Georgia: Lottery Deal Gives Post Office a Power Play

A postal service employee helps customers repack boxes for shipping at the 0102 post office in downtown Tbilisi. Georgian Post, the government-owned postal service, recently took charge over 70 percent of a private company's holdings in the country's lottery, and is working on a comeback. (Photo: Molly Corso)

In the United States, the embattled postal service is resorting to drastic cost-cutting and sell-offs to stay solvent. In the Republic of Georgia, the post office is taking a different route to fiscal soundness – running the lottery.

For reasons that remain unclear, the Georgian Lottery Company (GLC), which holds a 15-year license for all lottery games in Georgia, decided this August to give the government a 70-percent controlling stake in its business. The Georgian post office, in turn, has a five-year hold on the company’s management rights.

Few details about the deal are available, but Kakha Baindurashvili, a former finance minister who now serves as both GLC’s board chair and as head of the post office’s supervisory board, portrayed the deal to EurasiaNet.org as a win-win “business transaction” for both parties.

“[W]e profit because our offices will be in use and there is the revenue we will receive from the Georgian Lottery Company as majority shareholders, but, also, the investors who stayed as minority shareholders will benefit still,” said Baindurashvili, who took up his lottery role after the transaction. “There is a huge cut of expenditures for the company because now they are using the infrastructure of the Georgian Post.”

Democratization activists, meanwhile, suspect there may be something rotten in Tbilisi. Representatives for the anti-corruption watchdog Transparency International Georgia described the deal as essentially a “renationalization” of private property. The lottery was privatized in 2009, as part of the Georgian government’s ongoing campaign to unload state-owned assets.

Now, two years after the government granted the Georgian Lottery Company an exclusive contract to operate the national lottery, the company has invited the government to come back and make the GLC a minority, 30-percent shareholder in its own business.

“It just seems astonishing that if you have this extremely profitable business -- you run the lottery -- and then you decide just to give it back to the state,” Transparency International Senior Analyst and Program Manager Mathias Huter said. “It doesn’t seem like there are market forces in place here.”

Dimitri Chikovani, the attorney for GLC’s former parent company, Lexor Capital Corp, was not available for comment; all of EurasiaNet.org’s lottery questions were directed to Baindurashvili.

Baindurashvili stressed that the lottery has not become a direct asset of the postal service. Despite its 70-percent government ownership, he claimed that GLC “stays as it was -- an independent lottery company.”

“[T]he company itself has its own board, its own director, its own service and everything,” Baindurashvili added.

The post office’s management role for the lottery has prompted many analysts to think that the government is trying to make the Soviet-era postal service attractive for future private investors.

A push from Prime Minister Nika Gilauri’s office to allow the state to sell 15-25-percent shares in state-owned companies such as the railway and electricity distribution networks has fueled that speculation.

In the past, the Georgian government has made clear its desire to privatize the postal service. Earlier this year, three potential investors from Georgia, Switzerland and Romania submitted bids for the post office, but the privatization auction was later called off. No reason was given.

The need for a makeover of the postal service lingers. Nugzar Bregvadze, head of the post office’s legal and IT department, asserts that the mission is to rebuild the service from “zero.” Aside from the lottery business, the post office is counting on a new cargo service and sales of textbooks and insurance policies to generate income. It has also taken over an international mail delivery service, but faces stiff competition from private carriers.

Ironically, Georgia’s post office is hard pressed to produce revenue through mail delivery. Postal rates are expensive even by US standards -- 2.50 lari ($1.51) to send a letter within Tbilisi --although the post office now pledges delivery within 24 hours. For inter-city mail, Georgians mostly rely on traveling friends and family to act as couriers. Red motorbikes and uniforms have been introduced for carriers throughout Tbilisi, according to Bregvadze, but their presence is not uniformly visible. In addition, computerization has been slow to take hold. Most post offices, some of which are in dilapidated condition, still rely on handwritten forms.

Potential investors will be wary of the quick marriage of the lottery and postal services, cautioned Tbilisi-based economist Edward Raupp, “They can change it just like that,” Raupp said, referring to the government’s handover of lottery management rights to the post office. “So, as an investor, I would be very skeptical of any scheme like that.”

Baindurashvili, however, stressed that no privatization of Georgia’s post office is planned at this point, and that discussing the potential implications of such an event is mere speculation.

The government’s first priority, he told EurasiaNet.org, is to “develop” the postal service. “[A]fter it is developed, at some point … then the question will go to privatization,” Baindurashvili said.


(This story was amended on 9/15/11. Kakha Baindurashvili became chairman of the board of the Georgian Lottery Company after the government's acquisition of a 70-percent stake in the company. Mr. Baindurashvili also serves as head of the post office's supervisory board.)