Passing through Georgia

By bne IntelliNews October 21, 2013

Molly Corso in Tbilisi -

As the recovery in emerging market trade continues, plans for a new port and investments by Georgia's recently launched $6bn Co-Investment Fund could help the country realise its potential as a regional transit hub.

A small country straddling European, Asian and Middle Eastern trade routes, Georgia has been pushing for a place in the international transit sector as China and Central Asian countries revive the ancient Silk Road for trade. Vakhtang Marsagishvili, a transport and logistics specialist with the US government's Economic Prosperity Initiative in Georgia, says that government support and investment are key to improving Georgia's competitiveness and capacity as a transit hub.

A good sign, he notes, is that Prime Minister Bidzina Ivanishvili's Co-Investment Fund - a private equity fund launched on September 30 with major backing from the Middle East, China, Kazakhstan, Turkey and Azerbaijan - has listed the trade and transit sector as a priority for investment. "What is important is that transportation and logistics is still a main priority for the government and recently the Co-Investment Fund was established in Georgia... one of the key directions is logistics, what is really important for this country," Marsagishvili says. "This means that the government realises that logistics is the key to success, economic development for the country. Also it is vitally important to spend money and invest in this sphere."

The fund's management has already revealed plans to build a new port in Anaklia, a Black Sea village near the Abkhaz conflict zone, which would be the deepest port in the country. The Anaklia port project was initially floated as part of Georgian President Mikheil Saakashvili's Lasika development. Reviving the transit sector was a priority for the Saakashvili administration following the 2003 Rose Revolution, and it began by reforming the country's corrupt customs, dilapidated railways and crumbling road infrastructure.

The previous government's efforts paid off: Georgia has consistently improved in the World Bank's "Doing Business" annual survey, and is currently ranked the 4th easiest economy for transit in the Eastern Europe-Central Asia region, above Russia and Turkey, its main competitors among regional trade routes, which are in 19th and 8th place, respectively.

New investment

While the reforms underscored Georgia's potential as a transit hub, high costs and out-dated logistics terminals have hurt the country's competitiveness and hampered the ability of Georgia to exploit its strategic location, according to a 2012 report published by Deloitte Consulting as part of the USAID Economic Prosperity Initiative in Georgia.

Observers say a new €10.5m logistics centre built by Austrian Gebrüder Weiss and Georgian Tegeta Motors is a good first step from the private sector to rectify this. Alexander Kharlamov, the centre's general manager, says it's the first warehouse and modern logistics centre of its kind post-Soviet space. And Chaim H. Huijsman, head of corporate sales at Gebrüder Weiss, says the investment is part of the group's eastward expansion. "From a strategic point of view, our growth is eastwards," he says. "One still fantasizes about the Silk Road... For the past few years we have a team working on this area of the world."

The thinking is that the transit route through Georgia offers a good alternative to the northern route through Russia, because it is less corrupt and quicker. But despite the relatively short transit distance from the Black Sea to Central Asia, high costs along the route have hurt the country's competitiveness as a regional transit hub.

The Economic Prosperity Initiative's Marsagishvili points out a cargo that originates in Central Asia needs to pass through Central Asian countries like Uzbekistan, Turkmenistan, then across the Caspian Sea, then though Azerbaijan before it reaches Georgia. "When we are talking about transit routes, the transit route is not only Georgia," says Marsagishvili. "We have several players and all of them have their costs and issues."

And these costs through Azerbaijan and further east, especially over the Caspian Sea, undermine the attractiveness of the route. According to the World Bank's "Doing Business" survey, it takes nearly four-times as long - and costs twice as much - to export a container from Azerbaijan as it does from Georgia.

Intergovernmental initiatives between Turkey, Georgia, Azerbaijan and the Central Asian countries could help ease some of the issues that are slowing the transit cargo. The Baku-Tbilisi-Kars (BTK) railway, for example, a seven-year project to create a unified rail line from Turkey to the Caspian Sea, has been promoted as an important link to increase capacity and speed for transiting cargo. Once opened in 2014, the new railway could move up to 30m tonnes of cargo through the region every year.

Observers are optimistic about the future, especially given the recovery in trade in the region and beyond. Emerging market export growth accelerated to 4.7% on year in value terms in August, following a 3.7% expansion in July, with the recovery in shipments from Emerging Europe, and the Middle East and Africa, which started in the first half of the year, gathering pace.

As evidence of this optimism, Kharlamov says Gebrüder Weiss might consider expanding its 10,000-square-metre logistics centre. "There are no such warehouses in the former Soviet Union and when the economy grows, and business is growing, that is the first step for a business - to have such an A-class warehouse in the country," he says.

"There are difficulties. But somehow we handle this," he adds.

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