40 BFC Georgia Agriculture Finance Bulletin

12/2015

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40 Ge o r g i a Agriculture Finance Bulletin Danelia: All Markets are Important to Georgian Agriculture A New Vision for Georgian Rural Development

KfW to Help Fund Batumi Infrastructure Project Bio-products Hope to Find Niche in European Markets

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Georgian Agriculture Finance Bulletin Edition #40, December 2015

Contents State Initiatives ........................................................................................................... 2 1) 2) 3) 4) 5) 6)

Danelia: All Markets are Important to Georgian Agriculture .......................................................... 2 Danelia Meets with Director General of the SDC ............................................................................ 2 A New Vision for Georgian Rural Development .............................................................................. 2 The Cost of SPAERS .......................................................................................................................... 3 Reigniting Georgian Tea Production................................................................................................ 3 State Agricultural Support Program Spending Announced ............................................................. 4

Foreign Aid ................................................................................................................. 4 7) 8) 9) 10)

USAID to Promote International Standards and Food Safety Management ................................... 4 ADB Investment Continues to Support Georgian MSME Operations ............................................. 4 KfW to Help Fund Batumi Infrastructure Project ............................................................................ 5 FAO Project Completes Successful Aqua-Crop Development ......................................................... 5

Private Sector.............................................................................................................. 5 11) 12) 13) 14) 15) 16) 17) 18) 19)

Bio-products Hope to Find Niche in European Markets .................................................................. 5 Georgian Farmers Demand Protection from Cheap Turkish Imports ............................................. 6 Georgian Hazelnuts Need Help ....................................................................................................... 6 Beer Producers Call for the Fulfillment of an Association Agreement ............................................ 6 National Conference Highlights Need for More Agricultural Extension Programs ......................... 7 Rural Population in Steep Decline ................................................................................................... 8 Nikora Plans to Take Shares to International Stock Market............................................................ 8 Georgian Citrus Harvest Underway ................................................................................................. 8 Food Testing Laboratory to Receive International Certification by January 2016 .......................... 9

Note: The Georgian Agriculture Finance Bulletin presents a monthly roundup of headlines and news stories related to investments and financing flows to Georgia’s agricultural sector.

This bulletin is prepared by Business & Finance Consulting—a Swiss-based development finance consulting company with a long history of working in Georgia. Currently, BFC is implementing the Agricultural Lending Programme for KfW. Read more »

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BFC Georgian Agriculture Finance Bulletin

State Initiatives 1)

Danelia: All Markets are Important to Georgian Agriculture

December 4th, 2015, http://cbw.ge/economy/agriculture-ministry-georgia-does-not-have-the-luxury-of-choosing-the-marketsat-its-discretion/

In a recent interview, Otar Danelia, the Georgian Minister of Agriculture, discussed how Georgian agriculture will be affected by Russian-Turkish tensions in recent months. While hoping that the conflict between Moscow and Istanbul settles, Mr. Danelia maintains that, from the Georgian perspective, everything is business as usual: “Our strategy envisages the diversification of markets. We do not plan on anything special. We take into account the current state of Russian-Georgian relations. We work in a normal rhythm.”

When asked if more intensive relations with Russia might ensure amid Moscow’s ban on Turkish agricultural imports into Russia, Mr. Danelia noted that export to Russia is beneficial as it is one of the largest markets in the world, but he also stressed the importance of mitigating risks and diversifying the markets that Georgian agriculture exports to: “All markets are important, and each has its own risk. Our responsibility is to minimize risks. The Russian market is one of the largest in the world; however, exports to other countries such as China, Japan, and European markets are also significantly increasing.”

The European Union accounts for 35% of Georgian agricultural exports, and this number is rising due to the decline in the share exported to CIS countries, according to the Minister. It is also important to understand Georgia’s niche marketplaces, “For us, the quantity is not important, as we’ll never catch up with the leading countries. Georgian products should not be associated with quantity but quality.”

2)

Danelia Meets with Director General of the SDC

December 9th, 2015, http://moa.gov.ge/index.php?menuid=17&lang=2&id=636#.VnK0tivxC4o

Georgian Minister of Agriculture Otar Danelia met with Oliver Burke, Director General of the Swiss Agency for Development and Cooperation, to discuss technical assistance for a project that seeks to create a national animal identification, registration and traceability system within Georgia.

The project, carried out by the National Food Agency with financial and technical assistance being provided by the Swiss Agency for Development and Cooperation (SDC), the Austrian Development Agency (ADA), and the UN Food and Agriculture Organization (FAO), includes obligations for the government to develop efficient and flexible food safety as well as veterinary and plant protection systems within Georgia that are consistent with current EU legislation. The project aims to produce systems to facilitate exports, manage animal health, and improve communication with farmers.

3)

A New Vision for Georgian Rural Development

December 11th, 2015, http://moa.gov.ge/index.php?menuid=17&lang=2&id=639#.VnK05yvxC4o

Georgian Minister of Agriculture Otar Danelia presented the Ministry’s vision for the development of Georgian agriculture at the international conference “Rural Development in Georgia” to all stakeholders who seek to contribute to the development process.

“A high standard of living is important in rural areas and requires that all relevant government agencies have a common vision, a common strategy and deadlines for rapid strategy implementation,” said Mr. Page 2

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Danelia. He further went on to note, “First it’s necessary to develop a common rural development policy that improves the quality of life and economic well-being of inhabitants of rural areas. In this regard, agricultural development is crucial.”

The main aim of the conference was to work towards agreement on the best possible roadmap for the development of an integrated policy framework to support rural development in the country. The conference, held by the Georgian Ministry of Agriculture, the Food and Agriculture Organization (within the framework of ENPARD and funded by the EU), and the Austrian Development Cooperation, also saw the introduction of a draft position paper on Georgian rural development that outlines the current situation in the Georgian rural sector, defines various activities and measures to achieve goals, and identifies all relevant parties to achieve success.

European experiences and debates about the vision of Georgian rural development further elaborated on the position paper and a final draft version is expected soon. It will lay the framework for rural development in Georgia in the near term.

4)

The Cost of SPAERS

December 15th, 2015, http://www.sarke.com/cgi/search/news.asp?Code=10046262

Presentation of the Strategic Plan of Agriculture, Environment and Rural Statistics (SPAERS) was held earlier this month. It is the first time such a document has been drafted in Georgia. Implementation of the plan between 2016 and 2020 is estimated to cost GEL 11.2 million (USD 4.7 million), with 48% of expected budgetary costs to go to annual selective studies of agriculture farming. These preliminary numbers factor in 10% growth each year over the 5 years.

International and donor organizations will provide assistance in terms of investments in equipment and human resources. Statistics systems will still need technical assistance and is expected to cost GEL 720,000.

5)

Reigniting Georgian Tea Production

December 16th, 2015, http://www.sarke.com/cgi/search/news.asp?Code=10046275

Deputy Agriculture Minister Levan Davitashvili recently stated, “We will start large-scale rehabilitation works on tea plantations and, within 2-3 years, will have several thousand hectares in plantations in leaf-picking condition. We are also envisaging the establishment of tea processing plants.” Within the project to rehabilitate tea production in Georgia, the government will provide for 90% of cooperative rehabilitation costs and 70% of those costs for private companies. The maximum funding sum per hectare is GEL 2,500.

President of the Tea Producers Association, Tengiz Svanidze, noted that the rehabilitation project should be implemented only after the completion of comprehensive studies on the tea plantations’ conditions.

He points to the need for ownership identification and plantation inventories. Tea producers also consider recent attempts on legislation of tea production to be weak, full of inaccuracies, and lacking in definitions for control mechanisms.

While experts evaluate the potential for Georgian tea to be very high in terms of quality and price points, it is clear that work needs to continue for the full development of the Georgian tea industry.

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BFC Georgian Agriculture Finance Bulletin

6)

State Agricultural Support Program Spending Announced

December 24th, 2015, http://sarke.com/cgi/search/news.asp?Code=10046361 http://sarke.com/cgi/search/news.asp?Code=10046362 http://sarke.com/cgi/search/news.asp?Code=10046360

This year, GEL 102.4 million was invested in 29 agricultural projects through the Produce in Georgia program, with high-tech greenhouses accounting for 25.3% of the total, fish processing 23.4% and high tech cattle farming 22.1%. Food and beverage projects accounted for 16.3% of the GEL 355.6 million invested across all 133 projects sponsored by the program.

In 2015, GEL 3.96 million was distributed to 102 beneficiaries through the Plant the Future program, reported Agriculture Projects Management Agency Director Mariana Morgoshia. State-of-the-art intensive and semi-intensive plantations were erected across 730 hectares, she added. The program budget for 2016 is GEL 5 million, bringing the estimated total investment to GEL 15 million over the project’s 2-year duration, said Morgoshia.

In 2015, 10,359 loans worth USD 105.8 million (GEL 237.1 million) were issued through the preferential agri-lending program, according to the Agriculture Projects Management Agency. Since its launch, 25,290 loans worth USD 165.7 million (GEL 644.9 million) were disbursed, funding 128 new enterprises.

The agriculture processing and storage enterprise support program distributed USD 7 million in cofinancing for 28 projects worth USD 18.85 million. In total, 11 new enterprises were funded.

More than 27,000 policies worth GEL 190 million were issued through the agro-insurance program, covering 38 types of crops over 29,000 hectares. Over the past two years, the state disbursed GEL 14 million in claims.

Foreign Aid 7)

USAID to Promote International Standards and Food Safety Management

December 14th, 2015, http://georgien.ahk.de/georgien/newsletter/agro-food-news-georgia/agro-sv/artikel/usaid-project-topromote-introduction-of-haccp-and-iso-in-agro-processing-and-storageenterprises/?cHash=98d1193a79241353ee7c502a70451128

The Agriculture Project Management Agency and USAID’s Restoring Efficiency to Agriculture Production (REAP) signed a memorandum for technical assistance in Tbilisi.

Under the memorandum, REAP will fund 50% of the costs related to the introduction of international systems and standards for food safety as well as those related to training programs. In turn, the Agriculture Project Management Agency will fund 30% of the aforementioned costs in addition to presenting to REAP enterprises which intend to take part in certificate training.

8)

ADB Investment Continues to Support Georgian MSME Operations

December 21st, 2015, http://www.finchannel.com/index.php/world/georgian-news/item/53488-adb-130-million-to-helpfinance-sector-boost-msme-support

The Asian Development Bank (ADB) is providing USD 130 million in loans and USD 1.05 million in technical assistance grants to three Georgian financial institutions in an effort to support micro, small and medium-sized enterprises (MSME) and Georgian farmers, ultimately raising income and Page 4

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employment levels in the country. TBC Bank, Credo Microfinance Organization and Finca Bank Georgia will receive USD 100 million, USD 23 million and USD 7 million in loans, respectively. The loans will range from 4 – 6.5 years and allow lending institutions to provide long term funds to clients.

Approximately 43% of Georgians live in rural areas and 27% in regional towns. A large number work in small enterprises or as subsistence farmers. The assistance will help address low levels and productivity, employment and income that results in high poverty in the regions. ADB assistance to TBC will help it grow its MSME lending program; assistance to Credo will help it to broaden its lending to small businesses; and support to Finca Bank Georgia will finance efficiency improvements and branchless banking services for clients in remote areas.

Since 2007, ADB has provided nonsovereign loans of USD 125 million to banks in Georgia and this continued investiture is a mark of pride for ADB according to Rainer Hartel, Principal Investment Specialist for ADB: “We are proud to work with TBC Bank in expanding the TBC Academy services to MSMEs, helping Credo to expand services to MSMEs, and supporting Finca Bank in going the extra mile to serve remote villages.”

9)

KfW to Help Fund Batumi Infrastructure Project

December 22nd, 2015, http://www.sarke.com/cgi/search/news.asp?Code=10046331

The Georgian Finance Ministry and German Bank for Reconstruction KfW signed agreements this month for the continuation of a project to rehabilitate the water supply and sewage infrastructure in Ajara.

The project, currently in its forth phase, has already seen EUR 89 million be allocated (including a grant of EUR 28 million). The current phase will provide EUR 32 million to Georgia for continued development of the rehabilitation of Batumi communal infrastructure.

10) FAO Project Completes Successful Aqua-Crop Development December 23rd, 2015, http://www.sarke.com/cgi/search/news.asp?Code=10046348

The United Nation’s Food and Agriculture Organization (FAO) reported on the completion of a project that provided assistance to Georgian aqua-crop development. Deputy Minister Yuri Nozadze said that activities within the scope of the project have increased the market for local fish and fish products to be worldwide. Trainings organized in 2014 and 2015 were held for those involved in food inspection and the fishing industry; these trainings will be bolstered by new laboratory methods which will be added early 2016.

Private Sector 11) Bio-products Hope to Find Niche in European Markets December 7th, 2015, http://www.sarke.com/cgi/search/news.asp?Code=10046181

Georgian bio-products hope to find their niche in European markets. Some wine makers, tea producers and, most recently, hazelnut exports are gradually shifting their focus to organic farming in hopes of guaranteed markets and higher prices.

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At the moment, 17 Georgian winemakers are transitioning towards these newer markets along with tea producer GeoFlowers and hazelnut producer Anka Fair Trade. Despite the raising interest in a wider diversity of bio-products and the potential that Georgian agriculture has to meet this demand, Georgia’s bio-farming is a mere drop in the ocean compared to other, post-soviet countries. 2,000 hectares were allocated in 2013 within Georgia for organic cultivation (including 1,400 hectares allocated for the growth of wild plants). By comparison, Ukraine leads this group with 400,000 hectares.

12) Georgian Farmers Demand Protection from Cheap Turkish Imports December 8th, 2015, http://commersant.ge/index.php?m=5&news_id=30158&cat_id=5

Georgian farmers are demanding government action to protect domestic products from cheaper Turkish imports.

Recent Russian sanctions against Turkey have created some measure of panic and pushed prices on Turkish goods down by as much as 40%. According to Deputy Agriculture Minister Levan Davitashvili, that decline in the value of Turkish imports can more of an influence on Georgian agriculture products than may be initially thought.

Georgian farmers fear that cheap imports will necessarily come to Georgia, local products will not be able to compete, and Georgian farmers will be forced to sell their goods at a below-cost price or not sell them at all. They hold that government intervention is the only way out — that the government should introduce duties that will make imports of Turkish products into Georgia unprofitable. Only through such a measure will local producers be protected from bankruptcy.

Georgian farmers explain the non-competitiveness of Georgian products is due to the use of more advanced technology in Turkish production.

13) Georgian Hazelnuts Need Help December 9th, 2015, http://www.sarke.com/cgi/search/news.asp?Code=10046206

Early December saw the price of hazelnuts drop from GEL 8.70/kilogram down to GEL 6.30/kilogram Although hazelnut suppliers expect the price to rebound to GEL 9 – GEL 10/kilogram in the near future, last year’s price of GEL 12/kilogram will not be seen.

Nodar Khorava, a representative of a hazelnut procurement center in Zugdidi noted that “The harvest is of bad quality, so our profit is insignificant. […] At the same time, the hazelnut harvest in Turkey is rich, with high quality.”

The core market for Georgia’s hazelnuts is the EU (mainly Italy and Germany); however, recognition of Georgian hazelnuts is low on the global market, and many believe that state intervention is required for the development of the potential of Georgian hazelnuts.

14) Beer Producers Call for the Fulfillment of an Association Agreement December 10th, 2015, http://www.sarke.com/cgi/search/news.asp?Code=10046221

Beer producers are calling on the Georgian government to fulfill its obligations under an association agreement made with the European Union that will see the excise tax be based on alcohol content (i.e. percentage of alcohol) as opposed to the current system of taxation by volume.

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Director of Corporate Issues for Natakhtari brewery, Nikoloz Khundzakishvili, stated that “in order to fulfill this norm, we have a concrete deadline of September 1, 2017,” adding that this is the position of the three largest breweries in the country.

Beer producers are not the only group being impacted by the association agreement with the EU, and not all groups are as enthusiastic as the beer producers for the change. Tobacco manufacturers will also see a dramatic change in excise taxation, and the ad valorem portion of the excise tax for cigarettes is already doubling from 5% to 10% starting January 1, 2016.

Georgia has five years to fulfill its obligations under the association agreement.

15) National Conference Highlights Need for More Agricultural Extension Programs December 14th, 2015, http://georgiatoday.ge/news/2330/Policy-Makers-and-International-Donors-Reach-Out-to-the-FarmingCommunity

The National Conference for Agricultural Extension for Georgia was organized this month by the United Nations Development Programme (UNDP) in Georgia, the Swiss Cooperation Office in the South Caucasus, the Georgian Ministry of Agriculture, and the Georgian Ministry of Education and Science. The conference centered on Georgia’s lagging agricultural sector and the need for an expanded agricultural extension programs in the country.

While roughly 50% of the population in Georgia is engaged with agricultural work, less than 10% of the country’s GDP comes from agriculture. The conference highlighted a central problem in Georgian agriculture — lack of contemporary, context-specific, business- and technology-savvy knowledge and skills. In the last four years, a mere 4% of respondents to an agricultural survey in Georgia reported having received agricultural training, while only 10% of respondents reported receiving any kind of advisory or consultative assistance in the past three years.

Dr. Florian Biermann of the International School of Economics explained, “Because knowledge and skills not only directly affect agricultural productivity, they also affect how you can use technology. Whether you have capital available - if you can’t write a good business plan it’s difficult to get a good loan from the bank. It can really stifle productivity.”

The payoff of properly increasing the nation’s aggregate agricultural knowledge could be huge. Closing the knowledge gap in soil preparation, for example, could increase wheat production per square meter by 80 grams.

“Here, we’re targeting farmers of all different sizes, providing them with the tools, knowledge, the information that they need to be able to improve their crop output, improve incomes and livelihoods for their families,” Mr. Sharp of the UNDP in Georgia said. “The evidence is quite clear from international experience that a well-developed system of Agricultural Extension is a key prerequisite of a modern society.”

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16) Rural Population in Steep Decline December 15th, 2015, http://www.sarke.com/cgi/search/news.asp?Code=10046261

Georgia’s current rural population consists of 1.59 million people (23.8% less than the previous census in 2002) and is expected to continue to fall. If the rates of decline continue, Georgia’s rural population will fall to, at most, 1.2 million people within the next 10 years and many territories will be empty.

Demographer Anzor Totadze points out that the “main reason of rural population reduction is deterioration of both gender and age structures there. Now, 1.5 people live there, but most of them are of old age. In next decade, birth rate in rural areas will be even more declined, in fact, it will be halved and situation there will be grave. Respectively, it cannot be excluded that size of rural population will be halved as well” Georgia’s rural capacity is 2.3 million – 4 million people and optimal production and living conditions in villages call for 300,000 to 330,000 people (with an average size of 10 ha.) according to agriculture expert Patta Kogualshvili.

Although this trend makes the situation look bleak, there is nothing strange in the rural population’s decline as a high rate of urbanization can be observed not only in Georgia, but also in many countries, including developed ones.

17) Nikora Plans to Take Shares to International Stock Market December 16th, 2015, http://georgiatoday.ge/news/2361/Nikora-Plans-to-Take-Shares-to-International-Stock-Market

Leading Georgian food market company Nikora plans to issue shares through Galt and Taggart into an international stock market by the end of the year. An estimated USD five to ten million will be used for continued development in large-scale projects.

Company director Irakli Bokolishvili acknowledged the difficulties in 2015 for the company and the general business sector in light of the depreciation of the GEL; however, the company plans to move forward on several projects including the creation of a modern bakery in 2016 and continued investment in existing company programs.

Bokolishvili added that planned steps will help develop the stock market and form the stock exchange as a viable trading platform.

18) Georgian Citrus Harvest Underway December 22nd, 2015, http://commersant.ge/index.php?m=5&news_id=30840&cat_id=5 http://www.sarke.com/cgi/search/news.asp?Code=10046334

The Georgian citrus harvest has already provided farmers with more than GEL 990,000, while state subsidies have amounted to GEL 494,000. Two projects have helped to bolster the citrus industry in Georgia: one supports tangerine production and the other stimulates mandarin production.

To ensure the high quality of exported citrus, 40 packaging facilities have been opened and exports are underway. Georgian citrus exports are largely to Russia (80.10% of citrus exports) and Ukraine (13.02%)

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TCF Georgia is one company that has utilized available project funds to receive and process approximately 15,000 tons of citrus this season. The company can process 100 tons of citrus per day, and investments in the company have grown to USD 2.4 million since its founding in August 2012.

Georgian citrus continues to be of interest for development and the industry is expected to continue its growth in the coming years.

19) Food Testing Laboratory to Receive International Certification by January 2016 December 28th, 2015, http://sarke.com/cgi/search/news.asp?Code=10046393

The Ministry of Agriculture’s food testing laboratory is expected to receive international certification in January, 2016, according to Minister of Agriculture Otar Danelia. Honey could be exported to the European Union market as soon as February 2016, added the Minister.

Breti, a honey producer, presented its products at the 4th EU-Georgian Business Council forum in the Hague in the Netherlands. Eastern European and Central Asian buyers expressed interest.The Dutch Royal Industrial Club agreed to organize further exhibitions, tastings and promotions pending the signing of a contract, according to Breti Director Girogi Kepashvili.

The first EU-Georgian Business Council forum was held in Austria in November 2014. Since then, meetings were held in Bratislava, Brussels and the Hague. Overall, 107 companies participated in the event, including 35 from Georgia. Next year, the event will be held in Germany.

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Prepared by Business & Finance Consulting (BFC) www.bfconsulting.com In this bulletin, BFC provides extracts from articles that have been published by others and as a result cannot be held responsible for such content.

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