79281 Georgia: A Roadmap to Competitiveness Four Priority Short Term Recommendations from the World Bank Summary of the 28th of February - 1st of March 2013 Discussions Background 1. This short note lays out the recommendations from the World Bank following the Competitiveness Workshop which took place in Tbilisi on the 28th of February and 1st of March 2013. This workshop was led by the Ministry of Economy and involved a broad cross-section of government institutions actively involved with the competitiveness agenda. 2. The note is organized along the following four priority recommendations that should be implemented before the end of June 2013: 1) Create the Competitiveness Council supported by a dedicated Competitiveness Secretariat 2) Develop the first draft of Georgia’s Competitiveness Strategy 3) Launch the five Competitiveness Taskforces on the key industries and cross-cutting themes 4) Develop the Rules of Engagement for implementing the Competitiveness Strategy Recommendations 1) Create the Competitiveness Council supported by the dedicated Competitiveness Secretariat 3. Recognizing that the current level of exports is insufficient in terms of both quantity and quality as reflected in vulnerability of export survival and low level of export sophistication, especially given Georgia’s highly skilled and underemployed taskforce, the Government of Georgia has identified the need to become more competitive as a national priority to achieve high and sustained economic growth. 4.To that effect, Georgia has already signed special trade agreements with a number of countries and the Government launched trade policy negotiations with other strategic trade partners like EU (under the DCFTA), Russia and others, led by the Ministry of Economy. Moreover, the Government of Georgia has announced a number of special institutional initiatives aimed at supporting private sector growth and export promotion. These include discussions about the future role and reorganization of the state Partnership Fund, the role of Agriculture Fund in agricultural development and rural reform, creation of a Private Equity Fund, consideration for creation of Georgia Development and/or Export Promotion Agency, enhancement of Georgia Invest agenda. In addition, a number of sector specific studies and initiatives were undertaken with the support of international consulting and donor agencies (e.g. special studies on wine and apparel under the World Bank Growth Study, special McKinsey reports for selected industries, numerous USAID/EPI studies etc). 5.The government recognized the need to better coordinate these various initiatives to ensure strategic focus, consistent and high quality of design and effective implementation. In line with the experience of successful countries (e.g. Costa Rica, Croatia and others), the World Bank recommends that Georgia constitutes a high level Competitiveness Council responsible for setting Georgia’s Competitiveness Strategy and making the 1 policy decisions related to its implementation. The World Economic Forum (WEF) Guidelines for creation of a national competitiveness council1 can also serve a good guidance. Some references for selected countries’ experience are also attached in Annex 3 of this note. 6. Given the importance of the competitiveness agenda, and in line with the experience of other successful countries, we recommend that the Competitiveness Council should be led by the Prime Minister of Georgia. The key members of the Competitiveness Council should include the Minister of Economy (also responsible for its operations through an effective mechanism of secretariat and overall coordination of the process, including the taskforces as proposed below), the Ministers of Finance, the Minister of Regional Development, the Ministers of Energy and Agriculture, and the heads of the main business associations. For the Competitiveness Council to be an effective decision making body, its membership should ideally not exceed 9, but be maximum 11 members. 6. The Competiveness Council should be supported by the Competitiveness Secretariat consisting in a small dedicated team from the Ministry of Economy, as indicated above. This team should combine expertise in competitiveness, economics and public policy. The Competitiveness Secretariat will be responsible for:  Organizing the Competitiveness Council meetings (e.g. at least every three months) – including setting their agendas, drafting the minutes and following-up on the implementation of the decisions made by the Council.  Continuously updating Georgia’s Competitiveness Strategy in the light of international development s and the results of new information/analyses from the Competitiveness Taskforces (discussed below).  Supervising the work of the Competitiveness Taskforces – e.g. updating their terms of reference, ensuring that they deliver their work on time according to the highest quality standards in line with the Competitiveness Rules of Engagements.  Engaging with competitiveness experts and private sector leaders in Georgia and abroad.  Coordinating the support from development partners to the competitiveness agenda. 7. The Competitiveness Council should be established as soon as possible and hold its first meeting in the nearest months (but not later than May-June 2013), to pronounces the importance of the competitiveness agenda, validate the creation of the special Competitiveness Taskforces as suggested below (including their composition and the terms of references – mandates), endorse the Rules of Engagement for implementing the Competitiveness Strategy - discussed in turn below, and approve the Concept/Vision of Georgia’s longer-term Competitiveness Strategy. 2) Develop the Concept note /vision of Georgia’s Competitiveness Strategy 8.The Government of Georgia, under the leadership of the Prime Minister, with the support of a team from the Ministry of Economy, should develop the Concept note (vision) for Georgia’s Competitiveness Strategy. This note should articulate (see Annex 1 for a more detailed outline): 1 http://www3.weforum.org/docs/GAC13/WEF_GAC_GuidlineCreatingNationalCompetitivenessCouncil.pdf Guidelines for creating a national competitiveness council 2 The reasons for why the Competitiveness agenda is central to the goal of achieving and sustaining high economic growth – e.g. all of the 13 developing countries which managed this over more than 25 years did it on the basis of export led growth;  The industries where Georgia could develop a competitive advantage, distinguishing between existing industries (e.g. agriculture, tourism, hydropower and mining), new relatively low value industries with large short term potential (e.g. labor intensive manufacturing industries like apparel) and new high value industries (e.g. ICT, services and high value manufacturing);  The main constraints (both cross-cutting like trade logistics, access to finance as well as industry/location specific) standing in the way of realizing this potential;  The policies and institutions which will help remove these constraints;  A detailed action plan 9.This first draft will be informed by the studies already available (e.g. the USAID and McKinsey studies) as well as by the analysis currently under way with the support of the World Bank (e.g. the Trade outcomes and product space analyses, Growth Study, Georgia Export Performance Report, Fostering Entrepreneurship Study). 10. In line with the agreed concept note for the Competitiveness Strategy, the Taskforces should lead the work in specific areas and engage actively with other working groups, local NGO community and businesses, analytical groups and academia, international experts and Donors community to elaborate a comprehensive Georgia Competitiveness Strategy. The strategy should then be reviewed and endorsed by the Competitiveness Council and approved by the Government Decree before end 2013. 3) Launch the five Competitiveness Taskforces on the key industries and cross-cutting themes 11. We recommend the Government of Georgia to launch, in March-April 2013, special Competitiveness Taskforces to spell-out the Competitiveness Strategy based on the key pillars by the end of December 2013. Specifically, we recommend establishing five special Taskforces, although the Government can decide to establish more groups based on the needs and priorities. 12. For each industry and cross-cutting themes, the Taskforces will spell-out the main improvement opportunities, the constraints standing in the way and the specific actions required to remove them. The five Competitiveness Taskforces should be focused on the following key industries and cross-cutting themes which emerged as priorities during the Competitiveness Workshop:  High value manufacturing. The Product Space Analysis and the analysis of the exports of successful countries similar to Georgia raised the question of whether Georgia could become competitive in high value manufacturing industries such as metal processing, machinery, electronics and automotive which are also among the largest and densest industrial clusters. This task force should establish a mapping of industrial assets and skills followed by detailed feasibility studies and engagements with leading potential investors;  High value services. High value services (e.g. ICT and business services) should also become an increasingly important source of high value export revenues and employment for Georgia– leveraging its large pool of highly educated and underemployed workers. The development of competitive high value services will also help improve the competitiveness of Georgia’s other industries as well as the effectiveness of its government (e-government);  Trade logistics. Given Georgia’s strategic geographic location, world class trade logistics (including trade finance) would both be an important source of high value export revenues as well as a must for the 3 competitiveness of all manufacturing industries. This Taskforce should take a broad view of trade logistics issues, including the trade finance dimension;  Other important industry groups (e.g. Agribusiness, Tourism, Mining, Hydropower and Apparel). This Taskforce should assess and integrate within a common analytical/operational framework the initiatives currently underway in these other important industries to ensure high levels of quality and consistency of the competitiveness approach across all sectors.  Institutional set up, policy and access to finance support of Georgia’s competitiveness. Georgia has a number of institutions and policy initiatives aimed at improving its competitiveness (e.g. Georgia Invest for investment promotion, export promotion initiatives, the Partnership and Agriculture Funds etc). There is a need to consolidate and reinforce these institutions along the following four essential missions: (i) Foster entrepreneurship and new business entries to create job and support growth, and help Georgian’s MSMEs access markets, technology, business development services and financing in the most effective and non-distortive for economy, financial sector and fiscal policy way (via special instruments and programs, including capacity building, start up financing and support (including through an equity fund), a matching grant, partial credit guarantees and other programs in line with the best practices of successful countries), (ii) Encourage public private partnerships for the development of quasi-public goods such as workers’ skills, applied R&D and specialized infrastructure (e.g. cold storage and “plug and play� industrial zones), (iii) Attract leading investors in the high potential industries, and last but not least (iv) Continuously improve the business environment. This Taskforce should draw inspiration from good practices (e.g. Singapore). 13. These Taskforces should include representatives from the relevant government institutions and the private sector and be supported by world class experts. The composition and terms of reference for these Taskforces should be discussed as soon as possible, with Taskforces established before end April 2013 and their mandates/terms of references approved before the end of June 2013 (see Annex 2 for an outline of the Terms of reference). The Competitiveness Secretariat will be responsible for synthesizing the work of the five Taskforces into Georgia’s Competitiveness Strategy before the end of 2013. 4) Develop the Rules of Engagement for designing and implementing the Competitiveness Strategy 14. Because supporting the competitiveness agenda is fraught with risks of capture and expensive failures (especially in the case of industry specific interventions), the Government of Georgia should develop a set of strict and explicit Rules of Engagement for designing and implementing its interventions in support of the Competitiveness agenda. In particular, such rules should specify the documentation requirements that each intervention being submitted to the approval of the Competitiveness Council should obey to. Such documentation should present:  The objective and rationale for the intervention – e.g. which competitiveness opportunity is being pursued, which government or market failure standing in the way is being tackled;  The alternatives which have been considered (based on the international experiences) and the reasons for the chosen one justified by an analysis of the expected benefits, costs and risks;  The sources of funding – in particular the amount which will be drawn from the Competitiveness Budget; 4  The specification of sunset/exit clauses and their enforcement;  The implementation arrangements specifying the key milestones, responsibilities and risk mitigation measures;  The process and methodology that will be used to monitor and evaluate the intervention;  The process by which the intervention has been vetted by all the key stakeholders following an inclusive and transparent process;  The seal of approval by independent world class experts (including economists) on the issue at hand Proposed Next steps and support from the World Bank During March –April 2013: 15.The World Bank Competitive Industries project team stands ready to discuss and provide further comments to this draft note and its detailed implementation. We will appreciate feedback from the Government of Georgia to this note, and the agreement on the plan moving forward. 16. The World Bank Competitive Industries project team will finalize the analytical notes on:  Trade outcome analysis (led by Jose Guilherme Reis);  Provided that a firm level data will be available, more in depth analysis of export quality and survival will be done, with focus on quality and sophistication, and supported by the manufacturing industry survey of these firms;  Preliminary analysis of cross-cutting barriers to export growth (led by Vincent Palmade);  Identification of industries where Georgia could compete based on product space analysis, benchmarking of factors of production and benchmarking with other similar successful countries (led by Vincent Palmade) From end April (April 22nd) throughout May 2013: 17. The World Bank Mission comprised of Angela Prigozhina, Vincent Palmade will visit Georgia on April 22- 27 to:  Discuss the progress made in institutionalization of the Competitiveness Reform, as proposed in this note, specifically (i) creation of the Taskforces, (ii) discussion of their terms of references, (iii) creation of the Competitiveness Council, provide further advice and guidance in this context;  Launch inventory of skills and needs (as a follow-up to the Skills Mismatch study) – to feed into the work of the High Value Services and High Value Manufacturing Taskforces;  Launch inventory of industrial assets – this will feed into the work of the High Value Manufacturing Taskforce;  Under the leadership of the Ministry of Economy and jointly with the experts, other ministries and NBG, Invest Georgia, Taskforces (if established), private sector experts, academia and donors community launch preparation of the Concept note of Georgia’s Competitiveness Strategy  Help develop the Terms of Reference of each of the Competitiveness Taskforces;  Help develop the Rules of Engagement for the Competitiveness Strategy. 5 18. The World Bank mission in the middle of May (dates to be confirmed) lead by Mr. Jose Guilherme Reis will visit Georgia to (i) discuss finalized trade outcome analysis; (ii) interview exporters and government, to test hypotheses and discuss policy options to be included in the paper. 19. May-June 2013 – launch of operations of the Taskforces and preparation of the draft Concept Note on Competitiveness Strategy: During June 2013: 19. Work of Competitiveness Council is launched:  Discussion of the draft Concept Note on Competitiveness Strategy and the results of the World Bank analysis;  Approval of rules of engagement;  Discussion of the technical assistance and lending support from the World Bank and other donors to support competitiveness agenda July-December 2013:  Detailed work of Taskforces to develop the Competitiveness Strategy and the detailed action plan (with the support from the World Bank and other donors);  Approval of the Competitiveness Strategy with a road map for reform July 2013-further on (5-10 years) – implementation 6 Annex 1 Proposed Outline for Georgia’s Competitiveness Strategy 1. Why Georgia needs a Competitiveness Strategy  Export growth as the engine of high and sustained economic growth. o Export led growth was the strategy pursued by all the successful developing countries o Export led growth entail the following positive externalities – access to large markets for high value manufacturing and services, exposure to global best practices, competitive pressure, spillovers into the domestic parts of the economy through linkages and demand effects o Export led growth provides also a strong motivation to reform the domestic industries which will continue to account for the vast majority of employment (the productivity of all workers in all industries count for economic growth). The main domestic industries include agriculture, retail/wholesale, construction, transportation, utilities, health and education.  Georgia’s export performance has been below par o Relatively low share of trade o Relatively low value of exports o High mortality of exporters  Georgia has a unique combination of assets to leverage o Highly skilled (and underemployed) workforce o Unique geographic location in between major markets o Rich cultural heritage and beautiful/varied landscapes o Abundant mineral resources o Favorable agro climatic conditions (including abundant water resources) o Large potential for competitive hydropower o Favorable business environment 2. Industries where Georgia could develop a competitive advantage  High value manufacturing – sub-segments of metal processing, electronics, machinery and automotive  High value services – sub-segments of ICT, business services and e-government  Agribusiness – high value wine and horticulture products  Tourism – high value cultural and nature based tourism  Mining  Hydropower  Labor intensive manufacturing - e.g. apparel (with a view to move up the value chain) 3. The main constraints standing in the way (cross-cutting and industry specific)  Constraints to accessing key output and input markets - e.g. Russian embargo and remaining issues with trade logistics  Remaining issues in the business environment (e.g. commercial justice, intellectual property rights and competition)  Difficulties for SMEs to access finance  Large sections of the workforce with insufficient/inadequate skills 7  Remaining deficiencies in infrastructure (power, roads and irrigation)  Lack of specialized infrastructure – e.g. plug and play industrial zones, cold storage  Low productivity in (large) manufacturing companies  Lack of adequate quality systems in agribusiness  High cost of tourism 4. Policies and institutions to help remove these constraints  Free trade agreements with all key trade partners and neighbors in addition to Turkey – e.g. Russia, EU, US, China, GCC, Azerbaijan and Armenia  World class trade logistics - e.g. ports, customs and trade finance)  World class business environment – e.g. specialized commercial courts and judges, arbitration, strong intellectual property rights, empowered competition agency  Support to well performing SMEs – e.g. partial credit guarantees, matching grants, innovation fund, business plan competition, export promotion, business angels  Vocational training (TVET) and skill certification programs  PPP unit to develop basic and specialized infrastructure  Investment promotion targeted at potential world class investors  Support to farmers’ associations – e.g. irrigation, extension services, quality certification attached to high value labels, linkages with large farmers and/or downstream players  Development of high value tourism zones  Detailed geological survey to engage/negotiate with leading mining companies 5. Detailed action plan  List of priority policy actions requiring immediate attention  Rules of Engagements for implementing the Competitiveness Strategy  List of institutions/persons responsible for their implementation  Detailed work plan for implementing them specifying deadlines, milestones, budgets (including sources of funds), stakeholder engagements, technical partners and M&E systems (as per the Rules of Engagement of the Competitiveness Strategy)  Action plan for lower priority medium/long term actions 8 Annex 2 Outline of Terms of Reference for the Competitiveness Taskforces Taskforce 1 – High value manufacturing  Identify the main industry groups to be analyzed – completing and leveraging (with the help of the World Bank) the results from the RCA, Product Space Analysis, Benchmarking of key factor costs and the export trajectory of successful countries which share similarities with Georgia - at this stage the analysis has revealed the following high value manufacturing industries: metal processing, machinery, electronics and automotive.  A mapping and evaluation of Georgia’s legacy and existing industrial clusters in high value manufacturing should be conducted to complete the analysis above.  For metal processing, the Taskforce should focus on the raw materials which are readily and cheaply available in Georgia. It should benchmark the cost of processing (cost of energy and capital) and shipping them with its main competitors - with the strong possibility that many of these competitors are subsidizing the cost of power and capital made available to these industries.  For the other high value manufacturing industries the Taskforce should analyze the approach taken by other similar countries to become competitive (e.g. Costa Rica for electronics, Romania and Morocco in automotive).  The Taskforce should develop detailed feasibility studies spelling out the necessary actions to be taken by the government to help such industries take off in Georgia.  These studies should be discussed/validated with leading industry experts and companies (from Georgia and abroad). Taskforce 2 – High value services (including ICT, business services and e-government)  Take stock of current policy initiatives and studies - e.g. the PWC and the World Bank (TWICT team) studies.  Take stock of available ICT/business services studies, databases, toolkits and case studies (not necessarily focused on Georgia).  Identify leading industry players present in Georgia and/or which have shown an interest in investing in Georgia.  Benchmark the cost of skilled professionals (e.g. software programmers) with competitors (e.g. Armenia, Russia, India and The Philippines). This should entail asking leading ICT/business services companies active in Georgia and other competing countries to compare the cost of professionals of comparable skills/productivity.  Benchmark the cost and quality of broadband internet  Assess the stock and flow (both in terms of quantity and quality) of graduates and skilled professionals in the ICT/business services in Georgia (this should include an assessment of language skills)  Identify the opportunities and constraints for each of the main segments of the industry – e.g. software development (including micro-works), remote services, data processing, accounting, legal services, engineering services and financial services. 9  Develop an action plan for removing the main constraints identified and attract leading investors.  Validate the diagnostic and the recommendations with leading industry experts and companies (from Georgia and abroad). Taskforce 3 – Other important industry groups (Agribusiness, Tourism, Mining, Hydropower and Apparel)  The objective of this Taskforce is to integrate into a common analytical and operational framework the studies and initiatives currently underway in the other important industry groups – these include agribusiness (e.g. wine, mineral waters, nuts, horticulture, dairy/livestock and aquaculture), tourism, mining, hydropower and apparel.  Take stock of the policy initiatives and studies underway in these industries.  Seek second opinion on those from leading industry experts and companies (from Georgia and abroad) – exploring in particular whether they provide a clear path towards climbing up the value chains.  Launch any necessary complementary analysis – e.g. in the case of agribusiness, mining, updating Georgia’s geological survey. Taskforce 4 – Trade logistics (including trade finance)  Take stock of current policy initiatives, public/private investments in transport infrastructure and studies.  Analyze the underlying data to understand the root causes of Georgia’s relatively poor performance in the World Bank’s Trade Logistic Index and “Trading across Borders� Doing Business indicator.  Benchmark the cost of transportation by road, sea, rail and airplanes with Georgia’s main competitors.  Benchmark the cost of trade finance for different classes of companies  Interview leading logistic companies to specify the main constraints and improvement opportunities along each of Georgia’s main trade corridors  Assess the impact on the competitiveness of key manufacturing industries of current trade logistics bottlenecks.  Develop an action plan for Georgia to develop world class trade logistics along each of the main trade corridors taking into account the expected growth in merchandise flows.  Validate the diagnostic and the recommendations with leading industry experts and companies (from Georgia and abroad) Taskforce 5 – Institutional and policy set up to support Georgia’s competitiveness 10  Take stock of all the existing institutions and cross-cutting policy initiatives aimed at supporting Georgia’s competitiveness – e.g. export and investment promotion agencies, the Partnership and Agriculture funds.  Benchmark the existing institutional set up against international good practices along each of the key dimensions of the competitiveness agenda: o Supporting SMEs with respect to access to markets, technology, business development services and financing o Developing Public Private Partnerships for the development of quasi-public goods such as workers’ skills, applied R&D and specialized infrastructure (e.g. cold storage and “plug and play� industrial zones) o Attracting leading investors in the high potential industries o Continuously improving the business environment - critical initiatives currently under way includes the pursuit of free trade agreements with Georgia’s key trading partners (Russia, the EU and the US), the strengthening of intellectual property rights, the removal of distortions to competition and the improvement of commercial justice (e.g. through arbitration).  Develop an action plan to consolidate and reinforce Georgia’s competitiveness institutional and policy set up – which would form the basis of the Bank’s future lending program under the new Country Partnership Strategy, including the new lending operations (e.g. an investment lending operation focused on the institutional set up and/or a result based lending operation focused on the competitiveness policy set up). 11 Annex 3 Competitiveness Council – selected samples (for information only) Croatia Croatia National Competitiveness Council http://www.konkurentnost.hr The National Competitiveness Council was established in February 2002 at the initiative of the Croatian business sector and the Croatian Employers' Association and on the basis of a decision of the Government of the Republic of Croatia in response to the challenges that the country was facing at the beginning of the 21st century. These challenges included the process of globalization, the transition to a market economy, the efforts to become a member of the European Union, and strengthening the competitiveness of the private and public sectors in Croatia. The Council is an independent advisory body comprised of 26 members and four key interest groups – the business sector, government, trade unions, and the academic community – with the goal of creating dialogue, partnership and consensus on programs and policies that are critical to the sustainable growth and development of the country. The goals of the Council are simple, focused and immediate:  To act to increase the competitiveness of the Croatian economy  To prepare Croatia for entry into the European Union.  To make Croatia one of the 40 most competitive economies in the world before becoming a member of the European Union. To achieve these goals, the Council acts:  by encouraging policies for reform  by recommending and creating guidelines for development policies  by constructing coalitions with stakeholders that support the reform process  by increasing public understanding of and support for reforms  by encouraging dialogue between the public and private sectors  by raising and expanding the level of awareness and knowledge of the importance of competitiveness  by monitoring and evaluating reforms that have been implemented United Arab Emirates United Arab Emirates Competitiveness Council http://www.ecc.ae/en/about_ecc.aspx The Emirates Competitiveness Council (ECC) is a UAE federal government organization that serves as a conduit between the public and private sectors to strengthen the UAE’s competitiveness by actively informing policy creation and process development of federal and local government bodies to become more globally competitive. It is committed to on-going partnership with the private sector to fortify its position as a leading center for global businesses and to support effective policies, procedures and legislation to advance the UAE’s competitiveness, regional and global leadership, and future prosperity. 12 List of selected countries with a Competitiveness Council:  USA  EU (COMPET)  Canada  United Kingdom  Brazil  Korea  Costa Rica  Armenia  Philippines  Ireland  Egypt  Saudi Arabia  United Arab Emirates  Russia  Panama  Croatia Global Federation of Competitiveness Councils – GFCC www.thegfcc.org 13