Proposed Changes to Georgia’s Land Ownership Laws

Mooted amendments to Georgia’s arrangements for foreign ownership of agricultural land have negatively affected foreign investment in Georgian agriculture. This is not unimportant; domestic investment in this sector is negligible and underdeveloped technical competence mean that many local ventures are not globally competitive. If Georgian agriculture is to develop into a competitive and sustainable entity, then foreign private sector capital, expertise and markets will be needed, and it is unrealistic to expect foreign donors to spoon-feed Georgian beneficiaries with technology and capital forever. Donor countries have their own massive fiscal problems to deal with, much worse than Georgia’s on a structural basis.

Some issues of concern to foreign investors are:

*Existing mid-sized foreign farmers and vignerons who have already invested millions of dollars are now caught in the situation where they may not effectively expand and reap benefits of economy of scale.

*Potential foreign investors, faced with the prospect of having to lease land instead of purchase it, are applying very large discounts to their enterprise valuations, as experience in other developing countries is that leasehold is not secure tenure and that uncompensated evictions are a substantial risk. Investments that might have gone ahead two years ago are now being cancelled as a result of this risk.

*Given that land cost is generally less than 20% of total project cost, leasing is seen as unattractive as one is just value-adding somebody else’s rather cheap asset.

*Other countries offering leasehold-only land tenure offer blocks of 10,000-100,000 Ha, whereas in Georgia to acquire more than 2000 Ha in one district is rare.

*Other countries offering leasehold-only land tenure offer large tax concessions, which Georgia does not. e.g. Ukraine 0% tax, Russia 6% tax.

*Other countries offering leasehold-only land tenure offer substantial subsidies and tax concessions as a package e.g. Kazakhstan.

In many cases, investors from Europe and the Middle East are bypassing Georgia now to invest in CIS countries.

The following article from Tabula is harshly critical of this policy direction, and raises some good points. The central point is that restricting foreign ownership of farmland on the basis that it is contrary to the country’s interest is a false premise.

“The country’s interests” should imply those basic values upon which each and every citizen of Georgia agrees. The frequently used term “the country’s interests” is beloved by politicians, scientists and other active representatives of society in their discussions. An action harming “the country’s interests” is a very grave accusation and almost amounts to treason. Every person perceives this term in his/her own way. The basic values upon which society agrees may include: statehood, history, traditions, culture, et cetera. How much does the sale of agricultural land to foreigners threaten these values? For example, in 2007, an Italian company, Ferrero, entered the Georgian market. The company purchased 3,000 hectares of land to grow hazelnuts and built two hazelnut processing plants. Another example is an Italian wine firm, Badagoni, which owns a certain amount of Georgian vineyards. Do these two developments contain seeds of treason? Both companies employ up to 1,000 local residents. They have already invested up to 100 million euros in these businesses. Ferrero uses 18,700 tons of hazelnuts annually in the production of its hazelnut chocolate spread Nutella. Georgia is well known as one of most favorable regions for hazelnut growing, but for years the Georgian population failed to export the product because it lacked the knowledge, advanced technologies and standards of growing and processing hazelnuts, which rendered the product uncompetitive. In London, Badagoni’s dry red wine “Alaverdi Tradition” received the premier prize, Grand Gold, at the Decanter World Wine Awards in 2010. Winning the Central and Eastern European regional trophy in the category of red wines priced over £10 a bottle was a great result because no Georgian wine had ever received such a prize before. According to information from Badagoni, the Kakhetian Noble and Trioni white wines that were also sent to the Decanter World Wine Awards each received bronze medals and certificates of acknowledgment. In addition to their core activities, these companies make contributions to the construction of bridges, roads and the restoration of churches in Georgia. How has all that damaged the reputation or harmed the interests of the country? Quite the contrary, these companies promote Georgian traditions, culture and history throughout the world. Badagoni is one of the first companies through which the world learned about Georgia as an ancient wine producing country.

The sale of agricultural land to foreigners thus does not harm our national interests. However, the probability that the welfare of each and every person will improve decreases. The economy is a complex system. An individual’s standard of life depends on how well a person succeeds in realizing his/her capacities. For welfare to increase, we should give up something that we have in exchange for something what will increase our benefits even more. If society can be conventionally divided into consumers and producers, the resources (goods, in general) in the free market will be owned by those willing to pay more for those resources; similarly, producers who manage to sell resources (goods) at cheaper prices will be satisfied first. Higher prices are paid by those for whom the resources are worth the most. Thus, those who are willing to pay more than others can use those resources more efficiently, irrespective of their ethnicity, religion, skin color or sexual orientation. A more efficient use of resources means processing those resources in such a way that makes a product more competitive compared to similar ones. The fewer the actors (people, organizations) engaged in the purchase of a resource, the lower the probability of the efficient use of that resource. For example, if a resource is owned only by the state, the efficiency of that resource will depend on how skillfully public servants manage to use that resource. If that resource can be owned by citizens of Georgia who are willing to pay more for that resource, the likelihood of its efficient use will increase. But if citizens of other countries are also allowed to use that resource, it will heighten competition and the economic benefit from that resource will increase further still. The greater the number of people engaged in competition, the higher the value of the resource as well as the expectation for a “sensational result.” A sensational result, alongside its economic dimensions, also implies social benefits (for example, the construction of bridges and roads in the case of the Ferrero company or the promotion of Georgian wines in the case of Badagoni), regardless of the nationality, race, citizenship, religious belief or sexual orientation of the actor. Thus it does not matter whether or not the owner of a resource is a foreign citizen; the important thing is that the actor that becomes the owner of the resource is the one who pays more than others. Restriction of the competitive environment in any form will reduce the possibility of the efficient use of a resource. Agricultural land is a resource, just as water, oil, metals, fertilizers, tractors or anything else used to produce goods. A piece of land can be used by Georgians as efficiently as it can be by Germans, French, Indians or representatives of any other country.

From Tabula “Why are You Against Growth and Economic Development” by Akaki Tsomaia, July 2013.

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