1.4. Overview and brief assessment of previous actions

1.4.1. Previous actions with Community support

EU technical assistance program Phare has started its support to Lithuania’s agricultural sector in 1991. Since then, Phare has allocated to the sector about 29 million EURO. The amount of allocations varied from year to year depending upon priority areas selected and volume of assistance required. As characteristic with Phare program projects, one part of the resources provided were for development of institutional building, another part – for procurement of equipment and other types of investment. Annex V contains a list of Phare technical assistance projects carried out in 1991 – 1998.

At the beginning of the program, the main attention focused on development of an overall strategy for the agricultural sector. During the period of 1991-1994, the greatest part of Phare allocations were given to the preparation of various feasibility studies for different sectors, technical assistance to the development of advisory services for private farmers, land reform, establishment of land information system and rural banking system initiation. To address these issues, Programme Implementation Unit was established within the Ministry of Agriculture.

Another Phare agricultural program started in 1995. The strategic goal was to assist the Ministry of Agriculture and other public and private sector organisations in translating the Government's policies and reforms into practical market restructuring activities. 1995-1996 Phare allocations for agriculture mainly concentrated on the provision of necessary financial resources for the sectorial reforms, restructuring of agricultural processing enterprises, strengthening of food control system, as well as substantial assistance for rural credit system generation.

Starting with 1997 and onwards Phare program shifted its emphasis to the European Integration issues. The financial support has been provided for the establishment of necessary systems prerequisite for future EU member states. A specific attention has been and will be paid to the veterinary and phytosanitary subsectors, land market development, strengthening of institutional capacity, establishment of integrated agricultural information system and development of fisheries sector.

The main direct beneficiaries of the Phare projects started in the last two years are the Ministry of Agriculture, Rural Credit Guarantee Fund, State Veterinary Service, State Plant Protection Service, State Laboratory of Milk Control, Lithuanian International Agricultural Trade Agency, Lithuanian Institute of Water Management, Institute of Agricultural Machinery Engineering, Milk Processors Association, Institute of Aerial Geodesy and other social and economic partners.

During the first quarter of the year 2000, by OMAS Consortium there have been produced an Assessment Report for Assistance funded under the European  Union Phare Programme 1996-1999. Summary of the overall implementation assessment, conclusions and recommendations is presented below:

The activities funded under the Programmes can be grouped under the following headings:

·        Institutional Strengthening and Human Resources Development;

·        Farm Restructuring and Development

·        Land Market;

·        Quality Development for Agricultural and Food Sector;

·        Agri-business Enterprise Restructuring and Development;

·        Establishment of the Rural Banking System and Agricultural Information Systems.

Below there is presented table of commitments and disbursements under each of the headings:

Source: The Ministry of Agriculture, 1999

Those projects involved following activities:

1.      Assisting the task force on Credit management of Agricultural Bank in appreciating selected investment and working capital farm loan applications, and training rural credit officers and analysts of the RCGF in farm loan appraisal methodology and techniques.

2.      Development of legal and economic/financial concept as the basis for the framework law on credit guarantee institutions, and preparation of the Operational Manual of the RCGF.

3.      Assisting in the development of key staff, policy makers and leaders involved in the development of Lithuanian agriculture in areas related to EU integration.

4.      Assisting in establishing legal and organizational framework for Lithuanian breeding system, and improving the performance of State Laboratory of Milk Control and Animal Breeding Information Centre.

5.      Procurement of equipment necessary to the operation of the orthophoto production line and related training.

6.      Improving LAITA services in dissemination of market reports on selected target markets, and strengthening overall management of LAITA.

7.      Assisting in organizing a new system of animal identification and delivering know-how, methodology and documentation related to the field.

8.      Development of a promotional campaign for multifarm machinery use and educational lessons about multifarm machinery use,.

9.      Assisting the Ministry of Agriculture to become effective in preparing the policy, administrative and legislative frameworks required to allow Lithuania to commence negotiation on EU accession.

10.  Provision of intensive training for staff of the selected 10 dairies, the Lithuanian Dairy Association, local training providers, local consultants and other in modern quality management, practical implementation of HACCP, internal calibration, the introduction to the document control requirements of ISO 9000 and the design of Quality Manual.

11.  Provision of focused practical consultancy inputs to the ten dairies with the aim of raising quality standards by developing the concept of quality assurance, modern food safety and ISO 9000 requirements

12.  Assisting the dairies in the development of the improvement of raw milk quality at farm level.

13.  Assisting State Veterinary Service and State Plant Protection Service to prepare a strategic plan that will focus on priorities, and to identify:(a) how the border inspection service is to be organised at national and border levels; (b)which border posts have to be chosen to be upgraded to reach EU requirements; (c) what equipment is required at border inspection posts as well as domestic laboratories, and its cost, prepare the supply of the equipment for the new system; (d) an appropriate form of central and small laboratory control.

14.  Developing Land Reclamation Association and setting up of a land reclamation GIS;

15.  Procurement of drainage maintenance machinery, training aids and materials, hardware and software related to GIS, survey and diagnostic equipment related to subsurface drainage.

The activities resulted in:

1.      Developed of Multifarm Use of Machinery (MUF) strategy, printed set of educational materials about MUF and their introduction in the seminar, and guide on machinery options has been printed and disseminated.

2.      Increasing number of subscribers to the publications of LAITA on agro markets, yearly sector reviews about dairy, grain and meat sectors were produced, and database and mass-mailing tools for domestic food companies assembled. Additionally, companies with niche key products for export identified, joint export shipments facilitated, and proposal for joint-branding, including a schedule, statute, budget, brand manger and interim premises.

3.      The delivered outputs deepened professional skills and expertise of Lithuanian land reclamation specialists in specific activities of the land reclamation process. Various items procured from the project resources used in the demonstrations raised farmers’ awareness of the advantages of land reclamation in daily undertakings. Western countries experience has been disseminated to wide audience of Lithuanian specialists.

4.      Operational Manual of the Rural Credit Guarantee Fund prepared.

5.      Staff of the Institute of Aerial Geodesy was trained in how to (a) operate the orthophoto production line, (b) organise production, (c) guarantee sustainability of the solution proposed through maintenance organisation, (d) guarantee integration of the system with the existing mapping configuration, and (e) more than 30 orthophoto sheets (scale 1:10,000) were produced and accuracy of produced orthophoto checked.

6.      Organised a new system of animal identification: (a) prepared a description and scheme of existing Lithuanian system of animal identification of breeding and non-breeding area and a comparison between the existing Lithuanian animal identification activities and EC requirements; and (b) prepared a proposal of a new system of animal identification.

7.      Audited GHP and HACCP systems and advised on GHP, GMP and HACCP implementation, analysed the situation regarding the quality of raw milk, reviewed the calibration issue and recommended how to improve internal calibration, trained of certification procedures, packaging.

8.      Provided intensive training in food safety and hygiene, HACCP and quality assurance and audit techniques.

9.      Strategic plan to State Veterinary Service and State Plant Protection Service was prepared. Additionally, 9 veterinary and 7 phytosanitary border inspection posts (BIP) that have to be upgraded were identified and described; the investment cost for the upgrading of the physical infrastructure was estimated for each of the long term BIP, as well as equipment for BIPs (small laboratory control at BIP), CL and laboratory at Klaipėda and their costs were identified.

10.  Identified the appropriate forms of National Veterinary Laboratory and Central Plant Health Laboratory control.

11.  Office equipment was purchased for Medininkai BIP. Other funds for the purchase of equipment was reallocated to the payment for the provided services by a local architects.

12.  Breeders Associations were provided with comprehensive documentation on the elaboration of breeding programmes. Substantial support provided to Breeders Associations in the formulation of their statutes and design of their organisational structures to enable them to provide cost-effective breeding services and to get full co-operation with cattle breeders. Tentative business plan was prepared for Breeders Associations and submitted to Breeders Associations and Ministry of Agriculture,

13.  Extended and improved performance of State Milk Quality Control Laboratory in Kaunas by: (a) necessary equipment for the analyses for somatic cell count procured, (b) elaborated detailed laboratory running and management instructions, (c) submitted application for the accrediting State Milk Quality Control Laboratory according to ICAR rules, (d) concept for the reorganisation of milk collecting and recording has been prepared in close co-operation with Lithuanian Dairy Association, Milk Laboratory and Ministry of Agriculture, (e) proposals on making Milk Quality Control Laboratory self-sustainable and self-financing were worked out; European standard structure for bookkeeping has also been handed over,

14.  Improve the performance of Animal Breeding Information Centre (ABIC) by: (a) joining the data processing network of ABIC, Kaunas Milk Laboratory and Animal Recording Centre, (b) strengthening ABIC data base, (c) improving knowledge of ABIC staff in data bank development and genetic evaluation.

As the results of the previous PHARE assistance indicate, the program has been playing a major role in transferring know-how and building institutional capacity. Strengthening of the administrative bodies (e.g., the Ministry of Agriculture), the control institutions (e.g., State Veterinary Service, State Laboratory of Milk Control) and other public organisations creates a framework required for EU integration. At the same time, it is followed by structural changes in the agricultural sector: for example, strengthening of control institutions, together with related investment support, has made an impact on the improvement – although, slight – of raw milk quality.

Programme design and implementation

The Programmes have generally been well designed, particularly in respect of preparing policies, administrative and legal basis to allow Lithuania to start negotiations for EU accession. There were clear and relevant wider and immediate objectives, set in accordance with priorities defined in the White Paper, the Europe Agreement and the Accession Partnership.

There were few serious problems in implementation of Programme activities. The beneficiaries were successful in ensuring the completion of the planned activities and realisation of outputs, although the achievement of results was sometimes hindered by slow tendering and contracting actions.

Achievement of wider objectives

There was good progress in achievement of the wider objectives. These were all concerned with EU accession and embraced preparation of a pre-accession startegy, reduction of constraints in integration of Lithuanian agriculture into regional, European and international structures and modernisation of agriculture to meet the terms of the Accession Partnership. The Phare assistance supported development of a pre-accession strategy for agriculture and enabled near completion of bilateral screening. This was a significant contribution to the objective of reducing constraints on integration of Lithuanian agriculture into European structures, since it allowed systematic identification of barriers to the adoption of the acquis.

One of the major objective of the 1995 and 1996 Phare programmes for agriculture was to assist Ministry of Agriculture in developing capacity to develop and implement EU integration strategy, develop the required instruments and tools as well as provide training for trainers, teaching and demonstration equipment in order to continue and extend the development and co-ordination of extension, research and development services. The Phare projects raised to a significant extent the awareness and technical knowledge of the staff of the Ministry of Agriculture and related institutions of EU policies in the agricultural field. Information base on EU integration issues was strengthened by provision of a large variety of publications and subscriptions in this field. Technical base for further training and teaching activities has been improved as well.

Achievement of immediate objectives

There has been good progress in achieving immediate objectives in institutional strengthening and human resources development. These embrace creating capacity  to design, monitor and implement transformation in agriculture; developing and implementing an EU accession strategy; continuing institutional strengthening and human resources development; and assisting the Agi-business training Centre in training. An EU accession strategy has been developed and is under implementation. The creation, under one of the Phare projects, of funcioning Accession Working Groups, composed of local staff and assisted by the EU experts significantly contributed to the objective of implementing EU accession strategy, as evidenced by the progress in bilateral screening. Key staff has been trained in EU related matters.

There was less progress in immediate objectives in farm restructuring and development. There were major developments in establishing quality systems needed to improve the quality of food, but objectives of improving productivity or increasing export competitiveness in agri-businesses have been partially achieved. There were significant improvements in productivity and quality of dairy enterprises, but less was achieved in the meat and other industries, especially in respect of meeting requirements of Western markets. Phare support mainly benefited Beneficiary companies which were direct recipients of Phare support and there was no evidence of wider dissemination of benefits to other companies.

Some immediate objectives for rural banking have been achieved. These were to improve access to agricultural finance, to establish a loan guarantee fund, to mobilise and channel rural savings, to assist the Agriculture Bank in on-lending, and to create sustainable capacity at the Lithuanian Banking Training Centre. The Rural Credit Guarantee Fund is functioning and the level of banks’ take –up of guarantees suggests that it has contributed to achieving the objective of improving access to rural finance.

While a number of PHARE projects are not finished yet, the exact contribution of these in achievement of programme objectives is to be evaluated after the end of the projects.

Relatively little EU or bilateral assistance has been provided to assist in the development of fisheries policies and operations.  However, the following projects relating to the fisheries sector are being implemented:

Danish experts from the Biotechnological Institute assisted two of fish processing companies in preparation and implementation of HACCP system in their enterprises. These experts organised seminar “In-house” control for food enterprises. Requirements and recommendations” for fish industry in December 1999.

With the Danish bilateral assistance executed project “Restructuring the Lithuanian fish processing industry sector” – An analysis of the industry’s conditions and performance including a strategy of preparing the industry for the Lithuanian admission to the EU. The sector strategy as strategy of fish processing sector developed together with the experts from consulting firm “NIRAS Consulting Engineers and Planners A/S” (Denmark) is important for the future development of the Lithuanian fish processing and for the preparation of the industry for Lithuania’s accession to the EU. Important political and financial decisions for the Lithuanian fish processing industry will be taken on the basis of this strategy. One such decision in the distribution of the EU SAPARD funds. The results of the project are following:

an overview of the present situation of the Lithuanian fish processing companies;

action plans for two model companies with recommendations regarding markets, production equipment and facilities;

a strategy for restructuring of the fish processing industry sector in Lithuania.

The PHARE project “Support to the European Integration in Lithuania” (SEIL) has provided support on fisheries matters. The SEIL Project provided technical assistance for the harmonization of Lithuanian legislation and institutions to enable implementation of the Common Fisheries Policy of the EU.

PHARE project "National Fishing Vessel Register" on the establishment of a fishing vessel register in the 7 associated countries including Lithuania. Project currently is in progress under management of Swedmar. After evaluation of EU experts Lithuania is in the B-group. This means that the project will undertake the following actions :

-establish that the proper authority exists and meets the conditions including the legalities to pursue data collection leading to the maintenance of a national fishing fleet registry containing at least the data required by the various EU regulations;

-Assist the designated authority to understand the purpose and requirement of fishing vessel registry. Provide a model plan along which each country will need to produce its own national plan for such a registry;

-Assist in the review of the national plan produced by the national authority and examine the plausibility and the level of effort (including costs) to implement such plan. Encourage the authorities to reproduce the plan and adopt it as official;

-Provide a report with the consultants observations and conclusions indicating the key issues which need to be addressed and the action that needs to be pursued before each of the countries in this category can have the prerequisites to a valid and compliant fishing vessel register.

FAO TCP/EASTFISH project TCP/RER/8921 “Restructuring of the Fish Canning Industry in Estonia, Latvia and Lithuania” has provided support on evaluation of current situation and recommendations on restructuring of fish canning enterprises in Lithuania as well as for finding new markets for canned fish and training of specialists.

By the Danish bilateral assistance the project “Salt Cod in Lithuania” is presently under scrutiny of the Ministry. The main goals of the project:

to make good co-operation between Danish and Lithuanian fish processors;

to train workers, technologists of the selected Lithuanian fish processing company;

 to introduce representatives from education institution, Ministry of Agriculture and other institutions, involved in fisheries, with Danish fish processing sector, inspection, fish landing infrastructure and work of fish auction;

to develop a programme for the future collaboration.

In the framework of the by-lateral co-operation a long-term Japanese expert is working with the Fisheries Department of the Ministry of Agriculture;

1.4.2.Previous operations undertaken without Community assistance

A brief historic overview of agricultural and rural development policy

According to OECD experts, summarizing the broad objectives of the legislation adopted in 1991, Lithuania’s land reform can be characterized as based on the following broad objective of privatizing assets of collective and state farms and restituting these assets to new and more efficient types of farming, with emphasis on family farms.

The National Program for Development of Agriculture (NADP) approved in September 1993, set out the following objectives for the development of the agricultural sector:

·        to satisfy the people's demand for high quality food products;

·        to develop food product exports;

·        to ensure farmer income parity to average income levels;

·        to reduce the level of unemployment in rural areas;

·        to promote farming practices taking environmental concerns into account; and

·        to revive and preserve rural cultural traditions.

After implementing significant changes to agricultural policies and radically changing the framework of the pricing mechanism in the beginning of the transition process, the Lithuanian government launched a new market intervention program in early 1995. Price support measures of this program comprised the application of so-called minimum marginal purchase prices (MMPP) for specified quantities of farm products, direct subsidy payments to primary producers for a specified subset of these products, and ad hoc interventions including government purchases and temporary export subsidies. In addition to these measures, the program also provided input subsidies, direct payments for less favored areas, and subsidies for storage. However, in the absence of an institutional mechanism for enforcing the minimum purchase prices scheme, the government relied on processors to pay these prices to primary producers, i.e. when market conditions warranted it, price subsidies were paid through the processors. Understanding that the design of this support scheme was not well targeted, providing conflicting incentives to private decision makers and neither contributing to quality improvements, nor to development of efficient farming structures, the government decided to initiate a new package of reforms in early 1997.

In these reforms the government integrated all support measures and funding sources under the Rural Support Fund (RSF). The core elements of the reforms are comprised of a partial elimination or reduction of MMPP levels for specified products, targeting of direct payments to higher quality products, and replacement of the subsidized credit program with targeted investment grants, the Rural Credit Guarantee Fund, and a system for interest cost-sharing on short term loans for purchased inputs. Furthermore, value added tax (VAT) preferential rates for domestically produced agricultural and food products (9% instead of the standard rate of 18%) were abolished.

Current State Aids Policy

To regulate market of agricultural products and secure income of agricultural holdings, the Ministry of Agriculture has applied subsidies for agricultural production sold to farmers and other agricultural economic entities. Market regulation of agricultural products was based on price administration model. On average agro-food market regulation measures accounted for more than a half of Rural Support Fund available. However, the experience showed that market regulation model selected was not effective enough and did not speed up restructuring of agriculture and food processing sectors.

Thus, recently the Ministry of Agriculture has elaborated the following major strategic objectives regarding state aids policy:

·        to change subsidy payments for agricultural production sold model to priority investment support (grant aid schemes) and direct payments per hectare/ per head;

·        to implement measures of agri-food market regulation and export promotion programme, and guarantee financing of the programme;

·        to implement market intervention model which is applied in EU countries.

These also aim at restructuring of Market Regulation Agency: change its operation from price administration to market intervention model. With the aim of Market Regulation Agency restructuring, amendments in legal basis of the Republic of Lithuania have been prepared. The amendments of Law on Economic Relations in Agriculture have introduced target and intervention prices of agricultural products, as well as principles of market intervention model.

In the strategic plan of Market Regulation Agency, it is planned to apply market intervention in 3 sectors:

·        grain (wheat, rye);

·        dairy products (butter, milk powder);

·        beef and canned meat.

Regarding intervention in grain sector, the Market Regulation Agency will purchase a surplus of grain (up to 200 000 tonnes) at intervention prices. The intervention price will be lower than target prices, and will be set taking into account export prices. The Agency will purchase a surplus of grain in a certain period of time: from 1^st September to 30^th November.

In case of dairy products, the Market Regulation Agency will purchase dairy products at export prices. The intervention scheme will be applied from May to October. The Agency also will provide support to storage costs.

Similarly, the Agency will intervene in beef and canned meat market. The Agency will intervene when beef prices fall by 10% from target prices. Storage costs will also be subject to covering by the Agency.

To conclude, the restructuring from price administration scheme to market intervention model will allow the Market Regulation Agency to operate more effectively, and at the time promote enterprise restructuring.

Rural support fund

Transition to market economy and restructuring of the agriculture sector led to an acute need for investment. For this purpose, the Government of Lithuania in March 1997 established the Rural Support Fund (RSF), and currently, it is a main agriculture and rural development policy instrument. Later, a sister institution – Rural Credit Guarantee Fund was set up. The state budget is main source of those two funds. RSF aims at providing financial support to farmers, stimulating rural development and promoting export of agricultural products. Financial support from RSF is provided in a form of grant aid or subsidy. Rural Credit Guarantee Fund provides guarantees for farmers applying for a loan.

Financial resources of RSF basically are used for the following programmes:

Agro-food market regulation measures. These include subsidies for farmers and other agricultural holdings, as well export subsidies for processors of agricultural products.

Priority investment measures. These include grant aids for investments in agricultural holdings, farm diversification projects, rural infrastructure, etc.

Technical assistance, training and research. This programme provides funds to farm advisory services, establishment of agriculture information system, research project in field of agriculture and rural development, etc.

Rural Credit Guarantee Fund. Financial resources are allocated to secure farmers’ loans.

In general, total annual RSF budget is about 400 million LTL[1]. The agro-food market regulation measures account for the largest proportion of RSF financial support: they usually take up more than 60% of the total RSF budget. The priority investment measures receive about one quarter of the total financial support.

Table 23 Major measures of the Rural Support Fund, 1997-1999 (in million LTL)

Regarding the priority investment programmes, financial support from RSF is focused on the following:

1.      Support to farm set-up, farm modernisation and improvement of rural infrastructure. Since the establishment of RSF, this measure has been the most important in terms of attention and allocated funds. Under this measure, actions directed to improvement of rural infrastructure were supported. These include electrification, construction or reconstruction of rural roads, installation of water supply systems, etc. In addition, support to reconstruction and construction of production facilities, purchase of new farm machinery or equipment is provided. Young farmers are provided with particular terms of financial support.

2.      Support to co-operatives and agro-service enterprises. Under this measure, co-operatives and agro-service enterprises are granted aid for investments in production facilities, new machinery, equipment and technologies. Though this measure is a top priority in RSF, only 1.2 million LTL were absorbed in 1998.

3.      In recent years, particular focus is laid on new technology measure. This measure promotes new technologies in primary agriculture, as well in farm diversification. In 1998, total RSF expenditure for these purposes was 2.2 million LTL.

4.      Support to organic farming. In addition to grant aid for investments in development of organic farming, premium payments per hectare are provided. In 1998, this measure absorbed 1.4 million LTL

5.      Farming restructuring in less-favoured areas. Financial support in a form of grant aid is provided to agricultural holdings in less-favoured areas. In 1998, 1.7 million LTL was allocated for this purpose.

6.      Compensation of loan interest. Farmers and agricultural enterprises are eligible to receive the compensation. The compensation is provided for the investment loans. In 1998, 6.0 million LTL were paid as the compensation for investment loan interest.

Table 24 Priority investment measures, 1997-1998 (in million LTL)

Source: The Rural Support Fund database

In 1998, more than 6 thousand applicants received grant aid for investments. Almost 3 thousand projects involved improvement of rural infrastructure, and 2.5 thousand projects applied for refund of farm machinery or equipment (e.g., tractors, harvesters, milking and cooling equipment, etc.).

Average grant aid was comparatively small: it hardly exceeded 12,000 LTL. Volume of grant aid for projects involving improvement of rural infrastructure was bigger – more than 16,000 LTL.

Annex V contains further information on the RSF priority investment measures: actions eligible for grant aid, levels of aid and number of projects aided in 1998.

Recent studies of the previous RSF allocations carried out by Lithuanian Institute of Agricultural Economics conclude that the highest economic impact[2] was achieved by the following investment support measures:

·        Partial compensation of interest payments on long- and short-term loans.

·        Support to young farmers.

·        Support to investments in farm equipment and machinery.

Good progress can be observed from support to acquisition of bloodstock and semen. Agricultural enterprises and newly set-up farmers were able to acquire advanced cattle breeds and that was the base for increased quality and productivity. Short term loan subsidies have helped to solve the problem of need to cover operational expenses, especially during the spring sowing.

However, there are many opinions about the effectiveness of agricultural production price subsidies. Price subsidies distort the natural market relations, but during the crisis period, when production prices have suddenly dropped and price for resources was increasing, such subsidies were the main instrument to amortize the drop of farmers’ income. Despite of that, agricultural households’ income and standard of living is almost three times lower than of urban households.

Science of economics and business development practice has proved that the greatest benefit is achieved from the funds, invested into the newest technologies and intellectual potential. Therefore, establishing the Rural Support Fund priority was given to investment support. The Rural Support Fund investment part had three main focus areas: infrastructure, technical and intellectual potential. In order to speed up the farm set-up process in rural areas, support was given to construction of common use infrastructure objects (roads, electricity, communications, water bores). During the three year period, there have been allocated around 30 million EURO or 10% of the Rural Support Fund to infrastructure measures. There have been carried out more than 1000 electrification projects, arranged 150 water supply drills and around three thousand farmers installed communication lines. Common use infrastructure objects improved farmers’ and other rural inhabitants’ economic and social conditions.

A very important area of support is partial compensation of expenditure for acquisition of new technological equipment and machinery. In a period of 1997 – 1999 this measure have absorbed around 40 million EURO or 12% of the total Rural Support Fund. This has been the most effective form of support. Its result is the acquired new tractors, harvesters, milking and cooling equipment, construction and reconstruction of buildings. Only in 1998 farmers, supported by the state, have acquired 1334 tractors, 420 crop harvesters, 236 milking and cooling equipment sets, and many other techniques. Farmers have also bought buildings from agricultural enterprises, reconstructed and rearranged them in order to work with new technologies.

The effectiveness of the RSF allocations can be expressed by changes in productivity of main agricultural products. In the period of 1993-1997, grain yield increased by 19.5%, rape-seed – 69.3%, sugar beet – 15.4%, potato – 4.1%, flax – more than 2 times, this was especially evident in central Lithuanian regions, where the Rural Support Fund was mainly used for investment into new technologies. Last year 70% of food wheat has met the first grade requirements.  Improvement of raw milk quality was affected by appropriate RSF measures (support to investments in farm machinery and equipment and support to establishment of specialised dairy farms). In 1999, 40% of raw milk was of the highest grade.

Positive trends could be seen regarding the absorption of funds by different investment programmes (i.e. in 1997 investments into infrastructure composed 55% and investments into new technologies, equipment and machinery – 39%, while in 1999 this proportion has been 13% and 63% respectively). This reveals that after improvement of basic and general socio-economic conditions, farmers now are more concerned to invest into operational efficiency, productivity and quality of their produce.

Investment into human resources probably is the most effective form of support, however, it is very difficult to evaluate its benefits. Each year, about 7 million EURO are allocated to scientific research works, training, agricultural advice services and establishment of agriculture information system. The most important area is farmers’ training and agricultural advice. In all of the Lithuania’s districts there are established agricultural advice service offices, where farmers and agricultural specialists are able to get information on economic and technological issues.

During the Russian crisis, Rural Support Fund budget has been used for buying of surplus production, its storage and export. Thus, farmers had an opportunity to sell the grain, milk and other produce. 

Because of lack of efficient the RSF monitoring system, the correct and precise evaluation of RSF results has not been carried out yet. On the other hand, financial return on investment is calculated ten and more years, therefore its effectiveness can be only partially assessed because the RSF exists for just three years.

The RSF support can be measured as an opportunity for farmers and agricultural enterprises to gain experience on how rationally utilize state investment support. Funds were allocated on a tender basis to finance the best investment projects, therefore farmers are more or less familiar with the basics of preparation of investment projects, marketing research and the principle of financing with own and borrowed capital. Such experience will be helpful absorbing SAPARD support and support from the Structural funds after accession.

Capital market and rural credit

As is the case with the most transitional economies, the financial sector in Lithuania has faced many difficulties and there is still much to develop. Since independence, three state-owned banks, 25 commercial banks, a development bank and some representative offices of foreign banks have been established. Of the 25 private commercial banks, only about 15 were still functioning by mid-1995 and only about 5 are still functioning by now. While a significant informal financial sector had also developed post-independence, based mostly on local trading companies in search of profitable outlets for excess liquidity; their importance has declined sharply.

Number of commercial banks have been reduced through consolidation, mergers and liquidation. Most of the commercial banks had started out as the treasury arm of their state-owned enterprise founders. However, progress in enterprise privatization, and successful attempts at raising new capital have weakened those ties considerably. Some of the more active banks succeeded in acquiring credit lines or participated in financial sector assistance projects.

During the last decade the larger private banks have been expanding their network of branches and now have offices in major towns of the country. Funding comes mainly from private sector enterprises, and a large portion is denominated in foreign currency. While initially most of these banks limited their activities to short term foreign currency loans and accounts in foreign correspondent banks, from 1995, banks have started to expand their lending activities and introduced wider spectrum of services. In response to the need to raise additional capital and to build up their loan loss provisions, dividend pay-outs were cut and efforts to increase equity were increased.

Due to lack of information, experience, and expertise in lending to agricultural activities, Lithuanian commercial banks were not extending credit to farmers and small-scale rural enterprises. High transaction costs of servicing small size farm loans, uncertainties surrounding collateral, titles and a general perception that farm lending has relatively high risk, all served to aggravate situation. Banks have been predominantly engaged in the financing of highly profitable short-term trading activities and there have been very little for lending to the agricultural sector. The Agricultural Bank of Lithuania has been the sole source of agricultural credit. ABL specializes in providing banking services to the agricultural sector although it is a universal bank authorized to serve all the sectors of the economy. During 1993-1995 there have been major restructuring of ABL. The Government of Lithuania has agreed to take over bad loans which were result of politically directed lending from the ABL’s portfolio and has committed to inject new share capital which would allow ABL to fully restore its capital base and move towards becoming a viable commercial bank. ABL has been re-capitalized by diverting funds from the main source of subsidies, the Rural Support Fund.

In early 1994 the ToRs of a large agricultural project to operate the agricultural Phare programmes and to assist with further Phare programming were drafted. The banking and rural credit component of this large project had two major objectives. The first was to provide institutional support and training to increase the capacity of the rural sector to benefit from a World Bank Private Agricultural Development Programme (PADP) involving a 30 million EURO credit line expected to be disbursed over the period 95-97. The pursuit of this objective involved two components: institutional development of ABL, especially in credit management, to enable the bank to meet the pre-conditions to be eligible for channeling the World Bank credit line; and a training component addressed to the on-lending banks of the PADP credit line and to develop the capacities of the Lithuanian Banking Training Centre (LBTC) in training bankers, in particular in rural credit management. The second objective was to assist the MoA to develop policies for rural financial issues, and to establish standards, compatible with sound financial market intermediation for establishing a Rural Credit Guarantee Fund under preparation in the MoA.

Initially the focus was set on the first objective: a new credit manual was developed, for the ABL which benefited from extensive training and met the criteria  to channel the World Bank credit line, while training was also provided to the other banks participating in PADP scheme. Support was given to LBTC and the project extended its training and technical assistance to actors not belonging to the banking sectors but important to increase the capacity of the rural sector at large to formulate credit demand and in general to benefit from improved financial intermediation: the Lithuanian Agricultural Advisory Services (LAAS), the Rural Business Centre (RBC), the Ministry of Agriculture.

Partly because the World Bank loan initially was not so successful , for various reasons linked to its cost administrative modalities, to attract the anticipated level of demand from rural borrowers, the focus of the project shifted to to preparation and support for the establishment of the Rural Credit Guarantee Fund (RCGF) the capital of which would come from Government and a 2 MECU grant from Phare. In February 1997 after several iterations a concept of RCGF proposed by the contractor was approved by the Government. Statutes were prepared and after long negotiations RCGF was registered in 1997. The Fund started operations in the first quarter of 1998. The timing for a programme addressing these major needs was appropriate, in particular because macroeconomic stabilisation was evolving favourably, privatisation was well advanced and the World Bank was offering a specific 30 million EURO credit line under a Private Agriculture Development Programme. Disbursement of this credit line could become a reality only if capacity to channel the funds was developed.

Two specific market failures were major impediments to the development of financial intermediation, particularly for agricultural sector:

·        The insufficient development and inadequate functioning of the capital market which resulted in the lack of funding for long term lending within the banking system (the impossibility for domestic banks to issue bonds or other long term instruments);

·        The inadequate legal framework which did not enable borrowers to provide adequate collateral on purely commercial basis.

Impact of the above activities is that an essential condition for a Guarantee Fund to ease access to credit and bank loan is available. In this respect, the major factor is the availability of a World Bank credit line, which is the main source of long term funding for agriculture. After initial failure of this credit line, it has been redesigned and today there are 25 million. EURO especially for farmers’ loans. There are very favourable conditions because LIBOR + 2% margin compose about 9% of interest rate, while margin of other banks are 4%, which makes interest rate of about 15-16%. Today a rough calculation indicates that approximately 55% of total long term lending to farmers is covered by a guarantee from RCGF, there is provided 70% loan guarantee. The institution therefore had an impact.

There had also been improved access to bank lending through a better formulation of loan applications and business plans. The latter two were achieved through the training provided both to bank managers and extension services.

Awareness and interest for rural lending has increased in several banks which would have normally disregarded this activity. In quantitative terms these trends can be measured by the growing market share of such banks as Hermis Bank and Vilnius Bank as compared to traditional lender The Agricultural Bank (below there is presented a table of bank lending to agricultural and rural sector):

Thousand Lt

Source: Rural Business Development and Information Centre, 1999

Although lending by the Lithuanian banks during 1997-1998 has decreased because of the overall economic situation and Russian crisis, investments in agricultural rural sector have increased, which means that more private funds are being invested.

Also, Lithuanian Agricultural Bank is being supported by European Bank for Reconstruction and Development and German Investment Agency DEG and there has been signed a 20 mln DEM subordinated loan agreement.

Financial viability of local lenders improved to the extent that the loan appraisal has been improved and this should result in better repayment rates. As the approach toward market clearing interest rates will be fully implemented, financial viability will be further improved.

[1] 1 EUR – approximately 4.1 LTL

[2] The base was gross agricultural output per 1 hectare of the utilized agricultural area.