THE NEXT WAVE: PLANNED PRIVATIZATION SALES SHOULD BOOST THE BUDGET

The Georgian government is ushering in the new year on a wave of new sales of public assets worth a potential 250 million lari. Critics, however, question if revenue from the sale of state assets is the best way to boost the country’s business potential.

Maia Edilashvili

Riding the wave of new privatization deals, the Georgian government is promising something for everyone: better deals for investors and more money in state coffers.

While the plan has received a tentative thumbs up from economists, questions remain about the fate of the assets to be privatized.

This latest trend in privatization, which began in October 2009, is a calculated bid by the state to cash in on “the apparent economic recovery and increased interest from investors,” according to a government-issued press release.

So far, the government’s plan has paid off. According to data from the Ministry of Economy, privatization proceeds amounted to over 170 million lari – nearly three times what was earned in 2008, when sales stalled at just under 70 million lari.

According to Minister of Economy Zurab Pololikashvili, the list of privatizations scheduled for 2010 includes approximately 130 facilities, an estimated 250 million lari in projected earnings.

“The goal is to hand over the remaining unprofitable assets to private entrepreneurs to make them more efficient,” Pololokashvili said. He added that each property will be worth at least 1 million lari.

Over the past five years, the government has repeatedly turned to privatization as a money maker for the state. Privatization sales have earned the government an impressive 2.5 billion lari over the past five years. The biggest year was 2007, when a record 664 million lari was deposited in the budget – 20 percent of total revenues – after a series of large deals in the energy, real estate and healthcare sectors.

The money from privatizations is a crucial source of income for the state; in the past it was used to finance the budget deficit. For example, in 2007, 15 percent of budget expenditures were financed using  earnings from the privatization of state assets, according to the central bank’s 2009 Financial Stability Report.

Given that the budget deficit for 2010 is 288 million lari, it will be an onerous task to bridge the gap. According to the Ministry of Finance, GDP is expected to increase by two percent this year, against the negative four percent growth in 2009.

The Republican Hospital is also up for privatization.

The state’s dependence on privatization earnings concerns some economists.

According to Nodar Khaduri, who lectures on economic policy at Tbilisi State University, the Georgian government has put too much emphasis on how much investors pay, leaving little room for businesses to maneuver – or reinvest in the enterprise itself.

A better example, he says, is the German approach to privatization in eastern Germany after the country was reunified two decades ago. He notes the majority of state assets were sold at the cost of one Deutche Mark.  “So, instead of paying huge sums to the budget, the investor used resources to re-equip plants and enhance their competitiveness globally,” Khaduri said. 

But according to Paata Sheshelidze, the president of the local think tank New Economic School-Georgia, it is a classic example of getting what you pay for.

“If a buyer pays a high price, he certainly figures out the return,” he said. “If he develops the plant, he will benefit, if not, he will lose…So it’s up to him.”

According to Polokashvili, the ministry is updating its database of completed privatizations in the department of contract obligations monitoring so the government can track how investors perform. He noted that due to the improved access to information, the department re-approved the deal terms for 43 contractors in 2009, while requested to cancel deals for 53. Over one million lari was transferred to the budget in fines from those investors.

A change in philosophy?

Another issue, which keeps critics at odds with state officials, concerns the lack of transparency and the attitude towards assets with strategic value.

Kakha Bendukidze kicked off Georgia’s privatization drive while serving as the Minister of Economic Developmentr His infamous words, Georgia “should be ready to sell everything but its conscience,” have shaped the character – and perception – of the country’s privatization policy.

While the government has not been clear if its philosophy has changed since then, the government did recently sell Ltd Georgian Railway Telecom, once considered a strategic asset, to Linxtelecom. The Netherlands-based company paid a little over $14 million for the facility.

For Khaduri, that raises red flags about security.

“If Georgia had the location of Switzerland, we would not be running any risks,” he said. “But if we sell the railway system, who will be the buyer? Russia of course, which  already controls the rail link in Abkhazia as well as in the North Caucasus; has already purchased Armenia’s rail links and voiced plans to build the one in South Ossetia.”

But Sheshelidze maintains privatization means selling assets to a company, not to a state. “Any company operating in Georgia must abide by the Georgian law. And once it abuses [the law], it will face sanctions,” he said. 

He did, however, underscore that privatization needs to be more transparent and open – for example, selling assets in the form of stocks to several buyers rather than handing over a whole package to a single investor.  

Currently the government has two types of privatization sales – an auction and a direct sale. Only the president can authorize a direct sale; he is responsible for selecting the investor and setting the terms of the sale. For example, President Mikheil Saakashvili sold the Black Sea port of Poti to UAE’s Ras Al Khaimah Investment Authority via a direct sale. The deal brought in 155 million lari making it the most expensive privatization since 2004.

Polokashvili maintains that the process is open and transparent. He added, however, that there are plans to open some assets up as stock sales. 

There are changes planned for the privatization process, however. The minister told Investor.ge that the newly liberalized privatization law gives him more latitude over which assets can be sold. Under the old law, buildings and other assets could only be eligible for privatization after going through special procedures to be included on a list.

“Now the ministry is authorized to start privatization procedures based on an expressed interest from both legal or private entity. It’s very important since there are a lot of non-operational state-owned assets, in particular, in the regions,” he said.

The government is also hoping a new promotional campaign will ease concerns about the transparency and openness of the process. There are plans for special brochures featuring the assets up for sale, along with the current advertising mechanisms, namely announcements on the website www.privatization.ge as well as in the newspaper “Mesakutre” (Proprietor) and “24 Saati” (24 Hours).

A good start

In addition to the Railway Telecom, another outcome of the new wave of privatizations was the sale of the Tbilisi Hospital of Infectious Diseases, located in the Saburtalo district of the capital. The territory, including its medical facilities, was sold to Aversi, a leading pharmaceutical company in Georgia. The proceeds, the government said, will go to finance the construction of a modern hospital of the same kind somewhere in Tbilisi.

“Our interest was motivated by the hospital’s nice location,” Paata Kurtanidze, founder of Aversi, told Investor.ge. Having paid $12.25 million for the property, he preferred not to specify his company’s intentions as to its future.

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