Doing Business favorite looks investment-deficient
11 November, 2010
Doing Business favorite looks investment-deficient

Georgia tops the list of reformers globe over by Doing Business 2011 rating but lags far behind its investment prognosis targeted this year. Economic analysts say Georgia needs to make its business climate much friendlier actually.
Among the world’s 174 economies, Georgia improved its business environment the most in the last five years, according to Doing Business 2011: Making a Difference for Entrepreneurs, the eighth in a series of annual reports published by International Finance Corporation (IFC) and the World

Bank.
Georgia enjoying the runner-up position in Doing Business 2006 rating turned out the most active worldwide in reforming business regulation and is number one in the list. Among 174 economies covered by the Doing Business change score, 85% of the economies have made it easier for local entrepreneurs to operate, through 1,511 improvements to business regulation.
Georgia having been progressing in the Doing Business rating list starting 2005 [Georgia ranked just 137 in the ranking on ease of doing business in 2004] made yet another step forward progressing to 12th rank globally from 13th in accordance with changed methodology and remains the only Eastern European country in top 15, setting the pace for business regulatory reforms. Georgia reformed in the following areas of business regulation: Closing a business, Enforcing contracts, Getting credit (legal rights), and Protecting investors.
In particular, Georgia improved insolvency proceedings by streamlining the regulation of auction sales. It made the enforcement of contracts easier by streamlining the procedures for public auctions, introducing private enforcement officers, and modernizing its dispute resolution system. In addition, it improved access to credit by implementing a centralized collateral registry, with an electronic database accessible online. Georgia also strengthened investor protections by allowing greater access to corporate information during a trial.
Georgian government believes that the Doing Business rating is a precondition to Foreign Direct Investments’ inflow in Georgia for investors take into consideration the World Bank’s rating during decision-making process.
According to Nika Gilauri, Prime minister of Georgia, this rating is “a very serious advertisement for international investors” as far as business is inquest of business-friendly environment today. Mikheil Saakashvili, President of Georgia, dubbed Georgia as “the Champion from economic reforms point of view” that means that no other government in the world did as much to create economic development opportunities to its people as Georgian government did [during the past five-year period].
However statistic figures show that the Doing Business favorite lags much behind the FDI prognosis during the past three years. FDI inflow accounted for USD 197 million by data of the second quarter [by September of 2010] this year that is about 19% of the targeted billion. The FDI inflow reduced by 58% in 2009 compared to 2008 dropping from USD 1.5 billion to USD 658 million that translates into USD 906 million slump compared to 2008. The FDI figure of 208 lags by USD 500 million behind the USD 2 billion of 2007.
This year seems to be the worst taking into account that 2009 was the crisis year with the economic slump of 3.9% while government believes that Georgia has already bottomed out the crisis in 2010 and projected to attract twice more investments this year so as to go on the data of 2008 and even higher.
According to economic analysts investments inflow in the first quarters of the year is slower usually and the pace is gathered in the last quarters, but they do not expect serious improvement this year.
Levan Kalandadaze, Head of Association of Georgian Small and Medium Sized Enterprises, does not thinks that the FDI inflow achieves billion this year. He believes that the diminishing investment figure bespeaks of defects in the business environment and much more should be done to improve it.
“Doing Business rating is excellent but there are number of other ratings including country risk ratings of Fitch, Moody’s and Standard & Poor’s, economic freedom, property right protection ratings where Georgia is not as favorably rated as would like. Investors take into account all ratings. And no serious investor enters any country if does not research it beforehand through its own experts. It is a step forward that one can start business easier in Georgia, but to start business is not a major thing actually, the key thing is how easily you can develop this business. And we limp to this end,” He said.
According to Kalandadaze, Georgia has serious legislative collision on definition of SME sector that can stumble any business and economic development of the country as far as SME is the basement of social-economic development of any country. Georgian new tax code defines as small business only physical entities turnover of which do not exceeds GEL 100 thousand. On the other hand the law on foreign investments stipulates that all business no matter legal  or physical entity  that have under GEL 500 thousand of annual turnover  and employs 20 persons are small; and enterprises  that have  more than GEL 1.5 million of annual turnover and employ at least 100 person are medium sized.
“So an investor starts its business simply but when the tax officer will come he would be staggered for it is not clear how one can define business status actually. According to law on investments LLC can be a small business while the tax code defines only individual entrepreneurs as small business. As a result a small bakery or beauty salon is taxed equally to big plant. That should be retrieved. No rating can help if you have blemishes like that, but if you create a really business-friendly environment you need not any rating - investors will rash to the country eagerly,” Kalandadze told Georgian Journal.
Levan Surguladze, Head of Caucasus Financial Service, an investment bank, thinks that Doing Business rating is very important to Georgia when it comes to FDIs.
“When an investor enters country via direct investment he/she takes into consideration this rating for sure because they need to know how protected the investment is. And it is very important that Georgia each year makes a step forward in this rating,” Surguladze said.

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