Unsuccessful “Kazakh investment” in Adjara - საერთაშორისო გამჭვირვალობა - საქართველო

Unsuccessful “Kazakh investment” in Adjara

29 June, 2015


TI Georgia continues its research into investment projects in Adjara and has now probed the largest investment project in 2006.

On the basis of the Order No. 15, dated 14 February 2006, of Levan Varshalomidze, the former head of the government of the Autonomous Republic of Adjara, the Ministry of Finance and Economy of Adjara A/R signed a sales and purchase agreement. Under the agreement, Adjara Resorts Holding B.V., a company registered in the Netherlands, acquired 21 properties located on the shore of the Black Sea (in Batumi and Kobuleti) through the direct sales procedure. Adjara Resorts Holding B.V. purchased 52,83% of shares in JSC Adjara Resorts and JSC Meskheti for 17,5 million USD. Out of the latter number, 13,5 million was paid for the compensation of the internally displaced persons living in these hotels and 4 million USD was the privatization price of the shares. The analysis of the documents that the Ministry of Finance and Economy of Adjara provided to us demonstrates that Adjara Resorts Holding B.V., the so-called Georgian-Kazakh company, did not perform the obligations it undertook. In the 9 years since the execution of the sales and purchase agreement, the company has only constructed one of its 21 undertakings – Hotel Radisson at the site of Hotel Medea.

Investment project

Adjara Resorts Holding B.V. was incorporated offshore a week earlier to the execution of the agreement (06052861, registered address: Steupelstraat 16, 3065 Je Rotterdam, Netherlands).

The following properties were transferred to the company under the entered agreement on 14 February 2006:

1.   Resort house “Kolkheti”,

2.   Former pioneers’ camp “Mtsvane Kontskhi”,

3.   Tourism center “Kobuleti”,

4.   Sanatorium “Kobuleti” (old and new buildings),

5.   The unfinished building of the former Ministry of Georgia on Social Protection,

6.   Hotel Medea LLC,

7.   Resort House Mtsvane Kontskhi LLC,

8.   Talgha LLC,

9.   Turbaza Tsikhisdziri LLC,

10. Turbaza Chakvi LLC,

11. Aisi LLC,

12. Turbaza Mtsvane Kontskhi LLC,

13. Pansionati Chiraghdani LLC,

14. JSC Resort House Narinji,

15. JSC Sanatorium Adjara,

16. JSC Pansionati Mtsvane Kontskhi,

17. JSC Sanatoriumi Makhinjauri,

18. JSC Pansionati Mziuri,

19. JSC Horizontisa,

20. Passive part of the main resources separated from the authorized capital of JSC Niavi (premises and parcels of land),

21. 52,83% of shares in JSC Meskheti.

As a basis for this decision, the sales and purchase agreement cites the fact that, on 21 October 2005, Silk Road Group S.A, an affiliate of Adjara Resorts Holding B.V., signed a memorandum of understanding with the Ministry of Economic Development of Georgia. Under the document, Silk Road Group expressed its willingness to implement investments in Georgia together with Kazakh partners. The objective of the investment proposal was a development of tourism and tourism infrastructure in Adjara A/R  as well as creation of new jobs.

Obligations that the Holder Company Undertook

Together with the payment of the compensation for IDPs and the privatization price of the project, the company undertook other obligations as well:

1. Guarantee that the structures of Hotel Medea, Sanatorium Kobuleti and Hotel Meshketi would be permitted for use by 1 June 2007;

2. In other premises, it had to arrange and have resort complexes, health rehabilitation centers, entertainment, tourism-recreational and/or similar facilities permitted for use.

Further, Adjara Resorts Holding B.V. (pursuant to Article 7.4 of the sales and purchase agreement) was authorized to transfer, concede, assign, sell, rent, lease, impose any type of encumbrance or, in any other form as permitted under the law, to transfer or sell the property to any other third persons or legal entities in a way that the person receiving such rights, duties, obligations, shares and property would in full replace the company bearing all the rights, duties, obligations and liability that the company undertook before the state.

Amendments made to the investor obligations

According to the documents that were provided to us by the Ministry of Finance and Economy of Adjara, several amendments were made to the agreement. The first amendment was made a few days after the execution of the agreement on 2 March 2006, whereby the deadline of completing the 21 projects in 36 months was prolonged by several years. However, it was specifically determined that Hotel Meskheti and Hotel Medea must have been completed by the end of 2008.

The second amendment of the sales and purchase agreement is dated 27 February 2008. Under this amendment, the construction of Hotel Horizonti in Kobuleti must have started in January, 2010. Construction of the remaining 19 properties needed to have been finished by 2015.

After the third amendment, the Order signed on 14 February 2006 by the head of the government was also amended. According to a document dated 7 December 2009, the amount of investment required to have Hotels Medea and Meskheti permitted for use, was increased to 50 million USD and the deadline was fixed at 1 July 2010.

Unfulfilled obligations

Construction of Hotel Meskheti, as well as other 19 properties, have not yet started (the company presented the technical study document of property to the Ministry of Finance and Economy of Adjara according to which every building examined in the study is subject to a complete demolition). Demolition of some of the transferred property has already been completed and although none of the properties have been completed by the agreed deadlines, no amendments have been made to the agreement under the current government.

Despite the fact that the deadline for performing the obligations by the company has been missed, most of the listed objects are abandoned as of today. Moreover, the competent agencies of the government have not taken effective measures to ensure the performance of the obligations undertaken under the agreement with the investor.

Actions of the Government of Adjara

It seems that no sanctions have been imposed against the company for the breach of obligations; both current and former government have failed to fully ensure an effective monitoring of implementation of investment projects and have not responded to gross breaches of deadlines of agreements.

TI Georgia asked the Ministry of Finance and Economy of Adjara as to why it has not been resorting to measures provided for under the law in order to ensure the performance of obligations by an investor or why it has not launched the procedure to invalidate the agreement due to the non-performance of the obligations by the investor company. In response to this question, a representative of the legal service of the Ministry stated that the purchaser had the property pledged in the Kazakh Bank Turanalem, which impeded the process. According to the renewed data of the Public Registry, the pledge over the property of JSC “Adjara Resorts” has been removed since 14 October 2014. Despite this, there is no progress in the legal area in the relations between the parties.

In case of a breach of the sales and purchase agreement entered into between the parties, the issue (in case of a claim to find the agreement null and void) was supposed to be submitted to the Arbitration Court of International Chamber of Commerce in Paris for a final decision. The Ministry of Finance and Economy of Adjara has not exercised this right until today.

Our assessment

We believe that it is important to attract investors in the country. However, we also believe that an investor which has been provided with favorable conditions should not abuse these conditions and should perform all its obligations. It is equally important that the state implements an effective monitoring of the performance of obligations undertaken by investors. Effective control of fulfillment of investment obligations is as important as attracting foreign investment and implementing new projects. The government should reasonably dispose the property it holds, especially in cases of direct sales. It should lay down criteria and sell property under multiple lots in order to avoid negative consequences which may entail protraction, suspension or termination of investment projects.

Author: TI Georgia