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INTERVIEW caucasus business week
February 29, 2016 #135
IRAKLI ROSTOMASHVILI: BANK OF GEORGIA DECEIVES YOU BY PUTTING YOUR MONEY INTO M2 Relations between the development sector and commercial banks are worsening day by day. Developers accuse commercial banks of savage crediting policy, while commercial banks do not plan to abandon non-core assets, especially development companies. In his interview Irakli Rostomashvili, the president of the Georgian Association of Developers overviews this and all other interesting issues.
However, Bank of Georgia provides tireless efforts to firmly clutch various business fields in its tentacles. - In 2005-2007 the development sector was a leading chain in the Georgian economy. Following the period of wars and global economic crisis, the development business turned out vulnerable to major challenges. What is the current situation in the field, what are the main problems before the developers and why have they failed to overcome the crisis period? - The development business may be compared to a mighty bomb with enormous potential that is based on staff, professionals and traditions. Qualified approaches and political goodwill are required to develop this sector. So far every efforts were taken to terrorize and hobnail this field. Therefore, it is surprising there are still some efforts to achieve success in this field. I mean not only tax burden, but also the attitude to representatives of the housing sector, while the development business was a field that used to create material goods. Naturally, other fields are also well-developed, but a major part of the revenues from the trade industry goes to the foreign countries of origin and only small part of the revenues remains in Georgia. The same challenges are reported in the agriculture sector too, because today imports accounts for 80% in Georgia’s total agriculture product consumption. To outline the problems arisen after the 2008 developments, I would refer to one sample. On August 7 Korean elevators were delivered to Georgia for one of the facilities. The developer referred his manager to Poti for transporting the consignment to Tbilisi, but the manager failed to reach the city because of road obstruction near the city of Gori. This situation lasted three months. The highway was unblocked and the company representative arrived in Poti, but he was said to pay a fine for storehouse demurrage for three months. Having paid the fine, the customers sued against the company for delay in finishing the construction works. Moreover, a commercial bank increased the interest rates and the company had to pay higher interest rates. Similar approaches have aggravated situation in the development business. - Today such famous developers as Arci, Axis, Center-Point, Olympic Star does not appear on the market. Where have these companies disappeared and what is the fate of their unfinished projects for which the customers have already paid money? - These companies are facing serious problems at this stage and these problems are mainly related to the projects commenced before 2008. I mean Arci and Axis companies. The situation with Center-Point is different. The worst things in the business sector start when the environment
and rules of games change. This situation resembles a football match, where a referee introduces rugby rules.
The next day after the outbreak of war, on August 9 developers received letters from commercial banks notifying the credit interest rates had grown to 22% from 12-14%. Moreover, commercial banks revoked the credits instead of their extension. In that period developers used to receive revenues mainly from presales, because their brand-names and images were guaranteeing project completion. However, presales ceased. As a result, the commenced projects were left without financial sources and the construction schedules were violated. As a result, the customers rejected payments and violated contracts. This signifies the whole pressure came on the development business. Therefore, currently these companies are trying to settle the previously arisen problems and return to the market stage by stage. - How would you characterize the current relations between commercial banks and development companies? Is it easy today for developers to attract due financial resources? - The attitude of commercial banks towards the business could be appraised as catastrophic. There are 19 commercial banks in Georgia and we are said to apply to other banks if we do not like one. Traditionally, several commercial banks were engaged in the development business, Bank of Georgia, TBC Bank and Bank Republic. Other banks had not developed portfolio in this sector. Developers established relations with the mentioned three banks initially. Consequently, they have to cover certain liabilities to apply to other commercial banks. Conditionally, 85 companies out of 100 ones had relations with Bank of Georgia, 8-10 with TBC Bank and the remaining five ones with other banks. It is logical and justified that commercial bank take over a certain business in case of repayment problems. And the commercial banks will try to sell the asset as soon as possible.
No banking organization issues loans without purpose. They demand specific projects. They explore the feasibility of these projects. If they found the project feasible and valuable, they issue loans. At the same time, Bank of Georgia follows the policy, when the client pays additional sum so as the bank control the loan spending. And now it is interesting which land plots has M2 company owned by Bank of Georgia used for construction projects? M2 launched projects on the land plots that previously belonged to other companies; but
Bank of Georgia has done everything that these projects fail. Then the bank purchased this site and implemented the same project and received huge profit. This is a criminal case. In this case I do not accuse the bank, as a finance organization. A certain part of officials are guilty who have fostered certain violations in this direction and ruined the business and the Georgian economy in this way. In turn, they earned enormous profits for themselves. I believe a commercial bank will make a fortune from strong and solvent clients. I do assert that a commercial bank that has business in any field is not interested to assist its competitors. - Under the decree of the president of the National Bank of Georgia (NBG), commercial banks are banned to own subsidiaries. Was this decision implemented in real life and do major business companies intervene in the developing business? - I have asserted for many years this decision was necessary and finally the national bank announced that noncore businesses would be stripped from commercial banks. For five years I have demanded this evident truth. In practice, a commercial bank is an organization that is to operate and drive the business, while the different realities are created in Georgia, because commercial banks serve their own interests. They say that there are commercial banks with similar priorities in several countries. These are investment banks that make focus on a specific field. For example, one makes focus on the power sector, another on agriculture, third on development sector and so on. If you deliver your savings to Bank of Georgia, conditionally, in the amount of 10 000 USD, the annual yield will be 5%. If you ask why only
5%, they will say that the bank issues the loan with 12% interest rate along with risk percentage, service fee, other expenditures and only 5% are left. In reality, Bank of Georgia directs your money into the development sector, from where it may receive 50% benefit. When a person applies to an investment bank, they are asked whether they are consent that their money be put in construction of a certain facility. Through this mechanism, the individual becomes a co-participant in a specific business project for a certain period. So, Bank of Georgia seems to be deceiving you, because the bank puts your money in M2. Does this company earn only 5% or 12%? This signifies the construction projects are implemented through your money, while you receive only 5% and the remaining profits go to their pockets. I am ready to discuss these issues with any opponent. No commercial bank in Georgia is tuned to develop the business sector. - Apartment prices have declined recently, but the sales are decreasing anyway. What do you think about reasons? Has the demand fallen or the supply is too high?
The sales are not declining. Today about 90% of Tbilisi residents want to improve living conditions. This signifies this part of our citizens will invest money in real estate as soon as they acquire similar resources. The reason is that the apartment space is not sufficient frequently or the building is outdated or several generations reside side by side. Therefore, problems are related to financial resources, not lack of supply or demand. - For the past years active discussions were underway on adoption of the building code. Was this code adopted and what changes have taken place on the market in this respect? - The building code has not been adopted yet. This process started about 18 months ago and proceeds in collegial atmosphere. We, the developers’ association, were invited to the working process. Moreover, the first version of the code was unacceptable for us. Currently, all our recommendations have been envisioned in the code. This document is important and necessary for our country if we want to follow the European values. According to the document, labor safety, compliance of materials with standards and so on should be preserved. The code comprises standards and norms that are recognized in the civilized and high-developed world. However, there is a problem too. To satisfy these requirements, we need specialists. Good laws always required qualified specialists. bfm.ge