The Budget is the Big Loser in the State Lottery

Five years ago, the young brother-in-law of a very well-connected Georgian gave an interesting gift to his nation.

The well-connected Georgian was former Minister of Defense (and now fugitive) David Kezerashvili. His brother-in-law is Dimitri Chikovani, who at the time was only 24 years old.

And the gift?

A majority interest - 70 percent - in the Georgian Lottery Company, which Chikovani had controlled for the previous two years. On Aug. 9, 2011, he turned those shares of the lottery over to the Ministry of Economics, free of charge. This company was the only one with a license to run a lottery in Georgia.

It was not nearly as generous a move as it might have seemed at first glance, however. According to documents given to ifact.ge, the Lottery was already $12 million in debt to the state - a debt that was only going to grow.

Now it appears the government can't give the Lottery away. Eight months after announcing an open tender, the Ministry refuses to say if there is any candidate to take over the Lottery. The Ministry also refuses to release figures on how much taxpayer money it continues to lose under the current management.

Officials involved were not eager to talk about how a potential gold mine like a national lottery was managing to lose money. But some of the details are revealed in the Panama Papers, a collection of 11.5 million secret documents from the Panamanian law firm Mossack-Fonseca, obtained by the German newspaper Suddeutsche Zietung and shared by the International Consortium of Investigative Journalists with reporters from more than 80 countries, including OCCRP and ifact.ge.

According to documents, emails and interviews with current Georgian officials, the Lottery ran aground because the people behind it promised the government wildly unrealistic profits in exchange for the exclusive right to run it.

The story starts with a holding company called Lexor Capital, founded in the offshore tax haven British Virgin Islands (BVI), in 2008. Chikovani, then 21, was the sole shareholder.

His brother-in-law, Kezerashvili, was only 30 years old and already flying high.

Kezerashvili had served as Minister of Defense under former President Mikheil Saakashvili until late 2008, when he left to go into business fulltime. After Saakashvili lost the 2012 election, however, Kezerashvili abruptly decamped to Europe.

The Georgian government accuses him of stealing tens of millions of dollars in cash and properties, and for the past two years has tried unsuccessfully to extradite him, first from France and more recently from England, where he now lives. Kezerashvili's lawyers have successfully argued that the charges against him are politically motivated.

The Georgian Lottery Company was founded in 2009 by Lexor Capital. One month later, it won a tender to exclusively operate a lottery for the Ministry of Finance for 10 years. In exchange, the Lottery promised to pay the ministry a total of GEL 913 million (about $406 million).

After a year, much like a homeowner refinancing a mortgage for better rates, the Lottery Company renegotiated the deal. In exchange for a longer pay-back period—15 years as opposed to 10—the lottery would now pay the government GEL 1.5 billion (about $667 million).

That didn’t come close to happening.

Levan Chikvaidze, the current Lottery Company director, says that since its founding seven years ago, the lottery has paid only GEL 19 million (about $8.4 million) to the government. The Ministry of Finance would not confirm that figure, saying lottery information is confidential, despite the fact that 70 percent of the Company belongs to the Georgian people.

Chikvaidze said the Lottery does take in more money than it pays out, although annual revenues have dropped more than 50 percent since 2010. On paper, the annual losses are increasing rapidly because the Lottery is falling so far behind on the payment schedule for the rights fee.

In just its first two years, the Lottery fell GEL 30 million (about $12 million) into the hole. The Panama Papers documents trace how, in 2011, Lexor Capital managed to dump the money-losing operation onto taxpayers.

On August 5, 2011, Mossack-Fonseca employees told Lexor Capital that it was against Mossack-Fonseca policy to work with any BVI-registered company engaged in the gambling industry, due to BVI’s strict anti-gambling laws.

Three days later, a Mossack-Fonseca staffer wrote that Lexor Capital had stated that its activities were limited to “ticket printing, computer systems and accounting” and that Lexor Capital claimed it was not involved in collecting lottery money or distributing it to winners, even though it was the 100 percent shareholder of the Lottery Company.

On August 9, Lexor Capital handed over 70 percent of its shares to the Ministry of Economy - along with the fast-growing debt. The document was signed by Chikovani and Zurab Aznaurashvili, who at that time worked in the Enterprise Management Agency within the Ministry of Economy.

The Ministry of Economy was already trying to manage hundreds of failing and failed Georgian businesses. Aznaurashvili said he was told by then-Deputy Minister of Economics David Giorgadze to sign the document.

Chikvaidze and Gigla Mikautadze, head of the Taxpayers Union, an independent organization that tries to protect taxpayers' rights, agree that Chikovani simply wanted to dump an unprofitable company.

Chikovani, former Lexor Capital director Leli Chelidze and former board member Alexander Gogokhia have either been unavailable or refused to comment. Attempts to reach Deputy Minister of Finance Giorgadze were not successful.

Lottery director Chikvaidze says the original owners had totally unrealistic projections for the lottery revenues. Indeed, the current yearly rights fee alone works out to about $11 for every man, woman and child in Georgia. “The license conditions agreed to in 2009 showed a lack of experience in calculating the company's payments, and are not relevant to the current situation,” Chikvaidze said.

In January 2016, the Ministry of Finance announced that it was willing to sell its 70 percent share of the Lottery Company for only GEL 1,000 (about $440).

According to its website, the Ministry calculated the Lottery Company's debt as of 2016 at GEL 216.3 million (about $96.1 million). But when civic groups complained about the low sales price, the Ministry canceled the sale.

According to Nick Kamushadze from the National Agency of State Property, there is no current strategy for selling the shares. The Ministry of Finance refused to comment.

As for the other 30 percent, the Panama Papers show that in 2013, Chikovani transferred Lexor Capital to Teimuraz Aronia, a Georgian businessman who serves on the board of mobile phone operator Beeline Ltd. and internet service provider Caucasus Online. The Panama Papers documents do not show whether Aronia paid anything for the Lottery Company shares.

Chikvaidze, the current Lottery director, says he has never spoken to Aronia, and that four letters to Lexor Capital have gone unanswered. The distance between the Lottery office and the Lexor office is about one kilometer. Chikvaidze says that since the government owns 70 percent of the shares, he makes decisions unilaterally.

Aronia did not reply to e-mail questions.

Chikvaidze says the Lottery Company has held talks with the Ministry of Finance about reducing the huge license fee debt, but he says the Ministry refuses to change the contract now. The ministry declined to comment.

In September 2016, the Ministry announced a tender to pick a new licensee. PricewaterhouseCoopers (PwC) Georgia was paid $73,470 to organize the tender. According to documents prepared by PwC Georgia, the new licensee should have earned at least GEL 350 million (about $144 million) from lottery games in the last five years and paid at least $5 million into national budgets.

The license was supposed to be awarded by the end of 2016. The Ministry now refuses to answer questions about the tender auction results, calling it confidential information.

Ana Iaseshvili, a spokeswoman for Georgia Lottery Company, says employees are waiting for this information from the Ministry just like everyone else.

Nino Bakradze, ifact.ge