EPI Investment Case Study: Competitiveness of Georgian Agriculture – AgriGeorgia

AgriGeorgia started operations in March 2007, following a strategic decision by the Italian confectionary giant, Ferrero, to develop and diversify its hazelnut supply base. After six years, the company’s total investment stands at more than EUR 40 million, which has included the purchase of 4,000 ha of land, agricultural machinery, construction of facilities and operating salaries. The company has yet to turn a profit. The first 40-ton test harvest was collected in 2012, and full production capacity will not be reached before 2020.

While the overall investment is proceeding, Ferrero has faced significant issues with access to about a third of its landed properties. Ferrero has managed related disputes with the local communities with the active involvement of the Georgian government, resulting in compensation for affected smallholder farmers and land swaps.

Given AgriGeorgia’s self-sufficiency in local production inputs and services other than labor, the main “external” aspect of the company’s operations is related to a unique portfolio of Corporate Social Responsibility (CSR) activities. AgriGeorgia’s CSR portfolio is truly unique in that it includes a major component implemented as part of a Global Development Alliance (GDA) with the US Agency for International Development (USAID). Assisted by USAID’s Economic Prosperity Initiative (EPI), this Public Private Partnership (PPP) allowed for the implementation of a massive training program promoting modern but accessible cultivation and post-harvest handling methods. The USAID- and AgriGeorgia-supported training and extension services ultimately reached thousands of hazelnut growers in the Samegrelo region. The effort culminated in the creation of the Georgian Association of Hazelnut Growers (GHGA), which, while nascent, is mandated to propagate modern technologies, facilitate cooperation among smallholder farmers, and represent them in discussions with the government and other industry stakeholders.

Ferrero’s decision to set up its operation in Georgia can be said to reflect the country’s progress in securing investors’ rights. At the same time, the company’s early successes should also be attributed to Georgia’s generally liberal business environment and the Georgian government’s continuous attention and willingness to engage—at a sufficiently senior level—in redressing any grievances or legal complications concerning the company’s land acquisitions and relations with local communities. The need for Georgia to maintain this type of supportive engagement with foreign investors is the first key lesson of this study.

The second key message concerns the negative impact of Georgia’s current legislative drive to restrain foreigners’ access to agricultural land, introduce tougher labor market regulations, and impose a stricter visa regime with many non-EU nations. At best, the moratorium on foreign ownership of agricultural land can be used to gain time to sort out persistent land registration issues, but on balance it sends an overwhelmingly negative message to would-be investors. Because they have the clout and market pull to special government attention to solve their problems, large global players like Ferrero may still be willing to invest in Georgia despite these restrictions. But this favors large companies and depends on the continued willingness of GoG officials to intervene on their behalf. This has its own negative connotation, and it sends the wrong message about rule of law and transparency. Georgia should expedite the process of developing new land legislation allowing for foreign participation in the development of Georgian agriculture.

The third key message of the case concerns opportunities for Georgia to maximize the benefits of foreign direct investment (FDI) by promoting Public-Private Partnerships involving foreign companies, donors and government institutions. The challenge for Georgia is to make sure that Ferrero’s presence and willingness to engage in Georgia is fully utilized, not only for public relations purposes, but also to improve the lot of Georgia’s smallholder farmers. It may be years before Georgia sees the direct revenue benefit of significant tax revenue from AgriGeorgia and other greenfield agribusiness investment projects. But there are myriad more immediate benefits, from knowledge transfer and productivity gains to increasing integration of Georgian smallholder farmers into national and global value chains.

Ferrero’s partnership with USAID demonstrates that a strategy to attract investors for the dual purposes of making productive use of uncultivated land and helping local farmers thrive can yield outsize benefits. With the right strategic partnership between government, donors, and the private sector, the latter goal of raising the productivity and improving livelihoods of smallholder farmers becomes even more attainable.

As a result of expected improvements in access to Eurasian and European markets (e.g. under the DCFTA), the Georgian agricultural sector is very likely to receive considerable investment in modern primary production and processing. Such investments—and the export opportunities they will bring—will create ever stronger incentives for smallholder farmers to commercialize their activities, improve product quality and achieve market access. Under these circumstances, well-structured, win-winbased PPPs like Ferrero’s partnership with USAID present one excellent way to harness private sector interests to economic development goals.