Georgian Business Boost

Monday, 25 July, 2005

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Gennady Abarovich

The Georgian government has sought to boost its flagging privatisation programme by introducing legal reforms and simplifying the much-criticised business licensing system.

The new licensing law, passed in July, reduces six-fold the number of types of business that need to apply for licenses in order to function – a move the government hopes will cut corruption and boost revenues.

When former economy minister Kakha Bendukidze launched a root-and-branch privatisation programme a year ago, he announced, "Everything is for sale in Georgia except its conscience."

This programme was supposed to become the locomotive of change, enabling Georgia to finally start earning money independently, after years of relying on substantial grants and loans from the West.

The programme started successfully, with two out of 10 large enterprises sold in quick succession at the beginning of 2005. International Tinsel Inc. of the United States bought Georgia Telecom for five million US dollars, and then the British-Australian Marine Capital bought the Georgian Ocean Shipping Company for 93 million dollars.

Since then, however, only one application has been made: for Georgia's largest enterprise, Chiaturmanganumi, a manganese mining and processing plant, and the Vartsikhe hydroelectric power plant. However, this deal fell through after the Russian company YevrazHolding that had intended to pay 132 million dollars for both businesses decided not to carry through with the investments.

Although Bendukidze, the author of the privatisation programme, now holds the post of State Minister, he is still the leading advocate of economic reform, and he was behind the latest business-friendly plan, the new licensing law.

The law does away with a whole host of bureaucratic procedures. Previously, there were 909 types of business activity that required a special license, entailing long bureaucratic procedures. From now on, to obtain a license, it will be necessary to visit only a single department, and sometimes none at all. Only 159 business activities now need a license at all.

"The main prerequisite for improving the investment climate is not economic changes but a real reform of Georgia's judicial system so that businessmen receive guarantees that their investments in this country's economy are protected," Bendukidze told IWPR.

Legal expert Giorgi Sulakadze told IWPR that the overhaul of the judicial system which began in April has three principal components: the creation of specialist courts to handle civil, administrative and criminal cases; the establishment of appeals courts, a new institution for Georgia; and the introduction of jury trials for criminal cases.

There was wide agreement on the need for judicial reform in Georgia earlier this year when a conflict erupted between businessmen and the government over the abolition of the private court of arbitration.

The arbitration court, was established in January 2005 in line with the new tax code, was intended to serve as the main instrument for resolving disputes between tax inspectors and taxpayers. But two months later, the government abolished the court after it made several decisions in favour of businessmen.

Well-known business magnate Badri Patarkatsishvili described the abolition as an "unprecedented step, and a unilateral violation of the agreement with businessmen."

Fadi Asli, a prominent Lebanese businessman in Georgia who is head of the US Agritechnics company, was similarly indignant. "Businessmen collaborated closely with the government in developing the new tax code,” said Asli. “Establishing the court of private arbitration was a major issue. The government's decision to abolish it is not only in violation of the agreements; it will also have a negative impact on the investment climate."

However, Georgian prime minister Zurab Noghaideli responded to this by saying that the decisions the court of arbitration had taken had been "politically motivated and directed against the state and budget in an organised manner."

The business community is more positive on other fronts, and many have welcomed reforms which have seen the number of taxes reduced from 21 to nine, the income tax rate fall from 20 to 12 per cent, and value-added tax slip from 20 to 18 per cent.

The International Monetary Fund has also praised Georgia. Managing director Rodrigo de Rato visited Georgia in the middle of June and said the financial reforms were a "considerable success".

Government revenues in Georgia have more than doubled in the last 18 months. So has foreign aid. The country is set to at least 300 million dollars over the next four years within the framework of the USA’s Millennium Challenge programme for "countries that have achieved success in democratic reform".

According to USAID, Georgia is the second highest recipient of US assistance per capita, after Israel.

Total foreign investment in Georgia last year amounted to almost 500 million dollars, three times as high as in 2002. About three-quarters of this money is attributable to the investment by BP in two new pipelines, the Baku-Tbilisi-Ceyhan oil pipeline and the South Caucasus gas pipeline.

However, the government is hopeful that it will receive around 250 million dollars of what it calls “real investment” from privatisation.

Budget revenues from the privatisation of 35 medium-sized and small enterprises amounted to 218 million lari (120 million dollars) during the first five months of this year. But Giorgi Isakadze, executive director of the Georgian Federation of Businessmen, says he hopes the reforms will lead to the hitherto elusive sale of Georgia’s large factories.

Gennady Abarovich is economics editor at Black Sea Press news agency in Tbilisi.