To Be, or Not to Be. How Adequate is the Current System of Subvention Distribution?
The subventions distribution system has provoked a mixed reaction among the farmers themselves. People were particularly outraged by the fact that Myronivskyi Khliboprodukt gets most money being the most successful agribusiness in Ukraine.
Many people think that the owner Yurii Kosiuk gets a “gratitude” for his services this way because he was the Vice Chairman in the Presidential Administration not so long ago.
This reason is quite convincing given the Ukrainian realities. But it’s hardly the only one.
Subventions for farmers: distribution logic
This year, the Ukrainian budget provides for ₴4,774.3 bn. to be allocated for supporting the agro-industrial complex.
₴1.91 bn. of subventions were paid to farmers in the first semester, from which ₴809 mn. (the largest share) were allocated to Myronivskyi Khliboprodukt that works in two agrarian segments – horticulture and poultry husbandry.
That said, its net profit amounted to $210 mn. for the last 9 months, which was more than the vast majority of Ukrainian agrarian companies.
Another ₴141 mn. were allocated to Avangard, a poultry husbandry agriholding. The rest of the funding was distributed among other producers.
The companies engaged in the animal husbandry and gardening are traditionally among the underperforming Ukrainian companies by profits compared to the horticulture and poultry farming ones.
Such distribution of subventions seems rather illogical. Indeed, these payments are ought to stimulate the development of loss-making and underperforming enterprises in the first place. And we are doing exactly the opposite. Which brings us to a question: how come?
Of course, we can blame the corruption for everything. The fact that Yurii Kosiuk, the owner and founder of Myronivskyi Khliboprodukt, has ropes to the top echelons of power and held a high office not so long ago is indeed incendiary.
And even the owner of Avangard holding, Oleh Bachmatiuk, is no stranger to Ukrainian political elite: he was the Deputy Chairman of the Board at NJSC Naftogaz of Ukraine.
A conclusion on corruption schemes in this situation is self-evident. However, there’s also another explanation.
What goes around…
Let’s take a look at how the subvention distribution system is functioning now. And it works simple enough.
First, agrarian companies have to apply for a subvention to the Fiscal Service. Applications are received only from enterprises that produce no less than 50% of their agricultural products independently. Moreover, over a half of their profits should constitute the proceeds from primary agricultural products sold.
The list generated is to be submitted to the Treasury. Then, it analyzes every candidate’s solvency – the VAT amounts paid, to be precise. The calculations determining a subvention size are based on them. Companies giving a high VAT receive more subventions and vice versa.
This approach is really good in many ways. Namely, due to its transparency, which many politicians and experts have already noticed – from the Prime Minister Volodymyr Groysman to the Chief of the Chamber of Tax Advisors in Ukraine Olha Bohdanova.
Firstly, it prevents the representatives of shadow economy from intercepting the state payments.
Secondly, companies not directly involved in the agrarian sector (such as bakeries that do not produce agricultural products but process them instead) are denied in this opportunity, same as the enterprises engaged in grain crop farming.
The latter are officially excluded from the list of candidates to receive subventions as they do not need governmental support. And finally, the entire process of allocating money is now less tied to the decisions of bureaucrats, who can be bought. The economic performance of an enterprise is the determining factor.
Unfortunately, the system’s transparency is not enough to make it good. In this case, the calculation through VAT is ruining everything.
This approach benefits only those areas of agriculture that are able to survive regardless of the governmental support. It is the poultry husbandry I speak of, which is Ukraine’s second profitable industry after horticulture. The profits of poultry companies are stable and high, and thus, they pay a high value-added tax.
Therefore, the government simply wants to support those who give more money for the budget and replenish it the sooner the better, instead of waiting for the less profitable businesses to find their feet and generate high GDP.
From a business perspective, this approach is logical: it is better to invest something profitable other than some business ready to go down.
But in this case, it is not about private investments but the government ones. That is why such business approach may not be 100% correct in this case.
Most experts on agrarian markets still insist on changing the current system. As an alternative, it is proposed to calculate subventions based on the margin between tax liabilities of agricultural producers and a tax credit. Such approach would indeed allow the subventions to be distributed more evenly and, above all, make it seasonally adjusted.
By the way, the latter is something that the current subvention distribution system also takes no account for.
The specific nature of poultry husbandry is designed in such a way that they cannot sell their products all year long. The vegetable and fruit growers only prepare to get their harvest in the first semester, which they can only sell in the second one.
Hence the difference in their income, and thus in the number of subventions received.
Artem KovbelPartner, Head of Financial Investigations