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"Georgia Goes Full Throttle With Privatization"

"Georgia Goes Full Throttle With Privatization:

Former Soviet Republic Hopes Sales Will Raise More Than $1 Billion"

Selina Williams, Wall Street Journal

As Georgia celebrates the first anniversary of its bloodless revolution, its leaders are telling foreign investors that nearly everything is for sale.

Airports, seaports and the country's entire telecommunications network are among 1,800 state-owned assets that will go on the block in the former Soviet republic over the next two years.After spending much of the past year rooting out government corruption and renegotiating foreign debt, the free-market regime that swept to power on Nov. 23, 2003 hopes to raise more than $1 billion (€770 million) in a massive privatization program.

"Privatization is one of the main pillars of our economic reform and it's a real test for our government," said Prime Minister Zurab Zhvania.

As an incentive, in the next few weeks Georgia's parliament is expected to reduce the number of taxes on businesses to nine from 22 and lower some tax rates. The value-added tax will drop to 18% from 20%. The flat income-tax rate will fall to 12% from 20%. There also will be unrestricted repatriation of profits as well as a one-time amnesty program aimed at getting rid of the shadow economy that has plagued Georgia since its independence in 1991.

Investors are impressed, though some say it will take time before investors are willing to put their money back into Georgia. "The privatization plan is brilliant," says Peter Hopkins, managing director of U.K.-based Drum Resources Ltd., a risk management group that has cut back its Georgia staff to a single representative from 40 in 2000. But, he adds, "It's going to be a year at least before the banks start looking at Georgia."

Money poured into the country in the early 1990s, attracted by the pro-Western views of former president Eduard Shevardnadze. But, over the next decade, crime, corruption and bureaucracy prompted many companies to flee the country. Last year Georgia's biggest investor -- U.S. power company AES Corp., which had invested more than $250 million in Georgia -- sold its 75% stake in the Tbilisi electricity network at a loss for $23 million and pulled out. Privatization also never really got going under Mr. Shevardnadze's government, with revenue amounting to only $13 million last year.

After Georgia's people took to the streets and forced Mr. Shevardnadze's resignation, the administration of President Mikhail Saakashvili, a New York-trained lawyer, purged government ministries, streamlined regulatory agencies and simplified licensing procedures and the tax code. The privatization program is the next step.

In London on Nov. 11, ministers gave polished presentations about their economic overhauls to about 250 people who packed the offices of the European Bank for Reconstruction and Development, which co-sponsored the event. The Georgians plan a similar event in New York in the next few months.

The message is one of opportunity. Sandwiched between Turkey, Russia, Armenia and Azerbaijan, Georgia and its Black Sea ports form a transit corridor for trade between Central Asia and Europe and for oil and gas export pipelines from the landlocked Caspian states to European markets.

To spearhead the selloff, Mr. Saakashvili tapped an experienced business executive -- Economics Minister Kakha Bendukidze, a 48-year-old Georgian businessman -- rather than a politician, hoping that he will be able to press measures that could prove unpopular by contributing to unemployment. "What's important is to create a strong and sustainable foundation and not just a bubble for a couple of years," says Mr. Bendukidze, founder and general director of Russia's biggest heavy-engineering group, OMZ.

Georgia's goal of netting $1 billion from asset sales is ambitious. Privatization never really got going under Mr. Shevardnadze's government, with revenues amounting to only $13 million last year. In much-larger Romania, privatization revenues are forecast to be as high as €1.5 billion this year, including the sale of petroleum giant Petrom.

But anecdotal evidence suggests things are improving, albeit slowly, in Georgia. British Airways restored direct flights from London to Tbilisi on Nov. 1 after an 18-month hiatus, and they are typically packed. Business travelers say it's hard to find a hotel room these days in the Georgian capital.

"The perception of Georgia is not the best in the world, and you can't change that sort of reputation overnight," says Mogens Hansen, director of Batumi's Oil Terminal for Greenoak Holdings, which has been in Georgia since 1999.