Document Type: Studies

This document is the final report on the Transport and Logistics Time Motion and Cost Study prepared for Deloitte Consulting LLP in the framework of USAID Economic Prosperity Initiative (EPI) by ACT Research.

Transport and logistics is one of the strategic sectors of Georgia. It can be pivotal and catalytic to a broad segment of the economy. In order to fully understand its potential impact on the economy, it was critical to make an assessment of the transportation and logistics sector, which has been identified as a crosscutting sector that the EPI will focus on.

In order to condcut a deep assessment of transport and logistics value chains and develop a strategy work plan in this sector it is critical to obtain baseline data using statistically relevant methodology. Unfortunately, there was no such recorded data in this sector until recently. Taking these considerations into account the research was arranged, planned, and then implemented from April till July, 2011.

The main purpose of ACT’s research was to design and develop statistically relevant methodology for a baseline measurement of transport and logistics-related factors between specific transport nodes within Georgia and then conduct a baseline survey according to the developed methodology.

The main objectives of the baseline survey were to study the timing, costs, availability, quality, and reliability of transportation and logistics in Georgia.

For this purpose ACT Research has developed an optimal research approach, which include the following main components: (a) Desk Research (in order to obtain and analyze secondary data pertaining to the nodes that are to be studied in the scope of this project), (b) Surveys of Transport and Logistics (Warehousing and Distribution) Companies (all transport and warehousing companies were studied) and (c) Tracking the Actual Transportation Process using GPS Tracking Devices.

Besides these main components, ACT has also developed a visual map, in which all transportation and logistics companies operating in Georgia are represented.

According the survey results a major part of the transport, cargo-handling and distribution is located in three main region/cities of Georgia. These are Tbilisi, Samegrelo-Zemo Svaneti (with Poti as its center), and Adjara region (with Batumi as its center).

Different types of transportation service are available in Georgia (truck/road, rail, sea, and air). The average amount of goods/freight transported during one year by companies is 18,800 tons. The cost of transporting goods one kilometer with one truck within the territory of Georgia is USD 1.88 on average, and similarly the cost of transporting freight for one kilometer with one freight car (rail) within the territory of Georgia is USD 2.56 on average.

The average time (measured by GPS) needed for trucks to move to several destinations is: 17.8 hours – (Poti-Sadakhlo), 12.5 hours – (Tbilisi-Poti/Poti – Tbilisi), 13.8 hours (TbilisiBatumi)

Warehousing companies operating in Georgia use various types of storage (dry, cold-frozen, bulk) for keeping goods. The average price of storing goods is USD 2.30 (1 ton/day) in dry storages, USD 6.70 (1 ton/day) for cold-frozen storages and USD 0.40 (1 m³/day) for bulk storage. Based on the survey results the full-potential capacity of all warehousing companies in Georgia is 1,477,690 tons. The average capacity of a company is 3,307 tons (the average number does not include data for the Poti sea port).

Port/airport-handling companies along with various services provide loading/unloading services. On average the loading/unloading time for one truck is two hours and the cost for liquid, bulk, and general cargo is USD 13, USD 9, and USD 12, respectively.

Energy efficient buildings are designed to provide comfortable temperatures inside throughout the year, with minimal energy consumption and without expensive power supply systems.

This study evaluates heat insulation materials in Georgia, from quality, efficiency, and cost perspectives, to enable consumers and the construction sector to make informed decisions on alternative construction methods to the traditional concrete blocks.

According to the results, building insulation has a number of positive impacts aside from increased energy efficiency (up to 50%). These include obtaining additional space and reducing the quantity of materials required as a result of decreasing the weight of the building. Taking these factors into account, insulating buildings can be profitable.

Launched in 2010 by USAID, EPI aims to support businesses operating in various different economic spheres of Georgia, while promoting the rise of the country’s overall economic competitiveness for sustainable development. The research conducted by ACT aims to examine the work of potential beneficiaries of this project, as well as their views and opinions.

EPI’s assistance is designed to improve enterprise, industry, and country-level competitiveness through three components (1) Expanding and Deepening Georgia’s Economic Governance Capacity and Country-Level Competitiveness; (2) Improving Private Sector Competitiveness in (a) the agricultural sector and (b) other industries; and (3) Cross-Cutting Activities.

The first wave of research was conducted in 2011 and was comprised of three surveys:

• EPI Competitiveness Perception Survey – Household Survey
• EPI Competitiveness Perception Survey – Business/Enterprise Survey
• EPI Beneficiary Survey

In 2012, the second wave of the Business/Enterprise Survey was conducted. A brief description of the main results of Business/Enterprise Survey follows.

ACT Research prepared this Second Wave International Visitor Survey Report for Deloitte Consulting LLP in the framework of USAID-funded Economic Prosperity Initiative (EPI). The report represents the period July to September 2011.

The research was undertaken to create an annual set of visitor surveys based on statistically valid templates and methodologies. The data produced is necessary to underpin a best-practice tourism industry in Georgia and enable Georgia’s compliance with European Union (EU – Eurostat) and United Nations World Tourism Organization (UNWTO) obligations.

Face to face interviews were conducted at a variety of border-crossing points (road, airport, port and railway) with 1096 international visitors leaving Georgia between August 26 and September 5, 2011.

The aim of this study is to determine the export potential of Georgia by identifying the most prevalent export products and export destinations and analyzing the potential of such export products. The study also analyzed transit flows from 2005 to 2010 through Georgia to better understand the opportunities in Georgian economy with regards to cargo flows and requirements for logistics centers.

The study indicates the following key opportunities:

• There has been a continuous annual growth of transit flows
  • Explosive growth by weight in the transit of commodities (i.e., coal and petroleum with over 300 percent increase on average for the period 2005-2010; agricultural products, meat, and poultry), with expected rising numbers over the next few years
  • Top cargo includes coal, petroleum, iron and iron ores, wheat and meslin, various meats and poultry, cane and beet sugar, and various chemicals
• There are potential opportunities for Georgia from transit cargo flows
  • Investment into specific types of logistics infrastructure to meet cargo requirements, such as agricultural and food product logistics centers
  • Opportunities for additional processing to increase value added
• The study allows for targeted promotion of Georgia as a corridor for cargo with origin and destination countries
  • Major countries of origin for goods transiting Georgia include the US, Turkey, Armenia, Ukraine, Russia.
  • Major countries of destination for goods transiting Georgia include Armenia, Azerbaijan, Turkey, Russia and Central Asian countries.

The re-export of used motor vehicles is a growing export sector. The liberal import and transit procedures allowed Georgia to establish a used vehicle market and then re-export vehicles to Azerbaijan, Armenia and Central Asia. A similar model of consolidation could be applied for other products, such as furniture, washing materials, automotive spare parts, meat, or sugar. While significant investment would be needed to establish a relevant
logistics and consolidation center, a better understanding of trade and cargo flows is one step into that direction.

Other transport and logistics opportunities are emerging in the near future, such as the railway connection from Azerbaijan to Turkey through Georgia. A new transmission line for electricity will not only allow for export of electricity as new hydro power plants are being constructed, but the lower-cost electricity can also be consumed by logistical and goods processing centers.

The study has analyzed the export and import statistics per different commodity value and weight, and country origin and country destination. In addition, the study elaborates top transit products by weight for the last years, top 30 country origins and country destinations for the transit cargo, top five transit goods and their transportation modes.

The total amount of trade and cargo data information is too large to be analyzed in one study alone. EPI recommends that the transport and logistics industry and other relevant stakeholders continue to analyze available data to identify opportunities for their businesses; for example, the specific demand in destination country, available transportation modes, better understanding what is processed by the ports, what is delivered by the ferries, and where improvement of the infrastructure to better handle the cargo flows, such as cold storage facilities or specifically designated warehouses (for example, for cotton), is necessary.

This study’s source of data is statistics from GEOSTAT and the Revenue Service. The data quality, however, has significant issues which have been identified and presented to the two entities. EPI believes, and it has been confirmed by the Revenue Service, that some of the value figures may have been miscoded as cargo enters the country. The data for 2008 is especially problematic as it indicates that some of the cargo value has increased ten-fold. The upcoming EPI-supported activity with establishing the trade facilitation system will assist, among other significant trade efficiency enhancements, in also improving the quality of trade and cargo data.

This study focuses on the economic costs of infringement of Intellectual Rights in Georgia. Whereas the country is not commonly known for counterfeiting, Georgia ranks poorly in terms of protection of IPR. The presence of counterfeit goods and, piracy over Internet, are visible in the economy.

Four dimensions of impact have been analyzed: Consumer Surplus, Producer Surplus, Government Revenue, and Externalities. The availability of counterfeit goods generates welfare for the consumer. However, to manufacturers and distributors of branded goods, the existence of trade in counterfeits and piracy causes losses. Government tax revenue is also lower when lower-priced counterfeits are traded. Externalities include such effects as there are lower investment and increased health and safety risks resulting from the consumption of lower-quality products (medicines, cosmetics, spirits, automotive spare parts).

The analysis integrates data obtained from observations in the local markets, from meetings with private sector representatives as well as the results of a Household Expenditure Survey commissioned for the purpose. The data have been used under various scenarios.

Findings confirm that the economic impact is significant in relative terms within the twenty risk categories studied, though not significant in absolute terms when related to GDP, total imports and total Government revenue. The prevalence of counterfeits and pirated material is relevant for consumer welfare; the Consumer Surplus is indeed sizeable because of the significant price difference between original branded goods and counterfeit “equivalents.”

If remaining unchecked, the issue of counterfeits is expected to become more important in the future with rising household incomes, as higher income households consume relatively more counterfeit goods – in most risk if not all risk categories — than low income households do. The purchasing power of higher income households also means that in absolute terms, the dimension of the counterfeit market will only increase in the future.

The fact that Consumers benefit from a non-cash transfer – virtually a subsidy – through the Consumer Welfare generated by the prevalence of counterfeits and pirated material is NOT an argument in se to abandon efforts of combating counterfeit markets and piracy. The study concludes with a strategic approach to reduce the phenomenon.

In Georgia, there are currently two pensions systems: (1) the state pension and (2) the non-state pension funds. The state pension is a PAYG (unfunded) pension program providing pensions for: (a) old age, (b) persons with qualifying disabilities and (c) survivors due to loss of a breadwinner. The non-state pension funds are voluntary pension schemes mainly established by a few number of employers for the benefit of their employees. The pension for the elderly under the state pension program is universal because benefits are paid irrespective of the needs or economic status of the pensioner. The principal purpose of this report is to present the need and basis for creating a Mandatory Savings Pension System, also known as the World Bank Pillar II System, with the immediate objective to create a pension system that requires the automatic participation of formally employed individuals from both the public and private sectors who earn monthly wage or salary of 400 GEL or more and who are between ages of 15 and 45. As such, this report focuses on the old age pension system. In order to comprehensively research this report, the authors performed the following analytical tasks:

• Examined the features, operations and functioning of a mandatory savings pension per the Georgian context and perspectives;
• Discussed the preconditions of Pillar II Pension System,
• Analyzed the rationalization of the Multi-Pillar Pension Systems to the Georgian case study.

Thus, the report analyzed the current Georgian pension systems and then hypothesized how the Georgian pension systems may be used as a base for establishing a Mandatory Savings Pension System. The authors recommend the combination, co-existence and correlation of these three pension pillars that should mirror the classical models of the World Bank Multi-pillar pensions.

At the present time the Caucasus Transit Corridor (CTC) plays a relatively minor role in the movement of non – oil cargo between Central Asia and Europe; the preferred route is via Russia and the Baltic ports. Some reasons for this include the erratic operation of Caspian Sea ferries linking Baku with Aktau and Turkmenbashi, lack of “transparency” of port charges and customs fees in Baku, inadequate warehousing at the port of Poti for some commodities and “established” relationships with the traditional transport route providers on the route through Russia and the Baltic Sea ports. This report investigates the comparative transport charges and service provided by the CTC with the Russia/Baltic corridor as well as through the Ukraine and the southern routes through Turkmenistan and Iran. Primary focus of the conclusions is identification of measures needed, whether they are investments or changes in policy/legislation which would improve the attractiveness of the CTC to potential users and the likelihood that significant traffic could be diverted from these alternative routes.

Several recommendations are included which will improve the infrastructure as well as the logistics environment in both Georgia and Azerbaijan. Azerbaijan was also included as it is the partner to Georgia in the CTC.

There are many positive signs for the future traffic potential for the CTC. Block container trains are now operating between Poti and Baku providing faster rail service in the corridor; forwarders and shipping lines are seriously considering moving cargo between China and Central Asia via Poti due to serious rail congestion within China and at the China/Kazakhstan border; private operators of block container trains between Odessa and Klaipeda have expressed interest in extending their services to the port of Poti and the CTC to Baku; the extension of the CTC rail link to Kars in Turkey will create an all – rail route option between Turkey and Baku; this route will likely capture some of the lucrative cargo flows now moving by truck between Turkey and Central Asia. All of these events point towards a bright future for an increase of traffic on the CTC, provided some improvements can be made to infrastructure and more effective movement of cargo through Baku port and across the Caspian Sea.

This report provides a brief analysis of Georgia’s competitiveness position as reported in the World Economic Forum (WEF) 2011-2012 Global Competitiveness Report (GCR). It compares the changes in the GCR Global Competitiveness Index (GCI) and overall country rankings between 2010 and 2011, provides possible rationale for the changes, and identifies key areas of weaknesses that Georgia needs to address in order to increase its competitiveness.

Trade balances of countries in the Caucasus, Black Sea, Central Asia and Middle East regions are analyzed to identify new markets for promising Georgian export goods and services. The most significant goods and services with a trade deficit (the top 100) are identified from each country and are analyzed alongside corresponding Georgian exports. Particular attention is given to those sectors EPI initially identified in their sector assessment: pharmaceutical goods, wood construction materials, apparel and shoes, paper, and plastic products.