Georgian Railway and GOGC Divesture Suspended
06 December, 2012
Georgian Railway and GOGC Divesture Suspended
The Initial Public Offering (IPO) of minority shares of the state-owned Georgian Railway and Georgian Oil and Gas Corporation at international stock exchange does not top the agenda of the new government. It prefers to peruse the issue for a while to find the most rational solution.
New CEOs were assigned to the state owned Georgian Railway (GR) and Georgian Oil and Gas Corporation (GOGC) a week ago but plans whether or not the enterprises will be privatized or minority
shares up to 25% of companies will be divested, are still unclear. Both companies are of geopolitical importance to Georgia and the interest is quite high in the region to have a share in these pies: GR is one of the core passages of Silk Road transit corridor connecting Caspian Sea with the Black Sea through the shortest route between the Europe and Asia. Moreover, an additional route connecting Asia with Europe through rail-only corridor via Baku-Akhalkalaki-Karsi new rail track is upcoming. This project will effectively open a new rail-only corridor from the Caspian Sea to Europe via Turkey, eventually excluding the need for sea transportation once the planned rail tunnel under the Bosporus Strait in Istanbul is complete. The Baku-Tbilisi-Kars project could also open a North-South rail corridor linking Russia to Turkey.
One of the key assets of GOGC is the North-South gas trunk pipeline connecting Russian pipeline system with Armenia and leaving 10% of transported gas in Georgia as a transit fee. The pipeline has been coveted by the Kremlin for a long time for the latter gets a controlling lever in the region if this pipe is added to its map. 
As a matter of fact, privatization of both railway and main gas pipeline topped the agenda of Rose-government now and anon when they needed quick fiscal assistance and non-transparency and speculations followed all of these attempts as a rule. 
Claiming it could not afford rehabilitation of the heavily damaged trunk pipeline ex-power was intent to sell the North-South pipe to Russia for several times however Washington interfered and dissolved the deal as disbursed money to Georgian government on rehabilitation purpose in 2006. In 2007 government attempted to exchange Georgian railway in the then very popular TV channel Imedi to its founder the late Georgian tycoon Badri Patarkatsishvili. However the deal failed and assets still remain in the state control. 
Then rose-government decided to divest minority shares at international stock exchanges and attract financial resources scarcely available to non-state assets during the crisis. IPO of minority shares of GR, GOGC and Telasi, electricity distribution network of Tbilisi, was scheduled in fall of 2011 but delayed due to sagging market reasons till better times. IPO talks topped agenda again in spring this year and 25% of Railway was already scheduled to be offered at London Stock Exchange (LSE) by end of May expecting to attract USD 200- 250 million. But the deal was canceled quickly after billionaire Bidzina Ivanishvili, the active Prime Minister of Georgia at the moment who headed opposition in spring, became intent to participate in the bids. An official excuse was spoilt market claims again and IPO of GOGC was also delayed. 
A little bit earlier GOGC succeeded to place USD 250 million-worth Eurobonds to raise funds for the construction of Namakhvani 450 megawatt hydro cascade relevance, which has been and still is questioned by environmentalists. The deal was carried out non-transparently and some experts worried that putting the North-South trunk pipeline under a loan with unclear economic argumentation was risky.
Shortly in July GR also placed USD 500 million 10-year Eurobond to pay back its first and more expensive 5-year USD 250 million Eurobonds issued in 2010. The deal was successful but disbursement of USD 202 million out of the attracted loan to pay out dividends [to government that is the sole stakeholder] made experts doubt that the Eurobond emission was linked with the pre-election campaign financing. The best world practice shows dividends are paid from profit not the debt.
Ultimately, shares of both GR and GOGC went into hands of new government untouched and their future fate is still under discussion. “We will research the reasonability of IPO of Georgian Railway and GOGC and only after will make final decision,” Irakli Kovzanadaze, CEO of Partnership Fund managing with the said companies, stated during his meeting with Georgian media at Maestro press-club on November 21, 2012. He stressed that privatization of Georgian Railway is not of economic but also of political importance too as the interest toward Georgian Railway is increasing in the region. 
Georgian economic analysts agree with Kovzanadze although some find no harm in privatization of smaller portions only if the control package remains with the state. 
“Placing 25% of GR at international stock exchanges as was planned before is not reasonable at the moment. It is the most attractive investment project to the country and should be tailored to Georgia’s economic development concept that we are working out now. I think it is better to find internal investments to make GR stronger and divest around 49% in 3-5 years at international stock exchanges when its share price will grow,” Demur Giorkhelidze, an economic expert, told GJ. 
Ditrikh Muller, a financial market analyst with Georgian Investment Group, finds reasonable step-by-step divesture of less than 25% of GR or GOGC. 
“Let’s start by selling from 1% to 5% gradually to fix real market price and see whether or not shares are worth to be sold out,” Muller said. He suggests using the GR and GOGC to revive the half-dead Georgian Stock Exchange (GSE). 
“These are assets of regional importance and they may attract interest to GSE and act as a drive force to our flabby market, we should use this chance” he said. 
Soso Archvadze, an economic analyst, thinks to keep both GR and GOGC in the state control or divest just around 5-10% lest the strategic assets would be handed to groups who may not act in the interest of Georgia.
“The fiscal effect of given divesture of GR and GOGC shares will be so low that we can easily attract through other investment projects. As to GSE, it can be revived through bigger involvement of banks too. We better have more in-depth projects rather than seek for a shallow profit,” Archuadze said.
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