Agro-Industrial Law Threatens Ukrainian Reforms

In an act which has western aid organizations up in arms, the Ukrainian Parliament passed a draft law “On Peculiarities of the Privatization of Property in the Agro-Industrial Complex,” by a 219 to 29 vote on Thursday, Oct. 5. The law, which would remove approximately 4,000 enterprises from the mass privatization program, could have serious ramifications for Ukraine’s economic reform process. 

The draft will become law after October 16, unless vetoed by President Kuchma.

Western aid organizations including USAID, the World Bank, and the IFC have been actively lobbying against the bill. 

According to Mike Cully, IFC Project Manager for large-scale privatization, the law commits several violations of ownership rights and hinders the restructuring of enterprises following privatization. “We consider the law to be extremely damaging to the cause of market reforms in Ukraine, and would certainly hope that President Kuchma would veto the law,” Cully said. 

The bill is being criticized on several points. The law allots a 51 percent interest of all agri-businesses to the enterprise’s suppliers, thereby hindering an enterprise’s ability to increase profitability by finding low-cost suppliers and, in turn, driving up market prices. In addition, suppliers will receive a certain number of shares free of compensation by cash or privatization certificates, a practice seen by many as unfair. 

The main suppliers of agro-industry in Ukraine are the collective farms. Giving shares of agro-industrial enterprises to these farms as collectives will complicate the restructuring of farms undergoing reforms. Farm restructuring requires agreements between all farm workers as to the division of assets. When stocks are owned by a farm this can become very complicated. 

Western aid organizations have expressed worries that implementation of the law will further delay the already sluggish pace of privatization. Since January, only 949 enterprises were offered for auction under the mass privatization scheme. Of 484 enterprises offered in the first four certificate auctions, only 129 were successfully “sold” (meaning at least 70 percent of the enterprise’s shares were sold). This a far cry from the optimistic 8,000 enterprises President Kuchma’s privatization decree demanded be sold by the end of 1995. 

Agro-industrial enterprises represent half of the enterprises slated for certificate auctions under Ukraine’s mass privatization program. The current version of the law removes these enterprises from the program by allowing an agro-enterprises’ suppliers 51 percent of its shares and workers the chance to purchase its remaining shares during closed subscriptions. This means that Ukrainian citizens will be denied the right to bid their privatization certificates towards nearly 50 percent of Ukraine’s industry. 

While it is unclear whether the president will support the law, officials in the Cabinet of Ministers are divided over the issue. 

Mykola Scherbina, chief of the sector for privatization issues in the Cabinet of Ministers called the law “pointless,” explaining that the privatization of agro-industrial enterprises was already covered under the mass privatization program. Scherbina echoed western complaints that the law gives suppliers a majority interest of agro-industrial enterprises virtually for free. He adds, however, that although he opposes the bill, he has “no say” as to whether or not the legislation is passed. 

Valeriy Shovkaluk, chief of the Cabinet of Minister’s agro-industrial issues department disagrees. He supports the law, stating that it is good for both Ukraine’s agro-businesses and the farmers. According to Shovkaluk, the law is intended to build better relations between collective farms and the enterprises which purchase their goods. 

Western lobbyists haven’t met with a tremendous amount of success in their efforts to kill the law. “I don’t think there is a lot of awareness regarding this bill,” said Paul Dodds of USAID. As evidence of this fact, Shovkaluk said that he did not understand why western organizations would be opposed to the law.

If President Kuchma does veto the law, it could prove to be politically disastrous. The law is supported by farmers and agro-business alike, accounting for a tremendous portion of Ukraine’s population. 

According to Dodds, if the president does not veto this bill, future USAID funding to Ukraine could be affected. USAID has already pumped $10 million into the mass privatization program alone, in addition to funding the small scale privatization program. In combination with dismal privatization statistics, this law will make it tough for USAID to defend continued Ukrainian funding to a U.S. Congress already determined to slash foreign aid.

Read the original issue here.