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Marlboro Country
it isn't...British American Tobacco Georgia Fights Corruption and Slipshod Tax Enforcement. |
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| By Jeffrey K. Silverman |
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Many complain about the ills of tobacco. Meanwhile tax money is generated to governmental budgets in paying for schools, hospitals and other demands of
any society. This is not the case in Georgia, not because the British American Tobacco is not willing to pay their legal taxes but because there is large-scale
smuggling of cigarettes in the region. This is a direct consequence of the layers of vested interests that are involved on making sure the budget doesn't
receive any money to distribute. There is much documentation showing how the current political situation in Georgia serves as an economic no-man's land
between the West and other republics of the former Soviet Union. Serious business interests and multi-national companies like BAT have been threatening to
pull out from Georgia and the region in response to the business climate and endemic corruption. In a press release earlier this year, British American
Tobacco said:"Unless urgent steps are made to improve the business climate BAT will be reviewing its investment plans." Having worked in the tobacco business
for 15 years, the editor of Azerbaijan Today, Jeffrey Silverman believes that this will not come to pass anytime in the near future but it should be considered as a sign that every firm has a point where it will walk.
In an article published recently on Eurasia Insight, he wrote that law and order can likely cut "into profits from the smuggling of
fuel, tobacco, and weapons. The prospect of a better trained Georgian troops looking for corrupt activity could also upset the country's status quo, from the Pankisi Gorge to
South Ossetia (lawless and breakaway regions) and at points in between." This story can be applied to many marginal countries in the former. The point is to provide a case
study to illustrate the situation - something has to be done to attract and keep high-level business, especially from the private sector. Many of those making business in
Georgia are often, shady operators who are more interested in the chaos and instability, which provides the perfect conditions for money laundering and other criminal
activity. The West is already up against the business environment in their effort to promote law and order. If Georgia loses BAT, then it will be yet another black
mark on the report card of where not to make business. Many Georgian officials are actively involved in making cigarette deals that produce untaxed profits.
Regardless of the right or wrong of the system as it stands, BAT faced the same problems with their UzBAT operation, which was a joint venture between BAT, "Uzmalozhir-tabakprom" - cottonseed oil fat and
tobacco association under the umbrella of the government of Uzbekistan. It was thought to have been a marriage made in heaven. Investments flowed into leaf growing and tobacco-processing plants - centers of
the UzBAT operation included Samarkand and Tashkent. A state of the art cigarette factory was brought on line. Investments made don't mean dividends back. The problem in Central Asia was a direct result
of having negotiated a contract with a corrupt government that was also benefiting with barriers implemented to keep currency from being freely and legally converted.
BAT was granted the exclusive right to grow and export tobacco for several years as an incentive package. The company took the bait hook-line and sinker. The deal was concluded by the best minds and all things were thought out
carefully - so it seemed.Coca Cola learned the same valuable lesson; the playing field was more level since the deal with cemented with a marriage between Karimov's daughter and the director
of Coca Cola. Things soured when the daughter of the Uzbek president divorced. Closer to Baku, Coke does business in Georgia thanks to the gift of 50 million for economic development from
the Turkish government. However, like so much international money, this ended up as the private investment fund for one very close to president-elect Eduard Shevardnadze. It is yet to be
repaid and sources within the Georgian government and non-governmental sector claim that it will who earned marked this for a close associate will likely never be repaid.Corporate learning
curves are expensive and more attention should be directed to perceiving problems before they cost shareholders revenue. As with BAT, the management thought it had a monopoly on the growing
and export of tobacco and raw material. Reality only too soon proves the way things are actually done in Uzbekistan. Old habits are hard to break. Regardless, BAT decided to continue
business with an eye to the strategic long-term. BAT is an international company that produces upwards of 85 percent of their own raw material and purchases certain grades from
dealer companies from many different countries.BAT industries has brought prosperity to many developing countries but the problems that face Georgia will likely continue. Regulation
and actions by the government will not result in anything. The profit levels for the key people involved in the import and transit of non-taxed tobacco is too high.
The result of the Georgian reality may prove that more attention should have been given to a country risk analysis and to understand the political and economic structures. The experience in
Uzbekistan has been a valuable lesson for management. Several years ago, Alain Schacher, leaf director Urgut tobacco processing plant. He believed that "UzBAT was going to
be able to develop this plant as the "Center of excellence" for manipulation and fermentation in all of Central Asia. It would be possible to eliminate taxes on imported
tobacco for several years provided BAT would invest money and technology transfer into the historic growing regions of Georgia. In theory - reality is somewhat different.
Many wonderful opportunities for value added activities are being lost because the leadership and business leaders are only looking for today's payoffs - both in terms of
immediate profit and bribes.ITS, a British inspection service was contracted by the government to address the problem of contraband and tax collection; the attempt was a dismal failure.
This was not because of the lack of professionalism of the employees but that the Ministry of Internal Affairs had a different business plan. The alternative is to reduce the cost of
tobacco by encouraging local production and look to the long-term payoffs. BAT also benefits from some of their production being marketed in various parts of the world under very good terms.
There are the main producers of tobacco in many South American countries. In Georgia certain elements in the Ministry of Internal Affairs and government are calling the shots. It is doubtful if
anything will change until there is a paradigm shift in what the purpose of government and various agencies is.Foreign companies such as British American and the foreign controlled and operated
electric supply AES Telasi should calculate the externalities of setting up shop in such a market. If private foreign investment is to be encouraged, it is necessary to provide investment guarantees.
The main problem for Georgia is to devise policies that both encourage the inflow of private foreign capital and ensure that it makes the maximum contribution possible towards meeting the development objectives of that country. Georgia and any other nation state must first define these in
order to define whether or not there is going to be a level playing field. What works on paper will not have any positive impact unless it is accompanied by legal enforcement. This must be within the framework of an open and progressive business climate. Government must go beyond political
rhetoric.BAT is correct that the current circumstances in Georgia are a barrier to foreign investment and how it is almost impossible for local manufacturers to compete with much larger factories in neighboring countries who pay less taxes. Taken together with widespread smuggling and back
handers, it is nothing new for government policy makers to not follow economic rationality, but instead they would rather pursue their own political resources, and maintain the economic status of their key supporters in government by sharing in the spoils.
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