Monopoly Money in Georgia

As Georgia introduces stronger its anti-monopoly legislation to satisfy the international community, some commentators question whether the government has the political will to force through genuine change.

As a precondition for a free trade deal, the European Union demanded that Georgia take steps to allow free competition and recommended the creation of a strong anti-monopoly watchdog.

The Georgian government responded this month with a bill on free trade and competition, which will go before parliament later in the autumn.

Georgia had an anti-monopoly watchdog until 2005. When it was closed, some of its functions passed to the Agency for Free Trade and Competition, but international organisations say the body does not provide sufficient protection for consumers.

The new bill aims to prevent firms with a dominant market share from abusing their position, as well as to ensure all companies can compete freely in the market. The existing competition agency will gain new powers, including the right to take companies it suspects of anti-competitive behaviour to court.

Vakhtang Lejava, senior adviser to the prime minister, says the new law will mean Georgia’s legislation will be harmonised with that of the EU.

The blue-and-gold EU banner fluttering alongside the Georgian national flag symbolises the strategic importance attached to closer ties with Europe. For their part, EU officials say talks on a free trade agreement could start by the end of the year as long as Georgia gets all the necessary reforms in place to address concerns about corruption and transparency.

Nodar Khaduri, head of macroeconomics at Tbilisi State University, said that the fact that that the government was prepared to adopt the EU’s recommendations even though it claimed they were not needed demonstrated how serious it was about the relationship.

“Economic relations with the EU are of vital importance to Georgia,” he said. “Judged by the standard of living, our country is unfortunately not at a very high level, so we need investment. And to attract serious investors, we need to offer them stability as well as a rise in production…. The Russian market is closed to us, so Europe is our biggest nearby market.”

The authorities are still stressing that the competition agency is being given new powers to satisfy the EU, not because it really needs them.

“The fact that the country’s anti-monopoly legislation is weak does not mean that monopolies have free rein,” Temur Tsurtsumia, deputy head of parliament’s economics committee, said. “It’s just that once this law comes into effect, it will give the agency greater powers and that in turn will help implement the EU’s recommendations.”

By contrast, independent commentators have long argued that many areas of the Georgian economy are dominated by monopolies.

Merab Janiashvili heads the Association of Young Financiers and Businessmen, which looked at market control issues last year and concluded that the government often acted to bolster monopolies.

“One example is minibuses in Tbilisi,” he said. “The government took a completely incomprehensible decision to end competition and create a monopoly in which 100 per cent of the market is controlled by one company – Tbilisi Mikroavtobus – which won the tender for it. The result of this crude intervention in the market was that ticket prices went up immediately.”

In the pharmaceuticals sector, there were three dominant companies rather than just one, with 90 per cent of the market between them, plus control of health insurance and clinics. But Janiashvili’s association found that all three were charging “virtually identical” prices, a situation he described as “violating consumer rights”.

As further examples, Janiashvili cited the sugar market, which one company controls completely, and petroleum products, in which just four out of the 50 companies that operate control 90 per cent of the market. Since most of the motor fuel sold in Georgia comes from neighbouring Azerbaijan, that country’s state oil company controls “about 75 per cent of the [wholesale] diesel market and 62 per cent of the petrol market”, he said.

Janiashvili said that where a wholesale market was entirely or mostly in the hands of one player, it made no difference if there was a wide range of retailers.

“It isn’t important to the consumer whether there’s one company or four if all their prices are the same,” he said.

David Narmania, director of the Caucasus Institute for Economic and Social Research, said the new law was better than previous legislation, but its effectiveness would depend on how it was put into practice.

“The success of this reform will depend on how effective the Agency for Free Trade and Competition is, on how the courts operate, and on how all this is applied. I think the EU will impose an obligation to see this through once the law is passed. But how it actually works in practice will depends on the government having the political will,” Narmania said.

Levan Kalandadze, a one-time deputy head of the old anti-monopoly service, sees the government’s continuing denial of the existence of monopolies as a bad omen.

He said the government might well have argued that the law had been not been needed previously, and was being passed now in response to the emergence of monopolies. Instead, he said, “What they are saying is that there are [still] no monopolies.”

A further concern, Kalandadze said, was that the bill envisaged that the anti-competition agency would be subordinate to the government, with its head appointed by the prime minister. That would create a conflict of interest, as the agency would have to probe the activities of a government of which it was part. A truly independent anti-monopoly agency would be appointed by, and report to, parliament.

Finally, he expressed concern that the competition agency would have no powers to look into the telecoms and broadcasting sectors, which have their own regulatory bodies.

Tina Zhvania works for Business Times Georgia magazine.