GEORGIAN BUSINESS CLIMATE LACKS CONFIDENCE
15 December, 2011
GEORGIAN BUSINESS CLIMATE LACKS CONFIDENCE

This year Georgian government trumpeted its readiness to make business environment as business-friendly as possible; however, Georgia cannot recover its pre-crisis Foreign Direct Investments (FDIs) figure. According to the preliminary data, the FDI inflow in Georgia in three quarters of the year stands at USD 643.1 million that exceeds official FDIs figure of the past year by 7% but still lags behind pre-crisis data. Some economic analysts ascribe the reason to global financial crisis and lingering political conflicts. O

thers say the problem is a business climate as far as countries with much more complicated political tension contrive to be an investment paradise thanks to their comfortable business environment.

To find out opinion of investors regarding the said issue, Georgian Journal interviewed David Lee, President of the American Chamber of Commerce and General Director of Magticom. The American Chamber of Commerce largely known as the AmCham incorporates about 150 members - all big businesses and has been contributing to the creation of business-friendly environment in Georgia for 15 years of its activities in the country.  Currently, the AmCham focuses on improving the transparency of legal processes in Georgia.

 

Q: Mr. Lee, let’s summaries activity of the AmCham this year; how successful was it, how did it meet your expectations?

A: AmCham has over 20 new members this year, we continue to grow, we have moved to the new place and almost doubled the office size and our staff numbers. In terms of members it is a good growth story and this is a good sign for economy.

Q: What’s the amount of investments the AmCham members made this year?

A: We are still seeing a slowdown in new investments from new entrants, but before you get investment you normally get signals like in increasing membership of the Chamber  more activity within the economy from existing players and I do see more activity, things are certainly getting better not worse. We do not keep figures how much has been invested cumulatively, but a good example of brand new investment from existing companies is actually MagtiCom who will be launching its new satellite TV system in January.   If you look what’s happening in Batumi in particular you see a lots of hotels chains previously operating only in Tbilisi like the Sheraton and  the Radisson who gave opened new franchises in Batumi. So we see a lot of investment from existing companies that are already here, and our real challenge to try to get brand new companies to come to Georgia for the first time. We are seeing a very active investment now in Poti Port that has new management and new investors and we are seeing the first signs of a revival in the agriculture sectors, such as new cold storage facilities in Poti and the active focus of Agri-business coming for the GOG and the aid sectors, in particular EPI. So I think the picture is getting better, but of course, I want to speed this process up.

Q: Georgia cannot recover its pre-crisis FDI figure, experts say political factor affects our investment image but on the other hand countries with more severe political conflicts, Israel for example,  manage to be an investment haunt. What’s the problem with Georgian business climate?

A: The Georgian investment story has not changed since this government came to power; there are three factors that AmCham always promoted: low corruption, friendly government and lots of business opportunities. With the possible exception of mobile telecommunications, banks and class A hotels [where there are lots of competitors and international quality standards] the vast majority of the economy is underinvested and there are lots of business opportunities. When you have business opportunity generally you have investment because people are willing to invest under almost any circumstances if they see a good business case and Georgia has that.  But I think that of the main barriers that stop people investing in Georgia is confidence. Georgia has all these great arguments [low corruption, a business-friendly government and business opportunity] but it has to demonstrate to new investors very quickly, very openly that these things are true.  We are doing a lot of work now with the AmCham on transparency, we are looking at the transparency of legal system, not that we are saying that the legal system is not working correctly, but how easy it is to see that the legal system is working correctly. We have worked extensively on the tax system, not that the tax system is bad but to know how transparent it is, so that companies have a dispute or when they pay tax they can see that the tax system works according to the rules. This transparency is extremely important and difficult thing to any country to get right. I think now this is one of the last things the government needs to do to create an environment in which business people will be comfortable to come and invest here.  The story is very good, the reality is good but if you don’t believe it, if you can’t see it, then you arenot going to invest in a country like Georgia. We have to be very focused on this:  You can’t make people invest, you have to win their confidence if you want them to invest. Georgia is a very good business opportunity but people have to be convinced of that and that’s why I think transparency will be a big focus in 2012.

Q:  The Georgian government applied some efforts to make the tax legislation liberal and drafted a new tax code with less tax burden years ago but business claims not tax rates but administration is a problem. This year government undertook another attempt to make tax code tailored on business. Did it succeed this time?

A:  Yes, the government is continually improving the legislation but again the fundamental requirement of the business is that the ownership of property and lands will be protected, and if there is dispute then it’s resolution is transparent. The tax burden should be ideally low but more importantly businesses need to know that it will be applied fairly and transparently. The two challenges right now are basically centered on this: the transparency of the legal system to insure that your ownership of property is protected by the system and that everyone will see it is working, and secondly that the tax system is correctly administered and you can see as an outsider that it is correctly administered. So our big focus right now is on transparency, it is on making sure that the law is properly applied and the fair tax regime and the ownership of property are paramount. Nobody, nobody will invest if they believe their investment, the ownership of property, the land they buy is not protected by the law.  And nobody will start business if it is not clear what the tax regime will be, and how any disputes will be resolved because if that’s not transparent nobody is going to invest. And I think if we improve these areas next year we’ll see a significant increase in foreign investment. But something is holding Georgia back, I don’t believes this is because of lack of energy in the Government, I believe it is to do with the idea of transparency.  Georgians themselves understand this, there is still a kind of lack of trust amongst the Georgian people and their relationship with authority, and the way to deal with this we believe is to just make everything very open so everyone can see what’s happening and that  includes the wider issues:  the freedom of the press, the way the TV stations and broadcasters operate, the way the tax, legal and communication commissions operate,  everything should be as open as possible.  This in my opinion is the next step to opening up this market to more significant foreign investments.

Q: The AmCham focus falls on agriculture lately. What would be your recommendations to this end?

A: AmCham has for a long time been making statements about the need to include agriculture as a strategic sector.  We now have a large agri-business committee which is looking at not just  producers of agricultural products but at trying to assist business working with the output of the farms such as hotels, restaurants, transportation companies, storage companies, the whole agriculatural value chain, this will be another big focus for Amcham in 2012 . The AmCham  believes that Georgia has a lot more potential than just wine, for example hazelnut, meat, grains, fruit and vegetables are all capable of being produced profitably in Georgia.  Instead Georgia is importing 70% of this food and that is very, very bad for the economy and a big business opportunity that is simply not been exploited.  Georgia has only one true natural resources apart from it’s people and that is its climate, its soil and its river systems and it needs to utilize those not just for hydropower but for agriculture and it is probably the most unusual aspect of the Georgian economy that of all the things it has been able to do it still has not addressed is this issue of agriculture. The good news is that this year the President and the government have turned their attention to agriculture, the other good news is the USAID through the USAID supported Economic Prosperity Initiative  has focused on agriculture and the European agencies and Japanese continue to assist with to the development of agriculture.

Q: Do you think government should subsidise agriculture to push it forward?

A: No I am not advocating direct financial support.   The problem with agriculture starts with education. Agriculture is now a high tech business, as complicated in every way as telecommunications and certainly as important for the future of Georgia and indeed the whole World. My first recommendation is to get qualified people onto the farms, so the Government should be involved in this now. Secondly, we are advocating that the governmental policy should focus on the creation of an environment in which farmers can flourish. This includes the land registration process, tax environment, good roads, and education. Finally, I would note that it is absolutely essential that the companies who own the land must have confidence that the lands are theirs and have good title. Ownership of land must be secure and transparent, and government must ensure that there is no doubt that once a company, foreign or local,  buys land it is secure, because in agriculture the entire business depends upon land so if there is any doubt over the land ownership you are not going to spend money to improve that land.  Agriculture is a long-term investment so from the very beginning everything must be absolutely clear and transparent. What AmCham will be pushing in 2012 is transparency of ownership of land, transparency of tax, transparency of the legal system, we will be very active in all those areas.

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