A ccording to a new government program, published on 20 November, one of the priorities for Georgia's economic development is the promotion of public-private partnerships through increasing the role of the private sector in the economy and using public resources efficiently.
In order to achieve this goal, one of the instruments envisaged is the creation of a sovereign investment fund to be formed on the basis of the partnership fund that is currently operating. The aim of the sovereign investment fund is to attract foreign investments. There are also plans to set up several other funds with the same central aim.
According to international financial institutions, the Georgian government's talks about establishing several different investment funds increase confusion among investors and impede the inflow of investments to the country. It all indicates an ambiguous economic policy, which adversely affects economic growth.
The Georgian government has admitted that by the end of 2013, the country's economy will increase by between 2% and 2.5%, instead of the 6% initially forecasted.
The CEO of the partnership fund, Irakli Kovzanadze, declares that the regulatory issues of economic policy do not fall within the scope of the activity of his fund. Tabula interviewed Kovzanadze about the importance of the funds; the critical statements international financial institutions have made about Georgia's current economic policy; the business environment existing in Georgia; the decline in economic growth; and, in this light, the investment policy of the government.
Let's briefly recap the activities of the partnership fund: what has been done over the past period? How many investments have been attracted? Who funds the projects?
The aim of partnership fund is to support private investments in several sectors of the Georgian economy – in those sectors that are considered priorities for our country. Among these are four sectors: energy; agriculture; industry i.e. the manufacturing industry; and infrastructure, by which I mean hotels and the relevant infrastructural facilities needed for this sector. We have projects in each of these directions; some of them are currently being implemented, others will be launched soon and some have already been completed.
The partnership fund itself is a hundred-percent state owned institution. For its part, the partnership fund owns several strategic state companies. Our monies are accumulated from dividends received from these companies; these dividends, proceeds and revenues from other projects are invested in these projects.
Why did you decide to establish a sovereign investment fund on the basis of the partnership fund? How will the sovereign fund differ from the existing fund?
The idea of a sovereign investment fund was first voiced by Prime Minister Bidzina Ivanishvili earlier this year. We set up a government working group to define a concept for the structure and function of the sovereign fund, as well as the process of transition from the partnership fund to the sovereign fund.
The partnership fund includes certain functions of the sovereign fund, but the sovereign fund is a much more well-tested institution. For any foreign investor, a sovereign fund is more understandable than any other type of fund – in terms of both the notion itself and its structure.
Today, the partnership fund has two very important functions – the management of strategic assets and the implementation of investments. In the case of a sovereign fund being established, these functions will be expanded to include a management dimension in the form of corporate management issues.
Sources of financing will remain the same at this stage – the fund will depend on those profitable projects we are currently planning.
In general, the majority of sovereign funds existing worldwide are oriented on taking excess liquid resources existing inside a country, which are often accumulated owing to natural gas and oil revenues, out of the country and placing them abroad. Our country does not have natural gas or oil fields, therefore the monies attracted by the sovereign investment fund will be invested in facilities of strategic importance for the country.
If the sovereign investment fund has the right to take out loans, who will pay back those loans?
Naturally, it will have the right to take out loans. We have this right now and will have it in the future too. These loans may come from both those international financial institutions operating in Georgia as well as those operating outside Georgia – the European Bank, the Asian Development Bank, international financial corporations and many others. As the sovereign fund attracts these loans, it will naturally have to pay them back.
We have already taken out loans, which we are paying back, and have invested in projects too.
In this direction I think that the sovereign fund will have an interesting function. There is a principle of the so-called three P's – Public Private Partnership – the partnership and cooperation of the public and private sectors. This format is very well tested abroad – for example, numerous projects are being implemented in this way in Turkey. I think one of the objectives of the sovereign fund will be to implement such initiatives within the framework of which the state and the private sector will jointly build and carry out projects of strategic importance.
You are talking about the importance of attracting investments and I would like to ask you about the new government's attitude that the improvement in international ratings is not necessarily one of the goals of the country. Is it important for your activities that Georgia has a leading position in international ratings? I can recall a speech Prime Minister Ivanishvili made during the world economic forum in Davos, when he said that Georgia, in reality, did not deserve a high place in the Ease of Doing Business ranking. Do such statements harm the investment image of the country and are they impeding your activity?
I cannot agree with you. The rating has improved and we have moved up to eighth place this year. Any rating somehow, but not fully, reflects the situation in the country. I think that ratings, in general, are somewhat important for investors when they are planning to enter a country. However, let me be frank: investors, in reality, enter countries when their rights are protected there, when investments and private property are protected, when the courts are fully independent from the state, and when various advantageous circumstances exist. In our case, these circumstances – I mean in terms of investment and taxation – do exist today: we rank fourth in the world by the size and number of taxes. In this regard, I believe that the environment is the best and will improve further.
You mentioned the economic environment – here economic growth has declined. Instead of the initially forecast 6% economic growth, the economy will grow by between 2% and 2.5% this year. International financial institutions explain this backslide as being a result of political tensions and the vague economic policy of the government. Do you agree with this assessment?
I think that in this regard a key condition exists today – business is inviolable. I can tell you that one of the most important elements in the relationship the current government has with business is that the government does not interfere with the choices business makes.
Then why does this not positively affect business and the economy?
There has been a decline in economic growth and not, for example, a recession and so on and so forth. I view that as something natural because significant changes took place in our country over the past year; there was a change in power and all elections – both parliamentary and presidential – were held democratically.
Any investor, coming from outside – I mean external investors – look at how and when changes in a country will occur, and this can be felt in Georgia too. I want to tell you honestly that the elections have just ended and we have already had meetings with several investment groups and have made proposals to organize business forums. I think that the conditions for economic growth will be better next year.
You say that the government does not interfere with private business, but it pursues a policy which increases regulations – toughening the Labor Code, establishing quotas on imports, prohibiting the sale of land to foreigners, and toughening the visa regime. In your opinion, does this policy not affect investments?
This is not an element of our work. However, I, as the head of the partnership fund, have not felt that to be a problem for any investors so far.
The partnership fund is implementing several projects now, including in the energy sector – a thermal power plant with a capacity of 230 MW, the total value of which is 220 million USD, will be put into operation in 2015. Another project concerns agriculture – a pig farm equipped in accordance with European standards, which, as estimated by the partnership fund, will meet 20% of the demand for pork on the Georgian market. The partnership fund also works in the direction of developing hotel infrastructure: hotels have been built in Akhaltsikhe and Kvareli, and one is being built in Borjomi, namely in Likani.
one of these projects will be suspended.
These are questions that you should probably ask the relevant ministries – the economy or finance ministries.
Your position is clear. I will now ask you about funds. In the assessment of the same international financial institutions, the government's economic policy is vague because of its plan to set up many different funds whose specific aims have not been clearly formulated. In this regard, they have repeatedly mentioned both the partnership and sovereign investments funds. What is the difference between the sovereign fund and, for example, the co-investment or other funds?
Let me say that I have not seen the partnership fund anywhere on that list. In our case, the matter is clear. We are a state investment fund that has its functions. Some of these functions, which perfectly fit into the framework proposed by international financial institutions, were established on their recommendations.
We have also involved those financial institutions, for example, the International Monetary Fund and the World Bank, in the process of developing a sovereign investment fund for our country and we take their recommendations into account.
There is nothing ambiguous here. The annual results of our activity are examined by the Big Four audit firms.
And as regards the difference with the co-investment and other funds?
With regard to the co-investment fund, you should perhaps ask them. In general, however, it is a private investment fund. We are a state fund and our revenues consist of dividends from those organizations we own. The share of our participation in an investment project must not exceed 50% of the total amount of the project, whilst the participation of the co-investment fund may reach 75% of the total project.
One of main threats named in relation to funds, and the presence of a great number of different funds, is corruption. In your opinion, is there such a risk?
All of our operations are transparent. Transparency is fully observed. We have a supervisory council that is led by the prime minister and, at present, includes several government members, representatives of commercial banks, as well as representatives of the public and private sectors. We receive opinions from international audit firms. Any investment project goes through many filters before it is implemented in reality. Therefore, I rule out elements of corruption.
When will society be able to evaluate the results of the activity of the sovereign fund?
In the first half of the [following] year. That is when our financial results are normally published.