71446 LETTER OF DEVELOPMENT POLICY OF THE GOVERNMENT OF GEORGIA FOR THE COMPETITIVENESS AND GROWTH DEVELOPMENT POLICY OPERATION PR IME MINISTER OFGEORGIA Robert B. Zoe ll ick President of the World Bank W ashington, DC Re. : Letter of Development Policy - Georgia First Competitiveness and Growth Development Policy Opera/ion Dear Pres ident Zoe llick. Allow me to be g in by thankin g the World Bank for strong s upport of Georgia ' s s llccessful devel o pmcm efforts that have been underway in all the recent years . O ne o f the key o bjectives of the Govern ment o f Georgia. as slated in o ur Ten-Point Plan for Modernization and Em ploym ent (2011-15), is to create the preconditions for success ful and pros perou s Georgia. To achi eve thi s goa l, we have been focllsed on foster ing job creation through establis h ing best poss ible investm e nt envi ro nme nt. parti cularly in the sectors with hi gh export growth potential and capacity to ge ne rate hi gh-productivity jobs. We be lieve this w ill he lp make th e economy mo re res ilient. At the sa me time . we continue deploy ing efforts a im ed at improvi ng living conditi ons of the most vulnerable me mbers of our population. Georg ia has been imple men tin g deep and compre he nsive reforms si nce 2004 with impressive resuhs. We undertook significant reform s to re inforce publ ic finance managemen t, improve business enviro nmen t and socia l serv ices. eradica te corruptio n, liberali ze trade a nd upg rade infrastructure. These e fforts. aga in st the background of favou rabl e g lobal eco nomic environm ent, resuhed in growth rate o f mo re thun 9 perce nt per year during 2005-2007 . Large innow o f fo rei gn direc t investment ( FOI ) was o ne of the drivers behi nd thi s g rowth trend . The FO I in Georg ia was galvanized by strong in vestor confide nce in the country ' s d evelopm ent dynam ics. large-scale pri vatizat io n and significantly improved bu siness environment - Georgia's Doing Busi ness rank rose from tl2th in 2 005 to 16th in 20 12 . Prudent a nd prag matic public debt management he lped ensure steady improvement in public debt in dica tors. wi th public debt declining fro m 63 .2 percent o f GOP in 2003 to 25.5 perce nt in 2007. We res po nded sw iftly to the twi n shocks of the g loba l econo m ic and finan c ia l cri sis and the milita ry in vas ion by Russ ia in August 2008. Co untercycl ical fi scal stimulu s measures helped ushe r sustainable economic recovery from 2010 on wa rd s. In 2010, rea l GOP growth rate was 6.3 percent, up from -3.8 pe rce nt in 2 009. c hie fl y driven by robust perfo rmance o f manufacturi ng. constructio n and services. Pu bli c expend itures were repriorit ized and inc rea sed from 33.7 percent of GOP in 2007 to 37.2 percent in 2009. Expenditu res o n infmstructurc, ed uca tio n, hea lth , and soc ia l pro tec tio n were sca led up. w ith the fi sca l s pa ce fo r these inc reases comin g partly fro m ti ghtening o f public sector admi nistration costs a nd reduction of other no n-rec urrent expe nd itu res. At the 5.:'1 me time, revenue co ll ection declined . The resulting hig her fi scal deficits we re financed primarily through increa ed international donor support pro vi ded on conces ional and gra nt ternlS that allowed us to s usta in a favo urable public debt s ituatio n. In 201 1, rea l GO P grew 7 percent despite challengi ng external environme nt. with strong per formance across th e boa rd . A s the economic recovery ga ined trac tion, public expenditure to GD P ratio dec lined to below 3 I percen t in 20 I I and is expected to dec line further below 30 percent by 20 12-1 3. In summ ary, Georgia's economic performance has been excel lent in al l the recc nt years, bo lstered by far-reac hin g ins tituti o nal reforms, s teep fi sca l conso lidat io n a nd firm recognition th at a dy namic and vibra nt pri va te sec tor needs to be in the d riv er's sea t with th e state play ing a fac il ita ting rote. Yel. global econom ic ou tl ook remai ns uncert.a in. compounded by lingering urozone choppine s. W e thu s need to con tinue building afelY buffcrs to make sure that macroccono mic sta bility, which is o ne the key o bjectives of the Ten-point Plan, is preserved un sca th ed. To thi s end, we are on the ri ght tra ck with ou r po li cy of fi sca l conso lidation and we continue managi ng o ur publ ic de bt in a conservative manne r. T hese po li cies wil l a llow us to maintain adequate fiscal-space with sufficient headroom to react in th e even t th at exogenou ri sks to econom ic growl h materia lize. We have been complementing horizonta l reform focused on the bu incss environment wit h reforms aimed at increasing co mpetiti veness of the Georgian economy through modernization o f healthcare, ed ucati on, infrastnlclu re (i ncluding the power sec tor) and agricu lture. Active promoti on of exports, in ves tment a nd tOllrism , with continued emphasis on a m arket-friendly business environ men t, effic ient management of public finances and a zero- toleran ce po li cy against c rrupti on - are all pal1 o f Ollr strategic vision . Al ong th ese lin es, we suggest inc ludin g a number o r important re form measures in the Compet itiveness a nd Growth Deve lo pm en t Policy O pe rati on. In the area of trade o ur s trategy is three-fold . To secure market access, faci li ta te investment in tradab le secto rs, and pro mo te exports . It is in this s pirit that the Govemment is actively wo rking to ward s a successful conclusion of negotiations of a Deep and Comprehens ive Free Trade Agreement with the European Un ion ( 0 FTA). The current trade regime with the EU, GSP +, is tempo rary and covers ma ny bu t no t all products, ur Objecti ve is to liberalize trade w ith the EU on a permanent basis th rough a free trade agreement tha t covers widest possible runge of products. We also expect th at improved mark et access will attract morc fo reign direct in ves tm ent to Georg ia. w hich will in tum support emp loyment. To thi s end, we have sta rted 0 FTA negotiations, wh ile at the same time taking ste ps towards the re levant legi ' lati ve approximation wi th the EU . In thi s context, s ho nl y after the first round of negotiations in the midd le o f Marc h 20 I 2. Georgia 's parliament approved a Icgislat ive package inc ludin g new laws on competition, food sa fety . and technica l barriers to trado. We have achi eved significa nt strides in transforming Georgia into a regiona l hub fo r trade, tra nsit, logisti cs and manu facturin g. C ustoms adm inistration has been streamlined. both in tenn s of infrastructure at the po ints o f service del ivery and s imp Iifi cati o n of proces es. We have been s uccessfully upg rading infrastructure o f cro s- borde r s ig nificance incl ud ing trade corridors and railways to achieve better efficiency and hi gher transportation speed . As a res ult, o ur transpo n and trans it sectors have been g row ing apace. , ith the number of loaded truck entries into Georg ia increasing by 18.4 percent y-o-y in 20 1 I and 22.6 percent y-o-y in the fi rs t 5 111 0nths of 20 I 2. To funher improve the delivery of o ur serv ices, we have been impl ementing seve ra l measures. In particular. th e overnmcnt has authorized the Revenue Service o f the Minis try of F inance of Georg ia to issue certificates of o ri g in and permits re la ted to ex po rt s and impo rts in accordance with be t international practice. A ction s are also being tak en to improve efficiency of coord in ation among various de partments thro ug h improved IT syste m s, and to introduce a utomated selecti v ity in ri k assessment fo r tran s it trarric. To boost emp loyment generati o n, we have emba rked on the implementation of broad reform s agenda in genera l and vocational education system s, aiming to better prepare young peop le fo r e ntry into the job market. In particular. we are working to increase private secto r parti c ipation in o ur vocational education system. W e have strength ened th e relevance of genera l educati n by upgrading and m oderni zi ng the cu rric ul um . Introduction o f the new c urri c u lum in the sch ols has a lready started, a nd over th e next three years, the new cu rri c u lum will be impl e m c ntcd fo r' all g rades . Over the ame period, teachers in all di cip lines will be ce rtifi ed . T he Govcrn me nt is also supporting teac her certification thro ugh professional deve lop ment services, including bet1er pre·service and in-service training. The physica l infrastruc ture of sc hoo ls is undcrgo ing improvemcnts as well. throu g h the provision of new co mputers. la bo ra tories, and o ther eq uipment. Efforts are underway to improve schoo l manageme nt thro ug h the launc h o f principals' certificatio n and mod ificat io n of th e funding formula th a t is used to su pport erriciency of schoo l spendin g. Over the la st d ecade, the ove rnm e nt ha s uccessfully tran sfo rmed a loss-making, heavily indebted s tate-ow ned natio nal power' sector into a fast-growing sector with sign ificant upward potential. Buildin g o n these hi ghl y successfu l reforms. ou r govern men t is pursuing two strategic o bj ectives: to ensure continued re liabl e do m estic e ne rgy s uppl y, and to faci litate Georgia's hydropowe r plants' participation in regional e lectricity trade. In parti c ular, our effor1s are currently focused o n implementing two parallel a nd mutually reinforc ing prio rity ta k s: ( I) brin g in g responsible investors to deve lop hydropowe r plants and o ther rcn ewab les following best inte rnatio na l env ironmen tal and soc ial safeguards practices; and (2) continuin g implementation over the next three to five years a program of approximation o f the legal a nd reg ul a to ry framework of t he power m arket in eorgia to releva nt EU market reg u lations to promote private investm e nt and regional power trading as well as facilitate market integrati on. W e sta nd read y to coo perate with the W orld Ban k, th e E , a nd o ther development par1ners in the imp le m e nt ation o f the tasks outl ined a bove . T he Governme nt has already s igned the roo s-Border E lect rici ty Trading Agreement with T urkey, w h ich is an initial step towards the estab lishment of a framework for regio na l power Irade. In addition. ' ... e initiated regulatory re form s by preparing a mendm ents to the market ru les a im ing at ensuring tran sparent and non- di scriminatory access to interconnecti on transmission line by new investors. W e p lan to e nact the re levant decree w ithin th e next three m nt h after a process o f public hearings and cons u ltati o n with a ll stakeho lders. and incorpora tin g their comm e nt s as appropriate. We wi ll continue o ur efforts to cstab li s h an efficient regulatory a nd ins tituti onal e framework for the e lectri city sector. In pa rti cu lar, we a r" prcparing a tra nsm is ion grid code to ensure that techni ca l s pecificati ons are establ ished that will help improve system reliability. W e a re a l 0 rev ie win g o the r as pects of the legi lative framework, s uc h as the law on electri city and gas with a view to rev isi ng these as needed over th e next 18-24 mo nth s. W e are also drafting a Law o n Re newab les in line wi th EU prineiples to support th e use and development of renewable energy, which we plan to subm it to the Parliament. These wide-ranging efforts to facili tate investm en t and enhance competitiveness are accompanied by measures to rurther strengthen public fin anc ial management through improved accountabil ity, broader coverage, and greater transparency of the Government fi sca l accounts. These actions sup port o ur ongoing efforts to expand perfo rmance budgeting to all leve ls of the governm ent and will contribute to improving budgetary contro ls and to enhancing the quality or publ ic pending. An important step in that direction is the publicati on o f the accounts of Legal Entit ies of Public Law (LEpLs) in the annual budget execut ion report. Theil' integration into the budget reporti ng system will help improve monito ring or public expenditures and will support o ur overa ll results- oriented approach. Georg ia has developed strong and well-targeted social sarety nets. including both the targeted social assistance program (TSA) and the medica l insura nce plan (MIP). While advancing o n the fisca l consolidation rront, we have been able to ma intain at the adequate levels pending on health. oc ial protection and educati on to ensu re that our objectives of protecting vu lnerable demographic gro ups are nOl compromi ed. A part of these efrort . we are increa ing the coverage of the medica l insurance plan (MW) to inc lude children under six yea rs of age and pensio ners. and will a lso extend insurance to university students and per on with di abilities. We thus expect coverage to increase by mo re than 600,000 persons over the next two years. We are also improving further the efficiency of administration of our targeted program through the devel pment and ro ll -out of a ocia l Inrormation Management System that is expected to reduce sig nificantly the time taken to issue benefits for both the T A and the MIl'. We are focussing both on access and quality. In thi s context, the Government has introduced mechani sms to enforce upgraded standards in hospital , including the development o r a detailed reporting system to monitor quality that will comp lement physica l inspections. We would appreciate support of the Wo rld Bank in the implementation of the strategic actions outlined above. We are looking rorward to our co ntin ued success rul partnership with the Wo rld Bank. incl uding in the context cr the proposed deve lopment policy operation. Allow me, Mr. President, to take thi s opportunity to extend my regards and esteem . incerely, Nika Gilauri