GUARANTEED YIELD

Natural disasters observed worldwide - floods, droughts, fires etc. - increase the importance of insurance in rural areas. Last year alone, crop areas were flooded in Azerbaijan as a result of a disaster in the Aran (central) region of the country and 76 hectares of cropland and pastures remained under water, which had a negative impact on the grain harvest. To meet the country's demand for cereals, it is now planned to increase imports.

Natural disasters cause great damage to both agricultural land and villagers' property. But if the property is not insured (which is often the case in Azerbaijan), they can only rely on assistance from the state budget. The state also supports agriculture through the State Agency for Agricultural Lending under the Ministry of Agriculture, to which state budget funds have been transferred since 2007 for preferential lending to farmers.

Due to the high risk involved, agricultural banks are reluctant to lend to this sector, so the volume of credit investment is growing at a negligible rate. While in 2009 agricultural loans accounted for 4.7 per cent of banks' total loan portfolio, in 2010 this figure increased to just 4.8 per cent. In total terms (along with government loans) lending to the agricultural sector grew by 11.8 per cent. This being the case, it is expected that the government may replace subsidies to farmers with preferential lending in the future.

Today, economically developed countries support the agricultural sector with subsidies. In particular, in the EU, the volume of subsidies to the agricultural sector is approaching 50 billion euros per year. State support for agriculture in Azerbaijan is planned to be over 500 million manats in 2011. This includes both direct and indirect costs. It is planned to allocate 35 million manats from the state budget to the JSC Agrolizing and 10 million manats to the Agency for Agricultural Lending under the Ministry of Agriculture. Of the funds allocated to the National Fund to Support Entrepreneurship this year, 34 million manats, or 48 per cent, are earmarked for the production and processing of agricultural products. Some 111.6 million manats will finance the state programme on long-term sustainability and food security by 2016 and 220 million manats will finance the modernization of land reclamation and irrigation.

According to studies, the cost of one thousand cubic metres of water for irrigation is 18.8 manats, but today it is sold to agricultural producers for 0.5 manats, that is at 2% of the cost. This means that the state is providing direct subsidies of 80 manats per hectare of sown area.

In 2011, indirect subsidies to the agricultural sector are expected to reach 150 million manats. In 2009, tax exemptions for the country's farmers were extended for another five years; they are exempt from all taxes (excluding land tax).

50/50

It should be noted that today, a logical, structural model for economic relations between agricultural enterprises, budgetary and credit institutions and insurance companies seems to be the most promising, and makes it possible to obtain a loan for property, insured by an insurance company, while up to 70 per cent of premiums are subsidized from various budgets.

Azerbaijan currently funds up to 50 per cent of an insurance policy from the budget while insuring against agricultural risks. The remaining 50 per cent are undertaken by insurance companies. The average tariff on agricultural insurance in Azerbaijan is about 1,500 manats per year (5 per cent per hectare). This is despite the fact that the average profit per hectare of land is about 25,000 manats per year.

In particular, budgetary funds may be used to insure agribusiness risks associated with the cultivation of wheat, barley, maize, potatoes, sugar beet and vegetables (except greens). According to the Ministry of Finance, the opportunity to insure risks will allow farmers to increase agricultural production and ensure the profitability of their production.

According to Namiq Xalilov, head of the State Insurance Supervision Service under the Ministry of Finance, Azerbaijan now has the necessary legislation to promote insurance in agriculture. Every year the state budget allocates a certain amount for insurance against risks in the agricultural sector, but local farmers have shown little interest here: only about 10 per cent of the total volume of funds allocated from the state budget is being used.

To raise interest in state-owned commercial insurance, the AzarSigorta company has been active in informing the rural population and farmers about insurance services. A joint working group has also been established of representatives of the country's ministries of agriculture and finance in order to study international experience in this area and to prepare relevant proposals.

Sabir Valiyev, head of the Ministry of Agriculture's department to control the production and processing of crop products, believes that the rural population does not understand the importance of crop insurance. Although the Ministry of Agriculture regularly holds special events to educate the rural population in this regard, farmers still refuse to use the services of insurance companies. According to Valiyev, the reason for farmers' refusal to insure their farms is mainly their lack of trust in insurance companies, despite the fact that by decision of the Azerbaijani Cabinet of Ministers, 50 per cent of premiums for this type of insurance are provided by the state budget.

"We need a pool!"

Meanwhile, non-banking credit institutions, vigorously active in rural areas, are also interested in insurance risk guarantees for agricultural loans. In this regard, the Azerbaijan Microfinance Association (AMFA) conducted a study of insurance mechanisms in the agricultural sector. During its analysis, it studied international experience, the current situation in Azerbaijan and a number of proposals.

Given the high risks in agriculture, and in order to improve the rural population's access to financial resources (other than budget funds), the AMFA proposed the establishment of a fund to insure and guarantee loans for agriculture. According to the initiators, on the one hand the fund will deal with risk insurance in the agricultural sector and on the other, it will act as a guarantor for loans to the agricultural sector. The association submitted its proposals to the government, since the state must take an active part in the establishment and operation of such a fund. It should be noted that all the public institutions surveyed (Ministry of Finance, Ministry of Economic Development, Ministry of Agriculture, the Central Bank and the state commercial insurance company AzarSigorta) support the idea of establishing a guarantee fund for agricultural loans.

According to the association's research, published on 25 February 2011, the fund will act as an intermediary between farmers and insurance companies. According to the currently prevailing concept, an insurance company will transfer premiums received from farmers into the fund, receiving a commission from it. The insurance payment for a claim will be made directly by the fund. A number of insurance companies may reinsure the risks of the fund if it does not have enough funding.

According to Vaqif Rustamov, head of the association's research group, risk insurance in the agricultural sector is currently experiencing certain problems. Specifically, this is due to the limited number of objects of risk insurance in the agricultural sector and the limited terms of insurance payments for claims, which are mainly natural disasters. According to the project, the fund can identify priority areas for its activities; set maximum limits on insurance and guarantees, identify specific cases for insurance payments and establish evaluation criteria for insurance and guarantees.

Rustamov believes that there is no need for a separate law in order to set up a fund, as Azerbaijan has had the law "On state support for small businesses" since 1999, and it contains a clause on "government financial support for small businesses", which envisages the issuing of subsidies, compensation, preferential loans, grants and guarantees, and the organization of leasing and other services to entrepreneurs. With this in mind, a Fund to Insure and Guarantee Agricultural Credits can be created by presidential decree. Investors in the fund could be the private sector and international funds that would expand access to capital and appropriate the available experience. In addition, the association proposes exempting the fund from all taxes.

Further steps, according to Rustamov, should be directed primarily at developing a legal framework for the fund. Above all, it is necessary to develop relevant draft laws and regulations, as well as specify the funds mechanisms, to develop its draft charter and to determine mechanisms of interaction between all parties interested in the project.

Meanwhile, the state insurance chief, Namiq Xalilov, believes that the establishment of a fund requires further study, since this is focused more on insurance against the failure to return loans issued by non-banking credit organizations to the rural population rather than on the insurance of property, crops and livestock. Therefore, today it is too early to determine in what form the guarantee fund will operate.

Also, according to experts, to improve the system of agricultural insurance in Azerbaijan, along with the Fund to Insure and Guarantee Credits in Agriculture, it would be better to create a large insurance company and a network of regional agrarian companies. In addition, it is proposed to recover damages related to the loss of fixed assets, to compensate for crop losses by insurance payments, improve the pricing policy (differentiate rates and bring them into conformity with the degree of risk) and to form and use insurance reserves.

In general, it would also be useful to introduce new instruments (bonds from accidents, insurance contracts based on the index of adverse weather conditions, insurance contracts on the index of territorial production), technological innovations (weather forecasting by satellite, space images and an early warning system) and encourage private insurance companies (provision of benefits in the payment of insurance premiums and fees and grants for administrative expenses and reinsurance subsidies) for a more effective mechanism for the insurance of agricultural loans.

All this will ultimately promote agribusiness, bring the level of industrial relations in this sector into line with world standards, which is very important for the food security of Azerbaijan, and ensure stable revenues for the state treasury, bypassing the oil sector.