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Thursday, April 24, 2014
News Making Money

Who Invests in Georgia?

Written by Madona Gasanova, The FINANCIAL

21/08/2013 15:41 (245 Day 22:50 minutes ago)


The FINANCIAL -- There are 34 individuals registered as presidential candidates at the Central Election Commission. George Margvelashvili from the ruling party Georgian Dream and David Bakradze from National Movement are the main candidates representing the most influential political groups. It's expected that former Parliamentary Speaker Nino Burjanadze will ballot as well.

National Movement, which ruled the country from 2003-2012, is actively backed by the U.S. because of its strict pro-western orientation and anti-Russian policy, while Georgian Dream and the party of Nino Burjanadze are mainly more oriented on improving relations with Russia. This makes experts think that a Margvelashvili or Burjanadze victory will likely fast be followed by investments from Russia.

"If the candidate of the Georgian Dream party loses the presidential elections then that will negatively impact the investment environment in the country. No one can persuade me that the so-called ‘cohabitation' does not create a sense of uncertainty for investors," said Pertaia.

Since the drastic fall of FDI in the country Georgian Indian multinational conglomerate company Tata Group and its partners, with USD 750 million, are one of several companies listed as investors in Georgia. National Investment Agency couldn't provide a list of investors due to the confidentiality of such information.

READ ALSO: Georgia Preparing for USD 8 Billion Worth of Investments from Russia

Pertaia, who worked as Business Ombudsman in 2011-2012, said that the Agency does not deal with all investment projects and that it's better to ask GeoStat what the total volume of FDI is for the current year.

According to GeoStat, total volume of FDI reached USD 226,213,700 in the first quarter of 2013. The figure was USD 261,193,900 in the same period of last year.

"Our potential investors are glad to see that a radical opposition party managed to replace the then-government without any serious problems during the 2012 parliamentary elections. They are glad that the drastic change did not affect business in the country. All of this indicates that we are getting closer to the type of countries where government changes have no impact on business. This is the biggest problem in developing countries where as a result of political changes large companies are going bankrupt immediately, due to close connections with the government. Belgium is a good recent example of where a political crisis has been prolonged for over a year yet none of the country's businesses have felt it. However, this one example, of October 2012, is not enough for investors. They still require other assurances.

Solving the country's external problem with Russia is the second positive sign. Being involved in daily conflict with Russia was perceived by foreigners differently. What about Russia? - This question has been posed to us by every investor. It was hard to find an accurate response that would reassure investors. Currently nobody thinks that Russia will attack Georgia and there will be armed conflicts of any kind. Stability is the key point for investors. Receiving profit is their main objective.

The independence of the judiciary was the third question usually brought up by investors. Various watchdogs have always criticized Georgia for this. A democratic system is truly essential but we have seen that in some cases there are exceptions and it does not play a key factor for investors. China and Singapore are good examples of that. Defining the rules of the game is the main purpose for investors. None of the rest of the criteria will attract investors if they do not feel stability. These three concerns are the main determiners for starting business, not the country's tax laws.

Q. Who invested in Georgia in 2013?

A. The first and the largest share of investment was launched by Tata Group and its partners IFC and Norsk Mineral. The President of Tata Group met with Georgian PM Ivanishvili in Davos. The meeting was significant due to the fact that two such large decision-makers were meeting each other. Two weeks ahead of the meeting we hosted them in Georgia. USD 750 million has been issued by Tata Group and their partners in Georgia for the construction of a hydropower plant here. Later this spring Tata expressed its interest in other projects as well. hotels as well as spa centres in Tskaltumo are part of the company's potential interests to be implemented in Georgia and we are in the midst of negotiations and discussions of various offers and possibilities. Chemical materials are also in the portfolio of Tata Group. Our neighbour country Turkey annually imports chemicals worth USD 2 billion, hence producing them in Georgia could be of interest to Tata Group. The Group also produces cars, so we are discussing the potential of producing car parts here.

We met with the representatives of Rushydro who are interested in implementing large-scale hydropower projects in Georgia.

Q. Which companies have frozen their projects due to the political changes?

A. I do not know which companies or how many of them have stopped their projects, but if they have frozen their business it is because they were backed by the government either directly or indirectly or with some forms of verbal guarantees.  There is one glass-producing factory in Khashuri that stopped production. Meanwhile we already had a glass producing factory in Ksani. Therefore it seems that the owners of Khashuri simply didn't find it to be sufficiently profitable any longer. Otherwise they would have found partners and continued the project they had started.

It often happens that the government gives some form of guarantee to investors. For example, if they are a producing company, they promise to give them orders. But enterprises cannot operate only with state orders. As soon as the Government stops giving orders, the producer will go bankrupt. This is not a crime but it is economically unjustified. The country needs enterprises that will be profitable.

Q. What is the amount of FDI expected to be received this year?

A. This year will be quite difficult due to the presidential elections in October. Foreign investors are currently in the process of waiting. The results of the work done by our agency and the government will be seen in the second half of 2014.

Last year FDI to Georgia amounted to USD 920 million. I do not think that this year's results will be any less.

Q. Which countries are you targeting?

A. We are targeting the Gulf region, South Korea and Russia, CIS and neighbouring countries like Turkey among others. All of these countries have expressed huge interest in Georgia. The visiting of Russian tourists to Georgia is a positive step for the further attraction of Russian investors. For nine years we have been giving mixed signals to Russians, where officially we expressed openness towards Russian tourits etc., but on the other hand leading politicians were daily criticizing their Government giving Russians the message that they were not welcome in Georgia. Russian investors knew that if any problem were to arise their government would not protect them, that is why Russians did not invest in Georgia. There can't be a bad investor. There can only be an unfavorable contract. TAV Georgia is a good example of that. Even President Saakashvili criticized it due to the high taxes, but nothing can be changed as they operate under the terms of the contract. All risks that we are afraid might have a negative impact/outcome can be regulated by a good contract.

The opening of the embassy and visa-free regime will stimulate Russian investments in Georgia. You cannot erase in a day what they have heard over the course of nine years. To see FDI in concrete figures requires time. Just a feasibility study of one project worth more than 40 million takes over 6-7 months. Further investors start looking for partners and only after that do they decide to invest or not.

The level of competition is high; however Georgia remains an attractive investment destination for Russians. Russian investments are necessary.

Q. Which countries are our competitors as an investment destination?

A. Every small-sized country with an open market, or free trade, is considered our competitor. Presently Georgia has become Turkey's competitor. Labour costs in Turkey are twice as high as in Georgia. The existence of 5 textile factories in Adjara proves that Georgia has the some advantage over Turkey. Investors require access to huge markets. We offer that with a European environment and logistics advantages. Turkey does not have a free trade agreement with Russia. Therefore Turkish companies that work for Russia will replace enterprises in Georgia. They will export goods to Russia, Ukraine and Kazakhstan without any taxes. Of course companies can achieve this from other countries as well, but Georgia has strengths such as low bureaucracy, lowest crime in the region, low, simple and fair tax administration, young labor, simple and fast customs procedures, cheap energy etc.,which are important competitive advantages over other countries in the region.

Q. Which are the most attractive sectors for investors?

A. The most attractive sectors are manufacturing, hydro power, agriculture, tourism, logistics as well as regional service hub. As to why these sectors are considered the most attractive, let’s take energy industry for example. Turkey is developing very quickly and that directly increases their electricity consumption. The seasonality of Turkey's demand and the seasonality of our supply match each other. Many European companies were outsourcing to North Africa: Egypt and Tunisia. The prolongation of the destabilization in Egypt has forced investors to look for replacements. The Baltic States were once attractive destinations for Europeans but since their membership to the EU, acceptance of the EUR currency and increased prices, investors have lost interest. Georgia is considered to be the hub of the Caucasus, because Azerbaijan and Armenia have a tense relationship with each other. Consequently, the region of Georgia is the best option. Sea, port and direct access to Europe, direct ferryboat to Istanbul and Ukraine are our big advantages.


READ ALSO: Georgia Preparing for USD 8 Billion Worth of Investments from Russia




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