Georgia launches power privatisation

By bne IntelliNews May 19, 2008

Matthew Collin in Tbilisi -

The view across Tbilisi's picturesque old town after nightfall is dramatic, with hilltop churches and the Georgian capital's ancient stone fortress spectacularly illuminated by floodlights. It's easy to forget that at the start of the decade, this same landscape was regularly thrown into darkness by power cuts - a result of the institutional corruption and post-Soviet decay which was crippling the country's energy system.

Frequent power outages were among the factors behind widespread discontent that culminated in the Rose Revolution in 2003, when the pro-Western government of Mikheil Saakashvili was swept into office on a wave of popular protest. But after launching a crackdown on corruption and a transformation of the power sector, Saakashvili's government now faces another challenge - to keep the lights on. With GDP growth of 12.7% last year, Georgia needs to create new capacity to ensure that anticipated future demand is met.

Last year, Georgia became a net exporter of electricity, selling small amounts to neighbouring Turkey. In the future, it hopes to become a more significant exporter of energy - but without investment, this is unlikely to happen, and the country could again suffer power shortages. "According to the forecasted energy balances, power consumption will grow around 10% this year and 10% next year," says Archil Mamatelashvili, CEO of the company Caucasus Energy and Infrastructure in Tbilisi. "So within the next two years, if the economy grows at the same rate, Georgia will not have as much extra capacity as it has now. According to our estimates, by 2013-2014, if Georgia doesn't have new capacities, there will be power deficiencies."

Water power

Around 85% of Georgia's electricity is currently generated by hydroelectric power plants, which have a combined installed capacity of 1,600 megawatts (MW). In a country whose mountainous geography and rich water resources make it particularly suitable for hydropower, the government believes this could rise significantly, as older, gas-fired power stations are gradually phased out, reducing Georgia's dependence on imported gas. The Ministry of Energy says Georgia is currently only using around 20% of its potential hydropower capacity.

Fast-paced economic reform has been a key element of the Saakashvili government's strategy to revive the economy, and steps have been taken towards liberalising the power sector and making it attractive for investors. "We have minimised the bureaucracy barriers and we're proud that we no longer have any corruption," Energy Minister Alexander Khetaguri tells bne in an interview in his office in central Tbilisi. "Those who invest in the Georgian energy sector in the short term will have quite significant profits and earnings on their investments."

Alexander Khetaguri

The power sector has been broken up into separate generation, transmission and distribution units. Some generation, transmission and distribution assets have been partly or wholly purchased by private companies, although the recently created market-maker, responsible for the contracting of imports and exports, is state owned. "We have a fully deregulated electricity market," adds Khetaguri. "The wholesale tariffs are also fully deregulated. Only the household tariffs are regulated by the independent regulator." He says he expects that the sector will be fully liberalised by 2023.

The Georgian authorities were given cause for optimism about investment potential last year, when a Czech company, EnergoPro, bought six hydropower plants and two distribution companies for a reported $132m, making it the leading electricity distributor in Georgia. Since then, the Energy Ministry says there has been further interest in the power sector from Turkish and American companies.

Earlier in May, the government announced a new investment programme for a proposed 87 small and medium-sized greenfield hydropower plants with capacities ranging from 5-60 MW. Winners of tenders will be able to purchase the land at a "nominal price," and will be free to sell the electricity generated within Georgia or abroad without restrictions, apart from a three-month period during winter, when it can only be sold domestically.

The government is not offering tax breaks for investors. But according to Archil Mamatelashvili of Caucasus Energy and Infrastructure, which has raised around $50m from investors to build a new hydro plant in Georgia, tax rates are already favourable and even small plants can offer substantial profits.

Bidzina Bejuashvili, CEO of Galt and Taggart Asset Management in Tbilisi, also believes the government's reforms have made conditions for potential investors in Georgia's power sector extremely attractive. "If you look at the energy tariffs, they are among the highest in the former Soviet Union at the moment, and the cost of production should be very low," Bejuashvili says. "In early part of the decade, there was a lot of corruption and cash collection was low, so there was little incentive to invest because few people were paying for electricity. Now that has changed dramatically, cash collection is at 95%."

"You have a local market with very clear economic development, then you have Turkey right next door and you can export as much as you want - there are no limitations, no monopolies, no licenses, nothing required. And you also have Russia - the Russian south is energy-deficient, gas prices are going up, so Russian gas-fired power plants will become less and less competitive compared to hydropower plants. So that all creates a very favourable environment for investments, both for local markets and for export," he says.

Nevertheless, in a country that's endured repeated outbreaks of political turmoil and civil war since it became independent from the Soviet Union, and is currently locked in a long-running and extremely bitter diplomatic dispute with neighbouring Russia, there are risks - both political and economic.

Noisy neighbours

Unresolved conflicts with Russian-backed separatist regimes in Georgia's two breakaway regions, Abkhazia and South Ossetia, are potential flashpoints for future instability. Georgia's largest hydropower station is considered a strategic asset and is expected to remain state-owned for the foreseeable future because it stands close to the de facto border with Abkhazia.

There is also the potential for political unrest in what remains an extremely poor country. Although the economy has been growing, discontent about poverty and unemployment fuelled mass demonstrations last November, which were broken up by the security forces. The Georgian prime minister, Lado Gurgenidze, admitted afterwards that the violence on the streets of the capital damaged the investment climate and hit projected growth.

Liana Jervalidze, an expert on energy issues at the anti-graft group Transparency International in Tbilisi, also raises concerns about the Georgian judicial system, which critics have alleged is strongly influenced by the executive, and about whether the Georgian National Energy Regulatory Commission, which sets domestic tariffs, is genuinely independent. "If you're an investor, it's very important to know that there is an independent regulatory body, legislation which will protect you, and independent courts which will uphold the legislation," Jervalidze says. "But that is not the case here in Georgia, so you have to be very careful."

However, Energy Minister Khetaguri rejects any suggestion that the Regulatory Commission is somehow being manipulated by government. "It is independent and free from politics," he insists.

In the words of an independent assessment produced by Econ Poyry Emerging Markets for the Energy Ministry, this small former Soviet republic has "one of the largest untapped reserves of hydropower in the world." Coupled with economic growth and rapid liberalisation, that means genuine opportunities for investors, concludes Bidzina Bejuashvili of Galt and Taggart Asset Management. "The trend is very positive," Bejuashvili declares. "With the economic environment in Georgia, it's just a matter of time before people realise how attractive it is to invest in the energy sector here."

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Georgia launches power privatisation

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