The Agreement signed between the government and the investor, Enka Renewables Ltd, on the Namakhvani HPP project makes it clear that the project will not contribute to the energy security of the country, as indicated by the government, and furthermore, it will imply heavy and indefinite fiscal burdens on the country's budget.

The Agreement also shows a number of guarantees and conditions of support given to the company by the state, which made it possible, by circumventing the strict requirements of the legislation, to obtain basic permits as well as to start the construction process.

The analysis of the Agreement shows that the company is actually using Georgia's natural resources free of charge and does not undertake to sell energy on the domestic market, which overturns the arguments of the country's energy security or even economic benefits.

The list of possible circumstances in which the company seeks compensation from the state is indefinitely extensive and puts the country in an unequal position since it seeks to secure the risks beyond the control of the state with budgetary funds. Under the Agreement, virtually every possible business risk is insured for the company by the state budget.

The Ministry of Economy had not publicized this agreement public for a long time. It was only shared publicly on February 7, 2021, when the Union of Investigative Journalists "Ifact" obtained the document and published it. EMC has studied this Agreement and critically reviews the content of the Agreement in this document.

Namakhvani HPP cannot provide better energy tariffs and energy security for the country

According to the Agreement: The state is obliged to purchase the electricity guaranteed for 15 years for 6.2 cents, which will increase annually by 3%.    

Why is it a problem? In fact, the cost of electricity will be higher than the energy supplied by other suppliers in the energy market.

According to the Agreement: The guaranteed purchase agreement is valid for 8 months of the year (September-April period) for a period of 15 years, during which the company is free to dispose of energy for 4 months. Besides, the government is obliged to increase the capacity of the transmission line towards Turkey by January 1, 2022.

Why is it a problem? After 15 years, the company is not obliged to sell electricity on the Georgian market, which refutes the argument that Namakhvani HPP will serve Georgia's increased energy needs in the long run. Also, strengthening the transmission lines is Georgia’s financial obligation, and if the state does not fulfill this obligation in time, the company will have to pay compensation to the company from the state budget.

The company’s unlimited rights on natural resources

Land Resources:

According to the Agreement: In addition to the approximately 600 hectares of land transferred to the company, the government is obliged to provide the company with other “necessary land plots” for 1 GEL, even if the land has agricultural status within the Rioni Valley, Racha-Lechkhumi or Imereti.

Why is it a problem? The term "necessary land plots" in the Agreement is defined in a very broad sense and includes plots that are needed not only for construction but also for the extraction of mineral resources (including sand and gravel). At the same time, the "need" for the land is determined by the company, and its definitions are so broad that they apply to the Rioni gorge, Racha-Lechkhumi, and Imereti. If the "necessary land plot" is owned by a private person in Racha-Lechkhumi or Imereti or in any area within the Rioni Gorge who refuses to transfer the land, the state is obliged to assist the company in obtaining the land through expropriation/seizure.

Water Resources:

According to the Agreement: The company has the right to use not only the water resources of the Rioni and its tributaries but also the Tskhenistskali River. At the same time, the Agreement contains a vague provision according to which it is the government’s obligation to provide water supply to the company from Tskhenistskali. Also, the government undertakes the responsibility that using the upper waist of Rioni will not endanger Namakhvani production. Otherwise, the state will reimburse all losses.

Why is it a problem? The company has no financial obligations for the use of Georgia's water resources. Moreover, the state will need to incur additional budgetary expenditures to ensure that the HPP has sufficient hydro resources to achieve maximum output with the help of another river.

According to the Agreement: The government relieves the company from the obligation to obtain a license required for the use of natural resources from the quarry or for any other natural resource. The government is also committed to assisting the company in the process of storing cut wooden material.

Why is it a problem? The company is entitled to extract any natural resource without a license, with appropriate justification. We should also assume that the company can cut down timber from the land plots it uses/owns.  

Financial costs caused by changes in legislation, taxes, and market rules will be fully reimbursed by the state

Changes in the legislation or market

According to the Agreement: If legislation amends, that would have a substantial adverse effect on the Company's economic or financial condition, or if the rules for operating the electricity system and/or trading in electricity are changed, the parties must agree to make respective amendments in the Agreement (e.g. in the provisions on the realization of electricity) so that to maintain the economic and financial position of the company, as provided in the Agreement. In case of disagreement, the fiscal burden is borne only by the state.

Why is it a problem? While Georgia is actively working to bring national legislation closer to European standards under the EU Association Agreement, substantial legislative amendments are expected, including in the energy sector. Consequently, this clause of the Agreement will probably impose heavy fiscal obligations on the state in the near future.

Taxation amendments

According to the Agreement: The company and the "project participants" are entitled to claim compensation from the government for any damages incurred by the tax increase, or by introducing any regulation that would increase their tax burden.

Why is it a problem? The government is not only obliged to compensate the company for reduced income or increased expenses caused by tax increases, but also for additional "losses" or damages. The loss is defined as broadly as possible in the Agreement and, in addition to the direct loss, includes income and profit that the company has not received and also, even lost opportunities. In addition, the government has to pay compensation not only to the company but also to other participants in the project.

The Agreement does not create employment guarantees for Georgian citizens

According to the Agreement: The company takes all commercially reasonable efforts to ensure that an average of 70/50/70/80% of employees (depending on the project stage) are Georgian citizens. However, this condition will be fulfilled if the company is able to find sufficiently qualified Georgian citizens, who would work commercially under the same conditions as foreigners.

Why is it a problem? The record, which speaks of "all commercially reasonable efforts" to employ Georgian citizens, is process-oriented and not outcome-oriented, which, under the terms set forth, does not imply the Company's obligation to employ Georgian citizens. In the conditions where the company is not required to train the citizens of Georgia under the Agreement, it is very unlikely that the qualified personnel required for the construction of the power plant will be found on the spot, therefore, most of the locals are likely to be employed at so-called “black work”. Consequently, if the company cannot find cheap and "qualified" workers on the spot, in accordance with their assessment, it is completely free to use foreigners as such workers.

Compensation for all types of damages and losses in case of force majeure is the State’s obligation

According to the Agreement: The Agreement separates physical and non-physical (political) force majeure circumstances and the consequences caused by them are regulated differently. Physical, i.e. non-political force majeure includes events such as fires, floods, earthquakes, epidemics, etc. Political force majeure includes any hostilities, armed conflict, revolution, insurgency, civil unrest, blockade, embargo, etc., as well as any public agitation or protest that interferes with the construction or operation of the project.[1] Under the Agreement, in such force majeure situations, the government is obliged to compensate the company, in addition to specific costs, for the damage caused, i.e. "loss", which is an extremely broad term defined by the contract.

Why is it a problem?

Under the agreement, the state is not only not exempted from fulfilling its obligations under the Agreement during a political force majeure (e.g. uninterrupted payment of electricity bills), but moreover, if the company suffers damages under circumstances beyond the control of that state, the government is obliged to compensate the company. On the other hand, in the event of a political force majeure, if the company has failed to meet its obligations, it is considered to be justifiable.

...

EMC considers that the Agreement between the State and the company carries significant risks, as it essentially sacrifices state interests in favor of a private company, which, along with the significant damage and threats caused by the Namakhvani HPP, casts doubt on its economic benefits and role in the country's energy security.

Share