## Georgia — Public Sector Balance Sheet Update (2012–2018), 1geoea2020004 ## Source details **Canonical URL:** [Georgia — Public Sector Balance Sheet Update (2012–2018), 1geoea2020004](https://www.imf.org/-/media/files/publications/cr/2020/english/1geoea2020004.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2020/english/1geoea2020004.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2020/english/1geoea2020004.pdf.json) --- ### Mission, purpose and activities - FAD capacity development mission in Tbilisi: November 6–25, 2019. - Mission team: Jason Harris, Vincent Tang and John Zohrab (FAD), Viera Karolova (STA), Phillip Barry and Irina Grigoryan (short term experts). - Ministry of Finance and other Georgian interlocutors listed and engaged in workshops on the Public Sector Balance Sheet and SOE financial analysis. - Purpose: provide guidance on compiling, analyzing and using the public sector balance sheet; update/refine/extend Georgia’s PSBS for 2012 to 2018, consolidating central government, local governments, central bank and non-financial SOEs. ### Overall public sector position (2018) - Total public sector assets: 149 percent of GDP. - Total public sector liabilities: 81 percent of GDP. - Public sector net worth: 68 percent of GDP. - Consolidated Public Sector totals (Percent of GDP, from Table 1.1): - Total assets: 149.3 - Nonfinancial assets: 101.5 - Fixed assets: 67.1 - Land and minerals: 27.8 - Other nonfinancial assets: 6.6 - Financial assets: 47.8 - Currency, deposits, SDRs (financial assets): 11.5 - Debt securities (financial assets): 23.1 - Equity/invest fund shares (financial assets): 0.0 - Other financial assets: 13.3 - Liabilities (consolidated): 81.3 - Currency, deposits, SDRs (liabilities): 20.5 - Debt securities and loans (liabilities): 53.6 - Equity/invest fund shares (liabilities): 0.0 - Insurance, pension, and standardized guarantee schemes: 3.6 - Other accounts payable: 3.6 - Net financial worth: -33.5 - Net worth: 68.0 - Revenue: 33.3 - Expense: 29.1 - Net lending/borrowing: -0.5 ### Key risks and vulnerabilities - Net foreign exchange exposure (excluding central bank reserves): close to 50 percent of GDP — described as one of the largest among measured countries. - SOE sector: - Large relative to other public sector assets; highly risky; a net draw on the budget. - Imminent SOE financing needs: around 18 percent of GDP (GEL 7.6b over next three years). - Aggregate fiscal draw from government budget over past five years: around 6 percent of GDP. - SOE dividends: sector has not contributed dividends over that period (despite government GEL4.6b equity). - Valuation concern: government non-financial assets valuation not in line with international standards and may be revised down. - Power Purchase Agreements (PPAs): - Aggregate exposure worth around 65 percent of 2018 GDP in total (maximum exposure), or a discounted value of 27 percent of 2018 GDP. - Expected fiscal cost of residual PPA payments under baseline projections: 22 percent of GDP over 40 years. - Annual peak PPA payment under baseline: 0.6 percent of GDP. - Under plausible scenarios these payments could double. - Currency depreciation impacts: - Cumulative 60 percent depreciation from 1.66 GEL/USD (2012) to 2.67 (2018) reduced net worth by 6 percent of GDP over six years; GEL further depreciated to 2.95 against the dollar during 2019. - A 30 percent depreciation would increase SOE sector losses by 4 percent of GDP; specific SOE net worth impacts (GEL M): total -1,821 (Engurhesi -53; Georgia Rail -348; GOGC -148; GSE -472; MK Rail (50%) -390; UWS -410). ### Demographics and long-run fiscal pressures - Ageing: number of working-age people supporting each pensioner falling from four to two over the next 50 years. - Demographic timing: transition begins as soon as the mid-2020s—within the medium-term horizon. - UN Population Projections (population aged over 65 share): - Central: rise from 15 percent today to 20 percent in 2069. - Low scenario: could double to 29 percent in 2069. - Share of population eligible for pensions under current policy: - Current: 18 percent. - Projected to rise to between 27 percent by 2069 under the central population scenario. - Fiscal projection results (unchanged policy): - Pension-driven increase in primary deficit by 2069: between 1.9 percent (policy variant 1) and 3.3 percent of GDP (policy variant 3). - Government debt could increase from 2018 level of 45 percent of GDP up to between 88 percent to 122 percent of GDP depending on pension policy. - INFW estimates under different pension indexing options range from minus 122 percent of GDP to minus 178 percent of GDP. - Second pension pillar: assets accumulated over first 12 months: over 400m GEL; projected to rise to over 60 percent of GDP by 2050; modeled additional annual contributions ramp to steady state of 0.7 percent of GDP per year after 10 years. ### Intertemporal fiscal sustainability - Current policy settings produce future fiscal deficits that exceed net worth, resulting in negative intertemporal net worth. - Intertemporal Net Financial Worth (INFW): - Current net financial worth minus 35 percent of GDP; INFW could fall to minus 122 percent (pension variant 1) or minus 178 percent (pension variant 3). - Sensitivity to population projections: - Under ‘low’ population projections, INFW would reduce by approximately a further 5 percent of GDP. - Under ‘high’ population projections, INFW would increase by approximately 2 percent of GDP. - Impact on projected debt in 2069 relative to median variant: +25 percent of GDP (high) / -15 percent of GDP (low). ### Consolidation, cross-holdings and evolution (2012–2018) - Cross-holdings consolidated out: amount to 24 percent of GDP. - On-lending portfolio owed to Central Government by SOEs: 5.7 percent of GDP. - Balance sheet evolution 2012→2018: - Assets: 132 percent of GDP (2012) → 149 percent of GDP (2018). - Net worth remained around 68 percent of GDP. - Drivers of change (2012 base rescaled to 2018 GDP): - Cumulative government deficits: GEL 2b, or 4.9 percent of GDP. - Cumulative public corporation deficits: 5.6 percent of GDP. - Capital expenditure: government invested 16 percent of GDP; public corporations invested 8 percent of GDP. - Revaluation and impairments: Georgia Rail GEL380m write-down; cumulative GEL1 billion impairment on certain projects; MK railway project valued at GEL1.6b (4 percent of GDP) currently in severe negative equity. - Inclusion of public land holdings added GEL3.4b in 2018 terms. ### On-lending and public corporation indebtedness - Government on-lending portfolio: 5.7 percent of GDP in 2018 (up from 3.5 percent in 2012); 97 percent denominated in foreign currency in 2018. - Concentration: 80 percent of outstanding on-lending owed by four companies — United Water, GSE, Energotrans (GSE subsidiary), and Engurhesi. - Restructuring: 15 percent of current value of outstanding loans subject to rescheduling. ### Sectorization exercise: scope, methodology and impacts - Assessed 241 SOEs identified by the MoF (112 central government controlled; 73 municipal; 56 subsidiaries). - Financial statements for 2018 available for only 63 largest SOEs. - Classification results: - 196 SOEs classified as general government units. - 44 SOEs classified as public corporations. - One SOE (Marabda-Kartsakhi Railway, MKR) required further assessment. - Impacts on 2018 fiscal aggregates (GFSM 2014, excluding MKR; illustrative including 50 percent of MKR): - General Government Debt: +1.2 (excluding MKR) / +3.8 (including 50 percent of MKR) percent of GDP. - General Government Balance: -0.3 / -0.3 percent of GDP. - General Government Revenue: +2.1 / +2.1 percent of GDP. - General Government Expenditure: +2.4 / +2.4 percent of GDP. - Classification rationale based on GFSM 2014 market/non-market tests, institutional unit criteria and dependence on regular government financial assistance. ### SOE sector performance and the six large SOEs - Aggregate observations: - Underlying operating earnings among most of the big six SOEs are positive, but large recent and pending asset write-downs impair sector financial position. - Only one of the big six SOEs is generating sufficient operating profits to cover its capital costs; others incur significant losses. - Aggregate net worth of the six large SOEs declined from around GEL2.8b to under GEL1b over the last 6 years. - Average Return on Assets (RoA) for the six large SOEs fell from 3.8 percent in 2016 to negative 4.8 percent in 2018. - Average leverage (D/(D+E)) increased to 88 percent in 2018. - Estimated recapitalization required to restore equity to 40 percent debt/total liabilities: around 7 percent of GDP (working assumption includes allowance for 50 percent of MKR debt). - Major SOEs gross financing requirements (next three years): - Estimated total: GEL 7.6b (18 percent of GDP), with around half expected to be raised from the private sector. - Specific planned/sought external amounts include USD350m and EUR150m by GOGC and USD500m by Georgia Rail. - Company-level highlights: - Engurhesi: owns 1,300MW Enguri dam (~40 percent of generation); RoE average negative 2 percent p.a.; all debt in foreign currency; 30 percent depreciation increases finance costs by around GEL53m. - GOGC: profitable; average RoE over last seven years of 14 percent p.a.; projects large revenue increases with new CCGT plants; gross financing requirements next three years ~GEL1,600m; 30 percent depreciation reduces NPAT by around GEL148m. - Georgia Rail (GR): freight volumes declined by half; 2018 asset write-down GEL691m (2 percent of GDP); potential exposure if assumes 50 percent of MKR. - GSE: revenue growth and investments; net worth remains negative; write-downs (Energotrans GEL250m); 30 percent depreciation increases financing costs by around GEL472m. - MKR: project cost now estimated USD775m (from USD200m in 2007); accumulated losses and negative equity; assets likely heavily impaired. - UWS: losses every year for seven years; cumulative losses 1.2 percent of GDP; high water losses up to 75 percent; close to bankruptcy; 30 percent depreciation increases financing costs by around GEL410m. ### SOE sector financial flows (2014–2018) - Net financial flows from government to SOEs (GEL M) by year: - 2014: Total Net Flows to SOEs 314 (Capital Injections 166; Net lending 144; Subsidies 5; Dividends 0). - 2015: Total 501 (Capital Injections 232; Net lending 258; Subsidies 12; Dividends 0). - 2016: Total 535 (Capital Injections 210; Net lending 311; Subsidies 15; Dividends 11). - 2017: Total 777 (Capital Injections 596; Net lending 148; Subsidies 34; Dividends 10). - 2018: Total 446 (Capital Injections 143; Net lending 279; Subsidies 4; Dividends 3). - Total 2014-18: Capital Injections 1,347; Net lending 1,139; Subsidies 91; less Dividends 3; Total Net Flows to SOEs 2,574. ### Accounting, reporting and data quality - Government financial statements rely on national standards, are aggregated rather than consolidated, and remain unaudited at consolidated level. - NBG and major SOEs use IFRS. - Key gaps: especially land and non-financial assets identification and valuation. - Planned adoption of IPSAS in 2020 expected to strengthen PSBS reliability. ### Accounting reform status, requirements and risks - Reform objective: produce consolidated financial statements of central government in line with IPSASs; commitment to achieve for the 2020 year (MEFP). - Current reform approach: apply "most important provisions of the most relevant IPSASs" rather than full IPSAS compliance for 2020. - Key components (to be approved before 1 January 2020 or in course of 2020): - Recognition and Disclosure Instructions. - Chart of Accounts and Instruction on its Application (Chart finalized and ready for Jan 2020; Instructions on Application still being prepared). - Instructions on Preparation of Financial Statements to be finalized in 2020. - Immediate needs and risks: - Translation of relevant IPSAS into Georgian (latest Georgian translation: 2012 IPSAS Handbook; translation work with GIZ to finish by end-2019). - Finalize Recognition and Disclosure Instructions and Chart Instruction with illustrative double entries. - Training of public sector accountants and IT readiness for consolidation (World Bank offered technical assistance; decision needed on consolidation module). - Audit arrangements: SAO capacity to audit whole-of-central-government consolidated statements needs enhancement; legislation amendments required to mandate audit and presentation to Parliament. - Risks to 2020 application: delays in instructions translation/distribution, training, IT modules; likely substantial qualifications in early audits. ### Selected policy recommendations and timelines (selected actions preserved) - Public Sector Balance Sheet: - 1.1 Strengthen 2020 budget documentation by including returns on government assets, and an expanded assessment of PPAs (e.g. including maximum payment cashflow scenario). — Nov 2020 - 1.2 Include in (a) 2019 FRS the public sector balance sheet and (b) 2020 budget documentation an updated public sector balance sheet and long run fiscal projections. (a) Dec 2019 (complete) (b) Nov 2020 - 1.3 Accelerate stocktaking of public land and buildings. — Nov 2020 - Sectorization: - 2.1 Include a discussion of the sector classification in the 2019 FRS — Complete (Dec 2019) - 2.2 Review the sector classification of SOEs proposed by the mission — Jan 2020 - 2.3 Repeat the sectorization classification every three years — Jan 2023 - 2.4 Decide future legal, reporting and institutional framework for SOEs that are general government units — June 2020 - 2.5 Complete the assessment of the sector status of Marabda-Kartsakhi Railway — Jan 2020 - The 6 Large SOEs: - 3.1 Finalize and approve an SOE governance law by 2021. — Mid 2021 - 3.2 Include in the 2019 SFR the gross financing requirements of the big 6 SOEs — Nov 2019 - 3.3 Include in the 2020 SFR a risk analysis of the top 10 SOEs; align DSA assumptions; provide base-case macro assumptions to the SOEs; develop methodology for QFAs; include detailed assessment of gross financing requirements — Nov 2020 - 3.4 Investigate the need to include recapitalisations or restructurings of major SOEs in fiscal envelopes — May 2020 - Accounting Reform: - 4.1 Finalize the Recognition and Disclosure Instructions reflecting the recommendations in the June 2019 FAD mission report — Dec 2019 - 4.2 Finalize the draft Chart Instruction on its Application by introducing illustrative double entries — Dec 2019 - 4.3 Include provision in the Budget Code and the Law on State Audit Office to require presentation of audited consolidated financial statements of the central government to Parliament — Mar 2021 *Source: PREFACE, EXECUTIVE SUMMARY, Sections I–IV, Annexes I–III, 1geoea2020004* ### PREFACE _________________________________________________________________________________________ 6 ### PREFACE ### Mission and participants - A Fiscal Affairs Department (FAD) capacity development mission took place in Tbilisi from November 6–25, 2019. - Mission team: Jason Harris, Vincent Tang and John Zohrab (FAD), Viera Karolova (STA), Phillip Barry and Irina Grigoryan (short term experts). - Ministry of Finance interlocutors included: Mr. Nikoloz Gagua, Deputy Minister; Mr. Z. Tolordava, Head of Accounting and Reporting Department; Ms. E Guntsadze, Head of Budget Department; Mr. S Gunia, Head of Fiscal Risk Management Division; Mr. I. Katcharava, Deputy Head of Public Debt Management Department; Mr. M Gelashvili, Head of Macroeconomic Analysis Department. - Other Georgian counterparts met: Mr. David Tvalabeishvili, Deputy Minister; Mr. V. Tsintsadze, Ministry of Economy; Ms. E. Ghazadze, Deputy Auditor General, State Audit Office; Mr. V. Pkhakadze, Head of Monetary Statistics Division; Mr. V. Pkhakadze, Head of Balance of Payments Division; Ms. Tamar Baiashvili, Head of Monetary Policy Division, National Bank of Georgia. - SOE and public asset interlocutors included: Mr. Giorgi Tsimakuridze, Chief Financial Officer, Partnership Fund; Mr. Mamuka Skhiladze, Chief Financial Officer GSE; Ms. Salome Vashakidze, Head of Financial Reporting and Budgeting Division, UWS; Mr. Vasil Vashakidze, Head of Analytical Department, National Agency of State Property; Mr. Gocha Chagelishvili, Head of Financial Department, MK Railway; Mr. Omar Ogbaidze, Chief Financial Officer, GOGC; Mr. Irakli Titvinidze, Chief Financial Officer, Georgia Rail; Mr. Zviad Kilasonia, Head of Financial Department, Engurhesi. - The mission also met World Bank staff: Mr. Pierre Messali, Mr. Patrick Umah Tete, Ms. Natalie Manuilova, Ms. Irina Gordeladze, Mr. Joseph Melitauri. - Activities included workshops on the Public Sector Balance Sheet for the MoF and NBG and SOE financial analysis for the MoF Fiscal Risk Division. ### Acknowledgements - Mission expresses gratitude to the Ministry of Finance staff for organization and facilitation, in particular Shota Gunia and Maia Lavrinenko of the Fiscal Risks Division. - Acknowledges support from Mr. S. Cakir, IMF Resident Representative; Ms. N. Sharashidze and Ms. K. Danelia of the IMF office in Tbilisi; and interpreters Natia Jakhia and Maka Chkeidze. ### Purpose - Mission provided guidance on compiling, analyzing and using the public sector balance sheet. --- ### EXECUTIVE SUMMARY ### Overall public sector balance sheet position - Total public sector assets: 149 percent of GDP. - Total public sector liabilities: 81 percent of GDP. - Resulting public sector net worth: 68 percent of GDP. - Position: net worth places Georgia in the top third of countries in the IMF’s database. ### Key risks and vulnerabilities - Net foreign exchange exposure: around 50 percent of GDP; described as one of the largest amongst measured countries. - SOE sector: large relative to otherwise lean public sector assets; highly risky; a net draw on the budget. - Imminent SOE financing needs: around 18 percent of GDP. - Valuation concern: government non-financial assets valuation not in line with international standards and may be revised down in the future. ### Demographic and long-run fiscal pressures - Ageing: Georgia has one of the largest ageing rates; the number of working age people supporting each pensioner falling from four to two over the next 50 years. - Timing: demographic transition will begin as soon as the mid-2020s—within the medium-term horizon. - Existing PPA guarantees: set to peak in 2024. - Expected fiscal cost of residual PPA payments under baseline projections: 22 percent of GDP over 40 years. - Annual peak PPA payment under baseline: 0.6 percent of GDP. - Under plausible scenarios (key risks of foreign exchange domestic price exposure) these payments could double. ### Intertemporal fiscal sustainability - Current policy settings produce future fiscal deficits that exceed net worth, resulting in negative intertemporal net worth. - Intertemporal Net Financial Worth (INFW) estimates under different pension indexing options range from minus 122 percent of GDP to minus 178 percent of GDP. - New second pension pillar will increase the size of the balance sheet and calls for greater transparency around asset allocation and returns. ### Sectorization exercise and implications - Sectorization assessed 241 SOEs to determine whether they should be included in general government based on economic (market/non-market) characteristics. - Outcome: 196 SOEs are to be included within the general government sector, including ESCO, United Water Supply, Melioration of Georgia and the Partnership Fund. - Fiscal impact (2018): inclusion increases general government deficit by 0.3 percent of GDP and general government debt by 1.2 percent of GDP. - General government revenues and expenditures for 2018 will be revised up by 2.1 percent of GDP and 2.4 percent of GDP, respectively. - Debt impact could be 3.8 percent of GDP if MK Railway were reclassified as a 50 percent Georgian general government unit; clarification required on MK Railway’s Georgian government-controlled status. ### SOE sector performance and fiscal transfers - Underlying operating earnings among most of the big six SOEs are positive, but large recent and pending asset write-downs impair the sector’s financial position. - Only one of the big six SOEs is generating sufficient operating profits to cover its capital costs; others incur significant losses. - Aggregate fiscal draw: the sector has drawn around 6 percent of GDP from the government budget over the past five years. - Dividends: sector has not contributed dividends over that period. ### Accounting, reporting and data quality - Government financial statements rely on national standards, are aggregated rather than consolidated, and remain unaudited at a consolidated level. - NBG and SOE accounts use International Financial Reporting Standards (IFRS). - Key gaps: particularly regarding land and non-financial assets. - Planned adoption of IPSAS in 2020 expected to strengthen reliability of the PSBS. ### Accounting reform status and near-term needs - Chart of Accounts: ready. - Chart of Accounts instructions: not yet ready; need supplementation with examples of double entry inputs. - Recognition and Disclosure Instructions: yet to be translated into Georgian and adjusted to meet local requirements. - Timeframe: there is time to complete work before January 2020 start, but additional efforts are needed for training on instructions and IT systems preparation. --- ### SUMMARY OF RECOMMENDATIONS (SELECTED ACTIONS AND TIMELINES) Public Sector Balance Sheet - 1.1 Strengthen 2020 budget documentation by including returns on government assets, and an expanded assessment of PPAs (e.g. including maximum payment cashflow scenario). — Nov 2020 - 1.2 Include in (a) 2019 FRS the public sector balance sheet and (b) 2020 budget documentation an updated public sector balance sheet and long run fiscal projections. (a) Dec 2019 (complete) (b) Nov 2020 - 1.3 Accelerate stocktaking of public land and buildings. — Nov 2020 Sectorization - 2.1 Include a discussion of the sector classification in the 2019 FRS — Complete (Dec 2019) - 2.2 Review the sector classification of SOEs proposed by the mission — Jan 2020 - 2.3 Repeat the sectorization classification every three years — Jan 2023 - 2.4 Decide future legal, reporting and institutional framework for SOEs that are general government units — June 2020 - 2.5 Complete the assessment of the sector status of Marabda-Kartsakhi Railway — Jan 2020 The 6 Large SOEs - 3.1 Finalize and approve an SOE governance law by 2021. — Mid 2021 - 3.2 Include in the 2019 SFR the gross financing requirements of the big 6 SOEs — Nov 2019 - 3.3 Include in the 2020 SFR a risk analysis of the top 10 SOEs; align the DSA assumptions; provide base-case macro assumptions (e.g. exchange rate path) to the SOEs; develop a methodology for QFAs; and include a detailed assessment of the gross financing requirements of the major SOEs. — Nov 2020 - 3.4 Investigate the need to include recapitalisations or other restructurings of the major SOEs with unsustainable capital structures in the fiscal envelopes. — May 2020 Accounting Reform - 4.1 Finalize the Recognition and Disclosure Instructions reflecting the recommendations in the June 2019 FAD mission report — Dec 2019 - 4.2 Finalize the draft Chart Instruction on its Application of the Chart of Accounts by introducing illustrative double entries — Dec 2019 - 4.3 Include provision in the Budget Code and the Law on State Audit Office to require presentation of audited consolidated financial statements of the central government to Parliament — Mar 2021 --- *Source: PREFACE and EXECUTIVE SUMMARY, 1geoea2020004* ### 3. This report updates, refines and extends Georgia’s PSBS, covering the period 2012 ### 3. This report updates, refines and extends Georgia’s PSBS, covering the period 2012 to 2018. ### A. Overview and purpose - Updates, refines and extends Georgia’s Public Sector Balance Sheet (PSBS) for 2012 to 2018, consolidating balance sheets of the central government, local governments, central bank and non-financial state-owned enterprises (SOEs). - Enables international and intertemporal assessment of the balance sheet to highlight vulnerabilities and opportunities for improved management. - Uses IMF Public Sector Balance Sheet database (launched 2019) for international comparisons. ### B. 2018 Public Sector Balance Sheet — key statistics (from Table 1.1) - Consolidated Public Sector totals (Percent of GDP): - Total assets: 149.3 - Nonfinancial assets: 101.5 - Fixed assets: 67.1 - Land and minerals: 27.8 - Other nonfinancial assets: 6.6 - Financial assets: 47.8 - Currency, deposits, SDRs (financial assets): 11.5 - Debt securities (financial assets): 23.1 - Equity/invest fund shares (financial assets): 0.0 - Other financial assets: 13.3 - Liabilities (consolidated): 81.3 - Currency, deposits, SDRs (liabilities): 20.5 - Debt securities and loans (liabilities): 53.6 - Equity/invest fund shares (liabilities): 0.0 - Insurance, pension, and standardized guarantee schemes: 3.6 - Other accounts payable: 3.6 - Net financial worth (financial assets less liabilities): -33.5 - Net worth (assets less liabilities): 68.0 - Revenue: 33.3 - Expense: 29.1 - Net lending/borrowing: -0.5 - Narrative summary points: - Georgia’s public sector has an estimated net worth of 68 percent of GDP. - Public sector assets are estimated at 149 percent of GDP; liabilities at 81 percent of GDP. - Non-Financial Assets: 102 percent of GDP (infrastructure, buildings, public land, SOE fixed assets such as railways, powerplants, water network). - Financial Assets: 48 percent of GDP (including General Government cash deposits of 5 percent of GDP and NBG-held debt securities for FX management of 19 percent of GDP). - Liabilities: 81 percent of GDP (government debt securities and loans 43 percent of GDP; currency and deposits owed by NBG 21 percent of GDP). ### C. Consolidation and cross-holdings - Cross-holdings amount to 24 percent of GDP (consolidated out of the PSBS). Examples include: - On-lending portfolio owed to Central Government by SOEs: 5.7 percent of GDP. - Government deposits at the NBG. - Equity value of SOEs owned by the Central Government. - Cross-holdings have nil net impact on consolidated PSBS but can transmit risks across sectors. ### D. Comparisons and relative position - Net worth of 68 percent of GDP places Georgia in the top third of countries in international comparisons. - Net financial worth of minus 34 percent of GDP is in the top quartile of comparators. - Georgia’s gross assets and liabilities are relatively lean among comparator countries. - General government liquidity exposure and gross financing needs are described as relatively comfortable. ### E. Evolution of the balance sheet (2012–2018) - Over six years, balance sheet expanded by around 20 percent of GDP: - Assets increased from 132 percent of GDP (2012) to 149 percent of GDP (2018). - Liabilities increased to 81 percent of GDP in 2018. - Net worth remained relatively stable around 68 percent of GDP. - Drivers of change in net worth (2012 base rescaled to 2018 GDP): - Cumulative government deficits: GEL 2b, or 4.9 percent of GDP. - Cumulative public corporation deficits: 5.6 percent of GDP. - Capital expenditure: government invested 16 percent of GDP; public corporations invested 8 percent of GDP (contributed to public capital stock ~67 percent of GDP at end-period). - Revaluation and impairments: impairments at Georgia Rail including a GEL380m write-down and cumulative GEL1 billion impairment on certain projects; MK railway project valued at GEL1.6b (4 percent of GDP) currently in severe negative equity. - Currency depreciation: cumulative 60 percent depreciation from 1.66 GEL/USD (2012) to 2.67 (2018), reducing net worth by 6 percent of GDP over six years; GEL further depreciated to 2.95 against the dollar during 2019. - Other revaluations and unexplained changes improved net worth by over 20 percent of GDP (examples: increased value of sub-soil assets; inclusion of public land holdings added GEL3.4b in 2018 terms). ### F. Liquidity, foreign exchange exposure and valuation risks - Net foreign exchange exposure (excluding central bank reserves) close to 50 percent of GDP — one of the largest among measured countries. - Majority of FX exposure in USD; significant exposure in euros on-lent to public corporations. - Liquidity exposure: general government liquidity compared favorably with short-term liabilities in international comparisons. ### G. On-lending and Public Corporation indebtedness - Government on-lending portfolio: 5.7 percent of GDP in 2018 (up from 3.5 percent in 2012); 97 percent denominated in foreign currency in 2018. - Valuation changes since 2015 increased loan values by 0.8 percent of GDP. - Concentration: 80 percent of outstanding on-lending owed by four companies — United Water, GSE, Energotrans (GSE subsidiary), and Engurhesi. - Restructuring: 15 percent of current value of outstanding loans subject to rescheduling (payment extensions of principal and interest). - Concerns highlighted about indebtedness of Energotrans and United Water (including prior restructurings in 2014 and 2015). ### H. Financing needs and SOE gross financing requirements - General Government gross financing needs projected to rise from 5.7 percent of GDP in 2018 to 7.8 percent of GDP by 2020. - Approximately 60 percent of these financing needs denominated in foreign currency. - Major SOEs’ Gross Financing Requirements (next three years): - Estimated total: GEL 7.6b (18 percent of GDP), with around half expected to be raised from the private sector. - Specific planned/sought external amounts include USD350m and EUR150m by Georgian Oil and Gas Corporation (GOGC) and USD500m by Georgia Rail. - FX mismatch: major SOEs heavily exposed to depreciations due to majority of debt in foreign currency; a 30 percent depreciation would increase SOE sector losses by 4 percent of GDP. ### I. Public Corporations’ operating performance - Public Corporations sector ran a positive net operating balance (before devaluations and impairments): - Average net operating balance: 250m GEL since 2012. - Net operating balance defined as total revenues less operating expenses (includes depreciation; excludes impairments and currency depreciation effects). - Performance is heterogeneous: several large companies with positive operating balances offset by many unprofitable companies. - Further financial analysis of selected public corporations provided in Section III and Annex III. ### J. Data sources, compilation and methodological notes (Box 1.1) - Main data sources and compilation steps: - General Government: IMF Government Financial Statistics (GFS) and Treasury Financial Statements; municipal fixed assets and National Agency for State Property holdings approximated and merit improved estimation; accrued pension liabilities not regularly reported. - Financial Public Corporations: NBG is the only entity classified as a financial public corporation; data from NBG Annual Report and IMF Monetary Survey. - Non-Financial Public Corporations: SOE financial statements and aggregate data compiled by the Fiscal Risks Division of the Ministry of Finance (MoF). - Classification: mapping of financial reports to GFSM standards requires judgment, especially for public corporations; additional breakdowns by liquidity and domestic/foreign currency denomination recommended. - Consolidation: cross-holdings consolidated out (noted major consolidations between Non-Financial Public Corporation equities and debt/receivables held by General Government and General Government deposits at NBG). - Production note: once compiled, Georgia’s PSBS can be updated relatively quickly; anticipated improvements from accounting reform and movement to IPSAS. *Source: Staff estimates.* ### 17. The equity value of the Public Corporations Sector has halved relative to GDP over ### 1geoea2020004 - 17. The equity value of the Public Corporations Sector has halved relative to GDP over ### Decline in Public Corporation Equity - Public Corporation equity rose as a share of GDP from 2012 to 2014, then fell by nearly 10 percent points until 2018. - Large equity injections by government starting in 2013 were worth 3.8 percent of GDP (1.6b GEL). - These injections were offset by large impairments valued at 3.8 percent of GDP, particularly at GSE, Georgia Railway, and Energotrans in 2017 and 2018. - Further losses from MK Railways and exchange-rate driven revaluations contributed to additional reductions in equity. - Percent of GDP figures are as a share of 2018 GDP. ### Returns to Government Across Asset Classes and Public Corporations - Government’s cost of borrowing: 3 percent. - Return on holdings of cash: 5.6 percent in 2018. - Excess funds from financing activities are held in long term deposits in commercial banks. - Returns on SOE assets: 2.4 percent in 2018; averaged 2.5 percent per annum between 2012 and 2018. - Comparison sample average: 1.9 percent (sample of 14 countries). - 75th percentile benchmark: 4 percent. - Note: SOE asset returns reported are before impairments and depreciation effects. - Returns on equity: averaged 5.1 percent per annum (also before substantial impairments). - Government’s on-lending portfolio return: 1.7 percent in 2018. - Around a third of the loans in the portfolio have been restructured. - These returns are directly transferred to cover the external financing costs of the original loans. - Calculation note: interest payments over outstanding principal. ### Asset Reporting and Public Land - Returns on fixed assets (e.g., rent on government buildings) are not separately recorded within government revenues. - National Agency for State Property stocktaking (begun in 2017) is set to identify public land over some 700,000 hectares and other public buildings not currently managed by budgetary central government units. - Conclusion of stocktaking could identify underutilized resources that could generate revenues or be suited for privatization. - Recommendation: FRS should publish the size and use of the main budgetary contingency fund and how it is used for fiscal risk management. ### Second Pillar Pension Fund: Scale and Risks - Established: January 2019. - Assets accumulated in first 12 months: over 400m GEL. - Projected to rise to over 60 percent of GDP by 2050. - Risk: returns could be jeopardized if funds are used for economic projects or financing activities not seeking to maximize financial returns. - The experience of the Partnership Fund is noted as salient. ### Demographics and Intertemporal Balance Sheet - Current Net Worth of Georgia is positive, but fiscal pressures likely to build over coming decades. - Old Age Dependency Ratio trend: from one old-aged person supported by five working-age adults today to one old-aged person supported by two working-age adults in 50 years’ time. - UN Population Projections (population aged over 65 share): - Central: rise from 15 percent today to 20 percent in 2069. - Low scenario: could double to 29 percent in 2069. - Share of population eligible for pensions under current policy (women above 60, men above 65): - Current: 18 percent. - Projected to rise to between 27 percent by 2069 under the central population scenario. - Healthcare and pension spending pressures are heavily dependent on age structure; non-demographic factors can further raise healthcare spending pressures. ### Fiscal Projection Assumptions and Drivers - Fiscal projections modeled on unchanged policy; pensions and healthcare driven by demographic changes. - Main drivers: - Pension indexation: three policy variants modeled (see Table 1.4). - ‘Second Pillar’ pension: additional annual contributions modeled to ramp up to an estimated steady state of 0.7 percent of GDP per year after 10 years, assumed additional spending. - Healthcare pressures: projected based on demographic changes only. - Power Purchase Agreements (PPAs): aggregate government payments modeled based on power output and energy prices. - Revenues assumed to stay constant as a share of GDP. - Table 1.4 pension variants (policy summary): - New Pensioners: Men 65-69; Women 60-69 (variants list these ranges). - Inflation treatment and minimum GEL 20 increase in Variant 2; Inflation + earnings in Variant 3; Old pensioners over 70 treated as Inflation + Earnings across variants. ### Projected Fiscal Outcomes and Debt - Under median UN population projection, demographic pressures increase the primary deficit by between 1.9 percent (policy variant 1) and 3.3 percent of GDP (policy variant 3) by 2069 depending on pension policy. - Government debt could increase from 2018 level of 45 percent of GDP up to between 88 percent to 122 percent of GDP depending on pension policy. - GEL 20 minimum increase impact: raises spending for only the first decade of indexation, falling back to an additional 0.1 percent GDP by end of 50-year projection relative to case without GEL 20 increase. ### Intertemporal Net Financial Worth (INFW) - Intertemporal net financial worth estimated to fall: - From minus 35 percent of GDP to minus 122 percent under pension variant 1. - Pension variant 3 could erode INFW to minus 178 percent of GDP. - Interpretation: INFW is current net financial worth plus discounted future flows of primary balances; negative INFW implies future fiscal pressures implied by current policy would further erode public sector wealth if not adjusted. ### Power Purchase Agreements (PPAs) and Fiscal Risks - PPAs: more than 150 hundred in total; commit government to ensuring minimum revenues/returns to power generators over a 50 year plus period. - Aggregate exposure worth around 65 percent of 2018 GDP in total (maximum exposure), or a discounted value of 27 percent of 2018 GDP. - Under baseline assumptions, majority of revenue guarantees expected to be covered by customer payments, leaving a residual funding gap ultimately covered by government of 22 percent of 2018 GDP (discounted value of 12 percent of GDP). - Fiscal risks: - Foreign exchange exposure: a 30 percent depreciation would double the government’s exposure. - Lower domestic prices risk as market deregulates and renewable prices fall over the longer term. - PPAs highlighted in 2016 Fiscal transparency Evaluation and Fiscal Risks Statement (FRS). ### Sensitivity to Population Projections - UN ‘low’ and ‘high’ projections sensitivity: - Under ‘low’ population projections, INFW would reduce by approximately a further 5 percent of GDP. - Under ‘high’ population projections, INFW would increase by approximately 2 percent of GDP. - Impact on projected debt in 2069 relative to median variant: +25 percent of GDP (high) / -15 percent of GDP (low). - These relatively modest INFW changes reflect divergence of population variants mainly after two decades when impacts are heavily discounted. ### Fiscal Adjustment Illustration - To maintain current net worth, Georgia could make fiscal adjustments over the next 50 years through spending reductions or revenue increases. - Figure 1.17 illustrates the amount of fiscal tightening required each decade starting in 2025 to maintain INFW at the static level. ### Policy Recommendations (numbered) 1.1: Make improvements to the 2020 budget documentation through inclusion of: - Assessment of return on government assets and equity holdings; - Expanded analysis of PPAs, including maximum payment cashflow scenario, and risks relating to foreign exchange and energy prices; - Disclose size and utilization of contingency funds, setting out its role in the government’s fiscal risk management strategy. 1.2: Publish the public sector balance sheet with 2020 budget documentation: - Publish public sector balance sheet in 2019 FRS, and updated public sector balance sheet for 2020 budget documentation, with discussion on net exposures to foreign exchange and liquidity risks; - Develop and include long run fiscal projections, including impact of policy decisions, highlighting medium-long term demographic changes. Discuss implications for long term fiscal pressures and forthcoming policy decisions on pensions. 1.3: Improve wider balance sheet management through: - Accelerate stocktaking of public land and buildings, reporting on progress in 2020 FRS. - Examining debt issuance and asset management policies of both government and SOEs with a view to reducing foreign exchange and liquidity risks. ### Sectorization: Rationale, Methodology, and Results - Immediate reason: structural benchmark of the Extended Fund Facility (EFF) requiring a complete list of SOEs qualifying as public corporations and SOEs qualifying as general government units by end-September 2019 (deadline later requested to be reset to end-March 2020). - Underlying reason: ensure non-market SOE activities are transparent within an appropriate framework so fiscal risks from non-market activities are captured in general government fiscal statistics. - Methodology (GFSM 2014-based): - Distinguish general government vs public corporations by whether entity operates on a market or non-market basis. - Entities acting like market producers -> public corporation sector. - Entities not charging economically significant prices -> general government sector. - Economic substance prevails over legal form. - SOEs classified as general government units if they: - Don’t act as independent institutional units (act as government agents); and/or - Do not provide goods and services at economically significant prices; and/or - Depend on regular financial assistance from the government. - Mission examined 241 SOEs identified by MoF: - 112 SOEs controlled by central government. - 73 SOEs controlled by local governments (municipalities). - 56 subsidiaries of SOEs. - Legal forms: JSCs - 34; LLCs - 204. - Financial statements for 2018 available only for 63 largest SOEs operating mainly in transport, electricity, gas and water production, and trade. - These 63 accounted for shares in total production costs of all SOEs (for which data were available) of 29.5 percent, 16.1 percent, and 8.7 percent respectively. - Out of 178 SOEs without financial statements, 54 deemed inactive reporting zero employees. - Classification results: - 196 SOEs classified as general government units. - 44 SOEs classified as public corporations. - One SOE, Marabda Kartsakhi Railway (MKR), required further assessment at IMF headquarters. - Impact on 2018 fiscal aggregates (Table 2.1) measured according to GFSM 2014, excluding MKR and including 50 percent of MKR for illustrative purposes: - General Government Debt: +1.2 (excluding MKR) / +3.8 (including 50 percent of MKR) percent of GDP. - General Government Balance: -0.3 / -0.3 percent of GDP. - General Government Revenue: +2.1 / +2.1 percent of GDP. - General Government Expenditure: +2.4 / +2.4 percent of GDP. *Source: MoF and IMF staff estimates; IMF staff estimates (figures and projections as presented in source).* ### 40. Based on available information, and in agreement with the MoF, SOEs were ### 1geoea2020004 - 40. ### Classification of SOEs as General Government Units — Key Findings - 18 SOEs did not act as autonomous institutional units: they acted on behalf of the government (ESCO and the Partnership Fund), sell most of their output to government, or are the only supplier to government without going through an open competition. Most significant in this category: Melioration of Georgia, State Construction Company, State Food Company, and Construction Company - Builder 2011. - 68 SOEs did not provide goods and services at economically significant prices as described in Box 2.1. Of these: - 60 SOEs mainly provide health services financed by government health programs; payments were typically not linked to services provided but to indicators such as number of registered patients, and thus could not be classified as sales for the market/non-market test. - Other significant companies failing the market/non-market test: Mountain Resort Development Company, Mechinazatori, Batumi auto transport, and Rukhi Trade Center. - 16 SOEs depended on regular financial assistance from government (subsidies, capital transfers, equity injections), lacking the capacity to carry out activities using own resources. Most significant: United Water Supply Company (UWSC), Black Sea Arena Georgia, and Football Club Beacon. - 23 municipal-owned SOEs engaged in loss-making activities requiring government support lacked data to conduct the market/non-market test (examples: Tbilservice Group, Kobuleti water, Communal Framing, Utility Service of Batumi). - Data not available for 71 small SOEs; majority (48) inactive. Classified into general government for prudential reasons. Of the 23 active SOEs in this data-deficient group: 8 owned by municipalities, 3 by the MoESD, 2 by the Partnership Fund (Startup and Lycan residence), remainder owned by other SOEs. ### Box 2.1 — Criteria for Determining Whether an Entity is an SOE (Preserved Criteria) - Institutional unit criteria (entity should): - be entitled to own goods or assets on its own right; - be able to exchange ownership of goods or assets in transactions with other institutional units; - be able to take economic decisions and engage in economic activities for which it is responsible and accountable; - be able to incur liabilities on its own behalf, to take on other obligations and to enter into contracts; - be able to draw up a complete set of accounts, comprising accounting records covering all its transactions and a balance sheet of assets and liabilities. - Qualitative indications an entity is not an institutional unit: - dedicated provider of ancillary services to government → non-market producer → consolidate within government; - sells most output to government or is only supplier to government without open competition → output and price determined by government → consolidate within general government. - Market/non-market (50 percent) test (quantitative criterion): - Revenue from sales > 50 percent of production costs over at least 3 years to be classified in public corporation sector. - Sales should exclude: (i) payments receivable from government unless a real purchase of goods/services equivalent to other producers; (ii) compulsory payments that are de facto taxes; (iii) holding gains, property income, investment grants, capital transfers. - Production costs include compensation of employees, use of goods and services, consumption of fixed capital (CFC), other taxes on production, and return on capital (return on capital may be measured as net interest expenditure). - Dependence on regular financial assistance: - Even if 50 percent test passed, inability to function without regular government transfers, capital injections not yielding market returns, payment of guaranteed debt, debt cancellations/assumptions, large accumulated losses/arrears/overdue debt → indicates non-market behavior and requires comprehensive analysis. ### Mission’s Specific Classifications and Reasons (Selected Significant SOEs) - Partnership Fund: - Legacy assets (GOGC, GR, GSE, ESCO) produce no output; shareholder rights (except dividends) exercised by MoESD. - Supervisory board chaired by Prime Minister comprises only ministers and no independent members; board acts as government members rather than as fiduciaries to the Partnership Fund. - Non-commercial government policies have driven investments, constraining portfolio management; portfolio now highly illiquid and inconsistent with mandate of projects with clear exit strategy. - Prospective overall performance inconsistent with return on equity expected from a commercial entity. - ESCO: - Owner Partnership Fund considers ESCO a non-commercial regulatory body and agent of government implementing cross-subsidization and signing PPAs. - Very thinly capitalized; implausible to assume PPAs risks autonomously. - UWS (United Water Supply Company): - Consistently made significant losses; large cumulative losses of 1.2 percent of GDP and unpaid payables of 0.1 percent of GDP. - Survives because of additional subsidies and equity injections; current intention to establish a PPP to operate UWSC assets indicates lack of confidence in future commercial viability. ### Assessment of MKR (Marabda-Kartsakhi Rail) - Mission assessment: MKR is currently a non-market SOE. - Key facts: - Cost overrun on the railway project: from USD 200 million estimated in 2007 to USD 775 million estimated at present. - Current agreement to transfer assets and liabilities of MKR to a JV between GR and Azerbaijan Railways (yet to be established) appears inconsistent with JV being commercially viable. - For JV commercial viability would require large upward revaluation of assets and/or a large injection of equity and/or conversion of debt into equity or quasi-equity. None are in prospect; assets might be impaired under international accounting standards. - No realistic basis at present to assess MKR as a commercially viable project; mission did not conclude whether risks are borne and control is solely/predominantly by Georgia, solely/predominantly by Azerbaijan, or jointly 50/50—this requires more extensive assessment. ### Way Forward — Fiscal Risks Statement and Timelines - Revised FRS should include a sub-section on the sectorization exercise that: - explains why the exercise was important and needed; - summarizes criteria for classifying entities as public corporations or general government units; - indicates that possibly as many as 196 SOEs will be classified as general government units; - summarizes the possible impact of sectorization on fiscal aggregates as per Table 2.1, excluding MKR; - identifies larger SOEs that could be classified as general government units; - notes that status of MKR is uncertain at this stage. - Submission timeline for changes to sector classification: - Authorities should submit suggested changes based on new information to IMF by end-December 2019 to meet structural benchmark deadline of end-March 2020. - After March 2020, authorities should continue monitoring public entities regularly and make reclassifications as appropriate. ### PFM System Consequences — Options and Decisions - Main PFM issues to decide for SOEs classified as general government units: legal status, financial accounting and reporting, disclosure in budget process, and treasury coverage. - Two main options (decision desirable before end-March 2020): 1. Convert SOEs classified as general government units into Legal Entities of Public Law (LEPLs). - Advantage: existing frameworks for LEPL financial accounting, reporting, disclosure, and treasury coverage can be applied straightforwardly. - Disadvantage: SOEs would have to be wound up and all assets and liabilities transferred to new LEPLs; process could be complex and time-consuming. 2. Retain current legal status of SOEs classified as general government units. - Advantage: avoids winding up SOEs and transferring assets/liabilities. - Disadvantage: would require amending the Law on Accounting, Reporting and Auditing to exclude such SOEs, amending the Budget Code to apply LEPL provisions to such SOEs, and issuing decrees/regulations/instructions to give effect — making these amendments could be complex and time-consuming. - Decision required on MKR status desirably before end-March 2020; assessment depends on substantive control analysis by Azerbaijan vs Georgia. ### Box 2.2 — Practical Application of the Market/Non-market Test (Preserved Practical Approach) - Classify into government sector if market/non-market test holds below 50 percent for 3 years in a row. - If unit failed test for less than 3 years and is expected not to pass in following years → classify in government sector. - If test results are very volatile → conduct comprehensive analysis of financial results, relations with government, and business plan. - Minor fluctuations or one-off exceptional cases in sales/production cost ratio do not necessarily require reclassification. - For units already in government sector: - Reclassify to public corporations only when market/non-market test holds above 50 percent for at least 3 years, or unit passed test in preceding year and strongly expected to hold it in near future. - For newly established public enterprises with no historical data, classification should be based on a realistic business plan; if merger of previous units, use prior results as indication. - Recommendation to apply sectorization test every three years to all public entities, with first comprehensive reassessment as soon as required data are available. ### Recommendations (Preserved Numbering) - 2.1: Add a sub-section to the FRS associated with the 2020 state budget in line with paragraph 43. - 2.2: Review the sector classification of SOEs proposed by the mission and, if information or data suggesting changes become available for meeting the structural benchmark, consult with the IMF in the course of December 2019 – January 2020. - 2.3: Ensure availability of data and relevant information on all SOEs to enable future examination of their sector classification, and apply the sectorization test every three years to all public entities based on Box 2.2., with first comprehensive reassessment as soon as all required data are available. - 2.4: Decide on the main option for treating SOEs classified as general government units in terms of legal status, financial accounting and reporting, disclosure in budget process, and treasury coverage, and develop a road map for implementing it. - 2.5: Complete further work required to conclude whether MKR is a general government unit of Georgia, of Azerbaijan or of both jointly. ### The Six Large SOEs — Overview (Key Characteristics and Performance Indicators) - Engurhesi: - Owns and operates the 1,300MW Enguri dam, water reservoir and related facilities. - Dam accounts for around 40 percent of the country’s generation. - Provides around 40 percent of output to Abkhazia free of charge; sells rest at prices well below market. - Achieved an average RoE over last seven years of negative 2 percent p.a. - Georgian Oil and Gas Company (GOGC): - Purchases/sells gas from Azerbaijan under government-to-government agreement; owns and operates a 230MW thermal power station (Gardabani 1), with second unit due to be online by end of the year. - Consistently profitable and financially stable; average RoE over last seven years of 14 percent p.a. - Georgian Railway (GR): - Owns/operates the rail network; main assets include land, rail, rolling stock, truck fleet, logistics terminal, freight-forwarding business. - Freight accounts for 95 percent of revenue; around 60 percent of freight is international transit freight. - Freight volumes declined by a half over last six years, leading to a major asset write-down in 2018 equivalent to 2 percent of GDP. - Under current agreement, GR supposed to own 50 percent of MKR operating JV once construction finished; GR’s future as independent commercial entity unclear if it assumes 50 percent of MKR. - Georgian State Electrosystem (GSE): - Provides electricity transmission and dispatch services. - Investing in projects to improve security of supply and increase capacity. - Has been in bankruptcy regime for a number of years but recently received regulatory approvals which may enable it to become profitable on a sustainable basis; likely to be recapitalized to exit bankruptcy and become an independent commercial entity. - Marabda-Katsakhi Rail (MKR): - Constructing a 200km railway line and associated terminals from Marabda to Kartsakhi; projected completion by end of 2020 (originally expected finished by 2013 when construction commenced in 2011). - Liabilities currently well in excess of assets; both supposed to be transferred to an operating JV after construction is complete. - United Water Supply Company (UWS): - Provides drinking water and wastewater services outside Tbilisi. - Approximately 40 percent of company’s 335,000 customers are unmetered; high water losses of up to 75 percent. - Made losses in every one of the last seven years and required regular equity injections from government. *Source: IMF mission report excerpt.* ### 53. The six large SOEs experienced a significant deterioration in their financial ### 53. The six large SOEs experienced a significant deterioration in their financial ### Financial performance (2012–18) - Average Return on Assets (RoA) fell from 3.8 percent in 2016 to negative 4.8 percent in 2018. - RoA is calculated as EBIT/Average Total Assets (post-asset write-downs). - Return on Equity (RoE) is calculated as NPAT/Average Equity (post asset-write-downs and post-currency depreciation effects). - EBITDA/Assets reflects operating performance only. - Average leverage (D/(D+E)) increased to 88 percent in 2018, the highest level in the last seven years. - Estimated level of recapitalization required to restore equity to 40 percent debt/total liabilities could be, on end-2018 figures, around 7 percent of GDP (working assumption includes allowance for 50 percent of MKR debt). ### Asset write-downs and drivers of deterioration - Much of the recent financial deterioration resulted from asset write-downs, reflecting a permanent downgrade in expected future revenue generation. - Major specific write-downs recorded: - Georgia Rail: 2 percent of GDP asset write-down (GEL691m) in 2018 due to permanent decline in traffic volumes. - Tblisi bypass: near total write-off of GEL400m in 2017 following the new government’s decision to halt the project. - Energotrans (GSE subsidiary): write-down GEL250m in 2017 (likely to be reversed in 2021 following a regulatory decision). - UWS: GEL200m restated back to 2015; further write-downs may occur at the next revaluation in 2023. - MK Rail’s assets could be heavily impaired given project delays, testing problems (lower than anticipated speeds), concerns about carrying oil and oil products, and declining rail traffic volumes elsewhere. ### Operating-level performance across SOEs - GOGC, Georgian Rail and GSE deliver strong and reasonably stable cashflows at the operating level. - UWS is not covering its operating expenses. - MKR has yet to generate any revenue. - Engurhesi delivers positive operating returns. - Operating (cash) returns exclude depreciation and the cost of capital (interest and return on equity). - Only GOGC is generating returns close to covering its cost of capital and thereby adding economic value. ### Aggregate financial metrics and projections (selected figures from Table 3.1) - Revenue (Lari, M) by year: 2012: 1,013; 2013: 1,055; 2014: 1,135; 2015: 1,350; 2016: 1,374; 2017: 1,370; 2018: 1,389; 2019: 1,454; 2020: 1,823; 2021 (projected): 2,041; 2022 (projected): 2,138. - EBITDA (Lari, M) by year: 2012: 215; 2013: 111; 2014: 109; 2015: -465; 2016: 538; 2017: 546; 2018: 528; 2019: 538; 2020: 546; 2021: 528; 2022: 465. - Total assets (Lari, M) by year: 2012: 6,239; 2013: 6,595; 2014: 7,171; 2015: 7,797; 2016: 8,513; 2017: 8,248; 2018: 7,845; 2019: 8,513; 2020: 8,248; 2021: 7,845; 2022: 8,839. - Net worth (Lari, M) by year: 2012: 2,751; 2013: 2,851; 2014: 2,913; 2015: 2,367; 2016: 2,109; 2017: 1,666; 2018: 951; 2019: 703; 2020: 872; 2021: 1,077; 2022: 1,362. - RoA (EBIT/Assets) by year: 2012: 3.4%; 2013: 1.7%; 2014: 1.3%; 2015: -5.6%; 2016: 3.8%; 2017: -0.9%; 2018: -4.8%; 2019: 2.9%; 2020 (proj): 3.7%; 2021 (proj): 6.1%; 2022 (proj): 6.9%. - RoE (NPAT/Equity) by year: 2012: 5.5%; 2013: 1.0%; 2014: 0.4%; 2015: -25%; 2016: -11%; 2017: -40%; 2018: -76%; 2019: -22%; 2020 (proj): 9%; 2021 (proj): 21%; 2022 (proj): 27%. - EBITDA/Average assets by year: 2012: 3.3%; 2013: 1.6%; 2014: 1.5%; 2015: -5.7%; 2016: 6.4%; 2017: 6.8%; 2018: 6.3%; 2019: 5.0%; 2020 (proj): 6.0%; 2021 (proj): 8.8%; 2022 (proj): 9.8%. - Capital structure (D/(D+E)) by year: 2012: 56%; 2013: 57%; 2014: 59%; 2015: 70%; 2016: 75%; 2017: 80%; 2018: 88%; 2019 (proj): 92%; 2020 (proj): 91%; 2021 (proj): 88%; 2022 (proj): 85%. - Liquidity (EBITDA/interest) by year (note n/a for earlier years): 2018: 9.9; 2019: 2.7; 2020 (proj): 6.1; 2021 (proj): 4.4; 2022 (proj): 2.2; 2023 (proj): 2.7; 2024 (proj): 3.6. (Table labels indicate measure excludes gains/losses on foreign exchange movements.) - Aggregate net worth of the six large SOEs declined from around GEL2.8b to under GEL1b over the last 6 years. - Liquidity improved in 2018, but average interest coverage ratio is projected to decline to only 2.2 times in 2020. ### Company projections and risks to outlook - Companies project aggregate ROA to increase to 6.9 percent by 2022. - Companies project average revenues to grow at an annual average rate of 12 percent, described as optimistic and 50 per cent higher than the projected rate of growth of nominal GDP. - Some revenue increases may be justified (e.g., GOGC commissioning Gardabani 2 thermal powerplant), but overall projected aggregate revenue growth contrasts with 1 percent growth achieved over the last two years. - Even with optimistic projections, average leverage is expected to stay above 80 percent throughout the forecast period. - MK Rail had net worth of negative GEL668m at end-2018; further major write-down likely. - Priority recapitalization needs: MKR, GSE and UWS (all with negative worth); Georgia Rail may also require assistance, especially if it assumes 50 percent of MKR. ### Fiscal Risks Statement (FRS) and transparency - Publication of the FRS improved transparency of government finances and awareness of SOE sector risks. - FRS development timeline: - First produced and published in 2015 (focus on macro environment). - 2016: financial information on SOEs first included. - 2018: quantitative risk assessment of major SOEs added. - 2019 FRS (associated with 2020 draft Budget) to include PPPs, SOE balance sheets, sectorization and updated risk analysis for major SOEs. - Suggested improvements to the 2020 FRS: - Expand risk analysis coverage to include Georgia Post, Tbilisi Transport, Union of Georgian Airports and Mountain Resorts Development so top ten SOEs are included. - Align risk scenario assumptions across DSA, macro scenarios and SOE analysis; have at least one common scenario. - Provide base-case assumptions to SOEs on GDP, inflation and forex for consistent financial forecasts. - Include a detailed and comprehensive assessment of gross financing requirements of SOEs over the next three years. - Develop a comprehensive methodology for identifying and assessing quasi-fiscal activities (QFAs); current approach of asking SOEs is inadequate. - FRS accompanying the 2020 draft state budget discloses two QFAs: Enguri’s provision of free electricity to Abkhazia and GOGC’s provision of below-market-price gas. Other QFAs may include subsidized employment by Georgia Rail and Enguri’s supply of electricity to areas outside Abkhazia at below-market prices. MoF will collect information on QFAs and develop an action plan. ### Net fiscal transfers and exposures - Over the last five years SOEs added 6 percent of GDP to General Government expenditures via GEL1.3b capital injections and GEL1.1b of on-lending. - SOEs have paid little or no dividends on the government’s GEL4.6b equity investment. - Net financial flows from government to SOEs (GEL M) by year: - 2014: Capital Injections 166; Net lending 144; Subsidies 5; less Dividends 0; Total Net Flows to SOEs 314. - 2015: Capital Injections 232; Net lending 258; Subsidies 12; less Dividends 0; Total Net Flows to SOEs 501. - 2016: Capital Injections 210; Net lending 311; Subsidies 15; less Dividends 11; Total Net Flows to SOEs 535. - 2017: Capital Injections 596; Net lending 148; Subsidies 34; less Dividends 10; Total Net Flows to SOEs 777. - 2018: Capital Injections 143; Net lending 279; Subsidies 4; less Dividends 3; Total Net Flows to SOEs 446. - Total 2014-18: Capital Injections 1,347; Net lending 1,139; Subsidies 91; less Dividends 3; Total Net Flows to SOEs 2,574. - Impact of 30 percent depreciation of the Lari on net worth (GEL M): Engurhesi -53; Georgia Rail -348; GOGC -148; GSE -472; MK Rail (50%) -390; UWS -410; Total -1,821. ### Financial risks and gross financing requirements - Major financial risks: - Forex risks: most debt denominated in foreign currencies; estimated that a 30 percent depreciation of the Lari would reduce major SOEs’ net worth by around 4 percent of GDP. Most affected: GSE, UWS, MK Rail and Georgia Rail. GOGC has partial hedge; Engurhesi has relatively low debt. - Valuation risks: downside risks to assets of MK Rail, Georgia Rail and UWS; possible upside if Enguri and GOGC move to market pricing. - Political risks: pressure to subsidize prices, provide employment (especially Georgia Rail), and undertake non-commercial investments. - Refinancing risks: gross refinancing and new financing requirements totaling around GEL7.6b (18 percent of GDP) over the next three years (Table 3.4); around 45 percent expected from private sector, remainder through central government. - Selected entries from Gross Financing Requirements (summary format preserved from table): - Engurhesi: GEL100M outstanding, 10yr, principal/refinancing requirements listed as 10/10/10 across years (table format). - GOGC: USD250m Eurobond outstanding due 2021, 6.75% current; 3,5% new; principal and refinancings listed as 750/240/990/000 in table columns (table structure maintained in original). - G Rail: USD500m Eurobond 2022 bullet, 7.0%; entries include 750/750/0750 etc. - MK Rail: GEL2,415M from Azerb MoT outstanding; entries 2,415/2,415 in table. - UWS: GEL1,150M 10yr outstanding; entries include 115/115/115/222/319/0337/434/115 in table columns. - Total gross financing requirements table sums to figures across refinancing, new financing and loans outstanding (table preserves original layout and numeric entries). ### Recommendations (numbered) - 3.1: Finalize and approve an SOE governance law by mid 2021. - 3.2: Include an estimate in the 2019 FRS of the gross financing requirements of the six big SOEs based on Table 3.4 in this report. - 3.3: 2020 FRS — actions to improve FRS coverage and consistency: - Expand the SOE financial risk analysis to include Georgia Post, Tbilisi Transport, Union of Georgian Airports and Mountain Resorts Development so the top 10 SOEs are included. - Align the DSA assumptions for the SOE financial risk analysis so a consistent approach is taken in the FRS and include SOE-specific risks as appropriate. - Provide base-case assumptions for GDP growth, inflation and forex rates to the SOEs so a consistent approach is adopted across the SOEs. - Develop a comprehensive methodology for identifying and assessing QFAs. - Include a detailed and comprehensive assessment of the gross financing requirements of the major SOEs for the next three years. - 3.4: Explore options to bring leverage of major SOEs (including possible recapitalisation or restructurings) back to reasonable levels and investigate need to include any recapitalisations in the fiscal envelopes. ### SOE law, governance and expected reforms - MEFP from the Fifth Review of the EFF commits authorities to develop a comprehensive strategy to address financial vulnerabilities and improve corporate governance in SOEs. - Expected outcome: a new SOE Law that could be approved by parliament in 2021; law should support privatization, shifting prices to market levels, reducing leverage and forex exposure, and improving governance. ### Accounting and reporting reform (public sector) - Consolidated Public Sector Balance Sheet reliability depends on accounting and reporting standards. Major SOEs and National Bank use IFRS; Government financial statements are aggregated and prepared using national accounting standards with gaps in completeness and valuation of infrastructure assets. - Authorities aim to align government accounting and reporting with IPSASs. Timeline and progress: - Desire to comply with IPSASs first expressed in 2004. First IPSAS-based instructions introduced in 2015. Accounting reform strategy adopted in 2014 as part of PFM reform strategy 2014–17 with aim to comply with IPSASs by 2020. - Implementation lags: selected IPSAS paragraphs planned for 2017 included, but full compliance not achieved; national standards remain far from full IPSAS compliance (recognition, measurement, disclosure). - Historical background: - Post-1991 Georgia maintained two accounting systems: cash-basis centralized treasury system and accrual-basis decentralized financial accounting for budget organizations, derived from USSR Instruction No. 61 of March 10, 1987. - GFSM 2001 economic classification was incorporated into budget classification prior to IPSAS adoption efforts. ### IPSAS implementation timetable (original 2014 PFM Reform Strategy) - Table 4.1 sets out original timetable for introduction of IPSASs from 2015 to 2020. IPSASs identified as most relevant at current stage are in bold in original table. (Implementation is lagging; selected provisions included based on relevance and capacity.) *Source: Company financial statements, IMF staff estimates, Ministry of Finance, and text of the provided chapter.* ### 75. The ultimate goal of the accounting and reporting reform is to produce ### 1geoea2020004 - 75. The ultimate goal of the accounting and reporting reform is to produce ### Reform objective and required framework - Ultimate goal: produce consolidated financial statements of central government in line with IPSASs. - Commitment in the MEFP to achieve this for the 2020 year. - Complete framework required, which defines: - the accounting and reporting standards (recognition criteria); - a chart of accounts designed to reflect the requirements of those standards; and - formats of separate and consolidated financial statements and disclosure notes. ### Current consolidation practice and limitations - Consolidated financial statements are currently prepared at the level of individual Line Ministries (LMs). - Local accounting software is widely used by budget organizations and their supervising LMs; the mission did not verify the extent to which the consolidation to LM level is automated. - Consolidation to whole-of-central government-level by the Treasury has not been automated; transactions between LMs and their mutual balances have not been fully eliminated on consolidation. - Whole-of-central government financial statements are more accurately described as an aggregation of the consolidated financial statements of LMs. ### Audit arrangements and capacity - The State Audit Office (SAO) does not audit the whole-of-government consolidated financial statements; there is no legal requirement for it to do so, and no requirement for Parliament to receive the audited statements. - The SAO audits many individual LM consolidated financial statements but is at an early stage of developing its capacity to perform financial audits. - SAO currently receives only the final financial statements, meaning LMs do not have the opportunity to take SAO’s comments into account before finalizing statements. ### Non-financial assets valuation challenge - One of the biggest challenges: valuation and recognition of non-financial assets. - LMs have difficulties identifying the complete list of non-financial assets they own and performing their valuation for recognition in financial statements. - Assets inherited from the USSR and immediate post-USSR periods are mostly undervalued or are not presented in any balance sheet at all. - Creation of an asset register is proposed to solve identification and ownership clarification. - Government should consider valuation options for non-financial assets, particularly infrastructure assets which might require professional expertise and substantial financial resources. ### Technical assistance and prior work - FAD assistance to the MoF on reform began in 2014: periodic reviews of accounting and reporting instructions, training of Treasury staff on various IPSASs, and advice on revision of the Chart of Accounts. - FAD provided specific recommendations on selection of the most important provisions of the most relevant IPSASs as part of its June 2019 follow-up mission report. - FAD September 2019 follow-up mission report includes the list of recommended most relevant IPSASs, provisions of which should be introduced in 2020. ### Current status of the reform (section B) - Authorities decided not to attempt full compliance with IPSASs in their 2020 financial statements; instead the framework will include the most important provisions of most relevant IPSASs. - Consolidated central government financial statements will be prepared in line with the most important provisions of the most relevant IPSASs. - Accounting and reporting framework for consolidated financial statements will consist of three separate instructions: - Recognition and Disclosure Instructions and the Chart of Accounts and Instruction on its Application should be approved before 1 January 2020. - Instructions on Preparation of Financial Statements will be finalized in the course of 2020. - The Recognition and Disclosure Instructions will define most important parts of the most relevant IPSASs and centrally defined accounting policies where IPSASs allow alternative treatments. - The 2018 version of the relevant IPSASs will be annexed to the Instruction. - Authorities had yet to finalize the Recognition and Disclosure Instruction and send for stakeholder comments before approving it for application from January 1, 2020. - A revised Chart of Accounts developed with FAD assistance: - embeds necessary accounts to allow reporting in line with required parts of relevant IPSASs and the GFSM 2014 economic classification; - has been finalized and is ready for introduction from January 2020. - Instructions on Application of the Chart of Accounts still being worked on; recommendations of FAD June 2019 follow-up mission report not yet incorporated. - Revised Chart of Accounts enables recognition of administered items (e.g., government debt and tax revenue) in the general ledger of government entities. - Currently LMs report solely on their “own” assets/liabilities/revenues/expenses, not on items administered on behalf of the state. - MoF does not currently include government debt in its financial statements; the Revenue service does not include tax revenues in its financial statements. The revised Chart of Accounts is set up to allow this. - Revised Chart of Accounts sets structure for accounting transactions between the Treasury and government entities: - TSA should be recognized on the Treasury’s statement of financial position because it is controlled by the Treasury. - Assets of the Revenue Service and budget organizations at the Treasury should be recognized as accounts receivable, not as sub-accounts of the TSA. - Budget organizations should credit accounts receivable instead of cash and recognize balances at the Treasury as accounts receivable balances. - Correct application of the revised Chart of Accounts will allow preparation of consolidated financial statements using only financial statements of government entities (enables consistency checks). - Instructions on Application of the Chart of Accounts are still being prepared and should be used to modify stand-alone accounting systems of BOs; draft Chart and Instructions have already been shared with LMs to start configuring accounting software; authorities confident LMs will have systems ready by January 2020. - Instructions on the Preparation of Financial Statements will define formats of financial statements and disclosure notes; FAD proposed draft formats in September 2019; authorities plan to consider recommendations while developing Instructions in 2020. Financial statements for the year 2020 will be prepared in 2021. - LMs and budget organizations use different stand-alone local accounting systems supplemented by spreadsheets; an e-Treasury System developed by the Financial Analytical Service of the MoF is used for budget management and is linked to the National Bank of Georgia which hosts the Treasury Single Account; local accounting systems are not integrated with the e-Treasury. - Agencies record budget execution and financial accounting transactions twice—in the e-Treasury for payment processing and budgetary accounting, and in local accounting systems for financial accounting. - Authorities pursuing creation of an integrated in-house FMIS based on e-Treasury with accrual financial accounting/reporting functionality; some modules developed but completion not feasible in short-run due to capacity issues. - Local governments have not yet been included in the rollout of IPSASs but will begin piloting selected IPSASs provisions in 2020. - Municipalities set to pilot the chart of accounts and accounting regulations used by central government entities from January 1, 2020. - Pilot framework will run in parallel with current framework; thus 73 municipalities and their subordinated units will prepare two sets of financial statements for 2020. ### Immediate steps for reform progress (section C) - Recognition and Disclosure Instructions to be introduced from January 2020 had yet to be finalized at time of mission. - Treasury changed approach: new Instructions will not contain IPSAS text but will define accounting policies where IPSASs allow alternative treatments; users must use the actual relevant 2018 version of IPSASs excluding paragraphs defined in the Instructions. - Latest available Georgian translation of IPSASs at time of mission was the 2012 IPSAS Handbook; translation of relevant IPSASs for new Instructions ongoing with GIZ and planned to be finished by end-2019. - Existence of Georgian language IPSASs imperative for implementation of Recognition and Disclosure Instructions from January 2020. - Instructions on the Application of the Chart of Accounts should include illustrative double entries to explain new elements (items administered on behalf of the state and treasury stocks and flows) and reduce human error. - June 2019 FAD mission report contains illustrative double entries for BOs and the Treasury for tax revenues, own revenues and salaries. - Training of public sector accountants in application of new Recognition and Disclosure Instructions and Chart of Accounts has yet to begin. - Treasury Accounting Methodology Department provides on-going training, but revised framework and Chart of Accounts will require additional capacity building at government entity level. - The World Bank expressed willingness to provide training to government accountants throughout 2020. - An IT module for automating the consolidation of financial statements at whole-of-central government level is yet to be developed; the World Bank offered technical assistance. - Two options discussed: a) enhancement of the e-Treasury System; and b) implementation of a stand-alone consolidation module integrated with the e-Treasury. - The World Bank recommendation: implement a stand-alone consolidation module. - Authorities have not yet made a final decision. Preferable that decision is made and consolidation module is ready by time financial statements are to be consolidated in 2021. - Consolidated financial statements should be audited by the SAO to ensure credibility and incentivize preparers to improve quality. - Financial accounting and reporting framework from January 2020 constitutes a fair presentation framework; SAO should be able to carry out financial audit on that basis. - First audit likely to result in a number of qualifications; international experience shows many years required to reach financial statements free from material misstatements. - Maximize cooperation between MoF and SAO, including submission of draft consolidated financial statements to SAO and incorporating its comments in final version. - Illustrative double entries (Box 4.1) for accounting a loan taken by the MoF (GEL 1,000): - Books of the MoF: - Dr 1-13-1200 Budget Organization Receivables from Treasury - Cr 2-22-1100 Non-current Credits and Loans in Lari - Books of the Treasury: - Dr 1-11-2100 Treasury Single Account in Lari - Cr 2-13-1300 Payables to Budget Organizations by Treasury - Statement of Financial Position (MoF | Treasury | Consolidated) - Assets: Treasury Single Account - 1,000 1,000 - Assets: Receivables from the Treasury 1,000 - eliminated - Liabilities: Payables to budget organizations (1,000) eliminated - Liabilities: Non-current loans and credits (1,000) (1,000) - Legislation recommendations: - Legislation should require consolidated financial statements of the central government to be audited and then presented to Parliament. - Currently Budget Code does not require presentation to Parliament, nor does Law on State Audit require their audit. - Legal amendment would create strong incentive to succeed in reform. - Legislation should allow ample time in first few years; a deadline of November 30 should be reasonable until quality stabilizes, after which deadline could be moved forward, perhaps eventually to June 30. ### Way forward (section D) - Financial accounting reform will require attention beyond preparation of first consolidated financial statements in 2021; many issues need technical and financial capacity to resolve. - Biggest issues include: - Stocktaking and valuation of non-financial assets (see above). - Completion of IT system for financial accounting and reporting: decision needed on whether to continue developing FMIS to integrate accrual financial accounting/reporting of BOs or have standalone systems interfaced with Treasury FMIS. - A roadmap succeeding the plan in Table 4.1 will be developed once current stage is advanced; MoF resources are fully consumed in implementing new framework in 2020. ### Accounting reform risks (section E) - Serious risks to application of IPSAS standards for the 2020 financial year. - Delay in translation and distribution of Recognition and Disclosure Instructions, or completion of Chart of Accounts instructions could mean financial year begins without clear instructions to accountants, risking initial transactions not recorded in line with new framework and compromising reliability of accounts. - Even if instructions completed before start of year, delays in training, IT systems or development of financial statements could still cause problems. - Training on new standards for government accountants is required; IT systems will need updates to avoid incomplete or incorrect programming of double entries in new CoA. - Reliability of 2020 financial statements will depend on completion and approval of Instructions on Preparation of Financial Statements and automation of consolidation module; absent these, consolidation will rely on ad hoc excel based adjustments. *Source: 1geoea2020004 - 75. The ultimate goal of the accounting and reporting reform is to produce* ### 101. The audit and reception of the 2020 financial statements also presents a risk. The ### 1geoea2020004 - 101. The audit and reception of the 2020 financial statements also presents a risk. ### Audit risk and fiscal reporting challenges - The audit arrangements are yet to be agreed, and there is a risk that 2020 financial statements will not be audited by the SAO. - Gaps in the legislation to require preparation, audit and presentation of the whole-of-central-government consolidated financial statements need to be closed. - The capacity of the SAO to perform financial audit of the whole-of-central-government consolidated financial statements needs to be enhanced. - There is a lack of awareness about the complexity of the accounting reform and the time needed to achieve fair presentation in the whole-of-central-government consolidated financial statements. - Parliament and other stakeholders should be informed about the likelihood of substantial qualifications to the financial statements. ### Recommendations - 4.1: Finalize the Recognition and Disclosure Instructions reflecting the recommendations in the June 2019 FAD mission report, including: - Translation of the relevant IPSAS into Georgian language; - Defining the most important provisions of the most relevant IPSAS to be introduced from January 2020; - A section requiring recognition of administered items by LMs. - 4.2: Finalize the draft Instruction on the Application of the Chart of Accounts by introducing illustrative double entries as a minimum to reflect: - Tax and customs revenue; - Treasury Single Account; - Transactions between Treasury and BOs; - Government debt. - 4.3: Include provision in the Budget Code and the Law on State Audit Office to require presentation of audited consolidated financial statements of the central government to Parliament. ### Annex I — SOEs assessed as general government units (high-level inventory) - SOEs which do not operate like independent institutional units and/or provide services only to government: - 205170036 JSC ESCO Commercial Electricity System Operator - 205140257 LLC State Construction Company - 404482537 LLC State food company - 401961445 LLC Construction Company - Builder 2011 - 245548153 LLC Sanitation - 204524568 LLC Melioration of Georgia - 404391975 JSC Georgian Energy Development Fund (parent) - 204878542 LLC Sportsmshenservices - 404942470 LLC Georgian Solid Waste Management Company - 404924276 LLC Perspective - 404389372 LLC State Service Bureau (parent) - 237076524 LLC Adam Beridze Diagnostic Center for Soil and Food - 401960339 LLC Georgian Food Company - 211327410 LLC Specialized Surveillance Center for Disinfection, Disinfection Deratization and Sterilization - 405249075 LLC Partnership Fund - Green Development - 205064446 LLC Sakspecetrans - 405007200 LLC Asset Management and Development Company - 404404550 JSC Partnership Fund (parent) - SOEs which do not provide goods and services at economically significant prices: - 404945164 LLC Mental Health and Addiction Prevention Center - 205165453 LLC Academic Nikoloz Kipshidze Central University Clinic - 215096367 LLC Mountain Resorts Development Company - 212153756 JSC Scientific-Practical Center for AIDS and Clinical Immunology of Infectious Diseases - 236035517 LLC Regional Health Center - 206348736 LLC Mechanizatori - 245445200 LLC Batumi auto transport - 209446900 LLC Tbilisi Mental Health Center - 212693762 LLC Kutaisi Mental Health Center - 212677566 LLC Kutaisi Regional Blood Bank - 217881175 LLC Curtis Hospital - 202054034 JSC Boris Paichadze National Stadium - 239866579 LLC Senaki Interdisciplinary Psychoanerological Dispensary - 202887126 JSC N. Makhviladze Laboratory of Medicine and Ecology Scientific Research Institute - 216296318 LLC Kvemo Kartli Regional Blood Transfusion Station - 223234426 LLC Akhalgori District Polyclinic - 206051449 LLC Scientific-Practical Center of Clinical Pathology - 245426490 LLC Batumi Emergency Medical Center - 206269045 LLC IDP Family Medicine Center - 202054908 LLC F. Sanikidze War Veterans Clinical Hospital - 221273315 LLC Geguti Polyclinic - 202065807 LLC Pathologoanatomical Scientific-Practical Center for Adult and Child Pathology - 238750106 LLC The future - 404381165 LLC Regional Hospital - 405192795 LLC Clinic Development Company (group, head office) - 202172139 JSC National Center for Tuberculosis and Lung Diseases - 212693780 LLC Kutaisi D. Nazarishvili Family Medicine Regional Training Center and Hospital - 216296880 LLC Rustavi Mental Health Center - 227721383 LLC Shida Kartli Primary Care Center - 231171157 LLC Telavi Psycho-Neurological Dispensary - 212686477 LLC Kutaisi Adult Polyclinic N5 - 211331389 LLC Outpatient Medical Rehabilitation Center - 206344062 LLC Ponichala is a medical outpatient - 404484704 LLC Rukhi Trade Center - 233642662 LLC The neuron - 231171148 LLC Telavi Drug Center - 204379074 LLC Tbilisi Dental Polyclinic N1 - 404904458 LLC Grain Logistics Company - 202059388 LLC Center for Social Rehabilitation of People with Disabilities - 404928469 LLC Georgian vegetables - 230805117 LLC Manglisi Hospital Polyclinic - 227720883 JSC Akhtala resort - 202888269 LLC Book - 239866542 LLC Senaki Children's Hospital - 239866551 LLC Ambulatory-polyclinic association - 239865071 LLC Senaki Hospital-Polyclinic Association - 208146834 LLC Adult Polyclinic N25 Tbilisi - 204522515 LLC Family Medicine Center – Abkhazia - 239890668 LLC IDP Polyclinic in Senaki - 212153747 LLC Vakhtang Bochorishvili Anti-Sepsis Center - 245418392 LLC St. Batumi Regional Center for Infectious Diseases, AIDS and Tuberculosis - 245428880 LLC St. Batumi Republican Clinical Hospital - 245426392 LLC St. Polyclinic No1 in Batumi - 220395347 LLC Zugdidi Polyclinic for Internally Displaced Persons from Abkhazia - 202887787 LLC City Blood Transfusion Station - 231184232 LLC Child Health Center - 202051670 LLC St. Tbilisi N3 Preventive Center - 435892483 LLC Mestia Hospital-Outpatient Association - 223234435 LLC Akhalgori Raisa Hospital - 243123455 LLC East Georgia Mental Health Center - 212672080 LLC O. Chkhobadze Disabled and Elderly Clinical Center - 233646757 LLC Guria Medical Center - 239866588 JSC Senaki District Hospital - 243572594 LLC Resort Tskaltubo Development Company - 221268447 JSC Sanatorium Railway - 212697429 LLC Kutaisi Regional Drug Center - 204871594 LLC Tbilisi Children's Infectious Disease Clinical Hospital - 405001466 JSC Universal Medical Center - SOEs which depend on the regular financial assistance from government: - 412670097 LLC United Water Supply Company of Georgia - 405158804 LLC Black Sea Arena Georgia - 446952511 LLC Football club beacon - 226560860 LLC Gardening, Utilities and Landscaping Services - 436034104 LLC Mtskheta Sopotskali - 425358409 LLC Bolnisi Municipal Transport Service - 239394259 LLC Sachkhere water channel - 234237607 LLC Senaki Interdisciplinary Psychoanerological Dispensary - 434158163 LLC Marneuli village - 246952524 LLC Transport regulation of Kobuleti - 225376189 LLC LTD Football Club Sioni - 437066201 LLC Satis - 244691259 LLC Khobi Cleaning and Lighting - 448382562 LLC Khelvachauri Water Canal - 426518388 LLC Gardabani Transport Company - 427716518 LLC Amenities - SOEs owned by municipalities engaged in loss-making activities requiring government support but for which data were not available to conduct the market/non-market test: - 206267494 LLC Tbilservice Group - 225370960 LLC Communal farming - 205060244 LLC Muscatide Culture and Recreation Park - 228544091 LLC Service-2007 - 232556659 LLC Kaspi amenities - 231281109 LLC Utility Service of Batumi Municipality - 247009856 LLC Kobuleti Water - 205267085 LLC Aquatic species center-tonus - 441993407 LLC Chokhatauri Road Division - 435891830 LLC Mestia Road - 431171929 LLC Infrastructure and Landscaping Service - 215613192 LLC Chiatura football club - 200217684 LLC Rose Revolution Park - 245622205 LLC Dinamo Batumi - 419983432 LLC ANAKLIA-GANMUKHURI RESORTS - 245626684 LLC Hygiene 2009 - 432542395 LLC Rural Water - 434065726 LLC Road 2015 - 219630228 LLC Football club miner - 445384628 LLC Volleyball Club Batumi - 238771432 LLC Sports Complex – Samtredia - 445384691 LLC Basketball Club Batumi – 2010 - 429323314 LLC Aragvi football club - Small SOEs (mainly inactive) for which data were not available (selected examples included): - 245626835 LLC Shopping Center 2009 - 211360944 LLC Palace of Sports - 245400775 LLC Batumi Oil Refinery - 205221614 LLC Demeter 96 - 400031559 LLC Auto parking 2011 - 237978550 LLC Square 2009 - 223353387 LLC Sanitation of Akhalkalaki - 224618313 LLC Tushuri sheep breed - 404401615 LLC Ilia's Garden - 204961121 LLC GCI Service - 201953378 LLC Saxexpertise - 215109932 LLC Resident 2000 - 245629388 LLC Goderdzi Resorts - 404928174 LLC Food Production Company - 211358207 JSC Business center agro installation - 404897484 LLC Tbilisi Logistics Center - 404515468 LLC Startup Georgia - 238725947 JSC Samtredia 2002 - 420424589 LLC ZugdidiGroservis - 245427783 LLC The newspaper is Adjara and Adjara - 201990701 LLC Food product - 220341324 LLC Infrastructure Development Company - 400051199 JSC Georgian Film Development Center - 226574098 JSC Theco - 242262056 LLC Kevri - 239395622 JSC Sachkhere Production Plant - 212705517 JSC Rioni - 236686528 LLC Ninotsminda district - 234160109 JSC Marble - 240388228 LLC Tsnori Machine-Building Factory-2003 - 204892189 JSC Sacramento - 211328589 LLC Builder-Technic - 236041341 LLC Juniors - 242729286 JSC Jvari oil product - 219617859 JSC Tkibuli oil product - 244548110 JSC Khobi Oil Product - 212705045 LLC Chance Oil - 215083610 LLC Rosebud - 203852713 JSC Gudauri - 236061364 LLC The chases - 249250313 LLC The airline is Abawi - 201947572 JSC Agroinvest - 206222942 LLC Sakgeoservice - 203822827 LLC Georgian market - 225377641 LLC Bolnisi -2000 - 203860330 JSC Tung of Georgia and essential oil - 204396563 LLC Geo-Tech - 204983143 LLC Logos - 212814953 LLC Building materials - 420005256 LLC Anaklia 2018 - 405205601 LLC Lycan residence - 205017621 LLC Special Cap Service - 206337677 LLC Comes after the Lyceum - 206285081 LLC Tam – Polymer - 206274501 LLC Tam-energy - 400004650 LLC Sakpressa + - 212677673 LLC Kutaisi Press House - 236049904 LLC Tetnuldi Development - 219984952 LLC Zugdidi Preventive Disinfection Unit - 415081084 LLC Poti Free Economic Zone Utility Management - 206107540 LLC Technical Specialist Training Center - 202054196 JSC Georgian film - 245400748 LLC Georgia Maritime shipping - 206337748 LLC National Warehouse Sales Service - 239862966 LLC Georgian traditions - 404908007 LLC Georgian Greenhouse Company - 203850092 LLC Sakcoopservices - 225393197 LLC Bolnisi agro market - 426109052 LLC Jiar Borjomi-Bakuriani - 404951691 LLC Georgian Fruit and Vegetable Export Company - 404957597 LLC Product of Georgia ### Annex II — Impact of sectorization on fiscal aggregates (selected values preserved as in source) - Table header/context: Pre sectorization (percent of GDP) | Post Sectorization (Per cent of GDP) | Change (percent of GDP) - Excerpted figures (as presented): - Revenue: 01.193 -0.329 0.864 - Revenue (alternate line): 0.864 00 - Subsidies/grants: 0.203 - Capital injections: 0.126 - Expenditure: 0.329 1.299 -0.329 - Expenditure (alternate): 1.299 2 0 - Operating: 1.135 - Capex: 0.164 - Balance: -0.329 -0.106 0 -0.4352 - Balance (alternate): -0.4352 00 - Debt: 01.307 -0.8 0.507 - On lending: 0.8 - GGSOE / Consolidated Public Sector block (selected figures as presented): - Revenue: 0.02.9 -0.8 2.1 - Revenue (alternate): 2.1 0.0 0.02.1 - Commercial: 2.1 - Subsidies/grants: 0.5 - Capital injections: 0.3 - Expenditure: 0.8 3.2 -0.8 3.2 - Operating: 0.02.8 Operating 2.8 - Capex: 0.00.4 Capex 0.4 - Balance: -0.8 -0.260.0 -1.1 - Debt: 0.03.2 -1.9 1.2 - On lending: 1.9 - Commercial: 1.2 - Pre sectorization (GEL b) / Post Sectorization (GEL b) / Change (GEL b) labels are present in the source table for the sectorization exercise; figures above are presented verbatim as in source. *Source: MoF, IMF* ### Annex III. SOE Financial Summaries ### Annex III. SOE Financial Summaries ### Engurhesi, LLC — Lines of business and overview - Owns and operates the 1,300MW Enguri dam, water reservoir and generation facilities. - Accounts for around 40 percent of the country’s electricity generation. ### Engurhesi — Recent financial performance - Revenue growth of around 30 percent in 2018 due to strong hydrological inflows and a tariff increase. - EBITDA and EBIT grew and NPAT in 2018 was positive for the first time in the last four years. - RoA improved but remains low at around 2.8 percent. - Leverage increased from 34 percent to over 50 percent over the last six years, mainly due to exchange rate movements. ### Engurhesi — Projected performance and financing - Revenue in 2019 projected to decline mainly due to rising Georgian and Abkarzian consumption crowding out foreign sales. - Abkhazia takes 100 percent of the company’s output during peak winter months and around 40 percent across the year as a whole. - A 3-month shutdown in Feb-May 2020 to rehabilitate its tunnel will adversely affect the company but is necessary to sustain output. - Company planning to raise new foreign currency loans of around GEL60m over 2019 and 2020 to finance investments. ### Engurhesi — Major financial risks - Consumption in Abkhazia continuing to rise, crowding out revenue-generating sales. - Forex risks: all debt in foreign currency; exposure increasing with loss of $US revenue and increasing debt. A 30 percent depreciation in the Lari would increase finance costs by around GEL53m. - Upside asset revaluation risk: asset values are well below market value; revaluation would lead to higher prices. - Policy note: In line with the commitment to the EU on QFAs, Engurhesi should receive market prices for its output or be compensated explicitly for QFAs. ### Georgian Oil and Gas Corporation, JSC — Lines of business and overview - Historically purchased and sold gas from Azerbaijan via government-to-government agreement; receives revenues from transit to Turkey and supplies gas to the social sector at subsidized prices. - Electricity generation became major activity: 230MW CCGT Gardabani 1 built in 2015; Gardabani 2 scheduled end-2019; third unit planned around 2023. - 60 to 70 percent of EBITDA now comes from electricity generation; company accounts for around 15 percent of the country’s generation. ### GOGC — Recent financial performance - Despite revenue decline in 2018, recorded RoA and RoE of 9 percent and 16 percent respectively. - Paid a dividend of GEL71m in 2018. - Strong operating cash flows reduced leverage to 41 percent. ### GOGC — Projected performance and financing - Projects large increases in revenue as the two new CCGT plants come on stream. - Total assets projected to double between 2018 and 2022. - Finance needed for two thermal stations and planned underground gas storage facility. - Gross financing requirements over the next three years projected to total around GEL1,600m. ### GOGC — Major financial risks - Forex risks: around 93 percent of revenues and 87 percent of operating costs in $US, but all debt in foreign currency. A 30 percent depreciation in the Lari would reduce NPAT by around GEL148m. - Political pressures to keep natural gas prices low for the social sector. ### Georgian Railway, JSC — Lines of business and overview - Owns and operates railway network; main assets: land, rail, rolling stock, truck fleet; logistics terminal and freight-forwarding business. - 95 percent of revenue from freight; passenger transport is small and loss-making. - Approximately 60 percent of freight is international transit freight. - Company is not price regulated. ### Georgian Railway — Recent financial performance - Freight volumes declined by around 50 percent in recent years as oil and gas transport switched to pipelines. - 2018 fixed assets written down by GEL691m to reflect reduced traffic volumes. - 2019 year-to-date revenue above budget with increasing higher-margin cargo and Lari depreciation (revenue largely in $US); finance costs up and NPAT likely down on budget. - Balance sheet weakened: D/(D+E) ratio increased to 77 percent. ### Georgian Railway — Projected performance and financing - Expecting return to moderate profitability from 2020, with RoA around 5 percent. - Projected total assets in 2022 around GEL2,000m (around 2/3rd the value of total assets in 2016). - Leverage projected to remain above 60 percent; may require government support to refinance USD500m Eurobond maturing in 2022. ### Georgian Railway — Major financial risks - Re-financing risk: Eurobond covenants not at risk currently, but bondholders may require higher interest rates absent government support. - Labor market unrest: company has 12,600 employees, the same number as in 2012 when volumes were twice as large. - Risk from assuming 50 percent of MKR’s liabilities and assets on GR’s balance sheet. ### Georgian State Electrosystem, JSC (GSE) — Lines of business and overview - Provides electricity transmission and dispatch services. - Revenue increased from GEL67m in 2012 to GEL237m in 2018. - Investing in projects to improve security of supply and increase capacity (new interconnect lines with Turkey and Armenia). - Planned full merger with subsidiary Energotrans and takeover of Georgian assets of a 50/50 Georgian-Russian transmission JV to make GSE the single transmission company. ### GSE — Recent financial performance - 2018 NPAT of GEL44m, first positive return in four years. - Revenue increased by 60 percent as a project completed in 2017 was included in regulatory asset base. - Net worth remains negative, reflecting 2015 depreciation and approx. GEL250m write-down of Energotrans fixed assets in 2017 (may be reversed in 2021). - Authorities working on plan to make GSE financially stand-alone, possibly by converting Government loans to equity and then issuing bonds. - GSE working with the National Bank of Georgia and the Pension Fund to convert loans to Lari. ### GSE — Projected performance and financing - 2019 budget projects positive EBITDA but Lari depreciation could turn NPAT into a loss. - Every 8 percent depreciation in the Lari results in a GEL20m increase in GSE’s financing costs. - Balance sheet projected to double over next four years to around GEL2,200m due to major investments. - Approximately GEL800m of funding required to finance its investment program; restructuring required for sustainable financial position. - Profitability expected to improve markedly from 2021 assuming tariff reset in 2020 goes ahead. ### GSE — Major financial risks - Forex risks: all loans in foreign currency; a 30 percent depreciation of the GEL would increase financing costs by around GEL472m. - Volume risks: network flows may not meet forecast growth. - Regulatory risks: planned tariff increases could be rejected by the independent regulator. ### Marabda-Katsakhi Rail (MKR), LLC — Lines of business and overview - Responsible for constructing 200km railway line and associated terminals from Marabda to Katsakhi, linking Azerbaijan and Turkey. - Projected completion by end of 2020. - Total project cost budgeted at US$775m. - Initial trials indicate quality issues: trains operating at reduced speeds; no flammable or passenger freight permitted. ### MKR — Recent financial performance - Accumulated losses of GEL750m at end-2018. - Foreign-currency denominated debt impact from Lari depreciation over GEL2,000L (as stated in source). - Capitalization of interest from lengthy delays contributed to losses. - Total assets (valued at cost) of GEL1,350m; negative net worth around GEL560m. - Debt to Ministry of Transport of Azerbaijan to be serviced only from free cash flow once operational; Georgian government has not guaranteed liabilities. ### MKR — Projected performance and risks - At project completion a 50/50 Azerbaijan Railways/Georgian Railways JV planned to take over assets and liabilities; transfer likely accompanied by major asset write-down. - Major risks: asset write-down risk (freight volumes and revenues unlikely to justify construction-cost based asset value), forex risk (all debt in foreign currency), and construction and operational risk. ### United Water Supply Company of Georgia (UWS), LLC — Lines of business and overview - Provides drinking water and wastewater services outside Tbilisi. - Approximately 40 percent of 335,000 customers are unmetered, paying fixed rates based on household size. - High water losses of up to 75 percent due to poor asset condition. - Government policy restricts water tariffs to no more than 4 percent of household income; current tariffs often much lower despite higher costs to serve in rural areas. ### UWS — Recent financial performance - Operating loss of GEL8m in 2018; NPAT negative GEL79m. - Close to bankruptcy with debt/(debt + equity) of 94 percent and negative interest coverage ratio. - Impairments in 2017 and 2018; fixed assets written down by around GEL200m. - Regular past equity injections from government to keep company afloat. ### UWS — Projected performance and financing - Projecting continuing operating losses and NPAT deficits in each of the next five years. - Planning investments in new treatment plants and pipes financed by loans (through the ADB via the government) and further equity injections. ### UWS — Major financial risks - Forex risks: all loans in foreign currency; a 30 percent depreciation of the GEL would increase financing costs by around GEL410m. - Political risks: planned tariff increases in 2019 and 2020 could be postponed. - Construction risks: delays and cost overruns in projects. - Impairment risks: possibility of further fixed asset write-downs when next valued in 2023. ### Select financial metrics (high-level snapshots from tables) - Engurhesi revenue series (Lari, M): 40 42 61 47 31 32 42 35 28 36 36 (2012–2022). - Engurhesi RoA (EBIT/Assets) example points: -0.6% -1.6% 3.4% -3.6% 0.5% 1.3% 2.8% 1.5% -0.1% 2.0% 2.1% (2012–2022). - GOGC revenue series (Lari, M): 340 380 372 529 635 680 626 696 961 1,066 1,059 1,098 (2012–2022). - GOGC RoA (EBIT/Assets) example points: 11.5% 12.3% 7.1% 4.2% 9.2% 12.3% 9.1% 4.7% 8.1% 7.2% 8.2% (2012–2022). - Georgia Rail revenue series (Lari, M): 521 508 536 626 539 474 444 472 511 527 576 (2012–2022). - Georgia Rail capital structure (D/(D+E)) example points: 46% 46% 47% 52% 50% 57% 77% 77% 75% 72% 69% (2012–2022). - GSE revenue series (Lari, M): 67 79 125 117 136 148 237 209 175 375 384 (2012–2022). - GSE sensitivity: Every 8 percent depreciation in the Lari increases financing costs by GEL20m; a 30 percent depreciation would increase financing costs by around GEL472m. - MKR total assets (Lari, M) example points: 806 870 1,010 1,170 1,348 1,348 1,352 1,418 1,659 (2012–2020). - MKR capital structure (D/(D+E)) example points: 93% 99% 108% 135% 144% 141% 146% 172% 162% (2012–2020). - UWS capital structure (D/(D+E)) example points: 30% 35% 46% 60% 87% 91% 95% 95% 94% 92% 95% (2012–2022). - UWS projected EBITDA (Lari, M) series: -4 -14 -28 -78 -12 -7 -8 -7 -6 -6 -6 (2012–2022). *Source: Company financial statements, IMF staff estimates.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1geoea2020004.pdf_