Georgia: Tbilisi Woos Arab Investment

The latest Arab entity to establish a presence in Georgia is Fresh, an Egyptian home appliances manufacturer. In conjunction with a local partner, Georgian International Holdings, the Egyptian company is creating a subsidiary, Fresh Georgia, which plans to spend an estimated $100 million to develop a free industrial zone in the central Georgian city of Kutaisi.

The Kutaisi project follows on the heels of a string of mega-million-dollar investments made by companies based in the United Arab Emirates. Together, the UAE outlays accounted for over 18 percent ($273.14 million) of Georgia's total foreign investment in 2008, according to government data.

One of the emirates, Ras Al Khaimah, is alone projected to invest $2 billion in a wide range of Georgian projects, including a free industrial zone, tourism, real estate, media holdings and banking. The Abu Dhabi Group has reportedly invested around $200 million in banking, real estate and telecommunications. Meanwhile, a Dubai-based company, Vtel Holdings, has pumped $30 million into telecommunications.

Like other investors from the Middle East, Fresh Vice-President Mohamed Raphat credits Georgia's strategic location, straddling Central Asia and Europe, as the main attraction for his company. "Georgia is a very, very important country because of its location," Raphat said. Low custom duties and a perceived low level of corruption also played a role in selecting Georgia as a regional hub, he added.

The Egyptian joint venture paid an undisclosed sum for 27 hectares of land on the grounds of the former Kutaisi Automobile Factory. The parcel will become the free industrial zone, provided the government approves of Fresh's plans. Surrounded by a rusting fence and now a site where livestock commonly graze, the parcel does not strike observers as ideally suited as a trading center. But for the Egyptian-Georgian team, that dilapidated landscape spells opportunity.

Fresh is already an exporter of consumer goods to former Soviet states, and is now looking to increase its presence in the region. It is also looking to reduce costs. Basing some of its operations in Georgia would allow it to achieve the latter aim at the very least. Shipping directly from Egypt to Central Asia "is a very long route and very expensive," explained Mikheil Tigishvili, the head of Georgian International Holdings, the venture's local partner. "From Georgia, Tajikistan or Uzbekistan is much closer."

The Georgian market itself will only represent about 2 percent of Fresh's projected sales in the region, he estimated. The primary benefit of the Kutaisi facility will be as a regional distribution center.

The location, though, comes with potential risks. Russian troops last year paralyzed Georgian cargo traffic by setting up positions along the country's sole East-West highway, Kutaisi's main access route. Tigishvili noted that while Georgia's volatile combination of war, protests and economic crisis made his Egyptian partners "nervous," after already working on the deal for two years, they have no intention of backing out.

Raphat, the Fresh executive, said recent meetings with President Mikheil Saakashvili and other top government officials helped allay the company's investment jitters. "I feel that they will settle these problems between Georgia and Russia," he said.

The project is widely expected to receive free-industrial-zone (FIZ) designation from the government. The approval process is well underway, according to Lali Gogoberidze, an economic analyst at the Ministry of Economic Development. The FIZ status means that the state will receive no tax or customs revenue from export-orientated production. Fresh Georgia will also be exempt from paying property tax. The Georgian government would benefit through the jobs created by the venture, and could end up obtaining revenue through income taxes on employees. When approved, the so-called Fresh Georgia venture will become the country's second free industrial zone; the UAE-based RAK Investment Authority is already working on a FIZ near the Black Sea port of Poti.

With a population of 186,000, Kutaisi ranks as Georgia's second-largest city, but, after nearly 20 years of decay and neglect, it has transformed into the heart of Georgia's Rust Belt. For the Georgian government, the prospect of creating jobs in an economically depressed area is worth the sacrifice in tax revenue, according to regional governor Mikheil Chogovadze. "It is most important for us that people have money to spend," Chogovadze said. "That [the Fresh Georgia venture] creates money circulation and has a good impact on the regions."

The first phase of Fresh Georgia's operations should start this summer, employing an estimated 3,000 locals to manufacture household appliances. Eventually, the company will also start to manufacture textiles. When it becomes fully operational in three years, the free-industrial zone is projected to have 12 factories, housing roughly $3 billion-worth of machinery, and employing 15,000 Georgians.

It all sounds good on paper, but some locals are being careful not to let expectations get out of hand. "If there is work, we are not against it," said Vaso Datuashvili, a mechanic at an auto repair shop near the planned factories. "Whether that is 15,000 jobs or five, it is still jobs."