Government’s Foreign Investment Promotion Policy

Removing Administrative Barriers to Investment in Georgia . FIAS (Foreign Investment Advisory Service, a joint service of the International Finance Corporation (IFC) and the World Bank) conducted a study of administrative barriers to investment in Georgia. The principal counterpart for this project was the Presidential Commission on Support of the Private Businesses in Georgia. The Presidential Commission on Support of Private Businesses is the lead counterpart for this project (for more details refer to Paragraph 1.3.1 describing the activities of Foreign Investment Advisory Council - FIAC). The main objective of this study was to identify the major administrative impediments to investment and to recommend the steps for streamlining, simplifying and increasing transparency in order to help improve the environment for business in Georgia. Although the primary focus of the study was foreign investment, the administrative procedures and regulatory framework affect domestic investors as well. Therefore, applying the principle of national treatment (i.e. no preferential treatment for foreign investors), this study is intended to help strengthen the business environment for all investors—domestic and foreign alike.

 

The study covers the core administrative processes for:

· Establishing a business - including investor entry (visa and residency requirements for expatriates) and business registration.

· Locating a business - including land acquisition, site development, construction and operation.

· Operating a business - including taxation, trade regime and customs, licensing, permits, inspections, intellectual property issues, and product standardization.

 

Establishing a Business—Investor Entry and Business Registration. The procedures for obtaining entry visas are relatively transparent and present no significant administrative impediments. Most notably, foreign investors and expatriate employees do not require special work or residence permits to live and work in Georgia.

 

The court registration procedures have been simplified in the past 2 years. However, because of the lack of technical and human capacity, court registrars are unable to fulfill the provisions of the Law on Entrepreneurs aimed at guaranteeing timely service, ensuring public availability of information on companies, publishing data on newly registered companies, and protecting company names. The most pressing issues relate to length of time required to register (2 to 3 weeks) and to retrieve information on companies.

 

The principal recommendations for improving the business registration process and the access to company records include:

· Modernization of the registration and data filing systems by taking advantage of new technologies (including the internet) to speed up processing and to improve the access to information, as provided under the law.

· Centralization of the court registration system.

· Publication and dissemination of information on business registration procedures, requirements and fees.

· Resolution of the legal provisions for information disclosure under the Law on Entrepreneurs and the Tax Code.

 

Locating a Business. Locating, acquiring and constructing or rehabilitating real estate for business activities are not perceived as significant problems by either foreign or domestic investors in Georgia. The current system may not pose an overwhelming difficulty for investors because of the low volume of transactions and the institutionalized system of unofficial payments and influence peddling to facilitate the process. However, there are a number of specific areas where regulations, requirements, and procedures need to be clarified, simplified and streamlined. The report includes a number of detailed short and long-termrecommendations for strengthening the laws related to the privatization of agricultural land and improving the quality of service provided by the various bureaus responsible for processing the permits necessary for property development and construction in Georgia.

 

One of the principal recommendations relates to the Law On Privatization of Agricultural Land. The set of laws on privatization of real estate exclude a legal basis for privatization of large agricultural holdings, all of which are presently held under government leases. To the extent that investment in commercial scale agriculture is viewed as having significant potential in Georgia, privatization of larger agricultural holdings is an appropriate next step. A law on privatization of large agricultural holdings is being developed and is an element of the government’s longer-term plan for further development of property relationships.[1] Enactment of this law should be a priority.

 

 

Operating a Business - Tax Administration. On the basis of interviews with representatives of the private sector, government officials, and technical assistance experts, it appears that the tax administration system is fraught with problems that seriously constrain the activities of private enterprises. The recurring themes voiced by the private sector as being burdensome for business included the complexity of the tax system, the lack of clarity in some aspects of the Tax Code and the sheer number of taxes itself. Foreign-owned enterprises seem to be particularly affected under the existing system. In keeping with the scope of this study, the discussion is focused on taxation administration. Recommendations on tax policy are confined to those issues that directly affect administrative procedures and impede business activity. It should be noted that the International Monetary Fund, the World Bank and USAID are currently providing assistance to the Government of Georgia on taxation policy issues.

 

The main recommendations include the following (for more detailed discussion of tax issues please refer to the next paragraph - "1.4 Tax Regime"):

· Adopt and implement the proposed amendments to the Tax Code. These proposed amendments cover a number of policy and tax administration issues. They are broadly in line with IMF recommendations, except the Government proposal for the fixed tax and the elimination of the payroll tax.

· Simplify the procedures for filing VAT. The proposed measures include allowing quarterly, rather than monthly filings for small businesses.

· Establish an effective tax-refund system. The International Monetary Fund has outlined a refund strategy that includes limiting entitlement to immediate refunds, distinguishing claimants with a history of compliance, and using pre-refund audits for high-risk refund claims and post-refund audits for claims of lesser risk.

· Review the micro level target-based system for tax collection. It is important to distinguish between the fiscal macro targets which are an important aspect of revenue administration and micro or firm-level targets which are often arbitrarily established within tax jurisdictions. These targets must be realistic and they should be part of a number of efficiency and effectiveness indicators.

· Improve information compilation and dissemination. Taxpayers must be informed of changes in the Tax Code and related regulations, legal interpretations, and instructions in a timely manner. Also, a credible resource must be established to respond to queries offer binding interpretations of the Tax Code.

 

Operating a Business – Customs. The State Customs Department (SCD) operates an inland clearance system that requires considerable resources and logistical support for effective control of cargo. In practice, the current system is largely ineffective and prone to fraud and corruption. There is no compendium of the legislation on customs available to the customs service employees or the public. In the absence of common information and an official interpretation of the rules and regulations, the discretionary authority of individual customs officers and offices is strong thereby facilitating corruption. There is significant leakage of cargo transported for inland clearance. Some sources estimate that as much as 50 percent of fuel and cigarette imports are diverted.

 

Management of the SCD has suffered as a result of frequent changes in the management. Efforts to reform the SCD have been impeded by the lack of political will, competing political agendas, and the frequent changes in leadership. Under these circumstances, the inputs of external advisers have been marginalized and the reforms implemented by previous chairmen have been reversed in many instances. The detailed action plan prepared under the ITS contract and endorsed by the government has been stalled with only marginal progress. The customs reform committee established by the President to lead the reform effort has met irregularly.

 

The principal recommendations for strengthening and improving the customs service include:

· Implementation of the already approved customs reform program. This is a well developed and comprehensive program that can be implemented over time. It encompasses a number of the IMF and FIAS recommendations. One of the immediate tasks would be to assign priorities for implementation.

· In light of the decision not to renew the ITS contract, it is necessary to immediately develop and implement a framework for carrying out efficient pre-shipment inspection services if it is to be continued after December 30, 2001. The SCD clearly lacks the capacity or the expertise to carry out this function independently.

· Review of the existing regulations for the valuation of cargo and implementation of guidelines that are consistent with the provisions of GATT.

· Revision of the declaration processing procedures to eliminate contact between the import (or broker or freight forwarder) and the customs officer.

· Expansion of the ASYCUDA system to all major customs clearance offices.

· Implementation of risk-based criteria for selecting goods and documents to be examined at all locations where imported goods are cleared.

· Implementation of an information publication and dissemination program.

 

Operating a Business - Licensing and Permits. The existing regime for licenses has benefited from extensive efforts to streamline and simplify the legal framework for licenses. As a result, the current licensing procedures do not appear to present significant barriers to investment and business activity in Georgia, particularly compared with other former Soviet Union countries. However, some of the sectoral licensing laws and regulations do not conform to the provisions of the framework Law on Licensing.

 

The Law on Local Charges and related normative acts (including municipal regulations) are not entirely clear in defining the purpose and scope of permits. The criteria and conditions for authorizing and terminating permits (similar to licensing conditions) are not clearly specified in the laws and regulations. In effect, the enforcement of the permit system is arbitrary and subject to abuse of the compliance provisions and the assessment of violations. While this permit regime does not generally impede business in Georgia, it does create unequal conditions for newcomers and arbitrary enforcement can cause significant problems for individual companies.

 

The main recommendations for strengthening the framework for the system of licensing and permits and facilitating the streamlining and simplification of the current system in Georgia include:

· Passage and adoption of a strong and clear framework law and implementing regulations on the licensing and permit regimes.

· Review and rationalization of the number and level of legally permissible permits to avoid the proliferation of permits for revenue generation.

· Development of a basic set of guidelines on the procedures for processing and enforcing permits (similar to those in place for licenses).

· Development of a monitoring mechanism within the Ministry of Justice that will ensure consistent enforcement of provisions for permits.

· Publication and dissemination of information on the legally sanctioned licenses and permits (e.g., regulations, procedures, documentation requirements, fees and appeals mechanisms).

 

Operating a Business - Inspections. The passage of the Law on Supervising Entrepreneurial Activity represented the most recent of a series of attempts to streamline the business inspection process by state and local governments. It is, however, too early to assess the effect of this new law. At the time of the FIAS mission, the implementing regulations had not been completed and the law had not been fully implemented.

 

The main recommendations to strengthen the implementation of the new regime for inspections include:

· Articulate and publish the mandate of each inspectorate as well as information on definitions of violations, criteria for selecting businesses for inspection, the penalties that may be assessed under specific conditions, and the rights and responsibilities of inspectors and businesses.

· Halt extralegal inspectorate activity pending the registration of all sanctioned inspection activities.

· Establish and enforce procedures for conducting on-site inspections.

· Regulate the payment of penalties and fines resulting from inspections to a central cashier in order to avoid on-site payments and minimize opportunities for corruption.

· Coordinate and rationalize the activities of inspection agencies; implement initiatives for joint training and information sharing among inspection agencies; introduce a code of conduct for inspectors; and train inspectors to understand that their primary function is to ensure public health and safety.

 

 

Conclusions and Next Steps. There is a general agreement within Georgia that the existing environment for investment needs to improve if the country wishes to attract new FDI flows and secure the expansion of existing investments. This report has focused on the principal administrative barriers that increase the cost and risk of doing business in Georgia.

 

Pervasive corruption and the apparent lack of political will to implement reforms have emerged as two fundamental issues affecting the business environment in Georgia. While the degree of corruption may not be the worst in the region, it has a negative effect on business activity and increases the risks and costs of doing business in Georgia. The process of streamlining and simplifying administrative procedures must go hand-in-hand with anti-corruption programs. In a similar vein, it should be noted that number of reforms (e.g. Customs reform) have been stalled as a result of resistance to change and the apparent lack of political will effect change.

 

In addition to making recommendations for solving some of the regulatory, administrative, and institutional issues that need to be addressed in order to improve the business environment in Georgia, the report points out the areas where further review is necessary and where significant technical assistance is already being channeled, albeit with limited impact.

 

The experience of other countries clearly demonstrates that sustainable change cannot be achieved without government commitment at the highest political levels. Successful and sustained change requires leadership, strong champions, and shared goals among all stakeholders within the government and the private sector. On the basis of shared goals, the process of rationalizing, streamlining, and simplifying bureaucratic procedures can develop, gain momentum, and improve the values of government agencies and transform them into service-oriented organizations. A comprehensive approach to change is necessary, and commitment and time are essential ingredients. Procedural and institutional reforms will require the support of public servants at all levels of government, plus their support for changes in the systems of performance monitoring, evaluation, and rewards.

 

The Presidential Commission on Support of Private Business already exists as a champion of this initiative. However, the framework for the change agenda must include the participation and inputs of stakeholders at all levels. Stakeholders must be drawn from the public and private sectors. In addition, there is a role for the international donor community in this framework since the incorporation of related donor-sponsored initiatives must be integrated into the change agenda. Chapter V of the report proposes a framework for the development and implementation of the change agenda.

 

The institutional structure to support the change agenda should include:

 

· The Presidential Commission. The Commission should serve as the focal point of the change agenda and it should be given the mandate to promote and advocate reforms in collaboration with other parts of the Government.

· An implementation team. The staff of the commission’s secretariat should constitute the core group of the implementation team. The responsibilities of the team would include the development of the Action Plan, coordination of implementation activities, solicitation of donor funds and resources to support reform, coordination of related initiatives, and regular reporting on progress to the Commission.

· A consultative committee. The committee should provide a mechanism for regular consultation with a broad group of stakeholders on various reform initiatives.

 

The above - mentioned Action Plan should be utilized to document the agreed-upon changes, establish priorities and timeline, provide a basis for accountability, and keep an ongoing record of progress. Therefore, it must be emphasized that the Action Plan is not a static document but one that must evolve over time.

 

Law of Georgia "On Investment Activity Promotion and Guarantees". On 12 November 1996 the Parliament of Georgia adopted the law of Georgia "On Investment Activity Promotion and Guarantees", which replaced the Law of the Republic of Georgia "On Investment Activity" adopted on 10 August 1991 and the Law of the Republic of Georgia "On Foreign Investments" adopted on 30 June 1995.

 

The Law defines the legal bases for realizing both foreign and local investments and their protection guarantees on the territory of Georgia. The purpose of the Law is to establish the investment-promotional regime in Georgia.

 

Investments. Investments shall be deemed to be all types of property and intellectual valuables or rights invested and applied for gaining possible profit in the investment activity carried out in the territory of Georgia, such as:

a) Monetary assets, a share, stocks and other securities;

b) Movable and immovable property (real estate) - land, buildings, structures, equipment and other material valuables;

c) Lease rights to land and the use of natural resources (including concession), patents, licenses, know-how, experience and other intellectual valuables;

d) Other property or intellectual valuables or rights provided for by the law.

 

Investor. An investor shall be deemed to be a physical (individual) or legal person, as well as an international organization investing in Georgia. A foreign investor shall be deemed to be:

a) A foreign citizen;

b) A stateless person temporarily residing on the territory of Georgia;

c) A Georgian citizen permanently residing abroad;

d) A legal person registered beyond Georgia.

 

An enterprise with a foreign investment of not less than 25% shall enjoy the same rights as the foreign investor.