RESTRUCTURING-SHACKLES OF BUSINESS OR ABOLISHMENT OF MARKET MECHANISM

By. Eka Lomidze

Debt restructuring bill provides for debtor’s delay for a definite period depending on the type of restructuring. This bill passed by the Parliament of previous session has played its own particular role.

However, proceeding from the situation it was revised on the initiative of the ministry of economy and patronage of the ministry of finance. This bill was approved by the government session and sent to the Parliament on the President’s initiative.
Substantial changes were made in the debt-restructuring bill. Compared with the law in force, this bill concerns both tax debt and loan debt restructuring. The bill provides for the so-called special case of tax and loan restructuring. It covers longer period and it is implemented by the order of the President. Under the current tax debt restructuring law, the President has the right to grant a five-year delay to an enterprise. According to the law, the special case is defined as follows: “If state owns major interest (or more than 50%) in an enterprise; if an enterprise has a strategic meaning for the social-economic development of the country; if it has export potential and is ready for privatisation with the prospect of implementing important projects; if its tax and loan debts result from a failure of the state to pay for the production from the budget”. As we see, this definition is rather complex and general. It can be useful for investors. Compared with the law in force, the new bill provides for the delay of loan debts, which is undesirable. According to the data of the Parliament budget office, the total sum of tax debt delay made up 66,8 million GEL. Given the fact that the delayed sums are calculated in laris with factors of devaluation and inflation considered, this mechanism would be tantamount to debt forgiveness in three years’ time. It is dubious that debtor’s delay rule will be efficient.
Besides, a picture of loan debt delay is of interest, too.
In accordance with the Parliament budget office data, under the provision of January 1, 2002 loans made up 52,7 million GEL. The total sum of loan indebtedness including interests and penalty taxes totalled 92,2 million GEL. In the same period, the state regained only 15,7 million GEL or 17% of the total loan indebtedness.
In the same period, the sum of loans in dollars made up 47,1 millions and 53, 7 with interests and penalty taxes. Only 368, 9 thousand US dollars or 0,7% were regained by the state.
The two types of loans totalled 154,7 million GEL or 208,5 million GEL with interests and penalty taxes. The state regained 16,5 million GEL or 7,9 % of total loan indebtedness.
Sixty four enterprises made use of budget funds. The sums were not used rationally. The reasons and motives for appropriating the funds give rise to suspicions.
Roman Gotsiridze, head of Parliament budget office, said that this vicious practice of debt restructuring has existed up to the present by the President’s order and served to give rise to new ways of evading tax and debt refund. Given the fact that loan indebtedness has also included private firms’ external debts for which the state assumed liability (f.e. 50 millions debt of Turkey), the above-mentioned amendment will cause delay or forgiveness of these debts. Such an illegal case has already occurred when the President ordered to grant a certain firm a 10-year delay of 10 million dollars’ worth Turkish credit.
The inexpedience of the current debt restructuring practice has repeatedly been mentioned in the Parliament budget office report. Debt restructuring practice has, in fact, been used as a means of tax evasion.
Proceeding from the above-mentioned, the Parliament budget office will not approve this bill in the present form.
The president should be deprived of the right to grant tax debt delay to enterprises. In case of emergency he could become an initiator of this process. Only the Parliament must take a decision on this type of delay.
Naturally enough, the debt-restructuring bill has caused difference of opinions with state officials and entrepreneurs on the one hand and some economists and parties on the other. The latter viewed this law as corruptive and destructive for the development of Georgian economy.
Vaja Kapanadze – Deputy minister of Georgian economy, industry and trade: – It is as Tutashkhia once said. If you do not approve of one’s behaviour, you must tell him what behaviour is good”.
– Some say the law contradicts market economy. It does not contradict it, but makes for the effective transition to market economy and prevents us from liquidating such gigantic enterprises as Rustavi metallurgic industrial complex, “Azote” that lost all chances to survive during the hyperinflation period in 1992-1993. They encountered with the heavy tax liabilities, interests, and fines. A colossal amount of money is necessary for the restoration of these giants. I do not say that management was all right there – there were 10-15 men altogether, but there were also 3000-4000 men depending on the enterprise. I would like to inform all economists that there is a less loss theory. Under this theory, state deliberately makes this step because it chooses to make some subsidy in an enterprise despite the fact that it is a loss-making one. Besides, when these enterprises function, they have to pay indirect taxes – I mean VAT and other similar kinds of taxes. That is why one cannot assert that debt restructuring contradicts principles of market economy. Ten years ago our enterprises functioned in the conditions of planned economy. Can one change everything and make it possible for all enterprises to function successfully in the conditions of market economy just by using a magic wand?
If a serious investor comes, we must try to make the enterprise attractive for him so that to cause his interest in investing his capital. As a rule, he who invests money wishes to gain some profit.
– What if we enforce bankruptcy law?
– If Rustavi metallurgic industrial complex goes into bankruptcy, then the whole city will be bankrupt, too. If “Azote” and metallurgic industrial complex go bankrupt, Rustavi will exist no more. I do not mean that debt-restructuring law must concern everybody. This law must be used in extraordinary conditions. The executive authorities must negotiate with the investor without having to break the law.
– There is a difference of opinions about this law.
– Unfortunately, Georgian economy is so politicized that all such steps always entail politicization of opinions. You will not be able to give an example of any market economy fathers’ thesis without any opponents or followers. Then, the whole society will be involved in the dispute clearing out who is right and who is wrong. Afterwards, it will turn into personal insult, abuse and so on and so forth. This is the way it all will end.
– State officials and entrepreneurs support the debt restructuring law. It is clear that their interests in this matter coincide. Laws of the executive power are approved by the Parliament that can influence it. I would like to say one thing: theoretically speaking, this law may not be a classic example of market economy. Yet, have you ever heard of theory being directly applied to life? There is other reality in life. Therefore, proceeding from it, the necessity of taking this unordinary step must not oppose the main strategic line. People will no longer be able to steal from themselves.
– Can an enterprise be in private sector if it has a strategic destination?
– State must not be involved in business. Its purpose is creating business environment, collecting taxes and pursuing a particular policy. State must not interfere with making business. Yet, what else has it done for the whole length of seventy years but making business? The result is obvious now. Has Georgia been detached from this environment? Watch the experience of post-soviet countries. Break-up of unions and transition to market economy has been an especially poignant process for the gigantic enterprises.
– Do you suppose that enforcement of this law will cause retroaction and losses? Who will be responsible for it then?
– No medicine has been invented that would not cause any side effects. Losses are not ruled out, either, but who cared to count them? Let us now consider this matter in a different way: what suits us – delay and increase of debt, its amounting to billions, having no debt-payers or postponements of payment for a certain period. An enterprise must start work and pay current taxes. All investors say that they will repay current taxes and old debts. As proverb says, he has the right to criticize who has the heart to help. You are not right in criticizing someone’s judgement and not offering your own one in return. Such approach is not justified.
According to Vaja Kapanadze, changes in debt restructuring bill will make it possible for the executive power to make enterprises more or less attractive for potential investors without breaking laws.
– We will have result even if half of the 100% is executed. Economy is not only a science of figures where two and two is four. That is why economy will not be able to avoid these disputes. Deputy minister of economy called Reagan to mind. Reagan asked to call to him single-handed economists. When he was asked why he did so, Reagan answered: “On the one hand, they say it will be so, on the other hand they say that if this condition is fulfilled – this is the very if that I do not need”.
– Mr. Vaja, some say that this law implies corruption.
– I would like to say that he who does business is criticized. If you do nothing, no one will ever criticize you. It should not pass some bounds and it should not be insulting. What does a corruptive nature mean? What is transparency? This transparency cannot be counted, but it is someone’s objective opinion. We can thus assert that any law makes its conclusion on the basis of positive and negative effects.
Lado Papava:
– “Debt restructuring comes on the agenda because elections are nearing. In fact, debt-restructuring law is anti-market law. This is the main reason of why I am against the law. I will explain you this. The basis of market economy is competition. As a result of competition, there appear successful firms that make large profit and reach success. There are also firms that lose this competition and therefore, go into bankruptcy. In the conditions of market economy, the example of developed countries shows that there are institutions formed by the state that legalize actual bankruptcy. What situation do we face nowadays? We have non-competitive enterprises due to different reasons: outdated technology, poor management or both of them. These enterprises must leave the real market environment. They are bankrupt, they cannot sell their production or they sell it at a very low price. Actually, they are loss-making enterprises so they cannot pay for electricity and sometimes they cannot pay taxes. Naturally enough, bankruptcy laws must be applied to these enterprises. There is a bankruptcy law in our country, too. This law was made with the help of German experts. It was doomed for failure from the very start in spite of its being a theoretically justified conception. Unfortunately, it did not agree with the Georgian reality. After this, we passed the national debt restructuring law and then bankruptcy law. Yet, the latter did not function well because of national debt restructuring. Proceeding from this, we can conclude that debt restructuring stands in the way of applying market economy mechanisms in practice. Let us go back to history. In 1998, the minister of finance put forward an issue of forgiving entrepreneurs’ national debts. Everything was to start all over again. This idea was, certainly, mistaken because it found no implementation. It was changed by a more flexible veiled mechanism that envisaged for debtor’s delay, but not for debt forgiveness. Debt forgiveness for the first time means recurrence of this forgiveness period. The necessity of it comes on agenda during the elections, no matter whether these are local, parliament or president elections. Everyone needs votes. Entrepreneurs who pay taxes are released from debt. In return, they have to provide both votes and finances. Therefore, debt restructuring is suitable to everybody. It is suitable to entrepreneurs because they do not want to pay taxes and it is suitable to state officials because of its corruptive mechanism. A business plan must be developed that will determine the mechanism of paying taxes. A state official must check all this and decide whether it is a good or bad plan. He will, certainly, take some money for giving his approval and, in the long run, the executed document will be submitted to the President for signature. Thus, it suits entrepreneurs, state officials and some Parliament members who lobby these types of enterprises. Who is this document unsuitable for? First of all, it is unsuitable to Georgians and to Georgian economy. If no bankruptcy law is passed, we will never avoid noncompetitive production and poor management. It would be logical to abolish debt-restructuring law. Yet, everything happened the other way round: according to the new amendment, debt restructuring of strategic objects will extend for a period of 15 years. Thus, the two-year period will grow into fifteen-year one. It implies rejection of market economy. President and Parliament will have nothing to do in economy. Being a citizen of our country and an economist, I do not at all wish to postpone the establishment of market economy in our country for 15 years. This is the main reason that makes me conclude the following: no amendments must be made in the debt restructuring law. Instead it must be abolished as soon as possible.
– Some say this law will attract investments.
– All arguments are used only for justifying the maintenance of the management. This management was doomed for failure because debt had been accumulated under the leadership of this very management. As for investments, let us not fall into delusion. Let us begin a usual process connected with bankruptcy mechanism. The matter is simple enough: it is a national debt. The matter is that the state must let this enterprise out for privatization. Though the debts might not be cancelled, the management itself would be changed.
– The question arises: “They do not approve of our opinion and they suggest nothing in return”. You are against the law. What do you think is the way out? Can you suggest anything better?
– A very good question. I cannot think of anything better than what we already have in market economy. There is nothing better that this in the whole world practice. Therefore, what I use is not re-invention of bicycles. I say things that are known in the civilized market economy. I want civilized market economy to be established in Georgia, too. The enterprise employees must not think that bankruptcy means closedown of an enterprise. Bankruptcy means change of management. What can I offer? I can offer nothing. The market economy gives us its suggestions. It is a bankruptcy mechanism that is based on the centuries-old experience of market economy countries. We can say nothing new. Debt restructuring mechanism is new to market economy.
– Is there an analogy of debt restructuring law? Perhaps, post-soviet countries are familiar with this method.
– You know, I would like to say that of course, there is an analogy of this law because this bill had been prepared with the support of the World Bank. I think it was one of the grave mistakes of the World Bank in Georgia. You know, I am not at all interested in the existence of the same problems in other countries. One must overcome any abnormality in his own country. The main thing is not abnormality in other countries, but a right way of overcoming it.
– The bankruptcy law must be improved, too.
– The parliament has already taken some measures for simplifying it. The bankruptcy mechanism must become very simple and quick. This process must be resolved as soon as possible. If we choose this way, we must know that we will do much for implementing market economy.
Niko Lekishvili – Chairman of Tax Payers’ Union of Georgia. “A man was killed in a khinkali canteen and cooking khinkali was forbidden in Georgia”.
– Our union as well as the Georgian government has long requested the Paris club to cancel our debts. We do not want to cancel national debts accumulated by organizations. We have bankruptcy law. Unfortunately, it was not enforced because there are many enterprises that will not function no matter what kind of restructuring is performed. Therefore, it is important to create an article that will consider these issues very seriously so that we will be able to drive at a certain decision.
Some say this law is corruptive. I remember there was a murder in one of the khinkali canteens in the 70-s and cooking khinkali was forbidden in Georgia as if nothing like this has ever happened in shashlik canteens. We must not come to such absurdity. As for bankruptcy, I think it actually implies resale of a bankrupt enterprise. The owner as well as the situation change. Thus, today we face an unordinary situation because there are many enterprises that were made bankrupt by the government. The issue must be studied well so that a state could take a decision and file a bankruptcy suit. An enterprise should be given some period for performing restructuring and then it should be liquidated. I can give an example of many enterprises that need nothing more but liquidation. They will not be purchased because they are not fit to function. They will not be sold even if their profile is changed. Therefore, the government must take decision for each enterprise. Any object and enterprise must be preserved. There should be a commission consisting of state minister, parliament and representative of anti-corruptive council who will take a decision. “We forgave “AES Telasi” 100 million debt. Why do not we consider forgiveness of American and German’s debt a corruptive source. When a Georgian businessman wants to defer debts payments for a period of 3 years, we consider it a corruptive source. Why did not we say anything to “AES Telasi” when it obtained a delay of 100 million debt. Why were not there any press-conferences? Why can not we grant a 15 years delay to an enterprise that will function and employ people? Why can we grant a 100 year delay to “AES Telasi” and why can not we do the same for a champagne factory or “Bakhtrioni”. The latter transported its goods to Turkmenistan with the purpose of paying out national debt. The government ruined the factory by refusing to refund the debt. Should not a government give a helping hand to these enterprises? I will speak about it as soon as there is an answer to this question.
– Do you think that we reject market economy by resorting to debt restructuring?
– I can not say this. I have more experience than the one who asserts it. I watched this process in foreign countries. There is nothing like this there. A state decides upon the strategic importance of the enterprise. If it is strategic, a state provides it with assistance. If it has no strategic importance, it resorts to bankruptcy law. I oppose the idea that the restructuring process must concern everything. Therefore, it is important to clear out what situation is in the enterprise and whether it is fit to function or not. What happens when we close down and liquidate the enterprise? Does it entail any social tension? This issue enters the competence sphere of state policy. It is a social problem that can not be viewed as “no, you can not do this” . It is the easiest way, I think. It is evasion of responsibility for people. Professors and doctors trade in the markets. What do we care?! We have already created workplaces. What can Chiaturi population do with there being no workplaces in the region. Should we say that Chiaturi manganese is a loss-making enterprise and it must be bankrupt? Should we close it down until a good investor turns up? I can not understand this approach. I think that the main thing is to enforce debt-restructuring law that will concern strategically important enterprises, but not all enterprises.
Sandro Tvalchrelidze – professor of Georgian Academy of Natural Sciences – “both laws will be viewed as closely connected with corruption”.
– The idea of developing our industry, insolvent enterprises and debt restructuring should take into account some very important issues: the infrastructure of Georgian industry will not be the way it used to be during the Soviet Union period. You know that it was involved in the division of labour of gigantic countries. The infrastructure that was used during the Soviet period will be ruinous for a small country. Therefore, the bankruptcy law must be enforced. Bankruptcy adjudication does not imply closedown of an enterprise. On the contrary, the privatization law makes it possible for the enterprise to find a new owner or a seller. There are branches or there must be branches that will have state agreement. The problem is that we are not aimed at such priorities. We are country without any priorities. Thus, both laws will be viewed as closely connected with corruption.
Debts of enterprises will be restructured. There is another condition. There is no estimation mechanism – what types of enterprises should this law concern or what types of enterprises should not this law concern. The law envisages for no mechanisms as f.e. the fact that Rustavi metallurgical industrial complex needs restructuring and “Azote” does not. There are no objective economic indices. It is very dangerous.
– What do you think is the way out?
– We must make these indices on the first stage. They will be developed in two ways: the enterprises that meet the state requirements must be restructured, the ones that do not meet the requirements must resort to bankruptcy law.
– You mean creation of commission that must decide which enterprise to apply this law to.
– It is very dangerous. The decision of commission is a personal decision. If I become a commission chairman, I will use my criteria. There will be other people in the commission who will do the same. There will be quite a mess there. This issue must be settled by law, but not by commission. Then a state commission might be formed that would cover the sphere not covered by the law. We make a law and we write that we will create a commission, which means nothing else but that the law is bad. If the law requires creating a commission then this law is not required. We can create a commission instead. If we write a law, it must cover everything. It is necessary to classify enterprises. First category: strategic enterprises, inventory of the enterprises that are not subject to privatization. Second category: enterprises that can become shareholders’ companies. Third category: enterprises that can be privatized. This regime must be applied to the first category only, but not to the second and third ones. Afterwards, this law must determine the period of debtor’s delay.
– Does debt restructuring imply rejection of market economy?
– We should not aspire for market economy, but for the improvement of our economy. We must take decisionu that will be suitable to us. We can use this law as soon as we clearly determine economic safety priorities for the development of Georgia. We do not know any such priorities.
There is a new term in our mass media – political will. I would rather call it social disaster. Georgia being a small country does not at all need such a gigantic enterprise as Rustavi metallurgical industrial complex. We must think of converting this factory. Yet, there will be thousands of unemployed. We are afraid that they will not give us our votes. We do not have political fear. Instead, we have social fear because we think that he who will converse the factory will become very unpopular and will retire from policy. The processes taking place now are temporary. That is why the factory will be liquidated in the future. Our children will do things for us. It is nothing else but social uncertainty. Yet, chemical fibre, Chiaturi manganese and ferroalloy are quite a different matter. This approach must become unilateral. Submitting this issue for the consideration of the commission is also sort of uncertainty. The author of the law says that I will write the law and we must create a commission that will be responsible for it while he washes his hands. This is not the right thing to do.
We can not pass such laws until economic development strategic paper is prepared.
As far as we see, attitude to the debt restructuring law is different. Principle actions are more important now than enforcement of laws. If the government will use laws for strengthening its positions, work for image and reject implementation of market mechanisms, we will lose sight of our future in the fog.