New State Export Company Poses Anti-Trust Risks
06 September, 2012
New State Export Company Poses Anti-Trust Risks

A new state-run export company created to solve the agriculture export-related problems, is believed to be ineffective and can transform into a monopolist ultimately, hampering the commercial sector development. 

To boost Georgian agriculture export, Georgian government set up a new Fruit and Vegetables State Company LLC, a public law entrepreneur owned by the state in this August after Vano Merabishvili, a former Interior Minister took over the post of Prime Minister. The Premier has been personally promoting and explaining the benefits

of an export-oriented company with farmers during his regional tours.

According to Merabishvili, the new state export company will guarantee to accept the surplus harvest from the regional population and then export it to Ukraine whence the product will be re-exported to the European countries. Premier promised farmers that the said company would accept entire harvest for competitive price. It also will be responsible for marketing and logistic sides of export and will pay back the compensations in case of losses.

Merabishvili accentuated that instable markets are the key challenge to Georgian farmers that caused significant financial losses and now the state will stand as a guarantor to sell the harvest out that will be big stimulus to farmers.

According to Giorgi Jakhutashvili, Head of Fruit and Vegetables State Company, the state export company has already started operation and it will act as a mediator and key counselor to export-oriented companies and farmers. It will get the harvest producers in touch with the reprocessing enterprises and exporters.

“The export company will set up fruit-and-vegetable collecting units in regions and handle with their marketing and logistics completely,” Jakhutashvili said in the interview to Georgian Journal. “We have already worked out a data-base of producers and potential export companies and when an interested entrepreneur asks to be provided by certain product we would get them in touch with the  producer, also provide with due consulting and logistics service to insure the smooth operation.”

Jakhutashvili cannot name at the moment how many collecting units will be set up. All he can say now is the state rehabilitate old units and equip with the state-of-the-art technologies for fruit-and-vegetable sorting, packing and storing for construction of the brand new infrastructure may require big investments.

The new company plans to construct a new refrigerator warehouse in Ukraine where Georgian agriculture product will be stored and sent on re-export to Europe.

The export company will be financed from the profit it will enjoy that includes the service fee too.  Jakhutashvili cannot name even average tariffs as of yet as far as it depends on the service package, besides the company is not completely shaped out.

The commercialization of the state run export-oriented venture makes some economic and agriculture sector analysts alert that it will be ineffective and monopolistic. Badri Ramishvili, an agriculture marketing expert, predicts that the state company involved in a commercial activity will be ineffective as almost all state enterprises are and is supposed to become a market monopolist hampering to commercial sector development ultimately.

“If the new company will be mediating [between producers and reprocessing or logistic enterprises] it will be good but as soon as the state export company will be payable, it sends a signal that this company may become a market monopolist eventually. When a big, united structure is created under aegis of the state, structure that has no alternative at the market it is a monopoly,” Ramishvili elaborated to GJ.

Such state monopoly is supposed to press on its privileged keys to win competition with the private sector that kills competition and private business.

He doubts that such a structure can be privatized in future thus becoming a private monopoly that is worse than the state one.

“As a rule state enterprises are non-profitable and ineffective for they include corruption risks, demand big administration resources and are less controlled while private business is always better controlled/managed as far as founders are interested in profit and efficiency. The efficiency is lost with the state. Any state interference in commercial business if it does not include strategic importance [like railway, roads, ports, forest fund] is ineffective. And the agriculture is of no strategic importance.  I wonder that government with libertarian ideas does this.  It would be better for the state to be involved in streamlining legislative base with other states to make simpler taxation and the business will do the rest,” Ramishvili said.

Shota Murghulia, an economic analyst with the Center for Strategic Research and Development, also questions effectiveness of the new state venture that looks like a pre-election project. He does not see monopolization risks at the moment but does not rule out such risk in future.

“The state always tries to use its privileged levers that private business cannot afford,” Murghulia explains.

What he questions is the profit and reasonability of the venture.

“I do not see any monopoly risks at the moment for the state undertook the activity that private business cannot do and it will be good if they really help the export. But I wonder why private business could not do that? There were number of small businesses operating in export of Georgian agriculture product but they quit that makes me inclined to presume this business is not profitable perhaps the quality of Georgian product is low,” Murghulia presumes.

He cannot understand how a new export company can re-export Georgian product from Ukraine to European countries with stronger safety and quality requirements if Georgian product do not meet these standard requirements. If the quality problem does exist with Georgian export in Georgia it is scarcely supposed to be removed in Ukraine.

“May be this export company will do a good job but it should clearly stipulate how it is going to have profit that private business could not get,” Murghulia said. “Otherwise it very much resembles pre-election vote-oriented enterprises that end bad as a rule.”

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