Attachment_1-_Georgia_Market_Sector_Assessment_(2).pdf

ASSESSMENT

Market Sector Assessment in Georgia

[April 2017]

This publication was produced at the request of the United States Agency for International Development. It was prepared independently by Mendez England & Associates.

CONTENTS

EXECUTIVE SUMMARY

1. INTRODUCTION

1.1 Assessment Purpose

1.2 Assessment Objectives

2. PROJECT BACKGROUND

2.1 General Overview

3. METHODOLOGY AND LIMITATIONS

3.1 Assessment Methodology

3.2 Data Collection

3.2.1 Review of Published Documentation

3.2.2 Qualitative Research and Analysis

3.3 Assessment Limitations

4. KEY FINDINGS OF THE STUDY

4.1 General Observations

4.2 Selected Priority Value Chains

4.2.1 Vegetable Production and Processing

4.2.2 Fruit Production and Processing

4.2.3 Agri-Tourism and Wine Tourism

4.2.4 Eco-Tourism and Adventure Tourism

4.2.5 Organic Food

4.2.6 Hazelnuts

4.2.7 Logistics Hub

4.2.8 Construction Materials

4.2.9 Packaging

4.2.10 Creative Industries

5. CONCLUSIONS AND RECOMMENDATIONS

5.1 Conclusions

5.2 Recommendations

ANNEXES

ANNEX 1: Methodology for Assessing and Prioritizing Sectors and Value Chains to Target ANNEX 2: Statement of Work ANNEX 3: List of Interviewees ANNEX 4: List of Documents Reviewed

ACRONYMS

AA Association Agreement ADC Anaklia Development Consortium APMA Agricultural Projects Management Agency BOT Build-Operate-Transfer CAGR Compound Annual Growth CCIs Cultural and Creative Industries CTC Caucasus Transit Corridor DCFTA Deep and Comprehensive Free Trade Area EaP Eastern Partnership EDI Electronic Data Interchanges ENPARD European Neighborhood program for Agriculture and Rural Development EU European Union FAO Food and Agriculture Organization (of the United Nations) FGD Focus Group Discussion FIZ Free Industrial Zone GDP Gross Domestic Product GHGA Georgian Hazelnut Growers Association GeoStat National Statistics Office of Georgia GFA Georgian Farmers’ Association GITA Georgia’s Innovation and Technology Agency GIZ The Deutsche Gesellschaft für Internationale Zusammenarbeit GLA Georgia Logistic Association GNTA Georgian National Tourism Administration GOG Government of Georgia GVC Global Value Chain HACCP Hazard Analysis and Critical Control Points HPP Hydro Power Plant ISET International School of Economics at Tbilisi State University JIT Just-in-Time KIIs Key Informant Interviews LAG Local Action Group ME&A Mendez England & Associates RCA Revealed Comparative Advantage SCC Supply Chain Council SCOR Supply Chain Operations Reference SDC Swiss Development Corporation SME Small and Medium Enterprise SOW Statement of Work STS Sanitary and Phytosanitary Standards UNDP United Nations Development Program UNIDO United Nations Industrial Development Organization USAID United States Agency for International Development USDA United States Department of Agriculture VMI Vendor Managed Inventories

EXECUTIVE SUMMARY

EVALUATION PURPOSE

This Market and Sector Assessment was commissioned by USAID/Georgia with a view to identifying sectors and value chains in Georgia with a high potential for growth, based on competitiveness and likelihood of contributing to job creation and poverty reduction. The purpose of the assessment was to address five specific objectives, namely: 1) develop a methodology for assessing and prioritizing sectors and value chains to target; 2) identify the most competitive current and potential sectors and major value chains within those sectors representing the largest potential for Georgia’s mid (2-4) and long term (5-

10) growth; 3) identify promising value chains, which will assist Georgia to realize the benefits of European Union (EU) association; 4) rate and rank identified economic sectors and value chains based on proposed assessment methodology; and 5) assess industry make up and estimate the number of existing and potential future enterprises that will be represented in the 10 highest ranked value chains.

EVALUATION METHODOLOGY AND LIMITATIONS

In pursuit of these objectives, the Assessment Team prepared a methodology1 as required by its terms of reference2, which formed the team’s first deliverable. This methodology was then subsequently used as the primary tool the team employed to identify and select the specified sectors and value chains. The methodology provides a step-by-step approach to the selection of sectors and value chains based on a filtering system that gradually leads, through a process of elimination, to the ultimate desired result – in this case 10 value chains. The scoring and weighting mechanism in the methodology is based on international best practice adopted by UNIDO3, the World Bank and other recognized world authorities. It was adapted by the Assessment Team to develop ranking criteria in line with data and information gathered during the team’s literature review and taking account of the prevailing economic circumstances in Georgia at the time of the investigation.

In support of its in-country research activities, the Assessment Team met with various representatives in Tbilisi from the public and private sector, international donor organizations, and business and professional associations.4 A focus group discussion (FGD)5 was also held in Borjomi where feedback was obtained from participants involved in tourism, one of Georgia’s most important economic sectors.

The information gathered from these meetings contributed towards the team’s understanding of the views, perceptions and concerns of key stakeholders in the identified and selected value chains. During its in-country mission, the Assessment Team encountered one major issue that limited its findings. There was very little official statistical data available on industries, sectors or value chains in the country which, unfortunately, impacted one of the filtering steps in the methodology process. This concerned data on productivity, employment and levels of investment. As a result, the selection of sectors was primarily based on export activity over the past five years with an assessment as to whether sectors identified in 2012 that were most competitive in terms of exports remained the same today. The Assessment Team judged this to be the case based on its extensive literature review, including previous USAID-commissioned studies on sectors and value chains. Other limitations included the limited time and resources allocated to conduct such an assessment.

1 See Annex 4: Methodology for Assessing and Prioritizing Value Chains to Target 2 See Annex 1: Statement of Work 3 UNIDO – United Nations Industrial Development Organization 4 See Annex 2: List of Interviewees 5 Due to time constraints, the Assessment Team decided it was more practical to focus on one-to-one meetings with key stakeholders in Tbilisi than organizing additional FGDs around the country. The Borjomi FGD was possible due to liaising with USAID’s ZRDA project based there and which was holding Working Group session with representatives of the tourism sector.

FINDINGS

The Assessment Team conducted an analysis of each of the 10 selected value chains, which are elaborated in the main body of the report in Section 4 – Key Findings. In order to best represent the team’s findings, each section identifies the Critical Success Factors needed for each value chain to survive and prosper, followed by what the team found as a result of its investigations. From this information, a brief table was prepared highlighting the pros and cons, Deep and Comprehensive Free Trade Area (DCFTA) impact, and measures to be considered for future action to either address deficiencies or further improve existing performance to increase productivity and profitability of value chains.

What transpired was that different value chains were at a different stage of development, although weaknesses and problem areas were often common to all. Fruit, vegetables and hazelnuts were determined as being more mature in their economic activities while creative industries, at the other end of the scale, were at an early stage in their progress towards developing and growing to the point where they were making a meaningful contribution to Georgia’s economy and to advancing the cause of entering export markets.

Emanating from this analysis was the almost universally held view that Georgia is not capitalizing on potential opportunities either domestically or internationally due to one or more of the following failings hindering competitiveness: 1) lack of understanding in the wider business community, especially in rural communities where small medium enterprises (SMEs) are the norm, of what is actually required to run a successful business and the skills needed to do so - planning, financial management, marketing etc.; 2) restrictive access to finance hindering investment for development; and 3) lack of technical know-how on modern techniques and working practices.

Poor customer service featured particularly highly in all aspects of tourism while high wastage levels in rural farming in fruit, vegetable and honey value chains was afflicting productivity and hence profits, largely through a combination of ineffective farming practices, inability to control pests and diseases, and post-harvest handling and storage. In addition, growth in fruit and vegetable production was further restricted by the absence of value added products through processing.

Construction materials and logistics had their own specific characteristics driving economic performance, such as proximity to raw material for the former, and dependence on transportation linkages and initiatives, in particular the soon-to-be completed rail link – the Baku-Tbilisi-Kars railway and Anaklia Deep Sea Port on the Black Sea, for the latter.

Packaging is essentially a cross-cutting value chain as it transverses all manufacturers to one degree or another though appears not to be as progressive as it could be due to a lack of customers’ understanding as to what is available in Georgia that could meet their needs. Creative industries encompass a wide variety of sub-sectors and activities. While the Government of Georgia (GoG) does offer support for various initiatives, opportunities exist to develop and grow though further research and analysis is needed to identify how this could be achieved and who in the private sector could drive the industry forward.

Tourism was viewed by most interview respondents as having significant potential, subject to advances being made in improving infrastructure, product development, customer service, marketing and promotion, and community involvement in developing local or regional strategies and action plans for all those involved in specific value chains such as eco-tourism, adventure tourism, wine tourism, and agri-tourism.

Regarding the Association Agreement (AA) and DCFTA between the EU and Georgia in 2014, this now allows Georgian companies to export to EU countries free from import duties, assuming exporters satisfy the rules and regulations associated with their particular products. While there are some enterprises which have been successful in entering EU markets (honey, blueberries, hazelnuts), most respondents with whom the Assessment Team met indicated that, for SMEs in particular, exporting to the EU did not offer immediate prospects. However, there was a general recognition that the ‘door remained open’ should circumstances merit a re-think.

CONCLUSIONS

As a result of its activities and findings, the Assessment Team was able to conclude that the value chains selected through the methodology designed at the start of the assignment, exhibited performance levels, features, and characteristics that inferred further progress could be made in terms of growth and opportunities realized, if certain actions were taken to support such development. While there was recognition by stakeholders that more could be done by businesses and communities themselves to address known anomalies and weaknesses in performance, it was further felt that advances may be hindered without the aid of external experts (or local service providers if they were sufficiently knowledgeable and trained), particularly with regard to technical know-how and also business management.

RECOMMENDATIONS

In terms of offering recommendations, the Assessment Team drew the assumption that USAID/Georgia was potentially interested in supporting certain sectors or specific value chains through future possible interventions. With that in mind, the following courses of action may be worth considering:

• While several value chains have been and, in some cases, are still being served by international donor-funded programs, issues that appear unaddressed or not making progress relate to access to finance, availability of educated or skilled labor, and lack of knowledge regarding how to run a business. These matters remain outstanding and should be considered as areas of interest for future interventions.

• Where a value chain(s) has been identified as an area(s) of interest then this should be followed up with further study to determine the precise nature of the constituent parts of the chain, their current performance levels, issues hindering growth, financial status, and impact each has on its local community in terms of employment and economic contribution to rural livelihoods in particular. More importantly is the need for the development of action plans that can practically be implemented by targeted beneficiaries.

• With respect to the DCFTA, it is clear from the above findings that the door is now open for Georgian companies to enter EU markets following the AA agreement. However, there remains a significant level of ignorance about the nature and extent of potential opportunities, especially among SMEs who simply do not have the knowledge to prepare a strategy for their products to be marketed in EU countries. It would therefore be incumbent of any future planned interventions to ensure that targeted businesses, communities, value chain participants are fully made aware of the implications of exporting to the EU and what is needed in real terms to realize such an objective.

• Feedback from several respondents questioned during the in-country mission advised that there is a certain amount of ‘donor fatigue’ in Georgia with, on occasion, some projects overlapping with others with no common purpose in mind. Any future planned interventions must therefore ensure that potential support is targeted at supporting or addressing specific weaknesses or anomalies in a value chain(s) that are not the subject of attention by other donors.

• Evidence suggests that knowledge transfer and training in modern working practices and techniques appears to be a priority for value chain businesses as this can affect productivity as well as customer service. Focusing on improving these issues will positively impact business performance and bottom-line results.

1. INTRODUCTION

1.1 ASSESSMENT PURPOSE

According to the Statement of Work (SOW), USAID/Georgia funded the Market Sector Assessment with the purpose of identifying economic sectors and high-performing value chains within those sectors that represent the largest potential for Georgia’s mid-term growth. The assessment was also tasked with “identifying not only the most ‘lucrative’ sectors and value chains but also specific value chains within sectors that have a high likelihood of sustained and inclusive growth and job creation.”

1.2 ASSESSMENT OBJECTIVES

In particular, the assessment was to address the following objectives also highlighted in the

SOW:

• Develop methodology for assessing and prioritizing sectors and value chains to target.

• Identify the most competitive current and potential economic sectors and major value chains within those sectors representing the largest potential for Georgia's mid (2-4 year) and long term (5-10 year) growth.

• Identify promising value chains, which will assist Georgia to realize the benefits of European Union (EU) association.

• Rate and rank identified economic sectors and value chains based on proposed assessment methodology.

• Assess industry make up and estimate the number of existing and potential future enterprises that will be represented in the ten highest ranked value chains.

2. PROJECT BACKGROUND

2.1 GENERAL OVERVIEW

In recent years, a number of important developments, initiatives and reports have been implemented and/or prepared to help Georgia’s efforts towards improved economic growth, job creation, and poverty reduction, particularly in rural areas. Significant among these are: USAID’s Country Development Cooperation Strategy – Fiscal Year 2013-2017; and the Association Agreement (AA) signed between the EU and Georgia on 27 June, 2014, which entered into force on 1 July, 2016. The EU-Georgia AA introduced a preferential trade regime – the Deep and Comprehensive Free Trade Area (DCFTA) – which aimed at increasing market access between the EU and Georgia based on better-matched regulations. In principle, it is anticipated that DCFTA will allow Georgian trade-related laws to generally match selected pieces of the EU legal framework. It is hoped that Georgia’s adoption of EU approaches to policy-making will improve the provision of more economic opportunities for Georgian goods and services.

The EU is currently Georgia’s main trading partner, accounting for around one third of its total trade in 2015 (32.6%), followed by Turkey (17.2%), and Russia (8.1%)6. Key Georgian exports to the EU include minerals, agricultural products, base metals, and chemical products. The total value of exported goods from Georgia to the EU was €742 million in 2015, an increase of 12.5% from the previous year. Of this, industrial products accounted for 75% of total exports to the EU, with the remaining 25% being agricultural products. Despite this increase in exports, Georgia has significant trade imbalances with the

6 Data from European Commission – Directorate-General for Trade

EU (importing just over €1.8 billion, the vast majority of which were industrial products). In terms of world trade, Georgia has been experiencing year-on-year trade deficits of between 12% and 15% since 2013.

In short, recent economic trade trends appear to suggest that Georgia needs to embark in a difficult and challenging path to address its trading imbalances and make advances in import substitution that will lead to improved competitiveness and quality of exportable items to the EU, neighboring countries, and other countries around the globe such as the U.S., China, and Japan, among others.

It is against this background that USAID/Georgia decided to initiate its Market and Sector Assessment for Georgia, the results of which would serve to provide up-to-date information and analysis on which sectors and value chains are most likely to contribute towards Georgia’s economic future prospects.

3. METHODOLOGY AND

LIMITATIONS

3.1 ASSESSMENT METHODOLOGY

In recognition of the above background, and with USAID/Georgia’s objectives and requirements for this study in mind, the Assessment Team developed a methodology for the selection of priority value chains based on available statistical data, supplementary published sources, and field interviews – (see Annex 1 for a comprehensive overview of this methodology, which counted as the Assessment Team’s first deliverable). The methodology included the application of several levels of filters: 1) FILTER 1: Rapid Sector Analysis; 2) FILTER 2: Narrowing down to four sectors; 3) FILTER 3: Selection of top 10 value chains from the four sectors; 4) FILTER 4: Assessment of the 10 value chains and ranking them according to the export and domestic market growth and Global Value Chains (GVCs) integration potential; and 5) FILTER 5: Value chain mapping and competitiveness assessment. It should be noted that during the implementation of the assessment in the field, the Assessment Team could not follow Filter 2 as it did not have information from the National Statistics Office of Georgia, GeoStat, on investment, productivity or employment and, therefore, it did not have a way to measure or assess recent and future performance of various sectors. Therefore, the Assessment Team considered as the most profitable sectors those that were identified by a 2013 World Bank study, Georgia Competitive Industries, Preliminary Sector Diagnostic. The team then compared these sectors with findings from its in-country research regarding exports and concluded that those same sectors emerged as continuing to be the most competitive today in Georgia.

When scoring value chains, the Assessment Team specifically considered and addressed critical success factors for each of the selected value chains that were deemed necessary for that value chain to survive and prosper. Based on research and analysis, the team assessed the current performance of each selected value chain (in as much as the available data and information allowed) relative to the prevailing circumstances of the industry / sector with which it was associated and, in particular, relative to real or perceived constraints that could limit competitive advantage in domestic and overseas marketing activity.

Section 4, below, highlights each value chain in detail and forms the basis of the Assessment Team’s findings.

The assessment and selection of value chains was based on various criteria related to poverty reduction, economic growth potential, and some additional pragmatic aspects which the Assessment Team considered highly relevant to the analysis and calculations of value chains. This exercise resulted in the analysis of the above-mentioned 20 value chains from which the top 10 with the highest scores made the final list. Although Wine, Meat and Dairy and Mining had high scores they were discounted on account of not being assessed as suitable for further support. Wine was considered as being sufficiently advanced in the private sector to care of itself; Meat and Dairy as being the recipient of ongoing government and donor support; and Mining as essentially having a few main private sector players running their own affairs. In the final selection process, the Assessment Team concluded that Packaging would be a suitable addition as a value chain given its cross-cutting implications for manufacturing as a whole in Georgia. It also recognized that while Logistics and Creative Industries were not in fact value chains but sectors, they should also be included in the value chain assessment on account of their exhibiting potential to develop and grow in the coming years. Table 1 below depicts the weights, criteria and the pool of 20 value chains. The 10 selected value chains constitute the left half of the table.

3.1.1 Georgia’s Top Export Sectors

In conducting its investigation, the Assessment Team became aware that GeoStat would be unable to provide meaningful information on sectors, which would assist the team in its selection process in accordance with the methodology that was prepared at the beginning of the assessment. It was therefore decided to proceed with assessing sectors based on largely but not exclusively on their export performance. Information on this performance was gathered from various sources, including Georgia’s Revenue Service of the Ministry of Finance, World Bank and Foreign-Trade.com. During the process, Harmonized System (HS) codes were subsequently translated into Industrial International Classification Codes (ISIC) via Concordance Tables7. As part of the process, the team also introduced the Revealed Comparative Advantage (RCA) tool8, which demonstrates where Georgia competes well internationally.

Table 1 below highlights the team’s findings on export values and RCA measures for Georgia’s top exports.

However, in conducting this assessment, it became apparent that those top performing export-related sectors largely focused, for the most part, on areas of economic activity that would not be suitable for potential future support such as heavy manufacturing, minerals, cattle, and oil and gas, among others. The Assessment Team therefore reverted to those sectors in the above-mentioned World Bank report, which were deemed to be competitive within Georgia and with potential for growth. The most significant of these were: 1) Agribusiness from which four value chains were selected: hazelnuts, fruit & processing, vegetables & processing, and honey; and 2) Tourism from which two value chains were selected: agri-tourism and wine tourism, and eco-tourism & adventure tourism. Light manufacturing produced one value chain – packaging. Construction materials, logistics hub and creative industries, as mentioned above, were identified as additional sector candidates from other studies although these were classified as value chains by the Assessment Team, given their particular characteristics. This exercise provided 10 initial value chains for the prioritizing stage using the sample weighted scoring mechanism.

The additional 10 value chains were selected from both the World Bank report and other studies conducted by, for example, Enterprise Georgia.

7 Converts one classification code to another.

8 8 RCAij = (Xij/Xit) / (Xwj/Xwt)

Where Xij and Xwj are the values of country i’s exports of product j and world exports of product j and where Xit and Xwt refer to the country’s total exports and world total exports. A value of less than unity (1) implies that the country has a revealed comparative disadvantage in the product. Similarly, if the index exceeds unity (1), the country is said to have a revealed comparative advantage in the product.

Table 1.

RATING HS

CODE

HS DESCRIPTION ENG ISIC

CODE

ISIC DESCRIPTION EXPORT

VALUE IN

1000 USD

RCA

1 2201 Waters, including natural or artificial mineral waters and aerated waters, not containing added sugar or other sweetening matter nor flavored; ice and snow

1154 Manufacture of soft drinks; production of mineral waters

137,192.80 301.06

2 0802 Nuts (excluding coconuts, Brazils and cashew nuts); fresh or dried, whether or not shelled or peeled

0113 Growing of fruit, nuts, beverage and spice crops

182,193.6 117.63

3 7202 Ferro-alloys 2710 Manufacture of basic iron and steel 285,605 105.01

4 3102 Fertilizers; mineral or chemical, nitrogenous 2412 Manufacture of fertilizers and nitrogen compounds

137,622.05 56.17

5 2204 Wine of fresh grapes, including fortified wines 1552 Manufacture of wines 176,951.79 38.17

6 7214 Iron or non-alloy steel; bars and rods, not further worked than forged, hot-rolled, hot drawn or hot-extruded, but including those twisted after rolling

2710 Manufacture of basic iron and steel 63,775.34 29.62

7 0102 Bovine animals; live 0121 Farming of cattle, sheep, goats, horses, asses, mules and hinnies; dairy farming

29,884.25 29.44

8 7207 Iron or non-alloy steel; semi-finished products thereof 2710 Manufacture of basic iron and steel 44,748.83 16.46

9 2208 Ethyl alcohol, un-denatured; of an alcoholic strength by volume of less than 80% volume; spirits, liqueurs and other spirituous beverages

1551 Distilling, rectifying, and blending of spirits; ethyl alcohol production from fermented materials

65,440.04 15.61

10 2603 Copper ores and concentrates 1320 Mining of non-ferrous metal ores, except uranium and thorium ores

70,393.02 14.08

11 2202 Waters, including mineral and aerated waters, containing added sugar or sweetening matter, flavored; other non-alcoholic beverages, not including fruit or vegetable juices

1554 Manufacture of soft drinks; production of mineral waters

28,523.29 13.35

12 6109 T-shirts, singlets and other vests; knitted or crocheted 1730 Manufacture of knitted fabrics and articles

36,802.04 9.10

13 3004 Medicaments; consisting of mixed or unmixed products for therapeutic or prophylactic use, put up in measured doses (incl.

those in the form of transdermal admin. systems) or packed for retail sale

2423 Manufacture of pharmaceuticals, medicinal chemicals and botanical products

83,329.01 1.90

14 7108 Gold (including gold plated with platinum) unwrought or in semi-manufactured forms, or in powder form

2720 Manufacture of basic precious and non-ferrous metals

39,334.30 1.33

15 2709 Petroleum oils and oils obtained from bituminous minerals; crude 1110 Extraction of crude petroleum and natural gas

36,178.48 0.33

3.1.2 Justification for the Scorings to Prioritize Value Chains

In Table 2 below the Assessment Team employed its judgement based on its desk review and feedback from key informant interviews (KIIs) to allocate scores to each value chain within three weighting parameters: Poverty Reduction; Economic Growth Potential; and Pragmatic Aspects. The rationale for the allocations reached centered on the team’s understanding of how value chains had performed in the past, how they were currently performing and, more importantly, how they were likely to perform in the future in terms of capitalizing on potential opportunities both domestically and in international markets.

It is neither possible not pragmatic in this exercise to consider or reflect on each and every score in the table. However, in principle, a score has been assigned (1 lowest and 5 highest) on a level of probability identified by the Assessment Team as representing a realistic assessment of how a value chain might achieve its perceived potential based on the available evidence.

Some of the scores are by default self-evident, for example, in terms of the impact on the weighting parameters. An example is Mining, which despite having a high score on contribution to GDP due to its economic impact as a strategic industrial sector, was perceived as having little or no impact on contributing to poverty reduction. Similarly, given Mining’s almost monopolistic characteristics, there was little evidence that donor support would be either useful or indeed accepted as necessary by the industry, resulting in the low score. The overall scoring attributed to Mining, across all weighting and selection criteria, clearly indicated that this was not an industry/sector/ value chain that would merit its inclusion in the final selection as one of the 10 value chains worth pursuing as potential for future USG support.

At the other end of the scale, the Assessment Team was suitably impressed with the potential of Construction Materials as a value chain, given the high level of probability that it would meet the weighting parameters, for example, the positive influence it would have on provisions of jobs, contribution to Georgia’s economic well-being, and potential for growth through further donor-supported measures. The Construction industry in Georgia has witnessed significant expansion in recent years, with little likelihood of slowing down in the foreseeable future given the need for social housing, tourist accommodation and business facilities. This in turn has a positive impact on associated support sectors involved in supplying construction projects and those at the front end involved in sales and marketing. With increased demand comes the need for ongoing support and the implied job creation opportunities. In adopting this approach, the Assessment Team was able to identify and select 10 value chains from the ‘pool’ of 20 initially identified, using a scoring mechanism perceived to be fair and realistic based on the available evidence.

However, for ease of understanding, it might be useful at this stage to elaborate further on the decision-making process related to the various criteria rankings for one of the top ten value chains, in terms of how the scores were determined within the three percentage weight parameters (Poverty Reduction, Economic Growth Potential and Pragmatic Aspects), highlighted in Table 2 below. As a significant amount of data and information already exists on agriculture value chains from published sources, the Assessment Team chose to select the Construction Materials value chain as an alternative for review.

The available evidence suggests that the construction sector is growing year-on-year in Georgia, which means by extension that construction materials is growing too. Both contribute to job creation and de facto towards overall poverty reduction, hence the high score of 5 attributed to both criteria within the Poverty Reduction weighting. This development to a large degree supports the involvement of smaller producers in the value chain mainly as suppliers to major construction developers thus meriting a score of 4. Access to finance and entry barriers were considered as average contributing factors to poverty reduction meriting a score of 3 for both criteria. The weakest link in this particular weighting was perceived as the environmental impact of construction activity, which has not yet reached international standards in terms of recycling and reduction of waste materials and thus meriting a low score of 1.

Within the Economic Growth Potential weighting all criteria scores attained a score of 3 or above based on the Assessment Team’s view that construction materials would in all probability continue to contribute towards the country’s macro-level economic performance based on the aforementioned continuing annual sector growth levels. Scores of 5 have therefore been attributed to GDP, investment prospects, promotion of policy changes and scaling up potential. Local and international demand is also deemed to be relatively high meriting a score of 4 and a score of 3 for SMEs with an average potential for market integration.

Criteria within the Pragmatic Aspects weighting encompass various activities within the construction materials value chain attaining average scores or above. The most significant and highest score of 5 was attributed to the potential for donor impact on construction materials not least for the contribution the donor community could make to improving industry attitudes to waste disposal and alternative means for recycling waste materials. Value addition, availability of resources, and availability of materials and inputs all merited a score of 4 on the basis of their perceived relative importance to supporting the development of the construction materials value chain. The level of competitive advantage and existence of industry leaders / champions both merited an average score of 3 based on the Assessment Team’s view that neither one nor the other was perceived as having or likely to have a significant impact on the performance of the construction materials value chain.

Finally, several significant factors emerge from the team’s findings that support the final selection of the 10 value chains as a result of the scoring system adopted: 1) All but one fit Georgia’s country strategy for poverty reduction; 2) Almost all will contribute significantly to the country’s GDP; and 3) The potential for job creation in 8 out of the 10 value chains through anticipated market demand is encouraging, especially as this is likely to benefit smaller support businesses as well as the service sector.

Table 2: Sample weighted score sheet used to prioritize value chains

W ei gh t

Criteria

Score for each value chain (1-5)

C on st ru ct io n M at er ia ls

H az el nu ts

V eg

P ro ce ss

Fr ui t

P ro

A gr i - T ou ri sm

W in e T ou ri sm

E co

-T ou ri dv en ey

P ac ka gi ng

Lo st ic s ub re at iv e In du st ry in e

B ot tl ed

W at er

M in g

P ha rm ac eu ti ca l

C he m ic al s

M et al pp ar el bs la st ic s

M ed ic al

T ou ea t

D ai ov er ty

R ed uc ti on

0%

Fits the country’s strategy for poverty reduction 5 5 5 5 5 5 5 3 5 5 5 3 1 3 1 3 5 3 1 5 Employment generation potential 5 5 5 5 5 5 3 3 5 5 3 1 4 2 2 5 2 2 4 5 No. of small producers in Value Chain 4 4 5 5 2 2 4 3 4 5 3 2 1 4 1 4 3 2 1 4 Access to finance

3 4 3 3 4 4 3 3 4 1 1 1 1 2 1 3 3 1 1 3 Entry barrier levels for small producers 3 4 3 3 4 4 3 3 2 2 4 1 1 1 1 3 3 2 1 3 Environmental Impact / Food Safety 1 4 1 1 5 5 3 2 2 1 3 1 1 1 1 2 2 2 3 3 Sub-total A 21 26 22 22 25 25 21 17 22 19 19 9 9 13 7 20 18 12 11 23 Poverty impact µ = (X x A)/100

6.3

7.8 6.6 6.6 7.5 7.5 6.3 5.1 6.6 5.7 5.7 2.7 2.7 3.9 2.1 6.0 5.4 3.6 3.3 6.9

E co no m ic G ro w th ot en ti al

Contribution to GDP 5 5 5 5 5 5 2 4 5 2 5 5 5 4 4 3 3 2 2 2 Potential for local / international demand 4 5 5 5 5 5 2 5 2 2 3 3 2 2 2 2 4 3 3 5 Public & private investment prospects 5 5 5 5 5 5 3 4 3 3 4 3 3 3 3 4 3 4 3 2 Potential for market integration for SMEs 3 5 5 5 5 5 3 2 4 5 4 3 4 4 3 3 3 2 2 1 Promotion of policy changes 5 5 5 5 4 4 2 2 5 1 2 4 2 3 4 3 2 2 3 2 Scaling up potential 5 3 3 3 2 2 2 3 5 3 3 3 3 2 4 1 3 2 2 4 ei gh

Criteria

Score for each value chain (1-5) st ru ct io n M at er ia ls az el nu ts

V eg

P ro

Fr ui t

P ro gr i - T ou ri sm

W in e T ou

E co

-T ou ri dv en ey ac ka ng

Lo st ic s ub re at iv e In du st e

B ot tl ed

W at in g

P ha rm ac eu ti ca l

C he m ic al s

M et al pp ar el bs la st ic s

M ed ic al

T ou ea t

D ai

Sub-total B 27 28 28 28 26 26 14 20 24 16 21 21 19 18 20 16 18 15 15 16 Economic growth impact α = (Y x B) /100

10.8 11.2 11.2

11.

2 10.4 10.4 5.6 8.0 9.6 6.4 8.4 8.4 7.6 7.2 8.0 6.4 7.2 6.0 6.0 6.4 ra gm at ic a sp ec ts

Donor potential impact 5 3 5 5 5 5 4 3 5 3 1 1 1 1 1 3 3 1 5 4 Extent of value adding potential 4 4 3 3 4 4 3 5 5 4 3 1 1 4 1 3 1 2 5 4 Level of competitive advantage 3 4 4 4 3 3 2 4 3 3 3 4 2 2 1 3 3 2 2 2 Available resources &

no. of operators 4 4 3 3 3 3 5 2 3 2 3 4 4 4 3 3 4 2 2 5 Availability of raw materials & inputs 4 3 3 3 5 5 4 1 3 4 3 5 2 2 2 1 4 2 3 2 Existence of industry leaders or champions 3 5 5 5 5 5 3 1 3 3 5 5 1 5 1 3 3 2 3 2

Sub-total C 23 23 23 23 25 25 21 14 22 19 18 20 11 18 9 16 18 11 20 19 Pragmatic aspects β = (Z x C)/100 6.9 6.9 6.9 6.9 7.5 7.5 6.3 4.2 6.6 5.7 5.4 6.0 3.3 5.4 2.7 4.8 5.4 3.3 6.0 5.7

Total score (A + B + C) 71 77 73 73 76 76 56 51 68 54 58 50 39 49 36 52 54 38 46 58 Total score based on weight (µ + α + β)

24.0 25.9 24.7 24.7 25.4 25.4 18.2 17.3 22.8 17.8 19.5 17.1 13.6 16.5 12.8 17.2 18.0 12.9 15.3 19.0

3.2 DATA COLLECTION

The main thrust of the Assessment Team’s activities in conducting data collection for this assignment focused primarily on a review of existing publications, reports, and studies on sectors and value chains in Georgia from a variety of available sources9, together with information, statistics and data gathered from its in-country meetings with key informants and from focus group discussions (FGDs) held in the field.

The end result of these deliberations formed the basis on which the Assessment Team was able to decide which sectors and value chains provided some evidence that they represented potential for growth in the medium- to long-term.

3.2.1 Review of Published Documentation

In pursuit of its investigations, the Assessment Team reviewed documentation provided by USAID/Georgia and materials generously provided to it by key informants. In addition, the team sourced and reviewed a wide range of relevant published reports on Georgia by organizations such as the World Bank, UNIDO, Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ), Food and Agriculture Organization (FAO), United States Department of Agriculture, and European Commission, among others. The outcome of this document review was cross-referenced with findings accumulated from the team’s qualitative research approach to determine the extent to which evidence and information gathered contributed towards a more comprehensive understanding of sectors and value chains in Georgia (past, present, and potential future performance) as well as the industries to which they belonged. From this review, and after triangulating with data collected from its qualitative approach, the team was ultimately able to draw conclusions and offer recommendations in line with USAID’s assessment objectives.

3.2.2 Qualitative Research and Analysis

3.2.2.1 Key Informant Interviews

A significant aspect of the assessment was to identify and meet with representatives from across the industrial spectrum10 in Georgia (both public and private sector) with direct knowledge and/or experience of the country’s economy and, in particular, with an in-depth understanding of the country’s main sectors and associated value chains. To this end, the Assessment Team met with a number of individuals representing government ministries and some of its associated bodies, business associations, and members of ongoing international donor-funded projects. Feedback from these parties provided the team with an important insight into official views on economic development in Georgia as well as those held by organizations representing the interests of its members, e.g. the Georgian Farmers’ Association and EU-Georgia Business Council.

In addition, the Assessment Team believed it highly relevant to also meet with captains of industry or known ‘champions’ in their specific fields whose views on local market conditions and on export-related matters would be particularly relevant to the team’s investigations. In that regard, it met with the Director of Borjomi Likani International JSC11 whose interests are in tourism (hotels and spas), and the Chairman and President of ARIC LLC (food production and processing, including vineyards, stone fruit orchards and recently planted 1000 hectares of pistachios). Their views, observations and perceptions on Georgia’s economy and future growth prospects contributed greatly to the Assessment Team’s

9 See Annex 4 for a full list of documents reviewed by the Assessment Team 10 See Annex 3 for a full list of interviewees 11 Company 50% owned by KMC-Service Group LLC and 50% by the Partnership Fund LLP understanding of sectoral performance and value chain strengths and weaknesses in their respective industries.

3.2.2.2 Focus Group Discussions (FGDs)

The Assessment Team organized one FGD in Borjomi with representatives from the tourism industry.

They included officials from Georgian National Tourism Association (GNTA), regional administration, and local municipality, as well as private sector owners of tourism hotels, sites and facilities. The FGD provided invaluable feedback from the participants, all of whom had earlier attended a working group meeting hosted by USAID’s current ZRDA Program12 to deliberate on the way forward for tourism in Samtkhe-Javakheti region. FGDs with other sectors / value chains were not deemed necessary by the Assessment Team, having concluded that within the time constraints of the mission it would be more productive to meet with as many KIIs in Tbilisi in other fields of interest.

3.3 ASSESSMENT LIMITATIONS

• It was initially anticipated that reliable, quantifiable statistical data might prove difficult to acquire for the Assessment Team during its investigations and this proved to be the case in terms of data that would have been useful for analysis on sectors related to productivity, employment levels, and investment. GeoStat was unable to provide any meaningful data on such performance levels during the in-country mission.

• The analysis of the positioning of the GVC tasks is usually costly and time consuming. It requires an industry expert and includes the analysis of the flow of final and intermediate goods that comprise the industry to find out what have been the historical developments, and what are the current trends in the GVC. The industry expert’s perception of the target country and industry is the principal criterion for the positioning analysis. In this study, the Assessment Team found little in the way of up-to-date statistical data on industry makeup related to each of the 10 selected value chains from recognized published sources. As a result, this impacted on the extent to which comment has been made in some of the value chain sections, for example, concerning number of enterprises in the value chain and nature of their activities i.e. supply businesses or in services.

• The team was provided with limited time and financial resources to conduct such a comprehensive assessment.

4. KEY FINDINGS OF THE STUDY

4.1 GENERAL OBSERVATIONS

The following sections elaborate in detail the 10 value chains selected as a result of the methodological approach adopted by the Assessment Team. Each section highlights the Critical Success Factors deemed necessary for them to have of any chance of survival in today’s highly competitive world, the current situation in Georgia for each chain - as far as could be determined from the available evidence - and what needs to be done to improve medium- to long-term prospects and growth opportunities. Each section is supported by a table outlining each value chain’s strengths and weaknesses, impact of DCFTA and suggested actions required for progress to be made, and for potential opportunities to be realized.

It is however important to note that due to a lack of available statistical data with respect to

12 A five-year program designed to promote inclusive and sustainable economic growth in target regions by improving MSME growth, increasing productivity of rural households, facilitating market linkages between producers and buyers, and promoting local economic development by establishing and strengthening networks productivity, employment, and levels of investment in specific sectors or value chains in Georgia, these factors are not reflected in the analysis of each chain described below, as such a breakdown of statistics could not be provided by GeoStat at the time of in-country investigation by the Assessment Team.

4.2 SELECTED PRIORITY VALUE CHAINS

4.2.1 Vegetable Production and Processing

4.2.1.1 Critical Success Factors

Success in vegetable production whether organic or not is largely dependent on the existence of a number of key influential factors from the planning stage of a farming operation to post-harvesting activity, marketing, and distribution to the end customer. These include: site selection; water supply and quality; crop and variety selection; and market development. If the wrong decision is made with regard to anyone of these factors, the operation will have limited chance of succeeding or surviving.

Vegetable production is essentially a small-farm venture that benefits thousands of families in urban, peri-urban and rural communities. Growing vegetables provides self-employment to families who are engaged in all aspects of the business: propagation, production, harvesting, preparation for the market, and even selling. However, as noted by the Food and Agriculture Organization (FAO) of the United Nations (1999), in recent years, production costs have increased by about 50–60 percent. Most farmers are compelled to use family labor in order to cut costs and remain competitive in local markets.

High costs compel resource-poor farmers to limit their inputs, such as fertilizer and agro-chemicals, often resulting in crop losses and lower outputs. Often, there is an overuse of harmful chemicals, which endanger the health of consumers and pollute the environment. High levels of crop wastage also often occur through lack of post-harvest handling and storage facilities as well as through farmers’ lack of understanding of crop yields, irrigation and how to tackle pests and diseases. All these issues need to be addressed and alleviated where necessary before and after the initiation of primary vegetable production.

Processors and traders of vegetable products also have key success factors they need to consider and address, the most significant of which (among others) involve the existence of the following:

1. An integrated supply chain and scale of operations through the establishment of backward linkages with farmers

2. Possession of modern processing technologies to ensure efficiencies and quality of the end product

3. Direct access to markets at minimum or no cost

It is also important to note that on-farm processing (as opposed to more industrial operations) can represent realistic opportunities for small farmers, including:

1. Increasing the farmer’s share of food dollars by eliminating middlemen

2. Enhancing farm profitability and viability

3. Expanding consumer access to fresh, whole, foods

4. Building the local agriculture economy, creating jobs

5. Contributing to community culture and cuisine, quality of life, tax revenues

6. Reducing food miles and conserving energy

During its investigation, the Assessment Team endeavored to match the above Critical Success Factors with current practices in both primary production and the processing of vegetables in Georgia. The results of this research are highlighted below.

4.2.1.2 Description of Industry Makeup

There are two kinds of vegetables production: open field and greenhouse cultivation. Production of open-field vegetables is a challenge, even under conditions of good temperature, moisture, sunlight and other factors, including soil types. This sector covers field vegetables grown in the open, for example, carrots, cabbages, onions, and potatoes, among others. Within field vegetables, the most important irrigated crops include carrots, onions, lettuce, and baby leaf salads. These are all dependent on supplemental irrigation to maximize yield and quality. There is of course a significant difference between crops grown as seedlings and greenhouse vegetables, which employ heating equipment, cooling, and lighting in order to optimize conditions for plant growth. In Georgia, the most popular greenhouse vegetables are tomato, cucumber and peppers. In terms of vegetable production, Shida Kartli (50,000 tons annually), Kvemo Kartli (43,000 tons annually) and Imereti (26,000 tons annually) are the three main producing regions. There are four main companies in the country supplying vegetable seeds, fertilizers and pesticides: 1) Villanus Baltic; 2) Cartlis Agrosystems; 3) Noblex; and 4) Agrouniversal.

To increase Georgia’s vegetable yields and to offset imports, several large investments in greenhouse construction have occurred in recent years. For example, a multi-million dollar greenhouse has opened in the Kapanakhchi village, Georgia’s Gardabanim region within the framework of the government’s state program ‘Produce in Georgia’. The project was implemented by the French company Richen Group together with Georgia’s Co-Investment Fund.