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Aerial view of farmland, Johannesburg, South Africa

Government Admits Exceptions into Land Law – Legal Amendments and Expected Outcomes

Parliament of Georgia has discussed a bill of amendments to the law on Ownership of Agriculture Lands by a first hearing.

In the transient period, the current moratorium about suspension of acquisition of ownership rights on agriculture land plots will not be applicable to commercial banks and microfinance organizations. The bill also grants discretional rights to Government of Georgia to pass corresponding decisions regarding exceptional cases.

Parliament member Anri Okhanashvili noted that this bill keeps considering a land as a special resource that must be owned by Georgian citizens. At the same time, the submitted bill is to prevent a legal vacuum so as the constitutional property rights be protected. The bill will work in the transient period until an adoption of organic law, which will regulate the land-related issues, Okhanashvili pointed out.

The bill obliges commercial banks and microfinance organizations to sell their own lands to Georgian citizens within 2 and 1 year period, respectively.

The Caucasus Business Week (CBW) has inquired reasons for making exceptions for the finance sector and what to expect from the government’s decision.

Beso Namchavadze, economist for Georgian Association of Reforms, explains that the Government has supposedly taken this decision to let commercial banks issue loans under land guarantees. This signifies the Authorities has decided to incentivize the banking-finance sector.

“Foreign citizens hold huge ratios in Georgia-based commercial banks and microfinance organizations. There are only one or two commercial banks in Georgia, where foreign capital’s ratio is small. Without the mentioned amendments, landowners would not be able to mortgage their property at commercial banks to take loans. This gap would frustrate agriculture sector development. We know that commercial banks try to avoid taking lands as loan guarantees if these lands are not of strategic importance. Therefore, this decision is to raise the interest of commercial banks, otherwise, Georgian citizens would not be able to take loans for agriculture lands and commercial banks would not accept lands as loan guarantees, because commercial banks would not be able to acquire ownership rights on agriculture lands in case of bad loans and loan risks would increase. As a result, previously, commercial banks used to issue loans for 10% interest rate, but now the  rate would increase and agriculture land as a guarantee asset would become a high-risky asset”, Namchavadze said.

As to reverse effect, Namchavadze fully agrees with the Government decision and says that bill will bring only positive results.

Irakli Makalatia, head of Center of Economic Policy Experts, noted that in this case the Authorities become a monopolist of land sales and they will decide themselves  to either sell and or not to sell the land resource to this or that client.  According to his statement, coming preferences to microfinance organizations and commercial banks are preconditioned by the fact that the banking-finance sector is the most developed direction in the country. Huge finances are circulated in this field and this factor preconditions state motivation too, he added.

The Authorities are carrying out unjustified economic policy, as they preserve the right to sell land in exceptional cases. Since they have announced a moratorium on land sales, this restriction is to be applied to both private  and state sectors. Moreover, the legislation should not comprise exceptions, the expert noted.

“Both commercial banks and finance sector are private, but it is unjustified when private sector becomes a monopolist and determines the rules of game on the market. As to why insurance sector is not mentioned among exceptions, I think the Authorities set barriers when the number of private owners declines. Consequently, number of insurance service beneficiaries declines and insurance companies are not interested. We have insurance products, but they are inefficient because of high interest rates and they are less applied. For the purpose of making agro insurance attainable, it is necessary that a great number of consumers exist. For example, if a person owns a 5-hectare land and its value is under 10 000 GEL, this property will not be insured. If this asset has real value, number of owners of similar assets will increase, competition will be intensified and insurance sector will be interested in developing new products and diversifying them”, Makalatia pointed out.

About 60% of agriculture lands remains in state ownership and it would be better to transmit these resources to private sector, to Georgian citizens and they will decide to whom and how to sell their own lands, he said.

“There are ungrounded fears as if Georgians will sell these lands and foreign citizens will settle the country. Today, foreign citizens buy lands because of low prices, but after privatization process, the land price will rise and the value of Georgian land will be commensurate with international tariffs. As a result, foreign citizens will encounter high prices. In similar cases, the price becomes a natural regulator for the people we are afraid of so much. As to financially strong foreign companies, they will pay several ten thousands of EUR in case of due interest”, Makalatia noted.

At this stage, foreign citizens own about 5% of agriculture land plots in Georgia, that is 2% of total land fund. This is a very small figure and it cannot be hazardous for the country, Makalatia said.

After amending the Georgian Law on Agriculture Lands Ownership, investors will not have attractive business environment, Makalatia added. “When investors enter the country, they have to conduct negotiations with not private sector, but the Government. And this is not an attractive environment for an investor and they prefer to communicate with the private sector”, Makalatia said.

As to economic effects, the expert says that adoption of similar amendments will generate various negative processes, including a frustration in agriculture sector development, the expert said.

“Today agriculture sector cannot be developed, because farmers lack for financial resources to cultivate the land. Therefore, the price of land assets should be high. If the price of one hectare is 10 000 USD, in this case commercial banks will lend at least 50 000 USD to farmers and this is an unimportant sum to make something valuable in agriculture sector. The time has come to make land assets more expensive to attract additional financial resources in this way”, Makalatia noted.

Rahim Abachi, director general of Chamber of Commerce of Iran, also talks about sales of agriculture lands to foreign citizens. According to his statement, after legal restriction of sales of agriculture lands to foreign citizens, two quite major Iranian investors refused to make investments in Georgia.

The Georgian Authorities have taken incorrect decision and this step will bring quite negative outcomes in the future, he added.

“Several investors were interested in making significant investments in the country. They intended to buy lands, but we failed to assist them. Foreign investors will not take risks of making investments in the country if they cannot have lands in ownership. We had two similar cases”, Abachi said.

It will be wonderful if the law comprises exceptional cases, namely, if lands will be sold in case of large-scale investments.

Sascha Ternes, head of supervisory board of German Business Association, noted that mistakes from restriction of agriculture land sales to foreign citizens may bring serious negative results and thwart agriculture field development for many years.

Sascha Ternes told the Commersant radio station that the regulations should not thwart investing process. “The new law should not contradict bilateral investment agreement, including Germany-Georgia agreement. Therefore, it is our recommendation to maximally involve business in the issue resolution”, Ternes noted.

Georgia needs foreign investments and agriculture sector is a good asset in this respect. At the same time, we should be sure that lands are not purchased for speculations, he added.

There is threat that investors may lose trust. When the issue is of administrative regulations and exceptions, the process should be transparent to prevent arising additional questions, Ternes said.

As reported, the bill submitted by Georgian Dream is being discussed in accelerated regime. According to United National Movement members, the ruling team has taken the decision that is directed against economic development of the country.