Issue 5, 2015. October-November



Following the signing of the Deep and Comprehensive Free Trade Agreement with the European Union, the Georgian government is looking for opportunities to develop the country's export potential, as well as constantly aiming at bringing more foreign direct investment to the country.

The Georgian National Investment Agency commissioned KPMG to study the investment potential of the chemicals sector in Georgia and to identify the most investment-attractive segments of the chemical industry where production and export of chemicals to neighboring countries, the CIS and/or Europe has a good potential.

Strategic Assets

Georgia's strategic location is an asset to any investor. As a bridge between Europe and Asia, Georgia offers direct access to European, Gulf Cooperation Council and CIS markets. Its three major oil and gas pipelines, Black Sea ports, and well-developed railway systems, together with its airports, are playing an increasingly important role in linking the East and West. In addition, Georgia has low tariffs and streamlined border-clearance procedures. With a range of free trade agreements, Georgia has access to a 900 million customer market that is not subject to customs tariffs, including Turkey, the CIS and EU countries.

There are several business factors that make Georgia an ideal location for chemical factories, including low labor and electricity costs. The highest tariff for industrial consumers for one KWh of energy in Georgia in 2014 was around USD 0.045, which is lower than in neighboring countries (35% lower than in Armenia, 52% lower than in Turkey and 21% lower than in Azerbaijan). Labor costs in the manufacturing industry are also low, amounting to an average of USD 410 a month.

A New Area for Investment

The four-month study, which looked at the Georgian market, as well as trends in the wider regional market, identified eight subsectors that match the investment climate and business conditions in Georgia:

1. Paint and Varnish
2. Glaziers' putty, grafting putty, resin cements, painters' fillings
3. Printing, writing or drawing inks
4. Pigments, opacifiers (to make material opaque), colors; enamels and glazes; engobes (slip coating); liquid lustre
5. Washing and cleaning preparations
6. Hair preparations
7. Beauty, make-up and skin care preparations, sunscreens, manicure and pedicure
8. Nitrogen fertilizers

Room for Large and Small Investors

Investment proposals were prepared for each of the identified subsectors, including identification of optimal capacity of the relevant sector of productioninGeorgia; required level of investment; and a limited SWOT analysis and financial calculations.

These investment proposals are available on the website of the Georgian National Investment Agency.

All financial calculations showed a positive net present value, an internal rate of return in the range of 15-35% depending on the sector and a payback period of 4-8 years. The financial feasibility study showed that there are new sectors for investment in Georgia with good potential and high feasibility. Moreover, the required investment proved to be different per sector (ranging from USD 4 million to USD 140 million) meaning that there is room for both large-and small-scale investors to start production in Georgia.

With the exception of nitrogen fertilizers, which are expected to require around three years for plant construction, the respective subsectors are expected to take around a year to start production.

Potential challenges for investors in chemical plants in Georgia include the lack of raw materials needed for production in Georgia. They can, however, be imported from neighboring countries. Another challenge is the lack of a specialized workforce, as there are few Georgians with experience in certain specific chemical sector, for example paints and varnishes.

The main advantages for investors are persuasive, however: the relatively stable macroeconomic environment, favorable taxation regime (including free industrial zones in Poti and Kutaisi, in which businesses are exempted from all taxation, except the personal income tax) and other government incentives, as well as easy access to the entire Caucasus market as well as the European market.