Capital Investments in Georgia: volume, structure, sources, dynamics, tendencies

Manana Kharkheli, assistant professor

Construction industry is a sector with big capital capacity. Currently average capital capacity of 1sq/m residential area in Tbilisi is USD 500-800.
Therefore, construction of residential nine-storey building with one doorway and 4500 sq/m area in Tbilisi requires USD 2 250 000 investment. According to such estimations, Georgia needs USD 1 billion in order to complete construction of 2 million sq/m area that has been suspended. Georgia does not possess local sources of the investments in the mentioned volume. However, attracting investments from abroad is not an easy task. Foreign investments have one peculiarity: “It is very careful and awkward. If investor decides that there is no safe environment in Georgia he won’t risk investing of funds”. (1, page. 73) In terms of current global crisis and recession, nobody can be condemned for care of safety of own capital first of all. In the decision-making process investors First of all think of protection mechanism and not of future benefits.
That is the main reason of decreasing capital investments’ volume in whole world. (Private investments have decreased by 21% in USA (2, page 31), according to estimates of British experts the figure will decrease by 29% in 2009 (3, page 46).
Dynamics of investments in a fixed capital was systematically increasing in Georgia up to 2007 (Table 1). In 2002-2007 years it increased by 2.5 times and even more (263,2%). At the same times, increase of investments in a fixed capital is above average in some of the sectors. (For instance, capital construction – 4.5 times, real estate operations 6.5 times, communal and social services – 5 times, transport and communication 3 times).
In the years taken for the analysis, 25-30% of investments were directed to establish main funds of transport and communication, except 2002. 20-22% was invested in private assets, 24-25% in common assets, the rest in other sectors of economy – 33-41%. GEL 684,3 million is spent on creation of main funds of production such as industry + agriculture + capital construction. In other words only 14,3% of investments for creation of main funds; this figure is 10 points less compared to the figure in 2002. This proves the widespread idea that Georgia develops not production economy, but service economy. Major part of investments made in fixed capital makes up foreign investments (table 2). The table shows that together with the increase of volume of direct foreign investments its share in capital investments of Georgia increased from 21.1% to 73% in 2002-2007 years. This implies that foreign investment became main sources of renewing main funds of Georgia. It is a common knowledge that investment is a basis not only for the country’s development, but also for social stability of the society. Direct foreign investments encourage implementation of advanced technologies and progressive managerial skills. However, direct foreign investment can have negative effects also, specifically (5, page 53):
• Withdraw domestic investments from market;
• Strengthen differentiation of the populations incomes;
• Increase scales of donor investing country in domestic political and economic life of investment recipient country;
In terms of abovementioned, one should not understand 12 times increase of direct foreign investments in 2002-2007 years as unambiguously positive event. In order to objectively evaluate this process it is necessary to define whether total volume of investments was simultaneously increasing in the country; were modern technologies and managerial skills were acquired; and what is more important, were new opportunities created for increasing export and was population’s living condition improved etc; if these requirements are not fulfilled then destination of foreign investment is establishing economic bondage of a recipient country.
Unfortunately, it is difficult to answer all these questions, as Statistics Department of Georgia does not possess relevant information (for instance, managing of direct foreign investment in various sectors of economy, implementation of advanced technologies and managerial skills). The only information the Department was able to give was in regard with total investment and change of populations living condition.
Joint investments of fixed capital increased from GEL 1825,6 million to 4805,6 in 2002-2007 years (or by 263,2%). Poverty level has increased from 21,3% to 24,6% in 2002-2007 years (toward 60% median consumption), depth of poverty increased from 6,9% to 8,1%, while acuity of poverty grew from 3.2% to 4% (6, page 68).
According to these figures population living condition is obviously deteriorated (poverty level, depth and acuity are increased). As regards volume and growth pace of local investing, it exceeds foreign investments in volume, but annual pace of growth is only 13.7% (For comparison: growth pace of foreign investments is 220,7%). (See Table 3).
It can be seen from table 3 that local investments are not drive out foreign investments. However, low level of living of the population, extreme poverty and need are indicating that neither foreign nor local investments are not directed for the development of export oriented sectors (sources of creating foreign currency) in order to increase country’s production potential as a result. We have talked about this while analyzing 1st Table, where we saw that investments in Georgia are spent not for development of industry, but for growth of private and common assets, for development of transport and communication industry (63,7% of investments made in a fixed capital were spent on these fields in 2007).
Now it has become clear why the population is at the verge of poverty, why poverty level increases and how should be the investments realized in the future.
Many foreign and Georgian scientists assert (in terms of current crisis) that state regulation of investment processes should be strengthened in Georgia. “Under modern conditions it is necessary to comprehend investing in real sector, to carry out common systemic and at the same time, selective policy. It is impossible to activate investment market entities and correspondingly attract capital in real sector without creating advantageous conditions for regulation of investment activities” (8, page 81). State regulation of investment sector of economy should ensure streamlining of investment field, relevance of constituent elements, and achievement of optimization in separate sectors of economy. Unfortunately these processes do not take place in Georgia.
Considerable reduction of investments in Georgia has started after August events. At the current stage there is a tendency of investment decrease caused by world financial crisis that is connected with exhaust of the list of major privatization objects in Georgia. According to the government’s prognosis attraction of USD 1.7 billion investments was planned in 2009. (9).
However, one is to say and another is to do. Economic expert D. Giorkhelidze writes: “We will see in 2009 that declared orienteer of the new governmental economic team does not bring radical changes, because country might not receive the volume of investments necessary for its development. If some friend investors will be attracted that is not bad at all, but this is not a decisive factor. External investments must complement of internal resources. In terms of insufficient internal resources and good economic conditions opportunities for attracting investors arise. When there is a total unemployment in the country, when growth paces are slowing down it is an absurd to talk about increase of foreign investments” (10 page 36). Representative of International Monetary Fund, Mr. Christiansen expressed approximately the same opinion in 2007. “I want to deliver message – economy requires stability. Macroeconomic stability is meant here. At the same time we need political stability in order to increase investments…” (11, page 18).
If over last three years, economy of Georgia was developing dynamically (Growth of Real GDP in 2005-2007 made up 10%). Driving force of this growth pace was intensive flow of capital from foreign countries. However, this process was disturbed in 2008 – investments are decreased 5 times in Georgia (12, page 76). Obviously this becomes the reason of cessation of economic growth. According to the data of 3 quarters of 2009, GDP of Georgia has decreased by 5.9% in comparison with previous year (13, page 5). In order to improve the situation Georgian specialists are offering complex of recommendations. We totally agree with them. These recommendations will encourage attraction of foreign investments in Georgia. List of the recommendation is given below (14):
1. Correct comprehension of importance of direct foreign investments in general strategy of country’s development;
2. Determination of the sectors of regions that must be developed by means of foreign investments; estimation of its expected effect;
3. Restructuring of investment encouraging agency in accordance with the requirements of direct foreign investments and potential of attracting them;
4. Elaboration of investment attraction encouraging strategy. Strategy should emphasize strong and weak points of Georgia as an investment recipient country. Sectors that can achieve maximal capitalization should be revealed;
5. Investment encouraging agency of Georgia (like Czech Republic and Hungary) should established offices in regions, where local governmental bodies will receive training in relations with investors;
6. Image of Georgia must be improved at international arena. Action plan of improving country’s image should be implemented;
7. Data base of investors should be created and maintained always up to date;
8. Business service centers should be established. Their main responsibility will be studying of market for investor and preparing investor’s visit etc;
9. Finally, it is necessary to apply to internet presentation in order to increase interest of investors in Georgia. National Agency of Investments owns such website, but the information presented is very scarce and outdated. It cannot play a role of investor attractor.
As one can see from these recommendations, whole burden of working on investment attraction in Georgia lays on the government. Georgia still has not become polygon of foreign investments and this is a result of bad work of these structures.
At the same time, instead of giving some preferences to foreign investors (like so-called “Asian Tigers” – Singapore, Korea, Hong-Kong, – who were in our situation 10-15 years ago), we are establishing restrictions for them. For instance, government of Georgia has made amendments to the law of Georgia on “Encouraging investment activity and its guarantees” – Article 16 (15, page 22) regarding the rule of dispute settlement between foreign investors and state of Georgia. Until Jul-17-2009 foreign investors were allowed to settle the dispute either in court of Georgia or at International Investment Dispute Centre, or at any International Arbitrage. According to amendment made in Jul-17, investors have no right to sue at International Arbitrage the case mist be discussed at court of Georgia. None of the investors would like such restriction and it restrains from making investments in Georgia, as they have no chance to apply to International arbitrage. Article No15 has been excluded from the mentioned law. It was establishing guarantees for the investor – over ten years amendments in the mentioned article do not apply to the investments made before it would come in to force. It was written in the second point of the same article that no amendments could be made to article 16th. Investors cannot find this point of article in the new law. Under conditions of such changes recently President of Georgia presented the “Act of Economic freedom” to the parliament. Act of Freedom promises investors that taxation environments of the country will not change and the money invested will be safe. Whom should the investors believe – presidents loud promises or quite restrictions of their rights that came into force in Aug-10-2009?
Investment Encouraging Agency does not work perfectly also and it cannot be said that it really supports investors. The main work of the agency implies attending of various conferences and advertising Georgia there. This is not enough. It is necessary country to have strategic view of how and where it plans to spent attracted investments? What will be the stimuli for foreigners? Which sectors are growing and of first-priority? Agency should present these programs to potential investors and provide them with additional information on attractiveness of capital investments in Georgia.
Creation of Free Industrial Zones (Poti, Kutaisi, and Rustavi) cannot become “investment salvage”. One cannot create free Industrial Zone for every investor, as then whole Georgia becomes one big Free Industrial Zone.
Therefore, in order to broaden investment activity in the country and attract investments, it is not enough to carry out some fragmented measures as they have no output. It is necessary to have long-term strategy for investment activity of the country and every instruments and levers for it. Country’s development by the principle of “Try and Mistake” must be excluded. It should be based on conceptual and methodological approach that will be elaborated by professionals and not by people selected by party principle.
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