Port Power: Georgia Hopes Poti Will Fuel Country's Economic Recovery

Georgian officials hope that the decision to transform the Black Sea port city of Poti into a tax haven will give a boost to President Mikheil Saakashvili's much-touted war on poverty.

Eleven companies responded to the port's privatization tender and its transformation into a Free Industrial Zone, a move initially announced in October 2007. Although a final decision is not expected before mid-April, Prime Minister Lado Gurgenidze has already announced the name of the frontrunner.

Georgia seems likely to hand Poti's Free Industrial Zone and a 51 percent stake in the Poti port itself to the United Arab Emirates' RAK Investment Authority http://www.rak-ia.com, Gurgenidze indicated during a March 27 briefing. The port will become a joint stock company in which the government holds a 49 percent share, and enjoys veto power over any shareholder decision. Shares in the port will also be put on the Tbilisi stock exchange, the prime minister said.

Citing ongoing negotiations, Gurgenidze, an investment banker by profession, declined to release the price to be paid for the Poti package. He put the initial price for Poti's port, though, at "approximately" $70 million, Interpress News reported. Deputy Economic Development Minister Vakhtang Lezhava told EurasiaNet that the 400 hectares of adjoining territory slotted for development as a free industrial zone will be sold for "at least $1 billion."

While the cash involved in the deal has alone attracted considerable public interest, officials have sought to play up the additional benefits of the deal. Gurgenidze estimates that the Poti zone and port development could create up to 20,000 jobs over the next five years. That figure represents 6 to 7 percent of the 274,500 Georgians (13.6 percent of the working-age population) who were unemployed in 2006, the latest year for which state figures are publicly available. Outside observers tend to believe unemployment numbers are higher than officially reported figures.

For Saakashvili -- who ran for reelection in January on a pledge to do something about Georgia's chronic lack of jobs -- the Poti privatization represents a critical component of his post-vote political strategy. It also has implications for Tbilisi's latest overture to separatist authorities in Abkhazia, just up the coast from Poti -- an initiative announced by Saakashvili on March 28 includes development of a similar, jointly run zone for Abkhazia's Ochamchire and Gali regions.

The expected benefits from the Poti plan are not limited to employment and potential facilitation of relations with Abkhazia, though. With a Free Industrial Zone established, the government believes cargo shipments at Poti's existing port will increase so quickly that a new port will be required.

Under the terms of the pending deal, the RAK Investment Authority will spend about $200 million on construction of a new port on 100 hectares of land adjoining the current port.

Poti, which celebrates its 150th anniversary this year, currently processes about 7.7 million tons of cargo annually, based on 2007 government figures -- a drop in the bucket compared with the world leader, Shanghai, at 537 million tons for 2006. The government believes that Poti's turnover can eventually increase to 25 million tons of cargo per year, according to Georgia's National Investment Agency.

The government, though, wants the emphasis on construction of container terminals. In this category, Poti currently handles 185,000 TEU (Twenty-Foot Equivalent Units, the industry standard of measure) of cargo, compared with Singapore's 24.79 million TEU, or 10-ranked container port Los Angeles, at roughly 8.47 million TEU, according to a 2006 ranking released by the American Association of Port Authorities.

That size difference prompts some local economic experts to urge caution about the government's plans. Out of about 3,000 Free Industrial Zones worldwide, only about 200 can be considered successes, said economist Davit Narmania. Georgia's weak judiciary system and its small domestic market are among the significant risk factors for whatever entity wins the Poti tender, added Narmania, who is a former head of the Georgian Young Economists Association and a finance professor at the Georgian Institute of Public Affairs. "Hong Kong and Singapore have huge markets and the productive capacity of their ports exceeds ours by 20 times," Narmania said.

Lezhava, the deputy economic development minister, dismisses such criticism. "As to 7 percent of the world's Free Industrial Zones being successful, for that matter, I think that only 7 percent of the world's countries are successful, don't you agree?" he scoffed. "The best barometer for [the likely success of] Poti port is not those pundits who appear on TV and express various opinions, but the fact that the interest in Poti's Free Industrial Zone is huge."

Among the companies initially bidding on the Poti project, Lezhava noted, were "celebrity" Free Industrial Zone developers Hutchison Westports, Limited (United Kingdom), Hamburger Hafer und Logistics (Germany) and a partnership between the United Arab Emirates' Dubai Port Authority and Jafza International.

Some economists find fault with Lezhava's reasoning. In countries suffering from investment hunger, a free industrial zone is the wrong approach, argues Vladimir Papava, an analyst at the Georgian Foundation for International and Strategic Studies, and an independent member of parliament.

Papava, a former minister of economy under ex-President Eduard Shevardnadze, contends that Poti's tax-free zone could divert both foreign and domestic investments away from the rest of the country, without leaving any benefits for these geographic areas.

Companies operating in the Poti Free Industrial Zone will be able to assemble and reprocess products on-site, but not produce anything. To maintain their VAT exemption, shipments to areas of Georgia outside the zone cannot exceed 5 percent of the zone's total turnover.

The rules that will govern Poti's Free Industrial Zone, however, remain a work in progress. A framework law for the zone was approved last summer, but without a detailed description of the zone's regulation and monitoring mechanisms. Amendments to some 26 related laws have, however, since been passed. Still outstanding is a "normative law" that would reconcile contradictions in the existing legislative framework, the government says.

Details about how the zone will actually operate are the responsibility for the company that wins the Poti bid, according to Lezhava. The government's role is limited to defining the zone's borders, tax requirements and privileges and the currencies that can operate within the area, he said.