A program meant to spur investment and job creation shows signs of nepotism and may have trampled on property rights.by Maia Edilashvili 30 September 2013
TBILISI | Upon taking office in 2004, the government of President Mikheil Saakashvili launched a privatization effort to get the Georgian economy off the ground. Generally, assets were sold at market price, via tenders.
But at some point, and quietly, the government started off-loading property for a symbolic sum of 1 lari, or about 60 U.S. cents. That program was heavy with buildings or land in prime locations, suitable for tourism. The idea, officials later said, was to spur investment and create jobs for local people.
It was not until watchdog groups got wind of the giveaway that it became more broadly known. The opaque and non-competitive nature of many of the deals raised alarms, suspicions that were only reinforced by the previous government’s repeated claims that it did not retain information about the transactions that had been sought by civic groups.
The logjam broke last fall, when Saakashvili’s United National Movement lost its grip on parliament. Shortly afterward, the new government, led by Prime Minister Bidzina Ivanishvili’s Georgian Dream coalition, released details about the program for the last three years, and subsequently it released data from the two years before that. In the files, Transparency International’s Georgia office found cases that bear the hallmarks of nepotism and corruption.
An additional cloud hangs over some of the deals, in which land-owners claim their property was taken out from under them and illegally transferred to private companies.
“It’s extremely hard to directly catch corruption, but our findings and analysis gave us every reason to think that the risks were pretty real,” said Ekaterine Bokuchava, a lawyer and regional coordinator for Transparency International Georgia. “For many years we suspected that state-owned property was being given for almost nothing to people with close ties to the government, so we figured that nepotism or corruption was taking place and launched an investigation to check.”
Neither the presidential administration nor officials from the United National Movement party responded to repeated requests from TOL for comment.
The TI Georgia researchers found that in some cases where the recipient had failed to live by the terms of the agreement, the deal was canceled, but not in others. “This made us think that, at a minimum, enforcement of the law was discriminatory,” Bokuchava said.
The watchdog group found that from 2007 to 2012 the government transferred tens of thousands of square meters of land and buildings, either with strings attached or unconditionally. In 2011 alone, through direct sale or at a symbolic price, 52 pieces of property were disposed of in the Black Sea resort region of Adjara, which has seen a recent construction boom.
Among the recipients were government officials, public figures, and their family members. The list included a company part-owned by Irakli Ugulava, the brother of Tbilisi Mayor Gigi Ugulava. On 10 October 2012, that firm, Geo Land Limited, paid 1 lari for 8,000 square meters of land in the mountainous region of Kazbegi, on which it plans to build a ski hut and campground. Company director Zviad Beglarishvili said design is under way and the company expects to meet the two-year contract deadline to complete the work.
Another recipient was Levan Kardava, brother of Megis Kardava, former director of the Defense Department’s military police. In November 2011, when his brother was still in office, Levan Kardava received 2,501 square meters of land in the resort village of Kodjori near Tbilisi for 1 lari without any conditions.
In the years covered by the records released to TI Georgia, the Orthodox Church received more than 144,000 square meters of land and several buildings throughout the country through the 1 lari program with no strings attached.
In many cases, the assets were handed over to legal entities that had been registered just a couple of days beforehand, casting serious doubt on their ability to fulfill contractual obligations.
There were also instances of property being handed over to offshore entities about which little information has been made public. For instance, in February 2012, the regional government of Adjara transferred a 25,000-square-meter plot of agricultural land to DH Hotel Batumi, whose sole owner, Island Association Limited, was registered in 2010 in the Virgin Islands. The Adjara government did not respond to queries about the owner’s identity by press time.
In most of Georgia, it is the presidential administration that decides which property gets off-loaded and at what price, upon a recommendation from the government or whichever agency is managing the property. The exception is Adjara, which enjoys some autonomy and where the head of the regional government makes the call.
The program was the brainchild of officials in the United National Movement, who saw private investment, both domestic and foreign, as the cornerstone of a rebuilt economy and a way to whittle down an unemployment rate that ranged from 13 percent to 17 percent in the late 2000s.
Officials cut red tape and taxes, and various international reports portrayed Georgia as one of the most open countries for foreign investors. The strategy got results for a while. In 2004, when the United National Movement came to power, the country’s gross domestic product grew by 5.9 percent; three years later, the economy grew by 12.3 percent. Driven to a large extent by privatization, proceeds from foreign direct investment more than doubled in 2007, reaching $2.15 billion, equivalent to about 20 percent of GDP − although the economy has since cooled considerably.
Meanwhile, Transparency International has been giving the government high marks: Georgia ranks 51st of 176 countries in the group’s most recent Corruption Perception Index, up from 68th in 2010. The index measures how corrupt a country’s public sector is perceived to be.
It was not only developers who were to benefit from the giveaway. Some of the deals included specific goals for job creation. For instance, DH Hotels Batumi is on the hook to build a four-star hotel in Adjara with at least 300 rooms and a casino, and a work force that is 90 percent Georgian, by 31 July 2015. Construction has yet to start, however, with a company representative citing financial problems in response to an inquiry from TI Georgia.
Archil Khabadze, chairman of the Adjaran government, said officials can fine recipients who do not live up to their end of the bargain, or cancel the contracts. He said his government, which took office in October 2012, has ended five contracts this year and extended deadlines in cases where owners made “convincing arguments” that they could do the required work with more time.
In an email, Khabadze said the new government has given away property without a tender two times since it came to power. It gave apartments to people who had been displaced by natural disasters, and citrus packing and pricing facilities to investors. A subsequent email from the province's legal department, however, said the citrus packing faciities were awarded through competitive bidding.*
In addition to questions of corruption, the property privatizations have given rise to dozens of court claims by people who say they are the rightful owners of some of the properties. If those rulings go against the government, the price tag could be enormous.
Omar Akubardia said his son owned about 48 hectares of land in the small Black Sea town of Anaklia, where the family had planted 16,000 saplings of feijoa, kiwi, and lemon and had ambitious business plans. According to a report by a team of civic groups in 2012, almost all of that land was transferred to the Economy Ministry, without the family’s consent, after the region was selected as a tourism development zone in 2009.
The family filed suit for restoration of their title but have lost a series of court decisions, and amid the legal proceedings the property was registered to a private company called Anaklia-Port. It was among 2,000 hectares that Anaklia-Port bought from the government for 6.34 million lari ($3.8 million) for the construction of a transport hub.
Akubardia said his family received no compensation “even though we had all the important documentation.” They have taken the matter to the European Court of Human Rights in Strasbourg.
“That’s my only hope to get my property back,” Akubardia said.
Giorgi Chikaberidze, Akubardia’s advocate from the Georgian Young Lawyers’ Association, a human rights group, suggested that Georgian courts were under pressure to abide by the government’s decision even though his client is the legal owner of the property. “So both the private property rights and right to a fair trial have been infringed,” he said.
Officials in the Georgian Dream-led government that took power last fall have promised to review controversial cases like the Akubardias’ and, if necessary, restore property to legal owners whose rights have been violated, although TI Georgia says it knows of no cases that have been reversed.
In late November, Justice Minister Tea Tsulukiani said there were as many as 700 cases filed against Georgia with the Strasbourg court, suggesting that the government might eventually have to pay huge sums in compensation. To head off that possibility, she called on plaintiffs to bring their complaints to her ministry.
“If [plaintiffs] see that after the change of government there is a chance of resolving certain cases domestically, [they] shouldn’t wait until we get a note from Strasbourg, which may take four, five, or more years,” Tsulukiani said. “We, the state, are here for the goal to settle certain human rights-related problems in a shorter period of time.”
But Akubardia sees that as an empty promise. He said the ministries of justice and economy have washed their hands of his case, citing the court rulings.
As it happens, the government later canceled the sale to Anaklia-Port, citing the investor’s failure to fulfill its obligations, but that is little consolation to Akubardia, as the land remains in the government’s hands.
TI Georgia’s Bokuchava said cases like the Akubardias’ typically happen in areas where the national government − in this case the Economy Ministry − backs some major development, and they are difficult to resolve.
“We’ve been involved in almost 50 such cases and we lost all of them,” she said. “The Economy Ministry says that since the assets were already sold, it’s impossible to give them back.” Officials fear that giving even one property back would set a precedent and “lead to chaos,” she added. TI Georgia is insisting that the government at least return the properties it still controls.
Eric Livny, director of the International School of Economics at Tbilisi State University, welcomed TI Georgia’s scrutiny of the program. “Privatization procedures need to be improved and enforced,” he wrote in an email, and not only for the sake of good governance.
“One point to add is that legal entities and individuals acquiring state property through shady deals (that could be challenged in court) are risking their investment,” Livny said. “I wouldn’t want to make a multimillion dollar investment in a real estate project unless I’m sure that the land on which this property sits is really mine and nobody is going to take it away.”
Officials at the Economy Ministry agreed to comment on the program only in response to written questions via email. They said the government would continue the “symbolic” property sales “only in very rare and exceptional cases,” when it would help spur investor interest.
The ministry said it has acted against those who have violated the terms of the deals, but it did not elaborate. It has also had deals audited independently to check for compliance and is creating a database to better keep track of the program. “This rules out any delay in reacting to the violation of a contract or other types of loopholes. Notably, so far no cases of corruption have been revealed,” the ministry said.
Asked how he would measure the success of the program, Vakhtang Lezhava, a former deputy economy minister who now works at a Tbilisi think tank, said, “You may question how effectively the idea was carried out, but you can’t question its goals and say it was just corruption.”