Georgia moves to IPO state assets

By bne IntelliNews September 13, 2011

Molly Corso in Tbilisi -

The Georgian parliament is set to vote in September on changes that would allow the government to sell minority shares in strategic assets, like gas pipelines and the electricity grid.

The plan - a new twist on Georgia's privatisation drive - would put more money in the coffers and limit the burden of state owned assets, note economists and investment bankers. Opposition parties, however, are concerned the propose sales will open strategic objects to foreign ownership.

If the proposal is passed, it would pave the way to sell parts of strategic holdings, like the Georgian Gas and Oil Corporation and the railways. Mikheil Saakashvili's pro-privatisation government has been eager to parcel off parts of both entities for several years, although popular opposition to the idea has stopped the government from selling them in the past. Other entities earmarked for IPOs include a minority share in the Georgian State Electricity System and the state's minority share in the Tbilisi electricity distribution system.

Prime Minister Nika Gilauri initially announced the plan, which would reportedly allow the government to sell between 15-25% of state-owned entities on international stock exchanges, during a government meeting on August 10; the proposed changes were presented to parliament on September 9 and a vote is expected later in the month.

Although this amendment will provide the first chance to IPO state assets, Tbilisi is no stranger to the international stock market: in April they listed and successfully issued their second $500m Eurobond. As such, Georgia is a known commodity for investors, notes BG Capital CEO Nick Piazza. "CIS region is known to be a place that investors go to be forgotten and mistreated," he says. "Georgia's red carpet treatment [is an exception]."

The former finance minister, Kakha Baindurashvili, tells bne the move to IPO state own assets "reflects a change in our approach to privatisation." Now the chairman of the supervisory council for the Georgian Post, Baindurashvili stresses that privatisation can mean "different things" ranging from minority shares to full-blown sales. The postal service has also been rumoured for a possible IPO; however, no sale is currently planned, Baindurashvili says.

Opposition leaders like Irakli Alasania, however, have objected to the new IPO plan. In an open letter to Gilauri in August, Alasania said Georgian "reality" - evidently eluding to the conflict between Tbilisi and Moscow - would make IPO sales potentially "dangerous" for the country. "Because of strategic importance of these facilities only our neighbouring countries can become potential buyers in order to strengthen their political and economic influence over our country," Alasania wrote in the letter, according to an excerpt published on He also argued that the economic crisis will push down the value of the assets floated on international stock exchanges so Georgia will have to sell shares for less than they are worth.

But some economic analysts argue the small size of share offerings will make the sales more secure, and could push the state to provide better corporate governance over the entity. It will also, they stress, bring in valuable revenue for the budget.

Paata Sheshelidze, head of the New Economic School in Tbilisi, stressed that "any privatisation is good" and there is not "any problem" with offering up strategic assets, especially for a minority share. "I don't see any problems with this," he says, noting that Tbilisi did not suffer from any electricity blackouts during the 2008 war with Russia - even though 75% of the distribution system is owned by a Russian company.

Anders Aslund, senior fellow at the Peterson Institute for International Economics in Washington, adds that IPOs are more secure than seeking a "strategic investor" for sensitive assets, as well as offering a good way to get money to the state coffers. "Of course you can't control who is buying in an IPO...[but] the risk is less than if you sell to a strategic investor," he says. "You can get into a situation that a strategic investor sells and then sells to the least desirable partner."

Interest in Georgia is high, Piazza says, and the assets that are potentially up for an IPO, including a minority share in the Georgian Oil and Gas Corporation and the railway, could be attractive for investors. "I think that especially debt investors are very bullish about Georgia," he says. "I think they have probably privatised everything that they could, more or less... There are not a lot of companies looking to expand...this way you can still attract capital."

Aslund adds that the time is right for Tbilisi to look at IPOs to increase capital.

"Initially, I was against an IPO at the early stages of development because they are too slow if you want to get the maximum revenue to the state and the maximum speed," he says. "[B]ut now the situation is different and I feel it is just right."

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