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Sketch by Giorgi Magradze/ Caucasus Business Week

Georgian Development Bank To Launch Operation in Spring 2016

After long considerations, thoughts and experiments, the Georgian government has taken a final decision on establishing the Georgian Development Bank on basis of the Partnership Fund. Organizational works are underway and the Georgian Development Bank will launch operation in spring 2016 with focus on financing business projects.

The Bank or the Corporation for Development (the final appellation has not been selected yet) will be entitled to issue low-interest loans, guarantees, and bonds. At the same time, the Development Bank will not be authorized to accept deposits and provide payment services. The bank will make focus on financing small and medium business sectors, startups that commercial banks ignore like a leper. The bank will serve only legal entities and companies. The issue is of innovative projects that commercial banks avoid financing. Moreover, the bank will employ its own assets to draw financial resources for further making investments.

Founded in 2010 under the ruling of Mikheil Saakashvili, the Partnership Fund was to fulfill the same missions, in practice. However, our society associates the Partnership Fund’s operation until 2012 with a well-paid shelter for fired or quitted high-ranking officials (ex Prime Minister Nikoloz Gilauri, ex Finance Minister Dimitri Gvindadze and others).

The Fund’s assets include the following state-owned enterprises: Georgian Railway (100%), Georgian Oil and Gas Corporation (GOGC – 100%), Georgian State Electrosystem (GSE- 100%), Electricity System Commercial Operator (ESCO – 100%) and JSC TELASI (25%).

In the first months after the change in power, the new Authorities decided to maintain the Fund’s format and appointed EBRD’s senior banker Irakli Kovzanadze as the Partnership Fund’s executive director. Under the management of Irakli Kovzanadze, the Partnership Fund has implemented large-scale projects, including a whortleberry plantation and a processing plant, a construction materials plant, a new steam power plant in Gardabani, hotels such as Rixos Borjomi in Borjomi, Gino Valley SPA in Akhaltsikhe, Royal Baton in Kvareli, a cattle-breeding complex in the Kvemo Kartli Region. In this period, two major projects were also inaugurated – Nenskra HPP and the new seaport in Anaklia to handle big cargo ships.  Somehow or other, the decision has been taken and the Development Bank will be established on basis of the Partnership Fund. Efficient and valuable interaction with international finance institutions will be the most important factor for the Georgian Development Bank’s success.

The Georgian Development Bank is expected to replace finance institutions in comparatively small transactions (100 000 to 5 million USD). At the same time, finance institutions will be able to finance the reliable projects prepared by the Development Bank.

Specialists assert that a financier, not a politician or a doctor, should manage the Development Bank. Hence, if the Government follows the suggestions of economic experts, the Partnership Fund head David Saganelidze cannot be an appropriate candidate for the new position. Everybody agrees that a team of professionals with rich experience of working in the finance system and without questionable traces in their reputation should lead the finance institution of similar scales.

Bidzina Ivanishvili initiated to establish a bank or a corporation and added the developing countries vitally needed similar finance institutions.

At this stage, the Partnership Fund’s management is conducting consultations with Chinese colleagues around creating the Development Bank. The Partnership Fund’s head David Saganelidze has visited China several times.

“We started our consultations with Chinese colleagues in summer 2014. The Chinese Development Bank’s management was astonished to learn Georgia had no similar bank”, David Saganelidze said and added about 250 similar-format banks operate in the world, including in England, France, Germany (KfW was founded in 1947 to overcome crisis in Germany), as well as in the Near East, Czech Republic, Slovakia, Poland, Ukraine, Turkey, Russia, Greece. The Chinese Development Bank is one of the largest among similar bodies with 1.4 trillion USD foreign assets. The bank’s net profits in 2014 marked 11 billion USD, Saganelidze noted.

“Following our verbal agreement, the Chinese Development Bank separated the South Caucasus Region from its branch in Turkey. The new unit with a representative office in Tbilisi embraces three countries: Azerbaijan, Armenia, and Georgia. The Chinese Development Bank has conditionally allocated 0.5 billion USD for Georgia as the first tranche. Chinese colleagues promised to make considerable investments in our country if Georgia sets up an analogical bank. If we finance this or that project by 10 million USD, the Chinese party shows readiness to invest much more investments in the same project”, Saganelidze said.

Specialists stress that foreign capital are frequently attracted for developing other economies, but in most cases, similar-format banks rely on state sources, especially, on reserve funds that are formed on the ground of surplus budget. By the way,

At this stage, the State Treasury keeps more than 600 million GEL as a balance amount. A part of economists suggests the Government to apply these funds for making investments. Therefore, these sums may be redirected to the coming Development Bank.

Specialists think that private enterprises, who are ready to make investments in state projects, can also keep shares in the Development Bank. These considerations imply major businesses (not small ones), as well as international finance organizations that are making investments in both private and state sectors.

The commerce sector showed certain restraint concerning the idea of creating the Development Bank, because it considered the new finance institution as a major competitor. The most part of bankers were saying after the announcement of this idea that the State Bank for Development, if established as a competitor to the commerce sector, would frustrate the country for several years. Bankers suggested setting up an agency like a finance corporation, not a state bank, because this decision would send a bad signal to foreign private investors. However, today

A majority of specialists is sure the Development Bank cannot be competitor to commercial banks, because  its accents and priorities will differ from ones of commercial banks.

The Development Bank will not accept deposits, will not open corporate and individual accounts, will not issue retail credits. It will not need the National Bank’s licenses for implementing its activities and consequently, it will not be subject to regulations. If the Development Bank makes focus on drawing foreign capital and efficiently investing them in the state economy, this will bring positive economic effects, specialists noted.

Commercial banks, in practice, do not foster development of the domestic production. Therefore, the coming Development Bank is expected to play a decisive role. Unlike commercial banks, the Development Bank will finance domestic enterprisers, not foreign ones. The new institution will also resolve the issues that cannot be dealt by the private sector because of lack of capital or high risks.

Georgia owns one of the most valuable and perfect bank systems in the region, but no other components of the finance sector have been developed in the country. The bank sector controls 90% of the finance sector’s assets. Nonbank bodies control 5%. Credit associations have no share in deposit and crediting transactions. There were five leasing companies in 2013, but the leasing system remains undeveloped in Georgia. The insurance sector with 492 million GEL assets also remains less developed. The existing five pension funds own only 15 million GEL assets. The stock market still remains at the level of a germ.

There are a wide range of bank products in Georgia, in theory, but, in reality, the business sector, especially small and medium business sectors, has restricted access to loans.

Bank loans remain as one of the conservative products in Georgia and commercial banks make focus on making enormous profits through issuing short-term loans.

Commercial banks have set many restrictions to the business sector and these barriers limit an access to loan products. For instance, business loans greatly depend on real estate guarantees and this factor points to limited potential of the bank sector for meeting loan needs of enterprises. Incapability of commercial banks for issuing loans to small and medium business sectors directly generates problems in the economic growth.

Economic experts noted that, according to the 2014 Global Competitiveness Report of the World Economic Forum (WEF), 18.8% of the business sector consider a limited access to bank products to be a main problem, after the inadequately educated workforce factor, that exceeds all other challenges indicated in the report.