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Photo/ Poti Fiz

Why Free Industrial Zones are Inefficient in Georgia

RAKIA, one of the major Arab investor companies in Georgia, has returned an 85% stake in Poti free industrial zone (FIZ) to the Government, Ministry of Economy reports. The Arab company maintains a 15% stake in Poti FIZ.

LLC RAS Al Khaimah Investment Authority Georgia is a subsidiary of RAS Al Khaimah Investment Authority (RAK), the Poti FIZ management company. Besides 15% stake in Poti FIZ, the company also owns Sheraton hotel, where, an about 30 million USD investment project is being implemented for the hotel renovation. The Arab company also owns Tbilisi Mall.

It should be also noted that, under the  Government resolution of September 16, the agreement on sales of 98.26% stake in Poti Airport to Rakia has been also suspended. Under this agreement, investor was to develop the airport infrastructure.

Vice Prime Minister Dimitri Kumsishvili said that the returned asset’s value is about 100-150 million GEL. The Government has taken back the free industrial zone on more than 300 hectares and Poti airport on 150 hectares. Moreover, negotiations are underway with potential investor on making 600 million USD investments in Poti FIZ, Government officials noted.

“Investments of 600 million USD will be made in FIZ. Therefore, our objective is to make  Poti FIZ and Poti airport as instruments for implementing our investment policy”, Dimitri Kumsishvili said.

According to government officials, RAKIA has failed to fulfill obligations for Poti FIZ development. As a result, a fine was imposed on the Arab company, but the latter applied to the Government for pardoning this fine in exchange for 85% stake in the asset.

The Government does not specify the amount written off from the Arab company in exchange for the mentioned deal, under the pretext the agreement conditions signed by the Government and the investor are confidential and information on fines and other details must not be divulged without the company’s consent.

It is unclear why the agreement between the government and the company is confidential. It is inadmissible that the government conceal  information about its relations with a private company from citizens, excluding information about deals on defense items or security issues of other countries.

Free industrial zone was organized in Poti under the ruling of the United National Movement (UNM). The previous ruling party used to adopt and implement very favorable decisions for investor, but detrimental decisions for the country, including concealment of Enguri HPP agreement, as well as the agreement with CT Park with absolutely losing conditions for the country and so on.

As to Poti FIZ perspectives, Ministry of Economy explained that the asset has maintained the status of a free industrial zone and its development is continued. FIZ was established in Poti in June 2008 for a period of 99 years.

According to statement of the then President Mikheil Saakashvili, ten thousands and hundred thousands of new job places would be created in the FIZ. In reality, the FIZ failed to fulfill even a half part of the President’s promises. Private companies have not showed much interest in Poti FIZ and the asset’s workload made up only 10-15% over the past 8 years.

It should be also noted that similar hopeless situation exists in Kutaisi  free industrial zone too, where Egyptian company Fresh was to make 2 billion USD investments, but these promises also turned out exaggerated. Nor Kutaisi FIZ manages to work at full capacity. Despite free industrial or economic zones have not justified in Georgia, new ones are being still created. For example, over the past years 2 new zones were created:

1) one near Tbilisi with BitCoin data center  and 2) another was created by Hualing company, nearby Fresh FIZ in Kutaisi. However, nor the new free industrial zones are showing spacial success.

Free industrial and economic zones, as a rule, work successfully in big and closed or semi-closed economies, however, in Georgia this practice has not justified. And nobody has analyzed reasons why free industrial zones do not work in Georgia. Despite failures, the government keeps creating new free industrial zones, but the reality suggests that either FIZ organization strategy should be revised or similar zones should not be created any more, because taxes are lower in the whole country compared to European countries and it is better that the government direct efforts for promotion the whole state economy, not its specific zones and sections.