The Business Environment in Georgia

Investors face a difficult environment in Georgia starting with the fundamental issue of geopolitical instability. In addition, several surveys of existing and potential domestic and foreign investors show that the business environment is generally perceived as bureaucratic, non-transparent and corrupt. Georgia is perceived as having significant obstacles to investment in the areas of taxes and regulations, policy instability/uncertainty and corruption. While the average official and unofficial fees for business procedures and the resources required (staff and time spent) may not be the highest in comparison to other countries, the unpredictability of costs and delays related to administrative procedures combined with uneven implementation and enforcement of regulations increases business risk and results in differential treatment among firms.

As shown in the above Figure, when scores on general constraints to business operations for enterprises in Georgia are compared to regional averages, the constraints are shown to be worse in Georgia for every category except the performance of the judiciary and anti-competitive practices. This substantiates the earlier observation that the business environment is perceived as being much more constrained in Georgia compared to competitors in the region. Further, it emphasizes the need for the Government of Georgia to address these critical constraints in order to help improve the country’s attractiveness for domestic and international investors.

Time and again it has been observed that decrees and programs of reform have been adopted but weakly implemented in the absence of the strong political will necessary to effect change. For example, the State Customs Department (SCD) reform committee was established by Presidential Order to finalize a reform strategy and implement an action plan. To date, little has been done on implementation. The committee rarely meets. Reform has been impeded by competing agendas and frequent changes in SCD leadership due to absence of strong political will to reform the customs department.

Corrupt practices significantly affect the process of doing business in Georgia by increasing the cost and the risk associated with a range of administrative procedures. From the perspective of foreign investors in particular, facilitation payments or bribes do not simply increase business costs. They constitute significant risk because in Georgia they are unpredictable and uneven. Also, in all OECD countries bribery constitutes a serious legal offence that can be prosecuted in the home country. Finally, corrupt taxation administration (income tax evasion) and customs procedures (smuggling) result in unfair competition for legitimate, law-abiding enterprises.

In addition, the following fundamental issues have the impact on administrative procedures in Georgia, particularly in the areas of customs and tax administration, licensing, and inspections:

· Inconsistent implementation of legislation and lack of transparent implementing regulations and procedures. Since 1991, a number of laws have been revised and new laws have been written and promulgated. Although these laws are generally modern and well written, poor implementation and enforcement effectively undermine the intent of the laws. Throughout this report, it is clear that the legal framework and official requirements for most administrative procedures are relatively sound. However, problems and inconsistencies arise in implementation as officials often seek to maintain and exercise discretionary authority and control of administrative procedures.

· Lack of published information on the various administrative procedures required for business establishment and operation. For example, the official gazette is significantly behind schedule and the business stamp approval procedure is still issued by the police at the cost of 10 GEL. The challenge of publishing and disseminating timely and current information among officials and the public is even greater because of the ongoing changes to existing laws. However, timely publication and dissemination is necessary in order to minimize information gaps and opportunities for corruption.

· Absence of effective mechanisms for holding public officials accountable. In principle, the Administrative Code and the Civil Code include provisions on the conduct and accountability of public officials. However, in practice these provisions are not enforced. Efforts to introduce and implement codes of conduct for taxation and customs officials have had limited effect to date.

· Absence of effective appeals mechanisms and the inadequate capacity of the courts. The Administrative Code provides for the public’s right to be heard in protesting or seeking clarification on the actions of most government agencies. However, there is no provision for an independent or autonomous arbiter to provide recourse. This function is apparently to be carried out by the courts. However, the integrity of the courts is often suspected and the capacity of the courts to address these issues is limited.