Document Type: Briefs

The PRADD II project returned to the Central African Republic in January 2016 thanks to support from USAID Bureau for Democracy, Conflict and Humanitarian Assistance (DCHA) intended to contribute to the return of peace and stability in diamond mining communities– the foundation of the war-torn national economy and the source of employment for thousands of diamond miners. During terrible civil strife from 2012-2014, rebel forces took over many diamond mining sites and used proceeds from illegal diamond export to finance purchases of arms and ammunition. For many years, no one visited diamond mining areas to assess the impact of the war, but with the return of the PRADD II project, the project carried out a month long diagnostic of how the diamond economy has evolved over the years and identified ways to return diamond mining areas to the peace and security once known.

Let’s listen to the tales of these key actors– people who suffered greatly, yet in some cases, perversely gained from the effects of war, but who are all looking forward to returning to the legitimate export of diamonds under the Kimberley Process Certification Scheme. These vignettes recounted to the PRADD II research team provide a glimpse into the complexities of bringing the country back to greater peace and security. Diamond for peace is the project mantra:

“My name is Ali Babolo. I’ve been working in diamond section for the past twenty years. I’m a Muslim diamond mining collector living as a refugee at the Catholic Church compound with my family. I so much want to return home, but my wish as well is to meet the new government officials after these recent elections to explain to them our suffering. I’d like to tell them this. There is not enough security in the diamond mining areas to guarantee my welfare. I’ve lived for two years here at the Catholic Church next to my Muslim brothers. I’ve lost a lot of equipment during this crisis — water pumps, bulldozers, my home in Yawa, and all my personal effects. Peace and security must return to diamond mining areas. But, I want to say this. There are no longer good relations between diamond collectors and the diamond houses like in the past (licensed diamond exporters). Well before the recent crisis, the diamond houses directly financed mining. Before, more than 800 collectors were financed by the diamond houses. Today, the number is much less as many are bankrupt and in debt.

Diamond mining activities have dropped off so much since the military and political crisis affecting the entire southwest. Circuits of fraud channel diamonds to Cameroon and Congo. The government needs to tighten things up because right now diamond mining and exports are opened up to anyone. There is too much smuggling and corruption in the mining area of Carnot. It’s up to the State and its partners to reinforce social cohesion and the legitimate relations between diamond diggers, us the diamond collectors, and the diamond export houses.”

For a different perspective, let’s listen to the stories of young diamond collectors, often the non-Muslim faith. These young people filled the gap left by Muslim diamond traders forced to flee during the war to safe havens, either in church yards or displaced peoples settlement camps in Cameroon:

“We are young diamond collectors between 27 to 36 years of age. We each have several wives and between 2-8 children to take care of. We buy and sell diamonds, but we also invest in stores selling motorcycles and car parts, build modern houses, and own motorcycle taxi services. We finance directly teams of diamond miners. We bought the new diamond collector license for 680,000 CFA (about $1,100).

We started our professional lives as simple owners of diamond mining claims and we hired workers. We benefited from the financial support of Muslim collectors and we learned much from the financial support of Muslim collectors and we learned much from them on how to organize diamond digging and buying and selling diamonds. We have attained our current status around 2015 after the war. Today, we carry out diamond trading once occupied by Muslim collectors. We are proud of our successes. We hope that the Central African Republican will return to peace and security because our livelihoods depend on this. We would like assistance from government to learn more about how to manage our finances. We would look forward to organizing ourselves better as diamond collectors.”

The PRADD II team in the Central African Republic builds strong trust with actors throughout the diamond mining sector. Through the recent one month long field diagnostic, the PRADD team met many people like those interviewed for this story. Passionate and insightful suggestions are often spelled out about how government, civil society and donor organization can contribute to rebuilding the synergistic relations that long existed in the diamond economy categories. But, times have changed. Dynamic youth have now filled the space left by the elder Muslim diamond traders. Returning the past may not work in a society fractured by the effects of the war.

Artisanal diamond mining in Guinea often occurs in areas critical for agriculture: along floodplains, valleys, swamps, and river flats. Miners in Guinea have historically extracted diamonds by pitting, a technique which is extremely harmful to the environment. After the pitting method is employed, the land is no longer productive, resulting in a loss of crops for food and sale. PRADD II introduced SMARTER Mining (Sustainable Mining by Artisanal Miners) to Guinea, building on experience in Liberia and the Central African Republican. SMARTER mining is a technique which provides for a far better and safer way to mine.

The traditional method of pitting involves digging with shovels, axes, machetes, sieves and hand jigs down to the gravel layers, located at depths of up to six meters. The removed material is then washed to search for diamonds, leaving behind sterile gravel which remains in unproductive heaps around the pits many years after activities cease. Although land restoration is required by law, the pitting technique does not include restoration of mining sites. Furthermore, the pitting process washes away fertile top soil, and neither government officials nor customary landowners had been able to bring the land back to productivity. In addition to the unproductive gravel heaps left behind, the pitting process leaves large pits which are an environmental health hazard. These pits are breeding sites for mosquitoes and lead to the spread of other diseases, threatening both humans and livestock. Finally, miners who employ this traditional method of pitting can only access about 65% of the gravel in a pit compared to 90% with SMARTER mining.

SMARTER mining is a bench terracing technique that simultaneously digs and refills the pit. First, the miner removes and sets the rich topsoil. Then, a series of 2-3 meter trenches are dug, first removing the overburden (the layer below the top soil and above the gravel) and finally the gravel itself. As a new trench is dug, the previous trench is filled with the overburden from the current trench. In some cases, washed gravel is mixed with the overburden to ensure that the trench is sufficiently refilled. Once the entire site has been dug in this manner, the topsoil is carefully replaced, restoring the site for productive use and farming can resume almost immediately. Furthermore, in areas where the method has been used, native plant species recolonize very quickly and since the pits are refilled, the environmental health hazard is reduced and there are no piles of sterile material.

Alongside the environmental and public health benefits, SMARTER mining is advantageous for miners to increase both their safety and diamond yield. In contrast to pitting, SMARTER mining allows miners to access and wash about 90% of the gravel. Furthermore, the process is less labor intensive and it improves the structural integrity of the pit, increasing the pit stability and reducing the risk of collapse.

Recently, the PRADD team carried out training and field demonstrations of SMARTER mining in the villages of Gberedabon and Bouramaya. In Bouramaya, fifteen men dug to a depth of 4.5 meters, extracted the diamondiferous gravel, and refilled the site in a single day. In the past, it would have taken the team 7 days using traditional pitting techniques. The owner of the mining claim expressed surprise, for this rapid rate of extraction significantly lessens the costs of mining.Through a training of trainers approach in the nearby village of Gberadabon, 35 miners trained in this bench terracing will likely disseminate the technique even further in the Forécariah District and elsewhere in Guinea.

To support the government of Guinea (GOG) to increase the volume of diamonds entering into the formal chain of custody, the Property Rights and Artisanal Diamond Development Project (PRADD) II, in collaboration with the Kimberley Permanent Secretariat of Guinea, launched a series of training sessions on the Kimberley Process and its Certification Systems (KPCS). The first two sessions of this series were held on December 15—16, 2014 in Conakry for sixty (60) participants, including brokers, collectors, and diamond dealers and other influential members from the two unions working on diamonds and gold in Guinea (Union nationale des diamantaires et orpailleurs—UNADOR and Confédération nationale des diamantaires et orpailleurs de Guinée—CONADOG).Two modules were developed: 1) General Concepts of the KP and 2) The Internal Control System of the KP in Guinea. Each module was developed and presented in detailed themes (twelve themes in total) in French, followed by translations in local dialects (Mandingo, Soussou and Fulani). To help spread the word about the training sessions, leaders of the two unions invited the public and private media for coverage and covered all of their costs.

In response to an introductory question on whether anyone had previously heard of the KP, participants responded, “Yes,” but Ibrahima Kalil Diakité of UNADOR hurried to say, “We have heard of the Kimberley Process before but we have never received any training on the KP. That is the reason why some people confuse the Kimberley Process with Kimberlite”. Another participant followed up, “Do not confuse the Kimberley Process and Kimberlite, which is a rock. We are here to learn about the Kimberley Process.” To further highlight the lack of information about the KP and of communication with the Government and the actors, Seny Kaba of UNADOR added, “The state is not looking after us. There is no communication between the state and the socio-professional structures. This creates disorder in the ASM sector. That is the reason why everyone acts based on his/her own understanding of the rules and regulations, which is not normal”. Youssouf Diaby added, “We have the impression that the state is totally absent in the ASM sector. That is why the government does not make any effort. Fortunately for us the PRADD project has arrived. We hope that the project will facilitate establishing the link between us and the government”.

Along these lines, the expectations from the participants were diverse, including: better understanding of all of the aspects and principles of the KP and its certification system; clear understanding of the difference between the KP and Kimberlite; improved information and communication mechanisms with the Government; and broad technical and material support to the sector by the project.

At the end of the training sessions, participants were not shy in expressing their enthusiasm. Cheick Bandian Kourouma of UNADOR noted that “The project has taught us what the KP is about and what its importance is. We will be very proud to pass this knowledge to our other colleagues who did not attend this session.” Fodé Traoré of CONADOG said, “This is the best training session because understanding what the KP is about and respecting it are a warranty for our profession and for all of the artisanal miners.” Madame Salimatou Sall of UNADOR also added that “The lack of communication, information and training has impacted our understanding of the KP. From today, we will be able to comply with the rules of the KP, but we request support from the PRADD II project on this matter.”

Following the report about the training sessions broadcast on public and private TV stations, the Vice President of CONADOG called the Country Director to express his enthusiasm and great satisfaction for providing such training to his colleagues and associates. He noted that similar training sessions will greatly improve the collaboration between different actors of the diamond sector and enhance the information and communications between the actors of the sector and the government of Guinea. Not long after this phone call, the Head of the Precious Minerals Division at the Customs called the KP Focal Point to express his interest in participating in similar training sessions, which was already planned by the project anyway.

These first two training sessions underlined the importance of communication and information exchange between various actors involved in the artisanal mining sector. They also highlighted the need to review and strengthen the policy and institutional framework governing the ASM sector.

In the coming months, PRADD II is planning to review and readjust the training modules based on lessons learned from the first two sessions and to deliver trainings to various actors at the national and local levels, both in Conakry and the countryside.

This paper provides a summary of findings and policy recommendation based on a series of eight case studies that document foreign direct investment in Georgia’s agriculture and food processing sectors. The investors are in a variety of industries, including grape and wine production, hazelnuts, poultry, cereals and medicinal herbs, pickled fruit and vegetables, and apple concentrate and aroma. Each study includes a detailed discussion of factors concerned with the general policy and business environment, such as protection of property rights, taxation, access to finance, land, labor and other production factors, the range and quality of suppliers and service provider networks, and quality of infrastructure. The analysis focuses on the strategies investors employed, and the effectiveness of those strategies, in dealing with shortcomings in the business enabling environment and other challenges they faced investing in Georgia.

The studies also look at the positive impact of these investments on the Georgian economy, examining qualitative benefits like job creation, workforce development, and the introduction of new products or processes (including technology spillovers) that might positively affect suppliers, competing agribusinesses, and smallholder farmers. The studies also look at how these investments affect the range and quality of products available to Georgian consumers, including substitution of imports. Addressed to both government and investors, the recommendations drawn from the case studies and summarized in this report are focused on addressing deficiencies in the business enabling environment and, for investors, strategies to overcome these deficiencies.

Given the significant positive contribution that foreign-capitalized and -managed agribusinesses make to Georgia’s economic development, current and proposed policies that damage the business investment climate should be reviewed and amended or repealed. This includes potentially excessive bureaucratization as part of the drive to approximate EU anti-trust legislation, labor market regulations and immigration laws. It also includes the moratorium on farmland purchase by foreign-invested entities and the seemingly arbitrary enforcement of visa restrictions upon existing farmland investors from abroad. Georgia has been attractive to foreign investors because of a relatively liberal regulatory and investment environment. For domestic and foreign investors to risk their capital in Georgia’s agricultural sector, the Georgian government should continue to support (and improve) a business friendly policy and enabling environment, including protection of investors’ property rights.

The eight case studies also offer numerous lessons learned for investors. Investors should seek reliable Georgian partners to help them navigate the environment. Recognizing the cost and pitfalls of early missteps with local populations, investors should perform rigorous due diligence to avoid conflicts with the community and proactively engage in targeted CSR and extension activities. Even with constructive outreach and engagement, investors should also invest in security and theft prevention. Finally, investors should invest in their human resources, both in terms of bringing the right expertise to bear on business challenges, but also in building up the capacities and capabilities of local staff. Not only will investors discover that they can unlock a great deal of potential in Georgian employees, but foreign investors increase their positive ties to the community.

Jagpal Singh is a Canadian national, born and raised in Punjab State of India. Having taken interest in Ayurvedic medicine, Mr. Singh investigated growing medicinal herbs in Georgia, noting that much of the country’s climate was similar to Himachel Pradesh state in India. Operating in Georgia since 2009, Mr. Singh currently owns an Ayurvedic medicine store in Tbilisi and a number of businesses which seek to identify export commodities that can be grown cost-effectively in Georgia, to produce them on his own properties, and/or to contract Georgian farmers to grow them using the same technology.

In 2010, Mr. Singh registered Foodland Ltd. as his own landholding and agricultural production company in Shida Kartli, to farm licorice and other herbs. In 2012 he established Landmark Ltd. in Tsalka district, Kvemo Kartli. In the same year, encouraged by the Georgian National Investment Agency, Mr. Singh created Agricultural Investment and Development of Georgia LTD as a consulting firm servicing Indian investors in Georgian farmland.

At present, Foodland’s properties in Shida Kartli (a total of 95ha) are occupied by squatters. Landmark Ltd is currently engaging in trials of novel crops in Tsalka, and is yet to yet to turn a profit.

On the one hand, this case demonstrates the critical role of foreign investors in developing potentially lucrative production and processing of non-traditional crops such as Ayurvedic herbs. Mr. Singh’s concept of providing canola seed, lentil seed and training to farmers, and buying back the crop at harvest, is an interesting one with potential benefits for local farmers, improved national food security and enhanced exports. As Georgia’s oilseed production is negligible, with only one sunflower seed crushing plant in Kakheti and one soybean crushing plant in Poti, and no crush for canola or any other oilseed, innovative programs like those represented by Landmark Ltd in Tsalka could reduce Georgia’s reliance on imported staples like oil.

But the conflict surrounding Foodland Ltd activities has also attracted significant media attention and has done a great deal to impair investor confidence in the Georgian agricultural sector.

The lessons learned and recommendations related to this case fall into two categories: those concerning national and local government on the one hand and those concerning foreign investors on the other. We recommend that government maintain consistent and transparent long-term policies on foreign ownership of farmland and immigration, improve communications with the private sector regarding farm investment, improve co-ordination between national, regional and local governments regarding farmland privatization, establish guidelines for compensation of displaced grazers from public funds, disperse tax revenues generated in rural districts from commercial enterprises to local jurisdictions rather than remitting all taxes to national government, and to strengthen investor aftercare and supporting services.

Investors should take care to integrate Georgians into their permanent workforce, consider measured and culturally sensitive responses to conflict, to engage the local community before commencing operations, to manage the risks of theft prudently, and to fence their properties.

Habibco Agriculture Ltd and Agrowest Ltd, both established in 2012, are two Georgian agribusiness companies owned by the Habib family of Egypt. Habibco Agriculture operates a mixed dry land cereal and pulse cropping enterprise in Bolnisi, Kvemo Kartli on 692 ha, and Agrowest operates a mixed dryland cereal and pulse cropping enterprise on 1650 ha in Ulyanovka, Kakheti. The owners have a seven-decade history of trading and manufacturing in Egypt, and they plan to fully develop both properties with irrigation, establish a vertically integrated livestock operation, and develop vineyards in Ulyanovka.

Upon taking possession of their land in Ulyanovka, it quickly became apparent to the investors that relations with the neighbors were going to be a serious issue. Both parcels included substantial areas that had lain fallow for a number of years, and the neighboring villagers had long used them as common grazing land. At the same time, many Ulyanovka residents had not received their full quota of freehold land during land reform, and they were distressed at being denied free grazing access to what had previously been open to them and free.

When Agrowest arrived with farm machinery, villagers denied them access to the land, threatening violence against the machinery operators and property managers. When Agrowest sought support from the local authorities to mediate the dispute, for reasons that still remain unclear they were unsuccessful.

Nevertheless, Agrowest was in a good position to respond directly to the challenges raised by the local population. They hired a respected local operations manager who was effective in negotiating with villagers and reaching agreement on a package of benefits that would accrue to the local population. The package, which included local sourcing of contractors from the village, employment of some of the key agitators, utilization of Interior Ministry Security Police to secure property rights, and a local social welfare program, sufficiently ameliorated local concerns to allow operations to commence without further conflict. However, some of the locals still have mixed feelings about an commercial operation in their midst.

Once Habibco and Agrowest were able to begin operations, the broader benefits of the investment started to become clear. The companies have been using western technical advisors as well as a skilled Egyptian technical manager with a strong record in cereal cropping. Using modern dry land farming methods and novel crops, the companies are likely to displace a substantial quantity of imported grain. Their first harvest will already see them exporting oilseeds and pulses. The introduction of novel forage crops and raw materials for pharmaceutical manufacture are firsts for Georgia, and the companies are planning to outsource some of their production to neighboring farms. Agrowest is likely to plant around 350 ha of vineyards, which will be a substantial employer of both full-time and seasonal staff from the village, potentially making Agrowest the second largest wine grower in the country. Finally, although it will take as long as six years to come to fruition, the development of labor-intensive dairy enterprises on the properties will eventually create many more jobs for the local population.

Still there is impatience among the local population, and by their timelines the benefits they have been promised are slow to accrue. Given the regional uncertainty and comparatively high risk of doing business in rural Georgia, it is not unusual for investors to execute investment plans in stages, with clear milestones to be met along the way. Local residents who lose access to grazing land have a much higher level of urgency than the cautious investor’s pace is likely to match. Hearing government promises of economic and technical benefits from foreign agricultural investment, villagers become frustrated and impatient with the slow pace of benefits accruing to the local community.

The lessons learned and recommendations related to this case fall into two categories: those concerning national and local government and those concerning foreign investors. We recommend that government track investment pipelines, actively engage with incoming investors, and proactively manage disputes with the community to avoid collateral damage to investors. At the same, time there is an urgent need for the government to finalize the land reform process that began more than a decade ago. The process needs to enable local communities to be more financial viable and give them (and local government) a greater voice in decisions—like land privatization and investment in infrastructure—that will directly the livelihoods and well-being of their constituents

At the same time, investors need to work with a knowledgeable Georgian with ties to the local community. They should actively engage the local government while they are making investment plans, not as a reaction to inevitable concerns raised by local stakeholders. This should include communicating with the local community before commencing operations, developing a Corporate Social Responsibility (CSR) strategy to mitigate any negative impact of the investment on individuals and the community, and considering training, extension services and other capacity building measures for neighboring farmers.

This case analyzes a joint venture involving two prominent Georgian entrepreneurs and a Swedish investor to restore a unique Georgian château dating back to the second half of the 19th century. The business concept is, first, to use a mix of modern and traditional methods and leverage the 19th century story of the château to create a premium brand of Georgian wines on the international market, and, second, to develop the winery, castle and other historical assets to provide wine tourism and hospitality services, in line with the European small luxury hotel model.

The project took advantage of Georgia’s liberal business environment to acquire full ownership of the entire estate, including 160 ha of land and historical buildings. At the same time, the investment phase has taken much longer than originally envisaged. To date the company does not have full access to about a third of the land it lawfully privatized in 2009, and the project has had to deal with many of the bottlenecks that seem to characterize doing business in Georgia. These include limited access to long-term finance (particularly after the 2006 Russian trade embargo and the armed conflict in 2008), an inadequately educated workforce, low labor productivity due to an inadequate management culture and resistance to learning, a very small number and low quality of local suppliers, and very small foreign and domestic markets.

The group of Georgian investors, which had initially received Château Mukhrani in a 50-year lease in 2001, changed in the process. Frederik Paulsen, a Swedish businessman, academic, philanthropist and explorer, joined the company in 2006, buying out the shares of other partners and bringing a much needed infusion of cash. Paulsen currently owns 80 percent of Château Mukhrani shares through Marussia Beverages (which also owns Georgian Wine and Spirits Company (GWS).

The enterprise was ultimately a great success thanks to a unique constellation of factors, including long-term vision, a well-executed branding and marketing strategy, and access to significant equity funding from a foreign partner. The project also benefited from an excellent international management team, which combines knowledge of Georgian and global best practices in wine production, hospitality business, and marketing. The investment carries many benefits for the local community and Georgia’s economy as a whole.

• While its self-sufficiency in grape production—integral to the château concept—means that the Château does not buy the output of local farmers, the company brings many benefits to the local community. The main one is employment, which peaks at harvest time, and Château Mukhrani plans to expand the breadth and depth of services it already procures locally once the wine tourism and hospitality business reaches full scale.
• Château Mukhrani’s business concept provides a key reference point for the Georgian wine industry as a whole, with modern wine production coupled with the branding and marketing possibilities of Georgia’s rich history.
• Finally, the company’s prominent shareholders and senior management play a crucial role in organizing the Georgian wine industry, facilitating its dialog with the Georgian government, and promoting Georgian wines on the international scene.

This case study analyzes a unique green field investment project initiated, financed and managed by a prominent member of the Georgian-Russian diaspora. Having earned his personal wealth in the Russian chemical industry, Mr. Revaz Vashakidze chose to repatriate a part of his fortune to Georgia to invest in a modern, fully integrated poultry production plant capable of competing with the cheap imports of frozen meat products dominating the Georgian market until 2013.

Designed and built as a turnkey project by Israel’s Agrotop in 2011-2013, Chirina is a unique, vertically integrated complex that includes production of maize and wheat, drying and storage facilities, a modern feed mill, hatchery, parent stock farms, broiler farms, a meat processing plant, distribution fleet and a mobile retail network. The company’s production facilities are located in Marthopi, Gamargveba, and Sartichala (a total of 172ha of land in freehold), and in immediate proximity to the Tbilisi International Airport and nearby Customs Clearance Zone. This latter area is very well served by air, road and rail transport networks.

After only a year on the market, Chirina’s products – fresh and frozen chicken meat sold under the BiuBiu brand – already account for about a sixth of Georgia’s total consumption. With its plans to double processing capacity by the end of 2014, Chirina will become a major food industry player in Georgia. Its operations will integrate Georgian agricultural producers into its supply base, apply downward pressure on prices, and expand the range and quality of products available to Georgian consumers.

This study carries many lessons learned with implications for Georgia’s economic development. One thing Chirina’s case teaches us is that Georgia, once a powerhouse of food production for the entire USSR, should at least be able to feed itself. Modern agronomic and processing technology is readily available on the global market, and Georgia has the people and the soil and climate conditions to regain the economic territory it once controlled. To achieve this and much more, Georgia should make a serious effort to re-integrate and bring home some of its best talent who left the country during many years of emigration.

In this context, engaging the Georgian diaspora is a first recommendation to the Georgian government from this case. Second, it is abundantly clear that Rezo Vashakidze’s investment would not have happened in the business-hostile context of 1990s. Safeguarding the business-friendly policy environment that has been built in Georgia since 2003 is a necessary condition for Georgian diaspora investors to come back. For instance, a mechanism has to be created to swiftly review and react to complaints about inefficiencies in the tax administration or other bureaucratic hurdles. Finally, the government should avoid using agricultural policy as a primary means of achieving social policy objectives. Rural employment is important, but instead of trying to subsidize smallholder agriculture the Georgian government should encourage investment into large/medium size food processing businesses, which will in turn create demand for agricultural products, integrating smallholders or providing jobs for those not able to survive in agriculture.

As far as investors are concerned, Chirina’s experience provides ample evidence for the benefits of working with international production management and technology partners to design production facilities, install modern equipment, and acquire the necessary management and technological knowhow. Another recommendation is to avoid starting too small in scale-sensitive sectors. In the absence of tariff and non-tariff protection measures, investors have to invest in sufficient capacity to be able to compete with larger foreign competitors. Finally, given the underdeveloped nature of Georgia’s market and supporting environment, investors in food processing should find opportunities to for vertical integration. This means investing in agriculture and basic production capacity to ensure control and stability of raw materials. It also means investing in downstream service capacity like distribution capacity, and, if necessary, even retail channels.

Georgian Wine and Spirits (GWS) is a French-owned beverage company based in Telavi town, Kakheti region, engaged in viticulture and winemaking. Acquired in 2011 from French beverage giant Pernod Ricard by Marussia Beverages, the enterprise has recently been aggressively investing in management reform, administrative reform, technical innovation in vineyards, expansion of areas under vine, and quality management.

This study examines the existing shortcomings in the business enabling environment and how GWS has been dealing with them. A key shortcoming identified is managerial training and productivity, which the company is addressing by investing in staff training and the implementation of an Enterprise Resource Planning (ERP) system to monitor productivity parameters both physically and financially. Importantly for Georgia, many of the company’s technical innovations are imitated by suppliers and competing ventures.

Unlike some other large agribusinesses, GWS has been able to maintain constructive dialog with the local community and government. This seems to be a matter of the age of the business—the company has been operating in different guises since 1970s—and having an “inclusive” business model that integrates considerably with the local economy. GWS employing many locals, retains the services of local contractors, and outsourced grape production to smallholders. In particular, the enterprise purchases 70% of its grape requirement from small and medium-scale producers in the Alazani and Iori valleys of Kakheti, both of which are low-income regions. All told, GWS disburses almost GEL 8 million a year to the local economy in the form of wages, payments for grape and fees paid to local contractors, helping maintain a healthy symbiotic relationship.

The GWS experience carries many lessons to be learned for private investors, the first of which concerns the benefits of acquiring an existing enterprise instead of undertaking a greenfield development. In Georgia, the risks of a greenfield investment include the potential of a falling out with the local community before cooperative relationships can be developed. When considering this risk, and applying an appropriate discount to the Net Present Value of a greenfield investment, in many cases the acquisition of an existing enterprise may represent better value.

Second, continued improvements in Georgia’s access to export markets, as experienced by GWS, and the legislative requirements of Georgia’s Deep and Comprehensive Free Trade Agreement (DFTA) with the European Union, will provide an impetus for the Georgian food and beverage processing companies to expand their supply chains to keep up with demand. It will also require processors to implement internationally accepted food safety and quality assurance standards. To remain competitive, Georgian companies should:

• Seek opportunities to integrate vertically by investing in their own land and/or developing long-term contractual relationships with commercial farms, farmer organizations and smallholders. Sourcing arrangements will eventually need to include rigorous safety and traceability protocols
  as part of their contracts.
• Make better use of existing land assets by putting fallow land into production, investing in modern production and post-harvest handling technologies, and providing extension services to farmers and farmer organizations that form parts of their supply chains.
• Implement other measures to improve productivity (and competitiveness), including modern IT solutions to monitor operational and financial performance and investing in foreign management when skills deficits are obvious and cannot be addressed by local hiring.

To enable Georgian companies to maintain their competitive edge and take advantage of new export opportunities, the Georgian government is advised to:

• Repeal the ban on foreign investment in agricultural land and put in place a comprehensive set of land market regulations taking into account the needs and interests of both foreign investors and smallholder communities;
• Maintain the current “cheap loans” policy framework, possibly with the help of EU and other donors, to facilitate the implementation of (expensive) food safety and quality standards, and investment in productivity-enhancing cultivation and post-harvest treatment technologies;
• Exercise great care in the implementation of the EU-compliant regulatory framework concerning food safety and quality standards. The main concerns should be i) to provide Georgian businesses with sufficient time, knowhow and resources to make necessary adjustments, and ii) make sure that the new standards uniformly and simultaneously apply to all businesses in the each sector (to incentivize compliance and ensure fairness);
• Carefully evaluate the unintended consequences of interventions in particular value chains (e.g. provision of price support in the grape market) and consider repealing interventions that do more harm than good;
• Co-operate with technically advanced processing enterprises that are willing to integrate smallholder farmers and farmer groups into their supply chains and invest to lift yields and enhance product quality.

Established in 2007, Marneuli Food Factory (MFF) is a classical story of an old Soviet factory brought back to life through the establishment a proper supply base and massive investment in new products, modern machinery and mallnagement. Yet, it is also a story of a unique friendship and business partnership between two families: the family of Avtandil Svimonishvili and his wife Nino Ramishvili, on the one hand, and that of Thomas Diem, a Zurich-based Swiss psychologist, on the other. The two stories are so intertwined that it is impossible to fully appreciate the business success of MFF without understanding the human and ethical aspect of this venture.

The Swiss-Georgian Margebeli Holding, of which MFF is a part, includes four subsidiaries: Tskhali Margebeli (producer of Nabeghlavi mineral water), Marneuli Food Factory (manufacturer of canned food), Marneuli Agro (producer of agricultural raw materials), and Engadi (food distributor, including own products and imported goods such as mustard and olives).

MFF was built on the foundations of a defunct factory that was a key supplier of canned food, brandy and wine to the Soviet Union. When it was purchased in 2007, none of the old machinery at the plant was suitable for production. Thus, the bulk of initial investment had to be made in renovation of the factory shell and new equipment, including a tomato paste line from Italy. Lack of a stable raw material supply base was quickly identified as a key constraint for the business. This bottleneck was addressed through the establishment of a sister company, Marneuli Agro, and direct engagement of Georgian suppliers, including both farmers and traders.

Since its inception in 2007, MFF has captured 30% of the domestic market of canned and bottled preserves, and it is a major buyer of fresh produce from throughout Georgia. Based in the rich horticultural districts of Marneuli and Gardabani, in southern Georgia’s Kvemo Kartli region, MFF is partly vertically integrated with Marneuli Agro, which accounts for 40% of its raw materials, while also maintaining longstanding supply relationships with more than 150 small and mid-sized farmers.

More than US$25 million has been invested in MFF and Marneuli Agro since inception, including purchase of land and agricultural machinery, renovation of physical assets and installation of new production equipment. After a number of start-up years, the company was able to generate positive earnings (EBIDTA) in 2013. Most importantly, however, the wide range of essential products it places on Georgian shelves provides a revenue and market base beyond bottled water, which is still a luxury for the majority of Georgian households.

MFF’s success demonstrates the viability of import substitution as a business strategy for investors in Georgian food production and commercial agribusiness. Its cooperation with the holding’s distribution and agricultural production arms (Engadi and M-Agro, respectively) point to vertical integration as a useful mechanism of overcoming deficiencies in market support systems, which in Georgia include a highly fragmented supply base and weak business services.

Based on the findings of this case, our main recommendation to the Georgian government is to proceed carefully in the implementation of EU-style food safety requirements, for which Georgian producers are far from being ready. The Government should also repeal the ban on foreign investment in farmland, offer tax breaks and other appropriate incentives to compete with rival FDI destinations, and reform VAT administration to reduce its impact on companies’ cash flow, The GoG should also reform welfare regulations to strengthen incentives for formal seasonal employment conforming to Georgian labor legislation.

Our main recommendations for foreign investors are to seek reliable local partners to develop and secure their assets, consider a vertically integrated structure combing processing with commercial production base and in-house distribution; and manage payment risk by maintaining a mix of large, mid-scale and small-scale retail customers. Large retailers can be enticing, but a good customer is one who pays his bills.