## tarea2026029-source-pdf ## Source details **Canonical URL:** [tarea2026029-source-pdf](https://www.imf.org/-/media/files/publications/tar/2026/english/tarea2026029-source-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/tar/2026/english/tarea2026029-source-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/tar/2026/english/tarea2026029-source-pdf.pdf.json) --- ### Mission overview and participants - IMF Fiscal Affairs Department (FAD) mission visited Tbilisi between July 15 and 29, 2025, at the request of the Minister of Finance of Georgia (MOF). - Mission objectives: - Review progress of State-Owned Enterprises (SOEs) reforms to improve SOE performance and strengthen ownership and governance practices. - Take stock and analyze achievements and challenges in implementing SOE ownership, financial oversight and governance reforms over the past five years. - Identify next steps to further strengthen SOE accountability framework. - Mission leadership and team: - Team led by Ms. Natalie Manuilova (FAD). - Team members: Mr. Yannick Vel (FAD Fiscal Risks Resident Advisor), Ms. Avril Halstead, Ms. Sorana Baciu (FAD short-term experts). - Government and stakeholder meetings included MOF, MOESD, NASP, Administration of the Government of Georgia, SOE boards and management (DFG, GSE, GOGC, Georgian Railway, UWSC, UAG), and development partners (World Bank, ADB, Swiss Cooperation Office). - Acknowledgements: Mr. Shota Gunia (MOF); Mr. Andrew Jewell, IMF Resident Representative; interpretation support by Ms. Lali Gagnidze and Ms. Natia Jakhia. ### Executive summary — key findings - Role of SOEs: - SOEs deliver essential services in electricity, water, gas, and transportation. - Progress in financial oversight and fiscal risk management: - Establishment of the Fiscal Risk Management Department (FRMD) in MOF. - Regular publication of the Fiscal Risks Statement (FRS) and SOE aggregate report has enhanced transparency. - Introduction of Statements of Corporate Intent (SCIs) to set performance expectations. - Government Decree 1012 empowered MOF to oversee finances of seven major SOEs. - FAD support to reforms over the past seven years. - SOE Strategy (2022) and pilots: - Strategy for the Comprehensive Reform of SOEs prepared and published in 2022; piloted in three large SOEs with improvements in decision making, coordination, and professionalizing SOE boards. - Decree 1012 and the Code of Corporate Governance for SOEs support implementation; Draft SOE Law remains unapproved and requires significant improvements. - Dual ownership model: - Strategy envisaged dual ownership (MOF and MOESD); implementation faced challenges but delivered benefits in pilot SOEs. - Remaining challenges and gaps: - Fragmented ownership structure and decentralized oversight complicate governance and accountability. - Administrative burdens from shareholder approvals for state property transactions hinder progress. - Corporate Governance Code not enacted; draft SOE Law lacks critical elements. - Political interference in board appointments and dismissals undermines professionalism and independence. - Absence of formalized processes for board selection, appointment, and dismissal reduces governance effectiveness. ### Executive summary — policy implications and needs - Strengthen MOF financial and fiscal oversight: - Expand Decree 1012 from pilots to all covered SOEs, then broaden scope to include more SOEs and material subsidiaries. - Develop framework for defining and reporting on Public Service Obligations (PSO) and Quasi-Fiscal Activities (QFA). - Conduct portfolio-wide analysis of major SOEs to identify non-core operations for streamlining, winding down, or transfer. - Strengthen ownership and corporate governance: - State should act as effective and professional shareholder; establish clear division of roles among stakeholders. - Enhance ownership functions: selection, appointment and dismissal of SOE boards and executive management. - Improve legislative framework: update SOE Strategy and Action Plan; enact Corporate Governance Code with phased “apply or explain” 2026–2029 and mandatory compliance by 2030; develop supplemental regulations for board selection, appointment, dismissal, remuneration, and performance management. - Revise draft SOE Law to enshrine ownership principles and address governance gaps. - Anticipated implementation challenges: - Potential resistance from line ministries to ownership and decision-making changes. - Reservations about professionalizing governance and limiting policy or political interference. - Insufficient MOF capacity to expand oversight coverage and lack of training for line ministry staff. - Fragmented ownership responsibilities risk inconsistent reform application. - Overcoming obstacles requires strong political support, coordination, and sustained commitment. ### Numbered recommendations (as in source) - Fiscal Risks Management and Financial Oversight of the SOEs 1. Issue regulations under Decree 1012 to operationalize the MOF’s oversight by defining roles, reporting requirements, KPI setting, performance evaluation, and approval procedures for major SOE investments and borrowings — Responsible: MOF 2. Expand the scope of Decree 1012 to broaden the range of covered SOEs beyond pilots and include material SOE subsidiaries, align the SOEs covered by the reform under various legislation — Responsible: MOF, shareholder ministries 3. Develop a framework for defining and reporting on QFAs, PSOs for informed assessment of SOE performance and effectiveness — Responsible: MOF, shareholder ministries 4. Continue strengthening the MOF FRMD staff and building their capacity in analyzing SOEs financial performance, related fiscal risks and providing input to the ownership decision-making — Responsible: MOF - SOE Ownership and Corporate Governance 5. Revise draft SOE Law to enshrine ownership principles, clear division of responsibilities among the stakeholders, define transparency rules, and the ownership function — Responsible: MOF, MOESD 6. Update the SOE Strategy and its Action Plan to clearly articulate the state ownership objectives, institutional roles, and sequence of reform priorities — Responsible: MOF, MOESD 7. Develop and adopt regulations governing selection, appointment, dismissal, remuneration and performance management of SOE boards and executive management — Responsible: MOF 8. Apply the Corporate Governance Code to the largest SOEs under a phased approach with “apply or explain” in 2026–2029 and mandatory compliance by 2030 — Responsible: MOF 9. Engage annually on SCIs to set a limited number of targets for SOEs and their boards, introduce annual performance assessment of SOE boards and their regular evaluation — Responsible: MOF, shareholder ministries 10. Conduct a portfolio-wide analysis of major SOEs, identifying non-core operations for streamlining, winding down or transferring to other agencies/companies — Responsible: MOF, shareholder ministries ### Background — key statistics and historical context - At the end of 2023, 142 SOEs owned by the central government (out of total of 301) held assets worth GEL 5.3 billion, equivalent to about 6.6 percent of GDP; the remaining 159 SOEs are owned by local governments. - Number of SOEs reduced from over 1,300 entities in 2009 through liquidation and consolidation. - Four large SOEs—GR, GOGC, GSE, and ESCO—were moved from the Partnership Fund to direct oversight by line ministries; Partnership Fund refocused on statutory mandate as Development Fund of Georgia (DFG). - Since 2017, MOF’s Fiscal Risk Management Unit has included SOE contingent liabilities in annual FRSs and disclosure quality has improved substantially regionally. ### Progress and reforms to date - Appointed fully independent supervisory boards or boards with independent members in key SOEs: GSE, GOGC, GR, UAG and DFG. - Annual SCIs introduced for covered SOEs. - Government Decree No. 1012 (June 10, 2022) empowers MOF to exercise financial oversight over seven largest SOEs. - MOF publishes annual Fiscal Risks Statement and an aggregate SOE report in line with OECD SOE Guidelines. - FRMD created two new divisions: fiscal risk management and financial oversight of SOEs. - Pilots delivered improvements in decision making, government coordination, and board professionalization. ### Decree 1012: scope, requirements, and implementation - Decree 1012 applies to seven SOEs: (i) GSE, (ii) Enguri HES, (iii) GOGC, (iv) GR, (v) GGTC, (vi) UAG, and (vii) UWSC. - Decree 1012 requires MOF approval for: SCIs; borrowing and investments exceeding GEL 5 million or above 1 percent of the SOEs’ assets (whichever is less); QFAs; and dividend policies. - Decree authorizes MOF to issue subordinate regulations on SCI preparation and monitoring, KPIs, performance evaluation, and reporting procedures. - FAD advised MOF in 2025 on subordinate regulations related to SCI details, KPIs, performance evaluation, and reporting. - Implementation is uneven: some SOEs do not comply with SCI processes or timely financial reporting to MOF. - Administrative burden from shareholder approvals under the Law on State Property diverts co-shareholders to minor tasks; role previously carried out by NASP. ### QFAs / PSOs: findings and recommended framework - FRMD initiated QFA information sourcing via templates; only three SOEs comply: GR, GOGC, Enguri HES — full scope of QFAs not known and could be a fiscal risk. - Examples of QFAs and state support: - GOGC: in 2022 received GEL 230 million loan amid liquidity challenges; new energy legislation authorizes compensation for PSOs but GOGC has not yet received any. - Enguri HES: significant electricity supplied free to population of the Autonomous Republic of Abkhazia; from 2025 some compensation introduced via tariff. - GR: passenger services at reduced fares with partial compensation; cross-subsidized by freight profits. - UWSC: operating revenue insufficient to cover costs; state provides an annual subsidy of approximately GEL 60 million to service its debts. - Recommended PSO framework design steps (adapted from IMF/OECD/EU guidance): - Entrustment: formal assignment via legislation or contract with beneficiaries, service levels, KPIs, duration, compensation and reporting. - Costing: objective and transparent costing methodology for net costs of defined service. - Compensation: cover no more than net cost plus reasonable profit; where no competition, base on costs of a typical, well-run operator. - Monitoring and Auditing: financially separate PSO activities, require detailed public reporting on costs, compensation and outcomes. - Where possible, convert QFAs into direct fiscal transfers. ### FRMD capacity, fiscal risk assessment, and SOE financial trends - For the 2025 budget, 301 SOEs were considered important for fiscal risks analysis. - These SOEs account for 92 percent of total SOEs revenue for 2023. - Out of these 301 SOEs, 142 entities are fully owned by the central government, accounting for over 85 percent of the selection’s total revenue. - SOEs from energy and transportation sectors account for about 15 percent of the total portfolio by number, but almost 77 percent of total revenues in 2023. - These SOEs have 103 subsidiaries. - SOE financial liabilities decreased from GEL 15 billion in 2019 (30 percent of GDP) to about GEL 9.7 billion in 2023 (about 12 percent of GDP). - SOE liabilities concentrated: largest SOEs hold about 60 percent of all SOE liabilities. - Key reform-targeted SOEs (seven covered by Decree 1012 and five others) continue to hold over 60 percent of all SOE liabilities. - GR, GSE and UWSC hold the largest obligations of up to 6 percent of the country’s GDP, half of total SOE liabilities of around 12 percent of 2023 GDP. - During 2019-2023, staffing reduced by about 15 percent in the twelve SOEs covered by reforms, which led to growing profitability. - Cumulative SOE profitability 2019–2023: net loss of GEL 858 million or 1.1 percent of GDP. - Excluding losses of UWSC and GA, cumulative results would be net profit of about GEL 140 million. - Net cash flow from the state budget to SOEs averaged -0.3 percent of GDP over 2019 to 2023. - SOE dividends were about GEL 32 million in total or an average of 0.05 percent of GDP between 2019 to 2023. - Key risks from sensitivity/scenario analysis: - Exchange rate risks: SOE debt totaling GEL 9.5 billion—much of it in foreign currency—and most earnings in local currency. A 30 percent local currency depreciation could raise the debt-to-asset ratio by 15 percent in the first year (2024 FRS). - Contingent liabilities: GR’s USD 500 million Eurobond maturing in 2028 is a contingent liability warranting close monitoring. ### Plans to strengthen SOE fiscal risk assessment - Enhance FRMD operational effectiveness with newly created SOE Financial Oversight Division. - Planned measures: - Address capacity constraints: SOE Financial Oversight Division currently under-staffed (only one staff); planned measures include filling vacancies, creating positions, and staff training in financial analysis, modeling, risk assessment, and corporate governance. - Introduce quantification and measurement of QFAs; require policy reforms and guiding principles for identification, reporting and compensating PSOs. - Operationalize the Fiscal Risk Registry as centralized repository for all fiscal risks. ### SOE Law, Corporate Governance Code, and ownership arrangements - SOE Law intended to: - establish governance and management framework with subordinate regulations; - define roles of shareholding ministries and MOF (financial oversight, approving SCIs and QFAs, monitoring fiscal risks); - establish transparent, merit-based board appointment framework; - set rationale for state ownership and conditions for creating new SOEs; - require publication of audited financial statements and aggregated portfolio reporting. - Draft SOE Law on hold since 2023 due to significant gaps; areas requiring strengthening include: - (i) clear separation of roles and responsibilities among MOF, MOESD, line ministries and regulators; - (ii) rationale for continuous state ownership or establishment of new enterprises aligned with public policy; - (iii) minimum qualification requirements for SOE board members; - (iv) high-level provisions on SOE executive appointments and remuneration and board authority over it; - (v) definition and high-level guidelines on treatment of PSOs; and - (vi) other governance principles: performance management, board dismissal, commercial principles, anti-corruption policies. - Corporate Governance Code: - Developed and adopted in 2021 (Decree No. 1618 (September 21, 2021)) but unimplemented; designed to apply on “comply or explain” basis. - Code requires supervisory boards for SOEs with assets or turnover exceeding GEL 10 million and sets expectations for independent, qualified board members. - Implementation has not started because the list of SOEs to which it applies was never published. - Ownership fragmentation and NASP role: - NASP is registered legal owner of all central government SOE shares and delegates shareholder authority to ministries/agencies. - NASP directly responsible for 62 SOEs and has delegated shareholder responsibilities for 24 SOEs to relevant line ministries. - NASP’s role described as largely administrative without strategic oversight; recommended to be limited to legal/administrative functions with strategic decisions led by shareholding ministries and MOF. - Dual ownership pilot: - Piloted at GR, GGTC and UAG; achievements include improved MOF role in financial analysis and SOE transparency. - Main operational challenge: requirement for shareholder approval of transactions involving state property forces duplicate approvals and delays under Law on State Property. ### SOE boards, appointments, performance management, and SCIs - Current board practices: - Board structures: (i) fully independent boards (GSE); (ii) mixed boards (UAG); (iii) boards composed exclusively of public officials (GOGC, Georgian Post). - Supervisory board sizes ranged from three to nine members. - Appointments often made directly by line ministers; lack of formal nomination process, eligibility criteria, and MOF involvement in many cases. - CEO appointments typically determined by the shareholder rather than by the board. - SCIs: - SCIs concluded for seven major SOEs in 2022 and 2023; four-year forward-looking document prepared annually by SOE boards and reviewed/approved by MOF. - Under Decree 1012, SCIs must include field of activity; financial and non-financial goals with KPIs; dividend policy; risk limits; planned transfers; any QFAs and related budget transfers; disclosure requirements; and consequences for not meeting goals. - Shortcomings: SCIs often contain excessive targets (some outside boards’ control), lack clear quantification/costing of QFAs, lack explicit risk limits, lack mechanisms for systematic monitoring, no mid-year/year-end assessment linked to consequences, and absence of performance-based rewards or sanctions. - Recommendation: focus on limited number of KPIs (up to fifteen) within board control and set more challenging targets where appropriate; institutionalize regular monitoring and link performance to consequences and incentives. - GGEs: - Identified GGEs: UWSC, GA, and Asset Management Company. - UWSC covered under Decree 1012 and receives annual subsidy approximately GEL 60 million. - Plans for all GGEs to be fully integrated into the Treasury system by the end of 2026. ### Board selection, eligibility, dismissal, and procedural guidance - Selection and Nomination Committee (SNC) proposal: - SNC composition: 3–5 members with representation from ownership entity, sector ministry, and independent expert. - Public call open minimum 30 calendar days; proactive outreach and headhunting recommended. - Shortlist typically 2–3 candidates per vacancy; GMS appoints within 10 working days. - Results and anonymized summary to be published online. - Mandatory eligibility criteria: - Bachelor’s degree in relevant field; postgraduate degree an asset. - Minimum of 8 years relevant experience including 3–5 years in leadership, board-level, or senior management role. - Corporate governance knowledge; clean criminal and tax record; not under investigation; declaration of independence required. - Independence defined per Corporate Governance Code (e.g., no political positions in last two years; no significant business relationships; no material liabilities; no remuneration beyond board fee). - Additional competitive scoring considerations: - Sectoral expertise; international experience; diversity; commitment 15–25 days/year; not serving on more than 3 boards. - Grounds for dismissal (Annex III) — powers may be terminated early only on the following grounds (selected): - (i) Failure by the SOE to achieve objectives in letter of expectations based on performance evaluation. - (ii) Discovery that member does not meet qualification or independence requirements (publication requirement within two working days). - (iii) Improper performance of duties; procedures for SOE board or shareholder with at least 25 percent shares to initiate dismissal. - (iv) Resignation or health reasons. - (vi) Entry into legal force of court verdict preventing duties; (vii) administrative liability for corruption-related offense; (ix) court decision finding violation of fiduciary duties. - Decision to terminate for subclauses (i)–(iii) made by SOE’s GMS. ### Remuneration — principles, procedure, and examples - General principles: - Non-executive board members to receive fixed-fee remuneration; avoid performance-based/variable pay for non-executive directors. - Remuneration should be market-related and proportionate to SOE scale and complexity. - Disclosure of board and CEO remuneration at individual or aggregate level recommended. - Proposed national wage context: - Average gross monthly wage in Georgia approximately 2,058 GEL (about USD 763) — annual gross wage around USD 9,156. - Recommended annual fee ranges (by SOE type): - Commercially Oriented SOEs: Ordinary Member Fee (USD) 6,000 – 8,000; % of National Avg Wage 65–85%; Chair Multiplier 1.5× – 2.0×; Committee Chair Premium Up to 20–30% - Public Policy–Oriented SOEs: Ordinary Member Fee (USD) 4,000 – 5,000; % of National Avg Wage 45–55%; Chair Multiplier 1.5×; Committee Chair Premium Up to 15–20% - Example calculations: - Commercial SOE – Large & Complex: Base USD 7,000; Chair USD 14,000; Committee premium USD 1,750; Total USD 15,750 + reimbursable expenses. - Public Policy–Oriented SOE – Medium: Base USD 4,500; Chair USD 6,750; Committee premium USD 675; Total USD 7,425 + reimbursable expenses. - Annex IV: proposed remuneration-setting procedure (Phases I–IX) — key features: - Phase I: Establish Remuneration Policy Framework (MOF and MOESD lead); initial adoption and review at least every three years. - Phase II: Develop Annual Remuneration Guidance by fourth quarter for next year. - Phase III: NRC conducts benchmarking and drafts proposals. - Phases IV–VI: Board review, submission to ownership entity, and decision by MOF/MOESD within specified timeframes. - Phases VII–VIII: Implementation, mid-year review, year-end assessment and bonus approval with malus/clawback provisions. - Phase IX: Disclosure and portfolio-level reporting concurrent with SOE Annual Report. - International/region comparators provided (selected datapoints). ### SOE Reform Action Plan 2025–2026 — key timeline entries - March 2026: Creation of SOE Reform Council and Working Group; Approval of the 2025-2028 SOE Strategy and 2025-2026 Action Plan; Determination of the shareholder(s) of enterprises (SOEs). - April 2026: Corporate Governance Code update; Determination of core SOE functions and long-term goals; Defining SCI content and oversight mechanisms; Submission of SCI to MOF; Development and adoption of board selection, appointment, remuneration and dismissal policies. - June 2026: Staffing boards and defining functions; Formation of board-level audit and remuneration committees; Board approval of remuneration policy; SOE boards’ approval of SCI approved by MOF; Analyze SOE procurement specifics. - July 2026: Approval of special procurement rules for SOEs. - August 2026: Development of Guidelines on quantification of non-commercial activities (PSOs/QFAs). - September 2026: Revision and finalization of SOE Law for submission to Parliament; Boards to analyze non-core activities and submit real estate registers and proposals; Involvement of Competition Agency for privatization/suspension plans. - October 2026: Identification and reduction of non-commercial expenses; Council’s Working Group to decide on privatization of non-core property; Approval of Reform Action Plan for 2026-2027. ### Strategic next steps and priorities - Build on successes (SCIs, increased board independence, stronger financial oversight) to: - Achieve more effective ownership-level decision making. - Reduce political influence and conflicts of interest between ownership and policymaking functions. - Improve SOE operational effectiveness and increase contributions to state budget. - Sustain reform momentum by reinforcing MOF leadership in financial oversight while collaborating with line ministries on ownership matters. - Continue evaluating and strengthening FRMD capacity if scope expands beyond current coverage. *IMF Technical Assistance Report — Fiscal Risk Management and Financial Oversight of the State-Owned Enterprises (excerpts).* ### Preface ................................................................................................................ ### Preface ### Mission overview and participants - IMF Fiscal Affairs Department (FAD) mission visited Tbilisi between July 15 and 29, 2025, at the request of the Minister of Finance of Georgia (MOF). - Mission objectives: - Review progress of State-Owned Enterprises (SOEs) reforms to improve SOE performance and strengthen ownership and governance practices. - Take stock and analyze achievements and challenges in implementing SOE ownership, financial oversight and governance reforms over the past five years. - Identify next steps to further strengthen SOE accountability framework. - Mission leadership and team: - Team led by Ms. Natalie Manuilova (FAD). - Team members: Mr. Yannick Vel (FAD Fiscal Risks Resident Advisor), Ms. Avril Halstead, Ms. Sorana Baciu (FAD short-term experts). - Government and stakeholder meetings: - MOF: Deputy Ministers Mr. Giorgi Kakauridze and Ms. Ekaterine Guntsadze; Mr. Shota Gunia, Head of Fiscal Risks Management Department, and his team. - MOESD: Deputy Minister Mr. Vakhtang Tsintsadze and Ms. Ketevan Chapidze, Head of Economic Analysis and Reform Development. - NASP: Deputy Chairman Mr. Mirian Chachava and staff. - Administration of the Government of Georgia: Mr. Levan Zhorzholiani. - SOEs: Board members and executive management representatives from Development Fund of Georgia (DFG), Georgia State Electrosystem (GSE), Georgia Oil and Gas Corporation (GOGC), Georgian Railway, United Water Supply Company of Georgia (UWSC), and United Airports of Georgia (UAG). - Development partners: World Bank (Mr. Miguel Sanchez Martin, Mr. Ubelis Andzs, Ms. Irina Gordeladze), Asian Development Bank (ADB) Country Director Ms. Lesley Bearman Lahm and team, Swiss Cooperation Office in South Caucasus (Mr. Rati Anjaparidze). - Acknowledgements: Mr. Shota Gunia (MOF) for assistance and coordination; Mr. Andrew Jewell, IMF Resident Representative, and his team for guidance and administrative support; Ms. Lali Gagnidze and Ms. Natia Jakhia for interpretation support. ### Executive summary — key findings - Role of SOEs: - SOEs deliver essential services in electricity, water, gas, and transportation. - Progress in financial oversight and fiscal risk management: - Establishment of the Fiscal Risk Management Department (FRMD) in MOF. - Regular publication of the Fiscal Risks Statement (FRS) and SOE aggregate report has enhanced transparency. - Introduction of Statements of Corporate Intent (SCIs) to set performance expectations. - Government Decree 1012 empowered MOF to oversee finances of seven major SOEs. - FAD has supported these reforms over the past seven years. - SOE Strategy (2022) and pilots: - Strategy for the Comprehensive Reform of SOEs prepared and published in 2022 to align governance with international good practices. - Piloted in three large SOEs, achieving improvements in decision making, government coordination, and professionalizing SOE boards. - Decree 1012 and the Code of Corporate Governance for SOEs support implementation. - Draft SOE Law remains unapproved by Government and requires significant improvements before submission to Parliament. - Dual ownership model: - Strategy envisaged dual ownership with MOF and MOESD as co-shareholders; implementation faced challenges but delivered benefits in pilot SOEs. - Remaining challenges and gaps: - Fragmented ownership structure and decentralized oversight complicate governance and accountability. - Administrative burdens from shareholder approvals for transactions involving state property hinder progress. - Corporate Governance Code not enacted; draft SOE Law lacks critical elements. - Political interference in board appointments and dismissals undermines professionalism and independence. - Absence of formalized processes for board selection, appointment, and dismissal reduces governance effectiveness. ### Executive summary — policy implications and needs - Strengthen MOF financial and fiscal oversight: - Expand requirements of Decree 1012 from pilots to all covered SOEs, then broaden scope to include a wider range of SOEs and material subsidiaries. - Develop framework for defining and reporting on Public Service Obligations (PSO) and Quasi-Fiscal Activities (QFA). - Conduct portfolio-wide analysis of major SOEs to identify non-core operations for streamlining, winding down, or transfer to other entities. - Strengthen ownership and corporate governance: - State should fulfill role as effective and professional shareholder; establish clear division of roles among stakeholders. - Enhance ownership functions: selection, appointment and dismissal of SOE boards and executive management. - Improve legislative framework: update SOE Strategy and Action Plan, enact Corporate Governance Code with phased “apply or explain” 2026–2029 and mandatory compliance by 2030, develop supplemental regulations for board selection, appointment, dismissal, remuneration, and performance management. - Revise draft SOE Law to enshrine ownership principles and address governance gaps. - Anticipated implementation challenges: - Potential resistance from line ministries to changes in ownership structures and decision-making powers. - Reservations about professionalizing governance and limiting policy or political interference. - Insufficient MOF capacity to expand oversight coverage and lack of training for line ministry staff. - Fragmented ownership responsibilities risk inconsistent reform application. - Overcoming obstacles will require strong political support, coordinated efforts, and sustained stakeholder commitment. ### Recommendations (numbered list as in the source) - Fiscal Risks Management and Financial Oversight of the SOEs 1. Issue regulations under Decree 1012 to operationalize the MOF’s oversight by defining roles, reporting requirements, KPI setting, performance evaluation, and approval procedures for major SOE investments and borrowings — Responsible: MOF 2. Expand the scope of Decree 1012 to broaden the range of covered SOEs beyond pilots and include material SOE subsidiaries, align the SOEs covered by the reform under various legislation — Responsible: MOF, shareholder ministries 3. Develop a framework for defining and reporting on QFAs, PSOs for informed assessment of SOE performance and effectiveness — Responsible: MOF, shareholder ministries 4. Continue strengthening the MOF FRMD staff and building their capacity in analyzing SOEs financial performance, related fiscal risks and providing input to the ownership decision-making — Responsible: MOF - SOE Ownership and Corporate Governance 5. Revise draft SOE Law to enshrine ownership principles, clear division of responsibilities among the stakeholders, define transparency rules, and the ownership function — Responsible: MOF, MOESD 6. Update the SOE Strategy and its Action Plan to clearly articulate the state ownership objectives, institutional roles, and sequence of reform priorities — Responsible: MOF, MOESD 7. Develop and adopt regulations governing selection, appointment, dismissal, remuneration and performance management of SOE boards and executive management — Responsible: MOF 8. Apply the Corporate Governance Code to the largest SOEs under a phased approach with “apply or explain” in 2026–2029 and mandatory compliance by 2030 — Responsible: MOF 9. Engage annually on SCIs to set a limited number of targets for SOEs and their boards, introduce annual performance assessment of SOE boards and their regular evaluation — Responsible: MOF, shareholder ministries 10. Conduct a portfolio-wide analysis of major SOEs, identifying non-core operations for streamlining, winding down or transferring to other agencies/companies — Responsible: MOF, shareholder ministries ### Background — key statistics and historical context - SOE counts and assets: - At the end of 2023, 142 SOEs owned by the central government (out of total of 301) held assets worth GEL 5.3 billion, equivalent to about 6.6 percent of GDP; the remaining 159 SOEs are owned by local governments. - Evolution of the SOE sector: - Number of SOEs reduced from over 1,300 entities in 2009 through liquidation and consolidation of inactive or underperforming entities. - Major restructurings: Georgian State Electrosystem (GSE) rehabilitation; Georgian Rail (GR) performance improvements including headcount reductions and stabilization from exchange rate movements. - Four large SOEs—GR, Georgian Oil & Gas Corporation (GOGC), GSE, and the Electricity System Commercial Operator (ESCO)—were moved from the Partnership Fund to direct oversight by line ministries. - Partnership Fund refocused on statutory mandate as Development Fund of Georgia (DFG) and its external borrowing repaid. - MOF fiscal risk management advances: - Since 2017, with FAD support, MOF’s Fiscal Risk Management Unit has included SOE contingent liabilities in annual FRSs. - Disclosure quality and transparency improved substantially and have become a regional model. - IMF staff have emphasized empowerment of MOF with formal authority over SOE oversight and clear separation of ownership, regulatory, and policy roles. - SOE Strategy (Government Resolution No. 573, December 14, 2022): - Five pillars: define rationale for state ownership and align portfolio; instill commercial orientation; ensure competitive neutrality with private sector; improve SOE corporate governance and transparency; increase accountability for performance. - Strategy envisioned a dual ownership model (MOF and MOESD as co-shareholders) and was piloted at three SOEs: Georgian Rail (GR), Georgian Gas Transportation Company (GGTC), and Unified Airports of Georgia (UAG). *Source: https://www.imf.org/-/media/files/publications/tar/2026/english/tarea2026029-source-pdf.pdf* ### 5. There has been tangible progress in implementing some elements of the SOE Strategy, ### 5. There has been tangible progress in implementing some elements of the SOE Strategy, ### Progress and reforms to date - Fully independent supervisory boards or board with independent board members were appointed to the boards of several key SOEs: GSE, GOGC, GR, UAG and DFG. - Annual Statements of Corporate Intent (SCIs) have been introduced, establishing clear performance targets to be achieved by the SOEs. - The Government approved Decree 1012 (Government of Georgia Decree No. 1012 (June 10, 2022) on Financial Oversight of the SOEs) to empower the MOF to exercise financial oversight over seven largest SOEs. - Since 2013, the MOF developed a comprehensive fiscal risk management framework including identification, analysis and management of fiscal risks, with technical support from FAD and CCAMTAC. - The authorities publish an annual Fiscal Risks Statement with a comprehensive section on SOE-related fiscal risks; the MOF also initiated publication of an aggregate SOE report in line with the OECD Guidelines on Corporate Governance of State-Owned Enterprises (SOE Guidelines). - The MOF’s Fiscal Risks Management Department (FRMD) created two new divisions to improve capacity: one focused on fiscal risk management and the other on financial oversight of SOEs. ### Decree 1012: scope, requirements, and implementation - Decree 1012 applies to seven largest and most important SOEs in Georgia: (i) GSE, (ii) Enguri Hydroelectric Station (Enguri HES), (iii) GOGC, (iv) GR, (v) GGTC, (vi) UAG, and (vii) United Water Supply Company (UWSC). - Decree 1012 requires MOF approval for: SCIs; borrowing and investments exceeding GEL 5 million or above 1 percent of the SOEs’ assets (whichever is less); quasi-fiscal activities (QFAs); and dividend policies. - The Decree authorizes the MOF to issue subordinate regulations providing more detailed guidance on SCI preparation and monitoring, KPIs, performance evaluation, and reporting procedures. - During 2025, FAD advised the MOF on development of these subordinate regulations related to SCI details, KPIs, performance evaluation, and reporting. ### Current status and implementation challenges - Implementation of SCI process and other provisions under Decree 1012 is uneven across covered SOEs; some SOEs do not implement the SCI process as required or provide financial information to the MOF on a timely basis. - Administrative burden and additional oversight requirements—such as both shareholders having to approve numerous transactions relating to state property under the Law on State Property—divert co-shareholders from strategic issues to minor administrative tasks; role previously carried out by the National Agency for State Property (NASP). - EU regulations required separation of ownership functions for electricity generation and transmission companies, necessitating modifications to the dual ownership model and creating uncertainty about application of Decree 1012 to entities such as GOGC and Enguri HES. - Administrative procedures requiring shareholder-level approval of transactions involving state property have created a disproportionate administrative burden for the MOF and the MOESD. - FRMD capacity has been enhanced in staff numbers, skills and experience, but additional capacity may be required if scope of activities increases beyond current SOE coverage. ### Fiscal transparency and SOE reporting - The annual SCI process has enhanced inter-agency coordination and alignment between enterprise objectives and broader fiscal policy goals. - The annual Fiscal Risks Statement and the aggregate SOE report contain comprehensive information including: (i) overview of SOEs and reforms, (ii) aggregate SOE financial results, (iii) individual review of 13 largest SOEs, (iv) sensitivity analysis of SOE financial results to macroeconomic variables, (v) funding received by SOEs, (vi) dividends paid by SOEs, (vii) QFAs undertaken by SOEs, and (viii) on-lending to SOEs. - Some SOE activities (e.g., water supplied at tariffs significantly below cost) are not reported in the FRS or the annual aggregated SOE report, limiting transparency and fiscal oversight. ### Areas for strengthening financial oversight and policy recommendations - Leverage Decree 1012: Strengthen, expand, and ensure consistent implementation - Evenly enforce the requirements of Decree 1012 for all SOEs currently covered by its scope to ensure timely feedback from the MOF. - Clarify governance and financial oversight responsibilities for energy SOEs to maintain proper fiscal risk monitoring, ensuring these SOEs continue to comply fully with Decree 1012 and submit regular financial and operational reports to the MOF despite delegation to NASP for un-bundling compliance. - Consider expanding the scope of Decree 1012 to include a broader range of SOEs, for example: (i) all centrally owned public corporations; or (ii) all SOEs (public corporations and general government entities) that meet revenue/assets thresholds in line with the Law of Georgia on Accounting, Reporting and Auditing; or (iii) all SOEs that are beneficiaries of state support (subsidies, transfers, on-lending, guarantees). - Clarify Decree 1012 coverage for subsidiaries by expanding scope to include material subsidiaries that meet criteria on a stand-alone basis and align lists of SOEs across different legislation (SOE Strategy, Decree 1012, Corporate Governance Code). - Issue secondary regulations under Decree 1012 to set detailed roles, responsibilities and timelines for SCI compilation, KPI setting, in-year and year-end reporting, evaluation procedures, and approval procedures for major investments and borrowing. - Define and formalize Public Service Obligations (PSOs) and Quasi-Fiscal Activities (QFAs) - Recognize that QFAs (including PSOs) are non-commercial activities imposed on SOEs that tend to worsen SOE financial performance and can create fiscal risks. - Good practice: reimburse QFAs or defined PSOs directly from the state budget to ensure transparency, cost-efficiency, and accountability. - Georgia has started quantifying QFAs and providing some compensation; examples include: - GOGC: growing cost of supplying social gas reduced profitability; in 2022 the company faced liquidity challenges prompting the state to provide GEL 230 million loan. Although new energy legislation authorizes compensation for such PSOs, GOGC has not yet received any. - Enguri HES: significant share of electricity is supplied free of charge to the population of the Autonomous Republic of Abkhazia; from 2025 some compensation for these QFAs is introduced via the tariff. - GR: passenger rail services at reduced fares with partial compensation from the state budget; remaining costs cross-subsidized by freight profits, limiting investment capacity. - UWSC: operating revenue insufficient to cover costs; state provides an annual subsidy of approximately GEL 60 million to service its debts. - Recommended PSO framework design steps (adapted from IMF/OECD/EU guidance): - Entrustment: formally assign PSOs via legislation or contract specifying beneficiaries, service levels, KPIs, mandate duration, compensation arrangements, and reporting requirements. - Costing: establish an objective and transparent costing methodology considering net costs of a defined service covered by the PSO. - Compensation: compensation should ideally cover no more than the net cost plus a reasonable profit; where no competitive process exists, compensation may be based on costs of a typical, well-run sector operator. - Monitoring and Auditing: introduce reporting requirements to financially separate PSO activities from other operations, require detailed public reporting on costs, compensation and service outcomes. - Assess existing guidance on QFAs and PSO compensation practices, identify critical gaps, and formalize definitions, quantification, costing and compensation procedures. - Where possible, convert QFAs into direct fiscal transfers for clarity and accountability. ### Next steps and strategic focus - Build on early successes (SCIs, increased board independence, stronger financial oversight) to: - Achieve more effective ownership-level decision making. - Reduce political influence on SOEs and minimize conflict of interest between ownership and policymaking functions by line ministries. - Improve SOE operational effectiveness and increase their contributions to the state budget. - Sustain reform momentum by reinforcing MOF leadership in financial oversight while collaborating with line ministries on ownership matters; the MOF drafted the SOE Code on Corporate Governance, contributed to drafting the SOE Law, and prepared a detailed action plan for 2025–2026 (Annex I). - Continue evaluating and strengthening FRMD capacity if scope of oversight expands beyond current coverage. *IMF Technical Assistance Report — Fiscal Risk Management and Financial Oversight of the State-Owned Enterprises (excerpts).* ### 28. FRMD has initiated the sourcing of QFA information from SOEs, but formalization of this ### D. Fiscal Risks from State Owned Enterprises ### QFAs and Information Sourcing - FRMD has initiated the sourcing of QFA information from SOEs, but formalization of this exchange is needed. - MOF currently obtains information on the impact of such QFAs by sending templates to SOEs to fill every year and only three SOEs comply with such requests (GR, GOGC, Enguri HES), indicating that the full scope of the existing QFAs is not known and could be a source of fiscal risk. - Moving forward, a well-defined framework to identify and quantify all QFAs (explicit and implicit), as well as monitor their impact, will be needed to enhance fiscal risks management of SOEs. ### Fiscal Risk Management Capacity - The MOF’s role in fiscal risk management and financial oversight of SOEs should be maintained and strengthened. - Enhancements to the legal and regulatory environment can reinforce this role, for instance through empowering the MOF to fulfill its fiscal risk management and financial oversight functions in the SOE Law and issuing subordinate regulations to Decree 1012. - Internal capacity of the FRMD must be maintained through ongoing capacity building, succession planning and ensuring it is adequately resourced to meet its scope of functions. ### SOE Coverage and Key Statistics (2023 / 2025 budget context) - For the 2025 budget, 301 SOEs were considered important for fiscal risks analysis. - These SOEs account for 92 percent of total SOEs revenue for 2023. - Out of these 301 SOEs, 142 entities are fully owned by the central government, accounting for over 85 percent of the selection’s total revenue. - SOEs from the energy and transportation sectors account for only about 15 percent of the total portfolio by number, but account for almost 77 percent of total revenues in 2023. - These SOEs also have 103 subsidiaries. ### Trends in SOE Financial Performance (2019-2023) - SOE financial liabilities decreased from GEL 15 billion in 2019 (30 percent of GDP) to about GEL 9.7 billion in 2023 (about 12 percent of GDP). - The decrease was due to loan repayments, robust GDP growth following post-pandemic recovery in 2021, and local currency appreciation. - Overall, SOE liabilities have demonstrated a considerable decline of about 11 percent of GDP in 2019 terms. - SOE liabilities are concentrated within the largest SOEs that hold about 60 percent of all SOE liabilities. - Key SOEs targeted under the reform action plan (seven covered by Decree 1012 and five others) continue to hold over 60 percent of all SOE liabilities. - Among those, GR, GSE and UWSC hold the largest obligations of up to 6 percent of the country’s GDP, half of total SOE liabilities of around 12 percent of 2023 GDP. - During 2019-2023, there was a reduction in staffing of about 15 percent in the twelve SOEs covered by the reforms, which led to growing profitability. - Cumulative SOE profitability from 2019 to 2023 is net loss of GEL 858 million or 1.1 percent of GDP. - Excluding losses of UWSC and GA, the cumulative results would be a net profit of about GEL 140 million. - The size of QFAs delivered by UWSC and GA should be carefully assessed for effectiveness gains or other policy actions. ### Main Sources of SOE Fiscal Risks - FRMD assesses likelihood and magnitude of SOE fiscal risks by assigning risk ratings across profitability, liquidity and solvency using generally accepted parameters in line with the FAD SOE Health-Check Tool; the combined ‘overall risk rating’ is based on profitability, liquidity and solvency scores of each entity. - The combined risk rating has improved since 2019 to lower risk categories for the reform-targeted SOEs; most SOEs migrated to lower risk scores and lower liabilities between 2019 and 2023. - UWSC remains at the highest risk category of persistent and material losses; Enguri HES and GOGC have raised their risk profile by one notch. - One cause of SOE losses are QFAs (non-reimbursed PSOs) that negatively impact SOE financial positions; QFAs delivered by GR, GOGC, and Enguri HES significantly negatively impacted profitability during 2021 - 2023. - Net cash flow from the state budget to SOEs averaged -0.3 percent of GDP over 2019 to 2023. - SOE dividends were about GEL 32 million in total or an average of 0.05 percent of GDP between 2019 to 2023. - Direct subsidies and other budget transfers to SOEs have been dominated by UWSC and GA. - Other transfers to SOEs have been through loans and on-lending such as that of GOGC amounting to GEL 230 million. - Key risks highlighted in sensitivity and scenario analysis include: - Exchange rate risks: SOE debt totaling GEL 9.5 billion—much of it in foreign currency—and most earnings in local currency. A 30 percent local currency depreciation could raise the debt-to-asset ratio by 15 percent in the first year (2024 FRS). - Contingent liabilities: GR’s USD 500 million Eurobond maturing in 2028 is a contingent liability warranting closer monitoring given GR’s need to finance renewal of its rolling stock. ### Plans to Strengthen SOE Fiscal Risk Assessment - MOF plans to enhance FRMD operational effectiveness with the newly created SOE Financial Oversight Division to implement the SOE reform roadmap and deepen fiscal risk management. - Planned measures include: - Addressing capacity constraints: the SOE Financial Oversight Division is currently under-staffed (only one staff). Planned measures include filling existing vacancies, creating new positions to match the growing mandate, and providing staff training in financial analysis, modeling, risk assessment, and corporate governance. - Introducing quantification and measurement of QFAs to better capture their impact on SOE financial performance and fiscal implications; this requires further policy reforms, including guiding principles for identification, reporting and compensating PSOs. - Operationalizing the Fiscal Risk Registry as a centralized repository for all fiscal risks (SOEs, PPPs, macroeconomic shocks, legal disputes) documenting likelihood, potential impact, mitigation measures, and assigning ownership across MOF departments and relevant agencies. ### Recommendations - Recommendation #1. Issue regulations under Decree 1012 to operationalize the MOF’s oversight by defining roles, reporting requirements, KPI setting, performance evaluation, and approval procedures for major SOE investments and borrowings (MOF, short-term). - Recommendation #2. Expand the scope of Decree 1012 to broaden the range of covered SOEs beyond pilots and include material SOE subsidiaries, meeting a defined criteria or threshold, align the SOEs covered by the reform under various legislation (MOF and shareholder ministries, short-term). - Recommendation #3. Develop a framework for defining and reporting on QFAs and PSOs to enable an informed assessment of SOE performance and effectiveness (MOF in cooperation with relevant line ministries, longer-term). - Recommendation #4. Continue strengthening the MOF FRMD staff and building their capacity in analyzing SOEs financial performance, related fiscal risks and providing input to the ownership decision-making (MOF, ongoing). ### SOE Ownership and Governance — Reforms to Date - In 2020, the MOF conducted a sectorization exercise with IMF assistance and GFSM (2014) alignment: out of 241 SOEs analyzed, 196 were classified as GGEs, including Partnership Fund (now DFG), ESCO, UWSC, and GA. - Partnership Fund was unbundled; major SOEs were re-aligned to respective line ministries, its mandate refocused, Supervisory Board reinforced with independent members, renamed Development Fund of Georgia (DFG) and reclassified as a PC. - PCs are to operate under commercial principles; GGEs perform primarily non-market activities and should be integrated into general government sector for statistical and fiscal reporting. - The Corporate Governance Code for SOEs was developed and adopted in 2021 (Decree No. 1618 (September 21, 2021)) but has yet to be implemented. The Code: - Is largely based on OECD Guidelines and sets requirements on corporate governance, risk management, internal control and internal audit, remuneration, financial reporting, and disclosure. - Requires shareholder approval for major transactions exceeding 30 percent of the SOE’s assets value. - Sets a selection process for SOE boards involving MOF, MOESD and a Selection Advisory Commission with at least 20 percent of members appointed by business association and relevant social interest groups. - Introduces board-level committees: Audit; Remuneration; Nomination and Governance; requires boards be comprised entirely of independent members and offers a definition of independence. - In 2022, Government approved the Strategy for the Comprehensive Reform of SOEs, introducing dual ownership (MOF and MOESD) and five key pillars: - Improving SOE corporate governance in line with OECD SOE Guidelines, appointing independent boards, enhancing reporting, transparency, and disclosure. - Ensuring SOEs are commercially focused and compensating non-commercial functions (fully or partially). - Warranting competitive neutrality so SOEs are subject to same legislation, regulations and taxation as comparable private companies and not benefiting from concessionary financing. - Defining an ownership policy with criteria for when SOEs are justified and pursuing restructuring, privatization, or liquidation for non-viable SOEs. - Increasing accountability via Statements of Corporate Intent (SCIs), annual SCIs agreed with shareholding entities, four-year strategic plans, and regular reporting comparing performance against SCI targets. *IMF Technical Assistance Report — excerpt from chapter D. Fiscal Risks from State Owned Enterprises* ### 48. The SOE Strategy was planned to be operationalized by an overarching SOE Law. The law ### tarea2026029-source-pdf - 48. The SOE Strategy was planned to be operationalized by an overarching SOE Law. The law ### SOE Law: intended scope and objectives - The SOE Law was intended to: - establish a framework for SOE governance and management to be further detailed in subordinate regulations. - define the roles of shareholding ministries and the MOF, which had already been tasked with financial and fiscal oversight over SOEs, approving SCIs and QFAs, and monitoring fiscal risks. - establish the framework for SOE board appointments to be transparent, merit-based, and competitive. - set major parameters of the rationale for SOE ownership that would be the basis for rationalizing the existing SOEs and provide clear guidelines for establishment of any new entities. - allow creation of new SOEs only if there was a natural monopoly, market failure, or strategic interest justifying state ownership over private alternatives. - establish additional requirements for SOE transparency and disclosure, such as publication of audited financial statements and annual reports, while the state would produce an aggregated report on the SOE portfolio. - The Code defines an independent member as a person that, within the last two years, has not been this SOE’s board member or CEO, has not occupied the position of Minister, Deputy Minister, Member of Parliament or other political position, has not run a business that directly or indirectly has a significant business relationship with the SOE or provided professional or other business services to the SOE, has no material liabilities to management or shareholders of the SOE, receives no remuneration from the SOE other than their remuneration as a Supervisory Board member, and has no other kind of relationship that may affect their independence. ### Draft SOE Law status and identified gaps - The draft SOE Law has been on hold since 2023 due to significant gaps vis-à-vis good international practices and lack of consensus within the Government. - Key areas still requiring strengthening include, but are not limited to, introducing: - (i) clear separation of roles and responsibilities between the MOF, MOESD, other line ministries and regulators; - (ii) elements of the rationale for continuous state ownership or establishment of new enterprises that are aligned with public policy objectives; - (iii) minimum qualification requirements for SOE board members; - (iv) high-level provisions on SOE executive appointments and remuneration and board authority over it; - (v) definition and high-level guidelines on treatment of PSOs; and - (vi) other key principles of good corporate governance, such as performance management, board dismissal, commercial principles, and anti-corruption policies. ### Current status of SOE reform coverage and oversight - Reform focus and pilot coverage: - The SOE Strategy and application of the dual ownership model focus on three pilot SOEs: GR, GGTC and UAG. - Two more SOEs – GSE and GDF - went through different types of restructuring and un-bundling that led to improvements in their corporate governance practices. - Financial oversight under Decree 1012 extends to seven SOEs: GSE, GOGC, GR, GGTC, UAG, Enguri HES, and UWSC. - More SOEs are targeted for further reform coverage (GEOPOST, GA), which is yet to be formalized. - The Law on Entrepreneurs remains the legal basis for managing all companies in Georgia, including SOEs, but it does not address ownership and governance issues specific to SOEs. - The Corporate Governance Code for SOEs: - provides a strong foundation largely aligned with the OECD SOE Guidelines but remains unimplemented. - was designed to apply to the largest SOEs on a “comply or explain” basis, but implementation has not started because the list of SOEs to which it applies was never published. ### Ownership arrangements, fragmentation, and NASP role - Current ownership fragmentation: - The National Agency for State Property (NASP) is the registered legal owner of all central government’s SOE shares; it can delegate its shareholder authority to other ministries or agencies. - NASP has direct responsibility for overseeing 62 SOEs and has delegated its shareholder responsibilities for 24 SOEs to the relevant line ministries. - A small subset of three SOEs have been subject to a pilot of the dual ownership model involving two ministries – MOF and MOESD – jointly exercising their shareholder powers. (Footnote: Georgian Rail (GR), Georgian Gas Transportation Company (GGTC), and Unified Airports of Georgia (UAG).) - Energy sector ownership reassignments: - To comply with the European Union Energy Community requirements, GSE (transmission system operator) was retained under direct ownership of MOESD; shareholder powers over Enguri HES, GOGC, and ESCO were transferred to NASP. - MOF preserved its financial oversight mandate over GSE, Enguri HES, and GOGC, while ESCO—classified as a general government entity—remained outside of the scope of SOE financial oversight. - Problems with current arrangements: - The fragmented oversight arrangements lead to ambiguous division of responsibilities (board appointments, participation in shareholders’ meetings, oversight of strategic decisions), inconsistent practices, weakened coherence of portfolio strategy, and diluted accountability. - NASP lacks capacity and faces inherent overlap of roles (subordination to MOESD, combining ownership and policymaking), producing conflicts of interest and undermining commercial orientation. - NASP’s role is largely administrative—share registration and approval of state property transactions—without involvement in strategic oversight, corporate governance, or performance monitoring. - Recommended allocation of roles given NASP constraints: - NASP’s role in SOE ownership and governance should be limited to supporting functions only (legal and administrative functions, routine approvals below defined threshold). - Strategic decisions—appointments and dismissals of SOE boards and executive management—should be led by relevant shareholding ministries and the MOF. - Any advances in ownership arrangements should build on the strong MOF role and progress to date and should focus on assigning key shareholders’ functions rather than assigning a single lead shareholder role. ### Dual ownership pilot: achievements and operational challenge - Achievements: - The MOF has demonstrated a clear role in high quality and timely analysis of SOE financial health and related fiscal risks. - MOF improved SOE transparency through regular publication of SOE section in the FRS and more recently – aggregate SOE report. - Main challenge: - The requirement for shareholder approval of any transactions involving state property (Law on State Property) forces approval by both MOF and the relevant sector ministry under dual ownership, causing duplicate approvals and delays. - The administrative burden can be addressed by introducing higher thresholds for shareholder approval or delegating approval authority for non-material transactions to improve efficiency. ### SOE ownership functions (Table 3) — selected functions and current roles/status - 1. Development and update of the State Ownership Policy (SOE Strategy/Action Plan): MOF and MOESD - 2. Participation in general meeting of shareholders (GMS): Shareholders (MOF, MOESD, NASP, other line ministries) and sub-items (approval of annual business plan and budget; approval of investment plans; approval of annual reports and financial statements; approval of independent auditor; set dividend policy and profit distribution; appointment of SOE boards; approval of SOE legal and corporate structure; approve capital decisions; approve major transactions) - 3. Board nomination and appointments: Identified gap. Suggested steps include setting up a Selection and Nomination Committee (SNC), developing SOE specific board profile, launching open calls, reviewing applications, preparing shortlists, interviews, proposing top 2 candidates, and GMS appointment. - 4. SOE Performance Management: MOF, MOESD, other shareholders. a) Setting policy objectives, shareholders’ expectations, performance objectives through Statements of Corporate Intent (SCI) — SOE Boards develop; Approval by the MOF with other shareholders (MOESD, NASP, other ministries) by Decree 1012. b) Monitoring SCI implementation — To be implemented (GD 1012 Art. 5). c) Evaluate board performance, including corrective measures — To be implemented (GD 1012 Art. 5). - 5. Develop and adopt remuneration policy for SOE boards and executives: Identified gap. - 6. CEO appointment to be carried out by SOE Boards with shareholders' oversight: Identified gap. - 7. Monitor and oversight of SOE financial performance: MOF (GD 1012). - 8. Assessment and management of SOE related fiscal risks: MOF (GD 1012). - 9. Approval of major investment and borrowing decisions: MOF (GD 1012). - 10. Development and adoption of PSO framework (incl. quantification, monitoring of SOEs’ QFAs): Identified gap. - 11. Report on SOE portfolio: - a) Fiscal Risk Statement: MOF - b) SOEs Aggregate Reporting: MOF - c) Report on the Implementation of SOE Ownership Policy/ SOE Strategy: Identified gap ### SOE boards and executive management — practices and gaps - Legal and formal requirements: - Under the current Law on Entrepreneurship, boards are not required unless their creation is envisaged by an entity charter. - The Code introduces mandatory creation of boards for the largest SOEs, but this requirement is not yet enforceable as the Government has not approved the list of SOEs to which the Code applies. - Current board practices and composition: - Some SOEs have appointed boards, including independent directors in a few cases; GSE established a fully independent board. - Current SOE board structures can be classified into three categories: (i) fully independent boards (GSE); (ii) mixed boards comprising government officials and independent members (UAG); and (iii) boards composed exclusively of public officials (GOGC, Georgian Post). - Supervisory board sizes observed ranged from three members (in one case, with only two incumbents) to nine members. - Problems with appointments, dismissals, and independence: - Board appointments are often made directly by line ministers and boards are frequently composed of senior civil servants, raising conflicts of interest and lack of operational independence. - There is no formal nomination process, no clear eligibility criteria, and no involvement of the MOF in many cases. - Lack of a clear dismissal procedure undermines board independence. - CEO appointments are typically determined directly by the shareholder (usually the sector ministry) rather than by the board. - Board-level governance mechanisms: - Board-led CEO appointments, establishment of board committees, and structured performance evaluations remain underdeveloped. - Some boards have begun to establish audit committees, but practices are not formalized or consistent. - The absence of functioning audit or risk committees and lack of regular board evaluations reduce board effectiveness (World Bank ROSC findings). - Remuneration: - Remuneration practices for SOE boards and executives are insufficiently structured and lack transparency. - Many SOEs operate without formal board compensation policies; uncertainty exists about remuneration of public officials for board duties. - CEO remuneration is typically determined by the shareholder rather than by the board, weakening board oversight and accountability. - Good practice recommends market-related compensation for non-executive board members reflecting SOE scale and complexity; Georgia lacks standardized remuneration policies. - Gender and diversity: - The World Bank ROSC report found women to be underrepresented on supervisory boards in Georgia. *IMF Technical Assistance Report | excerpt* ### 68. Initial progress in SOE performance management has been made through the introduction ### Initial progress in SOE performance management has been made through the introduction of SCIs for SOEs covered under Decree 1012 ### SCIs: design, implementation, and shortcomings - SCIs were concluded for seven major SOEs in 2022 and 2023. - An SCI is a four-year, forward-looking document prepared annually by SOE boards and then reviewed and approved by the MOF. - Under Decree 1012, SCIs must set out: - the SOE field of activity; - its financial and non-financial goals with corresponding key performance and target indicators; - dividend policy; - risk limits; - planned transfers to be received from the state budget; - any QFAs and related budget transfers to cover their costs; - disclosure requirements; and - the consequences of not meeting agreed goals. - Implementation issues observed: - SCIs often contain a large number of financial and non-financial targets—some outside the control of SOE boards or focused on inputs rather than outcomes—making it difficult to identify and focus on priorities of the state. - The scope and ambition of targets vary, while the state’s engagement in reviewing and challenging these targets has been limited, particularly after the first year of implementation. - Many SOEs are yet to clearly identify, quantify, and cost their QFAs. - Risks are generally described, but explicit risk limits are rarely set. - Mechanisms to systematically monitor SCI achievement, provide feedback to SOE boards, and hold them accountable are not yet established. - There is no structured process for mid-year or year-end assessments to enable timely corrective action or inform future target setting. - End-of-year reporting is not linked to formal consequences for SOE boards or executive management. - Absence of regular, evidence-based feedback from the state shareholder limits SOE boards’ ability to adjust strategies and address underperformance. - Absence of performance-based rewards or sanctions weakens the link between SCI targets and SOE accountability, increasing the risk that the process becomes procedural rather than a driver of improved governance and performance. ### Coverage of General Government Entities (GGEs) - Some GGEs are included within the scope of the SOE reforms, namely UWSC, GA, and Asset Management company. - UWSC operates in a water utilities sector in competition with private sector providers and demonstrates potential to function commercially. - The other two GGEs also exhibit commercial aspects in their operations. - Current reform status: - GGEs remain outside the formal SOE Strategy, which primarily focuses on PCs. - UWSC is covered under Decree 1012. - Plans exist for all GGEs to be fully integrated into the Treasury system by the end of 2026, enabling automated reporting and requiring MOF approval of their budgets. - Governance reforms for GGEs may be applied with appropriate flexibility to reflect their closer government integration and public service mandates. ### Strengthening SOE ownership and corporate governance: principles and gaps - Core expectation: the state must act as an informed, professional, and active owner—setting clear mandates, appointing competent and independent boards, monitoring performance, and holding enterprises accountable. - Pilot dual ownership model outcomes: - Delivered tangible improvements in SOE ownership arrangements in Georgia. - Requires strong coordination between ministries; otherwise faces inefficiencies, conflicting objectives, and fragmented accountability. - MOF fulfills financial oversight and fiscal risk management while carrying broader shareholder responsibilities; line ministries focus on operational targets aligned with policy goals. - Key gaps to address (as identified by the mission and outlined in Table 3): - Develop formal procedures for SOE boards and executive management appointments and dismissals. - Establish clear remuneration policies. - Develop PSO frameworks. - Options and trade-offs for ownership models: - Centralized ownership can deliver greater coherence, professionalization, and transparency but requires strong political support and close coordination. - Coordinated ownership (stronger coordinating function within MOF) can enable unified oversight without full separation of ownership and policymaking. - Dual model offers balanced oversight but risks conflict of interest and fragmented accountability without clear division of responsibilities. - Recommended pragmatic approach: - Focus on operationalizing key shareholder functions rather than on selecting an ownership model. - Assign clear roles to all actors in SOE corporate governance and formalize SOE board selection, appointment, and dismissal processes. - Empower MOF to: - exercise centralized financial and fiscal oversight; - participate in SOE governance through boards and executive management appointments and dismissals; - play a decision-making role in decisions concerning public finances; - Anchor these powers in formal regulations and procedures. ### Pre-requisites for an efficient ownership function (Box 2) - Legal mandate and policy authority: mandate grounded in law or high-level government policy authorizing access to SOE data, influence on board nominations, shaping ownership policies, and issuing guidance. - Institutional Autonomy: function located in a ministry or structure without sectoral policy or regulatory responsibilities; accountability to broader Government and Parliament to strengthen public oversight and transparency. - Qualified People: staffing with professionals in accounting and finance, public administration and corporate law, corporate governance, human resources, and data management; leadership capable of steering and coordinating ownership functions. - Adequate Financing: transparent budget allocations adequate to cover permanent staffing costs, operational tools (e.g., SOE monitoring software), and external expertise (e.g., legal reviews, financial restructuring). ### SOE legislation and Corporate Governance Code: priorities for reform - An SOE Law should be enacted to: - cement the SOE Strategy direction; - clearly define roles of ministries and agencies; and - align division of responsibilities among governance bodies—General Meeting of Shareholders, SOE boards, and executive management. - Key requirements that should be established by the SOE Law (elements currently in draft but with critical gaps): - Clear separation of roles and shareholder functions among MOF, MOESD, other line ministries and regulators, achieving separation of ownership, policymaking and regulatory functions. - Rationale for state ownership, building on the SOE Strategy and introducing elements of the SOE Ownership Policy, including rationale for continuous ownership or establishment of new enterprises aligned with public policy objectives. - Defined role for the MOF with equal responsibilities alongside other state shareholder representatives, including appointment and dismissal of SOE board members, approval of major transactions, development of the Letter of Expectations, etc. - Key aspects of selection and appointment of SOE board members: eligibility and minimum qualification requirements, requirements for independence, limitations on time or number of terms, and high-level details on the selection and appointment process for transparency and competitiveness. - Limitations on the circumstances and requirements for dismissing SOE board members—dismissals limited to clearly defined situations such as dereliction of duty or failure to meet fit and proper requirements (reference to Annex III). - Fiduciary responsibilities of SOE board members: act in the best interests of the SOE only; ensure compliance with laws; ensure integrity of accounting and reporting; manage conflicts of interest and related party transactions; determine executive remuneration. - High-level provisions on SOE executive appointments and SOE board authority to appoint and dismiss the SOE CEO to ensure merit-based leadership and safeguard independence of governance processes. - High-level details for evaluating SOE performance against the SCI: timelines, circumstances for changes to SCIs, requirements for evaluating performance vis-à-vis SCI targets, and consequences for failing to achieve them. - PSO definition and framework for implementation: clear definition of PSOs and requirements on entrustment, costing, compensation, monitoring, auditing and reporting; could be addressed with reference to a broader PSO framework covering public and private sector companies. - References to relevant secondary regulations with detailed guidance on board and executive remuneration, ethics, anti-corruption policies, internal controls, internal audit, risk management, sustainable development, and other areas as needed. *IMF Technical Assistance Report | 32–38* ### 87. Other legislation related to SOE ownership and governance will need to be reviewed and ### Other legislation related to SOE ownership and governance will need to be reviewed and amended to align with the intended direction of the SOE reform. ### SOE Strategy, Action Plan, and Corporate Governance Code - Update the SOE Strategy and related Action Plan (Annex I) to clearly articulate: - state ownership objectives; - institutional roles; and - sequence of reform priorities. - Enact and apply the Corporate Governance Code for SOEs (the Code) to relevant SOEs, ideally targeting the same SOEs covered by the reform effort to date. - The Code establishes government-level ownership processes including performance management, promotes board independence, merit-based appointments, and clearly defined oversight responsibilities. - The Code requires supervisory boards for SOEs with assets or a turnover exceeding GEL 10 million and sets expectations for independent, professionally qualified board members. - The Code encourages: - formation of board committees (audit, nomination, risk); - adoption of board charters; and - regular board evaluations. - Initial application: “comply or explain” approach, with targeted SOEs either implementing the Code or transparently disclosing reasons for non-compliance. - Transition path: make the Code mandatory for all major SOEs covered by the SOE Strategy and Decree 1012 in the medium term, such as three to five years. - Reinforce transition by incorporating key Code provisions into the forthcoming SOE Law and clearly assigning responsibility for monitoring compliance. ### General Meeting of Shareholders (GMS) - Under Georgian law, the GMS is the highest decision-making body in JSCs; participant meetings hold equivalent roles in LLCs. The Law on Entrepreneurs assigns the GMS responsibilities including: - approving charter amendments; - electing and dismissing supervisory board members; - endorsing financial statements; - authorizing major transactions; and - deciding on reorganization or liquidation. - In practice: - many SOEs do not hold formal shareholder meetings; - decisions legally within the GMS competence are often enacted through executive decrees and direct ministerial decisions. - Recommendations: - formalize shareholder/participant meetings for all SOEs, even wholly state-owned enterprises; - formally document decisions and publish key resolutions; - clarify division of responsibilities among the GMS, SOE boards, executive management, line ministries, and the MOF to reduce overlaps and enhance accountability. ### SOE Boards and Executive Management — Composition, Appointments, and Dismissals - Competent, autonomous boards with clear mandates are essential to oversight, strategic direction, and accountability. - Good practice trends and country examples: - Lithuania mandates boards for all large SOEs and complements legislation with a Corporate Governance Code; - Latvia applies public nomination procedures and standardized mandates; - Estonia grants decision-making authority over CEO appointments and strategy, balanced by reporting to the finance ministry; - Slovak Republic curbs political interference through formalized responsibilities and performance-linked oversight. - OECD-aligned guidance: - favor eliminating political representation on SOE boards; appoint state representatives at technical rather than political level. - many jurisdictions require independent members to comprise at least one-third of large SOE boards; Lithuania mandates a minimum of half independent directors in large SOEs. - Recommendations for Georgia: - formalize transparent, competitive, merit-based selection and appointment processes; - limit grounds for dismissal to reduce political influence; - establish clear criteria for board composition emphasizing relevant skills and experience; - strengthen board autonomy to appoint and evaluate CEOs and to reduce line-ministry-led CEO appointments. - Selection and Nomination Committee (SNC) proposal: - SNC composition: 3–5 members with representation from the ownership entity, relevant sector ministries, and independent experts; - responsibilities: prepare board profiles, define evaluation criteria, compile long- and shortlists, assess candidates via scoring grid; - public advertising of vacancies typically for a minimum of 30 days combined with proactive outreach and headhunting; - SNC shortlists typically 3–5 candidates per vacancy, followed by interviews and final evaluation; GMS formally appoints selected candidates within indicated timeframe; - publish an anonymized summary report detailing the process to ensure transparency. - Dismissal procedures: - dismiss only for justifiable reasons such as demonstrable underperformance, dereliction of duty, or failure to meet fit-and-proper standards; - insulation of removal decisions from electoral cycles and political considerations; - provide board members opportunity to respond before removal and publish a detailed report explaining reasons for dismissal. - Current gap in Georgia: - boards still lack full authority over management appointments; line ministries lead CEO appointments and dismissals, introducing political interference. ### SOE Performance Management and Service Contracts (SCIs) - SCIs are a solid foundation but currently: - contain an excessive number of financial and non-financial targets, diluting priorities; - include indicators measuring inputs rather than outcomes (example: number of committee meetings rather than risk mitigation results). - Recommendations to strengthen SCIs: - focus on a limited number of key performance indicators (KPIs) — up to fifteen — that are within the control of the SOE board and strategically focused on creating value; - set more challenging targets for SOEs and their boards where appropriate. - Public Service Obligations (PSOs) and state funding: - objectives for SOEs undertaking PSOs and projected costs of QFAs are not currently provided in SCIs; - many SOEs have QFAs unidentified and unquantified, and information on state transfers to SOEs is lacking; - to tie performance targets to state funding, the state must demonstrate commitment to provide necessary resources. - Monitoring and feedback: - establish mechanisms for regular monitoring and feedback with SOE boards during the year rather than only end-of-year reviews. - Performance incentives: - currently SCIs do not set out consequences for SOE boards if SCI targets are not met, nor are rewards or sanctions linked to SCI outcomes; - formalize links between performance and consequences, using SCIs as basis for performance contracts with boards and CEOs, and align executive remuneration and incentives with measurable outcomes. ### Remuneration of SOE Boards and Executive Management - Consensus across OECD member and partner countries: - non-executive board members should receive fixed-fee remuneration, varying by SOE size and commercial focus. - Benchmark figures: - in commercially oriented SOEs, board members earn on average around USD 17,356 annually — about 64 percent of the national average wage; - in SOEs focused on public policy objectives, the average drops to approximately USD 8,700. - Practices and safeguards: - nearly all countries avoid performance-based or variable pay for non-executive directors to safeguard independence; - additional compensation is typically modest and reserved for demanding roles (e.g., audit committee chairs). - Remuneration-setting models: - Sweden, Norway, Finland: centralized ownership bodies set or benchmark director fees using standardized principles and comparative data; - UK and France: SOEs propose remuneration levels requiring shareholder approval (line ministry or MOF); - Netherlands and New Zealand: SOE boards may initiate proposals but shareholder oversight remains crucial. - Treatment of public servants on SOE boards: - several OECD countries restrict participation of civil servants and elected officials on SOE boards, especially in commercially oriented entities; - where permitted, public officials often subject to zero-fee policies or capped remuneration, or service treated as part of regular duties without additional compensation. *IMF Technical Assistance Report | excerpt* ### 113. CEO and executive management compensation in SOEs typically includes both fixed and ### tarea2026029-source-pdf - 113. ### Executive and CEO remuneration in SOEs - CEO and executive management compensation in SOEs typically includes both fixed and variable components overseen by SOE boards. - Fixed pay covers base salary reflecting role responsibilities, market benchmarks, and internal pay equity. - Variable pay is often linked to individual, financial, or strategic performance targets and incentivizes meeting or exceeding goals such as profitability, efficiency, or achievement of KPIs. - Remuneration components frequently include performance bonuses, long-term incentives, and other benefits, with periodic board or remuneration committee reviews to ensure competitiveness and accountability. - Remuneration and compensation committees (typically composed primarily of independent board members) establish frameworks to align CEO pay with SOE medium-term performance targets, market comparators, and strategic priorities. - Examples of governance practice: - Lithuania, Latvia, and France have strengthened the role of remuneration committees to enhance objectivity, credibility, and consistency. - Norway and Sweden set SOE executive compensation within clear frameworks established by ownership entities, often with caps or guidelines. - Some countries with less mature governance frameworks have less structured or transparent approaches, creating variability in executive pay practices. - Transparency practices: - Majority of countries require disclosure of board and CEO remuneration, at individual or aggregate level. - Norway, the Netherlands, and New Zealand publish detailed data through centralized government portals. - High level guidelines on establishing SOE boards and executive management remuneration are offered in Annex IV. ### General Government Entities (GGEs): definition and governance approach - GGEs in Georgia: entities that operate like SOEs but are categorized as GGEs, requiring a modified governance and financial oversight approach. - Characteristics: - Rely primarily on state transfers because functions are generally not commercially viable. - Carry out a mix of public policy and commercial activities; management approaches similar to public corporations. - Typical examples: entities responsible for roads and water supply. - Identified GGEs in Georgia: UWSC, GA, and the Asset Management Company. - Recommended governance and fiscal treatment differences from commercial SOEs: - GGEs should be subject to the same financial oversight as budget spending units and be accounted for on-budget; their financial activities fully incorporated into respective line ministries’ budgets and operations. - Budgets should be approved by the relevant line ministry and/or MOF; GGEs should submit regular in-year and end-of-year execution reports to the line ministry and MOF. - GGEs should not be permitted to borrow or have budget deficits; any borrowing must be consolidated as part of the state’s borrowing for reporting purposes. - GGEs could remain under line ministry supervision; separation of state shareholding and policymaking responsibilities is not always necessary. - Corporate governance arrangements could be simpler than for PCs (public corporations). - GGE boards do not necessarily need to be majority independent; boards can be staffed largely with ministry representatives though independent members can add specialized perspectives. - GGEs must provide financial reporting in accordance with GFS for consolidation as part of general government; they may also produce financial statements in accordance with IFRS. - Financial results should be audited in accordance with requirements applicable to other budgetary spending units. - GGEs should be subject to similar ethical, risk management, internal control and audit requirements as PCs; CEO and Board should have similar fiduciary duties and conflict-of-interest management. - Oversight capacity: - Additional capacity needed within the MOF to effectively oversee GGE finances. - FRMD currently approves GGE budgets but lacks requisite capacity to fulfil the role effectively. - Financial oversight of GGEs aligns closely with other budgetary units and would be better placed within the Budget Department. - Shift requires strengthening the Budget Department with adequately skilled staff and sufficient numbers. ### Recommendations (numbered) - Recommendation #5. Revise the draft SOE Law to enshrine the ownership principles, clear division of responsibilities among the stakeholders, define transparency rules, and the mandate of the ownership function (MOF and MOESD, medium-term). - Recommendation #6. Update the SOE Strategy and its Action Plan to clearly articulate the state ownership objectives, institutional roles, and sequence of reform priorities (MOF and MOESD, medium-term). - Recommendation #7. Develop and adopt regulations governing selection, appointment, dismissal, remuneration and performance management of SOE boards and executive management (MOF, medium-term). - Recommendation #8. Apply the Corporate Governance Code to the largest SOEs under a phased approach with “apply or explain” in 2026–2029 and mandatory compliance by 2030 (MOF, medium-term). - Recommendation #9. Engage annually on SCIs to set a limited number of targets for SOEs and their boards, institutionalize annual performance assessment of SOE boards and their regular evaluation (MOF and other shareholder ministries, annually). - Recommendation #10. Conduct a portfolio-wide analysis of major SOEs, identifying non-core operations for streamlining, winding down or transferring to other agencies/ companies (MOF, shareholding ministries, medium-term). ### SOE Reform Action Plan 2025-2026: key timeline entries - March 2026: Creation of SOE Reform Council and Working Group. - March 2026: Approval of the 2025-2028 SOE Strategy and 2025-2026 Action Plan. - March 2026: Determination of the shareholder(s) of enterprises (SOEs). - April 2026: - Corporate Governance Code update, including defining the SOEs to which it should apply. - Determination of the core function of SOEs by the shareholder(s), as well as long-term goals/ expectations and indicators for the board. - Defining the SCI content, process for its finalization, financial and non-financial oversight mechanisms (performance management system for SOE boards and the executive management). - Submission of the SCI agreed with the shareholder(s) to the MOF and shareholder/s (if different). - Development and adoption of SOE board selection, appointment, remuneration and dismissal policies. - June 2026: - Staffing boards in SOEs and defining their main functions and responsibilities under the newly introduced policies. - Formation of SOE board-level audit and remuneration committees and determination of their provisions (charters of the committees). - Board approval of remuneration policy at each SOE (in agreement with shareholder(s)). - SOE boards’ approval of the SCI approved by the MOF. - Analyzing specifics of SOE procurement by boards and submitting procurement codes where special procurement regime is justified to the Reform Council and Working Group. - July 2026: Approval of special procurement rules for SOEs. - August 2026: Development of the Guidelines on the quantification of non-commercial activities (PSOs/QFAs). - September 2026: - Revision and finalization of the SOE Law for submission to Parliament. - Boards to analyze each direction of SOE’s operation (including their subsidiaries) and submit comprehensive information on activities other than the SOE’s main function to the Reform Council and Working Group. - Boards to submit a register of real estate of SOEs to the Reform Council and Working Group with argumentation on the need for each property to be owned by the SOE. - Analyzing information with the involvement of the Competition Agency and developing action plan for gradual termination/suspension of SOE activities where private sector could be more effective. - October 2026: - Identification of non-commercial expenses of SOEs by boards and submission of information on their reduction and cancellation of budget financing (with detailed calculations). - The Council’s Working Group to make a decision on privatization of SOE non-core property and an action plan. - Analysis and gradual elimination of non-commercial expenses and development of an action plan to establish a transparent funding mechanism. - Approval of the Reform Action Plan for 2026-2027. ### SOE Board Selection and Appointment Guidelines: objectives, roles, and steps - Objective and principles: - Establishes a clear, merit-based framework to ensure professional governance, reduce political interference, and align with international standards. - Principles: Transparency and open competition; Meritocracy and professional competence; Independence and ethical integrity; Board diversity and balance of skills; Accountability to the state as shareholder. - Institutional roles and responsibilities (entities and responsibilities listed in tabular form in source): - Ownership Entity: Triggers and oversees the selection process; ensures compliance. - Line Ministry: Provides input on sectoral needs and SOE Strategy. - Selection and Nomination Committee (SNC): Evaluates candidates and prepares appointment proposal. - Independent Expert (optional): Supports technical screening and interviews. - GMS / Ownership Entity: Formally appoints board members based on shortlist. - Procedural steps (high level): - Step 1: Launch of the Selection Process - Initiated at least 4 months before mandate expiry, or within 30 days of a vacancy. - Ownership Entity issues a formal launch notice and publishes a call for candidates on official websites and job portals. - Step 2: Establishment of the SNC - Appointed by the Ownership Entity. - Composition: 3-5 members, including: 1 from the Ownership Entity; 1 sector expert appointed by the line ministry; and 1 independent governance or HR expert. - All members sign confidentiality and conflict-of-interest declarations. - Step 3: Preparation of Selection Materials - SNC prepares Board Profile, Candidate Profile, Evaluation Grid, Interview Framework. - Step 4: Public Call for Applications - Public call open for at least 30 calendar days. - SNC should proactively seek candidates through targeted headhunting and other channels. - Application package must include CV and application form; degrees, certificates, and references; integrity and conflict-of-interest declarations; motivation or intent letter. - Step 5: Screening and Shortlisting - SNC reviews applications, applies evaluation grid, produces a longlist and a shortlist of 2–3 candidates per vacancy. - Step 6: Interview and Final Evaluation - Shortlisted candidates interviewed using approved plan and scored on technical expertise, integrity, strategic thinking, and independence. - SNC prepares a final report with scores, rankings, justification, recommended appointments and reserve list. - Step 7: Appointment - Ownership Entity endorses the SNC Final Report and decides on the candidate/s. - The GMS or relevant authority appoints board members within 10 working days. - Results and anonymized summary published online. ### Eligibility criteria and independence - Mandatory requirements: 1. Education - Bachelor’s degree in a relevant field (e.g. economics, law, engineering, finance, management, public administration). - A postgraduate degree (Master’s or PhD) is an asset. 2. Professional Experience - Minimum of 8 years of relevant experience, including at least 3-5 years in a leadership, board-level, or senior management role. - Preference given to experience in sectors relevant to the SOE. 3. Corporate Governance Knowledge - Demonstrated understanding of corporate governance principles, fiduciary duties, strategy, and oversight. - Previous board experience in public or private sector is preferred. 4. Integrity and Reputation - Clean criminal and tax record. - Not subject to ongoing investigations, bankruptcy, or disciplinary sanctions. - Declaration of independence, ethics, and impartiality required. 5. Independence (per Georgia Corporate Governance Code for SOEs) - An independent member is defined by exclusion from listed relationships and positions including, but not limited to: - Personal relations in the last two years with board/CEO or significant shareholders. - Holding Minister, Deputy Minister, Member of the Parliament of Georgia or other political/state-political positions in the last two years. - Managing/running the business for past two years or substantial business relationship with the enterprise or significant shareholders. - Material liabilities to management or significant shareholders. - Professional/business relationship with the enterprise, its executives, or significant shareholders for the past five years. - Receiving additional amounts from the enterprise beyond dividend and fixed salary for supervisory board membership. - Any other relationship that may affect independence. - Being a public servant as defined by Paragraph 4 of Article 46 of the Law of Georgia on Entrepreneurs. 6. Conflict of Interest and Declarations - Must submit required declarations on conflicts of interest, political exposure, assets and income (if applicable). *IMF Technical Assistance Report | 44–52* ### 4.2 Additional Considerations (for competitive scoring) ### 4.2 Additional Considerations (for competitive scoring) ### Candidate assessment criteria - Sectoral expertise relevant to the SOE's activities - International experience (e.g., international organizations, multinational corporations) - Diversity contribution (gender, age, background, region) - Commitment and time availability (estimated 15–25 days/year) - Not over-boarded (not serving on more than 3 boards simultaneously) ### Disqualifications (4.3) - Hold elected office or high-ranking political positions - Have been convicted of fraud, corruption, or similar offences - Are party to litigation against the SOE or state - Have been dismissed from a position on grounds of breach of trust - Fail to disclose required declarations - Provide false information ### Timeline Overview (Phase / Duration) - Launch and Public Call: Day 0–30 - Application Review and Shortlisting: Day 30–50 - Interviews and Final Evaluation: Day 50–65 - Appointment Decision: Day 65–75 ### Special Procedures - Vacancy Mid-Term: Fast-track procedure may be used (e.g., from a pre-qualified pool of candidates). - Mandate Renewal: Incumbents may reapply but must undergo performance review. - Induction: Newly appointed board members should receive governance induction training. --- ### Annex III. Proposed List of Grounds for Dismissing an SOE Board Member ### Purpose - Limit causes for dismissal to clearly defined and objective criteria to protect independence and long-term governance; align with OECD safeguards. ### Grounds for early termination (powers may be terminated early only on the following grounds) - (i) Failure by the SOE to achieve the objectives defined in the letter of expectations, as determined by the SOE’s ownership entity or GMS, and based on the results of the performance evaluation of the SOE board. - (ii) Discovery of facts indicating that the board member does not meet the qualification requirements, or that the independent board member fails to meet independence criteria. Information about such findings must be published on the SOE’s website within two working days from the date of such discovery. - (iii) Improper performance by the board member of his/her duties as defined by the civil-law contract and/or the SOE’s charter, or failure to meet the requirements for professional competence and business reputation. Early termination of powers on these grounds may be initiated by: - a. the SOE board, which by a decision adopted by at least two-thirds of its total membership, submits a request to the ownership entity (or general meeting) for termination of the member’s powers. The procedure for submitting such a request is defined by the SOE board; - b. a shareholder (participant) holding at least 25 percent of the shares (stakes), who initiates consideration of this issue at the GMS, provided that the SOE board issues an opinion on the validity of the matter and/or based on the performance evaluation results. The procedure for preparing the opinion is determined by the SOE board; - (iv) Submission of a written notice of resignation by the SOE board member, provided it is submitted no later than two weeks prior to termination of powers; - (v) Submission of a written notice of resignation by the SOE board member due to health reasons or other grounds preventing the performance of duties; - (vi) Entry into legal force of a court verdict or decision sentencing the SOE board member to punishment that precludes the fulfillment of their duties; - (vii) Entry into legal force of a court decision holding the SOE board member administratively liable for a corruption-related offense; - (viii) Death of the SOE board member, or a court ruling declaring him/her legally incapable, partially capable, missing, or deceased; - (ix) Entry into legal force of a court decision finding the SOE board member guilty of violating fiduciary duties according to Georgian law; - (x) Receipt by the SOE of a written notice regarding the replacement of a SOE board member representing a shareholder (participant); - (xi) Disposal by the shareholder (participant), represented by the SOE board member, of all their shares (stakes) in the company. ### Decision authority - The decision to terminate the powers of a SOE board member early on the grounds provided in subclauses (i)–(iii) shall be made by the SOE’s GMS. --- ### Annex IV. Outline of the Remuneration Setting Procedure for SOE Board and Management ### Introduction - Purpose: process for determining, approving, and disclosing remuneration of Board members and CEO in SOEs; align with OECD Guidelines and international best practices; balance fiscal discipline and need for effective professional governance. ### Proposed approach — overview of phases (I–IX) I – Establish the Remuneration Policy Framework - Lead Responsibility: MOF and MOESD (for dual model) - Timeline/Frequency: Initial adoption and review at least every three years, or earlier if there are significant market or regulatory changes. - Key elements: - MOF and MOESD shall develop and maintain a Remuneration Policy covering all SOEs under state ownership. - Policy principles: competitiveness, public accountability, transparency, alignment with long-term interests of the state. - Define national remuneration-setting model (e.g., centralized fee grid, SOE proposal with shareholder approval, or tiered formula based on size and complexity). - Include standard remuneration bands, clearly defined caps, chair multipliers, and rules for committee fees. - The policy shall explicitly prohibit performance-based pay for SOE board members to preserve their independence. - Require full public disclosure of remuneration levels, methodology, and approval decisions. II – Develop Annual Remuneration Guidance - Lead Responsibility: MOF and MOESD (for dual model) - Timeline: By the fourth quarter of each year, for application in the next financial year. - Requirements: - Publish Annual Remuneration Guidance detailing adjustments to salary bands, considering inflation, market conditions, and fiscal constraints. - Specify disclosure templates, performance measurement criteria for CEOs, and sector-specific constraints. - Distribute guidance to all SOEs and relevant ministries before the annual remuneration-setting process begins. III – Conduct Benchmarking and Develop Proposals - Lead Responsibility: SOE Board Nomination and Remuneration Committee (NRC) - Supporting Roles: External remuneration advisors (optional), Line Ministries (for policy-oriented SOEs) - Timeline: Last quarter of each year for the following year (to be included in the SOE budget) - Tasks: - NRC shall conduct external benchmarking for CEO remuneration against comparable organizations and verify board fees within the national fee grid. - NRC shall draft two proposals: Board Remuneration Terms (within national limits) and CEO Remuneration and Performance Agreement (base salary, performance-related pay, KPIs, payout ranges, and caps). - KPIs for CEOs shall align with strategic objectives, public service obligations, and Corporate Governance Code. - NRC shall confirm no variable pay for board members and that committee fees are modest, capped, and linked to workload. IV – Board Review and Internal Approval - Lead Responsibility: SOE Board - Timeline: Within one month of receiving the NRC proposals. - Tasks: - Full SOE Board reviews NRC proposals for alignment with strategic objectives, risk appetite, and the Remuneration Policy. - SOE Board approves remuneration packages ensuring they fall within Ownership Entity limits. V – Submission for Ownership Entity or Government Approval - Lead Responsibility: SOE Board Chair / Corporate Secretary - Timeline: No later than two weeks after Board approval. - Documentation to submit: - Proposed Board remuneration terms and justification. - Proposed CEO Remuneration and Performance Agreement, including KPI definitions, weights, targets, and payout scenarios. - Compliance statement confirming alignment with the Remuneration Policy and Annual Guidance, highlighting any exceptions. VI – Review and Decision by Ownership Entities - Lead Responsibility: MOF and MOESD (for dual model) - Timeline: Within one month of receiving the submission. - Tasks: - Review for compliance with Remuneration Policy, alignment with national strategic objectives, and market competitiveness. - For board fees, approval shall follow the national model (e.g., ministerial approval under a fee framework or GMS approval for listed SOEs). - For CEO remuneration, confirm performance incentives are reasonable, KPIs measurable, and safeguards (caps and clawback provisions) are in place. - Communicate decisions in writing, with reasons for modifications or rejections. VII – Implementation and Mid-Year Review - Lead Responsibility: SOE Board and CEO - Supporting Role: NRC - Timeline: Midway through the performance year. - Tasks: - CEO implements the Remuneration and Performance Agreement and reports quarterly to the NRC on KPI progress. - NRC conducts mid-year review to assess progress, identify risks, and recommend pre-approved adjustments. - Significant mid-cycle changes to KPIs or remuneration require prior approval from MOF and MOESD. VIII – Year-End Performance Assessment and Bonus Approval - Lead Responsibility: NRC and Full SOE Board - Timeline: Within two months of the financial year-end. - Tasks: - NRC assesses CEO’s performance against approved KPIs using audited and verified data. - NRC calculates formula-based performance bonus and applies malus or clawback provisions if necessary. - Full SOE Board approves final payout, ensuring it does not exceed Remuneration Policy caps. - Exceptional payouts outside approved limits submitted to MOF and MOESD for final approval. IX – Disclosure and Portfolio-Level Reporting - Lead Responsibility: SOE Board and Ownership Entities - MOF and MOESD (for dual model) - Timeline: Concurrent with publication of the SOE’s Annual Report. - Disclosure requirements: - Publish individual-level remuneration data for all Board members and the CEO, including base pay, allowances, benefits, and performance-related pay. - Disclose KPI outcomes and rationale for discretionary decisions transparently. - MOF and MOESD shall compile and publish board and CEO remuneration across the SOE portfolio, as part of the SOE aggregate report. --- ### Board Remuneration Examples (selected country datapoints and multi-country averages) - Latvia: Ordinary board member fee (USD) 34,760; ≈116% of national average wage; Chair multiplier 1.5–2.0×; Committee fees Limited/capped; Civil servants often zero or capped fees; participation being reduced. - France: Ordinary board member fee (USD) ≈25,000–30,000; Chair multiplier 1.5–2.0×; Committee fees Limited; Civil servants allowed but subject to same fiduciary duties; transparency required. - Netherlands: Ordinary board member fee (USD) ≈25,000–30,000; Chair multiplier 1.5–2.0×; Committee fees Limited; Disclosure of affiliations/compensation; no special incentives. - Chile: Ordinary board member fee (USD) ≈25,000–30,000; Chair multiplier 1.5–2.0×; Committee fees Limited. - New Zealand: Both types; Fees Set by Cabinet Fees Framework; Chair multiplier 1.5–2.0×; Committee fees Limited; Phasing down civil servant participation, especially in commercial SOEs. - Estonia: Both types; Ordinary fee Varies (within grid); Chair up to 2.0×; Committee fees Modest, capped; Audit Chair only; Limits on number of mandates; public disclosure. - Portugal: Both types; Ordinary fee Varies (within grid); Chair up to 2.0×; Committee fees Modest, capped; Limits on mandates for officials. - Croatia: Policy-oriented; Low fixed fees; <30% of national average wage; Often uniform Chair multiplier; Committee fees Rare; Civil servants common; fixed by law. - Lithuania: Commercial / mixed; Ordinary fee n/a; Chair 1.5–2.0× (typical); Committee fees Limited; Reducing civil servant participation, esp. in commercial SOEs. Multi-country averages: - Commercially oriented: 17,356 (USD), 64%, 1.5–2.0× (Chair multiplier) - Public policy–oriented: 8,974 (USD), 42%, 1.5× (Chair multiplier) Note: Percentages are calculated relative to each country's average national wage where data is available. Variable pay for directors is generally avoided; committee fees, where applicable, are modest and capped. --- ### Potential Approach for SOE Board Remuneration Package for Georgia ### 1. National Wage Context - Average gross monthly wage in Georgia is approximately 2,058 GEL (about USD 763). - This corresponds to an annual gross wage of around USD 9,156. ### 2. Recommended Annual Fee Ranges (by SOE type) - Commercially Oriented SOEs: Ordinary Member Fee (USD) 6,000 – 8,000; % of National Avg Wage 65–85%; Chair Multiplier 1.5× – 2.0×; Committee Chair Premium Up to 20–30% - Public Policy–Oriented SOEs: Ordinary Member Fee (USD) 4,000 – 5,000; % of National Avg Wage 45–55%; Chair Multiplier 1.5×; Committee Chair Premium Up to 15–20% ### 3. Example Calculations - 3.1. Commercial SOE – Large & Complex: - Base (ordinary member): USD 7,000 (~77% of avg wage) - Chair fee (2×): USD 14,000 - Committee premium (25%): USD 1,750 (for e.g., Audit Chair role) - Total (Chair & Committee): USD 15,750 + reimbursable expenses - 3.2. Public Policy–Oriented SOE – Medium: - Base (ordinary member): USD 4,500 (~50% of avg wage) - Chair fee (1.5×): USD 6,750 - Committee premium (15%): USD 675 - Total (Chair & Committee): USD 7,425 + reimbursable expenses ### 4. Additional Rules and Safeguards - No performance-based pay for board members, in line with OECD Guidelines to preserve independence. - Fee caps to be reviewed annually by MOF and MOESD to maintain competitiveness and public accountability. - Civil servants serving on SOE Boards to receive nominal (a symbolic or very small fee) or zero fees, with limits on the number of mandates held. *IMF Technical Assistance Report | Annexes III–IV (selected excerpts).* --- _Source: https://www.imf.org/-/media/files/publications/tar/2026/english/tarea2026029-source-pdf.pdf_