Challenges of Georgia's investment environment
Georgia’s economic situation has been actively discussed by political and public groups lately. The depreciation of the national currency, inflationary expectations, and the attractiveness of the investment environment are key topics of discussion. It is widely recognized that an unstable currency seriously undermines the growth of business and a country's economic well-being. Therefore, it is crucial that the Georgian Lari stabilizes and a new balance is established on the currency market. Transparency International (TI) Georgia offers a brief analysis of significant issues, apart from the currency rate, which may have positively or negatively affected the investment environment in the country since the election of the Georgian Dream government.
Investment is one of the key foundations of any country's economic development. Especially for a small developing state like Georgia, attracting foreign direct investment (FDI) is of crucial importance, because domestic investment is often insufficient.
2012 was a politically tense and active year with the parliamentary elections on October 1 ushering in a new government. Economic activity that year was turbulent as well: in the second half of 2012, the volume of FDI accounted for 432.7 million USD, which was a decrease of 46.2 million USD on the first half of the year.
In 2013, FDI increased slightly, reaching 941.9 million USD. This exceeded the 2012 figures by only 30.3 million USD. Preliminary data from the first three quarters of 2014 show the volume of FDI in Georgia was 923.3 million USD, an increase of 29% on the same period in 2013.
On February 5, 2015 at a meeting of the Government Prime Minister Gharibashvili urged the Government members not to create artificial obstacles for business. Unfortunately, the last two years have been marked with precisely such artificial obstacles and gratuitous regulations delivering negative messages to investors.
1. Unstable legislative environment and delayed amendments
Frequent delayed enactment of important legislative amendments has become one of the traits of the Georgian Dream Government. This has prevented the formation of a stable and predictable legal environment in the country. At the end of 2014 the time limits for enacting ten key reforms were delayed for a year.
2. New immigration policy
Introduction of new immigration rules was another unjustified decision by the Government. The new Law on the Legal Status of Aliens and Stateless Persons, drafted by the Ministry of Justice (MoJ), entered into effect on September 1, 2014. The amendments have tightened regulations on temporary migration to Georgia. The Government of Georgia has mainly linked the need for these amendments to obligations taken as part of the visa regime dialogue with the EU. TI Georgia has examined these regulations and the views of individuals directly affected by these amendments.
The organization concluded that several amendments stipulated in the new Law unreasonably complicate procedures for foreign citizens entering Georgia and obtaining the right to residence. They create needless problems to students arriving in Georgia for their studies, investors, and those wishing to live in Georgia for family reunification. The following issues are especially problematic:
- Unjustified reduction of the number of countries with visa-free entry;
- No longer allowing visas to be obtained at the Georgian border nor the extension of visas while in Georgia;
- Insufficient Georgian diplomatic missions abroad to process visa applications;
- Lack of an online visa application process;
- Unreasonable waiting periods for issuing residence permit and visa;
- Grounds for rejecting a residence permit are too broad and allow for a great deal of discretion;
- Frequent and unjustified application of Sub-Paragraph "a" of Article 18.1 (threat to national security) as a reason for rejection;
- Inefficient mechanisms for challenging the rejection of a residence permit.
Once the Law was adopted, numerous organizations and private individuals have protested against the new regulations, followed by the Prime Minister Gharibashvili's commentary. He has apologized to all foreigners who experienced problems due to the amended immigration rules and promised to solve the problem(s). Indeed, in December the Parliament adopted amendments, but they only partially solve the problem. Problems still exist, including: no online visa application process and not being able to obtain a visa on the border; a vast number of unjustified, vague and inconsistent decisions on rejection of residence permit applications, including the unacceptably wide application of Article 18.1.
TI Georgia has been approached by several investors who were directly affected by controversial decisions under the new Law and who have been refused temporary residence, while in some cases their family members and staff employed in their companies were granted residence permits.
3. Prolonged process of reforming the Labor Code
Talks about labor legislation reform began at the end of 2012, but the scales of the amendments were unknown. The first amendments to the Labor Code were initiated on November 22, 2012 authored by the Parliamentary Committee for Healthcare and Social Affairs. The draft provided for several key changes. It gained parliamentary support in its first hearing on December 28, 2012. Further debates on the law were suspended and a year later, on 11 December 2013, the Parliament examined the draft at the second hearing. At the second hearing they rejected the legislation.
The suspension of hearings on the draft law and subsequent failure were triggered by a competing series of new amendments to the Labor Code drafted by the MoJ. The MoJ’s draft was initiated in the Parliament by the Government on 11 March 2013. Prior to initiation, draft versions were published and consulted on widely, which must be applauded Interested parties often had a feeling of uncertainty because of difficulty in predicting a final version of the law. After debates in the Parliament, the draft Law was considerably modified and finally, 4 months after initiation, on June 12, 2013 the amendments were adopted at the third hearing.
Notably, after the adoption of the above important amendments, the MoJ stated that her agency intended to initiate a new package of amendments on women's rights. However, the type and scale of these potential amendments are still not known. This creates (once again) vague expectations among employers.
4. Prohibition on the sale of agricultural land to foreigners
In 2013 the Parliament made an unjustified and unconstitutional decision to introduce a provisional moratorium on the acquisition of agricultural land by foreigners. The moratorium was supposed to last until the end of 2014. Georgian MPs were referring to the need to regulate the cadastral system as a driving force behind this amendment. No steps were made to regulate an integrated registration system in the following months after the moratorium came into effect. According to the explanatory note to the draft, "currently there is a real threat of unreasonable privatization of land". Remarkably, the initiators have studied neither the number of foreigners who had purchased agricultural land in Georgia, nor the area of land they owned. TI Georgia interviewed experts, requested public information on the proportion of agricultural land owned by foreigners, and established that this proportion does not exceed 0.7% (approximately 18,500 hectares).
While probing into the matter, the TI Georgia's representatives have interviewed several large-scale foreign investors pursuing successful business activities in Georgia for several years, paying taxes, and employing citizens of Georgia. They claimed that the new regulation considerably limited their business expansion opportunities and more investments.
In June 2014 TI Georgia won its case in the Constitutional Court (Mathis Huter vs. Parliament of Georgia). The Court found the moratorium unconstitutional due to its contradiction with Article 21 of the Constitution of Georgia, pursuant to which the right to property and inheritance is recognized and guaranteed, and the abrogation of the universal right to own, acquire, transfer or inherit property is prohibited.
Notwithstanding this decision of the Constitutional Court, foreigners still encounter problems when registering land. TI Georgia is still approached by foreign investors, who have purchased agricultural land at auction, but the Public Registry does not grant registration for several months by establishing a flaw in the application. As similar problems are being reported rather often, the current situation raises questions that the Public Registry may deliberately hinder land registration process for foreigners.
5. New postal service regulations
New state regulations have negatively affected the postal/courier market as well, which was growing significantly prior to introduction of restrictions. Legal obstacles on this market were first introduced by the 25 January 2013 Order №30 of the Minister of Finances of Georgia. Based on this Order, procedures of import-export and declaration of goods in the customs territory of Georgia were substantially amended, creating serious problems for investors in the goods transportation business.
Many business leaders suspected these regulations aimed to oust them from the market, and to grant monopoly to one specific carrier. They implied that the monopoly was to be granted to "Georgian Post", whose sole shareholder is the State.
Local carriers have gone to courts to defend their rights and invalidate the Order of the Minister of Finances. TI Georgia defended the interests of carriers in the court proceedings. Carriers have won this case in all three instance courts.
Adoption of this Order by the Minister was followed by other state regulations, some provisions of which also curb competition on the postal market.
6. New labor migration regulations
Apart from those laws and legislative amendments already adopted, there are currently proposed amendments and laws which may also have a negative impact on the investment environment. The Parliament of Georgia has started to debate the draft Law on Labor Migration initiated by the Government. The draft Law aims to set up effective means to re-regulate labor migration in Georgia. However, the draft Law contains provisions which, if adopted, will deteriorate the investment environment and create unreasonable barriers for business.
More specifically, the proposed draft bears several risks:
- It grossly interferes in the private sector's personnel matters, which is a considerable limitation of freedom in doing business;
- It is an extra and irrelevant regulatory burden on business, which complicates and prolongs the recruitment process;
- It increases state expenses and bureaucratic administration;
- It will deteriorate Georgia's international ease of doing business rating (for instance, the methodology of the World Bank's doing business rating study considers freedom from regulatory barriers in employment as one of the key components);
- As a side effect, this limits the competition on Georgian labor market and will affect the quality of Georgian human capital;
- This draft legislation was prepared under a false pretext of EU requirements, which could result in expanding anti-EU sentiments in Georgian business community.
TI Georgia’s recommendations
- Stable and predictable legislative process is crucial for the investment environment, and therefore interested parties must be informed about and involved in reforms planned by the authorities;
- Preferably, the process of reforming concrete issues of importance to the business environment should not be drawn out, so that target groups overcome transitional period easily and adapt timely to a new reality;
- The authorities must avoid as much as possible adopting laws that introduce gratuitous limitations for local and foreign investors and undermine their development;
- The authorities must refrain from adopting regulations, which curb competition on specific markets and give advantage to individual companies;
- The authorities should make sure that line agencies would not use a pretext of EU requirement as a false one, as this would contribute to creating anti-EU sentiments.