III. Issues Concerning the Land Reform

A. Elements of a Complete Land Policy

Suggestions for a complete rural land policy would lie beyond the scope of this Strategy, but it is useful to recall the elements of such a policy in order to establish more clearly the context of the land reform. In areas where the land policy is not yet completely articulated, work subsequent to this Strategy may be directed to its fuller development. Such an undertaking would be important not only to complete our national framework for land markets, and to encourage efficient utilisation of land, but also to provide a framework within which local communities can make appropriate decisions regarding land use.

Accordingly, a land policy could be said to embrace the following principal elements:

• Land tenure. Full articulation of the framework of land ownership and tenure security, including the forms of ownership and long-term tenure (such as long-term tradeable leases), the inheritance rights for property, the role of immovable property as collateral, the State's right of eminent domain (to expropriate land for public purposes, such as infrastructure easements) and corresponding payment obligations to owners, the rights to subsoil resources (if any) which are conveyed by land ownership, and the rights of foreigners to own land in Estonia.

• Land registration. A fully developed land registry system at the local level, coordinated nationally, and full cadastral coverage with updated surveys and maps. For purposes of facilitating the functioning of land markets, the land registry system is more important than the cadastre. In fact, the sum of all land registry systems, with their information in the form of surveys and ownership documentation, fulfills many of the functions required of a cadastre.

• Fiscal land policy. The framework for taxation of privately owned and leased land, the division of tax revenues between national and local governments, the procedures for collection of land revenues from sale and leasing of State-held land (“land capital”), and the rules governing the use of land capital.

• Policy for infrastructure and other investments in land. The types of infrastructure for which land capital will be used, provisions for funding the continuing maintenance of the infrastructure in the future, the role of national and local governments in making decisions on the kind of infrastructure to be developed, provisions for incentives for private investment in land improvement.

• Land amelioration. As a special case of land infrastructure, the framework for land amelioration, including funding for rehabilitation, maintenance, definitions of responsibilities including the role of local associations of users of drainage systems in managing and paying for the maintenance of such systems. Considerable work has been done on this topic in recent years, but the concept of amelioration in its broadest sense such include windbreaks and other investments oriented toward soil conservation.

• Land as an environmental resource. Responsibilities, incentives and measures for financing and managing activities for protecting water quality in aquifers, streams, lakes and the ocean (as regards runoff and seepage of pollutants from rural land), the role of dedicated areas (reserves) for the protection of biodiversity and as greenbelts, and the responsibilities of land owners in preventing the growth of environmentally undesirable types of land cover.

• Scope of authority of local and national authorities. The role of national and local governments in land use planning and zoning for specified uses, rights of counties for forest areas to serve multiple local objectives, coordination with EU policies in regard to zoning, and the definition of fully transparent procedures for decisions on zoning, forest use permits, and infrastructure investments.

• The role of land in poverty alleviation. A policy framework which may include the provision of full title to household plots, whose occupants often survive on very modest income levels, and the allocation of land for community facilities and social roles.

• Integrated development of coastal lands. A framework for integration of coastal fishing, forestry, tourism, rural manufacturing and other activities in a development programme which will contribute to lifting many low-income fishing families out of poverty.

Land pricing per se would not be part of such a framework, as that would be determined in the long run by market mechanisms, but the State has important responsibilities to determine appropriate prices at which State lands are auctioned for sale and lease (minimum prices), and prices at which title shall be conveyed to household plots. It also needs to ensure that macroeconomic policies are conducive to a recovery of agricultural land prices, by inducing increases in the profitability of agricultural activities.

B. Limits to the Applicability of Restitution as a Means of Land Reform

In Põlvamaa and Tartumaa the applications for restituting the farms have practically all been satisfied. Only the most complicated cases remain to be resolved. The data of these two counties has been used for making prognosis for the other counties. In the county of Tartu 44,862 hectares of land, or 23% of the total, has been restituted (see Table 3-8). This figure includes the land in towns but these areas are not considered in the prognosis due to their smallness: In Polva county 38,441 hectares of land, or 26%, have been restituted. From these data it can be seen that on an average about 25%.of the agricultural land may be restituted when the process is complete for the entire nation. This estimate, combined with the information on land already restituted by county (Table 3-8), has been used to predict the areas remaining to be restituted. This basis for prognosis is not very reliable but we don't have anything better now.

In calculating Table 3-8, it has been assumed that 10% of the land that remains after the restitution process is complete will not be usable -that it will be covered with swamp or dense shrub or otherwise be unsuitable for agriculture. Nevertheless, even under this conservative assumption, the last column of the table shows that approximately two-thirds of the agricultural land will remain in State hands after the restitution process is complete. (Without the above assumption, the remaining proportion would be three-fourths.)

This result underscores the fact that restitution alone is not a complete solution to the land reform problem, and it shows the magnitude of the remaining challenge.

The predicted data of Table 3-8 show that more than half of the agricultural land that eventually will be restituted already have achieved that status. Now no more restitution claims may be filed, so what remains is the work of processing the claims already made. Unfortunately, many potential owners deliberately delay in registering their restituted land, in order to avoid paying land taxes. Such lands become overgrown with weeds and shrubs, and their drainage systems further deteriorate, so neighboring farms are affected by this inaction. Parliament may eventually have to pass a law that requires payment of taxes on such lands, even if they are not fully registered but a defined period of time for registration has elapsed. Alternatively, a new law could require transfer of use rights (usufruct) of such lands to persons who are willing to use them. The Estonian Parliament passed a legal disposition of this nature in 1926.

Table 3-8
Eeldatav maa, mis kuulub tagastamisele ja privatiseerimisele maakondades (29.09.96)
The Predicted Area to be Restituted and Privatised by Counties

C. Principal Issues in regard to the Structure of the Land Reform

Expressed in a concise manner, it can be said that there are four principal issues still to be resolved with respect to the process of agrarian reform:

1. The farm enterprises (successors to the State farms and collective farms) do not have security of tenure of their land. In most cases, they own buildings and machinery, but they do not own the land the buildings sit on, nor the land they work. Rather, this land is still in the hands of the State, awaiting final disposition, and it is rented to the enterprises on short-term contracts. Therefore they cannot use the land as guarantees for bank loans, nor sell part of it in order to invest in improved operations on the rest of it. According to the Land Reform Law of October, 1991, this land is to be sold at public or limited auction. Given the limited economic success that most of the enterprises have had in the short period since their creation, it is likely that auctions would result in transfer of the land to other owners, thus generating a counterproductive situation in which the owners of the improvements on the land are different from the owners of the land itself.

2. A faster method of privatising the unused State land is required. In the present circumstances of declining real agricultural prices and low or negative profitability for many farming operations, there has been little interest in this land, so an effective privatisation procedure may have to be accompanied by special incentives.

3. The household plots also do not have title to their land. As explained in section II above, these plots are a legacy of the way in which State farms and collective farms were managed, and for many families they now are the sole source of subsistence. While their average size is a little over 4 hectares, many of them are less than two hectares in size and the families that operate them live below the poverty line. On the other hand, these plots are highly productive, yielding almost twice as much output per hectare as the average of family farms and enterprises. Giving them title would contribute to increasing their productivity further, and it would contribute to placing low-income families on a self-sustaining path of economic improvement by endowing them with an asset of economic value. Even those families who chose to leave agriculture subsequently would be beneficiaries of titling, because they could then sell their plots in order to raise funds to start a new occupation. This option now does not exist for them.

   Over time, undoubtedly many titled household plots would be sold and consolidated into larger holdings, which would be a normal and healthy dynamic path for the sector. However, in order for this to happen, titling the plots again is a prerequisite. Thus titling these plots turns out to be important for the three goals of poverty alleviation, short-term efficiency in production, and long-term efficiency in production.

4. Although the work on the cadastre and the titling process both have a advanced more rapidly in recent months, it is necessary to accelerate those processes to the maximum. Inclusion in the cadastre is a prerequisite for titling, and the goal should be to have all farms registered in both the cadastre and the title book in a period of five years.

D. Procedural Problems in the Land Reform

While the process of restitution of agricultural land has had clear objectives that are based on social and historical“ foundations, implementation of the process has been slow. In some counties less than ten percent of the land today has private owners, including Harjumaa, Ida Virumaa, Läänemaa, Raplamaa and Saaremaa. Progress also has been quite slow in Tallinn, where one-third of Estonia's population lives. Only 8% of all plots of land there have been entered into the land cadastre.

The procedural deficiencies in the land reform, which have become major obstacles to its full realisation, are as follows:

• The basis for the reform was the physical restitution of land to its 1940 borders. The serious changes brought about by the Soviet land provision caused technical problems. It has been shown that only 5-10% of land units kept their former borders. The borders of returned land units had to be determined and their connection to roads and electricity and water supplies ensured.

• The process of restitution has been very complicated and time-consuming. Land reform was treated separately from property reform, a situation that greatly complicates the privatisation of plots that have structures on them. Applications for land have to be made to the local authority who would then verify the claim and determine its validity on the basis of archive documents.

• Institutions involved with the process have not had sufficient power, and coordination between local cadastre centres (subordinate to the Land Board), Real Estate Registry Offices (subordinate to the Ministry of Justice), local authorities and public notaries has left much to be desired.

• The difficulty of identifying former owners has caused conflicts between various applicants. On average there have been 2.5 applicants per land unit. Unresolved restitution problems led to many court cases. In many of these there were no valid land registration documents and it was not possible to identify former owners clearly.

• Difficulties have arisen when buildings or other structures belong to new owners and the land to the former owners, or when land has been given to farmers on the basis of the 1989 Farm Law. In such cases compensation has to be paid to the legally entitled owner. Compensation is also paid if the claimant does not want physical restitution. In addition to this, some 80% of former owners have moved and prefer compensation or alternative property, especially land, at their new residence.

• The financial resources available for the completion of land surveying have been limited.

• The restitution of land began to be implemented with insufficient prior planning and training of the officials involved.

E. Non-Contiguous Farm Properties

The problems connected with perspective use of agricultural lands can be divided into problems connected with possession and use. Simplifying, it can be said that the owner himself will solve the problems connected with use. But unfortunately the nature of land possession (form and amount) is closely connected with its utilisation. For example, in Denmark the State is using its rights of preemption (eminent domain) in order to consolidate and modernise the configuration of land possession. Separated plots and strips of land are bought up, a compart farm is formed and then sold out. It is a process of many years. Such an evolutionary process of forming compact farms would be possible also here since the Property Law (see § 170) prescribes preemption of immovables for local administration. In the course of carrying out the land reform, it would be possible to form, out of the land remaining to be privatised, compact agricultural properties which are consistent with the physical requirements of modem agricultural technology and which have the potential to be competitive. This unique opportunity to establish competitive land properties of agricultural enterprises in the process of land reform should be used to the maximum possible.

IV. Policy Objectives for the Structure of Agriculture

The broad objectives of policy for agricultural land and other assets must be support the general economic and social development of Estonia. More concretely, this implies supporting agricultural and rural development and guaranteeing that our land, as an irreplaceable and basic resource, is wisely used and protected.

The specific objectives guiding the future stages of land reform and agricultural reform may be summarised in the following way:

1. Accelerate the land reform process so that almost all rural land comes under private forms of tenure.

2. Ensure that the juridical and economic bases are established for land markets to function properly.

3. Support agricultural growth and the development of rural areas by providing a greater degree of land tenure security.

4. Ensure consistency between the agricultural reform and the land reform.

5. Develop fiscal mechanisms which provide for adequate investments in land improvements and supporting infrastructure.

6. Ensure that fundamental decisions on zoning land for different uses are made at a local level, and in a transparent way.

7. Bring land policy to bear on the question of rural poverty and how it may be reduced.

8. Put into place an appropriate framework for land management that is environmentally sound.

V. Policy Analysis

A. Major Accomplishments to Date

Summarising the foregoing discussion, it may be said that three advances of fundamental importance have been registered recently in the area of agrarian reform (including land reform and agricultural reform), as follows:

• The process of receiving claims for restitution of land to previous owners, that is, families that owned land before the expropriations of the 1940s, has been brought to a conclusion (as of January 15, 1997). Not all of the claims have been processed yet, and some claims are in conflict with each other, but the majority of them have been settled and no more will be forthcoming. Therefore it is now fairly clear how much agricultural land will remain to be adjudicated in other ways.

• The process of privatising the structures and equipment of the former collective farms and state farms is virtually complete. It has been administered at the county level. These assets have been transferred to new enterprises (cooperatives or shareholding companies) that have replaced the former collective farms and state farms, and to individuals who worked on those farms. The mechanisms have been based on the assignment of “labour shares” to former workers of the farms, in amounts corresponding to their years of employment, and on group decision-making regarding the formation of new enterprises.

• As noted, the coverage of the cadastre has expanded rapidly in the last 18 months. The area registered in the Title Book is much less, but it too expanded considerably in 1996 and the first part of 1997. Now over 20% of the arable land is titled, mostly restituted land, as compared with 10% at the beginning of 1996.

Table 3–9 summarises the current status of landholdings in agriculture. In that table the dominant role of household plots stands out clearly. In fact, often the difference between a household plot and a family farm (private farm) simply is a legal question: the latter have full (fee simple) title to their land, whereas the former do not. This situation underscores the importance of giving both these classes of landholdings more equal treatment in future land policy. Other comments on the current and future role of household plots are presented in section V.B below.

Table 3-9
The Status of Agricultural Landholdings (January, 1996)

Notes to the table:

* Approximate estimate.

** These farms are called “private farms” in some classifications, although all farms arc private now. They are distinguished from the enterprises in that they are owned by a single family, and from the household plots by virtue of being larger. Family farms averaged about 20 hectares in size in 1996. All of the restituted lands fall in this category, and it is anticipated that the number of family farms will increase, at the expense of both enterprises and household plots, as the remaining claims are processed.

In addition to the area recorded in the table above, at the end of 1995 the State held 226,371 of unused farmland, as a result of the increasing trend toward abandonment of land in the 1990s. This phenomenon has a regional dimension, being much more pronounced in the southeastern part of the country than elsewhere. Hence the search for appropriate ways to privatise this land is an important policy issue.

A schematic summary of the situation of the land reform and the challenges it faces is presented in Table 3-10. The assessments made in the table are approximate but they characterise the existing situation fairly accurately. (The 6.7% of the land without claims which is not listed as available for privatisation is considered unusable, due to its badly deteriorated drainage systems, thick cover of shrubs, or similar reasons.)

B. The Present Situation of Agricultural Enterprises and Family Farms

Large-scale forms of agricultural production survived the transition to a new economic regime, but most of them are not doing well economically. The enterprises were reformed legally and organisationally. The number of these enterprises increased at the outset of the reforms, because of splitting of some of them into smaller units, but then they began to decrease, owing to mergers and some bankruptcies.

Their role in arable land of field crops and total production of agriculture is still unremarkable in relation to the amount of land they use, as shown in Table 3-9. However, they do still own about 62% of the breeding cattle. They have received little assistance in choosing their organisational forms, in techniques of enterprise management, and in ways to form service cooperatives to provide essential services that formerly were channeled by the State through the large-scale farms. Furthermore, as commented below, they are greatly hampered by not being owners of the land that their buildings and other farm structures sit on, nor of the land they till.

Table 3–10
Ettevótete dünaamika põllumajanduses
The number of agricultural enterprises

The most notable change in the countryside since 1991 has been the rëemergence of the family-farm, or private owner-operated farm, which was the dominant mode of farming in Estonia before 1940. These farms have been reestablished first of all by the people who had lived in the country and worked in agriculture, and relatively few heirs who are legally entitled to restitution of their family's land have arrived from towns to take up farming. Those who have been most successful in developing their farms have been those who received title to buildings as well as land, and who have managed to obtain machinery and inventory under favourable conditions.

It is not expected that there will be many new farm founders from towns. The main population group with the potential for increasing the number of farms is the present grouping known as holders of household plots. As pointed out above, in fact the main difference between “family farms” and household plots often resides in their legal status, i.e., whether or not they are owners of the land they work. This has put holders of household plots at a considerable economic disadvantage and is and issue our land reform process has to solve, so that a considerable number of subsidiary farms can go over to legal status of a farm.

If this possibility is opened to them, several consequences can be expected to occur: a) they will become even more productive than they currently are, although they are now the most . productive group of farms per ha in the country; b) some of them will sell their land to more successful household plots, or to other investors, so that gradually larger farms will emerge from their numbers; c) their average levels of income, which now are quite low, will rise because of the development possibilities offered by tenure security; and d) those who decide to sell and migrate to start a new life in a town or a city will have a small sum of capital with which to start their new life, as a consequence of selling a piece of titled land, which is an economic benefit they do not now have.

This last observation is quite important, for many of the families on household plots have worked all their lives on State and collective farms, according to the dictates of the economic regime of their times, and yet because the successor enterprises are finding it necessary to reduce their labour force, these families have no means of subsistence except cultivation on the household plot, nor do they have an asset to sell if they wish to venture into a new occupation. This is a sad situation which leads to social problems for the nation as a whole as well as for the families directly affected.

Another striking trend is that the categories of family farms which have increased in numbers the most rapidly in recent years are the smallest, in order, those with less than 5 hectares of land, then those with 5 to 10 ha, then those with 10 – 20 ha (Table 3–11).

Table 3–11
Talude arv Eestis
Number of Family Farms in Estonia

The main reason for this trend is the nature of the land reform process itself, according to which farm lands are being restituted strictly within their former borders and size. At the same time, the unfavourable economic conditions in agriculture of recent years have not encouraged the establishment of bigger farms.

Another factor is that the land reform policy to date has not been concerned with making viable private companies (shareholding enterprises) out of the former State and collective farms. While small farms exist in all countries, and they can be quite efficient for the production of fruit, vegetables and other specialty crops, it is clear that the production of grains, milk and beef generally requires larger units to be viable. The annex to this Chapter presents calculations which demonstrate this point.

The separation of agricultural reform from land reform is an example of the lack of policy orientation toward making the new agricultural enterprises successful. Without title to their land, it is hard to expect the enterprises to attract the kind of investments that are necessary to become more efficient and competitive in international markets. Another indication of this gap in policy is the lack of programmes oriented toward assisting the new enterprises to learn the appropriate techniques of enterprise management and marketing, and to help both enterprises and farmers in the formation of agricultural service cooperatives where needed. (See Chapter 6 for an extensive discussion of this latter issue.)

In the medium to long run, Estonian agriculture will continue to have a range of farm sizes, but clearly policy needs to do more to assist both extremes of the size spectrum, the enterprises and the household plots, to become more economically self-sustaining.

C. Economic and Legal Considerations Relevant to Potential Solutions for Land Reform

Any viable solution to the problems discussed in section HI, regarding the structure of the land reform, must recognise that the purchasing power of rural households and farm enterprises is very low at present. Their ability to purchase land for cash or with a substantial down payment is very limited. The option of selling land to interests outside the sector which have the means to pay for it would convert the existing group of farmers into employees rather than landowners, contrary to the spirit of the reform process. Basically it is for that reason that the land reform process has not moved forward, except for the restitution process. In this respect, it may be said that the existing legal framework for the remaining tasks in land reform is not in harmony with the societal consensus on how the remaining land should be allocated. When there is a conflict of this nature, the result is stagnation in the legally mandated process.

On the other hand, it must be recognised that outside interests might be capable of bringing needed capital into the sector. One way of reconciling these viewpoints would be to promote the creation of land markets, by making all existing holdings fully transferable through market processes. Thus, for example, farm enterprises which owned their land and found it difficult to earn a positive return on it would have the option of selling part of the land, or partial interests in the enterprise itself, raising additional capital in that way. Under the present situation, the enterprises do not have those economic opportunities, since they are not owners of their most important assets.

Table 3–12
Current Situation of Land Reform in Estonia

Another compromise between these two viewpoints would consist of encouraging outside interests to purchase unused agricultural land, and at the same time assigning priority to the existing enterprises in the purchase of the lands which they currently are working. Just as their receipt of labour shares, for purchasing the farms' structures, was based on their years of labor on the large-scale farms, it would be logical to recognise the fact that they have earned at least a first opportunity to purchase the land they have been working for all their lives.

In light of the present situation of limited purchasing power in rural areas, it also should be recognised that sale and ownership are not the only forms of privatisation of land. An alternative form which exists in many countries is that of long-term transferable leases, say of 25 years duration. In the Estonian context, the State would issue the leases, register them, and receive annual payments on thém, but leaseholders would have complete freedom to invest in the leased land and to sell the lease, at a privately negotiated price, to any third party. Obviously, the price per hectare of leased land would depend in part on the number of years remaining on the lease, but that price would be determined by the two parties to the transaction. The only legal requirement on the transaction would be to register it after it were completed. The transferable character of the leases in this sense would mean that they could be used as guarantees for bank loans, whereas the existing short-term rental contracts cannot be so used.

If this lease option were offered, say to farm enterprises, it also would be important to specify legal mechanisms for subleasing and for eventual conversion of the leasehold to freehold, i.e., to full ownership. It also would be useful to allow the option of selling or subleasing part of the lease. One way to accomplish this would be, for larger holdings, to define several parcels and enter into a separate lease contract on each parcel, even though the lessee is the same person or enterprise on all parcels.

Finally, it should be noted that in the case of both lease contracts and sales of State land, there is an argument for setting the price of land at a low level. The currently low profitability of agriculture makes it difficult to earn a return on land as an asset. An additional consideration is that the subsidy implicit in such a policy is a transitional subsidy, designed to facilitate the transition to a market economy in which there will be greater efficiencies of resource use. Such subsidies are justified if they can assist this kind of transition, while longer-run subsidies are not. Yet another consideration comes into play regarding the price of household plots, where poverty alleviation is the predominant concern.

D. The Role of State Farms in Agriculture

In 1939 in Estonia there were 85 State-owned estates (91 names in the list) with the total area of 27,470 hectares. There were 41 State estates under the administration of the Government of State Estates and 37 under the Ministry of Education. It was intended to leave out State administration 49 of the estates, with a total area of 13,104 hectares. The activities of these State farms were coordinated, and they had been given concrete tasks for developing agricultural production in their corresponding areas of Estonia, activities such as plant breeding, pedigree cattle breeding, etc. In the post-war period the lands of the State estates were mostly united with sovkhozes and kolkhozes.

According to the resolution of the Estonian Supreme Council of 26 August 1992, the State's agricultural land was allocated to agricultural educational, experimental and scientific institutions and to State farms. Their register and fields of action were ratified (State Gazette /SG/ 1992, 36, 475). At the present time, there are 55 names in the list of institutions of this nature remaining under State administration, and the ratified amount of land use necessary for their main activities is 35,803 hectares. The spheres of action of experimental and. State farms are various kinds of scientific research, seed growing, variety testing, and registered cattle breeding.

Up to the present time, the teaching farms of agricultural educational institutions and schools have been working quite Satisfactorily. The students are getting practical experience of farm work along with their classroom education. A teaching farm also enables the students to dine cheaper in the school lunchroom. However, as a rule, the machinery and installations of these farms' workshops and food processing plants have become outdated. There are not enough resources for buying modern equipment and technology. These conditions threaten to undermine the efficiency of the practical learning experiences on these farms.

Because of the decreased demand for scientific research, the reorganisation of scientific institutions and the insufficiency of financial support for research, of 24 experimental stations 10 have been liquidated for the present time (Experimental Stations of Antsla, Karja, Kuusiku, Saku, Sangaste and Simuna; Horse Breeding of Pihtla, experimental stations of Leisi, Pihtla and Väike-Maarja). This process is continuing. The privatisation of Horse Breeding of Tori is in process now. In 1992 the State farms of Jüri, Luunja, Somerpalu, Kehtna, Jõgeva and Tartu were formed. Later the State Farm of Putkaste was added to this list. It may be observed that the results of these experimental and research farms have been very different depending on skills and initiative of their respective administrations. The presence or lack of State support also makes an important difference.

Some examples may be cited. The main activities of the Jüri State Farm were cattle breeding and grain growing. The number of workers was 46. The net turnover was 1.6 million kroons. The last working year ended with a loss of 3.65 million kroons. The debts totaled 2.3 million, including a fine for delayed payments of 0.7 million kroons. An attempt was made to decrease the debts by selling inventory, but Jüri State Farm has been liquidated.

The main activities of Jõgeva State Farm have been breeding registered cattle and growing seed. The farm's output of the last year was sold for 20.5 million kroons, and the resulting financial loss was 18.6 million kroons. The farm is being closed and as a cover for debts all inventory will be sold through Estonian Privatisation Agency.

In contrast, the Kehtna State Farm has been working quite well. In 1995, 1,544 tons of milk, 269 tons of pork (in live weight), 624,000 eggs were produced. There was decline in both production and gross income, with the latter falling by 18 % compared with the previous year, but nonetheless the net profit was 461,000 kroons.

The average number of workers on this farm has been 115 and their average monthly salary, 1852 kroons. In 1996 it is planned to increase the production capacity of production. Practically all spheres of production need renewing since during the last 5 years it hasn't been possible to invest in production according to needs, owing to lack of finances. Kehtna State Farm is being privatised.

A large-scale farm, Tartu State Farm, has achieved better economic results. Its spheres of action have been grain and hayseed growing and prodùction and distribution of livestock products. By the end of 1995, gross output was 26.9 million kroons and it increased 8.9 % during 1996. Plant cultivation is supplying the animal breeding activities with the principal feeds and concentrated fodder. The net profit in 1996 was 943,000 kroons and the number of workers was 302. In 1995 a grain dryer was commissioned, the building of which started in 1991. Over 3 million kroons had been invested for building the dryer.

In the present economic situation it is becoming increasingly difficult to run a State agricultural enterprise economically,' and it is hard to justify its existence if it simply tries to produce as a private farming enterprise would. Understandable questions are being aroused by the business form of a State farm in connection with business law and its paragraph no 507. State support to such farms may represent a kind of unfair competition with private farms.

On the other hand, State farms will continue to be needed for research and teaching purposes, and in some cases to play a validation and demonstration role for new agricultural technologies, including those which are environmentally friendly. Most of all, what these kinds of State farms need is a clearer definition of national policy on agricultural research and extension (Chapter 6), and the corresponding financial support. In this regard, the long-term prospects of agricultural are being sacrificed because of lack of policy vision and a fixation with the short-term finances of the Government.

VI. Policy Recommendations

A. Overall Orientations for a New Land Reform Policy

On the basis of the information and analysis presented in this Chapter, it can be concluded that while the Land Reform Law of 1991 has laid the basis for the progress to date in regard to restitution of land to former owners and their descendants, it has proven to be in inadequate instrument for the privatisation of the remaining unclaimed but cultivable lands, which are at least two-thirds of all agricultural lands. It is clear from the foregoing analysis that the fundamental orientation of a new land reform policy should be to redefine the process so that it adequately covers the cases of the agricultural enterprises, the household plots, and the unused and unclaimed agricultural lands. The present situation in which the State is the owner of those two-thirds of the country's agricultural land is not viable in the long run. It does not establish a basis for improving the economic efficiency and competitiveness of the sector, which are essential for its survival.

In designing new solutions, attention needs to be paid to the weakened economic state of the sector, and consequently new forms of land tenure need to be explored, such as long-term tradeable leases. The legislative framework for such leases does not now exist, but it can be created. For the same reason, it is necessary to be realistic about the prices at which land will be sold to those who are already working it.

Also, clearer guidance for local governments,'especially parishes, is necessary in regard to land reform. While the process should be implemented primarily at the local level, the present framework is too flexible and therefore is open to abuses at the local level.

More consideration is required of how to handle the flows of governmental revenues that will emerge from an accelerated land reform. Adequate formulas need to be devised for the sharing of such revenues between national and local governments, and institutional arrangements need to be made that will ensure that most of these revenues are returned to rural areas in the form of improved infrastructure and services.

B. Suggestions for a Revised Land Reform

The following suggestions are written in fairly precise language, to better indicate how a revised agrarian reform could be structured, but it should be borne in mind that they are preliminary ideas and should be carefully reviewed before a programme for their implementation is developed. They are put forward here for the purpose of stimulating further thinking on how to accelerate the process of land reform. The suggestions consist of five interrelated proposals that are designed to deal with the issues outlined above and to take into account of the considerations mentioned.

1. Proposals for unused Stale lands. Following the provisions of the Land Reform Law (October, 1991), all of the more than 200,000 hectares of unused and unclaimed State land should be privatised at limited or public auction. In preparing the land for selling, it is important that scattered plots be brought together in compact farms. Sizes of parcels need to be defined for purposes of the privatisation, and they should vary but upper and lower limits need to be established by policy. For example, it could be decided that they should not be less than 10 hectares nor greater than 250 hectares. In view of the crisis of profitability in agriculture, financial conditions similar to the following should be established for the sale of these parcels:

   1. Minimum auction prices should be low, following the above discussion of land prices. It is suggested that one-half of the tax assessment value be used. It is far more important to put these lands into private hands that will make them produce than to wait for an undefined period of time for a possibly better price.

   2. The required down payment should be 10%.

   3. A special State fund should be established to issue mortgages for 15 years at a special interest rate of 5%, and to collect the mortgage payments for the Treasury. The mortgage payments shall be apportioned between national and local governments according to a prescribed formula. (See the section on land capital below.)

   4. In the event of serious arrears in the mortgage payments, the purchaser of the land could be given 120 days to arrange a private sale of the land to another person or enterprise who can take over the mortgage payments. Failing such a sale, and if the arrears still exist at the end of the specified period, the land will be repossessed by the State agency and auctioned again. However, by extending this transition period, the possibilities are minimised of the State's having to incur the administrative costs of repossession and auction again. In addition, a measure of economic fairness is extended to the fanner who originally purchased the land and made the attempt to become viable in agriculture.

   5. If no buyers place bids at the original auction for sale of a piece of land, then within 90 days the parcel should be offered again at auction for long-term leasing (under a 25-year transferable lease). The minimum lease rate in the auction should be 10% of the minimum sale price specified in step a) above.

   6. If there are no bids in the leasing auction either, then the parcel should be retired from the market, and the process should be started again one year later, with a new auction for sale.

2. Creation of the legal framework for leases. The legal figure of a 25-year transferable agricultural lease needs to be created. Under such a figure, the leasehold should have full rights to produce, invest in the land, Sell part or all of the lease, or sub-lease all or part of the lease, subject to being current on the lease payments. The State agency created to handle the mortgages under section 1) above should manage the leases on State land and collect the lease payments for the Treasury and local governments, to be apportioned between them according to a prescribed formula. The legislation creating the framework for long-term leases should make it clear that such leases may be used for loan guarantees and that financial institutions may take possession of the leases in the event of defaults. (This kind of clause is subordinates legally the interest of the State to that of a private lending institution.) At the expiration of a 25-year lease, the parcel should be auctioned for sale again, but the last-leaseholder should be given the right to equal the highest bid for the land, thereby becoming its owner.

3. Privatising lands of agricultural enterprises. Notwithstanding the auction procedure followed for unused State land which is not claimed by previous owners (see above), a different procedure is recommended for the land of agricultural enterprises which has not been claimed by previous owners. The principles governing the “privatisation” of enterprise lands could be developed along the following lines:

   1. The current members of the enterprise, as defined by holdings of labour shares, or stock shares if a shareholding company has been created, should be empowered to decide the form in which the land shall be privatised (by type of parcel), according to the options described in paragraph d) below.

   2. The current members of the enterprise would have the first right to possession of the land. Only in the event of their unwillingness to enter into the corresponding financial obligations, and keep current on them, should the land be auctioned.

   3. The initial form of possession of the land could be 25-year transferable leases. At any time after the fifth year, the leaseholder would have the right to convert the lease to a mortgage, and he or she (or the enterprise) would be credited with the sum of lease payments made as a down payment on the purchase. If such right is not exercised during the lifetime of the lease, then at the end of the 25 years the land would be sold at auction. Again, the last leaseholder would have the right to equal the winning bid at the auction.

   4. Regarding the form in which the land of the enterprise shall be “privatised” by the above procedures, the holders of labor shares in the enterprise, or stock shares if a shareholding company has been created, should decide on its form by vote (1 share = 1 vote), choosing among the following three options:

      • Privatising all the land of the enterprise as a single entity.

      • Dividing the lands into a minimum of two and a maximum of five parcels, each of which would be privatised.

      • Dividing the land completely into parcels, one per member of the enterprise according to the number of shares that he or she holds.

The new State agency in charge of leases and mortgages should bear the cost of surveying and registering the parcels, under all options.

4. Titling household plots. For the reasons explained in previous sections of this Chapter, holders of household plots should be given full freehold title to their plots, and all the costs of surveying and titling should be assumed by the above-mentioned State agency. No price should be charged for the plot as long as it does not exceed 3 hectares, and the holder of the plot is a current or former member of a State farm or collective farm. The legislation of regulations in this area could allow that additional area from 3 to a maximum of 5 hectares be leased or purchased by the household, under the price conditions described in sub-sections 1) and 2) above (1/2 the tax assessment value, 10% down payment in the case of purchase, etc.). Area beyond 5 hectares would not be considered part of the household plot for purposes of the land reform.

5. Titling procedures. Titling procedures and procedures for registration of land in the cadastre should be modernised and accelerated so that all agricultural properties, leasehold and freehold, enterprises and family farms and household plots, are surveyed and recorded in the Title Book within 5 years.

6. Municipal lands. In the case of State agricultural land which is both unused and unclaimed, it could be desirable to allow transfer of portions of it to parishes and counties for educational, scientific and recreational uses. Perhaps up to 100 ha. per parish and 1000 ha. per county could be transferred, at no cost, for such purposes, provided that the land is determined to be both unused and unclaimed as of a given date. A policy of this nature should be coordinated with the proposal to create local forests for public uses, as proposed in Chapters 6 and 10 of this Strategy.

Clearly, variants of these approaches could be considered, but the essential conclusion is that it is necessary to revise the existing land reform legislation so that it deals more adequately with the cases of agricultural enterprises, household plots and unclaimed lands. Approaches along the lines indicated above would finally integrate the agricultural reform and the land reform, as well as laying a basis for agricultural growth and improvements in efficiency. They would also make a strong contribution to alleviating rural poverty and the associated rural social problems.

Auctions of land, for sale and for lease, and the other administrative measures proposed above would be carried out mostly by local governments, by parishes with the cooperation of counties. However, the national Government would have a supervisory role. By its nature, land policy must be carried out mostly at the local level, but for an issue of overriding national importance like the land reform, it is essential that local governments be given more guidance by national legislation and national authorities than they have been given so far in this process.

C. The Role of Land Capital

1. General Observations

Land capital may be defined as the flow of revenues which the State receives from selling and leasing agricultural land, and timber exploitation rights on State land. Under an accelerated land reform process, it can be expected that this flow of revenues would increase substantially, so it is important to consider how those funds would be administered and to what uses they would be put. Answers to these questions involve institutional concerns at the level of the national Government, relations between local and national governments, and analyses of Estonia's needs for adequate infrastructure and services for agricultural and rural development. Developing a policy for the management of land capital would constitute a solution to one of the main questions about the fiscal side of land reform.

In general, the economic principles of fiscal policy indicate that it is more efficient to allocate all governmental revenues to the general budget, and make expenditure decisions through that budget, unless there are important reasons for tying particular revenue sources to particular uses of those funds. However, compelling arguments exist for dedicating such funds to the national priorities of managing the process of land reform and of promoting agricultural and rural development. The relatively depressed state of the rural economy under Estonia's present economic policy, model is an important reason for assigning special priority at this time to land reform and rural development. In these circumstances, the rural population may legitimately ask that governmental revenues generated from privatisation of agricultural land be spent on rural development activities.

2. Institutional Aspects of the Land Capital Question

The institution managing the flow of land revenues normally would not be expected to be a Ministry, for governmental institutions of that type are not appropriately structured to handle considerable flows of income and the corresponding expenditures. The land capital revenues would have to be handled by a Land Capital Fund. The closest existing institutional parallels in Estonia would appear to be the Compensation Fund (Hüvitusfond) and the Environmental Protection Fund (Keskkonnafond). The proposed Land Capital Fund would have an interinstitutional board of directors, perhaps including directors from outside the Government, but that should not cause problems in defining the legal figure.

If the Land Capital Fund is to have this kind of legal character, then the decisions of the Land Capital Board would have to take the form of recommendations to the Minister of Agriculture, and perhaps to other Ministers as well, rather than as decisions which could be imposed on the Ministries. Nevertheless, the Board's decisions should be made public.

Most of the members of the Land Capital Board would be representatives appointed by Ministers, including the Minister of Agriculture, the Minister of Finance, and the Minister of the Environment. However, it is recommended that two members of farmers' associations be appointed to the Board as well. It seems appropriate that the Chairman should be the representative named by the Minister of Agriculture, and the Deputy Chairman the representative named by the Minister of Finance.

It is suggested that the Board be selected for terms of five years, to give sufficient continuity to its policies and decisions. Also, continuity could be further reinforced by specifiying staggered terms. In other words, of say 8 members, at the beginning two of them could serve three-year terms, two of them five-year terms, two of them seven-year terms, and two of them nine-year terms. (Alternatively, one, three, five and seven years at the beginning.) Then, upon expiration of the initial terms, each would be renewed for five years. That way, in the future every two years would see the replacement of two of the eight members.

The type of actions that are needed to complete the land reform process have direct implications for the flow of revenues generated from land. Those actions include creating saleable parcels of land, auctioning those parcels for both sale and lease, carrying out transfers of land under leasehold or freehold to agricultural enterprises, overseeing the titling of household plots, and many other measures. Therefore, the Board of the Land Capital Fund logically would be the manager of the next phase of the privatization process.

In establishing the areas of competence of the Land Capital Board, it is important to define its primary functions, or missions. In doing so, it should be borne in mind that the Land Capital Fund will be receiving income for much more than a decade into the future. Therefore the conception of the primary mission of the Land Capital Board has to be both immediate and long-term. It is suggested that such conception could include the following three basic components:

1. Prepare agricultural and forestry land parcels for privatization, whether by sale or by issuance of long-term leases.

2. Support the development of rural infrastructure, as a long-term activity.

3. Strengthen the Government's monitoring and supervision capacity for State forests (since forest exploitation fees would comprise part of the revenues of the Land Capital Fund).

4. Devote some of the Land Capital to strengthening the existing system for land title registry (the Title Book). Faster movement in privatisation of land (including long-term leases) will place greater demands on this system.

In addition, if the instrument of mortgages is to be used for the sale of some State lands, then the Board of the Land Capital Fund would become responsible for those mortgages. The related policy must be defined. Should the management of such mortgages, including allowance for foreclosure provisions, be transferred to the banking system? If so, what kind of fee arrangements would be made with banks for that kind of management? In the event of foreclosures, what would be the procedures for auctioning the land again? These questions need operational answers.

In using Land Capital for the development of rural infrastructure, it would be important to specify institutional mechanisms through which local governments (counties and parishes) participate jointly with the Land Capital Board in defining the priorities for projects of this nature, and in monitoring their implementation.

The Land Board would need a technical staff to support and help implement its decisions, and to monitor and evaluate the results. Equally, to maintain public confidence in the Land Board, it would be important to make provision for independent audits of its operations.

3. Financial Considerations for the Land Capital Fund

Prior to budgeting the land capital revenues for the abovementioned purposes, portions of them need to be allocated to other uses, including local governments (both counties and parishes), the Compensation Fund (for lands and other agricultural assets not claimed physically) and the Environmental Protection Fund. The urgent need to strengthen the management of and services provided by local governments, while they are gradually building up their long-run revenue sources, should be taken into account in devising a formula which allocates a specified share of the land capital to them.

In the case of the Compensation Fund, now that the deadline for filing restitution claims has passed, and it is known how many claimants are requesting compensation instead of physical restitution, then approximate forecasts of the total amount of compensation monies needed can be made. The Compensation Fund should receive no more and no less than this amount (allowing for its own administrative expenses). That amount can be deducted from the flow of land revenues that is generated (from land sales and leasing, etc.), before payments are made into the Land Capital Fund. This procedure would be preferable to allocating a fixed percentage of the land revenues to the Compensation Fund. Similarly, the needs of the Environmental Fund can be calculated, rather than allocating to it a fixed percentage of land revenues. In the enabling legislation, it should be made explicit that funds not allocated to one of these uses, nor to the Land Capital Fund itself, will go to the general governmental budget.

Annex. Economic Farm Sizes for Different Outputs

Agricultural technology is constantly changing over time, and both the technology and the optimal farm size depend very much on the cropping pattern, market prices, soil conditions, the farm's financial status, the attitudes of the farm owner, and other factors. For these reasons there always will be a considerable range of farm sizes in practice, as there was in Estonia before 1939. Nevertheless, for certain kinds of agricultural production some approximate indications can be given of how farm size would affect production and profitability the conditions which prevail in Estonia today.

For a family dairy farm using its own labor and feed harvested from its own fields, an economically efficient size turns out to be 40 – 60 hectares arable land and 20 – 30 cows with calves, heifers and steers.

Similarly, the size of pig farm using its own feedstuff will be 40 – 100 hectares of arable land and 200 – 500 pigs.

For an arable farm, present technologies of production and economic factors tend to indicate a size of 100 – 150 hectares. Such farms are operated with a minimum of labour, usually by the farmer and his family and perhaps one assistant. The wife would most often act as secretary. She should be able to handle milking machine, and she might have some production activities of her own, such as farmyard poultry etc. Some services requiring large machinery, or specific operations as artificial insemination, liming etc. would be provided by contractors or commercial veterinary services for a fee.

Calculations supporting these conclusions are presented below.

Arable farm

The arable farm would be equipped to produce potatoes, rye, barley, wheat, oil crops ,beet and other fodder crops. Equipment required for the farm is set out below with costing of new machinery in Estonian kroons.

Dairy farm

The dairy farm would be for a 30 milk cows, with a 1000 litre milk tank and chilling system

Figure 3-2
Farm size and profit for dairy farms

X - producer price (EEK per kilo); Y - number of cows; Z - calculated loss or profit (EEK)

Scenario C used the same assumption as scenario B, except that because of larger size there are economies of scale in most livestock activities. The labour requirement for 45 cattle including 20 cows increases to 748 work days and the return per day increases to 110 kroons. Similarly for scenario D the labour requirement increases to 1,343 work days for 88 cattle including 40 cows. Labour's return increases to 124 kroons per day. The production costs were calculated as:

Scenario E has the same feed base as scenario D but is oriented more towards beef production. It has the same labour requirement, gross income and return per work day. Depending on sale channels (sale directly to consumer, sale to dairies etc.) farmers have possibilities to get higher prices and profits.

Table 3–13
Farmi suurus ja kasum
Farm size and profit
4000 kg müüdud piima lehma kohta
4000 kilo fresh milk per cow

Figure 3-3
Farm size and profit
(beef production)

X - beef producer price (kroons per kilo);
Y - number of fattening cattle in farm
Z - calculated profit or lose (in Estonian kroons)

Table 3-14
Farmi suurus ja- kasum
Farm size and profit
(beef production)
(ööpäevane juurdekasv -575 gr. Müügi kaal 365 kg)
(weight increase per day -575 gr. sale weight 365 kilo)