GEO

Property sold for GEL 1: problematic trends

05 March, 2013

Transparency International Georgia has reported about the alienation of state property for a symbolic price through direct sale  before as well (blog post 1, blog post 2). We found this issue to be quite problematic on numerous occasions, as often the property was sold to legal entities that had been registered only few days prior to receiving the property from the state. In addition, links were established with entities, receiving the property for a symbolic price, with certain officials. On many occasions, the selection criteria for recipients of the property was totally opaque. Further, many cases were reported about investors not fulfilling obligations.

It is known that the state property is alienated by the decision of the President of Georgia; and within the scope of the Adjara Autonomous Republic, by the decision of the Chair of the Government. An administrative authority managing the property, or in special cases the Government of Georgia, submits the property for alienation. The price of the state property and procedure for its payment is determined by the decision of the President of Georgia.1

Pursuant to the Law, during the direct sale of the state property, based on competitive selection, certain criteria must be established and the recipient entity of the property must fully meet these criteria. Further, it must be capable of fulfilling the privatization obligation in full and in good faith.

In view of these two requirements we have examined several cases of alienation of state property, based on the information obtained from the Ministry of Economy and Sustainable Development of Georgia, concerning state property alienated for a symbolic price over the past three years. The analysis of this information has revealed the following trends:

Absence of a privatization condition

Of interest from the obtained information is the case of a non-commercial legal entity, the Ilia State University, which has received up to 285,000 m2 of real property along with a vast number of movable property in 19 administrative units for 1 GEL, without any investment or other privatization obligations. As already noted, a privatization condition is necessary for carrying out a competitive selection, which was absent in the given case. The above raises certain suspicions that the recipient of the property was selected in a biased way.

Capacity to fulfill investment obligations

As noted above, it is important that an entity is skilled and capable of fulfilling the respective investment or other obligations in full and in good faith. For instance, the obtained information has demonstrated that prior to receiving the privatization property, "EKO Georgia" LLC has been registered as a legal entity a month earlier, while "Gori Greenhouse Farming" LLC, "Caucasian Mining Group" LLC2 and "Hospital Digomi" LLC - five months earlier. A logical question arises in such cases as to the capacity of recently registered companies to duly fulfill undertaken contractual obligations.

Beneficiaries with governmental links

Further, substantial doubts arise in cases when the links with prominent officials are identified. For instance, 8,000 m2 of non-agricultural land in the Kazbegi Municipality was transferred for a symbolic price in November 2012 to "Geoland" LLC. A 50% shareholder of this company is Gigi Ugulava's brother, Irakli Ugulava. In September 2012, 100% of "O. Chkhobadze Treatment-Rehabilitation Clinical Center of the Disabled and Elderly" LLC and 15,140 m2 of non-agricultural land in Zugdidi with attached buildings were transferred to "Avente Hospital Management Group" LLC. The Director of the LEPL Center for Implementation of Health and Social Welfare Projects, Ivane Kachiuri, is the person responsible for the management of "Avente Hospital Management Group" LLC.

Recommendations

Many countries practice the alienation of property through direct sale. Usually this aims to create favorable conditions for investors, which accordingly stimulates the flow of investments in the country. A title through direct sale of property must be transferred to a buyer that will meet the criteria for privatization of state property in full and in good faith. It is crucial that the state reasonably disposes of its property. Alienation of state property must serve concrete objectives, and in particular it must support the strengthening of a private sector and growth of its efficiency, attract investments, secure employment, etc. During the alienation of property the state must give advantage to an investor (buyer of property) that will use the transferred property for the benefit of the country's economy. Hence, setting certain criteria and conditions for the transfer of property is central.

Part of the problems associated with the direct sale of state property for a symbolic price is caused by incomplete regulations, while the other part arises out of unlawful actions of the authorities. Accordingly, to remedy the problem it is necessary to:

  • Improve legislative regulations and expand the accountability of responsible persons;

  • Prohibit property alienation for symbolic sum to the companies registered in offshore zones.

  • Ensure maximum transparency of the process and inform the society effectively;
  • Fully justify the submissions transferred to the President for decision-making and ensure their public availability pursuant to requirements of the law.

The state institute that should be authorized to dispose of the state property is a secondary issue. Only changing the authorized entity will not warrant the solution of existing problems. It is crucial that the state introduces the mechanism, which on one hand will not give rise to substantial doubts among the public, and on the other hand will be a flexible and effective tool for boosting investments in the country and achieving other ideal objectives of privatization.


 

[1] Article 10, Paragraph 10, the Law of Georgia on the "State Property", Legislative Herald of Georgia, 48, 09/08/2010.

[2] 100% shareholder is "Pamtilon Holdings Limited", registered in Cyprus three months before this LLC was founded.

 

Author: TI Georgia