Roughly a year after Georgian President Mikheil Saakashvili's administration launched an ambitious privatization campaign, the state has disposed of roughly 10 percent of the 1,800 enterprises up for sale, generating roughly $314 million in revenue. The architect of the privatization plan, Kakha Bendukidze, says it has met expectations so far. But some economic analysts and entrepreneurs are questioning the program's success.

Bendukidze, the former economics minister who now serves as state secretary for economic reform, launched the privatization program in the summer of 2004. The guidelines then were relatively simple: state-owned enterprises would go to those individuals or entities that paid top dollar. According to data from the Ministry of Economic Development, the bulk of privatization revenue to date has come from three sales: the Ocean Shipping Co. in Batumi; the package deal involving the Chiatura manganese factory and Vartshikhe hydro power plant; and the Tbilisi Aerospace Manufacturing (TAM).

Of these three deals, only the TAM purchase went smoothly, with the plant's existing management team paying $67 million into state coffers. In the case of Ocean Shipping Co, the Armstrong Holding Corp. won a tumultuous bidding war in January, agreeing to pay $161 million, the Civil Georgia web site reported. [For background see the Eurasia Insight archive]. But Armstrong Holding subsequently backed out of the deal, and the shipping fleet was ultimately sold to a joint British-American venture through its Georgian subsidiary, Georgian Tankers, Ltd, for a reported $90 million.

The Chiatura manganese factory and the Vartshikhe hydro power plant were originally sold as a package in January to the Russian company EvrAzHolding and the Georgian-Austrian DMC-Ferro joint venture for a reported $132 million. However, in June the winners announced they would not go through with the purchase. The collapse of the deal opened a gap in the state budget, as the expected income had already been figured into the government's fiscal plan for 2005.

According to Davit Amaglobeli, the vice president of the National Bank of Georgia, the deal's collapse will not have a severe budgetary impact. "From our prospective it should not be a problem," he said. "The Ministry of Economy is still hopeful that they can make up that gap by the end of the year."

Bendukidze, in a recent interview with EurasiaNet, also downplayed the significance of the broken deals. "It is a part of process," he said. According to Bendukidze, the privatization program is designed to help keep Georgia's economy growing at a steady rate. "What we don't want is one year [to] have 20 percent [growth] and the next year [to] have minus 20 percent [growth]."

According to Anders Aslund, a senior associate of Russian-Eurasian Affairs at the Carnegie Endowment for International Peace in Washington, DC, broken deals are to be expected in any large-scale privatization effort. "Sometimes that happens. You can't stop that from happening. [Privatization] must be a messy process," he said in a telephone interview. Aslund, who has served as an economic advisor for the Russian and Ukrainian governments, believes it is vital to just keep the process going. "It is most important just to get it done."

Some economic analysts are skeptical of Bendukidze's claim that the privatization process is functioning as optimally as possible. The transparency of the process remains problematic, asserted Niko Orvelashvili, the founder of the Georgia Economic Development Institute. "Some auctions are transparent and others are not," Orvelashvili said. "The biggest deals are not openly privatized."

Giorgi Isakadze, the executive director of the Georgian Federation of Businessmen, believes that the difficulty associated with the Ocean Shipping Co.'s privatization could scare away possible investors in other enterprises. "[There should be] more guarantees for those who take part in the privatization process," he said. "It is not a good situation when the winners change."

Alexo Margishvili -- an economist with CERMA, a Georgian-based management company that works with local enterprises interested in privatization – maintained the process is today far more efficient than it was during former president Eduard Shevardnadze's administration. Nevertheless, Margishvili added, the current government is still encountering problems in attracting investors. "There are not a lot of investors," Margishvili said. "I think that is just because there is not enough experience in investing in our region. There is not enough confidence."

To bolster investor confidence, the process should place greater emphasis on predictability, Isakadze said. "Investors are not afraid; if they want to invest their money in something they will," he said. "[However] there should be predictability; they should know where we are going."

A few prominent Georgian entrepreneurs, including media tycoon Badri Patarkatsishvili, say the Saakashvili administration's taxation policies reduce Georgia's attractiveness to potential investors. However, Bendukidze shrugs off their concerns. "It is impossible to create the best possible investment climate immediately."

In addition to the transparency and investment climate issues, the government's privatization program has been slowed by a debate over what assets the government should hang on to. The privatization process became engulfed in controversy in February when Saakashvili told an Italian newspaper, La Stampa, that the government might sell the state-controlled gas-pipeline system to GazProm, the Russian conglomerate. Officials eventually decided that the pipeline network was a strategic asset and should remain under state control. The US government reportedly lobbied Georgian authorities against going through with the pipeline network sale. [For background see the Eurasia Insight archive].

Bendukidze indicated that the decision could some day be reversed. "The best idea for me is the pipelines should be privately owned," he said, adding that the ultimate outcome could be influenced by Georgia's ability to attract funding to renovate and modernize the aging pipeline infrastructure. "It is not important that we have [a] state owned something," Bendukidze said. "The important thing is to have big problems solved, to have all the big companies privatized. Or be going to be privatized."

When the government launched the privatization campaign, it aimed to complete the sell-off of selected state-owned assets within 18 months. At this point, however, it appears likely that the privatization time-frame will need to be extended by up to one year. "We are now solving the most important issues, the most sensitive issues [concerning privatization] and then we will go to the less sensitive," Bendukidze said.