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Section 15. Economics and management
Lazviashvili Nino> Professor of Georgian Technical University,
Tbilisi, Georgia E-mail: maiko_23@mail.ru
CONSTRUCTION BUSINESS AND IMPROVEMENT OF ENVIRONMENT IN GEORGIA
Abstract. In Georgia, construction business has a great potential of development. For this purpose it is important to attract and direct investments to the priority fields of economy in order to restore basic funds and create new capacities. In the both cases this function can be fulfilled only by construction business.
In the direction of seeking investments it is necessary for Georgia to become an attractive country for investing.
Keywords: construction, business, investment, investment environment, branch, risk, products, economy, stock exchange.
Georgia's investment attractiveness depends on various factors. It is quite difficult to define the influence of these factors. One of them is to do business easily, without barriers and obstacles. In the rating Georgia took the 9th place in 2014 instead of the 112th place in 2006. Georgia takes the 34th place according to the Index of Freedom, the 41st place based on Investor Protection Indicator, etc. It is true that these are not leading positions, though certain progress can be observed.
Construction business is one of the most prospective and profitable sphere of economy all over the world. The state of development of this sector shows the life-cycle stage of not only this branch but also the whole economy. Development of construction means development of economy, as well; collapse of construction, construction business implies beginning of economic stagnation [1].
In 2005, in Georgia, investment of GEL 9,032 million was carried out in fixed capital, this means that it was by 120.4% more than in 2008 and by 19.8% more than in 2014. The top-5 places in investments were distributed as follows:
• Transport and communication (16.9%);
• State management and operations with immovable property (16.4%);
• Agriculture (11.6%);
• Trading (11.5%);
• Industry (11.1%).
Construction has taken no place in this top-five unlikely to 2008. In 2008, it took the fourth place. In our opinion, the state policy of Georgia shall be built so that the first and second places were taken by branches of economy focused on export; these branches are agriculture and industry; construc-
tion shall be on the third place as construction is the branch which forms the fixed capital - buildings, structures, etc.- for them (and not only).
In the countries with transitional economy (including Georgia), all scientists unanimously admit that import of foreign investments is especially useful when investments are spent on adopting new technologies and developing export-oriented fields.
If capital construction is assessed only with this approach as a recipient branch of direct foreign investments, investments put in it are not useful for the country since its products are not oriented on export, but capital construction is the sphere which forms fixed capital for all branches of economy - oriented or not oriented on export. Thus, an investment spent on formation and renewal of the country's fixed capital, whether foreign or local, is regarded as useful investment by us. Order of spending an investment is another matter. Of course, if capital construction as a leaseholder forms, first of all, for the branches, sub- branches and separate enterprises fixed capital, this means erects buildings and structures, installs technical equipment, etc., which create export production, this will be the most appropriate investment. As it has been already noted nowadays such branches in Georgia are: agriculture, process industry, tourism and health resort business, hotels and restaurants, pharmaceutical industry. Buildings, structures and greenhouses are necessary for agriculture; erection of buildings and structure and installation of new technical equipment - for food industry; tourism needs construction of hotels and food facilities, etc. All these are created by construction companies on order of relevant branches.
Thus, spending investments on capital construction is not useless and non-priority for the country, but as we have mentioned above, these funds shall be directed according priorities, purposefully. It has not been done this way until today. Capital construction spent almost all investments on housing sector. Housing market has been saturated; the demand on flats has been mostly satisfied. The same picture is on the market of commercial areas. Now construction companies should focus on import substitution branches and the ones oriented on export. Formation and renewal of fixed capital in these branches needs large investments. With the purpose of attracting them from foreign countries, it is necessary to raise the country's investment attractiveness, this means to improve the investment environment.
Creation of a favourable investment environment is one of the most important issues of the state investment policy. The concept "an investment environment" implies all the factors which are taken into account by an investor before making investments and which, finally, affects such complex indicator as an investment risk [2]. It is very difficult to find the ways of improving the country's investment environment. Georgia tries its best to assure international society in the country's political and economic stability and investment attractiveness. As the result of the reforms made recently, Georgia has the image of one of the quickly developing countries on a world-wide scale. One of the factors of success is the fact that "economic reforms are made on a regular basis due to which Georgia establishes a place of leader in this sphere. The strategic geopolitical situation for accelerating the country's economic development gives it the opportunity of developing and using quite important resources. The favourable trade regime has been created. The effective tax reform has been carried out. The procedure of issuing licences and permits has been simplified; the environment free from corruption has been formed. Mechanisms of lawfulness in business have become operative" [3]. As the flow ofdirect foreign investments into Georgia has recently decreased, this means that the measures taken are not enough, there are hindering reasons and the country should work on their elimination.
The country's economic performance and growth depends on how it will be able to mobilize monetary funds in order to satisfy the demands of both the state itself and companies, and physical persons. For example, if the housing construction in the country had not had large investments, so many flats would not have been built and, what is most important, so many unemployed had not been hired in building. It is true that an investment activity of one branch cannot save the economy but it contributes to an economic growth. The same is for all countries and the same is for Georgia. Thus, all the country's economic subjects need availability to monetary funds and ''if they manage these funds reasonably or invest
them in production, this is the precondition of an economic growth" [4].
As Georgia's construction sector is production, more precisely, production of construction products, it can be stated with full responsibility that if the inward investments are directed to production and the reconstruction and renewal creation of fixed capital is ordered for agriculture, food (process) industry, tourism (we mean its infrastructure, as well), health resort business, pharmaceutical industry and other priority branches, this will be a great step towards the country's economic growth.
Thus, the country still needs foreign investments with large doses so it should be quite active in order to improve the investment environment in the country. As it is mentioned above, a lot has been done in this direction, but a lot is still to be done. Investors are still scared of frozen conflict zones (Abkhazia, Ossetia), uncontrolled territories, unmarketable stock exchange, unavailability to venture information, etc. in Georgia. In spite of a large number of the above listed problems, as the specialists write, "the main hindrance for investors in Georgia is the economic environment. Export diversification and attraction of direct foreign investments have close relation as an export sector oriented on more foreign markets is the most attractive for an investor. The county has a low index of freedom in relation with protection of property rights, according to which it lags behind the average world indicator" [5].
Low economic potential of Georgia is really a serious threat to the attraction of foreign investments. From this viewpoint Georgia, with its natural resource potential, which may become the basis for manufacturing production for export, is not a poor country. The climate and geological features of its territory conditions the variety of the exposure of natural minerals and the capacity of the country of being rich in resources. The mineral-resource fund of the country involves 950 quarries and exposures. 62.8% of the resource fund represents a large deposit, 30.9% represents the deposit of local importance, and 6.2% represents the exposure. It consists of thermal-energy resources, different deposits, chemical and non-chemical resources, construction material and underground mineral water resources. This is followed by forest resources, land resources and other resources[6]. Due to these resources and the location of Georgia it has a potential to be attractive for investors. At first, or during the time when Georgia became independent, and started its own path to the market economy, the situation was not similar. It was the time when various laws, such as the Law of Georgia on the Promotion and Facilitation of Investors were reviewed and a new law on Foreign Investments was drafted for the purposes of stimulating foreign investors. The field was completely liberalised. Almost each year the foreign investments were being increasingly attracted on this basis. But as it turned out the foreign companies were only interested in the purchase (or to take
them on the basis of a long-term lease) of our natural resources (deposits, land, forest area and other immovable property) and as soon as it was ruled to set some restrictions on the sale of such deposits, the foreign investment started to decrease. To our opinion, the restrictions on such property should be stringier.
The country is facing this challenge today. Georgia cannot develop its own economy without the help by the foreign investments, this is why we should reduce the barriers and facilitate the money attraction in the form of foreign investments, but we should also assure them to invest not only for their own benefit, but also for the benefit of Georgia. This shall be carried out not in the form of the sale of immovable property or other natural resource, but it shall be exercised in the form of the arrangement of an industry and manufacture on the basis of such resources -in the form ofthe development of agriculture on the land, and in the form of the extraction of raw material and its procession on the deposit quarry area, in the form of fish breeding and fishery on lakes and rivers, and in the form of the arrangement of tourism and resort economy and infrastructure in the forests and fields and meadows, etc. We should assure foreign investors that by investing in such field and by operating j oint enterprises they will raise the export potential in Georgia, by which both the foreign investors and Georgia will gain. For the purposes of taking this policy we should highly stimulate them in these fields (for a certain period). In order to create such stimulating environments the Georgian investment legislation shall be revised. In the new legislation Georgia shall focus on the creation of joint enterprises. It is known that Japan, Taiwan and South Korea have never sold their natural resources, but they created their own industrial base by way of the formation of joint enterprises. The same path is followed by the former social countries of the Eastern Europe. In the Czech Republic almost 70% of export in the country is supplied by its enterprises, which are created by the participation of the foreign capital. About 30000 foreign companies are registered in Hungary, which totally or partially work for export and release more than 2/3 ofthe export product ofthe country [7]. These countries created appropriate environment for achieving this, which should be exemplary for us. The Czech Republic totally relieved newly created companies from profit tax for 10 years, in Hungary investments were relieved from local taxes for 10 years, Hungary relieved the import of industrial equipment from the payment of customs duties by 50-100%, etc [8]. We do not have such exemptions, and we should adopt them and shall inform potential investors thereon.
The Georgian Investment Agency shall take an active part in this activity. It should provide information to foreign investors, namely in which fields and sub-fields they may create joint enterprises using their own funds and technologies. The assessment of risks related to different fields is carried out on the basis of the analysis of created conditions. As a result of the
analysis, it is clear whether the investor takes risk in investing in the given field [9]. The joint companies will be founded on the basis of the local raw material and by employing local workforce, and the investment and technologies shall be foreign. The export potential of Georgia will be thus raised together with the level of usage of natural and labor resources, the progressive structure of the economy will be developed and the level of living of the population will be raised, etc.
To create healthy investment environment for business entities is a complex and long process. It started in the 90's in Georgia and has not been finished yet. In this field the government's initiative is to cancel profit tax from 1 January 2017, more specifically, the distributed (dividend, etc) profit will be taxed, which means that the profit envisaged for reinvestment shall not be taxed. The Government presumes that by taking such measures it will raise the reinvestment motivation. The economists carried out special calculations and it turned out that after taking such tax reform, the total reinvestment of nearly one billion GEL remaining in the private sector shall not significantly influence the growth of the total GDP" [10]. The mentioned requires in-depth surveys by the specialists.
Nowadays, in accordance with the 2013-2014 report on Global Competitiveness, Georgia engages the 98th place in the component of total national savings, and in the component of availability of finances of the local capital market it engages the 126th place [11]. It is of course not a good index.
To our mind the facilitation of internal savings shall be more emphasized, what we mean here is the state as well as private savings. For the purposes of the increase of state savings the Government of Georgia shall carry out a consistence policy of fiscal consolidation. By ensuring the reducing and stable deficit the State will be able to increase savings in the country. What concerns the private savings, its increase is hindered by the poverty of population. There is a social layer in Georgia which has excessive money but they do not address banks to deposit their money, because the interest rate for the deposit in too low in Georgia (10-12% per year). The deposition in banks for a longer period (for 10 years and more) shall be facilitated. Then the volume of investments in the country shall be increased and a long-term and stable base for the availability of financial resources will be created.
A good source of extending local investment base is the development of a stock exchange, which has not been developed in Georgia yet. In the case of the development of the stock exchange the companies would place their shares, the purchasers would appear, as a result ofwhich the companies would not have to take credits from banks. Besides, the purchasers of shares would gain dividends from such companies, which would increase their savings. "Besides, it should be also taken into consideration that the issue and release of shares are related to other
types ofexpenses, such as: expenses related to advertizing, share emission, share distribution, etc [12]. "The paid dividends significantly influence the financial program of the enterprise, its budget and liquidity" [13]. From the legal viewpoint, the law of Georgia on Statistics enables the companies to reckon financial information as confidential and oblige somebody not to disclose it. We consider this is wrong and we think that the Georgian legislation framework will need to be reviewed in this field [14].
The restraining by the companies to participate in the trading process held at the stock exchange may be explained by the following reasons:
1. The deficit of information (ignorance) on making benefit from the stock exchange;
2. The complicated barriers which are set for the right to enter the stock exchange;
3. High cost of transactions compared to bank transactions;
4. A bad working experience of the similar stock market developed in the 90's in Georgia - such as the Caucasus Stock Exchange, the Tbilisi Stock Exchange.
Conclusion
As we have mentioned, according to the access to finances with the help of the local capital market, Georgia is nowadays on the 126th place. In the strategy of social and economic development of Georgia - "Georgia - 2020" - it is envisaged that it will move to the 75th place by 2020. In the given process, except for the commercial banks, a significant role shall be played by the stock exchange. This may happen only with the activeness and efforts of the Government of Georgia. With regard to the construction we would like to point out that the construction business is the realization of investments in the main capital. It constructs the building and structures and installs the equipment, and its operation is on what the state of all fields of economy depends and this is the means of providing main capital to the sub-field.
Hence, macro-economic regulation of internal or external investments, the state administration of the ways of receiving or "giving away" investments will turn Georgia into a country, which is safe and attractive for investments.
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