On March 19, the Georgian-Italian Business Forum was held at Courtyard Marriott where the Prime Minister Zurab Noghaideli gave a speech.
Ladies and Gentlemen, dear guests,
To begin with, I would like to extend my gratitude to His Excellency the Ambassador of Italy in Georgia, Mr. Fabricio Romano for being instrumental in organizing today's meeting. I would also like to thank the Italian guests for expressing keen interest to Georgia.
Today, I would like to brief you about the ongoing reforms in our country; these are just the reforms which have radically improved the enterprising climate in our country and have been highly estimated in the annual reports of the leading international institutions.
The International Financial Corporation has recognized Georgia as N1 reformer country of the year 2006; as for simplicity of conducting business activities, the country moved to the 37th place compared to the previous 112.
From the very first day of our government an overall combat against corruption was started. In order to achieve success in this direction, institutional changes were undertaken in the public service system. A heavy bureaucratic apparatus was changed into a small but flexible government structure. A number of ministries were abolished and eventually, 13 ministries remained of the 18 existing before. The number of personnel employed in the system decreased to 50% compared to the previous situation. Reducing the number of employees was not our sole aim; our main target was to bring down to the minimum possibility of interaction between the government structures and the business community (which in its turn would ensure decrease of corruption rate).
According to the data of EBRD (European Bank for Reconstruction and Development) Georgia is ranking top three on the list of less corrupt countries.
Reforms of paramount importance have been undertaken within the structure of the law enforcement bodies. The country has inherited a deeply corrupt road police of old Soviet system (the lorries and trucks used to be stopped at least 50 times on a 400 km segment of the road for the purpose of extorting bribes from the drivers). At the beginning of the reforms we had to take rather painful decisions; before forming the Patrol Police, we had to dismiss the whole crew of the road inspection police. During about a fortnight, you would not see representatives of any law enforcement body in the streets. The customs office went through the similar changes as well (no employees serving at the customs before 2003 can be found in this agency today).
Important changes have taken place in the educational sphere too. Instead of the practices of giving and accepting bribes which used to prevail during past years at the high educational institutions, the unified system of national exams has been introduced throughout the country.
In today's Georgia the young people are well aware that the only precondition for occupying a worthy place in the society is the knowledge obtained only through personal efforts.
We are also engaged in the reform of the judiciary system and the reform strategies have been endorsed by the President of the country.
The said strategy embraces all 9 principal directions of criminal law (the judiciary system, establishing an institute of a treasury paid lawyer, office of an ombudsman, prevention of crime, prosecution, penitentiary system, juridical education etc.). Changes have been entered into the civil procedure code, according to which the procedures of filing an appeal have changed and the time limits for settling the simple commercial disputes have decreased to 285 days compared to 375 days that had been in practice before. In future the institute of the magistrate judges is going to be introduced, which will resolve simple cases pertaining to civil, administrative and criminal law. Implementation of the new judiciary system will result in establishing a well functioning court administration which will prove to be the firm guarantor of protection of private property as well as of the investments in Georgia.
Now, I would like to draw your attention to the fiscal and economic reforms carried out in Georgia. A new Tax Code has entered force since January 1, 2005, according to which the number of tax fees have been decreased to 7 compared to 22 existing before; the amount of taxes have also been considerably reduced: the 20% of VAT was brought down to 18%, social taxes changed from 31% to 20%, and income tax - from 20% to 12% . Accordingly, the interests of the investors while investing their capital have also been taken in view: the principle of 100% amortization has entered force; also, while investing, VAT is considered an offset, which means that within the period of 1.5 months that amount of money will be reimbursed to the investor.
Quite recently, for the purpose of simplification of the tax administration and reducing the bureaucratic barriers, a unified revenue service has been established. It means that now, for declaring the information about a business the enterpriser will be dealing with only a single governmental structure.
A few days ago, the president of the country briefed the population on further simplification of the tax system. Starting from 2008, the income tax will be reduced to 15% compared to 20% existing before; the income and social tax will be joined in one and the average amount will be 25% versus former 27%. Along with reducing the amounts, the number of taxes will also be decreased from 7 to 6; you would certainly believe that all this will make business activities much simpler in Georgia.
From the point of view of enhancing foreign trade, we are supporting liberal trade policy in this as well. The import taxes have been abolished except for the agricultural products and building materials. On the said products we only left in force 3 rates: 0, 5 and 12 %.
On January 1, 2007, a new Customs Code entered force, which is harmonized with the EU standards.
The import-export procedures have also been considerably simplified. The time limits for customs procedures on import are reduced from 52 to 15 days and on export - from 30 to 8 days. The bureaucratic barriers concerning foreign trade have been brought down to the minimum as well. The number of documents necessary for the export has decreased to 3-4 compared to the former 9 items and the number of documents needed for import has been reduced from 16 to 5-8 items.
The policies implemented for the purpose of improving enterprising and business climate have touched upon the issues of registration of enterprises as well. The legal changes undertaken in connection with business registration in Georgia are of great importance indeed. For instance, the time period for registering a limited liability company has been reduced to 3 days compared to former 7. Business registration process has moved from the court to the tax department which enabled us to join the business and tax payer's registration procedures. The minimum amount of initial capital for founding a LTD was brought down to 200 GEL compared to 2000 GEL which was the former requirement. Thus, due to the above mentioned changes, the time limits, expenses and corruption risks pertaining to initiating business in Georgia have considerably decreased. This has resulted in almost doubling of the number of the registered enterprises in our country.
The same principles were adopted while undertaking reforms in the sphere of licenses and permits. In 2005 a new Law on Licensing and Permits entered force and the activities requiring license or permits were reduced by 800 entries, which means that about 85% of the activities subject to issuing a license or a permit were just deleted from the total list. Only 92 licenses and 52 permits are still in force; the time period required for issuing a license has been brought down to 30 days, whereas permit can be obtained in 20 days.
The procedures for registering real estate have also been considerably simplified. In compliance with the changes and amendments in legislation, the time and indirect expenses connected with registration of property have dramatically decreased. Today, it's already possible to register any real estate within the period of 6 days after paying 0.5% of the price of the property.
In 2006 the new Labor Code was adopted, according to which the contract relations are recognized as priority. Both parties are given the opportunity of reflecting in the contract all the conditions concerning labor agenda and job description as well as the amount of remuneration. In this particular case, we refrained from interfering too deeply into the relationship of the employers and the employees, being confident that the economic situation per se would take care of establishing adequate labor relations among them.
Reforms in the finance sphere are continued, so that the financial mediation as well as accessibility of credit resources will be further developed. For the high ranking foreign banks (with the rating of A+ and even higher) the procedures of entering Georgian market will be highly simplified. Just a year ago, it was prohibited by law that a person would possess more than 25% share in the initial capital of Georgian banks. Today, this restriction is removed and for the purpose of ensuring stability of the financial market the supervisory capital of the commercial banks is continuously increasing. The foundation has been lied to establishing a database of credit stories based on which the commercial banks will simplify the procedures of issuing credits for their "good" clients. Trade with the securities will become possible without the mediation of the stock exchange or a broker.
Our success in energy sphere is also quite imposing. This winter proved to be the first when Georgia achieved not only to satisfy its own needs on electric power but managed to become energy exporter to neighboring Azerbaijan as well. Such a result would be unimaginable even last year! We are in active cooperation with the neighboring countries (Azerbaijan, Turkey and Armenia) on the issues related to construction of the high voltage transmission lines which will provide the region with reliable energy supply and create stability in the operation of the whole energy system. The potential of investing in this field is great indeed. Georgia is a country very rich in hydro-resources... Only 11% of the hydro-potential has been utilized so far. Based on the approved energy policy, replacing thermal power stations by the hydro plants has become the issue of the day. Projects of paramount importance are taking the start in near future which envisages construction of cascades of hydro-electric stations in western Georgia. The said constructions will serve as guarantors of energy security and energy independence of our country; with this, Georgia's dependence on natural gas will also decrease.
For the purpose of enhancing economic growth, great attention is paid to the development of infrastructure. During immediate 2-3 years, investments amounting to about 2 billion USD will be allocated for rehabilitation of the roads, communications and sewage systems.
After the Rose Revolution, Georgia has embarked on the road of sustainable economic development. The pace of cumulative growth of GDP has reached 30%. In 2006 real growth of GDP equaled to 9.1%. It is expected that next year this indicator will increase to a double digit (12-15%) figure.
The tempo of development of considerable part of economic sectors can also be expressed with double digit figures. These are: banking sector, mining and recycling production, trade, transportation, telecommunications, hotels, restaurants and the health care system.
In 2006 (compared to 2005), the volume of foreign investments increased up to 150% and constituted 15% of the GDP. To our estimations, in the current year, the direct foreign investments will increase to 70% and reach 1.7 billion USD which amounts to 1/5 part of the GDP. Low rate of inflation (expressed by one digit figure) and stability of the currency rate are yet additional incentives for the economic development. Despite the economic sanctions imposed upon Georgia by the Russian Federation, foreign trade in Georgia increased to 39.2% (export to 15% and import to 48%) in 2006. In this connection, I would like to emphasize negative effect of Russian embargo on Georgian economics. Georgia lost 17% of its export market, which believe me, would be a considerable loss for the economics of any other country as well.
To our estimations, in case of absence of embargo, the growth of GDP in Georgia would reach a double digit figure in 2006.
Apart from the above said reforms are yet very actively developing in various directions in Georgia. Please allow me to present them briefly before you:
Development of the hospital sector
For the purpose of developing the hospital sector, a very important reform in the health care system was started. It must be admitted that so far, Georgia is too detached from the standards of developed countries in this field. We assume that development of the hospital sector will take at least three more years, but as a result of this process, our country will have 100 modernized hospitals with 7800 beds equipped with high level technologies. I would like to draw your special attention to the said trend because this is the right time to undertake private investments in this sector. In exchange to construction of the new hospitals (which by all means will remain in the ownership of the investor), Georgia's government stands ready to deliver to the investor (without any charge whatsoever) the buildings and the adjacent territory of the old hospitals located in Tbilisi.
The pension reform occupies one of the most important parts among our future plans. Today, the state is paying a fixed amount to all the citizens of pension age. We are planning to move to the pension system based on savings. For the purpose of implementing the reform we are ready to make the income tax even less, so that dwelling on their own economic interests, each citizen of Georgia would be able to manage the income that they generate (to spend immediately, invest in business or save in the pension funds). In addition to this, the state will allocate funds in favor of the vulnerable part of the population. Development of the pension reform is a long-term process and the results yielded will only be visible perhaps after 20 years.
Legal reforms in the field of termination of operations or bankruptcy are yet underway. According to this initiative, creditors will be given more authority in influencing the procedures and the period of time which is necessary for declaring an enterprise as bankrupt will be considerably shortened.
Paramount importance is attached to the judiciary reform; in order to ensure independence of the system, the judges will be appointed life-term.
The natural resources of the country also allow for investments. Georgia is rich in natural resources; deposits of different types (about 1550) have already been identified and studied on the territory of Georgia. "Invest in natural resources" is the title of a new project which envisages utilization of the natural resources. The Ministry of Environmental Protection and Natural Resources has already announced a tender on 14 mineral deposits; all interested parties are granted the right of obtaining detailed information on the said deposits at the ministry or on the ministry web-site. For the purpose of increasing transparency rate, licenses on the natural resources will be issued under an open tendering procedure.
At the closing of my presentation, I would like to emphasize that despite considerable success that has been achieved during this short period of time, Georgia's government is yet continuing the course of reforms with a great enthusiasm. We clearly realize that this is only the beginning of the capacity building of our country; we do know that more efforts are needed to turn it into a powerful state marked with high stability.
Please allow me to extend my gratitude to you all for attending this gathering; I would like to reiterate that we stand ready for cooperation under a strong intention to support all those who are willing to invest in Georgia.
Thank you!