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Privatizing Georgia: Dollars Are the Guide

The Georgian government is betting on privatization to keep the state treasury balance in the black, but transparency issues could muddy the process with the public.

On January 11, final bids were announced for two property sales that could dictate the course of the privatization campaign to come. Both deals rank as Georgia's two largest privatization projects to date – together, they could let President Mikheil Saakashvili's administration surpass its 2005 sales target of $200 million. At the same time, controversy surrounds both sales.

The first, the sale of the Georgian Ocean Shipping Company, a heavily indebted Black Sea operation with a 15-ship fleet, was originally expected to bring in $107 million to the treasury, ranking it as Georgia's largest privatization deal since the sell-off of state-owned property began in 1992. The prospective buyer, under the terms of a preliminary sales agreement announced on December 17, was the UK-based Greenoak Group, a collection of companies with major investments in Ajaria's power, textile and energy sectors, including the Batumi Oil Terminal.

But at a press conference on January 11, Prime Minister Zurab Zhvania announced that three -- as yet unnamed -- firms had also placed bids for the same amount of money for the company since the agreement with Greenoak was made public. "So this company has serious competitors now," the news service Civil Georgia quoted Zhvania as telling reporters.

The second property for sale could generate similar income for the Georgian government. A package made up of Chiaturmanganumi, a manganese mining factory, and the Vartsikhe hydropower plant, both located in western Georgia, has attracted bids ranging from $85 million to $117 million from four unnamed companies, according to Zhvania. Earlier reports had cited a preliminary high bid of $100 million from the international Austrian mining and trading company, DCM. Aside from an unnamed Kazakhstani company, a leading contender is reportedly the Interpipe Corporation, a Ukrainian company owned by the son-in-law of former Ukrainian President Leonid Kuchma, Viktor Pinchuk.

A final decision on purchasers should be made by January 18, after Economy Ministry officials meet with representatives of all companies placing "serious" bids, Zhvania said.

The preliminary agreement with Greenoak prompted sharp criticism from opposition MPs, who alleged that the government had entered into "a covert deal" to favor the British investment group. Criticism surrounding the Chiaturmanganumi-Vartsikhe deal has been more muted, focusing mostly on Pinchuk's participation in the sale, with questions raised about his ties to the Georgian government.

Privatization has a checkered past in Georgia, and the current government is anxious to prove that it will not repeat the mistakes made during the Shevardnadze era -- when millions vanished amid shadowy property sales. In response to the outcry over the proposed sale of the Georgian Ocean Shipping Company, Speaker Nino Burjanadze announced plans for a parliamentary investigation, telling reporters on December 21 that "many details of this deal are not known, even by me."

But in an interview with EurasiaNet, First Deputy Economy Minister Natia Turnava brushed aside the need for parliament's scrutiny, stressing that, "short of holding a conference," parliament could not have been more fully advised. Parliamentary hearings had been held to discuss privatization, she said, and an announcement for the sale of the Georgian Ocean Shipping Company and other properties was published in The Financial Times in early December. "Privatization should be transparent for the buyers," Turnava said. "Whether or not everyone in government knows what's going on with a given deal is a secondary issue. "

Some independent analysts disagree. The lack of public information – and public knowledge -- about the sales underway can only complicate attempts to evaluate the government's performance, warned Dato Narmania, a privatization expert at The Association of Young Economists of Georgia.

"We will see if the process is going in the right direction if in the near future they will publicize the list of properties to be privatized and explain the reasons for the privatization, give the pros and cons, and then prove the fiscal advantages of the sale," said Narmania.

For now, getting that information could prove a challenge for ordinary citizens. The Economy Ministry's privatization website, prepared with assistance from the United States Agency for International Development, does not include information on either the Georgian Ocean Shipping Company or the Chiaturmanganumi-Vartsikhe complex. Much information on completed sales is vague: a basement in a "non-residential area," for example, was sold to a "physical person" for $26,000; a computer engineering research institute was sold by auction to a "legal person" for $94,000.

With no published guide to Georgia's privatization process, outside observers say they are uncertain about the criteria for making a sale and the mechanisms used for disposing of listed properties. "No one knows what's selling, why or what for," commented Devi Khechinashvili, chairman of Tbilisi's Partnership for Social Initiatives.

Another stumbling block: turn-over at the top level of government. Georgia has had three economy ministers since Saakashvili took office in late January of 2004. [For additional information see the Eurasia Insight archive]. The current minister, Alexi Alexishvili, joined the government just as the Georgian Ocean Shipping Company sale was drawing to a close. "All this has created a lot of obstacles for privatization to develop normally," said Narmania.

While acknowledging the upheaval, Turnava claims that the process is straightforward. "The criteria are well-known. Whoever pays the most, gets the company."

Though a formal privatization committee does not exist, a working group made up of Economy Minister Alexishvili, Turnava and a rotating deputy minister meets once per week to review properties for sale and discuss "what form of privatization to use" for a given company, Turnava said. While most are put up for auction, "international-level" companies such as the Georgian Ocean Shipping Company will take an "optimized" route, that involves "an individual approach." These properties are listed for competitive bids, and most likely involve the participation of Prime Minister Zurab Zhvania. Still others might be slotted for transformation into a joint enterprise. A separate group of officials is charged with preparing properties for sale.

Identifying the individual who holds ultimate responsibility for deciding on a winning bid, however, remains difficult. Georgian law seems to place the burden on the Economy Ministry. Yet, , so far Zhvania has been the government figure most frequently associated with announcements on the Georgian Ocean Shipping Company and Chiaturmanganumi-Vartsikhe. Turnava described the prime minister's role in privatization as "very large," involving weekly briefing sessions and "immediate involvement" in "any complex decision."

Narmania described Zhvania's involvement as "very unusual," but cautioned that the stakes for the government in making Georgia's privatization a success are huge. From 2005 sales income, $70 million has been pledged to revitalizing the country's derelict energy system, another $70 million to modernizing the military and the remainder to repairing its crumbling highway network.

Former Economy Minister Kakha Bendukidze rebooted Georgia's privatization campaign last summer with the declaration that the country would sell everything but its conscience. Although, Bendukidze, as the new state minister for economic reform, no longer oversees privatization, Turnava stressed that his gusto for market-driven economic reform "will still have its full implementation."

But money alone should not be taken as a guarantee of privatization's success, according to Khechinashvili. "The devil is in the details," he said. "If there is no improvement in the direction of limited government, in its respect for property rights, and civil rights, then privatization will only have a temporary, monetary effect. You cannot take it as a measure of anything by itself."

Whether the public is getting the message the government wants them to hear remains in doubt. "People just think that privatization means that you're putting the country up for sale, that all the money will go outside the country because foreigners are buying things," Narmania commented. "People are becoming misinformed because they're not getting enough information."

In the end, Khechinashvili said, Georgians will be looking more at what effect privatized companies have on their wallets. "What the people expect is that Chiaturmanganumi, privatized or not, will employ people. The measure of the quality of privatization for them will not be $50 million or $100 million because that will be spent in one or two months. The real measure will be what will happen in the privatized companies."

Aside from an expanded privatization website, no plans exist for an information campaign to broaden public knowledge of the privatization process. "For that, we just need to privatize," Turnava said with a shrug. "After two or three successful sales, people will begin to understand that that money goes into the budget. And that it helps them in the end."

Elizabeth Owen is EurasiaNet.org’s regional news coordinator in Tbilisi.

Privatizing Georgia: Dollars Are the Guide

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