State management and regulation of capital construction of Georgia needs improvement

Manana Kharkheli TSU Assistant Professor

Necessity of state regulation of economy is derived from imperfections of market economy.

Market economy has no coordinating organ by itself. “Invisible Hand” of a market puts private concern in public service on the basis of free prices and competition. However, these mechanisms cannot solve many economic issues of a society. Therefore, state’s “visible hand” should support market’s “invisible hand” or in other words it should regulatie an economy (1, pg. 100).
State was always playing historic part and bearing special function. These functions were periodically increasing or on the contrary – decreasing. Current period is the epoch when world is returning to the search of wider and innovative ways of using regulation instruments. Unfortunately, everything in Georgia went vice versa and from the very start of the transformation state appeared offside and whole economy was transferred to market’s invisible hand. As a result, we’ve got economic crisis with its catastrophic consequences: even in 1998Y or seven years after the start of transition, the volume of Gross Domestic Product made up only 36.6 percent of 1988 year GDP; 15 percent of industrial production, 6.9 percent of agricultural production, 13.4 percent of investments et etcetera. Georgia cannot catch up with these arrears even nowadays. For instance, the volume of GDP in 2007Y was only 67 percent of GDP volume in 1990Y. By that time, Russia, Belorussia, Kazakhstan, Uzbekistan, Armenia, Latvia, Lithuania, Estonia and Azerbaijan had already catch up the pre-reform levels of the development (2, pg.55). There is no need to be a scientist to understand that government of Georgia made some mistake. To my mind, it appeared offside the game too early.
The situation has been somehow improved afterwards. By means of foreign funds state started construction and maintenance of so called public goods – roads, bridges, ports, community facilities, transportation and communication, irrigation facilities, forests and parks etc; reforming of defense, state management and public order organs. This process continues up today, but anti-cycle regulation of the economy is not performed in the country. Crisis, deep social inequality and unfairness are spread in Georgia. Monopoly is governing in majority of fields.
All the above mentioned problems are urgent and thorny. One of the main challenges is anti-cycle regulation of the economy or in other words, the draw of the country out of crisis.
Financial crisis that spread first in America and Europe and then reached Georgian borders mainly stroke a blow on banks and their biggest creditors – construction companies. The number of construction companies in Georgia decreased by 98 units in 1-1,5 years. Output was cut by 17percent, sales by 12 percent, value added by 24 percent, the number of employed people by 28 percent (3) and so on.
However, let’s follow the events consecutively:
Georgia’s division from Soviet Union was followed by break-up of relations, liquidation of centralized financing, political and economic instability, ethnic conflicts and many criminogenic circumstances. As we already mentioned it was resulted in unprecedented economic slump. Capital construction is cyclic field and general economic negative changes equally influenced it i.e. slump of production and its consecutive processes.
For instance, the share of investment in fixed capital was GEL 2545 million in 1990, while it made up only 5 percent in 1995, operating fixed funds – 3.8 percent, volume of construction works – 2.4 percent. The situation was slightly improved in following years, but we could not manage to achieve 1990Y figures in construction sector.
Economic situation of construction business was even aggravated in 2000-2009 years. The volume of construction works decreased to GEL 1412 million, value added – to GEL 482,3 million; the number of employed people decreased from GEL 52572 to 38109. Turnover reduced from GEL 1604.6 million to GEL 1412 million. (3) The reasons of such recession were world financial crisis and Russian-Georgian war. These events more or less influenced construction crisis and caused current situation. Demand on dwelling and commercial building is actually ceased. As a result, construction companies, the biggest clients for the banks cannot cover credits on time and due to default they were in danger of bankruptcy.
By the situation of 1/IV of 2009, indebtedness of construction companies in commercial banks was GEL 96,9 million and GEL 291,6 million in foreign currencies. The volume of default made up GEL 38,9 million (4, pg. 35). This became the reason of lost confidence of the banks. Interest rate on mortgage loans increased up to 40-45 percent. This process continued several months and then Georgian banks simply stopped issuing credits to construction companies. As a result, the volume of construction was cut, increased the number of unfinished constructions, conflicts between banks and building companies took a turn for worse; construction companies were disputing with discontent clients etc;
Late, but yet Georgian government admitted crisis in Georgia and started to take measures and support construction companies. For instance, mayor’s office will stand bail for seven companies that receive $53 million credit; decreasing the price of land plots in Tbilisi by 20 percent is being discussed. These are the efforts that government of Georgia is making for overcoming the crisis in construction companies, but how far is such behavior correct under the conditions of market economy? Is state obliged to pay colossal funds in order to correct mistakes made by private companies and this in the times when 40 percent of the population is beyond poverty line? Or this was a joint fraud of construction companies and banks. Not only Georgian, but also foreign experts have some doubts about this (6. pg. 26). In this case, government should take punishing measures, instead of helping them. We reckon that state played major role in the development of these negative events. As there is no full-pledged market economy in Georgia and the country is at transition stage only, state should have mechanism of controlling private economic subjects. In this case, it would not have needed taking post-factum measures against crisis.
Besides this, government of Georgia should have initially defined directions of capital construction and obligatory private resources for them (in order to insure clients), it should have timely established legislative-normative base for construction sector. Abrogation of the Ministry of Urbanization and Construction was another mistake made by the government. Unfortunately, all these events already took place and now we have to bear the fruits of them. Today, in Georgia, we have fourteen-men (!) and three-department (urban development; construction cases; permits on construction of objects of special importance) – Department of Urbanization and Construction that is subordinated to the Ministry of Economic Development of Georgia. This department manages and regulates whole capital construction of Georgia. The responsibilities of the department include: urban development of Georgia, spatial-territorial arrangement, municipal engineering and town planning, planning of land consumption and zoning, designing of construction projects and programs, analyses of regulating legislation, elaboration of dwelling indicators. It is seen from the list how scaled and responsible business is done by this fourteen-man team. 150-200 people team is accomplishing such work abroad and under the conditions when legislative-normative basis is in order.
We can also assume that department has no function of controlling construction companies. Such mechanism is necessary in a transition period in order to avoid wilfulness of private entities.
Department of Architecture and construction is not the only organ regulating construction. Local services of architecture are established in towns of Georgia. They are responsible for management of architectural- construction processes within the framework of existing legislation. The mentioned service is established in Tbilisi also. It has been founded on the base of Urban Planning service of Tbilisi Mayor’s Office in 2008Y.
One of the organs of state management and regulation of construction sector is Archmshen inspection (main architectural construction inspection). It manages quality control of buildings and structures in whole Georgia. The quality of construction and of construction articles and structures are subject to inspection also. Responsibilities of the mentioned institutions are quite versatile, complicated and scaled, while the number of employees is rather limited. Suppose that claims expressed by expert in construction Mr. Sakandelidze are raised from these circumstances: “Every house constructed by big or small company requires revision of structural stiffness, steadiness a d every building parameters that ensure safety of buildings”. (6, pg. 13). Unfortunately, uncontrolled construction process still continues and opinion of specialists is not taken in to account. Capital construction is the sector of strategic importance for Georgia and thus abrogation of the Ministry of Construction and Urbanization was a big mistake. At present, it is simply unimaginable to re-establish the ministry, but in this case it is necessary to strengthen Department of Urbanization and Construction both from the point of material-technical and information base and personnel. Half of the people employed in the department have nothing in common with the profession of builders). The department is doing a good job now, but it has a lot to do yet – construction code requires to be designed, technical regulations and standards need to be established etc. Only builders are capable to accomplish these difficult tasks at high academic level.
State regulation of construction sector requires presence of many legislative-normative acts. Absence of such laws, acts and statutes is not felt in Georgia. We have Law on “Construction activities”, Law on “Architectural activities”, Law on “State supervision of construction activities”, Law on “Spatial arrangement and urban planning” etc. However, regulation and management of construction business requires not variety of such laws, but their perfection. For instance, when designing Law on Construction Activities law makers have overlooked issues such as – to define notion of construction activity, list of types of construction works, rights and obligations of construction companies, limitations and prohibitions and many other issues.
Or, for instance, in the Law on “State supervision of architectural-construction activities” we can read that “state supervision must be accomplished only for those buildings-structures that require building permit according to legislation of Georgia” (7, article 3-g). In our opinion, supervision must be performed on every construction irrespective of whether building permit is required or not. As building constructed without building permit are destined for dwelling purposes and it is inadmissible to have any doubts in their reliability in whole period of maintenance.
Negative aspect of resolution on building permit is its capacity (87 pages). Besides this, there are 88 terms defined in the resolution that should be defined in construction code instead. We reckon that ten days assigned for third stage of building permit is unnecessary. This implies issuing of legal act and delivering to client (demand) that we reckon as fully unnecessary. Only a day would have been enough for this in today’s computerized world.
The same might be said about the Law on “Spatial arrangement and urban planning”. Specialist would surly understand that 50 percent of law (it consists of 38 pages) is full of senseless phrases and tautology. They are included for increasing the size rather than for regulation of spatial arrangement and urbanization of Georgia. One of the main aims of this law is considered full-pledged integration in Caucasian, European and world systems and structures (article 4, point 1-d). In our opinion, it is inadmissible that this law to have such aim. In this case, there should be some European or world standard (model) of country’s spatial arrangement and urbanization that Georgia would adopt (or not). World countries differ in space and relief that become a basis for town building and thus it is impossible to have one common standard. Therefore, form of spatial arrangement and urbanization of Georgia cannot draw us closer to or further from Europe.
It is read in this law (article 6, point 2) that activity of physical or legal bodies in the field of spatial-territorial planning might be limited in case if it contradicts with legislation, concerns, and encroaches upon rights of other people”. The law says nothing about what must be done if activity of public authorities violates legal rights of physical or legal bodies. Law implies publicity of spatial-territorial planning (article 17, point 1), but it does not explain what type of publicity is considered. If a team of five-six men, even if they are specialists of this field will discuss some subject, this cannot be called as publicity. Schemes of town building and urbanization (e.g. general plan of Tbilisi built-up) should be discussed in press, television, debates and hearing must be held in representative institutions (Academy of Sciences, Tbilisi State University, Technical University etc), in the circles of people who actively take part in formation of society’s opinion. All of us remember well that by the initiative of Americans discussion of Baku-Tbilisi-Jeyhan Project public discussion has been held and without support of Georgian population this project would not have been accomplished. Are general plans of spatial arrangement and urban planning less important?! Are not these issues of state importance? Thus their adoption must be subject to public discussion.
Besides this there are no national technical regulations for construction in Georgia. The process is started, but due to lack of funds the project is being delayed. According to resolution of government of Georgia – No 45 of Feb-24-2006, until the mentioned regulations come into force, Georgian builders are allowed to use technical regulations of 36 foreign countries (8, pg. 22). It’s obvious that construction standards and regulations of foreign countries cannot consider natural conditions of Georgia, the country’s lifestyle and other factors. This has become serious obstacle for Georgian builders.
To my mind, national technical regulations and construction standards cannot be common for whole Georgia as construction conditions are quite different in different regions of the country. Neither it would be right if these regulations are static, as in the times of former Soviet Union. Under the influence of technical progress it should be changed periodically and move up to higher levels.
Construction business in Georgia has not got the fundamental document of state regulation such as construction code. Parliament adopted special resolution that considered elaboration of such code, but the document has not been yet designed.
Therefore, legislative-normative base of state regulation and management of construction business in Georgia requires enrichment. Quite a number of laws need to be amended, some of the laws and acts should be re-written, some structures and institutions are to be established and existing ones need to be broadened. However, the main problem is that even adopted laws are not put into practice. There are many examples of this. For instance, in order to start construction in Tbilisi it is necessary to calculate building coefficients (K1 and K2) of a plot. K1=0.5 and it shows that only 50 percent of a plot can be built-up, while K2 shows the area of a building that can be constructed on this 50 percent of a land. If we look around Tbilisi buildings (e.g. Sports Palace surroundings), we will see that K1 coefficient is not considered anywhere: buildings have no yard, playground, parking place and other auxiliary areas. They are put tightly with each other. These new buildings defaced Tbilisi city and if this continues the situation might become even aggravated.
Used literature
1. M. Gvelesiani, Economics, Tb. Comment, 2000, Pg. 100;
2. N. Tchitinava, Metamorphosis of Economy of Georgia, M. “Business and Law”, No3, March, 2009, pg 55;
3. Website of the Ministry of Economic Development of Georgia http://www.economy.ge/geo/departments.php.;
4. Monetary and Banking Statistics bulletin, No1, 2009, pg. 35;
5. T. Akubardia, Georgian construction boom on the background of American Business, M. Business and Law” No19-20, 2007, pg. 26;
6. A. Sakandelidze, What, how and for whom are we constructing, M. Business and Law” No18, 2007, pg. 13;
7. Law of Georgia on “Supervision of architectural and construction activities”;
8. V. Kikutadze, Dynamics of construction development and management organization in Georgia, bulletin of the Centre of Strategic Researches and Development of Georgia, 2009, pg. 15.