ANTI CRISIS PLAN

Qarosanidze Eka

Construction business crisis started in Georgia in September-October of the last year. Everybody recognizes that construction business is in grave situation.

However, there is a variety of opinions concerning causes that gave a rise to this crisis. On the one hand, experts are talking about serious overheating of construction market. Sales value of constructions in Tbilisi considerably exceeded prime-cost and construction business was giving a possibility of gaining 200-300% conditional profit. Such difference was caused by high demand blown up by mortgage loans. On the other hand, Georgian builders are deprecating experts and declare that prices in construction business are quite practicable and they fully correspond to prime-cost of production. Moreover, construction companies are willing to relinquish profits.
Short a while before nobody believed that failure would reach such scales (construction of 2 million square meters of space is stopped now). However, hopelessly and inopportunely stopped constructions are already becoming a concern of the government.
overnment heard the entreaty at last and designed crisis overcoming plan that has become the only hope for construction business. It’s over! The era when government was criticized for not having anti crisis plan has come to an end. Now some new, different era is starting: criticism – but at this time, criticism of current plan. I am wondering what government took so long and how far is existing plan enough for overcoming the crisis? These questions are arousing naturally, if considering the fact that experts were stubbornly demanding anti crisis plan from the government all the time. However, government was declaring that crisis would not have had grave results in Georgia and that every bank is a private company that should solve problems on its own.
And yet… Georgian prime-minister Nika Gilauri presented new financial plan on 30 June of 2009. It is also named as Economy encouragement plan. Mentioned finance plan has been designed by Georgian government, National Bank of Georgia and Tbilisi Mayor’s Office in cooperation with construction and banking sectors. According to preliminary calculations there will be additional $900 million in an economy.
Government has declared that main goal of designed financial packet is stimulation of an economy, encouragement of banking system and support of construction sector. The first economic results of the project might be observed in 2-3 months, while actual consequences will be seen in about a year.
Plan consists of five clauses and mainly concerns banking and construction sectors. The plan might be divided in two groups: Construction support projects and banking sector encouragement projects.
New financial plan covers following five clauses:
1. “New life of Old Tbilisi”;
2. Issuing of treasury obligations by the government;
3. Government’s appeal to international financial institutions for assigning additional credit resources to the banks;
4. Simplifying standards of regulation for commercial banks;
5. Currency Swap instrument adoption by National Bank of Georgia.
First clause of the plan primarily concerns construction sector. Construction sector together with banking sectors was considered as one of the leading fields of Georgian economy that was developing intensively. However, Georgian experts were taking about anticipated crisis in these fields since 2006, due to high degree of interdependence of construction and banking sectors. Sharp increase of prices on commercial and residential real estate was observed in Georgia during recent period. Main reason for this was demand blown up by mortgage loans. Construction business in Georgia was giving an opportunity of gaining high profits, so banking sector took an interest in this business. Just like in the whole world, Georgian commercial banks started to issue high risk mortgage loans and soon they had to face nonpayment problems.
Problems were having not only construction companies, but also other fields connected with it. Default crisis arouse in Georgian construction market. Construction materials suppliers, building companies, developers and customers, population were facing indebtedness problem. All these are in chain reaction with banking system. This chain reaction was spread to other fields also. Construction business suffered huge losses due to crisis. In the beginning of November price reduction made up 15-20%, but according to experts, under the condition of sharply decreased demand, developers will have to considerably reduce prices. However, Georgian builders consider this as impossible, as the prices exactly reflect prime-cost of the project. They reckon experts statement on so-called “bubble prices” as unjustified and declare that if the population, in hope of price reduction at real estate market, stops payments or purchasing, following step will be direct suspension of constructions that will be resulted in destabilization of whole economy. Therefore, concern for salvation of construction sector is the subject interest not only for developers, but also for government. Developers welcome government’s new initiative tosupport construction business and consider it as timely and necessary.
Dynamics of construction sector development in 2003-2008 YY:
As we can see from the charts, in 2003-2007YY both total turnover and production showings were increasing, while in 2007 they started to lower that is an indicator of crisis start up in the construction business.
Problems in Georgian construction business are apparent now. Construction of 2 million square meters of real estate is suspended. 80% of Georgian construction companies are in danger of bankruptcy. Therefore, the situation is quite grave.
In the anti crisis plans designed by world’s leading states big attention is paid to supporting of construction business. Governments of the leading countries consider encouragement of construction business as significant instrument in overcoming the crisis. It seems that Georgian government agrees with this opinion as the support of construction business is considered as one of the important clauses in encouragement plan.
First clause of encouragement plan – “New life of Old Tbilisi” implies support of construction business and reconstruction of old Tbilisi districts. It has been designed according to the agreement concluded between the state and Association of Constructors. Aim of the agreement is support of construction companies and provision of the population living in the houses under the threat of collapse with housing space. According to the agreement, developers will borrow money from the banks under state warranty and in exchange they will provide living space for the population living in dangerous structures. At initial stage, government accentuates following districts: “Kibalchichi ravine” adjacent territory and “Golden District” in Chughureti; Territory adjacent to Vakhushti Bagrationi bridge; Qvemokala; Dolabauri Street and its adjacent territory; Upper Avlabari.
Construction companies will be able to offer apartments in the houses under construction to the residents of the houses under the threat of collapse. Until completion of construction, residents will stay in old living houses. After moving to new place, former living houses of the citizens become a state property. These houses will be either demolished or sold out. This enables government to cover expenses for construction of new dwelling houses.
Tbilisi Mayor’s Office, group of the banks and construction companies provide a living area for 50 thousand families that are the residents of the houses under the threat of collapse. Forty construction companies take part in the program. They will be able to complete construction of 420 thousand sq/m of area. Project might be accomplished only in case of mutual agreement of the population and developer. For participating in the voluntary program, whole neighbourhood of a dangerous structure will have to agree on it.
Selection of the living spaces will be made by area-in-area principle. Actual sizes of current dwelling and auxiliary facilities will be taken into account.
This project helps construction sector to overcome crisis stage and at the same time it solves the problem existing in historical part of the city. Moreover, it ensures creation of new working places.
Accomplishment of the program “New life of Old Tbilisi” has been already started. Special committee is established that receives applications from developers and banks. Developers are leading negotiations with the residents of dangerous structures.
We inquired opinions of Georgian builders about government’s new initiative and about the situation in Georgian construction business in general. We interviewed president of Association of Georgian Builders and founder of company ARSI Mr. Irakli Rostomashvili.
G.E. – Mr. Irakli, there are many talks about serious problems in construction business today. Let’s discuss the reasons of crisis once again.
Irakli Rostomashvili: Situation is actually grave. At present, about 2 million sq/m area is being constructed by means of private investments in Tbilisi. It might be said that these constructions are actually suspended. When only two or three workers are working at the site, this construction might be called suspended.
As regards, the reasons of crisis are not well developed in Georgia. As banking and construction sectors are the constituents of one economy, it is impossible to discuss them separately. Two main facts might be underlined when talking about construction crisis. One of the main factors is world economic crisis. In addition, constant war anticipating was the determining factor for crisis; I mean August war of last year.
G.E. – Experts were avowing from 2006 about interrelations of banking and construction sectors in Georgia and they were anticipating this crisis in both fields. Starting from 2007, crisis has been reflected in actual results. In other words, have the prognosis came true?
Irakli Rostomashvili: Many experts in Georgia are like foretellers. I reckon that expert is the one who makes actual forecasts based on something. Those experts whose forecasts appeared to be true, think that so-called “bubble prices” caused crisis; that prime cost of the construction was $300, while the selling price was $1000. This theme has been discussed by the people who were holding economic levers for years. I think that this situation has been caused by their ignorance. Situation is following – some experts declare (either due to evilness or ignorance) that prices on real estate will fall. However, this is impossible as the construction business actually refuses to get profit and the prices are the minimum that reflect prime-cost of aproject. Such expectation will be resulted in total suspension of constructions, the actual problem it is. Many debtors that have already bought apartment stopped payment as they saw this situation. There are lots of debtors of construction business that should continue to pay their debts. Nowadays, everybody is glad that construction business might be destructed. However, they are unaware of what are they doing. In order to show reality to such experts and prove that there are no so-called “bubble” prices”, I am offering main criteria of calculating constructions’ prime-cost.
Here is the table presented by Mr. Irakli Rostomashvili: