‘Fear and Hunger’ in Investments
24 November, 2011
‘Fear and Hunger’ in Investments

 

High pressure, low competition

Since 2007 foreign direct investments are on the permanent decline in Georgia. The official statistics confirm that in 2007 the figure exceeded 2 billion but slumped to 1.5 billion next year and dived under 1 billion in 2009. The situation slightly improved in 2010 when the FDIs rose to a bit more than 800 million. The first two quarters of the current year make up only for 377 million. Yet the Minister of Economy boldly predicts that

by the end of the year the FDIs will reach 1 billion. International Monetary Fund has a more modest expectation for that matter. It anticipates 850 billion-worth of FDIs for 2011. Even less optimistic is the European Bank for Reconstruction and Development with 750 million, i.e. EBRD expects further downfall in FDIs for the current year.

 

 

It seems the complexities start right from the moment of a company registration in Georgia. The private business representatives, for instance, account the ongoing “cleansing” of the pharmaceutical sector for the pressure exerted by the Authorities on businesses. Some time ago, regulators fined as many as 15 drug stores for violations. The fine ranged from one to three thousand Lari for each penalized firm. Since the start of the year, up to 160 drug stores have been fined for the total of 430 thousand Lari.

There are numerous instances of the pressure on businesses, which cannot be accommodated by a single newspaper article. We will only relate one of them. Recently, a reader contacted EkoPalitra (one of the publications of Palitra Media) and narrated the following story:

“I had a restaurant in a Tbilisi suburb. In 2004, a certain investor proposed that he would raise a residential multi-storey building in place of the restaurant and offered quite attractive conditions. He built it in 1.5 years and fulfilled his promise by handing the living space and a few more flats inside the building over to me. Both I and the investor felt satisfied about the deal. I have a land lot in the Vake area of Tbilisi. About one year ago I decided to find an investor for similar house construction for mutual benefits. Soon I found an investor and agreed with him on partnership conditions. However, we could not move the business forward. The Government not only had him pay official taxes but demanded nothing less than 5 million Lari from him. When the investor calculated pros and cons, he refused to invest the money in the undertaking. To put it directly, this was a shining example of the Government racketeering the private businesses.”

They were trying to persuade us that between 100 and 150 foreign companies showed interest in the Poti free industrial zone (FIZ). Actually only 22 companies are registered there so far. Moreover, only few of them are working actually. The Authorities expected employment for 25 thousand people but came to next to nothing. Another progenitor of tremendous hope was Kutaisi FIZ. Its main investor and partner is the Egyptian company Fresh. The Kutaisi FIZ organizer Georgian International Holding says that by now 9 companies are registered in the FIZ. Out of them, seven are Fresh subsidiary companies. The remaining two are still planning the entry.

Even in such dire circumstances of investment “hunger”, the Authorities create greenhouse conditions for specific investors. For instance, in Khaishi, to build a hydroelectric power station they are going to flood an old church with the X-XI century foundation and adjacent graves and are advancing the issue of relocating 525 families. According to the official information, the station is being built by an Indian company which subsequently is set to receive all the income from selling to Turkey the power generated from the station. As for Georgia, it will have to do  only with taxes which are thought to amount to less than 100 million. The State sold hundreds of hectares to the company for a symbolic price. What is more, the water for the future station is given free of charge. We learnt that the minimum fee to purchase power from the station will be 5.83 cents.

Keti Bochorishvili, Director of National Investment Agency of Georgia: “Interest in Georgia has increased. This will translate into projects in the nearest future. In the first three months of this year 600 Indian companies registered their businesses in Georgia. Based on statistical average, at least 50% are expected to operate in real terms. I would also note growing presence of Ukraine, China and Turkey. Further interest comes from the Central Asia and Arab countries. Apart from general interest, there are practical steps being undertaken, for instance, in tourism, energy and agricultural sectors.”

Irakli Lekvinadze, economic expert: “Compared to Georgia, much wider direct foreign investment flow is observed in the economies of our neighbors after 2009. The first reason is surely the existence of the two conflict regions. Yet, there are countries – take Israel – where investments do flow in large quantities despite persevering conflicts. If we have good conditions for doing business, why Forbes and other assessing organizations are not mentioning them in their reports? Why are the investments not increasing? The problem lies in an extremely low quality of competition. Pressure is felt by every business. Let us recall one of the recent occasions when they arrested the Israeli businessmen without much discretion. The incident caused strong resonance and displeasure in the business circles. In addition, many local businessmen are on the run to foreign countries. In overall, all these overweighs effects of positive moments. As a result, we do not get what we want.

 

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