Issue 5, 2013. October-November



An analysis of the tourism sector based on the tourism and hospitality industry chapter in the ISET Policy Institute's Georgian National Competitiveness Report 2011-12

Eric Livny and Andrei Sarychev

Georgia used to be a premier tourist destination in the USSR era, and recent data suggest that it has the potential to regain its appeal with sunseekers, nature lovers, skiers, extreme sports enthusiasts, and other holidaymakers from around the globe. Indeed, since 2005, the number of international arrivals to Georgia has been growing exponentially, reaching 2.8mln in 2011 and 4.4mln in 2012 (an increase of more than 57%). In the first eight months of 2013 the number of international arrivals hit a new high of 3.57mln (26% above the record achievement of last year).

With all the hype about the tourism sector's potential to create jobs and bring foreign currency, it is important not to lose sight of the negative externalities the current form of mass tourism and transit carry for Georgia.

In a year or two Georgia's entire transport and tourism infrastructure, starting with sea, air and land border crossing points, may face major congestion issues, certainly during the high season. Several observations are worth emphasizing in this context.
First, Georgia has done a lot to lift restrictions on travel to and through the country. In particular, it has no visa regime with almost 90 nations; citizens of most other countries can be issued visas (and, until last year, also bottles of wine!) at the border. Still, these measures did little to boost the number of arrivals from farther-away destinations. In 2012, 86% of all arrivals were from neighboring countries: Armenia, Azerbaijan, Russia and Turkey.

The Seasonal Pattern of International Arrivals to Georgia. Top 5 Sending Countries in 2012-2013

Second, and related to the above, Georgia remains a rather expensive and hard-to-reach destination. The opening of the Kutaisi airport and the entry ofWizzAir are certainly steps in the right direction; however, at present most foreign visitors enter Georgia by land.

Third, with the notable exception of Turkish visitors (see below), foreign arrivals are extremely concentrated in the high season around July and August. This highly pronounced seasonal pattern negatively affects the entire hospitality industry (by reducing incentives to invest in physical capital and skills), strains the environment, and creates congestion.

Fourth, three countries stand out as far as growth in the number of foreign arrivals is concerned: Turkey (up 117% in the first 11 months of 2012); Russia (up 85%); and Iran (up more than 45%).

Russia. Georgia's unilateral move to abolish visas, the opening and modernization of the border crossing point in Larsi (in 2009, and, most recently, in September 2013), and the reinstatement of flights have all played a role. Moreover, Russian tourism remains way below its potential, and could double or triple in 2013 and 2014.

Iran is a very special case: the economic sanctions imposed on Iran by the international community are pushing many Iranians to seek work and study opportunities abroad. Until July 2013 Georgia has been one of only 37 countries around the world that had a visa-free regime with Iran, making it an attractive destination for Iranian students, workers and businesspeople.The recent (temporary) reintroduction of the visa regime is likely to act as a restraint on the number of arrivals from Iran.

Finally, what about Turkey? The more than doubling in foreign arrivals from Turkey is apparently related to Georgia's growing importance as an east-west transportation corridor. As international sanctions are beginning to bear on Iran, more and more of Azerbaijani and even Iranian trade is being diverted from Bandar Abbas and other Iranian ports to Turkey and Georgia. Thus, many of the Azeri, Turkish and Iranian "arrivals" are in fact truck drivers who transit through Georgia.

This is consistent with the results of a survey carried out by the Georgian National Tourism Agency (GNTA) from April 2011 until May 2012: 27% of all international visitors do not spend a single night in Georgia; the median visitor spends less than 2 days (the maximum allowed transit period); 78% are repeat visitors.

Engineering A Shift To High-End Tourism

It is a no-brainer that Georgia should strive to increase its share of wealthy tourists from Western Europe and North America, who currently account for less than 5% of total border crossings by foreigners.

Additionally, it would be important to increase the number of tourists visiting the country in the low season period. If successful in engineering such a shift, Georgia's hospitality industry would be able to attract additional investment in human and physical capital, improving the quality of services and boosting the sector's productivity.

Yet there are several serious obstacles to overcome before the more discerning crowds come to discover Georgia.These relate to the limited supply of accommodation and amenities, service standards, and transport.

First, while a number of international chains are already operating or building hotels in Tbilisi, Batumi, Kakheti and Gudauri, the overall hotel capacity and tourist amenities are still insufficient to accommodate future growth in tourism, particularly in the high season.

Second, the level of hospitality services remains very modest. Given the seasonal pattern of employment, professional workforce is in short supply. The interviews we conducted with major industry players suggest that the problem is particularly acute outside of Tbilisi, e.g. in ski resorts and along the Black Sea coast. Temporary high season positions are often filled with people who do not speak foreign languages and are unwilling to learn them.

Third, affordable, frequent and direct flights are of utmost importance for the development of tourism. Until recently, Georgia had two international airports, located in Tbilisi and Batumi (both operated on a concessionary basis by the Turkish firm TAV), serving approximately 1mln passengers per year.

The Kutaisi airport, which opened last year, is operated independently and is primarily designated for budget airlines. The Tbilisi airport currently offers direct flights to just 34 destinations, while the corresponding numbers for Batumi and Kutaisi airports are a woefully low five and two, respectively.

International Arrivals to Georgia: 2005-2012

Ongoing Coordination Attempts At The National Level

There are many aspects of the hospitality industry that create scale effects and threshold effects, providing justification for coordination efforts by a benevolent social planner (the Georgian government, in this case). For example, a minimum number of daily users is needed to justify investment in a modern ski lift; a resort location must have at least 800 beds to be able to engage a major travel agency; a minimum number of regular passengers is required for a commercial airline to offer a new route.

By the same token, staff training programs are costly and take time. For investors to commit to provide employee training, , they must be reasonably assured that their employees will continue to remain continuously employed.

The sharp seasonal fluctuations in the number of tourists (particularly outside Tbilisi) reduce the incentives for both employees and employers to invest in training.

Finally, private investment in hotels and other tourist amenities must be synchronized with public investment in infrastructure such as air and ground transportation and water and sewage systems that provide important public goods, such as potable water.
All the above suggests that the tourist industry is suffering from a classic coordination failure, justifying government action. This is not to say that the government should directly engage in the construction of hotels or casinos. Scarce public resources should be used to provide public goods with the broadest possible spillover effects. National transport infrastructure —e.g. the Kutaisi airport, East-West rail and road communication systems — clearly falls into this category. Next in the order of priority should be coordination failures affecting particular regions, such as the local road networks. Finally, there may be scope for coordinating the actions of individual investors — through planning and infrastructure development — in key touristic sites along the Black Sea coastand Georgia's ski resorts in Mestia, Gudauri and Bakuriani.

Thinking And Acting Locally

Addressing coordination failures should not be the exclusive concern of Georgia's national government. Georgia's regions, such as Adjara, Imereti, Kakheti, Racha and Svaneti could use a bit of thinking and a very modest investment in local public goods — better signs, environmental cleanup operations, fairs and festivals — to attract potential visitors and convince them to stay overnight.

Adjara, for example, has all the attributes of a tourism hub (in addition to transport and trade logistics): an excellent location close to the Turkish border, Black Sea resorts, beautiful landscapes, a train connection to Tbilisi, and the Batumi seaport and airport.

Very importantly, it has an autonomous status, allowing its government to pursue a consistent strategy, allocate funds for public investment and coordinate (and bargain) with the national government over overarching initiatives that affect the region.

The Kobuleti bypass road, to be completed in 2013, is an excellent example of the latter.

The new road will promote Kobuleti's tourist potential by diverting through traffic from the sea resort area. A decision by the regional government to abolish the license fees for gambling establishments created a minor boom in casino tourism, of importance during the long low season.

The experiment in local self-government reform on which Georgia is about to embark at the initiative of the Ministry of Regional Development and Infrastructure will hopefully contribute to the ability of Georgian communities to act locally.

Local initiative, if coordinated with the national and regional authorities (and, in many cases, the international donor community), may indeed hold the key to the future of Georgia's economy, the tourism sector included.