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Andria Gvidiani

Foreign Investors Seek to Invest In Georgian Power Sector

The Association of Young Financiers and Businessmen (AYFB) comments on the preliminary report on IFD inflows that was published by the national statistics service of Georgia. Under the report, investment inflows to the power sector have decreased.

The FDI inflows in the sector made up 90 million USD, down 100 million USD (-53%) compared to the 2014 final report.

Despite the Geostat’s report, the energy sector remains an attractive direction for investors. At the same time, the FDI calculation methodology is based on special approaches and the preliminary reports cannot be used for making essential conclusions, AYFB analyst Andria Gvidiani said.

„It should be noted the power sector remains one of the most attractive directions for foreign investors. At this stage, about 20 hydro power plants are being constructed, while feasibility studies are underway on about 120 projects.

The preliminary indicators published by the statistics services cannot be fully relevant for making final conclusions.

As a rule, preliminary indicators largely differ from the final reports. The below chart reflects preliminary ands specified FDI inflows  to the power sector due to years.

Since 2011 (detailed sectoral indicators in terms of FDI inflows are available from only 2011) specified reports always prevail over preliminary indicators and this tendency is maintained every year.  I suppose the 2015 final indicators will increase again because in the fourth quarter of 2015 Nenskra HPP construction works started that is the major HPP project among all  other ongoing projects.

Its investment value makes up 1 billion USD. Moreover, under the FDI statistics calculation methodology, preliminary indicators are published on quarter basis, on the 70th day after completion of the reporting period, and the existing preliminary quarter indicators constitute preliminary indicators of the year, while the final reports are published by the statistics service on the 15th of August of the next year of the reporting period.

One of the main factors for making erroneous reports is related to the established practice, when companies submit specified indicators of losses and profits to the statistics service only once a year. This factor, naturally, leaves a wide gap between preliminary and specified indicators. This factor should be considered one of the main shortcomings in the statistics calculation methodology”, Adria Gvidiani noted.

The analyst also disapproves the considerations as if the existing tariff policy in the energy sector and failure for joining the energy union are main reasons for investments reduction in the Georgian power sector.

“It should be noted a part of experts refers to tariff policy to substantiate the slowdown in  FDI inflows in the preliminary indicators. The current tariffs do not reflect the market realities and the electricity consumer tariff is far lower to the market prices and this factor suggests investors no to make investments in Georgia, this part of experts are saying.  I assure you that similar considerations are ungrounded and these factors could not diminish investment inflows, because

Under the current legislation, investors are given very strong guarantees from the government.

The Energy Ministry follows the practice of memorandums that provide guaranteed tariffs for electricity sales. At the same time, It  should be noted it is less imaginable to find more reliable and attractive environment for investors.

Another argument submitted by this part of the experts is also unacceptable. They assert that Georgia has not joined the energy union and this factor has also preconditioned a decrease in FDI inflows. They think this fact creates non-transparent environment in Georgia and investors abstain from putting capital in the country. I believe this argument is ungrounded and the above-mentioned practice of memorandums will also prove my assertion.

These memorandums clearly determine obligations of both investors and the government. Moreover, the mentioned argument is useless because Georgia was not member of the energy union when FDI inflows recorded impressive figures”, Gvidiani said

The AYFB analyst says that the national currency volatility should be considered as one of the main preconditions for declination in investment inflows. The currency exchange rate volatility always affects FDI inflows, he said.

“Besides the above-mentioned factors, the national currency fluctuation has also driven the FDI slowdown tendencies to a certain extent. In 2014 the GEL exchange rate against USD was 1.75 on average and 2.35 in 2015, this signifies 33% year on year contraction. Namely, the investor was paying 100 USD for 175 GEL service in 2014 and 75 USD for the same services in 2015. Therefore, in 2015 the FDI amount marked ¼ lower figure, while the investors could buy the same services and goods for the mentioned sum”, Andria Gvidiani noted.