Articles

The Private Finance Initiative - a Leap Forward inn the Development of Georgian Infrastructure

21 October, 2002 

It is beyond any doubt, that a range of novelties have been introduced and being approbated in the developed economic systems over the last decades which, if introduced in our systems, would greatly contribute to a rapid development of Georgian economy.

Some of these novelties are of experimental nature, though many of them have already showed their effectiveness by making positive impact on economic relations and gave a fresh impetus to the finance and commercial infrastructure in general, one of the main components of which is the improvement of relevant legislative base and the skills characteristic to a legal profession. This time, we would like to focus a reader's attention on a phenomenon that is deemed very successful and popular among the leading European countries, especially in Great Britain - a country playing a key role in the financial life of Europe. This phenomenon emerged at the end of the 80s-beginning of the 90s and became known as the Private Finance Initiative. Such an approach attracts one's attention as it enables to divert the capital accumulated in the private sector for financing and management of large entities of the infrastructure being under the state management. Instead, the state authority lets the private sector have a certain monopoly over such entities or systems and enables them to exercise such monopoly for a certain period of time. By now, thanks to the Private Finance Initiative, up to 360 large projects have been implemented in Great Britain with the total value making up more than 14 billion pounds, while before the end of 2002 tens of other projects are expected to take effect with the total value exceeding 20 billion pounds. The Private Finance Initiative projects implemented in Ireland, Italy, Austria, South Africa and India as well may serve as very impressive examples of what is said above.

In reading this brief description a reader may feel a certain association with the widely applied privatization process. Such a comparison is partly logical, whereas the form of privatization is one of the largely spread forms of diverting private capital to state-run entities not only in Georgia, but in almost all Eastern European countries. Noteworthy, that having passed several basic stages in its relatively short-term historical development the Private Finance Initiative itself took its start by transferring state-owned property to private sector, i.e. by privatization (in this respect the privatization of British railway system at the beginning of the 90s can serve as an illustrative example). Besides, the Private Finance Initiative has the features making it different from a classical privatization model. The cornerstone of such difference lies in a concession agreement entered into between an investor and local authority providing for a particular outline of the Private Finance Initiative model for a specific entity and basic elements for its operation. As known, the Law on Procedure for Making Concessions to Foreign Countries and Companies, dated December 21, 1994, is applicable today in Georgia. It is not our intention at this time to discuss relevant details of this Law as, undoubtedly, it no longer meets the contemporary requirements. But it should be noted in general that the question of legislative base necessary for the said approach is quite actual and worth giving special attention, and we hope to have an opportunity to separately discuss this matter through your Journal.

Apart from the concessive nature, another considerable feature of the Private Finance Initiative is that it is acceptable for modernization of not only of large infrastructure facilities, but also the entire systems in terms of both technological and management aspects. Whereas, it is widely known, that privatization is equally applicable to large, medium and small-size businesses. It was the unique features of Private Finance Initiative that ensured its applicability to the spheres forming strong basis for future sustainable development of a particular community, among them power engineering, telecommunications, transport, water systems and etc. Large scales of the aforementioned spheres and complex legal schemes necessary for their modernization serve as the main reason for reflection of Private Finance Initiative based projects in the so-called BOT ("Building, Operation, Transfer") and BOO (Building, Operation, Ownership) agreements, preparation and further operation of which require not only excellent practical legal skills, but also good understanding of relevant topics and systems and thorough reflection thereof in concrete contractual provisions. We hereby add, that in Georgian reality, Baku-Tbilisi-Ceyhan Main Export Pipeline serves as a concrete illustrative example of the foregoing contractual models, that is likely to be added soon by the Shah-Deniz Natural Gas Project being at the preparation stage.

Along with the creation of legislative and contractual bases, the Private Finance Initiative is featured by the establishment of corporate entity by an investor or a group of investors directly for a particular project, which is known as the Special Project Vehicle in the international practice. To a certain extent, it may be considered as a feature that differs the Private Finance Initiative from privatization process. Though, as an exception, there was a case in Georgia of establishing the entity with the Special Project Vehicle functions directly for privatization purposes, when the American AES Corporation, for the purpose of purchasing the shares of JSC TELASI, and according to the laws of Antilles of Netherlands, established AES SILK ROAD B.V holding 75% of shares of JSC TELASI.

Naturally, an investor is in no way prevented from establishing the aforesaid corporate entity for implementation of a particular project. Though, undoubtedly, introduction of a notion of the Special Project Vehicle into Georgian legislation would be an additional clear massage to transnational corporations seeking the ways to secure themselves, to a maximum extent, against accompanying legal risks for creditors in the country with transition economy. For this purpose, it is the Special Project Vehicle that creates favorable conditions whereas it plays the role of a main counteragent for the investor's representation in the project, while the creditors themselves lack legal capacity to raise a claim against the assets of the investor's head company.

A wide application of the Private Finance Initiative would be largely beneficial for Georgia under the terms of its extremely limited financial resources. Similar benefits, regardless of their long list, can be generally divided into tactical and strategic categories: 1) the tactical category implies the fine-tuning of a particular infrastructure project or system at the expense of attracted private capital and directing of released state funds to settle other, e.g. social problems; and 2) the strategic benefit, the very essence of which is outlined by the statement of political implication made by the authority of the country in transition before international business community, which statement will confirm the readiness of the country to transact transparent businesses based upon the open-door principles that is free and clear from any protectionism and clannish tricks. And consequently, it will again bring material dividends as it is expected to find its further reflection in further projects and new capital investments.

It is not accidental that the Private Finance Initiative is often called as a certain partnership structure between public and private sectors. It stands for the reason indeed, as such relation enables both parties to attain their goals and meet their own interests against the background of coincidence of the interests stated above, that considerably reduces not only risk of interrupting a particular project at the initial stage, but also the probability of any further possible conflicts that may arise out of or in connection with such project. The latter factor is very important for successful operation of financial projects in general, and particularly for international financial and credit institutions, as no large infrastructure project can be practically initiated without the credits lines of institutions. Based upon the Georgian reality, we would consider the topic recently discussed such in the press in connection with the ELEKTROKAVSHIRI Ltd rehabilitation plan by TELENOL Company, Norway, as a certain category of the said "partnership".

In short, the introduction in Georgia of a model similar to the Private Finance Initiative would be largely beneficial for Georgian economy in terms of ensuring additional investment funds. All the more so when separate components of this model have been already operating in Georgia. Now, they need to be consolidated into a single body, say through a single legislative package. Though, one can not exclude a possible impact which such package may make upon separate legal fields of Georgia and which is natural in itself, provided that our intention is to put our country in the international economic orbit and subject it to the business laws and regulations applicable in the leading countries worldwide. At the same time, such consolidation process requires the acquiring of relevant skills that our country apparently lacks today. Therefore, in order to perform such work (and if the relevant sustainable strategy is formulated) it will be necessary to invite international experts equipped with relevant knowledge and practical experience, who are in an immediate touch with financial projects. In this respect, according to the available information and practice, the Anglo-Saxon system is quite an interesting one. The fact, that 3/4 of the capital investments worldwide mainly are tied up by the countries of the Anglo-Saxon origin and that they form relevant style and principles, is an excellent illustration of what is stated above. In turn, all these require immense and fundamental works necessitating a legal education reform in our country. Indeed, it is a topic requiring separate discussions, but quite an apparent is the fact that it would greatly promote the development of legal practice in general and formation of generations of Georgian practicing lawyers with a quantitatively new working style fit for contemporary requirements.
Finally, I would like to draw your attention to a very interesting figure which, I believe, will make us deeply ponder over the actuality of the foregoing. According to the International Financial Corporation, over the next decade the developing counties will require at least 200 billion US dollars only as direct investments for the development of their infrastructure systems and introduction of new systems. Such a bog task is to be carried out through financial projects and, in particular, in the form of the projects similar to the Private Finance Initiative. Indeed, as a rule, Georgia will have its share in these amounts, but lamentably, one cannot deny and overlook our fault in the fact that a rule does not always take effect in Georgian realities. Here too, we must make a step forward again by demonstrating our non-standard thinking and audacity to introduce economic and legal novelties. 
                                                              


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