When planning a debate about the impact of the new Rooms hotel on the local community in Kazbegi we expected it to be a mixed bag. A colleague who visited Kazbegi Rooms on a private reconnaissance mission told us how much he enjoyed his stay, but added: “for some reason, the relationship between the hotel and the villagers is best described as complex”. As economists, we assumed that Rooms would be a major employer of locals and so the only issue could be competition for tourists between the hotel and the local bed & breakfast providers. And as is often the case with economists, we have been proven dead wrong.

ROOMS KAZBEGI: POSITIVE IMPACTS

Kazbegi is touristic heaven in the picturesque Tergi (Terek) river valley offering many attractions such as bird watching, alpinism, castles, and towers. Located some 10km south of the Georgian-Russian border, Kazbegi boasts a spectacular view of Mount Kazbek and Gergeti Trinity Church. As a gateway to Russia, it serves traffic flows and tourism (heli-ski and casino).

The result of a $15mln investment project, Rooms opened a little over two years ago, in July 2012, providing a major boost to the meager hotel capacity in the region. The property was privatized in 2010 (at no cost) with the investors –Tbilisi Holiday Inn shareholders – taking upon themselves the obligation to build a modern hotel. As the management knows to tell, the first year was not an easy one, but since then Rooms has seen a doubling in the number of arrivals, including a 23% increase in the first 6 months of 2014 relative to 2013.

Rooms is by far the largest employer in Kazbegi. And it is the company’s explicit strategy to train and employ as many villagers as possible. The logic is straightforward: if available, locals are cheaper, don’t need housing, and are less likely to leave. At present, about 60% (100 of 170) of staff are, indeed, local hires, most of whom went through a 6-month in-house training program in language and hospitality services. A major constraint for hiring more locals, however, is the proud uplands culture (translating into the client-is-always-wrong approach to service) and language skills. Thus, only one local woman is employed in the front part of the operation (as a waiter) while others are doing the back office work, maintenance, kitchen, cleaning, and security. The most senior local hire is … head of security.

Not only is Rooms a boon for local employment, but also, as all stakeholders agree, its arrival did not have any negative impact on homestay owners who continued catering to backpackers and budget travelers. There is no displacement or competition among them and Rooms. In fact, the city has generally become a much more popular tourist destination, which benefits everybody, including the Alexandre Kazbegi museum, souvenir shops, and restaurants.

People always used to come to Kazbegi from Gudauri but did not stay given the lack of hotel capacity. Now, they tend to stay overnight, which is a great boost for the local economy. Locals and ex-pats living in Georgia account for about 30-32% of total visitors, and according to Valeri Chekheria, Rooms CEO, this is indeed a fast-growing segment of the market. Internal (weekend) tourism can be looked upon as a great (voluntary and non-distortionary!) way to redistribute income from Vera and Vake to the Georgian periphery.

There are also specific activities that Rooms leaves to the locals, such as Georgian traditional cuisine (e.g. khinkali, a local specialty), horse riding, local guiding, and transportation services. Providers of transportation services and local guides are in fact under contract with Rooms. And there are many products that Rooms sources from local farmers (many of whom are supported by the New Economic Opportunities project of the US Agency for International Development), such as cheese, salad leaves, broccoli, potato, and trout.

What could go wrong then?

IT’S INFRASTRUCTURE, STUPID

It turns out that a major source of conflict with the local community is competition over access to drinking water. Just a few months ago, in winter 2013/14, Rooms faced mass protests by the local community who blamed the hotel – not local or national government! – for chronic water shortages in wintertime. While infrastructure bottlenecks – beginning with public toilets, safe road crossings, and all the way to local road quality – are equally damaging for businesses and households, insufficient water supply creates a zero-sum game situation between Rooms and the entire Kazbegi community.

Ensuring a stable water supply is a huge pain for Rooms. According to management, at some point, it considered the option of shutting down Rooms’ winter operations but later decided to transport water in trucks from Tbilisi. Even refilling the trucks locally, however, was problematic as this ran the risk of inciting protests by the village community.

Water supply in Kazbegi and much of rural Georgia is the responsibility of the United Water Supply Company of Georgia – an LLC in 100%-ownership by the state. While having at least two years to prepare for the launch of Rooms, the company took no steps to upgrade the water infrastructure in anticipation of increased demand, subjecting the entire town to seasonal outbursts of anger and misery. Ironically, since consumption by Georgian households is not metered, Rooms is the water company’s only (sic!) paying client in Kazbegi – about $10-15,000/month. Yet, to this date, it has been unable to allocate sufficient resources to deal with the root cause of the problem: the size of water reservoirs. Instead, the company has been tinkering with holes and leakages in the water collection system and piping.

While the most burning issue, water is by far not the only constraint facing Rooms and other businesses in Kazbegi. For example, an attempt by Rooms to promote its green image and qualify for an eco-certificate by introducing waste sorting bins was inhibited by the lack of a local (or regional) recycling option – at the end of the day, a single truck would collect an entire load of garbage and dump it not far from the beautiful Tergi (Terek) river. The only thing the company could do is involve its staff in regular cleaning actions e.g. in the nearby forest, but in the absence of local support and enforcement, even these actions have been undermined by many locals for whom the forest is the place to have drunken parties.

Local road infrastructure is also a problem. The Georgian government has invested large resources in improving the main Gudauri-Kazbegi road, but the “last mile” from the village center to the hotel has not to be repaved despite an explicit commitment by the government to do so as part of the privatization deal. Rooms could not, and did not want to, invest its own resources (estimated at GEL 100,000) in paving the road until this year. Most recently, however, the government did agree to cost-share and build this road in fall 2014.

THERE IS A ROLE FOR GOVERNMENT

So far, the role of local government in developing the tourism infrastructure or helping local businesses in Georgia’s periphery has been quite limited. For instance, at present, tourism is the responsibility of one person in the Kazbegi municipality, with no budget and limited capacity to coordinate. Large private businesses, such as Rooms, can certainly help with ideas, skills, and resources. However, they cannot be expected to fix all the infrastructure problems such as waste management, sewage, and water supply systems. Businesses would be more than willing to pay a part of their taxes to the local government, providing it with the incentives and resources to invest in tourist-friendly infrastructure and public goods. Georgia’s tax administration system is, however, overly centralized, weakening the fiscal incentives of local government.

Incidentally, the casino operated by Rooms is potentially a major contributor to the local budget (approximately $200,000/year, depending on the number and types of tables operated), however, the Kazbegi municipality has not been authorized to use the money for local needs. Instead of serving local needs, these funds (and about GEL 30-50,000 in monthly VAT payments made by Rooms) are finding their way to the national government’s coffers.

Another issue for large businesses operating in the periphery is the fact that 99% of local service providers are operating in the shadow economy. Rooms has a hard time doing business with locals unless they are legally registered. An appropriate (budget neutral) policy response to this bottleneck could be a blanket tax exemption for small businesses and individual entrepreneurs operating in remote regions in order for them to officially register, receive support and grow.

Finally, there is a role for the government in managing the negative impacts of tourism on the environment by installing sewage and waste management systems, protecting rare animal species, on the one hand, and promoting people’s awareness of these environmental issues, on the other. After all, it should not be too difficult to explain to Georgia’s youth that good citizenship and patriotism are not only about rooting for the national rugby team, but also about not polluting the Motherland.