Samantha Shields in Tbilisi -

Having seen his predecessor unceremoniously sacked for failing to attract investors, Georgia's new economic development minister says he hopes to lure foreign capital from previously untapped sources and restart the country's stalled privatization programme.

Georgia, once an emerging market star with 2007 GDP growth of 12.4% and foreign direct investment (FDI) of $2bn, was cushioned from the worst effects of the world financial crisis by $4.5bn in donor money pledged after August 2008's disastrous war with Russia. But a year later and the conflict the crisis has finally started to bite: the government said in mid-September that FDI plunged 80% year on year to $226m in the first half of 2009, and that the economy could shrink by as much as much as 4% this year. "My concrete deal is to sell as much as we can through privatisation and to attract investors back," Zurab Pololikashvili, a 32-year-old former banker who was recalled from his post as Georgia's ambassador to Spain to take charge of the ministry at the end of August, tells bne.

However, Pololikashvili admits that this year's FDI target of just over $1bn is going to be "very hard" to reach.

Prime Minister Nika Gilauri, who plays the key role in setting Georgia's economic policy, is still predicting a return to growth of around 2% next year. He fired the previous economic development minister, Lasha Zhvania, after he'd been in the job for just eight months. Next year's predicted growth will have to be largely fuelled by investment, because Georgia has few natural resources and has to rely on its strategic location as an energy corridor between Turkey, Azerbaijan and Russia, and the favourable customs and tax regulations introduced by Mikheil Saakashvili, its hot-headed young president who swept to power in 2003's "Rose Revolution."

The biggest foreign investors in Georgia now are the United Arab Emirates, accounting for more than half the total in the first six months of the year, the UK and neighbouring Turkey. They're mostly investing in real estate and construction. Pololikashvili says he hopes to be able to widen the net to include Spain, Germany, France, India, Korea and Japan, and to concentrate on agriculture, tourism and energy, especially hydroelectric power.

Tapping tourism

Georgia is agriculturally rich and fertile, yet still has to import the majority of its food, he said, because it lacks the storage and transportation facilities to be self-sufficient. It has a picturesque Black Sea coastline and soaring Caucasian mountain peaks, but its creaking Soviet-era resort infrastructure does nothing to attract the kind of tourists who spend a lot of money. Its fast flowing rivers could allow it to produce and export hydropower. "People are interested. We have a delegation of about 20 Spanish hotel, energy and food companies coming in October, we recently held a German investment exhibition and some French companies are also coming soon," says Pololikashvili, adding that he's planning to draft in western consultants to help his campaign.

A scheme to develop three free industrial zones in the west of the country where companies are exempt from taxes and customs duties is gathering pace, he says. Egyptian white goods manufacturer Fresh Electronics said in April it would invest over $1bn in one of the zones in the city of Kutaisi and China's Fang Li and Industrial last month signed a memorandum of understanding to invest $100m in the second zone in the city. The third free industrial zone will be in the port city of Poti.

The war put Georgia's privatisation process on hold and Pololikashvili says he'll announce new sales in the next two months. The government has already privatised its utilities and wants to revive remaining loss-making state-controlled businesses, including Georgian Post and Railway Telecom, a fixed-line and internet provider that could give a potential investor the opportunity to lay fibre-optic cables alongside the railway lines that cross Georgia from east to west.

Georgia has received 20-25% of the donor money pledged last September and is hoping the drip-feeding of the rest over the next two or three years will shore up the economy enough to convince investors the government is using it properly. The lion's share of the first tranche filled a gap in the budget by paying state pensions and salaries. Before the crisis hit, the government hadn't run up debts that made its currency vulnerable and none of its banks collapsed.

Pololikashvili partly blames opposition protesters, who were camped out in makeshift jail cells in central Tbilisi from April to July trying to force Saakashvili to resign, for scaring away investors, and believes the internal political situation has stabilised since then. The opposition charge the president has concentrated too much power in his own hands, clamped down on media freedom and that he recklessly dragged tiny Georgia into a war with Russia it had no chance of winning. They left the streets when US Vice President Joe Biden visited Tbilisi in late July, but have threatened to restart their campaign this autumn. "If we Georgians want to live in a thriving country, we can't close down the capital's main avenue with protests for months - people have to understand that," Pololikashvili argues.

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