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State in leasing: Pluses and minuses

Analysis Materials 18 January 2011 12:05

Privatized after the reorganization of collective and state farms, the technology park of Azerbaijan's agriculture stood before the lamentable fact: it has 90 percent physically and mentally worn out. Since 1992, the machine and tractor fleet of the country's collective farms ceased to be updated timely and accurately. For a clear picture, it needs to look at the statistics of the Agriculture Ministry, according to which, in 1998-2004 the Republic imported only 798 units of agricultural machinery, particularly 233 combine harvesters and 212 tractors and other equipment. It is estimated that by 2015, the country needs to update 30,000 tractors and 25,000 trucks, 4,000 combine harvesters and 2,100 cotton harvesters. About $468 million is required to replace all this equipment.

And from where has the agriculture such amounts? Lack of financial resources has always been a topical issue for agriculture around the world. This is due to the peculiarities of the production cycle in agriculture. In almost all agrarian sub-sectors, it takes at least six months between investing money and receiving the product. Therefore, the possibility of peasants on self-financing of production is limited. This is due to disparity in prices for agricultural products and resources for its production, which is ultimately reflected in the fact that the peasants' income has always lagged behind incomes in other sectors of the economy. In addition, the features of the production cycle for the agricultural sector are subject to specific risks - the dependence of income on the unpredictable weather conditions, territorial remoteness and small size farms. So, many banks do not consider farmers as attractive borrowers.

This fundamental problem of agriculture in many countries are often tried to be solved with the help of state. Since Azerbaijan regained its independence, the state has tried all forms of agricultural support - from direct subsidies to compensate for interest rates on loans. But one of the most effective measures for cooperation between the state and the peasants was the transfer of production means into leasing.

For this purpose, in October 2004, the Azerbaijani government established Aqrolizing JSC, which acts under the Agriculture Ministry. The company's activities are aimed at improving the agricultural sector and supporting entrepreneurship in the country through acquiring and providing various agricultural equipment to local landowners via leasing.

Since beginning its activities (from 2005 to 2009), Aqrolizing acquired about 9,500 units of various agricultural equipment, including about 1,000 combine harvesters, 2,500 cultivating and manufacturing tractors of various brands, particularly Belarus tractors assembled in Azerbaijan's Ganja city, 140 excavators, as well as nearly 6,000 trucks, trailers and attachments. All of this impressive fleet was provided with a possibility of redemption under leasing schemes, which was the main factor of support to the bulk of small farmers that ensured an unprecedented increase in production in some sectors of agriculture, particularly in grain growing.

At the same time, for more than three years, the JSC has been providing subsidies and technical assistance to farmers, for each hectare of sown area - 40 manat (grain planting farmers receive additional 40 manat).

In 2008, at the expense of 25 million manat allocated from the Reserve Fund of the President, Aqrolizinq imported reproductive seeds of high quality to Azerbaijan from the Krasnodar region of Russia. About 70,000 tons of seeds R2 were received in 2009. This allowed to fully ensure the country's economy with high-productive seeds.

Aqrolizinq also implements 50-percent discount for fertilizers, creating a network of logistics centers, warehouses throughout the country.

Finally, in 2009 the State company started to develop riskier asset items, such as breeding stock. The company implements a comprehensive program - importing and leasing livestock to farmers on preferential terms. As of Dec. 1, 2010 Aqrolizinq imported to the country 715 pedigree cattle, including 501 young animals from Australia, 401 breeding heifers from Germany, 190 of which belong to the Holstein-Friesian breed. By 2015 it is planned to purchase and lease to farmers about 40,000 cattle, on which 80 million manat will be spent.

Besides all this, from 2005 to 2009, the JSC bought 8 dairy plants, 19 freezer compartments, 8 sets of feed equipment, various parts, 236,900 tons of fertilizer, 294,300 tons of pesticides. All the products of Aqrolizing are used successfully by the agricultural producers, and insufficient demand for equipment leasing is caused by the lack of awareness of farmers, and sometimes the cause is overpriced services.

Taking the latter into account, since the beginning of the new year, the government has decided to mitigate the terms of the lease. As a result, the Cabinet of Ministers has amended the terms of sale of farm machinery and processing equipment through Aqrolizing State Leasing Company.

According to the new conditions, legal and physical entities who acquire agricultural machinery and technological equipment from Aqrolizing must pay 10 percent of its cost in form of prepayment, and pay the other part for nine years, starting to make payments a year after the prepayment. Previously, if the equipment cost was over 40,000 manat, the prepayment was 10 percent, and if the cost was up to 40,000 manat, the prepayment was 20 percent.

Thanks to the State care, Aqrolizing became one of the largest leasing companies in Azerbaijan. From 2005 to 2009, Aqrolizing received public support at 221.26 million manat: in 2005 - 25 million manat, in 2006 - 41 million manat, in 2007 - 37.5 million manat, in 2008 - 72.5 million manat, in 2009 - 45.26 million manat, in 2010 - 38 million manat. Funds are allocated from the Public budget, Reserve Fund, the State Investment Fund, as well as from other public sources.

In 2011 the Public budget will allocate 35 million manat for Aqrolizing. Of these funds, 12 million manat will be spent on the purchase of tractors and agricultural equipment, 12 million manat - mineral fertilizers, 11 million manat - technological equipment.

Pluses

Urgency of Aqroleasing currently does not cause doubt - there is a strong demand for replacement of fixed assets, and therefore, there is a need for funding. However, the season of activity, the long production cycle and the lack of liquid security do not allow to attract bank loans. Here, the State Leasing Company comes to help, providing farmers the necessary machinery and equipment under preferential financial leasing.

As a rule, only large companies can afford to buy equipment for own money. For small business, the leasing is perhaps the only mechanism to acquire technology. The advantages of Aqrolizing clearly revealed after the increase of tariffs on certain types of fuel in early 2007. Then the private agricultural equipment service centers raised prices for the services, but the facilities owned by Aqrolizing kept them on the previous cost (term of loan payments for the purchase of machinery - 10 years, the security is provided in amount of 50 percent of the equipment).

It is clear that the State encourages the use of leasing primarily in those industries where the business is risky and is not particularly profitable. In particular, the Government creates favorable conditions for attracting investments in agriculture leasing, allocating tens of millions of AZN to finance leasing transactions in this area.

Minuses

The situation at state leasing company today can hardly be called satisfactory. The company experiences the problem of late repayments and unprofitability. So from 2005 to 2009, Aqrolizing received nearly 50 million manat from the use of equipment and leasing, as well as from preferential sales of fertilizers, animals and grains, which makes up only 22.6 percent of total investments.

The existence of Aqrolizinq State Company on the country's leasing market tightens the presence of private leasing companies, and creates an unequal competition. The State Company offers farmers agricultural machinery on preferential terms, and as a result, this segment is almost closed for private companies. So, the share of agricultural machinery in the total portfolio of leasing companies in Azerbaijan make up only 3 percent.

Offering goods in the domestic market cheaper than world market prices actually means indirect subsidies. Currently, the consumers in the agriculture of Azerbaijan pay for the farm machinery less compared to most other countries. And it brings to the complex problems associated with the technical operation of mechanical means. Thus, fiscal irresponsibility of lessee does not motivate them to the timely implementation of complex regulated maintenance and repair, which leads to very low rates of use of machinery and reduces their lifetime.

Today Aqrolizinq implements no proper control over the financial responsibility of the lessees and the state of technological capabilities, of which presence would enable the rational use of means of mechanization for the duration of their service.
As international practice shows, the state aid is a temporary case, which, while preserving the dependence on it damages the market.

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