Cash cloud hangs over Georgia's tax-free zone
By Tea Zibzibadze
KUTAISI, Georgia - A new "free industrial zone" is being touted in Georgia to
boost the country's faltering economy, but economists and experts are baffled
by the plan, which they call vague, opaque and potentially unworkable.
Kutaisi, Georgia's second city and home to the new zone, is waiting for the
arrival of equipment for three new home-appliances plants, the first factories
due to be built under relaxed taxation and legal rules.
The factories will belong to Egypt-based Fresh Electric Company and are
expected to produce their first products no later than next month.
In the new industrial zone, investors will enjoy a highly favorable
business environment. Procedures for getting permission to invest may be
simplified or cancelled altogether, while no value-added tax or customs dues
shall be levied on foreign goods imported, and enterprises operating in the
zone shall be exempt from paying property tax.
A multi-currency regime will be in place in the zone, and shipments of goods
produced there to the rest of Georgia will not be subject to customs fees.
The Georgian authorities say that they aim to make Kutaisi, a city in western
Georgia which has suffered since the fall of the Soviet Union, into the
country's industrial hub. They promise that 20,000 new jobs will be created in
the next two years.
"We plan to save Kutaisi," Georgian President Mikheil Saakashvili said on a
recent visit. "I take my promises seriously. We'll make Kutaisi an industrial
zone and Georgia's second capital."
Few experts share his optimism. Lawyers question the legal underpinning of the
scheme, which is only supported by a cooperation memorandum signed by Fresh
Electric and its Georgian partner, Georgian International Holding.
Nodar Jikia, of the Georgian Young Lawyers' Association, said the memorandum
carried no legal weight and, therefore there was nothing to force its
signatories to honor their commitments.
"The memorandum is a mere expression of goodwill by the two parties, and it has
no legal force whatsoever," he said. "The document does not oblige the parties
to take any specific actions, its fulfillment depending solely upon their
goodwill."
Fresh Electric will be responsible for building industrial facilities in the
zone, while its Georgian partner will attend to organizational and
administrative issues. The two signed their memorandum on April 6.
The Egypt-based company says it plans to invest US$2 billion in the industrial
zone. The first part of the sum - $1.2 billion - is to be spent this year on
construction of new factories. Economists have questioned its ability to meet
this pledge, since the company's website lists its annual turnover at a mere
$90 million.
"The investor company has neither the resources nor the experience it needs to
build an industrial zone," said Otar Konjaria, an economic expert. "Besides,
today, when the whole world is gripped by economic crisis, investments of a
scale like this are very rare."
But Mikheil Tigishvili, head of Georgian International Holding, denied the
venture would have any trouble funding its commitments. "This is a serious,
stable company, which exports its products to dozens of countries. Therefore,
nothing will threaten the promised investment," he said.
Fresh Electric was confident of the profitability of the venture. "We set great
store by the way Georgia is situated geographically. The countries neighboring
Georgia need the electronic appliances we make," said company vice-president
Mohamed Rafat. "We've studied the Georgian market." The company's products are
"of high quality, and we hope they will find their place in the market."
The government passed a special resolution allowing the free industrial zone on
June 5. A total of 12 new factories will be built on in the 27-hectare site,
which used to house the Kutaisi Car Works, and will operate for 99 years. A
customs checkpoint has already been set up.
According to the economic development ministry, the government will keep a
close watch on the zone's development and will cancel its special privileges if
the companies working there do not keep their promises.
"The order of creation, construction and functioning of a free industrial zone
is laid out in Georgian legislation," said Tsisnami Sabadze, deputy head of the
ministry's analysis and policy department. "Also guarantees have been agreed,
which have to be provided by the organizer of the zone. If these procedures are
not fulfilled, then the state will not give its permission for the zone to
function."
Georgia already has one free industrial zone, in the Black Sea port of Poti.
Experts say that when mulling the creation of another such zone the government
should have taken into consideration what they believe was a disappointing
previous experience.
"The free industrial zone in Poti has proved a damp squib," said one expert,
Nodar Khaduri. "As far as I know, there have been some serious problems there."
Many believe the government wants to increase Georgia's investment appeal,
damaged by its war with Russia last year and the political tensions that have
plagued it for months.
"Certainly, there are more-stable countries for investors to do business in,"
said Khaduri.
In Kutaisi, locals whom the Georgian president has already congratulated on
their chance of getting jobs bemoaned a lack of information on how they can get
themselves employed.
"No one has explained to us how we are to get jobs in the zone," said Kutaisi
resident Nana Maisuradze. "My husband went there and returned, having failed to
find out anything. Promises are all we've heard so far."
Another local, Guram Kiknadze, said, "You just can't get into the territory. In
the reception, there used to be a telephone number displayed on a wall to
contact representatives of the company. But, they have removed it since. They
say there were too many calls."
Tea Zibzibadze works for the newspaper Akhali Gazeti in Kutaisi.
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