Issue 2, 2013. April-May

   

NEW GOVERNMENT FUNDS TO BOLSTER FINANCING FOR INVESTORS

Prime Minster Bidzina Ivanishvili plans to create three new funds, including a non-government private equity fund, in a bid to attract investors. Investor.ge spoke with economists, investors, financial managers, and lawyers about how the funds could help Georgia - and what mechanisms should be in place to ensure the funds attract investors, not crowd out existing private businesses.

Author

Plans to create three funds - an agriculture fund, a sovereign wealth fund, and a private equity fund that will include an undisclosed percent of Prime Minister Bidzina Ivanishvili's money - have raised questions about how the government plans to structure and manage the funds.

There are also concerns about how the government plans to finance the fund, and where the fund will receive the money necessary to finance investments.

The core fund - a government run $2 billion sovereign wealth fund - will hold the same state assets as the current Partnership Fund: the Georgian Railway (100 percent stake), Georgian Oil and Gas Corporation (100 percent stake), Georgian State Electrosystem (100 percent stake), Electricity System Commercial Operator (100 percent stake) and Telasi (25 percent stake).

Economist Paata Sheshelidze noted that the source of the financing is the first question. "[E]ven if they have those assets, how will they have liquidity," he asked. "Because funds need cash to give out..."

Deputy CEO of the Partnership Fund Giorgi Bachiashvili told Investor.ge that financing for investments will likely come from IPOs of the state assets and, in some cases, budgetary transfers. Some entities, like the Georgian Oil and Gas Corporation, have already issued Eurobonds.

He stressed, however, that any budgetary transfers will have "important withdrawal rules for transparency."

Those rules - and the actual structure of the sovereign wealth fund - are still a work in progress: the government, through an international tender ,has hired a law firm.

Bachiashvili said the firm is one of the "top ten" international law firms with expertise in creating sovereign wealth funds. He added that once the tender process has been completed, the government will publish the results.

Maintaining a high level of transparency will be crucial, noted Zaza Bibilashvili, a founding partner of BGI Legal law firm.

"The key issue is that these funds should be transparent in the way they are set up, in the way they are managed, in the way they are financed, and in the way they are made accountable to the government and the public," he said.

One major test will be how the funds treat investments that will compete with existing private investors.

"The government has always to really look not to crowd out other players," noted Vakhtang Lejava, the chancellor at Free University who worked as an advisor for former Prime Minister Nika Gilauri.

That means making a clear distinction in how the government fund's choice of investments could affect the private sector.

Gogi Mgeladze, the general director for Mina, a glass bottle producer, noted that there were some concerns about how the Partnership Fund treated the line between government support and direct competition with private business.

Under the previous management, the Partnership Fund looked into investing into a glass factory - creating a joint partnership between an Azerbaijani company and the Georgian Oil and Gas Corporation, a business deal that could have presented a serious conflict of interest had it been funded, Mgeladze said.

Government-run funds, he noted, have to be careful not to compete directly with private investment.

"We cannot demand that the state protects and does not allow anyone to enter this business - of course it is a free market, it is a competition," Mgeladze said. "The only thing we don't want is competition with the state."

Bachiashvili stressed, however, that the government is aware of these concerns.

"Trust me, the investments that we make...none of these investments are competing, not even with the banks.... Basically we are like an equity investor," he said.