The FINANCIAL -- Do incentives really matter in the attraction of foreign direct investment? Does the cost to the government to provide incentives to the private sector result in equally tangible results for citizens? In other words, does the job creation resulting from foreign direct investment merits proactive government involvement in attracting and incentivizing such investments?
Some markets appear to be successful in attracting large and continued direct investments without the aid of business and economic incentive packages, while other markets struggle to attract any companies regardless of how vigorous and targeted their incentive offerings may be.
The policy makers of Georgia do have a handful of incentives initiatives for the investors in general to propose – after all, the success of our economy relies heavily on the FDI inflow. To name a few, Georgia has two unique Free Tourism Zones – Anaklia and Kobuleti. The Government of Georgia offers to interested investors extremely appealing terms for the construction of hotels along the seaside that has the best climate conditions. The offer includes free land for a symbolic price amounting to GEL 1; exemptions from Property and Profit Taxes until 2026; free casino license for hotels with over 80 rooms; pre-packaged hotel projects; and ready infrastructure. Moreover, from 2016 the Government of Georgia provides financial and technical assistance to entrepreneurs involved in hotel industry in all regions of Georgia except Tbilisi and Batumi, as the latter two are advanced in hotel development compared to other locations within the country.
The project Produce in Georgia aims to encourage production and agriculture industries in Georgia, and it offers two main incentives: financial resources and infrastructure, including land and building. Besides this, the Government started two projects supporting agriculture development in Georgia: Cheap agro-credit program initiated by the Ministry of Agriculture in 2013 where part of loan interest payments is subsidized by the Agriculture Projects Management Agency of the ministry; and Grants for new agriculture processing factories with minimum project value of USD 200,000 can get a grant - maximum GEL 500,000 and 40% of total project from APMA.
All of the above incentives could be appealing to Georgians and foreigners alike. Would offering Georgian citizenship be attractive for foreign investors on top of that? After all, economic citizenship gives you all of the rights and privileges of a citizen from whichever country you buy in to. This means the right to live, work, vote, etc. It also gives you a passport from that country.
At this stage Georgia issues only investment residence permit to a foreign citizen who invested at least GEL 300 000 in Georgia, as stated in the Law of Georgia on Promotion and Guarantees of investment. If needed, residence permits are also issued to the investor’s family members, including a spouse, underage dependent and/or fully dependent incapacitated person.
As the Director of Hotel Point, Mr. Serdar Tuzun mentioned to Experto, he first arrived to Georgia eight years ago to discover the investment potential of the country but because of the August 2008 war he had to go back to Turkey shortly after. When the situation deescalated and the tourism potential of Tbilisi became evident, he decided not only to invest in Georgia but move in as well: “I rented out a building of 500 square meters for 6 years in a central location of the capital – on Leselidze Street – and opened my first 3 star hotel Point in Tbilisi there. The hotel has been operational for only a year and has already managed to gain popularity among visitors. We are given high rankings on booking.com as well (8.6 out of 10)”. The hotel has an appealing lounge, a karaoke club and a very recently inaugurated terrace on the 5th floor with alluring views of Tbilisi. Mr. Tuzun has been charmed by Georgia’s hospitality and would like to be able to acquire Georgian citizenship eventually: “Right now I have a one-year residency permit that I plan on extending for five more years when it expires and if possible, I would even consider settling in Georgia and becoming a rightful citizen”.
Second passports are valued based on the number of visa free travel options they include and where they allow you to live and work. According to Christian Reeves of Premiere Offshore, for example, a second passport from St. Lucia gives you visa free travel to 125 countries. The cost is about USD 240,000 for a St. Lucia passport. For comparison, a second passport from Malta gives you visa free travel to 168 countries, including Canada and the United States, the two countries most difficult to access. A passport from Malta will cost about USD 1.2 million plus legal and other fees.
If the policy makers of Georgia ever consider making citizenship as part of the investor incentive deal, a lot of aspects will need to be factored in before its true appeal is revealed. Meanwhile, the Director of Hotel Point plans on expanding the business in Georgia in the coming year and aims to open a second hotel in the city center with 20 rooms and also consider buying out the first hotel after the six-year rent contract is expired.
Citizens of 94 countries can stay in Georgia without visa during 1 year and double taxation avoidance treaties have been signed with 52 countries. Country's impressive progress in improving business climate has not escaped the renowned international watchdogs and Georgia is considered as a politically stable, corruption-free investment destination with low business costs. Thus, offering citizenship in exchange of foreign direct investment may not bring as much added value considering the circumstances. This standpoint is fully grasped by the General Director of Schuchmann Group, Mrs. Nutsa Abramishvili: “If anything needs to be done in this regard, it is not whether or not to award citizenship to foreign investors but rather to give them an ability to buy and work the land”. Even after the moratorium, it is an established practice of the Public Registry that each and every application of a foreigner regarding the registration of agricultural land is reviewed and ownership rights are granted on a case-by-case basis.
Mrs. Abramishvili further elaborated that her business partner, the German investor Mr. Burkhard Schuchmann has been awarded an honorary citizenship of Georgia for the contribution and dedication to Georgian wine making: “Schuchmann Wines Georgia is an ultra-premium winery specializing in famous indigenous Georgian grape varieties. It was founded in 2008 by the Schuchmann family in a very center of Georgian wine growing zone in Tsinandali. The Schuchmann wines château in Kisiskhevi is part of a larger complex of buildings, nuzzled within a dreamlike environment in a country with over 8 000 years of continuous wine making tradition”. Thanks to a range of Free Trade Agreements, Georgia has access to a 900 million market that is not subject to customs tax, including Turkey, CIS and EU countries. The Schuchmann Group took full advantage of this incentive and has been exporting its ultra-premium quality wine under the brand Vinoterra to the US, Europe and Asia. “It was an educated decision not to export to Russia due to political as well as economic situation, especially considering the recent Ruble devaluation – the benefits are simply not lucrative enough to cover the high risk of relying on an unpredictable market” explained the General Director when talking about the diversification strategy of the company. The Group has been oriented on high quality wine production from day one: “We think that Qvevri (Clay Amphora) wine should become the visit card and core product for Georgian wine production. There are more than 100 Qvevris in Schuchman wine cellar and wine is produced using the harmonious synergy of old traditions and modern technologies”.
Schuchmann offers to preferred guests exclusive service of wine and gastronomic tourism and try to promote the Wine and Dine principle. According to World Tourism Organization, among European countries Georgia had one of the highest growth rates – on average yearly 23% – of international tourist arrivals during last three years. The incoming tour operator Schuchmann Travel played its partial role in it, stated Mrs. Abramishvili: “Our facilities in Kisiskhevi hosted over 20 000 unique visitors in the last year. Our boutique hotel had a 100% occupancy rate during the season, with 60-70% annual occupancy rate on average.”
The Group intends to say a new word in chain business development in Georgia and decided to franchise the Schuchmann concept and replicate the success story of having a Boutique hotel with quality wine bar and wine spa with clearly defined management guidelines. Schuchmann Wine Spa uses only local natural materials tenderly collected in their vineyards and processed with natural methods and at this stage the grape seed and grape seed oil products are used only in their own spa but the Group plans to start packaging and exporting the spa products as well: “We are currently soliciting interesting investment proposals for both projects in order to capitalize on growth potential. I myself am a loyal customer of our products and services, and of course it will not be hard for me to light the sparkle in our potential partners’ eyes as well” concluded Mrs. Abramishvili.