Cotton in Tajikistan. Problems and Solutions Tajikistan Development Forum 2 June 2007

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1 Cotton in Tajikistan Problems and Solutions Tajikistan Development Forum 2 June 2007

2 Cotton in Crisis Production -- declining yield: 2.8 t/ha in 1991, 1.6 t/ha in 2006 Poor soil structure (weak irrigation infrastructure, poor rotations) Processing -- low gin out-turns at 32% (Kaz 36%, West Africa 41%, developed world average 38%) Debt -- Most cotton farms are in debt; almost all are unprofitable Debt overhang limits production credit and production incentive

3 Cotton Farm Debt Status as of 31/12/06 Net farm debt due cotton creditors is estimated at $400 million (NBT data) 74 cotton creditors; 10 hold 79% of debt Cotton creditor borrowings from foreign banks ($318m), traders ($92m), domestic banks ($96.2m) and others ($94.7m) -- about $601 million, of which $409m for farm lending KreditInvest acted as a financial agent

4 Key Sector Issues: Short & Medium Term Large debt overhang across the sector needing restructuring, coupled with lack of incentives for profitable farming Lack of farmer education and legal training after farm restructuring from 640 to 27,000 farms Lack of adequate agriculture sector reforms -- policy, institutional, credit, markets, and investment

5 Roadmap for Cotton Sector Recovery Joint Government and Donors efforts since September 2004 Government passed Resolution # 111 in March 2007 Short term measures: farm debt resolution; land reform; removal of government interference Medium term measures: rural finance; input markets, grading, pricing and taxation, seed sector, farmer education and training

6 Work To Date (1) ADB TA on FDR provided initial thinking on resolution DfID TPAC: revealed legal situation of farms and debt, info on non-court settlements and farm bankruptcy WB studies: key issues on marketing, inadequacy of farm records, government controls on cotton movement, market prices and creditor/processor behavior ADB and WB loan development: supported Road Map, defined de-linkage of farmers from cotton creditors as fundamental step, proposed mechanism for repayments

7 Work To Date (2) Other donors: defined requirements for seed, land reform, other elements for ensuring sustainable debt resolution ADB/DfID/CIDA TA 2006/07: shift to Sector approach, raised issue of cotton creditor debt to external creditors and potential effects of bankruptcy; showed low farmer capacity to repay and poor farm legal and management structure

8 Debt Resolution Principles One time program to be completed rapidly & fully with measures to ensure sustainable resolution Rapid farmer de-linkage at 2 levels: NBT separation, and from cotton creditors Transparent and fair process to all Immediate implementation of freedom to farm provisions Cut-off date for farm debt is 31/12/06; excludes govt., sundry debtors

9 Debt Resolution Approach/Steps Cotton creditors enter into a debt resolution process, or refuse (and go to courts) Forensic review of cotton creditor records and value chain/profit analysis Forensic review of status of international creditors to domestic cotton creditors Estimate payout ratio on basis of review results

10 Debt Resolution Approach/Steps (cont.) Establish payment mechanism Establish legal mechanisms to formalize debt resolution agreements and payment mechanism Negotiate agreement on repayment terms and conditions cotton creditors to apply responsible business practices as condition of repayment during repayment period

11 Debt Resolution Approach/Steps (cont.) Government implements freedom to farm at the grassroots level; security of land tenure; farm autonomy Farmers helped to improve business plans and management, prudent borrowing, shareholder engagement Work with input suppliers, banks, MFIs, other potential financiers Consider establishment of special working capital finance facility Ensure effective farm debt monitoring Consistent Government progress to effectively implement Decree # 111

12 Mechanisms: Legal Debt Resolution Agency (DRA) as independent temporary body to: Oversee forensic reviews and debt `negotiations with cotton creditors Establish repayment agreements for Government yes/no decision Set and enforce conditions for repayment for cotton creditors Another option: Provide agreement to agent to act on behalf of the State to negotiate debt resolution with cotton creditors and arrange payouts

13 Mechanisms: Payment Establish escrow account with a reputable bank Account to hold funds for repayment of cotton creditors in amounts determined and agreed Arrange accounting/legal firm to oversee and certify payments

14 Mechanism: Conditions for Financing Government to: Agree on principles for debt resolution and setup of legal and payment mechanisms Agree to proposals for donor participation, including cotton credit market oversight Oversee effective Resolution #111 implementation Liaise with donors

15 Remaining Questions: 1. How much is the real debt? Current data through NBT: net $400m Farm records are inadequate Low quality accounting in some cotton creditors Forensic reviews and analysis of value chain and market profitability will provide practical information for debt determination

16 Remaining Questions: 2. Who should pay? Cotton creditors alone: As much of debt is legally questionable, cotton creditors bear all costs of farmer default. Results: risk of courts being jammed, cotton creditor bankruptcy, adverse flow-on effects; negative impact on agricultural credit

17 Remaining Questions: 2. Who should pay? Cotton creditors + Farmers: Farmers repay what they can through levy, cotton creditors take strong writedown on top of due diligence. Results: weak farmer capacity to repay and risk of default; risk of cotton creditor bankruptcy, adverse flow-on effects; impacts on agriculture credit

18 Remaining Questions: 2. Who should pay? Cotton creditors + Farmers + Government: cotton creditors take post-forensic review reduced amount as negotiated, farmers pay what they can afford and still rebuild their asset base, Government pays the balance through donor assistance. Results: risks that donor funds may be insufficient; managed negative impacts, but concerns over moral hazard and reputational risk.

19 Action Plan Establish legal mechanism for debt resolution agreements August 2007 Completion of forensic reviews (farmer debt, cotton creditor review, international creditor review) September 2007 Establishing mechanism for monitoring and enforcement of reforms October 2007 Final agreement on common approach and financing November 2007 Approve legal form, amounts and negotiating approach, escrow payment system December 2007 Open escrow account December 2007

20 What Government must ensure, immediately: Freedom to farm, on the ground Protection of farm management and land tenure from local government interference Full, accurate and timely access to data for debt resolution to be completed Full adherence to and enforcement of financial institution regulations Safeguards to prevent predatory behavior in mortgage-backed lending Effective implementation of all other aspects of Resolution #111

21 Donors are already committed to: Debt resolution analytic work: ADB, CIDA, WB, DfID Debt resolution financing: ADB,others to confirm Land Reform: USAID, EU, SIDA, DfID, WB, CIDA, UN Legal support to farmers: DfiD,, USAID Farmer training: multiple donors Farmer financing: EBRD and supporting donors Cotton pricing and processing reforms: ADB, WB Seed improvements: SIDA

22 Donors can also help by funding: Debt resolution finance Land policy and market development Ag policy, legal, regulatory development, including tax reform Further seed sector support Further farmer training Agricultural production and processing finance Risk mitigation/safety net

23 After reforms take hold Farms are profitable entities with diversified production base, secure tenure, reducing poverty, attracting investment, adding to national income Credit market is stabilized and expanded, lenders diversified, longer term investment enabled Competition provides farmers, processors, marketers with better options Government shift to market enabler lowers its costs, assures increased credibility, confidence, satisfaction

24 Thank you.