Issue no: 830/20www.georgiatoday.ge

MarketsAs of 25 Mar 2016

STOCKS Price w/w m/m BONDS Price w/w m/mBank of Georgia (BGEO LN) GBP 20.37 +0,8% +5,3% GEOROG 05/17 100.75 (YTM 6.17%) +0,2% +1,1%GHG (GHG LN) GBP 1.64 +3,8% +9,3% GEORG 04/21 107.40 (YTM 5.19%) +0,1% +1,9%TBC Bank (TBCB LI) US$ 10.30 +6,6% +8,4% GRAIL 07/22 106.44 (YTM 6.48%) +0,7% +2,8%

GEBGG 07/17 103.63 (YTM 4.75%) 0,1% +0,5%COMMODITIES Price w/w m/mCrude Oil, Brent (US$/bbl) 40,44 1,8% +14,6% CURRENCIES Price w/w m/mGold Spot (US$/OZ) 1 217,05 3,1% 1,3% GEL / USD 2,3350 +2,4% 5,8%

GEL / EUR 2,6074 +1,5% 4,5%INDICES Price w/w m/m GEL / GBP 3,2953 0,5% 4,9%FTSE 100 6 106,48 1,3% +1,6% GEL / CHF 2,3830 +0,9% 4,8%FTSE 250 16 674,35 1,3% +1,7% GEL / RUB 0,0342 +2,4% +4,3%DAX 9 851,35 1,0% +5,6% GEL / TRY 0,8118 +2,1% 4,1%DOW JONES 17 515,73 0,5% +4,9% GEL / AZN 1,4461 +2,4% 8,7%NASDAQ 4 773,51 0,5% +4,2% GEL / AMD 0,0048 +2,1% 4,0%MSCI EM EE 121,53 4,0% +12,5% GEL / UAH 0,0900 +5,0% 1,5%MSCI EM 812,32 1,7% +10,5% EUR / USD 0,8955 +0,9% 1,3%SP 500 2 035,94 0,7% +4,3% GBP / USD 0,7075 +2,4% 1,2%MICEX 1 866,23 2,5% +3,5% CHF / USD 0,9776 +0,8% 1,3%MSCI FM 2 455,24 0,2% +6,3% RUB / USD 68,1750 0,1% 9,5%GT Index (GEL) 886,18 0,0% TRY / USD 2,8758 +0,3% 1,8%GT Index (USD) 749,81 0,8% +6,4% AZN / USD 1,6163 +2,0% +3,3%

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• • MARCH 29 - 31, 2016 • PUBLISHED TWICE WEEKLY PRICE: GEL 2.50

In this week’s issue...Georgian Railway Signs Memorandum with Turkish LAM Group

Dechert OnPoint: The New Elements of Produce in Georgia

Why Georgia Is Not South Korea (or Israel)?

Georgia’s Healthcare Reform

New Multifunctional Complex to Be Built in Batumi

Continued on page 3

World Bank to Give USD 40 Mil to National Innovation Ecosystem Project

Where is Georgia with Turkey-Russia Crisis?

Prepared for Georgia Today Business by

New reforms to introduce teaching through partnership between the public and private sectors- guaranteeing qualifi ed employees and lower unemployment

FOCUS ON VOCATIONAL EDUCATION PAGE 3

BY EKA KARSAULIDZE

Treepex is an innovative mobile application that will change the idea of purchasing. By buying a product with the Treepex logo, you will automatically be planting trees in Pro-tected Areas of Georgia, thus promoting the

growth of Georgian species of trees and improving the ecological background of the country. Founders of the pro-ject, two friends Bacho Khachidze and Lasha Kvantaliani, said that the project consists of three components – envi-ronment, new technologies and the human factor.

The project works quite simply: you go to a shop, buy a product that you were planning to buy anyway, and if it has a Treepex logo, you download the same name app (Android and iOS), scan the logo’s unique QR Code, take a photo of your purchased item and upload the photo on your social network.

Treepex: Plant a Tree at the Touch of a Button

GEORGIA TODAY MARCH 29 - 31, 20162 BUSINESS

Contact: www.edelbrand.ge

Phone: 599 461908

BY EKA KARSAULIDZE

The fi rst Free Industrial Zone in East-ern Georgia was opened in Tbilisi in December last year. At present, only the data center of the world's leading BitFury Group operates there. How-

ever, the Zone provides great opportunities for creating business in Georgia and attracting foreign investment.

“Here, we have created a Free Industrial Zone to which we will be able to attract the world’s leading companies to execute their activities,” said Minister of Economy and Sustainable Devel-opment of Georgia, Dimitry Kumsishvili, at the opening in December. “Tbilisi Free Zone (TFZ) and the Data Center are important for placing Georgia on the world technology map. This is the fi rst stage, and we are convinced that it will be followed by other companies.”

TFZ occupies 17.0 ha land, arbitrarily divided into 28 individual plots, and enjoys direct access to the largest labor pool of Georgia. It is located in immediate proximity to the main cargo trans-portation highway, Tbilisi International Airport (30 km), and Tbilisi center (17 km).

The land plots, with the smallest unit at 2.000 sq.m, may be leased individually or collectively for up to 50 years. Its unique confi guration gives the opportunity to merge several land plots with-out restricting access to road and communications. TFZ also provides 24/7 security and customs con-trol.

Giorgi Tabidze, the General Director of Tbilisi

Tbilisi Free Zone as a Unique Business Environment

Free Zone held a meeting with representatives of business associations, private companies and ministries to discuss its adventures on March 23.

“Our goal is to satisfy the requirements of those who have their own businesses in Georgia, in par-ticular, we mean the preferential tax regime of the Zone. We will also contribute to the develop-ment of industries based on knowledge and inno-vation by offering a wide range of services and solutions,” said Tabidze.

Like other free industrial zones, TFZ operates according to the Free Industrial Zones Law and based on a long-term contract with the Ministry of Economy and Sustainable Development of Georgia. A Free Industrial Zone is designed to create such a tax, legal and administrative envi-ronment that tenant companies can compete suc-cessfully on the global market. Its benefi ts are tax incentives, simplifi ed procedures, payments car-ried out in any currency, exemption from the majority of licenses/permits, and autonomy from local self-government bodies.

Georgian legislation has no restrictions on for-eign ownership of companies or the form of own-ership itself. Therefore, a local or foreign indi-vidual, as well as a local or foreign legal entity, may establish a TFZ Enterprise.

Tbilisi Free Zone is available and open for dif-ferent areas of business: IT industry – in particu-lar data center development, light manufacturing, pharmaceutical production, household goods, warehousing and cold storage. Tabidze mentioned that restrictions will be imposed only on the pro-duction of tobacco, weapons and goods that are subject to excise duty.

GEORGIA TODAY MARCH 29 - 31, 2016 3BUSINESS

BY ANA AKHALAIA

Prime Minister of Georgia, Giorgi Kvirikashvili, has pre-sented a vocational education reform, as the fi rst stage of educational reforms, which

envisages the creation of a labour market-oriented vocational education system.

International studies show that one of the major obstacles for the country’s economic development is the lack of skilled workers. The new reform involves a completely different teach-ing model which will be based on part-nership between the public and private sectors in terms of both training and working.

PM Kvirikashvili stressed the impor-tance of the opportunity for students to communicate with employers in the learning process, after which they can become employed and then start their own business or continue higher educa-tion. He said the State aims to create the right conditions for them in every direc-tion.

“The partnership of public and private

Prime Minister Presents Vocational Education Reform

sectors in no way implies any kind of imposed initiative from the State,” the PM said. “It is a process whereby the private sector gets a guarantee in advance that it will have qualifi ed staff, and on the other hand where the State is able to help reduce unemployment and give a signifi cant boost to the development of the economy.”

The Prime Minister claims that the existence of this type of training model, improved quality of education and mod-ern infrastructure and fl exible bureau-cracy will allow the country to make a signifi cant leap forward in development.

He added that the government recog-nizes the importance of setting up appro-priate mechanisms for the realization of student business initiatives.

“That is why it is planned to create a funding institution for start-up ideas which will give students, young people with initiatives, the chance to fi nance their own ideas within new conditions, which will not require them to have to go through normal banking procedures,” PM Kvirikashvili said.

The above youth-oriented start-up fi nancing institution is expected to be launched in the next month.

Continued from page 1

Treepex: Plant a Tree at the Touch of a Button

“Then a tree will be planted and cared for at either the Tusheti Protected Land-scape, Ajameti Managed Reserve or Tbilisi National Park,” Khachidze explained. “Once a tree is planted on your behalf you will be notifi ed on the Treepex App and receive, through email, a photo of the tree with your nameplate as well as its GPS coordinates. And when you go to the Protected Areas of Geor-gia, you can meet your tree.”

One of the aims of the App’s creation was to change the attitude of Georgian people to the ecology and green issues. According to Khachidze, people still do not fully understand or have suffi cient knowledge in the environmental fi eld. “Therefore, fi rst we have to plant a tree in their minds,” he said.

New technologies will have to grow a new generation environmental popula-tion. It is worth noting that prior to the

offi cial launch (March 3, 2016) the project was presented to the Eurasian Global Challenge at which 6000 projects entered the fi nal stage.

The new start-up has attracted the attention of local companies. Treepex already has an agreement with a number of wine companies which are ready to release their products in a Limited Edi-tion line with the Treepex logo. In addi-tion, one of the leading banks of Georgia has agreed to transfer money from the collection of waste paper to plant trees in Protected Areas of Georgia.

However, Treepex still keeps its main focus on individual sales. There are already available fl owers and trees in pots and wooden products with the Treepex logo. The creators said that the wooden products were made from waste materials and that no trees were cut for their creation. In future, Treepex will open an online store with a wider range of products. Moreover, entering the online environment will give the com-

pany an opportunity to make their pro-ject global.

“Even when you are somewhere far away, on the other side of the world, just by purchasing your desired product you can plant a tree and support Georgia in greening. Moreover, you will be able to visit your tree and discover Georgia as a whole, which has recently become a suffi ciently attractive country in terms of tourism,” said Khachidze.

Planting the trees in the Protected Areas guarantees that they will not be cut down and will continue to grow for at least 300 or even 900 years. “The Pro-tected Areas of Georgia are under the special protection of the State- we signed a memorandum with the Agency of Pro-tected Areas to that effect. Agreement with them and our own knowledge makes sure we plant the right varieties of trees in the right place,” Khachidze added.

Tree planting will be carried out at the end of each month. Their number in the fi rst month reached 300. Khachidze notes that, with the involvement of various companies, the number of trees has already increased to 1000 this month.

BY ANA AKHALAIA

Georgian Railway subsidiary company Trans Kavkasus Terminals and Turkish LAM Group of transport companies signed a Mem-

orandum of Intention on March 24th, according to which the cooperation of the companies in the transport fi eld will help to connect Georgia’s transport potential to world trade routes. They also aim to jointly develop a Maritime Union of Georgia, Turkey and relevant European markets.

“We hope that the LAM group will be a company with whose support we will receive sea services on the Black Sea to Turkey and in other directions, in order to fully provide further transportation of freight from China to anywhere in the world,” said Levan Sulaberidze, Director of Trans Kavkasus Terminals.

Fully owned by joint-stock company Georgian Railway, Trans Kavkasus Ter-minals was established in 2009 and oper-ates and develops container terminals in Tbilisi and Poti. Trans Kavkasus Ter-

Georgian Railway Signs Memorandum with Turkish LAM Group

minals is now a member of the Trans Caspian Consortium which provides sea container transportation from China to Georgia, for the purpose of further trans-portation in various directions. The Consortium also consists of member companies from China, Azerbaijan and Kazakhstan.

“In recent years Georgia has consider-ably developed in the area of transport. And the China - Georgia Silk Road shows additional opportunities in this direc-tion,” said Selim Makzume, the Board of Directors Executive of LAM Group. “LAM Group, as a global transportation company, plans to use these opportuni-ties by partnership with Trans Kavkasus Terminals, to give Georgia a more sig-nifi cant role in the fi eld of worldwide transportation. We are proud to make a contribution to this project.”

LAM Group has 70 years experience and offers a complete range of shipping and marine, transportation and logistics services. It annually handles over 100,000 TEU containers, 1,500 strait transits and port calls in three countries, over 3,000 tons of air cargo, as well as many other logistic services for a total turnover of more than USD 100 million.

Levan Sulaberidze, Director of Trans Kavkasus Terminals and Selim Makzume, the Board of Directors Executive of LAM Group

GEORGIA TODAY MARCH 29 - 31, 20164 BUSINESS

THE ISET ECONOMISTA BLOG ABOUT ECONOMICS AND THE SOUTH CAUCAUS www.iset-pi.ge/blog

The ISET Policy Institute (ISET-PI, www.iset-pi.ge) is an independent think-tank associated with the International School of Economics at TSU (ISET). Our blog carries economic analysis of current events and policies in Georgia and the South Caucasus region ranging from agriculture, to economicgrowth, energy, labor markets and the nexus of economics, culture and religion. Thought-provoking and fun to read, our blog posts are written by international faculty teaching at ISET and recent graduates representing the new generation of Georgian, Azerbaijani and Armenian economists.

Israelis are not very good at following rules, but Israeli ingenuity helps fi nd innovative solutions to any problem, including the lack of discipline. Surveillance cameras record men who make some bad public choices and then upload the video to YouTube for public shaming, hi-tech style. Source: The Israel Project

BY ERIC LIVNY

Back in October 2014, soon after the intro-duction of new visa regulations by the Georgian government, I visited Seoul, the capital of South Korea. An unpleas-ant surprise awaited me on the way back

home at the Seoul airport. The young stewardess checked my (Israeli) passport and informed me that, according to the system, I will not be allowed to board the fl ight (to Istanbul) unless I show a Geor-gian residence card or buy a return ticket.

“But I live in Georgia, and it has never been a problem to come back, nobody ever checked my ticket”, I argued.

The stewardess apologized for the inconvenience but insisted – in a very pleasant Siri-ish voice: “According to the system, one has to have a return ticket or a Georgian residence card.”

Desperate to go back to my Tbilisi home, I initi-ated another round of negotiations.

“Look”, I said, “couldn’t there be a mistake in your system?”

“WE ALWAYS FOLLOW THE SYSTEM”, said Siri, demonstrating the futility of any further attempts to negotiate.

Ultimately, I managed to get on the fl ight because I found my (brand new) residence card among many other cards in my wallet, but this phrase - WE ALWAYS FOLLOW THE SYSTEM - stuck with me.

Why Georgia Is Not South Korea (or Israel)?It stuck because it seemed to encapsulate a quintes-sential truth about Korea (both South and North) – a deeply rooted tradition that “celebrates conform-ity and order”, as one observer put it. By the same token, “we always follow the system” is a great shorthand for everything that Georgia is not.

FOLLOWING THE SYSTEM: THE PROSConformity and order clearly have their advantages. One way to establish this is to plot South Korea’s GDP per capita growth over time alongside with that of Georgia.

Back in 1965, Georgia and South Korea were equally poor, with per capita income of US$ 1,266 and 1,285 (in 2005 prices), respectively. According to Forbes, “In 2004, South Korea joined the trillion-dollar club of world economies, and is currently the world's 12th largest economy.” Today, South Korean GDP per capita is close to US$ 24,000 (in 2005 prices), that is more than seven-fold of the same indicator for Georgia in real terms.

While South Korea’s “miraculous” moderniza-tion, industrialization and export-led growth is often compared to West Germany’s Wirtschaftswun-der, President Park Chung Hee’s (1961-1979) author-itarian rule and industrial policies carry much closer resemblance to those implemented by fascist Germany before and during the Second World War. In both cases, the state engaged in ambitious eco-nomic planning while coopting powerful economic elites (family-controlled industrial conglomerates known as “chaebols” in Korea’s case), suppressing

and destroying trade unions [1], engaging in nation-wide education and infrastructure projects, pro-viding credit guarantees, but demanding, in return, that all economic activity should serve the national interest, however defi ned.

As described on Wikipedia:“Government-chaebol cooperation was essential

to the subsequent economic growth and astound-ing successes that began in the early 1960s. Driven by the urgent need to turn the economy away from consumer goods and light industries toward heavy, chemical, and import-substitution industries, political leaders and government planners relied on the ideas and cooperation of the chaebol lead-ers. The government provided the blueprints for industrial expansion; the chaebol realized the plans. … the chaebol-led industrialization accelerated the monopolistic and oligopolistic concentration of capital and economically profi table activities in the hands of a limited number of conglomerates.”

When seen through this prism, South Korea’s miracle appears to be all about “FOLLOWING THE SYSTEM”: toeing the party line on industrializa-tion priorities; relentlessly adapting foreign tech-nology; willing to function under enormous pres-sure to perform in one’s studies and work; and, last but not least, sacrifi cing consumption and a “good life” today for the promise of a better future.

FOLLOWING THE SYSTEM: THE CONSIn a series of papers spanning several years, Daron Acemoglu, Philippe Aghion, and Fabrizio Zilibotti dwell on the changes fi rms (and, by implication, countries) must undergo as they get closer to the global technology frontier. A core feature of their models is the need for fi rms to eventually switch from imitation (investment and adaption of exist-ing technologies) to innovation.

Whereas imitation is most effective in (South Korea-style) large, vertically integrated fi rms with a rigid hierarchical structure and disciplined work-force, innovation requires a smaller size of fi rms, fl atter hierarchy, and greater reliance on outsourc-ing. Innovation is also preconditioned on a system of incentives that encourages experimentation and forgives mistakes. If “need” is viewed as the mother

of invention, a lack of “discipline” and the freedom to generate new ideas and try new practices may be portrayed as its “father”.

The Start-Up Nation, a bestselling book by Dan Senor and Saul Singer, describes the chutzpa of Israeli’s entrepreneurs and engineers as one of the key factors behind Israel’s astounding success as a hub of technological innovation since the 1990s. An eye-opening example in the book is that of Intel’s Israeli development unit having suffi cient autonomy with Intel’s global hierarchy and the guts to engage the company’s headquarters in a fi ght over abandoning the dominant “clock speed doc-trine” in favor of a new chip architecture empha-sizing portability and energy effi ciency.

“To cultivate a culture of disagreement and debate” was considered critically important for Dov Frohman, the founder of Intel Israel:

“The goal of a leader”, Frohman is quoted by Senor and Singer, “should be to maximize resist-ance – in the sense of encouraging disagreement and dissent. When an organization is in crisis, lack of resistance can itself be a big problem. It can mean that the change you are trying to create isn’t radical enough… or that the opposition has gone underground…”

It is important to realize that a lack of “discipline” is a double-edged sword. Indeed, Israel’s rebellious ethos, disrespect of authority and the tendency to trick “the system” set it oceans apart from Korea’s Confucian spirit. It is at once a key factor behind Israel’s rise to prominence as a “start-up nation” and its failure to transform a larger number of its startups into global tech giants such as Korea’s Samsung, LG or Hyundai.

GEORGIAN CONTRADICTIONSA beautiful social TV ad, which I chanced to see several years ago, contrasted the incredible har-mony of Georgia’s folk dance (shown in slow motion) with the chaos on Tbilisi’s streets (played on fast-forward, view from above).

Georgians consider themselves much more tradi-tional and religious (92% and 95%, respectively) than South Koreans (22% and 30%), according to World Value Survey. Yet, while Georgians value time-honored traditions and religious commandments, “following the system” is not in the Georgian book.

As a rule, Georgians hate rigid rules (such as coming to work on time) and do not trust any “sys-tem”. This may explain why the architects of the “system” – Georgian lawmakers – seem to pay so little attention to fi ne-tuning new laws and regula-tions. Indeed, why bother if these laws and regula-tions (such as those designed to please EU bureau-crats) are likely to stay on paper.

The Georgians’ love of freedom does translate, as may be expected, into incredible creativity. Georgian painting and sculpture, performing arts, fi lm-making and writing are truly world class. Yet, not properly managed, they fail to translate into commercial success, comparable to Italy’s.

Finally, Georgians are a very talented people as witnessed by their outstanding scholarly achieve-ments in Soviet times. Georgian physicists, math-ematicians, microbiologists, and medical surgeons were recognized leaders of the Soviet elite. Today, however, Georgia’s scholarly achievements are extremely modest, and demonstrate no signs of improvement. Moreover, combined with unrealis-tic expectations about own abilities and “presiden-tial” aspirations on the part of many Georgian males, poor education translates into very high unemployment and poor work ethic.

While the potential is certainly there, these con-tradictions do not bode well for fast catch-up growth through imitation (South Korean-style), or Israel-inspired innovation boom.

1. President Park’s demolition of South Korean trade union has apparently had a lasting impact. As reported by the Wall Street Journal, the Inter-national Trade Union Confederation has recently ranked Korea “below most of 139 countries surveyed in terms of workers’ rights, based on submissions from local labor unions. Korea was assigned the lowest rating of 5, defi ned as a country that has no guarantee of rights.”

GEORGIA TODAY MARCH 29 - 31, 2016 5BUSINESS

BY ANA AKHALAIA

A new multifunctional com-plex is to be built on Piro-smani Street in Batumi, Georgia, according to a decision by the Govern-

ment. For implementation of the project, the State Property Agency of the Min-istry of Economy and Sustainable Devel-opment transferred the ownership of 289 square meters of land to M Kvadrati Ltd (M Squared).

According to the terms of the invest-ment, a multifunctional complex con-struction will be completed on no less

New Multifunctional Complex to Be Built in Batumi

than 10 000 sq. m. space within an 18-month period.

The new complex of M Kvadrati will transfer renovated offi ce space worth USD 190,000, to be located on the second fl oor of the building, to the State free of charge.

The company is also expected to pro-vide a museum in Batumi of no less than 150 sq. m. of space within a month of the completion of the complex construction, as well as set up a transport museum library of archived material and other property without charge.

It should be noted that the company M Kvadrati is not a representative of development company ‘M2’ established by the Bank of Georgia.

BY ANA AKHALAIA

The fi rst olive processing plant, equipped with modern technologies, has been opened in Sighnaghi municipality, Eastern

Georgia. The company ‘Georgian Olive’ was built with the cooperation of the Agricultural Project Management Agency under the co-fi nancing pro-gram for agricultural product process-ing and storage facilities.

Olive Processing Plant Opens in Georgia

The opening of the plant was attended by the Prime Minister of Georgia, Giorgi Kvirikashvili, who inspected the 300-hectare olive plantation and new facility and expressed hope that Geor-gia-made products will be competitive in both domestic and foreign markets.

“This is an investment from the dias-pora, our fellow Georgians who left the county, invested and planted olive gardens- in total 200 hectares. The new processing plant employs more than 100 people and produces organic, biologically pure olive oil and pack-aged olives. We have funded a number

of interesting projects with agricul-tural promotion programs in the region. This project is one of the most impor-tant among them and I hope that more such projects will be implemented in future,” said PM Kvirikashvili.

The total investment of the project amounts to around 5 million GEL, including the setting up of the planta-tion of 250,000 olive trees and the construction of the processing facility.

Products are intended for the local market as well as for export. The com-pany plans to eventually expand its activities and to increase production.

GEORGIA TODAY MARCH 29 - 31, 20166 BUSINESS

The Galt & Taggart Research team comprises Georgian and Azerbaijani fi nance and economic experts who have broad experience of covering the macro and corporate sectors of the two countries. Our current product offering includes Georgian and Azerbaijan macroeconomic research, Georgian sector research, and fi xed income corporate research.

For free access to Galt & Taggart Research, please visit gtresearch.ge or contact us at gt@gt.ge.

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E-mail: info@peoplescafe.ge

Georgia’s Healthcare ReformFOR GEORGIA TODAY BY DAVID NINIKELASHVILI

Sector research is one of the key directions of Galt & Tag-gart Research. We currently provide coverage of Energy, Healthcare, Tourism, Agricul-

ture, Real Estate, and Wine sectors in Georgia. Here we provide an overview of Georgia’s healthcare reform, while in the next article we will discuss the sec-tor’s current state. The full report on Georgia’s healthcare sector can be found on Galt & Taggart’s website - gt.ge

Over the last 15 years, Georgia’s health-care system has undergone effective reforms, which have improved health indicators and narrowed the gap between Georgian and European standards. How-ever, the road to the current universal healthcare (UHC) model, with an improved structure and legal framework, was long and winding.

After Georgia regained independence in 1991, private spending became the major source of healthcare fi nancing, as annual public per capita funding slumped to US$ 0.5 from US$ 149 in 1990. Following the Soviet Union’s dissolution, Georgia, like other former Soviet states, could no longer afford a Soviet-style, cradle-to-grave healthcare system. In 1994, a plan was designed to restructure the healthcare system, defi ning the legal framework and the fi nancing scheme of the sector. In addition, efforts were made to soften the reliance on the Soviet-style Semashko model. To that end, in 1995, the state declared for the fi rst time that healthcare would no longer be free of charge.

A new direction was set in 2003, aimed at liberalizing healthcare policy and boosting competitiveness through major changes, including but not limited to easing regulations and letting private companies enter the market. Medical services have been exempt from most major taxes since 1997. In 2005, the num-ber of required general healthcare licenses was cut from 302 to 42, as the number of overall business activities subject to licenses and permits was reduced by 84%. In March 2006, the Ministry of

Labor, Health, and Social Affairs of Geor-gia (MoLHSA) established guidelines for care, against which patient complaints would be examined. The old Soviet state-run centralized Semashko healthcare model, which had been gradually sof-tened, was fi nally shut down in 2007, as Georgia moved to an insurance-based healthcare model.

Under the insurance-based healthcare model, the government started to pur-chase private health insurance packages for the neediest (0.75mn people or 21.3% of the population) in 2007 and expanded coverage to Internally Displaced Persons (IDPs) and benefi ciaries of child care institutions in 2008. According to the model, public funds went to private insurers, who delivered care to eligible citizens mostly through their own, pri-vately run hospitals. This change marked a makeover of public healthcare provi-sion, as the model handed healthcare delivery over to private companies. The second stage of public insurance came in September 2012, with the expansion of state coverage to children aged 0-5, pensioners, students, and disabled indi-viduals (an additional 0.9mn people or 19.8% of the population, for a total of 1.8mn people or 41.1% of the population). After the 2nd stage of public insurance coverage expansion, the healthcare model came closer to a UHC system.

In 2007, the government also initiated the Hospital Development Master Plan, with the goal of privatizing hospital infrastructure within 3 years. The reform was designed to reduce the number of hospital beds from 14,600 in 2007 to 7,800 in 2010 (of which 1,860 beds would remain in state ownership). Due to a lack of expertise from investors, the armed con-fl ict with Russia in August 2008, and the ensuing economic recession, privatiza-tion efforts stalled and almost none of the privatized assets were duly renovated. In 2010, the government adjusted the plan and combined hospital operation and the provision of health insurance. The country (excluding Tbilisi) was divided into 26 healthcare districts. Insurance fi rms were invited to partici-pate in tenders to provide coverage to eligible citizens. The winning insurers were obligated to build or renovate and

tation started in March 2013. The intro-duction of an extended range of services began in July 2013 and was completed at the end of 2014. The UHC program diminished the role of insurance com-panies, as government funds fl owed directly to healthcare providers. Renewed hospital infrastructure, combined with the UHC, improved accessibility of care as well as patient satisfaction, with 96.4% of patients satisfi ed by UHC.

Across the globe, healthcare expendi-ture models vary, with no single model being systematically and defi nitively more cost effective. Instead, the applica-tion and management of a system deter-mine its effi ciency. Many developed, industrialized countries have established healthcare systems with UHC. Under UHC, healthcare is provided by the gov-ernment (in most cases through private-sector providers) and fi nanced by the government through tax receipts. Depending on the country-specifi c model, the government controls to a varying degree what operators can charge and defi nes cost-sharing agreements.

In Georgia, even after the introduction of the current UHC model in 2013, the delivery of care remains reliant on pri-vate operators. As a result, Georgia’s UHC model, administered by a state agency (Social Service Agency), is unique: the fi nancing side resembles a pure UHC system, with the government as the pro-gram’s major fi nancial contributor and with cost-sharing in the form of co-pay-ments (out-of-pocket) by benefi ciaries. The state now negotiates rates with and funds the largely private healthcare pro-viders directly, bypassing insurance companies. Notably, under UHC, health-care providers shifted to retail business, as benefi ciaries became free to choose medical providers.

All in all, several tides of health reforms, backed by strong political support, fos-tered a competitive environment in the healthcare sector by attracting private companies. The latter made consider-able investments in the sector, which, combined with the MoLHSA’s liberaliza-tion policy and increased government healthcare spending, create room for sustained growth in Georgia’s healthcare sector.

operate hospitals in their respective regions by the end of 2011 or 2012. In that respect, as of end-2013, up to 150 new hospitals had been built and opened for operation. The new hospital owners also invested in renovating facilities, equip-ping them with up-to-date equipment and improving human resources.

In 2013, in order to improve fi nancial

accessibility of healthcare services, the Georgian government introduced a UHC system for the entire population. The UHC reform consolidated government-funded (general coverage) healthcare programs under the UHC umbrella, including the ones administered by pri-vate insurance companies, with any citizen eligible for coverage. Implemen-

GEORGIA TODAY MARCH 29 - 31, 2016 7BUSINESS

Technical Regulations of Building Safety to Be Enforced from 2017W

ith the support of TBC Business, the most innovative and convenient payment system is now avail-

able for businesses in Georgia. Mobile Terminal is a small device which,

by using the latest technologies, makes it possible to make payments in any location with all types of plastic cards, including contactless cards.

Mobile Terminal is an innovative prod-uct based on digital technology. It is ideal for different types of business: HORECA, beauty salons, markets, shops in trade centers, taxis, courier services, car washes, trade stands and any other type of busi-ness.

The advantages of the product: • Payment is faster than via traditional

Mobile Terminal from TBC Bank

POS terminals. The payment receipt can be received by SMS or via email.

• The device is small, making it easier and more convenient to carry and install.

• The Mobile Terminal has an online reporting system. The company can cre-ate a history of transactions through a web-portal and receive sales statistics, account reports and etc.

• TBC Bank will give mobile card read-ers to companies free of charge.

In future, several new functions will be added to TBC Bank’s Mobile Termi-nal.

TBC Bank launched this innovative payment service together with its stra-tegic partner Visa International.

TBC Bank is implementing this inno-vative service together with international company GoSwiff.

BY ANA AKHALAIA

Technical regulations on building safety will come into force from January 1, 2017 and to this aim the Ministry of Economy and

Sustainable Development held a meet-ing where specifi c directions of techni-cal regulations were discussed.

Preparation of technical regulations was stipulated by the fact that today in Georgia mostly Soviet norms and rules

are used in the planning and construc-tion of buildings, which are often out-dated and do not meet modern require-ments nor provide for proper security.

The new Building Safety Rules were developed based on the International Building Code (IBC) in the frames of USAID’s Economic Prosperity Initiative (EPI), which provides international experience in building planning, con-struction and maintenance.

The Building Safety Rules aim to create minimal requirements to achieve public health, safety and general welfare through the provision of exit facilities, sanitation,

proper lighting and ventilation, life and property protection from fi re and other threats in the building, as well as ensur-ing the safety of fi refi ghters and rescuers during emergency situations.

For the regulation of building and facil-ity planning, construction and mainte-nance, the new Building Safety Rules will create the opportunity to replace Soviet-era standards and regulations, as well as other regulations within the country.

The new Building Safety Rules techni-cal regulation was approved by Govern-mental Resolution No41 of January 28, 2016.

GEORGIA TODAY MARCH 29 - 31, 20168 BUSINESS

BY ANA AKHALAIA

The World Bank's Board of Execut ive Directors approved a loan of USD 40 million from the Interna-tional Bank for Reconstruc-

tion and Development for Georgia’s National Innovation Ecosystem (GENIE) Project.

The Ministry of Economy and Sustain-able Development’s Innovation and Technology Agency is in charge of a project aimed at creating enterprises based on a digital economy, as well as innovation and technology in the agri-cultural sphere.

The project aims to promote invest-ments in community centers by increas-

World Bank to Give USD 40 Mil to National Innovation Ecosystem Project

ing access to fi nancing and the internet, and by offering more innovative skills to household agricultural enterprises and small businesses.

“GENIE is the World Bank’s new phase of support for the Georgian Government, during which inclusive growth will be promoted by developing innovation and a knowledge-based economy. The invest-ment will be carried out through various activities to increase access to innova-tion potential, human capital, and fund-ing,” said Mercy Tembon, World Bank Regional Director for the South Cauca-sus.

The project is part of a partnership between the World Bank and Georgia and is in line with the ultimate goal of creating mutual cooperation and improved competitiveness in the private sector.

Nikora Trade LLC, JSC Nikora’s wholly-owned subsidiary, successfully completed its fi rst ever bond offering on March

18, 2016.Galt & Taggart served as the placement

agent for the US$5 million, two-year issu-ance. The bond was issued at par with a coupon rate of 11%, payable semiannually.

JSC Nikora acts as a guarantor for the issued bonds, which are intended to be listed on and admitted to the trading system of the Georgian Stock Exchange in the near future. Details of Nikora

Galt & Taggart Announces Successful Issuance of Nikora Trade Debut Bonds

Trade's announcement can be found at the following link: www.nikora.ge.

"We are delighted to have successfully completed the issuance of our debut bonds, one of our largest projects to date. The issuance was met with considerable investor interest. This transaction rep-resents part of our refi nancing of the Nugeshi LLC acquisition and enables us to enhance our fi nancial fl exibility by diversifying our funding sources. We intend to further strengthen our position on the Georgian grocery retail market, where we currently hold a 26% share by revenues,” Irakli Bokolishvili, CEO of

JSC Nikora said.“I am pleased to highlight the role of

Galt & Taggart in the successful issuance of Nikora Trade’s bonds. This is the fi rst public placement of a retail sector fi xed-income instrument on the market and the investor community revealed a great deal of interest. I would like to congrat-ulate the entire Galt & Taggart team, which has become the leading provider of investment banking services in the country to private and public companies as well as international fi nancial institu-tions,” Archil Gachechiladze, Chairman of Galt & Taggart said.

GEORGIA TODAY MARCH 29 - 31, 2016 9BUSINESS

Georgian Delta to Increase Export to USD 300 MillionBY ANA AKHALAIA

Georgian Military Scientifi c-Technical Center (STC) Delta plans to increase export to 300 million GEL by the end of the year. According to the Head of STC Delta, Ucha Dzodzuashvili, sales

departments of international relations are working intensively to this end.

In addition to the agreements that have already been signed and export shipments carried out, STC Delta’s products are transported abroad twice a month. Many countries from Asia, Africa and Europe, specifi cally the Baltic countries, have expressed interest in the various technology that STC Delta offers.

Agreements have already been signed on delivery of several different types of vehicles and systems used for both evacuations and military actions.

“We are planning to present a new type of weapon and an integrated combat system on May 26th (Georgian Independence Day),” said Dzodzuash-vili. “Interestingly, market needs are changing in terms of different types of systems and we are adapting accordingly. One of the major achieve-ments of Delta is that we are able to respond quickly to the needs of a changing market.”

STC Delta is in the process of selling anti-hail rocket systems to Moldova. As Dzodzuashvili stated, anti-hail system is a fourth category innovation created by STC Delta and today there is no ana-logue in the world. Five countries are interested in the product, but the head of the company has yet to give more detail.

“Our plan is to ensure the fulfi lment of the back-log of contracts. Others are being signed now, too, and our goal is to increase our export to 200-300 million GEL by the end of the year,” Dzodzuashvili announced. “This is a rapidly developing business, which needs our special attention.”

STC Delta is engaged in the Defense Industry and provides technical support for the Georgian Armed Forces concerning ammunition, military vehicles, specialized buildings and fortifi cations, implementation/application of new weapons sys-tems and their subsequent support, and humani-tarian demining and demilitarization works.

The main mission of STC Delta originated from the state interest of Georgia and their national defensive strategy. The main task of the Center is facilitation of the development of the national military industry, design-implementation in the production of up-to-date and innovative military technology, design, creation and serial production of combat equipment and armament that meets the requirements of world trends.

BY ANA AKHALAIA

Real year-on-year growth in Georgia’s GDP amounted to 2.9 per cent in the last quarter of 2015, according to pre-liminary data published by the National Statistics Offi ce of Georgia (Geostat).

According to statistics, nominal GDP totalled GEL 8.785 billion.

The largest shares of GDP – by activity – include trade services at 16.9 per cent and industry at 16.2 per cent.

Preliminary Data Shows 2.9% Real Economic Growth in Q4 of 2015

These were followed by public administra-tion at 11.6 per cent; transportation and commu-

nication services with 9.2 per cent; construction, 8.5 percent; agriculture; hunting and forestry, fi shing at 7.9 per cent, real estate, rent and business activities, 7.0 per cent and health and social work, 5.5 per cent.

Real growth was registered in mining and quar-rying, 23.5 per cent; construction, 12.2 per cent; social and personal service activities, 8.9 per cent; hospitality, 8.8 per cent; real estate, 8.5 per cent; fi nancial intermediation, 8.4 per cent and commu-nications, 7.4 per cent).

Newly adjusted data will be published on 15 November.

The anti-hail system is a fourth category innovation created by STC Delta and today there is no analogue in the world

GEORGIA TODAY MARCH 29 - 31, 201610 BUSINESS

BY ANNA KALANDADZE FOR VOICE OF AMERICA GEORGIAN SERVICE

American experts discussed the implications of the Turkish-Russian confl ict and its impact on the South Caucasus. An esteemed

panel of scholars tried to connect the historical frames of the Ankara-Moscow relations, while also examining the forces at play in the Syrian crisis and looking at what the individual players were doing to mitigate the bilateral confrontation and to avert its escalation. They also discussed the role the US should be pur-suing in all this. Journalist for Voice of America Georgian Service, Anna Kalan-dadze, followed the discussion at the Johns Hopkins University in Washington and, for the more in-depth effects on Georgia, asked a number of the scholars for specifi c analysis.

Kurt Volker, former US Ambassador to NATO, addressing the audience from the podium, reviewed the his-torical trends:

“Russia wants to maintain its military bases in Syria, with this it tries to keep its ties with the Assad regime and the

Where is Georgia in the Turkey-Russia Crisis?

government in Iran, aiming to keep Rus-sia out of the Middle-East developments and highlight its own relevance. Presi-dent Putin also seeks to boost his popu-larity inside Russia, while showcasing his military might outside of Russia. So far Putin has had very clear goals in Syria and has pursued them very effectively. Turkey’s interests are also clear and are often contradictory to Russia. We see an excalation and an expansion of a con-fl ict between Turkey and Russia from a geopolitical, geographical, even human-itarian standpoint. However, Washing-ton should recognise that is has more similar interests with Turkey than with Moscow and do everything it can to keep Assad out of power.”

Frederick Starr, Professor at the Johns Hopkins University sees a unique opportunity for the US:

“This is a rare opportunity for the US in which it needn’t take sides but can stand up for all three, for the Caucasus, and where they can all agree. There are plenty of people in Armenia who are concerned about the loss of sovereignty, plenty of people in Georgia who are worried about the loss of territory, and people in Azerbaijan who are worried

about the loss of important space that they have created for themselves in the world. All of this is in danger now.”

Experts, in conversation with VOA, also conceded that Georgia was in an especially weak position now that the US President is in his last Presidential term and the US public is more focused on domestic issues, namely the US elec-

tions, rather than foreign developments. Some experts predict Russia may do more to directly target its neighbors, as it did in August 2008.

Frederick Starr: “Georgia is in an espe-cialy complex situation. I remember August 2008, three months before the end of the US President’s last term. It’s the same situation now, US and Brussels are more concentrated on their domes-tic affairs than on the international situ-ation. Because of the Presidential elec-tion campaign, Washington does not follow its foreign policy well. As such, I feel Georgia is an easy target for Rus-sia.”

Svante Cornell, Director, Central Asia-Caucasus Institute, Johns Hop-kins University:

“The danger now is that this confl ict (between Russia and Turkey-AK) adds enormous volatility to an entire region which does not need any more volatil-ity: where there was a stable geopoliti-cal situation in the Caucasus, it’s no longer the case. We see drastic and rapid changes in the activities of foreign powers. Right now, the main impact will be on Armenia-Azerbaijan as their confl ict directly relates to the Turkish-Russian confrontation; we see Russia’s activities in Armenia and it is not excluded that the Russia-Turkey confl ict

may be manifested in the Nagorno-Karabakh situation. For Georgia, it is more of a general concern, and a broader issue so far, where Georgia continues on a Westward path, although more quietly, and also on the East-West trans-

portation corridor. But it is quite pos-sible for Russia to start creating prob-lems for this corridor. Georgia is a very vulnerable country now, it has not con-tinued to counter Russian subversion and infi ltration there, which is happen-ing quiet freely now, and the Georgian government thinks that the cost of countering Russian propaganda is higher than the benefi t. At some point I think they have to recalculate this.”

For the full article in Georgian, go to: http://www.amerikiskhma.com/a/turkey-russia-georgia/3257017.html

Kurt Volker, former US Ambassador to NATO

Frederick Starr, Professor at the Johns Hopkins University

Svante Cornell, Director, Central Asia-Caucasus Institute

GEORGIA TODAY MARCH 29 - 31, 2016 11BUSINESS

Dechert Georgia, through the contribution of part-ners Archil Giorgadze and Nicola Mariani, joined by senior associ-

ates Ruslan Akhalaia and Irakli Sokolovski, as well as Ana Kostava and Ana Kochiashvili, is partnering with Georgia Today on a regular section of the paper which will provide updated information regarding signifi cant legal changes and developments in Georgia. In particular, we will highlight signifi -cant issues which may impact busi-nesses operating in Georgia.

Dechert’s Tbilisi offi ce combines local service and full corporate, tax and fi nance support with the global knowledge that comes with being part of a worldwide legal practice.

Dechert Georgia is the Tbilisi branch of Dechert LLP, a global specialist law fi rm that focuses on core transactional and litigation practices, providing world-class services to major corporations, fi nancial institutions and private funds worldwide. With more than 900 Lawyers in our global practice groups working in 27 offi ces across Europe, the CIS, Asia, the Middle East and the United States, Dechert has the resources to deliver seamless, high quality legal services to clients worldwide. For more informa-tion, please visit www.dechert.com or contact Nicola Mariani at nicola.mari-ani@dechert.com.

INTRODUCTIONOn 1 June 2014 the Government of Geor-gia launched a state-sponsored program called “Produce in Georgia” (the “PG”). PG is supervised by the Ministry of Economy and Sustainable Development of Georgia (the “MoESD”). The program aims to facilitate competitive local pro-duction of goods and services by encour-aging production in Georgia while guar-anteeing high standards of quality. Since its commencement, PG has enhanced Georgia’s industrial and agricultural sec-tors by providing fi nancial and technical support to entrepreneurs.

On 1 March 2016, Prime Minister of Georgia Giorgi Kvirikashvili introduced changes to PG (the “New Elements”) that include a new component to facili-tate the development of Georgia’s hotel industry. The goal of this component is to support PG’s benefi ciaries in starting their own businesses, attracting tourists to the country, creating new employment in the hotel industry and bringing invest-ment to Georgia’s underdeveloped regions.

This edition of OnPoint provides an overview of PG’s New Elements while placing special emphasis on the hotel industry.

HOTEL INDUSTRYUnder PG, any building with respective infrastructure having at least ten guest rooms is qualifi ed as a hotel. Entrepre-neurs are free to establish or expand a

hotel as well as to enter into franchising agreements to use international brand names. An international brand is defi ned as a trademark of a foreign company having at least fi fteen hotels outside of Georgia.

The operation of hotels with or with-out an international brand name and located on the territory of Georgia (excluding Tbilisi and Batumi) is subject to fi nancial support under PG.

FINANCIAL SUPPORT FOR HOTELS WITHOUT AN INTERNATIONAL BRAND NAMEIn order to receive assistance from PG, the investor (the “Benefi ciary”) should fi rst apply to the Agency of Entrepre-neurial Development, which operates under the auspices of the MoESD. The Benefi ciary may benefi t from PG’s co-fi nancing of loans that it has obtained from Georgia’s commercial banking sec-tor. The Program provides fi nancial sup-port in the way of: (i) co-fi nancing the interest accrued on the loan; or (ii) back-ing the loan by granting a security.

Those Benefi ciaries who receive a pro-ject loan from commercial banks in Geor-gia, in an amount between a minimum of GEL 500,000 (or equivalent in USD/EUR) and a maximum of GEL 1,000,000 (or equivalent in USD/EUR), are eligible to apply for PG assistance. The annual inter-est rate on loans denominated in GEL shall not exceed 17%, while loans denom-inated in USD shall not accrue more than 11% per annum. The precise interest rate depends both on the amount and cur-rency of the loan granted.

PG co-fi nances the interest accrued on such loans in the following manner: (i) 10% per annum for loans issued in GEL (e.g., if a loan is established at 10% per annum, PG will assume 8% per annum and the Benefi ciary the remaining 2%); or (ii) 8% per annum in cases of USD/EUR denominated loans. The fi nancing period may not exceed 24 months. The Program also offers a security for the

loan in an amount not exceeding 50% of the principal amount of the loan. In any case, the amount of the security shall not exceed GEL 500,000 (or 200,000 EUR/USD) and the term of the co-fi nancing shall be 48 months.

FINANCIAL SUPPORT FOR HOTELS WITH AN INTERNATIONAL BRAND NAMEBenefi ciaries who enter into franchising or management agreements with inter-national brand names can access similar fi nancial support arrangements to those explained above, with the following modifi cations: (i) they are eligible to obtain a loan in the maximum amount of GEL 5,000,000 (or the equivalent in USD/EUR); and (ii) they are entitled to request the granting of a security of which the amount shall not exceed GEL 2,500,000 (or 1,000,000 EUR/USD).

Under PG, the Benefi ciaries are enti-tled to receive fi nancial support for the royalty fees incurred by using an inter-national brand name. Such co-fi nancing is provided for a period of 24 months and the annual amount of such support is limited to GEL 300,000.

CURRENCY AND AMOUNT OF FINANCIAL SUPPORTThe New Elements of the PG also con-cern currencies used and the limits of fi nancial support. Following introduction of the New Elements, the Benefi ciaries are entitled to receive loans not only in GEL and USD, but also in EUR. Addi-tionally, in order to satisfy the needs of smaller entrepreneurs, PG lowered the minimum amount of loans acquired by the Benefi ciaries for the development of each and every industry (with the exceptions of the hotel and movie indus-tries) from GEL 150,000 to GEL 75,000. As the Prime Minister declared, the

GEORGIA TODAY

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Dechert OnPoint: The New Elements of Produce in Georgia

purpose of the New Elements is to pro-vide support to smaller-scale industries and help meet the needs of every sector of the Georgian economy.

TECHNICAL ASSISTANCEIn addition to fi nancial assistance, the Benefi ciaries also have the opportunity to benefi t from technical assistance in the fi elds of marketing, business plan-ning and product sales. The New Ele-ments also include a detailed interpreta-tion of technical assistance provided under the PG. Specifi cally, technical assistance means compensation for any and all costs related to the following services provided on the territory of Georgia: (i) informational and consulta-tion services (excluding installation of fi xed assets or/and instruction services with regard to other assets); (ii) training and consultation for management, increase of productivity and production volume, operation optimization, sales and marketing, research and develop-ment, fi nancial accounting and legal matters related to the company/produc-tion; (iii) implementation of quality management and contemporary stand-ards in production processes; (iv) prep-aration and execution of a technical assistance plan; (v) implementation of leading international and local environ-mental protection standards in the pro-duction process.

CONCLUSIONIn sum, Produce in Georgia offers Ben-efi ciaries access to a variety of tools to facilitate the production of goods and services in Georgia. The new hotel indus-try component of PG aims to support regional development, while other aspects of the program’s New Elements are designed to support the needs of smaller-scale businesses and sectors.