Visit to Georgia by Nigel Peters, Director of CATBIG, 24-25 March 2011

GEORGIA

Visit to Georgia by Nigel Peters, Director of CATBIG, 24-25 March 2011

1. Introduction

The Central Asia & Trans-Caucasus Business Information Group (CATBIG) was established by what is now UK Trade & Investment (UKTI) in 1995, as a forum for business to business discussion of the economic, commercial and political situation in the 5 Central Asian and 3 Caucasus Republics of the former Soviet Union, and also for liaison with British Embassies in the region. The trade association British Expertise took over the running of the CATBIG secretariat in 2009.

Nigel Peters, Director of CATBIG, was invited to visit Georgia from 24-25 March by HM Ambassador to Georgia, Judith Gough. Supported by the FCO Commercial Diplomacy fund, the aim was for Nigel to develop an understanding of the potential for British business in Georgia, review the opportunities and obstacles, and also to make contact with local business intermediary groups.

Until recently, the British Embassy had not offered a commercial service to companies for some years, and UKTI continue to refuse to fund staff at the Embassy. However, the election of the Coalition Government in May 2010 caused the FCO to review their overall priorities, with the result that all British Embassies, with or without UKTI staff, have been to told to give the highest priority to commercial work. This has resulted in both HM Ambassador and the Deputy Head of Mission allocating part of their time to commercial work, supported by a newly engaged Commercial Officer, Data Parulava. The Ambassador herself worked in the private sector for Ernst & Young before entering the diplomatic service, so is ideally placed to lead the resurgence in commercial activity by the Embassy.

2. Summary & Conclusions

Georgia has not enjoyed an easy transition from being a part of the Soviet Union in 1990 to the thriving, open and democratic country that we see today. It is now one of the best countries in the region to do business in.

It has not been blessed (to date, though exploration continues) by the oil and gas reserves that neighbouring Azerbaijan enjoys, but rather has had to work hard to firstly overcome a corrupt political elite that were in power for most of the 1990’s, and secondly to benefit economically from its strategic position as an outlet to the West for Caspian oil and gas.

Political stability was not helped by break-away movements within the country and by conflict with Russia. Indeed, because bad news has a habit of lingering and good news not being so proactively reported, Georgia does not enjoy the good reputation that it deserves amongst the British business community. I was struck by the number of well educated young people at the heart of government (the Minister of the Economy and Sustainable Development is still in her 20’s) who are very forward looking and clearly see their future in developing ever increasing ties with the EU and the USA.

Donor funding, particularly in infrastructure, is at a peak for the next couple of years, and offers a range of good short term opportunities for UK companies. The Minister of Regional Development & Infrastructure is keen to visit the UK and this would be an excellent opportunity for a wide range of companies to meet him.

The timing, therefore, of the reopening of a commercial section at the British Embassy, is ideal. BMI offer regular flights from London via Baku, and there is also a convenient connection via Kiev with UIA. EU passport holders do not require a visa. If you have not yet been to Georgia, now is the time to go!

3. Overview of Georgia

Georgia is a small (population 4.4 million) open economy strategically situated at the cross roads of Europe and Asia. Since independence following the break-up of the Soviet Union in 1991, it has positioned itself as the hub for the 3 Trans-Caucasus republics, as the ongoing conflict between Armenia and Azerbaijan means that Georgia is the one country all are friendly with!

In particular Georgia has benefitted from the need for Azerbaijan to find an export route for its oil that bypasses Russia. This has led to BP being a major investor in the economy and significant upgrade work at Poti port. HSBC is the other major UK investor, with a large retail banking network. The UK accounts for around 1.55% of FDI in Georgia, and FDI overall accounts for around 4.27% of GDP.

In recent years, after the “Rose” revolution, the Government of Georgia has worked hard to improve the business environment, and has successfully implemented far reaching reforms in the areas of anti-corruption, social welfare, the business environment and fiscal management. Georgia has improved its ranking in the influential World Bank “Doing Business” global ranking from 112th position in 2006 to 12th in 2011. This is an extremely impressive achievement.

The economy proved pleasingly resilient to the world financial crisis, with GDP only decreasing by 3.9% in 2009, returning back to growth in 2010 of around 6.4%.

All this has happened within the context of armed conflict with Russia in 2008, which damaged many areas of infrastructure and seriously hit investor confidence, the regions of Abkhazia and South Ossetia remain tense, and as these areas are not currently under the control of the Georgian Government remain outside the scope of this report. By contrast, problems in the region of Adjara (which includes the port of Batumi) have been resolved and this region is now developing its tourism potential.

Donor funding is at a record high, both as a response to the reconstruction needs post the 2008 conflict, and also to deal with the global financial crisis. This offers good business opportunities for UK companies, particularly in the area of infrastructure development. It cannot be sustained at the current levels, so now is a particularly good time to look at this source of business opportunities.

Key areas to be addressed in the short term include: the continued need for a good banking supervision system with a particular focus on risk management policies; improvements in physical infrastructure and municipal utilities; further economic diversification including improving the competitiveness of the agricultural and other tradable sectors; making the tax regime and its application better understood; improving technical vocational education and training; capacity building to ensure the independence of the judicial system.

4. Opportunities by Sector

Opportunities are listed in a rough order of priority for UK companies.

4.1 Roads

The upgrade of the main east-west highway is a priority and is receiving substantial funding from the World Bank and ADB. Our own drive during the visit from Tbilisi to Kutaisi showed firstly the benefit of the newly upgraded section of the road just outside Tbilisi, but also the vast amount of upgrade work that is required on the remaining sections, which carry a heavy load of international lorries in addition to a wide range of domestic traffic, from horses and farm tractors to inter-city coaches!

The US Millennium Challenge Corporation (MCC) is also likely to fund further road projects. UK consulting engineers and other transportation professionals are well thought of, and MCC have been impressed with the performance of WYG/Roughton on their road project. There should be a number of funded road upgrade opportunities in the short term. There will also be associated opportunities for construction equipment manufacturers and for other companies with related civil engineering products.

4.2 Technical & Vocational Education

The Government is now starting to realise that they need to give greater priority to this sector after key investors, such as BP, have highlighted the lack of skilled local people in many areas. The donor community are keen to support such projects, and MCC may include a new technical institute in Batumi in their new programme. The UK has many skills in this area, from consultancy, teacher training and curriculum development through to franchise operations by colleges and universities, and supply of books and educational equipment. The British Council are already established in Georgia and can play a key role in helping UK education and training sector companies develop the market.

4.3 Public-Private Partnerships

Georgia is showing a lot of interest in PPP and the UK has very relevant experience. The fact that the Prime Minister’s Office has established a PPP unit shows that the concept has support at the very heart of government, and now is the right time for the UK to establish close links which could then enable a range of business opportunities further down the project cycle.

4.4 Ports

Both Poti and Batumi ports are undergoing significant upgrades and there should be a range of opportunities from consultancy through to management and equipment.

4.5. Kutaisi Infrastructure

The move of the Parliament of Georgia to Kutaisi will offer a range of opportunities, from the fitting out of the parliament building itself to the rejuvenation of adjacent buildings, and commercial developments. A successful privatisation of the airport could also open up wider opportunities.

4.6 Urban Water Supply & Sanitation

Funded donor opportunities lie in management, consultancy and equipment supply.

4.7 Hydro-Power

EBRD in particular are funding projects in this sector, where the aim is to move to 100% energy supply by hydropower. The sector is privatised and the latest project involves a Turkish investor, but there may still be consultancy and equipment supply opportunities.

4.8 Tourism

There are a number of hotel developments underway in Tbilisi, Kutaisi and in the Black Sea coastal strip around Batumi. There are also opportunities for more cruise ships to call into Batumi now that the port is being expanded. There is also a winter sports resort being developed near Tbilisi which will have some regional appeal.

4.9 Agribusiness

The climate and soils are good for this sector to be further exploited, but better distribution systems, including cold stores, are needed.

5. Meeting Reports

Summary reports of meetings held in Tbilisi and Kutaisi on 24 & 25 March.

5.1 Embassy Background Briefing

Georgia is a natural hub for the Caucasus. The President has a high popularity rating and politically the country is the most stable it has been in recent history. GDP recovered in 2010 and is now estimated to have grown by 6.4%. Aid inflows are running at a high level, though 2013 will be a crunch year for repayments.

The focus is on infrastructure development, especially roads. Other priority areas include the expansion of Poti port, renewable energy (especially hydro as they use only 16% of their capacity), tourism around the Black Sea resort of Batumi (and skiing to a more limited extent), and agribusiness.

BP have a major investment in the country through pipelines that take gas from their Azerbaijan gas fields through to the port of Poti, and also through to the Turkish Mediterranean coast at Ceyhan.

Georgia maintains good relations with the EU and the USA. By comparison the 2008 war with Russia continues to lead to a difficult relationship, which has badly hit trade (e.g. Georgian wine is still restricted from sale in Russia).

There is a British Georgian Chamber of Commerce in London, but no local equivalent in Georgia.

5.2 Breakfast Meeting with BP & KPMG

Andrew Coxshall

KPMG Managing Partner, Southern Caucasus

E: T: +995 32 935713

C. E. (Neil) Dunn

General Manager, BP Exploration (Caspian Sea)

E: T: +995 32 593400

Georgia is easier to do business in than Armenia, particularly in the areas of taxation & customs. The Asian Development Bank and EBRD are funding a number of projects in water supply and irrigation. The best opportunities for UK companies are in consultancy, as the contracting will be done by the Chinese, Turks or Koreans.

BP would welcome more focus on vocational and technical education, as they notice the local skills base has been depleted in many areas, especially construction. BP fund social infrastructure projects as part of their CSR agreement with the Georgian Government. These projects are managed on their behalf by the NGO Care International.

5.3 Roundtable meeting with the International Donors

Jamie McGoldrick

UN Resident Coordinator

E: T: +995 32 251126

Asad Alam

World Bank Regional Director for the South Caucasus

E: T: +995 32 913096

Paul-Henri Forestier

EBRD Director for Caucasus, Moldova and Belarus

E: T: +995 32 447400

George Kaziria

Asian Development Bank, Senior Country Coordination Officer

E:

(A separate meeting was held with the Millennium Challenge Corporation (MCC).

Donor funding is at an all time high, it will start to decrease after 2-3 years.

The Ministry of Education and Science has only just started to prioritise technical and vocational education, and is now in discussion with EU, USAID and UNDP.

It has generally been difficult to get Georgia to borrow for technical assistance or national strategic work. The World Bank has focussed over the past few years on road projects, lending the Georgians some US$400m in total. Construction has been undertaken by Israeli and Azerbaijani companies. New projects will mainly be in the rural development sector including rural roads and agriculture.

There has been engagement with the Government recently on the concept of PPP and the opportunities to introduce this into projects, possibilities being the maintenance of the East-West road upgrade. Responsibility for PPP rests in the Prime Minister’s office, and there is a feeling that a central PPP Unit should be established so that the concept can be properly applied across Government.

Asian Development Bank is the largest donor, with programmes in water supply (US$400m), roads (US$500m), and urban transport (US$300m). A number of large water contracts are being tendered, the largest being in Kutaisi. There will also be a tender to manage the national water company.

There is a need for a cold storage facility for agricultural produce. Hydropower has potential for private sector investment.

Current World Bank, Asian Development Bank and EBRD pipeline projects are as follows:

World Bank (www.worldbank.org/ge)

Third Development Policy Operation. To support the Government’s policy reform programme to mitigate the impact of the economic downturn in the short-term, and to prepare Georgia for post-crisis growth in the medium term. Loan of US$40m to the Ministry of Finance under preparation.