Prime Minister Promises 60-100 New Food Factories for Georgian Countryside

A lack of deep-processing capacity for food products  in Georgia has been identified for many years as a limitation to rural economic growth. As an example, if every small farmer in Kakheti places their peaches on the market in the same month, the local market for fresh fruit is quickly flooded and prices received are tiny, as there are few factories present to process peaches into juice, puree, jam or dried fruit. Government policy in the past had been to allow the private sector to fill that niche, both from domestic and foreign capital. There were a few exceptions, for example the state-owned Gruzwinpro, which purchased small consignments of grapes from vineyard operators and made it into cheap bulk wine.

There had been some success stories amongst private sector investors with factories dealing with a disparate supply chain of smallholders, such as Marneuli Food Factory, owned by former Agriculture Minister Mikho Svimonishvili, and Gori Baby Food Factory. Dairy processors Sante, Wimm Bill Dann and Ecofoods all established milk collection centres to process milk into a fit state for retailing. Italian confectionary giant Ferrero buys hazelnuts from smallholders, as do their Turkish and Georgian competitors in Georgia’s west.

A common problem is that small suppliers have no on-farm QA system in most cases, and so chemical application records and traceability are almost impossible to verify. This limits most Georgian produce to the domestic market, and a few less discerning countries like Belarus and Ukraine, none of which pay premium prices.

To expand deep processing capacity without addressing on-farm QA and factory food safety standards will not dramatically improve farmers’ margins, as Georgia’s consumption of canned or dried goods is not likely to increase just because of greater availability. Establishing QA standards within the farm-to-factory supply chain gives factories the flexibility to export produce surplus to domestic requirement, and hence to increase their purchasing. As competition in the market for commodity increases and seasonal gluts are less pronounced, it is natural that prices will edge upwards.

It is worth noting that if the Deep and Comprehensive Free Trade Agreement with the EU is ratified in 2015, all Georgian food processors will have to meet EU standards regardless of whom they sell food to. The same will apply to Georgian farmers, who must have on-farm QA systems in place to EU standards if they are to sell anything beyond the farm gate.

The Prime Minister’s promise in Guria during the election campaign in 2012 suggested that the state would establish and operate 60 food factories in the regions to stimulate development in the rural economy. While this may be music the the ears of struggling peasants with no real market for their surplus produce, it had the effect of chilling investor sentiment towards the food processing sector. Many foreign investors considering substantial investments in food factories have shelved their plans for fear of going head-to-head with a state-owned competitor, which in their minds sources its capital at no cost from donors and has the full might of the state regulatory apparatus to restrict private sector competitors.

After nine months of little further attention to this issue, it has become topical again. There have been no new state-owned food factories built since last October, and no more than a handful of small private factories opened. In the same period, German organic foods giant HIPP announced it would be leaving the Georgian market. It is well known that some owners of poultry, egg and dairy processors are seeking to exit the industry.

The Prime Minister’s statement on July 3rd is seen below:

With my apologies for my poor Georgian, he says;

“There is a wish to have at least one factory in each region. We can not do so in some of the regions. We are actively working specifically with businessmen that are interested in such regions as the basis of new ventures. Eventually, I think that 60 – rather, 100 – this requires more than the available funding for the new ventures.

The Opposition often ask “Where are the promised facilities?”  This is speculation, if we consider what it takes to secure venture funding, delivery and commissioning, but eventually we will manage – funding for more than 100 new  factories”

Before private investors risk their capital in Georgian food processors, the following questions need to be clarified:

  1. Are public-private partnerships going to be the model in achieving this target, or will such factories be state-owned?
  2. Will foreign-invested firms be eligible for such PPP participation?
  3. Can the government guarantee it will not invest in such factories in districts where private-sector companies are already active?
  4. Does the government have a divestment/privatisation plan for offloading state-owned or state-invested food factories?

If these issues are clarified and guaranteed via legislation, then confidence may return to the sector.

 

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