35508 ECSSD Environmentally and Socially Sustainable Development Working Paper No. 39 June 2005 ROMANIAN FOOD AND AGRICULTURE FROM A EUROPEAN PERSPECTIVE Csaba Csaki Holger Kray Contents List of Acronyms ...............................................................................................................................iv Acknowledgments..............................................................................................................................vi Executive Summary...........................................................................................................................vii Chapter 1 Agriculture and the Food Sector...................................................................................1 Chapter 2 The Policy Framework for Agriculture and Food ........................................................12 Chapter 3 Introducing the EU Common Agricultural Policy in Romania: Status and Impacts....26 Chapter 4 Land Tenure and Farm Structure..................................................................................61 Chapter 5 The Food Industry and Agro-processing......................................................................79 Chapter 6 Commodity and Factor Markets ...................................................................................89 Chapter 7 Developing Human Resources and Upgrading Institutions to Meet EU Standards .....134 Annexes Annex 1 Main Expenditures in the MAFRD Budget ..................................................................143 Annex 2A Introducing the EU Common Agricultural Policy in Romania: Modeling Methodology.................................................................................................................144 Annex 2B Introducing the EU Common Agricultural Policy in Romania: Selected Results........150 ii iii Acronyms Exchange rates 1 = lei 38,588 $1 = lei 34,095 ANCA National Agency for Agricultural Consulting ANCPI National Agency of Cadastre and Real Estate Publicity ARIS Romanian Agency for Foreign Investment ASAL World Bank Agricultural Sectoral Adjustment Loan CAP Common Agricultural Policy CEFTA Central European Free Trade Area CIS Commonwealth of Independent States CJCA Judets Centers for Agricultural Consultancy CLCA Local Centers for Agricultural Consultancy CNDP Compensatory National Direct Payments CPI Consumer Price Index EAGGF European Agricultural Guidance and Guarantee Fund EAFRD European Agricultural Fund for Rural Development EBRD European Bank for Reconstruction and Development EFTA European Free Trade Area ERP Effective Rate of Protection EU European Union EU-15 15 member states of the EU prior to 2004 accession round EU-25 25 member states of the EU after the 2004 accession round FDI Foreign Direct Investment FAO Food and Agriculture Organizationof the United Nations FIAS fostele intreprinderi agricole de stat (state-owned farms after 1989) GAO Gross Agricultural Output GDP Gross Domestic Product GNP Gross National Product GVA Gross Value-Added IAS intreprinderi agricole de stat (state-owned farms before 1989) IACS Integrated Administration and Control System IEA International Energy Agency ISO International Organization for Standardization LFA Less Favored Areas LPIS Land Parcel Identification System MAFRD Ministry of Agriculture, Forests and Rural Development MAKIS Modernizing the Agricultural Knowledge and Information System MAFWE Ministry of Agriculture, Forests, Water and Environment (MAFWE) MEBO Management/Employee Buy-Outs NARS National Agricultural Research System NIS National Institute of Statistics NRDP National Rural Development Plan iv NRP Nominal Rate of Protection NGO Non-Governmental Organization NPAA National Program for the Adoption of the Acquis POF Private Ownership Fund ROL Romanian Lei SAPARD Special Accession Program for Agriculture and Rural Development SAPS Single Area Payment Scheme SDA State Domain Agency SEUROP Research Institute of Animal Production SFP Single Farm Payment SOF State Ownership Fund TIC Training and Information Center WTO World Trade Organization v Acknowledgments This study is a revised and expanded version of a background study on agriculture and rural development prepared in late 2003 as a contribution to the Romanian Country Economic Memorandum. The Romanian Ministry of Agriculture was the main counterpart for this study. The task was managed and led by Benoit Blarel. The study was prepared by Csaba Csaki and Holger Kray, supported by Cecilia Alexandri, Dinu Gavrilescu, Lucian Luca, and Camelia Serbanescu of the Romanian Institute of Agricultural Economics, in Bucharest. In the World Bank's Bucharest office, Gabriel Ionita and Doina Petrescu coordinated and supported the study process. The authors gratefully acknowledge Irene Bomani's effective assistance with the final editing and formatting of the study. Valuable input and comments were received from the EC Delegation to Romania, Pierre-Olivier Colleye, Valeriu Steriu, and the participants at a seminar on held in Bucharest May 23, 2005. vi Executive Summary Policymakers in Romania will need to make a series of important decisions in order to prepare the country for accession to the European Union and adoption of the EU Common Agricultural Policy (CAP) in 2007. This report identifies the key challenges and suggests possible options for meeting them. It focuses on four main issues: completing preparations for implementing the CAP, determining how best to structure the CAP direct payments, facilitating structural adjustment to increase competitiveness, and accelerating reforms in agro-processing, input supply, and marketing. 1. Completing Preparations for Implementing the Common Agricultural Policy To prepare for implementation of the CAP, Romania will need to create a competitive market with private and public institutions capable of meeting Common Market requirements and establishing institutions capable of administering the CAP that are compatible with those of the European Union. Increasing Competitiveness Agriculture policy in Romania has traditionally emphasized increasing production. As the country moves toward EU accession, this approach needs to be replaced with one that emphasizes increasing the sector's competitiveness. Yields in both crop and livestock production are low in Romania, and the country's agricultural labor productivity is by far the lowest in the region. Efficiency can be increased only by adopting policies that facilitate the structural reorganization of agriculture by allowing inefficient farms to close down (through effective early retirement schemes, for example) and removing obstacles to the expansion of new and more efficient farming units (by removing the bias against land leasing, for example). Adoption of the new policy framework and support system cannot wait until 2007. Instead, measures should be taken now, in order to facilitate the sector's ability to adjust to the challenge of producing for the highly competitive EU market. Steps the government could consider taking include the following: · Quickly complete the most important pending transition tasks, such as privatizing land and creating functioning land markets. · Consolidate the small-scale farming sector by creating nonagricultural rural job opportunities that will reduce the agricultural work force and raise labor productivity. · Make more effective use of budgetary support to agriculture by refocusing support programs on enhancing efficiency rather than providing price support and export subsidies. · Integrate the various instruments of government intervention into a more consistent and predictable framework, by, among other things, providing a reliable orientation for farmers until the CAP goes into effect. · Create the institutions required to implement appropriate support policies after EU accession. vii · Clearly separate rural social measures (such as measures that reduce social tensions and provide social protection in rural areas) from major instruments aimed at improving efficiency and competitiveness. Creating Institutions and Regulatory Systems that are Compatible with those of the European Union Romania will have to implement the full acquis communautaire by the time it accedes to the European Union. This will involve establishing institutions capable of meeting Common Market requirements and of administering the CAP that are compatible with those of the European Union. Without timely implementation of an appropriate institutional framework, Romania will not be able to cope with the immense administrative task of implementing both pillars of the EU CAP (box 1), particularly the Single Area Payment System (SAPS) and the Compensatory National Direct Payment (CNDP) system. As the experiences of the new EU member states indicate, significant delays can create political tension and discredit the advantages of EU membership. Creating CAP­conforming institutions and training Box 1. The Pillars of the Common Agricultural Policy qualified staff represent EU spending on agriculture is channeled through the European Agricultural major challenges. Romania Guidance and Guarantee Fund (EAGGF). There are two main areas (pillars) of agricultural expenditure. has lagged in this area and remains well behind its Market and income support (Pillar 1) Market and income support measures include direct payments to farmers and second-wave accession market-related subsidies under the Common Market organizations, such as neighbor, Bulgaria. The buying of products for public storage, surplus disposal schemes, and export government has taken some subsidies. Until recently, income support--and to a lesser extent market steps to accelerate support--were the major areas of CAP expenditure. This is gradually changing as the CAP evolves. Funding for Pillar 1 measures comes from the EAGGF institutional development. Guarantee Section. In July 2002 it revised the Rural development (Pillar 2) National Program for the The increasingly important rural development measures aim at encouraging Adoption of the Acquis environmental services, providing assistance to difficult farming areas, and (NPAA). In October 2002 promoting food quality, higher standards, and animal welfare. These measures it opened the agricultural are jointly funded (cofinanced) by the European Union and member states. The new system of compulsory modulation (that is, switching of funds from chapter of negotiations with production to rural development) will be used to finance the introduction of the the European Commission, new rural development measures agreed to in the June 2003 CAP or to reinforce which it provisionally existing measures. closed in June 2004. These Most expenditure for rural development measures is funded by the EAGGF are positive steps, but they Guarantee Section, although a significant part comes from the Guidance Section. require sustained political The Guidance Section is one of four European structural funds that aim to assist will and timely budgetary regions, including rural areas that lag behind in their development. The other support to become reality.30 structural funds are the European Regional Development Fund, the European Social Fund, and the Financial Instrument for Fisheries Guidance. Significant progress has been made in some areas (such as the veterinary and phytosanitary acquis, including the food safety chapters). But concern remains about Romania's ability to comply with the complex 30 According to a November 2002 estimate by the Ministry of Agriculture, Forests and Rural Development (MAFRD), about 220 million is needed to implement the acquis, of which 87 percent represents the cost of implementation and 13 percent represents operational costs. Of the total amount, 54 percent is meant for institutional capacity building, 36 percent for acquis adoption and staff training, and 10 percent for investments. viii administration requirements of the CAP. Increased efforts and further institutional development should focus on a series of actions. Substantially accelerate efforts to set up institutions and horizontal structures related to administering Common Market organizations and create physical infrastructure, such as warehouse certification. Amend current legislation to comply with EU regulations, and set up a fully operational market information system by January 2007. The experience of some new member states (such as Hungary) shows that merely amending legislation without increasing capacity leads to substantial operational problems and potentially causes tensions among agricultural producers and rural inhabitants. To avoid these problems, the government will need to: · Create or transform its administrative capacity with respect to harmonizing standards and classifications. · Develop institutional capacities. · Create the monitoring capacities required to fully participate in the CAP. · Ensure that Romania has an adequate certified warehouse infrastructure in place to operate a market intervention system. Accelerate efforts to prepare the Integrated Administration and Control System (IACS) and the Land Parcel Identification Scheme (LPIS). Without both of these key institutions in place, Romanian authorities will not be able to effectively operate CAP-related payments. Romanian farmers will not be able to access CAP support or submit applications for participation in CAP aid schemes. To ensure that Romanian farmers benefit fully from EU accession, the government will need to: · Implement the required institution and capacity building (human, institutional, and information technology) to establish and operate the IACS, so that farmers and the CAP administration can apply for SAPS/Less favored areas (LFA) support; and · Check the accuracy of information in applications for agricultural land income support schemes (including on-site verification). Fully implement marketing standards, so that Romanian farmers benefit from "market measure" allocations. Implementation of the acquis on marketing standards and producer organizations is underway, but it remains at an early stage. Without full implementation, Romanian agricultural products will be excluded from the EU Common Market. To prevent this from happening, the government will have to accelerate the emergence of producer groups and organizations. This mandatory step must be taken if allocations for the CAP Pillar 1 market measures are to be disbursed. Create capacity in product labeling, especially of organic products, which does not yet conform to EU requirements, by improving infrastructure and training classifiers and trainers. Fully specify the details of the Single Area Payment Scheme (SAPS). The government has not yet fully specified a set of support programs for direct payments under CAP Pillar 1. The delay is attributable mainly to the need to significantly upgrade the human, technical, and physical ix capacities of the national and regional administrations. Timely specification is required to enable the agricultural sector to make appropriate decisions before the 2006 harvesting seasons. The government therefore urgently needs to create or transform capacities in the fields of direct payments (eligibility and payment modalities) and upgrade or transform the administrative infrastructure of the managing authority, the paying agency, the IACS, and the LPIS at the national and regional level. Implement administrative adjustments and build capacity to enable the rural sector to benefit from the significant allocations available under CAP Pillar 2. Pillar 2 funds are granted to support balanced development of Romania's rural regions, reduce income deficits, and support the structural transformation and improved competitiveness of the agricultural sector. The outstanding implementation of acquis obligations related to Pillar 1, the delay in creating or transforming national and regional capacities to operate the EU's rural development and structural funds, and the outstanding adjustment of public funds management significantly endanger Romania's capacity to adequately manage and absorb the 2.5 billion in Pillar 2 funds that have been allocated for 2007­09. Recent World Bank assessments have outlined the need for enhanced support of rural development. Lessons learned from the unsatisfactory uptake of the 2000­06 Special Accession Program for Agriculture and Rural Development (SAPARD) allocations in Romania highlight the need for substantial capacity building in both administration and the rural banking and business community. To enable the national and regional administrations to operate rural development programs and allow the rural community to successfully apply for and benefit from allocated funds, the government needs to take several steps: · Adjust the National Rural Development Plan (NRDP) and specify sectoral operational programs eligible for disbursement of Pillar 2 allocations and structural operation funds from the European Union. · Analyze and implement adjustments in public funds management and operations to meet Romania's cofinancing requirements given the country's fiscal budget constraints. · Restructure the public authorities (at the national and regional levels) so that they can operate and monitor Pillar 2 programs using EU evaluation practices, in order to avoid the risk of budgetary penalization. · Ensure that regional public authorities and farmers will be able to successfully file applications for Pillar 2 funds. 2. Determining How Best to Structure CAP Direct Payment Schemes Policymakers in Romania will need to make a series of decisions regarding the type of payment scheme it will adopt for direct income support measures. In doing so, they will to take account of the effects on producers' incomes, consumers' incomes, and the budget. Effects on Producers' Income - Introducing CAP Price Regimes Adopting the CAP will bring about a complete change in agricultural market and support policies in Romania. The prices of agricultural products will be adjusted to conform to those in the Common Market, and Romania's direct support schemes (which accounted for 4.5 percent of average farm income in 2004) will be replaced by a much broader set of CAP direct payments. What impact are these changes likely to have? x The analysis first examines the impact of introducing CAP Figure I. Projected Effect on Value-Added of Introducing the pricing only (without direct CAP at 2007 Levels, by Commodity payments), assessing the likely impact on farm incomes of replacing all current direct payment schemes with CAP wheat barley maize sunflowerpotatoes milk beef pork poultry eggs 25,000 pricing. Assuming that prices for agricultural products in Romania 20,000 ROL adjust to current EU levels, 15,000 introducing CAP direct billion payments without in 10,000 supplementary direct income Added 5,000 support payments would not maintain the incomes of all Value 0 agricultural producers at pre- -5,000 accession levels. Under this Current policies CAP pricing without SAPS CAP pricing with SAPS scenario, the incomes of most producers of crops in Romania Source: World Bank calculations fall. Incomes of livestock producers rise, since the reduced cost of feeding materials (especially grain) complements the positive revenue effect of higher output prices (especially for dairy). For the sector as a whole, adoption of the CAP pricing regime without granting direct payments reduces average producer incomes by 19 percent (figure I). Introducing the Single Area Payment Scheme (SAPS) With the exception of Slovenia, all new member states in Central and Eastern Europe introduced the Single Area Payment Scheme (SAPS), a simplified version of the EU Single Farm Payment Scheme. Romania will probably also opt for the SAPS. The phasing in of SAPS to agricultural producers, starting at a level of 25 percent of the EU-15 average in 2007, will increase the relative importance of direct payment schemes to Romanian farmers from 4.5 percent of farm income under current policies to up to 40 percent under the CAP. In 2007 the basic SAPS will not result in an immediate increase in income for agricultural producers, but it will compensate them for about half of that part of the income loss resulting from the shift to the lower EU market price support levels for crops. The aggregate impact of price changes upon accession to the Common Market for agricultural products and the initially relative low level of direct payments would reduce sectoral value-added 9.6 percent if no top-up were granted. Although livestock activities are not eligible for payments under the SAPS, livestock producers would enjoy income increases through price increases for outputs, price decreases for inputs, and SAPS payments to forage areas. Crop producers, on average, would have to cope with income reductions. By 2010 average agricultural incomes would exceed current levels, as SAPS reaches 40 percent of the EU-15 average. xi Introducing Complementary National Direct Payments (CNDPs) Within carefully defined limits, Romania (like all new member states) will have the option of supplementing EU direct payments by making Compensatory National Direct Payments (CNDPs), commonly referred to as "topping-up" payments. In view of the likely short-term income losses between 2007 and 2010, topping up SAPS direct payments with CNDPs represents the only way of Figure II. Projected Effect on Farmers' Incomes of safeguarding (or increasing) Introducing SAPS and CNDP at 2007 Levels producer incomes in the initial phase of EU accession that is 90,000 consistent with the CAP. While ROL SAPS phasing-in levels remain 60,000 below 40 percent of EU-15 levels billion in and annual CAP Pillar 2 measures have not been fully absorbed Added 30,000 (experience from the new member Value states has shown that initial 0 disbursements may take up to a year SAPS 2007 SAPS with SAPS with SAPS with CNDP (10% of CNDP (20% of CNDP (30% of after accession), a topping up of EU-15) EU-15) EU-15) SAPS by CNDPs of at least 20 CAP Scenarios, 2007 Current policies, 2004 percent of the EU-15 average would Source: World Bank calculations lead to sectorwide income increases of 1.9 percent in the first year of accession. If the Ministry of Agriculture, Forests and Rural Development (MAFRD) decides to grant CNDPs on a flat per hectare basis up to the maximum permitted level of 30 percent of EU- 15 average, sectoral income would increase by 8.0 percent in 2007. The MAFRD's decision on the level of CNDPs will therefore depend on the income transfer objective to be achieved. If the objective is to maintain average producer incomes at current pre- accession levels in the first year of accession, a top-up of 20 percent of the EU-15 level represents the preferred option (figure II). This option, however, would lead to an initial but small income reduction for medium-size farmers, potentially giving rise to social tensions. A top-up of 30 percent of the EU-15 level would be needed if the objective were to maintain the income of all farmers. This option, however, would increase the incomes of owners of farms of more than 100 hectares by almost 25 percent. In addition to these equity considerations, the government also needs to evaluate the effect of different options on the budget (see below). Choosing Payment Modalities This assessment acknowledges the need for topping-up SAPS with CNDPs in the initial phase of accession if agricultural incomes are to be protected in the early years of EU accession. The government will have to specify the scope of CNDPs--that is, determine whether these payments should be made on a flat per hectare basis or granted as premia to specific crop or livestock production activities. By allowing the government to target direct payments, commodity-specific CNDPs may appear to mitigate potential adverse income effects for some categories of farmers. In fact, the evidence indicates that applying a flat, decoupled CNDP scheme is preferable to using specific, coupled CNDPs. xii Concerns have been raised that milk producers, for example, could experience substantial income loss, since direct payments would be allocated only to agricultural land. But evidence points in the other direction: with the implementation of CAP­type policies, dairy farmers could experience an estimated income increase of up to 23 percent in the first year of accession. The high implementation costs and administrative complexity associated with commodity- specific CNDPs and their long-term distorting impact on production patterns militate in favor of using CNDPs on the most equalized and simplified basis possible. Support schemes targeting specific sectoral adjustment needs or regional income disparities are better addressed under the Pillar 2 umbrella. Determining Eligibility Criteria According to EU rules, the minimum holding size eligible for support under the SAPS is 0.3 hectares. Romania can decide to set the minimum at a higher level, as long as it does not exceed 1 hectare. All new member states applying SAPS have chosen to set 1 hectare as the minimum holding size. Farm-size eligibility criteria could exclude up to half of all farmers from benefiting from the SAPS/CNDP regime. Farm-size thresholds need to be set so that they facilitate structural change and avoid the prohibitive administrative costs of operating SAPS for extremely small farms. Nevertheless, they are likely to be controversial in Romania, where half of the 4.5 million farms are on less than 1 hectare of agricultural land. Efficiency Considerations of the SAPS: Important Caveats Without underestimating the social dimension of being excluded from direct income support payments, the role of direct payments in solving agricultural income problems must not be overestimated. Direct payment schemes such as the SAPS can provide some level of income stability and help mitigate farmers' exposure to income risk by guaranteeing a minimum income from farming. Direct support schemes, however, cannot substitute for the need to raise the productivity and improve the competitiveness of Romanian agriculture. Productivity growth and improved competitiveness remain the long-term and sustainable solution to solving agricultural income problems. Agricultural support schemes targeting specific sectoral adjustment needs such as farm consolidation, productivity or competitiveness-enhancing farm-level investments would better addressed under the Pillar 2 umbrella. Similarly, the application of a direct income support scheme cannot substitute for the implementation of Pillar 2 measures such as an (early) retirement scheme for farmers. In addition, direct income support payments may reduce the incentives for farmers to restructure, consolidate, and modernize. By guaranteeing a minimum income from farming, these payments reduce the incentive for inefficient farmers to sell or lease their assets to more productive entrepreneurs. SAPS payments and their effects on land prices or land rental rates may also make land consolidation more difficult, in particular in a farming environment in which agricultural credit is not well developed. Evidence from EU member states indicates that support payments granted on a per hectare basis lead to significant increases in prices for buying and especially leasing agricultural land. This will significantly disfavor tenants, slow any consolidation toward more viable farm sizes, and correspond to support to landowners rather than farmers. These tradeoffs between direct income support payments and the need for higher productivity and xiii competitiveness point to the need to clearly separate rural social measures (such as measures to reduce social tensions and provide social protection in the rural areas) from the major instruments of agricultural income support. Effects on Consumers' Income Because of its impact on agricultural prices--and therefore food prices--EU accession will also affect Romanian consumers. The experience of the new member states suggests that consumer food prices should decline after accession, as a result of greater competition among food retailers, processors, and distributors. If this is the case, real consumer incomes will rise. If prices rise, they will do so modestly, and the effect on real incomes will be even more modest. If food prices rise 1.6 percent, consumer incomes will fall less than 1 percent in the medium term if consumers adjust their consumption basket to the new set of prices and 1.4 percent if they do not adjust their consumption patterns (figure III). Although any immediate real income loss is likely to be small, it will be more Figure III. Projected Medium-Term Impact of the CAP on Food Expenditures in Romania, by Food Type severe for the poorest households and for (presumably urban) households that 15 do not produce their own food. Increases in food prices could increase the proportion of people living below policies Food and beverages, total the poverty line by 0.2 percentage 5 current Cereals and pasta points. to 1.61 Meatandmeatproducts Milkanddairyproducts relative Eggs Effects on the Budget Edible fat and oil Vegetablesandpotatoes change -5 Alcoholic beverages Romania will be a net beneficiary of the EU budget when it joins the European Union. Over the initial programming Percentage period (2007­09), it will receive about -15 4 billion in CAP funds--about five times the amount it will contribute. Total public spending for agriculture and rural development for the first three years of EU membership will be at least 4.6 billion, including 606 million of national cofinancing of Pillar 2 measures. This minimum figure is based on implementation of the CAP and the SAPS without top-ups. Any decision to raise the level of top-up would increase total agricultural and rural development public spending but also augment significantly national cofinancing requirements. In choosing the level of SAPS top-up and its source of financing, policymakers will have to strike a balance between how much the government can afford and how much total (that is, EU and national) spending for Pillar 1 and 2 measures it desires. Higher topping up of SAPS (up to 30 percent of the level of EU-15 support) implies a higher national budget requirement (table 1). Topping up the basic SAPS entirely from national budget resources is more costly to the state budget than sourcing partly by diverting up to 20 percent of the EU allocations to Pillar 2 rural development measures (as permitted by the European Union), but sourcing the top-up from Pillar 2 allocations reduces the funds available for rural development. xiv Table 1. Budgetary Implications of Sourcing Alternatives for Topping Up SAPS, 2007­09 Required Funds available Share of national contribution national Top-up Sourcing to for contribution (percent of in total of EU-15) top-upa Pillar 2 Direct Pillar 2 rural Direct rural Total CAP available payments development Total payments (Pillars 1 public funds measures development measures and 2) ( percent) (million EUR) (million EUR) 0 n.a. 0 606 606 881 3,030 4,643 13 10 National budget 294 606 900 1,175 3,030 4,937 18 10 percent of 10 EU allocation on Pillar 2 147 569 716 1,175 2,846 4,753 15 National 20 budget 587 606 1,193 1,468 3,030 5,230 23 10 percent of EU allocation 20 on Pillar 2 plus national budget 345 545 890 1,468 2,727 4,927 18 20 percent of EU allocation on Pillar 2 20 plus national budget 103 485 587 1,468 2,424 4,624 13 National 30 budget 881 606 1,487 1,762 3,030 5,524 27 10 percent of EU allocation 30 on Pillar 2 plus national budget 639 545 1,184 1,762 2,727 5,221 23 20 percent of EU allocation 30 on Pillar 2 plus national budget 396 485 881 1,762 2,424 4,918 18 n.a. Not applicable. Source: World Bank calculations. The most modest financial allocation from national sources (606 million for 2007­09) would be required if the government decides not to top up the basic SAPS. This allocation could be as high as 5.5 billion if a 30 percent of EU-15 top-up is financed entirely from national sources. Such an option would seem fiscally prohibitive in view of its national cofinancing requirements of 1.6 billion. Topping up SAPS is fiscally efficient, since it leverages greater amounts of EU financing, but it comes at a cost to the national budget and taxpayers. xv Financing part of the top-up by reallocating EU resources from Pillar 2 measures is fiscally expedient for Romania, since it significantly reduces the total level of national cofinancing requirements. For example, for a top-up payment equivalent to 20 percent of the EU-15 level, national cofinancing requirements could be reduced by more than half if Romania used 20 percent of EU Pillar 2 resources to finance the top-up. From the point of view of both the national contribution and total public spending, the 10 percent top-up option and the top-up financing option relying entirely on national sources are the least attractive options. Whatever decision it makes on financing SAPS/CNDP, the MAFRD needs to create the fiscal space for the significant cofinancing required--and it needs to do so before accession (that is, in 2006). The MAFRD budget was about 700 million in 2005, of which 574 million was allocated for direct support measures. To cofinance Pillar 1 and 2 interventions, the government will need to spend 202­544 million. Aggregate fiscal constraints and sound fiscal management point to the need to create the fiscal space to absorb EU grant resources. This fiscal space will have to come from policy adjustments that align current policies to a framework that is consistent with the CAP. This means that all national support programs (such as output price supplements and input price subsidies) that do not conform to the CAP will have to be phased out. 3. Facilitating Structural Adjustment to Increase Competitiveness Reducing Income Disparities with Pillar 2 Funds Half of all holdings in Romania are less than 1 hectare. Without exit of many of these farms, Romania's agriculture sector will not become competitive. Inefficient farms need to be induced to close down, and obstacles need to be removed that prevent new and efficient farms from expanding. Although direct income support measures can maintain or increase sectoral income at pre- accession levels in the short term, they cannot be relied on as a means of safeguarding agricultural income in the medium to long term. The most powerful and sustainable way to sustain agricultural incomes is to make agriculture more productive and competitive. Any attempts to solve structural problems through the SAPS/CNDP regime will only weaken the sector's structural adjustment. It is therefore recommended that the government clearly separate rural development and rural social measures fromagricultural income support. The structural adjustment needs of the sector can be addressed by focusing on the measures foreseen under Priority Axis 1 (measures improving competitiveness of farming and forestry) of the new EU rural development policy(box 2). The Romanian government will have to allocate at least 15 percent of the national envelope on Axis 1 (454.5 in 2007­09); the maximum allocation (determined by the minimum allocations for the other two axis) is 60 percent of the national envelope (1,818 million in 2007­09). xvi Box 2. Potential Measures under Axis 1 of CAP Pillar 2 The need to increase competitiveness and efficiency will most appropriately be targeted with the following measures: Measures aimed at improving human potential: · vocational training and information actions for people engaged in the agricultural and forestry sectors · setting up of young farmers · early retirement of farmers and farm workers · use of advisory services by farmers and forest holders · setting up of farm management, farm relief, and farm and forestry advisory services. Measures aimed at restructuring physical potential through: · modernizing farms · improving the economic value of forests · adding value to primary agricultural and forestry production · improving and developing infrastructure related to developing and adapting agriculture and forestry · restoring agricultural production potential damaged by natural disasters and introducing appropriate prevention actions. Measures aimed at improving the quality of agricultural production and products b : · helping farmers adapt to demanding standards based on European Community legislation · supporting farmers who participate in food quality schemes · supporting producer groups with information and promote products under food quality schemes. Transitional measures for new member states: · supporting semi-subsistence farms undergoing restructuring · supporting the establishment of producer groups. Source: EC proposal, 2004/0161(CNS). If not addressed in a timely and appropriate manner, the implementation of Pillar 2 measures may create a situation in which (already well-performing) larger farms (10 hectares and larger) will once again be the main beneficiaries of most support schemes. Half of all farmers (98 percent if all farms smaller than 10 hectares are considered) may not benefit from or take advantage of Pillar 2 allocations. The economic and social implications of their failure to benefit from these allocations could be more pronounced than their lack of eligibility for Pillar 1 support measures. The government must facilitate the uptake of the program by small and medium-size farms. This adjustment should be carried out in the light of the findings presented in the analysis of the potential effect of Pillar 1 measures. Structural improvement measures need to be complemented by measures aiming at improving the environment and land management (Axis 2) and improving the quality of life and diversifying rural areas (Axis 3). Consolidating the Farming Sector and Reducing Excess Agricultural Labor Creating a more efficient and competitive farming sector is probably the most important task Romania faces in preparing for EU accession. This complex task will require actions on several fronts. xvii Completing Farm Restructuring and Farm Privatization Romania has made significant progress toward establishing a private agricultural sector characterized by a mix of organizational types spanning the entire spectrum of individual and corporate farms. Land reform--in the sense of restoring the ownership and use rights of individuals--has been virtually completed. Some important tasks remain outstanding, however. Foremost among them are completing the privatization of state-owned farms and ensuring that the bulk of state-owned land is privatized by auction or, failing that, expeditiously entrusted to private operators. More than half of the original number of state-owned farms in the State Domain Agency portfolio are considered insolvent and are slated for liquidation rather than privatization. Liquidating these properties without further delay would make large areas of agricultural land available for leasing to private operators. Priority must be given to disposing of these large reserves of state land and returning them to productive cultivation by private farmers. For more than a decade, bankrupt state farms have been allowed accumulate losses. The time has come to resolve all bankruptcy cases in the former state farming sector, as these farms will not be eligible for state aid once Romania accedes to the European Union. In addition, the government should immediately impose hard budget constraints and strict financial discipline on all entities in the sector, public and private alike. One of the original goals of transition was to eliminate the large-farm bias built into the Romanian agricultural mentality since 1948. Commercial farming should be supported and encouraged in Romania, but support should be based on measures of commercial activity, not size. The objective should be to help small farmers increase their level of commercialization-- something that cannot be achieved by cutting them off from subsidies because of their size. Successful development of the farm sector requires abolishing the traditional preferential treatment of large farms and establishing a level playing field for farms of all organizational types and sizes. Consolidating Small Farms and Reducing Excess Labor in Agriculture Romania has 4.5 million farming units--two-thirds the number in the EU-15 member states. The average farm size in Romania is just 3.1 hectares (including all individual and corporate farms)--less than one-sixth the average size in the EU-15. Consolidation of small farms should be encouraged, because empirical evidence from farm surveys in Romania and other countries indicates that owning more land is associated with a higher standard of living in rural households. Consolidation will occur naturally if farming is a profitable business: farmers will seek ways to increase their holdings if they can earn enough money from agriculture. The government should implement policies that will encourage farmers to improve their financial performance. Possible actions include the following: · Develop marketing and supply channels for agriculture, and encourage the formation of service cooperatives and associations of small farmers (box 3). xviii · Provide market information, extension, and farm management training for small farmers. (All of these are public goods and thus the responsibility of the government.) · Establishrural credit systems that are accessible to efficient farms of all sizes. · Provide targeted grants and subsidies for the development of commercial activities, and introduce high value-added commodities with significant export potential. Consolidation must be left to market forces, with the government standing ready to provide budget support to successful and sufficiently motivated farmers willing to enlarge their farms in a market-driven environment. International experience indicates that government-initiated land- swapping programs (either directly between small landowners or through a state-owned pool) are never very successful. Box 3. Using Pillar 2 funds to support collective activity by far mers In Romania the most efficient farm organization for resource-constrained small farmers are "family societies," in which farmers collectively share in the provision of mechanized services. In Eastern Germany "partnerships" (small groups of farmers that pool their effort in certain production and marketing tasks) outperformed all other forms of farm organization between 1992 and 1997. Government can play an important role in adapting the structures to the needs and constraints of small farmers. Well-targeted and designed Pillar 2 measures under Axis 1 can be used to promote and encourage the emergence and large-scale replication of such models. Consolidation of fragmented farms naturally requires that some farmers give up the use (if not the ownership) of their land in favor of more efficient and more productive farmers. At least three market mechanisms may facilitate this change: developing markets for land transactions, providing adequate pensions for elderly rural landowners, and creating nonagricultural employment opportunities in rural areas. Land markets provide a mechanism for allowing elderly and nonproductive landowners to retire. But the current bias favoring selling land over leasing it out needs to be revisited if these markets are to improve the efficiency and competitiveness of agriculture. The development of land market transactions, including land leasing, is particularly important in Romania, where ownership and use rights were transferred to 4.2 million rural beneficiaries, half of whom are older than 60 and nearly 40 percent of whom are pensioners. According to certain estimates, pensioners own 65 percent of land in rural areas. These elderly people are not the most productive farmers and are probably on the verge of becoming passive landowners. Another 500,000 land owners are urban residents with other careers who have little or no interest in resuming active farming. Land markets have an important role to play in enabling land resources to be transferred from less to more active and more efficient producers, increasing productivity through consolidation. Toward that end, the leasing out of land by retiring farmers or urban dwellers should not be discouraged. Evidence from the European Union, the United States, the, Czech Republic, Hungary, and the Slovak Republic, where rented lands account for a significant share of farmed land, clearly demonstrates that land ownership can be separated from land use in farming without compromising competitiveness and productivity growth. To exploit land markets as a tool of land consolidation, the government should adopt policies that simplify registration and titling procedures, minimize transactions costs, and ensure long-term security for both lessors and lessees through appropriate, standardized land contracts and effective enforcement. xix The inadequacy of rural pensions forces elderly people to go on farming well into their retirement years in order to meet minimum subsistence needs. The only way to encourage elderly people to release their land resources to more productive users is by raising their pensions to a level that enables survival when supplemented with some income from land leasing. For budgetary reasons, the government cannot raise pensions; land fragmentation is a back-door substitute for its inability to provide adequate pensions to the rural population. This underlines the need for timely and comprehensive implementation of the retirement schemes provided for under Axis 1 of Pillar 2. Any significant consolidation of farm sizes would force large numbers of workers out of agriculture and could lead to massive migration to urban areas. To prevent this from happening, the government could spur development of nonagricultural rural employment opportunities in services, construction, and manufacturing, especially for people of pre-retirement age, by creating an enabling environment for small- and medium-sized enterprises in rural areas. This is a very long process, which the government could promote using Axis 3 of Pillar 2. Factors other than land consolidation have a strong positive impact on rural incomes. Improving education, rural infrastructure, and market channels raises farm incomes and helps create nonagricultural jobs. Access to machinery, human capital (education), and willingness to engage in commercial sales have an even greater impact on household well-being than land. These areas require government policy attention. Support schemes could be implemented under Axis 2 and 3 of Pillar 2. Reducing Rural Poverty To reduce rural poverty, the government could take action on several fronts. Create a vibrant rural non-farm economy, in order to absorb the labor that will be shed as farms consolidate Specific actions could include the following: · Maintain a market-friendly policy environment for small - and medium - size businesses (with specific technical or financial supports for rural businesses in certain cases). · Invest in physical infrastructure, including roads, water, communications, and energy. · Invest in basic education and training, to better prepare the rural population for off-farm work. Increase productivity on small- and medium-size farms Legislation in Romania needs to be amended and Axis 1 of Pillar 2 support used to increase farm productivity. Specific support for small- and medium-size farms could include the following: · Create a business environment conducive for agro-processing and agri-business, including by improving access to term finance from private lenders on commercial terms. · Provide agricultural extension for small- and medium-size farmers. · Improve marketing infrastructure, including by preparing simple standard contracts and enforceable contracting mechanisms. xx · Develop marketing associations. · Improve the environment for land transactions, by developing simpler administrative procedures and adequate contract enforcement. Maintain the Social Security of Rural Pensioners Since increasing pension payments is not currently feasible, the government needs to adopt indirect measures to assist the vulnerable elderly. These measures could include the following: · Encourage elderly landowners to engage in land rental transactions by preparing standard rental contracts and providing assistance in explaining and enforcing the legal options. · Increase demand for leasing land from elderly people by improving credit schemes that productive farmers could use to purchase farm equipment. · Expand the range of annuities attractive to elderly investors, so that rural residents have alternative investment options to retaining their land. · Reduce the isolation of the rural elderly through selective investments in transport and communications in remote villages to help them maintain access to social services and to the outside community. 4. Accelerating Reforms in Agro-processing, Input Supply, and Marketing Policymakers face two main tasks in the agro-processing sector: they need to facilitate the consolidation of privatized agro-processing industries, and they need to promote and attract Foreign Direct Investment (FDI) into the sector. The government should study the experience of other European countries--especially Ireland--in encouraging FDI. No special measures are needed to attract foreign investment into the food retail or restaurant business, but it is imperative to attract FDI for modernizing and upgrading privatized agro-processing firms. Axis 1 funds could be used to facilitate this process. The government should also develop policies that encourage domestic investment in small and medium-size processing plants in rural areas. Food processing is an ideal complement to the agricultural activities of the rural population, and it can be set up in villages with little effort or investment. In addition to augmenting the income of entrepreneur families, this activity would create local jobs. These policies should be part of a forward-looking rural development strategy that no longer relies on simply providing subsidies for the purchase of agricultural machinery and equipment. Policies could be funded under Axis 1, which provides for an integrated set of measures that support investments whichadd value to primary agricultural production and support farmers and producer groups participating in regional or national food quality schemes. Most small farms in Romania are subsistence farms that have only marginal contacts with markets. Most of the contacts that do occur are with local markets or in the form of direct sales from the farm. These firms have almost no direct relations with large retailing systems. To benefit from the revolution in retailing, these farms need to be integrated into vertical supply chains. xxi Becoming integrated will require fundamental change on the part of small farmers, many of whom are not willing or able to make these changes. Farms that do not become integrated will either remain as subsistence farms, providing only additional income, or disappear, providing scope for consolidation. Farms that do become integrated will become larger and more commercial, they will adopt improved technologies, and they will meet the challenges of vertical chains. Government policy should support these farms by implementing the transitional measures available to new member states concerning support to semi-subsistence farms undergoing restructuring. The supply of high-quality inputs and the competitiveness of farm input markets have improved in recent years, with the privatization of state companies and the entry of international firms into the domestic market. But a worrisome degree of market power remains among new domestic producers. Barriers to entry should be eliminated in these markets, so that they become more competitive. Electric power, fuel, and tractor subsidies should be eliminated, as they distort incentives for domestic producers versus international suppliers and adversely affect the competitiveness of input markets. The financial system needs to be upgraded to meet the changing needs of the rural population. Banks and non-bank institutions have made modest progress in recent years in increasing financial flows and outreach to rural borrowers, and NGOs have successfully entered the field. But rural credit remains inadequate. The existence of SAPARD grant funds and the need for bank financing of SAPARD­approved farm and agro-industrial projects raises the demand for rural bank lending. The rural banking sector needs to be strengthened to meet these needs. Other problems that may require increased attention include the need to strengthen legal institutions, which are unable to adequately enforce existing collateral laws; develop non-bank sources of finance, including reduction of tax constraints on equipment leasing firms; support expansion (and regulation) of microfinance institutions serving rural clients; and support the development of private sector risk management tools in rural areas. xxii Chapter 1 Agriculture and the Food Sector Romania has a good natural resource base for agriculture, with fertile soils in the south and in the Moldavian provinces (box 1.1). The climate is mild continental, and summer crops require irrigation. During the central planning era, economic policy emphasized industry over agriculture, but agriculture Box 1.1. Most of Romania's land is agricultural nevertheless continued to play a significant, though diminishing role in the economy. Agriculture was About 62 percent of Romania's total area of organized in large state and cooperative farms, and 23.8 million hectare--some 14.9 million upstream and downstream sectors were dominated by hectares--is agricultural. (The EU average state-owned enterprises. Much of the growth achieved is 41 percent.) Arable land represents about 63 percent of the agricultural area, in agriculture was due not to improvements in total permanent crops 3 percent, and permanent factor productivity but to increasingly intensive use of grassland 33 percent. In addition, 28 purchased inputs, especially chemicals and fertilizers. percent of Romania's land is forested. The reform process implemented over the past decade has been difficult, moving in fits and starts. Results have been mixed, and immense tasks in sectoral adjustment still lie ahead to cope with the challenge of accession to the European Union (EU). 1.1 Agriculture in the National Economy Beginning in 1989, the trends in Romanian agriculture began to differ Figure 1.1. Size of the total and agricultural labor force in Romania, 1989­2003 significantly from the long-term trends that had prevailed under 1989=100 percent of labor central planning. Until 1989 the total 125 50 labor force in Romania was 100 40 increasing, while the agricultural labor force was decreasing. After 75 30 1990 the trends reversed, with the 50 20 total labor force shrinking and the agricultural labor force increasing 25 10 fairly rapidly until 2000, when it reached 117 percent of 1989 levels 0 0 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 (figure 1.1). Data for 2003 show a Share of agricultural labor in total employment measurable decline in the share of Total labor (1989=100) Agricultural labor (1989=100) agriculture in the total labor force-- Source: World Bank calculations based on NIS data to 35 percent--for the first time since 1996. The share of agriculture in GDP has declined since 1990, stabilizing at about 11 percent in 1999 (figure 1.2). This decline is a normal trend in developing economies, but it is usually 1 accompanied by a decrease in the share of agricultural employment as labor migrates to other growing sectors. Some 3.6 million people work in Figure 1.2. Share of agriculture in GDP and agriculture in Romania--about 54 percent employment in Romania, 1990­2002 of the number of people working in % 50 agriculture in all EU-15 countries. The agricultural labor forces in just two Eastern 40 European countries--Poland and Romania 30 (6.3 million)--is close to the total number 20 of people employed in agriculture in the 10 EU-15 (6.7 million). Even if the 3.6 million agricultural workers in Romania 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 were compared with a broader EU statistic, Share in GDP Share in total employment the "total number of persons working on Source: National Institute for Statistics. agricultural holdings" in the EU-15, the number of Romanian agricultural workers would still be equivalent to 27 percent of total agriculture-related labor in the EU-15. Given the huge size of the agriculture labor force in Romania (35 percent of the labor force), it is remarkable that the sector contributed just 11.7 percent to GDP in 2003. 1.2 Agricultural Growth Agricultural growth in Romania can be measured in several ways. One Figure 1.3. Growth in industry and agriculture in Romania, measure is based on the system of 1990­2003 national accounts. The agricultural 1990=100 product index is usually calculated 120 from the estimated percentage share of agriculture in GDP (or gross value- 100 added in agriculture). An alternative measure of agricultural growth is 80 based on Gross Agricultural Output (GAO), which reflects total agricultural production, including 60 intermediate consumption by producers. GAO is derived from the 40 system of agricultural accounts. The 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 corresponding index is usually GVA in agriculture GVA in industry GAO different from the agricultural product index obtained from the system of Source: World Bank calculations using National Institute of Statistics data. national accounts (figure 1.3 and table 1.1). 2 Table 1.1. Economic and Agricultural Growth in Romania, 1980­2003 (1990 = 100) Total gross Gross value- Gross value-added Gross Agricultural Year GDP value-added added in industry in agriculture Output 1980 93.7 106.6 140.6 100.0 97.9 1985 109.5 104.1 116.5 115.7 119.2 1989 105.9 102.6 120.1 103.3 103.0 1990 100.0 100.0 100.0 100.0 100.0 1991 87.1 88.2 87.2 88.1 100.8 1992 79.4 80.3 75.2 76.5 87.4 1993 80.6 83.0 76.0 87.4 96.3 1994 83.8 86.5 78.6 89.9 96.5 1995 89.8 92.4 83.0 94.2 100.8 1996 93.4 96.0 88.7 90.2 102.1 1997 87.7 89.0 81.6 89.1 105.6 1998 83.5 84.2 77.3 79.6 97.7 1999 82.5 83.8 76.1 82.2 101.6 2000 84.3 85.6 80.6 66.5 86.6 2001 89.2 91.4 84.2 84.1 106.2 2002 93.6 95.9 89.2 79.7 102.9 2003 98.9 100.6 93.3 82.1a 106.0 a. Includes forestry and fish breeding. Source: All indices except GAO come from Romania's system of national accounts. GAO is derived from agricultural accounts. Agricultural output (as measured by GAO) has remained roughly constant since 1980: there was neither a marked increase during the 1980s under central planning nor a sharp decline after 1989. To the extent that agricultural output did decline, the downward phase began in 1985 and thus was not directly attributable to transition disruptions. GAO hit lows in 1992, when cooperative farms were broken up, and fell even farther in 2000, as the result of an extreme drought. Since then it has recovered slightly. The overall economy also declined until 1992. It recovered significantly through 1996 before decreasing again until 1999. Since 1999 it has grown continuously. During the first 10 years of the transition, agricultural output (measured as gross value-added in agriculture) declined less than industrial output. Since 2000 the industrial sector has enjoyed continuous growth, while the agricultural sector has experienced significant fluctuations due to its sensitivityto droughts. 3 1.3 Developments in Primary Agriculture 1.3.1 Product Mix The current structure of agricultural output looks quite similar to that of the Figure 1.4. Crop and Livestock Mix in Romania, 1989­ 2003 1990s--60 percent crops and 40 percent livestock (figure 1.4 and table 1.2). percent of output 70 During the 1980s the share of livestock 60 50 reached 50 percent of total output, before 40 quickly reverting back to the proportions 30 of the 1950s and 1960s. Over the long 20 10 term, the Ministry of Agriculture, Forests 0 and Rural Development (MAFRD) 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Crops Livestock would like to see a larger share (45 Source: World Bank calculations based on National Institute for percent) of livestock. Statistics. Table 1.2. Cropand livestock mix in Romania, 1950­2004 (percent of total) Year Crops Livestock 1950 65 35 1960 66 34 1970 62 38 1980 55 45 1987 50 50 1990­2000 (average) 60 40 2001 64 36 2002 58 42 2003 58 42 2004 61 39 Source: Ministry of Agriculture, Forests and Rural Development. The cropping pattern shows more systematic changes over time. The main Figure 1.5. Cropping patterns in Romania, 1990­2003 crop groups in Romania are cereals and percent of sown legumes, which consistently account for area more than 60 percent of cropped area 100% (figure 1.5). The share of land planted with cereals and legumes increased by 9 80% percentage points between 1990 and Cereals 60% 2001 (from 62 percent to 71 percent). Technical The area under technical crops Fodder 40% Vegetables increased by 6.6 percentage points (from about 9.7 percent in 1990 to 16.3 20% percent in 2003). These increases have 0% been made possible by the decrease in the second- largest user of sown land-- 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 fodder crops, whose share dropped from Source: National Institute of Statistics data. 21 percent in 1990 to 11 percent in 2001. 4 1.3.2 Productivity and Yields Reported yields in Romania are much lower than yields in the EU- Figure 1.6. Crop yields in Romania as a percentage of yields in 15 or the new member states (table the EU-15 (average 2000­03) 1.3). Yields of most commodities percent of EU-15 for which comparable data are 70.0 available (cereals, rape seed, milk, 60.0 wine, and sugar) are at most 50 percent of the corresponding EU-15 50.0 yields (figure 1.6). Productivity in 40.0 sugar is particularly low. Sugar in Romania is produced from sugar 30.0 beet, yields of which compare very 20.0 poorly with those in the European Union (average per hectare yields 10.0 are 19.8 tons in Romania, 38.4 tons 0.0 in the new member states, and 55 Cereals Sugar Rape seed Sunflower Milk Wine per hectare in the EU-15) 2000- Source: World Bank calculations using Eurostat and NIS data 2003. Moreover, the white sugar value of Romanian sugar beet is substantially lower than that in the new member states. In 2000­ 03 Romania produced 0.21 million tons of sugar from 2.7 million tons of sugar beet, a conversion coefficient of 7.8 percent.31 This figure compares poorly with conversion rates in the Czech Republic, Hungary, and Poland of 13­16 percent. Romania produces less than 2 tons of white sugar per hectare of sugar beet--23 percent of the 8.8 tons produced in the EU-15 (table 1.3). 31FAO Sectoral Report 2002. 5 Table 1.3. Yields of selected commodities in Romania, Eastern Europe, and the EU-15 (averages for 2000­03) Sugar Rape seed Cereals Sugar beet (100 Sunflower, Milk, Country (100 kg/ha) (t/ha) (t/ha) kg/ha) (100 kg/ha) (kg/cow) Wine, (hl/ha) Romania 16.1 2.0 1.5 12.6 10.6 3,025 23.5 EU-15 55.0 8.8 n.a. 29.9 16.7 6,020 50.9 Bulgaria 28.9 n.a. n.a. 11.6 6.0 3,580 30.5 Czech Rep. 41.9 7.1 40.0 23.2 21.8 5,467 26.5 Hungary 38.7 6.5 38.0 16.4 18.5 5,982 33.8 Latvia 22.4 4.4 n.a. 15.6 n.a. 3,990 n.a. Lithuania 27.6 4.5 n.a. 15.7 n.a. 3,896 n.a. Poland 29.3 5.4 38.0 21.6 15.4 3,945 n.a. Slovak Rep. 33.6 4.1 n.a. 17.0 18.4 4,835 20.7 Slovenia 49.3 5.4 n.a. 23.3 11.9 4,864 41.5 n.a. Not available Source: Data for Romania for all yields except sugar are from National Institute of Statistics. Sugar yield for Romania is estimated at 10 percent of sugar beet yield (based on FAO Sectoral Report, 2002). Data on EU-15 and candidate countries for all yields except sugar beet and Hungarian milk are from Agriculture in the European Union: Statistical and Economic Information 2004, European Union, Directorate General for Agriculture, Brussels, February 2003. Milk yields for Hungary are from Agricultural Situation in the Candidate Countries: Country Report for Hungary, European Union, Directorate General for Agriculture, Brussels, July 2002. Sugar beet yields for candidate countries are from Eurostat, Statistics in Focus, 19/2000. It is not surprising that yields in Romania are substantially lower than yields in the Figure 1.7. Ranking by Yields; EU-15, new member EU-15. But comparison with the new states, and Candidate Countries 2000-2003] member states also puts Romania in a very weighted rank unfavorable light. In addition to achieving 10 the lowest sugar beet and white sugar yields 8 among the candidate countries, Romania has the lowest milk yields and is fourth 6 from the bottom among 10 countries in 4 terms of cereal yields (only Bulgaria, Latvia, and Lithuania have lower yields). 2 An aggregate weighted ranking of EU-15 0 and the new member states by yields of EU-15 Hun Cz Svn Pol Svk Lat Lit Bul Rom Source: Eurostat milk, cereals, and sugar (as reported in table 1.3) puts Romania at the very bottom of the scale, together with Bulgaria (figure 1.7). Land productivity expressed by gross agricultural output per hectare is about 500­700--less than 30 percent of productivity levels in the EU (2,200 per hectare in 2002). Low land productivity is combined with very low levels of labor productivity, which averaged about 1,600 per worker in 2002--just 7 percent of EU levels of 22,600 per worker. 1.3.3 Mechanization and Use of Chemicals The availability of farm machinery has not declined significantly since 1989 (table 1.4). The number of tractors, mechanical ploughs, and cultivators was greater in 2003 than it was in 1989 6 and in the crisis years of 1990 and 1991. The tractor sufficiency ratio improved as the ratio of arable land to tractors decreased, from 62 hectares per tractor in 1989 (and 74 in 1990) to 55 in 2003. Only the number of grain combines decreased sharply, despite the continued dominance of grain in Romanian agriculture: in 2003 it stood at 40 percent of the number of grain combines in 1989 and at 65 percent of the number in 1990­91. Although the number of cultivators increased in 2002, by 2003 it has just recovered to its 1989 level. Table 1.4. Stock of agricultural machinery in Romania, 1989­2003 (thousands) Tractors Ploughs Cultivators Seeders Grain Arable area per combines tractor, ha 1989 152 83 35 44 62 62 1990 127 73 27 36 41 74 1991 133 73 24 35 38 71 1992 147 81 23 37 37 64 1993 158 96 24 44 37 59 1994 161 104 23 48 38 58 1995 163 107 23 50 38 57 1996 165 114 24 52 38 57 1997 163 115 28 54 36 57 1998 165 122 28 56 33 57 1999 164 123 28 56 31 57 2000 160 123 26 58 28 59 2001 164 127 26 60 26 57 2002 169 131 27 62 25 56 2003 169 132 27 63 25 55 Source: National Institute of Statistics, Statistical Yearbooks 1990­2003; Ministry of Agriculture, Forests and Rural Development. In contrast, application of fertilizers and herbicides collapsed between 1989 and 2002, when total quantities decreased 70 percent (table 1.5). The sharpest decrease was recorded for potassic fertilizers, whichdeclined 90 percent between 1990 and 2002. Table 1.5. Use of mineral and organic fertilizers in Romania, 1989­2003 Fertilizers used (000' Total NPK, Nitrogenous Phosphatic Potassic Organic fertilizers of tons of active (manure) (millions substance) of tons) 1989 1159 666 329 164 41.6 1990 1103 656 313 134 24.8 1991 464 275 145 44 16.9 1992 422 258 133 31 15.8 1993 538 346 165 27 17.1 1994 479 313 149 17 16.9 1995 470 306 149 15 17.4 1996 435 268 153 14 17.9 1997 404 262 129 13 16.5 1998 383 254 114 15 15.8 1999 305 230 63 12 16.7 2000 342 239 88 15 15.8 2001 369 268 87 14 15.3 2002 362 239 73 14 15.7 2003 362 252 95 15 17.3 Source: National Institute of Statistics. 7 1.4 Trends in the Agri-Food Industry The food industry is an important sector in the Romanian economy, accounting for about 17 percent of the output of all manufacturing industries, 9 percent of total national production, and 7 percent of gross value-added in 2002 (table 1.6). Information on labor in the food industry is limited to the number of employees.32 Table 1.6. Share of food industry in production and employment in Romania, 1990­2003 Share of food industry in Share of food industry in production ( percent) employment ( percent) Number of Gross value- employees Year Manufacturing National added Manufacturing National (thousands) 1990 16.8 10.0 6.5 7.5 3.2 259 1991 17.7 9.5 6.1 8.0 3.4 256 1992 18.0 9.7 6.4 8.6 3.5 243 1993 22.9 9.9 7.3 9.8 3.8 255 1994 20.0 10.2 7.7 10.1 3.8 244 1995 20.2 10.4 7.9 10.5 3.8 231 1996 20.9 11.6 9.2 10.2 3.7 219 1997 20.4 12.3 9.4 10.5 3.8 213 1998 23.1 10.1 6.8 11.2 4.0 214 1999 18.7 9.8 6.9 11.3 3.9 187 2000 20.3 10.3 7.6 10.8 3.7 169 2001 17.9 9.9 8.2 10.1 3.5 160 2002 16.5 8.9 7.2 10.2 3.5 163 2003 16.6 10.2 3.5 162 Source: National Institute of Statistics Statistical Yearbook 1991­2004. The food industry accounts for 10 percent of the labor force in manufacturing industries and 4 percent of the national labor force. The food industry's share of labor is much lower than its share of production, indicating that it enjoys substantially higher labor productivity than the average industry. The number of employees in the food industry decreased by nearly 40 percent between1990 and 2003, roughly in line with the decrease in the national economy and somewhat more thanthe decrease in the manufacturing industries (where the number of employees dropped 55 percent). The food industry has achieved robust growth in recent years, both in absolute terms and relative to the rest of the manufacturing industries (figure 1.8). The volume of production and gross value-added in 2002 reached about 140 percent of 1989 levels. In contrast, the manufacturing industries shrank to about 80 percent of their 1989 level. Following the initial transition-triggered decline, the food industry bottomed out in 1993. Since then its output has risen by a spectacular 60 percent. 32Figures exclude the self-employed. However, the proportion of the self-employed in manufacturing industries--for which full labor data are available--appears to have remained fairly constant over time. 8 The combination of growing output and a decreasing labor force has had a strong impact on productivity in the food industry, which more than tripled between 1990 and 2002 (figure 1.9). Labor productivity also increased in all manufacturing industries (at a slower rate), but only because the decrease in labor (45 percent between 1990 and 2002) outstripped the decrease in production (24 percent). Figure 1.8. Growth of production in food and Figure 1.9. Changes in output, labor, and manufacturing industries in Romania, 1989­ productivity in the food and manufacturing 2002 industries in Romania 1990 - 2002 percent of 1989 percent 140 250 120 200 100 150 80 100 60 Output 40 50 Labor Productivity 20 0 0 -50 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 -100 Food industry Manufacturing industries Food Manufacturing Source: World Bank calculations based on National Source: World Bank calculations based on National Institute Institute of Statistics data. of Statistics data. 1.5 The Evolution of Agri-food Trade Food and agricultural products have traditionally played an important role in Romania's foreign trade. These products were particularly important during the early transition period, and they have increased in importance in recent years. Romania has been a net importer of agri-food products since 1990. Net food imports peaked in 2002, at more than $1.27 billion (figure 1.10). Agriculture contributed only 3.2 percent to total exports in 2003, while agricultural products represented 7.2 percent of imports. Romania's major trading partners for agri-food products are members of the European Union and the Central European Free Trade Area (CEFTA) (table 1.7). The European Union is by far the most important destination for exports (close to 55 percent), followed by the CEFTA countries (nearly 15 percent). The European Union provides about one-third of Romania's agri- food imports, while about one-quarter of total agri-food imports originate from CEFTA countries, including Hungary, the largest single supplier of food and agricultural products (more than 15 percent). Brazil is another significant source of imports, providing nearly 15 percent of total imports and about 80 percent of Romania's imported sugar. Since the 2001 drought, Brazil has also exported large quantities of maize to Romania. 9 Table 1.7. Romania's Agri-foodExports and Imports, 2003 (percent) Source Exports Source Imports EU 57.1 EU 32.9 CEFTA 18.9 CEFTA 25.9 CIS, of which: 3.8 CIS, of which: 6.7 Moldova 3.0 Moldova 2.3 Russian Fed. 0.5 Russian Fed. 3.9 Ukraine 0.2 Ukraine 0.3 Turkey 4.6 Turkey 3.1 United States 1.3 United States 5.4 EFTA 0.4 EFTA 1.5 Canada 0.1 Canada 2.4 Syria 4.1 Brazil 8.6 Pakistan 2.4 Ecuador 1.7 Saudi Arabia 1.1 China 1.7 Bosnia and Herzegovina 1.0 Thailand 1.1 Other 5.1 Other 9.0 Source: National Institute of Statistics data. The main Romanian food and agricultural products exported in 2003 Figure 1.10. Agri-food trade balance, 1990­2003 were live animals, oilseeds, 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 vegetables, milk and dairy products, 0 honey, fruit, wine, oils, canned fruit -200 -99 and vegetables, bakery products, and -166 -267 -311 cereals. The major imports were -400 -365 cereals, meat, tobacco, sugar, fruit, -600 -525 -578 -594 -638 citrus, and coffee. This composition of -800 -706 -773.5 products reflects the inadequate -1000 international competitiveness of the -1200 -1129 Romanian food and agricultural sector, -1170 -1269 especially food processing. The share -1400 milion US$ of processed products exported is Source: National Institutes of Statistics data. slowly increasing, but it still remains below the levels achieved by other EU accession candidates. Romanian food processing shows little competitiveness even within the domestic market. This lack of competitiveness contributes greatly to the fact that the food and agriculture trade balance has constantly remained negative (figure 1.10). 1.6 Trends in Food Consumption The per capita caloric value of food consumption in Romania hardly changed between 1990 and 2002, remaining at about 3,100 calories a day. The structure of food consumption also remained fairly constant, with about 25 percent of caloric intake coming from animal products. Food consumption accounted for 53 percent of household expenditure in 2003. Farmer households spent substantially larger shares of their disposable income on food (69 percent) than salaried workers (45 percent). The relatively large share of expenditure on food reflects farmers' low incomes, which are about 60­70 percent those of salaried employees and have been declining. 10 Consumption of food products produced in the household plays a very important role in Figure 1.11. Consumption of food products farmer families, representing 60 percent of produced in the household by farmers' and salaried employees' households total cash and noncash spending on percent of total consumption (figure 1.11). By comparison, in income 70 households of salaried employees, this imputed component of consumption 60 expenditure is about 15 percent. The 50 importance of consumption of food products 40 raised by the household is further underscored 30 by table 1.8, which shows that farmer 20 households consume more than 50 percent of 10 cereals and most livestock products 0 (excluding beef) produced on their farms. 1995 1996 1997 1998 1999 2000 2001 2002 2003 Although this figure has declined over time, it Farmers Employees nevertheless remains very high compared with Source: National Institute of Statistics data. European averages. Table 1.8. Consumption by Farmer Households of Agricultural Products Produced on their own farms, 1993 and 2003 (percent of production) Crop 1993 2003 Decrease over time Wheat and rye 67 53 Sugar beets 26 12 Potatoes 87 45 Beef 36 30 Poultry 95 45 Milk 73 63 Eggs 88 65 No change over time Sunflower 3 3 Maize 72 73 Increase over time Barley 33 44 Wool 43 68 Source: IEA calculations based on Balance of Agricultural Products at Producer Level 1993­2003, National Institute of Statistics. 11 Chapter 2 The Policy Framework for Agriculture and Food In the early 1990s, after its first democratic elections, Romania embarked on a process of general economic reform that included specific and ambitious reforms in the agriculture and food sector. The reform program envisaged the transformation of agriculture into a sector based on the principles of private ownership of land and other agricultural property. The aim was to create a market-oriented and internationally competitive agricultural sector. Progress was modest until 1997. Since then Romania has made significant, if sometimes erratic, progress in implementing and maintaining the sectoral reform program. In 2000 the substance of reform began to shift toward measures aimed at EU accession. Overall progress has been slower and the results less consistent than in other Central European countries in the final phases of the process. Further substantial reform and changes in agricultural policies are still necessary before Romania can proceed with accession to the European Union. 2.1 Sectoral Reforms in Aggregate: Process and Perspectives Reform of the Romanian agriculture and food sector and the evolution of the agricultural policy framework have passed through several phases since the beginning of the transition. During the early years (up to 1997), important sectoral reforms were initiated, but their implementation was slow. The most important sectoral reform during this period was the 1991 Land Law, which resulted in the restitution of land ownership and land use rights to private holders and effectively dismantled the cooperative farming system. Policies in this period aimed to minimize the difficulties created by the changing economic environment both inside and outside Romania; relatively little attention was paid to the need to reform basic institutions and enterprise structures or to adjust the policies themselves to the above concept. The support program in agriculture was heavily biased toward large agricultural units and almost exclusively benefited state-owned farms. Small household farms could receive subsidies only through integrators (state marketing intermediaries), which purchased small farmers' output at fixed state-guaranteed prices, which could be attractive or not depending on the point in time and the location. As a result, input and output markets remained highly distorted. Driven by economic crisis and a growing consensus that more sustainable reforms had to be put in place, in 1997 Romania adopted a radical reform package that marked a fundamental adjustment of economic policies. This package, which affected the entire economy, can be viewed as the first step toward the current policy framework in the agriculture and food sector. The 1997 Stabilization Plan aimed to achieve greater macroeconomic stability and substantially reduce inflation by instituting a restrictive monetary policy and limiting the budget deficit. The plan included the following main elements: · price liberalization of products and services (bothgenerally and for agriculture) · liberalization of the exchange rate regime · reduction of import tariffs 12 · removal of subsidies (including the phasing out of directed credits for agriculture) · promotion of foreign investment · privatization, restructuring, or liquidation of loss-making state-owned enterprises (including former state-owned farms and agro-processing facilities). Implementation of the Stabilization Plan accelerated overall economic reforms as well as specific reforms in agriculture. Agricultural price controls were eliminated, tariffs were lowered, directed credits were discontinued, and the privatization process was jump-started. The emphasis on hard budget constraints and increased financial discipline aimed to create the conditions for the development of a sound and sustainable sector. Agricultural reforms supported by the World Bank Agricultural Sector Adjustment Loan (ASAL) resulted in a new form of support--the input voucher system--designed to redirect subsidies away from state farms and increase farm output through better access to inputs. The ASAL also led to the privatization of some state input suppliers and Banca Agricola, as well the privatization of state farms, beginning in 2000. The development of agricultural policy remained uneven, however. The voucher scheme came to be seen more and more as a social welfare scheme and was blamed for the unsatisfactory increases in agricultural production. To deal with this problem, in 2000 the government adopted a new policy framework, aimed at boosting production by redirecting support to larger farms. The policy framework has since remained fluid, with the system characterized by frequent changes, annual bargaining, and unpredictability. The importance of completing the remaining tasks of transition--privatizing state-owned land, improving competitiveness, and developing a market-conforming institutional framework--has become more apparent in recent years. Concerns about the social problems associated with the necessary reduction in the huge labor force in agriculture and eventual EU membership also need to be addressed. Given the complexity of agriculture and the problems of rural development in Romania, there is clearly a need for increased attention to agricultural and rural policies. The policy response to the demands of agriculture for more support and the need for more attention to social problems, however should take an appropriate form. They must not create new sources of inefficiencies or increase disharmonization with the requirements of EU accession. Agricultural policy and support programs must be determined entirely with the goals of developing a market-based institutional framework that conforms to EU requirements in mind. The recommended agricultural policy framework and support system would focus on facilitating the required structural changes by pursuing the following objectives: · Quickly complete the most important pending transition tasks, such as consolidating farms, privatizing land, and creating functioning land markets. · Facilitate the consolidation of the small-scale farming sector by creating rural nonagricultural job opportunities that would reduce the size of the agricultural work force and increase labor productivity. · Use budgetary support to agriculture more effectively by refocusing support programs on efficiency enhancement rather than price support and export subsidies. 13 · Integrate the various instruments of government intervention in the sector, especially the various support programs, into a more consistent and predictable framework, including provision of a reliable orientation for farmers until the introduction of the Common Agricultural Policy (CAP). · Complete the preparation for the timely and effective implementation of CAP measures in 2007, learning from the experiences of the new member states. · Create the institutions required for the timely and proper implementation of support policies after EU accession. · Clearly separate rural social measures (such as measures to reduce social tensions and provide social protection in rural areas) from the major instruments of agricultural policy aimed at improving efficiency and competitiveness. 2.2 The Macro Environment: Price and Support Policies As a result of overall macroeconomic reforms, Figure 2.1. Rankings of Countries in Central & Eastern Europe in Terms of World Bank Agricultural Policy & Institutional Reform Romania's agricultural sector Index, 2003/2004 now operates in a macroeconomic and trade 0 2 4 6 8 10 environment with direct links to world markets. The level of Estonia* 9.6 policy and institutional reforms Slovenia* 9.6 in agriculture however, is lower Czech Rep* 9.4 than in the new EU member states or in neighboring Hungary* 9.4 Bulgaria. According to the Latvia* 9.4 World Bank agricultural policy Slovak Rep* 9.2 rating system (based on a 1­10 scoring system, in which 1 Poland* 8.8 represents a centrally planned Lithuania* 8.8 economy and 10 represents a Bulgaria 8.6 fully developed market economy), Romania achieved a Romania 8.2 score of 8.2 in 2004, up from 6.0 Croatia 7.8 in 1997. 33 This constitutes Ukraine 6.2 significant progress in recent years, but it still puts Romania Russia 6.2 behind many of its neighbors Moldova 6 (figure 2.1). Belarus 2.6 Note: Scores for EU new member states (*) represent the 2003 scoring prior to accession. Score levels: 1 = centrally planned economy, 10 = fully developed market economy. Source: World Bank 2004 and 2005. 33For a discussion of the methodology involved in this ranking system, see C. Csaki and J. Nash, "The Agrarian Economies of Central and Eastern Europe and the Commonwealth of Independent States: Situation and Perspectives 1997," World Bank Discussion Paper 384, 1998. 14 Current support programs (applied since 2002) constitute an inconsistent package of instruments and eligibility criteria that creates distortions. Before 2005 the MAFRD had made the removal of these inconsistencies a key priority in the ongoing evolution of the agricultural policy framework toward CAP­type instruments. In reality, however, Romania's agricultural policy instruments and related institutions do not conform to the CAP. Although pre-accession agricultural policies and instruments do not have to be identical to CAP instruments, their convergence with EU CAP practices would facilitate the adjustment of the agricultural sector to the post-accession environment. 2.2.1 Prices and Terms of Trade in Agriculture Inflation in Romania peaked at more than Figure 2.2. Annual inflation in Romania, 1991­2004 250 percent in 1993, declining sharply thereafter (figure 2.2). A particularly 250.00% positive development is the continuing 200.00% decline in annual inflation rates since 1998, with consumer prices rising by 150.00% 11.9 percent in 2004 (down from 59 percent in 1998). Romania seems to be 100.00% on the road to macroeconomic 50.00% stabilization, although there is still a considerable way to go until it reaches 0.00% internationally acceptable inflation rates of 4­6 percent a year. 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Source: National Institute for Statistics. The development of prices for agricultural inputs and outputs is similar to trends in some other countries in Central and Eastern Europe. Figure2.3. Real Agricultural Prices and Terms of Trade During the initial phase of transition, in Romania, 1990­2003 primary producers experienced a sudden cost-price squeeze, because input 100input 700 prices--in both nominal and real terms-- 90 terms-of-trade increased more sharply than output 600 80 100] = prices. Due to the more liberal nature of 500 70 60 their markets and significant substitution [1990 400 50 of domestically produced inputs by 300 40 [1990 (often technologically more advanced) index 30 imported inputs, prices quickly rose to 200 = price 20 100] international levels.34 After having 100 10 overcome the initial shock of 1990/91, 0 0 real prices for agricultural inputs 199091 92 93 94 95 96 97 98 99200001 02 03 balanced out at levels twice as high as inputterms-of-trade inputprices outputprices those prevailing at the beginning of the decade. At the same time, prices paid to Source: World Bank calculations based on National Institute for farmers remained relatively low. After Statistics. the complete liberalization of prices in 34 According to experts, the effect of substitution by technologically more advanced inputs, such as improved pesticides and fertilizers, has been mirrored only by minor (inappropriate) adjustments in the reference basket used to measure price developments. 15 1997, these prices decreased to about 80 percent of the real prices received at the beginning of the decade. As in other countries, agricultural prices in Romania are a sensitive issue in public discussions. Many publications reiterate that Romania's farmers suffer from constantly worsening "price scissors" and terms of trade, with input prices increasing by a factor of 3,200 and output prices increasing by a factor of 1,200 over the past decade. While these figures are correct, the public debate pays hardly any attention to the fact that these figures are nominal not real. Analysis of real price developments reveals that (except for the significant price adjustments in 1990 and 1997) no exceptional price scissors effect is observed (figure 2.3). Meaningful discussion of recent developments in agricultural prices and the terms of trade has to take inflation into consideration. Because of overreaction on domestic markets in 1990/91 in response to the initial shock of transition, the choice of a reference period is very important in analyzing changes in the agriculture sector in Romania. The year 1990 is usually taken as the reference period for indices. Price dynamics were significant in 1990/91, when input prices jumped sharply (figure 2.2). After 1991 input and output price variations occurred at almost identical rates (or clearly mirrored policy changes such as the 1997 liberalization of output prices). In certain years (for example, 1993) agricultural output prices rose even more than input prices. Thus selecting a reference year other than 1990 would have led to a less pessimistic assessment of developments in the sector.35 Due to the still inadequate (regional and thematic) coverage of statistical data collection, price data tend to overestimate the adverse effects on the agricultural sector, for several reasons. A regional price monitoring system is not in place, and farmers have incentives to understate output prices. Adjustments of the input price monitoring basket for input substitution and technical progress potentially lead to a bias in the interpretation of input price developments. 2.2.2 Agricultural Support Systems Romania's agricultural policy has continually relied on the application of direct and indirect payments to support the incomes of primary agricultural producers. However, although the fundamentals have remained relatively unchanged, the agricultural support policies have undergone repeated changes and adjustments since 1997. The support system in effect was rewritten each year, with additional changes sometimes introduced in the course of a given year, as they were between2002 and 2004. Romania's agricultural support policy still explicitly favors large-scale farming operations. A government ordinance adopted in June 2001 stipulated that only relatively large farms--those with at least 110 hectares of crop land or 15 dairy cows (legally defined as "commercial" farms)--were entitled to the full range of agricultural subsidies.36 Farms that did not meet the stipulated size thresholds (legally defined as "family farms") were not entitled to any subsidies (other than free extension services). 35The relative prices received by agricultural producers in 2000­01were 40 percent what they were in 1990. This means that the (inflation-adjusted real lei) revenue needed to buy one tractor or one ton of fuel in 1990 could buy just 0.4 of a tractor or 0.4 of a ton of fuel in 2000­01 (discussion should, of course, focus on the entire basket of farm inputs rather than a specific input). Compared with 1991, however, the situation is not bad at all: the purchasing power of farm revenue in 2000­01 is about what it was in 1991, and a given level of farm revenue could buy a much larger basket of inputs in 1992­97 than it could in 1991. The terms of trade in 2000­01 were about half their level in 1994, which means that farm revenue in 2000­01 buys about half of what it bought in 1994. 36 The minimum thresholds for a "commercial" farm are 110 hectares for grain farms, 5 hectares for orchards and 16 Intense public pressure and unfavorable reaction from the European Union led Parliament to amend this ordinance in April 2002 and to add a provision that allowed (unspecified) support payments to family farms willing to increase their market sales. Although the law opened the door to eliminating the large-farm bias in subsidies, support to small farms remained very limited. Moreover, Parliament did not intervene to eliminate the complex documentation and formal registration requirements introduced as part of the eligibility criteria, which the vast majority of Romanian farmers cannot meet. The farm size thresholds introduced are much higher than those foreseen by CAP eligibility criteria, and the Romanian definition of "farm operation" for the purposes of subsidy payments is not harmonized with the EU definition. Until the end of 2002, fewer than 15,000 farms were registered by the MAFRD in the framework of the new legal requirements, of which 12,918 were commercial farms and 1,721 family farms. By the end of 2004, the number had increased substantially, to 288,238 farms, 19,527 of which were commercial. Registered farms cultivated 3.2 million hectares of arable land in 2002 and 6.2 million hectares in 2004, about two-thirds of all arable land in Romania (9.4 million hectares). The introduction of area-based cash payments for small farmers has improved the balance. The main support instruments applied in the past few years (with changing emphasis) can be divided into direct income support measures and indirect support programs. Direct income support measures include price supplements, input support, cash transfers to small farmers, investment support, other direct payments or compensation to farmers. Indirect support programs include support for general agricultural services and land reclamation. The 2005 MAFRD budget projects total support of $797 million, an increase of about $450 million 2003 (table 2.1).37 Due to the change in government, however, the budget is still being refined, and a final parliamentary decision on the agricultural support systems is expected by mid-2005. The detailed MAFRD budget is given in annex 1. vineyards, and 2 hectares for vegetable farms. For livestock farms the threshold is 15 dairy cows, 50 cattle, or 100 pigs. 37Figure includes the national contribution to allocations under the Special Accession Programme for Agriculture and Rural (SAPARD). 17 Table 2.1. Structure of agricultural support programs in Romania, 2005 Lei (billion) Percent Direct Support Measures 22,150.6 82 Price Supplements 6,131.8 23 Input Subsidies 3,878.2 14 Cash Transfers to Small Farmers 5221.8 19 Investment Supporta 6,618.8 24 Other direct payments 300.0 1 Indirect Support Measures 2,161.8 18 General Agricultural Support 961.8 4 Measures Land Reclamation 1,200.0 4 MAFRD administration 2,852.5 11 Total 27,164.9 100 a. Includes national budget share in SAPARD allocation. Source: MAFRD, 2005. A summary version of the structure of the 2005 agricultural support budget is shown in table 2.1. Of the various support programs, direct support measures account for 82 percent, among which commodity price supplements and financial support for inputs that do not conform to the CAP are the two main categories, accounting for 41 percent of total government support to agriculture. Some details of the various programs are described below. Direct Income Support Measures Price supplements for crop and livestock products. With a budgetary allocation of about lei 6 trillion (23 percent of total support for agriculture), price supplement programs are the most significant single item in the MAFRD budget. According to the officially declared objectives, these supplements are provided to raise the output and quality of farm commodities. The list of eligible commodities is determined periodically by the MAFRD. Upon filing an application (at the agricultural county directorate) and supplying a proof of sale to a registered trader or processor, the primary producer (registered commercial or family farm) is paid the price supplement for the quantity sold of each eligible crop or livestock product. It is doubtful that the price supplements contribute to achieving the officially declared goals. Only relatively large registered farms are eligible for milk price supplements, while 95 percent of milk is produced by non-registered household farms. It thus seems that rather thanboosting output and farm incomes, price supplements serve as a general measure for channeling budget resources to large-scale farms. Financial support for inputs. Subsidization of farm inputs was a major form of support to agriculture before 2000, when the voucher system was in place. The voucher system targeted family farms and was subsequently blamed for having insufficient impact on agricultural supply. The current input supply program includes one large program subsidizing the price of diesel fuel (accounting for 11 percent of MAFRD support programs) and the old programs of seed subsidies. In the spring of 2005, the system of cash transfers was changed to one of vouchers, which can be used to buy inputs (seeds, fertilizers, pesticides). 18 Cash transfers for small farmers. In August 2003 the government decided to pay lei 2 million per hectare to farms of less than five hectares and the same amount for the first five hectares of larger individual farmers (land used in formal associations is not eligible for this payment). The total budgetary allocation amounts to 19 percent of the 2005 MAFRD budget. Introduction of this support reduced some of the imbalances in the support of small versus larger farming units. The support represents the second-largest item in the MAFRD support budget and is the main form of support to small farmers. The per hectare allocation was raised to lei 2.5 million in 2004, but an allocation of lei 1.5 million per hectare has been budgeted for 2005 in the form of vouchers for previous autumn crops and spring crops (except maize, oats, and fodder crops). Investment support. Investment support is a minor component of the current support program (lei 700 million, or 4 percent of the support budget). It should be used on a much larger scale during the critical years of preparations for EU accession. Currently, only 45 percent of this support is provided as a grant for investment in machinery. These funds are accessed mainly by legal entities that are able to cover the remainder of the cost of machinery from other sources. Adding the national contribution to allocations under the Special Accession Programme for Agriculture and Rural (SAPARD) to this budget position increases its share to 24 percent. However, the take-up of the SAPARD remains unsatisfactory. Allocations to this type of investment support therefore represent mainly commitments rather than disbursements. Indirect Support Programs Indirect support programs include support for general agricultural services, land reclamation, and MAFARD administration. Support for general agricultural services includes several specific programs, such as the sanitary-veterinary strategic program, animal breeding, and research and development, which together receive 4 percent of total MAFRD support budget. Four percent of the MAFRD support budget is allocated to land reclamation and acid soil improvements. Another 11 percent is allocated to personnel, material, and capital expenditure of the MAFRD administration. 2.2.3 Level of Domestic Support Like the mode of intervention, the level of Figure 2.4. Measures of Agricultural Support 1991- overall support to agriculture fluctuated 2002 widely during the transition period (figure 2.4). The share of farm support in total state budget and in GDP has declined steadily since 1992. The level of support as expressed by the producer support estimate was relatively modest during most of the 1990s, but it seems to be higher since 1998 than previously. The liberal policies introduced in 1997 (when the producer support estimate dropped to a 10-year low of 3 percent) were short-lived, and support to agriculture has increased significantly since then. The average producer support estimate during 1991­96 was 13 percent; after 1998 it rose to 20­25 percent. 19 The level of support varies significantly by commodity (figure Figure 2.5. Nominal and Effective Protection Calculations in 2.5). Prices for all main agricultural Romanian Agriculture, 2004 outputs are above their world market price equivalents (as Wheat Barley Maize Sunflower Potatoes Milk Beef Pork Poultry measured by the nominal protection 200 indicators for outputs). Price levels for inputs to agricultural production 150 also remain above prices that would occur in the absence of policy 100 interventions. The import tariff regimes and their effect on domestic [%] 50 prices for imported inputs translate into an implicit taxation of farmers' 0 input costs. The net effect on farm -50 incomes has been measured based on the effective rate of protection. -100 The current agricultural market and trade regime translates into an NRP Outputs NRP Inputs ERP implicit subsidization of agricultural Source: World Bank calculations. incomes for only about half of the analyzed activities (barley, maize, potatoes, pork); for producers of wheat, sunflower, milk, beef, and poultry, the aggregate impact corresponds to an implicit taxation of income from these activities.38 2.2.4 The Special Accession Programme for Agriculture and Rural Development (SAPARD) As a part of pre-accession support by the European Union, agriculture and the rural sector in Romania are eligible for support under the SAPARD. This program provides grant support for investments in agriculture, food processing, and rural development. As foreseen in the general conception of the program, the SAPARD provides public grants that finance up to 50 percent of total investment; 75 percent of the funding for the program comes from the European Union, and comes 25 percent from the national government. Investors must cofinance at least 50 percent of the total investments (table 2.2). The SAPARD does not involve any advance payments, it reimburses expenditure already made. Thus financing the investment requires 100 percent prefinancing by the investor, who is then reimbursed (upon proof of expenses) by the SAPARD agency. 38For detailed results, see table A2.2 in annex 2B. 20 Table 2.2. Targeted Subsectors and Criteria for SAPARD Measures Eligible project value Measure Beneficiary Cofinancing requirements M1.1: Improvement of Private sector: commercial Minimum50 percent processing and marketing companies (100 percent private contribution of agricultural and private) and associations and 30,000­ (increase of minimum fisheries products groups of producers (legal 4,000,000 private contribution status). Special provisions for from 30 percent to 50 the wine sector percent for cereals), except in oilseeds and sugar, where a 70 percent minimum private contribution is required M 2.1: Development and Public sector: local councils 100,000­ Minimum25 percent improvement of rural of communes and national contribution infrastructure associations of councils 1,000,000 (national or local budget) M3.1: Investments in Private sector: individual agricultural holdings agricultural producers, 5,000­ Minimum50 percent agricultural family 500,000 private contribution associations, private agricultural companies/associations, agricultural commercial companies (100 percent private) M3.4: Development and Private sector: natural 5,000­ Minimum50 percent diversification of persons; registered family private contribution economic activities associations, associations, and 500,00 providing for multiple producer groups; NGOs activities and alternative (agricultural machinery income rings); and 100 percent private companies M4.1: Improvement of Public sector: MAFRD Minimumproject size Minimum25 percent vocational training 50,000 national contribution M4.2: Technical assistance Public sector: MAFRD Minimum20 percent Maximum50,000 a year national contribution The European Commission's allocation for Romania amounted to about 151 million (at constant 1999 prices) between 2000 and 2006 (table 2.3). After the European Commission approved Romania's SAPARD program, in November 2000, administrative problems during the first 18 months led to considerable delays in the start of the program and implementation of measures. As a result, only 16.3 million was allocated to Romania in 2003. In 2004 the take-up of the program improved, so that 158.7 million could be committed. 21 Table 2.3. Absorption of SAPARD Funds (as of May 24, 2005) Measure Number Number of Financial Commitment Authorized Disbursed Absorption of contracted allocationa (millions of payments payments of financial applicati projects (millions of euros) (millions of (millions of allocation ons euros) euros) euros) (percent) received 1.1 230 159 165.6 82.0 44.6 42.7 26 2.1 1,354 607 515.1 483.4 272.6 270.8 53 3.1 451 323 105.5 31.7 8.8 7.9 8 3.4 384 233 61.8 13.4 1.5 1.3 2 4.1 1 1 8.2 0.0 0.0 0.0 0 4.2 18 13 3.5 1.7 0.3 0.3 11 Total 2,437 1,336 860.0 613.4 328.0 323.3 38 a. For measures 1.1, 2.1, and 4.2, allocation as of 2000­03 is indicated. For measures accredited in 2003 (3.1, 3.4, and 4.1) allocation as of 2002­03 is indicated. Source: Romanian SAPARD agency. Significant steps were taken to increase the absorption capacity for SAPARD funds in Romania. Measures M3.1 and M3.4 were accredited, the program was adapted, new procedures were elaborated, and a public information campaign was launched by the SAPARD agency. Despite these steps, absorption remained unsatisfactory. According to the European Commission's progress report on Romania, a priority for 2004 was to increase absorption, especially of the 2000 financial allocations. By the end of 2004, all of the 2000 financial allocations (which had been due to be decommitted if unused) had been fully disbursed. By May 2005, 1,336 projects had been contracted with beneficiaries, representing 613.4 million of public expenditure (table 2.3). Absorption is dominated by the commitments for M2.1 (development and improvement of rural infrastructure), which targets public beneficiaries. If only measures for private beneficiaries are taken into account, only 715 projects (127.1 million public contribution) were contracted, of which 159 (82 million) were investments in the food processing industry (M1.1), 323 (31 million) were in agricultural holdings (M3.1), and 233 (13.4 million) were in diversification of economic activity (M3.4). This implies an average project size of 1 million for M1.1, 191,000 for M3.1, and 115,000 for M3.4. The SAPARD has provided significant resources to the rural sector, but it has not yet met expectations with respect to the tremendous development challenge of Romania's agricultural and rural sector. Issues contributing to the underperformance of the program include the following: · Program design has been only partially adjusted to meet sectoral needs. · Access to information about funding schemes remains restricted in rural areas. · Rural entrepreneurs are unable to comply with the complex and bureaucratic application procedures. · Rural entrepreneurs have restricted access to the required sources of prefinancing and cofinancing. · Small farmers and small-scale rural entrepreneurs are virtually excluded from the program. 22 2.2.5 Agricultural Taxation Since the end of 2003, Romania has imposed no tax on agricultural land or income from small farms. A 25 percent tax on profits (lowered to 16 percent in 2005) is levied on farms registered as legal entities, however. Sweeping tax exemptions for agriculture were introduced in 1990 as compensation for farmers' economic difficulties and the government's limited ability to pay direct subsidies. The failure to impose a land tax was associated with the uncertainties of land ownership during the "reconstitution" phase in the early 1990s. The tax exemption decision had its merits, and it played a role in improving the financial situation of farmers. There have been some attempts to redress the balance and subject agriculture to general taxation principles. A tax on farming was introduced in 1994 (Law 34/1994), but because of difficulties with income reporting by small farmers, it was assessed on the basis of the area owned or used, becoming in effect an agricultural land tax. Only the income from especially lucrative farming activities (flowers, vegetables, mushrooms, seedling nurseries) had to be reported; income from livestock remained exempt from tax. The tax rate was initially 15 percent of normative income, lowered to 10 percent during 1994­96. Normative tax assessment and collection never really took off, and taxation of farming activities was suspended in 1997. When a general income tax was introduced in 2000, the income derived from farming (except flowers, vegetables, and mushrooms) was exempted from taxation and has remained so since then. In 2001 the government imposed a land tax on holdings of more than 10 hectares. The tax was to have been imposed only on relatively large farms, because the winning party in the 2000 elections had promised poor farmers not to tax them. Parliament refused to allow any taxation of agricultural land and annulled the government ordinance. However, in December 2003 the adopted fiscal code imposed a flat tax of lei 10,000 (about 0.25) per hectare of agricultural land outside the village as local tax. 2.3 Agricultural Trade Policy Romania's agricultural trade policy has evolved through various stages since the early 1990s. The major determinants of policy have been the World Trade Organization (WTO) agreement, commitments made within the framework of the ASAL agreement with the World Bank, evolving relations with the European Union, and Romania's membership in CEFTA. Romania received developing country status with the WTO. This status, unique among Central and Eastern European countries, permitted it to negotiate very high tariffs, which became the main instruments for protecting agri-food producers. This tariff protection created a wall around Romania and has had serious negative consequences for domestic efficiency in agri-food products. Developing country status also allowed Romania to lower its obligations for average aggregated agricultural tariffs and to raise domestic support allowances. If Romania were forced to give up developing country status before it accedes to the European Union, the level of domestic support might become an issue, although at current levels it is not excessive compared withother countries in the region. The ASAL resulted in significant changes in the agri-food sector. The weighted average tariff level for all agricultural products dropped from 67 percent to 27 percent in July 1997. Tariff rates for sensitive products, such as meat, dairy, and sugar, remained higher (about 60 percent). All temporary tax exemptions were abolished and all unilateral export bans removed. Export and 23 import licensing were also eliminated, except for preferential tariff quotas set by international agreements. In the second phase of ASAL implementation, in January 1999, tariffs for sensitive products were lowered from 60 percent to 45 percent, and the average tariff rates for food and agricultural products fell from 27 percent to 22 percent. Romania's Association Agreement with the European Union became effective in 1995. This agreement provides preferential quotas and tariff reduction schemes for most livestock products, wheat, and vegetables. A special agreement was adopted for wine. In 2000 Romania signed another agreement with the European Unionon agricultural trade liberalization (the Double-Zero Agreement). A number of products (poultry, meat, cheese, wine, fruits, grain) received full or significant tariff reductions as well as a schedule for increasing quotas in trade with the European Union. Romania also agreed on further liberalization, and both parties agreed to eliminate export subsidies in bilateral trade. In 1997 Romania became a member of CEFTA and adopted preferential treatment of a number of agricultural products in CEFTA­related trade. CEFTA countries are Romania's major trading partners in agricultural products. The limited competitiveness of Romanian food and agricultural products has become most evident in these trade relations, resulting in the application of a safeguarding clause and temporarily increasing import tariffs for a number of products during the past few years, especially against Hungary. With the enlargement of the European Union to 25 countries in 2004, Romania lost CEFTA preferences with CEFTA member countries that joined the European Union. The acceding countries now benefit from all EU concessions to Romania, while Romania will be required to trade with them under general EU terms. 2.4 Agricultural Policy with Respect to the Common Agricultural Policy Until 2003 the government focused on completing the transition to a market-oriented agricultural policy environment and providing certain safeguards for farming incomes. Different forms of market interventions were tried, and harmonization with the CAP became an additional, albeit still not a major, objective. The current agricultural support system still mixes heavy government intervention with the principles of market-based agriculture. However, it does not fully correspond with the level of support and instruments of the CAP. Although there is pressure from farmers for immediate increases in support and protection and an obvious need to converge on EU levels before accession, the level of support and border measures should remain unchanged in order to maintain pressure to complete reforms and to remain within budgetary constraints and WTO commitments. The recommendation of this report is to align the level of support only after EU accession. As Romania moves toward EU accession, the emphasis on increasing production needs to be removed in favor of any emphasis on competitiveness. The focus on increased production has shaped past agricultural policy by promoting intervention in favor of specific commodities and introducing distortions in agricultural markets. Given the open trade environment that prevails generally and the trade goals of EU accession in particular, Romanian agricultural policymakers have to make a mental adjustment away from increasing production toward competitiveness. Romania suffers from low yields in both crop and livestock production, combined withby far the lowest agricultural labor productivity in the region. Policymakers must concentrate on these issues of agricultural reform rather than on increasing production. Competitiveness (which, if 24 properly achieved, will also increase production) requires greater efficiency and productivity growth in agriculture. This can be achieved only by policies that facilitate the structural reorganization of agricultural farms by allowing inefficient farms to close and removing obstacles to the expansion of new and more efficient farm units. At the same time, efforts should be focused on adapting Romania's policy instruments, as outlined in the framework already agreed on with the European Union. That agreement describes the direction of change, moving away from commodity-specific support to a decoupled area- based support system and a combined program of national and EU support. Chapter 3 provides a detailed analysis of options for the Romanian government in designing the agricultural support system upon EU accession. 25 Chapter 3 Introducing the EU Common Agricultural Policy in Romania: Status and Impacts Integration into the European Union is one of Romania's key foreign policy Box 3.1. The Pillars of the Common Agricultural Policy priorities. This far-reaching strategic EU spending on agriculture is channeled through the European objective creates a momentum for Agricultural Guidance and Guarantee Fund (EAGGF). There structural reforms before EU accession are two main areas (pillars) of agricultural expenditure. and covers all sectors of the national Market and income support (Pillar 1) economy. As a substantial part of this Market and income support measures include direct payments strategy, Romania has to gradually to farmers and market-related subsidies under the common adopt an agricultural policy and market organizations, such as buying of products for public institutional framework that is fully storage, surplus disposal schemes, and export subsidies. Until recently, income support--and to a lesser extent market compatible with the Common support--were the major areas of CAP expenditure. This is Agricultural Policy (CAP) of the gradually changing as the CAP evolves. Funding for Pillar 1 European Union. Like the 10 new measures comes from the EAGGF Guarantee Section. member states that acceded in 2004, Rural development (Pillar 2) Romania will meet the Copenhagen The increasingly important rural development measures aim at Accession Criteria, and align itself encouraging environmental services, providing assistance to with the full body of existing EU difficult farming areas, and promoting food quality, higher standards, and animal welfare. These measures are jointly legislation and policies (the so- called funded (cofinanced) by the European Union and member acquis communautaire). Accession states. The new system of compulsory modulation (that is, negotiations focus on the speed and switching of funds from production to rural development) will method by which Romania has to be used to finance the introduction of the new rural adopt the EU legislation. development measures agreed to in the June 2003 CAP reform (see box 3.3) or to reinforce existing measures. Negotiations on the most sensitive Most expenditure for rural development measures is funded by chapter in Romania's negations with the EAGGF Guarantee Section, although a significant part comes from the Guidance Section. The Guidance Section is the European Union (chapter 7, on one of four European structural funds that aims to assist agriculture) began in November 2002. regions, including rural areas that lag behind in their Important issues concerned the extent development. The other structural funds are the European of the CAP financial allocations for Regional Development Fund, the European Social Fund, and direct farm support payments the Financial Instrument for Fisheries Guidance. (hereafter referred to as "direct payments") to be extended to Romanian farmers after accession and related quotas for production and support;39 market measures, to be extended, mainly for processing of agricultural products;40 and rural development measures. For Romania the adoption of CAP­type agricultural policies will constitute a significant modification of current agricultural support (Pillar 1 of the CAP) and rural development policies (Pillar 2 of the CAP) (box 3.1). 39 Examples of direct payments in the EU -15 include area payments for arable crops, protein crops, and dairy and livestock payments. 40 Examples of market support payments in the EU-15 include aid to dried fodder, flax/hemp, and potato starch processing, as well as aid to producer organizations for the delivery of tomatoes, citrus fruits, peaches, and pears for processing. 26 Talks between the European Union and Romania and Bulgaria on the agriculture chapter ended in June 2004, with the two countries getting essentially the same agreement as the 10 new member states.41 These talks were much less painful than the year-long negotiations for the 10 new member states. The results include a phasing-in period for CAP direct payments, the possibility of topping up EU payments with additional funds, and an option for the Single Area Payment Scheme (SAPS). Both Romania and Bulgaria negotiated favorable terms for some of their quotas and premia allocations (on isoglucose, milk, and ewe, for example). These favorable terms can be attributed to the fact that Romania and Bulgaria benefited from the principle that they were to be granted treatment consistent with measures provided the 10 new member states.42 Under the agreement made in the accession negotiations on agriculture, CAP implementation requires that the government of Romania make a series of important strategic decisions. These decisions involve the selection of a payment scheme for direct income support measures, the potential topping up of area-based payments, payment modalities, transfers across budget allocations, and, of course, the definition of eligibility criteria. This chapter uses a simulation model of the Romanian agricultural sector to assess the effects of policy changes on farmers' incomes, consumers' incomes, and the state budget. A partial equilibrium model was employed to simulate the effects of a series of scenarios. 3.1 Results of Negotiations on the Introduction of the Common Agricultural Policy in Romania As a result of negotiations on chapter 7, Romania obtained a CAP­related general EU budgetary allocation of more than 4 billion for 2007­09.43 These funds will be split among rural development, market support, and direct payments:44 · Financial support proposed as direct payments to Romania during the three years amounts to 881 million. This figure includes financial support for the products or sectors in which quotas, reference areas, or national ceilings have been established. This type of financial support does not require cofinancing from the national budget, but it involves national implementation costs. · Financial support for market measures (market intervention and export refunding) totals 732 million and does not require national cofinancing. This support will be allocated beginning in 2007. Market intervention involves the stabilization of market prices by buying surplus production and stocking it in public or private stocks. Export refunds represent the allocation for certain exported products (such as milk and dairy products, beef, cereals, fruits and vegetables, sugar products, and processed products) of the difference between the export price and the world price, taking into account that the 41The negotiations were closed provisionally in June 2004 and finally in December 2004. 42 See U.S. Department of Agriculture, "Romania: Trade Policy Monitoring. Accession Talks on Agriculture Completed 2004." FAS GAIN-Report RO4013, June 16, 2004. 43The negotiation results are based on information provided by or derived from the European Commission and the Romanian EU Delegation; MAFRD; the Romanian Ministry of European Integration; and the U.S. Department of Agriculture FAS, GAIN-Reports. 44This information was provided by the MAFRD and the Romanian Ministry of European Integration. 27 prices for agricultural products are in general higher in the European Union than on the world market. · Financial support for rural development represents 2,424 million in commitments for 2007­09. Cofinancing from the national budget of 25 percent is required. According to the methodology of allocating these funds, committed funds must be spent within two years. The allocations of direct payments and market measures have been Box 3.2. Transitional Periods for Phasing in EU determined based on a system of Regulations reference quantities (regional average Romania has three years (until December 31, 2009) to: yields, quotas, base areas). These §Modernizeandrevamp26slaughteringandmeatprocessing measures have been agreed on for all units and 2 poultry processing units in compliance with EU applicable products on the basis of a requirements. reference period (2000­02 for §Modernize and revamp 28 milk processing units and Romania), taking into account organize its milk collecting and standardization centers in country-specific circumstances. In compliance with EU requirements. specific instances related to the §Comply with the EU structural requirements regarding cow negotiations under chapter 7, Romania milk farms and the quality of raw milk obtained. has requested and obtained §Prohibit a list of plant protection products with active substances that do not comply with EU requirements (two "transitional periods" for adopting and years for specific substance). implementing EU regulations (box 3.2). These transitional periods are Romania has eight years (until December 31, 2014) to exceptional and limited in time and remove the hybrid varieties prohibited under the EU vine scope. acquis cultivated on about 30,000 hectares. In accordance with the European Union's approach for the 10 new member states, direct payments will be gradually phased in over the next 10 years. Initial payments, starting in 2007, will be 25 percent of the applicable EU-15 level and should reach 100 percent by 2016. Key points of the introduction of the CAP in Romania will include details on the phasing in of CAP payments, the application of the SAPS, and the possibility for Romania to "top up" EU payments with additional funds (from either the national budget or the EU allocation on rural development measures under CAP Pillar 2). The transitional provisions for introducing CAP in Romania, however, are aligned with the latest CAP reform currently being implemented in the EU-15 member states (box 3.3). 28 In order to understand the Box 3.3. The 2003 Reform of the European Union's Common Agricultural Policy impact of joining the In June 2003 the European Union adopted a fundamental post­Agenda 2000 reform CAP on Romanian of the CAP, substantially changing the way it supports agriculture in member farmers' incentives, countries. The reform achieved the following: it is necessary to · Introduced a single farm payment scheme for EU farmers, independent of understand how they production ("decoupling"); limited coupled elements are maintained to will receive the new "avoid abandonment of production." payments and how · Linked direct payment to the respect of environmental, food safety, animal and plant health, and animal welfare standards and required that all much they will farmland be kept in good agricultural and environmental condition ("cross- receive. It is also compliance"). important to · Strengthened rural development policy (CAP Pillar 2) with higher understand that the budgetary allocations and new measures to promote quality, animal current negotiation welfare, and the environment and help farmers meet EU production standards beginning in 2005. results set the · Reduce direct payments ("modulation") for larger farms in order to finance framework for the the new rural development policy. budgetary · Revised the CAP market policy by making asymmetric price cuts in the allocations, but milk sector, cutting monthly increments in the cereals sector by half, several options maintaining the current intervention price, and adopting additional reforms remain for the in the rice, durum wheat, nuts, starch potatoes , and dried fodder sectors. Romanian government to determine. These include the specification of eligibility criteria and the reallocation of budgetary resources among CAP pillars. 3.1.1 Phasing In Direct Payments Like the 10 new member states, Romania will gradually phase in CAP direct payments over 10 years.45 During this period farmers will receive only a percentage of the direct payments applicable in the EU-15. Assuming that Romania accedes to the European Union in 2007, direct payments will start at 25 percent of the EU level in 2007, increase by 5 percentage points a year until 2009, and increase by 10 percentage points a year to reach 100 percent of then applicable EU level in 2016 (table 3.1). 45 Only direct payments to farmers will be phased in. Market support and rural development payments will be paid at 100 percent of the EU level upon Romania's accession to the European Union. 29 Table 3.1. Phasing-In Percentages for CAP Direct Payments in Romania, Bulgaria, and the 10 new EU member states Year 10 new member states Romania and Bulgaria 2004 25 -- 2005 30 -- 2006 35 -- 2007 40 25 2008 50 30 2009 percent of EU direct 60 35 2010 payment level 70 40 2011 80 50 2012 90 60 2013 100 70 2014 100 80 2015 100 90 2016+ 100 100 Source: EU delegation to Romania. As a general rule, the phasing-in approach will also apply to all new direct payments introduced before 2016 (that is, direct payments under future CAP reform initiatives). However, the provisions regarding modulation and financial discipline do not apply to Romania (or the other accession countries) until its level of payments reaches 100 percent of the EU-15 level.46 3.1.2 The Single Area Payment Scheme The 2003 CAP reform (box 3.2) includes a Single Farm Payment scheme, to be introduced in the EU-15 starting in 2005. The scheme is based on the direct payments the EU-15 farmers received under certain support programs during a reference period (2000­02). Because they did not receive these direct payments during the reference period and implementing direct payments involves a heavy administrative burden, Bulgaria, Romania, and the new member states have been given the option to choose the Single Area Payment Scheme (SAPS) instead.47 SAPS, however, will be applicable in these countries only for a very limited period of time (in the case of the 10 new member states opting for SAPS, the application is limited to the year 2006, with the possibility of two one-year extensions after that). Before the new member states can revert to the Single Farm Payment used by the EU-15 for direct payments, they must demonstrate that they have the management and control systems in place to do so. If they do not have these systems in place by 2008 (2011 for Romania), they will continue under the SAPS, but their aid percentage will be frozen at 50 percent of the EU-15 level. SAPS provides for an annual flat-rate, per hectare payment to farmers, irrespective of the crops produced--or even whether crops are produced at all (as long as the land is maintained in good 46Under the current CAP reform (see box 3.2), "modulation" is compulsory for the EU-15. It involves increasing the rural development budget by reducing direct payments for larger farms and transferring the funds into rural development measures. The measure will result in a reduction of direct payments exceeding 5,000 a year by 3 percent in 2005, 4 percent in 2006, and 5 percent from 2007 onward. 47Among the 10 new member states, all except Malta and Slovenia opted for the SAPS (U.S. Agriculture Department, FAS, GAIN Report E34004). 30 agricultural condition). The amount is calculated by the total amount of direct payment funds48 available in the calendar year, divided by the eligible utilized agricultural area.49 To be eligible for direct payments, farms and parcels have to satisfy a set of criteria regarding their size. The minimum size for an agricultural holding to be eligible for support under the SAPS is 0.3 hectares. Like the new member states, Romania can decide to set the minimum holding at a higher level, as long it does not exceed 1 hectare. (All new member states applying the SAPS set 1 hectare as the minimum holding size.) Under SAPS this criterion can be complemented with a minimum parcel size eligible for the area payment (Poland opted for 0.1 hectare, the Slovak Republic opted for 0.3 hectares). While the application of any minimum holding and parcel sizes will exclude some small farmers (see section 3.3), it will significantly reduce the budgetary and administrative burden associated with providing direct payments to unviable small-scale production units and enhance structural change toward a less fragmented land use structure in Romania. In Romania the MAFRD has signaled that the government will opt for the SAPS, with the minimum eligible holding set at 1 hectare and the minimum parcel size set at 0.3 hectares. By taking into account the budgetary allocation for direct payments in Romania (881 million) and the assumed eligible agricultural base area (about 7 million hectares), a preliminary estimate of the initial 2007 basic level of payments that would be due to Romanian farmers under the negotiated national envelope is 34.90 per hectare (representing the 25 percent cofinancing required in 2007). 3.1.3 Topping up Direct Payments Within carefully defined limits, Romania (as all new member states) will have the option to supplement EU direct payments by making Compensatory National Direct Payments (CNDPs), commonly referred to as "topping-up" payments. The CNDPs are part of the compromise reached with the 10 new member states to offset the impact of the 10-year phase-in period for direct payments. Under the principle of equal treatment, CNDPs will also be applicable in Romania and Bulgaria. As a new member state, Romania will have the possibility to top up EU direct payments according to either the 30 percent formula or the pre-accession formula: · Under the 30 percent formula, Romania could top up EU direct payments (for all or a specified list of agricultural products) by up to 30 percent above the applicable phasing-in level in the relevant year. This would allow Romania to reach 100 percent of the EU-15 payment by 2013 instead of 2016 (table 3.2).50 Through 2009 Romania will be allowed to fund the top-up payment in part by diverting up to 20 percent of the rural development funds that the European Union will provide after accession (Pillar 2 funds). Whereas the EU direct payments are not subject to national cofinancing requirements, all top-up 48Market support payments in certain sectors (payments granted mainly for processing of certain outputs and producer organizations) are not included in the SAPS. These schemes operate in addition to the SAPS. 49"Utilized agricultural land" includes arable land, permanent grassland, permanent crops, and household plots that have been maintained in "good agricultural condition." 50Payments can never exceed 100 percent of the EU -15 level. 31 payments must be matched by funds from the national budget. Starting in 2010 Romania would have to finance the topping up entirely with national funds. Table 3.2. Maximum SAPS and CNDP Levels in Romania Relative to the EU-15, 2007­16 SAPS Max. top-up Total 2007 25 30 55 2008 30 30 60 2009 35 30 65 2010 Percent of 40 30 70 2011 EU direct 50 30 80 2012 payment level 60 30 90 2013 70 30 100 2014 80 20 100 2015 90 10 100 2016+ 100 0 100 Source: EU delegation to Romania. · Under the pre-accession formula, if Romania were operating CAP­type programs before accession (which it has not yet been doing), it could top up EU direct payments to the total level of direct support the farmer would have been entitled to receive, on a product by product basis, before accession under a CAP­type national scheme increased by 10 percentage points. Given Romania's pre-accession agricultural support policies, this option is rather hypothetical in nature. 3.2 Simulating the Impact of Options for Introducing the Common Agricultural Policy CAP implementation in Romania forces the government to make a series of important strategic decisions. A simple but powerful partial equilibrium model of the Romanian agricultural sector evaluates and simulates the impact of different decisions on the financial situation of producers, consumers (including poverty effects), and the state budget (table 3.3). 32 Table 3.3: Current Options for Implementing the CAP in Romania GENERAL OPTION OPTIONS REFLECTED IN SCENARIOS BACKGROUND Introduction of Single Farm Payment (SFP) scheme vs. Single Area The MAFRD has confirmed that Payment Scheme (SAPS) Romania will opt for SAPS. The scenarios will therefore reflect this The current EU-15 CAP reform introduces a decoupled SFP. This scheme only (reduction of complexity payment is based on direct payments farmers received under of simulation). certain support programs during a reference period from 2000 to 2002. As Romanian farmers did not receive these direct payments The simulation is based on the 2007 during the reference period and due to the high administrative 25% phasing-in level. burden of implementing direct payments, the country will be able to opt for SAPS instead CNDPs: Topping-up EU payments from national envelope The scenarios will reflect four levels of topping-up: Subject to approval by the European Commission, Romania may TU00*: 0% use its own funds (national envelope) to increase payments by a TU10*: 10% maximum of 30% (of the EU payment). TU20*: 20% TU30*: 30% CNDPs: Payment modalities for topping-up EU payments No decision has been made yet, but a strong preference exists in the In case of topping-up the EU payment, Romania can decide to MAFRD for CNDPs to the livestock grant the top-up as a 'flat' per-area payment or as a payment to sector (especially dairy farming). specific production activities (e.g. livestock sector activities). The scenarios will therefore reflect From the distributional point of view it is important to note that several types of payment modalities: 'flat' payments to areas producing fodder crops can be considered support to livestock producers. PM1*: top-up as flat SAPS payment PM2*: top-up as product-specific payment (crop vs. livestock; various CNDPs within livestock sector). CNDPs: Transfer of budgetary resources from Pillar2 to Pillar1 support The scenarios will reflect three levels measures of Pillar 2 to Pillar 1 transfers: Romania will be allowed (for a limited time)to fund the topping- TP00*: 0% up in part by diverting up to 20 percent of the rural development TP10*: 10% funds that the EU will provide after accession. All such funds TP20*: 20% must be matched by funds from the national budget (co-financing requirement). Eligibility criteria for holdings The MAFRD considers setting the minimum holding size at the 1 ha The minimum size for an agricultural holding to be eligible for level and complementing it with the support under the SAPS of a parcel is 0.3 hectare, but Romania 0.3 ha minimum parcel size condition. can decide to set it at a higher level, but not higher than 1 hectare. In practice, all NMS applying SAPS have chosen to set 1 hectare Minimum holding size as the minimum holding size. HS05*: 0.5 ha Under SAPS, this criterion can be complemented with a minimum HS10*: 1.0 ha parcel size eligible for the area payment (Poland has opted for 0.1 ha). Sub-option: Minimum parcel size: PS03*: 0.3 ha * name of variable in simulation model. 33 3.2.1 The Scenarios The scenarios reflect the strategic choices to be made by the government, based on the options to be outlined in the Act of Accession. They assess the impact of all possible combinations of the listed variables. Since the number of permutations of all variables (options) yields a large number of scenarios, the discussion of results concentrates on the most significant aspects. More detailed results are provided in annex 2B. The scenarios are complemented by two baseline scenarios, against which the impacts of the various options are measured. In the first baseline scenario, current support policies on producers, consumers, and budget are maintained. This scenario is used to measure the impact of CAP options relative to the current situation. In the second baseline scenario, complete free trade takes place. This scenario is used to measure the impact of current policies and to measure relative protection and income distribution in the sector. 3.3 Effects of Introducing a Single-Area Payment Scheme on Farmers' Incomes, Consumers' Incomes, Poverty, and the State Budget Ten major agricultural products are considered in the model: wheat, barley, maize, sunflowers, potatoes, milk, beef, pork, poultry, and eggs. These products account for almost 70 percent of gross agricultural production in Romania. For each of these products, the simulation approach identifies and quantifies the potential impact of the changes in protection under each scenario on producers' value-added (farmers' income), consumers' real income, poverty, and the state budget.51 Farmers' income is determined by the difference between revenues from the sale of agricultural produce and tradable input costs and by any nonprice-related direct monetary transfers provided to farmers (for example, per hectare payments to crops or per capita payments to livestock). Any change in agricultural policies that affect input prices, output prices, or direct monetary transfers (such as CAP direct payments) translate into changes in the value-added of agricultural production (that is, farmers' income). In the medium to long term, the level of production of the various commodities is responsive to the level of profitability (approximated by value-added; see annex 2A) of each commodity. Therefore, changes in value-added will also lead to changes in total output, further compounding the initial changes in farmers' income. For each commodity the extent of the medium- to long-term supply response is determined by the elasticities of supply.52 Changes in agricultural output prices also have an impact on consumers, through their effect on food prices. Higher food prices lead to an increase in food expenditure and, given fixed nominal 51 This section provides only a brief overview of the main effects on producers and consumers in Romania. Section 3.3 provides a more detailed discussion (including a discussion of budget implications). Detailed tables and a full description of the model are presented in annex 2. 52The elasticities of supply used in this study are consistent with the elasticities used in similar World Bank studies for other countries in the regions. See for instance, C. Csaki, J. Nash, V. Matusevich, and H.A. Kray, 2002, Food and Agricultural Policy in Russia: Progress to Date and the Road Forward, World Bank Technical Paper No. 523; C. Csaki, J. Nash, A. Fock, and H.A. Kray, 2000, Food and Agriculture in Bulgaria: The Challenge of Preparing for EU Accession, World Bank Technical Paper No. 481; and A. Valdes and H.A. Kray, 1999, Lithuania: Adjustments of Agricultural and Trade Policies, World Bank ECSSD Working Paper No. 16. 34 disposable income (that is, a fixed amount of money available for consumption), consumers are forced to reduce their overall consumption of total goods and services by the percentage increase in food expenditure multiplied by the share of food expenditure in total consumption. This reduction in consumers' ability to purchase goods and services is equivalent to a reduction in their real income. The relative reduction of real consumer incomes is highest for households with low disposable incomes, because poor households allocate a higher share of expenditures to food products. In the medium to long term, consumers will adjust to the new set of relative prices, moving away from the consumption of foods that have become relatively more expensive as a result of the policy changes. The medium- to long-term impact on income, therefore, is expected to be more moderate than the short-run impact. The exact amount will be determined by the price elasticity of demand for each product, which regulates the extent of consumers' adjustments to changes in food prices. To allow for the various effects, two types of simulations were carried out for each scenario. The first simulation, which involves no supply and consumption changes, estimates the static short- run impact. The second simulation, which allows for a supply and consumption response, estimates the medium- to long-run impact. 3.3.1 Effects on Farmers' Incomes Introduction of CAP Price Regimes: Introduction of the CAP will bring about a complete change in Romania's agricultural market and support policies. The CAP will remove the currently applied direct support schemes (which in 2004 accounted for 4.5 percent of farm income on average, as shown in the figure in box 3.4). Box 3.4. The Increased Importance of the Direct Payment Scheme Introduction of the CAP in Romania will significantly increase the importance of Figure 3.3: Share of Current Direct Payments in direct payment schemes granted to Romanian Farming Income, 2004 farmers. Romania already operates a number of direct payment schemes (see section 2.2) 10.6% but they are not aligned with CAP 10.0% 10.0% provisions. 7.4% 6.6% Current direct payment schemes account for 5.7% 4.5% 4.5 percent of agricultural income in 5.0% 2.5% 2.3% Romania, with substantial variations across production activities and farm types. 0.0% 0.0% 0.0% 0.0% Variations among farm types occur due to total wheat barley maize sunflower potatoes milk beef pork poultry eggs differences in the product mix of farms and eligibility for direct payments. Whereas the shares presented in figure 3.1 represent sectoral average figures (including farms not qualifying for direct support), the mportance of current direct i payments in income among eligible farms accounts for up to 20 percent in crop and 40 percent in livestock production. From a sectoral perspective, the importance of direct payment schemes will increase upon EU accession: the share of direct payments in agricultural incomes will range from 13 percent (SAPS without top-up) to 25 percent (SAPS with maximum top-up), with the importance of direct payments increasing as SAPS phase-in levels rise in subsequent years. The increasing importance of direct payments underlines the need to carefully design and implement CAP support schemes. Experiences by the new member states have shown that maladjustments ofCAP implementations or delays in direct support disbursement create a risk of 35 political unrest in the farming sector, endangering political stability and continuity in the rural arena. It will also entail the introduction of Common Market organizations for agricultural products and the related adjustment of prices for primary agricultural products. The direct payment schemes currently applied will be replaced by a much broader set of CAP direct payments. Romanian farmers operate with relatively high production costs but still realize positive value- added from almost all of the analyzed activities (with the exception of egg production, where revenue, on average, covers only 66 percent of intermediary production cost). As a first step in approaching the potential importance of direct payments, current income levels are compared with those that would occur under a pure CAP pricing regime (without direct payments). Although the mere introduction of CAP prices without accompanying direct payments is neither the MAFRD's choice nor possible, the results of this simulation provide important insights into the potential future role of direct payments. Based on current price levels in Romania and the Figure 3.1. Activity-Specific Income Effects of Introducing the CAP in 2007 European Union and taking into account recent market trends, the results imply that the introduction of CAP wheat barley maize sunflower potatoes milk beef pork poultry eggs direct payments without 25,000 supplementary direct income 20,000 support payments would not ROL maintain the incomes of all 15,000 billion agricultural producers at pre- in 10,000 accession levels.53 Mere Added 5,000 conversion to the CAP pricing regime without Value 0 granting direct payments -5,000 would reduce average Current policies CAP pricing without SAPS CAP pricing with SAPS producer incomes by 19 percent (figure 3.1). Source: World Bank calculations Due to product price developments, without direct payments the income effect will be negative for most crop products. The effect is positive for livestock producers, for whom the reduced cost of feed (especially grain) complements the positive revenue development of higher output prices (especially for dairy). The negative impact for the sector as a whole indicates that substantial income losses in the crop production subsector (-30 percent for wheat, -44 percent for barley, and -43 percent for maize producers) and further losses in the poultry (-31 percent) and already extremely unprofitable egg (-66 percent) sector overwhelm the positive income effects for producers of beef (21 percent), pork (28 percent), and milk (32 percent). 53The analysis is based on the assumption that prices for agricultural products in Romania will adjust to current EU levels. 36 This initial assessment provides two important perspectives on CAP implementation in Romania. First, CAP pricing levels (at current productivity, efficiency, and quality levels) imply income increases only for livestock producers; the SAPS and eventually CNDP support schemes will be instrumental in safeguarding sectoral incomes of crop producers in the early years of EU membership. Second, the notion that livestock producers would loose out from a pure SAPS regime that allocates payments based on agricultural land is not confirmed by this initial assessment. SAPS Payments without Top-Up In addition to introducing CAP price regimes, the implementation of the CAP involves a series of strategic decisions regarding the definition of scope and eligibility for CAP Pillar 1 direct support schemes. As discussed later in this chapter, direct support schemes can serve only as a general means of income support; they cannot appropriately address structural adjustment needs in the agricultural sector. In designing an agricultural direct income support regime, the government will have to assess the producer income effects of SAPS payments and their potential top-up by CNDPs. In evaluating the income effects of the options available, a first assessment focuses on the income effects of the CAP pricing and the SAPS regime. The SAPS regime would be implemented at a level corresponding to 25 percent of the EU-15 average (see table 3.1). The simulations suggest that the Figure 3.2: Sectoral Income Effects of CAP-Introduction, basic SAPS (2007 level, without 2007-2010 top-up) will not result in an immediate overall income increase 100,000 for agricultural producers, but it will compensate for about half of that part of the income loss resulting from the shift to the lower EU ROL market price support levels for billion crops. The aggregate impact of price in 50,000 changes upon accession to the Common Market and the initially Added relative low level of direct payments in 2007 would induce a 9.6 percent Value decrease in sectoral value-added if no top-up is granted (see figure 3.1). 0 Although no SAPS payment will be 2007 2008 2009 2010 2011 granted to livestock activities as product sale SAPS such, livestock producers enjoy pre-accession without dir.paym. pre-accession with dir.paym. income increases as a result of price increases for outputs, price decreases for inputs, and SAPS payments to their forage area. Crop producers, on average, would have to cope with income reductions. Average agricultural incomes would exceed current levels only in 2010, when SAPS payments reach 40 percent of EU-15 average (figure 3.2). 37 The projected potentially negative income development for the first three years of EU membership are attributable to two main factors. First, current producer prices, especially for crops, are currently above average CAP levels. Compared with product markets in the EU-25 and taking into account the average quality of Romanian agricultural products, Common Market prices for several agricultural products included in the analysis are likely to be lower than current prices in Romania.54 The case of cereals reveals that this does not necessarily translate into a disadvantage for all agricultural producers: since grain also represents an important input into livestock production (representing more than 25 percent of the production cost in pig fattening), a reduction in grain prices reduces the costs of livestock production. Second, Romanian farmers have been provided with insufficient incentives to adjust their product mix, productivity, and efficiency to CAP­type policies. These incentives would have been sufficient only if the Romanian government had decided early on to approximate its agricultural support regime to the CAP, thereby creating incentives for sectoral adjustments. Earlier approximation of Romanian agricultural policies would have facilitated farmers' adjustment to transiting to the CAP regime. Topping Up SAPS Payments with Complementary National Direct Payments In view of the likely short-term income losses between 2007 and 2010, topping up SAPS direct payments with CNDPs would represent the only way of safeguarding or even increasing producer incomes in the initial phase of EU accession that is consistent with the CAP (box 3.5). Box 3.5. Topping Up EU SAPS Payments The MAFRD faces several options in setting CNDPs: § CNDPs can be granted as a flat (decoupled) per hectare payment to agricultural land or as production- specific (coupled but in conformity with the CAP) premia granted to specified crop or livestock production activities (subject to the premium quotas negotiated). If implemented as coupled payments, CNDPs contribute to the establishment of payment claims and titles to some producers in the sector. In most cases, allocation of these payment titles increases distributional inequality in the medium to long run and is almost impossible to withdraw once granted. § CNDPs must be entirely or partially financed from the state budget, whereas SAPS payments are covered entirely by the EU budget (for an analysis of budgetary implications, see section 3.3.4). § CNDPs do not have direct income effects on consumers through the price mechanism, butthey nevertheless represent an income transfer from taxpayers to farmers through the fiscal mechanism (for an analysis of direct consumer income effects of the SAPS regime, see section 3.3.3). § Theeffectsonregionalorindividualagriculturalproducersvarywiththeregionalorindividualproductmix and the size of the operations or holdings targeted. In assessing whether to implement SAPS with or without CNDPs, the sectoral, regional, and individual product mixes of the targeted producers are very relevant. Eligibility in terms of the size of the operation or holding is a second-order option. It influences the important question of income transfers to smaller farming units but it does not determine the decision for or against introducing CNDPs. 54This assessment is based on the average prices for agricultural produce in 2004, as recorded by the National Institute of Statistics. 38 CNDPs can be granted as a flat (decoupled) per Figure 3.3. Sectoral Income Effects of Introducing SAPS and CNDP at 2007 Levels hectare payment to agricultural land or 9 0 , 0 0 0 as production-specific (coupled but in ROL conformity with the CAP) 6 0 , 0 0 0 premia granted to billion in specified crop or livestock Added 3 0 , 0 0 0 production activities (subject to the premium Value quotas negotiated).55 0 Table 3.4 shows the 2 5 % S A P S 2 5 % S A P S + 2 5 % S A P S + 2 5 % S A P S + 1 0 % C N D P * 2 0 % C N D P * 3 0 % C N D P * estimated payments under p r o d u c t s a l e S A P S t o p - u p s P r e - a c c e s s i o n w i t h d i r . p a y m . a SAPS regime with CNDP top-up granted as a flat per hectare payment. CNDPs intended to top up SAPS can be granted to agricultural producers up to a maximum level of 30 percent of EU-15 support. This implies that CNDPs might constitute the most important fraction of direct support in 2007 (when SAPS will be granted at a 25 percent level of EU-15), but their relative importance will decrease over time, as SAPS levels increase on a yearly basis. For the period 2007­09, the assumption is that SAPS payments (not including CNDPs) will increase from 34.90 per hectare to 48.86 per hectare. To maintain 2007 incomes at pre-accession levels and increase them in subsequent years, the MAFRD does not have to set the maximum top-up level at 30 percent. The analysis of producer income effects under the SAPS with CNDP­type scenarios shows that, from a sectoral perspective, a topping-up of SAPS by CNDPs of at least 20 percent of the EU-15 average would lead to aggregate income increases beginning in the first year of accession to the CAP (2007). If the MAFRD granted CNDPs on a flat per hectare basis up to the maximum permitted level of 20 percent of the EU-15 average, sectoral income (as approximated by value-added ) would increase 1.9 percent in 2007 (figure 3.3). A higher top-up level of 30 percent of the EU-15 average would induce an 8 percent income increase the same year, but it would require a higher contribution from the national budget. 55For details, see, for example, http://www.mie.ro/media/English/2004/june/070604.htm. 39 A top-up of 20 percent of the EU-15 average farm income would significantly exceed pre- accession levels over time, as SAPS payments increase as they are phased in (figure 3.4). Given that the CNDP would have to be financed from national budget resources, figure 3.4 implies that in aiming to maintain producer incomes at pre-accession levels while economizing on national budget resources, the MAFRD might want to consider implementing a dynamic CNDP scheme. Such a scheme might involve the payment of a 20 percent top-up for the first year of EU membership and the gradual decrease of CNDP payment levels until 2010, after which SAPS payments alone would lead to substantial increases in producer incomes. In specifying the CNDP, the MAFRD will have to consider the potentially non-homogeneous effects of SAPS/CNDP support schemes on Figure 3.4. Sectoral Income Effects of SAPS and 20 percent CNDP, different size farms. To 2007­2010 assess this, the model included seven size 100,000 clusters of agricultural holdings in Romania: less ROL than 1 hectare, 1­5 hectares, 5­10 hectares, billion 10­20 hectares, 20­50 in 50,000 hectares, 50­100 hectares, and more than Added 100 hectares of agricultural land.56 The Value simulation results provide strong evidence that the 0 2007 2008 2009 2010 2011 income effect of introducing the SAPS product sale SAPS (with or without CNDP at top-up at 20% of EU-15 level pre-accession with dir.paym. various levels) varies significantly across farm sizes. Initial positive income effects are more pronounced for extremely small and extremely large farms (figure 3.5). If SAPS were introduced without CNDP, sectoral net income would decline during the first three years. Analysis by farm size clusters adds a new dimension to this finding. Farms smaller than 1 hectare would experience a 4 percent income increase even if not granted SAPS/CNDP payments, whereas all other size clusters would see their incomes reduced. The reduction effect is most pronounced for farms between 10 and 100 hectares. 56 Although farms smaller than 1 hectare might not be eligible for SAPS payments, this farm size cluster was included to display the basic effects on all farm size clusters. For the income derived from livestock production, SAPS/CNDP payments to forage area are included. 40 The distribution of the positive sectoral income effects of introducing SAPS with CNDP of 20 percent or 30 percent of the EU-15 level are also unevenly distributed across size clusters. Under these regimes, extremely small and Figure 3.5. Projected Change in Producer Income by 2007 relative to 2004 extremely large farms levels, by Farm Size are favored most; the S A P S ( 2 5 % o f E U - 1 5 ) w i t h o u t C N D P positive effects on medium-size farms are ha ha ha ha ha ha <1ha 1-5 5-10 10-20 20-50 50-100 >100 relatively moderate.57 2 % Judged against the - 2 % - 6 % background of - 1 0 % increasing levels of - 1 4 % - 1 8 % support in 2007 and subsequent years and S A P S ( 2 5 % o f E U - 1 5 ) w i t h C N D P ( 2 0 % o f E U - 1 5 ) taking into account the ha ha ha ha ha structural change ha <1ha 1-5 5-10 10-20 20-50 50-100 >100 toward medium-size 1 5 % farms (see chapter 4), 1 0 % complementary inter- 5 % 0 % ventions (for example, - 5 % Pillar 2 support) should be targeting the S A P S ( 2 5 % o f E U - 1 5 ) w i t h C N D P ( 3 0 % o f E U - 1 5 ) competitiveness of ha ha ha ha medium-size farms. ha ha <1ha 1-5 5-10 10-20 20-50 50-100 >100 Additional attention 2 5 % 2 0 % will have to be paid to 1 5 % 1 0 % the smallest farms, 5 % 0 % which may not qualify i n c o m e c h a n g e r e l a t i v e t o p r e - a c c e s s i o n t r e n d for support under the N o t e : B a r s i n d i c a t e p e r c e n t a g e c h a n g e o f p r o d u c e r i n c o m e s re l a t i v e t o 2 0 0 4 p re - a c c e s s i o n CAP direct payment l e v e l s . N e g a t i v e v a l u e s i n d i c a t e a n i n c o m e r e d u c t i o n , b u t n o t n e g a t i v e i n c o m e ! schemes if the MAFRD sets the eligibility threshold at 1 hectare. Taking account of the income effects of a potential topping-up of SAPS payments, the MAFRD's decision on the level of CNDPs will therefore depend on the income transfer objective it wants to achieve. If the objective is to maintain average producer incomes at pre- accession levels during the first year of accession, a top-up of 20 percent of the EU-15 level is the preferred option. This option, however, would lead to an initial but small reduction in the incomes of medium-size farmers, potentially giving rise to social tensions. A top-up of 30 percent of the EU-15 level would be needed if the objective is to maintain the incomes of all farmers. This option, however, would cause almost a 25 percent income increase for farmers on farms of more than 100 hectares. In addition to these equity considerations, the tradeoffs between these options would also need to be evaluated against their budgetary implications (see section 3.3.4). Over time, as SAPS payment levels increase, a dynamic approach to CNDP top-ups--in 57No separate cost and revenue structure information was available for different size clusters. Therefore, the results above represent the effect of differences in the product mix of farm classes only. 41 which the level of top-up is reduced to match the increase in SAPS--would enable the government to keep farmers' income constant. Without any top-up, by 2010 SAPS payments would be sufficient to raise average farmers' income. CNDP Payment Modalities: Flat versus Activity Specific The SAPS will have to be topped up by CNDPs in the initial phase of accession if agricultural incomes are to be protected in the early years of EU accession. Should the CNDPs be implemented on a flat per hectare basis or granted as premia to specific crop or livestock production activities? The evidence indicates that the application of a flat, decoupled CNDP scheme should be favored over specific, coupled CNDPs. Figure 3.6 displays the simulated producer Figure 3.6. Income Effects on Producers of Selected Commodities of income effects of Introducing SAPS and CNDP at 2007 Levels implementation of the SAPS with CNDP payments equal to 30 percent of the EU-15 wheat barley maize sunflowerpotatoesmilk beef pork poultry eggs average (the scenario 25,000 with the highest short- term impact on income). ROL 20,000 Like SAPS without 15,000 CNDP, the billion implementation of SAPS in 10,000 with a CNDP of 30 percent would increase Added 5,000 the income of producers 0 of almost all analyzed Value activities in 2007. -5,000 Significant income Current SAPS with CNDP (30% of EU-15), 2007 reductions would occur only for producers of potatoes and poultry. In both cases the income effect is a price effect occurring due to significant cost ineffectiveness of production. Although based on a scenario assuming a flat per hectare disbursement of CNDPs, figure 3.6 allows for important conclusions to be drawn about the required scope of CNDPs. From a sectoral perspective, only a limited need for specific, coupled CNDPs exists. Concerns have been raised that milk producers, for example, could experience substantial income loss, since direct payments would be allocated only to agricultural land. The simulation shows that the opposite effect is likely to occur. Upon implementation of CAP­type policies, dairy farmers would experience an increase in income of up to 23 percent in the first year of accession. This effect arises due to two principal factors: the assumed increases in raw milk prices, due to the implementation of the CAP intervention system on the milk market, and significant decreases in production costs, due to decreases in market prices for grain (and subsequently substitutes and complements in feeding dairy cattle). Income increases in the first year of accession under any SAPS with CNDP regime are also observed for producers of beef (16 percent), pork (19 42 percent), and eggs (a reduction of losses of 66 percent), with the factors causing the income increase identical to those described for dairy farming. The only livestock production activity in which income declines is poultry production, for which the reduction of value-added by almost a third will reduce the relatively high levels of value-added per produced unit in this subsector. In addition to the assumed positive effects of CAP introduction on the livestock production sector, a series of additional indirect income effects, not explicitly covered in the simulation, will add to the positive income developments in this subsector. Among these, the direct payments granted to all pastures, meadows, and forage area is expected to yield the most significant positive income effects.58 Because of the relatively high level of land-based livestock production in Romania, direct support to the abovementioned production activities will significantly reduce production costs in the livestock sector. From a more dynamic perspective, by adjusting to these changes in relative prices, producers will be able to optimize the structure of both inputs and outputs of production, potentially leading to additional increases in farming income. The high implementation costs and administrative complexity associated with commodity- specific CNDPs and their long-term distorting impact on production patterns militate in favor of using them on the most equalized and simplified basis possible. Preoccupation with CNDPs favoring particular regions or subsectors appears to be mainly a political decision. Support schemes targeting specific sectoral adjustment needs or regional income disparities would be better addressed under the CAP Pillar 2 umbrella. Setting Eligibility Criteria In light of the implications of the options discussed above, the government will have to make a strategic decision on eligibility levels for SAPS direct payments (that is, set criteria for farm and parcel size). According to EU rules, the minimum holding size to be eligible for support under the SAPS is 0.3 hectare, but Romania can set it at a higher level, as long it does not exceed 1 hectare. In practice, all new member states applying SAPS have chosen to set 1 hectare as the minimum holding size. 58 Due to data limitations, figure 3.6 does not include SAPS/CNDP payments to grassland. It therefore underestimates the positive income effects for most livestock producers. 43 Given the farm structure in Figure 3.7. Distribution of Farms and Area Cultivated, by Size, 2002 Romania, a decision on farm 100% size­related eligibility criteria might lead to the exclusion of up to half of all agricultural holdings from CAP direct payment schemes. Although thresholds need to be set in order to facilitate structural change and avoid the prohibitive administrative costs of operating SAPS for extremely small farms, they 75% are likely to be controversial. According to the 2002 Agricultural Census, half of the 4.5 million Romanian farms are on less than 1 hectare of agricultural land (figure 3.7). Setting the eligibility threshold at the 1 hectare level implies would >100ha exclude these farms from 50-100ha support under any 5-10ha 50% SAPS/CNDP direct support 1-5ha schemes. Setting the 0.5-1ha threshold at 1 hectare would <0.1-0.5ha exclude only 5 percent of agricultural land from SAPS eligibility. Complying with the EU minimum eligibility threshold of 0.3 hectares would exclude 26.2 percent of agricultural holdings but 25% only 0.9 percent of agricultural land from SAPS/CNDP payments. Small farms also have a relatively low share in many of the crop production activities analyzed in this report (table 3.5). 0% 44 The potential exclusion of large shares of farmers from direct Table 3.5: Share of Agricultural Land Qualifying for SAPS payment schemes is understandably Payments under Different Thresholds, 2007 a controversial issue. This Production Activity Cultivated on farms discussion, however, must take into >0.5ha >1.0ha account that the projected Wheat 99.71% 97.98% introductory level of SAPS payment Barley 99.76% 98.74% Maize 96.97% 88.87% amounts to 34.90 per hectare a Sunflower 99.88% 99.21% year--an amount that will surely not Potatoes 92.08% 81.97% substantially increase the incomes Source: World Bank calculations based on NIS, Agricultural Census of farmers operating less than one 2002 hectare. Instead of focusing on the exclusion criteria, attention needs to focus on enabling small and medium-size farmers to effectively absorb the funds allocated to CAP Pillar 2 and to provide them with adequate social security schemes (such as retirement schemes). CAP direct support schemes cannot substitute for the need to raise the productivity and improve the competitiveness of Romanian agriculture. Based on the simulation results, a 1 hectare threshold will correspond to a sectoral income decline of about 4 percent; for a 0.5 hectare threshold, this value falls to 1 percent. These sectoral averages do not provide full insight into the distributional inequalities between farmers who are eligible and those who are not. The average income from the production of the 10 analyzed commodities reaches only 75­87 percent of that of farmers eligible for support under these schemes (the lower figure corresponds to SAPS without CNDP, the higher figure corresponds to SAPS with CNDP at 30 percent of the EU-15 level). These results are based on the assumption that farmers not eligible for direct payments still benefit from the anticipated price increases in the livestock production sector (smaller farms in Romania have a higher share in total national livestock production). Efficiency Considerations of SAPS Payments: Important Caveats Without underestimating the social dimension of exclusion from direct income support payments, the role of direct payments in solving agricultural income problems must not be overestimated. Direct payment schemes such as the SAPS can provide some level of income stability and help mitigate farmers' exposure to income risk by guaranteeing a minimum income from farming. They cannot, however, substitute for the need to raise the productivity and improve the competitiveness of Romanian agriculture. Increasing productivity and competitiveness remains the long-term and sustainable solution to raising agricultural income. Agricultural support schemes targeting specific sectoral adjustment needs, such as farm consolidation, productivity, or competitiveness-enhancing farm-level investments, would be better addressed under the CAP Pillar 2 umbrella. Similarly, the application of a direct income support scheme cannot substitute for the implementation of Pillar 2 measures such as an (early) retirement scheme for the agricultural sector. In addition, direct income support payments may very well reduce the incentives for farmers to restructure, consolidate, and modernize. They may lower incentives for consolidation, because they guarantee a minimum income from farming, reducing the incentive for unprofitable or older farmers to sell or lease their assets to more productive entrepreneurs. SAPS payments and their effects on land prices or land rental rates may also make land consolidation more difficult, in particular in a farming environment in which agricultural credit is not well developed. Evidence 45 from EU member states indicates that support payments granted on a per hectare basis lead to significant increases in prices for buying and especially leasing agricultural land. This will significantly disfavor tenants, slow any consolidation toward more viable farm sizes, and correspond to support to landowners rather than farmers. These tradeoffs between direct income support payments and the need for higher productivity and competitiveness point to the need to clearly separate rural social measures (such as measures to reduce social tensions and provide social protection in the rural areas) from the major instruments of agricultural income support. Targeting Income Disparities through CAP Pillar 2 Funds Romania's rural sector requires restructuring to make it competitive and efficient. Many of the new member states required such restructuring, but the need is even more pronounced in Romania, where half of all holdings are less than 1 hectare. Measures need to be adopted that allow inefficient farms to close down (through effective early retirement schemes, for example) and obstacles to the expansion of new and more efficient farming units to be removed (by eliminating the bias against land leasing in the existing retirement schemes and establishing young farmers schemes, for example). Although direct income support measures can maintain or increase sectoral income at pre- accession levels in the short term, they cannot be relied on as a means to safeguard agricultural income in the medium to long term. The most powerful and sustainable way to sustain agricultural incomes is to make agriculture more productive and competitive. Any attempts to solve structural problems through the SAPS/CNDP regime will not sustainably improve the sector's productivity and efficiency but only weaken its structural adjustment. It is therefore recommended that rural development measures and rural social measures (for example, measures to reduce social tensions and provide social protection in the rural areas) be clearly separated from the major instruments of agricultural income support.59 The targeted and judicious application of rural development measures under CAP Pillar 2 that meet the structural needs of the agricultural sector has a key role to play in providing agriculture with the ability to sustainably take advantage of its integration to the highly competitive EU agricultural market. Romania's accession to the European Union takes place the same year that a reformed policy framework to CAP Pillar 2 measures will be introduced. The new framework will seek to reinforce the European Union's rural development policy and simplify its implementation. According to the current proposal, the European Commission expects this reformed rural development policy to play a more important role in the new, reformed CAP (the 2003 reform of CAP Pillar 1). The proposal recommends introducing a single funding and programming 59 If, for instance, coupled CNDPs were implemented to safeguard the incomes of small producers in less favored areas (with the aim of maintaining extensive grazing systems in mountainous areas, for example), further analysis on regional holding structures and the differences in their profitability would be needed. Experience from the Slovak Republic has shown that a coupled CNDP scheme, initially intended to support suckler cow production in less favored areas, has mainly favored larger scale herds in the most fertile regions of the country. Decisions on specific cases that might be under consideration by the MAFRD should always be evaluated against the opportunity to achieve a similar sectoral income effect with a more flexible and less specific type of instrument (specific payments coupled to dairy cattle versus payments based on forage area, for example) and against the opportunity to achieve a similar (or even higher) sectoral income effect by effectively targeting the funds available under Pillar 2 of the CAP (in the case of milk producers in less favored areas, the LFA schemes under Pillar 2 would represent a more targeted approach). Direct payment schemes granted only to specific production activities require a much more complex administrative framework and give rise to distributional inequalities in the medium to long run. 46 instrument, in an effort to simplify management and control of the program. Under this concept, the member states and regions are expected to have more freedom in implementing the program. This freedom may be advantageous in appropriately targeting country-specific rural development needs; the country-specific strategic framework in Romania, however, is in the process of being prepared and thus cannot be included in the simulation model. The main features of a new EU Box 3.6. Potential Measures under Axis 1 of CAP Pillar 2 rural development policy Measures aimed at improving human potential: include the following: § vocational training and information actions for people engaged · One funding and in the agricultural and forestry sectors § settingupofyoungfarmers programming § earlyretirementoffarmersandfarmworkers instrument, the European § useofadvisoryservicesbyfarmersandforestholders Agriculture Rural § setting up of farm management, farm relief, and farm and Development Fund forestry advisory services. (EARDF). Measures aimed at restructuring physical potential through: · A genuine EU strategy § modernizingfarms for rural development, § improvingtheeconomicvalueofforests with sharper focus on § addingvaluetoprimaryagriculturalandforestryproduction § improving and developing infrastructure related to developing EU priorities. and adapting agriculture and forestry · Reinforced control, § restoring agricultural production potential damaged by natural evaluation, and disasters and introducing appropriate prevention actions. reporting. Clearance of Measures aimed at improving the quality of agricultural production accounts audit system and products: will be extended to all § helping farmers adapt to demanding standards based on parts of rural European Community legislation development. § supportingfarmerswhoparticipateinfoodqualityschemes § supporting producer groups with information and promotion · A strengthened bottom- activities for products under food quality schemes. up approach. Member states, regions, and local Transitional measures for new member states: action groups will have § supportingsemi-subsistencefarmsundergoingrestructuring § supportingtheestablishmentofproducergroups. more influence on tailoring programs to Source: EC proposal, 2004/0161(CNS). local needs. The scale of the CAP Pillar 2 measures (2.5 billion for 2007­09) dwarfs that of direct income support for the farming community (881 million for 2007­09).60 In light of the lessons learned from SAPARD implementation, a key concern for the first years of Romania's EU membership is whether both administrative and sectoral absorption capacity can be created to effectively absorb the CAP Pillar 2 allocation. In the light of the challenges faced, it is advisable to address the structural adjustment needs of Romanian agricultural by concentrating on the measures foreseen under Priority Axis 1, (measures improving the competitiveness of farming and forestry) of the new EU rural development policy (box 3.6). According to the tentative allocations of the recent Commission 60 Assuming that the government decides to make use of its option to divert up to 20 percent of the Pillar 2 allocation to top up the SAPS direct payments, the allocations for Axis 1 would be reduced to still significant levels of 399.9­1,599.6 million. 47 proposal on the reformed EU rural development policy, the Romanian government will have to allocate at least 15 percent of the national envelope on Axis 1; the maximum allocation-- determined by the minimum allocations for the other two axis--amounts to 60 percent of the national envelope. This corresponds to 454.5­ 1,818 million for 2007­09. If not addressed in a timely and approriate manner, the implementation of Pillar 2 measures may again create a situation in which (already well-performing) larger farms (10 hectares and above) are the main beneficiaries of most of the support schemes. Half of all farmers (98 percent if all farms less than 10 hectares are considered) may not benefit from or take advantage of Pillar 2 allocations in adjusting to the future policy framework of Romania's agri-food sector. The economic and social implications of their failure to benefit from Pillar 2 allocations could be more pronounced than their lack of eligibility for Pillar 1 support measures. In addition to rapidly upscaling its efforts to upgrade the required administrative infrastructure and designing a more targeted programming strategy, government must focus on facilitating the uptake of the program by small and mid-size farms. This adjustment should be carried out in the light of the findings presented in the analysis of the potential effect of the CAP Pillar 1 measures. The measures aiming at structural improvements need to be appropriately complemented by measures aiming at improving the environment and land management (Axis 2) and improving the quality of life and diversifying rural areas (Axis 3) (table 3.6). Table 3.6 Goals of EU Rural Development Policy Reform Axis Goal Examples Minimum Maximum EU percentage of cofinancing national rate envelope that must be spent 1 Improve Improving and developing infrastructure 15 50 percent (75 competitiveness of related to the development and adaptation of percent in farming and forestry agriculture and forestry, supporting farmers convergence who participate in food quality schemes, regions) setting up of young farmers, and helping semi-subsistence farmers in new member states become competitive 2 Improve the Natural handicap payments to farmers in 25 55 percent (80 environment and land mountain areas, NATURA 2000 payments, percent in management agri-environment measures, and animal convergence welfare payments. Agri-environmental regions) measures will remain compulsory. Beneficiaries must respect the EU and national mandatory requirements for agriculture and forestry. 3 Improve quality of life Diversification to nonagricultural activities, 15 50 percent (75 and diversification support for the creation of micro enterprises, percent in encouragement of tourism, village renewal convergence regions) 48 3.3.2 Effects on Consumer Incomes Average consumption of food and beverages represents more than 52 percent of Romanian households' total consumption. This share is highest among the poorest income decile, which spends a striking 76 percent on food and beverages, and lowest among the wealthiest decile, which spends a still considerable 36 percent (figure 3.8). Since many rural households derive their food from their own (subsistence) farming, these shares are significantly different when cash expenditure for food and beverages is taken into account. The average household still spends about 52 percent on food and beverages, but the poor spend 42 percent and the wealthiest spend 46 percent. The highest share of cash expenditures in total expenditure is observed for the medium deciles, which spend 57 percent share of total expenditures on food and beverages.61 For all Romanian households, policy reforms that affect Figure 3.8. Composition of Consumption Spending, by Income Decile, 2004 agricultural prices also affect food prices and therefore consumers' real income. The experiences of many of 4 , 0 0 0 s e r v i c e s the 10 new member states has ROL] n o n - f o o d p r o d u c t s f o o d a n d b e v e r a g e s [1000 3 , 0 0 0 shown that an increase in producer prices does not necessarily lead to 2 , 0 0 0 an increase in food products at the Consumption retail level, however. In many of the 1 , 0 0 0 10 new member states, the Per-Capita - emergence of international A v e r a g e D e c i l e I D e c i l e X processors and supermarket chains intensified competition and led to a significant decline in the consumer price index for food after EU accession. Due to the complexity of the simulations on the producer side, the model applied in this study had to be limited to depicting price transfers from the producer to the retail level that would occur, everything else equal, in the short to medium term, with moderate competitive forces on the food retail market. (Annex 2A provides a brief description of how the model captures the link between agricultural prices and household incomes in the model.) The simulation of consumer income effects assesses the impact of changes in food prices induced by the implementation of alternative pricing regimes for agricultural products.62 CAP­ type scenarios involve a similar level of product pricing; the various SAPS options discussed above differ with respect to the level and mechanisms of granting direct payments to agricultural producers. The CAP pricing regime remains identical under all SAPS options. The simulations reveal that the introduction of CAP­type changes in domestic agricultural price policies would have a moderate impact on food expenditure by Romanian consumers. Given that 61To cover impacts on consumers' real income and acknowledge the opportunity cost for food consumption, in the following discussion the term expenditure is used synonymously with value of consumption. When referring to cash expenditure, the term cash is used. 62Conceptually, the simulation does not cover second-order spillover effects of tax transfers from consumer gross income through the state budget to the agricultural sector (gross income concept), because it simulates direct price effects on the disposable income of consumers (net income concept). 49 international retailers would increase competition on Romania's retail food market, a real reduction in the food CPI after accession would even be possible. According to the Figure 3.9. Real Consumer Income Effects of CAP Price Policies simulations, the introduction of CAP­type agricultural 0 policies would increase Romania's domestic agricultural prices moderately, leading to an increase of just 1.6 percent [%] in food prices in the medium term (figure 3.9). In the short change -1 term (that is, during the income initial phase before Real consumer demand responds to the new product prices), the changes in agricultural short-term effect medium-termeffect prices would induce an average increase in -2 expenditures on food and CAP nonalcoholic beverages of 2.8 percent relative to current base-period conditions.63 Due to the price increases for most of the main agricultural products analyzed, expenditures are projected to increase for all but two product groups. The Figure 3.10. Medium-Term Impact of Policy Changes on Food most pronounced medium- Expenditures to long-term expenditure 15 increases are projected for eggs (16 percent) and milk and dairy products (6.8 policies percent) (figure 3.10). The 5 Food and beverages, total current Cereals and pasta increase in expenditures on to 1.61 Meat and meat products Milk and dairy products eggs, however, has a minor Eggs relative Edible fat and oil impact on overall food Vegetables and potatoes change -5 Alcoholic beverages expenditure, because eggs represent just 1.2 percent of Percentage spending. Decreases in consumption expenditure are -15 CAPScenario projected for cereals and cereal products (-2.3 percent, 63Current Romanian agricultural policies have a moderate impact on consumers' food expenditures. As an indicator of the impacts of current agricultural policy framework, the noninterventionist policy framework would induce a medium- to long-term reduction in consumers' food expenditures of 3.95 percent on average, with the most pronounced reductions in meat and vegetables. In the short run, this effect would amount to a reduction of 4.8 percent. In fact, expenditures for almost all product groups except eggs would fall. 50 accounting for 12.4 percent of average food expenditure and 15.9 percent of food expenditure by the poorest households) and alcoholic beverages (-1.28 percent, accounting for just 1.7 percent of food expenditure). Food price­related effects of the implementation of CAP­type policies will only insignificantly reduce real consumer incomes in Romania. Alongside the expected increased competition in the food retail market, the overall purchasing power of Romanian households is actually likely to increase after accession. The increases in agricultural prices implied by the introduction of CAP­ type agricultural policies in Romania result in minor reductions in real income of only 0.84 percent in the medium run (figure 3.9). The impact is significantly higher in the short run (-1.4 percent), before consumers have time to adjust their consumption patterns to the new prices. Although still relatively modest, the immediate real income loss is more severe for the poorest households and for (presumably urban) households not producing their own food. Although the introduction of CAP­type agricultural policies may appear to have relatively moderate effects on real household incomes, they may still impose a heavy additional burden on Romanian households that already spend a significant share of their disposable income on food. 3.3.3 Implications for the State Budget As a result of the concluded negotiations on chapter 29 (on financial and budgetary provisions), Romania will be a net beneficiary of the EU budget, contributing about 800 million to the EU budget in 2007 and receiving about 11 billion in commitments and about 6 billion in payments (a yearly average of about 2 billion in payments).64 For the period 2007­09, these commitments include the following: · About 4 billion for CAP implementation and operation. This figure includes direct payments; market measures (Pillar 1, for which no national cofinancing is required); and rural development measures (Pillar 2, for which national cofinancing is required). · About 6 billion for structural instruments (structural and cohesion funds, for which national cofinancing is required). · About 1 billion for internal policies. This subsection examines some basic budgetary implications of these budgetary receipts from the EU budget.65 General Aspects of Agriculture-Related Allocations The EU budget will allocate about 1.3 billion to Romanian agriculture during Romania's first year of EU membership. National cofinancing of about 1.5 billion will also be available for public spending in Romania's agriculture-related sector in 2007 (table 3.7). 64Press release of the Romanian Ministry of European Integration, June 7, 2004. 65Additional budget effects associated with accession to the CAP but not quantified in this study include the budget effects of changes in the quantity and direction of agricultural trade flows and related spending and earnings on domestic and border measures (for example, intervention purchases, import tariff revenue, export subsidy spending), as well as the budget effects of restructuring Romania's administrative infrastructure and institution building in order to implement EU policies. 51 Table 3.7. CAP­Related Budget Allocations, 2007­2009 Programming Period First Year of Membership 2007-2009 2007 Transfer National Total public Transfer National Total public from EU co-financing spending from EU co-financing spending [mio EUR] [mio EUR] Direct payments 881 0 881 245 0 245 Market measures 732 0 732 244 0 244 Rural Development 2,424 606 3,030 808 202 1,010 Total CAP Romania 4,037 606 4,643 1,297 202 1,499 Source: Romanian EU Delegation; World Bank calculations About 489 million every two years will be available for support measures under Pillar 1 of CAP, which are financed entirely from the EU budget. Assuming an evenly distributed use of the allocation for Pillar 2 measures, about 808 million a year from the EU budget would be available for agriculture-related rural development measures. Since this spending is subject to a 25 percent cofinancing requirement, an additional 202 million a year would have to be raised from the national (presumably MAFRD) budget. The disbursement of funds under all three categories will be subject to the receipt of applications from farmers for direct payments, market measures, and rural development. Actual disbursement will depend largely on the ability of Romania's administration and its rural sector to develop an appropriate absorption capacity for these funds.66 The figures in table 3.7 should therefore be viewed only as commitments. The national budget needs to be prepared to complement Pillar 2 resources adequately. Compared with the 10 new member states, the CAP­ Figure 3.11. Financial Aid to New Member States of the European related budget allocations for Union for Structural Actions Romania (and Bulgaria) are 4.00% relatively high, a fact that can Bulgaria Latvia be attributed to the still very GDP 3.50% to high employment shares of rel 3.00% Romania Estonia agriculture in both countries. Lithuania As a percentage of expected 2.50% actions GDP, the allocations for 2.00% Slovakia agriculture amount to 2.1 structural Poland 1.50% percent in Bulgaria and 2.2 for Czech Republic Hungary percent in Romania-- aid 1.00% significantly more than the 0.7 0.50% Malta & Slovenia Cyprus percent allocated to the 10 financial new member states. 0.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00% per capita GDP rel to EU-15 The significant allocation to measures under Pillar 2 of the 66 In the first phases of the Romanian SAPARD, the absorption capacity was extremely low, and EU budgetary allocations for 2000 were at risk of being decommitted at the end of 2004. 52 CAP underlines the increasing importance of rural development and structural aid measures in the reformed CAP; it also reflects the need for such assistance in Romania. Among the candidate countries and new member states, Romania and Bulgaria have the highest relative allocations on such measures (figure 3.11). Budgetary Aspects of Implementation Options for the SAPS Regime In choosing the final SAPS implementation package, the MAFRD will have to base its decision not only on the impacts of its decision on producers and consumers but also on the impacts on the state (and its own) budget. Figure 3.12: Average Annual Public Funds Available for CAP Pillars 1 & 2 Measures As one of the main outcomes of the [million ] 2,000 accession negotiations on chapter 7 (on agriculture), Romania was offered an allocation of 881 million for direct farm 1,500 support payments in the programming period 2007­2009. This financial allocation was determined based on the 1,000 monetary valuation (in terms of current 0% 30% EU-15 support schemes) of the 10% 20% transfer P2 -> P1 10% 20% 0% top-up level negotiation results regarding base area, reference yields, quotas, and additional Figure 3.13: Average Annual Public Funds Available for Pillar 2 payment rights.67 The total allocation for Measures the programming period was computed [million ] by applying the agreed on phasing-in 1,000 levels (25 percent of EU-15 support level for 2007, 30 percent for 2008, 35 percent for 2009). 850 Like all new member states, Romania 700 will have the option to introduce the 0% 30% SAPS regime with or without topping up 10% 20% transfer P2 -> P1 10% EU direct payments. The simulations 20% 0% top-up level therefore include different top-up levels: SAPS without top-up and SAPS with a Figure 3. 14: Average Annual National Budget Requirement for CAP Pillars 1 & 2 top-up of 10 percent, 20 percent, and 30 [million ] percent of the EU-15 support level. 600 In raising the budgetary resources 400 required to top up the SAPS payments, budget the MAFRD faces two principal options. 200 support The first would be to obtain the financial dir. resources from the national (that is, 0 2005 MAFRD) budget. In this case, 100 0% 30% 10% 20% percent of the top-up would stem from transfer P2 -> P1 20% 0% 10%top-uplevel the national budget. The second option 67For details, see http://www.mie.ro/media/English/2004.une/070604.htm 53 (and another outcome of the negotiations on chapter 7) would be for the MAFRD (for a limited time) to fund the top-up in part by diverting up to 20 percent of the rural development funds that the European Union will provide after accession. All such funds must be matched by funds from the national budget (cofinancing requirement). The simulations reveal that the national budgetary allocation required to finance the CAP in Romania range from 606 million (SAPS without top-up) to 1,487 million (30 percent top-up with full national sourcing) (table 3.8). In addition to the income impacts on producers and consumers, the choice of options will depend largely on the desired compromise between the affordability of the funds required from the national budget and the desired amount of total (EU and national) public funds for Pillar 1 and 2 measures in the rural sector. 54 Table 3.8. Budgetary Implications of Sourcing Alternatives for Topping Up SAPS, 2007­ 2009 Required Share of national contribution Funds available national Top-up to for contribution (per- Source cent of of Pillar 2 Pillar 2 Total in total top-upa available EU-15) Direct Rural Direct Total Rural CAP payments Development payments Development (Pillars 1 public funds measures measures and 2) ( percent) (million EUR) (million EUR) n.a. 0 606 606 881 3,030 4,643 13 0 294 606 900 1,175 3,030 4,937 18 10 National budget 10 percent of 10 EU allocation on Pillar 2 147 569 716 1,175 2,846 4,753 15 National budget 587 606 1,193 1,468 3,030 5,230 23 20 10 percent of EU allocation 20 on Pillar 2 plus national budget 345 545 890 1,468 2,727 4,927 18 20 percent of EU allocation 20 on Pillar 2 plus national budget 103 485 587 1,468 2,424 4,624 13 National budget 881 606 1,487 1,762 3,030 5,524 27 30 10 percent of EU allocation 30 on Pillar 2 plus national budget 639 545 1,184 1,762 2,727 5,221 23 20 percent of EU allocation 30 on Pillar 2 plus national budget 396 485 881 1,762 2,424 4,918 18 n.a. Not applicable. Source: World Bank calculations. The options listed in table 3.8 reveal certain patterns: · Topping up SAPS payments leverages larger amounts of total (EU and national) public funds for the rural sector (figure 3.12). · Sourcing top-ups from EU Pillar 2 allocations reduces total public funds available for Pillar 2 rural development (figure 3.13). · A higher top-up of the SAPS payments (30 percent of the level of EU-15 support) implies a higher national budget requirement (figure 3.14). 55 · Topping up the basic SAPS payment entirely by national budget resources is more costly to the state budget than sourcing it in part by diverting up to 20 percent of the EU allocations to Pillar 2 rural development measures (figure 3.14). The most modest financial allocation from national sources (606 million for the EU 2007­09 allocation) would be required if the government decides not to top up the basic SAPS payments by CNDP. Total (EU and national) public funds for Pillar 1 and 2 measures in the rural sector could be as high as 5.5 billion in 2007­09 if a 30 percent of EU-15 top-up is financed entirely from national sources. Such an option would seem fiscally prohibitive in view of its significant national cofinancing requirements (1.6 billion). Topping up SAPS payment is fiscally efficient, since it leverages greater amounts of EU financing, but it comes at a cost to the national budget and taxpayers. Financing part of the top-up by reallocating EU resources from Pillar 2 measures is fiscally expedient for Romania, since it significantly reduces the total level of national cofinancing requirements. For example, for a top-up payment equivalent to 20 percent of the EU-15 level, the total national cofinancing requirements could be reduced by more than half if Romania uses 20 percent of EU Pillar 2 resources to finance the top-up. From the point of view of both the national contribution and total public spending, the 10 percent top-up option and the top-up financing option relying entirely on national sources are the least attractive options. Whatever decision it makes on financing SAPS/CNDP, the MAFRD needs to create the fiscal space for the significant cofinancing requirements of EU CAP resources, and it needs to do so before accession (that is, in 2006). The MAFRD's 2005 budget was about 700 million (of which 574 million was allocated for direct support measures). To cofinance the Pillar 1 and 2 interventions, the government of Romania will need to spend 202­544 million. Aggregate fiscal constraints and sound fiscal management point to the need to create the fiscal space to absorb EU grant resources. This fiscal space will have to come from policy adjustments that align current policies to a framework that is consistent with the CAP. This means that all national support programs (such as output price supplements and input price subsidies) that do not conform to it will have to be phased out. 3.4 Implications of the Government's Strategic Decisions Preparation for full integration into the CAP is among the most important priorities for Romania as it prepares to join the European Union in early 2007. Creation of the required administrative and absorption capacity still requires substantial reinforcement. The specification, implementation, and operation of agricultural (and rural) support schemes under both pillars of the CAP must be at the core of all related bodies. If they are not, Romania risks not being able to effectively implement the CAP. 56 3.4.1 Implications for the Single Area Payment Scheme (SAPS) With the exception of Slovenia, all of the EU member states in Central and Eastern Europe that acceded in 2004 opted to introduce the SAPS, a simplified version of the current Single Farm Payment Scheme. Romania will most likely also choose this option. The phasing in of SAPS payment to agricultural producers, starting at a level of 25 percent of the EU-15 average in 2007, will increase the relative importance of direct payment schemes granted to Romanian farmers from 4.5 percent of farm income under current policies to up to 40 percent under CAP. In 2007 the basic SAPS (without top-up) will not result in an immediate increase in income for agricultural producers, but it will compensate them for about half of that part of the income loss resulting from the shift to the lower EU market price support levels for crops. The aggregate impact of price changes upon accession to the Common Market for agricultural products and the initially relative low level of direct payments would induce a 9.6 percent decrease in sectoral value-added if no top-up is granted. Although no SAPS payment will be granted to livestock activities, livestock producers enjoy income increases through price increases for outputs, price decreases for inputs, and SAPS payments to their forage area. Crop producers, on average, would have to cope with income reductions. By 2010 average agricultural incomes would exceed current levels, as SAPS payments reach 40 percent of the EU-15 average. 3.4.2 Implications for Complementary National Direct Payments (CNDPs) In view of the likely short-term income losses between 2007 and 2010, topping up SAPS direct payments with CNDPs represents the only way of safeguarding or even increasing producer incomes in the initial phase of EU accession that is consistent with the CAP. While SAPS phasing-in levels remain below 40 percent of EU-15 levels and annual CAP Pillar 2 measures have not been fully absorbed (experience from the new member states has shown that initial disbursements may take up to a year after accession), a topping up of SAPS by CNDPs of at least 20 percent of the EU-15 average would lead to sectorwide income increases of 1.9 percent in the first year of accession to the CAP. If the MAFRD decides to grant CNDPs on a flat per hectare basis up to the maximum permitted level of 30 percent of EU-15 average, sectoral income would increase by 8.0 percent in 2007. The MAFRD's decision on the level of CNDPs will therefore depend on the income transfer objective to be achieved. If the objective is to maintain average producer incomes at current pre- accession levels in the first year of accession, a top-up of 20 percent of the EU-15 level would represent the preferred option. This option, however, would lead to an initial but small income reduction for medium-size farmers, potentially giving rise to social tensions (see figure 3.4). A top-up of 30 percent of the EU-15 level would be needed if the objective is to maintain the income of farmers of all farm sizes. This option, however, would increase the incomes of owners of farms of more than 100 hectares to rise almost 25 percent. In addition to these equity considerations, the tradeoffs between these options also needs to be evaluated against their budgetary implications. Over time, as SAPS payment levels increase, a dynamic approach to CNDP top-ups--whereby the level of top-up is reduced to match the increase in SAPS level--would enable the government to keep farmers' income constant. Without any top-up, by 2010 SAPS payments will be sufficient to raise average farmers' income. 57 3.4.3 Implications for Payment Modalities This assessment acknowledges the need for topping up SAPS by CNDPs in the initial phase of accession if agricultural incomes are to be protected in the early years of EU accession. The government will need to specify the scope of CNDPs, that is, decide whether they should be implemented on a flat per hectare basis or granted as premia to specific crop or livestock production activities. By enabling some targeting of the direct payments, commodity-specific CNDPs might be seen as an attempt to mitigate potential adverse income effects for some categories of farmers. However, the evidence indicates that the application of a flat, decoupled CNDP scheme should be favored over specific, coupled CNDPs. Concerns have been raised that milk producers, for example, could experience substantial income loss, since direct payments would be allocated only to agricultural land. In fact, evidence points in the other direction: with the implementation of CAP­type policies, dairy farmers could experience an estimated income increase of up to 23 percent in the first year of accession. Payments granted to forage area would add to the positive income effects in the livestock subsector. The high implementation costs and administrative complexity associated with commodity- specific CNDPs and their long-term distorting impact on production patterns militate in favor of using CNDPs on the most equalized and simplified basis possible. Any preoccupation with CNDPs that favor particular regions or subsectors over the crop sector appears to be mainly political: support schemes targeting specific sectoral adjustment needs or regional income disparities would be better addressed under the CAP Pillar 2 umbrella. 3.4.4 Implications for Eligibility Criteria According to EU rules, the minimum holding size eligible for support under the SAPS is 0.3 hectares. Romania can decide to set the minimum at a higher level, as long as it does not exceed 1 hectare. All new member states applying SAPS have chosen to set 1 hectare as the minimum holding size. Farm-size eligibility criteria could exclude up to half of all farmers from benefiting from the SAPS/CNDP regime. Farm-size thresholds need to be set so that they facilitate structural change and avoid the prohibitive administrative costs of operating SAPS for extremely small farms. Nevertheless, they are likely to be controversial in Romania, where half of the 4.5 million Romanian farms are on less than 1 hectare of agricultural land. Fixing the eligibility threshold at the 1 hectare level would mean that these farms would be excluded from support under any SAPS/CNDP direct support schemes. These farms represent just 5 percent of agricultural land in Romania. Complying with the EU minimum eligibility threshold of 0.3 hectares would exclude 26.2 percent of agricultural holdings but only 0.9 percent of agricultural land from being granted SAPS/CNDP payments. 3.4.5 Implications for the National Budget A higher top-up of the SAPS payments implies a higher national budget requirement,; topping- up the basic SAPS payment entirely from national budget resources is more costly to the state budget than sourcing it, in part, by diverting up to 20 percent of the EU allocations to Pillar 2 rural development measures; and sourcing the top-up from Pillar 2 allocations reduces the funds 58 available to CAP­related rural development measures in Romania. The most financial allocation from national sources (606 million for the EU allocation 2007­09) would be required if the government decide not to top up the basic SAPS payments by CNDPs. Total (EU and national) funds for Pillar 1 and 2 measures could be as high as 5.5 billion in 2007­09 if a 30 percent of EU-15 top-up were financed entirely from national sources. Such an option would seem fiscally prohibitive in view of its significant national cofinancing requirements (1.6 billion). Topping up SAPS payment is fiscally efficient since it leverages greater amounts of total (EU and national) financing for the agricultural and the rural sector. It comes, however, at a cost to the national budget and taxpayers. Financing part of the top-up by reallocating EU resources from Pillar 2 measures is fiscally expedient for Romania, since it significantly reduces the total level of national cofinancing requirements. For example, for a top-up payment equivalent to 20 percent of the EU-15 level, the total national cofinancing requirements could be reduced by more than half if Romania uses 20 percent of EU Pillar 2 resources to finance that level of top-up. From the point of view of both the national contribution and the availability of total public spending, the 10 percent top-up option and the top-up financing option relying entirely on national sources are the least attractive options. Whatever decision it makes on financing SAPS/CNDP, the MAFRD needs to create the fiscal space for the significant cofinancing requirements, and it needs to do so before accession (that is, in 2006). The MAFRD's 2005 budget was about 700 million (of which 574 million was allocated for direct support measures). To cofinance the Pillar 1 and 2 interventions, the government of Romania will need to spend 202­544 million. Aggregate fiscal constraints and sound fiscal management point to the need to create the fiscal space to absorb EU grant resources. This fiscal space will have to come from policy adjustments that align current policies to a framework that is consistent with the CAP. This means that all national support programs (such as output price supplements and input price subsidies) that do not conform to it will have to be phased out. 3.4.6 Efficiency Considerations of SAPS/CNDP Payments Without underestimating the social dimension of being excluded from direct income support payments, the role of direct payments in solving agricultural income problems must not be overestimated. Direct payment schemes such as the SAPS can provide some level of income stability and help mitigate farmers' exposure to income risk by guaranteeing a minimum income from farming. Direct support schemes, however, cannot substitute for the need to raise the productivity and improve the competitiveness of Romanian agriculture. Productivity growth and improved competitiveness remain the long-term and sustainable solution to solving agricultural income problems. Agricultural support schemes targeting specific sectoral adjustment needs such as farm consolidation, productivity or competitiveness-enhancing farm-level investments would better addressed under the CAP Pillar 2 umbrella. Similarly, the application of a direct income support scheme cannot substitute for the implementation of Pillar 2 measures such as an (early) retirement scheme for farmers. In addition, direct income support payments may reduce the incentives for farmers to restructure, consolidate, and modernize. Direct income payments may reduce incentives for consolidation, because they guarantee a minimum income from farming and therefore reduce the incentive for 59 unprofitable or older farmers to sell or lease their assets to more productive entrepreneurs. SAPS payments and their effects on land prices or land rental rates may also make land consolidation more difficult, in particular in a farming environment in which agricultural credit is not well developed. Evidence from EU member states indicates that support payments granted on a per hectare basis lead to significant increases in prices for buying and especially leasing agricultural land. This will significantly disfavor tenants, slow any consolidation toward more viable farm sizes, and correspond to support to land owners rather than farmers. These tradeoffs between direct income support payments and the need for higher productivity and competitiveness point to the need to clearly separate rural social measures (such as measures to reduce social tensions and provide social protection in the rural areas) from the major instruments of agricultural income support. 60 Chapter 4 Changing Land Tenure and Farm Structure Land reform--including the transfer of land into private ownership and individual use and the dismantling of inefficient, large-scale, state-controlled farming structures--has been one of the most difficult and complex tasks of transition for all countries in Central and Eastern Europe. Romania has been no exception. Sweeping changes in land tenure and the farming structure have been made, but the task of creating a farming system able to produce internationally competitive products has yet to be finished. 4.1. Legal Framework for Changes in Land Ownership and Farm Structure Romania's agrarian transition had to cope with the dual task of (at least partially) reversing the post­1945 expropriations and decollectivizing cooperatives, which had been the dominant farm structure since the 1950s. The reforms also had to eliminate the ingrained legal bias that had favored cooperatives and state-owned farms since adoption of the 1948 constitution. The process started in 1990, when members of agricultural cooperatives received ownership rights to land plots of 0.5 hectares, up from the traditional 0.3 hectares in rural household plots. The reform was not based on any restitution principles, it simply gave ownership rights in incremental land to people who worked on it, triggering the flow of land to the private sector. The Land Law passed in 1991 (Law 18/1991) laid the foundations for a dual land reform mechanism. It restored ownership rights to former owners whose land had been expropriated by the state after March 6, 1945 (the day when the first communist government assumed power), and it returned use rights to individuals whose land had been managed for years by cooperatives and state-owned farms. In Romanian usage the dual mechanism introduced by the 1991 Land Law is called reconstitution of land ownership rights, as distinct from restitution in the conventional sense of returning land to former owners. In addition to "reconstitution," the Land Law also introduced "constitution" of land ownership rights, namely, the distribution of land to landless farm employees who had worked at least three years on a cooperative or a state farm and to landless young families who undertook to start farming. The Romanian land reform is thus distinguished by a combination of land restitution and land distribution elements, elements that set it apart from the strictly restitution based--and thus less equitable--procedures adopted in other Central European and Baltic countries (Hungary is a notable exception). Romanian legislation set absolute limits on both the amount of "reconstituted" land and the amount of land in private ownership. According to current legislation, a family can receive a maximum of 50 hectares by "reconstitution" or "constitution" and purchase up to 200 hectares of land. Land in excess of 200 hectares must be leased; it cannot be purchased. This land ownership limit does not apply to legal entities. Under the 1991 Land Law, cooperative members received physical plots of land in return for the land they had originally brought into the cooperative. In contrast, ownership rights in state land were initially restituted by allocation of shares in former state-owned farms. The situation of the 61 "shareholding" restituents was gradually equated to the situation of former cooperative members, and in 1999 it was resolved that all land owned by individuals within the holdings of a former state farm should be restituted in physical form, with the owners free to dispose of it at their discretion. Based on 1996 land data, this legislation affected 0.56 million hectares of privately owned land held in state-owned farms, or nearly one-third of the 1.7 million hectares used by 477 state-owned farms at that time.68 The land restitution and distribution laws were complemented with laws focusing on new organizational forms in agriculture. Romanian legislation classifies farms according to legal organization and type of ownership (table 4.1). All physical entities--individual farms and informal family associations--are in the private sector. Since 2005 legal entities (all formal associations and agricultural companies) have also been in the private sector. The group of state- controlled agricultural companies (the so-called FIAS), shrunk continuously through privatization or liquidation, ceased operation altogether in 2004. Formal associations (generally called legal associations but also referred to as agricultural societies) were envisaged as successor organizations to former cooperatives; family associations were conceived as a new, flexible form that would allow small farmers to benefit from economies of size through joint action unencumbered by legal registration requirements. In addition to the two types of farming associations, there is also the category of agricultural companies. These companies include former state-owned farms reorganized as state-controlled joint-stock companies; privatized farms, mainly using land in concession from the state; and other private corporate entities (organized mostly as limited liability companies) operating on their own land or land leased from private individuals or the state. Table 4.1. Farm Types in Romania Entity Legal Framework Private Sector State Sector Physical entities Individual farms Land Law (Law 18/1991) x Family associations Law on Associations (Law 36/1991) x Legal entities Legal associations Law on Associations (Law 36/1991) x Agricultural companies Company Law (Law 31/1990) x x 4.2 Progress with Land Restitution and Privatization of State Land 4.2.1 Reconstitution of Ownership and Use Rights Reconstitution of ownership rights required the filing of claims with supporting documents up to strictly specified (although repeatedly extended) deadlines. Table 4.2 presents data on the cumulative progress of land reconstitution between 1999 and 2005. The total area claimed for reconstitution (by former owners and cooperative members) was 10.2 million hectares--85 percent of the agricultural land used by state-owned farms and cooperatives in 1989. 68Ionita and others, Green Book, pp. 108­109. 62 Table 4.2. Progress in Applying Land Laws (Law 18/1991 and Law 1/2000), 1999­2005 Indicator March 1999 November 1999 June 2000 March 2001 January 2005 Total area used by state-owned 11,019 farms and cooperatives in 1989 (thousands of hectares) Total area to be reconstituted 9,361 9,367 9,419 9,426 10,194 (thousands of hectares) Land reconstituted to date 7,769 7,998 8,114 8,245 9,782 (thousands of hectares) Number of claimants 4,688,091 4,696,280 4,716,062 4,716,498 Not available Number of satisfied claims 3,748,777 3,847,118 3,918,159 3,965,209 Not available Ownership titles to be issued 4,322,626 4,329,973 4,340,507 4,341,493 4,350,553 Ownership titles issuedto date 3,237,156 3,349,273 3,413,299 3,469,944 4,298,153 Ownership titles under Not available 36,036 29,084 15,732 completion Percentage of area reconstituted 83.0 85.4 86.1 87.5 96.0 to date Percentage of satisfied claims 80.0 81.9 83.1 84.1 Not available Percentage of ownership titles 74.9 77.4 78.6 79.9 98.8 issued to date Source: Buletin Informativ al Ministerului Agriculturii si Alimentatiei (1/2000, 7/2000, 2/2001). Much has been accomplished by reconstituting land ownership and land use rights since 1991, but the task remains uncompleted. The completion percentages rose steadily from March 1999 through January 2005, when the reconstitution rate reached 96.0 percent (98.8 percent of reconstituted land owners had been issued titles) (figure 4.1). These figures compare favorably with the situation in other Central European countries. Figure 4.1. Progress Impementing the Land Law, 1999­2005 100 90 80 70 60 percent Mar. 1999 50 Mar. 2001 Jan.2005 40 completion 30 20 10 0 Restituted area Titles issued 4.2.2 Privatization of State Land The state lands that remained after satisfying the restitution claims fall into two legally distinct categories--public state domain and private state domain (table 4.3). Lands in the public state domain are of special "public interest and use." They cannot be sold or exchanged, but they can 63 be leased out, given in concession, and Table 4.3. Land Ownership by Type, 2000 so forth. Land in the private state Type of land Thousands of hectares domain is the residual land that Total agricultural land 14,856.8 belongs to the state but is not classified Privateproperty 14,218.2 as public domain land. This state- Legal entities 1,298.8 Physical entities 9,690.4 owned land can be sold (through State 1,015.7 privatization), leased out, given in Counties and municipalities 2,219.6 concession, exchanged, and so forth. Public property 632.3 Parts of this private state land belong State 418.4 to villages, towns, municipalities, and Counties and municipalities 213.9 counties, where they are earmarked for Source: National Office of Cadastre. local needs and uses. Parts are under the central administration of the State Domain Agency and given on concession to private farmers. Western practice normally includes as state land all public property (632,300 hectares in Romania)69 as well as so-called "private domain land" of the state, counties, and municipalities (another 3,230,000 hectares). According to this calculus, there were almost 4 million hectares of state land in Romania in 2000, about the same area as in 1989­90 (table 4.4). Of this 4 million hectares, 630,000 hectares (the public state domain) cannot be privatized, 1 million hectares (the private domain of the state) is potentially subject to privatization but is under active consideration for transfer to private use through leasing and concession arrangements, and 2.2 million hectares (the private domain of counties and municipalities) could potentially be privatized but does not appear to be under any active consideration for change of ownership or even tenure. Table 4.4. Ownership of State Land, 1989­2001 Total Land owned by the state, counties, and agricultural municipalities Percentage of total agricultural land (thousands of hectares) land (thousands of Year hectares) Public "Private" Total Public "Private" Total 1989 14,759 4,134 0 4,134 28.0 0 28.0 1990 14,769 4,244 0 4,244 28.7 0 28.7 1991 14,898 2,662 1,912 4,574 17.9 12.8 30.7 1992 14,790 2,560 1,834 4,394 17.3 12.4 29.7 1993 14,793 2,615 1,842 4,457 17.7 12.5 30.1 1994 14,798 2,618 1,338 3,956 17.7 9.0 26.7 1995 14,798 2,618 1,338 3,956 17.7 9.0 26.7 ...... 2000 14,857 632 3,229 3,861 4.3 21.7 26.0 2001 14,833 571 3,204 3,775 3.8 21.6 25.5 Source: Data for 1989­95 are from National Strategy for Preparing Romanian Agriculture Accession to EU, MAFF and IAE], Bucharest, 1995, p. 89. Data for 2000 are from the National Office for Cadastre Geodesy and Cartography. Data for 2001 are from Romania's Agriculture, MAFRD, Bucharest, 2002, p. 6. 69 In 2004 another 190,000 hectares of state land was restituted to private owners, decreasing the total area administered by the State Domain Agency to 550,000 hectares. 64 Table 4.4 reveals that what is usually presented as a dramatic decline in state land--from more than 4 million hectares in the communist period to 571,000 in 2001--is merely a reclassification of public and "private" state land. More than a decade after the 1991 Land Law, the state had privatized about 800,000 hectares. This figure represents 5 percent of total agricultural land, 17 percent of total land in state domain (both public and private), and 20 percent of an estimate of the original privatizable reserve of state land (4 million hectares in the base year of 1991). Table 4.5 summarizes the outcomes of state land privatization between 1991 and 2001. These estimates refer to privatization of land to individuals (mainly through restitution); they are not related to the privatization of state-owned farms, which are privatized without their land (see below). They apparently do not include sales of state land by auction, which although legally permitted have not yet been held by the State Domain Agency. Table 4.5. Privatization of State Land, 1991­2001 Item 1991­1995 1996­2001 1991­2001 Privatized state land (thousands of hectares) 618 181 799 Percentage of total privatizable land in 1991a 15.5 4.5 20.0 a. Estimated at 4 million hectares: 4.6 million hectares in public and private state domain in 1991 minus 0.6 million hectares in nonprivatizable public state domain in 2001. Source: NIS 4.3 Farming Structure and Organizational Forms in Agriculture During the communist era, Romania's agriculture was organized primarily around state-owned farms and agricultural cooperatives, which on the eve of transition, in 1989, controlled more than 85 percent of all agricultural land. Despite the sweeping collectivization in 1949­50, private agriculture never disappeared. It was represented by a multitude of small individual farms and household plots on which the large rural population cultivated about 15 percent of agricultural land, mostly for subsistence. The land use pattern changed dramatically during the decade of transition. The individual sector increased its holdings from 15 percent of agricultural land in 1989 to about 55 percent in 2002 (table 4.6), of which an estimated 5 percent is cultivated by individuals in joint cultivation in various informal family associations without legal status. The cooperative sector disappeared completely: cooperatives (and some state-owned farms) were transformed into various legal entities (including privately owned companies and what remains of the former state sector) that today control about 45 percent of agricultural land. Table 4.6. Agricultural Holdings and Utilized Agricultural Areas, by Legal Status, 2002 Legal status of holdings Number of Utilized agricultural Agricultural area per holding agricultural holdings area (hectares) (2)/(1) (1) (2) Individual agricultural holdings 4,462,221 7,708,757 1.73 Legal entities, of which: 22,672 6,221,952 274.43 Farm associations 2,261 975,564 431.47 Commercial companies 6,138 2,168,792 353.34 Public administration units 5,698 2,867,368 503.22 Other 8,575 210,227 24.52 Total agricultural holdings 4,484,893 13,930,710 3.11 65 Source: Agricultural Census 2002. Before the 2002 General Agricultural Census, the statistical base for assessing farming structures and developments in land use patterns was weak. The analysis presented here section reflects ambiguity. The first agricultural census resulted in solid information on the farming situation and, in general, confirmed the conclusions and development trends outlined above. It revealed the dual structure of agriculture, with about 55 percent of agricultural land used by the individual and household sector and 45 percent used by various categories of legal entities. Land not registered as farms or agricultural holdings was not accounted for. After more than a decade of transition, Romanian agriculture is characterized by farms of two organizational types. The first, the dual or household sector, consists of 4.5 million farms of about 1.73 hectares on average. This sector controls nearly 55 percent of agricultural land. About 185,000 holdings of these farms exclusively produce animals and do not farm any agricultural land. A subcomponent of private agriculture consists of so-called family associations or informal associations. Due to the informal character of these associations, statistics for this category are not explicitly outlined in the 2002 census but are instead included in the category of individual holdings. These family associations, which number about 6,500, are spontaneously created Figure 4.2. Distribution of Agricultural Land in Romania, by Type of Holding, 2002 othertypesofholdings 3% publicadministrationunits 23% individualholdings 54% commercialcompanies 14% farmassociations 6% Source: Agricultural Census 2002 voluntary associations of individual farmers that are not registered as legal entities and have no separate legal status. They are much smaller than the legal associations, averaging about 120 hectares and estimated to cultivate 5 percent of agricultural land. The second component of Romania's agriculture is agricultural holdings classified as legal entities. According to the 2002 census, there were about 22,000 such units, with an average holding of 274 hectares. This category includes farm associations, commercial companies, public administration units, and other types of holdings (figure 4.2). Romania has some 2,261 farm associations. These are legal person entities, structured on the communist-era producer cooperatives, with crop farming as main activity. The average holding is 431 hectares. 66 Commercial companies are mostly crop farms operating on privately owned or state- concessioned land, either bought or leased from its post­1991 owner. Some 6,138 of these companies operate in Romania, with an average holding of 353 hectares. Commercial companies include a small number of state-controlled agricultural companies (successors of former state- owned farms), whose number gradually declined after 2002.70 Public administration units (mainly communal pastures managed by central or local administration units) account for 5,698 entities, with an average size of 503 hectares. Other types of holdings (NGOs, religious settlements, and few cooperative units) account for 8,575 entities, with an average size of 25 hectares. 4.3.1 Privatization of State-Owned Farms In 1989 Romania had 411 state-owned farms--known as intreprinderi agricole de stat (IAS)-- which controlled 2 million hectares of agricultural land (14 percent of total agricultural land and 50 percent of state-owned agricultural land). The strategy for transition to a market-oriented economy naturally included privatization of state-owned farms. As a preliminary step to privatization, the farms were technically transformed in 1990­91 into joint-stock companies. The assets of the former state-owned farms--now called fostele intreprinderi agricole de stat (FIAS)--became the property of the new commercial companies, with the state initially continuing in the role of sole shareholder. The next stage of state-farm privatization, begun in 1991, involved transfer of the shares of the state-controlled commercial companies (including FIAS shares) to two types of holding organizations: the state ownership fund (SOF), which accounted for 70 percent of the shares, and five private ownership funds (POFs), which accounted for 30 percent. The SOF was to sell about 10 percent of its portfolio to private investors each year. The POFs issued "ownership certificates" against the shares in their portfolios, which were distributed free of charge to all Romanian citizens as part of a mass privatization scheme. The management of the assets of the former state-owned farms remained in the hands of state-controlled holding companies (the SOF and the POFs). These organizational changes, however necessary, did not convert the state- owned farms into privately owned, profit-oriented units. The third stage of privatization began in December 1999, when the government established the policy of selling the assets of state-owned farms to private investors and leasing state-owned land to the new operators or other interested users. According to this policy, state land had to be privately farmed, based on a 49-year concession or a long-term lease between the administrator of state land and a private investor. This transfer of land use rights may or may not have included the sale of shares in the farms' assets, which may be privatized separately through an auction or other mechanism. An important element of the new policy announced in December 1999 was the transfer of responsibility for privatizing state farms from the largely unsuccessful SOF to the MAFRD, which established for this purpose the so-called State Domain Agency (ADS in Romanian, SDA in English). The SDA started in January 2000, with 739 state-controlled agricultural companies in its portfolio. This number was substantially greater than the number of state-owned farms in 70The statistics on the state sector remain highly ambiguous (see section 4.3.1). 67 1989 (411), because the original state-owned farms sometimes split into several units in the initial process of legal reorganization into (state-controlled) commercial companies (FIAS). As of March 2004, 281 (38 percent) of the 739 FIAS had been privatized (sold to private investors) (table 4.7). Another 8 (1 percent) remain to be privatized. The remaining 450 (61 percent) have been liquidated, either through bankruptcy or administrative liquidation. Table 4.7. Status of Privatization of State Farms, 2002­2004 Item January 2002 May 2002 Oct. 2003 March 2004 Number of firms privatized 163 205 262 281 Number of firms remaining to be privatized 314 172 35 8 Number of farms liquidated, reorganized, or gone 264 362 442 450 bankrupt (Law 64/1995) Source: Mihail Dumitru, Romania: Country Case Study on Integrating Land Issues into the Broader Development Agenda, World Bank, Bucharest, March 2002; press conference with Cristian Candet, General Director of SDA, Nine O'Clock, English Language Newspaper, No. 2671, May 17, 2002; State Domain Agency, October 2003. SDA's initial portfolio in January 2000 included 1.1 million hectares of agricultural land, 950,000 hectares less than the original state farm holdings in 1989. The difference presumably represents areas restituted between 1991 and 2000 and a reserve for future restitution. Of this initial portfolio, some 160,000 hectares were restituted to individuals up to mid-2002 (table 4.8), so that SDA was left with an endowment of 977,000 hectares of state land (from the "private state domain"). As of mid-2002, 49 percent of SDA holdings had been transferred to private operators, 36 percent in conjunction with privatization and 13 percent granted to private lessees (table 4.8). More than 50 percent of land, or 500,000 hectares, was available for concession. Of this amount, nearly 360,000 hectares were in use by FIAS that had not yet been privatized. The total area managed by SDA decreased to only 550,000 hectares, all of which was transferred to private operators through concession contracts. Table 4.8. Land Inventory of the State Domain Agency December 2000 May 2002 (thousands of (thousands Status hectares) of hectares) (percent) Initialagricultural land area in SDA portfolio, January 2000 1,140 1,140 Restituted from state domain 160a Managed by SDA 977 100 Transferred to private operators, of which: 267 477 49 Concession contracts linked with asset privatization (49 155 351 36 years) Other concession contracts to private operators 112 126 13 Available for concession, of which: 500 51 Used by nonprivatized companies (preemptive concession) 356 36 Available for concession to new private operators 144 15 Source: Mihail Dumitru, Romania: Country Case Study on Integrating Land Issues into the Broader Development Agenda, World Bank, Bucharest, March 2002; press conference with Cristian Candet, General Director of SDA, Nine O'Clock, English Language Newspaper, No. 2671, May 17, 2002; State Domain Agency, October 2003. a. Interview with Corneliu Popa, General Director of SDA, Nine O'Clock, English Language Newspaper, No. 2905, April 24, 2003. 68 The FAO Synthesis Report (2002) states that SDA has 816 concession contracts with physical and legal entities for 817,000 hectares (1,000 hectares per contract on average). These numbers correspond to land in both concession and preemptive concession in table 4.8, which is correct because, legally, all state-owned farms had to conclude concession contracts with SDA. Overall, the process of privatizing the state-owned farm land has been slow, especially with respect to farms subject to bankruptcy procedures. This process needs to be accelerated immediately, since state-owned farms will not be eligible for any kind of financial support under the CAP­type support policies to be introduced alongside Romania's EU accession. 4.4 Miniaturization and Consolidation Romanian policymakers are preoccupied with the fact that their country has 4.2 million farming units, 60 percent of which are smaller than 2 hectares. For comparison, the 15 countries of the European Union in aggregate have 6.8 million farming units, of which 60 percent are smaller than 5 hectares. The average farm size in Romania (including all individual and corporate farms) is 3.1 hectares, while farms in the EU-15 average 19 hectares. The small size of Romanian farms has led to heated discussions about miniaturization and consolidation, accompanied by expressions of concern that "small, quasi-subsistence household farms far outnumber commercial (private or state-owned) farms operating large areas of land" (FAO Macro Report, 2002). The fact that this "outnumbering" is quite normal in all market economies does not seem to calm the ongoing debate. 4.4.1 Distribution of Farm Sizes Romanian farms vary greatly in size (table 4.9). Most individual farms are small, with less than 0.25 percent of them larger than 20 hectares. About 60 percent of individual farms are smaller than five hectares; 38 percent (corresponding to about 1 million farms) are between two and five hectares. Table 4.9. Distribution of Individual Farms and Utilized Agricultural Area, by Farm Size, 2002 Farm size category Number of holdings Share of number of Utilized area Share of utilized holdings (percent) (hectares) area (percent) Less than 0.1 539,325 12.6 23,871 0.3 0.1­0.3 580,255 13.5 103,515 1.3 0.3­0.5 322,825 7.5 124,510 1.6 0.5­1 723,600 16.9 505,830 6.5 1­2 896,603 20.9 1,270,922 16.4 2­5 949,521 22.2 2,898,616 37.6 5­10 215,714 5.0 1,421,180 18.4 10­20 35,953 0.8 453,214 5.8 20­30 5,081 0.1 120,916 1.5 30­50 3,450 0.0 130,434 1.6 50­100 2,759 0.0 180,933 2.3 More than 100 2,229 0.0 474,810 6.1 Total 4,277,315 100.00 7,708,757 100.00 Source: General Agricultural Census 2002. 69 The number of individual farms in the extreme size categories--farms with Figure 4.3. Change in Average Farm Size between 1996 and less than 0.5 hectares and farms with 2001 more than 3 hectares--has been percentage points growing. Their combined share 4 increased from 35 percent of all farms 2 in 1996 to 40 percent in 2001 (figure 0 4.3). The increase in the number of the smallest and the largest farms was -2 accompanied by shrinkage of farms -4 with 0.5­1 hectares, whose share dropped from 31 percent in 1996 to 26 -6 under 0.5 ha 0.5-1 ha 1-3 ha >3 ha percent in 2001. There was almost no Source: NIS change in the share of farms in the one to three hectare category. Some spontaneous consolidation has been occurring, as evidenced by the increase in the proportion of relatively large individual farms. At the same time, there are signs of increasing fragmentation. Romania is thus experiencing a certain polarization of farm sizes in the individual small farm sector, as the number of both the smallest and the largest among the generally small household farms grows while the number of mid-sized farms is shrinking. This process is not unique to Romania: similar trends are apparent in other Central and Eastern European countries, particularly Poland. There is a diversity of holding sizes among the commercial companies and legally registered farm associations as well. Almost 60 percent of these entities are larger than 100 hectares (with an average size of 655 hectares). These enterprises farm more than 97 percent of the agricultural land belonging to this farm category. Table 4.10. Distributionof Corporate Farms (commercial companies and farm association) and Utilized Agricultural Area, by Farm Size, 2002 Number of Share of number of Utilized area Share of utilized area Farm size holdings holdings (percent) (hectares) (percent) category Less than 0.1 133 1.68 6,2 0.00 0.1­0.3 286 3.61 50 0.00 0.3­0.5 156 1.97 60 0.00 0.5­1 221 2.79 148 0.00 1­2 245 3.09 318 0.01 2­5 300 3.78 932 0.03 5­10 259 3.27 1,818 0.06 10­20 309 3.90 4,363 0.14 20­30 235 2.96 5,667 0.18 30­50 309 3.90 11,803 0.38 50­100 796 10.04 55,908 1.78 Less than 100 4,681 59.03 3,063,275 97.42 Total 7,930 100.00 3,144,348 100.00 Source: General Agricultural Census 2002. 70 4.4.2 Measures to Encourage Farm Consolidation One of the benefits of land reform in Romanian is that very large farms no longer dominate the farm structure, as they did in the past. This is a very positive development, reflecting better compliance with market principles. Yet these results do not say anything about absolute farm sizes, and they are certainly not to be construed as evidence that farm sizes--especially of smaller farms--are adequate for commercial or even subsistence production. Complaints about excessive miniaturization of land holdings are prevalent among Romanian policymakers and small farmers. Is miniaturization a serious problem that deserves priority attention? The best way to determine if it is would be to analyze the income of rural families with farms of different sizes (including all farm and off-farm components) and to determine the incidence of poverty (that is, inability to meet the minimum standard of living) in different farm size categories. This would provide a first indication of the range of farm sizes that are too small even for subsistence needs and makes a case for consolidation. A simpler, but less accurate, approach would ignore the poverty line and focus on the variation of family income with farm size: if family income were shown to be larger for families with larger land holdings, this would constitute prima facie evidence in favor of consolidation.71 Unfortunately, no such study of the household-level impacts of fragmentation has been carried out for Romania, although the various World Bank and Phare/Ace surveys conducted between 1996 and 2001 contain the necessary information. Empirical evidence from farm surveys in Romania and other countries shows that more land is at least a partial guarantee of a better standard of living in rural households. This clearly suggests that consolidation of small farms should be encouraged. Consolidation will occur naturally if farming is a profitable business: farmers will seek ways to increase their holdings in a supportive environment, in which they can earn enough money from agriculture. The government should accordingly implement policies that will enable farmers to improve their financial performance. These policies include the following: · Developing marketing and supply channels for agriculture, including encouraging service cooperatives for small farmers. · Providing market information, extension, and farm management training for small farmers (all these are public goods and thus the responsibility of the government) · Paying attention to the establishment of rural credit systems accessible to farms of all profiles. · Providing targeted grants and subsidies to develop commercial activities and introduce high value-added commodities significant export potential. One conclusion about farm consolidation emerges very clearly from international experience: formal government-initiated land-swapping programs (either directly between small landowners or through a state-owned pool) are never very successful. The Slovak Republic, where Napoleonic inheritance laws produced extreme fragmentation of holdings over several generations, followed this path. After more than a decade, it reached a dead end. Consolidation 71This methodology has been applied to Poland in Z. Lerman, "Productivity and Efficiency of Individual Farms in Poland: A Case for Land Consolidation," paper presented at the AAEA Annual Meeting, Long Beach, CA, July 28­ 31, 2002. Electronic versions at AgEcon Search. 71 must be left to market forces, with the government standing ready to provide budget support to successful and sufficiently motivated farmers willing to enlarge their farms in a market-driven environment. Consolidation of fragmented farms naturally requires that some people give up the use (if not the ownership) of their land in favor of more efficient and more productive farmers. At least three market mechanisms may act in this direction: development of markets for land transactions, provision of adequate pensions to elderly rural landowners, and development of nonagricultural employment opportunities in rural areas. The development of land market transactions, including land leasing, is particularly important for Romania, where restitution and reconstitution transferred land ownership and use rights to 4.2 million rural beneficiaries, of which 40 percent are older than 60 and nearly 30 percent are pensioners.72 According to some estimates, pensioners own 65 percent of the land in rural areas.73 These elderly people continue to cultivate their land plots as a source of food and some cash income. This is evident from the astonishingly high activity rates among rural seniors: about 40 percent of the rural population in the 65­75 age group work (predominantly in agriculture), compared with less than 2 percent of the urban population (FAO Farm Consolidation Report 2003). These elderly people are obviously not the most productive among farmers, and they are probably on the verge of becoming passive landowners. Another 500,000 restituents are urban residents with alternative careers who have no interest in resuming active farming. In this setting, land markets play an important role in providing a medium for the flow of land resources from less active to more active and efficient producers, generating potential productivity improvements through consolidation. Land markets are not restricted to buy and sell transactions: they also include land leasing. Everywhere in the world, and especially in transition economies, small landowners prefer to keep their land in the pool of family assets, where it potentially provides a safety net for the family. Land leasing enables landowners to retain legal ownership of an asset that they cannot themselves use productively while at the same time receiving a stream of earnings from the lessee. (Emerging land markets in Romania are examined in the next section.) To exploit land markets as a tool of land consolidation, the government should adopt policies that simplify registration and titling procedures, minimize transactions costs, and ensure security for both lessors and lessees through effective contract enforcement. A detailed analysis of the Romanian system of farm pensions (FAO Farm Consolidation Report 2003) suggests that rural pensions are inadequate and that elderly people are forced to continue to farm well into their retirement years in order to earn enough income to meet their minimum subsistence needs. As a result, households of pensioners derive only 30 percent of their income from pensions and fully 58 percent from the household farm (50 percent in kind and 8 percent in cash from product sales). There are valid budgetary and actuarial reasons why the government limits rural pensions to an absolute minimum. Given this situation, however, no one should expect pensioners to give up the relative safety of food flows from the family plot in exchange for the much less certain and probably insufficient income from sale or lease of their land. The 72NIS data for 1998; cited from Gavrilescu et al., Romania Case Study, Phare/Ace report, June 1999. 73Data for 1997 from C.Chirca and E.Tesliuc, "De la saracie la dezvoltare rurala." World Bank and NIS, Bucharest (1999), p.42. 72 only way to encourage elderly people to stop farming and release their land resources to more productive users is by raising their pensions to an adequate level, or at least to a level that will enable survival when supplemented with some income from land leasing. This is obviously a policy that the government cannot implement under the present circumstances. As a result, land fragmentation will remain a back-door substitute for the government's inability to provide adequate pensions to the rural population. The current MAFRD program is projecting the possible introduction of an early retirement­type payment scheme for farmers older than 60. A higher pension is foreseen (about 100 euros) for one hectare of land that is sold and a lower pension (about 50 a year) for one hectare of land that is leased out. In a country with 4.2 million farm units on some 10 million hectares of arable land, it is not realistic to expect a doubling in size of the smallest farms in the short term. Any short-term moves in this direction would force more than 2 million people--most of them elderly--out of agriculture and could lead to a new migration of active rural people to urban areas, increasing urban unemployment. Development of nonagricultural rural employment opportunities in services, construction, and manufacturing is essential in this situation, especially for people of pre-retirement age. Nonagricultural rural employment will release labor from farming and facilitate farm consolidation, but the process is a very long one. The government should initiate appropriate policies as soon as possible in order to ensure successful development of nonagricultural jobs a few years down the road. Factors other than land consolidation also have a strong positive impact on rural incomes. For a given land area, other factors--human capital (that is, education), access to machinery, willingness to engage in commercial activities--can have an even greater impact on household well-being. Better technology and more human capital can work wonders in improving the productivity and efficiency of even the smallest farms. Emphasis on physical and human capital and development of market channels (for commercial activities) are probably the priority policy directions that the government should explore, in addition to land market development, in its efforts to counteract the impacts of fragmentation. Similar conclusions regarding the importance of physical capital, education, and market services for successful farming in transition economies have been reached by other researchers. Increasing access to capital, education, and market channels may produce additional synergies by enhancing the motivation and capacity to develop nonagricultural activities in rural areas. 4.5 Emergence of Land Markets Privatization of land never guarantees the emergence of land markets. In Romania the 1991 Land Law specifically prohibited alienation of land that "new," previously landless landowners received as part of the "constitution" process. Whole categories of transactions were blocked in this way for 10 years from the date of the original grant of land. The prohibition on sale of land by "new" owners remained in force after the passage of the Law on Land Transactions in 1998. The legal framework for land market transactions is provided by two main laws. The first is the Law of Land Transactions (1998), which regulates buying and selling of land by both physical and legal persons. This law also imposes a limit of 200 hectares on private land ownership and provides preemptive rights to existing lessees, neighbors, and co-owners. 73 The second law is the Law on Land Leasing (1994, amended in 1998), which regulates the contractual relations between lessors and lessees. The originally imposed five-year minimum on land leasing was removed in 1998, but other restrictions persist. The current law does not allow subleasing or establishment of real estate leasing agencies, the lease contract can be transferred to a third party only if the lessee dies, and individuals seeking to lease agricultural land need to obtain a professional qualification certificate from the MAFRD. These bureaucratic restrictions are a legacy of the communist era, when land leasing, like land sales, was prohibited. Corporate ownership and foreign ownership of land are two sticking points for all transition economies. Unlike some of its neighbors, Romania allows land ownership by legal entities, but the 1991 constitution prohibits foreign ownership. Foreign nationals are banned from buying land. Foreign-owned Romanian companies (that is, Romanian subsidiaries of foreign corporations or joint ventures) may buy land, but the land may be owned by the company only for as long as it exists in the form of a Romanian legal entity. Both foreign nationals and foreign- owned companies are permitted to lease land. State land may be leased (concessioned) by auction to foreign nationals and foreign-owned companies. The issue of foreign ownership is one of considerable political and practical importance for Romania, as for all transition economies. The argument is fueled by two factors: the historical Eastern European resistance to the acquisition of land--especially farmland--by foreigners and the practical consideration of land prices, which are lower in Romania than in the European Union and even Poland. Although prices have risen significantly during the past five years (table 4.11), at an average price of $300 per hectare of agricultural land outside of villages in 2004, prices remain low compared with the $14,000 per hectare in western Germany, the $4,000­ $5,000 per hectare in eastern Germany, and the $800­$1,800 per hectare in Poland. The low price of land in Romania reflects low yields, insufficient market development, low productivity, and the low return on agriculture, but yields could be raised by applying foreign technology. Thus Romanian farmland could be bought up relatively cheaply by EU nationals. Some observers fear that allowing foreign ownership would drive prices up and make farmland less affordable to local farmers. Foreign ownership of land is one of the issues that will have to be addressed as part of Romania's EU accession strategy. EU member states are generally required to eliminate all barriers to land ownership by EU nationals from any country, and only very specific exceptions are allowed. 4.5.1 Land Transactions Relatively unrestricted buying and selling of land became possible after the adoption of the 1998 Law on Land Transactions, which among other provisions removed the preemptive right of the state to purchase land from individual owners. As of October 2004, 482,000 hectares of agricultural land had been sold inside and outside villages (table 4.11). This is a very respectable 4.2 percent of private agricultural land in rural areas (11.5 million hectares). 74 Table 4.11. Buying and Selling of Land in Romania, 1999­2004 (cumulative end-of-year data) Item 1999 2000 2001 2002 2003 2004 (October) Inside villages Sold area (hectares) 26,904 33,646 37,966 58,014 64,381 68,686 Total value (billions of 1,555 1,870 2,439 5,395 7,942 9,600 lei) Price (millions of lei per 58 56 64 93 123 139.8 hectares) Outside villages Sold area (hectares) 43,977 65,723 94,480 254,281 340,699 413,368 Total value (billions of 281 452 764 2,209 3,040 4,313 lei) Price (millions of lei per 6 7 8 8.7 8.9 10.4 hectares) Source: Ministry of Agriculture, Forests and Rural Development and National Office of Cadastre. The strong potential for land sales among rural landowners is also revealed by the results of the 1996 World Bank/PHARE survey, which shows that 8 percent of respondents indicated willingness to sell land (two years before the Law of Land Transactions legalized land transactions). An interesting feature of the survey results is the increase with age in the percentage of respondents willing to sell land (figure 4.4). No official statistics are available on land leasing. The MAFRD Directorate of Rural Development made a one-time attempt to collect land leasing data for 1997. According to these data, land leasing and crop share arrangements accounted for 16 percent of agricultural land operated by individuals. These numbers do not include the land leased by individual shareholders to the former state-owned farms, which in 1996 accounted for 0.56 million of the 1.7 million hectares used by state-owned farms (33 percent). They also exclude concession and lease contracts signed by the State Domain Agency after 1999, which reached 477,000 hectares in mid-2002. Pooling all of these numbers (with the full knowledge that they correspond to different years) yields a very rough estimate of the volume of land leasing in Romania of about 2 million hectares, nearly 14 percent of total agricultural land in the country. The structure of land prices in Romania seems to favor the landowner's decision to Figure 4.4. Percentage of Romanian households willing lease out instead of sell. Typical lease to sell their land, by average age of adults in household, 1996 payments to private landowners represent 20­30 percent of harvest. Taking the modest 1999 yield of 2,700 kilograms of percent of respondents 12 wheat per hectare and the selling price of 10 lei 1,500 per kilogram, Florian (2002) 8 calculates the lease payments at about lei 1 6 million per hectare in 1999 prices. 4 Capitalizing the lease payments at the real 2 interest rate of 5 percent (which is internationally quite high) yields a value 0 Less than 50 51-65 Over 65 All sample of about lei 20 million per hectare in 1999 average age of adults in household Source: Private Agriculture in Romania, 1997, p. 24 75 prices (much more if a lower capitalization rate is used). This is almost three times the average reported selling price of lei 7.2 million per hectare in 1999. 4.5.2 Cadastral System Until 1999, when the Law on Cadastre and Real Estate Publicity became effective, Romania had a dual land registration system inherited from before World War II: the land book system (practiced in the 18 Transylvanian counties) and the inscription/transcription system (practiced in the remaining 24 counties). The land book is the chronicle of ownership for a particular plot of land, showing the survey boundaries. A change of ownership occurs when a corresponding entry is made in the land book. A copy of the page from the land book is therefore the basis of every sale contract. Under the inscription/transcription system, transfers of ownership are recorded in an alphabetical register under the name of the buyer. Title verification therefore requires a laborious search through notebooks in which previous transfers have been recorded. A title issued on the basis of such searches is always disputable: if another person comes forward with a title to the same property, the dispute has to be resolved in court. The new law extended the land book system to all counties, through the land book offices established within territorial courts. The 1996 Law on Cadastre and Real Estate Publicity provided for transition to the land book system throughout Romania. The law came into effect only in July 1999, and the process of registration of properties in the land books continues. In areas in which the inscription/transcription system was used, the registration of real estate in the land book was undertaken either when a transaction occurred or at the simple request of the owner. The condition is that for each property a cadastre file is prepared based on surveys conducted by certified surveyors. The information under the inscription/transcription system is kept in archives for verification and validation of ownership rights at first registration in the land book. Land book offices have been established throughout the entire country to facilitate and control registration. Until 2004 the land book offices operated as extensions of the court system, falling under the jurisdiction of the Ministry of Justice. Each land office was headed by a local judge with auxiliary staff. The National Office for Cadastre was established in 1996, under the direct authority of the prime minister. In 2001 it was incorporated into the Ministry of Public Administration. Subsequent establishment of the Ministry of Administration and Interior (in 2003) through merger of the Ministry of Public Administration and the Ministry of Interior brought the National Office of Cadastre under the Ministry of Administration and Interior. In 2004 the activities of cadastre and land book were merged within a single agency, the National Agency of Cadastre and Real Estate Publicity (ANCPI), which incorporated the National Office of Cadastre and all land book offices. This merger simplified transactions, improved the efficiency of registration and evidence of properties, and relieved the courts. ANCPI will continue the activities of land book offices but without the involvement of judges, their role being transferred to administrative staff (registrars). ANCPI is responsible for creating the general cadastre (a full inventory of land and buildings in all counties) and ensuring public access to cadastral information. The general cadastre is organized at the county and country level, showing the boundaries of administrative units (urban and rural). At this stage, there is no electronic data exchange between the county cadastre offices and headquarters. A comprehensive information technology system that will integrate cadastre and land book information is in the 76 stages of preparation and testing under the World Bank­financed Cadastre and Land Registration Project, launched in 1999. In addition to its statutory responsibility for the electronic cadastre of the entire country, in mid- 2001 the National Office for Cadastre took over from the MAFRD responsibility for manually titling agricultural land distributed into private ownership since 1991. More than 90 percent of land has been titled manually since 1991, up from 70­75 percent until 2001. The system will be replaced with an electronic cadastre based on updated digital maps and recent aerial photography. Pilot testing of the methodology was conducted in two counties near Bucharest, Dambovita (90 percent completed as of mid-2003) and Prahova (30 percent completed). The goal of establishing a full electronic cadastre at the country level by the end of 2004 was extremely optimistic, and a number of administrative, financial, and legal matters prevented its achievement. Full coverage of the country with new aerial photography records is expected be achieved by early 2006, with digital maps available by late 2006. Preparation of digital cadastral maps based on the new topographical maps would require more time to complete, in direct relation with the funding available. More urgent is the need to prepare the maps for the Land Parcel Identification System (LPIS), which is compulsory for implementation of SAPS. Since the general national cadastre is still a work in progress, all land registrations based on notarized sale contracts and private surveys are legally regarded as "provisional" until the new National Cadastral Survey (begun in 1999) is completed at the county level. Currently, registration guarantees possession but not the precise boundaries of the property. Notaries, who are responsible for validating the title, play a central role in transfer of ownership, as only a notarized sale contract can serve as the basis for recording ownership transfers. Notary fees (generally based on a percentage of the transaction value above a certain fixed minimum) and survey fees are thus two unavoidable components of the cost of property transfer. A recent calculation by the ANCPI showed that the transactions cost of a piece of land worth 90,000 is about 2.2 percent. Owners perceive these costs as high, and they constitute a serious obstacle to completion of cadastral registration. Therefore, these costs should be under constant supervision by the government. 4.6 Priority Tasks for Completing Land Reform and Farm Restructuring Romania has made significant progress toward establishing a genuine private agricultural sector characterized by a mix of organizational types spanning the entire spectrum of individual and corporate farms. Land reform in the sense of restoring the ownership and use rights of individuals has been virtually completed. Yet some important tasks remain outstanding. Foremost among them is completing the privatization of state-owned farms and ensuring that the bulk of state-owned land is privatized by auction or, failing that, expeditiously entrusted to private operators. More than half of the original number of state-owned farms in the SDA portfolio are judged to be insolvent and are slated for liquidation rather than privatization. Liquidation procedures must be completed without further delay. Large areas of agricultural land will thus be released from their currently locked status of preemptive concession and become available for leasing to private operators. Priority must be given to disposing of these large reserves of state land and returning them to productive cultivation by private farmers. 77 Bankrupt state-owned farms have been allowed to accumulate losses for more than a decade due to the traditional regime of soft budgets, which encouraged financial irresponsibility. A preliminary analysis of the financial data for some 10,000 legal entities provided by the National Institute for Statistics suggests that more than half of these corporate farms reported losses. Not all of these farms have reached a state of true insolvency, but the proportion of unprofitable farms is alarming. The government should avoid the potential financial disaster that may evolve from this situation and take immediate measures to impose hard budget constraints and strict financial discipline on all farms. Bankruptcy procedures, however painful, should be enforced for all chronically unprofitable farms. One of the original goals of transition was the elimination of the large-farm bias built into the Romanian agricultural mentality since 1948. Unfortunately, recent policies have only strengthened the feeling that large farm bias persists. The most recent manifestation of this bias is the curious classification into "commercial" and "family" farms, which allows subsidies to be paid mainly on the basis of size. Commercial farming should definitely be supported and encouraged, but this should be done based on measures of commercial activity, not size. The objective should be to help small farmers increase their level of commercialization, something that cannot be achieved by cutting them off from subsidies because of their size. Successful development of the farm sector requires abolishing the traditional preferential treatment of large farms and establishing a level playing field for farms of all organizational types and sizes. An important task with major implications for the welfare of the rural population and rural development in general is consolidation of the fragmented farm structure. As discussed in section 4.4, the measures required to advance this task extend far beyond the conventional framework of agrarian reform. Significant efforts are required to finalize the establishment of a national electronic cadastre system and to implement measures to simplify and facilitate land transactions (including leasing of agricultural land) as well as to reduce related transactions costs. In addition to the development of land markets and other market services for agriculture, this task requires promoting the nonagricultural rural economy, including by paying attention to education and training, rural finance, and rural pensions. The statistical institutions must improve the collection and reporting of data on land ownership, land use, and farm organization. Policymakers should be able to rely on a complete set of data covering the full period since 1989­90 and reflecting all relevant aspects of land reform, farm restructuring, and agricultural privatization. It is the responsibility of the statistical institutions to provide such data for decision-making. 78 Chapter 5 The Food Industry and Agro-processing A well-functioning and competitive food industry is an essential precondition for EU accession. The privatization of Romanian agro-processing has been almost fully completed, but the state still retains a strong presence in some subsectors. Progress with privatization may have been responsible for the growth in output and productivity in agro-processing since 1990. The options for private ownership have also attracted increasing flows of FDI, but the level of FDI in the food sector (and primary agriculture) remains low. Moreover, foreign investors generally prefer food retailing and restaurants; FDI in food processing is limited to breweries and dairies. Small private owners (who constitute two-thirds of the sector) generally lack the financial resources for technological improvements, while the oversized and technologically obsolete state-owned plants work at low capacity and efficiency. Privatization of the remaining state-owned processors (especially in the important sugar and fruit and vegetable subsectors) combined with aggressive promotion of FDI should become a high priority. 5.1 Industry Performance and Structure The food industry accounts for 14 percent of total industrial production in Romania (18 percent of all manufacturing industries), and the real value of its output increased 43.5 percent between 2000 and December 2004--far more rapid growth than the 25.0 percent increase for all manufacturing industry.74 The combination of the developments in output values (table 5.1) and output quantities (table 5.2) hints at a modest shift of the sector toward the production of outputs with higher value. Table 5.1. Value of Production in the Food and Beverage Industry, 1998­2003 (millions of lei in 1990 constant prices, deflated by the CPI) Product 1998 1999 2000 2001 2002 2003 Meat and poultry products 14,149.0 12,550.3 1,5751.6 19,799.7 18,723.0 17,628.0 Fish products 164.9 160.0 293.4 574.1 310.6 398.8 Fruit and vegetables processing 1,790.7 1,424.2 1,809.1 1,478.5 1,589.7 2,157.3 Oils and fats 5,972.3 6,058.7 6,469.1 7,420.9 12,221.4 5,429.0 Dairy products 3,827.0 3,498.3 6,191.1 5,118.0 5,553.0 6,906.2 Milling 7,630.7 5,934.0 10,950.4 8,742.2 8,656.5 13,511.3 Baking 25,414.1 10,557.9 13,461.7 13,839.0 11,186.3 17,049.4 Sugar and sugar-based products 3,835.4 5,245.3 4,052.7 5,917.8 4,616.1 4,781.3 Wine, beer, alcoholic beverages 17,562.1 15,424.9 21,377.2 16,240.7 14,657.1 16,594.7 Mineral waters 7,962.3 6,989.8 6,818.9 7,348.9 7,208.3 7,725.9 Other 2,180.8 3,188.2 3,682.3 5,210.3 5,253.8 4,782.0 Total 90,489.1 71,031.6 90,857.5 91,690.1 89,975.9 96,963.9 Source: National Institute of Statistics a. Includes starch and animal feeds. b. Includes pasta and biscuits. c. Includes sugar products and chocolate 74 Figures are based on a Laspeyres-type index. 79 Table 5.2. Volume of Production in the Food and Beverage Industry, 1998­2003 (thousands of tons, except where indicated otherwise) Product 1998 1999 2000 2001 2002 2003a 2003/1998 ( percent) Meat 374 361 259 248 238 227 60.7 Meat products 129 147 127 138 136 136 105.4 Canned meat 10 10 11 14 15 19 190.0 Semi-canned fish 0.9 0.6 0.4 0.4 0.4 0.3 33.3 Canned fish 0.6 0.7 1.1 1.2 1.3 0.4 66.7 Canned vegetables 75 65 61 71 67 -- -- Canned fruits 40 41 43 40 40 -- -- Edible oil 173 245 253 285 218 206 119.1 Margarine 36 36 38 34 44 26 73 Consumption milk (thousands of hectoliters) 1,864 1,750 1,608 1,580 1,170 1,123 60.2 Fresh milk products (3.5% fat) (thousands of hectoliters) 825 922 905 1,077 1,578 1,485 180.0 Butter 7 7 6 6 6 7 100.0 Cheese 37 31 29 30 31 26 70.3 Wheat and rye flour (wheat equivalent) 2,945 2,763 2,275 2,249 2,269 2,436 82.7 Sugar, of which: 321 246 476 493 514 462 143.9 Sugar beet 185 114 55 74 66 57 30.8 Confectioneries and pastries 81 83 87 96 99 94 116.0 Alcohol (100% alcohol equivalent) (thousands of hectoliters) 376 184 275 348 409 455 121.0 Beer (thousands of hectoliters) 9,989 11,133 12,664 12,087 11,602 12,514 125.3 Tobacco products 29 31 33 38 33 32 110.3 Source: Ministry of Agriculture, Forests and Rural Development, Department of European Integration, Agricultural Statistics Service. -- Not available. a. Data are provisional. The concentration of the industry is low. The top five enterprises in the industry account for 8.6 percent of total revenue and 5.4 percent of employment. The top 20 enterprises account for 19.4 percent of total revenue and 12.5 percent of employment. In 2003, 10,688 firms were operating, 99 percent of them with majority private capital (table 5.3). These firms accounted for 99.4 percent of the value of production. Two-thirds of the 9,000 firms in the sector have fewer than 10 employees. Relatively large companies (with more than 50 employees) are dominant only among sugar, wine, and beer producers. In these three subsectors, 50­60 percent of companies have more than 50 employees (with the national figure is 9 percent). 80 Table 5.3. Structure and Privatization Status of Romanian Food and Beverage Industry, by Sector, 2003 Percentage of all firms Percentage of firms Sector Number of firms in sector owned by state Meat and poultry products 1,193 11.2 1.0 Fish products 51 0.5 2.0 Fruits and vegetables processing 279 2.6 3.9 Oils and fats 319 3.0 0.6 Dairy products 812 7.6 0.2 Millinga 1,873 17.5 0.6 Bakingb 4,306 40.3 0 Sugar beet, raw sugarc 254 2.4 2.4 Wine, beer, alcoholic beverages 579 5.4 0.8 Mineral water 481 4.5 0.4 Other 544 5.1 0.4 Total food and beverage industry 10,688 100.0 0.5 Source: National Institute of Statistics. a. Includes starch and animal feeds. b. Includes pasta and biscuits. c. Includes sugar products and chocolate. 5.2 Privatization of the Food Industry During the 1990s, a number of agri-food subsectors that lie at the border between primary agriculture and the food industry were privatized (box 5.1). These subsectors include pig and poultry complexes, grain elevators, agricultural service companies, and seed trading companies. Pig and poultry complexes were a feature of the Romanian state farm sector. In 1989 the state sector, with less than 10 percent of all large farm enterprises (both state farms and cooperatives), accounted for more than half of all pigs and all of the poultry in Romania. By the end of 1996, the SOF had in its portfolio 114 pig and poultry complexes slated for privatization. There was a tremendous degree of concentration within this subsector, with the eight largest farms accounting for 70 percent of stocks and 70 percent of total debt. State livestock farms suffered from high indebtedness; their transfer to the private sector was a combination of privatization (that is, sale to private investors as going concerns) for the relatively successful companies and liquidation for the failing companies. As of early 2000, almost all pig and poultry complexes had been privatized. All of the new owners are domestic investors, as the livestock complexes failed to attract foreign capital. Grain storage sector was traditionally handled by Romcereal, the giant state-owned grain monopsony that until 1996 owned all of Romania's 10 million tons of grain storage and silo capacity and acted as a major input supplier, distributor of directed credit, grain purchaser, and grain storage and marketing agent. Through Romcereal, the government maintained full control over the grain market, preventing the private sector from entering the inputs and cereal markets. By early 1997 Romcereal had been broken up in two stages into 73 commercial grain companies (44 Comcereals and 29 Cerealcoms), which continued to operate with majority state ownership, while effectively exercising a judet- (county) level monopoly. 81 Box 5.1. Laws governing the privatization of commercial enterprises in Romania The legal framework for privatizing commercial enterprises in Romania has evolved since 1990 . · Law 31/1990: Transformation of state enterprises into commercial companies with state-held share capital. · Law 58/1991: First privatization law in Romania, defining the legal framework for equity transfer from the state to the private sector. The law established the State Ownership Fund (SOF), which took over more than 70 percent of total equity of all state-owned commercial companies, and five regional Private Ownership Funds (POFs), which took over the remaining 30 percent. The law envisaged a two-step process. The first step was the free transfer of "shares" in commercial companies (in the form of ownership certificates) to qualified Romanian citizens. The second step was the sale of remaining shares to the private sector. After these steps were completed, the sale of shares or assets could legally start. In retrospect, it seems that one of the main bottlenecks in its implementation was the fact that the SOF was allowed to choose the specific privatization method according to market conditions. · Law 77/1994: The MEBO (Management/Employee Buy-Outs) Law regulates participation in the privatization of a commercial company of its employees, management, former employees, and others having contractual relations with the company. The law was particularly relevant for agriculture, because it allowed agricultural producers to participate in the privatization of mechanical service companies. The law introduced the system of privatization on credit, with payback by installments over up to 12 years at low interest (5­10 percent a year). · Law 55/1995: The Mass Privatization Law provides for the real and free transfer of 30 percent of shares in state-owned commercial companies to the population (about $300 per qualified recipient) and the setting up of realistic procedures for selling shares issued by commercial companies. · Law 64/1995: The Bankruptcy Law establishes procedures for liquidating and reorganizing failing companies. Grain companies began to be offered for privatization in late 1998. The SOF did not have any difficulty finding private buyers, and most of the grain storage and marketing companies were privatized within one year (1999). Like livestock complexes, all grain storage companies were purchased by local investors, and contrary to expectations none of the multinational companies operating in Romania entered the grain sector. The privatization drive opened the grain sector to some new entrants, who bought a significant share of storage capacity (about 20 percent), generally in key areas (in important grain basins or close to the Danube and Black Sea ports). The emergence of the new storage capacities was also hastened by the fact that the former Comcereals used their inherited monopoly position to increase storage fees. Despite lack of experience and difficulties with access to credit, new entrants have generally shown satisfactory performance, suggesting that they had done a thorough business assessment before the acquisition and engaged in sound management afterward. In early 1997 agricultural service companies consisted mainly of 1,428 Agromecs (providers of mechanical field services), as fertilizers and chemicals were supplied directly by manufacturers or by specialized private firms. The Agromecs inherited old and obsolete machinery from the socialist regime. They suffered substantial financial losses, which left them unable to replace their equipment. Service companies began to be privatized in 1994­95 in the framework provided by the management/employee buy-outs and mass privatization programs. Some 450 companies had been privatized by 1996. The privatization rate accelerated in 1997, and almost all service companies had been privatized by the end of 1999. The privatized service companies find it difficult to compete with private one-tractor operators, who offer similar services at lower prices, mainly because they are not registered legal entities 82 and thus do not pay taxes. To compensate for competitive pressures, most privatized service companies have begun augmenting their activities with crop farming, mainly on land leased from individuals for an average payment of 600 kilos of wheat per hectare. Given their fleet size and tillage equipment, the privatized service companies farm an average of 3,500­5,000 hectares, equivalent to the area of a large state farm. Some companies have upgraded their fleets with high-performance imported machinery and purchased domestic tractors with various subsidies from the budget. In many cases old Romanian tractors were not sold (to avoid competition) but kept for spare parts. A problem remains in providing mechanized services to farmers, and farmers lack the financing sources to buy their own agricultural equipment. Most of the commercial seed produced in Romania was under the technical and financial control of SEMROM (for field crops) and UNISEM (for vegetables, flowers, potatoes). In early 1997 SEMROM was split into five state-owned companies with independent regional coverage; UNISEM remained almost intact. All six seed companies were privatized in 1998­99. They have to fight for market share, competing with private importers of certified quality seeds. The SEMROM companies generally deal with large seed producers (formal associations and state farms); small farmers are not encouraged to produce seeds (although doing so is profitable). Some SEMROM companies also import seeds, and import activities represent a steadily increasing share of their sales. The sales of seed trading companies declined after direct subsidies for seed purchases were reduced and the eligibility for these subsidies to private importers was extended. Privatization, increased competition, and shrinking operations have led to reductions in the work force of more than 30 percent, but no major changes in management have been reported. 5.3 Foreign Direct Investment Foreign direct investment (FDI) is needed to modernize privatized industry and facilitate access to export markets. Romania received 10.2 billion in FDI between 1991 and 2003 (table 5.4). The main sectors attracting FDI have been the processing industry and the service sectors. The food and beverage industry attracted 10 percent of total FDI. Primary agriculture accounted for a mere 1 percent of total cumulative FDI in Romania between 1991 and 2003. Table 5.4. Foreign Direct Investment in Romania, by Industry, 1991­2003 Cumulative Value Share Industry (millions of euros) (percent) Processing, of which: 5,239.9 51.6 Food, beverages, and tobacco 983.4 9.7 Post and telecommunications 1509.2 14.9 Trade 1157.0 14.9 Financial intermediation and insurance 936.9 9.2 Services for enterprises 675.2 6.6 Other 641.4 6.3 Total 10,159.6 100.0 Source: National Institute of Statistics. Nine of the top 100 foreign investors are in the food processing and food retail sectors, and one is in the timber industry (table 5.5). Total FDI in the 12 companies in these sectors represents about 6 percent of the FDI stock in Romania. 83 Table 5.5. Foreign Companies Investing in Food Processing and Food Retail in Romania Rank among largest Foreign investment, Ownership share of Romanian foreign investments (millions of dollars) company Company ( percent) McDonalds 24 51.0 100 Metro Supermarkets 26 45.7 85 Interbrew Efes Brewery 37 38.0 50 European Drinks 46 30.9 40 Danone 60 23.1 65 British-American 75 18.5 100 Tobacco Massiv Forest Products 66 18.1 100 Kraft Foods 78 17.6 100 Selgros Supermarkets 80 17.8 50 Parmalat 81 17.4 70 Perrier Vittel < 100 6.3 -- Agroindustriala < 100 0.3 -- Legumicola Total FDI n.a. 284.7 n.a. -- Not available. n.a. Not applicable. Source: ARIS; Agroindustriala Legumicola from APAPS. The European Bank for Reconstruction and Development (EBRD) provides more detailed data on the agri-business investment portfolio, as this is an important component of its strategy for transition economies. It has eight agri-business investment projects in Romania (table 5.6), all but one (Bucharest Wholesale Market) in privatized companies. The total value of the eight projects is 4.8 billion, of which EBRD's share is 1.6 billion. Although this amounted to a whopping one-third of total foreign investments in Romania, it is almost totally EBRD debt and thus does not qualify as FDI. Only the relatively small investment in Danone is equity. The EBRD's agri-business projects in Romania account for 4 percent of all EBRD projects in Romania, which is consistent with the national share of agriculture in FDI, according to ARIS. Agri-business projects in Romania account for 5.5 percent of EBRD's total agri-business portfolio in transition economies. Table 5.6. Net Cumulative Value of EBRD Agri-business Projects in Romania (as of December 2002) Company Ownership Year Total project value Total EBRD signed (thousands of euros) investmenta (thousands of euros) Coca-Cola Bihor & Iasi Private 1993 23,853 4,760 Danone MPF - Danone SRL Private 1998 25,688 7,235 EPH Grain Handling Project Private 1998 22,644 8,024 Leventis Extension Private 1995 21,467 4,111 Parmalat MPF Private 1998 15,613 5,614 Rompak S.R.L Private 1996 29,100 7,156 United Romanian Breweries SRL Private 1996 74,129 29,592 Bucharest Wholesale Market State 1994 36,482 23,818 Total 248,976 90,310 Total EBRD investments in Romania 7,672,296 2,251,300 Total EBRD agri-business projects in 4,786,960 1,643,190 transition economies a. All EBRD debt, except Danone, which is equity. Source: www.ebrd.com. 84 None of the numbers above reflects the notable developments in the sugar sector. Romania had 33 sugar plants in 1998. Because of the sharp decline in sugar beet production and disruptions associated with the transition, only 19 plants were operating in 1998/1999; the other 14 plants had closed, due to the lack of raw materials for processing or because of financial difficulties. The utilization capacity in the sugar sector was about 50 percent. Since then foreign investors from Austria, France, and Germany have purchased 10 sugar plants, so that one-third of the sugar sector is now owned by foreign investors (FAO Sectoral Report 2003). No systematic statistics on FDI are accessible in Romania, and there are major discrepancies in data from different sources. Given the importance of FDI in transition economies in general and for Romania in particular, improving these data should receive proper attention. 5.4 Preparation for EU Accession Food quality control at the producer and the processor level are among the first-priority issues in the SAPARD preaccession program. The MAFRD is engaged in an intensive program of preparing regulations and guidelines for the harmonization of quality standards and marketing procedures with the European Union. In April 2002 the pre­1989 grades and standards were abolished. Producers are now responsible for observing new quality standards, which are designed to comply with the minimum food hygiene requirements in the European Union. Harmonization is a very broad concept, covering a variety of issues and concerns for each commodity. It is therefore very difficulty to evaluate the extent of harmonization in the Romanian agri-food sector, especially since the legislative process is ongoing. Legislative harmonization has been achieved, for the most part, but enforcement is being achieved only gradually. Long delays exist in milk and dairy products sector, as well as in the meat sector (specifically pork, beef, mutton), where there are pressures from producers' groups to delay enforcement until 2006. Harmonization has been completed (or largely completely) only in seed production, grapes, wine, phytosanitary control, and veterinary-sanitary control. The monitoring of pesticide residues has been implemented at EU standards for crop production; additional adjustments are underway in the livestock production sector. With regard to all other commodities and activities, harmonization is at best partial, though progress was made during 2005 (table 5.7). Table 5.7. Status of Harmonization of Romanian Agri-food Sector with EU Standards, 2005 Largely harmonized Partially harmonized Not harmonized Seed production Fruits and vegetables Sugar Viticulture Cereals Milk and dairy Wine Milling and baking Meat (pork, beef, mutton) Phytosanitary control Pesticides, residue monitoring Eggs and poultry Veterinary-sanitary control Source: IAE, 2005 The fact that some commodities and activities are characterized as not harmonized does not mean that quality standards do not exist for these commodities. An example is the milk and dairy sector. This sector is extremely difficult to harmonize with EU standards, because milk is produced by a multitude of small household producers with one or two cows each. At their own expense, large dairies (some of them financed by foreign capital) have installed costly milk tanks 85 and refrigeration facilities in many villages. These collection centers receive raw milk from small producers, using modern equipment and observing standard hygienic requirements. These standards still do not match EU standards, however, and the dairy sector is regarded as generally not harmonized. The Romanian food industry is generally not prepared for the new competitive environment associated with EU accession. This lack of preparedness is highlighted by NIS survey data on ISO 9000 system implementation. Only 16 percent of companies had ISO 9000 certificates in 2002 (up from 8 percent in 1999), and another 13 percent were in the implementation and design stages (up from 10 percent in 1999). More than 40 percent of respondents in the food industry in 2002 indicated that they were not interested in ISO 9000 certification. This percentage has remained constant since 1999 and it has consistently been higher than the percentage of respondents in the entire manufacturing industry who were not interested in ISO certification (figure 5.1). The food industry is less aware of the importance of ISO certification than the rest of manufacturing. Legislative action alone is thus not sufficient to implement EU standards, including, HACCP and ISO. To ensure competitiveness with EU industries, Romanian agri- businesses must quickly change their attitude toward ISO 9000 certification and make concerted efforts to implement the system. Table 5.8 provides an overview of the current levels of preparedness of the food processing industry in complying with the EU market standard. It indicates the industries' current potential to supply EU markets. Figure 5.1. Share of Romanian Manufacturing and Food Industry Entities Not Interested in Becoming ISO 9000 Certified percent of respondents 50 40 30 Manuf Food 20 10 0 1999 2000 2001 2002 86 Table 5.8. Production Capacity of Romanian units that Comply with or Working toward Complying with EU standards, 2005 Already complying Will comply with In transition Total with EU standards EU standards in near future Red meat High capacity Slaughterhouses 4 13 20 37 Processing 5 43 17 65 Minced meat/ carcass 5 5 Low capacity Slaughterhouses 1 1 Processing 9 9 Poultry meat High capacity Slaughterhouses 6 7 2 15 Processing 4 4 Game meat High capacity Storage and meat cutting 2 2 Processing 1 1 Milk High capacity > 2 million liters/year 15 24 27 66 Low capacity 500,000­2 million 2 6 1 9 liters/year Less than 500,000 1 5 6 liters/year Source: Ministry of Agriculture, Forests and Rural Development. 5.5 Outstanding Tasks Policymakers face three main tasks in the agro-processing sector. First, the government must actively promote and attract FDI into agro-processing and primary agriculture. It should study the experience of other European countries, especially Ireland, in encouraging foreign investment. No special measures are needed to encourage FDI in the food retail and restaurant sector, but it is imperative to attract foreign capital for modernization and upgrading of privatized agro-processing. Second, in parallel with encouragement of foreign investors, the government should develop policies that encourage domestic investment in small and medium-size processing enterprises in rural areas. Net investment in the food industry is still relatively modest (table 5.9). Food processing is an ideal complement to the agricultural activities of the rural population, and it can be set up in villages with a minimum of effort and investment. In addition to augmenting the income of entrepreneur families, this activity would generate local jobs. It would help reduce the size of the agricultural labor force and spur nonagricultural rural development in a broad sense. These policies should be part of a general forward-looking rural development strategy that must not remain limited to the traditional course of providing subsidies for the purchase of agricultural machinery and equipment. 87 Table 5.9. Net Investments in Romanian Food Industry, 1998­2003 (millions of euros) Sector 1998 1999 2000 2001 2002 2003 1998­2003 Meat and poultry products 70.5 21.0 34.0 36.3 50.2 69.8 281.8 Fish products 0.9 0.5 0.8 1.4 1.6 8.6 13.8 Fruits and vegetables processing 15.8 6.8 7.0 4.2 4.4 8.7 46.9 Oils and fats 18.6 16.4 15.3 13.3 11.8 23.2 98.7 Dairy products 15.1 26.7 57.3 23.2 34.3 38.4 195.1 Millinga 10.3 12.3 15.3 95.6 26.3 28.2 188.0 Bakingb 51.4 28.9 32.6 51.7 69.9 101.9 336.3 Sugar beet, raw sugarc 14.2 10.0 9.8 16.4 14.2 18.3 82.9 Wine, beer, alcoholic beverages 70.4 37.8 20.0 27.6 28.8 39.1 223.7 Mineral water 42.1 45.3 42.5 156.9 38.7 27.2 352.6 Other 97.8 64.2 47.7 56.0 47.4 39.8 353.0 Total food and beverage industry 5.0 5.5 18.5 36.5 52.1 76.6 194.2 Meat and poultry products 412.1 275.4 300.8 519.0 379.8 479.9 2367.0 Source: National Institute of Statistics. a. Includes starch and animal feeds. b. Includes pasta and biscuits. c. Includes sugar products and chocolate Third, Romania must expeditiously complete its efforts to meet the quality and standards requirements of the European Commission relating to food industry. Considerable progress has been achieved in harmonizing local standards and regulations with those of the European Union, but much remains to be done. This is not so much the task of the MAFRD in Bucharest as the responsibility of the regional field offices, which must spearhead an extensive educational program aimed at producers and processors throughout the country. Romanian producers are still not fully aware of the crucial importance of meeting EU quality standards for their future access to European markets. The MAFRD should deploy its regional forces in order to overcome these behavioral barriers and persuade all actors in the food industry to take the necessary steps toward gaining EU approval. 88 Chapter 6 Commodity and Factor Markets Comprehensive policy reform affecting agricultural markets began in 1997, with the acceptance of the World Bank Agricultural Sectoral Adjustment Loan (ASAL). Despite the considerable progress achieved in more than eight years of reform, the internal weaknesses of emerging market arrangements, particularly their riskiness and high cost, are increasingly evident. These weaknesses impede the emergence of competitive farms and agro-businesses. One lesson of the reform experience is that standard policy reforms are clearly necessary but not sufficient to create well-functioning markets. This chapter documents progress toward more competitive agricultural markets over the past several years and identifies the challenges that are emerging as past reforms take hold and competitive pressures associated with EU accession mount. 6.1. Agricultural Marketing Improving the outreach and efficiency of agricultural input and output markets is critical for the development of Romanian farms. This issue is examined here by discussing the structure and performance of output and input marketing for five major commodity groups: dairy, grains, oilseeds, pork, and poultry (table 6.1). These commodities account for about 45 percent of gross agricultural output, and they were heavily affected by the trade and pricing reforms of 1997. 6.1.1. Agricultural Trade: Pressures and Opportunities All of the commodities considered are affected, to varying degrees, by international trade. Pressure from international and regional competitors has increased markedly since 1997. Romania is a net importer of dairy, pork, and poultry products. Dairy imports are nonetheless small, accounting for less than 1 percent of domestic supply. Import pressure has been especially strong for pork and poultry. Oilseeds, particularly sunflower, are highly profitable and are consistently exported. Grains (wheat, maize) are typically a net export, except in years of severe drought. The European Union and CEFTA are Romania's main trading partners, together accounting for more than half of exported grain in 2003 (47 percent of grains were exported to the European Union, 11 percent to CEFTA). Sixty-four percent of exported oilseeds were delivered to these two trading blocs (60 percent to the European Union, 4 percent to CEFTA), and another 17 percent went to Turkey, with which Romania has a bilateral free trade agreement. 89 Table 6.1. Marketing Characteristics of Key Agricultural Commodities Item Dairy Grains Oilseeds Pork Poultry Trade Consistent marginal net Net exporter of substantial Consistent net exporter of Consistent net importer Consistent net importer orientation importer amounts, with occasional net large amounts of large amounts of large amounts since 1997 imports due to drought Main trading EU, CEFTA EU, CEFTA EU, CEFTA, Turkey EU, CEFTA U.S., EU, Hungary partners Commercializa- Produced mainly by Household farms consume Commercial product is Produced mainly by Ten private commercial tion versus households. Half of all milk most of output domestically; increasingly coming from households, which buy a companies supply subsistence is consumed domestically, only a small portion (less than large private farms . There is few pigs for fattening. three-quarters of the one-quarter is sold directly a third) enters commercial strong competition among Half of all pork goes formal market for to consumers through markets. Private associations processors , cash sales through the commercial poultry meat; peasant markets, and the rest sell about two-thirds of their predominate, and good outlets marketing chain, with the substantial small-scale is delivered to processors . output, large private farms exist even for small operators. rest consumed locally or production for Large cities are supplied by (formerstate farms) sell 80 by producer households. household large commercial dairies. percent of their output consumption. commercially. Challenges and Cold storage and collection Increased competition among Processing is concentrated in Restructuring of Many integrated opportunities in facilities are severely storage units (some 70 of three mills. Large oil- processors is still in early producers (including output limited. Hygiene is poor, them). Storage security and processing plants with stages; capacity remains those involved in marketing testing equipment is needed. quality are poor. Millers buy outdated technology operate significantly rearing) have own feed Road/transport cost and all- from large producers only; below capacity. Bottling is underutilized. Some milling equipment. weather access remains a most small producers store on fully integrated with seed large producers achieve Quality of inputs, problem. Small start-up farm, at great loss, or sell at crushers . Animal feed reasonably good breeding stock, and processors have emerged harvest to local storage production is increasingly technical performance, feed is poor. Lack of since 1999, serving smaller companies. Some larger controlled by large livestock but only 14 of 117 units skills and training for towns and cities; larger producers are developing on- producers. There is very little comply with EU workers in processing privatized dairies and new farm storage to reduce market information and standards. Quality of facilities. Only 10 of 19 ones resulting from FDI exposure to high costs for no futures or forward trading. inputs, breeding stock, processing units serve largest cities. An storage. Warehouse Storage and transport costs are feed, and health of scheduled to comply increasing share of sales is certification scheme is not yet high. Level of bad debts is livestock is poor. The with EU standards by through supermarkets. in place. high and debt recovery slow. workforce is relatively 2007do so. Warehouse certification unskilled and scheme is not yet in place. uneducated. Constraints to Marketing information, grading/standards and food safety framework and necessary equipment, poor roads, lack of clean water supply (affects marketing processors), weak private sector marketing institutions, government role in providing public goods not fully understood, barriers to improved rural system financial intermediation and risk management. development 90 In 2003 the main imported agricultural and food commodities were cereals (in the first half of the year, as a result ofthe severe drought of 2002). Thirty­seven percent of imports originated from CEFTA, and 25 percent originated from the European Union. Meat was the second-largest imported agri-food commodity in 2003, with 42 percent of meat imports originating from the European Union, 30 percent from CEFTA, and 15 percent from the United States. Competitive pressure from the EU member states and CEFTA producers can be expected to continue and possibly even increase before and after accession. Domestic producers will lose ground against importers, unless they can improve the quality, consistency, and packaging of their products. This necessitates increased private investment and technology transfer, which must be complemented by public action, including investments in public goods that lower marketing costs and uncertainty, as discussed below. 6.1.2 Pricing, Quality, Grades, and Standards Improved product quality and adoption of EU­compatible grading standards are crucial to the competitiveness of importable products and will help Romania expand into higher value markets for exportables. In the dairy industry, the main challenge is for domestic producers to adhere to EU standards for hygiene of raw milk and processed products--something that is difficult for small producers. For pig products, competitiveness is undermined by the absence of the SEUROP classification system for carcasses and live pigs. Oilseeds suffer from little or no differential pricing for quality or grade, which reduces returns to farmers and exporters. Significant legislative steps have been taken toward developing a grain grading system, but a great deal needs to be done to implement the system, which is only functioning at a very limited level. A national grading system was established in 2002, under which grading operations were to start June 1, 2003. The National Grading Commission was established and the list of graders approved. Grading will become compulsory for operators wishing to use warehouse receipts. The warehouse receipts system, however, has not become operational, due to the lack of an indemnity fund. The state budget did not provide any money for this fund, and storage facilities owners are unwilling to contribute to create one. The grading system is closely linked to storage operations, since it is carried out only at the point of storage reception. Farmers and traders who have no storage facilities of their own stand to benefit most by this system, but obstacles to use of the system must still be addressed. The high grading fee is an obstacle, and not every warehouse operator is willing to transfer a fixed sum per ton of grain received to the National Commission, even though this transfer is a percentage of the fee paid by grain owners. The main problems faced by grain traders (mentioned in interviews mainly by international traders, such as Cargill, Continental Grain, and Dreyfuss) lies with the legislative framework (especially on warehouse receipts and grading), excess bureaucracy, market instability caused by the uncertain political environment, and the quality of production (the prices obtained by grain traders for Romanian wheat exported are lower than world prices due to differences in quality). Some local investors consider the main problems of grain storage to be the huge debts carried 91 over to new investors now operating the former state-owned Cerealcoms and Comcereals and the related lack of capital for technical improvements.46 The new private ownership structure in the grain storage sector is not yet fully stable, and the funding of purchase and storage is still limited. The grain trade system is still risky and uncertain for the actors involved, due to high seasonal price fluctuations and low prices paid to agricultural producers, thus offering them no real incentives for obtaining higher and better quality harvests. 6.1.3. Commercialization, Small versus Large Farms, and Market Outreach One common feature of all agricultural commodities in Romania is the dualistic structure of farm production, with a split between a large number of very small individual producers and a small number of larger operators. Integrating Romania's smaller farms into the marketing system represents a challenge, as marketing system access tends to be limited to the largest units, from whom procurement is less costly due to economies of scale. The picture varies by commodity (tables 6.2 and 6.3). For pork and poultry, many of the large units have in effect opted out of the marketing system by vertically integrating. Some units incorporate primary production and feed-processing activities in addition to breeding, fattening, slaughtering, and processing. The poultry meat market is dominated by 10 private commercial companies, which supply three-quarters of the formal market. Small commercial pig farmers are struggling, and although many small farms are buying one or more pigs for fattening, a medium- scale commercial sector (50­200 sows per unit) has not developed to any significant extent. Small individual farms dominate in pig and poultry breeding. Among agricultural holdings breeding pigs, 99.9 percent are individual holdings, which hold 84.8 percent of all pigs. Legal units represent less than 0.1 percent of all units but breed 15.3 percent of all pigs. The 73 large pig breeding holdings (more than 500 head), all legally registered, hold 13.3 percent of all pigs. In poultry breeding, 67 legally registered holdings with more than 50,000 head of poultry, breed 25 percent of all poultry. Some 3.3 million small individual holdings of less than 100 head of poultry breed 57.5 million head of poultry (70 percent of the total). 46Regoverning Markets Project: A Country Study. Romania. 92 Table 6.2. Holdings with Dairy Cows and Pigs, by Size and Legal Status 2004 Number of heads Item 1­2 3­5 6­9 10­19 20­49 50­99 100­499 500 and more Total Number of agricultural holdings with cows for milk Individual agricultural holdings 1,131,261 41,494 3,970 1,920 478 52 5 0 1,179,180 Legal units 472 314 162 233 213 96 125 6 1,621 Number of cows for milk Individual agricultural holdings 1,326,181 140,739 27,394 24,324 12,594 3,121 678 0 1,535,031 Legal units 710 1,195 1,173 3,196 6,554 6,726 25,119 3,361 48,034 Number of agricultural holdings with pigs Individual agricultural holdings 1,901,033 655,518 87,434 2,088 671 120 15 0 2,646,879 Legal units 330 444 785 309 231 95 88 73 2,355 Number of pigs Individual agricultural holdings 2,607,962 2,770,793 1,368,918 132,960 82,203 29,585 7,705 0 7,000,126 Legal units 513 2,392 18,799 21,933 30,916 25,979 56,912 1,102,110 1,259,554 Source: National Institute of Statistics, General Agricultural Census, Livestock (volume 3), 2004. Table 6.3. Holdings with Poultry, by Size and Legal Status 2004 Number of heads 1,000­ 10,000­ 50,000­ 100,000 and Item 1­99 100­499 500­999 2,999 3,000­4,999 5,000­9,999 49,999 99,999 more Total Number of agricultural holdings with poultry Individual agricultural holdings 3,337,072 13,907 150 74 9 7 1 0 0 3,351,220 Legal units 879 171 34 49 22 28 72 18 49 1,322 Number of poultry Individual agricultural holdings 57,522,840 1,845,841 91,850 113,781 30,650 42,926 10,250 0 0 59,658,138 Legal units 26,738 34,040 23,587 89,646 83,690 207,897 1,793,362 1,250,738 19,239,216 22,748,914 Source: National Institute of Statistics, General Agricultural Census, Livestock (volume 3), 2004. 93 Large farms are also prominent in grain, where they account for 30 percent of total production, and oilseed, where they account for 60 percent of production. For grains the main sales outlet is a relatively small number of established millers, who procure only from larger farmers. To circumvent local monopolies, some farmers have developed their own flour-milling operations. Sunflower processing is also highly concentrated, with three mills crushing 70 percent of seed in 2001­02. Although the volume of product entering the oilseed market increasingly comes from large-scale operators, they nonetheless face strong competition from smaller units. For cereals there are few low-cost on-farm storage options for small-scale producers: most farmers either store on farm at great loss or sell wheat and maize at low harvest prices to local storage companies. Seasonal off-farm storage rental is still difficult, because of contractual insecurity and high storage fees. Some larger producers are developing on-farm storage to reduce exposure to local storage monopolies. A different pattern of production is found in the dairy industry, where 97 percent of milk production is by peasant households, although the bulk of commercial production for the largest cities is done by large recently privatized dairies. Of all agricultural holdings breeding cows for milk, 99.7 percent are individual holdings, 95.8 percent have one or two cows, and only 284 holdings have more than 50 cows. Only six holdings (legal units) hold more than 500 cows. Holdings of one or two cows own 83.8 percent of all milk cows. More than 20 percent of production is delivered to local processors, most of it for consumers in small-and medium-size towns and rural areas. Cold storage facilities are notably lacking. The number of small processing enterprises has been decreasing since 1999 (from 909 in 1999 to 725 in 2002). For these enterprises, meeting the stricter hygiene standards associated with EU accession will be a challenge. The average farm household relies on milk for half of the total value of its agricultural sales. Milk is thus a hugely important source of cash for farm households and a potential force for poverty reduction. Lack of access to markets is only one of the barriers facing smaller farmers who try to increase the size of their operations. Other barriers include poorly functioning land markets, lack of finance for investment, and inadequate market information. Against great odds, some small milk and pig producers are still managing to consolidate. The medium-scale farmers emerging in the oilseeds subsector are the best example of viable medium-size farms. The general picture across commodities is still of a relatively struggling semi-commercial small- scale production sector, with lack of competition in the marketing functions of procurement and processing. One innovation that might increase integration of small farmers into the market is the use of marketing groups (associations or cooperatives) to achieve economies of scale in marketing. 6.1.4 Accelerating Developments in the Retail Trade Sector The retail sector has been the quickest to restructure and privatize. Most of the new private retail units were kiosks or small shops, due to the lack of capital and premises, as well as unclear ownership structures and processes. The number of retail units tripled between 1990 and 1994, by which time 77 percent of all retail units were privately owned. Over the same period, the number of publicly owned and cooperative shops dropped by one third. 122 Mixed food retail shops were the last to privatize, due to unclear legislation and high costs. High inflation (the CPI in 1993 was 3.6 times higher than in 1992) lead to very high costs of credit. As a result, in the mid-1990s small independent supermarkets emerged rather than the retail chains that developed in other countries in the region. Foreign investment turned these entities into larger supermarkets. The first modern supermarkets emerged in Bucharest in 1994, as joint- ventures with foreign capital. Very few of these firms were able to develop into successful local chains able to compete against major international chains. In 1996 Metro, an international chain of supermarkets, opened the first cash and carry store in Romania. By the late 1990s (when the economic decline came to an end and the legislative framework started becoming clear and increasingly attracting FDI), other international chains invested in Romania, opening cash and carry stores, discount stores, supermarkets, and hypermarkets. At the same time, the trend in the number of shops reversed. After the explosion of the early 1990s, a process of concentration started: by 2002 the total number of shops had fallen to two-third the 1994 level. In very large cities, wherever a supermarket emerged, most of the specialized surrounding small shops closed within months. Very few supermarkets emerged in smaller cities and rural areas, where small specialized shops continue to dominate. Local agri-food markets ("wet markets") sell fresh fruit and vegetables, other food products, and cheap, low-quality nonfood products. These local markets did not seem to be affected by the emergence of nearby supermarkets. On the contrary, most of them have benefited from investment by local authorities. As a result, they significantly improved in terms of presentation of products, freshness, and cleanliness. Small farmers can sell their fresh products in these markets. The absence of marketing cooperatives or wholesale markets for fruit and vegetables means that individual small farmers (who produce the largest share of total output of these products at the national level) are able to provide only small quantities of uneven quality. For this reason, the big supermarkets refuse to deal with them. By Western standards the Romanian retail market is fairly underdeveloped. However, as the second-largest market in Eastern Europe (after Poland), it has enormous potential. As a result, it has attracted international retailers, even though purchasing power in Romania is lower than that of other countries in the region. As elsewhere in Central and Eastern Europe, many foreign companies dominate the retail grocery market in Romania (table 6.4). There are few significant domestic players; as elsewhere in Central and Eastern Europe, the tone in grocery retailing is set by Western European companies. 123 Table 6.4. Profiles of Top Five Grocery Retailers in Romania, 2003 Average sales Retail banner Number of Sales area (square Market share Company area (square sales 2003 stores meters) meters) (millions of (percent) dollars) Metro 23 100,400 4,365 1,026 16.7 Rewe 21 76,000 3,619 435 7.1 Carrefour 2 18,900 9,450 145 2.4 Delhaize Group 15 11,700 780 59 1 Louis Delhaize 13 25,600 1,969 44 0.7 Top 5 74 232,600 4,036.6 1,709 27.7 Other -- -- -- 4,452 72.3 Total -- -- -- 6,161 100.0 .-- Not available Source: www.planetretail.com The situation in Romania is fundamentally different from that in the Czech Republic and Hungary, however, where Western retailers have been aggressive. Market concentration in Romania is low even by Central and Eastern Europe standards, with the top five grocery retailers accounting for just 28 percent of the market; only one firm (Metro Group) has a double-digit market share. Because Romania remains economically less developed than other markets in Central and Eastern Europe, foreign grocers have secured a few retail sites but are still in a waiting position. The supermarket and hypermarket chains that have already penetrated the Romanian retail market have been very successful (Carrefour, for example, announced its plan to make large investments in 2005­2006). This prompted other international chains to open facilities in 2004 and early 2005, and other new investors have announced that they are considering entering the Romanian market. Foreign investors may also have been attracted by the stabilization of the macroeconomic environment and the fact that EU accession is now just a few years away. Although modern retailing is still in its infancy in Romania, demand is growing, consumers are becoming increasingly educated, and the current situation is changing quickly. 47 Retail sales doubled between 1993 and 2002, growing rapidly during the first years of transition, slowing after 1998, and recovering after 2000. Industry specialists estimate total retail sales at 7­8 billion in 2002, of which modern forms of trade (hypermarkets, supermarkets, discount stores, and cash and carry stores) account for about 1­2 billion. Per capita retail sales increased as well during the transition, rising from $260 in 1993 to $975 per capita in 2003. Retail sales of food account for about 45 percent of total retail sales, which is quite high compared with Western Europe. This is due mainly to the lower standard of living in Central and Eastern Europe, which means that Romanian consumers have less money to spend on nonfood items (such as entertainment electronics, clothing, or leisure) than do consumers in Western Europe. A study by Pricewaterhouse/Coopers indicates that spending in supermarkets on fast-moving consumer products doubled between 2000 and 2002, rising from 4 percent to 8 percent. Food 47The situation in Romania is very similar to that in Bulgaria. 124 sales per capita in modern grocery distribution doubled between 2001 and 2003, while spending increased by17 percent in towns of more than 150,000 inhabitants.48 Competition in food goods has increased significantly in recent years, with Romanian brands starting to establish themselves on the market after the invasion of foreign imported products that began in 1990. Thus alongside multinational companies, some growing Romanian companies started to promote their products aggressively, gaining increasing market shares. Examples include the food and beverages group European Drinks, the food company Topway Industries, chocolate and sweets producer Excellent, meat producer Cris Tim, dairy products producer La Dorna, and several mineral water brands. Romania's main foreign investment agency, ARIS, recently revised its projection for FDI in 2005 from 2.6 billion to 3.1 billion, after it assessed FDI in 2004, the central bank's forecasts, and the effect of recently introduced 16 percent flat profit tax. According to ARIS, greenfield and brownfield projects will ensure inflows worth 875 million in the next two years. FDI in the first 11 months of 2004 totaled 2.15 billion, of which about 8­10 percent is estimated to have been in modern retail. The main international chains have announced further investment in modern retail, targeting cities of more than 150,000 inhabitants. This exploding development of modern retailing is posing challenges to the agri-food production sector, mainly for fresh and low-processed products (fruit, vegetables, meat). The absence of marketing cooperatives and producers' associations, as well as the nonfunctioning of wholesale markets, prevents the large majority of Romanian agri-food producers (small individual holdings) from selling to large chains. Romania's inclusion in the Single Market beginning in 2007 will expose it to fierce competition from EU agricultural producers and wholesalers. 6.1.5 Constraints to improved performance in the marketing system Romania's grain, oilseed, meat, and dairy sectors are still in the early stages of adjusting to a market economy. Although basic reforms have been completed, the private sector storage and trading systems have considerable ground to cover to become more competitive. In the grain and oilseed sectors, many storage owners have only recently acquired their assets, typically through management-employee buy-outs; financing mechanisms for private traders and millers to acquire crops are not yet fully functioning. International trading companies have nonetheless entered the grain and oilseed markets and are actively seeking opportunities, mainly in external trade in grain. The specific constraints to operating in different markets vary in degree and in the type of marketing function affected. In the grain and oilseed markets, storage and transport are expensive and risky, increasing marketing margins and reducing returns to farmers. Market information is extremely poor, and risk management instruments, including simple standardized forward contracts, are almost nonexistent. In milk markets and dairy processing, the main constraints are lack of collection, cooling, and hygiene testing equipment. High road and transport costs and poor reliability (in particular, lack of all-weather access) are also critical constraints. For pork and poultry, problems include the poor genetic quality of stock and poor 48Pricewaterhouse/Coopers, 2003/2004, Russia and Central and Eastern European Retail and Consumer Study. 125 feed quality. Processing activities are hindered by the lack of skills and education of the labor force in processing plans. A key concern is that the emerging new vertical chains will exclude a large share of farmers, particularly small farmers. A recent World Bank study identifies three factors that may hurt small farmers. First, transactions costs favor larger farms in supply chains. Second, small farms are often more constrained in their ability to make the investments needed to contract with or supply a company. Third, small farms typically require more assistance from the company per unit of output. Despite these obstacles, small farmers are not fully excluded from the supply chains: most major companies contract with small farmers. More sophisticated supplier assistance programs, however, tend to be available only to larger farms. Investment support to large dairy farms includes leasing arrangements for on-farm equipment, for example, while assistance programs for smaller dairy farms include investments in collection units with micro-refrigeration units. 6.2. Agricultural Input Suppliers Until 1996 input distribution channels were divided into two categories. The dominant distributors were state integrators--including Comcereal (grain storage), Semrom (seeds production and distribution), Agromecs (machinery operators)--and processing factories, mainly for oil and sugar. These integrators delivered a wide range of raw materials, in addition to agricultural inputs. Private distributors included associations, commercial companies, and specialized commercial firms. Due to state-subsidized competition from integrators, private sector input suppliers developed very slowly. Despite barriers to entry, however, mechanization services, fertilizers, seeds, and veterinary drugs had a significant, albeit not a dominant, share. Beginning in 1997 the main state-owned operators producing or supplying inputs were gradually privatized. The privatization effort encompassed Semrom, Agromecs, Comcereal, sugar and oil processors, and plant protection services at the county level. Today input distribution of seeds, fertilizers, pesticides, veterinary drugs, mechanization services, and other inputs is mainly through private operators. Some state factories, including Tractorul Brasov (tractors) and Oltchim (chemicals), sell their products directly to farmers. Farmers can thus buy inputs from dealers or directly from the producer. The emergence of networks of input dealers was determined by the extremely fragmented agrarian structure in Romania. These emerging dealer-operators are trying to supply a full range of products, with the same operator providing pesticides, seeds, growth stimulators, veterinary drugs, and fertilizers (these last only in small quantities). Although no firm figures are available, the number of dealers may exceed several hundred and has been increasing. Especially in the seed and pesticide markets, however, the largest volume of products sold comes from a small number of producers, not dealers. These markets still have strong oligopolistic elements. Significant competition from foreign companies is developing in the pesticide and seed markets. Numerous international manufacturing companies sell pesticides in Romania, with the highest market shares (in 1999) captured by Oltchim (19.0 percent); Dupont Zeneca, which sells through Aectra Agrochemicals (8.3 percent); and Novartis, which sells through Agrointernational (6.6 percent). Other foreign pesticide suppliers include Rhone-Poulenc (6.3 percent), Monsanto (5.7 126 percent), BASF (5.6 percent), Ecochem (3.1 percent), and Makhteshim Agan (3.0 percent). Oltchim, a state-owned domestic chemicals concern, controls the largest market share, at 19 percent. Foreign firms usually sell their products through dealers; less often they sell directly to farmers. A market survey conducted in 2001 revealed the presence of 300 pesticide dealers, of which only 7 (Alcedo, Aectra, Agrointernational, Agrovet, Brimex, Ecochem, and Naturevo) cover the whole country. The increased presence of international firms has resulted in the use of a narrower spectrum and less toxic chemicals than in the past. The same survey reveals the presence of more than 230 seed suppliers (some of them also seed producers). The indisputable leader in this market is the former state company (now privatized) Semrom, which controls more than 33 percent of the market. Foreign companies, which must distribute outside the Semrom network, include Pioneer, Monsanto, and Saaten Union. These firms have much smaller market shares. The opening up of domestic seed registration procedures in 1997 was crucial to the entrance of these foreign companies. Foreign companies often charge higher prices for their products in Romania than in their country of origin or in other Central European countries. This practice occurs not just because of transport and handling costs but because input suppliers operate in a very unreliable economic environment in Romania. High risks are due to two main factors. The first is the uncertain and extremely limited financial resources of farmers, which often involve payment in kind at harvest time. The second is the reluctance of the banking system to operate in the farm supply sector. For both reasons prices are high, and suppliers' credit to farmers expensive. Beginning in 1997 input prices were liberalized, along with prices of agricultural products. Price discrimination between state and private suppliers disappeared, as many state suppliers were privatized. The privatization of input suppliers was only partial, and in some sectors, including electric power and tractors, input remains dominated by state companies. This is part of the unfinished agenda for policy reform. In fuel supply there are several suppliers (including some foreign companies). Few foreign firms produce tractors, because only domestically produced tractors are eligible for investment credit subsidy schemes. 6.3. Rural Financial Markets Improving private sector financial intermediation in rural areas is critical to the process of shifting resources to more competitive farming and agro-industrial activities and supporting the development of viable nonfarm activities that can generate jobs for those moving out of agriculture. Some progress has occurred since 1998. Financial services that reach out to rural households and enterprises have been developed, and there has been a modest increase in the overall supply of rural financial services (table 6.5). The most marked improvement has been the provision of short-term credit services to farmers, particularly suppliers and traders credit. Progress toward developing a warehouse receipts system, which would help facilitate short-term financial flows (such as seasonal credit), has been halting. Long-term credit still remains significantly constrained, with few lenders willing to lend for more than 18 months and then only to the largest, most heavily capitalized borrowers. This is true despite significant improvements in the legal and institutional framework for acceptance of movable property as collateral. 127 Table 6.5. Supply of Rural Financial Services, 1998­2002 Type of service 1998 2002 Private commercial banking Most banks state owned; extensive Privatization substantially advanced; rural network, mostly for savings commercial banks beginning to lend to mobilization (not credit) larger agricultural units Mutual financial institutions Unregulated credit cooperatives and Many failed "popular banks" under strict "popular banks" rapidly proliferating supervision by central bank Microfinance Very thin market Number of institutions has risen significantly (see table 6.4) Informal market/family Most common form of finance for Most likely unchanged, but no firm households (for consumption, not evidence investment) Warehouse receipts Nonexistent Slow progress: legal framework exists, but system largely unimplemented Equipment leasing Unprofitable Little progress, due to tax regime constraints Input suppliers and traders Marginal Rapid increase from low base credit Private sector risk Nonexistent Very slow progress building market management foundation for risk management, commodity exchange contracts (new insurance law issued in 2004, but no budgetary funding provided for it). Futures Nonexistent Just developed One area of opportunity for long-term finance that has not been adequately exploited is equipment leasing, which can develop more quickly than long-term bank lending. Facilitating leasing requires resolving the issue of tax treatment of leasing companies. An approach to facilitating the strengthening of rural finance has to be multifaceted: · A broad range of financial institutions--banks, leasing companies, credit cooperatives, and microfinance institutions--needs to be included. Banks alone will not be able (or willing) to provide rural entrepreneurs with the full range of required financial services. · Work needs to be done on various fronts. On the lender's side, procedures need to streamlined, new financial products developed, and help provided to lenders in assessing and hedging risks. On the borrower's side, access to markets needs to be increased, productivity raised, business plans prepared, and extension services provided. Cash flow analysis needs to be conducted; assets such as the government's future income needed to eligible to be securitized; new forms of collateral, including warehouse receipts, need to be permitted; and instruments such as weather-related insurance need to be developed to reduce the risks to both parties. · Policymakers need to make necessary changes to the legal, regulatory, and fiscal environment. Efforts include passage of new laws on microfinance institutions and the fiscal treatment of depreciation of fixed assets, which remains a problem, particularly for leasing. 128 6.3.1. Bank Credit to the Rural Sector Banks' access to long-term funding has increased considerably over the past several years, in part as a result of the recent purchases of a number of banks by foreign banks. These foreign owners probably did not have agriculture at the top of their list when they purchased the local banks, but the increased long-term liquidity should facilitate longer term agricultural lending. Basic information about agricultural credit was collected in an informal survey of four major state and private banks (table 6.6). The banks surveyed account for almost 40 percent of total bank assets and 34 percent of total bank share capital in Romania. BCR and Banc Post together own half of the branch network, which makes them suitable for providing small- and medium- sized loans with nationwide coverage. The share of loans to agriculture of these four banks is substantially greater than the national average for all banks. The survey findings confirm the continued low interest of the commercial banking system in agricultural lending. A remarkable exception is RoBank, which has been consistently involved in agricultural credit. Agricultural loans represented more than 25 percent of RoBank's portfolio in 2000 and 2001. These loans were of very short maturity, and the interest rates charged (50­60 percent) were above the average of the other banks surveyed (40­50 percent). Table 6.6 Agricultural Credit by Selected Commercial Banks 2000­2002 (percent, except where otherwise indicated) Bank 2000 2001 June 2002 Banc Post (billions of lei) 2,878 4,483 5,705 Agriculture 5.3 1.6 1.4 Loans under Law 165/98 2.7 5.2 n.a. Eximbank (billions of lei) 746 1,470 1,543 Agriculture -- -- 6.4 Agri-food exports --. -- 7.0 RoBank (billions of lei) 3,452 7,328 6,442 Agriculture 15.7 21.0 13.5 Agri-food 11.0 6.8 2.3 BCR (billions of lei) 22,502 35,476 45,250 Agriculture 2.9 3.4 2.8 Private sector 1.9 2.7 2.7 Public sector 1.0 0.7 0.1 Agri-food 9.8 8.3 7.1 Private sector 9.6 8.2 7.1 Public sector 0.2 0.1 0.0 Respondent banks Total loans (billions of lei) 28,832 48,757 58,940 Loans to agriculture 14.0 13.6 9.8 National banking system Loans to private sector (billions of lei) 75,007 118,254 150,834 Loans to agriculture 5.1 4.3 3.8 Source: FAO Rural Finance Task Force 2002. -- Not available. The average loan portfolio of the banking sector included 51 percent short-term loans, 37 percent medium-term loans, and only 12 percent long-term loans. One positive development is that banks now accept crop inventories as collateral. This cannot be attributed to the development of 129 a warehouse receipts system, which remains very weak, but it does indicate favorable conditions for the implementation of such a system. 6.3.2. Credit Cooperatives Credit cooperatives in Romania are autonomous nongovernmental associations whose main objective is to provide banking activities for members. A credit cooperative has at least 100 members. Its share capital is made up of equal-value shares. Each cooperative operates in a specified geographical area within a county. So far, cooperatives have played no role in financing rural businesses. New legislation for setting up "popular banks," organized as credit cooperatives, was passed in 1996 (Law 109/1996). This law suffered from a number of serious weaknesses. Capital requirements were set very low, and the banks were not required to observe commercial bank prudential regulations or to participate in a compulsory deposit insurance scheme. The misleading use of the word "bank" for credit cooperatives allowed them to engage in a wide range of banking activities, including deposit taking and lending to nonmembers. These popular banks/credit cooperatives expanded rapidly. Some of them undertook highly risky lending and were aggressive in attracting deposits. The most prominent was Banca Populara Romana, whose bankruptcy left many uninsured depositors without their savings, severely eroding the public's confidence in financial institutions. Legislation in 2000­02 (Emergency Ordinance 97/2000, Law 200/2002) attempted to address these problems. Today credit cooperatives must meet much tougher regulatory requirements, and they fall under the overall supervision of the National Bank of Romania. Only one network, CREDITCOOP, has satisfactorily completed all the steps of the licensing process. With enforcement of the new legislation, the number of credit cooperatives dropped significantly, due either to noncompliance with the new rules or to withdrawal of the functioning authorization. Between May and December 2004, the National Bank of Romania withdrew the functioning authorizations of 430 credit cooperatives of the CREDITCOOP network. Currently, only 137 credit cooperatives of the CREDITCOOP network hold a functioning authorization issued bythe National Bank of Romania.49 For the time being, credit cooperatives are not well prepared to assume a significant role in rural finance in Romania. Their weaknesses include a lack of understanding of the rural sector, limited skills in appraising business plans of private farmers, insufficient funds to meet the demand for credit in rural areas, excessive collateral requirements, and inadequate infrastructure and communication facilities in rural areas.50 Although in the long run credit cooperatives could play an important role in rural finance, they are not likely to be significant in the next five years. 49National Bank of Romania Web site, "Register of the Credit Cooperatives Organisations," March 2005. 50 Overall, the sustainability of these credit cooperatives remains questionable. Efforts such as standardization of reporting requirements are required to determine how efficient they really are (although this standardization is voluntary, and it remains to be seen how many institution will adopt it). 130 6.3.3. Nongovernmental Organizations as Providers of Microcredit In recent years, nongovernmental organizations (NGOs) have increased their presence and broadened their fields of activity, with some branching into rural development and finance (table 6.7). There are no surveys of NGOs providing rural credit or information on disbursed loans or regions serviced. The primary focus of these NGOs is lending to community groups. Restricting lending to peer households has resulted in repayment rates of 97­98 percent. The group lending concept also helps develop a responsible social community that has a basic knowledge of loan application, follow-up, and recovery procedures. Direct lending to individuals also occurs. Table 6.7. Selected NGOs Providing Microcredit to Rural Clients in Romania NGO Main source of funds Location Targeted regions Centrul pentru Dezvoltare Soros Economic Bucharest Dambovita, Iasi, Prahova, Economica (CDE) Development Fund (SEDF) Calarasi CHF International Romania USAID Timisoara Transylvania CAPA Foundation Romania USAID Cluj, Napoca Transylvania Opportunity Microcredit Opportunity International Targu, Mures Transylvania Romania Fundatia FAER Swiss and HEKS/EPER Reghin, Mures Mures Fundatia LAM Ditto Ilieni, Covasna Covasna, Harghita, Brasov CDIMM Satu Mare UNDP Satu Mare Satu Mare, Bihor, Harghita, Salaj, Maramures, Arad, Cluj FPIPMM Tulcea UNDP Tulcea Tulcea 6.4 Policy Measures to Improve the Functioning of Commodity and Factor Markets Improving the functioning and effectiveness of output and input markets requires government attention and an appropriate strategy. A government strategy to stimulate domestic growth in a supply chain­driven development process should include at least four goals: · Create the environment in which private investments take place and induce supply chain coordination. · Ensure that small farms are included. · Ensure that small farms get a fair deal. · Help small farmers meet standards and participate in the supply chain. To accomplish these objectives, a strategy should include several policy components, encompassing changes in the regulatory environment and public investments. It is essential to position supply chain development strategies in a wider rural development strategy. Countries in which small farmers make up a large share of the supplier base are typically characterized by significant overemployment in agriculture. Significant productivity increases and growth from integration of farms in modern supply chains are unlikely to solve all structural problems. It is unrealistic to assume that all households currently employed in or relying on agriculture will be 131 able to be included in such a development. A broader process of rural development is needed, with emphasis creating nonfarm rural employment. Specific aspects of a government strategy to improve the functioning of commodity and factor markets in Romania should include policies that support market integration and consolidation of small- and medium-size family farms. This can be done by providing extension advice and adopting policies aimed at increasing the outreach of output and input markets and financial service providers. Such an approach would contribute to sector growth and rural poverty reduction. Opportunities for increasing marketing outreach exist in the milk/dairy and fruit/vegetable subsectors, where small producers are already active and expanding. Measures to help small and medium-size producers become more viable should also be implemented in the cereals subsector, while livestock and meat processors should strive to maximize the participation of smaller farmers in the marketing chain by developing contracting arrangements. The majority of small farms in Romania are subsistence oriented and have only marginal contacts with markets. Most of these contacts are with local markets or through direct sales. Most small farmers have no direct relations with large retailing systems. Beyond local markets, they sell to wholesalers and to the processing industry. These producers feel the impact of the retail revolution in increased demands and pressures from the wholesaling and processing side. The integration of small farms into vertical chains requires fundamental change on the side of small farms as well. A large portion of them are unwilling or unable to make these changes. Their farms will either maintain a part-time, subsistence nature, providing only additional income, or disappear, providing scope for consolidation of the remaining farms. Many small farmers, however, will become more commercial, increase the size of their plots, improve technologies, and cooperate to cope with the challenges of vertical chains. Policies should support this group in doing so. The disadvantage of small size is due mostly to transactions costs. These costs can be reduced in several ways. Transport costs could be reduced by improving rural infrastructure. Rural infrastructure is identified as a serious constraint on vertical coordination (VC), particularly on integrating smaller producers in more remote areas. The number of transactions could be reduced by investing in intermediary institutions, which could reduce the cost of exchange between farms and processors or input suppliers. Investments could include the creation of farm associations and collection points. Agricultural policy should aim to remove obstacles to improved marketing efficiency. Public action could focus on improving market and price information, raising grading/standards and improving food safety, and establishing private sector marketing associations. More generally, there is a need for the MAFRD to develop a clearer understanding of what useful role it and other public sector institutions can play in supporting the provision of public goods in agriculture. Specific actions are also needed in particular markets (table 6.8). The supply of high-quality inputs and the competitiveness of farm input markets have improved in recent years with the privatization of state companies and the entry of international firms as suppliers to the domestic market. Yet there is still a worrisome degree of market power among 132 new domestic producers. Policy attention needs to be directed at reducing barriers to entry. Electric power, fuel, and tractor subsidies should be eliminated, as they provide distorted incentives for domestic versus international suppliers and adversely affect the competitiveness of input markets. Table 6.8. Commodity-specific measures to improve the functioning of markets Commodity Measure Grain and oilseed · Reduce storage costs and risk, by setting up farm-level storage facilities in order to reduce storage costs, for example. Former Cerealcom and Comcereal operators charge relatively high storage feeds in order to cover their own losses and lack of efficiency. · Improve warehouse inspection. Improve transportation networks to reduce transport costs. Milk and dairy processing · Expedite adoption of EU food safety standards. Reduce transport cost and improve transport reliability (in particular by improving all-weather access). Pork and poultry Improve the genetic quality of stock and ensure provision of good- quality feed. Meat processing · Improve human capital by providing proper training and skills to the labor force in processing plants Trade policy should be taken into account in domestic marketing policy. The export strategy for EU integration should have a balanced emphasis on two important issues: supporting increased private investment to meet EU quality and grading standards (for example, for milk and cereals) and maintaining or increasing exports to "lower end" markets to the east and south of Romania. These measures would allow a transition to EU integration through the gradual upgrading of the competitiveness of Romanian producers. On the import side, pork and poultry producers face considerable pressure from surplus producers in the European Union, the United States, and the region. As these pressures are likely to continue, they must be met by efforts to facilitate consolidation and increased efficiency among domestic pork and poultry producers and processors. This may require removing barriers to foreign investment and technology transfer, with the aim of improving productivity and efficiency in these subsectors. The financial system must be upgraded to meet the changing needs of the rural population. Banks and nonbank institutions have made modest progress in recent years in increasing financial flows and outreach to rural borrowers. NGO activity has increased, but serious problems in the financial sector remain, most notably the collapse of mutual financial institutions and delays in the establishment of an active leasing market and warehouse receipts system. The existence of SAPARD grant funds and the need for bank financing of SAPARD­approved farm and agro-industrial projects has increased demand for rural bank lending. But impediments to bank lending remain, including lack of skills in agricultural lending and risk assessment and inadequate utilization of new approaches to loan tracking and credit scoring. Attempts are being made to address some of these constraints through the World Bank's Rural Finance Project. Other specific problems that may require increased attention include the need to strengthen legal institutions that have weak capacity for enforcing existing collateral laws. Efforts are also needed 133 to develop nonbank sources of finance, by reducing tax constraints on equipment leasing firms, supporting the expansion (and regulation) of microfinance institutions serving rural clients, and spurring development of private sector risk management tools in rural areas, possibly including agricultural yield risk, price risk, and general income risk through the provision of weather insurance. 134 Chapter 7 Developing Human Resources and Upgrading Institutions to Meet EU Standards The institutional and human capital enhancements implied by EU membership require significant effort and investment during the pre-accession period. Legislation must be aligned and the judicial and administrative capacity to implement and enforce the acquis communautaire developed. In preparing to join the European Union and adopt its regulations and policies, Romania will need to strengthen some institutions and some create some new ones. This chapter outlines Romania's key institutions and legislation for agriculture and rural development in the context of the implementation of the acquis, in particular the mechanisms for operating the Common Agricultural Policy (CAP). It assesses Romania's readiness to regulate food and agricultural products and meet the obligations of EU membership, particularly in key areas such as the market structure, harmonization with EU standards, border measures, and farm registration. 7.1 Institutional Framework for Implementing the Acquis and CAP Romania will have to implement the full acquis communautaire by the time it accedes to the European Union. Doing so involves two main prerequisites: creating a competitive market with private and public institutions capable of meeting Common Market requirements and establishing institutions that are compatible with the European Union that are capable of administering the CAP. Without timely implementation of an appropriate institutional framework, Romania will not be able to cope with the immense administrative task of implementing both pillars of the EU CAP (see box 3.1, chapter 3), particularly administering the Simplified Area Payment System (SAPS) and Compensatory National Direct Payment (CNDP) systems. As experiences of the new EU member states indicate, significant delays can create political tension and negate the advantages of EU membership. The implementation of CAP­conforming institutions and the training of qualified staff has proven to be one of the main challenges on Romania's road to accession. Romania has lagged in this area and remains well behind neighboring Bulgaria. Acknowledging the need for accelerated progress, the Romanian government passed a revised National Program for the Adoption of the Acquis in July 2002. It opened the agricultural chapter for negotiations with the European Commission in October 2002 and provisionally closed it in June 2004. These are steps toward accelerating institutional development in the agricultural and rural spheres, but to become reality they require sustained political will and timely budgetary support.51 51According to a November 2002 MAFRD estimate, about 220 million in budgetary support is needed to implement the acquis on Common Market organizations, of which 87 percent is the cost of implementation and 13 percent is operational costs. Of the total amount, 54 percent is meant for institutional capacity building, 36 percent for acquis adoption and staff training, and 10 percent for investments. 135 While significant progress has been made in some areas (for example, the veterinary and phytosanitary acquis, including the food safety chapters), concern remains about Romania's ability to comply with the complex administration requirements of the CAP. Increased efforts and further institutional development should focus on five main issues. 7.1.1. Substantially accelerate efforts to set up the necessary institutions and horizontal structures The government needs to move more quickly to set up the institutions and horizontal structures needed to administer Common Market organizations and to put in place the necessary physical infrastructure (such as warehouse certification). The current conversion of legislation to comply with Common Market regulations and the set-up of a market information system (which should be fully operational in January 2007) is a necessary but not sufficient condition to fulfilling the acquis communautaire obligations regarding the administration of Common Market organizations. Lessons learned in neighboring new member states (such as Hungary) have shown that mere adjustment of legislation with insufficient provision of physical capacities leads to substantial operational problems and potentially causes tensions among agricultural producers and rural inhabitants. The government therefore must: · Create or transform the country's administrative capacity with respect to the harmonization of standards and classifications, the creation of institutional capacities, and the monitoring capacities required to fully participate in CAP Common Market organizations. · Facilitate the creation or transformation of its physical capacity, in order to have certified warehouse infrastructure that is large enough to adequately operate a market intervention system. 7.1.2. Increase efforts to establish the Integrated Administration and Control System (IACS) and the Land Parcel Identification Scheme (LPIS) Controls of CAP payments are based on comprehensive administrative systems and have revolved around very specific technologies. Without these key elements in national CAP management, Romanian authorities will not be able to effectively operate the related payment schemes. Without a functioning Integrated Administration and Control System (IACS) and Land Parcel Identification Scheme (LPIS), Romanian farmers will not be able to access CAP support or submit correct applications for participating in CAP aid schemes. Failure to access these programs would reduce the benefits of EU accession. To secure these opportunities, the government must therefore: · Implement in a timely manner the required institution - and capacity-building (human, institutional, and information technology) to establish and operate the IACS. · Enable both farmers and the CAP administration to prepare preprinted application forms for SAPS/LFAsupport or informative reports for the purposes of completing applications for aid under agri-environment measures. · Check of the accuracy of information in applications concerning agricultural land. · Prepare physical on-the-spot checks at selected bodies and record the results of the checks. 136 7.1.3 Fully implement marketing standards to make farmers eligible for market measures allocations Implementation of the acquis communautaire regarding EU marketing standards and producer organizations is underway in Romania, but remains at an early stage, putting adoption of the CAP in 2007 at risk. Without full implementation, Romania's farming sector will be disadvantaged, because its products will be excluded from the EU Common Market. To prevent this from happening the government needs to: · Accelerate the emergence of producer groups and organizations. This is a mandatory step toward disbursing the allocations for CAP Pillar 1 market measures. · Create appropriate capacity in product labeling, especially of organic products, which does not yet conform to EU requirements, by improving infrastructure and building capacity (training classifiers and trainers). 7.1.4 Fully specify the CAP direct support (SAPS) scheme The government has not yet fully complied with its obligation to specify a set of support programs for direct payments under CAP Pillar 1. The delay is attributable mainly to the need to significantly upgrade the human, technical, and physical capacities of the national and regional administration. Timely specification is required to enable the agricultural sector to make appropriate decisions before the 2006 harvesting seasons. The government therefore urgently needs to: · Create or transform capacities in direct payments (eligibility and payment modalities). · Upgrade or transform the administrative infrastructure of the managing authority, the paying agency, IACS, and LPIS at the national and regional level. 7.1.5 Increase the capacity to enable the rural sector to benefit from CAP Pillar 2 allocations Under the CAP umbrella, Pillar 2 funds are granted to support balanced development of Romania's rural regions, reduce income deficits, and support the structural transformation and improved competitiveness of the agricultural sector. The outstanding implementation of acquis communautaire obligations related to CAP Pillar 1, the delay in creating or transforming national and regional capacities to operate the European Union's rural development and structural funds, and the outstanding adjustment of public funds management significantly endanger Romania's capacity to adequately operate and absorb the funds allocated for CAP Pillar 2 (2.5 billion over 2007­09). 7.1.6 Increase support to rural development A World Bank assessment identified the need to increase support for rural development in Romania. Lessons learned from the unsatisfactory uptake of the 2000­2006 SAPARD allocations--performance that raised the possibility that EU funds may be decommitted-- emphasize the need for substantial capacity building in both the administration and the rural banking and business community. 137 To enable the national and regional administration to adequately operate rural development programs and enable the rural community to successfully apply for and benefit from the allocated funds, the government needs to take the following steps: · Design or adjust in a timely manner strategies for making Romanian farmers eligible for disbursement of EU allocations on CAP Pillar 2 and structural operations. These strategies include the NRDP and the Sectoral Operational Program. · Analyze and implement the required adjustments in public funds management and operations to fulfill the country's cofinancing requirements with minimal risk of deficit spending. · Restructure the national and regional public authorities to operate and monitor Pillar 2 programs under the EU evaluation practices to avoid the risk of budgetary penalization. · Identify and address the needs of both regional public authorities and the rural sector by successfully filing applications to access and benefit from Pillar 2 funds. 7.2 Agricultural Research, Education, Extension, and Training Accession to the European Union represents a significant challenge to agricultural research, education, and extension and training organizations in Romania. The EU regulation governing direct income support measures under the CAP obliges all member states to establish and operate a national farm advisory service by 2007. It also requires high-quality agricultural services in these areas to improve the competitiveness and sustainability of the agricultural and rural sectors and to facilitate compliance with the obligations of membership laid out in the acquis communautaire. The Romanian agricultural research, education, extension, and training establishments should play a lead role in assisting farmers and the rural population in addressing and overcoming these challenges. The ability of these organizations to provide the required support will be a key determinant of the pace of change, the extent to which social pressures can be mitigated, and the ability of farms and food processors to comply with EU standards. 7.2.1 Agricultural Education The agricultural education network is well developed in Romania, ensuring good coverage of the entire country. Funding for educational institutions comes from local, state, and nationalbudgets; the incomes of the educational units; subsidies; donations; and sponsorships. The funding introduced in 1995 by the Education Law ensures the decentralized use of funds and allows local communities to be involved in allocating supplementary financial resources for education. Everycounty in Romania has at least two agricultural school groups, which provide all levels of vocational training; agricultural universities are located in all major regions of Romania. Pre- university education is provided in 124 school groups (agricultural, forestry, agro-mountain, and veterinary). Six universities, including one private institution, provide agricultural education, and many other universities, most of them located in small towns, offer various specializations. The government recently took steps to facilitate the equivalence of different levels and profiles of education in the Romanian and the EU systems. While the number of students enrolled in agricultural high schools has been falling for years, more and more students are enrolling in programs in forestry, agro-mountain, and the food 138 industry. The growing number of students enrolled in agricultural higher education shows a greater interest for higher training. The content of pre-university education is partly prescribed by the national curriculum. It includes a common component for all schools of the same type and a second component determined by each school. The need for technical knowledge is met through theoretical and practical training. A better balance is needed, favoring practical training. The needs for economic and managerial knowledge for agri-business are poorly met. New equipment and teaching material is lacking. Future employers and local authorities are insufficiently involved in pre- university education. There is an enormous need for adult education. The vast majority of adult training is conducted by the National Agency for Agriculture Consultancy through short courses. The MAFRD is not involved in the agricultural education system. 7.2.2 Higher Education and Training In the 1990s university education was the first of all education levels to adapt to the changed demand for labor. Major changes occurred during this period. Some reforms, such as the university structures and specializations that were accredited or authorized to function provisionally, have only recently been implemented or are under completion. Before 1990 there were four agricultural universities (Bucharest, Iasi, Cluj, and Timisoara) and two faculties (agriculture and horticulture at Craiova University). Today higher education in agriculture is also offered in other towns, such as Constanta, Galati, Oradea, and Pitesti. New specialties are also being offered, in response to the demands of the labor market. Courses are now offered in environmental protection, ecology, agricultural genetic engineering, and biotechnology. New specialties include food products quality control and survey, engineering and management in the catering and food industry, agro-tourism, and sustainable agriculture. Economic-oriented specialties include agri-food economics and agricultural management. New courses on agricultural policy and trade have been introduced, on the CAP, use of pre-accession instruments (such as the SAPARD), use of new financial and banking instruments for funding agricultural production, trade, marketing, and processing. New master's degree courses have been introduced, some of them requiring tuition. These include courses in management, marketing and rural development; management of agri-food product quality; vine, wine, and territorial management (international); rural engineering; and agricultural environment protection. In addition to basic knowledge about extension (a two-semester compulsory course) for all students of agricultural, horticultural, and animal breeding, a special master's degree course on extension has been created, offered only in Bucharest. Students pay tuition for this two-year master's program. NAAC pays the fees for all students enrolled and immediately employs them upon graduation, in an effort to enhance the quality of its own staff. In order to improve the quality of students' practical training, the size, number, and types of farms for practical courses have been expanded. Some students have been sent to receive practical training in research units, others have been sent to work in extension centers, at the SAPARD, or in various administrative services in the Ministry of Agriculture, Forests, Water 139 and Environment (MAFWE). These efforts have increased the rate of employment upon graduation. Faculties or departments set the universities' curriculum, which must, however, meet national standards. Higher education institutions organize their research and development activities and determine their consulting services. These activities may be organized in collaboration with other domestic or foreign education or research institutions. Basic research, as well as other programs of special interest, are financed by the state budget on a contract basis, separately from education funding. The funding of research contracts is made on a competitive basis. Despite significant improvement over the past few years, the agricultural education and training system is facing a number of difficulties. At the university level, there are constraints on research funding. Although core funding of salaries somewhat mitigates these difficulties, the research and educational infrastructure is underdeveloped, and links to the research and extension organizations are weaker than desirable. Immediately after 1990, a large number of private education institutions emerged, covering all educational levels and specializations that had existed under the state system plus new specializations. These new specializations reflected young people's desire to have broader access to education, as well as the need to diversify the education system. Today these private institutions are allowed to function only if accredited or under accreditation (temporarily authorized). Real competition from the private agricultural pre-university education system does not exist, and only one private agricultural university offers an alternative to the specializations offered by the state agricultural institutions. The World Bank MAKIS (Modernizing the Agricultural Knowledge and Information System) project began in July 2005. The component for education includes the establishment of a training and information center, which will be set up as a knowledge resource base. The center will be located at Bucharest Agricultural and Veterinary University and will have linkages with the agricultural universities in Cluj, Iasi, and Timisoara. The center will: · Gather knowledge on agricultural technologies from within Romania and abroad in order to meet both farmers' needs as well as EU requirements. · Develop relevant extension packages and training modules for selected topics for each agro-farming area. · Train and accredit trainers and providers of agricultural extension and advisory services · Train and accredit trainers and inspectors in the food safety system. · Train researchers on developing research proposals and integrating within the European Research Area. · Develop and implement an information technology system to serve as a knowledge and learning tool. The system will include a continuously updated database on EU legislation and requirements regarding agriculture, rural development and food safety, and new production and processing technologies. 140 7.2.3 Research Public funding from the Ministry of Education and Research for agricultural research declined 85 percent between 1990 and 2002, falling from $30 million to just $4.3 million. All public research funding is now allocated on a competitive basis, with no core funding for salaries, investment in infrastructure, or the conduct of long-term research programs. These changes have had several effects. The number of researchers declined 53 percent between 1990 and 2002, as researchers retired or sought new employment and the attractiveness of a research career for young graduates declined. The 20 percent decline in the number of public research establishments has reduced the number of researchers to below the "critical mass." Research infrastructure, the mobility of researchers, and access to external information have all suffered. In order to survive, research establishments adopted the logical route of commercializing research results. By 2001 income from these sources represented 46 percent of research establishments' total income. The opportunity for research establishments to benefit from such commercial activity varies. Some establishments have had limited possibilities to commercialize their research, and funding of "public good" research has suffered. Romania's agricultural research system suffers from several main weaknesses: · The system takes too long to respond to new challenges of the market economy. · Extended provisional legislative status has hurt innovation and decision-making. · Ties between producers, the scientific community, and decision-makers are weak. · Researchers under 30 years represent only 15 percent of all researchers, and there are few stimulating research programs. · There is limited capacity for competitive funding of projects. · The capacity for attracting additional funds through grants offered by international programs (the Food and Agricultural Organization, PHARE, the World Bank) is limited. Considerable efforts are needed to improve the ability of the Romanian research community to undertake the research required to improve the competitiveness and sustainability of the Romanian agricultural and rural sectors and meet the challenges of accession. The MAKIS project includes a component for research. This component--the largest in the project--seeks to strengthen the capacity of the National Agricultural Research System (NARS) to provide agricultural knowledge, skills, and information based on the needs of the agri-food subsector, in line with EU requirements. The component also aims at improving the capacity of the NARS to capitalize on the opportunities for financial assistance available to EU member countries and to facilitate closer linkages with the European Research Area. In support of these objectives, MAKIS supports agricultural research in the financing implementation of identified priority research programs and activities, including infrastructure rehabilitation at concerned research centers and providing five selected research centers with the opportunity to restructure toward a model center of excellence that is client driven, performance oriented, and financially sustainable. 141 7.2.4 Extension From 1994 to 1997, public extension efforts to private farmers were undertaken by the then Ministry of Agriculture and Food and, at the county level, its Directorates Generals for Agriculture and Food. A more independent extension capacity was established in 1998, with support from the European Union. The Directorate for Extension, Consulting and Vocational Education was turned into a national extension agency, the National Agency for Agricultural Consulting (ANCA). At the county level, extension activities in all 42 judets are carried out by county extension offices and their local commune networks. Todaya three-tier extension system exists. In 2000, in an attempt to make the extension service more responsive to local needs, the operation and control of the judet-level extension staff was decentralized to the judet administrations. The structure of the extension service between 1998 and 2001 resulted in a number of deficiencies, identified in the strategic review of the Romanian Agricultural Knowledge and Information System, undertaken in 1998. In particular, farmers found it difficult to distinguish the function of judet-level extension staff from other judet-level officials. The limited integration of extension activities with agricultural research and education hindered the transfer of knowledge and technology to the plethora of small farms in Romania. Despite these difficulties, the extension service did deliver training to farmers and prepare advisory publications. Just three years after its establishment, ANCA was radically reorganized. A decentralized system was introduced, resulting in a "double subordination" structure. While ANCA (the central level) remained under the MAFRD, the second level, the Judets Centers for Agricultural Consultancy (CJCA), and the local level of the system, the Local Centers for Agricultural Consultancy (CLCA), have been administratively and financially moved to the Ministry of Public Administration and Internal Affairs. Their salaries and office expenses are now paid by the state budget through the judets councils, and they report to the judets authorities. The extension program is managed by ANCA, which funds extension activities at the CJCA and CLCA level, and the CJCA and CLCA technically report to ANCA. This system does not work well. The local authorities (local councils) should provide facilities for local agricultural consultants and cover the material expenditures for the proper functioning of the CJCA and CLCA. At the county level, although the CJCA have been provided with some facilities and money for office expenditures, the level of office equipment (computers, printers, copy machines, phones, faxes, Internet connections) is poor. The situation is even worse at the local level. In most cases, local consultants in CLCA share offices with other municipal services; in very few cases do they have a room for themselves. They generally have difficult access to communication facilities, and few local consultants have access to a computer. In many cases these consultants are obliged to perform administrative tasks that have nothing to do with agricultural consulting. There is no possibility to provide incentives for better quality work, since ANCA assesses their work and another ministry pays for it. Although the system works in some judets (mainly at the CJCA level), the difficult relationships with local authorities have negatively affected the system, especially at the CLCA level. The number of farmers increased 60 percent in the 1990s, due to land restitution and the restructuring of the industrial and service sectors during transition. Most of the new farmers have 142 not been trained in agriculture and need proper training. For the moment, ANCA is the only provider of adult training for the agricultural sector. It suffers from an extreme shortage of staff, however, with only 900 local extension officers covering 2,700 communes. When local consultants cover several communes (usually three to five), they are not reimbursed for transportation. An important part of ANCA and its network activity consists of organizing training courses for farmers. Upon completion of these courses, a farmer obtains a certificate that is required to access subsidies and operate in the market. Demand for these courses is heavy: many courses fill up for the year by early March. The capacity of the ANCA network to meet the demand for these courses for farmers is very limited, in both financial and logistic terms. ANCA must cover a variety of activities, so the amount of funding it dedicates to organizing these training courses cannot be increased. There is a significant need for training agricultural consultants, particularly in areas that have not been covered until now, such as EU regulations and requirements regarding the quality and hygiene of agri-food products, environmentally friendly agricultural practices and technologies, organic farming, food safety, and animal welfare. It is equally important to train consultants in EU regulations on access to farm support from the CAP, so that at EU accession time, they will be able to help farmers apply for funds. Funding these activities will be difficult, as ANCA's budget allows only a very limited number of consultants to be trained each year. Until 2005 ANCA was funded completely from public budgetary sources, and any revenues received automatically flow back into the public budget. A change in the law--Government Decision 409/2004, which went into effect January 1, 2005--now allows ANCA to retain revenues from its activities. This could facilitate an increase in the volume and quality of the services it provides and lead to the gradual privatization of the service. The MAKIS project component for extension will support the development of advisory services in two main ways. First, the project will support a range of advisory and training activities, using contracted service providers. Finance courses in agricultural topics will be designed primarily to help farmers, agro-processors, and small businessmen market their produce, access subsidies, and access credit). Second, the project will introduce improved working practices into the public advisory system. 143 Annex 1: Main Expenditures of MAFRD Budget (billion ROL, current Approved prices) 1998 1999 2000 2001 2002 2003 2004 2005 Total MA budget 5209.1 4872.5 8877.2 10804 11906.9 17744.7 26145.8 23339.6 Subsidies 557.9 954.5 1191.9 2743 4450.7 5072.5 3134.3 3224.0 -land reclamation (SNIF) 389.7 479 789.5 1072 2094.0 2039.0 1807.5 1200.0 -WUAs 56.6 130.4 148.0 300.0 -interest ratea 26.1 18.9 49.5 93 103.7 41.8 16.9 40.0 -seeds 108 272 352.9 759 970 1279.1 849.2 852.2 -wheat storage 34.1 74.5 -allocations for public institutions 819.4 1220 1580.0 312.5 631.8 1371.1 1783.9 1800.0 Premia 162.7 341.3 713.7 693 943.8 -milk 160.7 243 943.8 1371.1 1783.9 1800.0 -calves 25.4 5 -wheat 114.7 232 451 450 -wheat and maize export 22.4 102 98.6 -meat export 6.3 3.4 Transfers 2772.8 2142.9 4936.5 5774.6 3525.1 7550.7 18311.7 15671.2 -natural disaster 677.0 552.7 50.0 compensations 38 -vouchers(98-00)/ cash(01-03) 2712.1 2110.7 4853.4 5601.6 134.5 1384.5 10205.4 5221.8 -breeding livestock 52.3 115.3 65.4 47.6 48.5 52.0 -crops programs 747.4 688.4 939.1 1977.8 -livestock programs 756.0 1394.8 2755.1 2016.0 -wheat storage 15.4 338.0 -"DRA" fund/machinery subsidiesb 1700 740.6 903.9 700.0 -free fertilizers 1969.2 -diesel subsidyc 425.1 3026.0 -insurance subsidy 14.4 23.0 50.0 -subsidized creditd 127.0 150.0 -shelters subsidiese 77.0 80.0 Loans 700 600 -budgetary subsidized credits 700 600 Personnel expenditure 488.3 864.7 914.1 704.7 866.3 1254.3 1096.3 1138.9 Material expenditure 243.8 300.1 704.7 316.7 1202.8 1556.1 667.1 735.0 Capital expenditure 247.5 183.9 309.3 323.9 728 786.4 965.7 978.6 aFor machinery acquisition in period 1999-2001; program discontinued in 2001, but subsidies paid by the end of planed payments. bGrants for domestically produced machinery (usually,45% of price). cROL 5000/ltr of diesel for quantities approved by local directorat of MAFRD. dBetween 3% and 10% of principal eFor dairy cows only 144 Annex 2a: Introducing the EU Common Agricultural Policy in Romania ­ Modeling Methodology This section provides an outline on some methodological aspects of the modeling approach employed in Chapter 3 of this study. A partial equilibrium model of the Romanian agricultural sector has been used to evaluate to simulate a series of scenarios on the adoption of the EU agricultural policies and to provide information about the likely impact on producers' value added (farmers' income), consumers' real income, poverty, and on the state budget. Ten major agricultural products are considered in the model, namely wheat, barley, maize, sunflower, potatoes, milk, beef, pork, poultry, and eggs. These products account for almost 70% of gross agricultural production. For each of these activities the simulation approach identifies and quantifies the potential impact of the changes in protection under various scenarios. The aggregate impact on the income of primary producers, i.e. its proxy value-added, measures the combined effects of price distortions on output and input markets, comparing the value-added of the analyzed activities at domestic prices vis-ą-vis value-added at border price equivalents. In principle, the quantitative analysis of protection intends to measure the relative deviation of observable market prices of commodities from their shadow price equivalents, i.e. the deviation of private (financial, observable market) prices from social (economical, shadow) prices52. Generally speaking, these measured price differences occur from two principal sources53, as there are policy effects (positive or negative) and market effects (positive54 or negative). Market effects occur because of the specific characteristics of (markets for) particular goods or services, or because of the production technology for that good or service. Since these effects lead to actual prices that deviate from their efficiency equivalents they are also referred to as effects of market failures. Consistent with the accepted criteria in welfare economics, governments need to restore "socially optimal" production, consumption, and pricing. Thus, government intervention may have two principal intentions, as there are i) to offset existing market failures or ii) to affect the income of consumers, producers, or the state budget not necessarily with regard to currently existing market failures. By this token, any "non-optimal" intervention by the government results in so-called government failure, constituting interventions that do not correct for market failure, or interventions that actually make society worse off. There are two main categories of support policies for agriculture that should be taken into account ­ market price interventions and government subsidies. Market price supports (positive or negative) operate directly through price-related interventions supported by foreign trade barriers such as import tariffs, export subsidies, and/or quantitative restrictions on imports or exports. Government subsidies in general mainly consist of subsidies for capital investment, 52 Economic values reflect the values that society would c.p. be willing. to pay for good (or a service), whereas financial values are the prices that people actually pay. 53In this context a possible third source of price differences, namely the existence of merit goods or demerit goods is not explicitly taken into account. 54Even if, generally speaking, market effects do have negative impacts on aggregate welfare, they may have positive income effects on some economic agents (e.g. increased rents of producers that are monopolists). 145 credit subsidies, land improvements, direct payments, research and extension, and others that do not directly affect market prices. By this token, budget outlays that are part of price support programs (such as price intervention purchases) are to be excluded of the applied type of analysis since the price-related measures capture the effects of such programs. Consistent with the accepted criteria in trade policy analysis, in computing the market price- related interventions, the current study compares the prevailing agricultural prices with the border (world) equivalent prices of tradable outputs and inputs. That is, the counterfactual for the analysis of the impact of price and trade policy is defined as farmers paying and receiving prices similar to those that would prevail in the absence of any policy intervention and any structural distortions. The analysis developed in this study assumes that Romania is a `price taker' in world markets for the products analyzed. Nominal tariffs (or tariff equivalents) apply to single commodities. Border price equivalents are calculated as unit values of imported or exported commodities, depending on Romania's trade position in the commodity discussed. The provided statistical databases did not allow for a separation between different qualities of the traded commodities. We can expect that products with a very high quality drive the border equivalence price up resulting in a negative protection of the product concerned. Impact on Farmers' Incomes In order to examine the impact of policies on resource allocation and farm income, we estimate the effect of price intervention on the return to primary factors (i.e., value added activities) by accounting for the effect of intervention on the prices of both outputs and intermediate (internationally tradable) inputs. Value added, it will be recalled, is defined as the difference between the value of gross output and the value of intermediary inputs, or in terms of factor payments, the returns to land, labor and capital. Notice that the available cost structures have not been adjusted for the impact of changes in relative prices of tradable inputs on the input matrix (i.e., fixed coefficient assumption). Such an adjustment is conceptually possible but it is beyond the scope of this study as it requires fairly sophisticated input data and a clear notion of the relevant production function. The consequence of the fixed coefficient assumption is that it could overstate the true relative input costs. Thus, farmers' income is determined by the difference between input costs and revenues originating from the sale of agricultural produce, and by any non-price-related monetary transfers provided to farmers (e.g., per hectare payments to crops or per head payments to livestock). This study emphasizes value added as an appropriate proxy for the income of primary producers because the available cost data indicate that value added per unit on average does not exceed 20% of gross output value. For example, in the case of beef production, farmer returns (value added) will be influenced by the level of protection on feed grains, as well as by the cost and protection of inputs such as fuel, agrochemicals, machinery and equipment, etc. When applied across the sector, this describes the relative incentives within the sector. Any change in agricultural policies with an impact on input prices, output prices or other direct monetary transfers (such as the EU compensation payments), translates into changes in the value added of agricultural production (i.e., farmers' income). It is worth pointing out that the differences 146 between changes in value added and changes in gross agricultural output value are caused by the changes in cost of intermediary input. The discussion so far has assumed that output levels for all analyzed activities remain constant (i.e., assumption of totally inelastic supply). This is a simplifying assumption but one which presumably captures the essence of the short-term effects. However, after some time, producers would naturally begin to react to the new price situation, readjusting the output mix and the overall level of resource intensity. In the medium- to long-term, the level of production of the various commodities is responsive to the level of profitability of each commodity. Therefore, changes in value added will also lead to changes in their total output, further compounding the initial changes in farmers' income. For each commodity, the extent of the medium- to long-term supply response is determined by the elasticities of supply, which in this study were consistent with the elasticities used in similar World Bank studies for other countries in the regions. The applied output supply elasticities in the usual sense (indicated as `unadjusted elasticities', e), were 0.3 for barley, 0.4 for wheat, milk and beef, 0.5 for maize, sunflower seed and eggs, 0.6 for potatoes, and 0.75 for pork and poultry. These are not econometrically estimated supply elasticities; they were set after expert opinion. The input-output coefficients (quantity of intermediary inputs per unit output of main product) were assumed to remain constant, and no adjustments were made for cross-price effects. For each activity the obtained results are compared assuming completely inelastic supply response (elasticity = 0) with those assuming the medium run supply elasticities. In a next step, elasticities were adjusted to capture difference in the ratio of value added to price (Valdes, 1973, p.158 f) among the considered production activities. In particular, the `adjusted elasticities', e, are calculated by multiplying the unadjusted elasticities with the ratio of value added to product price (e = e*v). Where v is the ratio of per-unit value added at base-run prices (VA, i.e. per-unit value added as of the base-period Scenario A) to base-period price (pA) (v=VA/pA). Estimates of percentage quantity supply response for the product j included by changes in value added at prices under the scenario B55 have been computed by applying ?qj (in %) = e*(VjB / VjA-1)*100. Where ?qj indicates the change of produced quantity and the ratio VjB/ VjA indicates the change of value added at Agenda 2000 prices and base-run prices, respectively. The calculation of the change in total gross output value relative to the base-period scenario was captured by the expression [(pB + cB)*qB]{[(pA + cA)*qA]-1, where pB represents the CAP price level of and cB represents the direct (compensatory) payments CAP-type policy to primary producers converted to a per-unit price equivalent. Total value added calculation is also based on the quantities under the CAP qB and base-period qA, respectively. Consequently, assuming a positive supply response, the percentage change per-unit value added differs from the percentage change in total value added due to the quantitative effects of supply response. Impact on Consumers' Real Incomes Changes in agricultural output prices also have an impact on consumers, namely via their impact on food prices. Romanian households, on average, spend about 34% of their disposable income 55 In the calculation of value added under different scenarios, input-output coefficients remain constant, but adjustments for price changes of intermediary inputs under the scenarios have been included in the simulations. 147 on food and beverages (if disaggregated by deciles, expenditure share vary from 26 to 37%56; see Table A2.1). Thus, policy reforms that affect food prices will undoubtedly affect consumers' real income. The availability of a detailed household survey enabled the inclusion of about 65 single or groups of food products and beverages in the simulations. The available statistics provided the shares of household income spent on each of the single food products. In order to present the findings clearly, these products have been aggregated to groups of food products in the following tables (these groups will be referred to as `food products' in the subsequent sections of this study). The food products covered by this analysis are cereals and pasta, meat and products thereof, milk and dairy products, fats, and oils of vegetable and animal origin, vegetables and potatoes, as well as alcoholic beverages57. Sample data on nominal expenditure and expenditure shares is provided in Table A2.1 Table A2.1: Structure of Household Expenditures (2003) Decile Average I58 Decile II Decile V Decile VIII Decile IX Decile X Nominal expenditure [1,000 ROL/capita] Total expenses 1,305.1 641.0 797.0 1,175.0 1,615.0 1,917.8 2,789.3 Food & beverages 448.9 167.7 246.7 424.6 598.5 690.6 875.0 Food & non-alc. beverages 434.3 162.4 238.1 412.7 578.4 668.8 840.9 Expenditure shares [% of total cash expenditure] Total expenses 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Food & beverages 34.4 26.2 30.9 36.1 37.1 36.0 31.4 Food & non-alc. beverages 33.3 25.3 29.9 35.1 35.8 34.9 30.1 Cereals and pasta 8.5 10.3 11.6 10.0 7.8 6.7 4.7 Meat and meat products 8.5 3.7 5.0 8.3 10.1 10.4 9.6 Fish and fish products 0.8 0.8 0.8 0.8 0.8 0.7 0.7 Milk and milk products 4.0 2.2 2.7 4.2 4.5 4.6 4.0 Eggs 0.9 0.5 0.6 1.0 1.1 1.1 0.9 Fat and oil 2.1 2.4 2.6 2.4 2.0 1.9 1.4 Fruits, fresh and dried 1.5 0.7 0.9 1.4 1.8 1.8 2.0 Vegetables and potatoes 3.5 2.5 3.0 3.7 3.9 3.8 3.1 Sugar and sugar products 1.6 1.5 1.6 1.7 1.6 1.5 1.4 Non-alcoholic beverages 1.8 0.7 1.1 1.7 2.1 2.3 2.5 Alcoholic beverages 1.1 0.8 1.1 1.0 1.2 1.1 1.2 Source: NSI (2003), own calculations 56 Note that these values (as the ones displayed in Table A2.1) represent expenditure shares that have been calculated based on the cash expenditure of Romanian households. Thus the relatively low expenditure share of the poorest households (Decile I) does not represent a violation of Engel's Law but the relatively high share of food consumed from own production (household plots). 57In addition, fish and fish products, fruits, non-alcoholic beverages and tobacco products were included in the analysis. Since none of the analyzed agricultural products was assumed to have a direct impact on the prices of these food products, they will not be displayed in the following result charts. Nevertheless, the expenditure on these products remains as a constant in the aggregate assessment of consumers' income effects. 58 148 For each scenario, food price changes were obtained by adjusting the base period food prices by the relative change in the price of agricultural raw materials weighted by its share in the total costs of the households' food baskets. For each scenario, the approach we use (based on Schiff and Valdes, 1992, ch. 8) is to compute the effect of the price change in the primary product on the price at the retail level and then compute the expected change in the cost of the consumers' basket given a constant nominal income. Food price changes had to be estimated on the basis of assumed cost shares of purchased agricultural raw products in the total costs of the food processing industry. Transmission of price changes was computed under the assumption of constant processing and trading margins, i.e. food price changes are solely the result of raw product price changes. Higher food prices lead to an increase in food expenditure and, given a fixed nominal disposable income (i.e. a fixed amount of money available for consumption), the consumer is therefore forced to reduce his/her overall consumption of total goods and services by the percentage increase in food expenditure multiplied by the share of food expenditure in total consumption. This reduction in the consumer's ability to purchase goods and services is equivalent to a reduction in his/her real income. More precisely, this corresponds to an `equivalent variation' in consumers' income as a result of the food price changes. Conceptually, all household types face identical food price changes, but the impact of these price changes on their real incomes varies as a result of the different weight of the various food items in their household expenditure. Different income groups have different consumption patterns and thus this estimate captures this differential effect of a given change in farm prices. The relative reduction of real consumer incomes is highest for households spending the highest share of their cash expenditure on food. In the medium- to long-term consumers will adjust to the new set of relative prices, moving away from the consumption of foods that have become relatively more expensive as a result of the policy changes. Consumers would adjust their consumption patterns to the changes in relative prices, and the rise in food prices could have some effect on nominal wages (increase) and the subsequent share of expenditures on food (decrease). The medium- to long-term impact on income, therefore, is expected to be more moderate compared to the short-run impact. As for the analysis of the supply and farm income effect, therefore, the medium to long-term impact on consumers was subsequently simulated by allowing consumers to adjust their consumption patterns to the changes in relative prices. A simple approach was used to sketch out the magnitude of possible impacts of demand response. The exact amount of adjustment will be determined by the price elasticity of demand for each product, which regulates the extent of consumers' adjustments to the changes in food prices. To better capture the medium - to longer- term response in consumption to price changes, price demand elasticities for each separate product group were introduced. As discussed above in the case of supply response, these elasticities are not econometrically estimated, but have been selected mainly on the basis of expert opinion and taking into consideration elasticities used in similar World Bank studies for other countries in the region. Specifically, the demand elasticities were assumed to be ­0.1 for bread, pasta, potatoes and sugar, ­0.2 for vegetable fats and alcoholic beverages, and ­0.3 for all other products. Compared to what has been estimated or assumed for other studies under a single price change, these elasticities are rather low. However, considering that the simulation captures 149 simultaneous changes in many prices, we expect these parameters to be lower than those which apply under a single price change. Impact on Poverty As mentioned earlier in this section, Romanian households spend on average about a third of their disposable income on food and beverages; for some income groups this share is as high as 37 % (see Table A2.1). Consequently, all changes in the agricultural policy framework aiming at an increase of product prices are likely to noticeably reduce the real income of domestic consumers. In order to assess the potential impact of the analyzed policy scenarios on the poorest parts of the Romanian population the analysis of effects for consumers of food products has been extended by an estimation of potential poverty effects of the scenarios. The share of the Romanian population classified as poor were determined based on the Total Poverty Headcount Ratio and an Extreme Poverty Headcount Ratio. The corresponding consumption level to these poverty lines is 1,535,570 ROL and 1,060,658 ROL per capita, respectively. Regarding the first, higher, poverty line 28.9 percent of the Romanian population could be classified as poor. According to the second poverty line the share of poor on total population amounts to 10.9 percent in the year 2002 (World Bank (2003): Romania: Poverty Assessment, Vol. 2, p. 9f). 150 Annex 2b: Introducing the EU Common Agricultural Policy in Romania ­ Detailed Result Tables Table A2.2: Agricultural Production Activities under Current Policies, 2004 Wheat Barley Maize Sunflower Potatoes Milk Beef Pork Poultry Eggs Intermediary Inputs [ROL/t*] 2,877,619 2,105,384 2,404,764 4,149,859 4,827,683 3,229,708 26,405,371 25,126,811 27,651,806 43,082,656 Output [ROL/t] 4,566,797 5,449,534 5,067,750 7,360,400 7,865,000 6,285,222 31,802,475 41,293,013 34,549,151 28,708,067 Value Added_dp0 [ROL/t] 1,689,179 3,344,150 2,662,986 3,210,541 3,037,317 3,055,514 5,397,104 16,166,202 6,897,346 -14,374,589 Direct Payments [ROL/t] 500,000 300,000 0 300,000 0 217,284 5,000,000 8,000,000 5,000,000 0 Value Added_dp100 [ROL/t] 2,189,179 3,644,150 2,662,986 3,510,541 3,037,317 3,272,798 10,397,104 24,166,202 11,897,346 -14,374,589 NPRO [%] 4.6 49.0 50.3 8.4 84.3 2.9 7.6 52.5 8.4 -5.8 NPRI [%] 21.1 29.3 31.5 20.4 54.6 30.9 22.2 21.1 22.7 13.6 EPR_dp0 [%] -15.5 61.3 72.6 -3.9 165.4 -14.6 -32.7 138.9 -72.0 -358.8 EPR_dp100 [%] 9.5 75.8 72.6 5.1 165.4 -8.6 29.6 257.2 -51.6 -358.8 * per ton of output; dp_0: without direct payments; dp_100: with direct payments Acronyms: VA: Value Added; NPRO/I: Nominal Protection Rates for Outputs/Inputs; EPR: Effective Protection Rate Table A2.3: Agricultural Production Activities under a Non-Intervention Scenario, 2004 Wheat Barley Maize Sunflower Potatoes Milk Beef Pork Poultry Eggs Intermediary Inputs [ROL/t*] 2,375,814 1,628,350 1,829,222 3,446,632 3,122,055 2,466,612 21,611,612 20,752,733 22,538,765 37,921,779 Output [ROL/t] 4,374,226 3,701,264 3,372,261 6,787,112 4,266,452 6,045,882 29,635,237 27,518,754 47,130,883 34,788,768 Value Added_dp0 [ROL/t] 1,998,412 2,072,915 1,543,039 3,340,479 1,144,397 3,579,270 8,023,625 6,766,021 24,592,118 -3,133,011 * per ton of output; dp_0: without direct payments; dp_100: with direct payments Table A2.4: Agricultural Production Activities under CAP-type Prices without Direct Payments, 2004 Wheat Barley Maize Sunflower Potatoes Milk Beef Pork Poultry Eggs Intermediary Inputs [ROL/t*] 2,805,516 2,006,122 2,233,327 4,148,598 4,827,683 2,778,932 26,665,403 23,087,140 25,774,466 40,569,867 Output [ROL/t] 4,056,981 4,042,218 3,909,350 7,340,595 4,904,535 6,631,273 33,108,504 42,958,979 30,831,812 34,845,736 Value Added_dp0 [ROL/t] 1,251,465 2,036,096 1,676,023 3,191,997 76,852 3,852,342 6,443,101 19,871,838 5,057,346 -5,724,131 NPRO [%] -7.5 9.6 15.9 8.2 15.0 21.4 41.0 65.6 1.9 16.4 NPRI [%] 18.1 23.2 22.1 20.4 54.6 12.7 23.4 11.2 14.4 7.0 EPR_dp0 [%] -37.4 -1.8 8.6 -4.4 -93.3 7.6 -19.7 193.7 -79.4 --- VA rel to current [%] -25.9 -39.1 -37.1 -0.6 -97.5 26.1 19.4 22.9 -26.7 --- * per ton of output; dp_0: without direct payments; dp_100: with direct payments 151 Table A2.5: Sectoral Production Activities under Current Policies, 2004 Total Wheat Barley Maize Sunflower Potatoes Milk Beef Pork Poultry Eggs Intermediary Inputs [bln ROL] 124,677 13,782 2,183 19,234 4,205 18,697 16,516 10,415 15,623 10,673 13,348 Output [bln ROL] 198,566 21,872 5,652 40,534 7,459 30,460 32,142 12,544 25,675 13,335 8,894 Value Added_dp0 [bln ROL] 73,889 8,090 3,468 21,300 3,254 11,763 15,625 2,129 10,052 2,662 -4,453 Direct Payments [bln ROL] 3,463 900 90 0 195 0 1,111 50 800 317 0 Value Added_dp100 [bln ROL] 77,352 8,990 3,558 21,300 3,449 11,763 16,737 2,179 10,852 2,979 -4,453 NPRO [%] 28 5 49 50 8 84 3 8 53 8 -6 NPRI [%] 21 21 29 31 20 55 31 22 21 23 14 EPR_dp0 [%] 12 -15 61 73 -4 165 -15 -33 139 -72 -359 EPR_dp100 [%] 17 -6 66 73 2 165 -9 -31 158 -69 -359 dp_0: without direct payments; dp_100: with direct payments Table A2.6: Sectoral Production Activities under a Non-Intervention Scenario, 2004 Total Wheat Barley Maize Sunflower Potatoes Milk Beef Pork Poultry Eggs Intermediary Inputs [bln ROL] 97,772 11,379 1,689 14,631 3,493 12,091 12,614 8,524 12,903 8,700 11,749 Output [bln ROL] 163,849 20,950 3,839 26,973 6,878 16,524 30,918 11,689 17,110 18,192 10,778 Value Added_dp0 [bln ROL] 66,077 9,571 2,150 12,342 3,385 4,432 18,304 3,165 4,207 9,492 -971 dp_0: without direct payments; dp_100: with direct payments Table A2.7: Simulation Results­ CAP pricing without direct payments; short-term Total Wheat Barley Maize Sunflower Potatoes Milk Beef Pork Poultry Eggs Intermediary Inputs [bln ROL] 117,883 13,437 2,081 17,863 4,204 18,697 14,211 10,517 14,355 9,948 12,569 Output [bln ROL] 177,702 19,430 4,192 31,269 7,439 18,995 33,911 13,059 26,711 11,901 10,796 Value Added_dp0 [bln ROL] 59,819 5,994 2,112 13,405 3,235 298 19,700 2,541 12,356 1,952 -1,773 NPRO [%] 21 -8 10 16 8 15 21 41 66 2 16 NPRI [%] 8 18 23 22 20 55 13 23 11 14 7 EPR_dp0 [%] -9 -37 -2 9 -4 -93 8 -20 194 -79 83 VA rel to current [%] -19 -26 -39 -37 -1 -97 26 19 23 -27 -60 dp_0: without direct payments; dp_100: with direct payments 152 Table A2.8: Simulation Results­ SAPS; 0% EU-15 top-up; all holdings eligible; short-term Total Wheat Barley Maize Sunflower Potatoes Milk Beef Pork Poultry Eggs Value Added_dp0 [bln ROL] 59,819 5,994 2,112 13,405 3,235 298 19,700 2,541 12,356 1,952 -1,773 Direct Payments [bln ROL] 9,223 2,885 622 4,079 1,270 366 0 0 0 0 0 Value Added_dp100 [bln ROL] 69,042 8,879 2,734 17,485 4,504 664 19,700 2,541 12,356 1,952 -1,773 VA rel to current [%] -11 -1 -23 -18 31 -94 18 17 14 -34 -60 dp_0: without direct payments; dp_100: with direct payments Table A2.9: Simulation Results ­ SAPS; 10% EU-15 top-up; flat payment; all holdings eligible; short-term Total Wheat Barley Maize Sunflower Potatoes Milk Beef Pork Poultry Eggs Value Added_dp0 [bln ROL] 59,819 5,994 2,112 13,405 3,235 298 19,700 2,541 12,356 1,952 -1,773 Direct Payments [bln ROL] 12,912 4,039 871 5,711 1,777 513 0 0 0 0 0 Value Added_dp100 [bln ROL] 72,731 10,033 2,983 19,117 5,012 810 19,700 2,541 12,356 1,952 -1,773 VA rel to current [%] -6 12 -16 -10 45 -93 18 17 14 -34 -60 dp_0: without direct payments; dp_100: with direct payments Table A2.10: Simulation Results­ SAPS; 20% EU-15 top-up; flat payment; all holdings eligible; short-term Total Wheat Barley Maize Sunflower Potatoes Milk Beef Pork Poultry Eggs Value Added_dp0 [bln ROL] 59,819 5,994 2,112 13,405 3,235 298 19,700 2,541 12,356 1,952 -1,773 Direct Payments [bln ROL] 16,602 5,194 1,120 7,343 2,285 659 0 0 0 0 0 Value Added_dp100 [bln ROL] 76,421 11,187 3,232 20,748 5,520 957 19,700 2,541 12,356 1,952 -1,773 VA rel to current [%] -1 24 -9 -3 60 -92 18 17 14 -34 -60 dp_0: without direct payments; dp_100: with direct payments Table A2.11: Simulation Results­ SAPS; 30% EU-15 top-up; flat payment; all holdings eligible; short-term Total Wheat Barley Maize Sunflower Potatoes Milk Beef Pork Poultry Eggs Value Added_dp0 [bln ROL] 59,819 5,994 2,112 13,405 3,235 298 19,700 2,541 12,356 1,952 -1,773 Direct Payments [bln ROL] 20,291 6,348 1,369 8,975 2,793 806 0 0 0 0 0 Value Added_dp100 [bln ROL] 80,110 12,341 3,481 22,380 6,028 1,103 19,700 2,541 12,356 1,952 -1,773 VA rel to current [%] 4 37 -2 5 75 -91 18 17 14 -34 -60 dp_0: without direct payments; dp_100: with direct payments 153 Table A2.12: Simulation Results­ SAPS; 0% EU-15 top-up; flat payment; holdings > 1ha eligible ; short-term Total Wheat Barley Maize Sunflower Potatoes Milk Beef Pork Poultry Eggs Value Added_dp0 [bln ROL] 59,819 5,994 2,112 13,405 3,235 298 19,700 2,541 12,356 1,952 -1,773 Direct Payments [bln ROL] 8,627 2,827 615 3,625 1,260 300 0 0 0 0 0 Value Added_dp100 [bln ROL] 68,446 8,821 2,726 17,031 4,494 598 19,700 2,541 12,356 1,952 -1,773 VA rel to current [%] -12 -2 -23 -20 30 -95 18 17 14 -34 -60 VA rel to full SAPS [%] -1 -1 0 -3 0 -10 0 0 0 0 0 dp_0: without direct payments; dp_100: with direct payments Table A2.13: Simulation Results­ SAPS; 10% EU-15 top-up; flat payment; holdings > 1ha eligible; short-term Total Wheat Barley Maize Sunflower Potatoes Milk Beef Pork Poultry Eggs Value Added_dp0 [bln ROL] 59,819 5,994 2,112 13,405 3,235 298 19,700 2,541 12,356 1,952 -1,773 Direct Payments [bln ROL] 12,078 3,958 861 5,075 1,763 420 0 0 0 0 0 Value Added_dp100 [bln ROL] 71,897 9,952 2,972 18,481 4,998 718 19,700 2,541 12,356 1,952 -1,773 VA rel to current [%] -7 11 -16 -13 45 -94 18 17 14 -34 -60 VA rel to full SAPS [%] -1 -1 0 -3 0 -11 0 0 0 0 0 dp_0: without direct payments; dp_100: with direct payments Table A2.14: Simulation Results­ SAPS; 20% EU-15 top-up; flat payment; holdings > 1ha eligible; short-term Total Wheat Barley Maize Sunflower Potatoes Milk Beef Pork Poultry Eggs Value Added_dp0 [bln ROL] 59,819 5,994 2,112 13,405 3,235 298 19,700 2,541 12,356 1,952 -1,773 Direct Payments [bln ROL] 15,528 5,089 1,106 6,526 2,267 540 0 0 0 0 0 Value Added_dp100 [bln ROL] 75,347 11,082 3,218 19,931 5,502 838 19,700 2,541 12,356 1,952 -1,773 VA rel to current [%] -3 23 -10 -6 60 -93 18 17 14 -34 -60 VA rel to full SAPS [%] -1 -1 0 -4 0 -12 0 0 0 0 0 dp_0: without direct payments; dp_100: with direct payments Table A2.15: Simulation Results ­ SAPS; 30% EU-15 top-up; flat payment; holdings > 1ha eligible; short-term Total Wheat Barley Maize Sunflower Potatoes Milk Beef Pork Poultry Eggs Value Added_dp0 [bln ROL] 59,819 5,994 2,112 13,405 3,235 298 19,700 2,541 12,356 1,952 -1,773 Direct Payments [bln ROL] 18,979 6,220 1,352 7,976 2,771 661 0 0 0 0 0 Value Added_dp100 [bln ROL] 78,798 12,213 3,464 21,381 6,006 958 19,700 2,541 12,356 1,952 -1,773 VA rel to current [%] 2 36 -3 0 74 -92 18 17 14 -34 -60 VA rel to full SAPS [%] -2 -1 0 -4 0 -13 0 0 0 0 0 dp_0: without direct payments; dp_100: with direct payments 154 Table A2.16: Simulation Results­ SAPS; 0% EU-15 top-up; flat payment; holdings > 0.5ha eligible; short-term Total Wheat Barley Maize Sunflower Potatoes Milk Beef Pork Poultry Eggs Value Added_dp0 [bln ROL] 59,819 5,994 2,112 13,405 3,235 298 19,700 2,541 12,356 1,952 -1,773 Direct Payments [bln ROL] 9,059 2,877 621 3,956 1,268 337 0 0 0 0 0 Value Added_dp100 [bln ROL] 68,878 8,871 2,733 17,361 4,503 635 19,700 2,541 12,356 1,952 -1,773 VA rel to current [%] -11 -1 -23 -18 31 -95 18 17 14 -34 -60 VA rel to full SAPS [%] 0 0 0 -1 0 -4 0 0 0 0 0 dp_0: without direct payments; dp_100: with direct payments Table A2.17: Simulation Results­ SAPS; 10% EU-15 top-up; flat payment; holdings > 0.5ha eligible; short-term Total Wheat Barley Maize Sunflower Potatoes Milk Beef Pork Poultry Eggs Value Added_dp0 [bln ROL] 59,819 5,994 2,112 13,405 3,235 298 19,700 2,541 12,356 1,952 -1,773 Direct Payments [bln ROL] 12,683 4,028 869 5,538 1,775 472 0 0 0 0 0 Value Added_dp100 [bln ROL] 72,502 10,021 2,981 18,944 5,010 770 19,700 2,541 12,356 1,952 -1,773 VA rel to current [%] -6 11 -16 -11 45 -93 18 17 14 -34 -60 VA rel to full SAPS [%] 0 0 0 -1 0 -5 0 0 0 0 0 dp_0: without direct payments; dp_100: with direct payments Table A2.18: Simulation Results­ SAPS; 20% EU-15 top-up; flat payment; holdings > 0.5ha eligible; short-term Total Wheat Barley Maize Sunflower Potatoes Milk Beef Pork Poultry Eggs Value Added_dp0 [bln ROL] 59,819 5,994 2,112 13,405 3,235 298 19,700 2,541 12,356 1,952 -1,773 Direct Payments [bln ROL] 16,306 5,179 1,118 7,120 2,283 607 0 0 0 0 0 Value Added_dp100 [bln ROL] 76,125 11,172 3,229 20,526 5,517 905 19,700 2,541 12,356 1,952 -1,773 VA rel to current [%] -2 24 -9 -4 60 -92 18 17 14 -34 -60 VA rel to full SAPS [%] 0 0 0 -1 0 -5 0 0 0 0 0 dp_0: without direct payments; dp_100: with direct payments Table A2.19: Simulation Results­ SAPS; 30% EU-15 top-up; flat payment; holdings > 0.5ha eligible; short-term Total Wheat Barley Maize Sunflower Potatoes Milk Beef Pork Poultry Eggs Value Added_dp0 [bln ROL] 59,819 5,994 2,112 13,405 3,235 298 19,700 2,541 12,356 1,952 -1,773 Direct Payments [bln ROL] 19,930 6,329 1,366 8,703 2,790 742 0 0 0 0 0 Value Added_dp100 [bln ROL] 79,749 12,323 3,478 22,108 6,025 1,040 19,700 2,541 12,356 1,952 -1,773 VA rel to current [%] 3 37 -2 4 75 -91 18 17 14 -34 -60 VA rel to full SAPS [%] 0 0 0 -1 0 -6 0 0 0 0 0 dp_0: without direct payments; dp_100: with direct payments 155