Surviving the Crisis: Khvedelidze on the Georgian Ferro-Alloy Sector

In recent months the Ferro-alloys Producers and Manganese Miners Association has been talking about the crisis in the field, precisely about the decrease of silico manganese prices on the global market and high costs of production in Georgia. We spoke to Sulkhan Khvedelidze, Head of Ferro-alloys Producers and Manganese Miners Association, to find out more.

What is the current situation?

The heavy industry sector is still in crisis-mode. Although some progress can be observed in terms of price increase for the silico-manganese products globally, the situation is still quite difficult. We’ve been negotiating with the Government of Georgia for four months already and have created a mutual project within which we’ve presented detailed information about production and costs. The Government has been working on it but the process has been dragging out. We’re waiting for a specific answer from them every week.

This is not the first time that the heavy industry has experienced such a crisis. Generally, is the production and sales of sicilo manganese products characterized with frequent price fluctuations?

The price decrease begins the moment there is excess in the supply of Ferro-alloy products on the global market. Although we’ve experienced a few similar periods in the past, the industry did survive them. Today, we continue working and hoping that the situation will be resolved, especially considering that Georgia has great potential. Three more factories have been built which can start production if the prices stabilize, meaning more people will be employed and the share of export will increase.

Does the Association ask for support during each period of crisis or should the government allocate long-term preferential benefits?

The Association does not ask for permanent support. The current crisis began a long time ago and we decided to ask the government for support only after every company had already used up all of its resources. We are large exporters and I believe that the government should also be interested in the correct functioning of our business, and in the development of the field overall.

The Association is aware of the ongoing court dispute between Georgian Manganese and the Revenue Service. What is your position regarding the case?

About seven months ago, the Association was created with the aim of resisting the challenges together and ensuring the development of the field. A few days ago Kutaisi City Court imposed a 200 million GEL fine on Georgian Manganese. In my opinion, this is a completely unfair and biased decision. I attended the court hearings and listened to the arguments of both parties and I can unequivocally state that the judge was biased.

Georgian Manganese presented audit reports made by audit companies recognized globally, such as Ernst and Young, PriceWaterHouseCoopers and BDO. The issues in dispute are relevant to all companies working in this field and the position of the Revenue Service is incorrect and even illegal.

One of the issues being disputed concerns recognizing the waste left from the produced products as material asset. Could you explain this part of the dispute in more detail?

Georgian Manganese was fined not because it was hiding revenues or paying taxes incorrectly, but because the Revenue Service believes that Georgian Manganese should have recognized the waste left from production as income. To clarify, the waste for the utilization of which the company takes on additional costs was labeled by the Revenue Service as material asset and was equalized with its value in raw materials and given the existing market value. According to the law in force globally, if a company registers such substances as material asset, which in reality do not have any value, it is considered as an attempt to artificially increase assets. This is a crime.

You mentioned the audit reports made by international organizations for Georgian Manganese which were not taken into consideration by the court. What did these reports suggest?

As paradoxical as it may sound, there is an audit report by BDO which suggests that there is a 20 million GEL error in the calculation made by the Revenue Service. It was submitted to the court; however, the judge did not take this report into consideration either.

What is the next stage? Will Georgian Manganese be able to pay this amount?

As the Head of the Association, I would like to emphasize that such precedents should not be allowed in this field. I’m very well aware of the work that each of the companies do and I know that the problem that Georgian Manganese is facing might become a problem for any of the other similar companies. If such cases emerge, the companies operating in the field will have to stop working. Georgian Manganese will appeal this decision in the Court of Appeal and I hope that, unlike City Court, the Court of Appeal will study the case thoroughly and make the decision in favor of Georgian Manganese.

What is the current situation for other members of the Association?

Several enterprises have stopped operating; others continue to work, though not at maximum capacity. We hope that the government will take specific actions and we are also waiting for prices to stabilize on the global market.

The Association works closely with the government, non-governmental sector, and specialists in the field. Do you also cooperate with international organizations?

Our Association has been working with the European Ferro-alloys Producers and Manganese Miners Association for a couple of months now. We have business correspondence with them and are planning to hold a meeting with them in the near future in order to talk about future perspectives.

Irine Khizanishvili

18 April 2016 20:21