Georgian Bid to Boost Economy Under Scrutiny

Few experts share government hopes that new enterprise region will help alleviate economic woes.

By Tea Zibzibadze in Kutaisi (CRS No. 502, 17-July-09)

Georgia is touting a new so-called free Industrial zone to boost its faltering economy, but economists and experts are baffled by the plan, which they call vague, opaque and potentially unworkable.

Kutaisi, Georgia’s second city and home to the new zone, is waiting for the arrival of equipment for three new home appliances plants, the first factories due to be built under relaxed taxation and legal rules.

The factories will belong to the Egypt-based Fresh Electric Company and are expected to produce their first products no later than August this year.

In the new industrial zone, investors are going to enjoy a highly favourable business environment. Procedures for getting permission to invest may be simplified or cancelled altogether, while no value-added tax or customs dues shall be levied on foreign goods imported, and enterprises operating in the zone shall be exempt from paying property tax.

A multi-currency regime will be in place in the zone, and shipments of goods produced there to the rest of Georgia will not be subject to any customs fees.

The Georgian authorities say that they aim to make Kutaisi, a city in western Georgia which has suffered since the fall of the Soviet Union, into the country’s industrial hub. They promise that 20,000 new jobs will be created in the next two years.

“We plan to save Kutaisi,” Georgian president Mikheil Saakashvili said on a recent visit. “I take my promises seriously. We’ll make Kutaisi an industrial zone and Georgia’s second capital.”

However, few experts share his optimism. Lawyers question the legal underpinning of the scheme, which is only supported by a cooperation memorandum signed by Fresh Electric Company and its Georgian partner, Georgian International Holding.

Nodar Jikia, of the Georgian Young Lawyers’ Association, said the memorandum carried no legal weight and, therefore, there was nothing to force its signatories to honour their commitments.

“The memorandum is a mere expression of good will by the two parties, and it has no legal force whatsoever,” he said. “The document does not oblige the parties to take any specific actions, its fulfilment depending solely upon their good will.”

Fresh Electric Company will be responsible for building industrial facilities in the zone, while its Georgian partner will attend to organisational and administrative issues. The two signed their memorandum on April 6.

The Egypt-based company says it plans to invest two billion US dollars in the industrial zone. The first part of the sum – 1.2 billion dollars – is to be spent this year on construction of new factories. But economists have questioned its ability to meet this pledge, since its website lists its annual turnover at a mere 90 million dollars.

“The investor company has neither the resources nor the experience it needs to build an industrial zone,” said Otar Konjaria, an economic expert. “Besides, today, when the whole world is gripped by economic crisis, investments of a scale like this are very rare.”

But Mikheil Tigishvili, head of Georgian International Holding, denied the venture would have any trouble funding its commitments. “This is a serious, stable company, which exports its products to dozens of countries. Therefore, nothing will threaten the promised investment,” he said.

Fresh Electric Company, meanwhile, was confident of the profitability of the venture. “We set great store by the way Georgia is situated geographically. The countries neighbouring Georgia need the electronic appliances we make,” said company vice-president Mohamed Rafat. “We’ve studied the Georgian market. Ours [our products are] of high quality, and we hope [they] will find [their] place in the market.”

The government passed a special resolution allowing the free industrial zone on June 5. A total of 12 new factories will be built on in the 27-hectare zone, which used to house the Kutaisi Car Works and will operate for 99 years. A customs checkpoint has already been set up.

According to the economic development ministry, the government will keep a close watch on development of the zone, and would cancel its special privileges if the companies working there did not keep their promises.

“The order of creation, construction and functioning of a free industrial zone is laid out in Georgian legislation. Also guarantees have been agreed, which have to be provided by the organiser of the zone. If these procedures are not fulfilled, then the state will not give its permission for the zone to function,” said Tsisnami Sabadze, deputy head of the ministry’s analysis and policy department.

Georgia already has one free industrial zone, in the Black Sea port of Poti. Experts say that when mulling the creation of another such zone the government should have taken into consideration what they believe was a disappointing previous experience.

“The free industrial zone in Poti has proved a damp squib,” said one expert, Nodar Khaduri. “As far as I know, there have been some serious problems there.”

Many believe the government wants to increase Georgia’s investment appeal, damaged by its war with Russia last year and the political tensions that have plagued it for months.

“Certainly, there are more stable countries for investors to do business in,” said Khaduri.

Meanwhile, in Kutaisi, locals whom the Georgian president has already congratulated on their chance of getting jobs bemoaned a lack of information on how they can get themselves employed.

“No one has explained to us how we are to get jobs in the zone,” said Kutaisi resident Nana Maisuradze. “My husband went there and returned, having failed to find out anything. Promises are all we’ve heard so far.”

Another local, Guram Kiknadze, said, “You just can’t get into the territory. In the reception, there used to be a telephone number displayed on a wall to contact representatives of the company. But, they have removed it since. They say there were too many calls.”

Tea Zibzibadze works for the newspaper Akhali Gazeti in Kutaisi.