EurasiaNet Business & Economics - Report Detials Failures in Georgian Petroleum Tax Collection

BUSINESS & ECONOMICS

REPORT DETIALS FAILURES IN GEORGIAN PETROLEUM TAX COLLECTION

Ken Stier 12/02/02

Georgia’s tax collection is so shoddy, according to a new study funded by the US Agency for International Development (USAID), that the country loses out on more than one-third of the total tax revenue it could collect from the petroleum sector.

With an economy still in a deep post-independence depression, the $800 million-per-year petroleum sector could be a substantial revenue source for the government. But according to the report, the government is currently collecting only 20 percent of the total tax owed by the largely privatized petroleum industry � roughly $50 million. The government’s poor enforcement efforts thus effectively leave some $200 million in potential revenue � more than a third of the government’s entire fiscal budget � uncollected.

These findings sharpen the dilemma facing Georgia’s donors, who are dispirited by the government’s persistent inability to put its financial house in order, but fearful of how much the worse the situation could get if the government loses financial support. The report, which reflects several years’ worth of research, offers disturbingly stark documentation of two prominent problems in Georgian government: weak management and intractable corruption.

The report, officially titled Oil and Gas Valuation Model for Georgia and Implications for Government Revenue Collection, paints a grim picture. Its calculations show an amount of uncollected tax revenue that roughly equals 20 times the money that the state allocates for education in a recent budget. "If the Government of Georgia was successful in collecting all of the potential revenues from the petroleum sector, its tax collections could increase by a staggering 33 percent," says the report. An individual familiar with the research in the report, speaking to EurasiaNet on condition of anonymity, said this oil sector tax hemorrhage was far worse in Georgia than anywhere else in the Caucasus or Central Asia.

Since there is little exploration, production or refining in Georgia, the vast bulk of petroleum product is imported into the country and most added value comes from marketing. Georgia imports most of its petroleum products from Azerbaijan and Russia; roughly three-fourths of losses are due to uncollected excise duties and VAT. Oil and diesel account for 75 percent of the sector, with market prices set by legitimate firms who incorporate petroleum taxes into their pricing.

Taxable revenues vanish everywhere along the petroleum delivery system, beginning when smugglers or other illegal operators charge the same price as legitimate marketers, or something close to it. When this happens, consumers suffer a double blow, paying a stiff surcharge that goes into shady operators’ pockets. "Consumers are paying but they are not getting even what you could call the benefits of the smuggling," says the informed expert. Citizens often have little choice but to buy from smugglers. Most rural gas pipeline networks have long since been sold for scrap metal, leaving people in the countryside dependent on liquefied petroleum gas (LPG). Tax rates on LPG hover near 100 percent. With official delivery networks defunct, smugglers of LPG can sell at the market price and enjoy nearly 100 percent profit margins.

Government statistics indicate the problems of smuggling and illicit refining may be worsening, despite numerous Western donor efforts to overhaul the customs department and enforcement agencies, as well as President Eduard Shevardnadze’s high-profile campaign against corruption. [For background, see the EurasiaNet Human Rights archives.] The country consumes around 650,000 tons of petroleum a year, according to estimates. Customs data, though, shows imports declining from 428,000 tons in 1998 to 132,000 tons in 2000. Similarly, diesel imports dropped from 303,600 tons in 1998 to 60,000 tons in 2000 � even though estimated consumption stands at 400,000 tons per year. The decline in recorded imports is believed to reflect both Georgian energy cartels’ success in blocking new importers and a proliferation of new illicit refineries.

Like smugglers, these small refineries impose costs on consumers without paying their share to the state. A senior Georgian official estimates that there are more than 40 of these small blending operations, turning out substandard product while creating new environmental hazards. They pay no taxes and are completely unregulated. "However, through the systematic non-payment of taxes, huge profits are able to be gained on very minimal amounts of investment," notes the report.

The report may provide impetus for stronger enforcement, unlike earlier donor-funded studies that mostly improved data collection. That earlier data collection helped this report’s researchers, say observers: now, the new report may spur a campaign for change. A Petroleum Advisory Group, formed of members from the American Chamber of Commerce, is drawing up recommendations to be presented to Tbilisi on ways to level the playing field for legitimate investors who are paying their taxes. Whether official Tbilisi will listen carefully is an open question, some local observers say. Briefed recently, Finance Minister Mirian Gogiashvili challenged some of the study’s base-line calculations. He will probably endorse the initiative, while the weight of President Eduard Shevardnadze’s support is less clear, observers add. The president will probably back industry-proposed initiatives, but the extent of support from the rest of the government is hard to predict.

Those involved in the budding campaign say they hope to enlist major donors, particularly the World Bank and International Monetary Fund, to use their financial leverage as a way of focusing Shevardnadze’s attention on weaknesses in Georgia’s tax collection. "Our firm belief is that without the direct support of the international financial institutions we will not have a chance to succeed in implementing any real changes," said one source in the effort, who asked not to be identified. Earlier ideas about a publicity campaign seem to have fizzled through a combination of deepening cynicism among foreign executives and some concern about retribution from powerful interests. Backers of change are planning a multi-stakeholder workshop in February. For now, they are letting the report speak for itself.

Editor�s Note: Ken Stier is a freelance journalist who specializes in Caucasus and Central Asian affairs.

The Central Eurasia Project aims, through its website, meetings, papers, and grants, to foster a more informed debate about the social, political and economic developments of the Caucasus and Central Asia. It is a program of the Open Society Institute-New York. The Open Society Institute-New York is a private operating and grantmaking foundation that promotes the development of open societies around the world by supporting educational, social, and legal reform, and by encouraging alternative approaches to complex and controversial issues.

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