First Free Economic Zone in Georgia

Georgy Kalatozishvili, Tbilisi. Exclusively to VK

During the past 20 years the problem of the Free Economic Zone has been difficult and acute for Georgia. Businessmen and the expert community supported the idea, but the authorities were afraid of “opening a Pandora's box,” as in the context of weak governmental institutions such zones could damage the establishment of a competitive internal market and common rules within it.

If we analyze the history of FEZ in other countries, we will see they are successful only in states where effective and uncorrupted bureaucracy exists, while fiscal administration supports economic creativity within establishing relations with business. On the contrary, the FEZ became a source of disastrous corruption, destruction of the internal market, spread of illegal traffic, and growth of prostitution, crime and drug addiction.

The reformers team, which came to power after the Rose Revolution in Georgia, despite radicalism, carefulness and impatience, chose the way of evolution instead of a revolutionary breakthrough. A positive role was played by talent of the well-known businessman, a smart person, the former Georgian minister for Economic and Structural Reform, Kakhi Bendukidze. He gave advice to his young colleagues to slow down and at first simplify the procedures for fighting corruption in all spheres of cooperation between business and the government, including fiscal bodies.

Today Customs Clearance Economic Zones (CCEZ), which are situated all over the country, surprise positively: all the procedures take a short time, and customers and financial agents are young helpful people, who deal with “paperwork” quickly. Computerization of CCEZ and simplification of all procedures have reached the maximal level. As a result the biggest share of exports in 2011 was taken by automobile exports, even though Georgia doesn’t produce automobiles, but re-exports them. But it is very beneficial for purchasers from neighboring countries.

After achieving their first success the reformers thought about their next step and decided to enhance the concept of CCEZ to a FEZ. irst FEZ will appear near Rustavi, where a huge automobile market is situated. The place is called Lilo. The market Lilo is a huge flea marketplace like the Cherkizovsky Market in Moscow. It was found in 1991. In Lilo you could buy everything from a needle to furniture. It was one of the largest markets in the Caucasus. Even Abkhazians and South Ossetians came there to trade.

The authorities decided to use a powerful resource of the stable tradition and assigned the FEZ status to this market first of all, rather than to Tbilisi or Kutaisi. However, a new Lilo-Mall would have few in common with its well-known predecessor.

European Bank for Reconstruction and Development and some Georgian banks allocated $60 million for construction of Lilo-Mall. The building complex will be constructed by the Spanish architectural company Salamanca Ingenieros, which is very experienced in construction of such markets. Instead of chaotic trend tents whole villages of Outlet-trading will appear. Moreover, the initiators promise that the market wouldn’t be closed not for a day – traders would be shifted to new market places gradually. At the moment, about 10 000 people are employed in Lilo. After Lilo-Mall will be opened, their number will increase by 50%. The most important thing is that new fiscal rules will operate in Lilo-Mall. First of all, private businessmen will have an opportunity to choose a tax regime and make their own decisions on paying VAT. Of course, customs clearance will take place there immediately – in a special customs terminal. Moreover, huge stores for products will appear in Lilo. FEZ is planned to be divided into many segments, but they will be united by the general electronic system. For example, if you buy furniture, chocolate and shoes, you should pay only once – at the exit from Lilo-Mall.

Traders shouldn’t pay 15-per-cent tax on profits and 20-per-cent income tax. From now on they should pay only 3% of profit from selling. Thus, leaseholders in Lilo-Mall shouldn’t have account books. Even if turnover of a leaseholder would surpass $60 000 a year, he could refuse from the registration of a VAT payer.

Comfort of service, absence of corruption and procrastination, security, cleanness, readiness of the municipal authorities to develop transport infrastructure are additional advantages. The initiators of the project hope that in a couple of years a trade center of a regional scale will appear in Georgia, and it would attract businessmen and customers not only from the regions of Georgia, but also from neighboring countries.