Restrictive land bill continues path to approval

RIGA - Foreign investors into Latvia’s agricultural sector feel they are the target of a bill that is moving through Saeima, sponsored by the Agriculture Ministry, which would severely restrict entry to new market participants.
At risk is continued growth and development of the sector - farming and forestry – in terms of capital, technology, skills and output.
According to data on the Web site quandl.com, agriculture accounted for 4.1 percent of Latvia’s $28 billion GDP last year, employing 9.5 percent of the population. Data published by the Bank of Latvia last year for end of 2010 total stock shows investment reaches over 253 million euros into the sector, or 2.5 percent of total foreign investment in the country.

Experienced applicants only

What the ministry proposes, in a bill titled “Changes in the law ‘On land privatization in rural districts’” would, in effect, severely limit the ability of both foreigners and inexperienced Latvian investors to buy agricultural land in the country.
Land purchases would be limited to those who have for at least the past 3 years worked in agriculture in Latvia, and to show that the land will be actively under agricultural production for the next 3 years. Other areas of the bill force additional requirements when selling land – including who has first rights to buy neighboring land.
EU law requires Latvia by May 1, 2014 to open up the land market to all EU citizens, but this proposed bill would effectively close off the market to non-Latvians, and Latvians new to the industry.

Others say that Latvia is losing valuable farmland to speculators and others who are not putting land into production.
Minister of Agriculture Laimdota Straujuma, through her advisor Andis Blinds, told TBT that “This amendment has been motivated by the situation in Latvia with regards to agricultural land management. During past years our experts have noticed the tendency that the area of agricultural land has been diminishing and [its] structure has been becoming more fragmented… it is essential that Latvian farmers have access to sustainable agricultural land. Latvia wishes to attain more rational use of agricultural land, to maintain [it] as well as to ensure the protection of land resources and availability to agricultural producers.”

However, the minister strongly denies that there is any anti-foreign element to the proposal.
“The objective of this amendment is to ensure more effective use of agricultural land resources in the national economy. Agricultural land should not be speculated with – agricultural land and forests are Latvia’s national treasure, as Latvia is not rich with mineral deposits. The proposal [from] the Ministry of Agriculture does not prohibit a foreign investor buying agricultural land if he/she wishes to use it for agricultural production. Requirements will be the same for everyone – both inhabitants and entrepreneurs from Latvia and the EU,” she says.

According to EU laws, this bill may be discriminatory against non-Latvians. The 3-year rule for buying agriculture land is, of course, impossible to fulfill for most EU citizens, as they’ve been kept out of the market since 2004 by previous restrictions. This is a “Catch 22” dilemma.
Partner at law firm Sorainen Girts Ruda told TBT: “We believe that this bill might be against Article 63 subsection 1 of the Treaty on the Functioning of the European Union (TFEU)... that is, against the fundamental freedom of free movement of capital. EU citizens willing to buy agricultural land in Latvia might raise a claim against Latvia in the European Court of Justice.”

Head of the Economics Department at SSE Riga Morten Hansen adds: “I am just surprised if they can do this in the EU. There is supposed to be free mobility of goods, services, labor and capital. Sure, land cannot travel, but its ownership can. Can they really restrict that?”
If approved, the law will have the effect of reducing demand, as fewer buyers will meet the requirements. And, reducing demand leads to reduced prices for those in Latvia who want to sell. It benefits those who are allowed to buy.
Hansen says this “would keep land prices low since it would restrict demand.” It’s basic economics.
Banks, if they hold land as collateral against loans, should also be worried.

Skewed incentives

Would the amendments be effective? After all, as currently written they will do little to promote better land use – the owner sitting on his land won’t be affected; it targets only new owners.
Straujuma says it is meant “to ensure rational, sustainable and effective use of each hectare of land.”
One forest property manager questions the accuracy of data used by the government in writing the law, and asks whether the amendment focuses too much on grain producers, and not enough on another valuable element of Latvian agriculture – forestry.

Considering the optimum use of Latvia’s land, for instance in the Ludza region in far east of Latvia, according to the statistics it has the lowest percentage of forestland, at about 30 percent and the highest percentage of agriculture land in Latvia. But is it really accurate information, he asks.
“This is hilly ‘agriculture land’” not suited for production of food, he continues, questioning: “Where is the analysis on the future effective and rational use of each land plot in each region, and can it really be managed with this kind of law? If the ministry can’t sort out where to grow what - grain/beef or forest - why not let the market take care of it, as it has actually functioned until today?”

The forester continues, noting that “Eastern Latvia has during the last 10 years seen a lot of investment into woodworking industries, such as Rezekne Latvijas Finieris ‘Verems mill,’ and pellet producer ‘New Fuel’ (UK) as well as 4 wood pellet factories by Latgran (Swedish-Finnish). In total they have added wood consumption of more than 1.5 million cubic meters to this region, all production that is aiming for export markets!”
Hansen points out that the law is mis-directed in improving Latvian agriculture: “Latvian agriculture is partly old-fashioned and outdated. One way to improve it is to invite foreign know-how, technology and capital. This proposal slams the door on such ideas and is thus counterproductive.”

He adds that it is “hypocritical to invite foreigners – even from outside the EU – and give them residence permits in exchange for residential investment and then slam the door or what could be productive investment for Latvia.”
Fears of foreigners taking over the country are also one possible motivation. It’s not uncommon that foreign investment brings out this paranoia. Americans in the 1980s worried that the Japanese were buying up the country, as they were purchasing high visibility properties. But land isn’t something an investor can buy and take home. And most likely, investors buy with the intent to maintain and improve the property, with the goal of increasing their return on investment.

Ruda has some theories: “We think that some politicians have some stereotypical idea that foreigners will buy all the land in Latvia, as they have more money and possibilities, and this might distort the market. Judging by the fact that national elections will be held next autumn, we might hear same protectionist ideas more and more. Also we have heard the idea that this bill is made in behalf of the big landowners who already have big farms in Latvia. This bill might help them to purchase more agricultural lands needed for their businesses. According to [the magazine] Ir data, currently out of the 10 biggest agriculture and forest land owners - legal persons - 9 are owned by foreigners.”
What other ideas did the ministry consider? This is important, as the current proposal will strongly distort the land market in Latvia.

Straujuma said “There were several alternatives on the table, including a mandatory agricultural education requirement for the agricultural land buyers. The Ministry of Agriculture organized several working groups and consultations with representatives and experts from the agricultural sector to discuss the ministry’s proposal. During the drafting process the Ministry of Agriculture consulted with experts from other EU countries as well as had informal discussions with experts from the European Commission.”

Whether the amendments were well-thought out and, if passed, will have a positive effect on the agriculture sector in Latvia is yet to be seen. Maybe these are well thought-out amendments intended to skew the market in favor of a few local landowners?
Latvia in the next planning period (2014-2020) will receive from the European Union around 2.7 billion euros for the agriculture sector, an attractive prize for local landowners.
The sector has made tremendous progress over the last 20 years as investment, both local and foreign, has poured in. This has been supported by the light hand of government. It is up to the politicians now to ensure that a favorable climate continues.