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GEORGIA | PUBLIC EXPENDITURE REVIEW

The government also faces explicit contingent liabilities from PPAs that it has signed with foreign investors to purchase all newly generated electricity. Hydropower is a potential source of economic growth and is a cheap alternative to thermal energy and imported electricity. To attract foreign investors in the hydro generation sector, the Government has signed Memoranda of Understanding (MOU) with foreign investors and has entered into 27 PPAs to purchase energy from the generators39. Some of this energy will be exported through high voltage transmission lines (HVTLs) through a subsidiary of GSE under the Electricity Transmission Agreements (ETAs).

However there is a low likelihood that these contingent liabilities will materialize. For PPAs two main sources of risks are identified: (i) price proxied by projected import prices; and (ii) market, or demand based on MOE projections. Two scenarios were considered to assess the risk to the government. The first scenario, which is an outlier, calculates the maximum exposure to market risk assuming no change in tariffs and further assuming that electricity consumption declines by 20 percent which was the largest drop since independence due to Georgia’s civil war in 1991-92. Under this assumption, the cost to government could average US$56.23 million per year during 2014-23 starting from US$9.3 million in 2014 and going up to US$87.4 million by 2020. The second scenario, which is the base case, uses MOE data and assumes a consumption growth rate of 5 percent, and with no price change there are net benefits every year starting in 2015 and rising to US$113 million in 2023. This scenario assumes that the newly built HPPs substitute more expensive imports and thermal electricity (Table 3.3). Table 3.3: Market Risk Exposures In US$ million First Scenario (full exposure)

Second scenario (Gain/loss to ESCO from trading)

2015

2016

2017

2018

2019

2020

2021

2022

2023

21.6

6.7

22.8

49.4

30.9

65.5

33.1

67.3

113.9

19.5

33.3

39.7

43.8

72.9

81.7

87.4

Source: Assessment of risks related to power purchase agreements in Georgian Electricity Sector, PER Background paper.

87.4

87.4

The government also faces implicit contingent liabilities from SOEs which have borrowed actively from international markets40. The bond issuance by two SOEs, Georgian Railways and GOGC, which amounted to US$750 million (about 5 percent of GDP) are not recorded as part of the public debt stock as they do not have an explicit guarantee. While they do not represent an immediate liability (repayments start only in 2017), such issuances need to be monitored. The PF also enjoys an implicit backing from the Government. While the PF legislation states that the Government is not under any legal obligation to bail out the PF, in practice, things seem to be different. The International Monetary Fund (IMF) noted that according to the Fitch credit rating report, the Government issued a Letter of Comfort in March 2012 stating its commitment to support the PF in case of distress.

E. THE WAY FORWARD

The government needs to have an inventory of its SOEs. There are significant data constraints in conducting any analysis of SOEs. The current degree of decentralization in the management of SOEs makes it difficult for the government to have a consolidated picture of SOE performance. In addition to the database, the government also needs to decide on an overall policy for SOE ownership. This policy would then dictate the government’s decisions to privatize, change legal status, close or integrate SOEs with public administration. For its privatization efforts, the government needs to have uniform privatization policies.

39. This section draws from a recent World Bank Policy Research Paper, “Assessment of Risks Related to Power Purchase Agreements in Georgian Electricity Sector”, January 2014. 40. JSC Partnership Fund, 2013 Consolidated Statement of Financial Accounts.

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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...