ADVERTISEMENTGeorgia / P4ADVERTISEMENTGeorgian National Investment Agencyworks to boost Georgia’s brandGeorgia aims to be a prime investment destination in the region and globally“We try to be involved in everystep with the investor duringthe procedure of investmentin Georgia. But once investorsare in the country and theyfeel good, we try to step backand not be in competition withconsulting companies”Giorgi Pertaia,Director of GNIAThe Azerbaijan-Georgia route is ideal for exporting natural resources from Central Asian countriesThe country of Georgia knows there are probably anumber of misperceptions about it. “When peoplehear about Georgia right now, they might think aboutthe post-Soviet countries; they may think about theUkraine-Russia conflict and about Armenia and Azerbaijan’sproblems,” admits Giorgi Pertaia, director ofthe Georgian National Investment Agency. The GNIA,a governmental agency focused on attracting foreigndirect investments, is working hard to show just howfar from reality that perception is.“We try to be involved in every step with the investorduring the procedure of investment in Georgia,”Mr. Pertaia explains. The agency provides information,help with staff training, tax modeling andmore. “We do simple consulting, but once investorsare in the country and they feel good, we try tostep back and not be in competition with consultingcompanies,” he adds.In fact, the GNIA provides information to consultingcompanies, particularly when the GNIA knows ofspecific projects that would interest the companies’clients. Attending international economic forumsenables the GNIA to efficiently meet with many potentialinvestors. Contact with local chambers ofcommerce and embassies also helps the agencypublicize the benefits of investing in Georgia.According to Mr. Pertaia, one of these benefits isthe speed at which important tasks can be accomplished.Customs clearance, company registrationsand assets registrations are completed much morequickly than in European Union countries. “We do itactually in hours,” Pertaia points out.Taxes in Georgia are another attractive element,and Mr. Pertaia is proud of this. “Our tax legislationis considered one of the best in the world, actually,with low tax rates.” And the process of creating andadopting tax legislation has changed to seek outand encourage input from businesses before finaldecisions are made.These benefits apply to all sectors, including hydropower.Georgia’s powerful rivers can producepower that is relatively inexpensive compared tothe cost of electricity in Turkey, one of the fastestgrowingconsumption markets. Companies from India,Norway, Turkey and South Korea have alreadyinvested in this fast-developing sector.Tourism is another vital sector in Georgia as thecountry looks to attract conferences and businessforums, particularly to the country’s capital, Tbilisi.A spa resort in Tsqaltubo, an area popular duringthe Soviet era, is under development with an eyeto becoming an international brand, as is Batumi,Georgia’s largest city on the Black Sea and a leadingsummer resort.The logistics sector is important in Georgia aswell, due to its geographic location. The Azerbaijan-Georgia route is ideal for exporting natural resourcesfrom Central Asian countries. Price, securityand time are all factors that contribute to Georgia’scompetitiveness with northern Russian routes andIran’s Bandar-e-Abbas southern routes. Increasedinvestments in infrastructure will only strengthenthis sector.Agriculture is the final major sector in Georgia.According to Mr. Pertaia, around 50 percent of thepopulation is involved in agriculture. The currentgovernment has invested a good deal into installingirrigation systems, creating grant programs for processingcompanies and implementing a loan systemby which farmers can get loans at very low rates.Mr. Pertaia’s vision of Georgia in 2020 is one thatshows the fruits of GNIA’s work. He sees improvedinfrastructure, a booming hydropower sector, bustlingtourism and a high GDP. “We have a lot of potentialthat we are not using right now,” he says. Butonce that potential is realized, Mr. Pertaia predicts,“I see Georgia as one of the leading destinations forchoice of investments in the world.”Prime sectors highlighted by theGNIA that investors could benefitgreatly from include hydropower,tourism, logistics, infrastructureand agriculture, among othersCustoms clearance andregistrations of companies andassets are completed much morequickly in Georgia than in manyE.U. countriesGeorgian Co-InvestmentFund boosts FDILaunched in September 2013, the Georgian Co-Investment Fund providesinvestors with unique access to opportunities in Georgia’s fastest-growingindustries and sectors through a private equity structureBacked by investment communitiesfrom Georgia, Azerbaijan, Turkey,Kazakhstan and the U.A.E., the $6billion Georgian Co-Investment Fund(GCF) will be used over the next five toten years to attract significant investmentinflows from international investorsin specifically targeted areas of thenation’s economy. The four expandingsectors currently prioritized by the GCFare energy and infrastructure, hospitalityand real estate, agriculture andlogistics, and manufacturing. The fundregards the last sector as possessingthe greatest potential for attracting FDIover the coming decade.On the strategic allocation of its resources,the GCF considers investments in both greenfieldand brownfield projects, as well as in distressedcompanies. “The main investment criteria is the commercialviability of the projects,” says the GCF’s C.E.O.,George Bachiashvili. “Our co-investors are usually largeprivate equity funds or corporations looking for stronglocal partners in such frontier markets as Georgia. Byproviding this service, we have opened up Georgia to aneven larger pool of investors.”The GCF made its first acquisition in May: a $98 millionhydropower project on the Mtkvari River. In September,the investment fund plowed a further $40 million into agreenhouse development project designed to boost thecountry’s growing agricultural sector. The investment willenable the development of a 35-hectare (86.5-acre) greenhousein Georgia’s Kvemo Kartli region and is expectedto reduce the country’s tomato imports by 30 percent.Another project initiated this year anticipates financingGeorgia’s largest ever real estate development: PanoramaTbilisi. The $500 million, 270,000m² (2.9 million ft²)project will create four new city areas in the capital andinvolves constructing hotels, serviced apartments, offices,exhibition halls, and health, leisure and sports centers, aswell as the supporting transport infrastructure.Among the various projects GCF has lined up for nextyear, Mr. Bachiashvili highlights the Tskhenistskali Rivercascade of four hydropower plants. “GCF will bring a totalof $700 million of investment and add 350 megawattsof generation capacity to Georgia,” he says, adding thatannual energy generation will be 1,744 gigawatt hours.“Energy is one of the main sources of wealth for manycountries, yet Georgia is utilizing only 20 percent of itshydro resources,” Mr. Bachiashvili notes. “By investing inthis capital-intensive industry we are not only providingreturns to investors, but also helping the country to useits natural resources more efficiently.”These investments, along with variousother hydropower, real estate, agriculturaland manufacturing projects,bring GCF’s total approved investmentsfor 2014 to $1.3 billion.“The main idea behind the fund wasto create the most efficient structurethat would align investors’ and thecountry’s interests, providing numerouspositive externalities to thecountry,” explains Mr. Bachiashvili.“This goal is best achieved though aprivate equity structure, which capturesgood value in investments andGeorge Bachiashvili, C.E.O. of theGeorgian Co-Investment Fund creates sustainable enterprises thatcontinue to contribute to the country’seconomy after the fund exits them. Our activities haveknock-on effects on the Georgian economy, boostingemployment, attracting smart capital, and improvingGeorgia’s overall competitiveness.”GCF has also set aside $500 million for projects outsideits priority sectors, as evidenced by its investmentin the BitFury Group in June 2014. A leading provider ofsemiconductors, servers and data center solutions to theBitcoin and crypto currency industry, it is also one of theworld’s largest Bitcoin processors. The proceeds fromthe financing were used by BitFury to roll out its nextgeneration proprietary semi-conductors, ASICs (ApplicationSpecific Integrated Circuits) and custom servers.They additionally support the development of the world’slargest Bitcoin mining data center located in Georgia.“BitFury chose Georgia because of the country’s attractiveinvestment climate and ease of conducting business,”says Valery Vavilov, C.E.O. of the San Francisco-basedcompany. “I believe having one of the world’s leadingBitcoin companies base its operations in Georgia puts thecountry on the world’s ‘technology and innovation’ map.”BitFury’s entry into Georgia has caught the attentionof other industry players. “There is a big interest,especially from the Bitcoin-related companies,” saysMr. Bachiashvili. “We are working on a project to createa special IT zone in Tbilisi which will benefit from specialregulations attracting various kinds of datacenters andrelated facilities.“We believe that it is the right time and place to beinvesting in Georgia, considering the rapid transformationit has gone through in the past 10 years. The currentgovernment’s stated objectives are much in line withbusiness needs and given the geopolitical turmoil inthe region, Georgia indeed can be viewed as a gatewayconnecting Europe to CIS and Central Asia.”
ADVERTISEMENTGeorgia / P5ADVERTISEMENTNew power projects come on streamENERGY ‘No cap on the sizeof investments,’ says EnergyMinisterGeorgia’s geographical location, flanked by the BlackSea, Russia, Armenia, Azerbaijan and Turkey, givesthe country a huge advantage in terms of energy policy.Its power transmission lines are connected to its neighboringnations and huge advances in internal deliveryreliability from 2004 onward – electricity generation in thecountry rose from 6.9 terawatt hours to 10.1 TWh – haveallowed Georgia to transform itself into a even start exportingelectricity in the summer when local consumptionis low”. Furthermore, the country’s strategic location inregional terms allows it to provide energy transportationservices for neighboring countries through its territoryfrom east to west (Azerbaijan– Turkey) and north to south(Russia – Armenia).The country’s key generator though is hydropower,which accounts for around 85 percent of domestic powerproduction. Estimates state that Georgia’s vast networkof rivers gives it the potential to reach 40 TWh perannum, which when achieved will place it among thelargest hydroelectric power producers in the world percapita. Meanwhile, a deregulated national electricitymarket for new generation plants is a hotbed of foreigndirect investment, a major part of the national sector’sdrive to achieve total energy sustainability.Kakha Kaladze, Minister of EnergyHowever, the country still faces challenges of energysecurity as it largely depends on imported energy resources.Utilization of domestic natural resources is requiredto ensure long-term 24-hour energy supply to itspopulation of some 5 million and the economy at large.Although production and consumption in Georgia areroughly equal, the seasons provide an unbalancing factor:when winter freezes the rivers, production slumpsand demand spikes. When the thaw comes, productionincreases but demand eases.“Currently Georgia has a dependence on importedenergy,” notes Minister of Energy Kakha Kaladze. “AndI’m not talking about just electricity. This figure includesgas and oil, and electricity. Roughly about 80 percentof our needs depend on imports; for seven to eightmonths a year we depend on imported electricity.”Georgia imported 500 million kilowatt hours last yearfrom Russia, rising to a forecasted 700 million in 2014.However, the path to self-sufficiency lies within the country’sborders: “Georgia has 22,000 rivers. Out of those22,000, there are some 300 which can be utilized to buildhydropower plants,” says Mr. Kaladze. “And this is the resourcewhich we are promoting in order to achieve sustainabilityof the energy sector and electricity generation.”Georgia’s chief source of FDI is the energy sector, inwhich major investors include Turkey, Norway, Indiaand China. One example of international cooperation isthe Adjaristsqali project. In partnership with Norwegianfirm Clean Energy Invest, the undertaking in the AutonomousRepublic of Adjara, in Georgia’s southwest on theborder with Turkey, the hydroelectric project will provideinstalled capacity of 175 to 300 megawatts with averageannual production of 700 to 1200 gigawatt hours.Other hydro projects under development scheduledto enter the construction phase in 2015, when combined,will command 1,560MW of installed capacity witha total investment of over $3 billion.“To be realistic in the current existing landscape interms of hydro resources, 4,000MW of generation can beprovided from the projects that are now underway. Butthat does not limit us in terms of future upcoming projectsbecause we are currently in the process of utilizingand fully understanding our hydro potential,” says Mr. Kaladze,who adds that Georgia is also “seeking other alternativesources of green energy such as wind and solar.”Along those lines, the European Bank for Reconstructionand Development has approved an $80 millionpackage to develop a 108MW power plant in Dariali,in partnership with the Green Growth Fund and Dutchdevelopment bank FMO. A $30 million project backedby the Georgian Energy Development Fund (GEDF) hasalso led to Georgia’s first wind energy project to constructa 20MW-capacity power station in Gori, in the eastof the country. Mr. Kaladze told a recent conference thatthe station would be online in the near future and wouldbe merely the beginning: “There is more out there. Wehave wind power potential of more than 2,000MW.”“We have projects ranging from 1MW all the way to700MW, so there is no limit, and no cap on the size ofinvestments,” adds Mr. Kaladze. “And in as far as incentivesgo, it’s Build, Own and Operate.”The energy minister also hopes that U.S. participationin the country’s energy sector will continue on itscurrent upward trend: “The U.S. is our strategic partner.Through USAID, over the past 20 years, there have beennumerous projects and numerous grants to rehabilitatethis sector and we’re very thankful for that and wehope that in the future this will continue. A consortiumof energy companies is to invest $2 billion in Georgianterritory in order to expand the gas pipeline system thatcrosses Georgia within the Shah Deniz Stage II pipelineproject. This will bring some additional 16 billion cubicmeters (565 billion cubic feet) in volume of natural gasflowing through Georgia.”GEDF helps thecountry realizeits potential inrenewable energythe <strong>georgia</strong>N Energy DevelopmentFund (GEDF) was establishedby the Government of Georgiain 2010 with the main objectiveto develop and invest in renewableenergy projects with furthertransfer to the private sector. Thefund operates as a joint-stockcompany working on a public-privatepartnership basis, with a highlevel of flexibility in terms of whatinternational investors can expect.Essentially, the GEDF works tominimize risks for partners andto ensure the success of a projectfrom the ground up.“We develop projects, generallywe are not involved inGiorgi Bezhuashvili,C.E.O. of GEDFThe nation’s energy investment vehicleconstruction or operations,” saysGiorgi Bezhuashvili, the GEDF’sC.E.O. “Our main idea is toreduce the risks that are usuallyassociated with getting projectsoff the ground.”GEDF will create a specialpurpose vehicle (SPV) for eachproject. The preferred legal statusof each SPV will be a joint stockcompany. The fund shall make initialequity investment in the rangeof 5 to 10 percent of total projectcost with the objective of sellingeach renewable energy project atthe initial stage of construction.GEDF may need to inject morefunds in a particular SPV if aproject could not be sold.SPVs shall carry out all initialdevelopment work on a project,namely conceptual design,topographical and geologicalstudies, hydrological calculations,environmental and socialassessment, land acquisition forconstruction and impoundmentareas for energy projects. Theymust also begin derailed projectengineering and design, implementinfrastructure development(access roads, grid connection,low voltage power supply lines),obtain all required licenses andpermits, begin site construction,submit the Project Design Documentfor validation, place ordersfor mechanical and electricalequipment and enter into powerpurchase agreement with thelocal or foreign counterparty, aswell as other project developmentactivities.An SPV should be able to obtainloans from international andprivate financial institutions toleverage a project. The preferredapproach is project financing.Completion of debt financing willoccur once sufficient equity investmentis acquired. The debt-toassetratio can be in the range of50 to 70 percent. Upon successfulcompletion of the above, the governmentcan announce an IPO ofall or part of its shares in the SPV.One such project is the Dariali108MW hydroelectric powerplant in the north of the country,in partnership with U.S. firmThe Robbins Company and alocal construction company,which GEFD was instrumental ingetting off the ground. Furthermore,the project was the firstin Georgia to embrace carbonneutralconstruction by layingout a reforestation plan in thepreliminary studies and receivingnon-recourse loan financingfrom the European Bank for Reconstructionand Development.As well as guiding foreign investorsinto the Georgian renewableenergy sector, GEDF mayalso provide a consulting serviceto investors in case they desirestate participation in the project.Mr. Bezhuashvili notes that“only 24 to 26 percent” ofGeorgia’s hydro potential hasbeen realized, and GEFD is in theprocess of offering tenders toscreen and identify new hydropowerprojects in Georgia’s fourlargest river basins: the Rioni,the Alazani, the Mtkvari and theInguri. The former has alreadybeen awarded to Swiss companyStucky and the remaining threewere put up in November.However, Mr. Bezhuashvili alsoholds a lot of faith in Georgia’sability to tap wind and solar energy.“We are developing the firstwind farm in Georgia, in Gori. It isreally perfectly situated and, if notthe top place in the world, we willbe in the top 10 places globally interms of energy production at thatsite. We are also very interestedin solar. We have done reconnaissancestudies and spottedthe places to develop, but theeconomics do not match our tariffsystem in Georgia at the moment.We don’t say ‘no’ to solar – we areready and when the time comeswe will be in a position to move.”Georgia, a key player intranscontinental power supplyThe Georgian Oil and Gas Corporation ensures Georgia receivesthe energy it needs, while maintaining international pipelinesthe <strong>georgia</strong>n Oil and GasCorporation (GOGC) is one ofthe main suppliers of naturalgas in the country. In addition,GOGC owns the domestic highpressuregas pipeline systemin Georgia and is of paramountimportance in ensuring thesecurity of the country’s supplyand handling the inflow ofnatural gas from abroad.GOGC is also branchingout into electricity generationthrough a thermal power plantproject near the capital, Tbilisi,which will have installed capacityof 230 megawatts and representsthe first combined cycle thermalpower plant in Georgia.As the national oil company,GOGC actively encouragesinvestors to pursue the country’srelatively untapped upstreampotential; around a millionbarrels of crude oil a day andbillions of cubic meters ofnatural gas a year pass throughGeorgia from the Caspian Seavia three pipelines that supplyEuropean countries furtherwest, but national productionis negligible. However, industryexperts believe that Georgia’sgeographical location nearthe Southern Caspian system,where Azerbaijan’s vast reserveslie, harbors great potential forGeorgia to uncover significantreserves of its own.“Currently we have just50,000 tons of oil productionper year; this is nothing ofcourse,” says GOGC GeneralDirector David Tvalabeishvili.“And we produce about 10million cubic meters of gas peryear; that equates to just oneday’s natural gas consumptionin Georgia. But during thenext two or three years someof the investors who areactive in Georgia are going toconduct some drilling in someDavid Tvalabeishvili,General Director of GOGCof the prospective sites andreservoirs. We hope that in twoyears’ time we will have a majordiscovery of oil. Again it will notbe comparable to Azerbaijanand Russia, but if Georgiamanages oil and gas productionon a scale to satisfy at least50 percent of our needs anddemands, that would be a hugesuccess for us.”The main areas of explorationare in the Black Sea and theKakheti region, where twoprospective fields have beenidentified. But Georgia’simportance to the continentalexchange of natural resourcesis significant and growing.“We have already achieveda major accomplishmentbecause the South CaucasusPipeline has been operationalfor seven or eight years,” saysMr. Tvalabeishvili. “This year adecision was made to increasethe pipeline’s capacity up to 22billion cubic meters. That meansthat at least 10 billion cubicmeters of gas will be suppliedto Europe. But that’s not enoughfor Europe’s energy and security.They need more: 30 to 60 billioncubic meters a year.”The proposed Trans-CaspianGas Pipeline from Turkmenistanthat will feed through toGeorgia, Azerbaijan andTurkey will be a key element ofcontinental supply, as Europeseeks to lessen its relianceon Russian oil and gas, whilemeeting rising demands.As a signatory to the EuropeanDeep and Comprehensive FreeTrade Agreement, Georgia isobliged to meet E.U. criteriain terms of supply safety soon,and GOGC is at the forefront ofensuring that is the case. TheNorth-South pipeline runningthrough Georgia, for example,is entirely managed by GOGC.However, as the South CaucasusPipeline running from Bakuthrough Tbilisi and on to Ceyhanin Turkey is controlled by aninternational agreement, GOGChas little control over supplyand must make sure there aredifferent sources of gas duringthe winter.“The pipeline is there, ofcourse. But all of this supplyfrom different countriesdepends on how the productionor pipeline operates indifferent countries as well,” Mr.Tvalabeishvili notes. “It is quitea complex thing. It’s not like inEurope that everything rollsaccording to the contracts. Wehave various challenges.”One of these is to provideGeorgia with the means forunderground natural gasstorage. “This facility is a keycomponent of Georgia’s energyindependence and energysecurity. GOGC is going toenter into negotiations to invitefinancing for this project. Workwill start in 2015 and this isour priority for next year,” Mr.Tvalabeishvili says.
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