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Georgia: Privatizing railway, bids before strategy

Controversial and often confusing, Georgia’s aggressive privatization campaign threatens to become sidetracked by a debate over how to privatize its railway.

Georgian officials maintain that the country’s 1,612-kilometer-long railway network provides the shortest route between the Caspian and Black Seas, and could play a potentially key role in transporting Central Asian cargo to European markets. Its connections to the Black Sea ports of Batumi and Poti -- both heavily promoted by the government among foreign investors -- have become additional selling points. But while the railway’s market potential may be clear, how best to move forward with interested investors is a question the government has yet to resolve. As of January 25, the deadline for submission of bids, five companies had expressed interest in acquiring a 100% stake in the state-owned Georgian Railways, Ltd: Center Invest Capital Partner (Russia), Stratton Holding LLS (US), Capital Investment Group (Sweden), East Capital (US), and the Silk Road Group (Kazakhstan).

On top of an offer for the railway’s assets, bidders were asked to submit proposals that outlined their model for privatization of the railway, and its further development, including a tentative investment schedule. The government, however, has fixed no exact deadlines for the deal’s completion, nor yet released information about the bids on its website. According to Deputy Economic Development Minister Vato Lezhava, the government has “no obligation” to agree to any of the bids received since “so far no concrete decision about how to privatize the railway has been made yet.” The ministry, which is overseeing the process, simply acknowledges the possibility of putting the railway under private management, Lezhava said. “We cannot speak in a decisive way right now since there is no decision what privatization strategy to undertake. We may sell the railway, but maybe not,” Lezhava told EurasiaNet. “Maybe we will find some other forms of divesting the enterprise. The Georgian government will be vetting proposed packages and based on these proposals will work out the best privatization strategy.”

Critics charge that such non-linear procedures suggest that the sale -- or potential sale -- had been hastily conceived. Nonetheless, public mention has already been made of two possible privatization strategies for the railway. Prime Minister Lado Gurgenidze has proposed divesting the railway via a so-called flexible privatization model: 10% would be privatized in a first phase, going up to 25% in a second phase, and, eventually, 100% of the company. The timetable for the proposal, outlined in a January 17 interview with Dow Jones Newswires, has not been given. Accumulated revenue from the phased privatization would be placed in a fund to be used only in case of war, natural disasters and the restoration of Georgia’s control over breakaway Abkhazia and South Ossetia. The fund’s creation is currently under consideration in parliament.

The second option, proposed by former state minister for reform coordination Kakha Bendukidze, would transform the Georgian railway into a joint stock company with shares placed on international exchanges. The state’s stake in the company would come with “special” rights, according to Bendukidze. “[W]e will create a kind of a gold stock -- a special sort of shares, which gives the state additional, special rights. This kind of share empowers the state to veto any decision [of any shareholder] that opposes state interests,” Bendukidze, the nominee for head of administration at the state chancellery, said in a recent interview with Rustavi-2 television. Deputy Economic Development Minister Lezhava has termed the idea “lucrative” and expressed a preference for keeping a controlling stake in the railway in state hands -- at least initially. Two local experts have also expressed support for the idea. Independent expert Gia Khukhashvili, a former member of the railway’s Supervisory Council, argues that the line is a strategic asset for Georgia, and a core part of the Silk Road transportation corridor -- two attributes that dictate that the state should be the controlling shareowner. No stake larger than 10 to 15% should be sold to any single investor, he said.

Meanwhile, Gia Jandieri, vice-president of Tbilisi’s New Economic School, contends that the railway’s strategic importance is overrated; complete privatization, he adds, is the only way to make sure that it maintains any competitive edge. “The importance of the Georgian railway is based on emotions alone and exaggerated. Of more strategic importance is cellular communication, in fact,” Jandieri said. “The world is developing at a very fast pace and if we do not put this railway network under private ownership, we will find other routes bypassing Georgia and the country will lose its geopolitical importance.” Khukhashvili counters that the railway company already has the financial resources to upgrade its stock; improving its infrastructure further before taking up a privatization option would let the state “sell [shares] at a higher price,” he said. “It will take one to two years, but we will derive more profits.”

The privatization debate is not the first time Georgia’s railway has been a source of contention. In the summer of 2007, the government handed over management rights for 99 years to the London-based Parkfield Investment, a company with no known experience running railways. Parkfield had pledged to invest $1 billion into the Georgian railway network over the next decade. By October 2007, though, the deal -- previously hailed by former Economic Development Minister Giorgi Arveladze as “the biggest investment project ever made in Georgia” -- had collapsed. Reasons for the about-face - both official and interpretations by outsiders -- varied. According to Bendukidze, Parkfield Investment’s inability to remove railway track from Tbilisi and along the Black Sea proved a deal breaker. Despite a massive influx of capital into Georgia under President Mikheil Saakashvili, the lack of transparency surrounding deals like Parkfield’s has caused some potential investors to think twice, American Chamber of Commerce Chairman Esben Emborg said in an October 2007 interview with EurasiaNet. This time round, agrees expert Khukhashvili, a clear-cut process is needed in put investors fully at ease. “Investors have a full right to know what they’re bidding for,” he said. (