On September 21, 2021, the Asian Development Bank (ADB) approved a USD 100 million Policy Based Loan (PBL) to the Republic of Georgia. The PBL can be used for general government budget support, but the loan is based on key policy updates that target the electricity transmission network in the country. I was honored to provide support to the program by conducting the economic and financial analyses for the loan and policy reforms.
The loan is intended to improve the operational structure, corporate governance, and financial management of the country’s electricity transmission company Georgia State Electrosystem (GSE), and its subsidiary, EnergoTrans. According to ADB Director General for Central and West Asia Yevgeniy Zhukov, "This is a flagship program for Georgia, focusing on improving the financial and corporate governance of two major energy sector state-owned enterprises (SOEs). We expect this to set the path for other Georgian SOEs to follow and ADB stands ready to support the government’s broader SOE reform agenda and economic growth."
Georgia has made significant progress in reforming the electricity sector from state monopoly to liberalized market structure. However key structural, financial and governance barriers remain, especially as they relate to GSE and Energotrans. The program addresses these barriers through three primary objectives: (i) it creates structural changes that will improve operational and network efficiency, (ii) it corporatizes GSE using a modern governance model, and (iii) it brings financial sustainability for GSE. These reforms will be vital to a healthy energy sector, which will play a key role in Georgia’s COVID-19 economic recovery.
Leading up to 2019, Georgia’s economic outlook had been positive, with steady annual growth averaging 4.7% during the decade. By 2019, the country had achieved its lowest fiscal deficit in 10 years (2.2% of GDP), a historically low current account deficit (5.1% of GDP), and its lowest unemployment rate (11.6%). However, in 2020 the economy contracted by 6.2%, as COVID-19 restrictions on movement and economic activity took a toll. Many sectors were affected, but the tourism industry was particularly hard hit as international arrivals fell by over 80% and revenues by 90%. The unemployment rate reached 20.4% in the fourth quarter, rising sharply from 2019, when it was at 12%. FDI also deteriorated, falling from 5.6% of GDP to 3.7%.
Georgia’s fiscal response to the pandemic was robust. In 2020 tax relief was GEL 362 million (USD 114, and 0.7% of Georgian GDP), fiscal expenditures totaled GEL 1,504 million (USD 477 and 3% of GDP), and capital spending was GEL 73 million (0.1% GDP). The increased expenditures and declining revenues combined to produce a government deficit of 9.3% of GDP in 2020. The efforts seem to have paid off, as the economy has rebounded in 2021.
The government has taken important steps to reform GSE, all based on international best practice. These steps include a new company charter, and the creation of an independent supervisory board. GSE’s investment planning and debt management capacity have also been significantly improved. However, some important constraints remain. One, operational and network inefficiency reduces the ability to adequately manage and maintain system assets, resulting in insufficient trade volumes. The absence of increased revenues from regional trade distorts GSE’s sustainability, negatively impacting its capital structure and liquidity gap. Two, a lack of financial sustainability limits the availability of capital. The constraint is illustrated by GSE’s need to raise funds exclusively from the government and IFIs. Three, inadequate corporate management results in overall poor performance and investment decisions. These threaten long-term service delivery.
To accelerate the country’s COVID-19 recovery, a reliable electricity supply is necessary to restore damaged industries as the country rebuilds its economy. Cross-border trade can be a key part of enhancing the balance of payments from a national income standpoint. Finally, there is additional pressure on the fiscal budget in the face of the pandemic, heightening the importance that GSE be self-sufficient.
2.Benefits of the Program
The policy changes will lead to an improvement in operational and network efficiency, eventually resulting in new investments targeting grid expansion and a more reliable electricity supply. Economic benefits should rise from increased availability of electricity. Incremental benefits will come from additional consumption of electricity by both existing consumer and new consumers connected to the national grid, while non-incremental benefits emanate from replacing current sources of energy with the more efficient and reliable sources.
Reforms will also improve the government’s fiscal position, creating room for more productive investments. For example, the elimination of subsidies to GSE, could result in budgetary headroom over 10 years of 0.6% of 2020 GDP, freeing up important resources to refocus on economic growth and employment.
The complete economic assessment can be viewed here, and all documents related to the program can be found here.
Richard Swanson, Ph.D.
Asset valuation and project finance expert, specializing in financial and economic analysis of civil infrastructure assets.