Freer Economy for Ajara
14 March, 2013
Freer Economy for Ajara
Ajara will remain the haunt for Free Industrial Zones (FIZ) development. New government plans to develop several such zones in Ajara. However, the idea is still under elaboration and the authorities don’t disclose taxation or any other kind of economic preferences that must lure investors to Ajara.
In spite of failed FIZ projects deployed by ex-powers throughout country on purpose, to attract investors and give an impetus to sluggish Georgian economy, new government does not discard
the FIZ idea. On the contrary, Ajara’s administration appealed to the central government at the end of 2012 with the request to allow development of several free industrial zones within Ajara and the economy minister said “yes” with reference to big potential of Ajara , which the new government intended to use thoroughly.
However, neither the Ajarian nor the central administration specifies what preferences they will give to the upcoming FIZ projects. Final decisions will be made after the ongoing negotiations with potential investors will be through although authorities already promise that all businesses will be treated equally with no separate privileges to enjoy.
Ex-government of National Movement initiated the FIZ idea starting 2007 by deploying the FIZ at the Poti Port adjacent territory. Such zones were beyond customs zones and exempted from Value Added Tax and property tax. Government was responsible to insure development of communication and engineering infrastructure including roads, water, gas and electricity supply. The overwhelming majority of economic analysts opposed the FIZ idea as redundant against the backdrop of the already liberalized Georgian business climate, small market, low quality and not cheap labor force, as well as political risks in conflicting regions that might trigger smuggling within FIZ territories. The best world practice proves that free economic zones are created in countries with big markets, robust and sustainable economic development when all tools of liberalization of economic climate expire while Georgia is just developing and overliberalized.
Nevertheless, free industrial zones were deployed in Poti, Kutasi, and Tbilisi and although in 2009 ex-government acknowledged that the FIZ projects were falling much behind the par, in 2010 President Saakashvili decided to make economy freer in tourist haunts too and started from Kobuleti in Ajara. Khelvachauri was the next stop. To attract investors in the targeted zones ex-government assumed engineering and communication infrastructure development obligation. In Kobuleti construction land spots with the total area of 11.3 thousand hectare were handed to investors for GEL 1 of symbolic price and those capable to complete hotel constructions within 14 months were exempted from income and property taxes for 15 years. 30 hotels were expected to be constructed in this way however only 2-3 projects are still developing at a low pace, Archil Khabadze, Head of authority of Ajara Autonomous Republic of Georgia, said. In Khelvachauri ex-powers did not meet their infrastructure development obligations after which potential investors were supposed to take the FIZ area under rent. Nevertheless, new authorities plan to go with Kobuleti and Khelvachauri projects ahead. Ditrikh Muller, a co-founder of Georgian Investment Group, believes first and foremost business climate must be improved, fair court restored and firm guarantees of investors’ rights protection to be created.
“The lack of trust toward the previous government caused by outrageous property violation practice and governmental interference in the business affairs undermined the FIZ projects,” Muller said. “And now the trust should be restored.” He believes the reputation of Bidzina Ivanishvili, a billionaire Prime Minister of Georgia, is a significant plus as big fishes of international business world do trust him. However, gambling having been luring tourists from neighboring countries with prohibited gambling opportunities to Ajara must be as a trump card to free zones in Ajara.
Paata Sheshelidze, President of New Economic School, thinks that development of free economic zones is unreasonable in Georgia for it is a small and fiscally centralized country; moreover, a fortiori, old projects failed and nobody explained why by means of proper analysis.
“If we had a decentralized fiscal system and regions could compete with different taxation regimes, it would be more flexible,” he said.
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