Issue 3, 2013. June-July

   

NEW FEES FOR BORJOMI AND NABEGHLAVI COULD HARM EXPORTS

Mineral water producers claim the government's decision to increase water extraction will raise prices and decrease their competiveness at home and abroad.

Maia Edilashvili

Minister of Economy and Sustainable Development Giorgi Kvirikashvili announced in April that the fee on mineral water extraction will triple, while the fee on fresh water extraction will double.

The new rates, which are slated to start in October, will raise Borjomi fees to 30 lari, up from the current fee of 10 lari per 1 cubic meter. Competitor Nabeghlavi will pay 18 lari instead of 6 lari.

Smaller bottlers will not be affected by the change, after they complained their production volumes are too small to stay profitable if the rates are raised.

The larger bottlers are also concerned, however, by the affect of the tariff increase. Borjomi noted it could jeopardize the company's large investment in foreign sales.

"This is quite painful," noted Zaza Kikvadze, the general manager of IDS Borjomi Georgia.

"We export Borjomi to 40 countries and once the increased fee will be reflected in the price, the demand will decline. As a result, Borjomi's compatibility will decline."

IDS Borjomi increased sales from 2.5 million liters in 1997 to 108 million liters in 2005, the period prior to the Russian embargo. Without the Russian market, sales dropped to almost 30 million liters. But - after a major expansion into foreign markets - Borjomi sold about 140 million liters in 2012.

Currently, 64 percent of Borjomi's revenues is from foreign sales.

Healthy Waters, which bottles Nabeghlavi, depends on foreign sales for 20 percent of its production.

For Georgia, mineral water is among the top ten export commodities. In 2012, the export of mineral water was worth approximately $59 million, a jump from $47 million the previous year.

Kikvadze noted, however, that after the price increase, Borjomi will become the "costliest mineral water resource in the world," and, while the fee hike will bolster the state budget in the short term, eventually it will hurt the government's revenues when companies are not able to sell as much as before.

In the CIS and European countries, the fee ranges between 0.1 euro and 5.7 euro, IDS Borjomi reported in a press release when the higher extraction fees were announced.

"The only country with a higher fee is France. However, is has to be noted that in France, mineral water companies enjoy preferential tax, which means that while the country has a VAT tax of 19 percent, water producers pay 7 percent. Given this, we can say that the existing fee is the highest for our company throughout the CIS and European space."

For now, however, that does not appear to concern Kvirikashvili. The current fee for mineral water extraction is "inadequately low," noted the minister, adding that the government has compared tariffs in other CIS countries to ensure that Georgia's fee is comparable.