The FINANCIAL — Georgia’s strategic geographic location has enabled the country to attract large investments and develop its transit potential during the last decade. Over $ 1 bn has been invested in Georgia for the construction of two of the longest oil and gas pipelines, Baku-Tbilisi-Ceyhan and Baku-Tbilisi-Erzerum , transporting Caspian natural resources to Europe.
Besides transport, other sectors of the economy have also attracted significant amounts of foreign capital.PMR Polish Research and Consulting group overviewed Major FDIs made in Georgia last years.
Georgia’s economy started to evolve mainly in 2003-2004,when the new government came into power, initiating liberal reforms and radical deregulation of the economy. In the World Bank’s Doing Business 2007 report, Georgia was named as the world’s top reformer in improving the ease of doing business. Since 2003, average growth rate of real GDP has averaged 10.5%, reaching a record rate of 12.4% in 2007. Growth in domestic consumption, high FDI inflows, rapid credit expansion, rehabilitation of infrastructure and booming entrepreneurial activity have been driving the growth of the economy in recent years. The active privatisation process of state-owned enterprises played an important role in accelerating FDI inflows in the country. Net
sales of state-owned enterprises amounted $ 1.3 bn during 2004-2008 YTD.
Local production couldn’t catch up with rapidly increasing demand, which resulted in a widening of the current account deficit in recent years. Strong investment inflows from strategic and portfolio investors and high and growing remittances from abroad have comfortably financed the most of the current account deficit. The value of the current account deficit achieved its maximum in 2007, while in the first half of 2008 it has reached the highest level as compared to GDP. The recent conflict with Russia and the global financial crisis decreased the FDI inflows in Georgia. However, international financial aid from the US, EU and other international financial institutions, for a total of $4.55 bn allocated for 2008-2011, will assist Georgia to maintain its international currency reserves and economic stability in the country.
Georgia’s International rankings Reform-oriented policies during the recent years have enabled the country to make an unbelievable leap from 112th place in 2005 to 15th according to the World Bank’s report of Doing Business 2009. Economic freedom index, by the Heritage Foundation, in 2007 ranked Georgia 32nd in the world, up from 93rd in 2005. Out of 180 countries, Georgia has been ranked as number 67 by Transparency International, according to its corruption perception index, up from 130th place in 2005. And finally, Georgia’s ranking in inward FDI performance index, by UNCTAD, improved from the 15th place to the 9 th in 2007.
FDI has been flowing into the country from all around the world and in almost every sector of the Georgian economy. UK has been the largest contributor to FDI inflows, by $626.1 m during 2004-H1 2008, followed by Netherlands and USA, with $492.5 m and $439 m, respectively.
During 2003-2006, a significant portion of FDI inflows has been directed to the construction of oil and gas pipelines. However, starting from 2006, investment inflows prevailed in other sectors of the Georgian economy. In 2007, with the highest net FDI ever, the share of transport & Telecom amounted to 20.7%, $416.7 m in value. The industry and financial services sector were the second- and the third -largest destinations of foreign direct investments, with 19.8% and 19%, respectively.
Gas & Oil Pipelines
The construction of the 1,768 kilometer-long Baku- Tbilisi-Ceyhan oil pipeline, which runs 249 km
through Georgia, finished in 2006. $3.9 bn has been invested in the construction of the pipeline, which is currently owned by BP (30.1%) and a consortium of energy companies: State Oil Company of Azerbaijan 25%, Chevron 8.9%, StatoilHydro 8.71%, Turkiye Petrolleri Anonim Ortakligi 6.53%, Eni/Agip 5%, Total 5%, Itochu 3.4%, Inpex 2.5%, ConocoPhilips 2.5%, and Hess Corporation 2.36%.
Another strategically important pipeline that runs through Georgia is the Baku-Tbilisi-Erzerum gas
pipeline, also known as the South Caucasus Pipeline. The 692 kilometre-long pipeline transports natural gas from the Caspian Sea to Turkey through Georgia, 248 kilometers. The pipeline is owned by a consortium led by BP (25.5%) and StatoilHydro (25.5%). Baku-Supsa pipeline is the second oil pipeline with the length of 830 kilometers. The pipeline was constructed in Soviet times, but was repaired in 1998. Total cost of repair works amounted to $53 m. In total, over $1 bn has been invested in Georgia for the development of oil and gas pipelines and corresponding infrastructure.
RAK Investment Authority, a UAE-based investment company, acquired a 51% equity interest in Poti Sea Port, the largest sea port in Georgia, with a turnover of 7.7 m tonnes of dry cargo in 2007. RAK acquired the share for $80 m. KazMunaiGas, a Kazakh oil and gas company, acquired Batumi Sea Port and Oil Terminal from Greenoak Holding, which privatised the assets from the State in 1999. Greenoak has been paid $9 m; however, the firm has invested more than $200 m in the development of the oil terminal and the port.
TeliaSonera, the leading provider of telecommunications services in the Nordic and Baltic regions as well as in the emerging market of Eurasia, including Russia and Turkey, increased its share in Geocell, the second-largest Georgian mobile operator, from 83.2% to 97.5%. The deal was executed through Fintur B.V., 74% of which is owned by TeliaSonera. The value of the deal amounted to $33 m. Vimpelcom, one of the leading Russian telecommunication companies, acquired a 51% equity interest in Georgian Mobitel for $12.6 m, in July, 2006. Up to the present, the company has invested $78 m in Georgia and serves about 60,000 subscribers. United Telecom of Georgia, the country’s largest fixed line telecommunication service provider, was privatised by the Ministry of Economic Development of Georgia in 2006. Central Asia Logistics, a Kazakh company, has paid $90 m on the auction.
In 2006, Societe Generale acquired a controlling stake of 60% in the third-largest Georgian bank, Bank Republic. Currently, the assets of Bank Republic amount to $416 m and the shareholders capital has achieved $68 m in 2008. In 2007, HSBC obtained an operating license from the National Bank of Georgia. Up to the present, HSBC Bank Georgia has increased its assets up to $32 m and shareholders’ capital to $11 m.
According to the announced plans, HSBC plans to expand its operations in Georgia further. VTB, one of the largest banks in Russia and CIS, acquired a 51% equity interest in United Georgian Bank, the third-largest bank in Georgia at the time of acquisition. Currently, the bank holds the fifth position by assets, $ 272 m, and ninth position by chartered capital, $ 30 m. Two other banks from CIS, Ukrainian Privatbank and Kazakh BTA Bank, have the controlling share in two Georgian banks, TaoPrivatBank and BTA Bank Georgia, respectively. Recently, another leading Kazakh bank, Khalik, entered the market and obtained the operating license from the National Bank of Georgia in 2007. Besides controlling interests, several European banks, such as Commerzbank, KFW, Bank Austria and others have minority interests in several leading Georgian banks.
Apart from banking, the presence of FDI is also significant in the insurance sector. Vienna Insurance Group has a 50% equity interest in GPI Holding, the second-largest insurance company, and a 90% interest in Irao, the third-largest insurer. AIG Europe is also present on the local insurance market, however, with just a small share market.
KazMunaiGaz, a Kazakh oil and gas company, acquired Tbilgas gas distribution company in Tbilisi which supplies gas to the Capital of Georgia, Tbilisi. The Kazakh company paid about $12.5 m and plans to invest over $100 m in Georgia. State Oil Company of Azerbaijan Republic (SOCAR), the owner of Kulevi oil terminal on the Black Sea coast, has already invested more than $380 m in purchase and reconstruction of the terminal. Further, the company plans to invest over $100 m to build oil storage facilities and launch 15 gas stations in Georgia.
Heidelbergcement purchased a 51% equity interest in Kartuli Cement, the first investment of the German cement producer in the Caucasus region. Heidelbergcement acquired a 75% stake in Saqcementi, another Georgian cement producer. The company has invested more than EUR 150 m in Georgia and plans to increase the amount by EUR 35 m during the coming year. EFES Breweries International acquired a 100% equity interest in Natakhtary Brewery, the largest beer producer in Georgia and controlling more than 40% of the market. EFES is considering the purchase of other assets in Georgia as well. Sisecam, a Turkish glass producer, acquired an equity stake of 81% in Georgian JSC Mina in 1997. Since then the Turkish company has invested more than $40 m in Georgia. In 2007, Mina produced 223 m glass bottles and controls 60% of the local market. Ferrero, an Italian manufacturer of confectionery, has purchased 1,235 hectares of agricultural land in Western Georgia to develop the hazelnut business. The company plans to double its investment in Georgia to EUR 20 m in 2008 and construct a hazelnut processing facility with annual capacity of 4,000 tonnes. It should be mentioned that Georgia contributes 5% of the worlds hazelnut production and can be further increased to 10%.
Rakeen, a UAE-based real estate developer, entered Georgia in 2006 with ambitious plans of developing high-class shopping malls, business centres and residential buildings. The cost of already announced projects is estimated at $170 m. These projects are part of Rakeen’s USD 1.5-2 bn investment plan in Georgia for the next five years. GRDC, one of the leading real estate developers, is implementing large-scale projects in Georgia. The company has raised $105 m in equity from foreign investors for the reconstruction of Tbilisi Central, the main railway station in Tbilisi, the capital of Georgia and for the development of office spaces, shopping malls and large resort near the city. Besides FDI, many portfolio investors are present in Georgia, investing heavily across a wide range of industries and businesses. The active privatization process of state-owned enterprises and IPOs planned by large Georgian companies is expected to increase the inflow of foreign capital in Georgia even further. Despite the financial crisis and the recent conflict with Russia, no significant capital outflows from Georgia have been observed. The volume of privatization transactions amounted to $61 m, post conflict, during August-October of the current year. Strong statements of confidence and support by international financial institutions, the US Treasury, G7 finance ministers and EU, along with $4.55 bn in financial aid have neutralized the tension among investors.