Agrarian subsidies: Ineffective targeted concession policy

A new mechanism for subsidizing agriculture has been introduced in Azerbaijan since January 1, 2020, and the system of state assistance to farmers has been fully digitalized. For this purpose, the required legislative framework was adopted in 2019, the relevant electronic system and its subsystems were formed. The Electronic Agricultural Information System (EAIS) has several subsystems. The most important ones of these are the subsystem of registration of agricultural entities and the subsystem of subsidies and livestock and artificial insemination. Farmers are not the only ones registered in EAIS. Through the subsystem of registration of agricultural entities, it is envisaged to register farmers, suppliers and providers, as well as other entities operating in the field of agriculture, to enter the required information and documents on their activities, and to map land plots.

Starting from January last year, a farmer wishing to receive a subsidy must first register with EAIS and then enter the relevant information into the subsystem of subsidies. In accordance with the Rules for subsidizing agricultural production approved by the Decree of the President of the Republic of Azerbaijan No. 759 dated June 27, 2019, the following subsidies are currently provided to the agricultural sector:

1. Planting subsidy. Subsidy given to farmers for each hectare of arable land in order to reimburse a part of the expenses incurred for the purchase of the means of agricultural production used for the cultivation of agricultural crops in accordance with the purpose of agricultural lands under cultivation and perennial plantings;

2. Product subsidy. Subsidy given to providers in addition to the planting subsidy for each ton of crop delivered;

3. Seed subsidy. Subsidy for the sale of domestically produced, certified 1^st and 2^nd reproduction seeds and seedlings;

4. Animal subsidy. Subsidy for each healthy calf obtained by artificial insemination or embryo transfer in order to improve the sex composition of local animals, increase the number of animals with high productive genetic potential;

5. Bee subsidy. Subsidy for each bee family (hive);

6. Cocoon subsidy. Subsidy for each kilogram of wet cocoon produced in the country and delivered to providers.

The amount of subsidies is calculated on the basis of the decision of the Agrarian Subsidy Council. The council consists of 7 members, including representatives of the Ministry of Agriculture of the Republic of Azerbaijan (2 persons), the Ministry of Economy of the Republic of Azerbaijan (1 person), the Ministry of Finance of the Republic of Azerbaijan (1 person), the State Statistical Committee of the Republic of Azerbaijan (1 person), the National Confederation of Entrepreneurs (Employers) of the Republic of Azerbaijan (1 person), and the Local Farmers Association (1 person). The head of the council is the Minister of Agriculture, Inam Karimov.

By January 15 of each year, the council shall approve the list of plants by regions and the planting coefficients applied to them for the application of planting subsidies, the list of crop products and the coefficients applied to them for the application of product subsidies, the list of crop products and the coefficients and quotas applied to them for the application of seed subsidies.

Provision of subsidies (payments) to farmers, as well as the organization and coordination of the activities of the State Agrarian Development Centers (SADC) of the ministry in this area, are carried out by the Agrarian Credit and Development Agency (ACDA) under the Ministry of Agriculture (MoA).

Among these types of subsidies mentioned, planting subsidies differ in that they cover more farmers, more money is spent in this area than others, and this type of subsidies is not related to productivity (yield), regardless of the outcome, depending on the implementation of planting. The information provided in the table also confirms the validity of these 3 conclusions. Therefore, in this article, we will focus on the existing problems related to planting subsidies.

On January 6, 2021, at a meeting chaired by President Ilham Aliyev on the results of 2020, the Minister of Agriculture, Inam Karimov, said: “To date, more than 546,000 farmers have been registered in the e-Agro system.”[1] According to the table compiled according to official statistics, in 2020, 498,121 people were allocated 277,840,000 manats in subsidies to farmers. Among the total recipients of subsidies, the share of farmers receiving planting subsidies for planting in autumn 2019 and spring 2020 was 82.1% (409,141 people), and the share of subsidy funds allocated in this direction in total subsidies was 83.9% (232,935,930 manats).

Table 1. Subsidizing the agricultural sector in 2020[2]

According to the current legislation, the amount of the planting subsidy is transferred to the Farmer's Card after the farmer uploads the required documents to the subsystem of subsidies (SIS). A farmer can use 25 percent of the planting subsidy in cash and 75 percent by transfer. The word "transfer" used here means non-cash. As the farmer uses the balance of the planting subsidy in the card account on the relevant payment line for the purchase of agricultural production means, he/she confirms the information sent to it via SIS. Then the amount corresponding to the relevant expenditure is automatically transferred from the farmer's card account to the supplier’s account.

It should be noted that the first half-year of the introduction of SIS was not remembered with such heartwarming facts. In July 2020, there were cases of illegal seizure of cards, which belonged to farmers operating in Guba, Khachmaz, Imishli, Shamkir, and other districts and to which subsidy funds were transferred. An organized group of about 30 members created formal legal entities in the names of their relatives and misappropriated subsidies by conducting various non-commodity financial transactions.

During the first 3 months of 2020, subsidy cards, which belonged to more than 2,000 farmers operating in different regions of the country, were collected by High Agro LLC, Rovshanoglu Agro LLC, which were created by the members of the group, and 6 other individuals. Then the money on the cards was transferred to the bank accounts of companies created in the names of formal persons on the basis of forged documents and cashed in for 25-40% payment. As a result of these illegal financial transactions, a total of about 5 million manats in subsidies were misappropriated by the members of the group.

Although the current e-subsidy mechanism significantly reduces the number of violations and corruption in agricultural subsidies (especially planting subsidy) compared to the previous mechanism, it has strengthened monopolistic tendencies, created favorable conditions for artificially raising the price of means of production, increased administrative costs covered by the state budget, and created restrictions on the full coverage of all farmers with state support. There are still many negative trends in the assignment and payment of subsidies, transparency in this area, and the disclosure of reports in accordance with the law.

The most serious problem in the field of subsidizing the agricultural sector is the lack of transparency and accountability of relevant government bodies. It is not possible to find information on the number of farmers, whom the appropriate subsidy (planting, product, animal, etc.) was assigned, the share of rejected farmers in the total number of applicants, the classification of reasons for the refusal, the share of those in lease relations in the final number of farmers receiving subsidies, names and surnames of subsidized farmers, amount of subsidy for each farmer, and other detailed information on the websites of the MoA, which must exercise control over the use of budget funds by the institutions included in its structure in accordance with the law, and ACDA, of which task is to provide benefits to the means of agricultural production at the expense of the state budget and to control the use of these funds for their intended purpose.

However, the regulations and other legislative acts regulating their activities of both government bodies set specific responsibilities for accountability. The MoA must ensure that the public is informed about its activities, that public information, the list of which is to be disclosed in accordance with the law, is posted on the website, and that this information is constantly updated.[3] The same task is included in the regulations of ACDA.[4]

Furthermore, in accordance with the Decree of the President of the Republic of Azerbaijan No. 759 of June 27, 2019, on the establishment of a new subsidy mechanism in the agricultural sector and the Rules for subsidizing agricultural production approved by this Decree, in order to ensure accountability and transparency, the above-mentioned government bodies must:

MoA:

• must report annually to the President of the Republic of Azerbaijan on the results of subsidizing agricultural production.[5]

ACDA:

• must submit a report on the current situation and improving proposals to the MoA once a year in accordance with the results of its monitoring and evaluation of the application of the subsidy mechanism.[6]
• must post the list of subsidized farmers by district (city) and village on the official website no later than December 25 of each year.[7]

Unfortunately, there is no information in the "Reports" section of the official website of the MoA,[8] the section is completely empty. In the "Reports" section of the official website of ACDA, “Information on the work done by the Agrarian Credit and Development Agency under the Ministry of Agriculture of the Republic of Azerbaijan in 2020” contains less than half a page of information on the provision of agrarian subsidies.[9] However, in accordance with the requirements of the legislation, the agency must prepare a report on the current situation once a year in accordance with the results of monitoring and evaluation of the application of the subsidy mechanism.

As for the publication of the list of recipients of subsidies, the agency posted on its website two indefinite lists in a pdf file entitled “Autumn planting, 2021, report”. The first list-table consists of "Type of entity", "District", "Village", "TIN / FIN" columns. There are no names and surnames in the list, only the word "individual" in the first column instead of the name and surname. The next list after this list contains only names and surnames. It is not known what the names and surnames mean, as there is no explanatory note in the title of the lists. The list is not numbered, so the final number of recipients of planting subsidies is unknown. The most interesting point is that there is no legal entity on the list. So, what is the source of the hundreds of thousands of manat subsidies received annually by 43 agro-parks and dozens of large farms operating in the country?

The list of other types of subsidy recipients (product, animal, bee, seed, etc.) has not been posted on the website at all, and their identities are not known. However, since the amount of subsidies allocated from the budget is a public fund, information on its spending is considered public information that must be disclosed by law.[10]

The attitude of Vugar Huseynov, the head of the Public Relations and Information Department of the MoA, to the issue of disclosure of information on subsidies can be considered as the official position of this state body. After the introduction of SIS, V. Huseynov justified the non-disclosure of information about the recipients of subsidies in a press release as follows: “We posted the information on the website so that the farmer could take the information from our website, print it, and submit it to the financial department. Now that process is carried out through the State Agrarian Development Centers. Orders are sent to SADCs, and SADCs provide this information to financial institutions instead of farmers. Therefore, there is no need to post that information on the website.”

It should be noted that the ministry refused to respond to our information request - “amount of subsidies for planting, product, seed, and livestock allocated to farmers in the Republic of Azerbaijan in 2018-2020 (by indicating years), number of subsidized farmers (by indicating years), cultivation areas (in hectare) to which planting subsidies have been allocated (by indicating years), number of farmers who applied for subsidies and whose applications have been refused, and classification of reasons for the refusal (by indicating years)” - dated January 11, 2021, addressed to the MoA.

Other negative aspects of the mechanism of subsidizing the agricultural sector are related to the MoA’s ignoring of the legal requirement of the State Tax Service (STS) under the Ministry of Economy of the Republic of Azerbaijan on registration of agricultural producers, not allowing it to be realized, isolation of accounting and reporting of the agricultural sector from the general economic system and transformation of this area into a separate area in order for the MoA to realize its own interests in the end. This has made the current agricultural subsidy system non-transparent, monopolistic, and costly. As can be seen from the list of subsidy recipients disclosed by ACDA, none of those registered with the SIS have a TIN in the STS or a municipal registration as a family farm. Farmers registered in the system are registered with the FIN of their ID cards.

The MoA has created a system within the system. Therefore, additional expenditures from the state budget were needed. At present, every farmer receiving a subsidy is issued a Farmer's Card. Special POS terminals are required to read these cards. Because 75% of the funds, which are non-cash, on these cards are not visible in any ATM. When you insert the card into the ATM, only the 25 percent portion of the funds allowed to be withdrawn is visible. Therefore, the MoA has provided each of the supplier’s stores with special POS terminals that "read" 75% of the funds, which are non-cash, on the card. This means additional budget funds. However, if farmers were registered in the STS, they would have the right to open an entrepreneurial account, and the subsidy would be transferred to their bank accounts, after which all transactions related to the purchase of means of production would be non-cash, and there would be no need for non-transparent games such as "25 percent cash - 75 percent non-cash". As a result, control over the spending of funds would increase, and the transparency of the process would be ensured.

In general, the system of "25 percent cash, 75 percent transfer" used in the provision of subsidies is absurd, this scheme has no official justification, incentive effect. At a time when cash settlements are restricted by law and a special simplified tax (1 percent) is envisaged to prevent cash withdrawals, allowing 25 percent of subsidy funds to be spent in cash creates favorable conditions for the application of illegal schemes that allow for non-transparency and misappropriation of budget funds.

Another negative aspect of the new electronic system is that the supply of agricultural producers with the means of production is completely monopolized. At present, the import and sale of fertilizers, pesticides, biohumus is concentrated in the hands of a group of monopolists, and random companies are not allowed into this system. The dominant supplier is an entity, which operated under the name of Agroleasing OJSC until August 17, 2020, and was renamed as Agroservice OJSC[11] from that date, and which is subordinated to the MoA. Agroservice OJSC has 3 provision bases, 9 regional offices, and 36 district branches in the country. Taking advantage of all the privileges provided by its status, Agroservice OJSC, which is subordinated to the MoA, sells mobile and stationary fertilizers to farmers on favorable terms at the expense of the state budget. AzGubra (there are 58 sales outlets in 8 economic regions), Agrarian Innovation and Supply Company Closed Joint-Stock Company (established for this purpose at the end of 2019, has sales outlets in all regions of the country), MKT Production Commercial LLC and P-Agro LLC (both dominant in the cultivation, provision, and processing of cotton), ASPI Agro (a major wine producer) are other suppliers, which also recognized companies in the field of import and sale of mineral fertilizers and pesticides. A comparison of the prices of fertilizers and pesticides shows that these products are offered at a lower price in stores, which are not registered with EAIS and do not make a sale on preferential terms. In fact, this fact indirectly confirms that the system of preferential supply of means of agricultural production is in the hands of monopolists. There are also complaints about the quality of the means of production offered by suppliers registered in EAIS.

Another limitation of the current subsidy system is the number of farmers who lease land. After the introduction of the new electronic system, most tenants will not be able to benefit from agricultural subsidies. Leased lands do not include large farms and agro-parks that occupy large plots of land (especially winter quarters, fields, pastures, etc.) included in the state and municipal land fund in exchange for very low rental prices. We are talking about small farmers who lease land from individual private owners. Such tenants are deprived of the right to apply for a planting subsidy because they are unable to formalize the lease in the face of strict documentation requirements. The owners of these lands receive subsidies by declaring the actual cultivation instead of the tenants. It is also interesting how landowners who do not cultivate the land benefit from these subsidy amounts. According to the law, landowners can spend the amount of subsidies they receive only on the acquisition of means of production. Landowners who lease their land to others (tenants) either sell the fertilizers and pesticides they buy from suppliers to other stores at a lower price or receive a certain amount of money in exchange for the product they pay for by bargaining on the spot.

The misappropriation of subsidies by agro-parks and large farms owned by officials is also a negative fact. It should be noted that the establishment of agro-parks and large farms in Azerbaijan began in 2014. Agroparks were created through the seizure of state and municipal lands and small peasant farms, which are unsuitable for grazing and planting, mainly inhabited by IDPs, used as winter quarters and farms. In this process, which is accompanied by mass violations of law and human rights, large-scale misappropriation of state budget funds is carried out under the guise of subsidies. Many of these lands are unsuitable for cultivation, so the productivity of any agricultural product grown on these lands (cotton, wheat, barley, etc.) is very low. Officials misappropriate large subsidies by seizing the land in exchange for very low rental prices. Depending on the planted cereals or technical crops, planting subsidy is paid in the amount of 180 (240) manats per hectare (first amount for the part of wheat sowing areas not exceeding 20 hectares, second amount for more than 20 hectares), 200 manats (corn), 260 manats (cotton), 280 manats (soybeans), 320 manats (paddy), etc. If we take into account that the area of agro-parks and large farms is measured in thousands of hectares, this means millions. Since the planting subsidy is not linked to productivity, the cost-effectiveness of such expenditures is not assessed. Unfortunately, the MoA and ACDA do not publish the amount of subsidies provided to such large farms on their official websites and do not respond to information requests on this topic. The seizure of unproductive lands, which are not suitable for cultivation, is a clear example of inefficient spending of budget funds and misappropriation by a group of officials.

Finally, let us note that in accordance with the introduction of a new subsidy mechanism, for the application of planting subsidy given to farmers for each hectare of arable land in order to reimburse a part of the expenses incurred for the purchase of the means of agricultural production, product subsidy given to providers in addition to the planting subsidy for each ton of crop delivered, seed subsidy for the sale of domestically produced, certified 1st and 2nd reproduction seeds and seedlings, animal subsidy for each healthy calf obtained by artificial insemination or embryo transfer in order to improve the sex composition of local animals, increase the number of animals with high productive genetic potential, bee subsidy for each bee family (hive), cocoon subsidy for each kilogram of wet cocoon produced in the country and delivered to providers, as well as discounts on leased and sold equipment, sets of irrigation systems, and breeding animals at the expense of the state budget, 475.7 million manats are envisaged in the state budget for 2021, which is 65.0 million manats or 15.8 percent more than in 2020.

This means that in 2021, the inefficient use of budget funds will continue without any efficiency assessment, demonstrating a commitment to the long-standing tradition in the agricultural sector, which does not have accurate accounting of producers, products, expenditures, and revenues.

Gubad Ibadoglu

[1] https://president.az/articles/49933

[2] The table is based on the official data of ACDA. The table does not take into account payments for cotton, sugar beet, tobacco products, as well as artificial insemination in January 2021.

[3] Article 10.13-1 of the Regulations on the Ministry of Agriculture of the Republic of Azerbaijan approved by Decree No. 226 of the President of the Republic of Azerbaijan dated April 20, 2005.

[4] Article 3.0.11 of the Regulations on the Agrarian Credit and Development Agency under the Ministry of Agriculture of the Republic of Azerbaijan approved by Decree No. 571 of the President of the Republic of Azerbaijan dated July 23, 2015.

[5] Presidential Decree on the establishment of a new subsidy mechanism in the agricultural sector, Article 3.4

[6] Rules for subsidizing agricultural production, Article 5.7

[7] Ibid, Article 6.3

[8] https://agro.gov.az/az/nazirlik/hesabatlar

[9] http://akia.gov.az/az/single/104

[10] Law of the Republic of Azerbaijan on Access to Information

[11] Decree of the President of the Republic of Azerbaijan on some measures to regulate the activities of Agroleasing Open Joint Stock Company