EBRD to triple its financial support for Georgia

The European Commission, European Bank for Reconstruction and Development (EBRD) and the European Investment Bank are combining their efforts to give more support to Georgian businesses so they can experience the benefits of the Association Agreement (AA), signed in June 2014 between Georgia and the European Union (EU).

Part of the AA was the Deep and Comprehensive Free Trade Area (DCFTA) agreement. This contract was expected to bring many economic benefits to Georgia by giving firms access to the EU's single market– the world's largest. In particular, the DCFTA will create business opportunities, bring better goods and services and boost competitiveness in Georgia.

The EU has begun to work with the Georgian Government and local businesses to help them achieve reforms and help upgrade goods and industries to ensure they meet necessary EU standards.

Agenda.ge’s economy editor Mariam Papidze spoke with EBRD Director for Caucasus, Moldova and Belarus Bruno Balvanera, and Director of Early Transition Countries Imitative Team Christopher Clubb to learn about EBRD’s support for Georgia.

Director of Early Transition Countries Imitative Team Christopher Clubb.

The men said it was very important for Georgia to implement industrial projects – which are a new trend for the country – as a way to benefit from the AA. One of the most important benefits and advantages the AA offered Georgia was the support it could no receive after the country advanced the institutional building and judiciary reforms.

"The European Commission, EBRD and the European Investment Bank are right now working on a very comprehensive program to triple our support for local businesses and increase their ability and capacity to really take benefit of the very favorable terms that the EU gives the Georgian businesses,” Clubb said.

Q. EBRD is providing support to Georgia to implement the DCFTA regulations. How would you assess the implementation process and how much has EBRD invested in Georgia in this direction?

Balvanera: On an accumulative basis we have invested about $2.2 billion USD in Georgia. Last year it was a record year. We invested €225 million, which is almost double the €120 million that we had in previous years. For 2015 we have a good pipeline of projects and I would expect we will have similar year to 2014. We are seeing several investments in industrial projects that we have not seen previously. I am optimistic about the trend of investment in the country.

The projects are about extension of business activities of companies that are currently working here or new projects in areas that are in line with what the Government has announced in the ‘Produce in Georgia’ program. It might be agriculture or which I call "light industry” – building materials, chemicals, and pharmaceuticals. These are industries which are not very intensive in capital expenditure, a not very big investment but they are intensive in output and in employment.

That is something I did not see last year or the year before. This is a good initiative and I am confident that that we will see more interesting investments than what I have seen over the last few years.

The EBRD and the EU are stepping up their efforts to support SMEs in Georgia. 

Q. Why do you mention project ideas that you say are new for Georgia? Do you think it is time to think about implementing projects in new industries?

Balvanera: Georgia is perceived to be a top reformer country. This is a country where the authorities overcame corruption. The private sector accounts for 30 percent. This is eminently a private sector country driven by private sector rules. What the Government is doing right now is to move to what I call a second round of reforms, which is to go deeper into the reforms that were done by the previous government. This is institutional building.

We need more institutions that will regulate competition, the broadcasting of signal on TV and telecommunications. This is exactly where the country is moving. Georgia is a signatory of the AA, which now needs to be embraced with European standards. For me the benefits of the AA and DCFTA are probably more on the institution building than in the DCFTA angle. I do not want to say the DCFTA angle is less important. It is important, as Georgia is going to improve the quality of its products and bring them to a level that Georgia can export to Europe. But it will take time before Georgia starts to penetrate the EU market.

Clubb: EBRD is here to support [Georgia] bring Foreign Direct Investments (FDI) into the country. This is a big ambition of EBRD and the European Commission as well as the Georgian Government. The Government does good work in order to make Georgia an attractive place to invest. If we look at the World Bank Doing Business report we will see that Georgia is the best country globally over last 10 years of making improvements and reforms to improve the business environment [and] that should attract more and more FDI.

EBRD is willing to support any FDI to Georgia. We are prepared to provide financing for the companies coming into this country to expand the industrial production of Georgia. We are ready to support this new entrance in Georgia.

EBRD and Georgia have signed a Memorandum of Understanding which creates the foundations for the organisation of the 2015 EBRD Annual Meeting which will take place in Tbilisi on 13, 14 and 15 May 2015.

Q. As you say Georgia has everything but it never achieves. How can Georgia finally see the beneficial results?

Balvanera: With regard to economic growth 2014 was a good year; [Georgia experienced] more than four percent growth. If we compare this rate to the large part of EU countries, Georgia did much better. Maybe not at the rate that you would have liked to have seen but the Georgian economy has expanded over the last few years.

The forecast of growth for this year is around the same number. This may be subject to regional challenges.

In order for Georgians to be able to catch up in terms of income per capita, you will need to have sustained growth for many years at a rate significantly higher than your partners. This was the case and what we saw in China for 30 years and today China is one of the largest countries in the world. OK, Georgia has not achieved that but I would say that I feel optimistic that Georgia has all the conditions to achieve that.

Georgia has a hydro sector that has been developing and that has attracted a lot of FDI. Unfortunately this is an investment that does not produce a lot of employment. Because once you have built the hydro station you just need a few people to operate it. But it is going to produce exports to Turkey that are going to be good.

The place of Georgia in the world is to try to experience the model of countries that have been in similar circumstances. I am referring to the Baltic countries. Those are three relatively small countries that are in between the East and the West; they have the legacy of the East but they want to be much more West. If we look at the example of Estonia, which is one of the most advanced countries in terms of e-commerce and e-governance, you can reach it as well. Georgia has achieved much in terms of e-governance.

Georgia has a traditional link with Israel, which is another good example of a country that is [located] in between a difficult area and Europe. Even they do not have the kind of land that Georgia has.

Now the Government has a very clear focus on where they need to bring Georgia to a better level.

The Georgian market is very small. When you want to bring investor like Nestle here and the market is only four million people, you will not attract it. In that respect the relevant market needs to increase with Azerbaijan for example, which are nine million people, with Armenia, another three million people, and why not also with Central Asia?

The second is to expand the industries that are already established here.

Overall, I think that Georgia is moving to the second stage of development. First is the creation of institutions and second is the development of the local market. Local investors are extremely important. There are beautiful examples of TBC Bank and Bank of Georgia who are listed on the London Stock Exchange. They are banks that were created by Georgian investors. This is an example of the entrepreneurial mentality that exists in Georgia. They have achieved what any other country of the region has not achieved yet.

I understand your frustration that country has done a lot and has very good ranking of the World Bank, but if you look through the window where is the difference? I think it is going to come!

The EBRD is stepping up its support for the development of renewable energy in Georgia by financing the construction of a new hydroelectric power plant (HPP) in Dariali on the Tergi river, in north-eastern Georgia.   

Q. Is it possible for Georgian companies to open a business in the EU?

Balvanera: Theoretically it is possible because the AA allows that but this is not something that I expect will happen in the near future.

Why not rather look to increase the quality of Georgian products to European standards and position them well here in Georgia and in the region, and [promote Georgia products] in every country where you have better margins - in the Middle East, in Russia or in Eastern Europe? The benefits are much wider than just Europe.

Q. How do you compare Georgia, Ukraine and Moldova as you cover the region?

Balvanera: Georgia is a country that culturally inherits a very open-mind European mind, a millennia culture of communication between the East and the West. Culturally, Georgians are imminently European, Western European.

Second, in terms of moving into a market economy after the fall of the Soviet system, Georgia experienced a very difficult first few years but despite this it made such strong advances in a number of other areas.

Georgia is starting with a new book, with a new young generation that is very western-oriented, with a good judicial system, with no corruption, transparency, and e-governance. That puts you in a very different place compared to Moldova.

The GDP per capita that you have today is not so far from Moldova’s. But the potential that you have looking forward is very different.

Clubb: The financial sector is also much better in Georgia.

The EBRD provides business advice to small companies and helps them succeed. As EBRD said "small businesses grow...like mushrooms!"