New Agreement of the Ministry of Finance and Economy of Adjara with a Kazakh Company Still Raises Questions
The agreement concluded between the Ministry of Finance and Economy of Adjara and the company Adjara Resort BV, so-called Kazakh investment, has recently become again a topical issue in Adjara.
In 2006, 21 tourist facilities located on the Adjara coastline were transferred by direct sale to the company, registered in the Netherlands. The cost of the privatized project was USD 4 million. The compensation payable by the company to the internally displaced persons (IDP), accommodated in the facilities at different times, was determined in the amount of USD 13,5 million. According to the initial version of the agreement, the buyer must have put into operation the purchased 21 facilities within 36 months, and must have spent in all USD 50 million for rehabilitation of the hotels Medea and Meskheti. On 24 June 2015 Transparency International Georgia published a research on failure to fulfil most of the obligations undertaken by the company, according to which only one hotel Radisson (on the place of the hotel Medea) was built out of 21 facilities, while the rest 20 facilities have been actually abandoned and destroyed (even an year later, the actual situation has not changed). According to the analysis carried out by our organisation, the company has not fulfilled its obligations for 10 years and the state, in this case the Ministry of Finance and Economy of Adjara, neither during the governance of the United National Movement, nor the governance of the Coalition Georgian Dream, was able to effectively monitor the investment project.
The interest, developed recently towards the Kazakh investment, was strengthened by the public statements made by Archil Khabadze, the former Chairperson of the Government of Adjara, and Davit Baladze, the former Minister of Finance and Economy of Adjara, according to which it became known that a new agreement was concluded with the company, which had not fulfilled its obligations. According to these statements, part of the property was returned to the Ministry of Finance and Economy of Adjara and another part of it is still in the ownership of the company.
Transparency International Georgia has asked several times the Ministry of Finance and Economy of Adjara to publicize the information, but (although the changes were made on 22 April 2016 according to the Public Registry) we were provided with the documents only on 26 July 2016, in response to the required public information; however even in that case the documents were incomplete. The Ministry of Finance and Economy of Adjara did not explain in its response the grounds, based on which the state has changed the investment conditions for the company.
Analysis of a new agreement concluded with the investor
According to the changes 12 facilities (out of 21), with the total area of 13,893.5 m2 of construction and 16,986 m2 of land, remained in the ownership of the company. According to the changes, the deadline for the obligation to deliver the facilities was prolonged up to 2025. During this period Adjara Resort BV must make the investment in the amount of USD 30,000,000.
- If under the initial agreement a hotel must have been built on the territory of the Hotel Meskheti (cadastral code (05.2.02.006)), this condition has been changed in a new document and specifies that at least 100 room branded apartment hotel must be built and put into operation by the company before 31 December 2020 by investing USD 11,500,000 in the project.
- USD 300,000 must be spent for the rehabilitation of Narinji and USD 200,000 must be spent for the rehabilitation of the tourist base Tsikhisdziri.
- The company must attract the investment of USD 3 million for the construction of 6 facilities on the Green Cape.
- The buyer must prepare the area development regulation plan of the Hotel Bobokvati project (4 hectare of land, cadastral code (20. 12 05 046; 20.42 09 078)) from January 2016 to 31 December 2018. It must obtain the construction permit before 1 December 2019 and complete the project before 2025 by attracting the investment in the amount of USD 15 million.
According to a new agreement, the articles of the purchase agreement (7.3, 7.4) related to the mortgage of the property transferred to the buyer, are changed. Although under the previous agreement the buyer was entitled to mortgage the property, under a new agreement the buyer can mortgage property before the fulfilment of the investment obligations only upon the agreement with the seller (the Ministry of Finance and Economy of the Autonomous Republic of Adjara).
Although, according to the purchase agreement concluded in 2006, in case of origination of a dispute (request of annulment of the agreement) the parties had to apply to the Arbitration Court of Paris within the International Chamber of Commerce, according to a new agreement if a buyer fails to fulfil its obligations, the Ministry of Finance and Economy may unilaterally terminate the agreement concluded with the company.
At the same time, the company has been fully exempted from the forfeit, imposed due to the failure to fulfil the obligations undertaken under the purchase agreement (the forfeit had been imposed only for the failure to fulfil the obligations undertaken with regard to only one facility, the amount of which is not specified in the letters provided to us).
The list of facilities, which remained in the ownership of the company, with the attached exact areas and exact addresses.
The list of the property returned to the balance of the Ministry of Finance and Economy of the Autonomous Republic of Adjara together with the cadastral codes and legal addresses.
Conclusion and recommendations
We would like to emphasize that it is a right decision to generally facilitate investments and cooperate with certain large investors, and we think that such activities are extremely important for the development of the economy of the country.
However, we also think that in the situation where the investor had not completely fulfilled the investment obligations and the state had not enacted the sanctions determined by the agreement in response to that fact, the questions of the society regarding that project are absolutely legitimate and, in this case, a special obligation of transparency and provision of information to the society is imposed on the state, in order to exclude any doubt of unlawful disposal of the state property and lack of substantiation of the decisions of certain officials.
Thus, we think that it is necessary to publicize the details of the negotiations and the agreement concluded with the investor, including the comprehensive information on the estimations, based on which new conditions were agreed with the investor in return for the exemption from the forfeit determined by the previous agreement. Also it is interesting specifically how the lists of facilities to be returned to the state and the facilities to be maintained within the ownership of the company were determined.
Also, it should be stated that we positively evaluate the articles of the changed agreement, which determine the possibility of settlement of legal disputes on the territory of Georgia and the necessity of obtaining the seller’s (Ministry of Finance and Economy of the Autonomous Republic of Adjara) permit for mortgaging the property.
Also, based on the past experience, we consider it is necessary that the above and other similar projects should determine the mechanism of step-by-step monitoring of the obligations, to be fulfilled by the investor. According to a new agreement, this project includes the fulfilment of the obligation of step-by-step monitoring only over one facility – the Bobokvati Project, and that obligation is quite general.
 On 21 October 2005 a Memorandum of Understanding was concluded between the Ministry of Economy and Sustainable Development and Silk Road Group S.A (an associated company to the Adjara Resort Holding BV), in which Silk Road Group expressed its intention on making investments in Georgia together with the Kazakh partners. That’s why this project is referred to as a ‘Kazakh Invetsment’.