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A blog about economics in the South Caucasus.

Kazbegi Rooms: with a View to Improvement of Regional Development Policies

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 a 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 expats 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 which 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 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 winter time. 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 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 collects the 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 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 to do 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 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.

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Guest - AP on Friday, 05 September 2014 19:40

Great piece!

Great piece!
Guest - Hans Gutbrod on Friday, 05 September 2014 20:22

great piece, Eric. Hopefully lessons will be learned...

great piece, Eric. Hopefully lessons will be learned...
Guest - William Dunbar on Friday, 05 September 2014 21:33

Nice piece, but Kazbegi is on the Tergi (Terek), not the Aragvi

Nice piece, but Kazbegi is on the Tergi (Terek), not the Aragvi
Guest - Eric Livny on Saturday, 06 September 2014 00:41

Thanks, William, you were not the first to point out this mistake (in the meantime it has been already corrected) :)

Thanks, William, you were not the first to point out this mistake (in the meantime it has been already corrected) :)
Guest - Florian Biermann on Saturday, 06 September 2014 16:44

Highly informative articles. A few remarks:
1) I do not buy that there is no competition for tourists between the hotel and local providers of accommodation. Seems to be overly harmonious picture, probably fostered by Rooms managers and tourism officials.
Personally, whenever I went to Kazbegi within the last two years (several times), I was always considering whether to go to the Rooms or a homestay.
However, it is plausible that if one looks at tourism in total (not only accommodation services), this potential competition may be more than compensated by increased demand for other services, e.g. driving people up to the monastery.
2) I do not think that tourists are a considerable threat to the nature of Georgia. On the contrary, much of the tourists coming to Georgia have environmental awareness. The locals are a much bigger problem when it comes to environmental protection.
3) Again, the article speaks about "public toilets" as a constraint to tourism. This is nothing but a red herring. Personally, in the last 20 years, with many extensive tourism endeavors in many countries, I have used a public toilet exactly one time. I remember still that it was at Berlin Alexanderplatz, about 10 years ago, and I was not even a tourist.
If tourists need a toilet, they go to restaurants and cafes, but they do not need public toilets (which are usually of a kind that you don't feel safe entering them).
Funnily, the issue of public toilets is typically mentioned together with the problem that Tbilisi is such a terrible place for pedestrians (not in this article). This suggests as if these two problems had similar significance. Yet while the traffic situation in Tbilisi is so horrible for pedestrians that I cannot recommend anybody who wants to have a relaxed, pleasant vacation to come to Tbilisi, the availability of public toilets is completely irrelevant for people who consider to visit Georgia.
4) It is not the case that the local self-governments (LSGs) in Georgia have no money. The money that goes to the coffers of the central government is distributed back to the LSGs (at least this was the case before they made the recent LSG reform), and an LSG like Kazbegi probably received more money from the central government than it had tax revenues.
The problem is the spending. It is amazing how much personnel some of these tiny LSGs employ. The available money is often not spent reasonably, but largely for providing employment to villagers and in this way keeping them happy. If the LSGs would have their own tax income, as suggested in the article, and without redistribution through the central government, this problem would not be solved and still no money would go to essential infrastructure.

Highly informative articles. A few remarks: 1) I do not buy that there is no competition for tourists between the hotel and local providers of accommodation. Seems to be overly harmonious picture, probably fostered by Rooms managers and tourism officials. Personally, whenever I went to Kazbegi within the last two years (several times), I was always considering whether to go to the Rooms or a homestay. However, it is plausible that if one looks at tourism in total (not only accommodation services), this potential competition may be more than compensated by increased demand for other services, e.g. driving people up to the monastery. 2) I do not think that tourists are a considerable threat to the nature of Georgia. On the contrary, much of the tourists coming to Georgia have environmental awareness. The locals are a much bigger problem when it comes to environmental protection. 3) Again, the article speaks about "public toilets" as a constraint to tourism. This is nothing but a red herring. Personally, in the last 20 years, with many extensive tourism endeavors in many countries, I have used a public toilet exactly one time. I remember still that it was at Berlin Alexanderplatz, about 10 years ago, and I was not even a tourist. If tourists need a toilet, they go to restaurants and cafes, but they do not need public toilets (which are usually of a kind that you don't feel safe entering them). Funnily, the issue of public toilets is typically mentioned together with the problem that Tbilisi is such a terrible place for pedestrians (not in this article). This suggests as if these two problems had similar significance. Yet while the traffic situation in Tbilisi is so horrible for pedestrians that I cannot recommend anybody who wants to have a relaxed, pleasant vacation to come to Tbilisi, the availability of public toilets is completely irrelevant for people who consider to visit Georgia. 4) It is not the case that the local self-governments (LSGs) in Georgia have no money. The money that goes to the coffers of the central government is distributed back to the LSGs (at least this was the case before they made the recent LSG reform), and an LSG like Kazbegi probably received more money from the central government than it had tax revenues. The problem is the spending. It is amazing how much personnel some of these tiny LSGs employ. The available money is often not spent reasonably, but largely for providing employment to villagers and in this way keeping them happy. If the LSGs would have their own tax income, as suggested in the article, and without redistribution through the central government, this problem would not be solved and still no money would go to essential infrastructure.
Guest - Eric Livny on Saturday, 06 September 2014 18:04

Thanks for your remarks, Florian.
1. I agree. The picture is perhaps not as rosy as the hotel and local government folks are willing to portray. Given that homestays charge per person, families may switch to Rooms. That said, single visitors and couples on a budget (e.g. backpackers) would most likely stick to homestays.
2. I agree. It is the locals (hunters and drinkers) who are the main threat to the environment. I think this point is somewhat reflected in the article.
3. I agree. Toilets could be provided by local businesses (though licenses to operate a restaurant or cafe would have include a requirement to install toilets and keep them public - at least initially, until people and businesses get used to the idea). I cut this point from the article due to length considerations.
4. I disagree. The issue is "fiscal incentives" (there would be a large body of theoretical and empirical literature on this subject). When taxes go to the central government's coffers and the amount of money allocated to the local government does not depend on (or, still worse, is negatively related to) the amount of taxes collected in a jurisdiction, local government would not exert sufficient effort to support business development and expand its tax base. There should be a fiscal mechanism to reward/punish local government for good/bad performance.

Thanks for your remarks, Florian. 1. I agree. The picture is perhaps not as rosy as the hotel and local government folks are willing to portray. Given that homestays charge per person, families may switch to Rooms. That said, single visitors and couples on a budget (e.g. backpackers) would most likely stick to homestays. 2. I agree. It is the locals (hunters and drinkers) who are the main threat to the environment. I think this point is somewhat reflected in the article. 3. I agree. Toilets could be provided by local businesses (though licenses to operate a restaurant or cafe would have include a requirement to install toilets and keep them public - at least initially, until people and businesses get used to the idea). I cut this point from the article due to length considerations. 4. I disagree. The issue is "fiscal incentives" (there would be a large body of theoretical and empirical literature on this subject). When taxes go to the central government's coffers and the amount of money allocated to the local government does not depend on (or, still worse, is negatively related to) the amount of taxes collected in a jurisdiction, local government would not exert sufficient effort to support business development and expand its tax base. There should be a fiscal mechanism to reward/punish local government for good/bad performance.
Guest - RT on Wednesday, 10 September 2014 00:23

Florian, on your first poitn. Given that the Rooms are priced in a very different category, they probably generate demand of its own, no? This summer we went there with an explicit purpose of staying at Rooms rather than seeing Kazbegi per se. Hard to say of course, but I would think quite a few of tourists I saw were driven by similar considerations. Definitely those, who played at casino :)

Right now the website suggests 110$ per weekday and $145 on a weekend (for this week). In June we paid more than that. How much does homestay cost?

Florian, on your first poitn. Given that the Rooms are priced in a very different category, they probably generate demand of its own, no? This summer we went there with an explicit purpose of staying at Rooms rather than seeing Kazbegi per se. Hard to say of course, but I would think quite a few of tourists I saw were driven by similar considerations. Definitely those, who played at casino :) Right now the website suggests 110$ per weekday and $145 on a weekend (for this week). In June we paid more than that. How much does homestay cost?
Guest - AP on Wednesday, 10 September 2014 00:33

We went to Kazbegi to go hiking in the mountains and we stayed in a guesthouse (40 GEL/person with breakfast and dinner included), though we spent most of the afternoon on the day we arrived relaxing outside on the deck of Rooms Hotel, overlooking the mountains and enjoying a long lunch. So, the hotel provides some amenities for those staying in guesthouses as well, perhaps even increasing demand for guesthouses.

We went to Kazbegi to go hiking in the mountains and we stayed in a guesthouse (40 GEL/person with breakfast and dinner included), though we spent most of the afternoon on the day we arrived relaxing outside on the deck of Rooms Hotel, overlooking the mountains and enjoying a long lunch. So, the hotel provides some amenities for those staying in guesthouses as well, perhaps even increasing demand for guesthouses.
Guest - Florian Biermann on Saturday, 06 September 2014 21:02

Regarding Point 4: I understand your argument and agree that you are right. Without the redistribution system, LSGs would have an incentive to cultivate local tax-payers and not just create useless jobs in the LSG administrations.

Regarding Point 4: I understand your argument and agree that you are right. Without the redistribution system, LSGs would have an incentive to cultivate local tax-payers and not just create useless jobs in the LSG administrations.
Guest - Florian Biermann on Thursday, 11 September 2014 22:57

Robert, it may be true that the intersection between those tourists who potentially stay in the Rooms and those who go to home stays is small. However, I belong into that group, as I think that both forms of accommodation have their advantages, and for me it is not only about price.

Robert, it may be true that the intersection between those tourists who potentially stay in the Rooms and those who go to home stays is small. However, I belong into that group, as I think that both forms of accommodation have their advantages, and for me it is not only about price.
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