Land reform plans leave foreign investors in Limbo
Despite, the government’s intentions, the revision of first draft of new legislation could mean that neither the state nor foreign investors can count on fast reaping the benefits of market liberalization.
The government’s plans to open up the land market to international investors have suffered a setback with the passage of its first reading of the Draft Law No. 2178-10 On Amendments to Certain Legislative Acts of Ukraine Regarding Agricultural Land Circulation. If passed into law, the new legislation would retain prohibition to by the agricultural land in respect of foreign investors until 2024 and could additionally result in a national referendum on the question. The Draft legislation, proposed by President Volodymyr Zelenskyy’s own Sluga Narodu party, seeks to protect local agricultural producers from foreign competitors with better access to low cost credit.
The Draft leaves many questions unanswered and omits the key clauses necessary to effectively regulate the land market. It leaves huge uncertainty over its main provisions, including those, which enable the participation of foreign investors in the Ukrainian land market, which will need to be addressed by its second reading.
Revisions to the Draft
The initial Draft of the legislation (No. 2178), proposed by the government, put forward the pro-market approach of allowing foreign investors to participate in the Ukrainian agricultural land market by establishing Ukrainian companies. However, alternative Draft Law (No. 2178-10) was introduced by parliamentarians from Sluga Narodu, which commands a majority in Parliament. This revised Draft aims to protect Ukrainian agricultural producers from foreign competitors, who generally have better access to cheap credits, by opening up the market gradually.
The Draft Law No. 2178-10 envisages that companies with Ukrainian beneficial owners will be able to purchase agricultural land plots from 1 October 2020, but that companies with foreign investors as beneficial owners will have to wait until 1 January 2024 before they can enter the market.
However, as it stands, the revised draft contains loopholes, which could see foreign investors enter the market much sooner, potentially from the day the Draft becomes law. Beneficial ownership normally requires a 25% stake, and with five or more joint investors a 100% foreign-owned business could have no beneficial owner. Further, the Draft does not seem to prohibit foreign investors acquiring Ukrainian companies, which have already purchased land plots. Nevertheless, we expect this room for legal maneuver to be removed at the Draft’s second reading.
The Draft does however contain an exemption for companies with foreign beneficial owners, under certain strict conditions. If such a company has been registered three years prior to the date the law is enacted and has an existing rental agreement for agricultural land, it may, under the terms of the draft, purchase the land.
Following lobbying by agricultural producers and opposition political parties, President Zelenskyy announced a referendum on the question of foreign ownership (by foreign citizens or foreign-controlled entities). Such a referendum stipulated in revised Draft Law No. 2178-10 during second reading would, he declared, be a pre-condition for adoption of draft law.
Far from being a reform in progress, free market with foreign investors involved has become a “what if” question. Zelenskyy’s political opponents have already carried out a huge media campaign warning of the perceived dangers of a free market in agricultural land, and in a country where agriculture is a considerable share of the national economy, this may have a significant influence on the public.
Impact on Privatisation
The Draft legislation seems to overlook potential effects on the nation’s privatization programme. Many large state enterprises own agricultural land and, absent the ability of foreign investors to participate in their privatization, the income realized by the state will certainly be reduced. It is our opinion that such privatizations should be exempt from restrictions on foreign ownership of agricultural land. Whilst we would not advocate postponement of privatizations of state agricultural enterprises, this may be necessary, to avoid gifting undervalued businesses to local purchasers.
The early promise of a liberal approach to the agricultural sector, touted by the President’s team, looks set to fall by the wayside as the Rada seems bent on a protectionist agenda. Opportunities remain to structure the legislation in a way that would enable foreign investors to enter the market for agricultural land, but this will require resolve on the part of the government and an understanding by the public of the significant receipts likely from privatisation and the benefits from foreign investment in the sector, in terms of increased productivity.
Bogdan Scoropad, Senior Lawyer, KPMG