Dream Big But Don’t Forget To Deliver!

Part I: THE DREAM

“I never liked Mishiko [Saakashvili] because of how he treated people”, Tamuna Meunargia tells me, “but he knew how to dream big”. We are sitting on the patio of the Legends Tskaltubo Spa Resort, enjoying an exceptionally warm late autumn day. Tamuna is a childhood friend of the owners, Rezo and Andro Dzhishkariani. A classical ‘city girl’, she moved to Tskaltubo two months ago in order to manage the place.

The hotel is the only former ‘sanatorium’ open for business in Tskaltubo - once a bustling all-Soviet center of spa tourism, now a ‘sleeping beauty’ in the vicinity of Kutaisi. I am here for a weekend retreat with a group of Caucasus University colleagues. Our only company are a handful of Russian-speaking families, spa tourists from Kazakhstan relishing in Tskaltubo’s radon-rich waters and beautiful autumn colors. However, the high season has just ended, and Tskaltubo is getting ready for a lengthy winter hibernation period.

Previously known as the Military Sanatorium, the hotel is the only Soviet-era resort in Tskaltubo (out of 23) that was not settled – and plundered – by Georgian refugees from Abkhazia (commonly referred to as Internally Displaced Persons - IDPs) in the early 1990s. Rezo and Andro bought it in 2009, having been impressed by Mishiko’s vision to turn Tskaltubo into a crossbreed of Las Vegas and Baden-Baden.

Mishiko dreamed big: Tskaltubo was to be restored to its former glory. Instead of healing the joints of fatty Soviet bureaucrats shipped by a daily train from Moscow, Tskaltubo was now to become an offshore zone, attracting gamblers from all over the (Muslim) world.

The Saakashvili administration amended the Georgian law on gambling establishments, eliminating the licensing fees for casinos located in designated areas, such as Tskaltubo. This was a serious incentive, considering Tbilisi’s licensing fees of 3mln GEL and 1mln GEL in other locations. Plans were quickly developed to rehabilitate the entire 78ha of parks and public recreation areas; repair drainage, drinking water and sewage systems; resettle thousands of IDPs (legally) squatting in 22 Soviet resorts (‘sanatoriums’) and privatize them to new owners; and attract private investors interested in the restoration and operation of nine mineral springs – a critical piece of Tskaltubo’s spa tourism infrastructure. Adam Smith’s invisible hand would take care of everything else – a shopping mall, restaurants and cafés, nightclubs and beauty parlors, bike rentals and sports facilities.

Rezo and Andro Dzhishkariani wanted to gain a first-mover advantage in the potential Tskaltubo Gold Rush, and quickly staked their claim on one of the best assets in Tskaltubo, the 500-bed, 16ha Military Sanatorium. Other investors followed suit. Zviad Zviadadze acquired Shakhtior, the largest resort in Tskaltubo, once a pearl of Stalinesque architecture; Badri Kakabadze purchased and fully restored the mineral springs #1 and 2; and mineral springs #6 and 9 also sprung to life thanks to another group of private investors.

Legends Tskaltubo Spa Resort, previously known as the Military Sanatorium, is the only Soviet-era resort, out of 23, that is currently open for business in Tskaltubo. 16 are still occupied by IDPs from Abkhazia; six are in various stages of privatization.

PART II. THE REALITY

Large parts of Saakashvili’s original dream were implemented, although with a significant delay. Aleko Dadunashvili (39), Tskaltubo’s deputy mayor, gave me a long list of recent accomplishments when we met on a busy Friday afternoon, just prior to Georgia’s presidential elections.

Financed by the World Bank, the rehabilitation of Tskaltubo’s dilapidated infrastructure started in 2014. A total of 12 large projects have been implemented to date, including constructing new drainage canals, greening of the central park, restoring drinking water and sewage systems. All streets and the main road connecting Tskaltubo to Kutaisi have been repaved and road lights were installed. And, of course, the opening of the Kutaisi International Airport in 2012 made Tskaltubo much more accessible for tourists from an ever growing number of European destinations.

Aided by the general surge in foreign arrivals to Georgia, the number of tourists staying in Tskaltubo has grown over time, from 12,000 in both 2014 and 2015, to 18,000 in 2017, to 19,000 in the first 9 months of 2018. A total of 11 new hotels are now operating in the municipality, not counting private guesthouses and B&Bs. According to Aleko’s rough estimate, at least a 1/3 of Tskaltubo’s 5,658 households currently derive their income from employment in tourism and hospitality services.

So much for the full half of the glass.

On the negative side, of Tskaltubo’s 23 Soviet-era resorts, 16 are still occupied by IDPs. This is neither good for the IDPs themselves, nor for the local tourism industry.

Another issue is the dearth of local entertainment options, a serious constraint for long-term spa tourists. Casinos are nowhere in sight, which may be fine. More importantly, tourists have little to do after sunset. The municipality is trying to finance musical performances during the high season, but there is little private sector provision of music, dancing, theater, cultural events, eating and shopping.

This is a classical chicken-and-egg problem. The lack of a vibrant hospitality industry detracts from Tskaltubo’s value proposition, particularly in the low season. And because the high season is neither very high nor long (only 4-5 months), private businesses face an extended payback period for investment in the hospitality industry. A deadlock.

PART III. LESSONS LEARNED

Early investors in Tskaltubo’s hospitality industry, such as the brothers Dzhishkariani, may be now beginning to see the light at the end of the tunnel, but the road ahead is still very long. Mishiko’s bonanza will take many more years to materialize, given the lack of a continuous coordination effort by the Georgian government. The WB-financed investment in Tskaltubo’s infrastructure was definitely a necessary condition for Adam Smith’s hand to do its job. But it is far from sufficient.

As long as the flow of tourists staying in Tskaltubo falls below a certain threshold – particularly in the low season – the private sector will not step in to provide modern hospitality services. Tskaltubo municipality’s meager budget and human resources will not be sufficient to address the gap.

Even the largest hospitality operators in Tskaltubo, such as the Legends Spa Resort or the 4-star Tskaltubo Palace, are not able to deal with the remaining public infrastructure issues. They are currently strained by the need to complete their private infrastructure projects, e.g. renovating additional Soviet-era buildings or constructing new spa, sports and recreation facilities.

Private actors will not be able or willing to invest in marketing Tskaltubo as a prime spa tourism destination in Georgia’s traditional markets, such as Kazakhstan. Promoting Georgia and its tourism destinations has all the attributes of a public good. Individual operators have the incentives to freeride, hence a role for the government in coordinating a joint marketing effort.

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Spa tourism to places like Borjomi, Sairme or Tskaltubo is Georgia’s best chance to smoothen the seasonal tourism pattern. What is needed is another big dream and a sustained effort to coordinate public and private sector investment in infrastructure and international marketing.

Our toast this week is for dreaming big but also not forgetting to deliver.

About the author:

Eric Livny is Founder and President at Tbilinomics Policy Advisors. In 2007-2018, he served as President with the International School of Economics at Tbilisi State University (ISET) and ISET Policy Institute. He may be reached at eric.livny@tbilinomics.com.

By Eric Livny, Tbilinomics Policy Advisors