EURASIA INSIGHT
Molly Corso
10/12/05
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Georgia’s Rustavi Steel Works, a rusting monument to Soviet industrial might, has changed hands in a $27 million transaction that promises to fuel further controversy about President Mikheil Saakashvili’s campaign to turn state property into cash for government coffers.
The sprawling, 5-million-square-meter complex was sold at a bankruptcy auction on October 12 to two Georgian companies. According to local media reports, Energy and Industrial Complex received the bulk of the complex for $20,500,000, as well as Rustavi’s limestone mines for $500,000. TedOil received limestone workshops, territory and some machinery for $6,000,000.
But despite these sales, one Italian company, Metal Geo, claims that it is, in fact, the true owner of Rustavi. In 2004, Metal Geo assumed ownership of Ares International, which acquired 98 percent of Rustavi by presidential decree in 2003.
Ares’ claims to Rustavi have long been the subject of much legal wrangling with the Georgian government; in 2004, the Georgian Supreme Court ruled against the Italian company, forcing it out of Rustavi, Alexander Seriogin, Metal Geo’s representative in Georgia, however, maintains that after negotiations with the government in November 2004, Metal Geo paid $1 million in return for a pledge that the steel mill would be returned to their ownership.
As such, Seriogin argues, Metal Geo already owns the Rustavi complex. Seriogin claims that the firm has invested 14 million euros ($16.8 million) in Rustavi.
At the same time, he claims, Metal Geo was also the uncontested winner of the first privatization competition for the steel complex, held in June 2005.
"Then [the government] told us they would not fulfill the memorandum [for the sale of Rustavi], but would hold a tender competition instead," Seriogin told EurasiaNet. The tender was later reformatted as an auction.
"We decided not to participate in the auction," Seriogin said. "The Italians don’t want to work in Georgia. There are no conditions here [for business] and investors are completely unprotected."
Metal Geo has since taken their claims to international courts in both Strasburg and Washington, and expects to see the case settled within the next three years, Seriogin said. The Italian firm is demanding $40 million in compensation from the Georgian government for lost investment and moral damages.
Representatives of the Georgian ministry of economic development could not be reached for comment about Metal Geo’s claims.
The company’s case, however, promise to complicate the Georgian government’s already complex – and highly controversial -- campaign to dispose of unwanted state property.
Rustavi’s sale was originally promoted not as a bankruptcy auction, but as a likely crowning achievement of Georgia’s aggressive privatization process: a state conglomerate with $130 million in estimated debts would be sold for a hefty price, officials claimed.
But a mere week after the official announcement of Rustavi’s privatization sale in June 2005, the steel mill and all of its possessions were declared "unfit for rehabilitation" and ownership reverted to bankruptcy court. The complex, however, is still listed on Georgia’s [ privatization website].
Nonetheless, Minister of Economic Development Irakli Chogovadze maintains the property disposal is all about bankruptcy, and bankruptcy alone. "It [Rustavi] is not a privatization," Chogovadze said during a September interview with EurasiaNet. "The bankruptcy manager is selling it."
Despite repeated attempts, Rustavi’s current bankruptcy manager (and former rehabilitation manager), Malkhaz Alborashvili, could not be reached for comment.
Other property disbursements, featured as part of the official privatization campaign, have also, in fact, been bankruptcy sales, the government says. According to Chogovadze, the combined $132 million sale of the Chiatura manganese factory and the Vartshikhe hydro power plant, widely celebrated as a resounding success of privatization before the deal went bust in June 2005, also did not fall under privatization.
"It [the sale of Chiatura and Vartshikhe] was not [privatization]. It was also an agreement between the bankruptcy manager, the state, and the buyers to create a joint company to maximize the value worth of the debt holders and the state holders because we were also selling a company in this transaction," Chogovadze said. "It was kind of a triad type of
agreement … partly privatization."
But while the minister remains upbeat about privatization, a commission in the Georgian parliament is actively studying the privatization process to see where it is going wrong.
The current privatization process employs multiple methods for disposing of property: auctions, tenders, hybrids and bankruptcy. Lawmakers are scratching their heads over who decides what and when.
"There are various approaches and no one can understand why this is a competitive bid and that is an auction. It is impossible to understand," Nicoloz Lekishvili, head of the parliamentary committee on sector economics and economic policy and a member of the Independent Majoritarians faction, told EurasiaNet.
According to Lekishvili, parliament created a committee task force of lawmakers, experts and lawyers to look at the privatization process and "correct" problems.
"We can instigate some corrections, create some documents that correct all of this," he said. "Now there are some nuances in the law that can be interpreted differently. It is not written that it is prohibited to do things like say, ‘I will pay one dollar more than those who place the highest price.’ That is absurd. That can be fixed."
However, Giga Bedineishvili, a financial consultant with the Zestafoni Ferro-Alloy Plant, which took part in the Chiatura privatization process with EvrazHoldings, paints a much brighter picture of privatization, alternate processes and all.
According to Bedineishvili, Chiatura Mining Complex (along with two other enterprises) was originally proposed as a straight privatization. The government, however, offered to put the mining complex into bankruptcy so that potential investors would have a "clean" product that was worth more, he said.
"The price for clean assets is higher than for assets with debt," Bedineishvili said. "If there were elements [of the privatization] that were non transparent, it was not because the government was trying to keep the price down [ like the administration of former President Eduard Shevardnadze did]."
Bedineishvili states that it is more likely that the final deal did not go through due to the final price; not because of problems with the privatization process itself.
Economic Development Minister Chogovadze also defends the process. All of the government’s different privatization methods are aimed at streamlining procedures, and bringing more cash into the economy faster, he claimed.
"We are changing the tender procedures," he explained. "Instead of having two stages, [we have] one stage. We open the envelopes, the highest prices wins."
He added that with the new measures, it will be harder for unhappy parties to call foul.
"Closed envelopes always produce some sort of misunderstanding or suspensions that someone might have a special tool to look into the envelopes and tell another party what is in it," Chogovadze said. "So we will create a hybrid system whereby we will have a set of conditions [such as that] you can not lay off workers for the next two years, for example, and we will put the company together with these conditions in an auction which will be open to anybody."
But the Georgian government’s tussles with foreign investors are not limited to Rustavi alone. Both the Turkish company Çelebi Holding and the Luxembourg-based Gestion en Technique Spéciale (GTS) accuse the government of violating their contract to rebuild and revitalize the Tbilisi International Airport. GTS has already taken the matter to the International Court of Arbitration in London. Çelebi is threatening to do the same.
Speaking from Luxembourg, Jean-Marc Demoulin, managing director of GTS, said that although the company had a contract and the appropriate financial backing, they were informed by fax at 3 a.m. on July 1, 2005, less than two months after their agreement with the government was signed, that the deal had been scrapped.
"Our company is 10 years old. We work all over the world [but] I have never seen this type of tender," he told EurasiaNet.
While Demoulin is confident GTS will win the case against the government, Economic Development Minister Chogovadze shrugs off any allegations of wrongdoing. "If somebody could explain what could be their complaint, it would be good. They had to present financial guarantees. They did not do it and they are trying to make a case in court. Well, good luck to them," he said.
According to parliament’s Lekishvili, the government was told that the winners of the tender were "bad" companies so the sale was held again. "I don’t know if this is true or not-but the government says that the companies that won are very bad. Why are companies like that winning competitions?" he said. "There is a need to implement changes so the process is held more seriously. First, study the companies, see how serious they are, if they have the financial backing needed, what they potential is. But this is not happening."
Lekishvili maintains that privatization suffers as a result. "There are various conversations, people are whispering things. There is no need for that," he said. "We want to first clarify what is behind that [the rumors] and secondly look and give recommendations on how all this can be fixed," he said.
According to Leila Butt, an economist with The Economist Intelligence Unit specializing in the Caucasus, such fixes need to be made. Butt maintains that since Georgia is already having problems attracting investors, the confusion and broken deals are bogging down the privatization process even more.
"Right now there are some problems regarding the privatization program," Butt said in a telephone interview from New York. "I think it does send a bad impression; simply the fact that Georgia still has a long way to go."
Editor's Note: Molly Corso is a freelance reporter and photographer based in Tbilisi.
Posted October 12, 2005 © Eurasianet
http://www.eurasianet.org
