Georgian State Development Bank heading the wrong way
08 May, 2014
Georgian State Development Bank heading the wrong way
The Georgian government is setting up a Development Bank to fund projects important to the state. However, the suggested model falls far from the best world practice and many sector pundits think it is doomed to a failure. According to the bill on the State Development Bank, the bank will be established on the basis of a state-owned Partnership Fund set up by the previous authorities in 2011 with the aim to promote investment in the country by co-financing maximum 50%
(equity, mezzanine, etc.) in projects at their initial stage of development and leave it 3-7 years after the investment. After the power shift in 2012, the new authorities added a couple of other state funds also aimed at attracting investments for projects of strategic importance to the state. Sector analysts found three funds excessive for a small country like Georgia. The FP was particularly criticized as an ineffective and redundant structure duplicating the functions of Ministry of Economy and Sustainable Development of Georgia which is in charge of managing state enterprises. Last spring the government decided to rebrand the FP into a sovereign fund to make it more effective, however, the reform recently ended up in the consolidation of all funds . Finally, the State Development Bank was created instead of the FP which is in line with international practice.
According to the bill, 49% of the Bank will be redistributed through private investors and the state will hold the controlling 51% package. The Bank will be mandated to issue credits, state securities and act as a guarantor. On the other hand, it is not allowed to disburse credits to commercial banks, accept deposits and perform banking operations for financial transactions. Therefore, the bank cannot disburse credits independently but can only issue credits with the support of commercial banks. These restrictions make sector analysts believe that the Georgian State Development Bank will be ineffective and at risk of corruption.
According to Lia Eliava, a financial analyst, the Georgian State Development Bank is a castrated version of the internationally accepted model of a similar bank. Usually, the Bank issues credits independently and commensurately performs financial transactions, also accepts deposits from its stakeholders in order to enhance the Bank’s capital, and equally handles financial transactions implemented by the stakeholders. The involvement of commercial banks in the scheme is a big mistake, she believes that because the chain of state money circulation consists of the State Bank-commercial banks-borrowers monitoring will be hard and non-transparent.
“Commercial banks’ participation will make things very complicated. I have always been negative about disposing state finances through commercial structures, it has never been effective and the Development Dank becomes dependent on commercial banks,” she said. “As for the deposits, even credit unions are allowed to accept deposits from their members while this State Bank is to be deprived of this right. And how will the Bank pay back its investors if it cannot perform financial transactions? Via commercial banks? This is not correct and will complicate the monitoring process on how reasonably state funds are spent.”
Soso Archvadze, an economic analyst, is also skeptical toward the sophisticated money lending mechanism that leaves state budget-based finances at the disposal of the private sector. He fears that the suggested state bank model is a fusion of state and private sector management while such bled always leads to corruption deals as the Georgian reality has witnessed many times before.
Archvadze cannot understand why there is a State Bank if commercial banks will be handling the credits disbursement and banking operations. “Looks like the fifth wheel of a car,” he said. “And the more complicated the mechanism is, the easier corruption is.”

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