GEO

Owners of property alienated through direct sale method in Adjara mostly fail to fulfill their investment obligations

19 March, 2018

TI Georgia continues its research on the investments made in Adjara. This time, the organization has taken an interest in the property that was alienated by the Government of the Autonomous Republic of Adjara through the direct sale method from January 1, 2013, up to January 30, 2017. In 2017, the organization released a study on the property that had been sold by the Government of the Autonomous Republic for GEL 1. Studying the practice of direct sales is especially important for assessing the risks of corruption and the transparency of the process.

The analysis of information provided by the Ministry of Finance and Economy of the Autonomous Republic of Adjara has revealed the following trends and statistics:

  • The Head of the Government of the Autonomous Republic of Adjara gives priority to the alienation of property through the direct sale method without competitive selection of buyers, which raises questions regarding the transparency and purpose-specificity of the decisions. In addition, being entitled to do so by law, the Head of the Government informs the controlling body – the Supreme Council of Adjara – about such decisions only after signing the act on alienation, which certainly weakens the controlling function of the Supreme Council.
  • Alienation of property without competitive selection of buyers creates risks of corruption, especially in cases when the property sold is located in the first line of the sea coast and is in high demand on the market (as a rule, non-agricultural land plots in the City of Batumi are located in the first line of the sea coast).
  • From January 1, 2013, up to January 30, 2017, 8 pieces of property were sold through the direct sale method on the condition of making significant investments. The total planned privatization price is GEL 16,232,360, while the amount of investments to be made up to 2024 is the equivalent of USD 342,350,000 in lari. It is noteworthy that in both aspects the reality lags behind the plan – the companies have not yet fully paid the privatization price and the implementation of the projects was not completed at the agreed time. In spite of this, the Ministry of Finance and Economy fails to impose sanctions on the companies.
  • 62,444 sq. meters of non-agricultural land plots and 8,737.23 sq. meters of buildings were alienated through the direct sale method during the period studied.
  • Four of the 8 legal persons that purchased property through direct sale were registered several months – and in one case, several days – before the signature of the contract (ABS Privilege Club Resorts, Rekan Group Georgia, Kakhetian Traditional Winemaking – Agro-Keda, Elite Ski Resort). 
  • In most cases, the companies failed to fulfill their contractual obligations within the agreed time frames. The Ministry of Finance and Economy of Adjara failed to provide us with official justification as to why the companies were given additional time to fulfill the obligations.
  • TI Georgia has studied all the direct sale contracts signed by the Government of Adjara during the reporting period, as well as amendments to these contracts: there is only 1 contract out of the 8 (the contract with Orbi Group Batumi) which has not been amended.  
  • Individuals associated with 4 out of the 8 companies that purchased property from the Autonomous Republic of Adjara by the direct sale method (Kakhetian Traditional Winemaking, Orbi Logistic Group, Elite Ski Resort, ABS Privilege Club Resorts) have made political donations. A representative of the last company in the list made a donation to “Georgia Is Not for Sale”, an association related to the United National Movement, and later to the Georgian Dream – Democratic Georgia. From the companies listed, Kakhetian Traditional Winemaking made the biggest donation (GEL 240,000) to the current ruling party.   

Legal basis of alienation of property

The administration of the property of Adjara is mainly regulated by the Law of the Autonomous Republic of Adjara on the Management and Administration of the Property of the A/R of Adjara.

According to this Law, property can be transferred and alienated by means of:

a)  auction with or without conditions;

b) direct sale/transfer of management rights;  

c) direct sale on the basis of competitive selection of the buyer;

d) transfer of ownership rights free of charge.            

According to the Law, privatization in the form of direct sale is aimed at transferring the ownership rights to the buyer who will fulfill the conditions for privatization of the property in the form of direct sale fully and in good faith; if direct sale is made on the basis of competitive selection of the buyer, the ownership rights are granted to the interested person (potential investor) who will fulfill the conditions for privatization of the property on the basis of competitive selection of the buyer fully and in good faith.

In accordance with the same Law, the Head of the Government of Adjara, on the recommendation of the Ministry of Economy, is entitled to administer property (in the form of direct sale and direct sale on the basis of competitive selection of the buyer), about which he/she must inform the Supreme Council of Adjara within 3 days. 

 

Company whose contract has not been amended

Buyer: Orbi Group Batumi LLC (Identification Number 445468798).  

Date of signature of the contract5/01/2017;

Date of registration of the company – 18/08/2015;

Privatization Price – GEL 7,167,142;

Amount of investment to be made – GEL 200,000,000;

Time frame for making investment – 60 months; 

Object of the contract: Alienation of a building with an area of 4,306.37 sq. meters adjacent to a sports school on Pirosmani Street in Batumi and an attached non-agricultural land plot with an area of 15,227 sq. meters (Cadastral Code 05.24.05.144); 

Obligations of the buyer: To pay a part of the privatization price (GEL 2,312,364) to the budget of the City of Batumi and the remaining amount (GEL 4,584,778) – to the budget of the Autonomous Republic of Adjara. Orbi Group Batumi LLC is obliged to ensure the completion of the construction of a multifunctional building (recreation area, children’s entertainment center, playing fields, swimming pool, cafes, restaurants, shops, parking area) within five years of the signature of the contract. The obligations also include designing a pedestrian bridge on Khimshiashvili Street, as well as the construction of a 10-meter-wide driveway and its registration as a separate cadastral unit within five years of the signature of the contract. The construction process has already started – the first part of the building is now being actively constructed. 

100% of the stake in Orbi Group Batumi is owned by Zviad Zoidze.

We give detailed information about those buyers that were given additional time to fulfill their contractual obligations.

 

1. BuyerABS Privilege Club Resorts LLC (hereinafter “Alliance Privilege”) – (Identification Number 412718466).

Date of signature of the contract19/09/2016;

Date of registration of the company – 08/06/2016;

Privatization price – USD 978,901;

Amount of investment to be made – GEL 50,000,000;      

Time frame for making investment – 60 months; 

Object of the contract: Alienation of a non-agricultural land plot with an area of 3,263 sq. meters near the Meskheti Hotel on Rustaveli Street in the City of Batumi (Cadastral Code 05.23.02.001). The purchase price amounted to USD 978,901. 

Obligations of the buyer: To complete the construction of a multifunctional complex and to invest GEL 50,000,000 in the project within 60 months of the signature of the contract.

Changes: The company was given additional time until June 1, 2018, for obtaining the construction permit (according to the contract, the company was supposed to obtain the permit until December 31, 2017). An employee of the Ministry of Finance and Economy of Adjara, Gela Tsintsadze, explained to our representative that the company had submitted the project to the Batumi City Hall to get the construction permit, but the City Hall demanded that the company modify the project, which caused the postponement of the construction. In spite of the fact that the company has not yet obtained the construction permit, presumably, the process of construction is currently taking place in violation of law.

Changes in the ownership of the company: At the time of signing of the contract, the entire 100% of the stake in the company was owned by Akaki Songulia. As a result of the most recent changes that were made on January 26, 2018, the following individuals became partners of the company: Akaki Songulia (with 13% of the stake), Temur Bitsadze (with 51%), Besik Zhgenti (with 18%) and citizen of the Russian Federation, Avtandil Gorgiladze (with 18%).

In 2012, Akaki Songulia, a stakeholder and current director of the company, donated GEL 25,000 to “Georgia Is Not for Sale”, an association connected with the United National Movement, while in 2014 he donated GEL 20,000 to the Georgian Dream – Democratic Georgia

 

2. BuyerRekan Group Georgia (Identification Number 443860485) – The company was registered three days before the signature of the contract of sale. 

Date of signature of the contract – 25/12/2014;

Date of registration of the company – 22/12/2014;

Investment to be made – USD 50 million;

Time frame for making investment – 36 months;

Object of the contract: A non-agricultural land plot owned by the Autonomous Republic of Adjara, with an area of 15,000 sq. meters and with a total value of the equivalent of USD 3 million in lari, which is located in the settlement of Kakhaberi in the City of Batumi. Until 2012, this property belonged to Sistem İnşaat, but the Ministry of Finance and Economy of Adjara annulled the contract of sale with the company due to non-fulfillment of obligations.

The number of postponements due to non-fulfillment of obligations: 3 times (on December 8, 2015; on March 28, 2016; on June 16, 2017). The Ministry changed the time frames of payment of the privatization price. Finally, the company paid the privatization price on March 15, 2018.

Presumable date of making the investment after the postponement: June 25, 2024. 

Sanction provided for by the contract for non-fulfillment of obligations: Not imposed.

According to Gela Tsintsadze, a representative of the Ministry, the agency has yet to decide whether or not it will impose the sanction on the company due to the failure to pay the aforementioned sum in a timely manner.

Owners of the company as of 26/02/2018:

Ahmed Ali Azeez Azeez, Iraq 25%

Ahmad Ismail Mohammad Sian, Iraq 25%

Muhammed Ismail Muhammed Seyan, Iraq, São Tomé and Príncipe 50%

 

3. BuyerKakhetian Traditional Winemaking – Agro-Keda LLC – (Identification Number 405048513)

Date of signature of the contract8/08/2014;

Date of registration of the company – 19/06/2014;

Investment to be made – GEL 1,350,000;

Time frame for making investment – 5 years;

Object of the contract: A building (partly damaged) with an area of 1,903.86 sq. meters, together with an attached non-agricultural land plot with an area of 4,055 sq. meters (Cadastral Code 21.03.35.075), which is located at 23 April 9 Street in the Keda Municipality, and a building (damaged) with an area of 272.15 sq. meters together with an attached non-agricultural land plot with an area of 2,981 sq. meters (Cadastral Code 21.03.35.076) – both of which were under the ownership of the Autonomous Republic of Adjara – were transferred to Kakhetian Traditional Winemaking LLC for GEL 30,000.

Obligations of the buyer: To put into operation a fruit processing enterprise with an investment of GEL 1,200,000; to make an investment of GEL 150,000 in order to put a warehouse facility into operation; to employ no fewer than 20 citizens of Georgia and to maintain the specialization of the enterprise for at least five years. 

The number of postponements due to non-fulfillment of obligations: 3 times. In October 2017, the company sent one more letter to the Ministry, this time with a proposal to decrease the amount of fruit to be processed. 

Sanction provided for by the contract for non-fulfillment of obligations: Not imposed.

Owner of the company: Kakhetian Traditional Winemaking LLC (100%).

In 2016-2017, Kakhetian Traditional Winemaking donated GEL 240,000 to the Georgian Dream.

 

4. BuyerElite Ski Resort LLC (Identification Number 448050698)      

Date of signature of the contract16/05/2016;

Date of registration of the company – 20/01/2016;

Privatization price – GEL 15,600;

Investment to be made – GEL 4 million; 

Time frame for making investment – 30 months; 

Object of the contract: A non-agricultural land plot with an area of 3,120 sq. meters, owned by the Autonomous Republic of Adjara, which is located in the Riketi Community of the Khulo Municipality (Cadastral Code 23.14.36.337).

Obligations of the buyer: To construct a multifunctional building (a hotel with no fewer than 60 rooms, food facilities, a conference hall, a sports and entertainment center) within 30 months of signing of the contract and to employ no fewer than 15 citizens of Georgia by investing GEL 4 million. 

The number of postponements due to non-fulfillment of obligations: 3 times. The first amendments to the contract were made on September 27, 2016. The limited liability company was unable to pay the purchase price of the property and was given additional time to fulfill its obligations. In addition, the amount of the investment to be made was increased from GEL 3 million to GEL 4 million. According to Gela Tsintsadze, a representative of the Ministry of Finance and Economy of Adjara, the company made one more request to the Ministry to amend the contract. This time, the amendments were necessitated by the status of an additional land plot that was necessary for the implementation of the project – in order to fulfill its obligations, the company needed a piece of land with the status of an agricultural land plot. According to representatives of the Ministry, the procedure of changing the status has been completed and the company continues to implement the project. 

Sanction provided for by the contract for non-fulfillment of obligations: Not imposed.

Stakeholders of the company: Levan Beridze, Besik Zhgenti (25%-25%), Medea Bochorishvili (30%), Mziuri Gogitidze (20%).

In 2012, Levan Beridze, the current director of the company, donated GEL 9,000 to the ”Georgia Is Not for Sale” movement.  

 

5. BuyerWestinvest LLC – (Identification Number 245399055);

Date of signature of the contract 22/04/2016;

Date of registration of the company – 26/09/1997;  

Privatization price – USD 525,001;

Investment to be made – GEL 25,000,000;

Time frame for making investment – 54 months;

Object of the contract: A non-agricultural land plot, with an area of 3,508 sq. meters, near the Meskheti Hotel on Rustaveli Street in Batumi (Cadastral Code 05.23.01.001). The purchase price of the property is the equivalent of USD 525,001 in lari. The property was previously owned by Resort BV, but the Government of Adjara annulled the contract of sale with the company due to non-fulfillment of obligations.  

Obligations of the buyer: Westinvest LLC is obliged to pay the privatization price, as well as to transfer a non-agricultural land plot with an area of 1,201 sq. meters under its ownership (Cadastral Code 05.23.05.002 – located at 51 Rustaveli Street in Batumi) to the Batumi City Hall; the company is also obliged to construct a multifunctional building (a hotel with no fewer than 100 rooms, hotel-type apartments, a conference hall, a sports and health center, public facilities, an entertainment center, a parking area, and a recreation area) within 54 months and to invest GEL 25,000,000 in the project. 

Changes in the ownership of the company: Changes in the ownership of the company were made on October 26, 2017. The company became the ownership of Orbi Logistic Group LLC (100%), while Irakli Kvergelidze became the company’s director. The said company was registered three months before it purchased the shares of Westinvest LLC.

The time frames provided for by the contract of sale have not been observed, although the changes in time frames have yet to be reflected in the document (according to the official explanation of a representative of the Ministry, the project made it necessary to remove a sewage pipe from the territory, which caused non-fulfillment of obligations undertaken by the contract).

Sanction provided for by the contract for non-fulfillment of obligations: Not imposed.

A few weeks before the local self-government elections of 2014, Irakli Kvergelidze, director of Orbi Logistic Group, donated GEL 60,000 to the Georgian Dream – Democratic Georgia. 

 

6. Buyer Stathotel LLC  (Identification Number 404462256)

Date of signature of the contract16/09/ 2016;

Date of registration of the company – 16/12/2013;

Privatization price – GEL 3,900,000;

Investment to be made – GEL 10 million;

Time frame for making investment – 36 months;  

Object of the contract: Stathotel purchased a non-agricultural land plot, with an area of 15,070 sq. meters, in the settlement of Makhinjauri in Batumi (Cadastral Code 05.34.22.120); a non-agricultural land plot, with an area of 660 sq. meters, in the village of Makhinjauri, Khelvachauri Municipality (Cadastral Code 22.21.09.120); and a building with an area of 2,255  sq. meters, together with an attached land plot with an area of 14,430 sq. meters, in the village of Makhinjauri, Khelvachauri Municipality (Cadastral Code 22.21.06.039). The latter property had been under the ownership of Resort BV, but, due to non-fulfillment of obligations by the company, it was transferred to the Ministry of Finance and Economy of Adjara on the basis of the agreement of April 26, 2016, while the Ministry again used the direct sale method and transferred it to Stathotel.

Obligations of the buyer: To pay the amount provided for by the contract of sale in parts – at the end of every ninth month during 36 months; to put into operation a building for the rehabilitation/health facility and to arrange a recreation area within 42 months of the signature of the contract; to invest GEL 10 million in the aforementioned projects and to maintain the specialization for 10 years.

Sanction provided for by the contract for non-fulfillment of obligations: Not imposed (the Ministry of Finance and Economy stated that the company had paid a part of the privatization price).

On December 18, 2017, MPMU International Ltd., a company registered in the United Kingdom of Great Britain and Northern Ireland, purchased 100% of the stake in Stathotel LLC. The company has already paid a part of the purchase price, although the construction has yet to be started.  

           

7. Buyer – Khatuna Koridze 

Date of signature of the contract 17/5/2016  

Purchase price – GEL 111,500;

Investment to be made – GEL 2,000,000;

Time frame for making investment – 6 months; 

Object of the contract: Khatuna Koridze purchased a non-agricultural land plot with an area of 223 sq. meters (Cadastral Code 05.36.26.069) in the settlement of Kvariati, the City of Batumi, for GEL 111,500.

Obligations of the buyer: Within six months of the signature of the contract, Khatuna Koridze (thereafter “Domus Development”) is obliged to obtain a permit for construction on a non-agricultural land plot with an area of 1,001 sq. meters under her ownership and on another non-agricultural land plot with an area of 223 sq. meters which she purchased by the aforementioned contract. Domus development is obliged to ensure the completion of a hotel with 30 rooms, an apart hotel, a swimming pool, and a parking lot within 30 months of obtaining the construction permit, as well as to invest GEL 2 million in the project. The implementation of the project has stopped because of a court dispute. In particular, non-fulfillment of the obligations was caused by a decision of the Chamber of Administrative Cases of the Batumi City Court which invalidated the construction permit (no. M2769) and permit certificate which the Batumi City Hall had issued to Domus Development LLC on November 17, 2016. The claim against Domus Development LLC was filed by residents of an apart hotel built by Archi LLC. The claimants pointed out  that the architectural project which Domus Development LLC had agreed with the Batumi City Hall and which was to be built in about three meters from their apart hotel in Kvariati deteriorated their living conditions and decreased the market value of their property. The claimants demanded that the company increase the distance between the buildings from three to about 10 meters. The claim is still being examined.  

Sanction provided for by the contract for non-fulfillment of obligations: Not imposed.

Recommendations

As a rule, alienation of property by the direct sale method serves to create favorable conditions for investors in areas in which the private sector is less active or which are priorities of the State. Accordingly, this method stimulates the implementation of large-scale projects, economic activity, and employment.

However, it is also necessary to ensure that the ownership rights are transferred by direct sale only to those buyers that will fulfill the obligations related to the privatization of state property fully and in good faith and that the obligations are alleviated only in force majeure situations.   

Therefore, we consider it necessary to ensure that:

  1. investors are selected in a competitive environment;
  2. fulfillment of obligations by investors is effectively monitored;
  3. precise criteria are established for the selection of the buyer when a piece of property is alienated through the direct sale method.