The Center for Economic Research

Reorganization of cooperative agricultural enterprises (shirkats) into farming business entities

The report is prepared with the assistance of the Uzbekistan Economic Reform Project, Uzbekistan Research group leader: A.S. Salimov National experts: A. Khaitov, O. Olimjonov,

A. Tuichiev, M. Ramazanov, K. Mullabaev, P. Kosimbekov

Coordinator: T. Shadybaev Tashkent 2004

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Introduction Section 1. Economic reasons and trends for reorganization of large agricultural enterprises into farming business entities 1.1. Development trends in agricultural enterprises reorganization process 1.2. Evaluation of financial state of shirkat enterprises and factors causing losses. 1.3. Government support of the agricultural sector 1.4. Analysis of the results and implications of the reorganization of agricultural enterprises effected in 1998-2003. Section 2. Economic and legal conditions for sustainable development of newly established farming business entities. 2.1. Evaluation of farming business entities’ profitability 2.2. Forming a new system of economic relations between farming business entities, the government and procuring organizations. 2.3. Improving the system of material and technical resource markets and developing infrastructure for servicing farming business entities. 2.4. Legal basis for reorganization of large agricultural enterprises. Conclusions and Recommendations

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Introduction One of the key objectives of the agrarian reform in Uzbekistan is forming efficient competitive agricultural production, initiative-driven and based on entrepreneurship of agricultural producers. For Uzbekistan, where the agriculture is a vitally important sector of the economy, the accelerated forming of the agricultural sector was selected as a key area of the agrarian reform. Redistribution of land resources in favor of farming sector is made mainly due to reorganization of loss-making and insolvent shirkats. Improving reorganization mechanisms was necessitated by the following: - reorganization mechanisms being implemented are not sufficiently ensuring establishment of sound farming business entities; - there are system factors, causing losses in agricultural production, which may continue to negatively effect the financial sustainability of newly-established farms; - there are risks of failure due to insufficient readiness of legal, economic and technical basis for operations of farming business entities, as well as lack of organization experience in timely implementing reforms of such a scope. For instance, lack of efficient mechanisms for distribution of the assets and liabilities of the reorganized shirkats entails conditions for losses for newly established farming business entities. Undeveloped networks of market and production infrastructure of rural areas is not facilitating rendering the entire array of necessary services, meeting demands of farming business entities. The process of agricultural enterprises reorganization includes elements of formalism, unreasoned bureaucratic approach towards organization of such important activity. The research objective is developing proposals, on the basis of current reorganization activities efficiency evaluation, for improving shirkat reorganization mechanisms and ensuring financial sustainability of newly-established farming business entities. The report consists of the two sections. The first section presents financial state of shirkats evaluation and factors, causing losses. It also studies loss-making factors I newly-established farming business entities. The reasons of losses in farming business entities related to effective reorganization mechanism are systematized. In addition, this section contains the analysis of effective legal acts and by-laws, regulating reorganization of agricultural enterprises, identifies their weaknesses and shortcomings hindering efficient implementation of the existing mechanisms. The second section analyses results and implications of the large agricultural enterprises reorganization. Proposals for forming reliable system of economic relations between the government and procurement organizations are developed as well as on creating production and sales infrastructure in the regions, which would facilitate more rapid adaptation of agricultural producers to market relations. Principal provisions of this report were approved at the international conference on issues of increasing efficiency of agricultural resources utilization in market economy, held in Tashkent in May of 2004. The report takes into account conclusions and proposals made by participants of the round table and seminar, held in Jizzakh City with participation of national experts, employees of the Committee on economic insolvency from all the regions, employees of the economic court, Association of Dehkans and Farmers, and representatives from the infrastructure facilities. The proposals were also tested in discussions with farmers of Pakhtakor and Dustlik districts of Jizzakh region in May 2004.

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Section 1. Economic reasons and trends for reorganization of large agricultural enterprises into farming business entities

1.1. Development trends in agricultural enterprises reorganization process

It is known, that in recent years the agrarian reform in Uzbekistan was primarily envisaging large scale development of farming business entities, which are being established mainly on the basis of liquidated loss-making and unprofitable shirkats. However, among the certain circle of economists and practitioners there is an opinion that the selected course for “farmerization” of agricultural production in Uzbekistan is erroneous, as it deprives the sector of the opportunity to take advantage of the economy of scale, characteristic for major agricultural producers. The answer to this question is not that easy and needs historical and economic analysis. One needs to take into account the agricultural reforms in Uzbekistan were developed by the cut and try method, and the idea of farming business entities development, despite the international practice, emerged by far not in the very beginning. Chronologically, three stages of large agricultural enterprises reorganization could be tracked down: -from the beginning of 1990th till 1998; - from 1998 till 2003; and - from 2003 till present The first stage of agrarian reforms began after Independence of Uzbekistan was proclaimed. In 1993 all state-owned agricultural enterprises (sovkhoz) were transformed into various forms of non-government entities. Most of them were not disaggregated/split and were just reorganized into relatively large collective farms. In subsequent years, based on the Chinese practice, various innovations on collective farms reorganization were tested, aimed at achieving higher autonomy at the unit and team levels. Significant part of large enterprises was split into smaller and better manageable production entities. In this particular period such organizational and legal form of agricultural enterprises as farms emerged. Since 1996 several collective farms were transformed into joint-stock companies.

Distinctive features of this stage of the reform are the following: a) legal framework for reforming agrarian and economic relations in rural areas were

established. The Laws On Land, On Cooperation, On Lease and On Dehkhan business entities were passed and enabled to built new legal relations in the rural area, created conditions for multiform economy forming and developing of farms and dehkhan entities;

b) fundamentals of the principally new economic mechanism in the rural area were developed and implemented in the form of family and team contract, as well as the new system of crediting, financing and insuring of the agricultural entities, settlements for agricultural produce and supplied machines, fuel and chemical fertilizers. Business autonomy of agricultural enterprises has expanded;

c) organizational and structural transformations in the agricultural sector were launched and management principles and the whole system of management began to change;

d) the structure of agricultural production was changed and the legacy of cotton monopoly was liquidated. The foundations of grain self sufficiency were laid, crops of popato, mainly imported previously, were considerably increased, as well as other agricultural crops.

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As a result of transformations in the agricultural enterprises on this stage, the share of government sector in the gross agricultural output decreased from 34 % in 1991 to 1.3 % in 1998 (Figure 1).

Figure 1 . Change of government sector share in the agricultural output of Uzbekistan

34.0%36.4%

12.0%

0.8%1.3%1.4%2.2%2.4%

5.6%

0%

5%

10%

15%

20%

25%

30%

35%

40%

1991 год 1992 год 1993 год 1994 год 1995 год 1996 год 1997 год 1998 год 2003 год

However, reserves of deep development and agricultural production efficiency increase, necessary for drastic reform of agricultural sector and introduction of new agrarian and economic relations in the sector, primarily, ownership relations, were not fully tapped.

In most agricultural enterprises the changes of economic form, including methods and ways of organization and operations management, facilitating efficiency and inter-economic relations were rather formal. In reality, the situation has not changed a lot, as collective farms, using land on the basis of perpetuity and free of charge, were not encouraged to set up conditions for human initiative and elimination of “hang-the-expense” economic mechanism. In addition, during reorganization both employees and leaders did not have sufficient information on owner’s rights, forms of work organization and so forth.

Since 1996-97, ongoing changes in agrarian sector, as well as complexity of the existing issues there called for comprehensive reform program, envisaging the set of economic, organizational and legal measures vs. partial changes.

Therefore with passing of the Land Code, Laws on Agricultural Cooperative (Shirkat), On farming business entities, On Dehkhan business entities and the Program of economic reform in the agricultural sector of Uzbekistan for the period of 1998-2000 the new stage of agricultural sector reforming commenced. This stage was characterized by radical reform of ownership relations in rural areas based on introduction of three triune principles, including:

- endowing the peasants (dehkans) – members of agricultural cooperative with a ownership share representing stake in cooperative property and net assets as well as related right for the interest in retained earnings of the cooperative;

- family contract - as the basis of business organization, allowing to correspond labor inputs of every employee with his/her income and family material well-being;

- agricultural cooperative (shirkat) which as envisaged on this stage of the reform should have become the most efficient organizational and legal form of agricultural enterprises, ensuring harmonious combination of interests of each peasant with the interests of the entire collective1.

Simultaneously with introduction of a new system of agricultural production organization an effort to review the system of agricultural enterprises organization, their activity principles and mechanisms was made aimed at the revival of truly cooperative relations in the rural area.

1 Analysis of factors, undermining shirkat’s efficiency is presented on the next paragraph of the report

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Agricultural cooperative (shirkat) has become a main form of enterprise transformed on the basis of shareholding. While necessary organizational and economic prerequisites have been set up, the collective entities, established on the first stage of reform were transforming into:

- agricultural cooperatives (shirkats) with introduction of ownership shares and the system of family contract; and

- farming entities (Figure 2) In addition, the sanitation mechanism has been implemented for loss-making agricultural

enterprises with introduction of external management and appointment of new leader – external manager.

Over 1998-2001, 1880 most profitable collective farms were transformed into shirkats, or 87.5 % of the total. The establishment of shirkats was followed, as a rule, by introduction of various forms of lease contracts among their members (family and collective) and granting them plots of land for the period from 3 to 5 years on the basis of temporary agreement for the use of land.

Figure. 2. Reorganization of collective farms

Pre-trial sanitation was applied to low efficiency and insolvent collective farms. This sanitation envisaged a set of activities aimed at financial recovery of enterprises, including financial, organizational and technical restructuring. The sanitation was granted by the Government Committee on Sanitation of Agricultural Enterprises for the period of 2 years with the possibility of extension if necessary2. By the results of sanitation one of the following decisions was made:

- transform the entity after sanitation into shirkat – in case of successful sanitation; - transform the entity after sanitation into farming entity – in case of sanitation plan

failure and losses by the results of the sanation. From 412 entities sanitated in 1998-2002, 335 (81 %) were transformed into shirkats. On

the basis of 79 reorganized entities failing to achieve positive results after sanitation, 3054 farming entities were established3.

Starting from 2001 some individual loss-making collective farms were transformed into farming entities4, bypassing sanitation. Although the number of such entities was not large, the performance indicators of farming entities compared to reorganized collective farms turned out to be better.

By the results of this stage the share of shirkats in total number of large agricultural enterprises accounted for up to 90 % in 2002 (Figure 3).

2 - In line with the Law of the Republic of Uzbekistan On Sanitation of Agricultural Enterprises passed in 1997. 3 - Economicheskoye Obozrenie, October 2003, p.6 4 - In line with the Cabinet of Ministers Resolution dated 29 December 2000, №516.

Collective farm

Agricultural cooperative (shirkat)

Farming entities Entity after sanitation

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Figure 3. Share of shirkats in total number of large agricultural enterprises by the results of 2002

other8%

collective farms2%

shirkat farms90%

However there were some shortcomings in shirkat operations5, causing their low

efficiency.

1.2. Evaluation of shirkats’ financial state and factors causing losses

Evaluation of shirkats’ financial state. At present, about 99% of gross agricultural output is produced by non-government sector, represented by agricultural cooperatives (shirkats), farming entities and dehkhan entities (Annex 1).

Development of the agricultural sector of the country is immediately related to financial and economic state of large agricultural enterprises (shirkats). They ensure employment for 40 percent of agricultural labor force and account for about 55 percent of sown areas. In addition, they are major producers of raw cotton and grain – key strategic agricultural crops in Uzbekistan.

As a result of reforms on improving production relations, forming of the class of owners and development of farming entities conducted in Uzbekistan, the share of shirkats in agricultural output is gradually declining. However, they still account for more than 60 % of raw cotton, and about a half of grain produced in Uzbekistan (Figure 4).

Figure 4. Share of large agricultural enterprises (shirkats)

32.928.9 26.8 25.7

85.881.8

78.5

71.3

62.2

71.966.2 64.7

58.8

49.3

24,0

0

10

20

30

40

50

60

70

80

90

100

1999 2000 2001 2002 2003

shar

e, in

%

в валовой продукции сельского хозяйства

в производстве хлопка-сырца

в производстве зерноколосовых культур

The analysis indicates, that

shirkats are more vulnerable to the risk of losses rather than farming entities (Figure 5). Despite considerable decline in the scope of economic insolvency compared to the previous years, the level of loss-making entities is still very high: in 2003 almost 40 percent of shirkats incurred losses. The highest numbers of

5 For details see paragraph 1.2. of this report

62

6.5

84

5.9

37

3.9

0

10

20

30

40

50

60

70

80

90

в %

2001 год 2002 год 2003 год

Figure 5. Share of loss-making shirkats and farming entities ширкатные хозяйства

фермерские хозяйства

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loss-making shirkats were recorded in the Republic of Karakalpakstan, Jizzakh, Syrdarya, Khorezm and Fergana regions where they accounted for from 52 to 98 percent of the total number of shirkats (Table 1). Most loss-making shirkats are engaged in cotton and grain growing.

Table 1

Share of loss-making shirkats by regions6 (by calculations; share in percent)

№ Region 2001 2002 2003 Variance (2003-2002)

1. Republic of Karakalpakstan 94.4 97.2 70.5 -26.7 2. Andijan region 48.4 79.6 39.8 -39.8 3. Bukhara region 44.6 80.0 12.3 -67.7 4. Jizzakh region 89.1 96.8 52.4 -44.4 5. Kashkadarya region 38.9 74.7 18.5 -56.2 6. Navoi region 39.6 81.5 13.2 -68.3 7. Namangan region 46.2 83.4 24.8 -58.6 8. Samarkand region 48.4 82.7 20.9 -61.8 9. Surkahndarya region 35.6 82.2 23.2 -59.0

10. Syrdarya region 89.2 96.7 84.2 -12.5 11. Tashkent region 39.9 74.3 19.5 -54.9 12. Fergana region 52.5 83.3 63.6 -19.8 13. Khorezm region 62.4 96.6 98.1 +1.5

Total for Uzbekistan 62.4 84.2 37.2 -47.1

Such a high percentage of loss-making shirkats is explained by many factors, related to objective and subjective circumstances, primarily with agricultural specifics (Annex 2), including risks of loss due to objective reasons (climate, land and so forth).

Major factors causing losses in shirkats could be conditionally divided in four groups (Figure 6).

Figure 6

inefficient forms f production organization and management methods; poor fertility and crop capacity of lands, insufficient land treatment;

6) operationally: without taking into account writing off and restructuring (government aid)

Major groups of factors causing

losses in shirkats

inefficient mechanism of prepayment and settlements with the

state

Low fertility of land, insufficient land

treatment

Forms of production organization and

management methods in agriculture

pricing mechanism

a) insufficient consideration of real needs of the entities, b) inefficient settlements mechanism; c) untimely final payments

a) poor condition of soil and reclamation network, resulting in low crop capacity; b) low level of mechanization

a) lack of flexibility in management decision making process, irresponsibility of shirkat managers for the results of operations, lack of incentives for the employees to perform efficiently b) halfway reform c) undeveloped corporate management d) administrative pressure

a) price disparity between agriculture and industry b) withdrawal of the part of agriculture income

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inefficient mechanism of prepayment for agricultural products and settlements with the state and servicing sectors; and

inefficient mechanism of pricing and state support of loss-making enterprises.

First group consists of organizational and administrative factors, due to inefficient form of agricultural production organization as a result of halfway reforms, and remaining administrative interventions of local government officials in business operations of agricultural producers, as well as poor management and lack of corporate forms of management in shirkats:

a) inefficiency of shirkat form of production organization given current management mechanism. Although forming of shirkats is accompanied by introduction of various forms of contractual relations among their members (family and team contracts) with subsequent allocation of land plots for the period from 3 to 5 years on the basis of temporal use agreement, shirkat as a form of agricultural production has a number of disadvantages. Major of them are:

poor employee motivation to perform efficiently in collective farm, when the final results depend on efforts of many people and employee can hardly influence management efficiency;

lack of flexibility in making management decisions; the process is very time consuming;

insufficient responsibility of shirkat management for default of internal agreements with contractors. In most of shirkats managers violating internal agreements are not punished thus undermining the key principle of contractual relations – liability for breach and end result based incentives.

b) halfway reforms, not allowing to establish autonomous management of own

agricultural production. In most shirkats changes of the form of operations, methods and ways of production organization, labor motivation and internal economic relations were only formal. As a result, human initiative and entrepreneurship is not duly stimulated and there is a lack of incentives among contractors to increase labor efficiency.

c) poor management and undeveloped corporate management. Although shirkat is a

self-managed and self-controlled entity, its management bodies (general meeting, board and auditing commission) are not functioning in practice (with exception of formal meetings and procedures). In practice, shirkat chairman appointment mainly depends on local authority (khokim). There are no examples when the shirkat chairman would be legally accountable to shareholders for loss-making operations and subsequent non-payment of the shares. In such circumstances the major objective for shirkat’s chairman would be to please heads of local administration by fulfilling the state order for procurement of grain and cotton at any cost thus keeping his position despite poor financial performance indicators.

d) strong intervention of local governments into business operations of shirkats. In practice, shirkats are under strong influence of local governments and basically all the issues are resolved with their active participation. Administrative pressure in determining the pattern of crops entails practice of sowing cotton and grain on unfavorable soils, not ensuring their sufficient crop capacity and profitability. In addition, so-called “assistance” from the local government in growing and procurement of raw-cotton and grain in large quantities in most cases adds to the incidental and unjustified expenses of the entities.

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Second group of loss factors relating to fertility and farming techniques is caused by poor state of fertile lands which entails low crop capacity.

a) For instance, while average yield of raw cotton in the country for the analyzed period was about 20-23 centners per a hectare, the same indicator in the Republic of Karakalpakstan was 9-13 per a hectare, in Syrdarya region 11-14 centners/hectare, in Jizzakh region - 11-16 centners/hectare and in Khorezm region – 15 – 20 centners/hectare (Table 2).

Table 2

Raw cotton crop capacity by selected regions of Uzbekistan7 (crop capacity – centners/hectare)

Regions 2000 2001 2002 2003

Republic of Karakalpakstan 9.5 13.3 13.3 9.6

Jizzakh region 12.7 11.1 16.0 15.8

Syrdarya region 12.1 11.4 14.2 12.9

Khorezm region 20.9 22.3 15.3 14.9

Total for Uzbekistan 21.5 23.0 22.2 20.3

Based on calculations, given current purchasing prices of raw cotton, as well as sale prices for major resources (fuel, lubricants and fertilizers), generated income at crop capacity of cotton under 20 centners is not covering expenses for cultivation of this crop in practically all regions of Uzbekistan. By the results of 2003 about 45 percent of shirkats failed to generate profit from raw cotton.

b) Losses in agricultural entities are also caused by aggravating condition of soils. Due to deficiency of financial resources and lack of efficient mechanism of using the available resources for land reclamation, maintaining and increasing soil fertility, the half of irrigated lands in the country is in desperate need for improvement (rehabilitation). Annual cleaning of collector-drainage system is only 60-65 % of the requirements. In the Republic of Kapakalpakstan, Jizzakh, Syrdarya and Kashkadarya regions this indicator is not reaching 50 %. Closed drainage systems in many regions are practically not cleaned8 and are not functioning. All this is causing decrease of crop capacity and profitability of agricultural output.

c) Another important factor of losses is the shortage and wear of agricultural machinery.

This is the reason why simplified technologies are used, entailing violation of cultivation schedules and significant losses of agricultural produce in all stages: harvesting, processing and storing. In the recent years there was a drastic decline in the numbers of basically all types of agricultural machinery (except intertillage tractors) (Table 3). In addition, considerable part of available machinery is inoperative. As of 1 January 2003 almost one third of tractors in the country, half of ploughs and cultivators were inoperative. In some regions (Jizzakh and Syrdarya regions) more than half of machinery was broken.

Table 3

7 ) – by Goskomstat data 8 ) – Economicheskoye obozrenye journal, N10, 2003, Specifics of sanation and bankruptcy of agricultural enterprises, page 5

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Changes in agricultural machinery numbers in Uzbekistan9 (1997=100 %)

Types of machinery 1998 1999 2001 2002 2003

Total tractors 89.6 78.1 72.3 67.8 65.8 including: Plowing 92.6 75.0 62.9 54.1 51.3 Intertillage 96.2 122.3 117.6 119.8 118.3

2 Tractor ploughs 87.4 73.1 63.2 56.0 50.3 3 Cultivators 90.3 84.2 80.3 78.4 76.7 4 Seeders 106.3 106.4 101.8 97.3 93.4 5 Tractor mowers 100.0 74.2 64.8 58.7 54.9 6 Grain combines 91.6 80.6 71.6 66.3 62.5 7 Forage combines 84.2 66.9 52.9 47.3 42.2 8 Cotton harvesters 81.9 43.1 25.7 14.6 12.0

Third group factors are directly related to current mechanism of agriculture finance. a) Agricultural entities are financed by advance payments for land treatment related to growing of crops purchased for the government needs (raw cotton and grain). Advance payments are made centrally by the Fund for settlements for agricultural produce, purchased for the government needs in line with the approved scheme. This advancing scheme has both advantages and problems/risks. This system is aimed at maintaining control over production from procurement to distribution. Centralized schemes of advance payments are not taking into account specifics of every agricultural entity in full, while entities may not independently use the received funds based on their own priorities and to achieve most efficiency. In such cases shirkats have spend the received funds on the specified purposes, even if there is no need in such types of services or resources, as otherwise the funds are payable back to the Fund. As a result of made-up “lack” of funds for some types of items, not envisaged in worksheets, but objectively required, they are not fully accomplished, which is subsequently negatively reflected on the end results (entities are not reaching harvest targets and anticipated profits respectively). b) existing mechanism of settlements is not allowing to make timely settlements with suppliers of goods and services and obtain due income. The mechanism of settlements for agricultural produce, purchased for the government needs is envisaging made-up financial schemes with suppliers for the purchase of goods and services within the norms specified in worksheets rather than for actually procured and delivered goods and services. Therefore in many cases actual deliveries are not matching the ones specified in estimated by terms and quantities. As a result, by the end of every year, shirkats incur outstanding debts to servicing sectors, considerable part of which has no cover sources. As of 1 January 2004 more than 20 percent of shirkats had outstanding accounts payable to servicing sectors due to untimely settlements for the delivered products. In the structure of outstanding accounts payable of agricultural enterprises the share of mineral fertilizers accounts for 29.7 % and a trend to increase. Shares of outstanding debt of agricultural enterprises to sectors, delivering petroleum products and rendering technical services account for 28.4 % and 21.4 % respectively (Table 4).

Table 4

9 ) – source: Goskomstat data

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Share of shirkats with outstanding accounts payable (as of 1 January, share in %)

Structure of outstanding debt by servicing sectors Including, for:

Years

Share of shirkats with outstanding

debt total

Oil products

Mineral fertilizers

Technical services

Other services (works)

2001 21.6 100 27.6 26.0 20.5 25.9 2002 18.2 100 31.2 20.8 21.8 26.2 2003 15.0 100 32.2 25.4 19.2 23.2 2004 19.5 100 28.4 29.7 21.4 20.5

c) final settlements with cotton growing shirkats for delivered produce (20 % of the raw

cotton cost) are made after 6-8 months after delivery, which is not allowing to timely receive due income and use cash flows for covering expenses and production development. The receivable 20% as a settlement for the previous year are considerably depreciated due to inflation.

Forth group of factors is related to current pricing mechanism. a) Until 2002 purchase prices (for raw cotton and grain) were actually based on the costs

incurred by entities operating in most favorable climatic and natural conditions and with better water supply and soils. Therefore most of the agricultural entities of the Republic of Karakalpakstan, Korezm, Syrdarya and Jizzakh regions operating in worse conditions incurred losses from cotton growing. Since 2003 purchase prices are established taking into account international market prices. However, actual costs of agricultural producers in individual regions are still higher than purchasing prices. For instance, in 2002-2003 actual costs for growing of 1 ton of raw cotton in entities in the above regions were much higher than the average costs for the country (Annex 3).

b) price disparity. In the recent years the prices for material inputs and resources were growing more rapidly than the prices for agricultural products.

Figure 7. Changes in prices for agricultural products and resources

Закупочная цена хлопка-сырца

Закупочная ценазерновых

Механизированные услуги (пахотные работы "Магнум")

Продажная цена ГСМ (диз. топливо)

Продажная ценааммиачной селитры

Продажная цена аммофоса

0

100

200

300

400

500

600

2000 год 2001 год 2002 год 2003 год

в %

Закупочная цена хлопка сырцаЗакупочная цена зерновыхМеханизированные услуги (пахотные работы "Магнум") Продажная цена ГСМ (диз. топливо) Продажная цена аммиачной селитрыПродажная цена аммофоса

The analysis indicates that in 2000-2003 prices for mechanized services and niter increased almost fivefold, while purchasing prices for raw cotton by 3.7 times, grain and cereals by 3 times (figure 7). Increase of purchase prices for raw cotton by 1.55 times in 2003 facilitated

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catching up of purchase prices with prices for inputs. This was positively reflected on financial indicators of the agricultural entities.

c) withdrawal of the part of the income of agricultural entities,

engaged into growing of crops purchased for government needs (raw cotton and grain). For instance, according to the World Bank data, in 1997 cotton producers could have received 40% of income in addition if internal purchase prices were equivalent to the world cotton prices. In addition, until 200310 about 15-20% of the agricultural sector income were redistributed to the other sectors due to the difference between official and black foreign currency exchange rates.

Foreign currency exchange rate unification, as well as efforts to increase purchase prices

for raw cotton, facilitated considerable decrease of such withdrawals in the recent two years. However, even in 2003 when the foreign currency exchange rate was almost unified, about 30% of the cotton producers’ income was withheld according to the estimates (Annex 4).

At the same time, the government through the mechanism of budget regulation is

redistributing the part of the income withheld from the agricultural sector between agricultural crop producers by funding water management system, repayment (writing off) of shirkats’ losses, sale of resources to the agricultural sector at lower prices and so forth. Efficiency of the above redistribution is examined in the next paragraph.

Comparison of financial resources outflows and inflows indicates that without taking into account expenses for water management, the outflows are increasing the inflows into the sector by approximately 25-29% (Annex 4). This is reflected at the financial indicators of the sector accordingly.

The last two groups of factors are closely linked to the government policy in the area of agricultural sector regulation and funding. Therefore it would be practicable to review the efficiency of the government support of the agricultural sector and its implications.

1.3. Government support of the agricultural sector.

Government support of the agricultural sector is effected by direct (budget) financing, as

well as by the number of direct and indirect instruments. Agricultural subsidies could be divided into several groups:

direct expenditures from the government budget; government support of loss-making agricultural enterprises (writing off and restructuring

of debt and rendering of sanation); Loans at lower (preferential) interest rates; tax benefits; Lower than for the other economy sectors prices for some inputs (fuel and lubricants,

electricity and so forth); and other forms of subsidies. Let’s review the efficiency of the each channel of the government support. a) By budget financing such activities like land treatment, maintenance and construction

of irrigation facilities, as well as part of the expenditures of the organizations under the Ministry of Agriculture (research institutes, inspections, centers and so forth). In the following years the

10 ) – prior to foreign exchange rage unification and introduction of the national currency convertibility

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expenditures for water management financing accounted for 6-8 % of the government budget or 65-70 % of the total government budget expenditures for the economy.

The analysis shows low efficiency of budget funding of water management facilities,

which is not sufficient to maintain necessary technical condition of the sector, causing the decrease of the land quality resulting in losses of agricultural enterprises. Actual expenditures of the sector are not reflecting the real funding requirements for its maintenance and development. The sector’s need in funding is satisfied at the level of 65-70%. As a result the half of irrigated lands has no engineering systems, while existing irrigation and drainage systems have practically served their depreciation time. In the country, 80.3% of irrigated lands or 3.45 million hectares require installation of drainage and construction of necessary artificial degree of drainage.

b) Government support of loss-making enterprises. Arrears of agricultural enterprises

to servicing sectors is the beginning of the long and repeatedly reproducible chain of arrears in the economy in general. Under such conditions the government had to support loss-making agricultural enterprises by writing off and restructuring their debt. The government is annually writing off (restructuring) debt of loss-making shirkats, accounting for 4-6 % of the government budget expenditures.

The practice of repeatedly writing off of agricultural enterprises’ debt is not an act of a “good will” of the government. This is due to the fact, that when writing off debt it is not possible to determine the causes of losses, whether they were objective or due to poor management or embezzlement.

The analysis of efficiency indicators of the sector enterprises with low efficiency of operations, high level of debt, large share of loss-making enterprises indicates that in fact, the government support provided in a form of writing off losses (restructuring and so forth) is not ensuring positive results, and on the contrary, creates conditions for inefficient use of material resources, dependency and irresponsible attitude to the land, thus aggravating the overall situation in the sector. The institute of “writing off debt” is encouraging non-efficient management.

Sanation is more effective form of government support of agricultural enterprises, providing loss-making enterprises an opportunity to restore their solvency. It includes debt restructuring or deferring for the period of the sanation, introduction of advanced forms of operations and labor organization, streamlining of the accounting and reporting system and so forth. Efforts on financial rehabilitation of shirkats (1998-2002) and farming entities (since 2003) enabled most of the entities to restore their solvency (Exhibit 1).

Exhibit 1 Efficiency of agricultural enterprises sanation Over 1998-2002, 412 loss-making, insolvent an economically unsustainable agricultural

enterprises, accounting for 15% of the total number of agricultural entities underwent pre-trial sanation. The government rendered direct support in terms of writing off and restructuring debt, as well as

in providing necessary material resources, including agricultural machinery. As a result of mobilization of internal resources and considerable government financial support, 311 (81%) ensured sustainable operations and created conditions for further development.

Since 2003 pre-trial sanation was applied to farming entities insolvent due to objective reasons (climatic, land, water and weather conditions). In 2003 956 farming entities were involved in the one-year sanation process and 904 of them or 95% have successfully accomplished it.

c) Providing credits on preferential terms. Crediting on preferential terms is provided to

financially support agricultural enterprises, mainly farming entities and dehkhan farms. For this purpose the banks establish the special Fund for crediting on preferential terms and allocate there

15

up to 25% of the profit. Commercial banks’ income generated by providing credits on preferential terms from such Funds are exempt from taxes for the period of five years11.

Farming entities may apply for credit on preferential terms from the extrabudgetary funds for the following purposes:

- forming of initial capital - 1/6 of the current discount rate of the Central Bank; - development and expanding of dehkhan and farming entities, for purchase of agricultural

machinery, building of farming facilities - 1/3 of the current discount rate of the Central Bank; - production and adding value processing of raw materials, development of local industry -

40% of the current discount rate of the Central Bank; - other purposed envisaged in the paragraph 10 of this Regulation – in amount of 45% of

the current discount rate of the Central Bank. Credits provided on preferential terms allow farming entities and dehkhan farms to expand

their operations and strengthen their financial state. However available resources are meeting the demand of farmers on less than 5%. The share of farming entities, received credits on preferential terms in 2003 accounts for less than 3% of their total number. In addition, since 2003, there is a preferential crediting of farming entities producing crops for the government needs. In 2003 farming entities of Bukhara, Namangan, Ferghana and Khorezm regions received credits on preferential terms, while in other regions such practice is being implemented in 2004-2005. Credits on preferential terms are provided at the interest rate of 5% a year for the period up to 18 months. They are used strictly on purpose (salaries, purchase of inputs, equipment and services and so forth).

d) Tax benefits. The legislation of Uzbekistan is granting various tax benefits to the

agricultural enterprises. Major types of such benefits are listed in the Table 5 below.

Table 5 Tax benefits to agricultural commodity producers

Type of tax Types of benefits in line with the tax legislation of Uzbekistan

Income (profit) tax

Article 31 of the Tax Code of Uzbekistan. The following legal entities are exempt from income (profit) tax: - income (profit) derived by newly-established dekhkan establishments (farms) and private enterprises from the production and processing of agricultural produce as well as from the production of consumer goods and building materials - within two years from the date of their official registration.

VAT Article 71, ibid. The following commodities, works, services and operations are exempt from VAT: the sale of agricultural products of one's own production… Article 72, ibid. The following commodities (works or services) are taxed at a zero rate: mineral fertilizers, fuel and lubricants supplied to agricultural enterprises to satisfy their production and agricultural needs.

Land tax

Article 102, ibid. The following legal entities are exempt from land tax: - farms within two years from the date of their official registration.

Water use tax Article 119, ibid. The following legal entities are exempt from tax imposed for the use of

water resources: - legal entities - for water utilized for the second time, provided that its primary use has been paid for;

- legal entities involved in production of agricultural produce as the main line of their activity - for the use of water resources in order to wash saline soils.

Compared to other forms of the government support the tax benefits are the most

efficient, as they create conditions for development of agricultural enterprises, specifically newly

11 ) – Regulation on the procedure of crediting individual entrepreneurs, subjects of small and medium business by commercial banks from credit lines of the extrabudgetary funds, registered in the Ministry of Justice as of 03 October 2001, #1074

16

established farming entities. The calculations demonstrate, that farming and dehkhan entities annually retain about 3-4 % of the total cost of their production in the form of tax benefits.

e) Price benefits. The government, establishing zero tax rate for the VAT on mineral

fertilizers, fuel and lubricants provided to agricultural enterprises for agricultural production purposes is compensating part of the withdrawn income by means of pricing mechanisms. The state budget is not receiving annually the due revenues from the VAT on mineral fertilizers, fuel and lubricants in amount equal to about 2-3 percent of the total budget expenditures.

However given current surd mechanism of settlements with suppliers, the efficiency of this support is very low, as shirkats are “obliged” to buy fuel, lubricants and mineral fertilizers in amounts envisaged under targeted “tranches”. Entities who incur debt every year written off by the government do not care whether the resources are bought with the VAT or without the VAT.

In addition, due to the lack of efficient mechanism of sale of fuel, lubricants and mineral fertilizers to farming and dehkhan entities, as well as due to the lack of appropriate control on behalf of the auditing bodies of shirkats, many managers illicitly resell fuel, lubricants and mineral fertilizers procured at the discount to other consumers and pocket the cash receipts. Dehkhan farms, occupying 8% of the sown areas and producing 80-90% of all fruit and vegetable are “supplied” by mineral fertilizers mainly though this channel.

Thus, the policy of cheap resources for agriculture at the lack of incentives for their efficient utilization in shirkats leads to their waste and is one of the causes of losses.

f) Other types of benefits. The leasing mechanism is another form of subsidizing the

agriculture. In 2003 Uzselkhozmash Leasing Company provided agricultural enterprises of the country with 1624 units of agricultural machinery worth UZS 23.6 billion12. Benefits granted by the government to leasing companies account for 0.5% of the state budget expenditures, rendering considerable support to agricultural producers.

In addition to the above, the government is also providing one-time financial assistance to entities (regions) affected by natural disasters. For instance, in 2000- 2001 due to drought the entities of the Republic of Karakalpakstan and Khorezm region received target grants for the total amount of more than UZS 2.2 billion.

Government support provided to agricultural enterprises is strengthening their solvent demand and create conditions for development of infrastructure, servicing agricultural enterprises.

Taking into account the above, it is possible to make a conclusion that such forms of the government support of agricultural entities as writing off debt, establishing lower prices for resources are not adequate to the market principles and do not facilitate agricultural producers and efficiency increase. Moreover they are extremely inefficient both for the government and agricultural producers themselves.

The government support shall focus more on setting up favorable conditions for agricultural operations, transparent subsidies for those agricultural producers who are fairly run their business in non-favorable climatic conditions and poor soils, as well as on leasing of agricultural machinery and infrastructure development. The key point is to refuse from the practice of administrative methods in agriculture management, attempts of non-market interference in operations of agricultural entities, and create conditions for efficient operations of real owners of the results of agricultural production and ensure efficient system of settlements for resources and agricultural products.

Summing up the analysis of economic causes and legal bases of the reorganization of

large agricultural enterprises into farming entities, undertaken in this section, it is possible to make the following conclusion: shirkats which failed to set up and develop corporate forms 12 ) – by operational data of the Ministry of Economics

17

of management in most cases are not able to stimulate human initiative and increase efficiency of agricultural production. They are easily become subject to local government officials interference who in fact, are not responsible for end results of business operations.

Losses of agricultural entities are caused not only by the organizational form of their operations, but are also related to inefficient government policy in the area of pricing and resources distribution. The support provided by the government to agricultural entities in many cases is not complying with market requirements and is not efficient.

The government is trying to solve such problems by accelerated transformation of loss-making and inefficient shirkats into farming entities and creating conditions for their sustainable development. Reorganization of shirkats into farming entities is aimed at overcoming the crisis, financial rehabilitation and development of agriculture.

However, the authors of the report believe, that there is a risk that current inefficient mechanisms of economic regulation, mentioned above, may negatively affect the financial viability of newly established farming entities.

These issues are further studied in the next sections of the report.

1.4. Analysis of the outcome and implications of the reorganization of agricultural enterprises in 1998-2003.

In 1998-2000 first attempts to transform loss-making enterprises into farming entities

were launched on the basis of the number of entities in Khorezm, Syrdarya, Navoi and Bukhara regions, as well the Republic of Karakalpakstan, and brought positive results. Therefore, since 2001 the government stirred up processes of reorganization of loss-making and inefficient shirkats into farming entities. While only 21 shirkats were transformed into farming entities over 1998-2000, in 2001 this number increased to – 52, in 2002 to 86, and in the beginning of 2003 reached 178 (Table 10). Over this period the large number of shirkats in Jizzakh (66), Kashkadarya (58), Syrdarya (53) regions and the Republic of Karakalpakstan (43) underwent such reorganization (Table 6)

Table 6.

Reorganization of agricultural enterprises by transforming them into farming entities, 1998-2002

Since 2002 the practice of transforming all shirkats of some regions into farming entities

was launched. In 2002 the government of Uzbekistan accepted proposals by Khokimyates of the

Number of reorganized agricultural enterprises № Regions 1998-2000 2001 2002 2003 1998-2003 1. The Republic of Karakalpakstan 5 2 15 21 43 2. Andijan region 3. Bukhara region 1 10 3 2 16 4. Jizzakh region 4 8 54 66 5. Kashkadarya region 14 12 32 58 6. Navoi region 2 3 9 5 19 7. Namangan region 3 8. Samarkand region 4 2 4 10 9. Surkhandarya region 1 4 6 11

10. Syrdarya region 3 16 34 53 11. Tashkent region 2 3 6 11 12. Fergana region 6 14 20 13. Khorezm region 9 4 14 27 For the country in general 21 52 86 178 337

18

Syrdarya and Ferghana regions on transforming all shirkats into farming entities in three districts. Earlier such practice was implemented only in arid areas of Khorezm region and the Republic of Karakalpakstan as well as in Romitan district of Bukhara region.

As a result of ongoing transformations the number of farming entities in 2003 has grown by 3.8 times compared to 1998 and the land area allocated to them increased by 4.9 times (Table 8). The very first and the most noticeable implication of the reorganization of large agricultural enterprises was the growth of the number of farming entities and the respective increase of the share of the farming entities in sown areas of agricultural crops and gross output of agriculture.

Table 8 Development of farming entities in the country*

Deviation Indicator 1998 2003 «+, - » In times

Number of farms, units 23000 87552 64552 3.8 Land area under them, thousands hectares 437.0 2148.1 1711 4.9

Land area per one farming entity, hectares 19.0 24.5 5.5 1.3

Share of farming entities (%) in:

Gross agricultural output 3.5 14.1 10.6 4.0 Raw cotton production 11.0 37.8 26.8 3.4 Grain production 8.0 35.6 27.6 4.4 *) – based on the Goskomstat data

The share of farming entities in total volume of gross agricultural output accounted for

14.1 % and increased by 3.8 times compared to 1998, they produced 37.8 % of cotton and 35.6 % of grain (compared to 1998 the increase was 3.4 and 4.4 times respectively).

Dehkhan entities were also further developed. All these things led to changes in the structure of gross agricultural product, in the structure of the land users and employment in the agricultural sector (Table 9).

Table 9

Changes in structural indicators of agricultural sector in Uzbekistan (in percent)

№ Indicators Large agricultural enterprises Farming entities Dehkhan

entities*

1. Structure of the gross agricultural output: 1998 35.8 3.5 60.7 2003 23.3 14.1 62.6

2. Structure of the sown areas: 1998 81.6 8.9 9.5 2003 51.9 36.9 11.5

3. Structure of employment in the agricultural sector:

1998 57.1 5.0 37.9 2003 41.1 19.0 39.9

*) – taking into account personal subsidiary plots Drastic growth of farming entities was notices at the second stage starting from 1998 due

to stirring up of the reorganization processes (figure 8).

19

Fugure 8. Changes in the number of farming entities

1.9 5.9 7.514.2 18.1 21.4 23.0

31.1

43.8

55.4

72.4

87.5

18.8

0102030405060708090

100

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Num

ber,

thou

sand

s un

its.

The share of farming entities in the sown areas under agricultural crops reached 37 % in 2003 (in 1991 it accounted for 0.3 %), in the gross agricultural output - 14.1 % (0.2 %). In 2003 the average area of land per one farming entity reached 24.5 hectares or increased by 3.5 times compared by 1991.

With passing of the Concept of the Farming Entities Development for 2004-2006.13 the new stage of the reorganization processes began. The government has determined the policy aimed at priority development of farming entities as the major producers of agricultural commodities in the future, which is the specific feature of this stage.

In line with the above Concept, and the Cabinet of Ministers Regulation dated 30 October 2003, №476, 1020 shirkats should be transformed into farming entities over 2004-2006 or 55 % of their total number (Table 7).

Table 7

THE PROGRAM14 of transformation loss-making, inefficient shirkats into farming entities over the period of 2004-2006

including:

Regions (oblasts) Number of shirkats, total

Including intended for transformation

into farming entities in 2004-2006

2004 2005 2006

Republic of Karakalpakstan 122 105 35 30 40 Andijan region 191 40 5 15 20 Bukhara region 138 125 30 45 50 Jizzakh region 103 81 40 41 0 Kashkadarya region 162 99 31 34 34 Navoi region 76 41 10 15 16 Namangan region 145 50 10 20 20 Samarkand region 244 110 30 30 50 Syrkhandarya region 151 86 22 21 43 Syrdarya region 57 55 25 30 0 Tashkent region 185 74 21 23 30 Ferghana region 162 52 10 20 22 Khorezm region 104 102 15 30 57

Total 1840 1020 284 354 382

In line with the approved Program over the next two years, more than 85-90% of shirkats in the Republic of Karakalpakstan, Khorezm, Syrdarya, Jizzakh, Bukhara and Navoi regions should be transformed into farming entities.

One of the key tasks of this stage is to facilitate efficiency of agricultural production. Let’s review the concrete results of the reorganization

13 ) – approved by the Presidential Decree of 27.10.2003, N УП-3342 14 ) – approved by the Cabinet of Ministers Resolution of 30.10.03, №476.

20

Table 10 Comparative efficiency indicators of shirkats and farming entities in 2003*

№ Indicator Shirkats Farming entities

Comparison (+, -)

1. Share of loss-making entities, % 37.2 3.9 -33.3

2. Share in the total losses of the agricultural sector, % 94.3 5.7 Х

3. Costs of growing one ton of **: Raw cotton (UZS ‘000) 201.0 190.5 -10.5 Grain (UZS ‘000) 48.4 41.8 -6.6

4. Expenditures per one hectar for growing of **:

Raw cotton (UZS ‘000) 445.5 354.3 -91.2

Grain (UZS ‘000) 169.4 141.3 -28.1

5. Labor productivity (cost of product produced by one employee, - UZS ‘000) 778.1 980.6 202.5

6. Crop capacity, centers/hectar:

Raw cotton 21.4 18.6 -2.8

Grain 35.0 33.8 -1.2

Vegetables 174.6 189.9 15.3

Potatoes 111.8 132.3 20.5 *) – based on the data from the Goskomstat, Ministry of Agriculture and Water Management and Committee on economic

insolvency of enterprises **) – based on estimates The analysis of financial indicators of farming entities demonstrates that their efficiency

in general is much higher than in shirkats, despite the fact that farming entities were set up on the lands of inferior quality where former shirkats incurred losses. By the results of 2003 only 3.9 % of farming entities incurred losses from operations while among shirkats this indicator reached 37.2%. In total losses of the agriculture, the share of farming entities is not reaching 6 %, while shirkats account for the remainder 94%.

However, lower crop capacity in farming entities is explained by the fact that they are usually set up on the land of inferior quality of those shirkats which failed to organized profitable production (Table 10, Annex 4-а). In this respect it would be interesting to compare financial and economic indicators of the former entities with the ones by newly-established farming entities on their basis (Table 11).

Table 11

Growth of raw cotton and grain crop capacity as a result of the reorganization in 2003* Growth of raw cotton crop

capacity*: Growth of grain crop

capacity*: № Regions (oblasts) c/hectare (+,-) In % c/hectare

(+,-) in %

1. The Republic of Karakalpakstan 3.3 130.8 2.7 110.3 2. Bukhara 2.5 111.8 7.9 129.1 3. Jizzakh 6.8 168.0 12.4 212.7 4. Kashkadarya 2.1 111.5 4.4 113.5 5. Navoi 3.0 113.3 2.4 108.5 6. Samarkand 4.5 129.4 8.1 135.7 7. Surkahndarya 7.4 135.4 2.3 115.3 8. Syrdarya 0.1 100.8 -1.5 94.5 9. Tashkent 8.6 157.0 0.5 101.3

10. Khorezm 3.0 122.5 0.5 101.3

21

Total for Uzbekistan 4.1 125.0 4.0 115.0 *) – compared to the indicators of the reorganized entity (previous year) The table shows that basically in all regions where farming entities were established on

the basis of the reorganized enterprises, the crop capacity of raw cotton and grain was higher than in the previous year. In general the crop capacity of raw cotton increased by 25% for the entities reorganized in 2003, while grain crop capacity increased by 15%. The newly established farming entities of Jizzakh, Tashkent, Surkhandarya and Samarkand regions as well as of the Republic of Karakalpakstan provided the increase of raw cotton crop capacity by 30 - 70% compared with the previous year. This is explained by the following:

First, the economic behavior of peasants (dehkhans) has changed. Farmers realize, that the end results of their operations are immediately related to their efforts, entrepreneurship and management skills. The middle class of owners has emerged in the rural areas – they are farmers, able to invest their earnings into the agricultural development, land improvement, purchase of machinery and parts and creation of the appropriate production and market infrastructure;

Second, the reorganization enabled to use the land resources more economically and rationally, specifically the irrigated lands. This primarily results in the increase of crop capacity.

Third, the labor productivity increased due to redundancies, efficient labor organization and new incentives for the farmers and hired labor. For farming entities, established in 2002 on the basis of 52 liquidated agricultural enterprises, the labor productivity in increased for raw cotton by 0.9 person/ton or by 52.9%, for grain by 2.2 person/ton or in two times. For the farming entities established in 2003 on the basis of 178 agricultural enterprises these indicators increased by 0.7 or by 38.9% and 2.8 or by 90.3% respectively (Annex 4-B). New incentives considerably affected the labor productivity increase. In shirkats their wages were paid with delays and they were not interested in end results of the operations, while being employed in the farming entities they receive due compensation both in cash and in kind.

Fourth, the reorganization facilitated saving of material resources, due to decrease of costs per unit of product15. The majority of newly established farming entities in attempts to survive tried to save on cost of inputs, establishing strict control over spending and using cheaper resources (labor, machinery, fertilizers and so forth). Decrease of costs per a unit of product enabled many newly established farming entities to avoid losses.

Fifth, the reorganization enabled to decrease losses for the agriculture in general, and on the level of individual entities, as mainly loss-making and insolvent entities were subject to the reorganization (this factor is studied in more detail in the next section of the Report)

Sixth, the development of farming entities is positively affecting the wellbeing of the rural population. Efficient operations of the considerable part of the farmers (in 2003 more than 90% of farmers generated profit) facilitate the improvement of the living standards of one fourth of the rural population, closely related to farming.

However, the reorganization of the agricultural enterprises has also a number of negative implications due to objective and subjective reasons.

In some regions (districts) where large number of the agricultural enterprises were reorganized, the local governments faced an increased unemployment problem due to:

lack of effective programs for the SME development, allowing to absorb the laid off labor and create jobs;

low professional skills and knowledge of the laid off labor; undeveloped market and production infrastructure in the rural areas; lack of funds and entrepreneurship for setting up own business among the laid off labor. It is important to consider that employment in the agricultural sector is not responding to

the market changes at the same pace as in the other sector, as the agrarian labor is not mobile.

15 ) – pertains to the respective region where the reorganization was implemented.

22

Rural dwellers, i.e. agricultural labor are closely linked to their living and labor conditions being specifically conservative. Mentality plays also very important role as most rural population prefers to live among their relatives. Therefore most part of the laid off labor opt for working on their own plot of land rather than to move to other regions with opportunities.

Thus, most part (85-90 %) of the laid off labor was employed at farming entities and also

preferred to work at their own plots of land with the area ranging from 0.06 to 0.20 hectares on irrigated lands and also on the plots of land additionally allocated for setting up dehkhan farms (from 0.20 to 1 hectares). In 2003 only 7.2 % of labor from the total laid off due to the reorganization of 178 shirkats found jobs in non-agricultural enterprises and organizations16.

To address this issue local governments need to develop and implement district (regional)

programs of laid off labor employment, with the special emphasis on creating new jobs in rural area due to SME development in non-agricultural sectors (production, construction and services).

Another issue is the loss of the part of shirkats’ assets in the course of the reorganization

process mainly due to lack of responsibility of shirkats managers for the assets safety. There were no embezzlement cases in practice where former shirkat leaders would be administratively or otherwise punished. Auditing committees of shirkats are basically inactive, and members of district Reorganization Committees do not have sufficient skills in property evaluation, or being overloaded with work perform all the procedures just formally.

And one more negative implication of the reorganization as is seen by the population

living in the former shirkats that they have to pay all the utility costs, previously partially covered by shirkats in full. In addition shirkats also covered maintenance costs of childcare and cultural facilities. After the reorganization part of such facilities were transferred to the local governments’ accounts and the remainder was privatized.

Despite all shortcomings and problems, the reorganization of agricultural enterprises contributed to overcoming of crisis, financial rehabilitation and recovery of the agricultural sector in the selected regions. Emerging of viable farming entities with sound prospects for sustainable development is the key achievement of the reorganization. Section 2. Economic and legal conditions for sustainable development of newly established

farms 2.1 Evaluation of farms profitability level

Trend of decreasing number of loss-making farms has been observed over the recent years: in 2003 the number of loss making cotton-growing farms reduced 1.5 times in comparison with previous year. As a result of it, percentage of loss-making farmers reduced from 5.9 % in 2002 to 3.9 % in 2003 (Table 12).

Table 12 Unprofitableness of farms of the republic

Loss making farms Years Total number of farms Number Share, %

Share of farms losses in % to total losses of agriculture

2001 55445 3590 6.5 4.8 2002 72406 4298 5.9 3.7 2003 87552 3418 3.9 5.7

16 ) – по данным районных комиссий по реорганизации сельскохозяйственных предприятий

23

Deviation (2003-2001)

32107 -172 -2.6 0.9

In geographical context high level of loss- making among the farms is being observed in the Republic of Karakalpakstan (11.6 %), Sirdarya (9.4 %) and Jizzakh (8.9 %) regions (Picture 9).

Рис 9. Убыточность фермерских хозяйств в 2003 году

3,9%

11,6%

9,4% 8,9%

0%

2%

4%

6%

8%

10%

12%

14%

По республике Республика Каракалпакстан Сирдарьинская область Джизакская область

Though in many regions to majority of farms poor fertility lands with poor water supply, poor farming equipment are assigned, yield in farms often is higher than in shirkat farms and loss-making is much lower. At the same time a part of farms is also exposed to the risk of loss-making on objective and subjective reasons. As a result, about 1 % of farms (of their total number) each year is liquidated due to loss-making (table 13). As the number of farms and tightening financial requirements to their activity grow, the number of farmers announced bankrupts also grows.

Table 13

Liquidation of loss making farms of the republic*

Indicators 2001 2002 2003 Number of liquidated farms

442 483 872

Including: through announcing bankrupt

14 49 96

In % from total number of the liquidated

3.2 10.1 11.0

*) operational data The farmers specialized in cotton and grain growing and having small plots of land are more exposed to the risk of bankruptcy. In 2003, the share of farms with land square of less than 25 hectare made 62 % in the total number of loss making cotton and grain growing farmers, and in 2002 that was 68 %. Reasons behind loss making can be divided into 4 groups: The first group is the factors related to the general problems of agriculture which have been considered in the first section of the paper (factors of 2-4 groups):

- Poor land-reclamation state and land fertility which lead to low fertility of agricultural lands

- Drawbacks in the current mechanism of funding agriculture and also inefficient system of subsidizing agricultural producers

24

- Mechanism of pricing generating loss-making of agricultural producers growing crops in less favorable conditions

Imperfect mechanism of forming farmers based on reorganized farms also causes conditions for loss-making activity. This occurs on the following reasons. Firstly, according with current procedure, assets and liabilities of a reorganized farm are distributed between established farms depending on land plots square assigned to them and appraisal score17. Newly established farms receive not only assets but also debt of the farm being transferred to them. At that, the farmers get only the land together with crops (work-in-progress) and fixed assets are transferred to alternative fleets of tractors and machines and Associations of water consumers, where the farmers become founders. In addition, in many cases debt transferred to farmers exceed the assets transferred (even with fixed assets inclusively). Thus, newly established farmers even without starting the operations already are bankrupts. In 2002 26 % and in 2002 22 % of total number of newly established on the base of reorganized farms farmers became loss-making due to that reason (table 14).

Table 14

Unprofitableness of farms due to transfer to them of uncovered debt of reorganized farms

Indicators 2002 2003 Deviation (+,-) Loss making farms 4298 3418 -880 Including with transferred uncovered debt

1140 758 -382

In % 26.5 22.2 -4.3 Secondly, due to imperfect mechanism of conducting contest and transfer of lands and also inactive operation of district commissions on reorganization, processes of assigning land plots and assets to a new farmer are delayed. Lands and hence crops too are left for a long time without proper treatment, spring field operations are not timely conducted. As a result, a new farmer does not get planned harvest and hence faces losses. Practice shows that timely transfer of lands to a new farmer is done in the best case only on 35-40 % shirkats. Thirdly, due to poorly selected candidates, low level of transparency of contest processes, lack of persons aspiring to participate in the contest, selection and other similar reasons, the land is transferred to people lacking training and capability of managing a farm. On experts’ opinion probability that such ineligible people would win is 8-10 % in total on the republic. In the republic of Karakalpakstan, Sirdarya and Jizzakh regions experiencing lack of skilled labor it reaches 20 %. Factors specific for the farms can be classified as a third group. Though farms on their nature are more adapted to market conditions than other agricultural commodity producers, they do have their weaknesses increasing the risk of bankruptcy:

- Relatively small square of land plots lead to high cost of farmer’s production especially in the conditions when farmer still cooperate poorly for joint recruitment and using agricultural equipment. Individual using of equipment, purchasing and transportation of

17 ) The mechanism of this procedure is stated in details in the next section of the paper

25

resources etc. increases cost per production unit. At present in the republic about 60 % o farms specialized in cotton and grain-growing possess land plots of less than 30 hectares

- Low level of processability and mechanization of production. Only 15 % of the farmers on the republic have tractors, 2 % - trucks, only each 50th farmer has a plow and a seeder and only each 62nd farmer has a cultivator (picture 10)

Рис. 10. Наличие у фермеров республики с сельхозтехники

2,8 %1,6 %1,9 %

4,6 %

15,3 %

02468

1012141618

тракторы тракторные прицепы плуги тракторные сеялки тракторные култиваторы

в %

, от об

щего

чис

ла фермеров

Alternative Machine and Tractors Fleets (MTF) could not fully satisfy farmers’ needs in technical services. As a result, land is not properly treated (especially in the regions with relative lack of labor force – Syrdarya and Jizzakh regions) or planned work is done manually with relatively high costs. Ultimately all this affects the outcome of operation: either harvest will be lower of that planned or costs will be higher than income. E.g., when studying reasons behind loss-making of farms it became clear that in 2003 in a number of districts of Samarkand and Jizzakh regions farmers cultivated cotton 1.2 times instead of 5 times during vegetation period due to lack of adequate amount of agricultural technique. As a result, many of them could not receive planned harvest and suffered losses. It should be noted also that under current pricing farmers are not able to ensure renewal of technique in Machine and Tractors Fleets, cleaning drainage, paying back establishing of other infrastructure oriented to farmers and dehkans who cannot form solvent demand. It causes situation when infrastructure facilities being created become loss-making and get liquidated due to lack of solvent customers. Lack of working capital for conducting current activity and capital for medium term and long term investments is felt by almost all farmers. Opportunity to attract soft loans is also limited. Funds assigned for lending to newly established farms in a form of starting capital are not significant. In 2003 only 45 out of 11.5 thousand of newly established farms got loans in a form of starting capital. New farmers having given all liquid assets of their family as collateral on that loans risk losing it since due to unexpectedness of weather conditions and other negative factors affecting farms activity, probability of repaying loans on experts’ opinion often is not more than 50 %. Many farmers due to limited nature of possibilities cannot conduct marketing researches to define the optimal structure of crops produced beyond government contractual work especially of melons and gourds and fruit and vegetables. In this connection, farmers often face great difficulties in selling their production. Often they have to sell production at such a low price that it does not cover actual cost. For instance, in 2003 about 60 % of farmers of the Republic of Karakalpakstan and Khorezm region growing rice faced losses due to overproduction of this crop. An important condition defining farms viability is the level of development of corresponding market and production infrastructure. In the republic on the initiative of the Government

26

certain activity in this direction is being carried out. In 1999 – 2003 on the territory of 337 reorganized agricultural enterprises 246 mini banks, 278 fuel supply points, 266 warehouses on supplying fertilizers, 312 alternative Machine and Tractors Fleets, 294 associations of water consumers were established (Annex 5). At the same time, the survey we conducted among farms established in 2003 shows there are bottlenecks and problems in organization of infrastructure facilities activity (Exhibit 2)18.

It is necessary to consider two important points. First, when there are no infrastructure facilities or their low development farmers cannot function properly. Second, to create and ensure proper functioning of infrastructure facilities solvent demand for their services is needed, which is ensured only under efficient work of farms, timely settlements with them. Therefore, optimal combination of these two factors is very important at local level. 2.2 Forming a new system for economic interrelations between farms, government and procurers based on equal contractual relations One of most important directions for ensuring financial sustainability of farms is to form a reliable system for economic interrelations between the government and the procurers on equal contractual terms. In the conditions of deepening market reforms economic relations between the farms and the government took two forms: Mutually beneficial economic cooperation when the government acts as one of major buyers of farms production. On this reason financial state of cotton and grain growing farms

18 ) The survey was conducted in all regions of the republic. 839 farms established on the territory of 143 reorganized farms were surveyed. They evaluated operation of established mini-banks, fuel, mineral fertilizers selling centers, alternative MTF and Associations of Water Consumers

Exhibit 2

The results of survey conducted

The survey conducted among farms showed that in the number of regions of the republic activity of newly established infrastructure does not satisfy fully demands of the farmers (Annex 6). On the republic 30 % of surveyed farmers believe it is necessary to improve operation of mini banks, in that in the Republic of Karakalpakstan – 45 %, Syrdarya region 42 %, Jizzakh 36 %, Khorezm region 33 %. The reasons of farmers’ complaint are: lack of efficiency, inconvenient office hours, remote location, low service quality etc. Activity of centers (warehouses) established on supplying fertilizers does not satisfy 35 % of the surveyed, centers of fuel supply – 42 % of farmers. Many of surveyed farmers of the Republic of Karakalpakstan, Jizzakh, Khorezm, Kashkadarya, Surkhandarya regions believe it is necessary to improve operation of these facilities. On the results of the survey it became clear that in many regions the established associations of water consumers have no adequate financial resources for exploitation of shared water facilities. There are also problems in organization of activity of alternative MTF, especially of technical supply and renewal of machine and tractors fleet.

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depends on mechanism of establishing purchasing prices for raw cotton and grain crops. Therefore measures taken recently on drawing purchasing prices for raw cotton near international prices will encourage improvement of farmers’ financial state. At the same time, despite of measures taken in a number of regions of the republic due to low fertility, production costs exceed income forecasted. In 2004, average costs forecasted to grow raw cotton made 541.7 thousand Soum per 1 hectare. In order to cover costs it is necessary to receive at least 27 centner / hectare yield under 2003 prices or to increase average purchasing price 1.4 times (under average yield 21.1 centner / hectare in 2002-2003). However, even under such increase in prices majority of cotton growing farms of the Republic of Karakalpakstan, Khorezm, Jizzakh and Syrdarya regions under current yield will not be able to cover their costs (see Section 1). In this connection, improvement of procedure of forming purchasing prices for raw cotton should be made in the following directions. Firstly, it is necessary to purchase of raw cotton from the farms at world prices. At that it is expedient to define real costs of farms objectively operating in worst conditions and having none of opportunities to ensure profitable production. For such farms two options of solving their problem of loss making operation. First one – to cover their losses and to establish conditions for receiving a normal profit by them from growing raw cotton through establishing special prices for them and assigning direct transparent subsidies. The other, more preferred, option can be provision of the right of free choice of agricultural crops to agricultural enterprises on lands objectively not ensuring profitable cotton production. On condition of not allowing price disparity (gap between purchasing prices in comparison with prices for material and technical resources and services), this mechanism encourages almost all cotton growing farms to increase profit from growing raw cotton and that way to raise production efficiency. Though the Decree of the President of the Republic of Uzbekistan19 determines that domestic purchasing prices for raw cotton are defined in line with the world market price situation for cotton, however in practice this mechanism is not implemented fully. Though current procedure20 envisages that basis purchasing price (5 type, 2 sort, 1 class) is fixed in national currency based on average international price for cotton fiber with considering level a normative fiber output, the calculations show that even in favorable 2003 forecasted world price used in calculation was understated (by 35 %) which affected purchasing price for raw cotton. As seen from the analysis (Annex 8) actual difference withdrawn from cotton producers made 394 USD per a ton. Secondly, it should be taken into account that purchase of raw cotton from farms and hence determining purchasing price occurs once a year in the harvesting period (September – November). Subsequent changes in world prices within year (as cotton processing and selling takes place during entire year) cannot be taken into account in purchasing prices beforehand and in practice can deviate from the prices existed in September – November. In order to ensure stable amount of governmental purchase and support to agricultural producers in case on world prices decline (in comparison with socially necessary average

19 ) The Decree of the President of the Republic of Uzbekistan of 20 August 2002 # 3114 ‘On mechanism of forming prices for cotton’ 20 ) Regulation on procedure of forming purchasing prices for cotton fiber and wholesale prices for cotton fiber approved by resolution of the Ministry of Finance of 04.01.03

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costs) for raw cotton it is suggested to consider a possibility of establishing Stabilization Fund of agriculture under the Ministry of Finance of the Republic of Uzbekistan which would compensate losses from world prices fluctuations for cotton fiber. When world prices after the purchasing period of cotton fiber are higher than purchasing prices, the received positive difference (net income) from selling cotton fiber should be withdrawn from cotton fiber producers and go to the Stabilization Fund. When world prices for cotton fiber within the period after its purchase are reduced, funds are directed to covering losses of processing enterprises and to supporting purchasing prices to the farms supplying raw cotton for the government needs. Pros on Stabilization Fund are shown in the Annex 9. The main sources of the Stabilization Fund can be:

• Funds received from export of cotton fiber at the expense of the positive difference between the purchasing price and the selling price

• Funds received from selling cotton fiber to the domestic consumers at the expense of the positive difference which can be formed between the purchasing price and the selling price21

• Funds on the accounts of the Fund for settlements for agricultural production purchased for the government needs under the Ministry of Finance

• Income from placing temporarily free monies from the Stabilization Fund in the form of banking deposits or in other forms in accordance with the current laws of the Republic of Uzbekistan

• Other sources provided by the laws. The Stabilization Fund will allow creating conditions for establishing mutually beneficial relations between agricultural producers and the government; prevent mass bankruptcy of the agricultural enterprises or enterprises processing raw cotton in the period of sharp decline in world prices for raw cotton. Activity of the Stabilization Fund can be limited in time with considering financial independence of agricultural enterprises, development of sustainable systems of insuring the harvest (insurance, futures, hedging etc.) from risks and changing in world price situation, refusal of such biggest cotton producers like USA from subsidizing their farmers. Economic interrelations of the farms with the government are implemented on a contractual base. The regulation on procedure for concluding, registering, executing agreements between agricultural producers and procurers and serving organizations determines how to sign and register all types of agreements including contracting agreements for supply of material and technical resources and for rendering services. In order to protect interests of agricultural producers, agreements of all types singed between farms and procurers and serving organizations are registered in district departments of agriculture and water resources. They are also exempted from payment of state duty on suits connected with non-accomplishment of contractual commitments by procurers and serving organizations.

21 ) In the periods of year when level of world prices exceeds purchasing prices fixed in the period of mass purchase of raw cotton

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At the same time, farms have no enough freedom in choosing and placing agricultural crops. Therefore in some regions farmers must grow mainly two crops – cotton and wheat - according to the agreement with the government on 95-98 % of assigned to them areas under crops irrespectively from availability of adequate conditions for their profitable production. It is necessary to note that realization of the right to independently allocate agricultural crops becomes extremely important in ensuring financial sustainability of the farms. An important factor of strengthening farms’ independence is establishment of the system on their legal protection. In very short term prospect the most efficient ways to protect interests of the farmers should be:

a) Further improvement of the laws in the direction of providing real independence to the farms in realizing their independence

b) Development of legal (advocatory) services in rural area with exempting them on the first stage from all types of taxes for services rendered to the farms

c) Expansion of autonomous authorities of citizens and associations of farmers and dehkans on protecting rights of the farmers through providing them opportunity to apply for protection of farms to economic courts without payment of state duty

d) Establishing of the system of training farmers to increase their legal literacy, including at the expense of assigning state grants and attracting international financial institutions-donors

Improvement of funding and lending system to the farmers is especially important in forming a new system of economic relations between farms, state and procurers. Although today the government makes advance payment for 50 % of the harvest of future year, however overwhelming part (about 95 %) of advance payments is of so-called constrained nature and farmer cannot impact procedure of their allocation and utilization. Such mechanism of advancing harvest does not meet requirements of market relations and reduces efficiency of financial resources utilization. Receiving short term loans against the future year harvest, particularly preparing and agreeing a whole package of documents is a very complicated and time-consuming process. Often farmer spends 2-3 months for collection and preparing many documents, references and financial indicators for provision to a banking institution. This requires including some corrections in the current mechanism of funding and lending to the farms in order to liberalize them further in using funds and simplify procedure for granting loans22. 2.3 Improvement of the market system of material and technical resources and developing infrastructure serving farms Free access to the markets of material and technical resources is one of major conditions of ensuring independence of farms. In this connection reforms directed to financial rehabilitation of agrarian sector assume creation of production and market infrastructure in the regions helping the agricultural producers to adapt quicker to market relations. At that, recently approved resolution of the Cabinet of Ministers of the Republic of Uzbekistan ‘On implementing market mechanisms of selling highly liquid types of production’, envisaging expansion of access of agricultural producers to highly liquid resources (fuel, mineral fertilizers) is of special importance. Agricultural producers in order to satisfy their needs (except for production for governmental needs – supplies on them are

22 ) This problem is studied in details in CER paper ‘Reforming system of funding agriculture’

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made on direct agreements according with the limits assigned) can participate in open exchange auctions and buy motor gasoline and diesel fuel supplied by Uznefteproduct Joint Stock Company. That way they can buy mineral fertilizers. Also full access to buying fodder is provided (cotton ….., cotton peelings) for cattle raising farms. General procedure for selling goods through exchange auctions has been developed and implemented (Annex 10). Specific mechanism of exchange and auction trade is determined by procedures of selling some types of goods. At present, exchange trade and auctions of gasoline, diesel fuel, mineral fertilizers, cotton Cotton waste and cotton peelings are conducted via Single Electronic System (table 15).

Table 15 Data on selling highly liquid commodities to agricultural producers via Single

Electronic Exchange System of the republic in I quarter of 2004

# Name of good Supplied (tons)

Sold (tons) in % Sold (thousand

Soum)

Starting price

(thousand Soum / tons)

Selling price.

(thousand Soum / ton)

In %

1. Diesel fuel 20398.0 8163 40.0 1379579.0 162.0 164.4 101.5

2. Carbamide (mineral fertilizers) 2073.6 915 44.1 37910.8 102.3 104.0 101.7

3. Ammonium nitrate (mineral fertilizers) 3855.2 1169.0 30.3 96700.2 87.0 89.3 102.7

4. Super phosphate (mineral fertilizers) 6665.0 5.0 0.1 279.7 55.9 55.9 100.0

5. Cotton waste 11926.0 11153 93.5 647744.0 54.8 58.1 105.9

6. Peelings 14843.0 13670.0 92.1 306971.4 19.3 22.5 116.3

The table shows that in Ist quarter of current year agricultural producers were passive regarding purchase of resources supplied. Only 40-45 % of diesel fuel and mineral fertilizers were sold. This is explained by the following reasons: Firstly, overwhelming part of farmers so far did not adapt to a new form of selling products or even are not aware about it. Many cannot understand mechanism of exchange auctions, procedure of participating in them. They are also not ready psychologically to the new mechanism (for many countrymen it is typical to react passively to novelties). Secondly, farmers’ need is not strengthened with adequate financial resources. On our estimate, 95 % of farmers have no free funds on their accounts. In addition, farmers have not yet received due funds on final settlements on 20 % of raw cotton sold to the government. Thirdly, purchase through the exchange in small lots is not beneficial for individual farmers since having small areas under crops (and accordingly small need in resources) they face high transactional costs (transport, time, etc). Most optimal is the variant when mineral resources, fuel are bought at the exchange by wholesale buyers (Fuel storages, mineral fertilizers storages established under the program of creating rural infrastructure) with their further sale to close located farms and dehkan farms. It is also expedient in future to encourage full transition from limit distribution of material and technical resources supplied to agriculture to market methods of trade.

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In addition to liberalization of material and technical resources markets issues of creating material and technical base of delivering goods to consumers- farmers (shirkats) are important. Reorganization of many shirkat farms into farms in 2004-2006 will require a lot of efforts and financial resources to create necessary market infrastructure facilities. According to the Concept relevant ministries and associations received an assignment to create a network of infrastructure facilities to serve the farms; number of the farms should reach more than 8200 by 2007. In comparison with 2003, the number of alternative machine and tractors fleets should increase 4.1 times, associations of water consumers – 4.6 times, network of facilities on selling mineral fertilizers and plant protection means – 4.4 times, purchases of agricultural production – 1.8 times, selling fuel - 4.6 times, dataware and consulting – 1.9 times, mini-banks – 3.1, selling pedigree cattle and zootechnician and veterinary services – 1.2 times. At the same time, in order to activate and raise efficiency of market infrastructure facilities operation it would be more correct to involve not administrative resources through setting up assignments to associations and companies responsible for creation of such services but to form conditions for development of private enterprises serving agricultural commodity producers. Most attractive and promising in this direction is establishment of private alternative machine and tractors, networks for selling fuel materials, enterprises rendering zootechnician and consulting services to farmers. It should be noted that organizational measures on creating infrastructure facilities will not give desired results if farmers will not enough adequate financial resources to pay for their services. When farmers have no solvent demand to pay for the services of serving organizations, created infrastructure facilities will simply go bankrupt and shut down. When locating infrastructure facilities real level of needs and solvent demand of farmers in a served zone also have to be taken into account. Considering low level of manufacturability and mechanization of farms (section 1.2) it is expedient to expand leasing services on supplying farmers with agricultural equipment on privileged terms. One more important factor of ensuring sustainable development of farms is improvement of purchases system of meat and milk products, fruit and vegetables and rawstock. Due to lack of encouraging mechanism of selling these types of products and the necessary infrastructure the sector potential is not exploited enough. On that reason 25-30 percent (about 1 million tons) of fruit and vegetables grown in the republic are lost as wastage. Major producers of such products in the republic are farms and dehkan farms (Annex 11) which produce 95 % of meat and milk products, 75 % of wool, 81 % of vegetables, 87 % of melons and gourds, 70 % of fruit, and 60 % of grape. Despite of high export potential only 6-10 % of fruit and vegetables are actually exported (table 16).

Table 16 Share of export in total fruit and vegetables produced in the republic

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2002 2003

# Type of products Export,

thousand tons

In % tot total

production

Export, thousand

tons

Share, in % to total

production

1 Vegetables 183.6 6.2 213.8 6.5 2 Melons and gourds 35.0 7.3 50.0 8.6 3 Fruit 86.4 10.5 45.4 6.0 4 Grape 50.3 10.0 40.9 10.2

In order to expand output of agricultural production by farms and dehkan farms it is crucial to create favorable conditions to develop network of purchases of meat and milk, fruit and vegetables and rawstock with procurers service centers, located as close as possible to the territories of mass production of such products. For this purpose it is necessary to maximally encourage signing futures contracts between agricultural producers and procurers and processing enterprises which envisage procedure of making advance payment to agricultural producers in amount of at least 50 % of the ordered production. Possibly, sound arrangements could be:

• To extend the taxation regime in force for trade enterprises (payment of tax on gross

income) to procurers and service centers established under processing enterprises, having excluded at that service procuring centers from the property tax for two years from the date of establishment

• Implementation of directed lending mechanism to processing enterprises and procurers for making advance payments to agricultural producers on future contracts etc.

2.4 Legal base of reorganization of large agricultural enterprises

Experience of developed countries shows that integrity and systemic approach of state policy in the area of reforming of agriculture are mainly predetermined by presence of efficient laws. In this respect in Uzbekistan as in other countries of the world, the processes of reforming are accompanied by simultaneous establishment and strengthening of necessary legal base in both institutional and legal and procedural context23. Reorganization procedures determined in the Civic Code are of general nature and are extended to all sectors of economy including agriculture. However specific features of this sector have predetermined that reorganization is conducted by way of transformation of shirkat farms into farms. Specificity shows itself in the fact that newly established farms are given the rights and responsibilities of reorganized shirkat in line with deed of conveyance and separating balance sheet.

23 ) Current legal base on reorganization of agricultural enterprises is based on Civic and Land Code, the Laws of the Republic of Uzbekistan ‘On agricultural cooperative (shirkat)’, ‘On farm’, Decrees and resolutions of the Cabinet of Ministers and other normative acts

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In recent years in accordance with the Decrees of the President of the Republic of Uzbekistan, resolutions of the Cabinet of Ministers a number of regulations guiding some procedures of agricultural enterprises reorganization have been developed and approved24. At the same time, when analyzing current laws and their practical applying, problematic issues related with implementation of legal norms and their improvement are observed. Firstly, according to the current laws reorganization of agricultural enterprises is conducted in administrative manner by specially established district commissions. The commission conducts all the work on reorganization of agricultural enterprises (Annex 7). Activity on reorganization of an agricultural enterprise is carried out (on a voluntary basis) jointly by Chairman (First Deputy of district Khokim) and members of the commission. In order to carry out function imposed the commission members need a lot of time which is not always available as they are appointed members having heavy work load on their main position occupied. In this connection, in practice a part of measures taken on reorganization of agricultural enterprise is implemented formally or is simply not implemented: inventory of fixed assets and other valuables, construction in process, collection of accounts receivable, restitution of assets embezzled, selling off needless assets etc. In 2003 only 58 % of assets of 178 reorganized farms offered for auctions, were sold within planned period of time. In addition, often assets of agricultural enterprises are sold to third parties very cheaply which does not allow paying accounts payable of reorganized farms which later on is transferred to new farmers. The following mechanism of reorganizing shirkat farms is suggested: 1) If a farm has no debts on compulsory payments and monetary liabilities (so far did not

happen in practice), then it is suggested to liquidate it in the order stated in civic laws with applying procedure of self-liquidation, and to distribute its lands by the commission on contest base between the claimants in the order stated by the laws (Resolution of the Cabinet of Ministers # 8)

2) If a farm has debts on compulsory payments and monetary liabilities, then shirkat should be liquidated in the order suggested in Annex # 12 by a liquidation manager who should be reporting to the district commission and the creditors.

I.e. reorganization would be divided in that case into two parts: • Activity related to selection of claimants on establishing a farm and transfer of

lands is carried out by the district commissions • Activity related to liquidation (selling off assets, debts compensation, etc) is

carried out by a liquidation manager. The suggested option would allow:

• Conducting liquidation processes timely and with high quality, not damaging creditors’ interests

• Selling off property of reorganized farm at fair (market) prices, collecting accounts receivable and directing incoming money to pay debts in the order stated by the laws

• Preventing transferring the ‘uncovered debts’ of reorganized farms to newly established farmers which helps to prevent their artificial bankruptcy.

24 ) In particular, resolutions of the Cabinet of Ministers of 8 January 2002 # 8 ‘On measures to reorganize agricultural enterprises’, of 30 October 2003 # 476 ‘On measures to realize the Concept for development of farms for 2004-2006’ approved more than 10 such regulations and procedures which allowed large-scale reorganization of agricultural enterprises

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At that, accounts payable are transferred to newly established farmers in the amount not exceeding the cost of work in process (crops) and agricultural equipment. The remaining debts of reorganized farm are paid at the expense of debtor’s assets in a stated order. It is suggested to sell assets of reorganized farm to farmers themselves first of all in a form of single property complex. Liquidation manager is authorized to offer to the creditors a part of assets of reorganized farm to pay debts at a price agreed upon with the district commission but not lower than depreciated book value. S/he also has the rights on the agreement with the district commission to offer to the creditors to establish a Machine and Tractors Fleet on share holding base in a form of Liability Limited Company with (partial) transferring assets of reorganized farm. As an exception, assets related to water facilities (irrigation and land-reclamation network) is transferred without compensation on decision of the district commission to the Association of water consumers, where newly established farmers are the founders. Assets remaining after paying creditors’ claims or unsold in the liquidation process (which were offered for sale when there was a refusal from creditors and shirkat’s shareholders) are transferred to Khokimiyat. If assets are not enough to cover all debts of reorganized farm, then assets (incoming funds) are distributed proportionally between creditors on their share (not on queue). On suggestion of district commission missing amount (uncovered debt) is written off in a stated order. Thus, suggested option is most acceptable as it protects interests of farmers and creditors, does not generate conditions for loss making a priori. Secondly, it is expedient to refuse from the practice of transfer of ‘uncovered’ debts of reorganized farms to newly established farmers, having them written off from liquidated shirkats. Considering the above paragraph it is needed to revise ‘The procedure of distribution of assets and liabilities under reorganization of agricultural enterprises into farms’ approved by the Resolution of the Cabinet of Ministers of the Republic of Uzbekistan of 5 January 2002 # 8. It is necessary to state clearly in that resolution that debts transferred to the newly established farms should not exceed the value of transferred work in process (costs on crops) and agricultural equipment. Thirdly, reorganization process starts as a rule in January. It seems to be too late and not optimal date as a result the following issues arise. Firstly, the farm itself knows that it will undergo reorganization. Therefore head of farm practically is not interested and does not account for quality of sowing campaign of winter crops. Secondly, on the same reason (irresponsibility) embezzlement of fuel and mineral fertilizers allocated for sowing winter crops occurs. Thirdly, there are high risks of squandering assets of shirkat. Fourthly, since procedure of transfer starts in January farmers have no enough time to start properly lands preparation to a new sowing season. In this connection, it is suggested to shift the process of selecting inefficient shirkats subject to reorganization to November – December keeping the same Head of shirkat responsible for successful finishing of campaign on picking up raw cotton. New farmers should themselves start sowing winter crops and ploughing up fields for new season crops on the areas free from harvesting raw cotton.

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Fourthly, time frames for some procedures established in the current laws are not realistic. Current scheme of operations sequence on reorganization of agricultural enterprise into farms provides for conducting entire range of operations (6 stages) within 2 months, however, practically in all regions of the republic the process of reorganization of shirkats is not completed within established time frames. Thus, in 2004, establishment of farms on the base of reorganized 284 shirkats25 required more than 4 months. Even in 6 months after beginning of the process 60 % of reorganized farms have not yet completed the process of assets selling off. Short time frames set result in bad mistakes in reorganization, strengthen formalism and perfunctory attitude especially in conducting contests and do not enable selling assets off at a fair price, which in the end reduces efficiency of reorganization. Therefore it is proposed to revise time frames for operations having divided all operations into two parts:

1) Establishing new farms arranged by district commissions within 2 months. 2) Liquidation of reorganized farm exercised by a liquidation manager – within 6 months

with 3 months prolongation when necessary. Fifthly, current laws do not ensure transparency of contests for establishing farms. For instance, this refers to main criteria of selecting claimants for participating in the contest and appraising proposals of applicants when often different approaches are followed to indicators applied and methodology to appraise proposals of competitors in two neighboring districts. As a result, a claimant who lost in the contest in first district can win in the contest conducted in another district not because s/he is better than the other competitors but because contest terms were less demanding than in the first district. In addition, when selecting on such important factor for sustainable development of farms as management and organization skills of the claimants is not taken into account fully at local level. (Exhibit 3).

Exhibit 3 Example In accordance with normative documents, specialists of the Ministry of agriculture and water resources

have developed methodical recommendations on reorganization of agricultural cooperatives (shirkats) into farms. In this recommendation the entire process of reorganization is described based on specific examples.

However some stages of reorganization described in the recommendation had no support in lower branch as many specialists, contactors, farmers and citizens present claims and this leads to misunderstanding among population. For instance, stage on selecting candidates and conducting tender on establishing farms. Appraisal terms included speciality criteria (agronomist, engineer, mechanic, economist, accountant, zoo-technician, builder, constructor (member of shirkat) and each tender participant is given score on these specialities.

Here naturally the issue arises: what if a claimant has other specialties not stated in this list? What to do? It infringes upon interests of claimants who have other specialties. Therefore explanation is needed: why specialties above were included to get score and it should have been stated that score would not be given to other specialties.

Due to absence of public control often local officials interfere into contests conducting process. This is proved by numerous complaints from local population on the issue of conducting contests. For instance, basically in all regions where contests were conducted, former heads of farms who led shirkats to bankruptcy succeeded to win in the contest and get best lands. It is therefore considered expedient:

• To revise the procedure of forming district commissions conducting contests among claimants with inviting representatives of public and local authorities

• to revise terms of selecting claimants to participate in contest and procedure of tender conducting

25 ) According to the resolution of the Cabinet of Ministers of 30 October 2003 # 476

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Sixthly, the list of reorganized shirkats is approved annually by Governmental decision based on proposals of the Council of Ministers of the Republic of Karakalpakstan and regions Khokimiyats. This enables to conduct simultaneously reorganization of loss making, low profitable and lacking in prospects shirkats into farms with creating appropriate conditions. At the same time when following such approach there are some factors reducing efficiency of measures taken:

a) No initiative of assets owner (shareholders) and shirkats members. When working out proposals on reorganization municipal administration insufficiently taking into account shareholders’ opinions is the initiator. This leads to low interest and passive participation of shareholders (and member) in reorganization process, in ensuring assets safety and timely conducting spring field work.

b) Proposals on inclusion into the List of reorganized farms are usually prepared in end August – beginning September. Selection of farmers occurs much later. This generates opportunity to manipulate the decision taken. For instance, in 2004 after approving the list a number of Khokims applied to the Government about exclusion of some shirkats and inclusion of others.

In this connection, it is necessary to develop procedure on preparing and revising proposals on reorganization of shirkats having approved it by decision of Governmental commission on bankruptcy issues and readjustment of enterprises. Seventhly, current laws do not regulate clearly issues related to activity of infrastructure facilities serving newly established farms.

a) There is no procedure of transferring assets of reorganized farm to enterprises of serving reorganizations (Uznefterproduct, Uzhimprom) to offset debts of reorganized farms. The thing is that in order to establish networks for supply of fuel, mineral fertilisers and chemical means of protecting plants premises, mechanisms, other types of equipment and working capital are needed. Assets appropriate for these purposes are available in reorganized farms; at the same time reorganized farms also have debts towards enterprises of these organizations. Certain time is needed (3-4 months) to buy these facilities in a stated order (after evaluation, offering for sale, conducting tender etc.). Considering critical need in creating infrastructure facilities to serve the newly established farmers within very short period of time it is needed to develop the procedure to transfer the assets of reorganized farm to enterprises of serving industries to offset accounts payable.

b) Creating infrastructure facilities under great number of reorganized farms (284 in 2004, 354 in 2005, and 382 in 2006) is concerned with large capital investments. For instance, in order to create 244 facilities on selling fuel provided for in the Program, unitary enterprises of Uzneftemahsulot company need 1.7 - 2.0 billion Soum (minimally 7-8 million Soum per one fuel centre), which by far exceeds planned annual profit of this organization. Situation is similar for mineral fertilisers selling facilities. On that exactly reason, in 2004 the Program of creating fuel facilities as of 01.04.04 was accomplished by 60 %, warehouses of mineral fertilisers – 70 %.

Due to insufficiency of own means of Uzneftmahsulot, Uzhiprom, Agromashpromservis to create infrastructure facilities it is needed to promote in every possible way inflow of private capital and establishing conditions for profitability of farms forming their solvent demand for infrastructure services.

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c) Due to flawed legal mechanisms of funding, associations of water consumers established on the territory of reorganized shirkats do not receive funds to maintain staff and water facilities. Associations of water consumers established in 2003 received 15 % of forecasted funds from the farmers. In addition, current laws on associations of water consumers do not state clearly their status as being a legal entity. On one hand, on their name they are associations, hence a non-governmental non-commercial organization but 99 percent of them have not been registered as NGO in the Ministry of Justice (do not enjoy privileged conditions). From the other hand, they render services related to water supply for irrigation to farmers and ensure water facilities maintaining (collector-drainage network, pumping stations etc), i.e. carry out functions peculiar to commercial organizations. That’s why it is needed to define clearly their status, funding sources, and also improve water-related arrangements between newly established farms. 8. In the course of reorganization of shirkat farms there is land left undistributed between farmers due to absence of persons interested (it is mainly unkept lands, not involved into production, with poor reclamation state). In 2003, more than 7 thousand hectares remained undistributed (about 100 farms could have been established). Usually, such lands are included into reserve lands of a Khokimiyat. Considering lack of funds of Khokimiyats to improve the state of these lands, it is expedient to transfer these lands to the interested with no commitments on government contractual work exempting them from all types of taxes for 5 years; hence a relevant procedure needs to be developed for that. 9. One of problematic issues related to development of farming are labor relations. Majority of members of reorganized farms were employed in newly established farms. However labor agreements with hired employees in farms are not documented properly. Many of hired employees have no labor books, do not receive salary (are paid by products), contributions to Pension Fund are not made; in future they will not be able to be paid a decent pension. In this context, measures need to be taken to ensure organization of labor relations in farms based on labor agreements. Thus, current laws creating fundamentals for legal and economic regulation of shirkats reorganization processes and establishing farms, need improvement; and large scale reorganization and rapid development of farmers sector in agriculture require development of these mechanisms. Conclusions and recommendations 1. Prevalent loss-making among shirkat farms is explained by many factors, in that by administrative and poor management, low crop capacity and fertility of lands, inefficient mechanism of making advance payments and settlements with the government, pricing mechanism and state support to loss making farms. The reasons of loss making are not only in the form of production organization itself; they are also related with inefficient state policy in sector pricing and funding. Current mechanism of subsidizing of cotton growing farms is not market one and extremely inefficient not only for the government but also for agricultural producers themselves. The practice of withdrawing a part of income of agricultural producers aggravates crisis situation in agrarian sector. 2. Analysis of financial state of farms shows that efficiency of their activity is much higher than that of shirkats. At the same time, they are also exposed to the risk of loss making on the reasons both typical for agriculture in general and deriving from nature of farming.

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3. Current laws creating fundamentals for legal and economic regulation of reorganization processes of shirkats and establishing farms do not ensure so far complete solving of problems existing in this industry. Reorganization process starts as a rule in January. It seems that this is too late and not optimal as head of farm knowing beforehand that shirkat will be reorganized into farms is basically not interested and does not account for quality of sowing campaign of winter crops. This is also the reason of embezzlement of fuel and mineral fertilizers, squandering of shirkat’s assets assigned for sowing winter crops. In addition when starting transfer procedures in January, farmers have no time to start a quality preparation of lands to a new sowing season. It is suggested in this connection: a) To shift the process of selecting inefficient shirkats subject to reorganization and tenders arrangement to November-December keeping the previous head of shirkat responsible for picking up raw cotton. New farmers should themselves start sowing winter crops and lands ploughing up for a new season crops on land plots free from harvesting raw cotton. b) To conduct shirkats reorganization through two parallel processes: Selecting claimants for establishing farms and transfer of lands to them – exercised by district commissions; Liquidation process carried out by a liquidation manager hired by district commission on a contractual base (payment is made out of assets of reorganized farm). c) To revise current procedure of distributing assets and liabilities when reorganizing

agricultural enterprises into farms in order to prevent exceeding of debts transferred to farms over cost of work-in-progress transferred (costs for sowing).

d) To establish the procedure of forming district commissions conducting contests between claimants with inviting representatives of public and local authorities and also terms of selecting claimants for participating in the contest and procedure of conducting tender.

e) To create additional conditions to develop infrastructure facilities including at the expense of transferring assets of reorganized shirkat to enterprises of serving industries to offset the accounts payable

f) To create conditions for privileged lending on infrastructure facilities within the period of their establishment

g) To expand the practice of applying the mechanism of privileged lending to farms against pledging their right to rent land plot and expected yield not only for production purchased on government contractual work but also for other agricultural production.

4. One of most important directions of ensuring financial sustainability of farms is forming a reliable system of economic interrelations between agricultural producers and the government. a) It is suggested to revise the existing procedure of forming purchasing prices for raw cotton: Firstly, purchase of raw cotton from farms should be done at prices existing on the world market. At that for the farms operating in the worst conditions and having no opportunities to ensure profitable production there are two possible options to solve the problem of their loss

39

generating activity. First option is to cover losses and creating conditions to get a normal profit from growing raw cotton through fixing special prices for them or assigning direct transparent subsidies. Another, more preferred, option may be provision to agricultural enterprises of the right to chose freely agricultural crops on lands objectively not ensuring profitable cotton production. b) In order to create conditions for forming mutually beneficial relations between the agricultural producers and the government, to prevent mass bankruptcy of agricultural enterprises within the periods of sharp decline of world prices for cotton fiber it is suggested to establish a Stabilization Fund of agriculture under the Ministry of Finance of the Republic of Uzbekistan which can be used as a source of soft loans in the periods of favorable world market situation to make advance payments for agricultural production and in the periods of unfavorable world market situation it can be used as a source of compensation of losses from fluctuations of world prices for cotton fiber. 5. It is expedient to encourage gradual transition from limit distribution of material and technical resources supplied to agriculture to market methods of trade.

Forming infrastructure facilities serving farmers at local level should be encouraged not so

much by way of setting up assignments to banks, associations and companies (which in principle contradicts to administrative and market reforms) but rather by way of creating stimuli to establish private enterprises of such infrastructure. The essence of these stimuli is simple: farmers should have income adequate to pay for the services of infrastructure facilities. If this condition is not met infrastructure facilities established will go bankrupt and simply shut down. When locating infrastructure facilities real level of needs and of solvent demand of farmers in the zone served should be taken into account. 6. It is considered expedient to adopt a Governmental decision in order to use the opportunities of farms and dehkan farms most rationally and efficiently and creating conditions for agricultural production meeting in amount and quality market needs, including needs of foreign market having provided in the decision:

• Creating stimuli to develop network of purchasing milk and meat, fruit and vegetables and rawstock with establishing service centers in areas closest to the locations of mass production of such products

• Implementing futures contracts between procurers and agricultural producers with making advance payments to agricultural producers in amount of al least 50 % of ordered production

• Extension of taxation treatment in force for trade companies to procurers and service centers established under processing enterprises

• Creating privileged conditions to procurers and service centers, in particular exemption of service centers from property tax for two years

• Implementing mechanism of directed lending to processing enterprises and procurers to make advance payments to agricultural producers on futures contracts.

Suggested set of measures will create conditions better than the existing ones for farms to invest earnings into raising lands fertility, implementing efficient technologies, purchasing the necessary equipment and raising professional skills which would allow forming financially stable and viable farms meeting requirements of market competition.

40

Annex 1

Main characteristics of organization and legal form of business operation in agriculture

Form of business

operation

Definition Conditions of establishing Land provision

Agricultural cooperative (shirkat)

An independent economic agent with the rights of legal entity established on shareholding base and predominantly family (collective) contract, voluntary association of citizens to produce agricultural commodities

Established by founders on voluntary base. Family (cooperative) contract is predominant form of arranging production activity in agricultural cooperative (shirkat)

Agricultural land into permanent possession for production of agricultural commodities

Farm

An independent economic agent with the rights of legal entity based on joint activity of members of farm involved into agricultural commodities production with using land plots provided to it for long term lease.

Established on a contest base, predominantly on those lands and territories where there is no excess of labor resources. Farm specialized in cattle breeding is established when cattle has not less than 30 conditional heads. For farms specialized in plant growing minimal size of land plots provided for leasing to grow cotton and grain makes 10 hectares, for gardening, wine-growing, vegetable-growing and other crops - 1 hectare.

Reserve lands, lands from a special republican fund, lands in farms with insufficient labor resources and lands of new irrigation. Lands of loss-making or low profitable agricultural enterprises. Lands of agricultural co-operatives (shirkats) (on decision of district Khokim).

Dehkan Family small scale On voluntary base. Attached to a house land

41

farm farm, producing and selling agricultural production based on personal labor of family members on attached to a house plot of land provided to the head of family for life long heritable possession

District Khokim makes decision (based on Board’s decision of agricultural cooperative) on establishing dehkan farm with taking into account conclusion of district commission on considering issues of providing land plots

plot including area occupied with buildings and back yards provided for life long inheritable possession up to 0.35 hectare on irrigated lands and up to 0.5 hectare on non-irrigated (dry) lands, and in steppe and desert zone – to 1 hectare on non-irrigated (dry) lands.

Annex 2

Specificity of agricultural enterprises activity26 :

Special nature of land tenure with using agricultural lands as a fixed asset; Seasonal, cyclical nature of production; Social importance of agricultural enterprises for the region where it located; Large share of social and engineer infrastructure facilities serving the entire surrounding territory in assets of agricultural enterprise; Large share of illiquid assets (especially real estate) in total assets of enterprise; Assets (cattle, plants) requiring permanent care and financial expenditures; Increased risk and quite lengthy time period of agricultural production characterized by dependence of plants capacity and cattle productivity on natural factors (drought, natural disasters etc) which makes it hard to forecast (even for 2—3 years) possibility to restore enterprise solvency; Lower rate of capital accumulation in comparison with other sectors of economy; Diversity of agricultural business resulting from varied specialization of production in cattle breeding and plant growing etc

Annex 3

Comparative costs to grow 1 ton of raw cotton on the regions of the republic

(in % to average republican level)

# Regions (oblasts) 2002 2003

26 ‘Economicheskoe obozrenie’ Magazin, October , 2003 , page 8

42

1 The Republic of Karakalpakstan 209.6 170.1 2 Andijan 83.6 65.3 3 Bukhara 83.8 114.0 4 Jizzakh 226.0 112.6 5 Kashkadarya 87.4 96.2 6 Navoiy 87.0 98.7 7 Namangan 110.6 126.8 8 Samarkand 83.6 89.8 9 Surkhandarya 88.0 97.1 10 Syrdarya 253.0 182.5 11 Tashkent 94.5 85.6 12 Fergana 111.5 131.3 13 Khorezm 134.6 149.2

Total on the country 100.0 100.0

Annex 4 Redistribution of income and expenses of agricultural sector27 (2003)

# Financial resources flow out Amount

(billion Soum)

Financial resources inflow Amount (billion Soum)

Price difference on: Debt writing off 110

Raw cotton 220

Grain - Low prices for fuel 35

Low prices for mineral fertilizers 25

Total 220 Total 170

Difference + 50 (129 %)

In addition for water industry 190

Annex 5 Raw cotton and grain crops productivity

# Regions (oblasts) Raw cotton productivity Grain crops productivity

27 ) –calculated

43

In shirkats In farms In shirkats In farms

2002 2003 2002 2003 2002 2003 2002 2003

1. The Republic of Karakalpakstan 10.2 9.5 11.4 10.6 30.2 19.5 26.4 23.6

2. Andijan 34.6 26.5 30.5 22.4 68.8 68.7 68.7 68.7 3. Bukhara 30.1 30.4 24.9 25.9 40.7 41.7 41.4 48.3 4. Jizzakh 10.5 9.2 16.8 16.2 10.6 8.7 30.1 22.3 5. Kashkadarya 25.4 24.5 19.7 20.1 27.5 19.1 35.0 32.9 6. Navoi 27.7 27.2 25.5 23.6 36.2 39.4 35.6 41.1 7. Namangan 25.8 20.8 23.9 16.2 44.4 44.5 44.6 48.6 8. Samarkand 23.9 23.3 23.2 23.5 34.3 33.3 40.6 40.3 9. Surkhandarya 26.7 28.1 26.4 29.3 38.1 36.7 45.0 45.0 10. Syrdarya 15.6 11.5 14.7 13.6 25.3 23.4 22.8 25.1

11. Tashkent 20.6 19.5 21.0 20.0 37.2 34.1 45.9 40.2

12. Fergana 27.7 19.7 24.1 16.9 43.9 46.8 46.0 51.0

13. Khorezm 15.7 15.7 17.9 15.1 38.4 30.4 36.4 32.1

On the republic 24.2 22.4 20.2 18.6 35.9 34.1 36.6 33.0

Annex 6

Labor productivity growth resulting from reorganization of farms *

Labor productivity (t/ people) # Period

Number of reorganized

farms * Before

reorganization After

reorganization Deviation (+,-) Growth rate (in %)

1. 2002

Raw cotton 1,7 2,6 + 0,9 152,9

Grain crops

52

2,1 4,3 + 2,2 204,8

2. 2003

Raw cotton 1,8 2,5 + 0,7 138,9

Grain crops

178

3,1 5,9 + 2,8 190,3

Annex 7

Creating infrastructure facilities in 1999-2003 serving newly established farms28

28 - on data of the Ministry of agriculture and water resources

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# Regions (oblasts)

Reorganized

agricultural enterprises

Established farms

Mini-banks

Fuel centers

(warehouses)

Mineral fertilizers supplying

centers

Alternative

Machine and

Tractors Fleets

Associations of water

consumers

1. The Republic of Karakalpakstan 43 1753 24 40 36 41 41

2. Bukhara 16 577 12 13 12 13 12 3. Jizzakh 66 4920 50 46 39 58 59 4. Kashkadarya 58 5905 46 56 56 56 54 5. Navoi 19 696 16 17 12 14 14 6. Namangan 3 55 3 3 3 3 3 7. Samarkand 10 448 8 10 10 10 10 8. Surkhandarya 11 238 8 11 11 11 9 9. Syrdarya 53 1946 36 33 37 51 45 10. Tashkent 11 641 9 11 10 10 11 11. Fergana 20 654 14 13 14 20 17 12. Khorezm 27 1472 20 25 26 25 19

On the republic 337 19305 246 278 266 312 294

Annex 8 Results of conducted survey among farms to evaluate operation of infrastructure facilities serving them

Survey results: percentage of farmers who stated in the questionnaire drawbacks in operation of infrastructure

facilities (in % of total number of farmers surveyed)

On mini-banks On fuel

supplying centers

On mineral fertilizers

supplying centers Alternative MTF Associations of water

consumers

Surveyed reorganized

farms *

Surveyed farmers

Including: those who stated reasons

# Regions (oblasts)

Number

In % of

total numb

er

Numbe

r

In % of

total numb

er

They consider it is needed

to improv

e operation of mini-banks

Inconvenient –

operation hours

Remote location

Low service quality

They consider it is

needed to

improve

operation

Fuel supply is

not satisfact

ory

They consider

it is needed

to improve operatio

n

Mineral fertilizers supply is

not satisfactor

y

They consider it is needed

to improve operation

Do not use services of MTF due to absence of

needed technique

They consider it

is needed to improve

organization of AWC operation

AWC do not take

measures to improve

operation of land

reclamation network

1 The Republic of Karakalpakstan 21 100 108 13,3 45,4 4,6 9,3 24,1 46,3 - 56,5 - 32,4 0,9 - -

2 Bukhara 2 100 15 39,5 - - - - - - - - 13,3 13,3 - -

3 Jizzakh 33 61,1 125 4,4 36,0 0,8 - 45,6 44,0 17,6 50,4 31,2 34,4 33,6 8,0 -

4 Kashkadarya 32 100 318 9,7 25,2 - - 6,0 50,0 - 31,8 2,8 28,0 - - -

5 Navoi 5 100 35 16,9 25,7 8,6 14,3 8,6 14,3 - 14,3 2,9 17,1 8,6 2,9 8,6

6 Samarkand 4 100 20 11,6 - - 25,0 - 35,0 25,0 50,0 - 45,0 5,0 25,0 -

7 Surkhandarya 6 100 30 24 30,0 26,7 10,0 23,3 43,3 40,0 46,7 40,0 23,3 33,3 30,0 16,7

8 Syrdarya 20 58,8 88 15,3 42,0 - 2,3 5,7 34,1 - - - - 1,1 - 2,3

9 Tashkent 6 100 34 11,1 14,7 - 5,9 - 11,8 11,8 5,9 5,9 - - 11,8 5,9

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10 Khorezm 14 100 66 8,4 33,3 30,3 24,2 16,7 39,4 33,3 60,6 37,9 48,5 22,7 15,2 36,4

On the republic 143 80,3 839 9,1 30,5 4,4 5,1 15,3 41,6 7,7 35,3 10,5 26,6 12,5 4,6 4,3 *) – on the territory of which infrastructure facilities serving newly established farms were created according with resolution of the Cabinet of Ministers of 22 January 2003# 38-6

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Annex 9

Forming purchasing prices for raw cotton *

Uzbekistan (2003)

# Formula Components of purchasing prices for raw cotton (1 ton) Thousand

Soum USD In % to the total

Current average world price for 1 т of cotton fiber (November 2003) 1388 1420 100

1. Pm Average forecasted by the Ministry of finance world price for 1 ton of cotton fiber which is a base for purchasing prices

1005 1026 73,3

2. Esf Expenses to sell 1 ton of cotton fiber 248 254 18,1

3. Re Average forecasted rate of CBU for the period of raw cotton picking up, Soum /USD. 978 х Х

4. Vb By-product value 49 51 3,6

5. Ep Costs of cotton processing enterprises (with VAT) 246 250 17,9

6. Fo Normative fiber output, % 32,0 х Х

Average purchasing price of 1 ton of raw cotton 195 200 Х

7.

Pp =(Pm - Esf)х Re + Vb - Ep)х

Fo Of cotton fiber (calculated) 560 573 *) – calculated: (573 = 1026- 254 + 51 -250)

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Annex 10

Pros on the Stabilization Fund of agriculture

At present funds coming in as a positive difference between forecasted and selling price arrive to the Fund for settlements for agricultural production purchased for state needs under the Ministry of Finance. The funds are spent to make advance payments for agricultural production through tranche payment in line with technological cards of expenses. Tranches take into account neither specificity of each farm (periods of conducting farm operations, soil quality etc.), nor real needs of farm. Writing off debts of loss making shirkats and farms serving them is done at the expenses of the same Fund. The mechanism is not transparent which results in writing off funds which were not used optimally or simply embezzled. At present stage the Fund de-stimulates farms to work efficiently. Moreover, conditions are created for satisfying corrupt interests of certain individuals and groups of officials, воспроизводятся subjective reasons of loss-making of agricultural enterprises. At the same time, there are objective reasons of arising difference between purchasing and world prices. Firstly, purchasing prices are fixed once a year – in the period of mass purchase of raw cotton. During the year world prices and accordingly selling prices for cotton fiber in domestic market and for export can change in any direction. Therefore the government fixes purchasing prices with taking into account world prices but leaving a certain ‘reserve’ for the case if within year world prices for cotton decline. As said above (table19), forecasted world price used for calculations to set purchasing prices in 2003 was less than 70 % of actual price. Secondly, mechanism of making advance payments for agricultural production is objectively necessary. But for this credit resources of banks having opportunity to bear risks on these loans are needed or support of the government. Therefore establishment of Stabilization Fund enables to combine these two options into one – to provide soft loans to agricultural enterprises having accumulated resources in the Stabilization Fund at the expense of sector’s funds. Such mechanism enables the government to define stable governmental contractual works and raise purchasing prices within sensible limits ensuring profitability on less favorable lands and encourage farmers, dehkans to increase labor productivity. Development of appropriate legal mechanisms ensures transparency of spending the Fund. Thus, establishment of the Stabilization Fund of agriculture will enable: The government to purchase stable (planned) volume of raw cotton for governmental needs at fixed purchasing prices; To form normal (contractual) relations between agricultural producers, processing enterprises and the government; To insure agricultural producers from negative consequences of change in world prices for cotton fiber.

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Annex 11 Mechanism of exchange and auction trade

Product sold as a rule should be used by enterprises for their own needs and is not subject to re-sale. Trade takes place through electronic trade system of the Exchange. Thanks to this, auctions take place in real time regime on entire territory of the republic simultaneously and all entrepreneurs have equal to resources. In order to buy resources enterprise-consumer should either purchase a broker place or use services of professional brokers. In order to buy resources enterprises–buyer should present to Exchange through a broker a certificate on state registration and bank reference on solvency. Product is supplied on prices declared by producers when no wholesale trade is available. Final price will be formed based on supply and demand.

Annex 12

Percentage of farms and dehkan farms in production of certain types of agricultural production29

(in % to total production) Farms Dehkan farms # Types of products

2002 2003 2002 2003 1 Meat (live weight) 2.0 2.0 93.2 93.9 2 Milk 2.3 2.1 95.3 95.9 3 Eggs (million) 3.4 3.7 55.8 54.2 4 Wool 1.5 1.8 75.4 76.8 5 Astrakhan pelts (thousand) 2.0 2.1 35.8 39.8 6 Vegetables 7.4 10.6 75.9 70.6 7 Potato 3.8 3.8 88.5 90.3 8 Melons and gourds 16.5 30.3 63.9 56.7 9 Fruit 7.1 7.2 58.9 62.7 10 Grape 6.6 5.8 44.3 54.3

Annex 13

Functions (tasks) of the commission on reorganization of agricultural enterprise into farms30:

29 ) –source – Goscomstat data 30 )- according to the Resolution of the Cabinet f Ministers of the Republic of Uzbekistan of 05.01.2002 # 8

50

Conducting explanatory work among members of reorganized agricultural enterprise; Notification of population about transformation of agricultural enterprise into farms through mass media or in other available form; Analysis of economic and financial activity of agricultural enterprise; Organization of actions on collecting accounts receivable; Notification of creditors on reorganization of agricultural enterprise into farms and agreeing upon with them further relations on restructuring debts and defining dates of their payment; Studying current state of land tenure, crop rotation and locating agricultural crops; Conducting inventory of shared and farms’ own irrigation system and collector –drainage systems included into farm’s balance sheet; Studying current state of machine and tractor fleet; Familiarization of farm members and other persons with the procedure of selecting claimants and conducting contest to create farms, choice of offered lands and other conditions of reorganizations of agricultural enterprise; Organization of access of claimants to the information on financial state of agricultural enterprise; Receiving and studying applications from claimants to establish farms, defining winners on a contest base; Developing dividing balance sheet and deed of conveyance on distribution of assets and liabilities of agricultural enterprise between established farms; Defining social infrastructure facilities and organization of their transfer to appropriate local authorities and other organizations; Organization of selling obsolete and unused fixed assets and valuables of farm; Documenting measures taken with appropriate minutes.