overview of farmers’ - food and agriculture organization · overview of farmers’ organizations...

The EC-FAO Food Security Information for Decision Making Programme

http://www.foodsec.org

Overview of Farmers’ Organizations in Georgia

and Main Constraints

Dragan Angelovski FAO

Conference on Policies and Programmes to Support Small Farmers’

Organizations in Georgia

Review of Experiences in Georgia and Selected European Countries



Overview of Farmers’ Organizations

• Three reports conduced in 2011

– Baseline Assessment

– Enterprise Legal Forms for FOs

– Taxation of Agricultural Sector



•Overall objective

– To assess the constraints of FOs to achieve their objectives, welfare and economic development

•Methodology

– 16 FOs selected and surveyed in 6 regions

– The management and members of each organization was addressed through Semi-structured interviews and questionnaires were filled

– Focus group meetings were hold with rural communities

Baseline Assessment



Status

Type Milk Fruits &Vegies Beekeeping Fish farming Livestock

Framework Farmer Associations 1 1 1

Farmer Associations 1 3 1

Farmer Associations with LTDs 2 1

Cooperatives 2 1 1 1

– Almost all FOs own significant assets (mechanisation/equipment and real estate), usually granted by donors.

– Most of the organizations have a solid base for development, ability to engage in commercial activities and opportunities for acquisition of loans.

– More than half of the FOs are virtual or centrally managed (managers “own” the FO

and members have no decision making power, or participation in the steering of the organisation)



Members and membership fees

– The average number of members is 37

– Cooperatives have more members (30-250) compared to Associations (10-58) as they are organized around services with commercial benefits to the members

– Membership fees range from Euro 10 to 20 per annum or at admission

• Only 2 out of 8 of the Farmer Associations actually collect fees

• None of the interviewed FOs ever excluded a member since their inception

– Formally, membership is open, however, resistance to new members was observed, due to the need to share assets and profits.

– Almost all FOs have approximately 50 % of passive members, reflecting the lack of focus on members’ interest.



• In most cases, FOs are managed by few persons with basic management training and little formal skills/training for development and democracy in managing of FOs.

• The FO management is usually well educated.

• There are significant variations in the setups of the FOs.

1. General assembly meetings and voting rights are regulated by the legislations.

2. Detailed operational rules are are prepared by default.

3. Internal regulations are poorly developed and almost not documented.

• Donor support is not preconditioned with internal development and provides little incentives to improve the FO’s internal systems.

• FOs co-managed by long-term projects have more advanced structures.

Governance



Activities

• Most FOs are involved in many different activities without a clear core activity.

• Almost all activities are at the inception fully funded by donors, and very few are usually further developed.

• The FOs offer most of their services to farmers, not exclusively to their members.

• Crediting and self-crediting is underdeveloped. None of the FOs provide any type of crediting (funds, inputs) to their members.

• Joint input supply, (apart from 2 cases) is not existent on regular basis.



Marketing

• The management of most FOs do not perceive significant marketing constraints.

• Most of the FO's management are sporadically involved in the marketing of their member’s produce. ( 3 FOs are dedicated to the collection and marketing of their members’

produce, including exports).

• FO’s members sell their products to the same buyers, as the non-member farmers.

• Limited and sporadic volumes and qualities from the few members, prevent the FOs to have a stable supply and integrate in the markets.



Donor support

• All except one of the FOs were established with donor support which was an important motivation.

• The donor contributions in assets range between US$ 7 000 and US$ 170 000 n, i.e. US$ 53 000 on average per FO and on average US$ 23 000 per intervention

• 7 FOs have received donations from 2 donors, and 8 from more. Donors prefer adding values to existing FOs, rather than initiating and developing new.

• Follow-up on the assisted FOs is not common or systematic.

• The Government usually play no role in the support of FOs, while Local authorities have been usually involved.

• The management of most FOs, has benefited from variety of trainings provided as TA



Perception of FOs by the general public

• There is significant knowledge gap amongst the rural population in regards to FOs.

• 84 % of respondents are unaware of FOs in their districts although FOs exist in their neighborhood.

• Farmers show interest in FOs and the majority of farmers would join as a way of addressing their constraints, although only 1/3 would pay the fees.



• The purpose was to analyse suitability of different legal forms.

Legal Forms for Farmer Organizations

• ORGANISATIONAL FORMS

• The Law on Entrepreneurs provides a general framework governing all legal forms through mandatory or default rules.

Legal forms for organizing an agriculture enterprise:

• General Partnership (GP),

• Limited Partnership (LP),

• Limited Liability Company (LLC),

• Joint-stock Company (JSC),

• Cooperative (CO).

• Farmer organization can also be organized under a non-profit association (NCE) form governed by the Civil Code.



Cooperatives

• Cooperatives are governed by the Law on Entrepreneurs as a commercial legal entity aimed to generate profit.

• In particular, cooperative is a company based on the labor activities of its members or a company founded with the objective to develop farms of its members and increase their revenues with the aim to satisfy interests of the members and without primary focus on profit generation.

• Liability of the cooperative is limited to its property thus securing its members’ personal assets from any failure.



Cooperatives

• Only 8 Articles of the Company Law are dedicated to the cooperatives. They are short, incomplete and poorly organized.

• Several aspects are missing or unadequately covered and terms used are not defined.

• Although not explicitely indicated in the law, Cooperatives may own or found other legal entities

• The Law fails to capture fundamental differences between the cooperatives and other common investor-owned companies.

Cooperatives in the world Other Commercial Entities Company Law of Georgia

Voting Rights One man one vote principle Control is vested wtih the

largest shareholders

This is not imperatively protected and

is optional

Return on

Investments

A member shall invest not primarily for the

return he will get on his money, but because

he is a beneficiary in other ways

Paid at a commercial rate or a

divident paid on equity capital Not addressed in the law

Profit Distribution

Distributed depending on the work or

custom rather than on what they have

contributed financially in share capital.

Paid at a commercial rate or a

dividend paid on equity capital

Paid in proportion to the membership

fee invested Profits can be reinvested,

with the shares increasing with the

investment.



General Partnership (Joint Liability Company JLC)

• JLCs are governed under the Law on Entrepreneurs described as a commercial entity in which several individuals (partners) jointly, under a firm’s common name, conduct entrepreneurial activities

• JLCs are liable before the creditors as joint debtors, with all of their personal assets, fully and directly.

• Normally, JLC is used by consulting, auditing and other services companies where limited equity capital and more intellectual work is involved.

Cooperatives JLC under Company Law

Motivation for

Establishment

To accomodate common needs of the cooperative

members JLC is a commercial entity with the aim to generate profit

Voting Rights One man one vote principle Depends on the size of the shareholding: control is

vested wtih the largest shareholders.

Return on

Investments

A member invests not primarily for the return, but

because he is a beneficiary in other ways, Paid at a commercial rate or a dividend paid on equity

capital Profit Distribution

Distributed depending on the work rather than on what

they have contributed financially in share capital.



Non commercial legal entity

• Non-entrepreneurial (non-commercial) legal entity are primarily governed by the Civil Code of Georgia.

• Particular types of NCE are not spelled out by the Civil Code and their particular objectives/focus are defined by their charters.

• Provisions of Tax Code of Georgia define them as organizations for which economic activities are only complementary to achieving their non-commercial goals).

• NCEs can generate profits from complementary commercial activities which are in line with their primary goal, for a reasonable portion of the overall income (precise portion/percent is not defined in the legislations).

• Exciding the level of reasonable returns from commercial activities may trigger a requirement for registration of the NCE as a commercial entity.



Non commercial legal entity

• NCE’s can own legal entities, however, if such legal entity is used for generating profits/dividends it may be considered as economic activity by the revenue services

• NCE is liable for the damages to third parties with it’s property.

• Charter of NCE should define it’s structure.

Cooperatives NCE under Georgian law

Motivation for

Formation

To accomodate common needs of the

cooperative members

NCEs are created with a particular common objective which

normally far exceeds interests of the founders themselves

Voting Rights One man one vote principle Member voting structure is fully absent and only the governing body nominated by the initial founders has capacity to act and decide on behalf of the entity.

Return on

Investments

A member shall invest not primarily for the

return he will get on his money, but because he

is a beneficiary in other ways

Not applicable. Any parties involved, if employed receive

salary or are contracted as goods or services providers.

Profit Distribution

Distributed depending on the work or custom

rather than on what they have contributed

financially in share capital. There are

differences country by country, but the fact

that ownership and control rest with the

members should hold.

Excess funds are distributed according to the objectives

declared in the Charter.



General conclusions

• Current institutional framework allows rapid, simple, and affordable registration for all types of organizations in one working day.

• Registration may be rejected if discrepancies are found in the registration documentation (absence of one or more document, failure to observe the form of the

documents, failure to address the issues required by law in the charter).

• The general characteristics of all organizational forms is that they are governed by few unclear mandatory rules and self established default rules, (procedures for governing, admission of new members, withdrawal, and suspension, Voting rights, with the exception of one legal form).

• Existing organizational forms do not provide for the principle of democracy and economic efficiency to be applied simultaneously.



Taxation of Agricultural Sector

• Personal income tax - 20%

• Value Added Tax (VAT) - 18%

• Corporate income tax - 15%

• Dividends tax - 5%



Personal Income Tax

• Personal income tax rate is 20% from 1st of January 2009 to be reduced to 15% starting from 1 January 2014.

• Exemptions for Individual Enterprises

Up to 1 January 2014:

– income received from agricultural products and

– salaries for employees if such income does not exceeds GEL 200,000 during a calendar year.



Corporate Income Tax

• Corporate income tax rate is a flat 15%.

• The tax base includes the following: trading income; capital gains; income from financial activities; and other items of income (benefits, etc).

• Deductible Expenses

– Generally, a deduction is allowed for all expenditures contributing to the generation of taxable income or those that the taxpayer incurs to contribute to the generation of its taxable income.

• Exemptions from Corporate Income Tax:

– Up to 1 January 2014 income received from initial supply of agricultural products, if such income does not exceed GEL 200,000 during a calendar year;

– Up to 1 January 2014 income gained from agricultural activates reinvested in agriculture.

• Few farmers alone can generate a turnover above the current exemption threshold, while a group of farmers can easily exceed the exemption upper limit and be taxed.



Value Added Tax (VAT)

• VAT rate is 18% for all taxable transactions.

• Supply of farm products by producers is exempted from VAT without entitlement to reclaim input VAT.

• Individual entrepreneur taxpayer can register for VAT voluntarily.

• VAT is applicable on every stage of supply. If FO takes ownership of member produce, FO becomes VAT liable unless farm products are exported. Food processors are also subject to VAT.

• VAT paid inputs can be credited/recovered however:

– Taxpayer must be a registered VAT payer;

– Since primary supply of farm products is exempted from VAT, farmers cannot reclaim the VAT paid on inputs (nitrogen fertilizer, fuel, etc.). affecting negatively their competitiveness



Value Added Tax (VAT)

• The current tax provisions largely influence and keep the FO service provision to members at rudimentary level.

• The tax system prevents FOs to take a title of member produce, add value and generate income for members.

• FOs try to limit their services to handling of member farm products (sorting, packing,

etc.). In this case FOs just pay a profit tax on generated revenue from services.

• Current proposal to abolish VAT on primary product trade along entire supply chain (with entitlement to reclaim input VAT) is a step forward. However;

– neither members nor FOs will be able to reclaim paid inputs VAT, unless registers as VAT payers.

– Registration as a VAT payer is voluntary. However, record keeping required is costly, and compliance is burdensome for small scale farms.



Dividend Tax

• If FO generates earnings for the members, the generated income should be distributed and taxed as dividends.

• Dividends are taxed at a level of 5%

• Before distribution of dividends, profit tax will be assessed at FO level.

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