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Why Georgian Companies Lose Road Infrastructure Deals

The tendency over the past few years prove that Georgian road construction companies have been losing  road infrastructure deals, and key motorways are entrusted to foreign companies, while several years ago Georgian companies were participating in, winning and implementing major and important projects.

However, starting in 2013, an intensified inflow of foreign companies to the Georgian market lead Georgian companies to bankruptcy, and made them withdraw from the market. Maia Tskitishvili, Minister of Regional Development and Infrastructure recognized the relevance and acuity of the problem when she noted at a parliament meeting that Georgian companies could not satisfy tender requirements for major projects.

For the purpose of implementing major projects, the Ministry follows the regulations of international institutions. “Why do foreign companies win tenders? In similar projects, we receive financial support from international institutions, and we follow their regulations and requirements. Based on the risk assessment component, project scales and technical complications, we determine specific volumes, turnover, the history of company performance. Companies must also have the experience of managing similar projects. Therefore, we must avoid experiments and project failures, where Georgian companies may win tenders, but fail the projects implementation process. Regretfully, Georgian companies frequently cannot satisfy the requirements ”, Maia Tskitishvili noted.

The Caucasus Business Week (CBW) has inquired why Georgian companies fail to win infrastructural projects and whether they genuinely have low qualifications.

“Placing focus on quality improvement and rejecting price as the only criterion can ensure a company’s growth and quality improvement”, Ana Sabakhtarashvili, director of Association of Infrastructure Developers, told Maia Tskitishvili, Minister of Regional Development and Infrastructure.

Negotiations should be conducted with donor institutions with the aim to involve Georgian companies in major infrastructure projects. These resources genuinely exist, and it is possible to diminish or fragment project scales in certain cases.  Small sections may be entrusted to domestic companies. Similar approach could be the only solution, Sabakhtarashvili said.

Secondly – all contracts must name a domestic subcontractor. Today, a similar strategy is carried out in certain deals, however, this practice should be established in all negotiations, Sabakhtarashvili noted.

‘We seek to achieve this objective with our donors. They cooperate with local subcontractors anyway, because otherwise it is impossible, physically. Moreover, this amount should increase for nominated subcontractors”, Sabakhtarashvili noted.

Frequently, tenders are held, and the final price radically differs from the initial price, and this is not good. Somebody may appraise this as efficient spending of state finances, but the law price signifies that either a company fulfills the project with low-quality work, or it does not invest money in development and labor safety, she added.

The existing state procurement system is oriented only towards price, and enables companies to offer the lowest price, she noted.

“The only mechanism for growing companies and improving their quality, besides a focus on quality and rejecting the price as the only criterion, consists of the obligation to care for a project. One company should be responsible for design, fulfillment and care. In this situation, companies will be able to perform works with higher quality, and lower expenditures will be required”, Sabakhtarashvili said.

The Ministry of Infrastructure is conducting negotiations on the aforementioned issue with the Association of Infrastructure Developers and the private sector, she added.

Gia Tsikarishvili, head of the LagodekhAvtoGas company, explains that Georgian companies are not able to receive experience in state tenders. The current situation does not enable us to act even as a subcontractor as a part of major projects, he said.

Irakli Khergiani was Deputy Chairman of Road Department, from October 2015 to December 2017. According to him, major projects in Georgia are implemented by international donor organizations. As a result, the purchasing schemes are almost identical, and they have not changed. Khergiani explains that international financial institutions apply almost  identical procedures, and the Ministry of Infrastructure is obliged to implement this process under donor-determined regulations.

“I mean a project worth several tens of millions of dollars, where companies were requested to have the required working experience. That’s why Georgian companies cannot satisfy the aforementioned requirement”, Khergiani said.

In response to the question of how Georgian companies could satisfy the requirements from donor organizations before 2012, Khergiani pointed out that Georgian companies have never participated in major infrastructure projects, because they could not satisfy even the financial requirements.

“I remember in 2004 or 2005, Georgian companies, including the ZIMO company, fulfilled construction works for the first section of the highway, but the project was funded from the state budget. After that, only foreign companies have participated in major projects, and Georgian companies were represented only as subcontractors”, Khergiani said.

The Ministry of Infrastructure should help Georgian companies get involved in major projects as subcontractors, he noted.

“It was the strategy of that period: to promote the growth of Georgian companies, and help them penetrate foreign markets, both construction and engineering companies. This is a necessary component. It is necessary that our country should export engineering services”, Khergiani noted.

In response to the question of whether the Ministry of Infrastructure follows the same strategy even today, Khergiani explains that Georgian companies provide active work even today, including the Black Sea Group, Caucasus Road Project.

“Only two companies have taken part in major tenders, and according to my information, they keep working very well, even today. Consequently, this strategy has been maintained”, Khergiani said.