Policy Briefs

Removing Obstacles to Investment in Georgia's Mining Regulations
Wednesday, 16 December, 2015

Although the mining sector of Georgia only accounts for a small share of GDP, around one-quarter of Georgia’s total exports are related to mining activities. Increased use of Georgia’s natural resources thus has the potential to benefit the economic development of the country as well as to contribute to public finances.

How can regulation be improved to strengthen the economic gains and public revenues from the mining sector? The current regulation creates unnecessary obstacles to investment in mining. These deter investors from increasing activities in Georgia, leading to the less economic growth of Georgia in mining and related industries as well as smaller public revenues from a sector that generally is highly interesting from a perspective of creating tax and other public income.

One key problem of the current regulation is the frontloading of the fiscal burden faced by mining companies due to an auctioning of licenses with a minimum price. As usually, only a single bidder exists, this system effectively reduces to an administratively determined fiscal burden in the early stage of a project, when investor liquidity is likely to be strained. Furthermore, not all existing geological information on potential mining sites is freely available, leading to unnecessary uncertainty about site attractiveness for investors. In the extraction stage, the royalty level does not respond to market price changes and payments are linked to pre-planned rather than actual extraction amounts.

We recommend a range of measures to increase economic activity in and fiscal revenues from the mining sector. First, inexpensive natural resources destined for the domestic market such as construction materials should be regulated separately from metallic minerals in focus here. Next, a national strategy for mining should be developed, which encompasses full and free access of possible investors to all existing information on sites and regulates the licensing process without minimum prices in auctions. Fiscal revenues should then be generated by using a two-stage royalty system with a fixed royalty (defined in money terms) per unit and a flexible element that depends on the world market price for the respective resource. The government should further consider joining EITI, the Extractive Industries’ Transparency Initiative, a group of countries with joint transparency standards for company data in resource extraction, hence strengthening profit tax enforcement.

Since September 2014, the ISET Policy Institute has been working with the German Economic Team (GET). In May 2015 ISET-PI and GET extended their partnership and began working on a variety of policy briefs for Georgia's industrial development. These briefs will simultaneously advance research in the sector and provide the Georgian government a set of guidelines for the development of its own policy, exploring where Georgia's comparative advantages lie. The German Economic Team is a consulting group that provides advisory services to the Georgian government on economic policy and is supported by the German Federal Ministry for Economic Affairs and Energy.

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