Lessons for SA? Ex-Georgian PM – rooting out corruption, growth in 5yrs

The former Prime Minister of Georgia, and McKinsey partner, Nika Gilauri caught up with Tim Modise at the Biznews studio, talking about his career in the Georgian government and how he became Prime Minister at the age of 33. Gilaur , who first started out as the country’s Energy Minister, developed Georgia into a net exporter of electricity in two years. The former Prime Minister tells Tim how government improved its ‘Doing Business’ ranking from 112 to within the top 10 in five years – the country’s economy grew and per capita increased four-fold in that period. Nika Gilauri says fighting and reducing corruption is a very important element of improving a country’s economic performance.

Nika Gilauri is the former Prime Minister of Georgia, partner of McKinsey and is with me here on our Transformation Section. Nika, thank you very much for joining me.

Thank you very much for inviting me.

Your biography is very interesting. You have occupied several senior positions within the Georgian Government at a much younger age than is typically, the norm. Tell me a little bit about your story. How did you get to the top – Minister of Energy, Minister of Finance, and ultimately, Prime Minister of Georgia?

I became Minister of Energy when I was 28 years old but the main reason for me becoming Minister of Energy was maybe because nobody else wanted that position. Back in 2004, Georgia’s energy sector was in a mess. We had blackouts. We had a terrible situation – one of the most corrupt sectors in the region. People would come out in the streets, demanding to know when exactly, they would get their scheduled electricity of two hours. In wintertime, there was a situation where some towns wouldn’t get electricity for days or weeks. Electricity was one of the main reasons why the peaceful revolution in Georgia happened. When new Government came in power, everybody realized that they needed somebody who would take charge of the energy sector. Nobody wanted to take that position, I’m guessing. Maybe I was young, stupid, and a bit ambitious and I decided to go for it.

That experiment worked very well. Within two years’ time, Georgia became not an only energy-sufficient country (not talking 24-hour supply), but we also became the main electricity exporter in the region. That was my first success story as a Minister. I was a technocrat. I wasn’t a member of any political party and after that, I was offered the position of becoming the Minister of Finance, and then I was offered the position to become Prime Minister of Georgia at the age of 33.

Well, let me go back to the time when you were Minister of Energy because we’ve had our fair share of problems with energy here in South Africa. To transform from scheduled two hour of electricity supply per day to 24 hours available electricity and even go on to export within two years, is quite an achievement. What did you do the, as Minister of Energy, that changed the situation?

Different countries and different energy sectors face different problems. The problem with Georgia was mainly, collection rate, unbalanced financial system, and corruption. For example, in the case of Georgia, our collection rate was approximately 30 percent. You can imagine that whatever product was produced by the energy sector, only 30 percent was collected. The rest went to the pockets of some bureaucrats and some others. Nobody knows and because of this financial mess, there was not enough funds to rehabilitate the sector. There was not enough funds to even give salaries so that was the main problem of the sector. What I did in two years’ time was I fixed that problem. Within two years’ time, we had a collection rate of 98 percent. Everybody was paying for their electricity consumption, which caused decline in consumption.

When you consume electricity and you are not controlled for that, you consume as much as you want. Somebody from the energy company comes to you and you just pay a small amount of money into his pocket. He goes away and you consume as much as you can, possibly. If you pay for whatever you consume, it’s a different story. What happened was with the increase of collection to 100 percent, we had a situation where our consumption decreased, which helped us. In parallel, we did rehabilitation of the energy/power sector and that was a good enough achievement in order for us to have a totally new energy sector and have 24-hour supply. Change of management, change of the financial systems, change of the tariff methodology, and checks and balances (so nobody could steal electricity anymore) were the main achievements of the first two years of me being the Minister of Energy. As a result, we had the turnaround story.

When you became Minister of Finance, what were your immediate challenges? I can imagine that the economy… In fact, one of the stories I like about your life story is that it happened at a time when the world was facing serious financial problems – the financial meltdown of 2008 and again, you had been thrown into the deep end there. What happened?

I guess I was used to taking positions that nobody else wanted. In late 2007, I became Minister of Finance and in early 2009, I became Prime Minister and it’s exactly the period where the World Financial Crisis hit our region. In addition, we had the Russian invasion in August 2008 and it’s not an easy thing geopolitically, to have a Russian invasion and after that, to survive economically. You’re absolutely right. Our biggest challenge was economic survival at that moment. We came up with a rather interesting formula, which I would like to call anti-austerity. Whatever the IMF or international financial institutions asked us to, we did the opposite. In our case for example, instead of increasing taxes, I decided to go ahead with decreasing taxes. For example, our personal income tax was decreased from 25 percent to 20 percent. We put more money in infrastructure.

We increased our budget deficit but for a very short period of time (two years) and invested heavily in infrastructure. It was the anti-austerity formula, which we came up with and it worked. The year that I became Prime Minister was the year we had the -3% growth. It was just the worst year. The next year, it was already +6.4% growth, so we were the fastest economy that got out of the financial crisis in the region and we were the fastest-growing economy for a few years. We created a new formula. We didn’t really go with the model, (which is called austerity) when you have to balance the budget, increase taxes, and decrease all the expenditure. No, we don’t believe that this was the right way for Georgia to go ahead and it worked for our case.

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During your life in politics and leadership positions, you learned a few things and you were exposed to a lot, I can imagine. Talking about the invasion of your country by Russia for instance, being one of the challenges you had to deal with, but I heard you at the conference that we attended. You were talking about corruption. How serious was corruption in Georgia and what did you do to help reduce corruption?

I believe that in 2003, before the new Government came in power, Georgia was one of the most corrupt countries in the world. I even joke that if there was a world championship in corruption, Georgia would win the title every year. At least, we would go to the finals every year. Actually, in 2004, when the new government came in power, it was a very interesting situation because the population gave the new Government a mandate to ‘do whatever you can do, guys. Do it. Just fight corruption’. That was the new wave when we decided to do whatever was possible to get rid of corruption. I’ll give you a couple of stories. I’m not sure that these measures are applicable to many countries but I’m sure that some of them can be very well copied and pasted in many African countries (amongst them – South Africa). The story that I like to tell, but which I don’t think is applicable is the story of traffic police.

Georgian traffic police was one of the most corrupt and in one day in 2004, (I think it was the 18th of April), we fired every single traffic policeman in Georgia and traffic was much better without traffic policemen. It took us three months to recruit new staff, but for those three months nothing really happened. Georgia faced no big problems despite the fact that we didn’t have any traffic policemen in the streets. That was the first stage. The most important formula to fight corruption was done in the following way: the first stage was simplification of rules and regulations. Whatever we couldn’t rule or regulate, we got rid of. For example, we decreased the number of licenses and permits by 85 percent. These were permits and licenses, which didn’t make sense. In a Scandinavian country or a European country, they may make sense because they could have been regulated properly and proper salaries could have been paid to the staff, etcetera.

In the case of Georgia where we didn’t have enough financial resources and human resources, these regulations didn’t make sense. I’ll give you just one example. According to Georgia regulations, if you had a car you had to go to a special technical checkup once a year and the Technical Checkup Department of the Ministry of Interior of Georgia would tell you what is wrong with your car and what needs to be fixed. Georgia wasn’t a rich country and still, is not a rich country most of the cars had something that needed to be fixed but nobody would fix it. This was invented for safety regulations, which is a noble cause but in reality, it was a source of corruption. Everybody would go there, just pay a bribe, and get a notification that nothing is wrong with the car. Even if you don’t go there, every time a traffic policeman stops you; instead of giving him a document, you give him a bribe.

It was a noble cause in the beginning, most likely, which was why this regulation was invented but in the end, it caused only corrupt practices so we got rid of that. Nothing bad happened but we got rid of these types of licenses, permits, and regulations as much as possible. This was one of the biggest achievements for us in fighting corruption. The second stage was actually a carrot for our civil servants. We decided to shrink the number of our civil servants, but increase their salaries – significantly increase their salaries – and accept the bonus system for a good performance. I think that was also one of the major reforms that helped us to fight corruption. The third was a very strict rule. It doesn’t matter who you are, whether you are a Member of Parliament, Member of Government, or family of the top political leader; if you do something wrong, you’ll be punished for it.

We actually even publicised lots of this type of events where high-level people were actually punished for bribery or for corrupt practices.

Read also: Vavi on SA: ‘A kleptocracy led by thieves’ – corruption cost R700bn in 20yrs

Let’s talk about the transformation of your society and its economic system from recession (-3) to growth rates of six percent, and these happened on your watch – during your time.

Even nine percent, yes. We had an average growth rate. For some period of time, it was nine percent.

Very impressive. Then you’re coming from a history where you were part of the USSR at some point (a communist country) where you must deal with that historical legacy. Then you have to deal with the domestic issues (some of which you’ve just outlined here) so talk me through the transformation that took place within Georgia overall, which led to those types of growth rates as well as creating a climate that’s conducive to doing business in Georgia.

In 2004, we had to come up with some kind of business model for the country. Georgia is not an oil-rich country. Georgia is not a diamond-rich country or with any natural resource, actually. We are maybe a bit rich with hydro resources but it wasn’t very well developed back then. We had to come up with some kind of business model for fast economic growth and for us, this model was what I call ‘hub economy’. By the way, South Africa is perfectly suitable for becoming a hub and it is becoming a hub economy, but I have a slightly different definition of hub economy. The definition of hub economy is (1) it’s a business environment. By business environment, I mean a low level of corruption – at least, a lesser level of corruption than neighbouring countries. Tax rates. Tax rates should be acceptable for the private sector.

So-called doing business environment, which is like how easy it is to start a business, pay taxes, and get electricity etcetera. The World Bank does this Business Report annually and it’s actually a very good document to check countries’ performance vis-à-vis neighbours and vis-à-vis other peer countries. That’s one part of hub economy – business environment. Taxes, corruption, and doing business. (2) International trade. How well is your contracts with your neighbouring countries or with big markets, about trade? (3) Infrastructure. How well is your infrastructure developed for transportation, ports, and airports etcetera? If you have these three together, I believe that a country can become a hub economy and a hub economy has to very good points. (1) It gives a higher growth rate to a country vis-à-vis its neighbours and (2) during recession time, it’s more resilient because it absorbs many different countries around it.

If one trading partner is going down (GDP-wise), others are going up and it kind of balances out. For example, in Georgia’s case, we did four or five years of these reforms. In Georgia’s case, we had a very good balanced trade with Europe, Middle East, and Asia. One region was going down and another was going up and because of that, this hub economy worked very well for Georgia. This was a kind of vision of our Government for Georgia to be transformed into a hub economy. It actually happened. How did it happen? It happened by fighting corruption. It happened by actually looking at every single rule and regulation from the private sector’s point of view and I think this is the most important vision from the Government. We believe that in the long run, Government cannot create jobs. We believe that Government is there to create an environment where private sector should lead in creating jobs.

We just decided to do anything possible for the private sector to become as free as possible – for Georgia to become as attractive to the private sector as possible. You can actually see from these ratings that according to the World Bank, Georgia was 112th in the world in the Business Report in 2006. Within five years’ time, Georgia was 8th in the Top Ten. This is a transformation from 112th place to number eight, which no other country has ever done – either before that or after that. Georgia was the only developing country that got into the Top Ten and the Top Ten countries are countries such as New Zealand, Singapore, U.S., U.K., Denmark, Norway, South Korea, and Georgia. It’s perfect company to be in. By that achievement, we actually sent a very clear message to international investors. If you want to invest in this part of the world, why don’t you come to Georgia, invest here first, and then you go to Caucuses, Central Asia, Turkey, or Middle East?

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That is what actually happened. A very good example of that our track record of export items. In 2004 and 2005, the number one export item of Georgia was scrap metal. Can you imagine how bad the shape of the economy of Georgia was, that the number one export item was scrap metal? Within three years’ time, the number one export item of Georgia was actually cars/vehicles even though we don’t produce any cars. Since our regulations were so simple…because our tax system was so simple and so law…because our corruption rate was so low, many car manufacturers around the world decided to bring their produced cars for a holding region in Georgia, store them in Georgia. Dealers from Armenia, Kazakhstan, and other countries would come to Georgia, buy from Georgia, and take them away. It’s not a pure export. It’s a rare export but it created more than 20,000 jobs.

A very simple thing. It’s not like building a new factory or building a new farm. By simplifying rules and regulations, and investing some money infrastructure, by decreasing the tax rates and by decreasing corruption rates we actually created a totally new concept in our region, which was a hub economy. It was functioning very well and created lots of jobs because of this new structure and new regulations.

Very briefly and from your own personal experience, if you were to give advice to countries on the continent and elsewhere that are trying to fix their economies and realise growths that can deal with unemployment and so on… To your mind, very briefly, what do you think are the steps to take to achieve that?

By the way, that’s exactly what I currently do. I advise countries in Africa. I advise countries in Europe, Middle East, and Central Asia on macroeconomic reforms and business environment reforms. I believe that simplifying rules and regulations, taking out Government bureaucracy wherever possible, and de-bottlenecking private sector problems should be the most important job of the Government. Allow the private sector to do its job with minimum interference from Government and they will deliver it. I believe that the biggest growth that can come in African countries, which hasn’t been realised yet, is small to medium-sized enterprises. I understand that many governments are going for big FDI tickets, big companies to bring money in and create jobs, which is create.

It can be done and they should continue, but de-bottlenecking problems for SME’S, for the small, new entrepreneurs to enter the market, for them to earn small money and create new jobs; I think there’s a huge potential, which many African countries haven’t realized yet. They can do it very easily. It’s not very difficult, by the way. There is quite a good structure/blueprint for it, which is even in the Georgian experience – doing a business report. You can actually check how easy your business environment is vis-à-vis your neighbouring countries and you can actually go with some steps in that direction.

Thank you very much Nika, for talking to us. I appreciate your time. Thank you.

Thank you very much.

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