family standard of living as satisfactory orgood and 30% described it as poor.

Consistently with the generally positive assessment of the standard of living, 40% ofrespondents report that the economic situation of their family improved after the establishment ofthe 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 orat least remain unchanged, and only 12% expect deterioration in the future (these are basically thesame respondents who report deterioration since the establishment of the private farm, so in effectthe pessimists expect deterioration to continue).

Changes in the Families' Economic Situation: Past and Future

Better

Unchanged

m PastEAFuture

Worse

Undecided

0 10 20 30 40 50

Figure 5.3.

The generally favorable assessment of the family standard of living is of course an indicationof satisfactory farm performance. Consistently with this conclusion, 85% of farmers indicate thatthey intend to make some farm investments within the next two years, and most respondents actuallyhave plans for more than just one investment project. The most popular investment is purchase offarm machinery (70% of respondents); it is followed by construction (50%), purchase of processingequipment (30%), purchase of livestock (25%), and planting of new perennials (20%). The projectedneed for investment funds is around 100,000 UAH ($40,000), and the anticipated rate of return is30%. The majority of farmers are planning to finance these investments from own savings (55%) andless 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 thistradition, 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 largelysimilar to the practice of the pre-reform period, showing a very slight bias in favor of cropproduction: over 60% of the value of agricultural output in farm enterprises is crop production, whilelivestock accounts for less than 40% (Figure 6.1).

Product Mix in Enterprises and Individual Farms(percent of total value of production)

100%

80%

60%riiLivestock*Crops

40%

20%

0%Enterprises Individual farms

Figure 6.1.

The specialization profile of private farmers is fundamentally different from that of largefarm enterprises. All private farmers in the sample grow crops, but only 30% are diversified crop andlivestock producers, while the remaining 70% specialize in crops, without any livestock. The productmix 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 thesample) strongly emphasize crops: their product mix is 75% crops and only 25% livestock (Table6.1).

The main reason that respondents give for avoiding livestock is lack of profitability (40% ofrespondents). It thus seems that private farmers have adjusted their product mix in response tomarket signals to a much greater extent than managers of large farms. Another possible factor, ofcourse, 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 lackthe 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) aregrain, 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 reorganizedenterprises, non-reorganized enterprises, and individual farms (Table 6.2). About 60% of thecropped 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 areprimarily 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 IndividLual farms

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 ofa 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 differentialbetween the two groups of producers: the average cropped area in farm enterprises is close to 2,000ha, 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 yieldsdo not reveal clear performance differences across farm categories (reorganized and non-reorganized;enterprises and individual farmers). For some crops the mean and median yields of reorganized farmsare higher than those of non-reorganized farms, while for other crops the situation is reversed (Table6.4). But in all cases the differences (in either direction) are not statistically significant, and thus donot 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 thatachieve 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 reorganizedand non-reorganized) are compared with independent private farmers, but the situation remainsinconclusive. Private farmers achieve significantly higher yields for sugar beet, feed roots, andpotatoes; while for wheat and hay it is the large farm enterprises that achieve significantly higheryielcds; for sunflower and vegetables the differences are not statistically significant, and theirdirection varies. Given the dominance of wheat and hay in the cropping mix of all farms, we cannotconclude 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- Privatereorganized 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 aremuch 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 isstatistically 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 thesmall number of non-reorganized farms). Thus, livestock productivity on the whole shows animprovement as a result of reorganization. The clearer picture for livestock may be due tomeasurement problems with crops: milk yields are typically logged almost daily by livestockproducers, whereas crop yields per hectare are much more difficult to estimate. Perhaps as more dataare collected on crop production and crop yields in farms of different categories we will similarlyobserve a positive effect in the productivity of land. The best that can be said at this stage is thatreorganization appears to boost the productivity of livestock, while the impact of reorganization oncrop productivity is still unclear.

Activities Outside Primary Agriculture

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

Table 6.5. Non-Agricultural Activities Reported by Farm Enterprises and Private Farnmers

Activity Percent of respondents engaged incorresponding activity

farm enterprises | private farmers

Services (of any kind) 26 40Mechanized 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 bothprovision of mechanized field works (ploughing with tractors, for instance) and transport. Farmerswith mechanical equipment and vehicles obviously use their assets to sell services to farmers whodo not have machinery. Rental of mechanical services substantially alleviates the widely advertiseddifficulties with access to machinery among individual producers.

7. Reorganized and Non-Reorganized Farms Compared

In addition to 86 reorganized farms, the sample contained 9 non-reorganized farms in thesarne districts, which were selected by local "expert judgment" in contrast to farms generallyrecognized as reform-minded. The inclusion of a small number of non-reorganized farms in thesample provided a limited opportunity for comparison between farms of two fundamentally differentcategories. The non-reorganized farms averaged 4,000 ha in 1998, and their size basically remainedunchanged since 1995. They were thus comparable in size to the "unsplintered" farms that hadundergone one-to-one reorganization without substantial downsizing (see Table 3.3). Similarly tothe reorganized farms, all the non-reorganized farms are mixed crop-livestock producers; some ofthem 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 thesehave actually changed their status from collective farm to limited-liability partnership in preparationfor reorganization. All the non-reorganized farms, even those that have not yet passed a decision toreorganize, have determined the land shares for their members (an average land share of 4 ha withabout 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. Thefarms have actually distributed certificates of entitlement in land and property to their members, andthese 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 landand property shares, and all resources remain in collective use. Nor have any arrangements beenmade 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, theprevailing opinion is that future exit from the enterprise with land and property in kind will requirethe 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 allof them report a decrease in their membership (Table 7.1). This may be more the result of generaldissatisfaction than a planned labor-shedding strategy. Thus, managers of non-reorganized farmsreport a significant deterioration in the behavioral variables of their workers (workers' satisfaction,motivation, pilfering of enterprise resources) much more frequently than managers of reorganizedfarms do (Table 7.1, Figure 7.1).

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

43

44 Ukraine: Revievw of Farm Restructuring Experiences

availability of credit), again with much higher frequency than managers of reorganized farms (Table7.1, Figure 7.2). In line with their negative assessment of workers' behavior and relationships withthe business environment, practically all the managers of non-reorganized farms report a decline inoutput, 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 ofReorganized 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 I 1 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 isobserved in their evaluation of the economic freedom of the farm in the new environment (Table7.1). While 60% of managers of reorganized farms report that their economic freedom has increasedin the process of reform, the corresponding percentage among managers of non-reorganized farmsis only 20%: in the assessment of fully 55% of managers of non-reorganized farms the economicfreedom 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% areconvinced 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 expectthe situation to deteriorate or at best to remain unchanged, while only 10% expect a realimprovement as a result of the immediate steps that they are taking toward reorganization (such asdistribution of land and asset shares).

We sometimes speculate that reorganized farms are led by managers of a new breed, whoinfuse 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(percent of managers assessing deterioration of each behavioral variable)

percent of managers

80

60E3Reorganized

2 Non-reorganized40

20

0Satisfaction Motivation Theft

Figure 7.1.

Negative Evaluation of Business Environment(percent of managers assessing deterioration of each factor)

percent of managers

80

40

20

0Inputs Sales Credit Economic freedom Output

ICIReorganized MNon-reorganized

Figure 7.2.

this conjecture. To the extent that the very small sample of non-reorganized farms makes it possibleto reach any conclusions, the managers appear to be largely individuals of the same profile. In bothgroups of farms, the managers are 40-45 years old, with higher education, over 10 years of seniorityin their current farm enterprise, and over 20 years of experience in agriculture. We were expectingto find the non-reorganized farms managed by old-guard types of advanced age, who naturally wouldnot be receptive to reforms. And yet, the managers of non-reorganized farms are actually slightlyyounger (42 compared with 47 for managers of reorganized farms; the difference is statisticallysignificant at 10% level) and have been for a shorter time at their present position (3.5 yearscormpared with 8 years for managers of reorganized farms; the difference is statistically significantat 10% level). Perhaps it takes maturity and experience to launch the reorganization, and therelatively new managers of the non-reorganized farms in the sample are still getting ready for the bigeffort.

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-reorganizedfarms. This conclusion may be valid only in the sample of farms surveyed, and in the absence ofhistorical performance data it does not allow for the possibility that the farms included in thereorganized 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 thanthe reorganized farms, and yet they generate a smaller volume of sales. As a result, the two standardpartial productivity measures (sales per hectare and sales per worker) are worse for non-reorganizedfarms than for their reorganized counterparts. The non-reorganized farms utilize their land and laborresources 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 thanthe non-reorganized farms. Reorganized farms spend more on purchased inputs both in absoluteterms and per hectare of land. Perhaps this greater use of purchased inputs, which include fertilizersand 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 ofprofits or losses to sales, expressed in percentage of sales). Table 7.3 presents a comparison of theestimated 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 lossesfor 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 statisticallysignificant, however).

There are fairly large differences in Table 7.3 between the 1997 margins for reorganizedfarms 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 anytwo categories is so small that even the difference between - 3% and - 46% in 1997 does not comeout 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 |Medianfarms 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; thedifference 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 perhectare 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 togenerate a certain output. The total or overall productivity is a measure of output produced by a givencombination inputs, and not just by land or labor taken separately. One of the standard techniquesfor comparing the total productivity of two groups of producers is by estimating their respectiveproduction functions and examining the incremental output produced by farms of one group relativeto farms of another group for each combination of inputs. The regression method used to estimatethe 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 regressionmethod 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 productionfunction; the input variables were land (in hectare), labor (as measured by salaries), costs ofpurchased inputs, and the number of animals (properly standardized). The choice of the output andthe 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 representsthe impact of reorganization on the production function: for each combination of inputs, reorganizedfarms produce 0.340 units of logged sales more than non-reorganized farms. This translates into a40% advantage in sales of reorganized farms compared with non-reorganized farms at each level ofinput 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 technicalefficiency of reorganized and non-reorganized farms. The technical efficiency of a productive unitis usually measured by its relative distance from the production frontier, which is the locus ofmaximum attainable outputs for each given combination of inputs. The technical efficiency attainsthe highest value of 1 for points on the frontier, and decreases for points at greater distances fromthe frontier. In the absence of a theoretical production frontier, an empirical frontier is estimatedfrom the actually observed bundles of inputs and outputs. Two standard techniques are used forestimation of technical efficiency. These are: (a) stochastic frontier analysis, a regression-likeeconometric method that assumes constant returns to scale and stochastic errors in observedinput-output combinations, and (b) data envelopment analysis, a non-parametric linear-programmingtechnique 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 asin 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 ofreorganized farms is higher than that of non-reorganized farms by both methods (the difference isstatistically 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 thereorganized farms (0.7 out of the maximum achievable value of 1), which implies that very fewreorganized farms actually attain the efficient frontier and most of them lie at a considerable distancefrom the frontier.

Stochastic Frontier: Sales vs Animals Plane

10 log sales

8 - r- - - - - - - - - - - C

4 --- c C -Sp uc b

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

2

0~~~~~~~0

4 5 6 7 8

log animals

Figure 7.3. Reorganized farms - white; non-reorganized farms - black.

Data Envelopment Frontier: Sales vs Animals Plane

sales (million UAH))

4 - - - - - - - - -- - -

00 500 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 afive-dimensional space. To visualize the production frontier and the location of the reorganized andnon-reorganized farms relative to the frontier, we created a two-dimensional projection of theobservation points, plotting the sales as a function of one input (instead of four), while the otherinputs were held constant at their mean values. Such two-dimensional projections of sales as afunction of the size of the livestock herd are shown in Figure 7.3 (stochastic frontier model) andFigure 7.4 (data envelopment model). The production frontiers are drawn as a solid line. Thestochastic frontier in Figure 7.3 is a straight line fitted by a special regression technique to loggedobservations. The data envelopment frontier in Figure 7.4 is a piecewise-convex hull traced by theextreme points in the input-output plane. In both diagrams, the non-reorganized farms (shown byblack 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 thereorganized farms is higher.

* * *

Comparison of reorganized and non-reorganized farm enterprises by various measures, bothqualitative and quantitative, seems to indicate that, in the present sample, reorganized enterprises areperforming better than the non-reorganized ones. Despite the observed advantage, the absoluteperformance level of the reorganized farm enterprises is very low: managers often give negativeevaluations 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 (althoughhigher than in non-reorganized enterprises). Nevertheless, this finding is certainly an encouragingsign in our evaluation of the outcomes of farm restructuring in Ukraine, but even the restructuredfarms still have a long way to go before they will be judged profitable and efficient by marketstandards.

Selected References on Land Reform and Farm Restructuringin Transition Economies

World Bank Country Reports and Agricultural Sector Reviews

Food and Agricultural Policy Reforms in the Former USSR: An Agenda for the Transition, Studies inEconomics 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 Paper233, The World Bank, Washington, DC (1994).

K. Brooks, E. Krylatykh, Z. Lerman, A. Petrikov, and V. Uzun. Agricultural Reform in Russia: A View fromthe Farm Level, World Bank Discussion Paper 327, The World Bank, Washington, DC (1996).

Euroconsult. Fann Restructuring and Land Tenure in Reforming Socialist Economies: A ComparativeAnalysis 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 BankDiscussion 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 andProspects, 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 WorkingPaper No. 17, The World Bank, Washington, DC (1999).

Land Reform and Private Farms in Armenia: 1996 Status, EC4NR Agriculture Policy Note No. 8, NaturalResources 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, NaturalResources 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, EuropeanCommission, and The World Bank, Bucharest (1997).

Other Sources

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, XXIIInternational 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 CentralAsia Environmentally and Socially Sustainable Rural Development Series; The World Bank,Washington, DC (1999).

Selected References on Land Reform and Farm Restructuring 53

C. Csaki, K. Gray, Z. Lerman, and W. Thiesenhusen. "Land Reform and the Restructuring of Kolkhozesand Sovkhozes," in: Food and Agricultural Policy Reforms in the Fortner USSR: An Agenda forTransition, 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 formersocialist countries in Europe," in: C. Csaki and Y. Kislev, Eds., Agricultural Cooperatives inTransition, Westview, Boulder, CO (1993).

C. Csaki and Z. Lerman. "Land Reform and Farm Sector Restructuring in the Former Socialist Countriesin 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 inEast 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 the1990s: Expectations and Achievements after the First Five Years," European Review ofAgriculturalEconomics, 24(3/4):428-452 (1997).

C. Csaki and Z. Lerman. "Land Reform in Ukraine: Slow Progress," Society and Economy in Central andEastern 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 ofIndependent States: Situation and Perspectives, World Bank Discussion Paper 387, The WorldBank, Washington, DC (1997).

K. Deininger. Cooperatives and the Breakup of Large Mechanized Farms: Theoretical Perspectives andEmpirical 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-SovietGeography, 36(9): 565-586 (1995).

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and Urban Development Operations Divisions, Europe and Central Asia Region, The World Bank,Washington, DC (1997).

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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 ofAmerica, Lanham, MD (1995).

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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 FarmRestructuring in Central and Eastern Europe, Avebury, Aldershot, UK (1998).

Z. Lerman. "Does Land Reform Matter? Some Experiences from the Former Soviet Union," EuropeanReview ofAgricultural Economics, 25: 307-330 (1998).

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Z. Lerman and K. Brooks. "Russia's legal framework for land reform and farm restructuring," Problems ofPost-Communism, 43(6): 48-58 (1996).

Z. Lerman and K. Brooks. "Land reform in Turkmenistan," in: S. Wegren, Ed., Land Reform in the FormerSoviet Union and Eastern Europe, Routledge, London-New York (1998).

Z. Lerman, K. Brooks, and C. Csaki. "Restructuring of Traditional Farms and New Land Relations inUkraine," Agricultural Economics, 13: 27-37 (1995).

Z. Lermnan, J. Garcia-Garcia, and D. Wichelns. "Land and water policies in Uzbekistan," Post-SovietGeography 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 andthe Former Soviet Union," Economic Development and Cultural Change, 47(1): 1-26 (1998).

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Moldova. Moldova Agriculture Policy Update, EC4NR Agriculture Policy Note #5, Natural ResourcesManagement 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, EC4NRAgriculture Policy Note #7, Natural Resources Management Division, Europe and Central AsiaRegion, The World Bank, Washington, DC (October 1996).

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M. Mudahar. Kyrgyz Republic: StrategyforRural Growth and PovertyAlleviation, World Bank DiscussionPaper 394, The World Bank, Washington, DC (1998).

R. Prosterman and T. Hanstad, eds. Legal Impediments to Effective Rural Land Relations in Eastern Europeand Central Asia: A Comparative Perspective, World Bank Technical Paper 436, Europe andCentral 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 CostApproach," in: C. Csaki and Y. Kislev, Agricultural Cooperatives in Transition, Westview, Boulder,Co. (1993).

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Selected References on Land Reform and Farm Restructuring 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 FarmRestructuring in Central and Eastern Europe, Avebury, Aldershot, UK (1998).

R. Trendafilov and V. Ivanova-Gidikova. "Reform and Market Adjustment of the Bulgarian AgriculturalSector," Vllth EAAE Congress, Stresa, Italy, Contributed Papers, Volume F: AgriculturalDevelopment and Transition, pp. 1-14 (1993).

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Recent World Bank Technical Papers (continued)

No. 415 Feitelson and Haddad, Identification of Joint Management Structuresfor Shared Aquifers: A CooperativePalestinian-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: Applicationsfor 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 in1Eastern Europe and the Former Soviet Union

No. 424 Jaffee, ed., Southern African Agribusiness: Gaininlg tlhrouglh 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 toPlanning, 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 Assistancefor 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 ofArtisanal, 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 WaterPricing 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 theRural 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 Europeand 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 JayanthaPerera, 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: Proceedingsof the Second Summit of the Ibero-Americani Supreme Courts

No. 451 World Bank, Privatization of the Power and Natural Gas Industries in1 Hun1gary and Kazakhstan

No. 452 Lev Freinkman, Daniel Treisman, and Stephen Titov, Subnational Budgeting in Russia: Preempting aPotential 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 FinanicialCrises

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

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