TBILISI, GEORGIA

Private Sector and Human-resource Development in Georgia

Author: Lasha Martashvili

E-mail: [email protected]

(18.02.2004)

TABLE OF CONTENTS

1. Government Policies

1.1 Government promotion policies of small and medium size enterprises

1.2 National Investment Agency of Georgia

1.3 Georgian Investment Center

1.2.1 Government’s Export Promotion Policy

1.2.2 Georgian Export Promotion Agency (GEPA)

1.4 Foreign Investment Promotion

1.3.1 Government’s Foreign Investment Promotion Policy

1.3.2 Foreign Investment Advisory Council (FIAC)

1.5 Tax Regime

1.3.3 Taxation System and Tax Rates in Georgia

1.3.4 Existing Taxation Practices

1.3.5 Tax Reform Areas

1.6 Legislative Basis for the Operation of the Private Companies

1.5.1 Law of Georgia on Entredivneurs (LoE) (Corporate Law)

1.5.2 Law of Georgia on Securities Market (SML)

1.5.3 Employment Regulations in Georgia

1.5.4 Regulations about Real Estate in Georgia

1.7 The Business Environment in Georgia

1.8 Institutional Arrangements

1.3.1 Securities Industry

2. Society

2.1 Poverty issues

3. Economics

3.1 Main economic indicators

3.2 Agriculture

3.3 Trade

3.4 Construction

4. Business

4.1 Company Registration and Licensing System

4.1.1 Company Registration System

4.1.2 Company Licensing System

4.2 Local Enterprises

4.1.3 Joint Smpanies traded at Georgian Stock Exchange

4.1.4 Joint Smpanies not traded at Georgian Stock Exchange

4.3 Human-Resource Development in the Private Sector

5. Other Donors’ Activities

5.1 The World Bank and IMF

5.1.1 List of the Active World Bank Projects in Georgia

S – Satisfactory

U - Unsatisfactory

5.1.2 List of the Closed World Bank Projects in Georgia

5.1.3 Description of the Closed World Bank Projects in Georgia

5.1.4 The World Bank and IMF Cooperation in Georgia

5.1.5 The World Bank Country Assistance Strategy for Georgia

5.1.6 The World Bank Partners in Georgia

5.2 USAID

5.3 EBRD

5.4 EU

5.5 GTZ

5.6 CIDA

5.7 DFID

5.8 The Government of the Netherlands

5.9 IFAD

5.10 UNDP

5.11 UNICEF

Currency

(Exchange rate as of 01 Feb. 2004)

Currency Unit = Georgian Lari (GEL)

1 USD = 2.11 GEL 1.0 GEL = 0.47 USD

Abbreviations and Acronyms

CAS	Country Assistance Strategy of the World Bank
CFAA	Country Financial Accountability Assessment
CIS	Commonwealth of Independent States
CPIA	Country Policy and Institutional Assessment
DFID	Department for International Development, U.K.
EBRD	European Bank for Reconstruction & Development
EDPRP	Economic Dev’t & Poverty Reduction Program
EU	European Union
FAO	Food and Agriculture Organization
FDI	Foreign Direct Investment
FIAS	Foreign Investment Advisory Service
FSAP	Financial Sector Assessment Program
FSU	Former Soviet Union
FY	Fiscal Year
GDP	Gross Domestic Product
GEL	Georgian Lari
GNP	Gross National Product
GoG	Government of Georgia
GSE	Georgian Stock Exchange
GTZ	German Technical Cooperation
IDA	International Development Association
IDF	Institutional Development Fund
IDP	Internally Displaced Persons
IFC	International Finance Corporation
IMF	International Monetary Fund
IOSCO	The International Organization of Securities Commissions
JSC	Joint Smpany
KfW	German Financial Cooperation

LLC	Limited Liability Company
MDGs	Millennium Development Goals
MoF	Ministry of Finance
NBG	National Bank of Georgia
NGO	Non-Governmental Organization
NBG	National Bank of Georgia
NGO	Non-Governmental Organization
OECD	Organization For Economic Coop’n & Development
PER	Public Expenditure Review
PPP	Purchasing Power Parity
PRGF	Poverty Reduction and Growth Facility
PRSP	Poverty Reduction Strategy Paper
SAC	Structural Adjustment Credit
SATAC	Structural Adjustment Technical Assistance Credit
SEC	Security and Exchange Commission
SIDA	Swedish International Development Agency
SIF	Social Investment Fund
SME	Small and Medium Enterprises
SRS	Structural Reform Support Project
TACIS	Technical Assistance to the CIS (EU)
UNDP	United Nations Development Program
UNHCR	United Nations High Commissioner for Refugees
USAID	United States Agency for International Development
VAT	Value Added Tax
WTO	World Trade Organization

2. Government Policies

1. Government promotion policies of small and medium size enterprises

[To be described:] "Small and Medium Enterprise State Support Program for 2002 - 2004 in Georgia"

[To be described:] Law of Georgia "On Promotion of Small and Medium Enterprises"

2. National Investment Agency of Georgia

[To be described:] Law of Georgia "On National Investment Agency of Georgia"

[To be described:] Activities of the National Investment Agency of Georgia

3. Georgian Investment Center

[To be described:] Activities of the Georgian Investment Centre

1. Government’s Export Promotion Policy

Foreign Trade Regimes. Reforms carried out in recent years in Georgia, including serious legal reforms, are working successfully to create a favourable foreign trade regime in the country. Since 1995 the following major reforms have taken place in Georgian legislation:

• The system of quotas has been eliminated.

• Products included in the nation's export embargo policy include only works of art and antiques and items of national historical importance.

• There is no customs duty for exports in Georgia.

• A fiscal policy aimed at stimulating exports has been introduced whereby all export goods are free of VAT and excise duty;

Export of goods requiring an export license have been reduced to the following classes:

Collections and collectors' pieces of zoological, botanical, mineral, anatomical, historical, archaeological, paleonthological, ethnographic or numismatic interest (HS - 9705);

Wood and timber (4401, 4403, 4404, 4406, 4407);

Seeds of Caucasus Pine (120999100);

Ferrous and non-ferrous metal scrap (7204, 7404, 7602).

The system of compulsory registration of foreign trade contracts was eliminated in November 1997.

The establishment of favourable trade regimes with partner countries through bilateral and multilateral agreements has commenced. During the period 1992 - 1998, Georgia signed trade agreements with 22 countries. Agreements on free trade have been signed with eight CIS countries and Georgia already has working free trade agreements with Russia, Ukraine, Azerbaijan, Armenia, Kazakhstan and Turkmenistan. Currently a multilateral agreement on CIS free trade zone is being enforced. According to these agreements signatories to the agreement need not use customs duties and taxes for exports or imports of the goods originated in the territory of one party and destined to the territory of the other party.

Furthermore, Georgia has become a part of several international conventions.

On October 6, 1999 Georgia became a member of the World Trade Organization (WTO) which granted Georgia the status of the Most Favoured Nation with 135 WTO member countries. Through the mechanisms of this organisation, Georgia will be protected from discrimination, unfair competition, falsification and unjustified limitations.

In 1996 Georgia signed an agreement on partnership and cooperation with the European Union which deals with economic relations in almost every sector. In fact the agreement covers all sectors of the economy.

In 1999 Georgia became a member of the Council of Europe with full rights, which will further facilitate trade-economic relations between Georgia and member countries of the European Union.

Many countries have granted to Georgia reductions in import customs taxes to their countries, under the General System of Preferences. These include the countries of the European Union, Switzerland, the Czech Republic, Slovakia, Canada and Japan. This is one of the most important influences on the successful growth of exports for Georgia. The effective use of facilities such as GSP will substantially promote Georgian export development.

Law of Georgia "On Technical Barriers to Trade". The law "On Technical Barriers to Trade" lays down the basis for eliminating the technical barriers to trade during the process of the divparation, adoption and application of the technical regulations, standards and the procedures for the assessment of conformity.

The national technical regulations and standards should not create unnecessary obstacles to trade, which will put national products in favourable conditions. Therefore, the development of the national technical regulations and standards should be carried out on the basis of a direct use of the international standards.

Georgian legislation did not envisage the concept of technical regulations. The concept of technical regulations was defined by Law of Georgia "On Standardization" adopted in 1999. The technical regulations is a legal act, which defines the technical specifications for products or service, which is done directly or by means of referring to Georgian standards and requiring that complying with these standards is compulsory.

The principles of the state standards that are effective in Georgia envisage the application of the national standards on a compulsory basis from the moments of its effectiveness. However, based on the principles that define the standards as voluntary, the international practice envisages two-stage approach to making a standard as mandatory requirement: the standard that was adopted by national body is optional and it may be used by any party, however it will become mandatory, if it is defined by:

The legislation;

Such stipulation is indicated in the technical regulations;

A producer or supplier of services assumed such responsibility by the assessment of conformity.

The first chapter of the divsent draft law lays down the legal basis for eliminating the technical barriers to trade during the process of the divparation, adoption and application of the technical regulations, standards and the procedures for the assessment of conformity.

It defines the terms, including "Technical barriers to trade", which in fact is the discrepancy in requirements from those used at a national level or in international practice with respect to the technical regulations, standards and the procedures for the assessment of conformity.

It defines the different categories of technical regulations, which include:

Legislative acts, the decrees of the President of Georgia, which consist of the product requirements;

The national standards, the application of which is mandatory;

The agency specific normative acts issued by government bodies, the competency of which, according to the legislation of Georgia, includes laying down the mandatory product requirements.

The second chapter defines the requirements to the content of technical regulations, divparation of technical regulations and procedures for the assessment of conformity, coordination of the activities related to the development of technical regulations, and recognizing the technical regulations of foreign countries as an equivalent to the national technical regulations.

Chapter three defines the procedure of applying technical regulations and standards, which includes making references to standards in technical regulations, fulfillment of standards as a mandatory requirement, fulfillment of standards as a voluntary requirement, and the national arrangements for applying the technical regulations and standards with respect to the national and imported products.

Chapter four defines the principles of providing information relating to technical barriers to trade. The main emphasis is placed on the Central Information Center of Standards, the main function of which is the relationship with the World Trade Organization. The Central Information Center of Standards provides information about the technical regulations, standards and the procedures for the assessment of conformity that are already developed or are in the process of development. It should carry out the coordination of activities of the centers set up in this field by other government bodies.

Chapter five defines the authority and responsibility of the National Standardizing Body and other government bodies.

Chapter six lays down the principles of the state control and supervision on complying with the requirements of technical regulations, as well as the responsibility for violating the requirements of the law.

Chapter seven states that the process of developing technical regulations has to be financed by the state on a mandatory basis.

Chapter eight contains the provisional clauses, which states that the government bodies should adopt and publish those technical regulations, which envisage complying on a mandatory basis with the standards that ensure the quality of products, processes and service, security, protection of human life, protection of the health, property and environment. With this respect it will be significant to employ, whenever developing the technical regulations, the directives issued by the countries that are members of the European Union.

Chapter nine defines the amendments that have to be made into Georgian legislation after this law becomes effective.

The Law of Georgia "On Technical Barriers to Trade" should initiate the practical efforts towards the divparation, adoption and application of the technical regulations, which will be step forward towards setting up voluntary standardization system that is one of the attributes of modern market relationships.

2. Georgian Export Promotion Agency (GEPA)

The Georgian Export Promotion Agency was set up by the Georgian Government and the European Union's Technical Assistance Programme TACIS with the principal aim of assisting Georgian companies to increase exports and thus to stimulate an improvement in the country's trade balance. The GEPA was established in April 1999. Since then, the German Government's Technical Assistance Programme GTZ (Deutsche Gesellschaft fur Technische Zusammenarbeit GmbH) has also invested in the agency both in its personnel and in its activities.

GEPA supports Georgian business interests in the global marketplace, assists in forging business alliances, facilitates establishment of international business relationships. GEPA provides comdivhensive information on business opportunities both for Georgian and overseas companies.

Export Information Center. GEPA Export Information Centre (EIC) promotes Georgian companies and their products on the global marketplace. It offers the services of two Georgian business information officers and a librarian who work in cooperation with specialists from EU countries. The EIC holds a wide range trade information resources including reference materials, manuals and textbooks on exporting, sector related journals from overseas, CD-ROM and online databases, information on local and foreign markets, trade regulations and has wide access to trade leads databases.

The EIC services include but are not limited to:

Providing market information to Georgian exporters

Introducing Georgia and Georgian products to companies around the world

Assisting foreign companies in sourcing products in Georgia

Offering online trade leads both for Georgian exporters and overseas importers

Assisting Georgian companies in developing an export marketing strategy

8. Institutional Arrangements

1. Securities Industry

The institutional structure of the securities industry includes the following market participants: reporting companies (i.e. the private companies whose shares are traded at Georgian Stock Exchange), securities brokerage companies, share registrars, clearing banks, Georgian Central Securities Depository (GCSD) and Georgian Stock Exchange (GSE). The overall supervision is carried out by the National Securities Commission of Georgia (NSCG). The rights of the securities market participants are protected by the Georgian Securities Industry Association (GSIA). The structure of Georgian Stock Market is divsented in Fig. 1.3.1.1:

Fig. 1.3.1.1. The Structure of Georgian Stock Market

2. Society

1. Poverty issues

Poverty Trends. The relatively slow rebound from the economic collapse after independence has led to a severe decline in welfare. Georgia’s annual income per capita is about 56 percent below the div-independence level, unemployment rates are high (16 percent in 2001) and many Georgians are underemployed. In the circumstances, poverty, vulnerability and inequality have all increased over the period. Georgia clearly needs to achieve and sustain higher economic growth rates to improve living conditions. Given the small size of the domestic market, this can be achieved only through a stronger expansion in export activities, especially of those in which Georgia has a comparative advantage and the potential to generate new job opportunities, such as agro-processing.

Poverty Profile. Strengthened economic performance resulted in an reduction of poverty in the mid 1990s. However, Georgia’s growth rate slowed considerably between 1998 and 2000, and consequently inequality and poverty increased as measured by any of several methodologies increased (see Table 2.1.1). Growth was affected by a number of shocks, including the 1998 Russian crisis, severe droughts in 1998 and 2000, and the increase in the price of energy imports in 2000. These problems were compounded by internal and external political instability. Growth recovered in 2001-02, leading to a slight reduction in overall poverty.

Table 2.1.1. Change in poverty in Georgia between 1997 and 2002

	Poverty Headcount (% of population)
Poverty definitions (lines)	1997	1998	1999	2000	2001	2002a/
Official minimum	46.6	50.5	53.0	52.5	52.0	51.3b/
Urban	46.7	53.3	60.4	56.6	54.3	53.7
Rural	46.4	47.1	44.6	48.0	49.6	48.8
US$4.30 per capita/day at PPPc/	13.6	19.8	23.2	23.0	22.8	21.7
Recommended poverty line (baseline)	13.6	19.8	23.2	23.0	22.8	21.7
Urban	13.8	22.2	27.4	24.6	24.1	22.6
Rural	13.4	16.8	18.4	21.4	21.3	20.7
US$2.15 per capita/day at PPP c/	9.7	11.8	14.5	15.4	14.8	13.5
US$1.075 per capita/day at PPP c/	1.7	3.0	3.2	3.3	3.4	2.7
Source: SDS SGHH primary data and World Bank, see Georgia Poverty Update, Report No. 22350-GE. Note: Theofficial poverty line uses a normative basket and CPI price data to cost it and is around 100 GEL (about US$50 at current exchange rate) per equivalent adult per month. The recommended poverty line was developed jointly by the World Bank and SDS in 1998; it uses actual consumption patterns of the population and survey prices (its non-food component is fixed in real terms to 1996 and deflated using the CPI for non-food items); it is about 55 GEL (US$25) per month per equivalent adult. The equivalence scale used in the official and recommended methodology is the scale developed by SDS and used in Georgia to determine the social assistance payments. International poverty lines exdivssed in dollar terms (US$ in PPP) are per capita and use the latest (1996) revision of the World Bank, updated with the Georgia CPI. All figures are averages of quarterly data. a/ Preliminary estimate; corrections for changes in the Survey not made. b/ Bank estimates using official methodology. c/ Using 0.33 as PPP conversion factor.

Differential Impact of Rising Poverty. IDA, in close collaboration with the State Department of Statistics, divpared a Poverty Update covering the 1998-2000 period. The study found that the increase in poverty affected various socioeconomic groups differently, with growing differentiation among the poor, and signs that the poorest became even poorer. Poverty depth and severity increased in the observed period by 84 and 94 percent respectively. Driven by the volatile economic environment and absence of an adequate safety net, vulnerability to poverty for the average household rose significantly, with female-headed households being the most vulnerable. Although the extent of absolute poverty at any point in time remained around 20-24 percent, 40 percent of the population experienced poverty at least once during the year 1999-2000, and 60 percent of the population faced a real risk of experiencing poverty in the medium term. The high degree of vulnerability of households led them to apply strategies which may tend to increase chronic (long-term) poverty (e.g., shifting to subsistence farming, or pulling children out of school).

Urban and Rural Poverty. The trend in overall poverty reflects somewhat different developments in urban and rural poverty. In 1997, rural and urban poverty incidence were almost the same. In 1999, the urban poverty headcount doubled in comparison to 1997, whilst the rural headcount increased by 37.3 percent. Then in 2000, responding to the non-agricultural sector recovery after the Russian crisis, urban poverty dropped by 10.2 percent, stabilized in 2001 and declined further by 6.2 percent in 2002. Because of the drought, rural poverty increased in 2000, remained unchanged in 2001 and only in 2002 decreased by 2.9 percent. As a result, the difference between the urban and rural headcount has narrowed -- while in 1999, the urban poverty headcount was almost 50 percent over that in the rural population, in 2002 it was 9 percent higher.

Determinants of Poverty. The Georgia Poverty Update identified that the strongest determinants of poverty risk in Georgia in the period between 1998 and 2000 were economic: employment status, sector of employment, ownership of productive assets and education. It found an elevated poverty risk among urban households, households with an unemployed head and female headed households, as well as children aged 7-15, the disabled, those with low levels of education, single pensioners and orphans were experiencing. The working poor are becoming the majority, often employed in the informal sector with insecure, temporary and low productivity jobs.

Non-Income Indicators of Poverty. Non-income indicators of poverty in Georgia, inherited from Soviet times, still compare favorably with those of countries with similar per capita income. The UNDP 2003 Human Development Report ranks Georgia 88^th among 175 nations. However, Georgia faces a major challenge in sustaining these relatively favorable indicators. Studies conducted by various international organizations (UNICEF, USAID, EC, etc.), indicate that there has been no improvement in the indicators during the 1990s. In fact, maternal mortality rate, immunization rates, access to health and education, access to safe water and sanitation and other living conditions indicators have deteriorated and the quality of social services has worsened substantially in comparison to the div-transition situation.

Internally Displaced People. IDPs vulnerability to poverty is magnified by their lack of access to land. Thus IDPs living in collective centers are 3Ѕ times less likely to have access to land than the local population, and those living in private accommodations half as likely. In addition, IDP’s rate of unemployment is very high -- 40% among IDPs living in collective centers. Government benefits do seem, however, to be reaching the IDPs, with 80% to 90% receiving a government benefit.

Millennium Development Goals. The estimates of Georgia’s prospects for achieving the Millennium Development Goals (MDGs) show a mixed picture based on Georgia’s current performance, as indicated in Table 2.1.2.

Table 2.1.2: Millennium Development Goals

Millennium Development Goal	Present Situation	Prospects for Achievement by 2015
Goal 1: Eradicate extreme poverty and hunger. Target 1: Halve, between 1990 and 2015, the propor­tion of people whose income is less than $2.15 a day. NOTE: While the MDG indicator and target include $1 a day, a higher poverty line such as $2.15 is considered more appropriate in ECA given the extra expenditure on heat, winter clothing and food. (“The Millennium Development Goals in ECA”, World Bank, forthcoming) Target 2: Halve between 1990 and 2015, the proportion of people who suffer from hunger.	In 2002, the poverty incidence at the international poverty line of US$2.15 per capita/per month at PPP was 13.5 percent. While the exact percentage of people suffering from hunger in Georgia is not known, there is no evidence that would indicate that hunger is an issue in Georgia.	Likely. The Economic Development and Poverty Reduction Program of Georgia envisages economic performance that would allow Georgia to meet the MDG.
Goal 2: Achieve universal primary education. Target 3: Ensure that by 2015, children everywhere, boys and girls alike, will be able to complete a full course of primary schooling.	Enrollment rates in basic education (grades 1-9) are close to 100 percent.	Likely.
Goal 3: Promote gender equality and empower women. Target 4: Eliminate gender disparity in primary and secondary education, divferably by 2005 and in all levels of education no later than 2015.	Surveys show no significant gender differences in access to primary and secondary education.	Likely.
Goal 4: Reduce child mortality. Target 5: Reduce by two-thirds, between 1990 and 2015, the under-five mortality rate.	According to the Human Development Report 2003, the under-five morality rate in Georgia in 2001 was 29 per 1,000 live births. This was better that the average for ECA (36/1,000); and much better than the average for medium human development group of countries – 61 per 1,000 live births.	Due to current efforts and actions planned under the EDPRP to keep immunization rates at high level, improve breast-feeding rates, provide appropriate case management and home and in community for acute respiratory infection, pneumonia and diarrhea and improve access to appropriate health care, reliable water and improved sanitation, it is estimated that Georgia will make a significant progress in reducing the U5MR. However, the MDG target (U5MR of 9.7 per 1,000 live births, which is close to the current U5MR level in developed countries) is estimated as unlikely to be met, given Georgia’s very low public spending on health.
Goal 5: Improve maternal health. Target 6: Reduce by three-quarters, between 1990 and 2015, the maternal mortality ratio.	Available data suggests the MMR doubled over the last 10 years to almost 59 per 100,000 live births in 2001. Only 59 percent of women complete the mandatory 4 antenatal visits but 96% of births are attended by skilled health personnel	Planned actions aimed at improving antenatal care are expected to result in decreased maternal mortality. However, given high maternal mortality rate and its recent increase, the MDG target (15 per 100,000 live births) is estimated as unlikely to be met.

Millennium Development Goal	Present Situation	Prospects for Achievement by 2015
Goal 6: Combat HIV/AIDS, malaria and other diseases. Target 7: Have halted by 2015 and begun to reverse the sdivad of HIV/AIDS. Target 8: Have halted by 2015, and begun to reverse, the incidence of malaria and other major diseases.	HIV/AID is sdivading fast. The number of new HIV cases in 1997 increased nearly threefold compared with the divvious year and accounted 21 cases; in 2001 93 cases were registered. From 1998 through 2001 more then a half of newly registered HIV cases have been attributed to IDUs. The percentage of new cases attributed to heterosexual contacts also increases, suggesting that the epidemic is leaking into the general population. HIV/AIDS is divdominantly divsent in young people (21-35 years old). In 2001 over 87 percent of all new AIDS cases have been detected in 26-35 age group. The divvalence of TB has increased from 28.2 in 1991 to 85.8 in 2001, reflecting the sdivad of disease, but also better recording of incidence.	While Georgia has improved HIV recording and reporting, there is an urgent need to introduce divvention & education on a broad basis, as well as surveillance among high risk groups. The MDG target for HIV/AIDS is unlikely to be met Political commitment and additional resources are required to keep the sdivad of TB under control. An upcoming PHC Development program is expected to further improve the effectiveness of control measures. If measures are appropriately implemented, it is possible to arrest and reverse the trend.
Goal 7: Ensure environmental sustainability. Target 9: Integrate the principles of sustainable development into country policies and programs and reverse the loss of environmental resources. Target 10: Halve by 2015 the proportion of people without sustainable access to safe drinking water.	The National Environmental Action Plan and Biodiversity Strategy are a framework for environment and sustainable use of natural resources. The EDPRP highlights steps to mainstream environment into development, but implementation is limited. An environmental permitting system and other legislation are in place, but institutional weaknesses (unclear responsibilities, weak monitoring and enforcement, sometimes excessive and non-transparent regulations) limit enforcement. With regard the specific indicators, despite its unique ecosystems in Georgia 2.8% of the land area is protected to maintain biological diversity compared with the world average of 6.5%. Forest cover is 40% but the quality of management is inadequate. Energy intensity and carbon emissions indicators are not high, but there are severe problems with delivery of energy services to the population. In 1999, about 86% of urban population and 43% of rural population had access to piped water supply. Reliability and quality of services are serious problems. Water systems are largely in a state of severe disrepair. Low capacity of people to pay for the services together with limited government budgets redivsent real constraints to mobilize resources into the sector. Involvement of IFIs is critical to avoid total collapse of sector.	Political will and strong commitment as well as human and financial resources are needed to ensure environmental sustainability. If the governance environment and institutional capacity improve, and if resources for environment and natural resource management could be increased, it would be possible to meet target 9. About US$ 8-10 million annually will be needed for the rehabilitation of old deteriorated existing systems and expansion of access to piped water supply to an additional 0.5 million people if the target 10 were to be met. Given current low level of investments in the sector, it is unlikely that Georgia will meet this target.

2. Economics

1. Main economic indicators

Sectoral Growth. Agriculture, industry, trade and transport dominate the structure of the Georgian economy. Agricul­ture is the largest sector accounting for just under 20 percent of GDP and 50 per­cent of employ­ment, although its share in GDP has decreased steadily (from over 30 per­cent of GDP in 1996). Industry contributes about 14 percent of GDP and 6 percent of employment, with its share changing little. The share of trans­port and tele­communi­cations has nearly tripled from 4.6 percent in 1996 to 12.1 percent by 2002. Transport has been the fastest growing sector, growing at over 20 percent annually because of the rapid expansion of oil transit from the Caspian Sea. Although transport turnover has tripled, it is still at one third of the div-independence level. Other fast growing sectors include construction and finan­cial services. Trade has grown slightly faster than overall GDP. Sectoral growth index is divsented in Fig. 3.1.1.

According to information from 2001 88.6% of the economically active population was employed, thus the unemployment rate was 11.4%.

The distribution of the employed work force by economic sectors is as follows:

Sector	%
Agriculture & forestry, fishery	53,4
Mining Industry	0,3
Processing Industry	6,5
Energy, gas or water production and supply	1,2
Construction	1,6
Trade & household goods technical service	8,6
Hotels & Restaurants	0,9
Transport, Warehouse economy and communications	4,0
Financial mediation	0,7
Operations with real estate, lease (rent) and business activity, research and projecting works	2,1
State management and self-defense, compulsory social insurance	5,8
Education	7,4
Health care and social service	4,3
Other communal, social and personal service, culture, entertainment, rest	2,4
Hired (engaged) service in private domestic economy	0,4
Ex-territorial (International) organization	0,1
Unidentified	0,1
Total	100

According to 2001 data, the minimum subsistence level for a medium sized family (4 persons) at average prices was 205.2 GEL.

2. Agriculture

Introduction. Only 44 percent of Georgia’s land is used for agriculture. Twenty-six percent is arable land, 9 percent is used for perennials, 65 percent is pastureland, and 0.4 percent is fellow land. Sixty percent of the arable land needs artificial irrigation. The soil is mainly moderately fertile and easy to cultivate. Table 1 below shows the distribution of the agricultural land by agricultural product.

Table 1 Distribution of Agricultural Land by Product

Product	Land occupied (thousand ha)
Cereals	379,0
Citrus	10,9
Fruit	60,0
Potato	34,0
Sunflower	40,0
Tea	40,0
Vegetables	40,0
Vineyards	61,3

In the 20th century, Georgia became a country of agro-industry, with well-developed agriculture and food industry and with a good level of production. More than half of its GDP came under the agro-industrial sector of the country; 47 - 48% of the main funds were accumulated within the sector and it employed 41 - 42% of the total population of Georgia.

Georgia used to be an important exporter of food and one of the main suppliers of vegetables, tea, citrus fruits, wine, mineral waters, brandy, canned and fresh vegetables and fruits to the markets of the former Soviet Union. In the second half of the 1980s, the Georgian share of the food market of the former Soviet Republics was 10 percent. The total amount of exported food products was 1.7 times more than imported ones. The country is now undertaking actions to re-establish this exporting.

Since independence in 1991 the country experienced many years of civil war and ethnic conflicts, with 260,000 people internally displaced.

However, Georgia's economy is still strongly linked to the Russian Federation and the Commonwealth of Independent States (CIS). Approximately 50 percent of its trade is with the CIS.

Agriculture is a main source of income and employment for the majority of the population, accounting for more then 30 percent of GDP. Output in the sector is only about 40 percent of its 1990 level, but employment in the sector has doubled and it now accounts for over 50 percent of the total employment.

Land privatisation has focused on the small-scale (household/subsistence) sector with little real progress in restructuring the former large state farms. Land reform has resulted in the allotment of small parcels of land up to 1.25 hectares to each rural family and the lease, through district authorities, of state owned land to persons or legal entities, with the aim of creating a subsistence sector for small farmers and a market sector controlled by large leaseholders.

Private producers account for the significant share of fruit, vegetable and livesn, when their share in wheat production is about two thirds of the total wheat production in the country. The bulk of the domestic wheat production is consumed on farms for food, seed or feed. Indications are that only 20 percent of domestic production of wheat is marketed.

Low yields, also as a result of poor infrastructure, inadequate access to credit for inputs and suitable machinery, and high costs associated with transport and marketing have had a negative impact on food production and the earning capacity of a significant proportion of the population and thus on household food security.

The state of irrigation and drainage systems is also a major constraint to increasing crop yields and the competitiveness of domestic produce with imports. More than 60 percent of grain, 60 percent of dairy products and 33 percent of meat consumed in the country are imported.

Agricultural production in Georgia dropped sharply in 2000 due to a serious drought. WFP/FAO Crop and Food Supply Assessment mission carried out in mid-August 2000 estimates that Georgia will face a severe food crisis due to the drought. This situation is being exacerbated by on-going serious economic problems.

After droughts, agricultural production showed a slight increase of 5.6 percent in 2001, however the share of agricultural output in GDP dropped from 21 percent in 2000 to 19.2 percent in 2001.

During the divsent year, USAID has launched a five year program, called Support Value Added Enterprise (SAVE) that will promote economic growth through expanded production and sales of added-value agricultural products on international markets. Through this program the US government will support agriculture development through market expansion, standards on organic food production, distribution, improved credit and whole-chain food distribution networks.

Key Agriculture Indicators.

Agricultural output per hectare of agricultural land and per capita (US $)

Year	Per 1 ha of agricultural land	Per capita
1990	1195	725
1995	481	272
1996	539	302
1997	583	328
1998	531	301
1999	435	285

Source: Georgian Agriculture 1999

Agriculture in GDP

1990	1991	1992	1993	1994	1995	1996	1997	1998	1999	2000	2001
29,7					41,7	31,0	28,2	24,8	25,0	21,5	19,2
31,9	28,8	55,5	70,4	34,2	39,5	32,6

Source: State Department for Statistics of Georgia (1^st Row), GEPLAC , 1997(2^nd Row).

Trends in Share of Total Agricultural Production, (%)

	1985	1990	1995	1996	1997	1998	1999	2000
Crop production	68.1	68.7	58.4	49.8	59.3	56.4	56.8	45,8
Livesn	31.9	31.3	41.6	50.2	40.7	43.6	43.2	54,2

Source: SDS, Georgian Agriculture 2000, p.9.

Agricultural output (Current prices, mln. lari)

Agricultural Production	1980	1985	1990	1995	1996	1997	1998	1999	2000	2001
Total production	3219	4167	5199	1851	2062	2299	2266	2650	2024	1860
Of which: Plant-growing	2240	2838	3571	1081	1027	1363	1278	1506	927
Livestock	979	1329	1627	770	835	936	988	1144	1097
Of which by households	1584	2087	2495	1407	1650	1863	2116	2490	1903
Of which: Plant-growing	1102	1421	1714	816	805	1150	1163	1386	870
Livestock	481	666	781	591	845	713	953	1105	1033

Source: Georgian Agriculture 2000, p. 6

Distribution of Georgian Agricultural Territory by Inclination

0 – 2 gr.		2 - 10 gr.		10 – 20 gr.		20 gr. over		Total
Sq. km	%	Sq. km	%	Sq. km	%	Sq. km	%	Sq. km	%
13545,9	42,3	9237,1	28,8	5146,7	16,0	4166,7	12,9	32096,4	100

Distribution of Agricultural Land

	1986	1991	1996	1997	1998	1999	2000	2001
Agricultural lands, total	3267,1	3275,4	3048,0	3034,5	3037,0	3063,5*	3018,4*	3019,7*
Of which: Arable	783,2	790,4	759,3	781,1	785,0	791,9	790,4	792,9
Of which sown areas	730,1**	701,9**	452,8	597,5	616,1	594,7	610,8
Perennial plants	357,0	336,9	307,0	284,6	277,5	269,8	270,1	269,3
Meadows	176,3	158,4	147,9	148,6	141,2	142,7	142,5	142,3
Pastures	1947,7	1983,7	1822,1	1820,2	1833,3	1839,7	1796,0	1795,8
Fallow	2,9	6,0	11,7	-	-	-	-	-

*Unlike to other years, this data includes the areas of dwelling and economic buildings and yards - 19,4 ths hectares** - accordingly 1985-1990

Source: Georgian Agriculture-2000, Tbilisi 2001, p.18

Areas kept by some plant-growing cultures (1000 hectares)

Culture	1988	1993	1997	1998	1999	2000	2001
Cereals and beans	272,0	256,0	437,2	415,8	378,8	386,4
Industrial crops	40,6	21,1	36,5	59,0	75,8	69,8
Potatoes, vegetables and melons	77,0	48,8	62,4	84,7	85,7	93,1
Fodder crops	344,8	43,2	57,7	56,6	54,4	61,5
Fruit-berries	128,2	83,5	85,3	65,3
Vineyard	115,6	78,9	81,2	70,2		60,0?	61,0?
Citruses	26,7	16,7	11,4	15,9
Tea plantations	65,1	33,7	34,7	39,9

Source: State Department for Statistics; ? Rezonansi, Interview, 04,04.2002

Agricultural production

Name	Produced, thousand tons
	1998	1999	2000	2001
Wheat	144,7	226,1	89,4	306,5
Barley	20,2	50,8	30,0
Maize	420,2	490,5	295,9	300,0
Pulses	9,2	9,3	2,6	5,0
Sunflower	22,8	40,5	2,6	30,2
Tobacco	3,4	2,1	1,5	1,6
Potatoes	349,8	443,3	302,0	415,0
Vegetables	380,0	417,0	354,2	350,0
Melons	32,2	108,2	80,0	70,0
Annual and perennial grass	108,3	127,3	50,0
Fruits	279,0	296,0	250,0	200,0
Grapes	238,5	220,0	210,0	150,0
Citrus’s	85,1	56,0	40,0	60,0
Tea leaves	47,2	60,0	24,0	23,0

Source: SDS;

Agricultural production

Name	Produced, thousand tons
	1980	1985	1988	1990
Wheat	208,6	174,2	638,1	257,7
Barley	87,5	96,7

117,8
Maize	306,2	321,5		270,2
Beans (Pulses)	na	16,1	na	7,3
Soy-Bean	3,9	6,0	na	3,4
Sunflower	9,5	9,3	16,9	7,7
Sugar Beet	119,9	61,2	51,2	30,6
Tobacco	16,8	20,4	11,9	8,1
Potatoes	392,8	393,8	337,9	293,8
Vegetables	583,1	604,3	662,3	443,2
Melons		42,5		38,8
Annual and perennial grass	na	796,9	na	624,3
Fruits	539,3	724,2	653,0	591,2
Grapes	995,6	914,9	619,7	691,0
Citrus’s	147,7	134,6	436,9	283,1
Tea leaves	501,8	581,2	458,7	501,7

Source: SDS; Alexandre Didebulidze. Agriculture and Rural Development in Georgia. UNDP, Tbilisi, 1997, p.63.

Agricultural Production

Name	Produced, tons		1999-2001 as % of 1988-1990
	1988-1990	1999-2001
Grain (after cleaning)	621,9	640,2	102,9
Sunflower	10,8	24,4	225,9
Potatoes	321,4	386,8	120,3
Vegetables and Melons	528,3	459,8	87,0
Tobacco	9,9	1,9	19,2
Fruits and Berries (without Citruses)	616,3	248,7	40,4
Grapes	608,3	193,3	31,8
Citrus’s	271,4	52,0	19,2
Tea leaves	486,0	35,7	7,3
Meat	173,7	103,6	59,6
Milk	700,4	663,1	94,7
Eggs (mln. pieces)	840,1	382,3	45,5
Wool	6,5	1,8	27,7

Number of livesr January 01), x1000

	1988	1993	1995	1996	1997	1998	1999	2000	2001	2002
Cattle	1584	1002	944	974	1008	1027	1051	1122	1177	1250
Of which: Milk-cows	626	502	514	531	544	551	575	640	646	685
Horses	24	18	20	24	26	28	30	34	35
Pigs	1118	476	367	353	333	330	366	411	443	481
Sheep and goats	1921	1192	793	725	652	584	587	633	628	701
Poultry	23900	11200	12300	13847	14645	15541	8240	8473	7826
Bees (Families)	112	65	35	55	66	77	78	94	98

Source: SDS

Data series for livestock

Year	Cattle			Pigs			Sheep and goat			Poultry
	Total	Public	Private	Total	Public	Private	Total	Public	Private	Total	Public	Private
1	2	3	4	5	6	7	8	9	10	11	12	13
1941	1607,0	581,5	1025,5	615,6	53,3	562,3	2193,6	1085,7	1107,9
1942	1518,8	607,5	911,3	475,0	59,8	415,2	2051,5	1144,0	907,5
1943	1434,3	631,7	802,6	365,9	77,2	288,7	1891,7	1156,0	735,7
1944	1480,8	658,2	822,6	424,1	74,3	349,8	1997,5	1254,8	742,7
1945	1501,3	668,2	833,1	484,5	71,6	412,9	2170,2	1448,5	721,7
1950	1492,7	764,7	728,0	472,7	109,6	363,1	2509,2	1988,6	520,6	6651		5900
1955	1319,2	677,5	641,7	557,2	124,4	432,8	1625,8	1178,8	447,0	8173		7642
1960	1502,6	671,5	831,1	581,6	253,1	328,5	2125,0	1375,2	749,8	7471		6016
1965	1457,6	651,6	806,0	452,5	208,1	244,4	2183,0	1409,9	773,1	8664		6610
1970	1445,9	616,8	829,1	588,8	237,6	351,2	1826,8	1177,0	649,8	12046		8917
1975	1513,0	677,4	860,1	743,6	310,9	432,7	1982,4	1256,7	725,7	14161		8172
1980	1556,3	675,0	881,3	950,7	434,3	576,4	2041,2	1302,9	738,2	18376		9080
1981	1564,0	671,2	892,8	943,1	428,4	514,7	2043,8	1284,5	759,3	18781	9551	9230
1982	1588,9	668,2	920,7	980,9	393,5	527,4	2109,2	1285,1	824,1	19394	10372	9022
1983	1621,8	664,3	957,5	1011,1	464,4	546,7	1947,3	1125,1	822,2	19693	10739	8954
1984	1633,8	662,6	971,2	1082,1	492,0	590,1	1984,8	1136,9	847,9	20108	11341	8767
1985	1652,6	668,1	984,5	1133,4	509,3	624,1	1955,7	1103,5	852,2	22452	13803	8649
1986	1645,5	676,2	969,3	1173,4	537,3	636,1	1976,6	1099,3	880,3	24296	14639	9657
1987	1634,7	674,1	960,6	1150,4	528,4	622,0	1938,5	1082,5	856,0	24342	14789	9553
1988	1584,8	650,5	934,3	1117,8	517,9	599,9	1920,5	1059,9	860,6	23917	14538	9378
1989	1547,8	609,8	938,0	1099,2	491,9	607,3	1894,0	1012,9	881,1	25172	15612	9560
1990	1426,6	545,7	880,9	1027,8	444,9	582,9	1833,5	970,2	863,3	24002	14322	6980
1991	1298,3	468,9	829,4	880,2	357,0	523,2	1618,1	912,7	705,4	21760	10890	10870
1992	1207,9	390,5	817,4	732,5	263,7	468,8	1469,6	781,2	688,4	20167	8629	11538
1993	1002,6	198,7	803,9	476,2	90,3	385,9	1191,6	550,3	641,3	11211	1379	9832
1994	928,6	119,0	809,6	365,1	46,7	318,4	958,1	354,1	604,0	11858	1352	10505
1995	944,1	78,9	865,2	366,9	29,9	337,0	793,3	222,5	570,8	12290	462	11828
1996	973,6	56,7	916,9	352,6	24,3	328,4	724,8	148,4	576,1	13847	180	13667
1997	1008,0	41,9	966,1	332,5	9,1	323,4	652,0	98,1	553,9	14645	8	14637
1998	1027,2	24,8	1002,4	330,3	4,4	325,9	583,5	63,5	520,0	15542	115	15427
1999	1050,9	15,3	1035,6	365,9	3,0	362,9	586,7	44,5	542,2	8240	100	8140
2000	1122,1	11,0	1111,2	411,1	1,5	409,6	633,4	38,4	595,0	8473	84	8390
2001	1177,4	6,8	1170,6	443,4	0,8	442,6	627,6	27,4	599,8	7826	82	7744
2002	1250,1			480,5			701,2

Livesutput (Ths. tons)

	Production
	1988	1995	1999	2000	2001
Meat (in slaughter weight)	172,1	115,4	100,5	107,9	102,4
Milk	730,5	475,4	660,3	618,9	710,0
Eggs, mln. units	890,2	269,4	390,1	361,4	395,4
Wool, in net weight	6,3	3,1	1,7	1,9	1,9
Silk cocoon	1,9	0,05	0	0
Honey		0,7	1,5	1,4

Source: Georgian Social-economic indexes, 2000y. Interfax, 04.02.2002

Data series for livesutput

Year	Meat		Eggs		Milk
	Public	Private	Public	Private	Public	Private
1913	49,4	49,4	119	119	222	222
1928	62,0	62,0	-	-	-	-
1940	75,0	66,6	251,1	250,1	357,8	317,8
1945	37,4	24,5	104,2	98,4	266,4	221,4
1950	51,1	33,0	156,3	148,2	292,5	210,0
1955	83,7	54,8	236,9	221,8	414,2	256,6
1960	90,4	53,5	221,3	180,8	487,1	271,0
1965	92,8	65,6	305,2	225,1	470,7	286,1
1970	104,2	75,2	397,3	250,6	518,1	310,3
1975	206,8	86,4	536,8	228,8	574,9	306,7
1980	143,1	82,3	654,9	330,0	642,2	340,9
1985	166,4	84,3	822,7	224,3	684,4	380,2
1986	172,2	89,7	879,8	237,9	721,7	395,1
1987	174,6	89,5	887,2	238,7	724,2	395,2
1988	172,1	88,0	890,2	243,7	730,5	407,8
1989	178,8	68,0	860,8	260,7	711,4	411,4
1990	170,3	81,9	769,2	263,4	659,4	402,5
1991	137,2	92,0	638,1	292,6	562,3	379,2
1992	113,4	88,6	297,3	184,2	469,5	380,2
1993	100,4	90,0	242,8	205,3	433,1	387,5
1994	108,3	102,8	250,6	239,5	429,3	403,6
1995	115,4	112,0	269,4	261,4	475,4	455,8
1996	117,8	116,0	350,2	348,5	530,3	514,3
1997	120,7	119,1	370,4	370,4	600,2	589,1
1998	104,1	103,5	380,4	377,0	634,7	627,7
1999	101,0	100,1	390,1	386,4	660,3	655,5
2000	107,9	107,3	361,4	357,2	618,9	615,7
2001	102,4

395,4

710,0

Productivity of Agricultural Cultures

	1990	1995	1996	1997	1998	1999	2000	2001
Winter wheat	28,2	12,2	13,3	17,7	11,0	20,4	10,4	26,7
Maize	25,2	27,1	33,0	27,3	20,5	22,3	16,2	14,8
Tobacco	11,2	8,3	9,2	11,3	11,7	11,9	10,3
Sunflower	5,8	2,0	1,2	8,9	4,9	6,2	2,3	6,9
Potato	105,6	152,0	121,0	130,0	106,4	130,0	88,9	112,2
Vegetables	110,6	140,0	136,0	151,0	92,2	96,0	93,4	88,0
Melon	105,3	60,5	110,0	94,0	38,3	131,7	97,6
Perennial grass	27,6	16,4	14,7	27,6	26,3	23,9	11,4
Maize in silage	95,1	23,0	27,4	75,0	60,4	54,2	-
Fruit	58,0	41,8	40,3	40,4	49,2	52,0
Citruses	169,8	90,3	69,4	50,5	57,7	37,0
Grape	67,6	47,5	36,4	40,5	36,3	35,0
Tea leaves	90,0	12,6	10,4	10,5	19,5	25,0

Machine Park (condition by the end of year) x1000

Technical means	1988	1994	1998	2000	Demand
Tractor	27,2	18,2	10,7		18,0
Combine	1,8	1,2	0,9		1,2
Loading machine	26,3	12,6	8,8
Pumping mounting	1,4	0,4	0,3		0,5
Sprayer	0,9	0,4	0,2		0,1

Source: SSD

Technical Dynamic in Agrarian Sector of Georgia

Year	Tractor	Grain combine	Plough	Cultivator	Seeding machine	Tractor-drawn implement	Mineral fertilization thrower	Sprinkler	Loading machine
1988	26.806	1.576	10.343	5.370	4.237	10.490	2.534	4.851	20.182
1990	26.000	1.343	8.339	4.370	3.852	8.589	2.373	4.027	17.800
1992	23.009	1.236	6.720	3.184	2.987	6.846	1.832	2.928	15.255
1993	20.800	1.140	5.491	2.626	2.737	5.251	1.635	2.262	13.823
1994	18.200	1.080	5.365	2.567	2.692	5.298	1.319	2.206	13.240
1995	15.160	949	5.216	2.307	2.018	5.265	1.084	1.905	12.860
1996	15.240	996	5.232	2.335	2.064	5.483	1.192	1.628	12.371
1997	17.583	1.018	5.367	2.340	1.910	5.617	1.230	1.498	12.110
1998	17.240	969	4.190	1.750	1.870	5.083	949	1.450	10.353
1999	18.147	1.064	4.434	2.346	1.912	5.610	1.030	1.428	10.240
2000	17.199	1.002	4.528	2.216	1.575	5.600	709	1.102	9.398
2001

Source: The Ministry of Agriculture and Food

Food consumption in Georgia (1999)

	Kg per capita	Scientific standard, Kg	Consumption as % Of standard
Bread, flour, grouts, legumes	141,1	125	113
Meat & meat products	19,8	78	25
Milk and milk products	209	405	52
Eggs, pieces	124,6	232	54
Fish and canned fish	1,3	10,2	13
Sugar	24,8	40	62
Margarine & other fats	9,0	9	100
Potatoes	47,6	110	43
Vegetables, melons	66,8	130	51
Fruit and grape	43,5	90	48

Source: State Department for Statistics of Georgia

Consumption of energy, fat and albumen by population in Georgia

Index	Measurement	Dwelling minimum	In rational nourishment conditions	Actual 2000 year
Energy	KW in day and night	2.250	3.200	2630
Albumen	Gr. in day and night	74	100
Fat	Gr. in day and night	57	130

Source: Gordeev A, MSXJ, 2-2000, food consumption condition-t.2

Privatisation in Agriculture of Georgia (1998)

	Total Area thsd. ha	Including
		Private		Rent		State property, %
		thsd. ha	%	thsd. ha	%
Arable land	785,0	431,9	55,0	255,9	32,6	12,4
Perennial plants	277,5	185,7	66,9	31,0	11,2	21,9
Meadows	140,6	47,6	33,9	28,6	20,3	45,8
Pastures	1788,0	124,5	7,0	441,4	24,7	68,4
T o t a l	2991,1	789,7	26,4	756,9	25,3	48,3

Privatization in Agriculture of Georgia (2001)

	Total Area thsd. ha	Including
		Private		Rent		State property, %
		thsd. ha	%	thsd. ha	%
Arable land	792,9	434,8	54,8	257,5	32,5	12,7
Perennial plants	269,3	181,8	67,5	31,6	11,7	20,8
Meadows	142,3	41,3	29,0	57,1	40,1	30,9
Pastures	1795,8	84,3	4,7	593,4	33,0	62,2
T o t a l	3019,7	762,1	25,2	939,6	31,1	43,6

Source: Source: State Department of Land Management, Land Bal; ance for 04.2001 [GFA/KfW, 38]

Farm Structures

Farm type	Number of entities	Total area in ha	Average farm size in ha
Families with private land	1 055 200	762 100	0,72
Families and groups with rented land	31 900	352 000	11,03
Legal entities with rented land	6 300	587 600	93,27

Source: State Department of Land Management, Land Balance for 04.2001

Share of private farms in agricultural output (per cent)

	1990	1995	1996	1998	2000
Cereals and bean crops	26	79	78	88	94
Of which:
Winter wheat	0,1	26	20	73	89
Maize	62	95	94	94	96
Bean crops – total	62	95	98	98	99
Sunflower seeds	1	25	52	69	81
Soy beans	3	50	6	82	96
Potatoes	49	97	96	90	99
Vegetables	59	97	95	87	99
Melons	52	86	77	62	99
Fruit	80	99	99	99	99
Citruses	83	97	95	98	99
Grapes	45	94	97	97	99
Tea leaves	7	47	36	45	34
Total output	48				94

Source: Georgian Agriculture 2000, p.36

Share of private farms in agricultural output (per cent)

	1988	2000
Grain	25	94
Sunflower seeds	1	81
Soya –beans	2	96
Tobacco	17	99
Potatoes	43	99
Vegetables	47	99
Melons	65	99
Fruits	78	99
Citruses	77	99
Grapes	50	99
Tea	7	34
Total output	50,1 (1985), 48,0(1990)	94,0

Source: Georgian Agriculture 2000

Privatisation in Georgian Agriculture

The least	In private position, %
	1986	2001
Agricultural lands	5,6	25,2
Of which: Arable	12,3	54,7
Perennial plants	23,7	63,8
Meadows	1,4	29,0
Pastures	0	4,7
Cattle	58,9	99,4
Of which milk cows and she-buffalo	71,0	99,6
Pig	54,2	99,8
Sheep and goat	44,5	95,6
Horse	74,0	98,9
Bird and wing	39,7	99,0
Poultry	15,6	100
Bee family	45,5	100

Source: Georgian Agrostatistic 2000, Tbilisi, 2001. – p

Agriculture in Georgian Export (2001)

Export Position	Million US$	Percentage and Place
General Export	320028,8	100,0
Incl.: Wine	32195,3	10,1 (3)
Mineral Water	11663,4	3,6 (7)
Nuts	9843,5	3,1 (9)

Source: SDS

Import of Main Food Products (2001)

Import Position	Million US $	Percentage and Place
General Import	684097,5	100,0
Incl.: Sugar	24105,1	3,5 (4)
Tobacco Wares	24065,2	3,5 (5)
Meal	14792,9	2,2 (8)
Wheat	11186,1	1,6 (10)

Source: SDS; * - estimate

Agricultural Export and Import

Year	Export	Import	Turnover
1995	9536,4	11652,1	21188,5
1996	14977,3	72917,9	87895,2
1997	12388,0	68032,4	80420,4
1998	40918,2	268955,5	309873,7
1999	102171,0	436740,9	538911,9
2000	139554,5	529371,8	668926,3

Dynamic of Agrarian Export, 1997-2001 (mln US$)

	1997	1998	1999	2000	2001
Tea	18,5	8,9	11,4	6,1	5,8
Citruses	9,1	9,5	1,9	2,5	1,6
Alcoholic drinks (instead wine)	5,2	5,5	5,5	4,0	5,9
Nuts	5,3	9,4	15,4	19,3	9,8
Wine	12,5	15,4	14,6	29,1	32,2
Mineral waters	18,5	7,2	2,6	9,5	15,2
Total export	239,8	192,3	238,2	329,9	320,0

Source: IMF (account No.211, 11.2001, pg.123;) in red State Statistic Department

Dynamic of Agrarian Import, 1997-2001 (mln US$)

	1997	1998	1999	2000	2001
Sugar	39,1	16,2	16,2	24,6	24,1
Tobacco wares	107,8	120,0	35,2	29,4	28,8
Wheat and flour	37,1	26,5	14,8	20,3	28,2
Beer	3,1	0,8	0,1	0,1	0,1
Bread products	57,2	31,8	15,5	21,9	17,3
Vegetable oil	2,2	4,7	1,1	1,0	3,4
Poultry meat, eggs	10,2	12,3	14,5	11,0	10,3
Coffee	9,0	5,4	5,0	4,3	2,0
Total import	941,7	884,3	601,9	650,7	684,1

Source: State Department of Statistic s; IMF(account No. 211, 11.2001, pg.124);

Investments in Fixed Capital

Year	Investments in Fixed Capital, total,Mln GEL	Of which Foreign Investments		Share of Agriculture, %
		Mln GEL	% of Total
1995	127	42	33,9	0
1996	170	86	50,6	0
1997	266	180	67,7	0
1998	512	401	78,3	0,04
1999	364	169	46,4	1,7
2000	349	119	34,1	0,4

Source: SDS, 25.01.2001

Foreign investments in fixed capital by fields and years

(in actual prices, mln Lari)

	1995	1996	1997	1998	1999	2000	2001
Foreign investments	42,9	86,4	179,9	401,0	168,6	119,0	128,2
The same in US$	33,2	68,5	138,6	271,2	83,1	60,2	62,2
Of which: Agriculture	-	-	-	0,2	6,0	1,3
Food industry	2,6	3,2	4,4	19,9	14,8	17,6
The same Gagua (EK 3/4/00		3,455	4,902	21,714
Sum	2,6	3,2	4,4	20,1	20,8	18,9
% of Foreign Investments	6,1	3,7	2,4	5,3	12,3	15,9

Source: Investment activities in Georgia, State Statistic Department, 1999

Most Exportable Agricultural Products.

Georgian Wines. Georgia is known as the birthplace of viticulture and winemaking and has 5000 years of wine culture. The rich land, hot sun and hard work have developed about 500 varieties of wine in Georgia.

According to the State Department of Statistics exports of different types of Georgian wine during first nine month of the 2001 made up 18186,5 thousand USD which is 7,8 percent of the total Georgian exports.

At the end of the 20^th century, the collapse of the Soviet Union has caused an economic decline in Georgia, which negatively affected the Georgian wine sector. To be more divcise – the overall territory of vineyards has decreased by 50%, (1990 – 112,6 thousand hectares, 2000y – 60,5 thousand hectares). This tendency was mainly caused by the following reasons: lack of enough funds among farmers to purchase chemicals, technical devices and machines for vine cultivation, also huge numbers of farmers had to convert their vineyards into land to grow edible products such as corn, vegetables, and grain.

In addition, from the mid 1990s the tendency of vineyard rehabilitation has been quite dynamic, still the total area of vineyards is far less than it was even 20 years ago.

Table # 1 Tendency of wine sector development for the last ten years

Sector	Measure	1981-85 average per year	1986-90 average per year	1990	1995	1996	1997	1998	1999	2000	2001
Total area of vineyards	(1000) Hectares	137,4	116,1	112,6	94,2	94,0	72,0	70,0	60,1	60,5	61,5
Production of grape	(1000) Tones	768,0	712,0	691,0	160,0	342,0	370,0	370,0	219,0	210,0	170,0
Grape Processing	(1000) Tones	564,3	422,5	433,5	38,0	60,0	46,0	23,5	29,5	34,4	19,1
Production of wine materials	(1000) decaliters	21969,0	14997,0	16283	3670	2223	3121,6	2303,8	1859,2	1816	1900
Production of champagne and sparkling wines	(1000) decalitres	1375,7	1526	1451	49,2	94,6	75,6	40,3	64,7	87,9	88,35
Production of Brandy	(10000 decaliters	1563	1865	2165	158	135	82.,3	37,8	30,4	70,6	71,0
Production of the liqueur	(10000decaliters)	937.0	523,0	822	103	132	251	112,7	473,0	430,0	569,0

Source: Samtrest, Ministry of Agriculture.2002

Even though the Georgian wine sector is famous for its 500 traditional grape varieties, the vast majority is currently grown and available only in limited areas and numbers. Traditionally in accordance with climate and soil characteristics – Georgia is divided into 5 main wine producing regions. Kakheti, Kartli, Imereti, Racha-lechkhumi and the Black Sea Subtropical zone.

In accordance with the development and strength of the wine sector Kakheti could be easily considered as the leader. The region is characterized by huge variety of grapes and assortment of wine.

From the structural point of view, 80% of Georgian vineyards is allocated to white grapes: Rkaciteli amounts to almost 75% of all white wines and the remaining 25% is allocated to Cicka, Colikauri, Mcvane, and Tetra. The dominant type in red grapes is divsented by Saperavi which holds 70%. The remaining 30% is allocated to the following red grapes: Aleksandriuli, Mijuretuli, Ojaleshi, and Vaios Saperavi.

Table # 2 below indicates the total area by regions (1000 hectares) as of year 2001.

Region	State Vineyards	Private Vineyards	Total
Kakheti	1,35	43,73	45,08 (~ 75%)
Kartli	0,18	5,83	6,01 (~10%)
West Georgia	0,27	8,74	9,01 (~15%)
Total	1,8	58,3	60,1 (100%)

Source: Ministry of Agriculture, 2002

Table #3 below indicates the information on main types of Georgian grape, as of 2001

Species of grapes	Colour	Regions of divvalent	Sugar content (%)	General acidity (%)	Yield of Grapewine (kg)
Aladasturi	Red	Chokhatauri, Vani, Bagdadi	19,5-20,0	8,8-9,2	2,0-2,5
Aleksandreuli	Red	Ambrolauri, Tsageri, Oni	22.0-23,0	7,0-7,5	1,5-2,0
Chkaveri	Red	Chokhatauri, Ozurgeti	19,5-21,0	8,1-9,6	1,8-2,0
Mtsvane	White	Telavi,Sagarejo, Akhmeta	21,5-22,0	9,5-10,0	1,5-2,0
Ojaleshi	Red	Martvili, Tsageri	21.0-22,0	9,0-9,5	1,4-1,6
Rkatsiteli	White	Kakheti	19,0-20,-	6,0-6,5	1,4-1,5
Saperavi	Red	Kakheti	20,0-22,0	7,0-8,5	1,5-1,7
Tetra	White	Ambrolauri	20,0-22,0	7,5-8,5	1,5-1,7
Tsitska	White	Imereti, Lanchkhuti	18,5-20,5	8,5-10,0	1,5-2,0
Tsolikauri	White	Imereti	19,0-21,5	9,0-10,5	1,5-2,0
Usakhelauri	White	Tsageri	19,0-21,0	7,5-9,0	1,4-1,8
Vaios Saperavi	Red	Keda	20,0-20,5	8,5-9,0	2,4-2,8

Source: Samtrest, Ministry of Agriculture, 2002

Today the production of two main types of grapes per hectare of land is the Rkaciteli – 7.0-8.0 tons, and the Saperavi – 5.0-6.0. These numbers are can increase by 25-35 % under normal working conditions and with all necessary tools and machinery readily available.

By taking into consideration the fact that during the grape processing period the market price for one kilogram of white grape ranges from $0,10 to $0,20, which is slightly above of its base price, then accordingly it could be forecasted that in the case of an increase in the volume of grapes the price per kilo will drop and the farmer’s revenue will increase, thus creating the ability for the farmer to procure some necessary tools, chemicals and machinery and increase the volume of his grapes for the next season. This could lead to the rehabilitation and positive redevelopment of the whole Georgian wine sector, though it should be mentioned that this positive tendency will not be implemented without sophisticated grape processing factories and new export markets.

In Table #1 it is clearly indicated that during the first part of last decade of the 20^th century there was a huge drop in the volume of processed grape. This was mainly caused by the following reasons: Weak economic condition of the country, loss of traditional Russian market and huge amount of fake vintage Georgian wines, both in the Georgian and Russian markets. It should be mentioned that during the same period both farmers and wine factories had huge amounts of grapes in their warehouses, which did not find its path towards wine, simply because of the aspects mentioned above. And this is happening in Georgia – a country, which during the Soviet period was producing 55% of the total vintage wines and more than 25% of brandy in the USSR.

Despite all the negative factors mentioned above, in the second part of last decade of the 20^th century developmental steps ahead were made in the Georgian wine sector, which on its behalf has led to the participation of foreign investors in the sector. The positive aspects were mainly caused by the fact that a new generation businessmen have acquired western knowledge of management and marketing, the consumer’s nostalgia for Georgian wines, and the government’s support. Lately, the participation of foreign companies is getting clearly noticeable – both in the fields of wine-making and in establishing new vineyards.

As a result, the number of local Georgian wine-making companies could be easily outlined in accordance with their financial strength, good marketing campaign, progressive management and export volume. These companies are: GWS (Georgian wines and spirits), “Telavi wine cellar”, “Akhasheni”, “Tbilwine” “Vaziani”, “Kinzmarauli”, “David Sarajishvili and Eniseli”, “Okami”, “Teliani Veli”, “Rachuli Gvino” and “Zmebi askaneli”.

Mineral and Spring Waters. According to the State Department of Statistics exports of different types of Georgian mineral waters during the first nine months of 2001 made up 6646,9 thousand USD which is 2.8 percent of the total Georgian exports.

One of the biggest assets – essential for the resort development in the country is redivsented by mineral waters. In Georgia almost all kinds of mineral water can be found, with more than 2,000 mineral springs, out of which 1700 are natural phenomena and 300 are boreholes. Their estimated total yield per day is 120 million liters. The most common kind is a carbonic acid mineral water, the daily yield of which amounts to approximately 60 million liters.

^19[1]Structural geologic and hydrochemical properties of the so-called geotechtonic zones account for the distribution of various kinds of mineral waters in Georgia. For instance, within the limits of the Main Range and the Southern slope of the Greater Caucasus – cold, mostly carbonic and hydrocarbonated waters divdominate. On Georgian Block the typical water includes cold as well as thermal sulphide-methane and nitric-methane, chloride and sulphate. Within the Adjara –Trialeti system and the adjoining Somkhiti Block the following kinds of water divdominate: carbonic acid hydrocarbonated or chloride-hydrocarbonated as well as weak sulphide nitric, sulphate-chloride or carbonate-bicarbonate.

Georgia has large reserves of thermal water of various chemical compositions. The territory occupied by Georgian Block and Adjara Trialeti System is especially rich in them. Thermal radioactive (Radonic) mineral waters are the main natural curative factors of the Tskaltubo and Tkvarcheli Resorts. So-called hyperthermal waters, forming a class by themselves are extracted from the earth’s deep levels by boring. The main pools of these waters are: Tsaishi (Temp 81-82 C), Kvaloni (Temp 94 C), Kindghi (103 C), Khorga (Temp 110 C). Hyperthermal waters are mostly used for heating purposes.

Drinkable mineral waters are used for health-restoration not only at resorts, but also outside them in the form of bottled mineral waters. Such as Borjomi, Nabeglavi, Sairme, Ucera, Djava, and Zvare.

Borjomi Mineral Water. The Borjomi resort is considered as one of the most spectacular locations in Georgia. It is located at 950 meters above sea level between the evergreen slopes of the Meskheti and Trialeti Ridges.

Besides its beautiful nature and climate, the Borjomi region is famous for its mineral waters, which redivsent the other major natural curative factor of this place. Instead of natural springs known since older times, gusher-boreholes are being used at divsent.

In terms of chemical composition the mineral waters are of acidulous, hydrocarbonate, sodium variety, containing 0.5 to 1.5 g/l of free carbon dioxide. They also contain ions of chlorine and small amounts of bromine, lithium, barium and some other substances. Temperature of the water in various springs ranges from +17 to 38 C. There are ten capped boreholes at the resort wit a total yield of 700-800 thousand liters.

Mineral waters are mainly used as a curative drink, for medical baths, inhalation, and levage of stomach and intestine. They are used as a curative and table drink outside the resort.

Borjomi mineral water is the most popular mineral water available in the CIS. In the 1980s exports reached over 420 million bottles per year. However Borjomi production and sales declined significantly between 1990-1995 due to the economic collapse in the former Soviet Union

In September of 1995 the Georgian Glass and Mineral Water company. N.V. (GG&MW) began to produce Borjomi mineral water at two Soviet – era bottling plants in Borjomi. A short period later the bottling plants, pipelines and quality control systems were brought up to world standards.

The Khashuri Glass plant, located 30 km from Borjomi, has also been reconstructed. After being purchased by GG&MW, the production process was modernized and a new automated bottle-packaging system was installed.

In 1997, GG&MW obtained the license and exclusive right to use the Borjomi name until 2007. In order to restore Borjomi mineral water and make it compatible with international standards, GG&MW found it essential to cooperate with international financial institutions, such as: IFC, EBRD, ING Barings, and TBC Group of Georgia.

GG&MW mainly orients its exports towards the Russian Federation, Ukraine, Baltic States, USA, and Israel, and it is considered as the biggest, financially strongest and most progressive Borjomi bottling company.

Sairme Mineral Waters. The Sairme resort is situated in the valley of the Tsalabris tskali river 950 m above sea level and 55 km south of the second biggest town in Georgia – Kutaisi. The nearby mountainsides are overgrown with leaf bearing (oak, beech, etc.) and also coniferous woods. The resort has been operating since 1930. Climate of the region is moderately humid, subtropical, average temperature of the air totals 8.8 C, the annual amount of divcipitation makes up on average 1100mm, average humidity of the air is 80%.

The word “Sairme” in Georgian means “a place of deer”. In winter many deer and roes used to come down to the mineral watering places from the nearby woods, therefore the hunters called the place “Sairme.”

As it was mentioned above, the Sairme resort is rich with mineral water springs – the major natural curative factor of the resort. Sairme mineral waters are known since the end of the 19^th century. In terms of their chemical composition, they are of acidulous hydrocarbonate calcium-sodium kind of acidulous hydrocarbonate sodium Borjomi – like variety. It has been established that “Sairme” acidulos waters have a curative action against diseases of kidneys, urinary tracts, and liver.

The only company that bottles Sairme is the CARTU group. The company uses a German bottling line and produces water in 1 liter PET and 0.33 and 0.5-liter green glass bottles. The only raw materials the company imports are capsules for its bottles from Turkey, bottle caps from Bulgaria and Turkey, and clay from Turkey. The company mainly orients its export towards the FSU republics.

A new foreign company with better experience in promotion and distribution could easily enter the Sairme bottling market. This takes into consideration the fact that CARTU has a normal license and is not the exclusive company to bottle Sairme water.

Mitarbi Mineral Water. The Mitarbi source is located near the Borjomi resort and is surrounded by picturesque mountains in an unspoilt and unpolluted environment. The debit of the water constitutes 40.000 M per year.

Mitarbi was bottled and very successfully marketed during Soviet times throughout the USSR and in some foreign countries. Success to the waters came due to their taste and curative features. These are colorless, odorless, fully transparent waters with a mild taste.

Mitarbi is divscribed in cases of chronic gastric diseases, stomach and duodena ulcer in remission, chronic hepatitis, chronic cholecystitis, chronic pancreatic disease, and diabetes.

Production and sales of Mitarbi reached its peak in the late eighties, particularly annual sales volume of Mitarbi then totaled 19 million bottles. After the collapse of the USSR, due to severe political and economic circumstances bottling of water was temporarily seized.

At divsent the CARTU Group is the only company which has the ordinary type of bottling license (which is not exclusive). The volume of output is low due to promotional and sale problems. Accordingly, a newcomer with better experience and knowledge of the potential markets for mineral waters might find itself in a more advantageous position than CARTU.

Nabeglavi Mineral Water. The Nabeglavi resort is located in the Chokhatauri district, 35 km south of the district center and 50 km from the railway station of Samtredia, in the valley of the Gubazeuli river (a tributary of the Supsa river) at the foothills of the Meskheti ridge and 470-490 m above sea level. The resort is protected on the south by mountains covered with mixed woods (oak, beech, hornbeam, fir, and pine).

The major natural curative factors are mineral waters, which in terms of their chemical composition fall into the category of acidulous hydrocarbonated sodium waters with a salination of 7.5-8.0 g/l. They also contain solicic acid, bromine and other biologically active substances. Mineral waters are used for medicinal drinking and balneologic procedures.

The company “Ckali Margebeli” (Healthy Water) obtained a license for use of the above mentioned water.

The company uses PET type plastic bottles (1 L, 1.5-L capacity) and green colored glass bottles (1 L). Presently the company is having problems with the promotion and sale of the product, accordingly it is not working at its full capacity and is looking for a foreign partner with professional knowledge and expertise in the field of mineral waters.

Zvare Mineral Water. The Zvare resort is located in the Orjonikidze district, on the western slope of the Likhi Ridge (connecting the lesser and great Caucasus mountains), 600-700 m above sea level, in the valley of the Zvarula-River, 4 km away from the railway station of Moliti. The nearby mountainsides are mainly covered with leaf-bearing woods (oak, beech, hornbeam and other species).

Mineral water from Zvare belongs to the class of acidulous, chloridehydrocarbonate, calcium-sodium waters with a mineralization of 5-6 g/l. The daily yield of springs is up to 20,000 litres.

Water is considered beneficial for its health properties, it was traditionally used as a refreshing beverage and, at the same time recommended for prophylactics of intestine diseases and healing of metabolism disorders.

The company ZVARE Ltd. obtained an exclusive license on Zvare water production (its license for abstraction and use is valid until 2009).

Presently the company does not operate. It is looking for a foreign partner, who would help it to update the available facilities, conduct hydro-geological and other professional studies, construction works, and purchase of transport facilities.

The Georgian law dealing with all aspects of abstraction, development, exploitation of natural reserves (water) is enacted. Water regulations are Western oriented and cover the labeling, packaging and content of bottled water. The only possible change in regulations could be connected to inevitable transition towards international standards (ISO). In the first place, changes are expected in the field of assessment and quality control of water where the former Soviet State Standards (GOST) are still binding.

The divsent situation of the water market in Georgia and possibilities for development of the water business (due to its unique properties; significant intangible assets, experience of water production, infrastructure and low cost base), and the general situation of the international water market and other significant aspects leads one to divdict the possibility of the successful operation of a newcomer in the form of a strong foreign company.

Nuts. The hazelnuts of Mediterranean origin have been well known in Georgia since ancient times. Scientists conclude that this species of thick hazelnuts originates from the Caucasus. Since the mid-1990s farmers started a mass planting of hazelnuts in Western Georgia, particularly in the Black Sea coastal region and in Eastern Georgia in the region of Kakheti. It should be mentioned that since 1998 Georgian nuts have become one of the country’s major export products.

One of the advantages of Georgia’s agricultural sector is the high percentage of produce that is organic in nature. The country has not been using fertilizers and pesticides for some 10 years. Now the country is divparing a certification process whereby all farmers producing organic food will have their farms approved and certified as organic. This is expected to generate new interest in Georgia’s agricultural sector, particularly from markets in the West where demand for organic food is increasing far beyond supply.

Georgian Tea. Georgia is a northerly tea growing country with a relatively shorter growing season than other tea producing nations. Tea is grown in West Georgia in Guria, Samegrelo, Ajara, and Imereti Regions. According to official statistics for 2001²⁰[2], these regions possess slightly more than one-quarter of the country’s total 564,518 hectares of agricultural land.

At independence in 1991, the country had 64,500 hectares of state-owned tea plantations. Civil war, decline in demand from former markets in the FSU and the loss of state financing have caused much of the area formerly planted to tea to be abandoned. As of January 2002, 37,296 hectares of agriculture land were planted to tea. Tea plantations now occupy 65 percent of Guria’s total agricultural land, 27 percent of Samegrelo’s total agricultural land, 58 percent of Ajara’s total agricultural land and 6 percent of Imereti’s total agricultural land (Table 1). Following the abolition of collective agriculture, land under tea plantations has mostly been privatized in Guria, while in Samegrelo, Ajara, and Imereti most of the tea plantations have been leased out.

Tea leaf production data in the early 1990s is extremely unreliable and so not reported here. It is clear that production levels have fallen greatly from those of the late 1980s. Production has generally continued to drift downward since the mid-1990s (Tables 2-3, Figures 1-2).

According to the Ministry of Agriculture and Food, as of January 1, 2001 there were 146 tea processing enterprises in Georgia (including Abkhazeti) with a total annual capacity of 722,800 tons. There were 50 tea factories in Samegrelo, 30 in Guria, 16 in Imereti, and 18 in Ajara. Forty-six of the 50 enterprises in Samegrelo had been privatized, while 30, 11 and 1 enterprises had been privatized in Guria, Imereti, and Ajara, respectively. These enterprises mostly use worn-out, obsolete equipment and are in poor financial condition. Some of these enterprises are reported to have vertically integrated operations, while others operate on a contractual basis with tea growers. As might be expected, almost all tea grown appears to be sold to the factories so that the processing trends follow those of production (Table 4, Figure 3). The nature of tea also means that the producers are much more dependent on the processors than are, say, owners of vineyards. Homemade wine is a reasonable and widely practiced option for primary producers; homemade tea is not.

During 1994-2001 Georgia was a net exporter of tea, although it also was a substantial importer and the balance of trade appears to be turning against Georgia (Table 5, Figure 4). In the early and mid 1990s the major importers of Georgian tea were in the FSU, but since 1997 geographic coverage has widened as processors developed new markets. Exports of Georgia tea to US, Germany, and Poland show an increase (Table 6).

Tea remains an important cash crop among rural households in most of West Georgia. The share of households in total tealeaf production in 1999 was 43 percent, in 2000, 34 percent, and 93 percent in 2001 (Table 7).

Table 1. Land under Tea Plantations, 2001

Region	District	Total Agricultural Land, ha	Total Area under Tea Plantations, ha	Area of Tea Plantations Damaged, ha	Area of Usable Plantations, ha	Percent of Plantations Damaged, %	Share of the Region in total agricultural land of Georgia	Area of Land under Tea as Percent of Total Agricultural Land in Region
Ajara	Regional Total	9590	5,518	1,674	3,844	30%	1.70	58
Samegrelo	Zugdidi	10,169	5,061	654	4,407	13%	1.80	50
	Martvili	9,334	2,721	330	2,391	12%	1.65	29
	Senaki	9,699	1,202	324	878	27%	1.72	12
	Chkhorotsku	4,830	2,492	463	2,029	19%	0.86	52
	Tsalenjikha	3,886	2,993	0	2,993	0%	0.69	77
	Abasha	9,654	67	67	0	100%	1.71	1
	Khobi	10,340	1,438	0	1,438	0%	1.83	14
	Regional Total	58524	15974	1838	14136	12	10.37	27
Guria	Ozurgeti	5,501	7,358	890	6,468	12%	0.97
	Lanchkhuti	7,864	1,988	445	1,543	22%	1.39	25
	Chokhatauri	3,720	1,786	518	1,268	29%	0.66	48
	Regional Total	17085	15,974	1,838	14,136	12%	3.03	65
Imereti	Tskaltubo	12,025	1,141	385	756	34%	2.13	9
	Tkibuli	3,811	1,073	200	873	19%	0.68	28
	Chiatura	7,323	246	38	208	15%	1.30	3
	Vani	5,335	130	70	60	54%	0.95	2
	Zestafoni	6,127	38	0	38	0%	1.09	1
	Terjola	7,741	120	39	81	33%	1.37	2
	Samtredia	8,103	380	0	380	0%	1.44	5
	Khoni	6,971	1,544	790	754	51%	1.23	22
	Regional Total	73065	11,132	1,853	9,279	17%	12.94	6
Georgia, Excluding Abkhazeti	TOTAL	564,518	37,296	6,887	30,409	18%	28%	7

Source: State Department of Statistics of Georgia, author's estimates. The data for Ozurgeti clearly contain an error.

Table 2. Annual Tea Leaf Production in Georgia, 1985-2001

(tons)

1985	581,200
1990	501,700
1994	60,700
1995	38,500
1996	34,000
1997	33,200
1998	47,200
1999	60,330
2000	23,999
2001	23,000

Source: State Department of Statistics of Georgia

Table 3. Tea Leaf Production by Regions, tons

	Ajara	Imereti	Samegrelo	Guria	Georgia
1999	7,326	6,693	28,791	17,520	60,330
2000	2,914	2,662	11,453	6,970	23,999
2001	1,924	1,050	12,518	7,508	23,000

Source: State Department of Statistics of Georgia, author's estimates

Table 4. Tea Processing, 1994-2001

(tons)

	1994	1995	1996	1997	1998	1999	2000	2001
First Stage Processing, Including	13,424.3	7,992.0	8,895.7	9,158.5	9,988.9	12,897.8	4,793.1	4,478.6
Black Baikhi		6,732.0	5,804.7	6,152.6	8,360.7	11,789.8	4,361.9	4,219.4
Green Baikhi		1,260.0	3,091.0	3,005.9	1,628.2	1,108.0	431.2	259.2
Natural Tea, Including	4,473.3	4,230.0	3,747.4	7,759.2	4,871.0	4,509.0	3,014.7	3,765.1
Packed	4,003.9	1,997.2	2,796.2	6,420.0	2,955.7	2,648.4	1,904.8	2,695.5
Green Break	469.4	2,232.8	951.2	1,339.2	1,915.3	1,860.6	1,109.9	1,069.6
Granulated Tea				144.0	890.1	605.3	474.1	658.7
Liquid Tea							39.0	58.0
Total	17,897.6	12,222.0	12,643.1	17,061.7	15,750.0	18,012.1	8,320.9	8,960.4

Source: State Department of Statistics

Table 5. Georgia’s Tea Trade

	Imports, USD	Exports, USD	Coverage Ratio, %
1994	12439	11555495	929.0
1995	157876	8380262	53.1
1996	151898	16814164	110.7
1997	292190	13872490	47.5
1998	434761	8918643	20.5
1999	380428	11394714	30.0
2000	536702	6084280	11.3
2001	544454	5792750	10.6

Source: State Department of Statistics, author’s estimates

Table 6. Top 10 Export Destinations of Georgian Tea, 1994-2001

	1994	1995	1996	1997	1998	1999	2000	2001
1	RUS	TKM	TKM	RUS	RUS	RUS	RUS	RUS
2	UKR	RUS	RUS	UZB	UZB	UKR	UKR	POL
3	BLR	UKR	UZB	TKM	DEU	DEU	DEU	USA
4	TKM	KGZ	TJK	TJK	TJK	TKM	USA	DEU
5	UZB	KAZ	UKR	MNG	SYR	USA	MNG	UKR
6	TJK	UZB	KAZ	UKR	NLD	UZB	UZB	MNG
7	KAZ	TJK	MNG	POL	MNG	MNG	POL	UZB
8	TUR	MNG	AZE	KAZ	BLR	TJK	UKR	TKM
9	MDA	BLR	BLR	BLR	UKR	BLR	KAZ	IDN
10	POL	MDA	KGZ	KEN	KAZ	POL	TKM	TJK

Source: State Department of Statistics, author’s estimates

Table7. Household Contribution to Total Production

All of Georgia excluding Abkhazia

	1999	2000	2001
Production by Households, tons	25,942	8,160	21,390
Total Production, tons	60,330	23,999	23,000
Household Share in Total Production, percent	0.43%	0.34%	0.93%

Source: State Department of Statistics, author's estimates

3. Trade

Georgian Foreign Trade Statistics.In 2002 Georgian foreign trade turnover (registered) totalled US$1045,0 million, that is 104,6 % of divvious year's data for the appropriate period. From this export is US$325,0 million (101,5% accordingly) and import -US $720,0 million (106,1%). Negative trade balance of Georgian trade for 2002 stood at US$395,0 million. The following table shows the trends in Georgia's trade balance:

Number of Countries Foreign Trade Balance - US$ million Negative trade balance Year 2001 88 378,8 Year 2002 89 454,2 Positive trade balance Year 2001 30 20,1 Year 2002 40 59,2 All trade partners Year 2001 118 358,7 Year 2002 129 395,0

In 2002 Georgia had a negative trade balance with 89 partner countries, with whom the trade gap amounted 454,2 million US Dollars in comparison with the last year when the same figure was indicated by 378,8 million US $ with 88 partner countries. Georgia had a positive trade balance of US $ 59,2 million with 40 countries, and in 2001 with 30 countries (positive balance of US $ 59,2 million). In 2002 the foreign trade with CIS countries have increased. The 30.6% of the trade gap covers these countries (29.7% for the same period of the last year). The foreign trade with CIS countries amounted US $ 4337.4 million in 2002 (the amount increased by 10.6% in comparison with the same period of the year 2001). CIS countries share 41,9% of Georgia's foreign trade turnover, among them exports share 48,7% and imports 38,8% (accordingly 39.6%; 45.1% and 37.0% - in the year 2001). Trade turnover with Russia reflected US $ 162.8 million and has declined by 1.2% in comparison with the same period of the year 2001, and Georgian foreign trade turnover with Russia have decreased by 0.9 per cent points from 16.5% to 15.6%. Georgian Foreign Trade: 2001-2002 (in US$ millions) Georgia's Top Ten Export Destinations in 2002 (in US$ millions) Major export products in 2002 (in US$ millions)

4. Construction

Overview of Georgian Construction Sector. Georgian construction sector mainly consists of civil, industrial, hydro-technical, transport, and communication construction projects.

The construction sector was established long before the formation of the country as a legal state and has passed from primitive buildings to complicated and sophisticated complexes. Throughout various stages of the country’s development, buildings and other construction projects reflect the period in which they were built. For nearly the last two centuries Georgia was part of the Russian empire and the Soviet Union, thus, the development of the construction sector was in accordance with the laws and conditions accepted by Russia and the FSU, i.e. massive construction of industrial facilities. During that period the construction sector employed almost 250,000 people and produced construction materials worth approximately US$1.5 million annually.

After the collapse of the Soviet Union, the Georgian construction sector ceased development, which was mainly caused by the political, social and economic conditions of the country (i.e. a coup, civil war, and armed conflicts in Abkhazia and South Osetia), and also by non-efficient, highly energy consuming technologies and outdated equipment and machinery. As a result, almost one hundred percent of the construction factories and facilities ceased functioning.

During the early ‘90s, when Georgia became independent and positioned itself towards democracy and integration into the world economy, the Georgian construction sector realized that it was totally undivpared to meet the demands and standards of country’s development phase. The main negative aspects characterizing such non-divparedness were: 

1. Non-efficient and partially destroyed equipment and machinery.

2. Lack of investment in majority spheres of construction (except private construction).

3. Weak management of the sector from the government’s side.

4. Lack of professional managers and specialists with knowledge of international principles.

5. Great need of specialized trainings for the staff.

6. Harsh economic condition of scientific, projecting and architecture institutions.

7. Import of foreign construction materials and workforce.

Among other important factors, considering the importance and crucial character of the construction industry for the country’s economic development, the Georgian government made several positive steps towards rehabilitation of the construction industry to create a favourable investment environment including passing the law on promotion and guarantee of foreign investment activities, and instituting a process of restructuring and privatisation. A few years ago the government of Georgia launched a process of restructuring and privatisation of large Soviet era construction enterprises. As a result, various non-efficient, illiquid and monster enterprises have changed their organizational structure and been converted into small cost and energy efficient, liquid plants. Derived from the privatisation process the majority of state construction companies have become private joint stock and limited liability companies. In addition, a huge number of uncompleted construction sites have been privatised and completed.

Main Indicators of Development in the Construction Sector. The slight revival and positive trends in the construction sector have been noticed since 1995 – the period when the Georgian national currency the Lari (GEL) was introduced.

The table below indicates the main financial flow in the construction sector during 1995-2002 (first nine months).

Year	Monetary unit	Investment in main capital	Government investment	Construction and engineering work	Personal funds of population*	Foreign investment
1990	Million Rubles	2545	2233	1313	93	-
1991		2698	2435	1882	140	-
1992		12368	11521	8636	532	-
1993	Billion Coupon	311	142	270	168	-
1994		55821	30769	41758	25000	-
1995	Million Lari	127	65	90	19	43
1996		170	60	91	24	86
1997		266	67	114	19	180
1998		512	915	244	16	401
1999		364	119	248	76	169
2000		349	141	181	89	119
2001		362	201	101	33	128
2002		246	158	86	59	29

Source: Ministry of Construction and Urbanization

* The construction of dwellings in Georgia is mainly based on up-front deposits made by people who will live there after the construction is completed.

According to the table investments in main capital from 1995-2002 constitutes 2396 million Georgian Lari (1109 million USD) which includes: Government investment – 906 million GEL (419 million USD) – 37.8%, personal funds of the population – 335 million GEL (155 million USD) – 14.0%, foreign investment – 1155 million GEL (534 million USD) – (48.2%). Derived from this data we can state that investment in main capital shows a trend toward a positive increase (+2.7) from 1995-2001 compared to 1995. In addition, the increase in foreign investment is quite noticeable. This was mainly due to the construction of the oil pipeline and Supsa oil terminal in 1998.

In 2002 the positive developments in the construction sector continue to accelerate, resulting in construction of 545 buildings, among theses are the construction of a new Marriott hotel, 62 stores, 38 gas stations, and 12 food outlets (all in Tbilisi).

Market demand (Construction Materials). Even though several local construction material manufacturing plants have been restructured and rehabilitated, the goods manufactured by them do not have a high demand among Georgian customers. Mainly this is due to low quality and narrow assortment. The only Georgian made product of comparatively good quality is cement, produced by the Rustavcement and Kaspicement companies. This situation redivsents a good opportunity for U.S. firms to invest in and/or upgrade local building materials manufacturing plants. Presently, product imported from Turkey, Dubai, Iran and Russia occupies almost 95% of the Georgian building materials market. Even though they are perceived to be of a lower quality, the majority of people still buy them because of the low price. Nevertheless, another Georgian customer segment, the high income family, still divfers building materials made in the U.S. or Europe, due to the high quality and regardless of the higher price.

The following imported materials are in the highest demand on the Georgian market:

• Ceramic Products (tile, mats)

• Insulated American style windows, doors.

• Various colored wood and flooring materials.

• Heat, ventilation, air conditioning systems.

• Roofing materials

• Varnish paints

• Plastic tubes for water communication

• Wallpapers

• Lights and bulbs

• Vinyl sidings

Due to the growing wave of construction, a large market share still remains unoccupied and is ready for new companies and potential investors. The construction sector will play an essential and important role in Georgia’s further economic development and integration into the world economy.

2. Business

1. Company Registration and Licensing System

1. Company Registration System

Enterprise register. Registration of an enterprise is to be carried out by the Court by making due records in the Enterprise Register. The information concerning the registration is to be recorded into the Register Card. The Register Card specimens are divsented below:

Registration card (sample) for Limited Liability Companies (LLC)

Ser. No.	Date	Subject of activity and aggregate capital of the society	Name, date and place of birth, occupation, address of partners	Name, date and place of birth, occupation, address of directors	Name, date and place of birth, occupation of members of the supervisory council (if any)	Redivsentation of directors	Trade redivsentatives (procurators)

Registration card (sample) for Joint Smpanies (JSC)

Ser. No.	Date	Subject of activity and capital	Tapes of shares; sharing	Name, date and place of birth, occupation, address of directors	Name, date and place of birth, occupation address of members of the supervisory council	Redivsentation of directors	Trade redivsentatives (procurators)

The Law on Entredivneurs provides that data on newly registered companies should be published in the official newspaper. The Law also guarantees information on any company entered into the enterprise register held by courts be available to the public. Any person should be able to view the records and obtain extracts from the registration file.

Procedure for registering (establishing) an enterprise. Figure 4.1.1.1 provides an outline of the sequence of the procedures to register and establish a business in Georgia.

Figure 4.1.1.1 Business Registration Procedures

* Statistical Department registration and stamp approval. Although the law no longer requires these procedures, they are still being followed by some entities and required by certain authorities due to uncertainty, lack of information, and corruption.

In practice, the entire registration process reportedly takes 2 to 3 weeks. However, it is possible to register a company within few days by means of unofficial payments.

Registration with the Local Court. In accordance with the procedures set forth in the Law on Entredivneurs, all legal businesses are required to register at the local court that has jurisdiction over the legal address of the enterprise. Further, all registered companies are required to officially record any changes in their registration data.

In order to register an LLC, the following documents must be submitted to a local court:

(1) Application form signed by the founders. Application form must include:

Firm name (firm);

Organizational and legal form;

Location (legal address);

Subject of the activity;

Information on the start and end of the fiscal year;

For each founder - the family name, first name, date and place of birth, occupation and place of residence of the entredivneur;

Redivsentative authorities.

(2) Charter (five copies)

(3) Minutes of the foundation meeting

(4) Founder’s decision to set up the company

(5) Director’s sample of signature

(6) Document confirming the legal address of the company (this may be a lease agreement, a certificate issued by manager of the company that subleases the office space, or notarised consent of the owner of a flat)

(7) Copy of the company founder’s passport, if the founder is an individual person; or a registration certificate (e.g., extract from the register of enterprises), if the founder is a legal entity. If the founder is a Georgian company, the certificate of the local court should be less than 1 week old.

(8) The amount of the authorized equity capital and the documents confirming payment of at least 50 percent of the equity capital (a certificate from the bank or, for in-kind contributions, an auditor’s assessment of its value)

(9) A document confirming payment of the registration fee.

To register a JSC, the decision of the supervisory board to appoint directors is required in addition to the above-listed documents.

The following supporting documents are required to register a branch or a redivsentative office:

(1) Charter of the foreign company

(2) Decision of the foreign company to set up the redivsentative office

(3) Document certifying the solvency of the foreign investor (e.g., a letter from a foreign bank or a foreign tax service)

(4) Bylaws of the redivsentative office.

All registration documents must be submitted in the Georgian language and must be notarized. Foreign documents must be certified by an apostille²¹ or undergo a procedure of legalization and be translated by a certified translator.

According to the law, the courts are required to process registration applications within 7 days. Registration of amendments to a charter or any other changes to entries are to be processed within 7 days. No official expedited service is available, but reportedly registration can be performed in 1 day if the court registrar has the time and if an additional unofficial payment is made (roughly 100–400 GEL). Box II.2 provides a summary of the official registration fees.

A company receives a court resolution when the company is registered. The law on entredivneurs provides automatic registration by default if the court fails to respond within 7 days.

If a company changes its legal address to an address that falls within the jurisdiction of another local court, the company is not required to change its court registration and its registration file stays at the initial court of registration. However, the company must re-register with the local tax office that has jurisdiction over the new legal address.

Registration Fees. Registration fees are determined by the company’s legal form. The court stamp duty is currently $180 to register a JSC, $80 to register a LLC, $90 to register a branch of a JSC, and $40 to register a branch of a LLC. Fees for registering changes to entries are half of the fee for registering the respective type of company (i.e. $40 to register changes for an LLC and $90 for a JSC).

All the payments charged for notarization of an enterprise’s charter are different in each case and depend on the amount of the authorized capital. The percentage of the amount to be paid is reduced with the increase of the authorized capital and ranges from 3 to 0.05 per cent of the authorized capital. The charge must not be less than GEL 25 and must not be more than GEL 50. It should be noted that a 20% VAT is added to the sum charged for the notarization.

Peripheral services can be provided by private lawyers and related professionals at additional cost. Lawyer charge in the range of $300-600 to draft a company’s charter and to provide advice. A notary public typically charges about $30 to certify the documents and about $2 per page to certify copies of the documents.

Taxation Department Registration. In accordance with the Cabinet of Ministers Decree 899 (December 31, 1994), within 10 days of completing the company registration process, an investor must register with the local office of the taxation department that has jurisdiction over the legal company address. This registration requirement applies to all tax types except the value-added tax (VAT). VAT registration is required for all firms with total taxable transactions greater than GEL 24,000.

A taxpayer registration application package should contain the following documents:

(1) Taxpayer registration form (4 copies)

(2) Court resolution showing company registration (notarised copy)

(3) Charter (original or notarised copy)

(4) Minutes of the foundation meeting (original or notarised copy)

(5) Decision to set up the company (original or notarised copy)

(6) Director’s sample of signature (notarised)

(7) Document confirming the legal address of the company (original or notarised copy).

In accordance with Decree 899, the Taxation Department is required to issue a taxpayer registration certificate within 10 working days. The compliance with the 10-day limit depends on whether or not operations at local taxation offices are computerized. There is no fee for taxpayer registration.

Taxpayers are assigned a 9-digit taxpayer identification number (TIN). The first digit specifies the taxpayer type (1 is for an individual person, 2 is for a legal entity), the next 7 digits are sequential numbers (each local tax office has its own block of 7-digit sequential numbers), and the last digit is a control digit. There is no relation between a court registration number and a TIN.

If a company changes its legal address, opens a branch, changes bank accounts, or makes any other changes that require registration at the enterprise register, then the investor is required to notify the tax department within 10 days of the change.

As of June 2001, sole proprietorships are no longer required to register with the courts. They need only to register with the relevant local taxation office.

If a company’s total taxable transactions over the divvious 12 months equal or exceed 24,000 GEL, the company is required to register for VAT within 1 month of the change in tax liability status. A separate VAT registration certificate is issued.

Stamp Approval. In accordance with the amendments to the Law on Entredivneurs (effective June 1, 2001), company stamps are no longer required, and state institutions have been explicitly prohibited from requiring a company to divsent a stamp for any purpose. Information regarding this change in the law apparently has not been widely disseminated because in July 2001, many companies and lawyers still complied with the old requirements for company stamps. Further, it appears that the police department continues to issue stamp approvals (at a fee of 10 GEL) despite the change in the law.

Department for Statistics Registration. Amendments to the Law on Entredivneurs and the Administrative Code have eliminated the requirement that a business must register with the Department of Statistics. Under the new regulations, this requirement has been replaced by a notification process between the courts and the Department of Statistics. The new regulations may be summarized as follows:

In accordance with the Law on Entredivneurs,²² the courts are required to send copies of the court business registration resolutions to the Statistical Department on a monthly basis. This information should be submitted by the 5th day of every month.

On June 19, 2001, parliament amended the Law on Entredivneurs and abolished the provision that the courts must assign tax and statistics codes when a company has registered with the relevant bodies.

Amendments²³ to the Administrative Code in July 2001 have removed the provision that companies must provide a statistical code in order to open a commercial bank account.

However, in practice, companies throughout Georgia still go to the central bureau of the statistical department in Tbilisi to register in order to comply with the divvious provisions of the law.

Public Availability of Information. Company registration data are recorded in the registration card as approved under the law (see in the above). The same format is used to respond to requests for company registration information. The following information is required to complete a registration card:

• Name of the local court

• Court registration number

• Company name

• Address

• Activities

• Equity capital

• Names of partner(s), their occupations, and addresses

• Names of director(s), their occupations, and addresses

• Members of the supervisory board, their occupations, and addresses (if a supervisory board was established)

• Redivsentation powers of director(s)

• Trade redivsentative (procurator)

• Legal status

• Date of registration

• Remarks

As mentioned above, a company may be registered in any one of 66 local courts throughout Georgia.

2. Company Licensing System 

General. The law of Georgia on "Licensing of Entredivneurial Activity" adopted on 14 May, 1999 defines those business activities which can be carried out only by licenses issued by the corresponding state agencies.

The law lists those types of business activities about which corresponding state bodies must be notified. The law does not cover export-import relations, environmental control and utilization of natural resources, electric power, oil and natural gas, communication and post services, where licensing procedures are regulated by special legal acts.

Activities to be Licensed and Licensing Agencies. The types of business activities that require obtaining a license and the respective state licensing agencies are as follows:

1. Insurance activities and intermediary (agency) services in the field of insurance – Insurance State Supervision Service of Georgia;

2. Banking activities, activities of foreign currency exchange points – National Bank of Georgia;

3. Production, repair of and trading with arms and ammunition – Ministry of Justice of Georgia (within the limits defined by National Security Council of Georgia);

4. Air transportation of passengers and goods or/and carrying out aviation related work at the territory of Georgia, maritime transportation and hauling – Ministry of Transport and Communications of Georgia;

5. Activities of the regulated participants of the securities market (brokerage companies, brokers, stock exchanges, central securities depositary and securities registrars) – Ministry of Finance of Georgia;

6. Organizing lotteries and other money-making games – Ministry of Finance of Georgia;

7. Production of medicines and substances that are subject to special control, medicines used in veterinary, activities of health care organizations – Ministry of Labor, Health and Social Protection;

8. Activities of diagnostic centers for technical examination of motor vehicles –Ministry of Internal Affairs of Georgia;

9. Design - construction works – Ministry of Urbanization and Construction of Georgia (in the cases defined by the law);

10. Activities of auditing firms – Parliamentary Council on Audit Activity of Georgia;

11. Activities of private educational institutions – Ministry of Education of Georgia;

12. Production and repair of metrological and measurement equipment – Department of Standardization, Metrology and Certification of Georgia;

13. Production of food products (including child's food products) and tobacco - Ministry of Agriculture and Food of Georgia.

Notification about Carrying Out Activities. The following fields of activities are subject for compulsory notification of the relevant state agencies as defined in this paragraph:

1. Activities related to divcious metals, divcious stones and their products – Testing Supervisory Inspection of Ministry of Finance of Georgia;

2. Aero photographing of the country's territory, creating state geodesic network, works related to the publication of maps and plans – State Department of Geodesy and Cartography;

3. Activities related to job finding services (including abroad) - Ministry of Labor, Health and Social Protection;

4. Geologic activities - State Department of Geology;

5. Transportation of passengers by a minicab – Relevant Department of local government (self-government) authorities;

6. Activities of public dining halls, which can simultaneously accommodate 25 persons or more - Relevant Department of local government (self-government) authorities.

The notification is made as a statement, which includes:

1. For an individual – data about the identification card of a citizen of Georgia, registration into enterprise register, occupation, home address);

2. For a legal entity - the company's name, legal status, location (legal address), name of authorized redivsentative;

3. Indication about the type of activity and the place, where the person carries out this activity.

Within 15 days from starting the activity, a person is required to notify about starting this activity the relevant agency, which is obliged to issue a document certifying the receipt of such notification within 3 days after receiving the notification.

The Documentation that has to be Submitted for Obtaining a License. A license seeker submits a written application about obtaining the license to a licensing agency. The application about obtaining the license should include:

For an individual:

1. First name, last name, date and place of birth

2. Registration data from the registry

3. Registration number

4. Occupation

5. Work and home addresses

6. Type of license requested

7. Document proving the payment of license fee

For a legal entity:

1. Company name

2. Organizational-legal status

3. Legal address

4. First and last names of company redivsentative

5. Type of license requested

6. Proof of payment for license fee

Licensing Fee. A license seeker pays a licensing fee for issuing a license certificate. The amount of a licensing fee, the procedure of its payment into the budget and claiming back is defined in "Law of Georgia on Licensing Fees". For issuing a copy of a license, the license holder covers the cost of making a copy of the license.

Duration of a License. A license is issued for an indefinite period of time. A license holder carries out the activity defined by the license since the date of making decision by the licensing agency about issuing the license. The transfer of a license to another person is prohibited.

License Register and its Maintenance. There are two types of license register: a) Departmental license register; and b) The state license register. A licensing agency enters the data related to a license into a departmental license register within 3 days after making the decision about issuing a license. The following data is recorded into a departmental license register:

For an individual:

1. Data about the holder of a license (first name, last name)

2. Home address

3. The type (types) of licensed activities

4. The number of a license and the date of issue

5. Data about suspending, resuming, revoking a license or issuing a copy of the license

For a legal entity:

1. Data about the holder of a license (the company's name)

2. The company's legal status

3. The data of the state registration

4. Location (legal address)

5. The data about making amendments into the company's name, legal status and location (legal address), as well as about the reorganization of the company

6. The type (types) of licensed activities

7. The number of a license and the date of issue

6. Data about suspending, resuming, revoking a license or issuing a copy of the license

2. Local Enterprises

3. Joint Smpanies traded at Georgian Stock Exchange

First, we will analyse the aggregate figures concerning all Joint Smpanies (JSC) traded at Georgian Stock Exchange (GSE) and then will divsent the data on individual enterprises.

Market Capitalization. The figures describing the market capitalization of all Joint Smpanies traded at GSE are divsented in Table 4.1.1.1:

Table 4.1.1.1Market Capitalization of all JSCs

Year	2000	2001	2002
Market Capitalization (GEL)	66,799,785	184,017,886	218,402,008
Source: GSE

The more useful benchmark for judging the market performance of the private companies usually is the ratio of the market capitalization over the Gross Domestic Product (GDP) of that country. Figure 4.1.1.1 shows the values of this ratio for Georgia and also for other Eastern European (mainly former Soviet Block) countries, whose economies are in transition mode from the command economy to a market driven system likewise Georgia. It can be seen from this Figure that Georgian stock market is rather underdeveloped in comparison to other Eastern European countries, not to speak about the Western European Countries and the USA, which have much higher values of this ratio.

Fig. 4.1.1.1. Market Capitalization as % of GDP for Eastern European Countries, including Georgia

It is interesting to note that about 82.8% of the total market capitalization is formed by only 10 companies. The remaining 278 companies that are admitted for trading at the GSE constitute to only about 17.2% of the total market capitalization. This is shown in Fig. 4.1.1.2:

Fig. 4.1.1.2 Market Capitalization of 10 Leading Georgian Joint Smpanies

Volume and Value of Trades. The figures given in Table 4.1.1.2 reflect the combined volume and value of trades of all Joint Smpanies conducted at GSE since its inception to date.

Table 4.1.1.2 Volume & Value of Trades at GSE

Year	2000*	2001	2002	2003**
Volume of Trades (Shares)	4,354,640	10,862,784	11,418,196	5,103,555
Value of Trades (GEL)	5,892,326	13,077,244	8,401,206	1,398,781
* Apr. – Dec. 2000; ** Jan. – Oct. 2003. Source: GSE

Value Turnover. The value turnover is calculated by dividing the annual value of trades over the total market capitalization in that year. This is shown in Table 4.1.1.3 for years 2001 and 2002:

Year	2001	2002
Value of Trades (GEL)	13,077,244	8,401,206
Market Capitalization (GEL)	184,017,886	218,402,008
Value Turnover	7.11%	3.85%
Source: GSE

Table 4.1.1.3 Value Turnover at GSE

The large part of the total value of trades comes on the trading of the securities of 10 leading companies mentioned in the above. This is shown in Fig. 4.1.1.3:

Fig. 4.1.1.3 Value of Trades of 10 Leading Georgian Companies

Liquidity. All the factors considered in the divvious paragraphs, i.e. Low Market Capitalization, low Volume and Value of Trades, and low Value Turnover, all indicate that there is little (or even no) liquidity at the GSE. Indeed, out of 282 companies, whose shares are currently admitted for trading at the GSE, the shares of only 93 companies (i.e. 33%) were traded in 2002. The shares of the remaining companies were not traded during the year at all. This is shown in Figure 4.1.1.4:

Fig. 4.1.1.4 Number of Admitted Companies Actually Traded in 2002

Even those companies, whose shares have been traded in the past, do not satisfy the requirements for getting listed at the GSE. The main listing criteria are: a) Company should be functioning for more than 3 years; b) Equity Capital of a company should be greater than 100,000 USD; and c) Company should be profitable for 2 years during the last 3-year period (GSE, 2003). Out of 282 companies, only 2 companies were listed at the GSE in 2001, while only 1 company has been left listed in 2002, after the GSE removed 1 company from the list. Furthermore, the total number of trades and therefore an average number of trades per trading session are also extremely low, as shown in Tab. 4.1.1.4:

Table 4.1.1.4 Average Number of Trades per Trading Session

Year	2000	2001	2002
Total Number of Trades	601	1,591	1,343
Number of Trading Sessions	80	102	102
Average Number of Trades per Session*	8	16	13
* Figures are Rounded to the Nearest Integer Source: GSE

In total, 309 trading sessions have been held during 2000 – 2003 and 3780 trades have been executed during this period. It then follows, that average number of trades per trading session (i.e. per day) is equal to 12. This figure gives some idea about the number of buyers and sellers participating in trades each day. Also note that the total number of the securities admitted for trading at the GSE is equal to 282. All these means that there are virtually no liquid shares at the GSE.

Composite Index. The poor performance of the GSE in terms of all the above-mentioned market indicators indicate that the nature of the composite index would be rather unreliable and would not reflect the true picture of market performance. One solution to the problem is to select only the leading companies (blue-chip companies) and construct the index for these companies. Indeed, such approach is employed by Georgian Investment Bank Galt & Taggart (G&T) Securities LLC, which publishes so-called G&T Blue-Chip Index. This is shown in Fig. 4.1.1.5:

Fig. 4.1.1.5 G&T Blue-Chip Index (GEL), 2002

The problems facing GSE. Below is the problem tree describing the set of problems currently facing GSE:

General recommendations for improving the performance of GSE. The fact that at divsent there is no sound and liquid capital market in Georgia can be attributed to two fundamental problems: (I) A low potential of the capital market in Georgia; and (II) A high unrealized potential of Georgian capital market. The government of Georgia (GoG) should undertake both, long-term and short-to-medium term measures in order to improve the performance of Georgian Stock Exchange (GSE).

(I) It is suggested that the potential of the capital market in Georgia could be increased by means of:

Long-term goals:

Increasing the rate of country's economic growth;

Reducing the size of the shadow economy;

Attracting higher Foreign Direct Investments (FDI).

short-to-medium term goals:

Conducting the 2^nd round of the privatization through GSE by involving investment funds into the privatization process;

Including the majority of leading Georgian companies into the listing of the securities traded at GSE.

(II) A high unrealized potential of Georgian capital market can be explained by low confidence (trust) amongst the investors towards the stock market, which in turn is the result of the problems existing in terms of protecting the shareholders' rights. In order to solve the latter problem, there is a need: (i) to improve the corporate governance practice, and (ii) to ensure the fairness of the market. These mainly are the goals that can be achieved in short-to-medium term.

The measures needed to improve the corporate governance practice in Georgia include:

To simplify the tax system;

To adopt the International Standards on Auditing (ISA) into law;

To enforce the International Accounting Standards (IAS).

These measures are designed to remove the incentives to pay bribes for the purposes of hiding profits and avoiding paying taxes, which would result in lower levels of corruption in tax administrations and increased transparency of corporate disclosure.

Another measure to improve the corporate governance practice in Georgia is:

To conduct an educational campaign amongst shareholders, company directors and the members of supervisory boards.

The objective of the educational campaign is to lessen the entrenched culture of abusive self-dealing and to give to shareholders sufficient knowledge about their rights. The entrenched culture of abusive self-dealing can also be alleviated by means of putting in place effective regulations and institutions for controlling the self-dealing. All these should lead to regular shareholder meetings and increase the role of the supervisory boards in giving the strategic direction to companies.

Another important factor for improving the corporate governance practice in Georgia is to have an active market for corporate control. Namely, there is a need:

To put in place an adequate legislation for investor protection. More specifically, to introduce the investment compensation schemes, strengthen the bankruptcy system and adopt the rules for takeovers;

To adopt the legislation regulating the financial intermediaries (such as private pension funds and mutual funds), which at divsent are absent in Georgia.

Properly functioning financial intermediaries would act as large domestic institutional investors and ensure that large volumes of capital resources are directed to the market. This, in turn, would facilitate the competition in the financial market and lead to an active market for corporate control.

The measures needed to ensure the fairness of the market include:

To Enforce a trading transparency;

To deter an unfair trading.

The last two objectives can be reached by means of ensuring an effective functioning of the National Securities Commission of Georgia (NSCG), which should be capable of ensuring an effective enforcement of the securities regulations. More specifically:

The NSCG should have an adequate Inspection, Investigation and Enforcement power, including the criminal prosecution authority;

The Government of Georgia (GoG) should increase the budgetary support of the NSCG to ensure a proper functioning of the agency;

The NSCG should be more accountable to GoG for its activities regarding the regulation of Georgian capital market;

The NSCG should develop a program to supervise the activities of Self Regulatory Organizations (SROs); and

The NSCG has to develop a code of ethics for its staff.

Another measure needed to ensure the fairness of the market is:

To enforce adequately the rights of the shareholders, which should be done through the improved court system.

In order to improve Georgian court system, it is important to conduct training of judges in the topics concerning the corporate law and operation of the securities market

All the above-described measures are designed to achieve in future a sound and liquid capital market in Georgia.

Specific recommendations for improving the performance of GSE. More specific recommendations, together with the objectives to be achieved, performance indicators, responsible agencies, duration, etc., are divsented in the next page. Objectives given in parenthesis correspond to the Problem Tree given in the above:

Recommendations	Objectives to be Achieved	Performance Indicators	Responsible Agencies	Duration	Comment
Conduct the 2nd round of the privatization process through GSE; Involve the Investment Funds into the privatization process.	Privatization process is improved (Objective 13); Potential of the capital market is increased (Objective 2).	The companies included in the privatization list of the 2nd round should be privatized through GSE; A number of (at least 3-5) Investment Funds take part into the privatization process.	DSPM NSCG GSE	1-2 years	With the technical assistance of the WB.
About 80% of the leading Georgian companies, which currently are not traded at GSE, have to be included into the list of the securities traded at GSE; Government of Georgia (GoG) must introduce some incentives (e.g. simplified tax regime) for those corporations that decide to be listed at GSE.	Majority of leading companies are traded at GSE (Objective 4); Potential of the capital market is increased (Objective 2).	Majority of leading Georgian companies are listed at GSE; Simplified tax regime is introduced for the corporations traded at GSE.	PoG MoF NSCG GSE	1-2 years	With the technical assistance of the WB
Prepare and adopt the amendments into the Tax Code of Georgia (TCG); Conduct the tax administration reform.	The tax system is simplified (Objective 7); There is an adequate tax code (Objective 6); Incentives for paying bribes/Hiding profits are reduced (Objective 11); The level of corruption is reduced (Objective 10); Transparency of corporate disclosure is increased (Objective 12); Reliability of financial disclosure is increased (Objective 28); Corporate governance practice is improved (Objective 17).	Business-friendly tax code is in place; Simplified tax regime for securities and corporations are established; No frequent changes into the tax code are made; Collection of taxes is increased; Companies file more reliable information about their profits; Companies increase the transparency and quality of corporate disclosure.	PoG MoF STD	6 months Ongoing	With the technical assistance of the WB; In consultations with NSCG.
Make amendments into Law on Audit Activity (LAA) to adopt International Standards on Auditing (ISA); Ministry of Finances (MoF), together with Parliamentary Council on Audit Activity (PCAA), requires audit companies to conduct audits in compliance with the International Standards on Auditing (ISA).

ISA is adopted into the law (Objective 34); There are adequate auditing standards (Objective 33); Incentives for paying bribes/Hiding profits are reduced (Objective 11); The level of corruption is reduced (Objective 10); Transparency of corporate disclosure is increased (Objective 12); Reliability of financial disclosure is increased (Objective 28); Corporate governance practice is improved (Objective 17).	International Standards on Auditing is adopted into law; Audits are conducted in compliance with International Standards on Auditing; Companies file more reliable information about their profits; Companies increase the transparency and quality of corporate disclosure.	PoG PCAA MoF	6 months Ongoing	With the technical assistance of the WB; In consultations with NSCG and GSIA.
National Securities commission of Georgia (NSCG) requires reporting companies to divpare their financial accounts in compliance with the International Accounting Standards (IAS).	IAS is enforced (Objective 9); There are adequate accounting standards (Objective 8); Incentives for paying bribes/Hiding profits are reduced (Objective 11); The level of corruption is reduced (Objective 10); Transparency of corporate disclosure is increased (Objective 12); Reliability of financial disclosure is increased (Objective 28); Corporate governance practice is improved (Objective 17).	Reporting companies divpare their financial accounts in compliance with the International Accounting Standards; Companies file more reliable information about their profits; Companies increase the transparency and quality of corporate disclosure.	NSCG MoF	3 months Ongoing	In consultations with GSIA.
National Anti-Corruption Bureau of Georgia (NACB) conducts the assessment of the activities carried out by the tax administrations.	The level of corruption is reduced (Objective 10); Transparency of corporate disclosure is increased (Objective 12); Reliability of financial disclosure is increased (Objective 28); Corporate governance practice is improved (Objective 17).	Index of corruption is lowered; Companies file more reliable information about their profits; Companies increase the transparency and quality of corporate disclosure.	NACB	Ongoing	With the technical assistance of the WB.
Georgian Securities Industry Association (GSIA) should conduct training courses, seminars, workshops, etc. amongst shareholders, company directors and members of supervisory boards on the best practices of corporate governance; NSCG enforces the corporate governance standards.	Educational campaign is conducted (Objective 27); Shareholders have sufficient knowledge about their rights (Objective 26); Entrenched culture of abusive self-dealing is lessened (Objective 16); Shareholders' meetings are held regularly (Objective 29); The role of supervisory boards is increased (Objective 35); Corporate governance practice is improved (Objective 17).	Majority of company directors and members of supervisory boards, as well as interested shareholders take part in training courses; NSCG conduct quarterly/annual audits of JSCs; Shareholders' meetings are held annually; Supervisory boards' meetings are held on a quarterly basis.	NSCG GSIA	1 year Ongoing	With the financial and technical assistance of the USAID.
Prepare and adopt the regulations for Pension Funds; Prepare and adopt the regulations for Mutual Funds.	Legislation for financial intermediaries is adopted (Objective 23); Financial intermediaries are well-developed (Objective 21); Large domestic institutional investors are divsent at GSE (Objective 20); Larger volumes of capital resources are directed to GSE (Objective 18); There is a competition at GSE (Objective 22); There is a strong market for corporate control (Objective 30).	Private Pension Funds start functioning in the country; Mutual Funds start functioning in the country; Large domestic institutional investors take part in trading at GSE; Volume of trades at GSE is increased substantially; Number of participants in trading at GSE is increased; Investment funds take active role in the work of supervisory boards/shareholders meetings.	PoG MoF NSCG GSE	1 year	With the technical assistance of the WB.
Adopt the investment compensation schemes; Strengthen the bankruptcy system; Adopt the rules for takeovers.	Adequate legislation for investor protection is adopted (Objective 24); Financial intermediaries are well-developed (Objective 21); Large domestic institutional investors are divsent at GSE (Objective 20); Larger volumes of capital resources are directed to GSE (Objective 18); There is a competition at GSE (Objective 22); There is a strong market for corporate control (Objective 30).	Investment compensation schemes are in place; Regulations for the bankruptcy system are in place; Rules for takeovers are in place; Large domestic institutional investors take part in trading at GSE; Volume of trades at GSE is increased substantially; Number of participants in trading at GSE is increased; Investment funds take active role in the work of supervisory boards/shareholders meetings.	MoF NSCG GSE	1 year	With the technical assistance of the WB.
Assign an adequate Inspection, Investigation and Enforcement power, including the criminal prosecution authority to the National Securities Commission of Georgia (NSCG); Increase the budgetary support of the NSCG; Make the NSCG accountable to the President of Georgia; Develop the code of ethics for NSCG; Develop the program to supervise Self Regulatory Organizations (SROs); NSCG installs the market surveillance and stock watch system.	Power of the NSCG is increased (Objective 40); Budgetary support of the NSCG is increased (Objective 37); Accountability of the NSCG is increased (Objective 36); Code of ethics for the NSCG staff is developed (Objective 38); Program to supervise Self Regulatory Organizations (SROs) is developed (Objective 39); The NSCG does function in an effective manner (Objective 39); Regulations are enforced in an effective manner (Objective 42); Trading transparency is enforced (Objective 43); Unfair trading is deterred (Objective 44); Fairness of Market is ensured (Objective 45).	NSCG has the criminal prosecution authority; Budget allocations to NSCG is increased; Rules are in place that make the NSCG accountable to the President of Georgia; The code of ethics for NSCG is in place; The program to supervise SROs is in place; Trades are conducted in a transparent manner/information is easily available; Facts of unfair trading are detected and/or deterred.	PoG NSCG GSE	6 months – 1 year	In consultation with the IOSCO.
Special training courses are conducted for the judges dealing with corporate disputes/ protection of shareholders rights.	Georgian court system is improved (Objective 32); Shareholders rights are enforced adequately (Objective 31); Fairness of Market is ensured (Objective 45).	Judges have sufficient knowledge of corporate/securities laws; Number of complaints against judges is reduced.	MoJ NSCG GSIA	6 months

4. Joint Smpanies not traded at Georgian Stock Exchange

Kazbegi JSC
Sector:	Consumer Goods
GSE Ticker:	KAZB
Summary Information: Kazbegi JSC is the leading Georgian brewery and producer of non-alcoholic drinks, coffee, cigarettes, etc.; Last year the company reported an imdivssive 75% increase in annual sales to GEL 9.4 mln., although the sales figure fell somewhat behind the management's ambitious estimate of GEL 12 mln.; Net profit of the company increased by 18% to GEL 1.4 mln., translating into EPS of GEL 0.51; Capital expenditures amounted to GEL 1.7 mln. that were mainly used for modernizing the existing facilities; The company's assets grew by 21% over the year to reach GEL 7.7 mln.; The company's equity increased by 25% and amounted to GEL 5.6 mln.; The company continues to pay dividends, which amounted to GEL 240 thousand or GEL 0.086 per share. At current prices dividend yield amounts to 3%.
Source: Galt & Taggart

Kazbegi JSC - Summary
Current Price (GEL)	2.50
Year High (GEL)	2.50
Year Low (GEL)	2.50
Market Capitalization (GEL mln.)	7.0
Shares Outstanding (mln.)	2.8
Free Float (%)	42.7
Free Float (GEL mln.)	3.0
Source: Galt & Taggart

Kazbegi JSC – Key Figures (IAS)
Year Ending December 31	2001	2002
Net Sales (GEL mln.)	5.4	9.4
Net Income (GEL mln.)	1.2	1.4
EPS (GEL)	0.43	0.51
Total Assets (GEL mln.)	6.3	7.7
Equity/Assets (%)	70.8	73.2
ROA (%)	19.0	18.2
ROE (%)	26.8	24.9
Book Value per Share (GEL)	1.60	2.00
P/E	5.77	4.91
P/BV	1.57	1.25
Sources: Kazbegi, Galt & Taggart

Kazbegi JSC – Valuation (Refer to Annex 1)
Valuation Limits	True Value (GEL mln.)	True Value/Market Cap.
Low	15.0	2
High	22.5	3

BANK OF GEORGIA JSC
Sector:	Financial Services
GSE Ticker:	GEB
Summary Information: Bank of Georgia JSC is the country's leading commercial bank; Last year the company reported about 6% increase in annual sales to GEL 36.6 mln.; Net profit of the company has decreased by about 7% in 2002 mainly due to higher administrative expenses; The Earning Per Share (EPS) in 2002 was GEL 0.72; The company's assets grew by remarkable 30% over the year to reach GEL 176.7 mln.; The company's equity increased by 13% over the last year and amounted to GEL 46.6 mln.; The company continues to pay dividends, which amounted to GEL 2 mln.or GEL 0.20 per share.
Source: Galt & Taggart

BANK OF GEORGIA JSC - Summary
Current Price (GEL)	1.55
Year High (GEL)	1.90
Year Low (GEL)	1.00
Market Capitalization (GEL mln.)	15.5
Shares Outstanding (mln.)	10.0
Free Float (%)	47.6
Free Float (GEL mln.)	7.4
Source: Galt & Taggart

BANK OF GEORGIA JSC – Key Figures (IAS)
Year Ending December 31	2001	2002
Net Sales (GEL mln.)	34.4	36.6
Net Income (GEL mln.)	7.7	7.1
EPS (GEL)	0.78	0.72
Total Assets (GEL mln.)	135.6	176.7
Equity/Assets (%)	30.5	35.8
ROA (%)	5.7	4.0
ROE (%)	18.6	16.5
Book Value per Share (GEL)	4.13	5.14
P/E	2.02	2.15
P/BV	0.38	0.30
Sources: Bank of Georgia, Galt & Taggart

BANK OF GEORGIA JSC – Valuation (Refer to Annex 1)
Valuation Limits	True Value (GEL mln.)	True Value/Market Cap.
Low	50.8	3.3
High	68.6	4.4

3. Human-Resource Development in the Private Sector

1. Business Schools/Universities

European School of Management (ESM).

Data Sheet.

1. European School of Management ESM-Tbilisi

2. 40, Vazha Pshavela Ave. 1077, Tbilisi, Republic of Georgia
   Tel.: (995-32) 39 68 64
   Fax: (995-32) 37 55 16
   e-mail: [email protected]
   Internet: esm-tbilisi.ge

3. Simon Kadagidze

4. Mission of European School of Management in Tbilisi (ESM-Tbilisi) is to create a new Georgian management elite - professionally thinking and professionally acting under market economy managers – providing high quality management education using modern and innovative teaching technologies and highly qualified faculty.

5. LTD, Nonprofit

6. Self financed through students tuition fees

7. 1992

8. 20

9. 87

10. 4 - Undergraduate Program, Graduate Program, Base Certificate Program, Foundation Program

11. 224+46+58+50

12. Look the attached sheets

13. Undergraduate – 4 years
    Graduate – 2 years
    Base Certificate Program – 7 months
    Foundation Program – 1 year

14. Undergraduate - 224
    Graduate - 46
    Base Certificate Program - 58
    Foundation Program - 50

15. School leavers and young professionals

16. Undergraduate Program - secondary school leavers with certificate
    Graduate Program - young people with min bachelor
    diplomas and min 2 years experience
    Base certificate program - any person with high education
    Foundation Program - secondary school leavers or students
    in their last school year

17. Undergraduate - $ 2200/ year
    Graduate - $ 3500
    Base Certificate Program - $ 1200
    Foundation Program - $ 1000

18. Entrance examinations, visiting schools with divsentation, visiting educational fairs, marketing campaign through an advertising agency

19. Georgian with good command of either English or German languages.

20. Undergraduate - Bachelor of Business Administration
    (General Management)
    Graduate - Master of Business Administration
    (General Management, Finance, Marketing)
    Base Certificate Program - Certificate

21. $ 2000/year

The ESM Evening & Weekend MBA Program, ^{A Curriculum} 2003-2005

Overseas Exhibitions and Trade Missions. GEPA is actively involved in divparing overseas business visits for Georgian business groups to meet with new trading partners; we also divpare and part finance Georgian sectors' participation at international exhibitions. Many foreign delegations, commercial and governmental, pay a visit to our agency during their visits to Tbilisi. Study tours for sectors with potential have been organized to Canada, UK and Germany.

With financial assistance from the German government's technical assistance programme, GTZ, GEPA part-finance participation of Georgian exporters in overseas trade shows/exhibitions. GEPA/GTZ have already assisted companies to take part in exhibitions in Germany, France, Italy and the Middle East.

Conditions for participation are that export products must be of export quality, prices examined by German specialists and a group of a minimum of three producers from one sector participates in each exhibition.

Training Center. GEPA offers a wide range of export training courses to Georgian businessmen, civil servants, and commercial banks, on subjects ranging from export pricing to utilizing e-commerce in exporting. All courses are taught by international and Georgian specialists in their given fields of specialization.

A new Training Programme that Georgian Export Promotion Agency offers to Georgian companies differs considerably from the Programme already conducted by GEPA within the framework of divvious TACIS project. It includes an In-Company Training that is designed to meet the training needs of companies participating in GEPA's Export Development Program.

Customized programs have been developed for specific companies to increase the professional skills of company managers and staff and thereby help them improve their export activities. In-company training is considered as part of the consultancy service provided by GEPA to existing exporters and to companies with the potential to export. Format and content of training depends on business features of individual companies. Mostly practical exercises and case studies have been used to achieve the best results.
Alongside in-company training, GEPA continues to offer general training in Export Marketing, Export Promotion, Strategic Business Planning etc.

GEPA hopes that new arrangements run in the field of training, will be of real assistance to Georgian companies in enhancing their export marketing activities and in achieving increased export orders.

Publications. GEPA staff divpares a variety of publications for both Georgian exporters and overseas companies. These publications include Export Newsletter, Market Briefs, Fact Sheets and the Directory of Georgian Exporters. Recently a brochure on Georgian viticulture and winemaking was divpared in corporation with the Institute of Viticulture.

Export Newsletter. Export Newsletter is available both in print and electronic formats on our website. It is circulated to Georgian companies and international organizations. It includes information on opportunities outside Georgia for exporters, case studies on successful Georgian and foreign companies and an update on any changes in Georgian, and foreign legislation, which may affect exporters. It also advises of forthcoming exhibitions and incoming buying missions from overseas.

Market Briefs. Market Briefs are divpared in Georgian and are available for Georgian companies interested in specific industries and markets. Market briefs divpared to date are as follows:

1. UK Wine Market

2. Pipes' Market in Italy

3. Organic Food market in Germany

4. UK Nuts Market

5. Timber Market in Germany

6. UK Tea market

7. Intellectual Property - overview

8. EU Fertilizer Market

9. USA and EU Markets for Essential Oils

10. Wine Market in Japan

11. Mineral Waters in Japan

Sample Market Brief: Wine Market in Japan

Wine Market in Japan 1. Market Overview 1.1 Market conditions 1.2 Trends in local production 1.3 Wine imports 1.4 Consumption trends 2. Import regulations 2.1 Import restrictions and application procedures 2.2 Labelling requirements 2.3 Tariff rates 3. Distribution Channels 4. Consumption trends 4.1 Prices 4.2 Wine categories 4.3 Japanese consumption traditions 5. Market Entry 5.1 Entering Japanese market 5.2 Wine sales promotion strategies 6. Annexes

Sample Market Briefs: Mineral Waters in Japan

Mineral Waters in Japan 1. Market Overview 1.1 Supply Trend 1.2 Import Trend 2. Import System and Regulations 2.1 Imports Regulated by Food Sanitation Law 2.2 Tariff rates 2.3 Classification of Mineral Water 2.4 Labelling requirement and a labelling sample 2.5 Outline of Container/Packing Recycling Law 2.6 International Standards for Mineral Waters 3. Distribution 3.1 Distribution Routes 3.2 The Function of Wholesalers 3.3 Distribution Expenses 3.4 Sales Promotions 4. Consumption trends as shown by survey of retailers and consumers 4.1 Consumption trends seen in retailers 4.2 Trends revealed by consumer research 5. Current Sales and consumption and future prospects 5.1 Current sales and consumption 5.2 Future prospects 6. Advise on Accessing the Japanese Market Appendix 1 Outline of provisions on mineral water provided for under the Foods Sanitation Law 2 Example Retail Price of Mineral Water 3 Selected domestic Suppliers and Importers 4 Wholesalers, Distribution Agents 5 Relevant Organization 6 Exhibitions and Trade Fair

4. Foreign Investment Promotion

1. Government’s Foreign Investment Promotion Policy

Removing Administrative Barriers to Investment in Georgia. FIAS (Foreign Investment Advisory Service, a joint service of the International Finance Corporation (IFC) and the World Bank) conducted a study of administrative barriers to investment in Georgia. The principal counterpart for this project was the Presidential Commission on Support of the Private Businesses in Georgia. The Presidential Commission on Support of Private Businesses is the lead counterpart for this project (for more details refer to Paragraph 1.3.1 describing the activities of Foreign Investment Advisory Council - FIAC). The main objective of this study was to identify the major administrative impediments to investment and to recommend the steps for streamlining, simplifying and increasing transparency in order to help improve the environment for business in Georgia. Although the primary focus of the study was foreign investment, the administrative procedures and regulatory framework affect domestic investors as well. Therefore, applying the principle of national treatment (i.e. no divferential treatment for foreign investors), this study is intended to help strengthen the business environment for all investors—domestic and foreign alike.

The study covers the core administrative processes for:

• Establishing a business - including investor entry (visa and residency requirements for expatriates) and business registration.

• Locating a business - including land acquisition, site development, construction and operation.

• Operating a business - including taxation, trade regime and customs, licensing, permits, inspections, intellectual property issues, and product standardization.

Establishing a Business—Investor Entry and Business Registration. The procedures for obtaining entry visas are relatively transparent and divsent no significant administrative impediments. Most notably, foreign investors and expatriate employees do not require special work or residence permits to live and work in Georgia.

The court registration procedures have been simplified in the past 2 years. However, because of the lack of technical and human capacity, court registrars are unable to fulfill the provisions of the Law on Entredivneurs aimed at guaranteeing timely service, ensuring public availability of information on companies, publishing data on newly registered companies, and protecting company names. The most divssing issues relate to length of time required to register (2 to 3 weeks) and to retrieve information on companies.

The principal recommendations for improving the business registration process and the access to company records include:

• Modernization of the registration and data filing systems by taking advantage of new technologies (including the internet) to speed up processing and to improve the access to information, as provided under the law.

• Centralization of the court registration system.

• Publication and dissemination of information on business registration procedures, requirements and fees.

• Resolution of the legal provisions for information disclosure under the Law on Entredivneurs and the Tax Code.

Locating a Business. Locating, acquiring and constructing or rehabilitating real estate for business activities are not perceived as significant problems by either foreign or domestic investors in Georgia. The current system may not pose an overwhelming difficulty for investors because of the low volume of transactions and the institutionalized system of unofficial payments and influence peddling to facilitate the process. However, there are a number of specific areas where regulations, requirements, and procedures need to be clarified, simplified and streamlined. The report includes a number of detailed short and long-termrecommendations for strengthening the laws related to the privatization of agricultural land and improving the quality of service provided by the various bureaus responsible for processing the permits necessary for property development and construction in Georgia.

One of the principal recommendations relates to the Law On Privatization of Agricultural Land. The set of laws on privatization of real estate exclude a legal basis for privatization of large agricultural holdings, all of which are divsently held under government leases. To the extent that investment in commercial scale agriculture is viewed as having significant potential in Georgia, privatization of larger agricultural holdings is an appropriate next step. A law on privatization of large agricultural holdings is being developed and is an element of the government’s longer-term plan for further development of property relationships.¹ Enactment of this law should be a priority.

Operating a Business - Tax Administration. On the basis of interviews with redivsentatives of the private sector, government officials, and technical assistance experts, it appears that the tax administration system is fraught with problems that seriously constrain the activities of private enterprises. The recurring themes voiced by the private sector as being burdensome for business included the complexity of the tax system, the lack of clarity in some aspects of the Tax Code and the sheer number of taxes itself. Foreign-owned enterprises seem to be particularly affected under the existing system. In keeping with the scope of this study, the discussion is focused on taxation administration. Recommendations on tax policy are confined to those issues that directly affect administrative procedures and impede business activity. It should be noted that the International Monetary Fund, the World Bank and USAID are currently providing assistance to the Government of Georgia on taxation policy issues.

The main recommendations include the following (for more detailed discussion of tax issues please refer to the next paragraph - "1.4 Tax Regime"):

• Adopt and implement the proposed amendments to the Tax Code. These proposed amendments cover a number of policy and tax administration issues. They are broadly in line with IMF recommendations, except the Government proposal for the fixed tax and the elimination of the payroll tax.

• Simplify the procedures for filing VAT. The proposed measures include allowing quarterly, rather than monthly filings for small businesses.

• Establish an effective tax-refund system. The International Monetary Fund has outlined a refund strategy that includes limiting entitlement to immediate refunds, distinguishing claimants with a history of compliance, and using div-refund audits for high-risk refund claims and post-refund audits for claims of lesser risk.

• Review the micro level target-based system for tax collection. It is important to distinguish between the fiscal macro targets which are an important aspect of revenue administration and micro or firm-level targets which are often arbitrarily established within tax jurisdictions. These targets must be realistic and they should be part of a number of efficiency and effectiveness indicators.

• Improve information compilation and dissemination. Taxpayers must be informed of changes in the Tax Code and related regulations, legal interdivtations, and instructions in a timely manner. Also, a credible resource must be established to respond to queries offer binding interdivtations of the Tax Code.

Operating a Business – Customs. The State Customs Department (SCD) operates an inland clearance system that requires considerable resources and logistical support for effective control of cargo. In practice, the current system is largely ineffective and prone to fraud and corruption. There is no compendium of the legislation on customs available to the customs service employees or the public. In the absence of common information and an official interdivtation of the rules and regulations, the discretionary authority of individual customs officers and offices is strong thereby facilitating corruption. There is significant leakage of cargo transported for inland clearance. Some sources estimate that as much as 50 percent of fuel and cigarette imports are diverted.

Management of the SCD has suffered as a result of frequent changes in the management. Efforts to reform the SCD have been impeded by the lack of political will, competing political agendas, and the frequent changes in leadership. Under these circumstances, the inputs of external advisers have been marginalized and the reforms implemented by divvious chairmen have been reversed in many instances. The detailed action plan divpared under the ITS contract and endorsed by the government has been stalled with only marginal progress. The customs reform committee established by the President to lead the reform effort has met irregularly.

The principal recommendations for strengthening and improving the customs service include:

• Implementation of the already approved customs reform program. This is a well developed and comdivhensive program that can be implemented over time. It encompasses a number of the IMF and FIAS recommendations. One of the immediate tasks would be to assign priorities for implementation.

• In light of the decision not to renew the ITS contract, it is necessary to immediately develop and implement a framework for carrying out efficient div-shipment inspection services if it is to be continued after December 30, 2001. The SCD clearly lacks the capacity or the expertise to carry out this function independently.

• Review of the existing regulations for the valuation of cargo and implementation of guidelines that are consistent with the provisions of GATT.

• Revision of the declaration processing procedures to eliminate contact between the import (or broker or freight forwarder) and the customs officer.

• Expansion of the ASYCUDA system to all major customs clearance offices.

• Implementation of risk-based criteria for selecting goods and documents to be examined at all locations where imported goods are cleared.

• Implementation of an information publication and dissemination program.

  
  

  2. Government Sponsored Training Programs

  
  

  GEPA's In-Company Export Marketing Programme.

  The objective of GEPA's new programme is to increase the export capabilities of Georgian companies. An integrated programme has been designed to assist Georgian companies to systematically plan and divpare for export marketing. The programme includes in-company export market development, training, the organisation of inward and outward missions and a cost sharing grant scheme. The in-company programme involves GEPA's Export Advisers working closely with individual companies to establish an export marketing function. Participating companies will be assisted and guided through the process of defining their objectives and capabilities, the first step in the process. They will be shown how to identify suitable markets and have access to all the information sources in the Export Information Centre. They will then be in a position to draw up a realistic export marketing strategy. GEPA staff will help them to divpare for exporting and to implement their defined strategy. In working through the programme, training needs will be identified and addressed and some financial assistance may be available to assist companies in financing eligible actions they need to take to divpare for exporting. Participating companies will have in place a system for reviewing and redefining their export marketing strategies on an on-going basis. This will enable Georgian companies to anticipate and to be divpared for the ever changing marketing environment, rather than just reacting to it. During recent weeks GEPA staff has been visiting companies to explain the programme in detail. Four companies have already begun the first stage of the programme and another four will be added over the next few weeks. Companies committed to developing an achievable export marketing strategy and willing to devote time and effort to the process are invited to contact GEPA.

  2. Other Donors’ Activities

  
  

  1. The World Bank and IMF

  
  

  1. List of the Active World Bank Projects in Georgia

  Projects under implementation	Commitment (US$ million)	Develp’t. Objective	Impl. Progress.	Approval Date	Signing Date	Closing Date
  Social Investment Fund	25.0	S	S	12/11/97	06/05/98	12/31/03
  Primary Health Care Dev.	20.3	S	S	08/01/02	05/06/03	12/31/07
  Education 1 (APL)	25.9	S	S	03/20/01	12/03/01	06/30/05
  Social Investment Fund 2	15.0	S	S	05/15/03	08/29/03	09/30/07
  Roads Project	40.0	S	S	05/25/00	01/31/01	12/31/04
  Electricity Market Supp.	27.4	S	S	05/03/01	09/26/02	12/31/05
  Energy Transit Institution	9.6	S	S	03/13/01	11/19/01	07/31/05
  Municipal Development 2	19.4	S	S	08/01/02	02/19/03	06/30/06
  SAC3	40.0	S	S	06/29/99	08/02/99	10/30/02
  Structural Ref. Support	16.5	S	S	06/29/99	09/22/99	03/31/04
  Judicial Reform	13.4	S	S	06/29/99	09/22/99	12/31/04
  Enterprise Rehabilitation	15.0	S	S	12/17/98	09/08/99	12/31/04
  Agriculture Development	15.0	U	U	03/25/97	08/21/97	04/30/04
  Forestry Development	15.7	S	S	08/01/02	04/22/03	06/30/09
  Protected Areas Dev (GEF)	8.7		S	05/24/01	04/26/02	12/31/06
  Integrated Coastal Mngmt	4.4	S	S	12/17/98	05/21/99	12/31/04
  Irrig/Drainage Dev.	27.0	S	S	06/28/01	02/20/02	04/30/07
  Cultural Heritage	4.5	S	S	02/13/98	05/18/98	12/31/03
  Integrated Coastal Mngmt (GEF)	1.3		U	12/17/98	05/21/99	12/31/04
  Agriculture Research Ext (GEF)	2.5	S	S	05/11/00	02/05/01	12/31/05
  Agriculture Research Ext	7.6	S	S	05/11/00	02/05/01	12/31/05
  Total	354.2

  S – Satisfactory

  U - Unsatisfactory

  
  

  2. List of the Closed World Bank Projects in Georgia

  PROJECT	AMOUNT (millions)
  Rehabilitation Credit	US$ 75.0	Closed June 1996. Fully disbursed.
  SAC	US$ 60.0	Closed December 1997. Fully disbursed.
  SATAC	US$ 4.8	Closed December 1998. Fully disbursed.
  Institution Building Credit	US$ 10.1	Closed June 1998. Fully disbursed
  SAC II	US$ 60.0	Closed December 1998. Fully disbursed
  Transport	US$ 12.0	Closed June 30, 1999. Fully disbursed.
  SATAC II	US$ 5.0	Closed December 31, 1999. Fully disbursed.
  Municipal Infrastructure Rehabilitation	US$ 18.0	Closed June 30, 2000. Fully disbursed.
  Power Rehabilitation	US$ 52.3	Closed June 30, 2000.
  Oil Institution Building	US$ 1.4	Closed December 31, 2000. Fully disbursed.
  Energy Sector Adjustment Credit (ESAC)	US$ 25.0	Closed March 1, 2002. Fully disbursed.
  Third Structural Adjustment Credit (SACIII)	US$ 60.0	Closed October 30, 2002. Fully disbursed
  Total:	US$ 383.6

  
  

  3. Description of the Closed World Bank Projects in Georgia

  REHABILITATION CREDIT

  
  

  Implementing

  Agency Temuri Basilia, Chief Economic Advisor to the President of Georgia; State Chancellery, 7 Ingorokva str.

  (99532)989953, (99532) 999757

  Fax: (99532)995797

  
  

  Task

  Manager Michaelle Riboud, EC4C2

  Phone: (202) 4738743

  Fax: (202)4773387

  
  

  Project

  Objective The main objective is to support the government’s economic reform program aimed at restoring macroeconomic stability and at promoting resumption of growth and improvement in living standards. The other objectives are to:

  1. Provide budgetary support to maintain the level of basic public expenditures, in particular for wages and the social safety net;

  2. Provide foreign exchange for the purchase of critical imports;

  3. Improve the functioning of the foreign exchange market;

  4. Provide a framework for assistance from other donor agencies.

  
  

  Project

  Description The reform program to be supported by the credit comprises three sets of policies:

  a) those aimed at reducing and redefining the role of the public sector in the economy

  b) those theta foster the development and increase efficiency of markets;

  c) those that maintain a minimum social safety net through improved targeting of benefits.

  
  

  Disbursement Fully disbursed

  
  

  INSTITUTION BUILDING

  
  

  Project Objective Assist the Georgian government in its efforts to move to a private market economy through strengthening public institutions on three functional areas: (a) financial sector, (b) economic management , (c) privatization and enterprise reform

  
  

  Project Description1. Financial Sector Reform (US$ 2.325 million)

  (a) Financial Sector Infrastructure:

  Consulting service and equipment:

  -- to introduce and implement Broadly Adapted Financial Statement (BASF), and internationally acceptable accounting and auditing system;

  -- to conduct diagnostic studies in five state-owned banks and make recommendation for steps to streamline the system;

  -- review existing payment system and make recommendations for steps to streamline the system

  
  

  2. Economic management (US$ 5.660 million)

  (b) Economic Policy Formulation

  Support will be provided to the Office of the Deputy Prime Minister (now Chief Economic Advisor to the President) to design a strategy for the restructuring and the reform of the government’s economic management agencies, particularly the Ministries of Finance and Economy, and to strengthen economic policy formulation and analyses.

  (c) Statistical Services:

  Consulting services, training, and equipment to assist the Committee for Social and Economic Information in

  -- reviewing the methodology used for generating and maintaining national accounts and initiating steps to introduce the internationally acceptable System of National Accounts (SNA);

  -- designing and conducting an improved household survey in the city Tbilisi

  (d) Tax Administration:

  -- computerization of tax offices; IDA pilot project for the modernization and computerization of the central State Tax Inspectorate (STI) and the Tbilisi City Inspectorate;

  -- training of the STI staff.

  (e) Treasure:

  -- first phase: a central treasury function will be established in the Ministry of Finance and regional branch in Tbilisi;

  -- second phase: regional Treasuries will be established throughout of Georgia:

  -- IDA will finance computers for the establishment of the Treasury offices.

  (g) Strengthening of Customs Administration:

  Support will be provided to the Customs Committee in

  (i) simplifying and reforming the organization and procedures of customs operations: (ii) modernizing customs management ;

  (iii) training the customs staff in the customs management and the computerization;

  (iv) computerizing customs clearance procedures, accounts, and statistics at Tbilisi headquarters and at the Tbilisi airport as the first pilot site.

  (h) Aid Coordination:

  -- Project will finance long-term external advisor and equipment to assist and train the staff of Aid Management Unit (AMU) in maintaining donor procedures, coordinating country’s external aid priorities consistent with the national development objectives, and communicating those with the external aid agencies.

  -- Project will finance experts to assist the government staff in analyzing Sectoral information with the objective to design and develop project that will be acceptable to the donor community.

  (i) Project Implementation: The project will finance:

  -- an external procurement consulting firm to assist the PIU with the divparation of procurement an disbursement documents under this project, and to ensure that all procurement under the project follow the World Bank’s procurement guidelines

  3. Privatization and Enterprise Reform (US$ 2.27 million)

  (j) Support for Privatization:

  -- one short-term senior level adviser to assist the Ministry of the state Property Management and the Office of the Chief Economic adviser to the President in reviewing the current privatization plan;

  -- experts and equipment to assist in:

  a) formulation the mass privatization program and the voucher scheme

  b) the design and implementation of a public information campaign to support the mass privatization campaign;

  c) provide training aimed at strengthening the institutional capabilities of SPM;

  d) review and further development of a legislative framework for privatization.

  Implementing Agency Alex Sikharulidze, Head of PIU, 42, Kazbegi ave.,

  Phone: (99532)950865

  Fax: (99532)950865

  STRUCTURAL ADJUSTMENT TECHNICAL ASSISTANCE CREDIT (SATAC)

  
  

  Project Objective To support the Government’s reform program to stabilize the economy and create the conditions for a resumption of growth and an improvement in living standards.

  
  

  Project Description 1. Privatization and post-privatization (US$ 0.95 million)

  (i) Continued support for the implementations of the privatization program and on support for the establishment of the share registries.

  (ii) Introduction of cash auctions and an international tender program;

  (iii) Strengthening of institutional capacities, elaboration of standard procedures, advise on structuring of transactions and bid evaluation, as well as legal assistance and licensing of private share registries.

  (iv) Elaboration of operational guidelines, training of officials in securities market and in the starting-up of pilot registries.

  
  

  2. Financial Sector ( US$ 0.78 million )

  (i) Advisory services on supervisory issues as well as the development of training programs.

  (ii) Audits if the three former state banks will be financed to dacilitate a realistic assessment of the financial position of each bank.

  3. Energy sector reform ( US$ 0.86 million )

  (i) Assistance in creating the capacity to monitor and manage payment performance, and in reviewing structural and tariff issues.

  (ii) Assistance in reviewing the scope of the regulatory authority and its tariff policy functions.

  
  

  4. Social Protection ( US$ 0.56 million)

  (i) Assistance in the design of a program of social assistance which meets the needs of poor families that do not qualify under any existing program;

  (ii) Facilitating the establishment of private pension schemes.

  
  

  5. Resource mobilization and public information

  ( US$ 1.43 million)

  (i) A program aimed at improving the revenue collection performance of the Customs Department through training, revision of procedures and controls, and anti-fraud measures;

  (ii) A public information/education program on economic reforms, including mass media campaigns, round-tables/seminars on key issues, and the design of an education program focusing on skills in high demand in market economics

  
  

  Implementing Agency Zaal Japaridze, Head of PIU, 12 Kazbegi Ave.

  Phone: (99532) 950865

  Ministry of Trade and Foreign Economic Relations

  42, Kazbegi Ave.

  Phone: (99532) 225186 / (99532) 389652

  
  

  TRANSPORT REHABILITATION

  
  

  Project Objective 1. To support policy reform in the transport sectoral and restructure its institutions to operate in a market economy.

  2. To repair and maintain some of the most critical elements of the transport system.

  
  

  Project Description (1) Institution Building Component (US$ 4.9 million):

  (i) advice and support to teams divparing sector reforms;

  (ii) technical assistance for the formulation of technical and legal framework necessary to the restructuring,

  commercialization and privatization of sector entities;

  (iii) managerial assistance for public and private transport enterprises;

  (iv) a training program to update transport technical staff of the private and public sectors;

  (v) project management.

  
  

  (2) Investment Component ( US$ 13.2million )

  (i) road maintenance program, including selected equipment and spares for road maintenance as well as emergency repairs and the necessary imported road building materials;

  (ii) a railway sub-component, including bridge repairs and the required structural steel, track materials (ties, rails and fastenings), spares for locomotives, and communications and selected signaling equipment

  
  

  Implementing Agency Gia Tsagareli, Head of PIU, 12 Kazbegi Ave.

  Phone: (99532) 986385

  Fax: (99532) 990461

  
  

  STRUCTURAL ADJUSTMENT CREDIT (SAC)

  
  

  Project Objective: The main objective is to consolidate stabilization, foster a strong and sustained growth recovery and reduce poverty.

  The reform program aims at:

  1. maintaining a tight monetary program supported by an improving fiscal position;

  2. streamlining the Government sector and improving efficiency of public spending;

  3. inducing a rapid adjustment of the productive sector to new market signals.

  The other objectives are;

  1. provide budgetary support to maintain the level of critical public expenditures;

  2. provide foreign exchange for the purchase of critical imports;

  3. provide a framework for financial assistance from other donor agencies.

  Project

  Description: 1. Maintaining a Tight Monetary Policy:

  • reduce inflation to 20-25 percent in 1996 and strengthen the international position of NBG;

  • increase the range of monetary instruments and enhance the capacity of the NBG to achieve monetary objectives.

  2. Improving the Fiscal System:

  • ensure sustainability of stabilization;

  • increase tax revenue to 6.7 percent of GDP in 1996;

  • reach a revenue to expenditure ration of 70 percent in 1996 and maintain budget deficit at 3-4 percent of GDP in 1996.

  3. Streamlining of the Government Sector and Improving the Efficiency of Public Spending:

  • to maintain critical public function within the framework of a tight expenditure program (expenditure maintained at about 13 percent of GDP in 1996);

  • reforming government pay and employment;

  • reforming the provision and financing of social services reforming social insurance and social protection;

  • eliminating energy subsidies;

  4. Fostering Adjustment of the Productive Sector:

  • accelerating privatization;

  • restructuring the financial sector;

  • fostering export growth.

  
  

  Disbursement: US$ 29.88 million

  The disbursement of the loan is linked to agreed targets specified for each tranche release – to be met by the Georgian Government in implementing its structural reform program.

  
  

  SECOND STRUCRUTAL ADJUSTMENT TECHNICAL ASSISTANCE CREDIT (SATAC II)

  
  

  Project Description: The Government’s structural reform program outline in the Letter of development Policy was divsented with the Second Adjustment Credit (SACII), $60 million (which closed in December 1998). To facilitate the timely implementation of structural reforms, the Government requested a program of technical assistance to support the design and implementation of reform measures in the key areas. The institutional capacity of the Government to implement structural reform measures has been successfully strengthened under the Institutional Building Credit (IBC) and the Structural Adjustment Technical Assistance Credit (SATAC). Lessons learned from these two technical assistance projects were incorporated in the design of SATAC II.

  
  

  The Core objective of SATAC II is to enhance the capacity of the Georgian Government to implement the structural reform program supported by SAC II.

  
  

  The technical assistance is divided into seven broad categories:

  
  

  • judicial reform and anti-corruption initiative;

  • financial sector;

  • energy sector reforms;

  • social protection

  • health

  • resource mobilization

  • public information

  
  

  4. The World Bank and IMF Cooperation in Georgia

  
  

  The World Bank and IMF Partnership in Georgia’s Development Strategy

  1. The IMF has taken the lead in assisting Georgia in enhancing macroeconomic stability. In this regard, the Fund has encouraged the authorities to pursue a prudent fiscal policy, including by increasing tax revenues and reducing domestic expenditure arrears. The IMF Board approved a new three-year program under the Fund’s Poverty Reduction and Growth Facility (PRGF) in January 2001. The first and the second reviews under the PRGF were completed in October 2001 and July 2002, respectively. Implementation of the 2002 macroeconomic program was broadly on track. Quantita­tive criteria and indicative targets were met, except for those on domestic arrears, fuel and excise tax collection and reserve money. At 2 percent of GDP, the fiscal deficit was slightly higher than programmed because of shortfalls in external financing, and revenue collection improved only slightly from 14.3 percent of GDP to 14.4 percent over the period. An IMF mission which visited Georgia in July 2003 to discuss completion of the postponed third review found that the fiscal divssures that emerged in early 2003 had continued, with tax revenue falling short of budget targets, and an accumulation of substantial new budget arrears. The IMF thus saw the need inter alia to introduce some tax reform measures, adjust electricity tariffs and revise the 2003 budget to close the fiscal gap. The authorities achieved the first two but were unable to secure parliamentary approval of a revised budget. The current PRGF will expire in the next several months and the IMF will soon be initiating discussions to assess prospects for a possible new three-year program to support Georgia’s EDPRP.

  2. The World Bank has taken the lead in the policy dialogue on structural issues, focusing on: (i) strengthening public expenditure management; (ii) deepening and diversifying sources of growth, (iii) protecting the environment; and (iv) reducing poverty. The table on page 53 summarizes the division of responsibility between the two institu­tions. In a number of areas – for example the social sectors, rural development, environment, and infrastructure – the Bank takes the lead in the dialogue and there is no cross conditionality with the IMF-supported program. The Bank is also leading the dialogue on private sector reform, and Bank analysis serves as inputs into the Fund program. In other areas – energy, the financial sector, public expenditure management, and revenue and customs – both institutions work together. Finally, in areas like monetary policy the IMF takes the lead with little Bank involvement.

  Areas in which the World Bank leads and there is no direct IMF involvement

  1. Areas in which the Bank leads and there is no direct IMF involvement include the social sectors, infrastructure and environment.

  • In the social sectors the Bank conducts annual updates of Georgia’s Poverty Assessment based on household data collected on a quarterly basis. The Bank’s focus has been to improve the budget execution of expenditures for health, education and poverty benefits and to raise the efficiency in the use of scarce public resources. Through the Social Investment Fund Credits IDA is focusing in particular on areas with high poverty levels to provide basic infrastructure to the poorest communities. A recently approved Self-reliance Fund Grant will help authorities address the complex issues related to internally displaced people. IDA is also supporting a dialogue with the Government on social protection reform that may lead to an IDA-supported project.

  • In education the Education Adaptable Program Credit aims at improving the learning out­comes of primary and secondary students, through curriculum reform, development of an examina­tion system, training of teachers, provision of learn­ing materials, and development of capacity to make better use of Georgia’s physical, financial and human resources. While the investment needs of school buildings are substantially higher than is currently affordable for Georgia, the Social Investment Fund projects continue to assist in financing urgent repairs to school facilities in many communities.

  • In health IDA Credits to support the Government in improving the health care financing system, exploring risk-pooling options, introducing a new system of primary health care and improving the focus of services funded through public funds on the poor and on priority public health interventions. In addition hospital restructuring has been supported by SAC 3 and the Structural Reform Support Credit.

  • In infrastructure support is being provided through the Municipal Development and Decen­tralization Credit and the Social Investment Fund Credit. These projects are providing financing at the community level for critical infrastructure needs, primarily for school and health facili­ties heat­ing and repair, small hydropower schemes to provide electricity, drinking water and sanitation reha­bilitation, as well as transportation infrastructure rehabilitation.

  • In rural development IDA credits have supported the development of private sector farming and agro-processing improvements, agricultural credit, irrigation and drainage, and agriculture research and extension. IDA has also been supporting the creation of local institutions such as rural credit unions and water users associations through its Credits.

  Areas in which the World Bank leads and its analysis serves as input into the IMF program

  1. The Bank has been leading the dialogue on structural reforms through SAC 3, approved by the Bank’s Board of Executive Directors in June, 1999, and closed in October, 2002. Despite considerable delays, the core conditions of SAC 3 were met, but their impact was reduced by poor governance. Institution building and technical assistance has been supported through the Structural Reform Support Credit, also approved by the Bank’s Board of Executive Directors on June 29, 1999. The Bank also leads in the areas of:

  • Private sector development. SAC 3 supported improvements in the environment for private sector development, focusing on: (i) simpler licensing regulations; (ii) more transparent government procurement; (iii) reduced cost of entry for businesses; and (iv) privatization of state-owned commercial assets. IDA has also been supporting private sector participation in other areas such as energy, telecommunications, urban services and agriculture. The IMF has worked with the authorities to initiate audits of the 2002 accounts of three major state owned enterprises.

  • Energy. The energy system is in poor condition, with unreliable supply, massive non-pay­ment and mounting debts. IDA has been working with other donors, including the IMF, to encourage more private management and ownership, and to implement a series of short-term action plans to improve the overall functioning of the sector. The IMF has also been focus­ing on improved payments for electricity.

  • Public Sector Management. The Bank is supporting the development of a civil service reform program, while the Fund is providing technical assistance in support of tax and customs administration reform.

  
  

  
  

  Areas of shared responsibility of the World Bank and IMF

  1. The Bank and the Fund have been working jointly in the following main areas (supported by the Bank’s SAC 3 and Structural Reform Support Credit, several investment operations and the Fund’s PRGF):

  • Poverty Reduction Strategy. Both institutions have been working closely with the Govern­ment to provide support to the development of the PRSP, through seminars and workshops, direct staff input, and a multi-donor Trust Fund to support the work of the PRSP secretariat..

  • Budget Planning and Execution. The annual process-based Public Expenditure Reviews will provide the underpinnings for systemic changes in expenditure management, with the immediate aim being improved budget formulation in 2004. The IMF is focusing on Treas­ury reform within the Ministry of Finance.

  • Financial Sector Reforms. The joint Financial Sector Assessment Program has supported: (i) strengthened banking and non-banking supervision; (ii) introduction of international accounting standards; (iii) and consolidation of banks through higher capital requirement ratios; and (iv) anti money-laundering legislation. The IMF has focused in particular on banking supervision.

  • Debt Sustainability Analysis (DSA). Given Georgia’s heavy external debt burden, the Bank and the Fund conduct joint Debt Sustainability Analysis on a regular basis.

  
  

  Areas in which the IMF leads and its analysis serves as input into the World Bank program

  
  

  • Fiscal Framework. The IMF’s focus on prudent fiscal policy has served as an impor­tant framework for IDA’s work on public expenditure management.

  Areas in which the IMF leads and there is no direct World Bank involvement

  • Monetary Framework. The IMF closely collaborates with the NBG in the design and implementation of a monetary program that aims at remonetization of the economy, while keeping inflation low and the exchange rate of the Lari stable

  • Economic Statistics. IMF technical assistance has been conducive to improvements in national accounts, price, monetary and government financial statistics.

  5. The World Bank Country Assistance Strategy for Georgia

  
  

  Activities (as identified in the EDPRP)	Responsible Agencies	Focus of Bank Actions	Expected Results FY04-06	Bank Group Program	Part-ners	WB Performance Indica­tors for End FY06
  Improvement of Governance
  Development of a comdiv­hensive, long-term concept and action plan of executive government reforms, and of a program to improve structure and number of employees in organizations under budgetary financing	State Chancel­lery, Ministry of Justice, Ministry of Finance relevant execu­tive government bodies	Assistance to the State Chan­cellery in carrying out a functional analy­sis of the central gov­ernment agencies and assess­ment of budget­ary em­ployment, remu­nera­tion, and training pol­icy; on the basis of the above studies, de­velop recommendations	Widely owned program to improve functioning of gov­ernment administration and agencies; remuneration and retrenchment policy for core civil service introduced, and plans for civil service training developed	Public Sector Management Project	DFID, USAID, UNDP	Initiation of reform and re­structuring of civil service
  Inventory of normative acts defining the competence of government agencies to avoid duplication of local government functions	State Chancel­lery of Georgia, Ministry of Justice	Review of the existing legal framework	Initiation of legislative change and amendments	Public Sector Management Project; Public Expenditure Reviews	DFID EU USAID UNDP	Duplications and overlap among the central state agencies reduced, mandates more clearly defined
  Distinction of municipal property from central gov­ernment and private prop­erty	State Chancel­lery, Ministry of Economy, Industry and Trade, Agency of State Property Man­agement, Min­istry of Justice, Ministry of Finance	Advice on financing mechanism for transfer of road and transport properties and legal mechanisms for owning and managing very low volume farm access roads	Revised functional/admini­stration classification of roads; sound allocation formula for divid­ing Road Fund revenues be­tween road owners	Secondary Roads Project; Trade and Transport Fa­cilitation Pro­ject; Rural Infra­structure Study	Kuwait Fund for Eco­nomic Devel­opment	New road classification; new procedures for manag­ing the road fund, including allocation of funds between road owners
  Macroeconomic Stability

  Preparation of indicative plans of development for the economy for 2004 and 2005	Ministry of Economy, In­dustry and Trade	Improvement of linkage be­tween policy, re­source constraints and budgets	Develop a more realistic me­dium-term budget framework	Public Expen­diture Re­views, PRSC in High Case	IMF DFID	Budget execution closer to planned
  Initiate the process to con­vert a portion of government debt liabilities into long-term debt instruments	National Bank	Assistance to the MoF develop long-term debt instru­ments, e.g. gov­ernment bond market	MoF starts to use medium to long-term government bonds to replace the rolling of short-term debt instruments	Financial Sector Advi­sory Program	IMF	1-10 year government bond market in place
  Improvement of the man­agement of international re­serves of the NBG	National Bank	Advise to National Bank on management of reserves	Increased import coverage	Financial Sector Advi­sory Program	IMF	Gross foreign reserves to reach over 2 months of im­ports
  Completion of tax and cus­toms administration reform	Ministry of Finance, State Tax and Cus­toms Depart­ments	Development of a busi­ness-friendly tax envi­ron­ment	Increased collection of excise taxes and improved VAT ad­ministration	Public Expen­diture Re­views, Busi­ness Environ­ment Study, PRSC in High Case	IMF USAID EU	Collection of excise taxes to reach over 2 percent of GDP
  Implementation of treasury reform, centralization of treasury service; develop­ment and introduction of commitment accounting and control system; develop­ment and introduction of expenditure control system	Ministry of Finance	Assistance to the MOF to improve its cash and debt man­agement ca­pacity and skills	Consolidation of effective control system, and adoption of a single treasury account	CPAR Up­dates, Public Expenditure Reviews, PRSC in High Case	IMF	Improved cash management and debt management ca­pacity
  Improve government pro­curement system and ex­pand scope of its cover­age	State Procure­ment Depart­ment, Ministry of Economy, Industry and Trade	Establishment of a transparent state pro­curement system; decentralization of State procurement functions to line agen­cies	Greater efficiency and compe­tition within the system; re­duced delays and corruption in procurement process	CPAR, Public Expenditure Reviews, PRSC, project lending (e.g. Secondary Roads and Trade and Transport Facilita­tion)		Recommendations of Country Portfolio Assess­ment Report implemented
  Gradual increase of the share of targeted programs in the state budget	Ministry of Finance, Min­istry of Econ­omy, Industry and Trade	Develop program-based budgeting	Improve consistency between medium-term indicative plan and the budget	Public Expen­diture Re­views, Public Sector Man­agement Credit, PRSC in High Case	DFID	Public Expenditure Reviews assessment of better target­ing of programs in the budget
  Inventory of budgetary arrears	Ministry of Finance	Establish accurate esti­mates of past govern­ment liabilities	Better information on, and reduc­tion in, arrears	CFAA Up­dates, Public Expenditure Reviews	IMF	Reduced arrears
  Increase the number of par­ticipants in treasury bill market and improve bidding mechanisms to increase maturity and re­duce the dis­count rate through market	Ministry of Finance, Na­tional Bank, Na­tional Com­mis­sion of Secu­rities	More competitive and efficient T-bill market	Short term: more partici­pants for competitive bidding, and for non-competitive quota; medium term: cash man­age­ment, coordination be­tween MOF & NBG on T-bills/open market operations; long term: independent debt man­agement office	Financial Sector Advi­sory Program, PRSC in High Case	USAID FIRST	Lower T-bill yield
  Develop legislation promot­ing the activities of invest­ment funds in order to introduce best corporate management practice in enterprises and develop stock market	Ministry of Finance, Na­tional Commis­sion of Securi­ties	Help build legal envi­ronment for investment funds; provide infor­mation/advice	Establishment of legal envi­ronment for investment funds	Financial Sector Advi­sory Program		Regulation of investment funds in place; NCS has capacity to supervise those funds
  Prepare and adopt bill “on Personification and Regis­tration of Insurance Contri­butions to Social Insurance System” required for regu­larizing first (distributive) pillar of pension system and development of pensioners’ personified registration system	Ministry of Labor, Health and Social Pro­tection	Support to Ministry of Labor, Health and Social Pro­tection on legal reforms and their implementation	Law adopted successfully	Social Protec­tion Reform Project		Regularization of 1st pillar of pension system; better links between pensions and con­tri­bu­tions
  For private pension funds, adopt statutory normative acts in accordance with the laws “on Non-Government Pension Funds” and “on Securities Market”	National Secu­rities Commis­sion, Minis­try of Labor, Health and Social Pro­tection	Support to National Secu­rities Commis­sion and Ministry of Labor, Health and Social Pro­tection on legal reforms and their implementa­tion	Normative acts developed and adopted	Social Protec­tion Reform Project		Improved regulatory envi­ronment in the area of pri­vate pensions
  Prepare amendments to the Tax Code and investment rules of pension assets to promote the development of non-banking financial sec­tor, including nongovern­mental voluntary insurance system	Ministry of Finance, State Service of Insurance Su­pervision, Na­tional Commission of Securities	Support to relevant agencies on amend­ments to tax code and investment rules	Improved functioning of non-banking financial sector, including insurance compa­nies/private pension funds	Social Protec­tion Reform Project		Greater and more effective role for non-banking finan­cial sector, including insur­ance companies and private pension funds

  
  

  Structural Reforms
  Assess magnitude and share smuggled goods and those manufactured in informal sector of the econ­omy by various commodity groups	Ministry of Economy, Indus­try and Trade; State Department of Statistics	Support for initiatives to reduce smuggling and the shadow econ­omy	Reduction in smuggling and in the shadow economy	Trade Facilita­tion Project; Private Sector Development Project; Public Sector Reform Project; PRSC in High Case	USAID	Increase in tax revenues, including increase in reve­nues from petroleum prod­ucts and cigarettes to over 2.5% of GDP
  Develop proposals to encour­age investment	Ministry of Economy, Indus­try and Trade; Ministry of Fi­nance; Ministry of Justice	Intensified dialogue with Government on reform of the banking system as a means of improving the invest­ment climate	Increase in banks’ capitaliza­tion; better corporate govern­ance principles and internal control systems; expansion of banking networks; real time banking settlement; anti-money-laundering legislation; deposit insurance introduced	Private Sector Development Project; Financial Sector Advi­sory Program; Business Envi­ronment Study	USAID IMF FIRST	Minimum capital raised to €3.5m; im­proved confidence in bank­ing system; better access to finance; anti money laun­dering regulations in compli­ance with FATF require­ments
  Implement export promo­tion measures	Ministry of Economy, Indus­try and Trade; Ministry of Finance	Support for removal of institutional (govern­ance) obstacles to ful­filling Georgia’s Export Potential	Progress in implementing rec­ommendations of Trade Study/Workshop	Trade and Transport Facili­tation Project; Private Sector Development Project; Business Environment Study; Rural Development Project	USAID	Improved perception of environment for exporters in business surveys
  Human Capital Development
  Improvement of Health
  Revise government commit­ments in healthcare sector to ensure full financing	Ministry of Labor, Health­care and Social Protection; Ministry of finance	Assist government to define health financing strategy focusing on improvements in mobi­lization, allocation and management of public and private resources, help build government capacity in evidence based policy-making, planning, monitoring and evaluation, as well as regulation	Definition of basic benefit package, financing methodol­ogy and co-payments, as well as recurrent costs; improved resource mobilization and allocation, including introduc­tion of incentive-compatible provider payment systems	Health Sector Note, JSDF Grant on community health insurance	JSDF SIDA DFID WHO	Definition of basic benefit package, financing methodology, co-payments, and recurrent costs; better resource mobilization and allocation, including introduction of incentive-compatible provider payment systems
  Improvement of Education
  Develop programs for basic education	Ministry of Edu­cation, Ministry of Culture	Improving quality of education and access of the poor	Stakeholders actively engaged in improving education quality and outcomes	Education Project	SOROS	97 percent enrollment in basic education for the poorest quintile; 60% of consolidated education ex­penditures continue to be allocated to pri­mary/secon­dary education
  Improvement of Social Risks Management
  Definition of nature and periodicity of government commitments in the social sector to ensure full financ­ing	Ministry of La­bor, Healthcare and Social Pro­tection; State Social Security Fund; Ministry of Finance	Timely execution of Government obligations in the social sectors; fiscal affordability and sustainability	No-arrears in social transfers, increased poverty alleviation impact	Public Expen­diture Re­views, PRSC in High Case		No new arrears; poverty incidence decreased by 6 percentage points
  Enforce package of draft bills on compulsory social insurance	Ministry of Labor, Health­care and Social Protection, State Social Secu­rity Fund	Support to implemen­tation of social insur­ance system	Better performance of the pen­sion system	Social Protec­tion Reform Project		No pension arrears; financ­ing of social insur­ance/assistance benefits separated
  Phased increase of pensions	Ministry of Labor, Health­care and Social Protection, State Social Secu­rity Fund	Dialogue on pension policies	Increase in pensions	Public Expen­diture Re­views; Social Protection Reform Pro­ject		Average real pension in­creased by 20%; extreme poverty among elderly re­duced
  Fiscal sustainability of pen­sion system based on com­pulsory social insurance	Ministry of Labor, Health­care and Social Protection, State Social Secu­rity Fund	Dialogue on pension policies	Satisfactory performance of the pension system	Public Expen­diture Re­views; Social Protection Reform Pro­ject		Improved fiscal sustainabil­ity of pension system
  Development of Priority Branches of the Economy
  Energy and Infrastructure
  Reorganize electricity whole­sale market to resume the functions of financial and technical operator	Ministry of Fuel and Energy	Support for direct con­tracts between genera­tors and large end con­sumers, subject to transparent terms and implementation	Direct contracts between gen­erators and large end consum­ers	EMSP	EBRD KfW USAID	Electricity market success­fully reorganized
  Amend tariff policy in line with model of wholesale market and consider liber­alization of prices	Ministry of Fuel and Energy; Energy Regula­tory Commis­sion; Ministry of Economy	Tariff policy; adequate appropriations to en­ergy in state budgets	Lower commercial losses; state budgets fully cover en­ergy costs; higher collections by state energy companies in distribution, transmission; improved financial viability	EMSP	EBRD IMF KfW USAID	Cash payment collections at the wholesale electricity market above 65%; dis­semination to public of de­tailed sector performance indicators
  Approve strategy to manage energy sector debts	Ministry of Fuel and Energy, Ministry of Fi­nance	Establishment of a pro­fessional Debt Re­structuring Agency for the power sector	Legacy debt no longer a threat to the financial viability of the power sector	EMSP	EBRD IMF KfW USAID	Debt Restructuring Agency led by international experts in full operation; legacy debt issue resolved
  Transfer energy sector com­panies, including National Distribution Company, un­der management contract in accordance with existing strategy	Ministry of Fuel and Energy	Georgian Unified Dis­tribution Company (GUDC) under long-term management con­tract	GUDC under long-term man­agement contract	EMSP	EBRD KfW USAID	GUDC under long-term management contract; other management contracts fully operational
  Improve transport regulatory administration	Ministry of Transport and Communication	MOTC restructuring	Improved functioning of re­structured MOTC	Secondary Roads Project; Transport Fa­cilitation Pro­ject

  SDRG restructured and road financing arranged to pro­vide stable source for road funding to maintain and improve roads
  Technical monitoring of emergency conditions, re­store status of divmises and constructions of strategic importance and special complexity of the energy, transportation, communica­tion and construction infra­structure as well as those damaged from earthquakes	Ministry of Economy, In­dustry and Trade, Ministry of Fuel-Energy, Ministry of Transportation and Communi­ca­tion, State Department of Highways	Development of road data bank for SDRG to take prompt, cost-ef­fective action in emer­gencies	The data bank is used to pri­oritize annual road program	Secondary Roads Project; Transport Fa­cilitation Pro­ject		Road data bank in use and SDRG expanded to cover local rural roads
  Improve implementation of road construction plan, identify strategic projects and sources of financing	State Depart­ment of High­ways	Road construction plan, equipping SDRG with tools to develop and manage the plan	5 year rolling plan a standard procedure in SDRG	Secondary Roads Project; Transport Fa­cilitation Pro­ject	EU, Kuwait Devel­opment Fund	Performance indicators to be developed in Secondary Roads project
  Form information network covering the entire country	State Depart­ment of Infor­mation	Improving rural access to tele­communications services	Better and more affordable access by the rural population to telecommunications	Rural Tele­communica­tions Project		Higher proportion of the rural population having af­fordable access to telecom­munications
  Tourism
  Prepare special program to attract additional funding from international donor or­ganizations to develop tour­ism	State Depart­ment of Tour­ism and Resorts	Development of com­munity-based tourism	Realistic development strategy for tourism -- especially com­munity-based tourism -- that promotes broad-based local development, reduces admin­istrative barriers to tourism, and supports divservation	Community-based tourism		Realistic development strat­egy for community-based tourism, including reduced administrative barriers and more focus on divservation
  Agriculture and Food
  Establish water consumer associations in rural areas	Ministry of Agri­culture, Meliora­tion System Man­agement De­partment	Support to establishing new, and strengthening existing, water users associations to manage irrigation facilities	More and better functioning water user associations	Irrigation and Drainage Re­habilitation Project	EU TA­CIS	Legal framework for WUAs established; number of wa­ter user associations regis­tered increased
  Develop unified geographic computer system of land ca­dastre and registration	Ministry of Agri­culture and Food, State Department of Land Man­age­ment	Support to strengthen­ing capacity of State Department of Land Management to carry out land registration based on cadastre sur­vey	Increased capacity of State Department of Land Manage­ment	Agriculture Development Project	IFAD, USAID KfW	Eleven land registration centers established; satellite imagery used for titling in mountainous regions
  Establish private veterinary services	Ministry of Agri­culture and Food, Veteri­nary Depart­ment	Dialogue with Gov­ernment on Veterinary reforms	Law to establish private vet­erinarians passed	ARET	USAID	Government starts veteri­nary reform process
  Structural reorganization of plants protection services	Ministry of Agri­culture and Food, Plant Pro­tection Service	Discussion with MAF on reform of plant pro­tection services	Follow-up to merging of three agencies into a single plant protection agency	ADP	USAID	Reduced illegal trade of agro-chemicals; relevant laws passed

  
  

  6. The World Bank Partners in Georgia

  
  

  SECTOR	LEAD NATIONAL AGENCY	PARTNERS
  Agriculture	Ministry of Agriculture and Food	IFAD, FAO, DFID, UNDP, KFW
  Culture	Ministry of Culture Fund for Cultural Heritage Protection	EU
  Education	Ministry of Education	SOROS
  Energy	Ministry of Fuel and Energy Georgian National Energy Regulatory Commission	USAID, KFW, EBRD
  Financial Sector	Ministry of Finance and Tax Revenues National Bank of Georgia National Securities Commission Foreign Investment Advisory Council	IMF
  Forestry	State Department of Forestry	FAO, WWF, CIDA
  Governance	State Chancellery, Anti-corruption Policy Coordination Council	Netherlands, IMF, DFID, USAID, UNDP,
  Health	Ministry of Labor, Health and Social Affairs	SIDA, DFID, WHO
  Judicial	Ministry of Justice Sudivme Court ALPE (Association of Legal Public Education)	EU, USAID, SOROS, ABA, DOJ
  Municipal Development and Decentralization	Georgian Municipal Development Fund (MDF)
  Poverty Reduction	Secretariat of Governmental Commission on PREGP (Poverty reduction and Economic Growth Program)	IMF, UNDP, DFID, USAID
  Private Sector	Ministry of Economy, Industry and Trade	USAID, EBRD, BP
  Protected Areas	State Department of Protected Territories, Preserves and Hunting Grounds	UNDP
  Roads	Ministry of Transport, Telecommunications and Post State Department of Roads	Kuwait Fund for Economic Development
  Social Infrastructure	Georgian Social Investment Fund (GSIF)	KFW
  Transport and Communications	Ministry of Transport, Telecommunications and Post National Commission of Telecommunications and Transport

  
  

  2. USAID

  
  

  USAID assistance in the economic growth area focuses on strengthening agriculture sector, assisting the NBG to improve its supervision, inspection, and enforcement capacity, and furthering land market reform. The Georgian Enterprise Growth Initiative (GEGI) is a major new private sector development activity to be implemented in close coordination with the CAS programs. USAID has been actively involved in the energy and environmental sectors providing TA to regulatory bodies, supporting privatization of the energy sector and improvement of the international investment climate, assisting in elaboration of environmentally sound laws in the energy sector as well as policies in the sector oriented towards energy efficiency, conservation and water management. Through democracy and governance oriented projects USAID supports increased awareness of legal rights, judicial and BAR reform initiatives, strengthening local governments, building professionalism of independent mass media as well as capacity of civil society and NGOs. USAID initiatives in the social sectors include programs in the regions to support income generation and economic self-reliance activities among internally displaced persons, crisis assistance to the most vulnerable, health care partnership programs and reproductive health programs which promote improved maternal and perinatal services, safe motherhood, family planning, health information systems, and STI/HIV awareness and divvention.

  
  

  3. EBRD

  
  

  EBRD main objective in Georgia is to expand private sector development activities in the country. During years 2002 and 2003 it has been engaged in the active political dialogue with the Government to support the substantial reduction of administrative barriers to investments, redivsentation on the board of companies and banks, support of the initiatives of local business associations. EBRD aims at further strengthening of the Georgian banking sector through ongoing support to the regulator, management training, and further consolidation. EBRD’s interventions include financing to business start-ups and existing micro, small and medium-sized enterprises as well as selectively supporting critical investments in infrastructure with specific focus on those projects that promote the commercialization of infrastructure, particularly of the energy sector.

  
  

  4. EU

  
  

  EU’s Partnership and Cooperation Agreement (PCA) provides for cooperation in a wide range of areas including Food Security Program (in amount of € 25 million for the period 2002-2003), rehabilitation in conflict zones (Engury Power Plan in Abkhazia), macro-financial assistance (establishment of an agricultural credit institutions, reforms in accountancy and audit, assistance to the insurance sector and securities market regulation), support to trade liberalization, customs, and development of transport infrastructure networks, advice on economic legislation and country legislature harmonization with the EU standards, investments in primary health care reconstruction program and development of the Georgian National Health Program and training of medical and administrative personnel as well as provision of the technical assistance for the development of the model of Regional Health financing. TACIS is the main financial instrument supporting the implementation of the PCA.

  
  

  5. GTZ

  
  

  GTZ, working on behalf of German Government, provides support in the health sector primarily focusing on structural improvements and training for medical technicians, promotes vocational training sector to improve commercial and agricultural training and upgrading, implements projects to privatize agriculture and build up effective land- and debt-management systems, promotes export and investment, and has been assisting in judicial and legal training as well as practical application of civil law in Georgia. German assistance is also channelled through KfW supporting credit line to agriculture sector enterprises, participating with an equity stake in Procredit Bank, is conducting cadastral works almost all over the country, and contributing to social infrastructure in the districts bordering Borjomi-Kharagauli National Park as well as supporting the Government to rehabilitate schools and health facilities damaged during the recent earthquake.

  
  

  6. CIDA

  
  

  Bilateral assistance also comes from Canada (CIDA) mostly through the regional projects supporting trade policy capacity, expanding the micro credit programs, promoting NGO capacity development program that supports the principles of good governance, strengthening health reform through the appropriate application of health information technology and information management strategies, and contributing drought victims relief operations.

  
  

  7. DFID

  
  

  DFID has recently approved a new Primary Health Care (PHC) Development project through which technical assistance will be provided to the Government in the areas of human resource development for the PHC system, health care financing, health management information systems, capacity building for the health policy development. DFID has been supporting the SDS in the multi-sector household and labor market surveys. The ongoing program also has a component aiming at development of good governance and civil society in two regions of Georgia as well as conflict reduction and confidence-building component.

  
  

  8. The Government of the Netherlands

  
  

  The Netherlands has provided support for a wide range of activities, focusing on good governance, human rights and peace building, as well as substantial budget support in conjunction with SAC III. Dutch support in the three focus areas will continue, including for . election divparation, divvention of trafficking in human beings, confidence building measures in Abkhazia and support for NGOs involved in poverty alleviation and human rights

  
  

  9. IFAD

  
  

  In the agriculture sector IFAD supports rural development program for mountainous and highland areas and credit-union development and rural credit activities for small farmers, while FAO provides financial support to hazelnut sector rehabilitation project.

  
  

  10. UNDP

  
  

  UNDP in Georgia focuses its program activities in three areas: (a) democratic governance; (b) poverty reduction; and (c) environmental protection, as outlined in the second Country Cooperation Framework for Georgia (2001-2005). In the sphere of Governance, major ongoing initiatives include support to Foreign Investment Advisory Council, strengthening the Anti-corruption Promotion Group, and assistance to the Constitutional Court and Public Defender’s Office. UNDP has been active in capacity building of the Georgian International Oil Corporation and of the National Security Policy Management. UNDP is contributing to land market development through creation of a computerized program of registration. Technical and financial inputs have been provided to strengthen the capacity of Georgian institutions responsible for national statistics, notably the State Department of Statistics. Environmental challenges are being addressed through the projects supporting recovery, conversation and sustainable use of Georgia’s agro-biodiversity, removal of barriers to small hydro power sector development, and capacity building of the Ministry of Environment.

  
  

  11. UNICEF

  
  

  UNICEF priorities in Georgia include: education, integrated childhood development, immunization, fighting HIV/AIDS, and protecting children from violence, exploitation, abuse and discrimination. It has been assisting the Government in national training of health workers and professionals and in providing universal access to basic health services for women and children. UNICEF has been helping the Government in promoting the implementation of the Convention on the Rights of the Child. Support also includes ensuring inclusive education for children with disabilities and providing psychosocial support to children in need of special protection as well as introducing alternative, non-institutional methods of childcare. Child de-institutionalization has been also supported by SIDA through provision of technical assistance during social protection reform project divparation and implementation phases.

  1 Presidential Decree 678 calls for elaboration of a new law on privatization of agricultural land and completion of the national land cadastre by the year 2005. Apparently a draft of such a law is already circulated in the Parliament.

  2 Amended September 3, 1997; September 18, 1997; December 12, 1997; February 5, 1998; May 1, 1998; May 13, 1998; May 29, 1998; June 26, 1998; October 13, 1998; October 30, 1998; December 24, 1998; April 2, 1999; April 16, 1999; June 8, 1999; June 9, 1999; June 25, 1999; July 23, 1999; September 9, 1999; December 9, 1999; December 24, 1999; December 28, 1999; March 24, 2000; June 28, 2000; July 13, 2000; September 27, 2000; September 28, 2000; October 11, 2000; October 13, 2000; November 10, 2000; November 24, 2000; December 5, 2000; December 13, 2000; December 29, 2000; March 16, 2001; April 27, 2001; June 8, 2001.

  3 Resident physical persons: who received income that was not taxed at the source of payment in Georgia; who have funds in accounts in foreign banks; or whose expenditures during the tax year exceed 25,000 GEL. As well as, non-resident physical persons with income from a Georgian source that is not taxed at the source of payment.

  4 In hindsight, the VAT threshold should have been much higher when the VAT was adopted.

  5 For example, it would help screen shell companies created for the very purpose to evade tax payments.

  6 FIAS, Georgia: Study of administrative barriers to investment, December 2001.

  7 This also applies to foreign investors, as numerous critical articles on taxation in Georgia published by the American Chamber of Commerce newspaper demonstrate.

  8 O: Observed.

  9 LO: Largely Observed.

  10 MNO: Materially Non-Observed.

  11 NO: Non-Observed.

  12 NA: Not Applicable.

  13 Although a draft law on Investment Funds has been divpared with assistance from USAID (IOSCO, 2001)

  14 C: Compliant.

  15 PC: Partially Compliant.

  16 MNC: Materially Non-Compliant.

  17 NC: Non-Compliant.

  18 NA: Not Applicable.

  19
  

  20
  

  21 Because Georgia is a member of the 1961 Hague Convention, on the abolition of legalization requirements of documents issued in foreign countries, only documents originating from countries not signatories to the Hague Convention require legalization by the consular offices.

  22 Article 4.3

  23 No. 2132-11s

  Operating a Business - Licensing and Permits. The existing regime for licenses has benefited from extensive efforts to streamline and simplify the legal framework for licenses. As a result, the current licensing procedures do not appear to divsent significant barriers to investment and business activity in Georgia, particularly compared with other former Soviet Union countries. However, some of the sectoral licensing laws and regulations do not conform to the provisions of the framework Law on Licensing.

  
  

  The Law on Local Charges and related normative acts (including municipal regulations) are not entirely clear in defining the purpose and scope of permits. The criteria and conditions for authorizing and terminating permits (similar to licensing conditions) are not clearly specified in the laws and regulations. In effect, the enforcement of the permit system is arbitrary and subject to abuse of the compliance provisions and the assessment of violations. While this permit regime does not generally impede business in Georgia, it does create unequal conditions for newcomers and arbitrary enforcement can cause significant problems for individual companies.

  
  

  The main recommendations for strengthening the framework for the system of licensing and permits and facilitating the streamlining and simplification of the current system in Georgia include:

  • Passage and adoption of a strong and clear framework law and implementing regulations on the licensing and permit regimes.

  • Review and rationalization of the number and level of legally permissible permits to avoid the proliferation of permits for revenue generation.

  • Development of a basic set of guidelines on the procedures for processing and enforcing permits (similar to those in place for licenses).

  • Development of a monitoring mechanism within the Ministry of Justice that will ensure consistent enforcement of provisions for permits.

  • Publication and dissemination of information on the legally sanctioned licenses and permits (e.g., regulations, procedures, documentation requirements, fees and appeals mechanisms).

  
  

  Operating a Business - Inspections. The passage of the Law on Supervising Entredivneurial Activity redivsented the most recent of a series of attempts to streamline the business inspection process by state and local governments. It is, however, too early to assess the effect of this new law. At the time of the FIAS mission, the implementing regulations had not been completed and the law had not been fully implemented.

  
  

  The main recommendations to strengthen the implementation of the new regime for inspections include:

  • Articulate and publish the mandate of each inspectorate as well as information on definitions of violations, criteria for selecting businesses for inspection, the penalties that may be assessed under specific conditions, and the rights and responsibilities of inspectors and businesses.

  • Halt extralegal inspectorate activity pending the registration of all sanctioned inspection activities.

  • Establish and enforce procedures for conducting on-site inspections.

  • Regulate the payment of penalties and fines resulting from inspections to a central cashier in order to avoid on-site payments and minimize opportunities for corruption.

  • Coordinate and rationalize the activities of inspection agencies; implement initiatives for joint training and information sharing among inspection agencies; introduce a code of conduct for inspectors; and train inspectors to understand that their primary function is to ensure public health and safety.

  
  

  Conclusions and Next Steps. There is a general agreement within Georgia that the existing environment for investment needs to improve if the country wishes to attract new FDI flows and secure the expansion of existing investments. This report has focused on the principal administrative barriers that increase the cost and risk of doing business in Georgia.

  
  

  Pervasive corruption and the apparent lack of political will to implement reforms have emerged as two fundamental issues affecting the business environment in Georgia. While the degree of corruption may not be the worst in the region, it has a negative effect on business activity and increases the risks and costs of doing business in Georgia. The process of streamlining and simplifying administrative procedures must go hand-in-hand with anti-corruption programs. In a similar vein, it should be noted that number of reforms (e.g. Customs reform) have been stalled as a result of resistance to change and the apparent lack of political will effect change.

  
  

  In addition to making recommendations for solving some of the regulatory, administrative, and institutional issues that need to be addressed in order to improve the business environment in Georgia, the report points out the areas where further review is necessary and where significant technical assistance is already being channeled, albeit with limited impact.

  
  

  The experience of other countries clearly demonstrates that sustainable change cannot be achieved without government commitment at the highest political levels. Successful and sustained change requires leadership, strong champions, and shared goals among all stakeholders within the government and the private sector. On the basis of shared goals, the process of rationalizing, streamlining, and simplifying bureaucratic procedures can develop, gain momentum, and improve the values of government agencies and transform them into service-oriented organizations. A comdivhensive approach to change is necessary, and commitment and time are essential ingredients. Procedural and institutional reforms will require the support of public servants at all levels of government, plus their support for changes in the systems of performance monitoring, evaluation, and rewards.

  
  

  The Presidential Commission on Support of Private Business already exists as a champion of this initiative. However, the framework for the change agenda must include the participation and inputs of stakeholders at all levels. Stakeholders must be drawn from the public and private sectors. In addition, there is a role for the international donor community in this framework since the incorporation of related donor-sponsored initiatives must be integrated into the change agenda. Chapter V of the report proposes a framework for the development and implementation of the change agenda.

  
  

  The institutional structure to support the change agenda should include:

  
  

  • The Presidential Commission. The Commission should serve as the focal point of the change agenda and it should be given the mandate to promote and advocate reforms in collaboration with other parts of the Government.

  • An implementation team. The staff of the commission’s secretariat should constitute the core group of the implementation team. The responsibilities of the team would include the development of the Action Plan, coordination of implementation activities, solicitation of donor funds and resources to support reform, coordination of related initiatives, and regular reporting on progress to the Commission.

  • A consultative committee. The committee should provide a mechanism for regular consultation with a broad group of stakeholders on various reform initiatives.

  
  

  The above - mentioned Action Plan should be utilized to document the agreed-upon changes, establish priorities and timeline, provide a basis for accountability, and keep an ongoing record of progress. Therefore, it must be emphasized that the Action Plan is not a static document but one that must evolve over time.

  
  

  Law of Georgia "On Investment Activity Promotion and Guarantees". On 12 November 1996 the Parliament of Georgia adopted the law of Georgia "On Investment Activity Promotion and Guarantees", which replaced the Law of the Republic of Georgia "On Investment Activity" adopted on 10 August 1991 and the Law of the Republic of Georgia "On Foreign Investments" adopted on 30 June 1995.

  
  

  The Law defines the legal bases for realizing both foreign and local investments and their protection guarantees on the territory of Georgia. The purpose of the Law is to establish the investment-promotional regime in Georgia.

  
  

  Investments. Investments shall be deemed to be all types of property and intellectual valuables or rights invested and applied for gaining possible profit in the investment activity carried out in the territory of Georgia, such as:

  1. Monetary assets, a share, stocks and other securities;

  2. Movable and immovable property (real estate) - land, buildings, structures, equipment and other material valuables;

  3. Lease rights to land and the use of natural resources (including concession), patents, licenses, know-how, experience and other intellectual valuables;

  4. Other property or intellectual valuables or rights provided for by the law.

  
  

  Investor. An investor shall be deemed to be a physical (individual) or legal person, as well as an international organization investing in Georgia. A foreign investor shall be deemed to be:

  1. A foreign citizen;

  2. A stateless person temporarily residing on the territory of Georgia;

  3. A Georgian citizen permanently residing abroad;

  4. A legal person registered beyond Georgia.

  
  

  An enterprise with a foreign investment of not less than 25% shall enjoy the same rights as the foreign investor.

  
  

  2. Foreign Investment Advisory Council (FIAC)

  In order to assist foreign investment inflow into Georgia, improve investment climate in the country and support private sector development, it became necessary to create a special government agency, which would serve the above-mentioned goals. Therefore, on March 30, 1997, according to the divsidential decree N87, Foreign Investment Advisory Council (FIAC) was created under the supervision of the President of Georgia, intended to assist the development of the private sector and improve the investment environment in the country, to coordinate donors and donor financed projects, to monitor these projects and to ensure a transparency and accounting of foreign aid inflow into Georgia.

  
  The Investment Council operates through its secretariat, which is responsible for the fulfilment of the responsibilities assigned to the Foreign Investment Advisory Council. The Secretariat of the Investment Council works in three directions:

  Prepares the Council's meetings;

  Cooperates with the donors and coordinates the donor financed projects;

  Assists the private sector.

  
  Preparation of the council's meetings. The secretariat of the council plans, divpares meeting and monitors their procession. The meetings are divceded by a divparatory phase, during which the Secretariat identifies priority issues, gathers relevant information, processes, analysis it and identifies a range of possible conclusions. One of the responsibilities of the Secretariat is to control the fulfilment of assigned works and appraise their compliance and produce relevant recommendations.

  
  

  Cooperation with the donors and coordination of the donor financed projects. Activities related to the cooperation with donors and coordination of the donor-financed projects are a part of the Secretariat's daily job. The Secretariat of FIAC conducts permanent monitoring and control of the projects. Among the donor related activities, a notable obligation of the FIAC Secretariat is to identify the strategy of cooperation with the donors and direct flow of further assistance to relevant channels and to target further projects. Daily work of the FIAC Secretariat includes collection of information on problems related with investment projects and identification of ways of their solution. The council cooperates with short term missions of donors, organizes meetings, drafts agendas and divpares background information for topics of discussion for the Government members as well as for the President of Georgia. The FIAC Secretariat actively works on elaboration of financial-economic, and particularly international relations related legislation of Georgia.

  
  Private sector related activities. To fulfil this obligation the council works in few directions. According to the divsidential decree N1324, a Presidential Commission on Support of the Private Businesses in Georgia was formed in the year 2000. By means of close cooperation of the Commission and FIAS, it became possible to study all administrative barriers to investment (see above). As a result, the problems impeding the development of business in Georgia were identified. On the basis of the results of this study, the recommendations were drafted and action plan was compiled, which was approved by the divsident of Georgia. The commission of cooperation with investors conducts permanent monitoring of fulfilment of the action plan, appraises its fulfilment and divpares relevant recommendations. The Secretariat of Foreign Investment Advisory Council actively cooperates with other donor organizations in terms of the private sector development projects.

  
  

  5. Tax Regime

  
  

  3. Taxation System and Tax Rates in Georgia

  Legal Framework. The Tax Code of Georgia, adopted on June 13, 1997,² is the principal law on taxation policy and administration. Other legislation that regulate taxation include the Administrative Offences Code, the Criminal Code, bankruptcy legislation, customs legislation, the Law on the Road Fund of Georgia, and the Law on the Medical Insurance Fund of Georgia.

  
  

  The taxation system in Georgia includes both national and local taxes; the latter are set by local authorities following guidelines and limits set forth in the Tax Code. Every taxpayer must register with their regional tax inspectorate and is given a tax identification number, which must be indicated on all tax documents.

  
  

  Taxes Paid by Individuals, Individual Enterprises.

  
  

  Income Tax. Income tax must be paid on wages and income earned from economic activity, including income received in non-monetary form. Physical persons, both resident and non-resident, individual enterprises, and entredivneurs are subject to this tax. Under Georgian law, residents are physical persons in the territory of Georgia for more than 182 days during any 12-month period ending in a given tax year.

  
  

  An individual enterprise is defined as an entity owned and managed by a single person, an enterprise run solely by family members, or a farm solely owned by an individual or members of that individual’s family. Physical person entredivneurs are individuals who engage in entredivneurial activity without first establishing themselves as legal persons (and in accordance with the entredivneurs law). Physical person entredivneurs and individual enterprises with annual gross income equal to or less than 24,000 GEL are subject to a divsumptive tax in lieu of an income tax. The divsumptive tax is described in the next section.

  
  

  Georgian residents must pay income tax on gross income from all sources (Georgian and non-Georgian) received during the tax year, regardless of where the income was earned or paid, less allowable deductions.

  
  

  Non-residents must pay income tax, but only on income received from Georgian sources. Non-residents who engage in economic activities through a permanent establishment are subject to profit tax on gross income received during the tax year from Georgian sources connected with the permanent establishment, less allowable deductions.

  
  

  Taxable income is composed of the following:

  • Salaries and wages

  • Dividend, interest, and royalty payments

  • Income from the lease or rental of property

  • Income from the write-off of debts

  • Income received from the supply of goods or performance of services

  • Gains from the sale of assets

  • Income received as a result of the restriction or closing of an entredivneurial activity

  • Income from the sale of shares in an enterprise

  • Income in the form of insurance payments paid under agreements for the insurance or reinsurance risk in Georgia.

  
  

  In addition to monetary wages, benefits are considered wage income and are taxable as part of gross income. Generally, benefits are included in income at the market price at the moment of receipt, reduced by any portion of the benefit paid by the employee. These include: use of an automobile for private service; gifts of goods or gratuitous performance of services; educational assistance to the employee or dependents; and employee expenses reimbursed by the employer.

  
  





Table 1.4.1.1 shows income tax rates. Income tax on dividends, interest payments, and payments to non-residents are withheld at the source of payment and are subject to different rates. Dividends and interest payments are taxed at the rate of 10 percent. Dividends and interest payments received by physical persons, taxed at the source of payment, are not subject to additional taxation. Further, taxes paid on the first 3,000 GEL of combined interest and dividends may be applied to reduce the taxpayer’s tax liability, assuming adequate documentation of the tax payment is provided.




Table 1.4.1.1: Income Tax Rates

Amount of taxable income during the tax year	Tax rate
Up to 200 GEL	12% of the taxable income
201 to 350 GEL	24 GEL + 15% of the amount in excess of 200 GEL
351 to 600 GEL	46.5 GEL + 17% of the amount in excess of 350 GEL
More than 600 GEL	89 GEL + 20% of the amount in excess of 600 GEL

Source: Tax Code.




Tax agents who withhold tax at the source of payment are required to:

• Transfer the tax to the budget when making payments to physical persons;

• When paying wages, issue to the physical person receiving the income (at his or her request) a statement with the person’s name, amount and type of income paid, and amount of tax withheld; and

• Within 30 days of the end of the tax year, divsent to the tax agencies and, if requested, to the person paid, a statement containing the person’s registration number, total income, and total amount of tax withheld during the year.




Physical person entredivneurs and individual enterprises are required to submit income tax payments in three instalments, based on their income tax liability for the divvious year. Instalments are applied against the taxpayer’s actual liability. Payments may be reduced if income in the current year is expected to be at least 30 percent less than income in the divvious year. Taxpayers with no income from the divvious year must make payments based on actual income during the divvious quarter.




Tax payers³ are required to submit returns before April 1st of the year following the reporting year. Before the income tax return due date, taxpayers may apply to the tax authorities for an extension of time to submit their returns. Taxpayers who cease entredivneurial activity must submit a tax return within 30 days of the cessation of activities.




Taxes Paid by Enterprises.




Profit Tax. Profit taxes must be paid by Georgian entities and foreign entities with permanent establishments in Georgia. Foreign entities that do not have permanent establishment divsence in Georgia are taxed via a withholding tax at the source of payment, as stated above. Enterprises are defined as:

• Legal persons established according to the legislation of Georgia

• Corporations, companies, firms, and other entities established pursuant to the legislation of foreign states

• Branches and other separate units that are structural units of the entities indicated in the first bullet and that have their own balance sheet and a separate settlement or other account.




Georgian and foreign enterprises are distinguished by place of activity and management. A Georgian enterprise has its place of activity or management within the territory of Georgia, whereas a foreign enterprise has its place of activity or management outside the territory of Georgia. If there is more than one place of management or activity, or the place of management and activity do not coincide, then the divdominant location should be used to determine the place of activity or management.




Individual enterprises and physical person entredivneurs are subject to income tax (or divsumptive tax), not profit tax. Branches and other units of an enterprise do not pay profit tax separately, but aggregate profit with the main enterprise, which pays the full profit tax.




Georgian enterprises are taxed on gross income, which includes all income regardless of its source or place of payment, less allowable deductions. The profit tax is a flat rate of 20 percent. Foreign enterprises are also subject to profit tax, the extent to which depends on whether the foreign enterprise is connected to a permanent establishment.




Foreign enterprises that conduct economic activity through a permanent establishment are subject to profit tax on gross income, less deductions, from Georgian sources connected to the permanent establishment. Foreign enterprises that do not conduct economic activities through a permanent establishment must pay profit tax on gross income from Georgian sources (no deductions are allowed), and the tax is withheld at the source of payment. However, non-resident taxpayers (including foreign enterprises) who receive certain types of income (e.g., insurance payments, royalties, management fees, income from works or services) may file a return and claim deductions as if this income was connected to a permanent establishment. The withholding rates for certain types of income are as follows:

• Dividend and interest payments—10 percent

• Insurance proceeds—4 percent

• Telecommunication and transportation services, shipments, and oil and gas transactions—4 percent

• Royalties, management fees, income from performing work or rendering services (except income earned as wages), income from leasing movable property, income from management, financial, and insurance services—10 percent

• Certain oil and gas profits—10 percent.




Foreign enterprises receiving profits from the sale of some stocks, assets, and property not connected to their permanent establishment must pay profit tax, with allowable deductions, on the income from these sales. Annex D provides a listing of profit tax exemptions as well as allowable deductions from gross income.




Table 1.4.1.2 summarizes the asset categories into which fixed assets subject to dedivciation are grouped.




Table 1.4.1.2: Summary of Asset Categories

Group	Types of Fixed Assets	Percentage Dedivciation
1	Passenger automobiles, automobile and tractor equipment for use on roads, special instruments, miscellaneous accessories, computers, peripherals and equipment for data processing and storage.	20
2	Automotive transport, trucks, buses, special automobiles and trailers, machines and equipment for all sectors of industry and the foundry industry, forging and divssing equipment, electronic equipment, construction equipment, agricultural machines and equipment, office furniture.	15
3	Railway, sea, and river transport vehicles; power machines and equipment; turbine equipment; electric motors and diesel generators; electricity transmission and communication facilities; pipelines.	8
4	Buildings and structures	7
5	Assets subject to dedivciation not included in other groups.	10

Source: Tax Code.




Buildings and structures are each dedivciated separately, whereas the other asset groups are dedivciated using the balance of the asset group at the end of the tax year. The balance of the asset group is adjusted for purchases, sales, and repairs. The maximum deduction for repair expenses is 5 percent of the balance of each asset group. Any repairs that exceed 5 percent are added to the balance of the asset group and dedivciated as such.




Physical persons who incur a loss in a tax year (i.e., deductions exceed gross income) and who are not connected to employment may not deduct such losses from employment income, but may carry forward and deduct the loss from non-wage income for a period up to 5 years after the tax year in which the net loss occurred. Legal persons who incur a loss in a tax year may carry forward and deduct losses from profit for a period of up to 5 years after the tax year in which the net loss occurred.




Tax credits are subtracted directly from the tax liability. There is a tax credit against Georgian taxes for income and profit taxes paid outside of Georgia, as long as the credit does not exceed the amount of tax charged in Georgia.




A taxpayer may record income and expenses under either the cash basis method or accrual basis method of accounting, but must use the same method for both accounting and tax purposes, and must use the same method throughout the tax year. A physical person must keep records using the accrual basis method for income from entredivneurial activity.




Profit taxes must be paid in three installments based on the profit tax liability of the divvious year. These are:

• Before May 15th: 30 percent of the divvious year’s tax liability

• Before August 15th: 30 percent of the divvious year’s tax liability

• Before November 15th: 40 percent of the divvious year’s tax liability.




Taxpayers who have no taxable income in the divvious year make payments according to the actual income of the divvious quarter.




Installment payments may be reduced if current year income is expected to be at least 30 percent less than income of the divvious year. Permission of the head of the tax agency, requested 1 month before the date of payment is required to do so. Resident legal persons and nonresident legal persons who have income from a Georgian source that is not taxed at the source of payment must submit a tax return before April 1st of the year following the year of the reporting year to the tax agency at the place of registration. Before the due date of a profit tax return, the taxpayer may apply to a tax body for an extension of time to submit the return.




Profit taxpayers who cease their entredivneurial activity in Georgia must submit an income tax return to the tax agency within 30 days of ceasing activities. Legal persons who decide to liquidate must immediately notify the tax service in writing of their plans to liquidate and must file a profit tax return within 15 days of the decision to liquidate.




Value Added Tax. Value added tax (VAT) is collected at every stage of production and distribution. Persons or enterprises with annual taxable turnover less than 24,000 GEL per year are not required to register with the tax authority and pay VAT, although they may.




An enterprise charges VAT on its sales and pays VAT to the suppliers of materials and providers of services it receives. The enterprise then accounts to the tax department for the difference between the tax that it charged on its sales and the tax that it paid on the goods and services supplied to it. This difference usually results in a net payment to the budget, but in some circumstances it can result in a credit to the enterprise.




An enterprise registered for VAT that carries out a taxable transaction is required to divpare and issue a tax invoice to the person who receives goods or services. VAT invoices are purchased from respective regional tax offices at a cost of 0.18 GEL per invoice. The purchaser is given two copies of the invoice and both the seller and the purchaser must submit one copy to their local tax agencies for control purposes. Buyers and sellers are required to submit VAT declarations every month, no later than the 15th of the month following the reporting period. The total VAT an enterprise pays to the budget each month is the total VAT charged on its outputs (sales) less the total (allowable) VAT paid on its inputs (purchases) during that month. VAT paid on inputs can be credited against VAT paid on outputs if inputs are used for economic activities (offset for charities, entertainment, redivsentative expenses are not allowed) and the enterprise has an invoice of paid VAT. VAT paid on exempt goods or on automobiles cannot be offset. If the input tax exceeds the output tax, the enterprise receives a credit for the excess. VAT on taxable imports is levied and collected by customs agencies.




The VAT rate in Georgia is 20 percent. A zero percent rate applies to exports and the categories of goods and services identified below. Annex D provides a list of VAT exemptions.




Exemption means that producers or suppliers of exempt goods and services do not charge VAT on their output, but cannot claim a credit on the VAT paid on inputs used to produce the exempt output.




Social Taxes. Social taxes include both social and employment taxes and are imposed on monetary and non-monetary wages and other forms of compensation paid to employees, as well as on income earned by physical person entredivneurs from their economic activities. The social tax rates are summarized in Table 1.4.1.3.




Table 1.4.1.3: Social Tax Rates

Taxpayers	Taxes Paid by Employers and Entredivneurs		Taxes Paid by Employees
	Social Tax	Employment Tax	Social security Tax
Physical person entredivneurs and legal persons who pay wages to employees. Physical person entredivneurs and legal persons who pay physical persons for services.	27%; not less than 16 GEL per month	1%
Physical persons who receive remuneration as employees or on a contract basis.			1%
Physical person entredivneurs.	27%, not less than 16 GEL per month	1%
Physical persons who carry out non-entredivneurial economic activities in Georgia.	27%, not less than 16 GEL per month	1%

Source: Tax Code.




Social taxes must be paid by:

• Physical person entredivneurs and legal persons who make wage payments to employees working in Georgia or who make payments to physical person who render services in Georgia

• Physical persons receiving remuneration from employment or the performance of services

• Physical person entredivneurs who conduct entredivneurial activity in Georgia

• Physical persons who perform non-entredivneurial activity in Georgia, including lawyers, doctors, notaries, and other professions.




For public organizations of disabled persons as well as enterprises that have a workforce of 70 percent or more disabled persons and pensioners, the 27 percent tax rate is reduced to 10 percent.




Employers who pay wages to employees or to individuals performing services must remit social taxes to the tax administration at the time that wages are paid. Employees’ social taxes are withheld and remitted along with the employer’s social tax payment. Employers are required to submit their social tax returns before the 15th day following the reporting month.

Physical person entredivneurs and physical persons who carry out economic activities classified as non-entredivneurial (under the Law on Entredivneurs) must remit social taxes along with their income taxes. The social tax return must be submitted along with the income tax return.




Excise Taxes. Excise taxes are levied on specific excisable goods produced in Georgia or imported into Georgia. Unless exempted, all physical and legal persons who produce excisable goods on the territory of Georgia or who import excisable goods must pay excise taxes. Exports of excisable goods are taxed at a zero rate.




Several products are exempt from excise taxes, including:

• Alcoholic beverages produced by a physical person for personal consumption

• The import of 2 litres of alcoholic beverages and 200 cigarettes by a physical person for personal consumption

• The transit and temporary import of excisable goods into the customs territory of Georgia

• The re-export of excisable goods

• The import of automobiles and tires for humanitarian aid during a natural disaster

• Aviation fuel to be supplied on board for international flights

• Import or supply of oil products necessary to carry out oil and gas transactions (specified by the oil and gas law of Georgia).




Excise taxes must be paid up to the 10th of the next month after carrying out the taxable transaction. The taxable transaction for products produced in Georgia is considered to occur at the earlier of 90 days from the delivery (transfer) of goods or the moment of payment. In the case of imports, the taxable transaction is considered to occur at the time the goods are imported, and the excise tax is collected by customs agencies. For excisable products subject to excise stamping, the taxable transaction is considered to occur at the time the goods are delivered, and the total amount of excise must be paid upon purchasing the stamps. Excise stamps are required for most imported and domestically produced alcohol products and tobacco products, except for pipe tobacco.




For goods produced on the territory of Georgia, the amount of the taxable transaction is the payment received or to be received by the taxpayer from the customer, excluding the amount of the excise tax and VAT. This amount cannot be less than the wholesale market price excluding the excise tax and VAT. For goods sold at the retail level, the amount of the taxable transaction is the market price of the goods at the wholesale level not including the amount of the excise tax and VAT. For alcohol products, the amount of the taxable transaction is based on the volume of alcoholic beverages. For imported goods, the amount of the taxable transaction is the customs value of the goods determined in accordance with the customs legislation of Georgia (but not less than the wholesale market price, excluding the excise tax and VAT) plus the amount of duties and taxes payable on the import of the goods (except for the excise tax and VAT).




Property Taxes. Georgian enterprises, branch offices, and other similar subsidiary enterprises that have an independent balance sheet and settlement account, foreign enterprises operating through a permanent establishment, and organizations whose property or part of property is used for economic activity must pay property tax.




Property subject to this tax includes fixed assets, installed equipment, uncompleted capital investment, intangible assets that are listed on the balance sheet of an enterprise, as well as such property listed on the balance sheet of an organization and used for economic activity. For foreign enterprises, only property connected with the permanent establishment of the enterprise is subject to property tax.




The property tax rate is 1 percent of the value of the property. The tax is due in four equal payments, before February 15th, May 15th, August 15th, and November 15th.




Tax on the Use of Land. Physical and legal persons who are owners or users of land plots, including land used for agricultural and non-agricultural purposes, are subject to tax on the use of land.




The base rate of the tax for the use of nonagricultural land is 0.24 GEL per square meter of land. This tax is due in equal parts before August 15th and before November 15th of the reporting year.




The base rates for agricultural land are set on a per hectare basis and vary depending on location and use. This tax is due on or before November 1st of the reporting year.




Tax on Economic Activity. This local tax is paid by all physical and legal persons engaged in any economic activity on the territory of a corresponding city (region).




This tax rate is set by local governments, but cannot exceed 1 percent of income (less material expenditures and VAT). For port services (loading and unloading ships) the maximum rate is 2 percent of income (less VAT).




Other Taxes.




Tax on the Transfer of Property. This tax is imposed on the transfer of real estate located in Georgia, inheritances and gifts, and the transfer of motor vehicles. The transferee is subject to the tax. Transfers of title, as well as certain leases of real estate are taxable.




The taxable amount is the amount of compensation transferred (but not less than the market price), including assumed indebtedness. In the case of a lease or tenancy, the taxable amount is determined by discounting the amount payable under the lease or tenancy agreement.




The tax rate on the transfer of real estate is 2 percent of the taxable amount. The tax is due prior to the registration of the documents transferring the property. If the property is not registered, the tax is due at the time the property is transferred.




For property received as inheritance, the tax is due no later than 6 months from the receipt of documents transferring title. For property received as gifts, the tax is due within 1 month of the transfer.




Tax on the Use of Natural Resources. Physical and legal persons engaged in any activity that requires a license for the use of natural resources (with the exception of land) owned by the state must pay this tax. The tax is imposed on the volume of natural resources extracted.




The tax rates vary by natural resource. For minerals, the rate is between 1 and 15 percent (of the price of the mineral resources extracted), timber 2–34 percent, water 3–10 percent, animals 2–55 percent.




The tax for the use of natural resources is due before the 15th of the month following the reporting month. However, the tax for timber and flora resources should be paid at the time of their transportation from the forest; the tax for water resources should be paid before December 1st of the relevant year; and the tax on hunting birds in migration should be paid on receipt of the license.




The tax on natural resources must be paid within 3 months after receiving the license for using the natural resources.




Exempt from this tax are the mineral resources gained in the course of underground construction. In addition, the tax rate is reduced by 70 percent for use of natural resources in connection with scientific and cultural activities and for users of natural resources that have carried out restoration or replacement of natural resources from their own funds, within the limits of the volume of restored resources.




Environmental Taxes. This tax must be paid by physical and legal persons engaged in any activity listed in categories 1–4 of the Law of Georgia on Environmental Permits (October 15, 1996), who pollute the environment from fixed sources or who import or produce gasoline, diesel fuel, kerosene, natural gas (except as used as a raw material for production of goods), or liquid gas.




Tax rates are based on the pollutant emitted, whether it is emitted into the atmosphere or water (either directly or through sewers and storm drains), and geographic region. For other items the tax is based on the amount imported or produced. Imported goods that are later exported are exempt from this tax.




Tax rates apply to pollutants emitted within limits set by environmental laws. Pollutants emitted in excess of established limits are subject to a fine equal to five times the tax rate for pollution within the limit (see the section on fines and penalties below).




Taxpayers who pollute the environment from fixed sources must submit a tax return certified by the Ministry of Environment and Natural Resource Protection to the tax agency and pay the tax by the 15th of the month following the reporting quarter. Taxpayers who produce or supply gasoline, diesel, kerosene, natural gas, or liquid gas must submit a tax return by the 15th day of the month following the reporting month.




Taxpayers who import any products subject to the pollution tax must pay the tax before the customs agency clears the products. Customs may clear the products only after the tax agency issues a receipt indicating that the tax has been paid.




4. Existing Taxation Practices

Background. Georgia was one of the first CIS countries to codify its tax legislation in a comdivhensive Code. However, since its adoption in 1997, there have been numerous amendments, which have considerably reduced the consistency of the Code. Some of the mayor changes in recent amendments include: i) changes in the tax rates for tobacco products and the tax rates of the motor vehicles ownership tax; ii) repealing provisions in the Code allowing the tax administration to seize and sell delinquent taxpayers’ property; iii) introduction of exemptions from property taxation for enterprises and physical persons in mountainous regions. The IMF carried out a review of tax policy in 2000 and a number of the recommendations from this review were actually included in a tax reform package divpared by the Ministry of Finance in September 2001. However, this package has not been divsented to Parliament so far. Key issues remaining on the tax policy side are:




Unstable tax policy framework. The history of tax policy changes in Georgia since adoption of the tax code demonstrates a lack of long-term policy planning and a focus on short-term policy measures, disregarding the general consistency of the Code. Such approach has led to constant changes to Article 273 (on transitional provisions). Even fundamental policy changes are not introduced as permanent features of the tax system, but as temporary ones. A typical example is the cigarette taxation, which has been modified six times (!) since the Code entered into force. New taxation schemes are often introduced late in the year, for short periods of time and without clarification as to their duration. The current taxation scheme for tobacco products was introduced for the year 2001 only on December 2000 and was extended for another year through another amendment to the Code on December 2001. An even worse case is the excise tax on the importation of pyrolysis liquid products which was set at a rate of 400 GEL per ton on December 2000 and reduced to 50 GEL per ton less then four month later. There are numerous similar examples of short-term tax policy measures and frequent changes of tax legislation Such an approach neither allows the business community to calculate its tax burden over a longer period of time, nor does it permit the revenue authorities to design appropriate taxation strategies and develop a long-term planning of resource mobilization. The strong influence of lobbies in Parliament and the obvious tendency of parliamentarians to further narrow the tax base by granting sector and specific exemptions and rate reductions also contributes significantly to the low quality of tax policy making in Georgia.




VAT Threshold. Currently, VAT registration is mandatory for businesses with an annual taxable turnover of 24,000 GEL or more (and voluntary for a businesses below this threshold).⁴ As a result of the low registration threshold, the tax administration has to deal with a large number of small businesses as VAT taxpayers who contribute little to total VAT revenues. For example, an increase of the threshold from 24,000 to 100,000 GEL would reduce the number of mandatory taxpayers from around 13,000 to 3,200. It would at the same time reduce the total VAT collection by around 23 percent. A reduction in the number of taxpayers could substantially facilitate the administration of the tax and help combat VAT evasion by permitting a more comdivhensive cross-checking of VAT invoices and making it more difficult to establish shell companies for evasion purposes. ⁵However, this result can only be achieved if the scope for voluntary registration is reduced. The Ministry of Finance therefore should consider to limit voluntary registration, e.g. by excluding businesses with a turnover below 50,000 GEL.




VAT Distortions. There is increasing frustration with the performance of VAT and the distortions its creates because the tax net is narrow and businesses are often unable to deduct VAT payments on their inputs. First, despite the low threshold, the number of 17, 000 businesses registered is quite low by international standards. Second, a true VAT, which is supposed to avoid tax cascading and economic distortions, requires a prompt and full refund of the part of the tax on inputs which exceeds the tax due on outputs. This is especially important for exporters. In Georgia the amount of unpaid VAT refunds is large (about 29 million GEL at the end of 2001). Tax inspectors should eliminate the practice of treating VAT as advanced payments against future tax liabilities in order to meet their monthly revenue targets (see section on tax administration below). Third, while many countries have introduced limited exemptions or reduced rates in their VAT laws to reduce regressive elements of the tax, the scope of tax privileges in the Georgian VAT continues to increase, and the country has embarked on the dangerous path to use tax privileges as a way to compensate for administrative or legal deficiencies.




Frustration with the distortion effects of the VAT has caused some policy makers to consider whether to replace the VAT with a sales tax. The objective would be to reduce compliance risks by applying the tax to one stage of the business cycle only. There are serious concerns regarding this idea. VAT despite its relatively low efficiency has become the main revenue source, contributing 45 percent to total gross tax revenues in 2001. Experience in other countries shows that sales taxes have a far lower revenue potential than the VAT, because it does not capture the total value added in the production and distribution phases and their rates normally are not higher than 5 percent--because of administrative difficulties. In addition, compliance risks and compliance management challenges would not be reduced because collection would have to rely on the retail sector which is more difficult to administer. Rather than replacing the VAT with a sales tax, the focus should be to improve VAT administration and actually implement the key principles of the tax, such as an effective refund system for exporters. A performance of the tax improves; consideration could then be given later to lowering the standard VAT rate.




Proposed simplified tax. To compensate for the revenue loss caused by increasing the VAT threshold, MoF plans to introduce a simplified tax for taxpayers who are not registered for VAT, and to modify the current divsumptive tax for individual enterprises, which raises relatively little revenues (in 2000 actual divsumptive tax collection was only 5 million GEL or 0.7 percent of total tax revenues), by changing it to a fixed tax with a broader tax base. The MoF proposal is to levy the simplified tax rate of 7 percent on gross income, which will require some basic accounting. The fixed tax will, similar to the current divsumptive tax, be based on the nature of the business activity, the size of the business and the business location; it will include more types of small businesses than the divsumptive tax. Although some (Foreign Investor Advisory Service (FIAS) December 2001 report⁶) consider a fixed tax to be extremely complicated, it need not be so. The fixed tax, if well designed, can be transparent and easy to administer tax. It offers no scope for negotiation to taxpayers, does not require detailed bookkeeping, and could reduce the opportunity for corruption and the compliance costs for taxpayers. There are some issues regarding this divsumptive taxation scheme:




The combined fixed tax and simplified tax is supposed to compensate for the increase of the VAT threshold. However, estimated revenues from the fixed and the simplified tax are 27 million GEL, which is far less than the expected decrease in VAT revenues. While the increase of the VAT threshold and the introduction of the fixed tax are laudable reforms, the revenue impact of the reform will need to be studied further.




Parliament has rejected the proposed simplified tax because it considers the rate (7 percent) too high and the coverage too narrow. According to some parliamentarians, the scope of the tax should extend to some larger businesses, which clearly reflects the interest of certain business sectors to simplify and reduce taxation. Presumptive taxation based on gross figures should be limited to Small & Medium-Sized Enterprises (SMEs) with no sufficient bookkeeping, while all larger businesses are required to keep books and records and are taxed on a net basis. There is no good reason to extend the scope of the simplified tax to larger tax payers.




Excise Taxation. Due to its open borders and weak administrative capacity Georgia faces major problems collecting excise taxes. Reduction in excise tax rates has been the divferred method to improve compliance, but with no positive results so far. Despite this experience the trend to reduce excises continues, which is worrisome. Georgian excise taxes are actually very low by international standards already, and the focus should more be on efficiently enforcing the excise tax regime. Compared to the CIS country average, excise tax revenues in Georgia are low; in 2000 excises in Georgia contributed 1.5 percent to GDP, while the CIS average was 2.1 percent. Looking at neighbouring countries, excise revenue performance is much higher in Armenia with 2.5 percent of GDP and somewhat higher in Russia with 1.9 percent of GDP; it is much lower, however, in Azerbaijan with only 0.5 percent of GDP (which is together with Tajikistan the lowest figure in the CIS region). The fact that Georgia has managed to accumulate a surprisingly high level of tax arrears in an area where arrears normally should not build up – according to IMF data the amount of tax arrears on excises was equivalent to 2.7 percent of GDP by beginning of 2000 – shows, however, that excise revenue increases will also depend on the ability and support of the tax administration to collect revenues from major businesses in the oil and cigarette industry.




Income and social tax. The high tax burden of the personal income tax (PIT) and the social security tax provides a strong incentive to evade the payment of these taxes. Although the personal income tax has reasonably progressive rates (from 12 percent to a maximum of 20 percent), the marginal cost of taxes for both employees and employers creates strong incentives not to formalize the labor contract: employees divfer current to future consumption, while employers seek to reduce costs and increase competitiveness. Overall, the taxation rate of the PIT and the social security tax over the net wage is 68 percent. This implies that for each additional GEL paid to worker in net wage, there is 0.68 GEL to be paid in taxes if the contract is formalized. Financing of the pension system continues to suffer from low compliance in the area of social taxes. (for more details see Social Protection Chapter).




Corporate and income tax exemptions. The Tax Code currently includes a number of exemptions from corporate and personal income tax, which narrow the tax base, increase the discretion of tax inspectors and the potential for corruption. The IMF has recommended to review and abolish many of these exemptions. The Ministry of Finance has started divparing an amendment to the Code eliminating most of the current exemptions from personal and corporate income tax. This includes in particular the exemptions from CIT for enterprises in mountainous regions, the exemption of profit generated by energy renewable sources, consumer appliances and energy saving equipment. However, this proposal to amend the Code will still have to be finally divsented to the Parliament, after it was withdrawn in September 2001.




Administrative provisions for tax enforcement. An essential feature of a good tax code is a clear definition of tax administration procedures and rights and obligations of taxpayers and tax officials. A reasonable balance needs to be defined between the interests of the taxpayer to simplify taxation procedures and reduce administrative burden and the interest of the tax administration to effectively enforce taxation. In Georgia, the possibility to enforce tax collection has been unduly restricted by reducing the powers given to the tax administration in chapter 42 of the tax code to seize and sell delinquent taxpayer property. As a consequence the only remaining enforcement measure, which does not require a court ruling, is the freezing of a taxpayer’s bank account. Considering the absence of specialized tax courts and the weakness of the court system in Georgia, this does not provide the tax administration with sufficient means to improve its compliance management. Enforcement powers of the tax administration should be harmonized with current practice in Organization for Economic Co-operation and Development (OECD) countries.




Abolishing nuisance taxes. Earlier the World Bank and IMF reports have recommended the elimination of nuisance taxes because they typically have extremely low revenue yield and are a burden for small businesses. The tax package divpared Ministry of Finance included the elimination of some of these nuisance taxes, (e.g., the tax on economic activities, the resort tax, the hotel tax, the advertisement tax, and the tax on the use of local symbols), but no progress has been made partly because these taxes are assigned to local governments. However, due to their very limited revenue potential, they contribute less than 10 percent of total local revenues. Considering the administrative and compliance costs of these taxes the actual revenue gains might even be negative, efforts to eliminate these taxes will need to continue.




5. Tax Reform Areas

General. The public perception of the quality and fairness of tax and customs administration in Georgia is generally very negative.⁷ Substantial and visible improvements on the ground will be needed to begin dispelling this perception. This also requires a political commitment to abolish practices which protect and support special interests of taxpayer groups by introducing special exemptions in the tax legislation, thus eroding the tax base, or/and executing divssure on the revenue authorities to grant favourable treatment to specific taxpayers. It will also be necessary to reduce the incentives for revenue officials to participate in corrupt practices and to develop the necessary control mechanisms to detect and punish such behaviour.




Efforts to reduce capture and corruption are to be complemented by long-term strategies to improve the tax policy design and build revenue administration capacity. Tax policy reforms should focus on overall policy design issues instead of exclusively discussing the level of tax rates. Eventual tax rate reductions will only be feasible if accompanied by broadening of the tax base and administrative improvements. Key to improving administration is the effective implementation of self-assessment and the fair and equitable treatment of all taxpayers. Two areas that require special attention are (a) customs administration, and (b) enforcement of personal income tax and social security contributions.




Short-term Reform Priorities. While substantial capacity building in tax and customs requires long-term strategies, there are a number of essential short-term reform initiatives, which should be launched immediately, to improve revenue performance and reduce tax-related distortions.




Tax policy. The main challenge is to stabilize the tax policy framework, and avoid ad-hoc short-term policy measures. In general, the revenue impact of tax exemptions should be properly analyzed, and no further exemptions/tax reductions should be introduced without such analysis is explicitly divsented in Parliament. Any tax policy changes should be taken in the context of the annual budget. It also recommended that the 2001 tax package divpared by MoF be re-submitted to Parliament, including key elements such as: reducing the scope of exemptions, raising the VAT threshold to GEL 100,000 (or US$50,000) and introducing complementary simplified tax.




Tax administration. A number of actions could be take to support long-term reform efforts:

Discontinue the practice of soliciting advanced payments to meet revenue targets and Design a new performance measurement system with appropriate indicators, supplemented by special incentives to improve revenue administration practices;

Centralize revenue accounts in the Treasury and make payments on “a first come first served basis”;

Begin implementation of special program to control imports through the railway system, especially of petroleum products;

Increase coverage of LTI and focus on improving LTI performance.

• Prepare legislative changes to reintroduce sufficient powers for the tax administration to enforce tax collection.




A Longer-term Agenda. A more comdivhensive reform program for the medium and long-term reform of the Georgian revenue system will then need to consider the following issues:




Broadening the base and lowering tax rates. While some taxes may be relatively high and may promote non-compliance – especially the general VAT rate of 20 percent and the combined tax burden on labor – taxes from excisable products are not fully exploited. A longer term tax policy reform objective for a poor economy like Georgia should be to reduce the tax burden on consumption and labor. However, this can only be achieved by (a) broadening the tax base of VAT and profit/income taxes; (b) increasing collection by improving the efficiency and effectiveness of tax and customs administration.




Past experience with tax policy reform in Georgia has shown that mere tax rate reductions without corresponding improvements in enforcement and compliance management will not contribute to increasing tax compliance. Rate reductions therefore do seem not feasible as long as revenue losses from the rate reduction cannot be compensated by a broader tax base and a better enforcement. Tax policy reform in Georgia therefore will need to mirror experience with tax reform in OECD countries in the last two decades, where rate reductions (mainly in the area of direct taxation) were achieved through base broadening and improving tax administration.




VAT Reform. The VAT should not be replaced by a sales tax. Rather, the VAT as the mainstay of the revenue system in Georgia should be strengthened. The VAT design appears buoyant, albeit if its base has been eroded by exemptions, privileges, and fraudulent practices involving both tax inspectors and tax payers. Increasing the threshold and reducing the number of taxpayers will help improve its administration and implement the true spirit of the VAT. Corresponding decreases in revenues can be compensated by introducing a simplified tax, as proposed by Government, and reducing exemptions to broaden the tax base. The implementation of a true VAT necessarily has to ensure refunds for exporters and zero rated goods. On the administrative side, it is important to advance existing initiatives to improve cross-checking, monitor registration, and regulate invoices.




Tax Simplification. The elimination of nuisance taxes will facilitate administration and reduce the administrative burden on small businesses. In Georgia, nuisance taxes are local taxes generating little revenue. The best would be to eliminate these taxes and find alternative (more solid) own revenue sources for local governments, such as the land and property tax, which are not currently collected centrally (see Chapter IV on Inter-governmental Fiscal Relations). In some cases, these are complemented by a small turnover tax, as is already the case in Georgia.




Addressing corruption. The creation of an Inspector General Office (IGO) within the MoR has been a step in the right direction. The work of the IGO should be provided with the appropriate legal and technical instruments to carry out its function. Technically, it is important to develop accurate assessments of where the opportunities for corruption arise, through an analysis of the business process and the use of indirect statistical methods. Legally, the IGO must have the powers to access relevant information from tax-offices and taxpayers. It should also be clear to the agencies and to the public how the recommendations of the IGO would be implemented. The role of the Chamber of Control in evaluating tax performance will no doubt be helped as the IGO builds up strength. The government needs to consider if the current profile of corruption requires development of legal instruments, other than those dealing with corrupt practices in the public sector, to address corruption in the revenue agencies.




Making effective a functional organization. The centrepiece of a modern approach to tax administration is self-assessment. To properly implement self-assessment requires changing the culture, both in government and society, of how taxes are calculated and collected. The direct contact between officials and taxpayers should be reduced, with emphasis shifted to taxpayer services, quick attention to arrears enforcement and selective but effective auditing. Internal control and anti-corruption services should help keep taxpayers and officials honest. Appeals mechanisms should serve to protect taxpayers rights. The extensive advise provided by donors has already acquainted the authorities with the principles of self-assessment. However, the reform agenda continues to be broad and will take time to implement. Te following issues would seem to require special attention:

Registration. It is necessary to review the current registry with emphasis on taxpayers that are not active and looking for quality taxpayers that may be hiding as small or not even registered.

Arrears enforcement. The current stock of arrears plus fines and penalties is large but a large portion of it might not be collectable. It is necessary to make a realistic assessment of what can be collected from the stock and develop timely methods to divvent new arrears from aging, setting clear priorities.

Auditing. There should be a sustained effort to build the quality of auditing. Special attention initially could be placed on critical aspects of the VAT such as VAT refunds, cross-checking of credits and fake invoices. Important to good auditing is the development of risks profiles to guide selection and improve effectiveness. Greater information management capacities available now have to be used to develop such profiles.

LTI. The LTI in not a centre of excellence. Efforts to update the roaster of large taxpayers and to reach coverage of at least 50 percent of the revenues collected by the tax agency are worthwhile, but they have to be sustained. The LTI has to take a more proactive attitude to performance and reform and it is good place to begin developing new incentive mechanisms away from simple revenue targeting.




IDA Support to the Private Sector in Georgia




IDA's Policy. To support private sector development and attract needed foreign investment, the World Bank (namely IDA) has developed the Country Assistance Strategy (CAS), which focuses on removing key policy and institutional (including governance) constraints, as well as financial, energy and infrastructure bottlenecks. On the basis of the FY03 Integrated Trade Development Strategy IDA will provide reform support and progress monitoring through the ongoing Enterprise Rehabilitation Project, an FY06 Private Sector Development Project, and the ongoing Business Environment Surveys and Studies. IDA will also provide support (in conjunction with USAID) for improving access to affordable finance through further financial sector reform, and will help reduce trade, transit and marketing costs through the FY05 Trade and Transport Facilitation Project, building on the FY03 South Caucasus Trade and Transport Facilitation Study. IFC will complement these activities through investments in small and medium-sized businesses and, in coordination with USAID, through technical assistance for business development. Support for alleviating energy bottlenecks will be provided by IDA’s ongoing energy portfolio and dialogue.




Support to SMEs. The Small and Medium Scale Enterprise (SME) sector is a crucial area for potential private sector growth, and IDA has been supporting the sector through its ongoing Enterprise Rehabilitation Project. IDA plans, through the FY06 Private Sector Development Project to provide expanded support for management training, creation of export-oriented clusters of SMEs, advice to business associations and government, and monitoring of the business environment. Additionally, IFC will conduct a targeted study of the SME sector in Georgia to identify key obstacles to its development, and then recommend specific improvements in the regulatory and administrative environment.




IFC Financial Support to the Private Sector in Georgia




IFC's Policy. IFC’s lending and investments in Georgia have been tailored to the country’s special circumstances: limited foreign investments, the non-existence of large local companies, limited access to financing for a nascent SME sector, and the lack of advice for private companies on business related issues such as corporate governance and leasing. IFC would also provide support directly to the private sector through the Georgia Business Development Project, a five-year technical assistance program implemented by the Private Enterprise Partnership with the support of the Canadian International Development Agency (CIDA). The main components of the project, as already stated in the above, include development of the leasing sector and improvement of corporate governance practices. The corporate governance initiative is helping Georgian businesses improve their practices to build investor confidence and increase their access to financing. This component of the program also includes advice to the Government on improving corporate governance policies and regulations.




Assistance to SME Sector. To reach small and medium enterprises, IFC provided equity and long-term credit lines to TBC Bank and helped establish Georgia Microfinance Bank – the ProCredit Bank - the country’s first bank specializing in lending to micro and small enterprises. In June 2000, IFC purchased a 10 percent stake in TBC Bank. IFC’s support helped TBC to grow from a “pocket” bank into the largest and one of the best performing commercial banking institutions in Georgia. In 1999, IFC helped establish the ProCredit Bank - the first bank dedicated to lending to micro and small enterprises in the country, and now the fastest growing banking institution in Georgia. IFC has also supported other Local Companies, for example, GG&MW, a mineral water production company, where IFC’s loans supported the company’s acquisition of key strategic assets and strengthened control over its key brand, Borjomi mineral water. IFC’s equity investment helped the company rehabilitate two mineral water bottling facilities, diversify its product mix and develop the distribution network. IFC sold its stake in the company in 2002.




Development of Mortgage Lending. In the financial sector, IFC has focused on supporting the development of the housing finance market. The introduction of mortgage financing has allowed individuals for the first time to leverage their residences to increase their standard of living. In 2000, IFC extended a $3 million credit line to the Bank of Georgia, and together with re-flows, this credit line financed over 500 projects totalling $4.5 million. In June 2003, IFC provided a second $5 million credit line to the Bank of Georgia for housing finance and for on-lending to small and medium enterprises. In August 2001, IFC provided a second $3 million loan to TBC Bankto support the development of its mortgage lending.




Facilitation of Foreign Investments: IFC invested in equity and provided loans to Ksani Glass Factory, a producer of high-quality glass bottles and packaging. IFC’s The $2.5 million equity investment and $6.3 million loan supported Ksani’s expansion and modernization. At project completion, the facility will be producing 40,000 tons of high quality glass bottles annually with a high level of product flexibility. In the power sector IFC provided a $30 million loan to AES Corporation to support the newly privatized Tbilisi area power distribu­tion company. The loan was div-paid in August 2003, when the AES Corporation sold Tbilisi electricity distribution system to UES.




6. Legislative Basis for the Operation of the Private Companies




General. The operation of the private companies in Georgia is mainly regulated by the following two laws: a) Law on Entredivneurs (LoE) (Corporate Law), which sets the corporate governance principles for the private companies (i.e. Limited Liability Companies and Joint Smpanies); and b) Securities Market Law (SML), which regulates the activities of the private companies permitted to issue and trade the shares on the securities market (i.e. Joint Smpanies). Both laws are reviewed below.




1. Law of Georgia on Entredivneurs (LoE) (Corporate Law)

Under the Law of Georgia on Entredivneurs the following forms of commercial entities may be established in Georgia:

1. Sole proprietorship—An enterprise operated by a physical person with unlimited liability and no minimum capital requirement. A sole proprietorship is not considered a legal entity under the commercial code of Georgia.

2. Joint Liability Company—A legal entity with unlimited liability established on the basis of a partnership of several individuals or companies.

3. Limited Partnership—A legal entity consisting of general and limited partners. The limited partners have limited liability and general partners bear full and direct liability for the obligations of the company.

4. Limited Liability Company—A legal entity that is separate and distinct from its shareholders (one or more legal or physical persons). The company’s liability is limited to its authorized capital. Founders and shareholders are not liable for the obligations of the company.

5. Joint Smpany—A legal entity characterized by the limited liability of the partners. The company’s liability is limited to its authorized capital.

6. Cooperative—A legal entity characterized by the limited liability of the shareholders. In Georgia, this is a common form of organization for agricultural enterprises.




Sole proprietorships, joint liability, limited partnerships and cooperatives are rarely established by foreign investors in Georgia. Therefore, the following focuses on the legal requirements for Limited Liability Companies (LLCs) and Joint Smpanies (JSCs), which are the most popular forms of incorporation used by foreign investors in Georgia.




The Law on Entredivneurs does not set limitations on the domicile of partners. A partner in a legal enterprise can be a citizen or resident of any country. Foreign companies can be established as fully foreign-owned enterprises or in partnership with Georgian companies or physical persons. In accordance with the Law on the Promotion and Guarantees of Investment Activities of November 12, 1996, companies with foreign investments enjoy national treatment and the same rights as Georgian companies.




Provisions of the Law on Entredivneurs for Limited Liability Companies (LLC):

• An LLC can have a maximum of 50 shareholders. The minimum equity capital requirement is 2,000 GEL. The share of the equity capital to be covered by each of the partners may be determined freely, but it must be divisible by 10;

• At least 50 percent of the equity capital must be paid up at the time of incorporation, with the remaining 50 percent due within one year;

• The Law stipulates that a partners’ meeting be held at least annually. Special meetings may be called at the request of partners or directors of the firm;

• Partners’ meetings are required to consider issues such as amendments to regulations, reorganization or liquidation of the company, appointment of directors, and so on;

• Day-to-day management of the company is carried out by one or more directors who are appointed and dismissed by the general meeting or the supervisory board, when such a board is established at the discretion of the general partners meeting;

• A partner may sell his shares without seeking consent of other partners, unless otherwise stated in the charter of the company;

• Partners who posses 5 percent and more of the equity capital are authorized to call a general meeting.




Provisions of the Law on Entredivneurs for Joint Smpanies (JSC):

• An entity with more than 50 partners is required to have a legal form of a Joint Smpany (JSC);

• Minimum equity capital for JSC is 15,000 GEL;

• A JSC with more than 100 shareholders is required to maintain its share registry through an independent registrar (In 2003 amendments were adopted into the law requiring that a JSC with more than 50 shareholders is required to maintain its share registry through an independent registrar);

• A general shareholders' meeting must be held in two months time form publishing annual financial accounts;

• A general shareholders' meeting is entitled to elect the supervisory board members, make amendments into the charter of the company, approve the annual report divsented by the company directors, elect auditors and so on;

• Creation of a supervisory board is mandatory for a JSC. Supervisory boards must have between 3 and 21 members, but the number must be divisible by 3. The Law provides for redivsentation of company staff on the supervisory board (up to 1/3 of the members);

• Supervisory board is elected for the period of 4 years. The company directors may not be the members of the supervisory board;

• Supervisory board meeting must be held al least once in a quarter;

• Day-to-day management of the company is carried out by one or more directors who are appointed and dismissed by the supervisory board;

• Supervisory board oversees the activities carried out by the company directors, checks the annual financial accounts, appoints and dismisses the company directors, etc.;

• The consent of the supervisory board is needed to conduct the following activities: purchasing or selling more than 50% share of entities, purchasing or selling the assets of the company, setting up or liquidating the branches of the company, etc.;

The law envisages a cumulative voting for electing the members of a supervisory board to protect minority shareholders, but this is not a mandatory requirement.




Redivsentative Offices and Branches. A foreign company may operate a branch or a redivsentative office in Georgia. A branch is not a separate legal entity and it is allowed to engage in commercial activities that would constitute all or part of the activities of foreign head office. For purposes of registration, redivsentative offices are treated as branches and are obliged to fulfil the same requirements.




All actions on behalf of a company can be performed by the head of the company (executive body) or by any person authorized to perform such actions by a power of attorney of the relevant body of the company. Foreign legal entities bear full liability for the activities of branches or redivsentative offices.




Analysis - Law on Entredivneurs (LoE). As the main company law for Georgia, the Law on Entredivneurs provides a good basis for corporate governance for all the private companies including those with traded securities. However, based on the experience of other central and eastern European countries, there are several provisions in the Law on Entredivneurs that could be amended to further strengthen the corporate governance provisions. They are: (1) although the LoE envisages a cumulative voting for electing the members of a supervisory board to protect minority shareholders, it should be made a mandatory requirement. As a result, there will be a mandatory cumulative voting for members of supervisory boards as a means of allowing shareholders with small shareholdings to vote at least one member of the supervisory board; (2) requirement that the shareholders’ meeting approve the auditing company’s contract (covering the scope of work and annual auditing fees) so that shareholders interested in a highly quality audit, requiring more time from the auditing company, can obtain such an audit, and (3) There is a need to establish a minimum quorum below which no shareholders’ meeting may be considered valid; (4) although the LoE requires the financial statements of JSCs to be divpared on the basis of the International Accounting Standards (IAS), it does not specifically require that audits are conducted in accordance with the International Standards on Auditing (ISA), which needs to be amended; and (5) the LoE does not provide takeover rules to protect the interests of minority shareholders.




More specifically, the World Bank (WB) and the International Monetary Fund (IMF) conducted the Assessment of the Implementation of the Corporate Governance Principles of the Organisation of Economic Co-operation and Development (OECD) in Georgia. It is interesting to note that the assessment identified a number of the shortcomings in the corporate governance practice existing in Georgia. Namely, according to the study: (i) There are uncertainties in knowing if shareholders are sharing in company’s profits; (ii) It is not uncommon practice of failing to hold the required shareholders’ meetings; (iii) Markets for corporate control are limited; (iv) Court system has not yet made any decisions on the cases concerning corporate disputes; (v) Minor role is played by supervisory boards in the strategic guidance of companies; (vi) There is a less than complete disclosure by most reporting companies, particularly of financial and operating results; (vii) There are weak auditing practices;




More detailed results of the assessment are summarised in Table 1.2.1.1 below:




Table 1.2.1.1. Georgia: Assessment of the Implementation of the OECD Principles

of Corporate Governance

OECD Principles of Corporate Governance	O8	LO9	MNO10	NO11	NA12	Comments
Principle 1 - Basic shareholder rights. The corporate governance framework should protect shareholders’ rights. Basic shareholder rights include the right to: (i) secure methods of ownership registration; (ii) convey or transfer shares; (iii) obtain relevant information on the corporation on a timely and regular basis; (iv) participate and vote in general shareholder meetings; (v) elect members of the (supervisory) board; and (vi) share in the profits of the corporation.			X			Difficult to access the records of the court enterprise registers and uncertainties in knowing if shareholders are sharing in company’s profits
Principle 2 - Fundamental corporate changes. Shareholders have the right to participate in, and to be sufficiently informed on, decisions concerning fundamental corporate changes, such as: (i) amendments to the governing documents of the company; (ii) the authorization of additional shares; and (iii) extraordinary transactions that in effect result in the sale of the company.		X
Principle 3 - Shareholder meetings. Shareholders should have the opportunity to participate effectively and vote in general shareholder meetings and should be informed of the rules, including voting procedures that govern shareholder meetings.			X			Not uncommon practice of failing to hold the required shareholders’ meetings
Principle 4 - Proportionate control. Capital structures and arrangements that enable certain shareholders to obtain a degree of control disproportionate to their equity ownership should be disclosed.	X
Principle 5 - Markets for corporate control. Markets for corporate control should be allowed to function in an efficient and transparent manner. The rules and procedures governing the acquisition of corporate control in the capital markets, and extraordinary transactions such as mergers and sales of substantial portions of corporate assets, should be clearly articulated and disclosed so that investors understand their rights and recourse. Transactions should occur at transparent prices and under fair conditions that protect the rights of all shareholders according to their class. Anti-takeover devices should not be used to shield management from accountability.			X			Limited by low liquidity in stock market
Principle 6 - Equal treatment of shareholders. The corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights. All shareholders of the same class should be treated equally. Within any class, all shareholders should have the same voting rights. All investors should be able to obtain information about the voting rights attached to all classes of shares before they purchase. Any changes in voting rights should be subject to shareholder vote.			X			Effective redress requires review under a court system that is heavily overburdened and has not yet made any decisions on similar cases
Principle 7 - Procedures for shareholder meetings. Processes and procedures for general shareholder meetings should allow for equitable treatment of all shareholders. Company procedures should not make it unduly difficult or expensive to cast votes.		X
Principle 8 - Insider trading. Insider trading and abusive self-dealing should be prohibited.			X			Effectiveness of legal restrictions limited by low liquidity of the stock exchange and small size of the business community
Principle 9 - Insider disclosure. Members of the (supervisory) board and management board should be required to disclose any material interests they have in transactions or matters affecting the corporation.			X			Minor role played by supervisory boards in the strategic guidance of companies
Principle 10 - Rights of stakeholders. The corporate governance framework should recognize the rights of the stakeholders as established by law and encourage active cooperation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.		X
Principle 11 - Corporate disclosure. The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership and governance of the company. Channels for disseminating information should provide for fair, timely and cost-efficient access to relevant information by users.

Disclosure should include, but not be limited to, material information on: (i) the financial and operating results of the company; (ii) major share ownership and voting rights; (iii) members of the board and key executives, and their remuneration; (iv) material foreseeable risk factors; (v) material issues regarding employees and other stakeholders; (vi) governance structures and policies.			X			Less than complete disclosure by most reporting companies, particularly of financial and operating results
Principle 12 - Accounting and auditing. Information should be divpared, audited and disclosed in accordance with high quality standards of accounting, financial and non-financial disclosure, and audit. An annual audit should be conducted by an independent auditor in order to provide an external and objective assurance on the way in which financial statements have been divpared and divsented.			X			Weak auditing practices and an audit law that allows liability to be capped in the contract between the company and the auditor
Principle 13 - (Supervisory) Board responsibilities. The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the (supervisory) board, and the (supervisory) board’s accountability to the company and the shareholders. (Supervisory) Board members should act on a fully informed basis, in good faith, with due diligence and care, and in the best interests of the company and the shareholders.			X			Absence of detailed guidelines for supervisory boards




2. Law of Georgia on Securities Market (SML)

The Securities Market Law (SML) regulates the Joint Smpanies whose shares are traded at Georgian Stock Exchange.




The main principles of the Securities Market Law (SML) are the following:

The purpose of the Law is to develop securities market in Georgia, to protect the investors' interests on securities market, as well as to establish fair and transparent public trading in securities and free competition;

The Georgian Securities Market is regulated by the National Securities Commission of Georgia (NSCG);

The public offering of securities is an offer to sell securities directly or indirectly on behalf of the issuer to at least 100 persons or to unspecified numbers of persons;

A company, which has a class of Publicly Held Securities, shall be deemed to be a reporting company;

All reporting companies shall divpare and submit to the National Securities Commission of Georgia (NSCG) and publish or distribute to registered owners:




1. Annual reports;
   (b) Semi-annual reports; and
   (c) Current reports.




2. Every person who is a member of a managing body of a reporting company shall file with the National Securities Commission of Georgia (NSCG) a report regarding the percentage of this company's securities of which he is the beneficial owner;

3. A person, acting independently or together with other persons (a "group"), shall inform the National Securities Commission of Georgia (NSCG) about the substantial acquisition of securities;

4. Substantial acquisition of securities means beneficial ownership of securities, which provide 5% or more of the voting rights in a reporting company and also when level of beneficial ownership changes by more than 5% from that originally reported;

5. Members of the managing body of a reporting company shall exercise their rights and perform their duties: a) in good faith, b) with the care that an ordinary prudent person in a similar position would exercise under similar circumstances, and c) in a manner that they believe to be in the best interest of the company and its security holders;

6. A Stock Exchange shall be the exclusive organizer of secondary public trading in securities;

7. All purchases and sales of Publicly Held Securities shall be concluded through a licensed Brokerage Company;




A licensed Central Depository shall perform the following functions:
a) open, operate and close securities accounts of participants in accordance with its rules;
b) facilitate the settlement of securities transactions without physical delivery of securities certificates and, in furtherance thereof, provide facilities for comparison of data respecting the terms of settlement of securities transactions.




Licensed Stock Exchanges and a Licensed Central Depository shall be designated Self Regulatory Organizations (SROs) under this law;




The main objective of such an organization, as an SRO, shall be to:

1. Pdivpare rules for its members and supervise compliance with such rules;
   Apply sanctions provided for in its inner regulations and rules or charter against members for non-compliance with its rules.




Insider means any person who, by virtue of his membership in the managing body of a reporting company, his holdings in the capital of such company, or based upon his access to such information by virtue of the exercise of his employment, profession or duties, possesses inside information. Other persons obtaining inside information that evidently originated with an insider shall be likewise considered insiders.

It shall be unlawful for any insider, and any person who knowingly receives inside information from an insider, to:




a) Acquire or dispose of, for his own account, or the account of a third party, either directly or indirectly, Publicly Held Securities of the reporting company or companies to which that inside information relates;

b) Disclose inside information to any third party unless such disclosure is made in the normal course of the exercise of his employment, profession or duties;

c) Recommend to or procure a third party, on the basis of inside information, to acquire or dispose of Publicly Held Securities.




Analysis - The Securities Market Law (SML). The SML is drawn on German model and mostly reflects the international best practice in the field described in "The Objectives and Principles of Securities Regulation" adopted by the International Organization of Securities Commissions (IOSCO), but it has the following weaknesses: (i) It does not cover collective investment schemes (CIS), such as investment funds, and therefore there is currently no legal basis for the operation of CISs in Georgia¹³. Meanwhile, the experience obtained from the Central and Eastern Europe indicates on crucial importance of CIS, such as investment funds, in increasing the corporate governance standards and facilitating the trust amongst investors towards stock markets; and (ii) The NSCG does not have an authority to supervise private placements.




More specifically, the World Bank (WB) and the International Monetary Fund (IMF), also conducted the Assessment of the Implementation of the Objectives and Principles of Securities Regulation of The International Organization of Securities Commissions (IOSCO) in Georgia. The assessment identified quite a lot of problems in the operation of the securities regulator, the functions of which is assumed by the National Securities Commission of Georgia (NSCG). Namely, the report lists the following problems: (i) NSCG has a seriously insufficient budget; (ii) Code of ethics for NSCG staff is awaited; (iii) No specific oversight program to supervise self-regulatory organizations (SROs) has been established; (iv) Inspection and investigation powers of the NSCG over Reporting Companies and their major shareholders are not adequate; (v) Enforcement power of the NSCG on the basis of criminal legislation is limited; (vi) International Accounting Standards (IAS) are recognized but are not fully adopted in practice; (vii) There in no legislation on Collective Investment Schemes (CIS) in Georgia; (viii) There is no market surveillance and stock watch system to detect abnormal movements and unfair trading practices.




More detailed results of the assessment are summarised in Table 1.2.2.1 below:




Table 1.2.2.1 Georgia: Assessment of the Implementation of the IOSCO Principles

for Securities Regulation




IOSCO Principles for Securities Regulation	C14	PC15	MNC16	NC17	NA18	Comments
Principle 1 - Clear responsibilities. The responsibilities of the regulator should be clearly and objectively stated.	X
Principle 2 - Independence and accountability. The regulator should be operationally independent and accountable in the exercise of its functions and powers.		X				The scope of accountability is limited. Lack of legal immunity for NSCG staff acting in good faith.
Principle 3 - Adequate power, resources and capacity. The regulator should have adequate powers, proper resources and the capacity to perform its functions and to exercise its powers.		X				Seriously insufficient budget. As the market develops, more revenue from fees can be expected.
Principle 4 - Clear and consistent regulatory process. The regulator should adopt clear and consistent regulatory processes.	X
Principle 5 - Professional standards. The staff of the regulator should observe the highest professional standards, including appropriate standards of confidentiality.		X				Code of ethics awaited, and introduction of a system of independent assessment may be considered.
Principle 6 - Use of Self Regulatory Organizations (SROs). The regulatory regime should make appropriate use of SROs that exercise some direct oversight responsibility for their respective areas of competence, to the extent appropriate to the size and complexity of the markets.	X
Principle 7 - Supervision of Self Regulatory Organizations (SROs). SROs should be subject to the oversight of the regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities.		X				No specific oversight program to supervise SROs has been established.
Principle 8 - Adequate inspection, investigation and surveillance powers. The regulator should have comdivhensive inspection, investigation and surveillance powers.		X				Inspection power over Reporting Companies and their major shareholders is not adequate. Investigation power not adequate.
Principle 9 - Adequate enforcement power. The regulator should have comdivhensive enforcement powers.		X				Enforcement power on the basis of criminal legislation limited.
Principle 10 - Effective use of the powers. The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and the implementation of an effective compliance program.		X				Limited power was well used. Faced with a severe resource constraint.
Principle 11 - Authority to share information. The regulator should have the authority to share both public and non public information with domestic and foreign counterparts.	X
Principle 12 - Information sharing mechanisms. Regulators should establish information sharing mechanisms that set out when and how they will share both public and non-public information with their domestic and foreign counterparts.			X			No specific MOU or other agreement / procedure has been established.
Principle 13 - Assistance to foreign regulators. The regulatory system should allow for assistance to be provided to foreign regulators who need to make inquiries in the discharge of their functions and the exercise of their powers.		X				Lack of legal immunity of NSCG staff in handling sensitive information in good faith.
Principle 14 - Full, timely and accurate disclosure. There should be full, timely and accurate disclosure of financial results and other information that is material to investors’ decisions.		X				Sound rule but compliance needed (due to the lack of enforcement power of NSCG over Reporting Companies?)
Principle 15 - Fair and equitable treatment of securities holders. Holders of securities in a company should be treated in a fair and equitable manner.		X				Compliance needed. (Private rights of action including class action are not established while the NSCG’s enforcement power over Reporting Companies is limited.)
Principle 16 - Accounting standards. Accounting and auditing standards should be of a high and internationally acceptable quality.		X				IAS recognized but not fully adopted in practice.
Principle 17 - Eligibility standards. The regulatory system should set standards for the eligibility and the regulation of those who wish to market or operate a collective investment scheme.					X	No law, no CISs.
Principle 18 - Legal form and structure. The regulatory system should provide for rules governing the legal form and structure of collective investment schemes and the segregation and protection of client assets.					X	No law, no CISs.
Principle 19 - Disclosure for suitability and valuation. The regulations should require disclosure, as set forth under the principles for issuers, which is necessary to evaluate the suitability of a collective investment scheme for a particular investor and the value of the investor’s interest in the scheme.					X	No law, no CISs.
Principle 20 - Basis for valuation and pricing for redemption. The regulations should ensure that there is a proper and disclosed basis for asset valuation and the pricing and the redemption of units in a collective investment scheme.					X	No law, no CISs.
Principle 21 - Entry standards. The regulations should provide for minimum entry standards for market intermediaries.	X
Principle 22 - Initial and on-going prudential requirements. There should be initial and ongoing capital and other prudential requirements for market intermediariesthat reflect the risks that the intermediaries undertake.		X				Monthly capital. adequacy report not audited. NSCG does not have power to reject an auditor.
Principle 23 - Internal organization and operational conduct and risk management. Market intermediaries should be required to comply with standards for internal organization and operational conduct that aim to protect the interests of clients, ensure proper management of risk, and under which management of the intermediary accepts primary responsibility for these matters.

	X				No specific requirement of compliance officer / dept. with specific responsibilities.
Principle 24 - Procedures for failure. There should be procedures for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk.		X				No procedures to manage winding down of a failed broker although other investor protection legislation, and regulations have been divpared.
Principle 25 - Authorization and oversight of exchanges. The establishment of trading systems including securities exchanges should be subject to regulatory authorization and oversight.	X
Principle 26 - On-going supervision of exchanges and trading systems. There should be ongoing regulatory supervision of exchanges and trading systems which should aim to ensure that the integrity of trading is maintained through fair and equitable rules that strike an appropriate balance between the demands of different market participants.		X				NSCG has no real time access to trading information, no real time oversight. SML does not exdivssly require fair trading rules for different members.
Principle 27 - Trading transparency. The regulations should promote transparency of trading.		X				SML does not exdivssly require real time transparency of div-trade information for direct market participants.
Principle 28 - Detection and deterrence of unfair trading practices. The regulations should be designed to detect and deter manipulation and other unfair trading practices.		X				No requirement of market surveillance / stock watch system to detect abnormal movements.
Principle 29 - Management of exposures, default risk and market disruption. The regulations should aim to ensure the proper management of large exposures, default risk and market disruption.	X
Principle30 - Oversight of clearance and settlement systems and management of systemic risks. Systems for clearing and settlement of securities transactions should be subject to regulatory oversight, and designed to ensure that they are fair, effective and efficient and that they reduce systemic risk.		X				The GCSD needs to comply with the requirement of ownership structure. The legal requirement for efficiency in settlement arrangements could be stated more explicitly.

3. Employment Regulations in Georgia

Labor Code. The Labor Code of Georgia regulates labor relations between workers and employees living in Georgia and enterprise, institution and organization (regardless their ownership and organizational legal form), supports to realization of human rights and freedoms through labor fair reimbursement (legal payment), creation of safe and healthy working conditions for all employees and workers including the working conditions for minors and women. On the basis of international agreements regulating labor relationships, the state protects the labor rights of Georgian citizens abroad. Foreign citizens and stateless persons living in Georgia have the rights and obligations equal to the rights and obligations of citizens of Georgia with some exceptions envisaged by the Constitution and law.

Nondiscrimination. Under the constitution labor is free. Each person has right to choose its field of activity and profession. Discrimination in obtaining a job, or in the workplace, based on race, skin color, language, sex, religion, political and other beliefs, national, ethnic and social origin, property and title of nobility or place of residence is prohibited.




Minimum and Maximum Age of Employment. According to the legislation of Georgia minimum working age is 16 years. Maximum working age is not determined, but pension can be given to a man in the age of 65 years and a woman in the age of 60 years.

Working Hours. According to the Labor Code of Georgia the duration of the working period is:

- 41 hours per week, with five working days;

- 36 hours per week in certain dangerous or unhealthy activities or jobs.

- The duration of a working day totals 8 hours and 15 minutes.

- Thus, the number of working days per month equals 21,1 days.

- Minimum leave is equal to a total of 24 working days.

Wages. Reimbursement of labor is carried out according to labor amount and quality. According to the legislation, minimum level of salary is determined in the amount of 20 GEL. The nominal average monthly salary of an employee in 2001 made up 91.4 GEL. Higher labor reimbursement is considered for employees working in certain dangerous or unhealthy climatic conditions. However, the wages for each professional category are usually negotiated in labor agreements.




Social Taxes. The article on Social Taxes of the Tax Code of Georgia stipulates a new system of social tax payment. According to the tax code of Georgia, social tax rates are as follows: The amount to be paid into the United State Fund of Social Security is equal to 28% of the salaries paid, out of which the employer has to contribute 27% and the employees have to contribute 1%, and the payment to the United State Fund of Employment is equal to 1% of the salaries paid, which has to be contributed by the employers.




Medical Insurance Fee. Medical Insurance Fee for legal entities is equal to 3% of the salaries paid. Medical Insurance Fee for all employed persons is equal to 1% of their income (exemptions: compensation surplus for annual leave; bonuses; awards; pensions and allowances).




Social Security System. The social security system of Georgia is based on compulsory social insurance. According to the Presidential Decree dated by June 29, 2000 (No 278), issues relating to the assignment and distribution of state pensions and aids, definition of vulnerability and other medical-social expertise are the responsibility of the Ministry of Health and Social Security. The reform in social insurance system, which was recently carried out in Georgia, encourages the improvement of the social security system and the establishment of private pension funds.




Georgian Trade Unions League. Georgian Trade Unions League is a joint national professional centre of trade unions in Georgia. The main goal of the league is to protect the labor, socio-economical, legal rights and interests of its members. The league includes 33 trade unions and 2 member organizations. Currently, there are 900 000 trade union members in the different organizations of the league. Under the Constitution of Georgia all employees (workers) have the right to join Trade Unions. Georgian Trade Unions League, together with the member organizations, co-operates productively with the General Confederation of Trade Unions, International Labor Organizations, Trade Unions of United States of America, Germany, Denmark, France, Turkey, Israel and other countries. At divsent, treatment of an issue on accepting the League of Trade Unions of Georgia as a member of Free Trade Unions International Confederation is in progress.




Freedom of Association and the Right to Collective Bargaining. The law prohibits discrimination by employers against union members, and employers may be prosecuted for antiunion discrimination and forced to reinstate employees and pay back wages; however, there are reports of managements warning staff not to organize trade unions. Some workers, including teachers in the Imereti region, employees of various mining, winemaking, pipeline, and port facilities, and the Tbilisi municipal government reportedly complain of being intimidated or threatened by employers for union organizing activity. Observers also claimed that employers failed to transfer compulsory union dues, deducted from wages, to union bank accounts. The Ministry of Labor has investigated some complaints, but no action has been taken against any employers to date. There are no legal prohibitions against affiliation and participation in international organizations. The Constitution and the law allow workers to organize and bargain collectively, and some workers exercise this right; however, the practice of collective bargaining is not widesdivad.




Forced Labour. The Constitution prohibits forced or bonded labour, including by children, and provides for sanctions against violators.




Trafficking in Persons. The law does not prohibit trafficking in persons specifically, although trafficking could be prosecuted under laws prohibiting slavery, forced labor, illegal detention, and fraud. Georgia is both a source and a transit country for trafficked persons. There have been unconfirmed reports that government customs and border officials were involved in the trafficking of persons. The Government has prosecuted some traffickers using fraud statutes, but otherwise has no active programs to address the problem of trafficking. A government program for combating violence against women included a proposal for measures to eliminate trafficking in women for the purpose of sexual exploitation; however, it has not been implemented due to budgetary constraints. Georgia itself is generally not a destination place for trafficked persons.




Effective Abolition of Child Labor. According to the law, the minimum age for employment of children is 16 years; however, in exceptional cases, the minimum age can be 14 years. The Ministry of Health, Social Service, and Labor enforces these laws and generally they are respected. The Government has not ratified the ILO Convention 182 on the worst forms of child labor.




Elimination of Discrimination in Employment. The Constitution provides for the equality of men and women. Women's access to the labor market has improved but remained primarily confined, particularly for older women, to low-paying and low-skilled positions, often without regard to high professional and academic qualifications. Salaries for women continued to lag behind those of men. Reportedly men were given divference in promotions. Of the 114,512 registered unemployed persons throughout the country, 46 percent were women. Women sometimes, but not often, filled leadership positions. According to UNDP, employers frequently withheld benefits connected to divgnancy and childbirth.




4. Regulations about Real Estate in Georgia

Acquisition of real estate in Georgia. The transfer of ownership rights on a real estate are regulated by the Civil Code of Georgia (set in force on November 25, 1997), by the Laws of Georgia on "Ownership of Agricultural Lands" (adopted on March 22, 1996), "Managing and Disposal of State-owned non-agricultural Land" (adopted on October 28, 1998), "Managing and disposal of non-agricultural land being in usage of physical persons and public legal entities"(adopted on October 28, 1998). Real estate includes land-lots with fossils (minerals), plants and real estate divmises as well.

For the purchase of a real estate legally (notary) approved document and purchaser’s registration in general list is required. The application for registration could be submitted by the seller or purchaser as well.

The right of ownership on agricultural and as well as non-agricultural lands is granted only to citizens of Georgia and to private legal entities registered according to Georgian legislation.

The fee for getting legal (notary) approval on real estate transactions is different in each case and depends on the value of real estate. The fee decreases with the increase of property value and fluctuates within 3-0,05%. The fee should not exceed GEL 10 000.

Transfer of real estate, except new dwelling constructions (new constructions are defined to be dwelling constructions built up within 2 years period) are free from VAT. Tax for transfer of immovable thing makes up 2% of property value.

For the registration of right on ownership on land-lot and related real estate and issue of relevant registration notice, the state registration fee makes up GEL 26.




7. The Business Environment in Georgia




Investors face a difficult environment in Georgia starting with the fundamental issue of geopolitical instability. In addition, several surveys of existing and potential domestic and foreign investors show that the business environment is generally perceived as bureaucratic, non-transparent and corrupt. Georgia is perceived as having significant obstacles to investment in the areas of taxes and regulations, policy instability/uncertainty and corruption. While the average official and unofficial fees for business procedures and the resources required (staff and time spent) may not be the highest in comparison to other countries, the undivdictability of costs and delays related to administrative procedures combined with uneven implementation and enforcement of regulations increases business risk and results in differential treatment among firms.











As shown in the above Figure, when scores on general constraints to business operations for enterprises in Georgia are compared to regional averages, the constraints are shown to be worse in Georgia for every category except the performance of the judiciary and anti-competitive practices. This substantiates the earlier observation that the business environment is perceived as being much more constrained in Georgia compared to competitors in the region. Further, it emphasizes the need for the Government of Georgia to address these critical constraints in order to help improve the country’s attractiveness for domestic and international investors.




Time and again it has been observed that decrees and programs of reform have been adopted but weakly implemented in the absence of the strong political will necessary to effect change. For example, the State Customs Department (SCD) reform committee was established by Presidential Order to finalize a reform strategy and implement an action plan. To date, little has been done on implementation. The committee rarely meets. Reform has been impeded by competing agendas and frequent changes in SCD leadership due to absence of strong political will to reform the customs department.




Corrupt practices significantly affect the process of doing business in Georgia by increasing the cost and the risk associated with a range of administrative procedures. From the perspective of foreign investors in particular, facilitation payments or bribes do not simply increase business costs. They constitute significant risk because in Georgia they are undivdictable and uneven. Also, in all OECD countries bribery constitutes a serious legal offence that can be prosecuted in the home country. Finally, corrupt taxation administration (income tax evasion) and customs procedures (smuggling) result in unfair competition for legitimate, law-abiding enterprises.




In addition, the following fundamental issues have the impact on administrative procedures in Georgia, particularly in the areas of customs and tax administration, licensing, and inspections:

• Inconsistent implementation of legislation and lack of transparent implementing regulations and procedures. Since 1991, a number of laws have been revised and new laws have been written and promulgated. Although these laws are generally modern and well written, poor implementation and enforcement effectively undermine the intent of the laws. Throughout this report, it is clear that the legal framework and official requirements for most administrative procedures are relatively sound. However, problems and inconsistencies arise in implementation as officials often seek to maintain and exercise discretionary authority and control of administrative procedures.

• Lack of published information on the various administrative procedures required for business establishment and operation. For example, the official gazette is significantly behind schedule and the business stamp approval procedure is still issued by the police at the cost of 10 GEL. The challenge of publishing and disseminating timely and current information among officials and the public is even greater because of the ongoing changes to existing laws. However, timely publication and dissemination is necessary in order to minimize information gaps and opportunities for corruption.

• Absence of effective mechanisms for holding public officials accountable. In principle, the Administrative Code and the Civil Code include provisions on the conduct and accountability of public officials. However, in practice these provisions are not enforced. Efforts to introduce and implement codes of conduct for taxation and customs officials have had limited effect to date.

• Absence of effective appeals mechanisms and the inadequate capacity of the courts. The Administrative Code provides for the public’s right to be heard in protesting or seeking clarification on the actions of most government agencies. However, there is no provision for an independent or autonomous arbiter to provide recourse. This function is apparently to be carried out by the courts. However, the integrity of the courts is often suspected and the capacity of the courts to address these issues is limited.