GEO

Property sold through non-competitive processes and corruption risks in Adjara

28 May, 2019

 

The Government of Adjara does not change its practice and sells its property through non-competitive processes. Transparency International Georgia analyzed the information received from the Ministry of Finance and Economy of Adjara on property allocated by the Government of the Autonomous Republic of Adjara through conditional auction, direct sale or free of charge from January 15, 2017, to December 31, 2018.

In March 2018, TI Georgia published a similar study assessing the data from 2013-2016.

The new study reviews the tendencies of allocation of Adjara’s property through direct sale and conditional auction terminated contracts with property recipient companies and their political donations.

Important trends and statistical data revealed during the reporting period:

1.     The purchase price of 33 objects sold through direct sales amounted to GEL 1 989 157 and investment value amounted to GEL 46 534 000. In comparison with previous years, the number of property sold through direct sale has increased and the investment value has decreased. In 2013-2016, 26 objects were allocated directly and the investment value amounted to GEL 920 million.

2.     The investment value of the property sold in the form of a conditional auction is 3 times more than the planned investments of the property allocated through direct sale.

3.     37 objects were allocated through conditional auction. In this case, the privatization value amounted to GEL 85 105 500 and the investment value – GEL 300 770 000. Out of 37 properties, only eight properties were sold after more than one bid, 29 winners had no competitors, which raised certain questions.

4.     The land plot was handed over without competition to 16 companies in Riketi community of Khulo municipality (Prior to 2017, the property was allocated through direct sale mainly along the seashore). The government of Adjara has not handed over this property in a competitive environment as well.

5.     Two companies related to Bidzina Ivanishvili were among those, which received property through direct sale: Business Development LTD (purchased a land plot for GEL 686 382) and Zimo LTD (purchased 19 camphor trees for Bidzina Ivanishvili).

6.     In the reporting period, 40 natural and legal persons who received property under investment liabilities were exempted from fines imposed for non-compliance with the obligations. In addition, the contracts with 14 legal / natural persons have been annulled.

7.     Business Development LTD, the company connected with Bidzina Ivanishvili, purchased a building of 3239.62 m2 (former student dorm of the university) and a plot of land attached to the Botanical Garden at Green Cape in the form of a conditional auction for GEL 4 600 000.

8.     In the reporting period, similar to the previous years, in Batumi a land plot was sold for GEL 1: 2 897 m2 of non-agricultural land was handed over to G2 Building LTD under the condition of implementing certain social and investment projects.

9.     The Government of Adjara does not have a uniform approach with investors - some companies are excused from payment of penalties and their deadlines for the fulfillment of obligations are prolonged, while other companies are not offered such favorable conditions.

Legislative basis for property allocation

According to the law of Autonomous Republic of Adjara “on managing the property of the Autonomous Republic of Adjara", the property can be allocated through:

A) A conditional or unconditional auction

B) A direct sale or handover of management rights

C) A direct sale by competitive selection

D) A free of charge transfer of ownership.

The Ministry of Finance and Economy of Adjara sell property through auctions. The Chairman of the Government of Adjara supervises privatization process of property through direct sale.

The Property allocated through direct sale

In 2017-2018, the number of property allocated through direct sales has significantly increased.

In addition to the frequent use of direct sale mechanism, in the reporting period, the problem arose in the case of the company G2 Building, which got land plots for the purpose of housing construction in exchange to GEL 1.

The company received 2836 m2 of a land plot in exchange to GEL 1 for finishing construction of two 9-storied buildings for eco-migrants on Tabidze Street in Batumi. The company completed the construction of two blocks (five floors were already constructed during the signing of the agreement), but it could not begin construction of a new building on the land plot because of the damaged building adjacent to the mentioned plot. The new construction could further deteriorate the condition of the old building. Consequently, G2 Building has not invested GEL 5 million and it could not fulfill the commitments to transfer 850 m2 of living space to the Ministry.

The Sale of property in exchange for a symbolic fee (GEL 1) is justified when a large investment can be raised.

The information received from the Ministry shows that, despite the increased number of property allocated through direct sale, in 2017-2018, the investments decreased, compared with 2013-2016. This trend questions the effectiveness of this process.

In 2013-2016, 26 objects were sold through direct sales, and the value of planned investment amounted to USD 343 million. In 2017-2018, 33 objects were allocated with the planned investment value of up to GEL 47 million (detailed information on directly sold property recipients, and their shareholders' investment and privatization values can be seen via attached link).

It should be noted that in 2017, 399 eco-migrant families received residential areas and attached land plots free of charge or for a symbolic price. Since the property has not been given under investment requirements, we have not reflected these figures in our statistics.[1]

Property sold through a conditional auction

In the reporting period, a significant portion of the property of Adjara was sold under a conditional auction. The value of 37 objects privatized through auctions, based on the Government conditions, amounted to GEL 88 059 500, and the investment value reached GEL 300 000 000.

To illustrate how effectively the government manages the property of Adjara we have compared two figures – the value of planned investment and revenue received from direct sales and conditional auctions:

In comparison with a direct sale, a conditional auction is more transparent, but in auctions, competition is still low: only eight properties out of 37 were sold after more than one bid. In 29 cases, the winners did not have competitors.

Certain questions have been raised regarding the initial privatization price of the auctioned property. We took two properties located on the same street (Memed Abashidze Street, Batumi) and compared their initial auction prices: both properties are monuments of cultural heritage; in one case, an initial privatization price of one m2 of the property was GEL 940 and in the second case – GEL 3 649.

It is unclear what caused such a big difference between the initial prices of two properties located on the same street. Despite the request of Tl Georgia, the Ministry of Finance and Economy of the Autonomous Republic of Adjara did not provide the expert conclusions and assessments of the property, which could allow us to find out the reason of such a difference. According to the legislation, the Ministry can sell the property at a lower than a market price if a relevant expert opinion exists.

Moreover, 21 expert opinions out of 22 have been prepared by the same auditor and this fact raise certain questions.

Information about property recipient companies, their shareholders and investment, and privatization values can be seen in Annex 1.

Investors with excused fines and terminated contracts

According to the information received from the Ministry of Finance and Economy of the Autonomous Republic of Adjara, 40 natural and legal persons were excused from penalties imposed due to unfulfilled obligations.

As of 2017, 22 companies and natural persons were fined for violating contract obligations. In 2018, this number stood at 18.

Business Development LTD, a company connected with Bidzina Ivanishvili, was not fined because, before the imposition of penalty, the Ministry of Finance and Economy rescheduled this company’s contract liabilities.

Adjara Resort BV also did not fulfill its obligations and returned back 18 properties to the Ministry of Finance and Economy of Adjara. This company has not been penalized for unfulfilled commitments as well.

The Ministry of Finance and Economy of Adjara has excused such companies from paying fines and postponed their liabilities that have been mentioned in the reports of Tl Georgia since 2013 due to unfulfilled commitments.  These companies are:

  1. Rekan Group Georgia – Excused from paying fines of GEL 1 299 375 and USD 415 473 and received additional time for fulfillment of obligations.
  2. Statotel LTD - Excused from paying fines of GEL 1 042 650 and received additional time for fulfillment of obligations.
  3. DS Group - Excused from paying fines of GEL 71 733  and received additional time for fulfillment of obligations.

In 2017-2018, the contracts with 14 companies have been terminated. Active Batumi, one of the companies, has sued the Ministry of Finance and Economy for this decision. The company requests back the money paid for the purchase of the property and reimbursement for conducted preparatory works: Active Batumi bought the property for USD 500 000 in 2010. The land plot is in the cultural heritage zone and the company could not receive a construction permit. In addition, due to the unfulfilled obligations the company was penalized with USD 1 333 500. The court dispute is ongoing.

It seems the Government of Adjara does not have a uniform approach with investors: in 2017, Adjara Resort BV returned back 18 properties, obtained in 2006, to the Government of Adjara without being penalized. However, Active Batumi could not get such a privilege as this company was fined after the termination of the contract.

A list of companies with terminated contracts in 2017-2018 can be seen in Annex 2.

Property recipient companies and political donations

The companies, which received property of Adjara through direct sale or conditional auction, have donated money to political parties different times.

·       Kakhetian Traditional Winemaking - Agro-Keda LTD – a company, which got one of the properties of Adjara through direct sale, was excused from paying a fine of GEL 36 053 in 2017. In 2016-2017, this company, together with its owners, donated GEL 240 000 to the ruling Georgian Dream party.

·       Malkhaz Beridze, a person owning 100% shares of New Time LTD donated GEL 40 000 to the Georgian Dream in 2014. In 2017, this company purchased 31 130 m2 of land for GEL 50 080 through direct sale in Beshumi, a resort in Khulo municipality.

·       In 2018, Alliance LTD bought property in Kobuleti through direct sale. In 2014, Akaki Songhulia, a person owning 15% of this company’s shares, donated GEL 20 000 GEL to the Georgian Dream.

Recommendations

Under the current legislation, the Chairperson of the Government has an exclusive right to dispose of property. In particular, he/she may choose a form of sale and a subject of the sale, which creates a risk of non-transparent, hidden deals.

Therefore, it is necessary:

1.     To set certain conditions which a property recipient should satisfy. The current policy of property allocation can lead to an impartial selection process, which creates risks of corruption,

2.     In order to raise and keep investments, creating a healthy environment for investors should be a government priority, but it is also important that, in case of problems in fulfillment of investors' obligations, the government should use a uniform approach to avoid suspicion of hidden deals and corruption.

3.     The Government of Adjara should review its policy of property allocation: a direct sale should be used only for raising investments. Fair and efficient management of the property will stimulate the economy.

 


[1] In 2017, the number of free property allotted free of charge unprecedentedly increased: 399 eco-migrant families received residential areas and attached non-agricultural land plots in Batumi, Kobuleti and Khelvachauri municipalities (the transfer period coincides with the local self-government elections). After the second round of the presidential election in 2018, another 30 eco-migrant families received residential spaces. Moreover, in 2017-2018, the Ministry of Healthcare of Adjara have been implementing special social programs aimed at providing eco-migrants with apartments.

Author: Transparency International Georgia
corruption