The world bank

Farm Machinery and Equipment Privatization

69. The privatization and distribution of farm assets is incomplete in most rayons. There is confusion on how these assets will be valued and distributed and how they will be used in the future. This is a major concern since redistributed assets constitute the much-needed working capital and input for independent farmers. In some cases, strong interests against the break up of collective farms, buttressed by the philosophy of the Soviet-era land code, hinder development of peasant farms. Lack of access to reliable information on independent farmers’ part is an important component of unclarity in the distribution of farm assets and property. Land distribution is proceeding fast in Azerbaijan and there are not many disputes on who will receive land. However, farm machinery and equipment distribution is substantially more controversial and is a major cause of continuing lack of trust in the overall agricultural reform project. About 44 percent of the people think that state farm machinery and equipment should be distributed to former workers; another 44 percent want the distribution to include the whole population.

70. Despite the existence of controversial issues, people demand that the distribution of machinery, equipment and estates be transparent and be rapidly completed. In Barda, a number of people argue that instead of distributing the farm machinery and equipment, it may be better to keep these in a common pool for use of the population. In the pilot village of Udjar, focus group indicates that equipment of the former kolkhoz was distributed only among the former workers of the kolkhoz.

71. The survey confirmed the qualitative findings that collective farm property and equipment distribution is, at best, problematic in all the rayons. Overall, only 17 percent of the respondents received their property and equipment shares. Allegations of wrongdoing in property distribution are most common in Lenkeran. In the rayon, 61 percent of those who say privatization took place in their settlements also indicate that they did not receive their property shares because the newly formed enterprises (i.e. joint farms and associations) which were supposed to receive this property were forced to be integrated. Individuals, in turn, did not receive property. People also argue that corrupt practices, favoritism and bureaucratic obstacles played an important role in not receiving property shares. In other regions, most respondents indicate that property shares have not been distributed to anybody yet. (100 percent in Barda, 21 percent in Lenkeran, 100 percent in Salyan, 65 percent in Udjar and 98 percent in Khachmaz). In Udjar rayon, there are reports of collective farm property being sold to the villagers, however, the household survey could not accurately confirm these reports. The following table gives the property share receipt in each of the project rayons.

72. There are practical problems in the use of privatized equipment. In some cases, the former equipment operators have become the new private owners of the equipment. Often, even though individuals own shares in the equipment and are entitled to services for a fee, the operator favors close relatives and friends. In addition, most farm equipment is still under the control of ex-farm managers. They also rent their services for a fee, however, farmers complain that this fee is too high and it is not always possible to have access to equipment when it is needed. There are problems regarding petty theft of agricultural equipment from former state and collective farms. Accusations of large-scale embezzlement of farm funds reflects the extent to which some farm managers are prone to treat collective farms and their successors as their own private property.

Access to Credit

Formal Borrowing

73. Most small independent farmers do not have access to formal agricultural credit. Since they were told that credit would be made available only to formal larger groups, many registered themselves with the Ministry of Justice as agricultural “firms”²⁰ to qualify for credit. There are concerns, however, that the current demand for credit is only from ex-farm managers who have succeeded in organizing other farmers into collectives or who have established private farms of larger size prior to the more recent land distribution process. People cannot understand why concessional IDA credit provided free of interest to the State has to be lent at “market” interest rates when there is no “credit market” as such.

74. The SA found that even though demand for cash credit exists, high interest rates, lack of procedural information on how to apply for credits, the inability to pay back the credit in cash and bureaucratic obstacles help curtail the number of credit applications among independent farmers (figure --: access to credit is low, independent farmers borrow informally). Independent farmers are also skeptical about potential usefulness of cash credits when they cannot have access to good quality seeds, fertilizers, pesticides, farm machinery and equipment.

75. Focus group discussions provide valuable information on access to credit. In Barda, lack of adequate information on procedures emerged from the focus groups as the main cause of low access to credit. In Salyan, participants say that even if they receive land in addition to their current holdings, they cannot cultivate without credit. Villagers in the rayon do not have a clear understanding of the credit system; their main information sources are the World Bank’s foreign and local representatives and credit commissions. Access to formal credit is also low in Udjar. People need to complete a cumbersome and time consuming state registration to receive credits, and the procedures to complete the application are unclear to most independent farmers. People in Udjar do not favor a group credit system, and heads of farm administrations would like to receive credits themselves. There are also concerns about corruption in the credit system once it becomes more available.

76. The household survey confirmed that small holders focus on the importance of access to cheap credit services. Most respondents (about 75 percent) had patchy information on credits allocated for agriculture. However, more than 60 percent of them are not satisfied with this information. They emphasize that currently, credit is expensive, application procedures involve excessive red tape and repayment is a large concern. Household survey respondents also indicate that credit alone is not sufficient for them to turn their small farm holdings into profitable enterprises; access to and availability of agricultural inputs at reasonable prices and suitable market conditions are also important. However, caution should be exercised and provision of additional information is necessary in devising an agricultural credit system; some people think they are not expected to repay agricultural credits i.e. they regard these credits as State grants.

Informal Borrowing

77. Due to repayment concerns, lack of information and bureaucratic obstacles, most people have been borrowing money from family and friends instead of attempting to obtain formal loans. About 24 percent of the interviewed households borrowed informally during the past year. However, only a fraction of those who borrowed were able to repay their debt (about 28 percent). The most important source of borrowing was relatives (89 percent) followed by neighbors and friends (57 percent). The most important problem in paying back the debt is the low level of profits (71 percent) and high costs involved in production (10 percent).

Demand for Credit

78. There is high demand for credit in all five rayons for the upcoming agricultural season. Ninety-six percent in Barda, 52 percent in Lenkeran, 96 percent in Salyan, 93 percent in Udjar and 80 percent in Khachmaz are willing to get credits for agricultural operations. However, even though farmers would like to enlarge their land, there is not a high willingness to cooperate to receive loans. The majority would like to receive loans as a single entity or for their family farm (69 percent). Another 28 percent favor the idea of joint farmer houses. A major concern with credit is not being able to pay the debt back in time. About 18 percent find the interest rates too high, and 6 percent complain about having to resort to bribery to obtain a loan. Households, on average, would be willing to pay only between 3-6 percent per annum as the interest rate as opposed to current rate of 14-18 percent. The following table presents the proposed use of credit in agricultural rayons.

79. The actual utilization of formal agricultural credit, on the other hand, was extremely low in the pilot project rayons. Only about 2 percent of the respondents obtained a formal credit this year. There is, however, a high number of people willing to provide a collateral for receiving credit during the upcoming season. For instance, 98 percent in Udjar rayon, 80 percent in Salyan, 70 percent in Barda and 57 percent in Khachmaz can place a collateral while only 24 percent in Lenkeran agreed to do so. About half of the people are willing to put their land allocation as collateral to agricultural credit while 64 percent would use privatization checks. Eighty-five percent are ready to put their personal belongings and 70 percent would also be willing to show their valuables as collateral to credit.