Issue 5, 2011. October-November

   

GEORGIA PRIMING TO IPO SHARES IN RAILWAY, PIPELINES

Government privatization is on the agenda again, although now the government seems to be considering share offerings as a means of making the sale. Georgian Railways is already well on its way to an initial public offering of a minority stake and Georgian Oil and Gas Corporation, the Georgian state electricity distributor and Telasi also seem set to follow. But how are these plans proceeding and how likely are they?

Molly Corso


The first step in any of these IPOs is the legislation to allow them to happen. Changes to legislation are being heard by parliament; if passed, the state would be free to sell minority shares in strategic objects like gas pipelines, the railway and the electricity grid.

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.

Opposition parties, however, are concerned the proposed sales will open up strategic objects to foreign ownership.

There appears little doubt that the amendments will be passed. Parliament has okayed the changes in the first two hearings; it is largely perceived the third and final vote will pass as well.

Prime Minister Nika Gilauri, who initiated the changes in August, believes the sale of minority shares could bring "hundreds of millions in additional investments".

Speaking to the cabinet in September, Gilauri tried to ease concerns that the sale of minority shares of strategic assets like the railway and Georgia Oil and Gas Corporation could harm national security.

"The Georgian government neither now nor in the future plans to sell the controlling stake of these enterprises," PM Gilauri said at a government session on September 14 - according to comments reported on Civil.ge.

"Our goal is to float minority stakes - 20, 25, 30 percent - of these strategic enterprises on the international stock markets; no more than a 49 percent stake in these companies will be floated."

According to some investors, these sales make sense because Tbilisi is no stranger to international markets. In 2006 Bank of Georgia was listed on the London Stock Exchange and in 2007 and 2011 Georgia made two large bond issues.

For this reason, Georgia is a known commodity for investors, noted BG Capital CEO Nick Piazza. It is also an easy place to engage with the government. While the region has a reputation as a place where "investors go to be forgotten and mistreated", Georgia has been an exception. The waves of reforms, coupled with the government's interest in engaging with investors, have helped create interest in the country.

However, selling equities on the international markets - IPOs for state owned assets - marks a change to the government's usual method of straight privatization.

Former Finance Minister Kakha Baindurashvili noted that privatization can mean "different things". Now chairman of the supervisory council for the Georgian Post, he said the post office is not being considered for an IPO right now.

The government is, however, investing heavily in the postal service. The intensity of the reforms, which include raising the cost of mailing and moving a controlling share of the state lottery to the post, have raised questions about how long it will remain a state company.

But opposition leaders like Irakli Alasania have objected to the new IPO plan. In an open letter to Gilauri, Alasania said Georgian "reality" - an apparent reference to relations between Georgia and Russia - would make IPO sales potentially "dangerous" for the country.

Alasania also argued that the economic crisis will push down the value of the assets floated on international stock exchanges so Georgia will sell shares for less than they are worth.

Anders ├ůslund, a senior fellow at the Peterson Institute for International Economics in Washington, stressed however that IPOs are more secure than seeking a "strategic investor" for sensitive assets.

"You can get into a situation that a strategic investor sells and to a less desirable partner," he noted.

Investment analyst Stephanie Komsa noted that right now appears to be a "good time" for Georgia.

"I think there is growing interest," she said.

"I think this is a really good time for Georgia, there is political stability and you can still see the progress that is happening with Georgia's economic growth."