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CHAPTER 3. STATE OWNED ENTERPRISES A. INTRODUCTION According to some measures, the state owned enterprise sector in Georgia is relatively small and contributed to 7 percent of gross GDP in 2012 and accounted for less than 10 percent of total formal employment. The privatization program that was underway during 2004-10 resulted in a significant reduction in public enterprise employment from 144,000 in 2004 to 60,000 in 2012. Although the share of SOEs is small in terms of output, their contribution to investment in fixed capital is oversized at 24 percent of total corporate investment in 2012. This is essentially because of the sectors in which the large SOEs operate–energy and transport–and the large infrastructure requirements in these sectors. Some of the government’s capital expenditures in these areas are undertaken by the large SOEs. Majority of the remaining SOEs operate in the health sector, municipal services, agriculture, tourism and manufacturing. No single government entity has a comprehensive picture of SOE performance. More than 400 SOEs operate in Georgia under different institutional arrangements and ownership structures. However, with the exception of the five largest SOEs, information on them is scant. According to the law on state property in Georgia, the MOESD is primarily responsible for the management and supervision of SOEs but in practice, this oversight function is spread across several ministries. As a result, Parliament does not receive any information on these companies as part of the budget preparation and execution process. Transfers from SOEs to the budget through dividends varied widely over the years based on performance of the SOEs and their negotiations with the government. While there are no explicit subsidies to the SOEs, the government has assumed responsibility for some of their liabilities.

The five largest SOEs in Georgia comprise 80-90 percent of the total assets of SOEs and are grouped under the extra budgetary Partnership Fund. Their combined profit amounted to GEL 63.5 million in 2012 or about 0.2 percent of GDP – and four out of the five were profitable. Based on negotiations with the government, these companies paid dividends of GEL 6.7 million in 2012 to the Fund. Their consolidated financial data also showed a positive return on assets (ROA) and return on equity (ROE) in 2012. The only exception was the Georgian State Electrosystem (GSE) which was not profitable. Sensitivity analysis impacting the operating income and other costs and income of the SOEs reaffirms the robustness of their operations.

The government however undertakes significant quasi-fiscal operations through these large SOEs which potentially understate the fiscal deficit and overall debt. Exact costs are not available but the government provides subsidized utilities to the population (gas, electricity, transport) through its 5 largest SOEs for which it does not compensate them. In addition, these SOEs undertake investment projects on behalf of the government, also without any compensation. The government also imposes other costs on SOEs like wage increases. Revenues and costs related to carrying government mandates need to be mainstreamed into the budget and this will potentially increase the fiscal deficit. Additional costs could surface from SOEs for which data is not currently available, especially those under the MOESD, several of which are bankrupt. Some of the largest SOEs are highly indebted and assumption of SOE debt would also increase government debt. This chapter reviews the fiscal implications of the operations of the Georgian SOEs, with an emphasis on the largest companies. The analysis in this chapter leads to the following measures for the government to consider:

• • •

Short-term: Establish an inventory of SOEs to get a consolidated picture of the government’s fiscal position. Short-term: Establish a clear dividend policy for SOEs. Medium term: Mainstream quasi-fiscal operations like provision of subsidized utility services and investment projects undertaken by SOEs into the budget to increase transparency.

The rest of the chapter is organized as follows. Section B provides an overview of the legal and institutional framework of SOEs. The next section focuses on their operational and fiscal implications while Section D discusses quasi-fiscal operations and contingent liabilities. Section E gives the way forward.


Profile for World Bank in Europe & Central Asia

Public Expenditures in Georgia: Strategic Issues and Reform Agenda  

Volume 1: Main Report. To keep Georgia’s government finances on a sustainable path along with sustainable growth and job creation, this publ...

Public Expenditures in Georgia: Strategic Issues and Reform Agenda  

Volume 1: Main Report. To keep Georgia’s government finances on a sustainable path along with sustainable growth and job creation, this publ...