“Georgian Dream” Coalition Agriculture Policy Briefing

Today, the International Chamber of Commerce of Georgia held a Round-Table discussion for members of Bidzina Ivanishvili’sGeorgian Dream” coalition to present their economic policies for the impending parliamentary elections, and to answer questions from the business community.

Mr Ivanishvili unfortunately did not attend as scheduled, but a presentation from the coalition’s candidate for the Kaspi electorate, economist David Onoprishvili was given.

Billion-Dollar Agriculture Fund

Pertinent to Georgian agribusiness,  the policy of developing a US$1 billion fund to provide cheap loans to small farmers was announced. It was stated that local currency loans would be provided at around 3 % p.a., which is a great deal lower than the 12-25% most farmers pay.

If managed very prudently so that default rates were very low, and if loans were packaged with mandatory crop failure insurance and mandatory extension services, then this fund could potentially benefit many small farmers starved of capital to improve their operations. It will still be a very costly exercise, as the loans are to be charged a rate of interest lower than the government can source funds on the wholesale market. It will not cover its costs and would need constant replenishment over time.

However, in a country with a USD$11 billion per year GDP, a new facility of a billion dollars would be hard to raise from zero. When queried from the floor about the source of such funds, Mr Onoprishvili admitted that only part would come from the State budget, some would come from international donors, and the balance would be provided by “private donors”.

It begs the question, do the international donor agencies know they are on the hook to finance this campaign promise? More to the point, are the private “donations” to be voluntary or involuntary, or will the Coalition Chairman just tip in his own funds to make up the shortfall? This was not clarified.

Foreign Ownership of Land

The second issue of great interest was the author’s question regarding ownership of farmland by foreign-invested Georgian companies. The current policy is that foreign-invested entities may hold freehold title to farmland on the same basis as local investors.

Mr Onoprishvili announced that there would be no immediate repeal of this policy, but that future acquisitions of farmland by foreigners were likely to be under a long-term leasehold arrangement, for example a 50-year right-of-use lease.

This would be a significant change to current policy and have a serious effect upon investment in agriculture. Georgia’s agribusiness sector is comparatively unattractive to huge multinational agribusinesses, as the population is too small, the farmland area too small, and land plots too small for serious large scale corporate farming, as practiced in southern Russia and Ukraine by foreign investors on estates from 10,000-200,000 Ha. There are many weaknesses and threats associated with foreign agribusiness investment in Georgia, but one of the outstanding strengths is the ability to own land freehold. Georgia is the only post-Soviet country to permit it.

The greater security of land tenure that freehold title confers dramatically alters the risk perceptions of foreign investors and facilitates inbound investment in rural businesses. These businesses employ many people, pay taxes, develop local supply chains amongst small-scale neighbouring farms, and train a new generation of Georgians in farm management, food safety, quality assurance, biotechnology and food marketing. Excluding foreign investors from freehold land title will cause the present modest levels of foreign investment in agriculture to decline to a very low level, as foreign investors can lease land on the same basis in much larger and more appealing markets such as China, Indonesia, Ukraine or Russia.

It also must be considered that domestic entrepreneurs often have the aim of building up their businesses to the stage that a multinational will acquire them at a handsome valuation. If they are unable to transfer land assets to a foreign buyer, a large discount to the asset’s valuation will be applied, to their detriment.

Conclusion

The round-table discussion provided more questions than answers, and details on new policy are still scant. Many thanks to ICC and Fady Asly for arranging the event.

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