Document of The World Bank Report No: ICR00004668 DRAFT REPORT INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT IMPLEMENTATION COMPLETION REPORT FOR THE FIRST AND SECOND PROGRAMMATIC PRIVATE SECTOR COMPETITIVENESS DEVELOPMENT POLICY OPERATIONS IN THE AMOUNTs of US$60 MILLION AND EUR 44.6 MILLION (US$50.00 MILLION EQUIVALENT) TO GEORGIA July 22, 2019 Finance, Competitiveness and Innovation Global Practice South Caucasus Country Unit Europe and Central Asia Region CURRENCY EQUIVALENTS (Exchange Rate Effective July 19, 2019) Currency Unit = Lari GEL 2.88 = US$ 1 US$ 1.38 = SDR 1 FISCAL YEAR January 1 - December 31 Vice President: Cyril Muller Regional Director: Lalita Moorty Country Director: Sebastian Molineus Practice Manager: Marialisa Motta Task Team Leader: John Goddard Gabriel ICR Team Leader: Natalie Nicolaou, Natalia Tsivadze ICR Main Author: Richard J. Carroll ABBREVIATIONS AND ACRONYMS A&A Accounting and Auditing NQI National Quality Infrastructure AA Association Agreement PD Program Document AFD Agence Française de Développement PPD Public-Private Dialogue (French Development Agency) R&D Research and Development CPF Country Partnership Framework SARAS Service for Accounting, Reporting CPS Country Partnership Strategy and Auditing Supervision DCFTA Deep and Comprehensive Free Trade SBA Stand-By Agreement Agreement SCD Systematic Country Diagnostic DIA Deposit Insurance Agency SDS Social Economic Development DIS Deposit Insurance System Strategy DPO Development Policy Operation SDR Special Drawing Rights EBRD European Bank for Reconstruction USAID United States Agency for and Development International Development ECA Europe and Central Asia WBG World Bank Group EDA Entrepreneurship Development Agency EFF Extended Fund Facility EG Enterprise Georgia (new name for EDA as of 2017) EU European Union FDI Foreign Direct Investment GAC Georgia Accreditation Center GDP Gross Domestic Product GEL Georgian Lari GeoSTM Georgian National Agency for Standards and Metrology GENIE Georgia National Innovation Ecosystem GITA Georgian Innovation and Technology Agency GNCC Georgian National Communication Commission ICR Implementation Completion Report IBRD International Bank for Reconstruction and Development IFC International Finance Corporation IMF International Monetary Fund ISSSG Insurance State Supervision Service of Georgia LEPL Legal Entity of Public Law MoESD Ministry of Economy and Sustainable Development MOF Ministry of Finance NBG National Bank of Georgia The World Bank TABLE OF CONTENTS 1 PROJECT CONTEXT, DEVELOPMENT OBJECTIVES AND DESIGN ............................................................................... 12 1.1 Context at Appraisal................................................................................................................................................ 12 1.2 Original Project Development Objectives (PDO) and Key Indicators ..................................................................... 16 1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and Reasons/justification ........ 16 1.4 Original Policy Areas Supported by the Program ................................................................................................... 18 2 KEY FACTORS AFFECTING IMPLEMENTATION AND OUTCOMES .............................................................................. 20 2.1 Program Performance............................................................................................................................................. 20 2.2 Major Factors Affecting Implementation ............................................................................................................... 23 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization.......................................................... 26 2.4 Expected Next Phase/Follow-up Operation ........................................................................................................... 26 3 ASSESSMENT OF OUTCOMES ................................................................................................................................ 27 3.1 Relevance of Objectives, Design and Implementation ........................................................................................... 27 3.2 Achievement of Program Development Objectives ............................................................................................... 28 3.3 Justification of Overall Outcome Rating ................................................................................................................. 34 3.4 Overarching Themes, Other Outcomes and Impacts ............................................................................................. 35 3.5 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops ........................................................ 37 4 ASSESSMENT OF RISK TO DEVELOPMENT OUTCOME ............................................................................................. 37 5 ASSESSMENT OF BANK AND BORROWER PERFORMANCE ...................................................................................... 37 5.1 Bank Performance .................................................................................................................................................. 38 5.2 Quality of Supervision ............................................................................................................................................. 38 5.3 Borrower Performance ........................................................................................................................................... 39 6 LESSONS LEARNED ............................................................................................................................................... 40 7 COMMENTS ON ISSUES RAISED BY BORROWER/IMPLEMENTING AGENCIES/PARTNERS ......................................... 41 ANNEX 1. BANK LENDING AND IMPLEMENTATION SUPPORT/SUPERVISION PROCESS .................................................... 42 ANNEX 2. BENEFICIARY SURVEY RESULTS ..................................................................................................................... 44 ANNEX 3. STAKEHOLDER WORKSHOP REPORT AND RESULTS ........................................................................................ 45 ANNEX 4. SUMMARY OF BORROWER'S ICR AND/OR COMMENTS ON DRAFT ICR ........................................................... 46 ANNEX 5. COMMENTS OF COFINANCIERS AND OTHER PARTNERS/STAKEHOLDERS ........................................................ 47 ANNEX 6. LIST OF SUPPORTING DOCUMENTS ............................................................................................................... 48 Page 1 of 52 The World Bank ANNEX 7. MAIN CHANGES TO DPO SERIES .................................................................................................................... 49 ANNEX 8. DPO 3 TRIGGERS AND STATUS ...................................................................................................................... 51 ANNEX 9. MAP ............................................................................................................................................................ 52 Page 2 of 52 The World Bank A. BASIC INFORMATION Program 1 Private Sector Country Georgia Program Name: Competitiveness DPO1 Program ID: P149998 L/C/TF Number(s) IBRD-85040 ICR Date: 7/11/2019 ICR Type: Core Financing Instrument: DPL Borrower GEORGIA Original Total Commitment USD 60.00M Disbursed Amount USD 60.00M Implementing Agencies: Ministry of Finance (MoF), Ministry of Economy and Sustainable Development (MoESD) Cofinanciers and Other External Partners: Program 2 Private Sector Country Georgia Program Name: Competitiveness DPO2 Program ID: P155553 L/C/TF Number(s) IBRD-87750 ICR Date: 7/11/2019 ICR Type: Core Financing Instrument: DPL Borrower GEORGIA Original Total Commitment USD 50.00M Disbursed Amount USD 52.69M Implementing Agencies: MoF, MoESD Cofinanciers and Other External Partners: B. KEY DATES Private Sector Competitiveness DPO1 P149998 Process Date Process Original Date Revised / Actual Date(s) Concept Review: 10/08/2014 Effectiveness: 06/12/2015 Appraisal: 01/30/2015 Restructuring(s): Approval: 04/28/2015 Mid-term Review: Closing: 12/31/2015 12/31/2015 Private Sector Competitiveness DPO2 P155553 Process Date Process Original Date Revised / Actual Date(s) Concept Review: 12/11/2015 Effectiveness: 09/22/2017 Appraisal: 05/23/2017 Restructuring(s): Approval: 07/31/2017 Mid-term Review: Closing: 07/31/2018 07/31/2018 C. RATINGS SUMMARY Page 3 of 52 The World Bank C.1 Performance Rating by ICR Overall Program Rating Outcomes Satisfactory Risk to Development Outcome Low Bank Performance Satisfactory Borrower Performance Satisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Overall Program Rating Bank Ratings Borrower Ratings Quality at Entry Highly Satisfactory Government: Satisfactory Implementing Highly Satisfactory Quality of Supervision: Satisfactory Agency/Agencies: Overall Borrower Satisfactory Overall Bank Performance Satisfactory Performance C.3 Quality at Entry and Implementation Performance Indicators Private Sector Competitiveness DPO1 P149998 Implementation Indicators QAG Assessments (if any) Rating Performance Potential Problem Program No Quality at Entry (QEA) None at any time (Yes/No): Problem Program at any Quality of Supervision No None time (Yes/No): (QSA) DO rating before Closing/Inactive status Private Sector Competitiveness DPO2 P155553 Implementation Indicators QAG Assessments (if any) Rating Performance Potential Problem Program No Quality at Entry (QEA) None at any time (Yes/No): Problem Program at any Quality of Supervision No None time (Yes/No): (QSA) DO rating before None Closing/Inactive status D. SECTOR AND THEME CODES Private Sector Competitiveness DPO1 P149998 Original Actual Major Sector Information and Communications Technologies ICT Infrastructure 25 25 Financial Sector Page 4 of 52 The World Bank Other Non-bank Financial Institutions 11 11 Insurance and Pension 10 10 Banking Institutions 4 4 Industry, Trade and Services Other Industry, Trade and Services 50 50 Major Theme/Theme/Sub Theme Economic Policy 30 30 Trade 30 30 Trade Facilitation 30 30 Finance 10 10 Financial Infrastructure and Access 10 10 MSME Finance 10 10 Private Sector Development 32 32 Business Enabling Environment 15 15 Innovation and Technology Policy 15 15 Enterprise Development 10 10 MSME Development 10 10 Jobs 7 7 Job Creation 7 7 Social Development and Protection 15 15 Social Protection 15 15 Social protection delivery systems 15 15 Urban and Rural Development 14 14 Rural Development 7 7 Rural Infrastructure and service delivery 7 7 Urban Development 7 7 Urban Infrastructure and Service Delivery 7 7 Private Sector Competitiveness DPO2 P155553 Original Actual Major Sector Public Administration 27 27 Central Government (Central Agencies) 27 27 Information and Communications Technologies 9 9 ICT Infrastructure 9 9 Financial Sector 36 36 Capital Markets 9 9 Insurance and Pension 27 27 Industry, Trade and Services 28 28 Other Industry, Trade and Services 28 28 Major Theme/Theme/Sub Theme Page 5 of 52 The World Bank Environment and Natural Resource Management 9 16 Climate change 9 16 Mitigation 9 16 Finance 10 36 Financial Stability 36 36 Private Sector Development 32 39 Business Enabling Environment 18 18 Investment and Business Climate 18 18 Enterprise Development 10 10 MSME Development 10 10 ICT 9 9 ICT Policies 9 9 Regional Integration 2 2 Public Sector Management 9 9 Public Finance Management 9 9 Public Expenditure Management 9 9 E. BANK STAFF Private Sector Competitiveness DPO1 P149998 Positions At ICR At Approval Vice President: Cyril Muller Laura Tuck Country Director: Sebastian-A Molineus Henry G. Kerali Practice Manager/Manager: Marialisa Motta Paloma Anos Casero Task Team Leader: John Gabriel Goddard John Gabriel Goddard ICR Team Leader: Natalie Nicolaou, Natalia Tsivadze ICR Primary Author: Richard J. Carroll Private Sector Competitiveness DPO2 P155553 Positions At ICR At Approval Vice President: Cyril Muller Cyril Muller Country Director: Sebastian-A Molineus Mercy Tembon Practice Manager/Manager: Marialisa Motta Lisa Kaestner Task Team Leader: John Gabriel Goddard John Gabriel Goddard ICR Team Leader: Natalie Nicolaou, Natalia Tsivadze ICR Primary Author: Richard J. Carroll F. RESULTS FRAMEWORK ANALYSIS Program Development Objectives (from Program Document) Page 6 of 52 The World Bank The program development objective was to increase private sector competitiveness through second generation business environment reforms, financial sector deepening and diversification, and increasing firms’ capacity to innovate and to export. Revised Program Development Objectives (as approved by original approving authority) The revised program development objective was to increase private sector competitiveness through second generation business environment reforms, establishing conditions for financial sector deepening and diversification, and increasing firms’ capacity to innovate and to export. Indicator(s) Private Sector Competitiveness DPO1 P149998 Original Target Values (from Formally Revised Actual Value Achieved at Indicator Baseline Value approval Target Values Completion or Target Years documents) Private Sector Competitiveness DPO2 P155553 Original Target Values (from Formally Revised Actual Value Achieved at Indicator Baseline Value approval Target Values Completion or Target Years documents) Pillar 1: Second generation business environment reforms to strengthen public-private dialogue, support entrepreneurship and SMEs, and enhance public procurement At least four (4) major reforms, including respective draft laws are reviewed by the Investors Indicator 1: Council 0 100% of major 4 (e.g., pension 4 Value (quantitative or draft economic reform, CIT reform, Qualitative) laws available for Judiciary reform, public review Insolvency reform) Date achieved 31-Dec-2013 31-Dec-2017 31-Dec-2018 31-Dec-2018 Target achieved. The original indicator for DPO2 triggers was modified to directly link it Comments (incl. % to the revised Prior Action #1. Web page of the Investors Council: http://ics.ge/en/IC- achievement) Meetings/ Indicator 2: Number of SMEs and entrepreneurs using EG services Value (quantitative or 0 100 8,000 9,740 Qualitative) 37% women 40.5% women Date achieved 31-Dec-2013 31-Dec-2017 31-Dec-2018 31-Dec-2018 Comments (incl. % Target exceeded. (Enterprise Georgia) achievement) Indicator 3: Number of registered users in the e-Procurement system Page 7 of 52 The World Bank Value (quantitative or 19,666 30,000 36,400 42,694 Qualitative) Date achieved 31-Dec-2013 31-Dec-2017 31-Dec-2018 31-Dec-2018 Comments (incl. % Target exceeded. 75% of procurement volume is accounted for by SMEs. (State Procurement achievement) Agency-SPA) Indicator 4: Number of SPA tenders monitored for unlawful practices Value (quantitative or 13,000 45,000 76,395 Qualitative) Date achieved 31-Dec-2013 31-Dec-2018 31-Dec-2018 Comments (incl. % Target exceeded. (SPA) achievement) Pillar 2: Establishing enabling conditions for financial sector deepening and diversification through deposit insurance system, comprehensive pension reforms, and development of insurance markets Deposit insurance coverage for household deposits in effect from 2018; the Deposit Indicator 5: Insurance Agency (DIS) is operational (Charter approved by Government, Director appointed by Board, Banks make initial contributions and monthly premium). No DIS DIS has initial Deposit insurance DIS coverage for household capital and coverage for deposits Value (quantitative or launches its household deposits in effect from 2018. DIS is Qualitative) operations. in effect from 2018; operational. DIS is operational. Date achieved 31-Dec-2013 31-Dec-2017 31-Dec-2018 31-Dec-2018 Comments (incl. % Target achieved. Web page of the DIS Agency: http://diagency.ge/en/home achievement) The Pension Agency is established, an Investment Board is selected, and information Indicator 6: technology systems are set up to accept contributions following the enactment of the Pension Law. No system in place The asset Pension Agency Pension Agency established, management established, Investment Board selected & IT system for the new Investment Board systems set up to accept contributory selected & IT contributions Value (quantitative or pensions was systems set up to Qualitative) established and the accept contributions personified accounts were ready to receive contributions. Date achieved 31-Dec-2013 31-Dec-2017 31-Dec-2018 11-Jun-2019 Target achieved, with some delay. The pension system is accepting contributions. Comments (incl. % Investment Board members were selected and confirmed by Parliament in June 2019. Web achievement) page of Pension Agency: https://pensions.ge/ All Public Interest Entities-PIEs-(estimated at 300) are obliged to start filing financial statements based on IFRS from 2017, large and medium companies start the process in Indicator 7: 2018, and the financial statements are published in an e-portal; and 10 audit quality reviews conducted by SARAS Page 8 of 52 The World Bank Only commercial banks All PIEs (est. 300) All 127 PIEs and insurance cos. start filing financial 700 enterprises have submitted required to publish stmts. (based on financial statements to the audited financial IFRS) from 2017, Service for Accounting, statements large and med. Cos. Reporting and Auditing start in 2018, and Supervision (for 2018). Value (quantitative or the financial stmts. Qualitative) are published in an 700 statements have e-portal; and 10 been published on the audit quality web-page reviews conducted www.reportal.ge. by SARAS 23 audits complete, 14 in progress by SARAS Date achieved 31-Dec-2013 31-Dec-2018 31-Dec-2018 Target exceeded. This indicator was added at the DPO2 stage. The number of PIEs is different from the original total estimate. The difference is because most publicly Comments (incl. % accountable enterprises have ceased trading at the stock exchange. According to latest achievement) information, there are 127 PIEs instead of 300. The law also applies to other entities and these entities are counted in the actual totals. The 700 enterprises are in the large and medium-size categories. (SARAS) Indicator 8: Insurance companies that are in compliance with EU solvency I margin requirements Value (quantitative or 0% 100% 100% Qualitative) Date achieved 31-Dec-2013 31-Dec-2018 31-Dec-2018 Comments (incl. % Target achieved. As of end 2018, all insurance companies are compliant with Minimum achievement) Capital and Solvency I requirements. Pillar 3: Increasing firms’ capacity to innovate and to export through reforms to upgrade the ICT sector and strengthen Georgia’s national innovation system and quality infrastructure Indicator 9: Vehicles with MTPL insurance Value (quantitative or Foreign (transit) Foreign (transit): Foreign: 90% Qualitative) vehicles: N/A 25% Date achieved 12/31/2013 12/31/2017 05/31/2018 Comments (incl. % This results indicator was dropped at DPO2 as the new MTPL insurance requirements took achievement) effect in March 2018. As of May 2018, 90 percent of foreign cars were insured (exceeding original target of 25%). Indicator 10: Incremental private investment in the telecommunications sector Page 9 of 52 The World Bank Value (quantitative or 0 US$50 million US$233.3 million Qualitative) Date achieved 31-Dec-2013 31-Dec-2018 31-Dec-2018 Comments (incl. % Target exceeded. This includes license fees which are part of private sector investment. achievement) Indicator 11: Broadband Internet subscriptions Value (quantitative or 33% 45% 65% Qualitative) Date achieved 31-Dec-2013 31-Dec-2018 31-Dec-2018 Comments (incl. % Target exceeded. An additional achievement was the 59 percent drop in mobile internet prices achievement) during 2013-17 which made internet access more affordable (GNCC’s 2017 Annual Report). Indicator 12: Number of firms/individuals that obtained innovation finance from GITA 0 50 300 (incl. 25% 367 Value (quantitative or female 20% female entrepreneurs Qualitative) entrepreneurs Date achieved 31-Dec-2013 31-Dec-2017 31-Dec-2018 31-Dec-2018 Comments (incl. % Target exceeded. Note that although the percentage of females was lower than targeted, the achievement) actual number (367) exceeded the target. 2 technology parks (1 in Tbilisi and 1 in the region) and 8 fabrication laboratories are Indicator 13: functioning (Equipped, team appointed, and open to the public) N/A 1 technology park 2 technology parks 3 Technology parks (1 in and 2 fabrication (1 in Tbilisi and 1 in Tbilisi, 1 in Zugdidi and 1 laboratories are the region) and 8 in Telavi) and 24 Fab labs operational fabrication are operational. Value (quantitative or laboratories are Qualitative) functioning (Equipped, team appointed, and open to the public) Date achieved 31-Dec-2013 31-Dec-2017 31-Dec-2018 31-Dec-2018 Comments (incl. % Target exceeded. achievement) Indicator 14: Number of certificates issued by GeoSTM Value (quantitative or 842 9.5% increase 2,105 5,195 Qualitative) Date achieved 31-Dec-2013 31-Dec-2018 31-Dec-2018 Comments (incl. % Target exceeded. Data is through end of 2018. achievement) Number of certificates issues by calibration/verification entities that received traceability Indicator 15: from GeoSTM Value (quantitative or 1,800 20% increase 7,200 9,780 Qualitative) Date achieved 31-Dec-2013 31-Dec-2017 31-Dec-2018 31-Dec-2018 Page 10 of 52 The World Bank Comments (incl. % Target exceeded. The data is reported by the Georgia Accreditation Center (GAC) achievement) Indicator 16: Score on the Global Innovation Index Value (quantitative or 34.5 37 34.5 35.0 Qualitative) Date achieved 12/31/2013 12/31/2017 12/31/2013 12/31/2018 Comments (incl. % This results indicator was dropped at DPO2 as it was too broad to be attributable to achievement) program actions. Page 11 of 52 The World Bank 1 PROJECT CONTEXT, DEVELOPMENT OBJECTIVES AND DESIGN 1.1 Context at Appraisal (Brief summary of country macroeconomic and structural/sector background, rationale for Bank assistance) Overview of Series The Private Sector Competitiveness (PSC) Development Policy Operation (DPO) series in Georgia supported the government in its efforts to increase private sector competitiveness through establishing conditions for financial sector deepening and diversification and increasing firms’ capacity to innovate and export. These objectives were to be achieved through a broad range of reforms: promotion of small and medium enterprises (SMEs), deposit insurance, pensions, accounting, reporting and auditing, insurance company solvency, broadband services, innovation, standards and metrology. The first PSC DPO (P149998) for US$60 million was approved on April 28, 2015. The second PSC DPO (P155553) for Euro 44.6 million (US$50 million equivalent) was approved on July 31, 2017 after a one-year delay because the macroeconomic framework went temporarily off track. A planned third DPO did not go through. However, it was partly merged with a revised DPO2, and most of the DPO 3 triggers were eventually carried out. Country Context First-generation reforms, which had begun a decade prior to the PSC DPO series, helped improve Georgia’s business environment, achieve sustained growth rates and maintain low inflation but proved insufficient to close the productivity gap, improve wages, and eliminate structural unemployment. Georgia ranked 15th in the 2015 Doing Business (DB) report while its Global Competitiveness ranking improved from 90th place in 2008-2009 to 69th in 2014-2015. Despite the good DB performance and strong economic growth over a decade leading up to this series, there was low net job creation and gaps in skills and overall human capital development. The unemployment rate was 14.6 percent in 2013, one of the highest in the Europe and Central Asia (ECA) region, and never fell below the 12-13 percent range. With economic transformation in Georgia in the absence of investments and on the back of ruined value chains after the collapse of the Soviet Union, some of the older industries contracted, shedding their labor force. New growth sectors, especially tourism, financial sector and other service sectors, were gaining weight but had not been able to generate sufficient formal employment yet. As a result of weak job creation and wage growth, it was particularly challenging to reduce poverty and promote shared prosperity, though there was progress. The 2012 US$2.5 per day poverty rate was 42.5 percent (2005 purchasing power parity-PPP), which fell to 32.3 percent by 2014 (World Bank). Consumption growth among the bottom 40 percent was lower than for the population as a whole in 2006-10. These numbers began to improve from 2010, largely because the fiscal stimulus put in place to counteract the negative external shocks from the global financial crisis increased social transfers. However, these transfers did not change the composition of the bottom 40 percent, who remained largely rural, unemployed or underemployed, and living in households with a higher number of dependents. There was broad recognition that the social and financial safety nets needed to be further strengthened to ensure more inclusive growth dynamics. Page 12 of 52 The World Bank There were two main findings, according to the national strategy (Georgia 2020), that future economic development would have to take into account: • The economic policies of the last decade were successful in terms of investment and correspondingly increasing short-term economic growth rates, but these policies failed in their attempt to lay foundations for increasing the competitiveness of the economy and ensuring long-term sustainable economic growth; and • Results of economic growth did not reach a significant part of the population and failed to have an impact on reducing unemployment and poverty levels. Second generation reforms were identified to strengthen the competitiveness of the economy, with a focus on addressing the needs of SMEs, building capacity in public institutions that support private investment, enlarging the financial safety nets, and encouraging deeper integration of trade and investment. At the time of appraisal, the government identified several business environment constraints in a variety of subsectors and developed a wide-ranging reform agenda as a response. Efforts included strengthening public-private dialogue (PPD), connecting SMEs to markets and information, and enhancing the public procurement system. Reforms were also being introduced to strengthen social and financial safety nets, particularly through comprehensive pension reforms and the introduction of a deposit insurance system. Reforms in the capital and insurance markets were expected to help to address supply and demand-side constraints to accessing financial services. Reforms to upgrade the telecommunications sector; the introduction of an innovation support framework aligned with EU practices; and upgrading of the services provided by state institutions in the areas of metrology, standards and accreditation, were expected to underpin long-term productivity growth and leverage the benefits of membership in the Deep and Comprehensive Free Trade Area (DCFTA) and the Association Agreement (AA) with the EU. The Financial Sector Assessment Program (FSAP) completed in June 2014 concluded that Georgia’s growth outlook depended on maintaining macro-financial stability, increasing investment and domestic savings, and enhancing economic competitiveness and exports. The financial sector lacked the necessary breadth and depth to provide stable and long-term financing for the investment required to enhance productivity. The FSAP recommended measures to enhance the crisis preparedness framework, strengthen financial safety net and foster financial sector diversification. The establishment of a deposit insurance system would protect the interests of the smaller depositors and enhance confidence in the banking sector. The FSAP also recommended introduction of the EU Solvency I Capital Adequacy Framework for insurance companies, inclusive of minimum solvency margin and capital requirements. Furthermore, to support growth and the role of the insurance sector, the FSAP recommended the introduction of new insurance products, including motor third-party liability insurance. Advancing pension reform would protecting the interests of the retirees and ensure safe investments of longer- term pension funds into more diversified investment instruments on the back of advancing capital market reform. Enhancing governance and transparency of the corporate sector and Public Interest Entities (PIEs) was defined as one of the key steps to mobilize investments and deepen financial markets, to allow corporate issuers to have access to finance both in the banking sector as well as the capital markets. Macroeconomic Framework for the Series Economic growth moderated in 2015 and 2016, largely because of the weak external environment and political uncertainty. Growth was 2.9 and 2.8 percent in 2015 and 2016 respectively. The geopolitical risk emanating from regional disturbances and the economic slowdown in Georgia’s main trading partners (Turkey, Azerbaijan, etc.), many of which were significantly dependent on the Russian Federation and also on hydrocarbons, had a significant Page 13 of 52 The World Bank impact on Georgia. The two main direct channels of transmission of the external shock were lower exports and remittances. The decline in exports bottomed out with a slight uptick in late 2016 and net remittances increased by 5.3 percent. Credit growth during 2016 was 17 percent and helped to support consumption. Inflation, measured by the consumer price index, was 2.1 percent in 2016 and climbed to 6.0 percent in 2017. Foreign Direct Investment (FDI) and tourism remained relatively resilient (8-9 percent increase in revenue from tourism and the number of tourists in 2016). Despite a depreciation of more than 30 percent of the Georgian Lari against the U.S. dollar, a smooth external adjustment was ensured by the prudent monetary policy of the National Bank of Georgia (NBG). Higher-than-planned spending led to an increase in the fiscal deficit to above 4 percent of GDP in 2015 and 2016. For both years, the government had budgeted a deficit of 3 percent of GDP. In 2015, the increase in spending was partly driven by higher net lending to state-owned enterprises (SOEs). In 2016, overruns were broader-based, with current expenditures exceeding initially planned amount by 3.4 percent and capital spending higher by 6.5 percent of GDP. Most of the increase was accounted for by wages and salaries, goods and services and social spending. With the introduction of universal health care (UHC) in 2013, health spending increased from 1.6 percent of GDP in 2013 to 2.9 percent in 2016. The increase in social assistance and pensions, payments under the high mountainous regions law, and higher teacher salaries also contributed to increased spending. In addition, the government implemented the Estonian tax model which cut corporate taxes on profits that are reinvested as opposed to distributed. This had a short run cost to the budget deficit but was expected to promote longer-term employment. Without increased revenues, but spending rising more than planned, the fiscal deficit widened. Table 1. Key Economic Indicators 2015 2016 2017 2018 2019 2020 Annual percent change, unless indicated otherwise GDP (nominal, local currency) 8.9 7.2 11.6 7.8 8.6 8.2 Real GDP 2.9 2.8 4.8 4.7 4.6 4.8 GDP per capita (nominal, US$) -15.0 2.7 5.3 6.9 4.6 4.3 Contributions to real GDP growth Private consumption (growth) 3.5 -0.6 2.4 2.2 2.2 3.1 Gross fixed investment (growth) 17.0 10.0 1.8 4.3 8.8 9.5 Exports (growth) 8.5 7.7 21.8 9.0 7.5 7.0 Imports (growth) 9.7 6.3 10.4 4.5 5.0 5.4 GDP deflator 5.9 4.2 6.5 2.9 3.8 3.2 CPI (year-average) 4.0 2.1 6.0 3.0 3.0 3.0 Fiscal Accounts (percent of GDP, unless otherwise indicated) Expenditures 32.2 32.4 32.1 32.1 32.0 31.5 Revenues 28.1 28.3 28.4 29.2 29.2 29.0 General government balance -4.1 -4.2 -3.7 -2.9 -2.8 -2.5 General government debt 41.4 44.4 44.1 43.6 44.7 43.1 Selected monetary accounts (annual percent change, unless otherwise indicated) Base money -2.5 12.9 17.2 14.8 13.4 12.3 Policy interest rate 6.0 7.1 7.0 7.0 6.5 6.0 Balance of payments (percent of GDP, unless indicated otherwise) Current account balance -12.6 -13.1 -8.8 -8.1 -7.8 -7.6 Page 14 of 52 The World Bank Imports, goods and services 61.9 59.0 61.7 62.2 62.6 63.4 Exports, goods and services 43.7 43.0 50.0 52.0 53.1 54.0 Net foreign direct investment 9.0 9.8 10.8 8.6 9.8 10.5 Gross reserves 18.0 19.2 20.1 20.8 21.9 23.6 Terms of trade 2.3 1.0 0.0 -1.0 -1.0 -1.0 Exchange rate (GEL/US$, average) 2.27 2.37 2.51 2.53 2.64 2.74 Other memo items GDP nominal in US$ (millions) 13,993 14,378 15,133 16,153 16,866 17,546 Source: World Bank Though the higher deficit was partly justified by the need to accelerate growth, these policies rendered the overall macroeconomic policy framework inadequate for a DPO in 2016. The International Monetary Fund (IMF) program for Georgia was also suspended in 2016. As a result, the second operation came with more than 12-month delay although the PSC DPOs were envisioned as series of three operations. With this delay, the government that took power in November 2016 following Parliamentary elections, requested in a letter of the Ministry of Finance (dated March 1, 2017) that the WB truncate the Programmatic PSC DPO, along with the IG DPO, from three to two operations. The implementation of the DPO 3 could not be completed within the Country Partnership Strategy (CPS) FY2014-17 and many of DPO 3 triggers had been already incorporated into DPO2. By 2017 the macro-fiscal framework was assessed as adequate to proceed with the second and last DPO of the series, as the authorities revisited their macroeconomic framework to enhance fiscal sustainability and resilience. Fiscal policy commitments also allowed the government to reach agreement on an IMF-supported program in 2017. The mitigation measures of increasing excise taxes on tobacco and fuel were implemented by the government to help increase fiscal space and reduce the deficit. While these new tax rates were not favorable from a revenue distributional perspective, they had associated health and environmental benefits. To deal with cost overruns in the universal health care program—and to rein in costs without reducing benefits—selective contracting was introduced in hospitals. Increased revenues (from 28.1 percent to 28.4 percent of GDP during 2015-17) and consolidated current spending brought the deficit back on track in 2017, facilitating the initiation of a new IMF program. Thus, the strong record of the GoG in preserving macroeconomic stability was back on track. In the medium term, Georgia's main macroeconomic vulnerabilities included risks to external sustainability and fiscal pressures arising from increased social spending. At 84 percent of GDP, external debt was considered high. Low domestic savings and large investment needs resulted in a large current account deficit, further adding to the stock of debt. In addition, loan and deposit dollarization was close to 60 percent (2014). The government prioritized social spending with increases in the level of targeted social assistance and pension benefits and the introduction of universal health care in 2013. These expenditures helped to build human capital, but better fiscal management of these expenditures was needed. The government also needed to monitor and manage risks arising from SOEs. Inadequate information on SOEs limited the ability of the government to monitor SOE-related fiscal risks effectively. Page 15 of 52 The World Bank Rationale for Bank Involvement The PSC DPO series was aligned with the two pillars of the CPS FY2014-17 and the Georgia 2020 development strategy. While first-generation reforms had made Georgia a more attractive destination for investors and accelerated economic growth in the past, they were insufficient to raise productivity and diversify exports. Analysis undertaken for the Systematic Country Diagnostic (SCD) in 2016 indicated that new and small firms were entering domestic markets and growing over time, yet substantial productivity challenges remained at the firm and aggregate level. The 2014 report on Entrepreneurship in Georgia indicated that many SMEs stagnate and don’t grow, in the absence of access to finance even in the 4th and 5th year of operations 1 due to existing challenges with high cost of funds, lack of collateral, poor business skills and low transparency. The Government’s 2020 Development Strategy aimed to strengthen the private sector and reduce the economy’s reliance on public investment as the main source of growth. The PSC DPO series pursued second generation reforms that would contribute to the CPS goal of enabling private sector job creation and also contribute to deepening competitiveness reforms, a priority in the 2012 ECA Regional Strategy of the WBG. Specifically, the series would promote the CPS goal of enabling the private sector to become the main driver of employment creation and provider of income opportunities for the bottom 40 percent of the population. The PSC DPO series was complemented by another DPO (the First and Second Inclusive Growth Programmatic DPOs - P149991 and P156444 - IG DPO1 and 2), which focused on improving public service delivery and fiscal management to make growth more inclusive. 1.2 Original Project Development Objectives (PDO) and Key Indicators (as approved) DPO1 PDO The program development objective was to increase private sector competitiveness through second generation business environment reforms, financial sector deepening and diversification, and increasing firms’ capacity to innovate and to export. Original key indicators are presented in Table 2. 1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and Reasons/justification The PDO was slightly revised at the DPO2 stage to: increase private sector competitiveness through second generation business environment reforms, establishing enabling conditions for financial sector deepening and diversification, and increasing firms’ capacity to innovate and to export. The phrase ‘establishing enabling conditions’ was added in recognition of the fact that actual financial deepening could not be reasonably assured within the time frame of the series, but rather only improved conditions to achieve that result. Increasing capacity to innovate and export could be plausibly measured within the timeframe of the series even if actual increases in innovations and exports might not be. Table 2 provides the original key indicators as well as the revised set. There were 15 indicators used in DPO1 plus one added in DPO2 (the latter relating to publishing financial statements of PIEs and large and medium companies). Of these 16 indicators two were dropped and seven targets were increased reflecting implementation ahead of original expectations (as explained in Table 2). 1 Fostering Entrepreneurship in Georgia, World Bank, 2014 Report http://documents.worldbank.org/curated/en/281821468244168985/Fostering-entrepreneurship-in-Georgia Page 16 of 52 The World Bank Table 2. Original and Revised Key Indicators Original Indicator Revision/Addition Reason Major draft economic laws that are At least four (4) major economic reforms, The result indicator was made available for public review: including respective draft laws are reviewed modified to directly link it to the Baseline: N/A; Target: 100% by the Investors Council: Target: 4 (e.g. revised Prior Action 1. Pension reform, CIT reform, Judiciary reform, Insolvency Reform) Number of SMEs benefiting from EDA Number of SMEs and entrepreneurs using Target was raised to reflect services: Baseline: 0 Target: 100 EDA services: Target: 8,000 (of which 37% higher than expected level of (Disaggregated by gender of owner) are women entrepreneurs) demand for EDA (now Enterprise Georgia-EG) services, and a quantitative target was introduced for the gender of beneficiaries. Number of registered users in the Target: 36,400 The target was increased to eProcurement system: Baseline: reflect higher than expected 19,666; Target: 30,000 level of use Number of SPA tenders monitored for No change unlawful practices: Baseline: 13,000; Target: 45,000 Baseline: No DIS; Target: The Deposit Deposit insurance coverage for household Upgraded the results indicator, Insurance Agency has initial capital deposits in effect from 2018; the Deposit taking into account the decision and launches its operations Insurance Agency is operational (Charter of the authorities to introduce approved by Government, Director coverage for depositors in 2018, appointed by Board, Banks make initial several years earlier than had contributions and monthly premium). been stipulated in the AA with EU. Baseline: N/A; Target: The asset The Pension Agency is established, an Modified the results indicator to management system for the new Investment Board is selected, and take into account the latest contributory pensions has been information technology systems are set up design and decisions made on established and the personified to accept contributions following the the rollout of the pension accounts are ready to receive enactment of the Pension Law reform. contributions. Baseline: Only commercial banks and New indicator, added for DPO2 insurance companies are required to publish audited financial statements. Target: All Public Interest Entities (estimated at 300) are obliged to start filing financial statements based on IFRS from 2017, large and medium companies start the process in 2018, and the financial statements are published in an e-portal; and 10 audit quality reviews conducted by SARAS Insurance companies that are in Insurance companies that are in compliance Improved specificity compliance with EU solvency I margin with EU solvency I margin requirements requirements as set for 2017 by the Page 17 of 52 The World Bank insurance regulator. Baseline: 0%; Target: 100% Vehicles with MTPL insurance: Dropped Indicator dropped as the new Baseline: Foreign (transit) vehicles: MTPL insurance requirements N/A Target: Foreign (transit) 25% would take effect only in 2018. Incremental private investment in the No change telecommunications sector (US$): Baseline: NA; Target: US$50 million Broadband Internet subscriptions: No change Baseline: 33% Target: 45% Score on the Global Innovation Index: Dropped Indicator too broad to be Baseline: 34.5 Target: 37 attributable to program actions Number of firms/individuals that Number of entrepreneurs and startups that The target was increased and obtained innovation finance from obtain innovation finance from GITA: Target: the target by gender specified. GITA: Baseline: 0 Target: 50 300 (25 percent are female entrepreneurs) (Disaggregated by gender of (end 2018) owner/individual) Baseline: 0 parks and labs; Technology Target: 2 technology parks (1 in Tbilisi and 1 Increased target park and 2 fabrication laboratories are in the region) and 8 fabrication laboratories operational are functioning (Equipped, team appointed, and open to the public) Number of certificates issued by Target: 2,105 The target was changed to a GeoSTM in 2014. Baseline: 842; number and greatly increased Target: 9.5% increase (150% vs. 9.5%) Number of certificates issued by Target: 7,200 The target was changed from a calibration/verification entities that percentage to a number and received traceability from GeoSTM. greatly increased (effectively Baseline: 1,800; Target: 20% increase 300% vs. 20%) 1.4 Original Policy Areas Supported by the Program (as approved) Pillar 1 - Second generation business environment reforms: Pillar 1 supported second generation business environment reforms as a way to stimulate private sector-led growth. Reforms were aimed at making the business environment more predictable to increase investor trust, and more inclusive, both in terms of the consultations around major economic reforms, as well as deploying new tools to increase productivity growth and the export potential of SMEs. These measures included: enhancing the PPD to generate consensus for reforms; eliminating market barriers for entrepreneurship and SME growth; and strengthening the public procurement system. Pillar 2 - Establishing enabling conditions for financial sector deepening and diversification: Pillar 2 supported financial sector development, which is essential for increasing savings and mobilizing the investment needed to enhance competitiveness and promote inclusive growth. 2 Pillar 2 supported the introduction of a deposit insurance 2 Again, promotion of inclusive growth was further supported in parallel by the IG DPOs 1 and 2 Page 18 of 52 The World Bank system geared towards protecting small depositors; enhancing financial reporting and disclosure framework; fostering insurance market soundness which is crucial for development of new insurance products (including life, vehicle and medical insurance) and growth of the industry. A comprehensive pension reform that mandated employee savings (topped up by the employer and the state contribution of 2 percent each) into individual pension accounts, was to complement the existing social safety net that included the old age basic pension and underpin growth of the domestic capital market. Pillar 3 - Increasing firms’ capacity to innovate and to export: Pillar 3 supported measures to improve the productivity and absorptive capacity of domestic firms, so they are better equipped to innovate and export. The reforms included: changes in the legal and regulatory framework for the telecommunications sector to improve efficiency and competition in the sector and faster roll out of high-speed broadband internet services; the establishment of a more effective technology transfer system and reforms to promote commercial innovation; fiscal measures to encourage car users to adopt more fuel efficient vehicles; and improvements in the national quality infrastructure (standards and metrology) that bring about international recognition and facilitate access to EU markets by Georgian firms. 1.5 Revised Policy Areas (if applicable) The policy areas were not revised. 1.6 Other significant changes (in design, scope and scale, implementation arrangements and schedule, and funding allocations) There were revisions to some of the DPO 3 triggers and a partial merging of the second and third operations in the series with DPO2. The main changes from the DPO2 triggers to the actual DPO2 actions are summarized in Annex 7. 3 The changes to the program mainly related to accelerated implementation and a one-year delay in the DPO2 Board date, which allowed for a more ambitious program. There were no changes that represented a scaling down or reduction in scope of the program series, despite the partial merging of DPO 3 with some triggers implemented later. The status of the DPO 3 triggers is also summarized below. The merging of DPO 3 did not seriously damage the actual reforms as most of the triggers were met (8 of 11) as originally conceived and the remaining three are in progress, although the process was prolonged (see Annex 8). All indicator targets for the program were met or exceeded. 3 Details of the changes to DPO 2 triggers are presented in the PD for DPO 2 (p. 14-17) along with a status for DPO 3 triggers (p. 18). Page 19 of 52 The World Bank 2 KEY FACTORS AFFECTING IMPLEMENTATION AND OUTCOMES 2.1 Program Performance (supported by a table derived from a policy matrix) The series consisted of two programmatic operations with the first operation disbursing US$60 million and the second US$52.69 million (Table 3). As required, all prior actions (Table 4) were completed prior to disbursement. Table 3. Basic Data for DPO1 and 2 Disbursed Amount (US$, Operation Approval Date Closing Date millions) DPO1 P149998 04/28/2015 60.00 12/31/2015 DPO2 P155553 07/31/2017 52.69 07/31/2018 Note: Disbursed amount for DPO2 differed from the original allocation because the government had an option to borrow in equivalent amount in Euros. At signing of the legal agreement US$50 million was equal to Eur44.6 million and the loan was fixed in Euros. Later, at actual disbursement Eur44.6 million was equivalent to US$52.69 million. Table 4. Prior Actions Completed under the PSC Series DPO1 DPO2 Pillar I: Promoting Second Generation Business Environment Reforms to Strengthen Public-Private Dialogue, Support Entrepreneurship and SMEs, and Enhance Public Procurement 1. The Borrower has established the Entrepreneurship 1. The Borrower has established and operationalized the Development Agency (EDA) to promote the creation and Investors Council by conducting regular meetings chaired by growth of start-up companies and SMEs, as evidenced by the Prime Minister, as evidenced by the Borrower's Cabinet the Borrower’s Resolution No. 173, dated February 19, Decree No. 829 dated April 20, 2015, and No. 2160 dated 2014. [Note: On April 4, 2017, the Borrower’s Resolution October 7, 2015, and by the minutes of the Investors No. 176 changed the Agency’s name to Enterprise Council's meetings dated October 29, 2015, February 17, Georgia. Original wording of prior actions is retained 2016, May 20, 2016, and January 24, 2017. here.] 2. The Borrower, through EDA, has implemented the SME Development Strategy by delivering access to finance programs, and micro and small business support programs, as evidenced by EDA's 2016 annual report, as published in: http://enterprisegeorgia.gov.ge/en/downloadcenter/enterpr eneurship-Statistics?v=25 2: The Borrower, through its State Procurement Agency 3. The Borrower, through its Parliament, has adopted (SPA), has established a training center to improve the amendments to its Law on Public Procurement to bring knowledge of contracting authorities and suppliers with about conformity with the basic standards regulating the respect to procurement procedures, as evidenced by the award of contracts as defined by Article 144 of the Borrower’s Resolution No. 306, dated April 23, 2014; and Association Agreement with EU, as evidenced by the Law on the SPA’s Chairman Order No. 1 dated May 7, 2014. "Amendments to the Law of Georgia on Public Procurement" (Law No. 617-llb dated April 6, 2017. Pillar II: Establishing the Enabling Conditions for Financial Sector Deepening and Diversification through Deposit Insurance System, Comprehensive Pension Reforms, and Development of Insurance Markets Page 20 of 52 The World Bank 3. The Borrower has established the inter-agency Deposit 4. The Borrower, through its Parliament, has adopted the Insurance System (DIS) Working Group that will design Law on Deposit Insurance System, as evidenced by the the DIS and coordinate its implementation and approved Borrower's Law No. 852-llb dated May 17, 2017, published in its corresponding work plan; as evidenced by the the Borrower's Legislative Herald No. Borrower’s Decree No. 33, dated January 16, 2015. 220050000.05.001.018461, dated June 2, 2017. 4. The Borrower, through MOESD, has submitted to the 5. The Borrower, through its Cabinet, has approved the draft Economic Council the proposed comprehensive pension Law on Private Pension to initiate a public consultation, as reform, as evidenced by: (i) the minutes of the Economic evidenced by the Protocol No. 6 of the Government of Council meeting dated December 30, 2014, and (ii) the Georgia meeting held on March 2, 2017. letter from the Minister of MOESD to the Bank, dated March 4, 2015 6. The Borrower has: (i) through its Parliament, adopted the Law on Accounting, Reporting and Auditing, as evidenced by the Borrower's Law No. 5386-IIb dated June 8, 2016, published in the Borrower's Legislative Herald dated June 24, 2016; and (ii) through its Ministry of Finance, established SARAS, as evidenced by the Borrower's Minister of Finance Decree No. 223 dated September 14, 2016. 7. The Borrower has: (i) through its Parliament, adopted amendments to the Law on Insurance, as evidenced by the "Amendments to the Law of Georgia on Insurance" (Law No. 5384-Ilb dated June 8, 2016, published in the Borrower's Legislative Herald dated June 17, 2016); and (ii) through the ISSSG, adopted relevant by-laws to make solvency requirements fully binding by 2018, as evidenced by the Order No. 15 and No. 16 of the Head of the ISSSG, dated September 16, 2016. Pillar III: Increasing Firms' Capacity to Innovate and to Export through Reforms to Upgrade the ICT Sector and Strengthen the Borrower's National Innovation System and Quality Infrastructure 5. The Borrower has: (i) amended the “Law of Georgia on 8. The Borrower, through GNCC, has: (i) issued new licenses Electronic Communications”; and (ii) through GNCC, for wireless broadband services in the 800 MHz band, as approved amendments to GNCC’s previous resolutions evidenced by GNCC's Decision No. 56/1 dated January 29, N6 and N13 related to radio frequency spectrum 2015 and No. 349/1 dated June 2, 2016 as published on said allocation; all with the purpose of promoting growth and GNCC's website on June 10, 2016; and (ii) initiated a public competition of wireless broadband services, as evidenced consultation on draft secondary legislation on electronic by the “Amendments to the Law of Georgia on Electronic communications market analysis aligned with the European Communications” dated August 1, 2014; and the GNCC’s Union practices, as evidenced by the publication of the draft Resolutions No. 7 and No. 8 dated November 7, 2014. "Regulation on Methodological Rules for the Definition of Relevant Markets and Market Analysis for the Purpose of ex 6. The Borrower, through GNCC, has adopted a revised ante Regulation and the Assessment of Concentration in the methodology for spectrum pricing for terrestrial services Sector of Electronic Communications" dated April 19, 2017, of electronic communications, which methodology as published on GNCC’s website: http://www.gncc. covers, inter-alia, reserve prices for auctions, and fees for ze/uploads/other/2/2524.pdf license renewal for telecommunication operators; as evidenced by the GNCC’s Resolution No. 7 dated November 7, 2014, and No. 9 dated December 4, 2014. 7. The Borrower has established: (i) the Georgian 9. The Borrower, through its Parliament, has adopted the Innovation and Technology Agency (GITA) with the Law on Innovations, as evidenced by the Law of Georgia on corresponding mandate and budget to carry out its Innovation dated June 22, 2016. Page 21 of 52 The World Bank programs, as evidenced by the Borrower’s Resolution No. 172, dated February 19, 2014; and (ii) the Research and Innovation Council, as evidenced by the Borrower’s Resolution No. 32, dated February 3, 2015. 10. The Borrower, through its Parliament, has adopted amendments to its Tax Code to increase the excise taxes on imported cars, with larger increases for cars with conventional engines older than seven years, and reduce the excise taxes on hybrid cars newer than seven years, while maintaining the tax exemption on electric cars. 8. The Borrower has: (i) achieved international 11. The Borrower, through GAC, has become a full member recognition of the Georgian National Agency for of the EA by signing a bilateral agreement with the European Standards and Metrology (GeoSTM)’s quality Cooperation for Accreditation, as evidenced by: (i) the signed management system in accordance with ISO/IEC 17025, European Cooperation for Accreditation Bilateral Agreement, as evidenced by the certificate issued by the Euro-Asian as published on the following website: Cooperation of National Metrological Institutions http://gac.gov.ge/files/bla_I.png; and (ii) a decision of EA (COOMET) dated February 11, 2014; and (ii) through Multilateral Agreement Council dated April 27, 2017 Georgian Accreditation Center (GAC) has applied to the European Cooperation for Accreditation (EA) to obtain international recognition of GAC, as evidenced by the official application to EA dated September 19, 2014. DPO1 and Transition to DPO2 Though DPO1 had a relatively short preparation period, it helped lay additional groundwork for the long-term reforms. DPO1 set the stage for the more challenging reforms of DPO2. In particular, some of the larger reforms such as submission of a pension law to Parliament, the introduction of solvency and regulatory requirements to strengthen the insurance market, and adoption of the Law on Innovation and the Law on DIS (originally planned for DPO 3 but transitioned to DPO2), all had preparatory actions in DPO1. Hence, by the time of DPO2, many of the actions ready for Government or Parliament approval. Therefore, the prior actions were upgraded to enactment and implementation of laws. In addition, as envisioned at the DPO1 stage, several additional reform prior actions were included in DPO2. These included the Investors Council, accounting and auditing reforms, and insurance reform. Along with reforms initiated by new legislation under the program, new agencies were created to implement the reforms. Both the Pension Agency and the Deposit Insurance Agency were created in a short period of time to run the newly created pension system and deposit insurance system and are fully functioning. Enterprise Georgia was also created under the program and has implemented various programs to develop SME Development Strategy, promote entrepreneurship and SME growth, facilitate exports and SME access to finance. In parallel, GITA was created to promote innovative culture and help develop innovative ecosystem. Likewise, SARAS was established to manage the accounting and auditing reforms. Each of these new institutions represents a significant increase in capacity to support private sector led development and helped to implement key aspects of the DCFTA and AA with the EU. Page 22 of 52 The World Bank 2.2 Major Factors Affecting Implementation Government Commitment The government showed strong commitment to reform throughout the program even during the off-track period. This commitment created a positive reform environment. During the program, the government realized the need to build trust with the population and business community and followed through with reforms aimed at supporting the private sector such as the establishment of Investor’s Council, which improved the PPD. Trust was also built with the success in passing the DIS and pension laws. The government showed commitment to innovation reforms, and after a slow start at GITA, has supported increasing numbers of small entrepreneurs. Despite the strong commitment, the reforms require further capacity building and public consultations. Analytical Underpinnings, Bank Experience and TA Support Each policy action was grounded in specific and rigorous analytical and advisory work, both by the WBG and other development partners. Pillar 1 actions were underpinned by the EBRD Transition Report (2013), Competitive Industries and Innovation Policy (CIIP) grant funding technical assistance (TA), and the 2014 Public Expenditure Review. Pillar 2 was supported by the FSAP 2014 and the Country Economic Memorandum (CEM 2013) as well as targeted TA for DIS under FinSAC Trust Fund (P143745) and Georgia Financial Advisory Project (P165513), and pension, capital market and insurance reforms under FIRST Initiative TF (P159890). The Accounting and Auditing (A&A) Review of Standards and Codes (ROSC) 2015 recommended improving A&A standards which would lead to better financial reporting and an improved business environment, as well as access to finance for enterprises. A&A reform, including adopting of the new law, was later supported by Strengthening Auditing and Reporting in the Countries of the Eastern Partnership (STAREP) project. Pillar 3 was supported by the Bank’s advisory on digital development (P123827) which contributed to the development of the Innovation Strategy and funded TA to GNCC, and supported preparation of the Law on Telecom and Telecom-ready Infrastructure Sharing. The CEM of 2014 helped underpin innovation reforms to create jobs and to support metrology advances. One key example of the importance of WB experience in other countries and long-term engagement related to pension reforms. For example, Georgia’s model was based on the experience of several countries that used a centralized, public non-profit agency established to manage the scheme and its contributions while optimizing the cost structure to make it less expensive for the beneficiaries, including the UK model of the National Employment Savings Trust (NEST) and experience from Kosovo and Armenia pension reforms. The WB support included transfer of international best practices, financial modelling, support in development of the comprehensive reform strategy and advice to the draft legislation (that included the main pension law as well as amendments to 11 other laws and Codes of Georgia). The WB also helped the government to respond to questions from Parliament and the public on the key design features and international experience. ICR interviews reported that it was particularly meaningful that the head of the Kosovo agency visited Georgia on two occasions to provide practical experience and add credibility to the design of the reform. The successful outcomes of the pension reforms were also a product of the WB instrumental role in policy discussions and donor coordination, that helped align other international donors’ efforts over several years prior to the operation. Just in time support available under extensive TA program designed to implement FSAP recommendations (funded by FIRST Initiative TF P159890) and aligned with CPF was key to successful design and implementation of the pension reform as well as insurance reform also covered under this project. Page 23 of 52 The World Bank Similarly, timely support available under FSD Advisory and FinSAC TF for deposit insurance reform was instrumental for reform design, policy dialogue and capacity building. Deposit insurance was one of the most debatable and misunderstood reform which was long delayed. In this context, FSAP analysis and recommendation to strengthen financial safety net and establish deposit insurance was a strong impetus for the market and the authorities to reopen the reform discussion. The WB expertise along with the intensive capacity building support provided to the authorities in 2014-2016 and then Georgia DIS Agency in 2017-2018 in addition to the international conference organized in 2013 helped build consensus about the reform agenda, design, and key steps. The WB team also provided extensive guidance and reference materials for development of the respective law, regulations, foundation documents for creation of the agency and its institutional development during the first months of its operations. 4 Flexibility, expertise, and ability to provide operational support to help new institutions operate effectively and be sustainable are the strengths and distinctive features of the WB support that help client countries succeed with their reforms. Another positive factor in the operation’s success is the in-country presence. During the series, the WB multi- sectoral team was supported by the Sector Coordinator and later by the Program Leader who led or contributed to the program design and policy dialogue, facilitated coordination with the CMU and the international donors, and contributed to the daily oversight of the program preparation along with the local procurement expert and financial sector expert based in the WB office in Tbilisi. Presence of the respective team members in the local office is critical for policy dialogue, sound analytical support and donor coordination. The PSC DPO was a catalyst for increased international donor attention and support (both TA and lending) for DPO supported private and financial sector reforms. During 2015-2018 many international programs of support were designed to facilitate reforms supported by the DPO both as a result of the active WB promotion of the reform agenda as well as in evidence of the increased capacity of the authorities to handle the reform. International donors mobilized additional TA to support the authorities with pension, capital market, insurance, accounting and audit, innovation, SME development, and deposit insurance reform. Various donors, including the Asian Development Bank (ADB), USAID, and French Development Agency (AFD), provided additional support for pension reform. USAID and EBRD supported selected capital market consultations and reforms. The German Development Agency (GIZ) and German Development Bank (KfW) launched additional support for insurance and were discussing potential support for deposit insurance. Moreover, upon completion of DPO2 and based on WB advice, AFD, EU and IMF provided additional funding to the authorities to advance reforms in some of these areas (see more details below). Risk Assessment and Mitigation The overall risk rating was lowered between DPO1 and 2 from substantial to moderate which, in retrospect was appropriate. Technical risks were appropriately mitigated, and sector strategies and policies risk was moderate as reflected in successful implementation of the program. The macroeconomic risk was raised from moderate to substantial which seems also appropriate given that the program’s macro framework went off track (Table 5). 4 https://worldbankgroup.sharepoint.com/sites/Finance/SitePages/Detail.aspx/Documents/mode=view?_Id=3107&SiteURL=/sites/F inance/ Page 24 of 52 The World Bank Table 5. Main Risks and Overall Risk Ratings in the DPO1 and 2 PADs Category Risk Rating-DPO1 Rating-DPO2 1 Political Moderate Moderate 2 Macroeconomic Substantial Substantial 3 Sector strategies and policies Moderate Moderate 4 Technical design Substantial Moderate 5 Institutional capacity Substantial Moderate 6 Fiduciary Low Low 7 Environmental and Social Low Low 8 Stakeholders Moderate Moderate 9 Geopolitical Substantial Substantial Overall Substantial Moderate Public consultations were effective, helped mitigate risk. Consultations were particularly effective with respect to conveying the deposit insurance and pension reforms, including comments to the draft strategies, draft legislation and final delivery to parliament. For example, for pension reform, the representatives of the Labor Union supported a defined benefit version of the pension scheme, but through discussions it became clear that this type of scheme is not as viable as defined contribution in a country like Georgia with aging demographics. The pension reform was discussed at two Investors Council meetings chaired by the Prime Minister. Consultations were also effective in winning support for DIS among broader public and private stakeholders, but particularly amongst the largest banks which resisted the reform. The WB team organized a large international conference, a 3-day training workshop for public sector for capacity building, as well as participated in two round table discussions organized by the Ministry of Finance with all the commercial banks to discuss the rationale, benefits for the banking sector, and share international experience. The WB also assisted the agency with development of a communication messages prior to the launch of the deposit insurance coverage and with preparation of the content, including Q&A for the agency’s website. Furthermore, the WB team organized a special workshop on deposit insurance for the media representatives to explain the rationale for deposit insurance, international principles and best practices. The WB project team regularly met with the relevant Parliament committees to discuss policy reform agenda, update on the program progress and share international practices. The preparation of the Accounting and Auditing reform benefited from consultations with various stakeholders including parliament, the NBG as well as business community and auditors. The Law on Innovations was prepared with consultations with universities and research institutes, which provided comments and proposals to the government. The concerted effort of multiple development partners was a key success factor in preparing and implementing the reforms which were catalyzed by the PSC DPO. As mentioned earlier, the EU provided financing and TA on private sector development to support the implementation of the DCFTA, while regular communications with the EU Delegation helped with alignment of key reforms with respective commitments made under the AA. The PSC DPO2 policy matrix was used by AFD to add substantial additional budget support to Georgia of $50 million, with joint missions organized for the AFD program appraisal and TA extended to support the Georgian pension agency institutionalization. The ADB also designed several of its adjustment lending operations along similar policy agenda. The IMF program also included pension and deposit insurance reforms as cross-conditions. Page 25 of 52 The World Bank 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization Design The results indicators appropriately covered the prior actions and linked them to the PDO with one exception. Each prior action had a corresponding results indicator relevant to the action. Thus, the number of indicators was appropriate. The targets for the indicators were ambitious but also feasible as evidenced by the fact that all of the targets were met or exceeded. This achievement is not because the targets were low but because program performance was strong. Most indicators were intermediate in nature which was reasonable given the short time frame to measure actual development impact. The indicators measured results that were consistent with the PDOs. The team enhanced the results framework by deleting one of the results indicators not attributed to the project for DPO2 (Score on the Global Innovation Index). Implementation Implementing agencies kept track of their respective results indicators, which were readily available for the ICR upon request. The MoESD carried out effective coordination and ensured that implementing agencies maintained their respective results indicators. During implementation appropriate adjustments were made to the results indicators to improve specificity and to raise targets given the extra time afforded because of the change in the Board date for DPO2. Implementation of M&E benefited from substantial TA and other donor support. Utilization The M&E framework tracked program progress that fed into decisions to accelerate the program, such as in the areas of SME financing, and GeoSTM and traceability certificates. The TA provided during the series also helped build M&E capacity. This improved capacity was observed in a number of areas and institutions including SARAS, ISSSG and GNCC. The M&E framework was central to each of these institutions carrying out their core responsibilities. SARAS, in particular, relies on financial data gathering to improve financial sector operations. The results framework provided a sound foundation for the ICR to make assessments. This increased capacity helps ensure the sustainability of M&E systems. The M&E rating is substantial. 2.4 Expected Next Phase/Follow-up Operation There are a number of World Bank and other partner funded operations that will continue to support reform areas of the PSC series. In addition to FIRST TA (which is expected to close in November 2019), the new Financial Inclusion and Accountability Project funded by the EU for 2019-2022 will support continued reforms in the areas of capital markets, insurance, financial inclusion, accounting and auditing. The continued programmatic Georgia Financial Sector Advisory Project (P165513) contributes to policy dialogue on financial stability and safety net, while the new TA project funded by the FINSAC Trust Fund for 2019-2021 provides support for development of DIS payouts and continued institutional strengthening of deposit insurance agency. There is also a currently active IPF, Page 26 of 52 The World Bank the Georgia National Innovation Ecosystem Project (GENIE-P144521) that supports GITA’s program. This project was recently restructured to accelerate implementation given the difficulties related to capacity constraints, and to increase the financing provided for startup and matching grants. The Increasing Institutional Capacity for Innovation project funded by the EU TF for 2019-2022 will also support increasing capacity at GITA and enhancing early stage financing instruments. The Improving Efficiency and Transparency in Procurement trust fund carries through to June 2019 and has already built on PSC reforms, in particular by increasing procurement data transparency to all stakeholders by making it available in machine-readable form. Ongoing ASAs (P167086, P166275) support the MOESD to define a national broadband strategy—to increase access to affordable broadband through more competitive markets and greater private investment—and to define a legal framework for infrastructure sharing, which will help to reduce the costs of broadband network construction. These activities also fund technical assistance to GNCC as it continues to strengthen ex ante regulation in wholesale markets for internet services. 3 ASSESSMENT OF OUTCOMES 3.1 Relevance of Objectives, Design and Implementation (to current country and global priorities, and Bank assistance strategy) Objectives-High PDO: To increase private sector competitiveness through second generation business environment reforms, establishing enabling conditions for financial sector deepening and diversification, and increasing firms’ capacity to innovate and to export. The program objectives were closely aligned to the CPS (FY2014-17) Pillar I: enabling private sector-led job creation through improved competitiveness, which in turn was based on the government’s reform program “Georgia 2020”.45 The objectives, as further defined by the associated indicator targets, were appropriate to country conditions and the level of government commitment to the program, which is supported by the fact that all targets were met or exceeded. The objectives remain relevant to the current CPF for Georgia for FY19-FY22 (April 25, 2018). The program laid much of the groundwork for private sector competitiveness, financial deepening and innovation, and now the focus is on implementation, which is essential for achieving impact. The PSC areas emphasized by the new CPF include improved connectivity and integration, diversifying sources of finance and strengthening innovation capacity (Focus Area 1) which correspond to PSC Pillars 2 and 3 and strengthening the resilience of households through DIS and pension reform (Focus Area 3). These objectives continue to be pursued in the follow up operations laid out in section 2.4 Design-Substantial The design of the program was substantially relevant. The programmatic instrument was appropriate because even though the program was delayed because of the macroeconomic framework, the GoG recovered well and the macroeconomic framework became sound again, particularly with good fiscal performance. The fact that it was originally designed as a three-operation series, but only two were approved does not significantly detract from the 55 The second pillar of the CPS was supported by IG DPO that ran concurrently with the PSC series. Page 27 of 52 The World Bank relevance rating. As discussed, the third operation’s triggers were largely implemented, and the remainder are underway. Some of the reforms were driven by the objective of aligning with EU standards and compliance with EU regulatory frameworks. These areas included procurement, SME support, DIS, insurance, metrology, innovation, all of which met or exceeded their targets. All the reforms supported by the DPO have also been defined as key priorities in the Georgian 2020 economic reform strategy. A minor shortcoming was in the results framework where an indicator had to be dropped for lack of attributability to the prior actions. Implementation-High Implementation relevance was high because the program generally exceeded expectations. Appropriate upward adjustments were made to the actions and indicator targets. The deposit insurance and pension reforms took extra time and effort to implement due to complexity and need for more extensive policy dialogue, but both have exceeded the originally envisioned DPO2 targets and represent potentially high-impact reforms. The delay in DPO2 and the decision not to go forward with DPO 3 did not significantly adversely affect the impact of the program, despite the concurrent changes in government. The negative impact was minimized given the strong commitment of the authorities to continue with the reform agenda that had been evidenced in the letter of development policy and other international agreements (including with IMF and other donors) and supported by the extensive TA from the WB and other development partners. 3.2 Achievement of Program Development Objectives (including brief discussion of causal linkages between policy actions supported by operations and outcomes) PDO: To increase private sector competitiveness through second generation business environment reforms, creating the conditions for financial sector deepening and diversification, and increasing firms’ capacity to innovate and to export. Each of the three PDOs is assessed separately. The three objectives, as separately laid out here, align directly with the three program pillars. PDO 1: Increase private sector competitiveness through second generation business environment reforms- Substantial achievement Investors’ Council-Substantial The Investors Council had regular meetings, chaired by the Prime Minister, as shown by meetings of the IC during 2015-17. These meetings continue to take place on a regular basis. The results indicator target for, ‘At least four (4) major reforms, including respective draft laws are reviewed by the Investors Council, was met. This target was met. The reforms included: Judicial Reform, pension reform the Organic Law on Agricultural Land, insolvency reform, Corporate income Tax (CIT) reform, and the Law of Entrepreneurs. Minutes of Investors Council meetings are available at http://ics.ge/en/IC-Meetings/. These meetings are an important input to improving the public- private dialog and are expected to lead to more accountable and transparent rulemaking and policy consistency, which are associated with private sector development in the form of stronger economic growth, higher investment rates, and faster productivity growth (a national priority). These reforms have increased the use of PPD in the Page 28 of 52 The World Bank formulation of policy reforms, taken into account private sector views, and more trust in policymaking as envisioned in the PD. SMEs-Substantial The PSC program laid groundwork for promotion of SME competitiveness, though impacts will take more time to be evident. The EEDA was established in 2014 to promote the creation and growth of start-up companies and SMEs. The program also improved SME competitiveness by implementing the SME Development Strategy, through the EDA (EG from 2017 onward), by delivering access to finance programs, and micro and small business support programs. This action was evidenced by EDA's 2016 annual report. 6 The target for the results indicator, ‘Number of SMEs and entrepreneurs using EDA services was met with 9,740 users (compared to a target of 8,000) of which 40.5 percent were women, against a target of 37 percent. Procurement-Substantial Improvements in procurement training and transparency have so far led to increased use of the e-procurement by SMEs, and a higher number of cases monitored, both of which move Georgia toward EU standards and having more inclusion in the private sector. Georgia had been a leader in procurement practices in the region, but wanted to go further, and the government agreed with EU to implement 2nd generation reforms and align its legislation according to Article 144 of the EU AA. The government also wanted to ensure that smaller players could take advantage of procurement opportunities. Through support for establishing a training center at the SPA, contractors, mainly SMEs, became more familiar with the procurement system and with e-procurement. This was evidenced by exceeding the results indicator target for ‘number of registered users in the e-Procurement system, with 42,694 actual level achieved compared to the target (36,400) and baseline (19,666). Transparency was promoted through amendments to the procurement law upgrading the basic standards for award of contracts. The progress on these measures was evidenced by exceeding the target for ‘number of SPA tenders monitored for unlawful practices with 76,395 actual achieved compared to the target (45,000) and baseline (13,000). PDO 2. Establish enabling conditions for financial sector deepening and diversification-High achievement Deposit Insurance-High The program overcame some resistance to introduce deposit insurance, which is a cornerstone of financial stability and financial safety nets. Following FSAP recommendations and given the need to increase market confidence and encourage higher savings, the authorities committed to establishing a DIS, despite the resistance of various stakeholders (including banks). several years earlier than had been stipulated in the AA with EU. This reform had been pending for more than 10 years since 2004 when it was first initiated but failed due to lack of support in Parliament and among banks. The results indicator target was to have ‘Deposit insurance coverage for household deposits in effect from 2018; the Deposit Insurance Agency (DIA) is operational (Charter approved by Government, Director appointed by Board, Banks make initial contributions and monthly premium),’ and was achieved. This is evidence that the WB and the joint WB-IMF FSAP program can play a catalytic role in prioritizing 6 Published in the following website: http://enterprisegeorgia.gov.ge/en/downloadcenter/enterpreneurship-Statistics?v=25 Page 29 of 52 The World Bank reforms essential for financial stability and financial sector development, and ensuring that public policy objectives are communicated clearly, and reforms are not left to drift even in reform-minded countries like Georgia. The existence of deposit insurance will help deepen the financial sector because the risk to smaller depositors in case of a bank liquidation is addressed and depositors will be less inclined to withdraw their deposits, thus reducing the likelihood of a contagion for the rest of the system. Another positive effect is that with reduced risk of depositor loss (especially on the back of the memories of Georgian households about their losses in early 90s), there is an increased incentive to have a bank account and save. Since the launch of the deposit insurance system in January 1, 2018, deposits grew 10 percent in 2018. As of April 2019, DIA accumulated and managed Deposit Insurance Fund (DIF) in the amount of GEL 22 million. The coverage ratio (DIF to total insured deposits in member banks) reached 1.29 per cent (Target Fund level). Under the existing coverage amount of GEL 5,000 per depositor, 96 per cent of individual depositors in the Georgian banks remain fully covered. DIF is sufficient to compensate insured deposits in any of the 8 smallest banks individually or in 5 smallest banks simultaneously. Pensions-Substantial The activities in this reform area contributed to creating conditions for financial deepening by mandating long- term savings and facilitating financial inclusion, while enabling better social protection policies and ensuring fiscal sustainability. The authorities already provided a universal pension to all elderly, but at only 18 percent of the average formal sector wage. Rather than face public pressure to keep raising the universal pension benefit well above poverty line, which Georgia could not afford, the strategy was to provide Georgian workers with the vehicle to save money for retirement that could be used to supplement the universal pension. The pension reform strategy was adopted in 2016, which included a proposal to establish a system of individual saving accounts. Under the new pension savings scheme—mandatory for those under age 40—individuals save 2 percent of their salaries, which is matched by employer and government contributions of 2 percent of wages each (all tax deductible), up to a ceiling limit. Self-employed persons may opt into the system on a voluntary basis. These savings are managed by a newly established and centralized Pension Agency, overseen by a Supervisory Board of Ministers. The investment decisions will be taken independently of the government by a board of professional experts. Investment activities are regulated by the NBG. The law was passed and the new scheme became effective January 1, 2019. The results indicator was a high impact process indicator which was substantially met: ‘The Pension Agency is established, an Investment Board is selected, and information technology systems are set up to accept contributions following the enactment of the Pension Law.’ The agency was established remarkably quickly after the Law on Pensions was passed August 6, 2018, and the system began to accept contributions starting from January 2019. The members of the investment board charged with investment decisions regarding scheme’s assets were selected through international competitive process and approved by the Parliament in June 2019. As of June 4, 2019, the system has registered 830,000 participants and 54,100employers. The total value of pension assets constituted GEL 232 million, or US$ 82 million. It is estimated that the funds will amount to 5-10 percent of GDP after 10 years of operations. Capital market reform is underway which will provide greater investment opportunities for pension assets. Page 30 of 52 The World Bank Accounting and Auditing-Substantial Accounting and auditing reforms were key to improving transparency and developing an accurate picture of the financial health of major entities in the marketplace. The target for action 6 (DPO2) under the responsibility of the SARAS, has essentially been met. According to the law of Georgia on Accounting, Reporting and Auditing, all PIEs, 7 as well as enterprises of first and second category (as defined by the law) were obliged to start filing their financial statements for the reporting period of 2017 and submit them to SARAS, no later than October 1, 2018. For those enterprises meeting the criteria of third and fourth categories, the obligation enters into force for the reporting period of 2018 and they shall submit their financial statements to SARAS, no later than October 1, 2019. The result so far is that 700 enterprises have submitted their financial statements to SARAS, including all 127 PIEs. 8 In addition, 700 statements have already been published on the web-page www.reportal.ge. Regarding the audit quality reviews conducted by SARAS, 23 quality reviews have been completed in 2018, and 14 more reviews are in progress. Insurance Industry-High The insurance industry improved from basically a barely functioning institution to one that was beginning to have meaningful role in risk mitigation. This accomplishment owed to a long-term effort and policy dialogue that began with the setting up of the Insurance State Supervision Service of Georgia (ISSSG) in 2013, a long-term, strong dialog between the WB and the authorities beginning with the 2014 FSAP and the amendments to the new Law on Insurance. ISSSG was the WB main counterpart. The reform of the insurance industry was necessitated in part by excessive deregulation which put beneficiaries at risk. There were essentially no solvency requirements since they had been rescinded in 2010 which led to the insolvency of several insurance companies in Georgia. In addition, the government phased out medical insurance in 2014-15, which had been the largest business client for insurance companies and insurance companies were highly reliant on medical insurance premia. The results indicator was that Insurance companies be in compliance with EU solvency I margin and minimum capital requirements. The improvement was large, from a baseline of 0 percent to achievement of the target of 100 percent of insurance companies meeting the minimum requirement in capital. 9Minimum Capital Requirement (MCR) has been gradually increasing from initially existing GEL 1 million (approx. US$ 400,000) to the current GEL 4.2 million (approximately US$ 1.6 million) and is expected to increase to GEL 7.2 million (approximately US$ 2.8 million) by the end of 2020. Furthermore, together with the implementation of Solvency I regime ISSSG has implemented Supervisory Capital Requirement (SCR). The insurance reforms have put the insurance industry on a stronger footing, helping companies reach the minimum standards of capitalization. The reforms also aimed at addressing issues that come from having uninsured motorists. A functioning insurance industry helps manage economic risk and supports financial sector 7 A publicly accountable enterprise the securities of which are traded at the stock exchange, a commercial bank or qualified credit institution, a microfinance organization, an insurer, a founder of a non-state pension scheme, an investment fund, a non-bank deposit institution – credit union and entities defined as PIEs by the Government of Georgia. 8 The number of PIEs is different though compared to the number indicated in the PD. According to latest information, there are 127 PIEs instead of 300. The difference is because many historically listed open – joint stock companies (many former state companies which were privatized through vouchers distribution to employees) have been delisted by the Georgian Stock Exchange due to absence of free float/trading at the stock exchange. 9 The full solvency requirement is 18 percent for capital adequacy. Page 31 of 52 The World Bank deepening and diversification. Compulsory Motor Third Party Liability (MTPL) insurance, that had been discontinued in 2004, needed to be reintroduced to facilitate faster growth of insurance sector, address the problem of mounting medical and social costs associated with road traffic injuries, and to encourage safer driving. MTPL for foreign vehicles became compulsory in 2018 (DPO3 trigger), with compliance reaching 90 percent after a few months of its introduction. This activity was an instant source of growth for the insurance industry with an estimated collection thus far of GEL10 million. For domestic vehicles, MTPL was submitted to the Parliament in December 2018 and is expected to come into force in 2020-21. This implementation substantially exceeded the expectations of the DPO 3 trigger that only draft legal amendments for phased introduction of MTPL were to be submitted to the Parliament. The introduction of MTPL insurance, which could be offered only by capitalized insurance companies, will expand the market, and help reach the threshold EU standard for capitalization. This is in line with the EU Articles of Association Agreement PDO 3: Increase firms’ capacity to innovate and to export-Substantial achievement ICT reforms—High Under the series, Georgia was able to make major strides in updating its regulatory and pricing framework for telecom. The indicator targets were both exceeded. Incremental private investment in telecom (US$236.7 million vs. a target of US$50 million, of which licensing fees were about US$30 million) and the broadband internet subscription rate (target 45 percent vs. an actual of 69 percent, compared to a baseline of 33 percent). The new Law of Georgia on Electronic Communications allows for upgrades to wireless networks without requiring new licenses. One area of concern is the lack of competition remains because wholesale markets remain concentrated, and as M&A has consolidated various submarkets of the telecom sector. Still the achievements in telecom do contribute to PDO 1-Increase private sector competitiveness because of improved quality and greater access to broadband networks, especially through the introduction of fourth-generation (4G) technology. Georgia is also improving nationwide access to ICT services by: (i) launching a “Broadband for All” program that is competitively-neutral and aligned with EU practices; and (ii) adopting an infrastructure sharing framework focused on broadband development. On the first, the process of finalizing the design of the related OpenNet project 10 is nearing completion; the WB continues to support this process. Sharing of infrastructure requires a new law on telecom and telecom-ready infrastructure sharing, which is under preparation with WB TA. The draft law is under preparation by the MoESD. This law, which aligns with the EU Directive 61, will be critical to the efficiency of communications network deployment, because it can help to reduce the costs of building broadband networks. 70-90 percent of the cost of network construction relates to civil works, and most of that cost component can be saved by using existing ducts, land, and poles (e.g. from electricity or municipal infrastructure). Another important achievement is the “Regulation on Methodological Rules for the Definition of Relevant Markets and Market Analysis for the Purpose of ex ante Regulation and the Assessment of Concentration in the Sector of Electronic Communications.” This regulation has been prepared and uploaded on GNCC web-site (http://www.gncc.ge/uploads/other/2/2524.pdf). Amendments to the Georgian Law on Electronic Communications, which will fully activate this regulation, are still pending. The amendments have been prepared 10 http://opennet.ge/eng Page 32 of 52 The World Bank within the EBRD-funded project and submitted to MoESD for further circulation to the government and the parliament. Promotion of fuel-efficient cars-Substantial The GoG adopted amendments to its Tax Code to increase the excise taxes imported cars with conventional engines older than 7 years and reduce the taxes on hybrid cars newer than 7 years, while maintaining the tax exemption on electric cars. The changes in the excise taxes for cars were expected to raise the share of electric and hybrid cars, and the trend is in that direction. Information obtained at the ICR stage showed that hybrid cars have increased their share from 0.2 percent in 2015 to 4.2 percent by mid-2019. Electric cars still have a tiny share but have increased from 59 cars in 2015 to 1,655 in mid-2019. The increase in the share of fuel-efficient cars will reduce GHG emissions over the medium-long term and reducing air pollution. This action is primarily aimed at reducing Georgia’s carbon footprint, but it also promotes the achievement of PDO 3 by stimulating the adoption of green technologies, which can be considered an innovative practice by the private sector. The policy action also generates tax revenue and creates a lower pollution environment that benefits the whole population. Innovation Law and Support-Substantial The reforms promoting innovation succeeded in meeting their intermediate results targets. Infrastructure development for innovation is a priority for the Government to promote innovation development and ensure inclusive access to high-tech equipment and services throughout the country. The target of two technology parks (1 in Tbilisi and 1 in the region) was exceeded with a third technology park established in Telavi, and the target for 8 functioning fabrication laboratories (Equipped, team appointed, and open to the public) was also exceeded with 23 laboratories established. The results indicator, ‘Number of firms/individuals that obtained innovation finance from GITA,’ was met with 307 entrepreneurs obtaining finance against a target of 300 and a baseline of 22 percent of the recipients were female, which nearly reached the target of 25 percent. The question is whether these achievements will translate into real outcomes because the facilities are more supply driven. The technology labs are typically 2-3 floors, provide space for exhibitions, and host stakeholders. Tbilisi Park is being used and has incubating offices for projects being nurtured and provides accounting and legal services and HR. The ‘Fab labs’ provide equipment such as 3D printers, wood cutters, industrial arts for prototypes. Additional information on the use of these parks and labs was obtained at the ICR stage. Although it is not clear that the number reflect a high rate of use of the facilities, users seem satisfied (amongst those surveyed, numbers are cumulative): • Telavi TechPark – 1057 users, of which 922 engaged in GITA programs, positive feedback from 902 and 20 neutral • Zugdidi TechPark – 965 users, of which 590 engaged in programs, positive feedback from 555 and 98 neutral • Rukhi IC – 538 users, of which 123 engaged in GITA programs, positive feedback from 501 and 11 neutral • Akhmenta IC – 969 users, 184 engaged in GITA programs, positive feedback from 165 and 4 neutral. Examples of programs that GITA is promoting include “Start your Business with FabLab” for young entrepreneurs, “Digital Literacy” trainings for households, “eCommerce trainings” for MSMEs, “TOT for Robotics, Lego and Little Bits”, “Arduino”, etc. for beginner IT specialists, as well as promoting the acceleration programs e.g. “Young Entrepreneurs School”, etc. Women account for approximately 30 percent of the users. Page 33 of 52 The World Bank The adoption of the law on innovation was a higher action than the DPO2 trigger because implementation was faster than expected, but there was a need of significant capacity building at the newly created agency (GITA). The original DPO2 trigger was “The Borrower has submitted the draft Law on Innovation to strengthen commercialization of innovation to Parliament for approval,” however the law was actually passed. The law gives GITA solid legal standing and is the first of its kind in Georgia. It calls for an innovation strategy and budget and financing to support the strategy, mostly managed through GITA. There were some concerns about this reform area because of a weak start for GITA, though it was somewhat understandable as it was a newly created agency. Staffing of GITA was slow, and there was significant staff turnover, including its senior management, which impeded decision-making. The Research and Innovation Council which intends to advise government on strategy was formed but has not met for two years. After 2016, GITA’s operations picked up and the agency is providing important assistance to new ventures in a variety of areas including virtual reality applications, and wi-fi analytics, to name a few of the current innovations. Metrology-High This achievement is important from the standpoint of establishing accreditation and standards for private sector businesses in Georgia and in complying with EU requirements that will put them in a better position to export. It is highly important for companies to obtain quality related services, such as testing, certification, and calibration to meet the requirements imposed by trading partners and regulators. The original and upward revised targets for the results indicator: ‘Number of certificates issues by calibration/verification entities that received traceability from GeoSTM were exceeded. The achievement was 12,475 certificates compared to an original target of 2,160 (a target of 20 percent above the baseline of 1,800 certificates) and a revised target of 7,200 certificates. The number of certificates issued by GeoSTM was 5,195 which exceeded the target (2,105). This means that labs are rapidly expanding their capacities to calibrate instruments and machines for the private sector. It was also reported during the ICR mission that Georgia provides metrology services for neighboring countries (Armenia and Azerbaijan) that do not yet have this capacity. Access to internationally recognized National Quality Infrastructure (NQI) services within Georgia will enhance Georgian firms’ access to international markets by increasing the number of firms that receive the NQI services. 3.3 Justification of Overall Outcome Rating (combining relevance, achievement of PDOs) Table 6 provides a summary of the program’s solid record with respect to its results targets. Rating: Satisfactory Table 6. Summary of Achievement of Results Targets Component/PDO Exceeded Achieved Not Total Achieved Pillar 1 2 2 0 4 Pillar 2 0 4 0 4 Pillar 3 6 0 0 6 Total 8 6 0 14 Page 34 of 52 The World Bank Note that with an additional year elapsing between DPO1 and 2, targets were appropriately raised in some instances. The overall outcome is rated satisfactory based on strong achievement of objectives with a few minor concerns. The program relevance is rated high and the outcome is rated a strong substantial, thus this may be considered a borderline overall highly satisfactory/satisfactory operation. The achievements in the core of the program including pensions, deposit insurance, insurance, accounting and auditing and telecommunications all represent potential high outcomes. Though the program met or exceeded all targets, there were several shortcomings: i) there remain issues about the final outcome of the innovation component; ii) while many of the follow up triggers (under DPO3) have been achieved some took longer than expected to achieve and still have not been fully implemented; iii) there were implementation delays with the pension reform (in addition to the delayed establishment of the investment board); iv) the macroeconomic framework went off track contributing to the DPO 3 not going forward. Again, these shortcomings are mitigated because of a continued strong policy dialogue, and that most of the DPO 3 triggers were eventually implemented. This operation’s success owes in large part to its good timing, that is, pursuing the right reforms at the right time for the government with the right technical and financial support and good cooperation of development partners and warrants a satisfactory rating. 3.4 Overarching Themes, Other Outcomes and Impacts (if any, where not previously covered or to amplify discussion above) (a) Poverty Impacts, Gender Aspects, and Social Development There are a number of areas where positive poverty impacts were promoted. Perhaps the most important area of poverty reduction and social development is in pensions where the new pension system offers double matching for all formal sector workers. While not all of these beneficiaries are the poorest in Georgia, the scheme is expected to help a vulnerable group, the elderly, receive a more comfortable, though not luxurious, retirement. The policy action to promote fuel efficient cars is part of Georgia’s commitment to its Nationally Determined Contribution (NDC) and to the Paris Agreement. The national strategy is to improve the country’s preparedness and adaptive capacity by developing climate-resilient practices that reduce the vulnerability of highly exposed communities. Another area is in telecom where wider access to high-speed wireless internet (covering over 90 percent of the population as of 2019), is a positive outcome for poorer areas. This outcome is due to the ability of network operators to upgrade their technology and use lower frequency bands, promoting service innovation and reducing costs (lower frequencies cover larger areas, requiring fewer towers). The promotion of SMEs is also expected to benefit the poor and working class disproportionately as they are more likely to be the employees of SMEs. A third area is deposit insurance which lowers the risks faced by small savers and therefore helps strengthen the resilience of households. The inclusion of women in a number of activities was explicitly targeted and substantially attained in several reform areas. These areas include access to innovation finance from GITA, female-run SMEs and female entrepreneurs using EG services. Promotion of the new pension system also benefits women disproportionately because of females’ higher life expectancy meaning that they receive pensions for a longer period. Page 35 of 52 The World Bank (b) Institutional Change /Strengthening (particularly with reference to impacts on longer-term capacity and institutional development) There was critical institutional strengthening in almost all reform areas. The institutional strengthening was in the form of both legal framework and implementation capacity. The key agencies that were strengthened under the series were: Investors Council- This council provides a high-level forum that will improve the PPD. Enterprise Georgia (formerly EDA) - This agency under the MOESD is supporting development of entrepreneurship, SMEs and exports by providing business advisory and information services, developing skills and promoting business development under “Produce in Georgia”, which includes among others an interest rate subsidy and a partial credit guarantee for newly established businesses in selected sectors. Pension Agency - This agency is tasked with managing the new contributory pension scheme, including both the system of individual accounts and the investments of assets (through an independent Investment Board whose members were selected through an international competition and approved by Parliament recently). It was duly established and has been accepting contributions to the system and crediting individual accounts of the participants. DIA -The DIA was created in July 2017 to manage the DIS and is fully operational now, with all the procedures established and deposit insurance coverage launched on January 1, 2018. With the World Bank support, DIA continues to work on creation of a modern payout system and envisions to increase the coverage for insured deposits. ISSSG - The Insurance Regulatory Agency has significantly strengthened the legal and regulatory framework during 2016-2018 and has increased its institutional capacity. It continues to work on institutional reforms to comply with international supervisory standards in parallel to enhancing insurance market regulation and fostering development of new products. In 2018, a number of new products have been introduced, including liability insurance for MTPL for transit vehicles, with more products expected to be introduced in 2019-2020. Creation of an independent insurance regulator has been a major step forward in fostering insurance market development and building a larger uptake of insurance products which are essential for economic growth, social safety net and insurance market development. SARAS - Accounting and Auditing functions have also taken off with a substantial increase in transparency of PIEs and other large enterprises. There still needs to be greater coverage of the private sector, but this new agency has made transformative progress in shifting the private sector toward greater transparency. GNCC - Though not a new agency, the capacity of GNCC to implement its mandate to promote competitive markets and expand access to telecommunications has improved with significant TA centered on new regulations and updates to the legal framework. GITA – Despite a slow start, GITA plays an important role in leading innovation promotion campaign and developing innovation infrastructure, building special programs and raising multiple donors support, and raising public interest in innovation. Just few years ago most of population and the public officials did not know much about innovation with non-existent ecosystem; innovation was not even mentioned in government programs prior to 2014, while in 2018 it is one of the key pillars of the government strategies and donor support programs in Georgia. Page 36 of 52 The World Bank (c) Other Unintended Outcomes and Impacts (positive or negative, if any) None 3.5 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops (optional for Core ICR, required for ILI, details in annexes) Not applicable 4 ASSESSMENT OF RISK TO DEVELOPMENT OUTCOME Ratings: Low Despite a few concerns in the past, the risk factors related to the outcomes achieved are not significant. The delays in the program should not be interpreted as an indication of future risk, but rather as in the cases of deposit insurance and pension reforms, as reflections of far reaching reforms that are challenging even for a strong reformer like Georgia. Even during the off-track period, implementation moved ahead because the government intended to see the reforms through and exceeded implementation targets with strong WB support through TA and the policy dialogue. The pension reforms and deposit insurance reforms are in place and unlikely to be reversed. The new telecom framework does not require amendments to move up to 5G network in the future. Electronic communications have been updated with new licenses issued for wireless broadband services, also unlikely to be reversed. Note that the investment in telecommunications has also greatly exceeded the target indicating an acceleration of private sector participation as companies need to spend to upgrade their technology. GNCC is also sustainable because it is funded by regulation fee (spectrum fees go to treasury). A few questions of sustainability linger, but the risk does not rise to the moderate level. For example, one DPO 3 trigger was for the a ‘Broadband for All’ initiative to be launched. The progress here is being supported by the ongoing ASA and a potential new Investment Project Financing (under preparation) which will focus on design and implementation of the OpenNet program. Another area where there might be some concern about sustainability is in the area of innovation reform because of slow start of GITA and the time required to use innovation facilities at full capacity. However, these concerns are small relative to the higher impact reforms in the rest of the program which continue to proceed at a steady pace. 5 ASSESSMENT OF BANK AND BORROWER PERFORMANCE (relating to design, implementation and outcome issues) Page 37 of 52 The World Bank 5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry (i.e., performance through lending phase) Ratings: Highly Satisfactory The WB helped prepare a well-designed, ultimately successful program making good use of its technical expertise and employing consultations in effective ways. A key positive effect of the WB was to help the government prioritize and accelerate reforms. For example, while Georgia wanted to upgrade its ICT industry, it still needed a partner to help with this effort. One important intervention of the WB was to help Georgia put the electronic and telecom updates on a timeline, so they would more expeditiously be implemented rather than dragging on for several more years. On deposit insurance, while the government was committed to this reform under EU AA, the WB assisted the government to build capacity that made it possible to accelerate the reform and follow international best practices and ensure its sustainability. On pensions, the WB technical team worked diligently to assist with the pension reform strategy and ensure the new legislation also reflects best international practices in setting up a system of mandatory individual pension accounts, including minimal administrative costs, independence of the investment decisions, and proper oversight. Overall, legislation and launch of the contributory pension pillar was introduced more smoothly and much faster than would have been in the case without the WB support. The WB provided similar support to other DPO supported reforms, including in the insurance market, accounting and auditing, innovation and other sectors where timely and quality WB policy guidance and capacity building support was instrumental for helping the Government to deliver these reforms. 5.2 Quality of Supervision (including of M&E arrangements) Ratings: Satisfactory The WB was seen as the leader on the reform in most areas and performed well in securing cooperation and coordination of other development partners. With the WB in the lead there was a generally cooperative spirit among the development partners. The WB also took advantage of the close link between financial sector reform, supportive TA and measures to improve the business environment. The WB maintained a strong country dialog to keep up reform momentum even when the program went off track. This was aided by in-country expertise in the areas of procurement, DIS, pensions, insurance, capital market, and accounting and auditing. A minor shortcoming was that adjustments could have been made to the results framework to better capture outcomes of the climate change prior action as well as the outcomes of the innovation component. (a) Justification of Rating for Overall Bank Performance Ratings: Satisfactory With the WB performance at entry rated highly satisfactory, and supervision rated satisfactory and the outcome rating of satisfactory, the overall WB performance rating is satisfactory. Page 38 of 52 The World Bank 5.3 Borrower Performance (a) Government Performance Ratings: Satisfactory The government committed to and followed through on a bold reform program that projected Georgia significantly forward in improving the private sector environment. The government showed a willingness to convene discussions with stakeholders, even when there was polarization of views, and an ability to use and benefit from technical experts. The government tended to exercise caution in the reform program and showed a preference for regular consultations. Still, the government did move fast in some areas such as wireless broadband, accounting and auditing, insurance. The MoF and MoESD coordination across ministries went very well and they adjusted to more ambitious reforms because of this good cooperation. A specific example of MoF commitment was the strong effort to convince banks to discuss deposit insurance and to candidly lay out their concerns and consider the merits of deposit insurance. To ensure that meetings would have results debriefings would include heads of agencies chaired by the Deputy MoF to lock in progress on the reform. Finally, when the program went off track, the government mobilized to take measures to get the macroeconomic framework back on track, and during this period, continued to implement the reform program so that time was not lost. (b) Implementing Agency or Agencies Performance Ratings: Highly Satisfactory Most IAs performed at a highly satisfactory level, exceeding targets and timing of reforms, while others recorded at least a satisfactory rating (Table 7). 11 One example of a strong performance was that of GNCC, the regulator, which functions well and has adjusted to a more liberalized and privatized telecom industry. Additional examples are noted in the table below. One shortcoming in implementation was the turnover at the top level in some ministries. Though this issue was minor as evidenced by the fact that the program exceeded expectations in most areas. Table 7. Summary Performance Notes on IAs Enterprise S-new agency quickly geared up and has implemented several programs including access to Georgia credit. SPA S-implemented the program as planned and reported on details of progress and continued with TA for Procurement efficiency SARAS HS-new agency, helped implement a new attitude toward financial transparency of companies essential for private sector development DIS HS-new agency, fast mobilization and progress toward compliance with EU Pension Agency HS-new agency, fast mobilization and is currently selecting the Investment Board GNCC HS-established agency, used TA well and has performed well in pursuing legal reforms. GITA S-new agency that initially suffered from turnover and government changes, but now oversees a vibrant hub that for the first time in Georgia is tapping local innovation potential. GAC S-helped ensure EU international recognition of accreditation Page 39 of 52 The World Bank GeoSTM HS-Helped ensure compliance with EU standards, critical for performance of instruments and machinery and for exporting. Also performs calibration for Armenia and Azerbaijan (b) Justification of Rating for Overall Borrower Performance Ratings: Satisfactory With the government’s performance rated satisfactory, and IAs’ rated highly satisfactory, and the outcome rating of satisfactory, the overall Borrower performance rating is satisfactory. 6 LESSONS LEARNED (both project-specific and of wide general application) Lesson 1: A DPO series that is well supported by the country dialogue and supplemented by well-coordinated development partner programs can correctly gauge the government’s willingness to pursue long range high impact reforms. Because the PSC series had the right mix of reforms and was correctly timed for government commitment and capacity it was able to achieve a broad range of high impact reforms from launching a new pension system and banking deposit insurance to major advances in corporate transparency and electronic communications while also making strides in EU compliance in insurance, procurement and standards and metrology. The WB can promote faster implementation with a positive policy dialogue even during periods when the program goes off track, with TA from the WB and other donors helping to make that happen. The areas of deposit insurance and pension reform were examples where heavy TA was critical to seeing the reforms through to completion once the macro framework was back on track. Lesson 2: Even in reform-minded countries like Georgia, there is a catalytic role that the WB can play that speeds up the reform process and results in better donor coordination. This acceleration of reforms is one of the areas of substantial value added of the World Bank’s participation in a country’s reform program. It is not only to get benefits of the reforms earlier, but to make sure that the reforms are not put off into the future and possibly fall by the wayside. This is a real occurrence even with strong reformers where reforms that could be carried out in the near term actually end up dragging on for years. Similarly, in countries like Georgia, the development space is fairly crowded by multiple bilateral and multilateral agencies often working on the same topic with small TA and little or no coordination and lack of big-picture view. As experience of engagement in the pension reform and other areas shows, the WB is often regarded by other development partners as an agency that can facilitate formulation of a common position and better coordination of resources. For this purpose, the 11 Most of IAs were under the jurisdiction of the MoESD except for SARAS which was under the MoF, and purely independent agencies such as DIA, the pension agency, SPA and ISSSG. Although an agency might be independent, related laws can only be submitted by government, for example, MoESD and MoF, for parliamentary approval. Page 40 of 52 The World Bank WB project team has regularly organized joint and individual meetings with development partners to coordinate the TA provided, discuss policy reforms and plan future support needed. Lesson 3: A good TA strategy is to build the capacity of the authorities/regulators with broad TA at first (including analytical support and policy formulation) and targeted TA (for capacity building and detailed technical level reforms) later to promote both financial stability and expansion of the industry. In the case of the insurance regulator, which was established as an independent body in 2013, the WB followed this strategy with success in turning around an underdeveloped industry. The WB supported the design of pension and deposit insurance reforms and later provided targeted TA to the respective agencies. Another key was to sustain the policy dialogue with the broader stakeholders and ensure capacity building TA over years, not to just come and go, parachute-style TA. This approach has also paid dividends in the telecommunications sector, where the DPO series supported ongoing policy dialogue, built a strong stakeholder base, and provided a clear channel for the WB analytical work to influence the reform agenda. Lesson 4: Though they may not seem as urgent, banking reforms such as the institution of deposit insurance may be best timed when the banking sector is relatively sound rather than when it under stress. It would have been more difficult to institute deposit insurance when the banking sector was in difficulty. The reason is that deposit insurance requires regular contributions from banks which would be more difficult at time of a crises. As Georgian banking sector reported high profits in 2017-2018, sound capital buffers and low non-performing loans, the creation of a deposit insurance in this environment was more feasible and therefore was eventually supported by the commercial banks. 7 COMMENTS ON ISSUES RAISED BY BORROWER/IMPLEMENTING AGENCIES/PARTNERS (a) Borrower/Implementing agencies The Borrower did not indicate disagreement with any of the conclusions of this ICR but raised a number of editorial points which were mostly taken on board in the ICR. The GoG rightly pointed out the need to clarify that EDA was in fact renamed EG in April 2017. The ICR has made this clarification at several points of the ICR. However, this change has not been made in cases of the prior actions and the results indicators in order to preserve original official wording. The GoG also provided a few updates on actuals for indicators that were also incorporated into the ICR. (b) Cofinanciers Not applicable (c) Other partners and stakeholders (e.g. NGOs/private sector/civil society) Not applicable Page 41 of 52 The World Bank ANNEX 1. BANK LENDING AND IMPLEMENTATION SUPPORT/SUPERVISION PROCESS (a) Task Team members Responsibility/ Names Title Unit Specialty Lending Cesar A. Cancho Economist GPVO3 Team Member Ana Fiorella Carvajal Lead Financial Sector Specialist GFCLT Team Member Christian Velichkov Filipov Project Manager GGOEW Team Member Natalija Gelvanovska-Garcia Senior Regulatory Specialist GDD09 Team Member John Gabriel Goddard Lead Economist GFCAS Task Team Leader Eugene N. Gurenko Lead Financial Sector Specialist GFCEW Team Member Ketut Ariadi Kusuma Senior Financial Sector Specialist GFCP1 Team Member Martha Martinez Licetti Lead Economist GTC Team Member Michael Minges Consultant DFCII Team Member Graciela Miralles Murciego Senior Economist GMTCI Team Member James L. Neumann Senior Counsel GDD09 Team Member Tram Thi Bao Nguyen Program Assistant GFCEE Team Member Angela Prygozhyna Senior Financial Sector Specialist GFCEE Team Member Lina Rainiene Consultant GDD09 Team Member Siddhartha Rarja Senior ICT Policy Specialist GDD09 Team Member Anita M. Schwarz Lead Economist GSP08 Team Member Natalia Tsivadze Financial Sector Specialist GFCEE Team Member Yulia Vnukova Consultant GMTRI Team Member Andrea Nelida Butelmann Peisajoff Consultant GGGPE Team Member Senior Customer Service Marcelle Ide Mireille Anyu Djomo GCSTI Team Member Representative Wolfgang Fengler Lead Economist GFCEE Team Member Djamilya Salieva Program Assistant GFCEE Team Member Supervision Tram Thi Bao Nguyen Program Assistant GFCEE Team Member Jan Philipp Nolte Senior Financial Sector Specialist GFCFS Team Member Fiona Elizabeth Stewart Lead Financial Sector Specialist GFCLT Team Member Shawn Weiming Tan Senior Economist GFCEW Team Member Thomas Edward Haven Senior Private Sector Specialist GFCEW Team Member Page 42 of 52 The World Bank (b) Staff Time and Cost Staff Time and Cost (Bank Budget Only) Stage of Project Cycle USD Thousands (including travel and No. of staff weeks consultant costs) DPO1 88.27 403,439.87 Lending DPO2 70.03 450,986.88 Total: 158.30 854,426.75 DPO1 0.00 1,282.30 Supervision/ICR DPO2 15.35 73,617.41 Total: 15.35 74,899.71 Page 43 of 52 The World Bank ANNEX 2. BENEFICIARY SURVEY RESULTS (if any) Not applicable Page 44 of 52 The World Bank ANNEX 3. STAKEHOLDER WORKSHOP REPORT AND RESULTS (if any) Not applicable Page 45 of 52 The World Bank ANNEX 4. SUMMARY OF BORROWER'S ICR AND/OR COMMENTS ON DRAFT ICR (if any) The Borrower raised a number of editorial points which were mostly taken on board in the ICR. The GoG rightly pointed out the need to clarify that EDA was in fact renamed EG in April 2017. The ICR has made this clarification at several points of the ICR. However, this change has not been made in cases of the prior actions and the results indicators in order to preserve original official wording. The GoG also provided a few updates on actuals for indicators that were also incorporated into the ICR. Page 46 of 52 The World Bank ANNEX 5. COMMENTS OF COFINANCIERS AND OTHER PARTNERS/STAKEHOLDERS Not applicable. Page 47 of 52 The World Bank ANNEX 6. LIST OF SUPPORTING DOCUMENTS Country Partnership Strategy for Georgia FY2014 – FY2017 April 9, 2014 Social-economic Development Strategy of Georgia “GEORGIA 2020”, Government of Georgia, 2014. IEG CLR [Completion and Learning Report] Review, CPS Year FY14 for the CLR and CPS period FY14-17, May 10, 2018 [date of review]. International Bank for Reconstruction and Development Program Document on a Proposed Loan in the Amount of US$60 million to Georgia for the First Programmatic Private Sector Competitiveness Development Policy Operation, March 31, 2015. International Bank for Reconstruction and Development Program Document on a Proposed Loan in the Amount of US$60 million to Georgia for the Second Programmatic Private Sector Competitiveness Development Policy Operation, June 27, 2017. State Procurement Agency Annual Report 2017, Tbilisi 2018. www.procurement.gov.ge ISRR for DPO1 (12/23/2015) and other documents in the program file. Page 48 of 52 The World Bank ANNEX 7. MAIN CHANGES TO DPO SERIES Original DPO2 Trigger Actual DPO2 Action Comment 1. The Borrower established the The Borrower has established and The operationalization of the Investors Investors Council. operationalized the Investors Council Council was expedited by conducting regular meetings chaired by the Prime Minister. 2. The Borrower has introduced the N/A Completed May 2016 (more than one practice of making major draft year prior to DPO2, thus dropped from economic laws that are approved by matrix). the Government available for public review and comments. 3. The Borrower adopted a Small and The Borrower, through EDA, has More progress was made than Medium Sized Enterprise (SME) implemented the SME Development originally envisaged because of the Development Strategy and action plan. Strategy by delivering access to finance change in the Board date for DPO2. programs, and micro and small business support programs. 4. The Borrower, through SPA, has The Borrower, through its Parliament, More progress was made than amended the bylaws regulating has adopted amendments to the Law originally anticipated given the change procurement practices to mitigate on Public Procurement to bring about in the Board date for the DPO2. The possible bid rigging and unlawful conformity with the basic standards original DPO2 action was replaced with practices in public tenders. regulating the award of contracts as the trigger for DPO3. defined by Article 144 of the Association Agreement with EU. 5. The Borrower (i) approved the DIS The Borrower, through its Parliament, More progress was made than reform strategy with a time-bound has adopted the Law on Deposit originally anticipated leading to action plan; and (ii) submitted the draft Insurance System. legislative change rather than Law on DIS to Parliament for approval intermediate measures 6. The Borrower: (i) approved the The Borrower, through its Cabinet, has More progress was made than strategy and roadmap for approved the draft Law on Private originally anticipated leading to comprehensive pension reform; and (ii) Pensions to initiate a public legislative change rather than through the Pension Reform Working consultation. intermediate measures Group, submitted the respective draft pension reform legislation to the Economic Council. 7. The Borrower designated the The Borrower has: (i) through its More progress was made than government authority that will be Parliament, adopted the Law on originally anticipated leading to responsible for coordinating Accounting, Reporting and Auditing legislative change rather than accounting and auditing reforms. (A&A); (ii) through its Ministry of intermediate measures Finance, established the Service for Accounting, Reporting and Auditing Supervision (SARAS). Page 49 of 52 The World Bank 8. The Borrower has approved a capital N/A Completed May 2016 (more than one markets reform strategy with a time- year prior to DPO2, thus dropped from bound action plan. matrix). 9. The Borrower: (i) submitted to The Borrower has: (i) through its More progress was made than Parliament draft legislation to Parliament, adopted amendments to originally anticipated leading to approximate Georgia’s legal the Law on Insurance; and (ii) through legislative change rather than framework with EU Solvency I margins the ISSSG, adopted relevant by-laws to intermediate measures and to strengthen the regulatory make Solvency I requirements fully powers, funding, and capacity of the binding by 2018. insurance regulator; and (ii) through the insurance regulator, adopted relevant by-laws. 10. The Borrower, through GNCC, has The Borrower, through GNCC, has: (i) More progress was made than permits the provision of high-speed issued new licenses for wireless originally anticipated given the change wireless broadband services by: (i) broadband services in the 800 MHz in Board date for DPO2 completing the modification of band; and (ii) initiated a public frequency licenses under technology consultation on draft secondary neutral terms to; and (ii) issuing new legislation on electronic licenses for wireless broadband communications market analysis services in the 800 MHz band. aligned with EU practices. 11. The Borrower submitted to The Borrower, through its Parliament, More progress was made than Parliament for approval the draft Law has adopted the new Law on originally anticipated leading to on Innovation to strengthen Innovation. legislative change rather than commercialization of innovation. intermediate measures New action. The Borrower, through its The action that helps reduce climate Parliament, has adopted amendments change vulnerability was introduced, as to its Tax Code to increase the excise this strong policy improves the energy taxes on imported cars, with larger efficiency across all sectors of the increases for cars with conventional economy and strengthens Georgian engines older than 7 years, and reduce firms’ capability and resilience to the excise taxes on hybrid cars newer climate change shocks. than 7 years, while maintaining the tax exemption on electric cars. 12. GeoSTM has adopted an The Borrower, through GAC, has The original action was completed in Institutional Reform Plan (IRP) that become a full member* of the November 2015. The improvements in defines the medium-term priorities, European cooperation for the national quality infrastructure were including development of new services, Accreditation (EA), by signing a acknowledged by the EA, and the budget sources and results to be Bilateral Agreement with the EA. action was upgraded achieved for international recognition of the priority laboratories according to the needs of enterprises. * Signatory to the EA Multilateral Agreement through a Bilateral Agreement Page 50 of 52 The World Bank ANNEX 8. DPO 3 TRIGGERS AND STATUS DPO 3 Trigger Status The Borrower has established a system of Regulatory Impact Assessments Progress, but not fully done. The (RIA) for priority economic legislation. amendments to the Normative Act law are being processed in the parliament. RIA will be mandatory for amendments to legislative acts starting from January 1, 2020. EDA has launched programs for start-ups and SMEs to meet the Done under DPO2 requirements of the Deep and Comprehensive Free Trade Area (DCFTA) with the European Union (EU). The Borrower, through SPA has: (i) adopted a comprehensive roadmap for Done harmonization of public procurement rules with relevant EU directives; and (i) Completed in March 2016 (ii) submitted legal amendments to Parliament for approximation to the (ii) Included as a prior action for DPO2. basic standards regulating the award of contracts as defined by Article 144 of the AA with EU. The Borrower has established the DIS Agency and approved its governance Done structure. The Borrower has launched a public communication and awareness Done campaign on pension reform. The Borrower has submitted draft pension reform legislation in line with the Done and exceeded respective strategy to Parliament for approval. The Borrower has submitted a draft law to spur the development of capital Not done, but progress made. NBG has markets in line with the respective strategy to Parliament for approval. adopted number of regulations. The draft Investment Funds law and the amendments to Securities Market Law are being finalized and expected to be submitted to the Parliament in June 2019 The Borrower has: (i) enacted the EU Solvency I and regulatory (i) Done under DPO2 and (ii) done requirements for insurance companies in line with the agreed phased-in subsequently market capitalization timetable established in the respective bylaws; and (ii) has prepared draft legal amendments for the phased introduction of Motor- vehicle third party liability insurance (MTPL) and submitted these to Parliament. The Borrower has improved nationwide access to ICT services by: (i) Not yet done (i) This reform is in progress. launching a “Broadband for All” program that is competitively-neutral and (ii) GNCC prepared and submitted the aligned with EU practices and the AA; and (ii) adopting an infrastructure amendments to the relevant law to the sharing framework focused on broadband development. MoESD, which has provided comments.) GNCC has adopted a revised framework for market analysis and for Done, adopted Dec. 6. 2018 wholesale tariff regulation aligned with EU practices. GAC has addressed the recommendations of the EA peer evaluation to Done under DPO2 become internationally recognized. Page 51 of 52 The World Bank ANNEX 9. MAP Page 52 of 52