Georgian Minister of Economy & Sustainable Development – Mr. Giorgi Kvirikashvili – The American Times
Mr. Kvirikashvili is the type of man that makes sure you are transparently aware of a problem but also articulates immediate and fast-track solutions to that problem. You can’t pave the way for rapid growth in the wake of snail trail bureaucracy.
The American Times: Let’s start with some basics Mr. Kvirikashvili. Considering the recent change in government and the policies set forth from the previous government; what will be the new definition of your Ministry?
To centralize my response: The role of the Ministry of Economy is to provide for a free and competitive business environment for everyone; from micro-enterprise to mega-businesses. We are also responsible for determining policy and drafting legislation for the communication, transport, tourism and construction sectors. There have been discussions about merging the Ministry of Regional Development & Infrastructure (RD & I) with this Ministry but have decided to halt the merger until some of the major infrastructure projects are finalized; such as the East-West Highway Corridor. Additionally, because the Ministry of RD & I is the acting counterpart of many international donor organizations, we’ve decided to plan further ahead to avoid unnecessary turbulences. We are confident that in a years’ time the Ministry of RD & I will be subsumed within ours.
Additionally, we are responsible for Trade Policy; as such, we are the lead in government negotiations with the EU regarding the Deep and Comprehensive Free Trade Agreement (DCFTA).
The American Times: What are the primary challenges that your robust ministry faces in the ensuing years?
The previous government has made some great strides in tax reform as well as in customs reform. There have also been some finalized large-scale projects accomplished through that government. However, there are two main areas of necessary improvement that were not remedied through the previous government: Property Rights and Anti-Monopoly legislations.
Property Rights Legislation:
With regards to property rights there needs to be concrete legislation in place that provides protection to owner rights and remedies for necessary government expropriations for key governmental projects. Because there were rampant expropriations without due-process there has been a run on our Ministry regarding property claims. We are handling them vigilantly and will fix these issues as a primary short-term objective. Of course, the long term solution is avoiding these claims en-masse in the first place by enacting the legislation that I spoke of a minute ago. This new legislation is steadfast in its policy of offering market-value rates for expropriated land for government projects. But preceding that policy is of course removing the ability for the government to frivolously expropriate the land in the first place. This comprehensive legislation regarding properties rights will be finalized by end of Q1, 2013. Although this legislation does not have an immediate effect on those who are filing claims in the current moment, it does offer a strong guarantee to all future land owners in Georgia, foreign and domestic.
American investors are more conservative and if you don’t bring your information there proactively the US portion of Georgian FDI will remain static, it will not happen mechanically
Anti-Monopoly Legislation:
The larger challenge is establishing a free market that is diverse in company size and offerings. To that end, we are establishing legislation to meet western standard Anti-Monopoly Policies. We plan on directly addressing the issues that current oligopolies represent in our market (currently in the Fuel industry). We are directly tackling this issue through Anti-Monopoly legislation reform and the development of a Competition Agency, both of which will be enacted within Q2, 2013. The beginning stages are set at monitoring monopoly activities. It is important to note that this is not some direct attach on any specific company. We understand that to simply attack and dismantle major companies due to their practices will not only be disastrous to our 3.5 million person economy but it will also impose undue hardship on those companies’ varied shareholders and customers.
They are running a successful business that has tremendous value to many; we just need to make sure they are operating in accordance with our new Anti-Monopoly legislation and bot thwarting sector diversification through abusive market control tactics. Once way in which we aim to indirectly promote the development of diverse sectors is by removing certain barriers to entry to SMEs. In fact, a week ago (today is 31/12/12), we’ve implemented a HOTLINE available to SMEs that are having concerns and questions regarding problems stemming from a multitude of customs issues. The ministry will directly handle the inquiries until the Competition Agency is established because need to hear from these people. They are important to our ministry and furthermore, our country’s long-term economic prosperity.
As a whole, our mission with the new Anti-Monopoly legislation is to send a clear message to colluding companies: We are leveling the playing field and minimizing their ability to engage in corrupt manners at the highest level. The previous government did the job of removing much corruption at the small and medium levels; we aim to tackle corruption in its highest forms. As a result of this we are also sending a clear message to our SMEs: go back to business, we are on your side!
The American Times: During our stay here we’ve managed to see many projects and initiatives, from the development of various investment funds, such as the Partnership Fund, to FTA negotiations. What initiatives do you see as primary and what sectors do you see as offering the greatest investment opportunities due to these initiatives?
The Partnership Fund is an organization that is working on the capitalization of strategic assets of the country; primarily in distribution and energy markets. It’s a consolidation of intellectual power to raise the money for strategic companies under the Fund (Georgian Railways, GOGC, primarily). The dividends paid by these companies allow us to finance other strategically important projects. However, it is important that the Fund does not impede private enterprises looking to access sectors in which the Fund operates. In fact, that would only serve to undermine the purpose of the Fund; we instead are looking to working together as a PPP with interested parties.
…we have a provision where the government provides 20-30% of required capital to develop land…
AT: We’ve heard of a separate investment fund being established by Mr. Ivanishvili; is this in relation to the Partnership Fund?
No, it is not a Fund that is in action at this point, but rather in the development phase. As such, there are no guarantees of capitalization but there have been positive indicators that the Georgian diaspora community is interested in purchasing shares in this private fund. What I do know is that the this fund will have a dual purpose: 1) Social: Fulfill pre-election promises such as helping small farmers and financing irrigation systems 2) Business oriented: This being the primary function; funding processing companies, storages, modern refrigeration, etc. This fund is also in response to the need of more flexible terms that banks do not offer as they are not deemed profitable, but people still need.
AT: Are foreign companies afforded access to these funds?
Yes, any foreigner investor that wants to invest money in a project here is encouraged to treat the fund as a local partner. For example, depending on the project proposed; certain funds will provide 25% of required capital to the investors 75% or vice versa. In this way the fund is extremely flexible.
AT: In terms of best available investment opportunities?
Currently we are meeting local investors (Editor’s Note: primarily local due to lack of international awareness), with many of them interested in Hydro-Power projects (HPPs), tourism (hotels, resorts), manufacturing and the textile industry, trade companies as well as gas power station projects. In addition to those investment types we’ve seen a lot of interest from Israeli real estate developers with a specific focus on building office buildings in Tbilisi.
AT: That’s interesting; in regards to property development, do you require purchasers of plots to develop the land within a certain timeframe to minimize speculator activity?
Of course, when we draft agreements we include obligations with a special department allocated to monitoring these obligations. But with these obligations we offer incentives to the investor. We prefer to sell large land parcels for development and, currently, include discounts to market value when there is a master development plan to use the parcel to its greatest economic potential. Additionally, we have a provision where the government provides 20-30% of required capital to develop land with the remaining being financed by the investor. In the past the ratio was inversed but we ran into the situation that you presented; where investors would buy up parcels with a majority of government funding and flip the parcel for a profit. Clearly this antiquated method was not a sustainable method for economic growth. New investors realize this and we’ve seen positive indicator that our new 70/30 ratio is still enticing for investors. To facilitate this development we’ve streamline the paperwork process; where it generally takes 2-3 months, from application to license to begin development.
Even with these development opportunities we must continue to promote and develop our incentives to compete with neighboring countries who currently subsidize certain sectors. This is a challenge for us but also an opportunity to develop more creative solutions through the feedback of private sector players. In this sense, we are always open to constructive dialogue from those players and are ready to implement great ideas as partners in the growth of this sector and our economy.
The American Times: Speaking of neighboring countries; how important is it to gain access to the Russian market for Georgian services and products?
Many companies throughout the world are spending a lot of money to access and tap the large Russian market (pop. of 150M). Georgian companies are in a lucrative position as our products are not only very well known to the Russian people, but are considered high-quality and therefore, in high-demand. Obviously, access to that market is closed which presents an obvious issue for our producers. On the other hand, it forced them to become more creative and deliver even higher standards in order to access other lucrative markets, like Europe. As such, when the Russian market re-opens it will represent a source of diversification rather than the sole market for export like in the past.
The American Times: In lieu of the Russian market; how important is furthering relations with the US and tapping its vast market?
The US for remains our main strategic partner; and we need to maintain this position as we develop our diplomatic ties with Russia. Our aspirations for NATO membership are paramount to our long-term objectives. In addition, USAIDs continued assistance over the years, in our darkest hours, will not go forgotten. We will continue that relationship even though FDI from the US has remained low (at roughly 10%); but it is most likely because we have not sufficiently promoted ourselves to US investors. We need to be more active there. American investors are more conservative and if you don’t bring your information there proactively the US portion of Georgian FDI will remain static, it will not happen mechanically.