Document of The World Bank FOR OFFICIAL USE ONLY Report Number: 48918 GE - INTERNATIONAL BANK FOR RECONSTRUCTIONAND DEVELOPMENT AND THE INTERNATIONAL DEVELOPMENT ASSOCIATION AND INTERNATIONAL FINANCE CORPORATION COUNTRY PARTNERSHIP STRATEGY FOR GEORGIA F o r the Period FY 10-FY13 August 11,2009 South Caucasus Country Department Europe and Central Asia Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its content mav not otherwise be disclosed without World Bank Authorization. CURRENCY EOUIVALENTS GOVERNMENT FISCAL YEAR (Exchange Rate Effective August 11,2009) January 1 to December 3 1 Currency Unit = Lari WEIGHTS AND MEASURES US%l 1.67 Lari = Metric System ABBREVATIONS AND ACRONYMS AAA Analytical & Advisory Services MDG Millennium Development Goals ADB Asian Development Bank MIGA Multilateral Investment Guarantee Agency BDD Basic Data and Directions MIP Medical Insurance Plan BEEPS Business Environment and Enterprise Performance NGO Non-Governmental Organization Survey NPL Non-Performing Loans CAE Country Assistance Evaluation OPIC Overseas Private Investment Corporation CIDA Canadian International Development Agency OSCE Organization for Security & Cooperation in CIS Commonwealth o f Independent States Europe CPA Country Procurement Assessment PEFA Public Expenditure & Financial CPIA Country Policy and Institutional Assessment Accountability CPPR Country Portfolio Performance Review PER Public Expenditure Review DFID UK Department for International Development PIRLS Progress in International Reading Literacy CPS Country Partnership Strategy Study CEM Country Economic Memorandum PRGF Poverty Reduction Growth Facility DPO Development Policy Operation PRSO Poverty Reduction Support Operation EBRD European Bank for Reconstruction and Development PRSP Poverty Reduction Strategy Paper EIB European Investment Bank SBA Standby Arrangement ESW Economic and Sector Work SCP South Caucasus Pipeline EU European Union SME Small and Medium-size Enterprises FA0 Food and Agriculture Organization SIDA Swedish International Development FDI Foreign Direct Investment Cooperation Agency FMO Netherlands Development Finance Company TA Technical Assistance FSA Financial Sector Assessment TRACECA Transport Corridor Europe-Caucasus-Asia GDP Gross Domestic Product TIMSS Trends in International Mathematics and IBRD International Bank for Reconstruction and Science Study Development TSA Targeted Social Assistance IDP Internally Displaced Persons UNDP United Nations Development Program IEG IndependentEvaluation Group UNHCR United Nations High Commissioner for IFC International Finance Corporation Refuges ILCS Integrated Living Conditions Survey UNOMIG United Nations Observer Mission in Georgia IMF International Monetary Fund USAID United States Agency for International IPSAS International Public Sector Accounting Standards Development IRMA Investment Risk Management Agency WBI World Bank Institute IUCN International Union for Nature Conservation WHO World Health Organization KM Kreditanstalt fUr Wiederaufbau WTO World Trade Organization LIL Learning and Innovation Loans WWF World Wildlife Fund MCC Millennium Challenge Corporation The World Bank Group Team LBRD/IDA - IFC Vice President Shigeo Katsu Vice President Jyrki Koskelo Country Director Asad A l a m Country Director Nena Stoiljkovic Team Leader Anthony Cholst Team Leader Lisa Kaestner FOR OFFICIAL USE ONLY TABLE OF CONTENTS ....................................................................................................................... Executive Summary i I The Country Context............................................................................................................ . 1 A. Introduction.................................................................................................................... 1 B. The Political Context...................................................................................................... 1 C. The Economic Environment........................................................................................... 2 D. Macroeconomic Outlook and Debt Sustainability ......................................................... 5 E. Poverty and MDGs......................................................................................................... 7 F. Governance and Anti-Corruption................................................................................... 8 . I1 Country Development Agenda and Priorities .................................................................... 9 A. The Country Development Program .............................................................................. 9 B. Key Economic and Social Priorities............................................................................. 11 . I11 The World Bank Group's Strategy ................................................................................... 16 A. Implementationo f the Last CPS .................................................................................. 16 B. The New Country Partnership Strategy for FY 10-13 .................................................. 19 . I V Implementingthe Strategy ................................................................................................. 25 A. Bank Group Instruments.............................................................................................. 25 B. Portfolio management and performance ...................................................................... 30 C. Results-BasedMonitoring and Evaluation................................................................... 32 D. Communications Strategy ............................................................................................ 32 E. Partnerships .................................................................................................................. 32 V . Creditworthiness and Risks ............................................................................................... 34 This document has a restricted distribution and may be used by recipients only in the performance o f their official duties . I t s contents may not be otherwise disclosed without W o r l d Bank authorization . Table of Figures Tables Table 1: Georgia-Selected Economic Indicators 2003-2012 ....................................................... 2 Table 2: Distribution o f Poverty in 2007 ........................................................................................ 7 Table 3 : Doing Business Ranking................................................................................................ 16 Table 4: Georgia - Ongoing IBRD and IDA Operations ............................................................. 26 Table 5: World Bank Group Finance During the CPS ................................................................. 28 Table 6: Georgia - Planned New Lending ................................................................................... 28 Figures \ Figure 1: Key Economic Variables .............................................................. ................................. : 5 Figure 2: Poverty Projections (% o f households) ........................................................................... 8 Figure 3: Index o f Infrastructure Quality: Georgia and Comparators .......................................... 14 Figure 4: Number o f Major Power Blackouts 2004-2008 ............................................................ 14 Figure 5: How Different Bank Activities Fit Into the Two Pillars ............................................... 27 Boxes Box 1: Key Non-Lending Services: AAA and TA ....................................................................... 29 Box 2: One Bank - IFC and IDAABRD Integrated Programs ..................................................... 30 Box 3: The Bank's Leadership Role in Coordinating Transport Investments in Georgia............33 Annexes Annex 1: Georgia . FY 10- 13 CPS Results Matrix ..................................................................... . 37 Annex 2: GEORGIA . CPS COMPLETION REPORT: FY06-09 ............................................. . 43 Annex 3: Consultations on the CPS ............................................................................................. 74 Annex 4: Expected Progress toward the Millennium Development Goals .................................. 76 CPS Annexes ................................................................................................................................ 78 Executive Summary i. The Country Partnership Strategy (CPS) for Georgia for FY10-13 has been prepared against the backdrop o f twin crises - the August armed conflict with Russia followed by the global economic downturn. As a result, the joint World BanWIFC strategy focuses on post-conflict and vulnerability issues in the near term, and strengthening the foundations for medium term competitiveness and growth. ii. Over the past five years, Georgia has embarked on a program of deep reforms. The Government has pursued a large reduction in corruption, a major improvement in the private sector environment, and the introduction o f a targeted social assistance program. It now has the highest policy and institutional assessment rating (CPIA) in the IDA cohort. In keeping with these reforms, Georgia attracted significant foreign investments, trade expanded, and growth through August 2008 averaged over 9 percent annually. iii. The August 2008 conflict and the following global economic downturn have altered the dynamic. Georgia has remained on i t s high reform track. But the global economic environment may not provide the same growth impetus as in the past, as levels of foreign investment and trade may be lower at least in the near term. Current projections are for GDP to contract by about 4 percent in 2009 before growth resumes at about 2 percent in 2010. iv. The Government of Georgia has responded to the twin crises with an appropriate macroeconomic policy mix. The currency was devalued by about 16 percent against the U dollar and an auction system S was introduced for foreign currency. Exchange rates have stabilized, as have gross reserves at about $1.5 billion, re-establishingthe level before the conflict. On the fiscal side, authorities have implemented strict controls over non-priority public spending, while leveraging donors to support countercyclical funding in key job-creating investments and widening the social safety net. In the financial sector, the short term rollover risk related to the banking system has been contained, though vulnerabilities remain in the medium term. v. A central element in providing economic and financial stability during the current period has been donor support. The IMF approved a $750 million standby program in September 2008, which has recently been augmented by about $400 million and extended through mid-2011. In October 2008, the international community collectively pledged $4.5 billion over a three year period including budgetary support, expanding the social safety net and addressing the needs o f IDPs, core infrastructure priorities, and the private sector, including significant support to commercial banks. To date, donors have committed about $1.7 billion o f the donor pledge. vi. It i s in this context - and Georgia's new status as a blend country - that the CPS envisages Bank Group financing o f about $740-900 million over four years, underpinned by a strong program of knowledge services. The financing envelope includes the remaining IDA-15 envelope (projected at about $130 million), IBRD lending (of about $266 million), disbursements under ongoing IDNIBRD projects (of about $135 million) and IFC investments and lending (of about $210-360 million). While lending i s necessary to meet investment needs, knowledge services are equally important to aid policy choices and suggest appropriate actions for addressing vulnerability and strengthening competitiveness, and therefore help meet Georgia's development objectives. vii. New IDA and IBRD lending under the CPS program i s heavily focused on budgetary support (with an emphasis on further deepening reforms in social assistance, the business environment, and the expenditure framework) and infrastructure (particularly in the area of roads to strengthen internal connectivity and Georgia's role as a transport corridor within the South Caucasus). These activities, combined with 11 ongoing projects and IFC efforts, are intended to address both pillars o f the CPS. On the first pillar, these efforts would provide near term support for economic and fiscal stability, the poor and vulnerable and help create immediate jobs. On the second pillar, they would advance future competitiveness and export potential. viii. Now that Georgia i s a blend country, the pace at which it will begin the process o f graduating from IDA to IBRD adds to uncertainties. Resources are estimated conservatively, without pre-judgingthe potential for either continued access to IDA under IDA-16, or a change in the amounts o f IBRD access. Within this estimated envelope, IDA and IBRD funds are frontloaded to provide countercyclical support during the current downturn. As a result, at estimated levels, the Bank would not be able to provide much, if any, new IDA and IBRD funding in the outer years of the CPS. The levels of IDA and IBRD support will be reviewed at mid-term and may be adjusted to reflect the evolving situation. The program leaves open the potential for additional amounts, should they be available, to enhance budget and transportation support, but also maintain Bank lending in sectors in which it has been active but where operations are concluding (such as municipal development, health, education, agriculture, energy). ix. The IFC program would continue to support the financial sector with both resources and advisory services, but seek to rebalance its focus with a greater emphasis on support to the real sector through financing and advisory services to the private sector and possible support to the Government through advisory services related to priority sectors, such as agribusiness and infrastructure. IFC and IDNIBRD synergy will be deepened in our support to the financial sector, in infrastructure and in further enhancing the conditions for doing business. IFC's response, in terms o f both the size and composition o f the program, will depend on the duration and characteristics o f the crisis. x. Knowledge services are central to the Bank Group's strategy. Bank analytic work and dialogue on public expenditure choices and poverty analysis will be critical inputs to supporting medium term fiscal adjustment. Post-conflict monitoring and reporting will be essential to ensuring donor funding i s on track and well coordinated. Other critical work will be the Bank's efforts to support IDP welfare and economic integration, IFCs support for improving the business and financial sector environment, critical sector work in health and education, supporting greater trade integration and quality standards (particularly in the context o f the EU's Eastern Partnership Agreement) and helping the Government improve monitoring, evaluation and overall communications. xi. The strategy described above i s designed to channel funds in the most effective manner during a difficult period, but i s not without risks. The largest risks are associated with (i) the potential for the economic downturn to be longer and deeper than anticipated, based upon the global and domestic economic and political environments, (ii) limited scope for Bank financial support to respond to emerging needs in the outer years o f the CPS, due to IBRD and IDA frontloading and uncertainties regarding IDA- 16 eligibility and (iii)rapid growth o f non-concessional borrowing in the wake o f the crisis. A higher debt service profile, including a challenging peak in debt servicing obligations in 2013, could, in a slow recovery scenario, crowd out key growth and social expenditures. Broad national support for the key prongs o f the development strategy and continued Government reforms would help mitigate some o f these risks. But the risks require building a strong basis for recovery and post-crisis growth, medium term fiscal adjustment including strengthening public expenditure management, and careful debt management, taking into account external financing including donor support. These are central elements o f CPS implementation. Staff would appreciate views from Executive Directors on: 0 Do the two pillars o f the CPS, and proposed activities, reflect Georgia's development challenges? 0 Are the programs of the IFC, IDA and IBRD well integrated and mutually supportive? 0 Does the results framework provide for sufficient accountability? 11 GEORGIA: COUNTRY PARTNERSHIP STRATEGY I. The Country Context A. Introduction 1. This Country Partnership Strategy (CPS) for FY10-13 reflects the Bank Group's intended support to Georgia in recovering from the August 2008 armed conflict with Russia and the global economic crisis, and setting the stage for future competitiveness. With income per head about $2480 in 2008, Georgia now ranks as a lower middle-income country and i s an IDNIBRD blend country. The CPS envisages full use of the remaining IDA-15 envelope (projected at about $130 million), an indicative IBRD lending amount of about $266 million over this four fiscal year period, as well as projected IFC - commitments of $210 360 million. Combined with undisbursed amounts of about $135 million as of end-FY09, total financing during this period from the World Bank Group i s expected to total about $740- 900 million. Bank and IFC lending will be complemented by a focused program of advisory services. 2. Several principles guide the CPS: First, there i s direct alignment with Georgia's development program as provided in both the longer term plan set out prior to the August Conflict as Georgia without Poverty, as well as in the Joint Needs Assessment (JVA) endorsed by the Government which set out a more focused program in the aftermath of the August Conflict, and in the Government's just published Basic Data and Directions (BDD) exercise it prepares in the context of i t s medium term expenditure planning exercise. Second, the Bank Group will exercise a strong level of selectivity, recognizing where other donors can lead or where the country has adequate internal knowledge and capacity. The JNA provides a strong framework for a division of labor among donors based on an agreed framework. Third, the CPS will need to be implemented with flexibility, given the uncertainties on the depth and duration of the international crisis and the uncertainty of Bank lending levels. Heavy frontloading the allocation o f Georgia's lending envelope at the request of the Government i s expected to yield higher economic and social returns than a more even allocation, but increases the uncertainty in the outer years of the CPS. The capacity of the Bank Group to respond to Georgia's growing and complex requirements beyond the initial period will need to be carefully reviewed at mid-term. Finally, coordination within the Bank Group will enable the Bank to deliver IDA, IBRD, and IFC resources to best meet the strategic objectives of the CPS. B. The Political Context 3. The domestic political scene i s strained. During the first four years following the 2003 Rose Revolution Georgia enjoyed rapid growth and the Government undertook significant governance, economic and social reforms, with impressive results. In 2007 domestic tensions grew and led into demonstrations to which the Government reacted with a brief period of martial law. Early elections were called and President Saakashvili won a second five year term in January 2008. In 2009, tensions again rose with some opposition parties seeking fresh elections. Nevertheless, the domestic situation has been relatively peaceful, tensions appear to have recently eased, and there appears to be support across most of the political spectrum on continuing liberal economic reforms. Domestic tensions underline the need for wide dialogue on policy options and investment priorities within and outside o f Government. 4. Geopolitically, tensions with Russia also remain high. Although armed conflict lasted less than a week in August 2008, tensions remain. Following intermediation by the European Union, fighting stopped and both sides separated. The EU has stationed about 300 monitors in Georgia (EUMM) along administrative borders and, with the OSCE, the UN and the US, i s engaged in a longer term mediation effort in Geneva, in which all involved parties are participating. Nevertheless, a shared vision for conflict resolution does not yet exist. The OSCE monitoring mission ceased in Georgia on June 30, 2009. The UNOMIG mandate was terminated on June 15,2009 and by the end o f 2009 will leave Georgia. C. The Economic Environment 5. Georgia has undertaken deep economic, social and governance reforms over the past five years. These include impressive progress in reforming the role o f the state vis-a-vis the private sector, dramatically reducing corruption, and strengthening the business environment (Georgia moved from # 112 in the 2006 Doing Business global ranking, to #15 in 2009). Georgia i s now an open business-friendly economy with a customs tariff close to zero. While tax rates are relatively low, tax revenues average about 25 percent o f GDP. Other achievements include far-reaching reforms in both quality and efficiency o f education, health and social protection. Improvements in governance and the business environment led to rapid growth and increases in FDI. Several international banks entered the country and banking intermediation grew significantly. Net loans as a percent o f GDP tripled and credit grew by more than 50 percent per year on average. Georgia's successful debut Eurobond issuance in April 2008 was oversubscribed and became part o f the EMBI index. Georgia's performance rating within the World Bank, the Country Policy and Institutional Assessment (CPIA), rose this year to the highest in the IDA cohort. 6. Based on this high reform path, the economy grew rapidly with an average growth rate of over 9 percent per year from 2004 through July 2008. Deep and fast paced implementation o f structural reforms paid o f f with substantial increases in tax revenue which financed rising public expenditures aimed at improving basic infrastructure, re-establishing electricity service, reforming education and health care, and strengthening the social safety net. The development strategy focused on building a dynamic private sector as the main source o f investment, growth and employment supported by a small and effective public sector, and elimination o f corruption. Foreign direct investment inflows rose from an average o f $180 million per year in 2000-2004 to about $1.7 billion in 2007, contributing to the restructuring o f the economy and stimulating high growth rates (see Table 1). Table 1: GeorgiaSelected Economic Indicators 2003-2012 2003 2006 2007 2008p 20092 20102 20112 20122 GNI per capita (US$, atlas method) 860 1,670 2,090 2,480 2,600 2,700 2,700 2,780 Unemployment Rate 11.5 13.6 13.3 14.0 16.5 16.0 15.0 14.0 GDP Growth Rate 11.1 9.4 12.3 2.1 -4.0 2.0 4.0 5 .O CPI (e.0.p) 7.0 8.8 11.0 5.5 3.4 3 .O 5.0 5 .O percent o f GDP, except where noted Total Revenues * 16.0 26.8 29.3 30.7 29.7 27.0 26.9 25.7 of which Tax Revenues 14.6 22.8 25.8 24.9 24.4 23.7 23.8 23.2 Expenditure and Net Lending 17.5 29.8 34.0 37.0 39.1 34.3 31.8 29.8 Current Expenditure 14.7 22.2 25.0 28.4 29.8 27.4 25.5 24.0 Capital Expenditure and Net Lending 2.8 7.6 9.0 8.6 9.3 6.9 6.3 5.8 Overall Fiscal Balance -1.5 -3.0 -4.7 -6.4 -9.4 -7.3 -4.9 -4.1 Privatization Receipts 0.4 5.2 5.2 3.7 2.5 1.3 1.o 0.7 External Current Account Balance -9.6 -15.1 -19.7 -22.7 -16.1 -16.5 -15.9 -14.9 Exports of Goods and Services 32.3 32.9 31.1 28.7 26.8 30.7 32.6 33.2 Imports o f Goods and Services 46.7 56.9 57.9 58.3 49.8 54.6 55.5 54.3 FDI Inflows 8.3 15.3 16.4 11.8 8.3 9.7 10.8 11.2 FDI inflows (M US$) 331 1,186 1,675 1511 910 1040 1220 1380 Intl Reserves (Mo. of Imports o f G&S) 1.2 2.4 2.8 2.4 3.7 4.0 4.0 3.8 Intl Reserves (M US$) 191 881 1,361 1,48 1 1,707 1,941 2,111 2,127 Total Public Sector Debt I/ 55.9 27.6 22.1 25.0 36.9 45.1 47.3 45.2 o f which External Public Debt 44.9 21.9 17.6 20.9 32.0 39.9 41.1 38.5 n REER (2000 = 100) 2/ 87.9 105.4 109.3 1-1 ILI.U * does not include privatization proceeds. Notes: p=preliminary; z=projections; e.0.p = end of period 2 7. The August 2008 conflict led to a number of severe shocks to the economy. While the conflict resulted in tangible direct infrastructure costs, the biggest damage was a result of the heightened perception of risk and weakening of investor confidence. Bond spreads have since fluctuated between 800 and 1000 ' basis points. New credit came to a halt, and foreign lending and FDI, which had been engines of Georgia's growth, were put in jeopardy. Public finances came under stress due to the combination of falling revenues and increased unanticipated expenditures related to the need to repair damaged infrastructure and the sharp increase in demands on the social safety net. Unemployment and poverty were exacerbated by new internally displaced people (about 137,000 at the height of the conflict, though since then 106,000 have returned to their places of origin and have received assistance for damaged or destroyed housing) and others who lost their livelihoods as a result of the conflict. At the request of the Government, the World Bank and the United Nations took the lead in coordinating preparation of a Joint Needs Assessment (JNA) during late AugusdSeptember, 2008. The JNA estimated the financing requirements of the recovery program to be about $3.8 billion, including budget support, social funding including the needs of IDPs, critical infrastructure and the financial sector. 8. The international community moved quickly to provide support. The IMF Board approved a $750 million Standby Arrangement (SBA) in September 2008, recently augmented by about $400 million. In October 2008 the international community pledged $4.5 billion for a three years period (of which approximately $800 million was for the private sectodbanking system). This i s additional to the IMF funding. During the first six months of the post-conflict period (the "immediate period" according to the JNA), the amount o f legally committed donor funds for public and private sector operations was in excess of $1.7 billion, of which more than $1 billion has been disbursed. This has allowed the Government to maintain and reorient public expenditures in line with the JNA. Donor resources committed to date have been focused on immediate needs including budget support ($4 15 million), expanding the social safety net and addressing the needs of IDPs ($165 million) and rehabilitation of damaged infrastructure and core priority recovery needs ($442 million). Additionally, the banking and private sector benefited from significant financing from a number of donors ($686 million), allowing them to meet cross-border obligations and ensuring banking sector stability. In addition to financial flows, Georgia also benefits as part of the EU Neighborhood Policy and signed the Eastern Partnership Agreement in May 2009. 9. However, the global economic crisis has further exacerbated the economic and social impact of the shocks from the August conflict. Growth projections have been revised downward to -4.0 percent in 2009, with further downside risks. This contraction appears to be less severe than in some developing economies, due in part to Georgia's growing economic resilience as a result of reforms implemented since 2004 and strong donor financial support. Unemployment i s rising from an already high 14 percent in 2008 and may reach 17 percent by the end of 2009. Poverty and inequality are also likely to rise. 10. The economic crisis has hit the Georgian economy through the following four main transmission channels-reduction of FDI, shrinkage o f remittances, collapse in export demand, and a sharp contraction in bank lending. FDI inflows have fallen sharply from $1 -7 billion in 2007 to a projected level o f about $900 million in 2009. Workers' remittances which had reached $300 million dollars by 2008 (or about 3 percent of GDP) have declined by about 20 percent in the first six months of 2009 compared to the same period in 2008. Exports are expected to decline in 2009 by about 8 percent in real terms and about 20-25 percent in nominal terms. And in the first six months of 2009, banks' total assets, loans and deposits, have all fallen while Non-Performing Loans (NPLs) have risen. 1 1. The Georgian authorities have responded by implementing an appropriate macroeconomic policy mix directed at mitigating the downturn and maintaining macroeconomic stability in the ' Georgia's sovereign bond rating i s "B" according to S&P, and "B+" according to Fitch as o f July 2009 3 medium term. First, the authorities have taken measures to safeguard external sustainability. The currency was devalued by about 16 percent in November 2008 and, following temporary central bank intervention to defend the exchange rate, currency auctions were introduced in March 2009 to permit the market to determine appropriate levels. The auction based system has become the only mechanism o f foreign exchange intervention by the central bank as o f M a y 25, 2009. Exchange rates have been relatively stable recently, helped also by the contraction in demand for foreign exchange on account o f slowing import demand. This has been accompanied by measures to strengthen the foreign exchange reserves position. While the August conflict led to pressure on the currency and a loss o f international reserves, at end-June 2009 gross reserves were $1.5 billion, re-establishing the level observed before the August conflict. The IMF-supported Stand-By Arrangement (SBA) i s a key pillar for this. 12. Second, countercyclical fiscal measures have been introduced even as the authorities have implemented strict controls over non-priority public spending. Key to the fiscal response have been the leveraging o f donor inflows to support job-creating investment projects, and the widening and improved targeting o f the social safety net. At the same time, non-essential spending has been cut or deferred. Military expenditures have also been reduced so as to free up resources for priority social and infrastructure needs. These have been accompanied by measures to improve the efficiency and effectiveness o f public expenditures. Although the fiscal deficit i s expected to widen to over 9 percent in 2009, covered in large part by increased donor support, the Government i s committed to bringing it down to about 4.0 percent by 2012. 13. Third, the authorities have embarked upon a deliberate strategy of securing external public funds to compensate for smaller private inflows. The authorities have pursued the pledges under the JNA while also drawing down the IMF supported Stand-By Arrangement. Georgia's capacity for higher external borrowing i s enhanced in that it entered the crisis with low levels o f external debt reflecting prudent debt management and high rates o f growth. Total public debt declined from 56 percent o f GDP in 2003 to 22 percent in 2007, and external public debt to just 17.6 percent. External debt service i s also low, with public debt service to exports ratio o f about 3.4 percent in 2008. While increased borrowings from markets, donors and international financial institutions over 2008-09 will increase debt stocks to about 40 percent o f GDP over the next few years, authorities are committed to implementing fiscal adjustment over the medium t e r m to ensure an adequate fiscal position to meet expenditure obligations. 14. Fourth, measures have been taken to strengthen the solvency and liquidity of the banking system. Georgia's financial system i s dominated by the banking sector with total assets equivalent to 46 percent o f GDP.2 In the first two weeks after the August 2008 conflict there was a temporary withdrawal o f deposits, but remedial measures, including providing liquidity, were effective in returning some deposits. Non-Performing Loans over 90 days have risen (currently about 4.6 percent o f loan^).^ With support from IFC and EBRD, the short-term rollover risk related to external borrowing has been contained, though vulnerabilities remain in the medium term in the event o f a protracted global economic crisis. Deposits and net loans are down 20 percent and 11 percent respectively as o f end-June 2009 compared to a year ago, signaling that confidence remains low compared to pre-crisis levels. While overall loan demand i s down, banks are also less willing to lend t o other than their best existing customers and loan rejection rates are high. As a consequence, some liquidity i s available even within a tight lending situation and the Government i s considering ways to mobilize these funds, possibly through issuing government bills. 15. A series of measures taken since September 2008 are helping to maintain financial sector stability. Against the backdrop o f rising NPLs, the Financial Supervision Authority (FSA) has required banks with riskier portfolios to strengthen loan loss provisioning, which has increased from 5 percent o f The banking sector includes 20 banks, o f which 7 are foreign controlled. 8 banks account for 90% o f lending. 3 Using a 30 day overdue measure, NPLs are about 18 percent, which provides an indicator o f emerging stress. 4 total loans in August 2008 to 12.2 percent in June 2009. The financial regulator has also taken a conservative approach to capital adequacy, requiring additional capital against foreign currency denominated loans. In May 2009, the FSA prepared stress-tests on the five largest banks which found that their capital and liquidity had thus far withstood the foreign exchange depreciation and NPL increase, though risks remain. Draft legislation i s being prepared for the merger of the FSA and the Central Bank, creating a consolidated regulator and supervisor for the financial system. Banks are conserving liquidity to enable them to set aside larger loan loss provisions and to better prepare for repayment of external obligations. D. MacroeconomicOutlook and Debt Sustainability 16. The global economic crisis i s having a significant impact on Georgia's outlook for recovery and growth, which was already weakened following the August conflict. The baseline projection for the economy i s a contraction of 4.0 percent in 2009, followed by marginal growth in 2010 and a pickup of growth in 201 1-2012 (see Table 1). Given the uncertainty regarding Georgia's external environment, as well as the impact of recent domestic tension on investor sentiment, there are downside risks to this growth outlook. At the same time, the projected contraction i s less severe than in some other CIS economies, due in part to Georgia's strong pre-crisis fundamentals, as well as the fact that the Georgian economy has more diversified trade and investment links. Notwithstanding the uncertainty associated with economic projections, the major downward revisions for key economic variables--such as GDP growth, FDI and trade--relative to the pre-crises prospects for Georgia are significant (see Figure 1 below). Inflation i s expected to remain moderate at 3-5 percent in the medium term, down significantly from 11 percent at end-2007 due to sharp declines in capital inflows, credit from the banking sector, and global commodity prices in the second half of 2008. Figure 1: Key Economic Variables 14 (a): Growth Projections 12 . 800 -2 4 - -4 99 00 01 02 03 04 05 06 07 08 09 10 11 12 - -Actual . __-_____ May 08 Projected ----)--- 99 00 0 1 02 03 Actual 04 05 06 07 08 09 10 11 12 --_--_---Projected May 08 Projected July 09 ,_---- 2oooo 1 (c): Trade Flows /' 16000 - ,/` ,/` ,/' - 99 00 Actual _________ 01 02 03 04 05 06 07 08 09 Proiected May 08 --e---- 10 11 12 Proiected July 09 5 17. External adjustment i s projected to continue over the medium-term, supported by a flexible exchange rate. As a result o f lower capital inflows (and assisted by an exchange rate policy consistent with external competitiveness), the external current account deficit i s expected to narrow significantly from 22.7 percent o f GDP in 2008 to 16 percent in 2009 and 15 percent in the medium term. A key element in this i s the sharp contraction in imports- from 58.3 percent o f GDP in 2008 to 49.8 percent o f GDP in 2009, resulting from the economic contraction and a shift o f expenditures away from import- intensive defense expenditures. The current account gap i s projected to be fully closed by a combination o f foreign investment, IMF financial flows, and other donor financing. 18. Foreign direct investment (FDI) inflows are projected to fall in 2009 before recovering gradually in the medium term. Although existing foreign investors have not pulled out o f Georgia and a survey o f enterprises conducted in December revealed continued interest in FDI for the medium term, projected F D I inflows have almost halved to about $900 million (about 8 percent o f GDP) in 2009. This i s expected to include several large-scale, lumpy investment projects in manufacturing, real estate, transportation, communications, and other sectors. FDI inflows are projected to recover to about 11 percent o f GDP by 2012. 19. Reflecting the changed economic fundamentals, a strong fiscal adjustment i s projected over the medium term. The overall fiscal deficit i s projected to widen to over 9 percent o f GDP in 2009 before narrowing to 4 percent by 2012. Public expenditures are projected to increase to about 39 percent o f GDP in 2009 before moderating to about 30 percent by 2012 (see Table 1). The fiscal stance also includes a significant reallocation away from defense toward social and infrastructure expenditures. Tax revenues are projected to decline from 25 percent o f GDP in 2008 to 24.4 percent in 2009 and remain in the range o f 23 percent in the medium term. Revenues and grants are expected to decline from 30.7 percent o f GDP in 2008 to 29.7 percent in 2009 and 26 percent in the medium term. 20. The higher countercyclical borrowing has led to a worsening of Georgia's debt burden and debt service indicators, but they are expected mostly to remain within relevant prudential thresholds. Georgia has been receiving significant foreign financing for post conflict rehabilitation and economic recovery, with much o f the assistance in the form o f grants and concessional loans. Debt ratios are projected to rise over the next two years, with external public debt projected to increase from 20.9 percent o f GDP in 2008 to 32 percent in 2009 and about 40-41 percent by 2010/11 (below the prudential threshold o f 50 p e r ~ e n t ) . With several large repayments due in 2012-2013, the projected external public ~ debt service to export ratio has a one-year peak at 25.6 percent in 2013 (hitting the prudential threshold o f 25 percent), before falling sharply to below 10 percent in the medium-term. Private debt almost doubled during the last two years, but i s projected to decline in the near term as the private sector made large repayments in 2009. The Debt Sustainability Analysis (DSA) within the recent IMF Third Review o f the SBA confirms that Georgia's debt burden indicators are expected to remain sustainable in the medium term, based on base-line growth levels as well as under alternative scenarios associated with greater economic shocks.' But fiscal adjustment in the medium t e r m i s critical for safeguarding Georgia's external debt sustainability. 21. The countercyclical fiscal stimulus to support economic activity in the short term i s supported by an IMF SBA program for which all structural and performance benchmarks have been met. The third review has concluded and was discussed at the IMF Board in August, 2009. The IMF also extended the program until mid-201 1 and augmented it with an additional $400 million which can also be used for budget purposes. 4 As per the Debt Sustainability Framework (DSF) for low-income countries The World Bank i s planning to prepare an updated Joint DSA as part o f the next DPO operation. 6 22. Nevertheless, Georgia faces a number o f significant but manageable macroeconomic risks and vulnerabilities. First, given the uncertain global economic outlook, the decline in capital inflows and exports could be sharper than currently projected, which would increase the depth and duration of the economic downturn. Second, with the global economic downturn affecting donor countries and given the increased demand for funds in other countries, actual disbursement o f donor assistance could fall short of pledges made at the October 2008 donor conference. Both of these scenarios would require greater external adjustment, and further downscaling of planned expenditures. Third, the financial sector remains vulnerable as a result o f the economic downturn. Given that similar shares of assets and liabilities are denominated in foreign currency, the direct risk to balance sheets from exchange rate depreciation i s limited, although foreign exchange risks in the loan portfolio may increase credit risk. 23. A number of risk mitigation measures are being pursued under this strategy. Bank staff, in collaboration with the IMF, have intensified their macroeconomic monitoring and are engaged in continuous dialogue on policy tradeoffs and options. Economic projections are updated frequently as new data becomes available. In order to secure adequate donor assistance, the authorities have worked closely with development partners on monitoring aid flows. A Progress Report on the JNA which reviewed financing committed and disbursed, major activities funded, and the outlook on evolving priorities was publicly issued in July 2009. In order to mitigate financial sector vulnerabilities, banks have increased provisioning, financing was secured to meet large repayment obligations in 2009, and the authorities are strengthening supervisory efforts and developing a financial stability plan. E. Poverty and MDGs 24. Poverty. In light o f the poor quality of official household surveys, the Bank and the Ministry o f Health, Labor and Social Protection (MOHLSP) did a separate LSMS survey in the Fall o f 2007 which benchmarked poverty at about 23.7 percent with moderate income inequality. The results of the LSMS were presented in a full "Georgia Poverty Assessment" which was published and made publically available in April 2009. This report identified three crucial points in the fight against poverty: The importance o f widening social assistance: Pensions and the newly introduced targeted social assistance (TSA) program, developed under the Bank-supported PRSO series, have played an important role in poverty reduction. Extending coverage o f the TSA would help reduce poverty and income inequality, particularly in the rural areas. 0 The importance of increasing employment: Despite the rise in wages, unemployment remains the major concern. Public sector labor shedding as part of reforms since Georgia's Rose Revolution has not yet been fully matched by growth in private employment. 0 The importance of addressing spatial disparities: Poverty in Georgia i s particularly entrenched in rural areas (see Table 2). In terms o f the distribution o f the poor across urban and rural areas, rural poverty rates are higher than urban poverty rates, and the incidence o f extreme poverty in rural areas i s almost twice that in urban areas. The poverty rate i s also quite differentiated by regions, with three regions - Kakheti, Shida Kartli, and Mtskheta-Mtianeti- having poverty rates over 40 percent. Beyond poverty levels, it i s important to note that while rural areas account for only about 9 percent o f GDP, about half the population and work force are situated there. Table 2: Distribution o f Poverty in 2007 (YO households) of Poverty Extreme Poverty Urban Rural Total 23.7 Source: World Bank estimates based on 2007 LSMS data 7 25. The double shocks of the August 2008 conflict and the global financial crisis risk are expected to worsen the poverty situation in the near term. Were it not for the negative welfare impacts o f the twin crisis, the poverty headcount in Georgia could be expected to decline (see Figure 2). However, with the twin crises, the poverty headcount i s instead forecast to rise in 2009. In response, the Government has already increased budget allocations for social protection in 2009, and i s keeping a close watch to see if more i s needed. The Bank i s cooperating closely in this effort. Figure 2: Poverty Projections (YO f households) o 8 40.0 1 1 ; 10.0 1 9.3) - u.3 * 6.7 m '2.3 i g a 0.0 4 l 07' 08' 09' + poverty (crisis) I Total -M- Extreme poverty (crisis) 26. Millennium Development Goals (MDGs): As noted above, the economic contraction may set back efforts, in the near term, to make significant gains in overall poverty reduction. Progress on many o f the other MDGs i s strong, though continued efforts will be necessary to protect gains during the economic downturn. Annex 4 provides a full review o f the M D G targets and status but some highlights include: 0 n I heath, significant progress has been observed. Infant mortality per 1000 live births has dropped from 20 in 2001 to 14 in 2007. However, there i s s t i l l some way to go to achieve the M D G target o f 7 per 1000 live births by 2015. Maternal mortality decreased from 58.7 per 100,000 live births in 2001 to 15.6 in 2007, and i s now approaching the M D G target o f 12.3. 0 I education, there i s very strong (92 percent) primary enrollment rates and close to full gender n parity in classrooms. Quality o f education remains a work in progress though, supported through the introduction o f new curricula and a 12' grade. Learning outcomes have been benchmarked through TIMSS and PIRLS, though the ranking indicates room for improvement (for example the 8' grade ranking shows Georgia as 33 out o f 49 countries in math achievements). 0 On environment, there has been improvement but there i s also room for further progress. While close to 100 percent o f the urban population has access to improved water, access i s lower for the rural population. National parks are being managed professionally, but forestry i s not yet managed according to best international practices. F. Governance and Anti-Corruption 27. Georgia has made major strides on governance and anti-corruption since the Rose Revolution. Addressing corruption and governance issues was seen as an overarching theme that was to be addressed in each o f the three pillars o f the last CPS. Along these lines, governance reforms implemented over the last CPS period aimed at maintaining macroeconomic stability, strengthening public finances and improving provision o f basic public services. Enhancement o f the business sector environment was at the core of the reform agenda as a competitive private sector i s viewed'by the Government as the main engine o f growth. 8 28. Significant steps were taken to improve the public financial management system, including budget reform and introduction o f a medium-term expenditure framework, implementation of the Treasury Single Account, simplifying Tax and Customs Codes, reorganization and strengthening revenue administration, and transforming the Chamber o f Control into the Supreme Audit Institution (SAI), including amendment o f the external audit legislation to address shortcomings in the area o f public accountability and oversight. 29. International surveys (BEEPS, Doing Business) corroborate that concern over bribery has come down considerably. These surveys indicate a substantial decrease in unofficial payments as well as time spent in dealing with public officials over interpretation o f laws and regulations. Pervasive petty corruption was addressed in many public institutions. Traffic police were reconstituted and restaffed to reduce this endemic source o f corruption. Objective testing was introduced to determine university placement. 30. Notwithstandingthese achievements, several areas continue to require attention. While the Government has made the establishment of an environment conducive for private sector investment and growth as a centerpiece o f its development strategy, there i s a need to further improve business practices and regulations to promote maximum competition and transparency. While the judiciary i s being reformed with the courts system reorganized, re-staffed and judges retrained, continued efforts are needed to reduce the perception that it i s not independent and that it can be heavy-handed in its approach. There i s also the perception of an ad hoc and heavy-handed approach to tax collection. Many o f the institutions of government continue to be weak. Most importantly, there i s a need to continue to deepen the dialogue between the Government and civil society to build transparency in decision making and program implementation. 11. Country Development Agenda and Priorities A. The Country Development Program 31. Several recent documents have laid out the authorities' development program over the medium-term. I n January 2008, the Government laid out a medium term reform program entitled "United Georgia without Poverty". The program established policy directions in a number o f action areas, including macro-economic growth, lower taxes, creation o f jobs, focusing the budget on social programs, extending health insurance for the poor, rehabilitating the road network, increasing hydropower generation, increasing agricultural exports, and strengthening higher education. While this strategy predates the significant changes to the economic environment following the August conflict and the global economic crisis, many o f the policy directions remain valid although the pace at which they are expected to be reached will need to be adjusted. 32. I n the immediate aftermath o f the August conflict, the Government worked with the donors to develop a post-conflict response. This response has included fiscal adjustment, safeguarding the financial sector, addressing the needs of IDPs, swiftly repairing damaged infrastructure, and seeking and obtaining international support. In September, 2008 a team lead by the World Bank and the United Nations (with the participation o f ADB, EU, EBRD, EIB and IFC and in collaboration with the Government) prepared the Joint Needs Assessment (JNA) which identified the following four areas for donor support: macro and fiscal stabilization, social needs (especially for IDPs), priority infrastructure investments, and the banking and private sectors. Donor commitments thus far are on-track in meeting these requirements. 9 33. Each year, the Government prepares an annual strategy document titled Basic Datu and Directions (BDD), which outlines the medium term reform program, provides the medium term macro-economic framework, including the fiscal resource envelope and allocations, and includes detailed descriptions of the individual sectoral strategies for achieving these objectives. The 20 10-20 13 Basic Data and Directions paper has been submitted to Parliament. Some o f the overall strategic directions o f the Government's economic reform strategy include: resumption of economic growth, support for social needs, investments in critical infrastructure, rural productivity, education, judicial reform, and government effectiveness: Resumption o f Economic growth: This will be pursued through continuing to reduce taxes, promotion o f free trade with the EU, improvement in customs processes, and strengthening infrastructure. 0 Surmort for social needs. The social safety net will be strengthened by increasing pensions and expanding the coverage and improving the targeting o f social assistance. Expanded access to medical insurance, with state subsidization for the poor, will also be a priority. Living conditions for new DPs will be improved and a phased program will be implemented to provide dwellings for earlier IDPs. Water.supply and sewage systems will be restructured and rehabilitated throughout the country. 0 Sumort for critical infrastructure: The state will finance core infrastructure projects and attract where possible foreign investments thus promoting businesses and jobs. A key sector will be transportation where the construction o f E-W Highway and other segments in the South and West will be a priority. Energy reliability will be enhanced, including by attracting donor and private investment to support a new power transmission line and increased hydropower generation. 0 Rural Productivity.: To increase productivity in agriculture, irrigatioddrainage systems will be rehabilitated. Assistance to farmers on critical inputs will continue. Agribusiness and processing will be supported which will also help create jobs. Efforts will be strengthened to increasing productivity in cattle raising and providing safety against epizootical threats and providing for food safety. Education: A l l public schools will be brought into line with modern standards and equipped with computers linked to the internet. Quality o f teaching at universities will be strengthened according to international standards and teacher training will be enhanced. Judicial Reform: Judiciary reform will continue to be implemented and independence o f judiciary will grow. Criminal and administrative judicial systems, data bases, and judge selection will be revamped along modern standards. Trial by jury will also be introduced in certain criminal areas. Government Effectiveness: The public sector will establish measurable parameters used for evaluation o f performance and this will make public service more transparent. Budgetary and treasury processes will be improved. On anti-corruption, a system o f asset declaration of public servants will be strengthened and a code o f ethics introduced. 10 B. Key Economic and Social Priorities 34. I n the light of the twin crises, the strategic objectives of the authorities fall into two main categories: (i)to address the fallout from the current shocks and (ii)to strengthen competitiveness for post-crisis recovery and growth. Over the rest of 2009 and into 2010, economic performance will continue to be constrained by the global contraction as well as the tight liquidity conditions. The f i r s t challenge for the authorities i s to restore economic stability and protect the social well being of the population. The Government i s anchoring these objectives within a countercyclical stimulus, financed in large part by donors. The second challenge i s to position the economy for high rates of growth as economic conditions improve. For a small open economy like Georgia, the Government believes this can only be achieved through strengthening international competitiveness and by making Georgia the destination of choice for foreign investors. This requires building further on the achievements of the past and completing the unfinished policy and institutional reform agenda. Meeting Post-Conflict and Vulnerability Needs 35. As discussed above, the economy faces adjustment pressures from the twin crises. The Government recognizes this as a priority. Addressing these concerns over the next two years i s critically important in order to protect the economic and social fabric of the country, and to assure growth and improved well being in the post-crisis period. This requires action on several broad fronts noted below. 36. First, the authorities are committed to the effective implementation of prudent counter- cyclical macroeconomic policies. The authorities have already taken important steps with respect to exchange rate liberalizationwhich will ease the external adjustment and improve export profitability. The Government has made maintaining an open trading regime a hallmark of i t s policy. Countercyclical fiscal policies are being implemented with a strong focus on leveraging concessional donor financing and on offsetting rising unemployment and poverty. Restructuring on the expenditure side i s underway to keep the fiscal deficit in line with IMF targets. 37. The Government has accompanied its countercyclical program with shifts in the composition of spending towards higher priority infrastructure and social investments as well as by improved efficiency o f investments. Infrastructure investments will yield high returns in the short-term by the creation of jobs, especially low skilled rural workers. Social expenditures, on health, education, and social protection, have been increased from 8.2 percent of GDP in 2007 to a budgeted 10.2 percent of GDP in 2009, while defense expenditures have decreased. Maintaining a focus on priority expenditures as the authorities adjust the budget i s essential to maximizing the impact on social well-being. At the same time, public investment has increased significantly in recent years, rising from 2.8 percent of GDP in 2003 to 9 percent in 2007, and maintaining the same ratio to GDP in 2009 as part of the stimulus package. Ensuring efficiency in the use of these funds will remain an important focus for the authorities. 38. Second, the Government recognizes that bolstering financial stability is a key objective. The liquidity and solvency of the banking system were strong at the start of the crisis, and the authorities are intent on maintaining this strength. At the same time, financial intermediation i s s t i l l low. The authorities are committed to a flexible monetary and exchange rate policy stance to help restore liquidity in the markets. In addition, the authorities are strengthening banking supervision through the Financial Supervision Authority (FSA), soon to be merged with the Central Bank, to monitor NPLs and ensure adequate provisioning to deal with increased risks to the economy. 39. Third, the authorities are improving the effectiveness of the social safety net. Georgia's system o f social transfers reaches 64.4 percent of the population and includes pensions, assistance to IDPs, targeted social assistance (TSA), and a number of smaller cash transfer programs. Fiscal outlays for 11 social transfers have increased in the aftermath o f the economic downturn, rising from 4.6 percent o f GDP in 2007 to 5.8 percent in 2008 and an estimated 7.4 percent according to the amended 2009 state budget. Social transfers are important for poverty reduction: simulations indicate that poverty would be much higher without the transfers. In order to address current vulnerabilities but also to strengthen institutional arrangements for countercyclical social response, the authorities stand ready to (i) further improve effectiveness o f the part o f social transfers that i s already targeted (Le. TSA), (ii) expand coverage and adequacy consistent with fiscal constraints, (iii) continue to improve targeting o f social transfer programs, and (iv) further consolidate administration of social benefits to ensure efficiency. Over the medium-term, implementation of a well-articulated strategy on the social safety net will promote a robust social risk management system in Georgia. 40. Fourth, the Government i s expanding coverage o f health insurance, particularly for the poor and the vulnerable at affordable rates. Though increasing, overall health expenditures accounted for a small and insufficient 1.5 percent o f GDP in the 2008 state budget. Georgia has the highest share o f out- of-pocket payments in ECA -72 percent of total health expenditures in 2006 compared with 27 percent in the EU-12 and 16 percent in the EU-15 (WHO Health for All). Georgian households also identify the health sector among the top priorities for government investment (see, e.g. L i f e in Transition report). The Government embarked upon an ambitious set o f health sector reforms in 2006 with the objective o f providing efficient, affordable, and quality health care to all. Health care providers are reimbursed on a contracted fee-for-service basis and money follows the patient. The Government has a long term vision o f attracting private operators for hospitals and primary health care facilities, and moving to a situation where those who do not quality for MIP can purchase it through private insurers with a subsidized minimum benefit package. A key plank o f it i s the Medical Jnsurance Plan for the poor which has already improved access to health care for the poor, although a significant share o f them are still not covered. The challenge for Georgia i s to fully implement i t s reform program and show the expected results from it. The current economic situation makes it important to ensure that this i s done in a fiscally sustainable manner. 41. Fifth, the Government has made improving the economic and social well-being of the IDPs a priority. The Government has moved rapidly in the wake of the August conflict with providing shelter and housing solutions and income support for the IDPs. At the same time, further work i s needed to provide income generating opportunities, and improve the quality o f their life, particularly for the young. This will be an ongoing challenge. The Government i s tackling this challenge in close coordination with the donor community. 42. Sixth, the Government recognizes the importance of expanding jobs in the near term as part of its countercyclical efforts. While the Government will seek to create long-term jobs through building a robust private sector, it recognizes that targeted public investments in key infrastructure can help boost short term employment and income. But such near term investments are not enough. I t also recognizes that this will need to go hand-in-hand with upgradingthe skills o f the labor force (see para 49). 43. Finally, the Government i s working towards increasing rural productivity and incomes. Although the share of agriculture in total GDP has declined significantly (from 25 percent in 1999 to about 9 percent in 2008), it remains an important sector in Georgia given that over 50 percent o f the population lives and works there. Issues depressing agricultural productivity and investments relate to fragmentation o f land, high transport costs and poor roads connectivity to markets, generally degraded rural infrastructure, and lack of standards for agricultural products. Social outcomes also vary across Georgia's regions reflecting the differences in income and poverty rates. While rural out-migration will continue to be a natural and economic response for the population, Georgia has untapped comparative advantage to produce a wide variety o f high value agricultural commodities. But productivity and exports have fallen short o f their potential and with free trade regimes under development with the EU and the US, there i s significant opportunity to increase production, exports, and create new jobs, especially in rural areas. 12 Environmental management i s another area, important for the rural economy, where Georgia needs to seek a sustainable balance between stimulating private involvement and the Government's appropriate regulatory and monitoring role. Similarly, greater involvement by the Government in integrated planning and management of watershed areas would be appropriate. for Strengthening Competitiveness Sustained Post-Crisis Growth 44. While addressing the short-term crisis needs are important, the Government of Georgia has a clear goal of strengthening competitiveness and resume Georgia's high growth path. To this end, the Government i s committed to continuing its strong reform approach even during the current crisis period. However, given the fiscal tightness, significant prioritization and focus i s needed. The Government i s moving forward in the following areas to strengthen competitiveness: 45. First, Georgia has made continued improvements in the efficiency and effectiveness of public finances an important priority. Given the scaling up o f public expenditures and the important shifts in composition o f expenditures that have already taken place, the priority at this point i s to improve the efficiency and effectiveness with which these higher and better allocated inputs generate the necessary outputs to support economic recovery and to create the conditions for sustained growth in the medium term. First, the higher level o f expenditures implies the need to ensure that the expenditures are contributing effectively to Georgia's growth and poverty reduction priorities. Second, in the current economic environment, greater efficiency in public finances will ensure that the countercyclical fiscal response i s more effective in supporting economic recovery. Third, greater efficiency will allow the level o f public expenditures to be reduced over time and thereby expedite the process o f re-establishingprivate investment as the engine for accelerating economic growth in the medium term. Further, the 2008 joint WB-EU Public Expenditure and Financial Accountability (PEFA) assessment pointed to the need for further improvements in internal controls, internal and external audit and financial reporting. The Government has indicated its intention to move forward on public financial management reform including the gradual introduction of International Public Sector Accounting Standards (IPSAS). Taken together, the Government i s committed to a medium-term agenda o f institutional reforms that would strengthen the results-orientation of the budget and set into place incentives for efficiency, transparency, and accountability o f public finances. This will be particularly important if the downturn i s deeper than anticipated and further fiscal adjustments are needed. 46. Second, Georgia has `set out a clear priority to support critical infrastructure improvement in order to spur foreign and domestic investment. Georgia lags comparator countries in the ECA region with regard to the quantity o f available infrastructure, based upon an index o f transport, energy, and telecommunications infrastructure (see Figure 3). A similar lag i s found in looking at the index o f infrastructure quality. The Government recognizes that in the current environment public investment will need to play a key role in developing this infrastructure, especially in roads, though private participation- in power, airports, telecommunications, ports- i s already being tapped by the authorities. A key investment need i s o f course in the roads sector which i s essential for boosting the country's potential as a transit country as well as to provide better connectivity between rural areas and market opportunities. Georgia i s also a key location for transit of oil and gas. The development o f infrastructure becomes particularly important to take advantage o f Georgia's strategic location with the eventual reduction of investors' perception o f political risk. 13 Figure 3: Index o f Infrastructure Quality: Georgia and Comparators 7 16 1991-98 141 1991-98 12 14 12 10 10 08 08 08 06 04 04 02 00 02 Georgia Industrial EU15 East Asia Latin ECA economies and the America 00 Pacific Georgia EUlO Baltics ENP5 CIS SEE Source: Calderon and Serven, updated July 2008 47. G e o r g i a has established t h e m o d e r n i z a t i o n of its transportation system a t o p p r i o r i t y . Georgia's transport system i s a key link in the historic "Silk Road", which the Transport Corridor Europe to Central Asia (TRACECA) initiative seeks to emulate. Both in terms o f geographical location and existing infrastructure, Georgia i s well placed to absorb growing transport demands. I t i s located on the shortest route between Europe and Azerbaijan, Armenia and the Central Asian Republics through its Black Sea ports. Modernization o f the East-West Highway, along with rehabilitation o f feeder roads, i s estimated to cost over $1 billion. Therefore, the Government has asked separate international development agencies to rehabilitate different segments, The World Bank i s already financing the most congested section through i t s first and second East-West Highway Operations. Other donors including JICA, ADB and the MCC are financing different sections, and the Government i s seeking additional donor support for other segments. The Georgian railways represents another key link along the East-West transit corridor, especially for oil and o i l products. In order to increase its capacity and maximize benefits to the economy, Georgia i s planning to invest around $300 million in the short-run for modernization o f rail infrastructure from Tbilisi to the ports o f Poti and Batumi. 48. On p o w e r and gas, t h e G o v e r n m e n t has made significant strides in recent years. System outages steadily improved in the power sector going from 15-20 hours per day (outside the capital) to Figure 4: Number of M a j o r Power Blackouts virtually continuous power supply (see Figure 4). 2004-2008 The turnaround in the sector was related in part to 16 the privatization o f power generation and distribution. Georgia has also stabilized its basic energy security by increasing gas supplies from Azerbaijan through the new South Caucasus Pipeline (SCP) and other pipelines. Now that Georgia has obtained a more stable and reliable energy sector, the next challenge i s to continue to increase the production o f energy to meet future 2004 2005 2006 2007 2008 domestic demand and generate export income, while I . TetclBlcckouu I ---k--PmulBltckor~~ I at the same time increasing the efficiency in domestic energy use. The most promising source o f Source: GSE, the power transmission company's Annual Report 2008. Local blackouts originating in the low- additional energy supply appears to be hydropower voltage distribution system not included where only 12 percent o f Georgia's hydropower 14 potential i s being utilized. In order to implement i t s strategy focused on reaching energy security and export oriented production, in the near term the Government i s focused on securing private investments for construction o f small hydro operations. For the medium to long term, the Government will explore larger hydropower projects. Further hydropower utilization would also require increased power transmission capacity for domestic and export purposes, an issue that i s being addressed in parallel. Strong regulatory involvement i s also needed, within the context o f private provision o f power. 49. Third, skills development i s key to a globally competitive middle income economy. 38 percent of firms surveyed in BEEPS 2008 report that the skills gap i s a constraint to operating a business in Georgia. Thus the Government i s also upgrading skills through ongoing education reform. Reforms include measures aimed at reducing the gap between skills o f the labor force and the skills needed by a new globally integrated emerging economy. To this end, reforms include modernizing curricula, monitoring and reporting o f academic attainment, establishing vocational training, rehabilitating basic school infrastructure which has been run down through years of disrepair and lack of maintenance, implementingnational and international testing in order to benchmark progress and introducing transparent university entrance examinations, and strengthened per capita financing. A new education law has established School Boards across the country, a 12`h grade was introduced in 2008, and the Government has started to benchmark learning outcomes against international ratings (TIMSS and PIRLS). The longer term challenge for the government i s to maintain the same level o f commitment for further advancing the broader education reform agenda. Now that basic reforms are underway in basic and secondary education, the next challenge facing Georgia i s on strengthening professional and vocational education after secondary school. The Government recognizes the need to consolidate and strengthen higher education, link higher education to the business and scientific community, and also strengthen vocational education. 50. Fourth, the Government recognizes that strengthening basic public institutionsand property rights are important in supporting private enterprise and investment. Further strengthening the rule o f law including protection o f property rights, increasing reliance on contracts, improving dispute resolution mechanisms, and further progress in adopting international technical standards are needed to expand business opportunities in the tradable sectors. A number o f efforts are underway in these areas. The Government i s implementing judicial reforms aimed at strengthening the rule o f law including protection o f property rights. In addition, the Government has recently decided to create , a special commission tasked with developing a program to adopt international and EU standards and technical regulations in select industrial sectors. This effort has been undertaken in preparation for EU-Georgia free trade negotiations in the context o f the Eastern Partnership Agreement. 51. Fifth, the Government continues to see improvement of the business environment as a key lever o f improving external competitiveness. While the business environment has improved impressively over the last five years, the costs o f tax compliance and the costs o f transactions across borders remain impediments to business activity in Georgia. The dimensions o f the business environment where relative weaknesses are found for Georgia, according to recent Doing Business reports, are "Paying Taxes" and "Trading across Borders" (see Table 4). Along these two dimensions, Georgia significantly lags its overall high ranking o f 15, with the "Paying Taxes" rank at 110 and the "Trading across Borders" rank at 81 .6 BEEPS 2008 reports that one in every four firms finds tax compliance a real constraint to operating a business and one in every five firms finds customs administration time another area where improvement i s needed. Significant progress has been made in recent years in introducing risk based customs procedures, but more i s needed. Reducing the costs associated with paying taxes and importing and exporting are key levers in improving external competitiveness in Georgia. In addition, there i s an 6 While Georgia also lags its overall ranking along the "Closing a Business" dimension, it has recently adopted a new insolvency law that shortens timelines for reorganization o f a distressed company or disposition o f a debtor's assets, which i s expected to result in improvement along this dimension going forward. 15 important agenda on improving corporate financial management, detailed in a 2007 Accounting and Auditing ROSC7, including strengthening institutions based on international standards for financial reporting (IFRS) and international standards for accounting (ISA). Table 3: Doing Business Ranking Category Doing Business 2008 Doing Business 2009 Starting a Business 10 4 Dealing with construction permits 11 10 Employing workers 4 5 Registering Property 11 2 Enforcing contracts 42 43 Closing a Business 105 92 Paying Taxes 102 110 Trading Across Borders 64 . 81 Getting Credit 48 28 Protecting Investors 33 38 Overall rank 18 15 yource: World Bank, Doing Business reports, 2008 and 2009 52. The Government also recognizes the need to strengthen its system of monitoring and evaluation to better meet the above mentioned development challenges. Central to such a system has to be the production o f reliable and timely statistics on economic and social conditions. This i s needed for informed decision-making by policymakers and investors alike. Georgia has long been hampered by poor quality national statistics. But in a significant move, the authorities have n o w embarked upon a program o f reforms that aims to establish a new statistical system that promises to produce credible, high-quality, and reliable statistics in a manner consistent with international best practices. The Government has recently submitted a new law in Parliament to strengthen statistics including making the Statistics Agency an independent agency, adoption o f internationally recognized statistical methods and standards, and improvement in institutional and staff capacity. 111. The World Bank Group's Strategy A. Implementation of the Last CPS 53. The FY06-09 CPS was prepared in the aftermath of the Rose Revolution. After just 18 months, the new Government had moved quickly on reforms across the development spectrum - in stabilizing the macro and fiscal situation, improving governance, strengthening infrastructure, introducing sweeping reforms in education, slashing red tape for businesses, and deepening poverty alleviation. Building on this rapid reform legacy, the last CPS was focused on assisting Georgia in implementing a second phase in i t s reforms focusing o n three areas: 0 ' Generating growth and jobs by further removing barriers to private sector development and improving infrastructure, finance and markets; Enhancing human development and social protection through improved education, health, social protection and community services; and Accounting and Auditing Report on Observance o f Standards and Codes (ROSC), January 2007 16 Strengthening public sector management and budgetary processes to enable Georgia to better plan and meet its own development goals. 54. The centerpiece of the CPS was a series of Poverty Reduction Support Operations (PRSOs) which allowed the Bank to engage on critical reform areas such as energy policy, public sector management, and social safety nets. The CPS also supported new investments in transport and energy infrastructure with the aim of improving the private sector environment and strengthening Georgia's role as a transit corridor. The Bank also extended i t s engagement in the education sector. These new operations were complemented by 18 ongoing operations in a variety o f sectors. 55. As originally envisaged, the CPS relied solely on ID A financing, as at the time o f its preparation creditworthiness considerations, including debt levels, precluded IBRD. The original amount estimated for IDA financing was about $143 million. Subsequently, based on a dramatically improved performance-based IDA allocation and some frontloading, IDA was able to provide $267 million to Georgia over the CPS period. By the time o f the CPS Progress Report, it was anticipated that Georgia would become eligible for IBRD borrowing beginning in FY09 and indeed the Bank extended its first IBRD to Georgia in FY09 in the amount o f $70 million (thus IDA and IBRD amounted to $337 million). 56. IFC's primary strategic focus was on the financial sector, both through advisory services and investments, to expand access to a wider range o f financial products. During the CPS period, IFC financed four banks to support access to SME finance, housing finance, and trade finance. In the last year o f the CPS, IFC focused significant resources on ensuring that the largest commercial banks remained viable following the twin crises given their exposure rollover risks. In addition to broadening the access o f businesses and households to financing through its support to financial intermediaries, IFC also sought to make direct investments in export-oriented companies or those providing services that support overall private sector development. Within this objective, IFC financed Tbilisi Airport to the benefit o f Georgia's travel and tourism business and two transactions to support the development of business and retail infrastructure. In total, IFC increased its committed portfolio from $54 million at the beginning o f FY06 to $3 12 million currently. As foreseen in the CPS, IFC also implemented a significant advisory program to improve the business enabling environment, strengthen corporate governance practices, and introduce new financial products, in particular commencing work on energy efficiency financing. Results achieved up to the August 2008 conflict 57. With respect to the first pillar - promoting private sector led growth and jobs the Bank-- Group program led to good results. Economic growth accelerated driven by a solid macroeconomic foundation and deep structural reforms consolidating market economy institutions, but also helped by external factors (remittances, foreign direct investment). The Bank program has contributed to the achievement o f results primarily through the PRSO series and investments in infrastructure. IFC's investments and advisory services were critical elements o f this pillar primarily through investments in the banking and real sectors. 58. With respect to the second pillar - human development and social protection - progress has also been strong. Ongoing investments in Education supported major achievements in curriculum reform and school financing. Additional achievements include restructuring the schools' management system, introducing a new transparent examination system and refurbishing schools in the highest priority areas. The Bank also helped to fund and establish an International School o f Economics (ISET) based on international teaching, which i s helping to strengthen higher education and encourage use o f evidence- based economic policy making. IFC introduced a student loan program with Bank Republic towards the end o f the CPS period. The Health Project was restructured to support the new direction o f moving health 17 provision to the private sector and ensuring the poor had access to affordable health insurance. On Social Protection, the PRSO helped the Government achieve a major breakthrough - the introduction of a new targeted social assistance program. On the analytic side, a key result has been the preparation of a full Poverty Assessment reviewing the components o f poverty and the link to jobs which was published in May 2009. 59. With respect to the third pillar - strengthening public sector management the results-- foreseen from Bank assistance have largely been delivered through progress in some specific areas lagged. Key achievements include improving the budget process and introducing multi-year budget frameworks, supported under the PRSO series, as well as through the Public Sector Financial Management Reform Support Project. The PRSO series and the Municipal Development and DecentralizationProject also supported a new inter-governmental financing system that transfers funds to local governments in a more transparent and effective manner. Though progress on public procurement has been slower, a good start has been made in designing an agenda and benchmarking future results through the Country Procurement Assessment (CPA) and the Public Expenditure Framework Assessment (PEFA). The recent adoption of a new law on the Chamber of Control elevating i t s status and establishing principles for i t s operations based on internationalstandards was a major achievement under the PRSO series. Progress was slower in the area of judicial reform. Post-Conflict Support in FY09 60. The Bank modified its approach in the last year o f the CPS, following the August 2008 conflict, to reflect immediate post conflict needs as well as longer term development goals. Significant analytic work was provided as part of the Joint Needs Assessment (JNA) as well as the organization with the EU of the Donors Conference in October 2008. Analytic work was accompanied by additional IDA flows, and some $100 million in IDA was extended in October 2008. This included a Supplemental to the PRSO-4 ($40 million), a Regional and Municipal InfrastructureDevelopment Project, including a special IDP housing component ($40 million), and Additional Finance for the Second East- West Highway Project ($20 million). 61. I n the aftermath o f the conflict, the Bank worked especially closely with other donors and the Government on IDP housing. Working with the Government and using rapid response procedures, housing for new IDPs under the MDF credit were completed by early December, 2008, allowing many of them to move out of temporary facilities before the winter onset. The Bank also maintained a continuous policy dialogue on economic management issues, assisted the Ministry of Finance in improving i t s capacity to track external assistance, and worked closely with other donors to facilitate delivery of their 2008 pledges. In February 2009, the Bank also extended a Peace Building grant of $2.2 million to further support the development needs of IDPs. 62. I n March 2009, the Board approved Georgia's first IBRD loan of $70 million for Secondary and Local Roads. This had been part o f the Bank's pledge in Brussels, and will generate much needed short-term employment throughout the regions, as well as build connectivity and strengthen competitiveness for the medium-term. 63. IFC also accelerated its support in the wake of the August conflict, working seamlessly within the Bank Group on the JNA to assess the overall state of the financial and private sectors, and provided about $250 million to Georgia. This included significant support (with EBRD, FMO and OPIC) to provide financing to the two largest banks in Georgia, Bank of Georgia and TBC Bank. This support was critical and timely, enabling these banks to meet their foreign roll-over obligations in 2009 and preserve financial stability. IFC also supported the continuation of trade flows through two trade lines to Georgian banks and continued to invest in the improvement of business and retail infrastructure. Within advisory services, IFC 18 has refocused activities to address emerging needs including conducting a survey o f SME's on the impact o f the crisis and providing training to private bankers and regulators on NPL management. Lessons Learned 64. Several key lessons are incorporatedin this CPS. These are based on the results of the Country Assistance Evaluation (CAE) and the FY06-09 CPS Completion Report (CPSCR). In 2008, the Independent Evaluation Group (IEG) prepared a Country Assistance Evaluation (CAE) to review the performance o f the Bank in Georgia from 1994 to 2007. Some o f the key lessons gleaned include: (i) the importance of staying focused and consolidating lending and analytic work on the basis o f client demand, (ii) strengthening coordination with other partners, including more joint work within the Bank Group, (iii) ensuring that Bank operations work to strengthen institutions, monitoring and evaluation, and physical infrastructure, and (iv) continuing to integrate project implementation units into mainstream Government institutions and ministries. 65. The CPS Completion Report for the FY06-09 period concurs with these lessons, and indeed many of them are reflected in this CPS. In addition, the CPS Completion Report highlights the effectiveness of: (i) maintaining a balance between policy based and investment operations and maximizing the synergy between them, (ii)building a programmatic approach to both lending and technical assistance, keeping the focus on just-in-time assistance, and (iii)establishing a good staffing mix, maintaining experienced staff with in-depth country and sector knowledge, while bringing in new staff that bring fresh perspectives and ideas. B. The New Country Partnership Strategy for FY10-13 66. The design o f the CPS strongly reflects the difficult economic situation in Georgia. The strategy rests on the two main strategic pillars o f the authorities' program - (i) meeting post-conflict and vulnerability needs and (ii)restoring growth and competitiveness. The first pillar will address key identified vulnerabilities including macro-stability and fiscal management, jobs, social services and the financial sector. The second pillar will continue to support Georgia's structural reform program to best position itself in the medium term by continuing to improve the private sector environment and build its role as a transit corridor. I t will do so within the context of strong selectivity (as underlined by the CPSCR and CAE). 67. Within these results areas, the Bank will support good governance through four ways: (i) in the execution o f its fiduciary functions (auditing, procurement, monitoring) within the implementation of investment operations, (ii) building capacity within public and private institutions to provide improved by services, (iii)integrating improvements in the monitoring and evaluation system through appropriate project design and implementation, and (iv) placing an emphasis on improving communications. Stratepic Obiective 1: Meetinn Post-Conflict and Vulnerability Needs Results Area 1: Preserve Economic Stability and Create Jobs Outcome 1: Improved public resource management 0 Outcome 2: Improved performance o f key financial institutions Outcome 3: Increased employment through Bank financed projects 0 Outcome 4: Improved quality o f education 19 68. Improved public resource management: In the wake o f the twin crises, preserving economic stability and improving the efficiency o f public expenditures gains prominence. The Bank will work with the Government to support this, and monitor overall progress through broad economic indicators (e.g. growth, inflation, debt sustainability etc). Within this broad dialogue, the Bank will focus strong attention on helping the Government manage countercyclical spending with improved prioritization o f public expenditures to support growth-oriented expenditures and key social programs targeted at the poor. Part o f the approach will be to improve the effectiveness o f revenue administration, so that Georgia can maintain adequate fiscal space once the immediate donor financed stimulus declines. This includes specific support for strengthening the use o f the e-filing payment system, and risk-based tax and customs auditing. An equally important element in building a sustainable fiscal framework i s to strengthen systems to help the government to better prioritize expenditures. The D P O series will play a central role in helping Georgia in these efforts - e.g. to build performance based budgeting processes and support adequate funding for social safety nets, public services, and priority infrastructure. This will be accompanied by the Public Sector Financial Management Reform Support Project, as well as annual analytic support through the Public Expenditure Reviews. These efforts will be supplemented by follow-up on the agenda on improving fiduciary controls, laid out in the 2008 Public Expenditure Financial Accountability Assessment (PEFA) and the Country Procurement Assessment (CPA). The Bank's Treasury Department will also provide support on debt management. 69. Improved performance o f key financial institutions: As an immediate response to maintaining financial sector stability in FY09, IFC-with EBRD and others--provided significant financing to the two largest banks. Nevertheless, the banking sector continues to be a source o f risk. Georgia aims during this period to strengthen i t s banking and monitoring system, re-energize bank lending, and keep the level o f non-performing loans down. IFC i s playing a particularly important role in this through i t s financial assistance to systemically important banks and i s also providing these banks with advisory services on managing NPL, risk management and corporate governance and will continue to do so during the CPS period. IFC will remain flexible and i t s mix o f products and the volume o f investments will depend on the duration and impact o f the crisis. The Bank Group will measure i t s success primarily by the financial health o f IFC-supported banks. The Bank and IFC (together with the IMF) will continue to provide advisory services to the financial sector during the CPS period. The Bank has an ongoing FIRST grant to assist the Financial Supervision Authority (FSA) in strengthening it risk assessment o f banks. In addition, a banking sector diagnostic or an update o the FSAP will be on the agenda during the CPS. Some areas f o f the dialogue include ways to further strengthen the banking sector stability framework, build capacity to monitor prudential soundness indicators, develop domestic capital markets, and improve the capacity o f the FSA. The Bank i s also providing technical assistance to improve payment systems to strengthen inter- bank transfers and the security deposit system. 70. Increased Employment: A key element o f the Government's near term strategy i s to create jobs, particularly to partly offset those jobs lost due to the economic downturn. The Bank will help the Government monitor the overall levels o f job growth and employment in the country and develop sound employment enhancing policies. At a more specific level, the Bank Group will help create jobs directly or indirectly through the projects it finances. During FY09, the Bank extended two new projects which would both build productivity and growth over the medium term while generating immediate employment - (i) a loan for Secondary and Local Roads, and (ii) the Regional and Municipal Development Project. The two new transport investments under consideration for FY 10 - East- West Highway and Kakheti Regional Road Improvement Project - will also yield significant short term employment generation while also laying down the basis for increased permanent job and income growth. The Programmatic Poverty Assessment will continue to review labor markets and the impact o f the crisis on the population. IFC's support to the banking sector helps sustain access to finance for SME's, allowing them to better weather the crises and keep jobs, and IFC's direct investment and advisory services in the real sector will similarly help 20 maintaidcreate jobs in those companies. IFC will also seek to support the growth of microfinance to support creation of self-employment and the sustainability and growth of existing microenterprises. 71. Improved quality of education: The Government recognizes that simply creating low level constructionjobs i s not enough, and that sustainable job growth will require a reduction in the gap between skills needed in a competitive economy and those currently available in the labor market. Georgian students participated in international testing in 2007, but the results were not strong which suggests further efforts are needed.' During the new CPS period, the Bank will contribute to improved learning outcomes and will help the country measure improved scores by students in international and national assessments of student learning (TIMMS, PIRLS reporting i s being supported under the project). The Bank will measure its own success through ensuring 100 percent roll-out of the new curriculum in subsequent primary and secondary grades, completion of urgent school infrastructure works, and introduction of teacher certification. The Bank will achieve these gains in primary and secondary education through the Education APL II Project which i s expected to be completed by 201 1. While higher education i s not included in the project, the Bank has secured Japanese and Danish Trust Funds to continue the dialogue on strengthening higher education and to monitor progress against Bologna standards. During the CPS period, the Bank will also prepare an Education Sector Review which will assess progress to date in both basic and higher education and help Georgia ensure that i t s education system i s at world class standards. Results Area 2: Improve Social Services 0 .Outcome 1: Increased coverage and efficiency of the TSA 0 Outcome 2: Wider health coverage facilitated through improved budgeting, infrastructure and information systems. 0 Outcome 3: Improved municipal services in supported areas (water, local roads etc) 0 Outcome 4: Improved IDPs housing and welfare 72. Safety Nets: Georgia has made major strides in introducing, with Bank support, an effective targeted social assistance (TSA) program in 2006. The Government recognizes that particularly in the wake of the twin crises, it will be essential to widen this program further. The Bank will continue to support the further strengthening the TSA through the DPO series, and will assist in measuring the impact of the TSA through the annual Poverty Assessment. While the Bank will contribute to the Government's overall effort to strengthen social safety nets, it will measure i t s success against the specific target contained in the DPO, e.g. the percent o f the extreme poor that receive poverty benefits through the TSA (2009 baseline = 30 percent; target = at least 50 percent). 73. Health Services: The Government i s in the midst of a major health reform, with greater private provision of services, combined with the introduction of a Medical Insurance Program (MIP), subsidized for the poorest. The ultimate goal i s to improve key health indicators of the population, where important strides have been made but further progress i s needed. The Bank will continue to assist the Government in measuring progress in overall health indicators, and will play a key role in supporting the Government in implementing i t s new health financing approach in an effective manner. This includes: (i)the establishment of an effective health information data base that will assist the Government in improving the implementation of health insurance, and (ii) specific DPO target o f a substantial increase in the share the of the bottom two quintiles of population with access to subsidized health insurance (current baseline = 20 percent in 2007). The Bank and the Government have recently restructured the ongoing Primary Health For example, Georgian 8" graders ranked #33 out o f 49 countries in math and 37 in science achievement 21 n Care Project to support this approach through the CPS period. I addition to supporting health care training and equipment, the restructured project w i l l assist the Ministry o f Health, Labor and Social Affairs in improving i t s database and linking it to the Civil Registry so that subsidized insurance can be well monitored and targeted to the poor. The DPO series will backstop the effort to extend the MIP to more o f the poor with the effective implementation and funding for the MIP. The annual Poverty Assessment will continue to monitor health outcomes and issues. The IFC i s exploring potential investments in private health providers. At the same time, improved health financing systems must be accompanied with strengthened institutional capacity to be effective, and the Bank will continue to provide analytic and technical support on health (and could consider a follow-up project if additional funds become available). Health and safety efforts will also be furthered through the Bank's transport projects. 74. Municipal Services: Georgia recognizes the importance o f building local infrastructure not only as part o f increasing the well being o f the population but also as a key element in promoting growth. To this end it i s supporting the improvement o f municipal infrastructure, including water supply, waste water management, local roads and housing through effective evaluation, prioritization, and financing o f projects through the Municipal Development Fund. Georgia has also implemented a reform o f inter-governmental finance in order to ensure that local authorities have needed resources. The Bank has provided significant support through the M D F towards this effort in the past, and continues to measure i t s success in this areas against improve water access and quality in supported areas, as well as reduced transport time and cost on n local roads. I 2006 the Bank entered into a service agreement with MCC to help supervise i t s funding through the MDF. I FY09 the Bank also extended a new Regional and Municipal Infrastructure Project n which i s providing both regular and emergency support in light o f the August conflict. The Bank i s also administering a Cities Alliances Grant for Tbilisi to develop a City Development Strategy. Project funds are being used quickly and the Government may request additional financing in the CPS period. 75. IDPs: Supporting IDPs i s a central and priority feature o f both the Joint Needs Assessment (JNA) and the recent Basic Data and Directions (BDD). This i s critical not just to improving the lives o f IDPs, but strengthening country cohesion. The Bank i s working closely with the UN to assess and monitor the needs o f IDPs and has made available $10 million out o f the recent Regional and Municipal Inpastructure Project for direct assistance on IDP housing. The Bank has also approved an I D P Community Development Grant to support the social and economic integration o f recently displaced IDPs into the society. The EU i s also making available grant resources to the Bank to support this effort. The Bank w i l l continue to monitor the situation with IDPs through analytic work on the impact o the economic crisis on f IDPs and its follow up JNA Progress Reports, and will measure i t s own success through the specific level o f IDP housing supported under i t s project and more general integration supported by grant funds. Stratepic Obiective 2: Strenpthening ComDetitiveness for Post-Crisis Growth Outcome 1: Transport time and costs reduced along key transit routes Outcome 2: Improved road safety 76. Improved Transport Corridor: The Government sees an enhanced transport corridor as a priority in attracting investment and building on Georgia's strategic location between Europe and Asia. The Bank i s playing a critical role in helping the Government achieve this priority both through i t s own highway investments and in helping to coordinate other donors. The critical measure o f the Government's success will be enhanced transport time across the country to the market. The Bank will measure i t s own 22 success primarily against time and costs o f the particular segments it i s supporting directly. These projects will continue to assist in strengthening the transport corridor and local connectivity while also having a major impact on both immediate employment during 2009-2011 and on the regional economy (in particular agriculture). Indeed, improving roads in the Kakheti region i s particularly important as it i s both one o f poorest regions in Georgia (46 percent poverty rate) and has considerable agriculture potential. At the same time, the projects will help to strengthen road safety. Several key donors have come together to adopt the same road safety standards on their interventions, and this too will be a monitorable indicator. The Bank's ongoing transport program has been significant and includes Highway Improvement I and IZ, the Secondary and Local Roads project and technical assistance through the Infrastructure Pre-Investment Infrastructure Facility. During the CPS period, the Bank will extend new loans to support further improvements via the Third East- West Highway Project, as well as local connectivity through the Kakheti Regional Roads Improvement Project. Bank interventions will also support greater coordination of a broader multi-donor program of rehabilitating the roads network in Georgia. The World Bank will also continue to provide capacity building for road sector institutions. IFC will seek to catalyze private investment in transportation and logistics through investments but also potentially through IFC's infrastructure advisory services, as requested recently by the Government. On railways, the Bank Group and the Government may explore the potential for possible support through the IFC-World Bank Subnational Finance Program. Results Area 4: Accelerate Business Growth 0 Outcome 1: Sustained improvement in the business environment 0 Outcome 2 Increased support to SMEs 0 Outcome 3 : Improved agriculture production, testing and sales 77. Overall Business Environment: A central element o f the Government's growth strategy for the past five years has been to make Georgia investor and investment friendly, and it has made great progress in this respect. The Government's overall goal in further strengthening the business environment i s to restore foreign and domestic investor confidence, which has been the foundation stone for i t s strong economic growth. The Bank will contribute to meeting this goal in specific ways. Clearly, improved transportation infrastructure through its various transport projects will facilitate business activity (see results area 3). The Bank's efforts to further streamlining tax and customs through the DPO series will also be an important input. Improving financial sector intermediation (see results area 1) i s another essential element. The potential for SME and rural development are also priorities that the Bank Group will support (see below). Taken as a whole, these targeted results are really more than the sum of their parts. The Bank will play a role in the all o f these aspects and will measure its own success against various indicators of business and investor confidence which show further progress needed in specific areas (Overall ratings for Doing Business, BEEPS are strong, but particular sub-ratings show patches o f weakness). IFC will continue to provide direct investment support to businesses and will finish i t s project which has provided advice on improvements in licenses, permits and inspections. IFC i s exploring the potential of future advisory work on the area o f food safety and will work with regulators to support the implementation of these processes. Complementing this, the Bank will administer a trade and competitiveness grant to help Georgia upgrade national quality standards to encourage food and related exports so that it can take full advantage o f its low tariff trade regime with the US, EU and other countries. A ROSC update to be conducted towards the end of the CPS period will evaluate the developments in private sector accounting and auditing practices. 78. SMEs. SMEs have an important role in Georgia's transition. They are only 8 percent o f output, but represent about 20 percent of enterprise employment. Just as important, SMEs have the potential to be 23 engines of innovation and growth. However, they have been hit by the economic downturn and access to finance to them has become more limited. IFC's support to the banking sector helps sustain access to finance for SME's, allowing them to better weather the crises and keep jobs, and IFC's direct investment in the real sector will similarly help maintain jobs in those larger companies. IFC i s also developing advisory services for SMEs on crisis management in a regional initiative that i s likely to include Georgia and would help SMEs to cope with key crisis issues, such as currency devaluation, cash flow problems, the need to reduce operating costs, and the increased costs of financing. IFC will also seek to support the growth of microfinance to support creation of self-employment and the sustainability and growth of existing microenterprises. Through i t s investments in the financial sector, IFC i s supporting microfinance, local currency finance, housing finance, energy efficiency finance, trade finance and reaching a range of key sectors including renewable energy, agribusiness and tourism. IFC will measure its own success by the amount of its own direct and financial sector lending support provided to SMEs (IFC will target an SME portfolio o f at least $750 million by 2013 through i t s financial sector clients. This would be a level similar to 2007, representing a full recovery after an expected decline in 2008- 10). 79. Rural Economy: The rural economy i s critical to Georgia's future growth as well as employment generation and poverty reduction. The Government's approach to the rural sector i s to strengthen rural infrastructure, while also facilitating agriculture financing and exports. To help the Government meet the first of these goals, the Bank's primary focus will be on improving the transport time, particularly in the agriculturally important Kakheti region. It will do so through its transport projects which will reduce transactions costs for farmers in getting products to and from local and export markets. The Bank has also provided support in the past for irrigation infrastructure, and while no decision on a new irrigation infrastructure project has been taken yet in the CPS, dialogue on improving efficient management in this area will continue. On the Government's second goal of promoting agriculture financing and exports, the Bank will actively work with farmers to strengthen supply chains in particular commodities, increase rural credit, and strengthen agricultural institutions including those involved in safety and certification. I t will do so through the ongoing Rural Development Project. The DPO series i s also supporting greater use of food safety controls and phyto-sanitary legislation. The Bank will also provide technical support to the Government in introducing greater food certiJication needed to increase trade, while maintaining an investor friendly environment and bearing in mind affordability constraints. ZFC continues to explore investments in agri-business, including through financial intermediaries, and may also support the introduction of international principles in food safety. On the analyticalpont, IFC has just completed a study on the competitiveness of particular agriculture products. The Bank's Country Economic Memorandum (CEM) due in 2009 will include a paper on rural development in Georgia. The Bank will also do follow-up analytic work on the rural investment climate and agricultural supply chains. As Georgia has experienced both swine and bird flu, the Bank will work with the Government to prepare for, control and respond to avian influenza, swine flu, and other infectious animalhuman diseases. It will do so through the ongoing Avian Influenza project 80. Energy: With the Bank's help, Georgia has made enormous progress in privatizing the energy sector, providing a stable supply o f energy to i t s population and businesses, and beginning to be a net exporter of energy to neighbors. The next step i s to facilitate investment in building increased energy supplies and transmission lines to neighboring markets. Towards this end, the Bank i s completing a feasibility study on the costs and benefits of the potential Khudoni powerplant through the ongoing Znfiastructure Pre-Znvestment Project. The Bank has also been helping to improve the domestic transmission system through the ongoing Electricity Market Support Operation. Looking towards the future, The Bank and IFC may explore ways of working together to attract private investors in the hydropower area, both directly and through financial intermediaries, and will also be coordinating with EBRD and EIB in this regard. In this regard, the Government has expressed interest in exploring the possible use of the Bank's Partial Risk Guarantee product to maximize attractiveness for private investment in energy or other infrastructure projects. KfW, EBRD and EIB are in parallel considering 24 supporting a high-voltage power transmission line to Turkey. The Bank may also extend analytic support to strengthen the regulatory role in protecting energy consumers and service quality and to address regional market issues. Although there i s considerable potential for Bank Group activity, the Bank has not yet set results indicators in this sector as options still need to be explored. 81. Environment: The Bank's operations in the environmental sector have wound down, in part due to the desire to focus its resources more on other areas, and in recognition o f the efforts o f other partners. The Bank continues to be involved in administering a multi-country grant - FLEG - which supports improvement in environmental legislation. In addition, IFC i s also considering support for more efficient use o f energy and i s carrying out a survey o f energy efficiency practices in five countries in the region, including Georgia, with the potential for a project that would work with financial institutions and SMEs to further support this. The Bank will use i t s energy and infrastructure activities to ensure that environmental assessments and considerations are taken into consideration. The Bank will also strengthen water supply through i t s ongoing Regional and Municipal Development Project. The EU i s now one o f the most significant partners for Georgia in the environmental field, especially engaged in assisting with solid waste management. The UNDP continues to administer modest resources from the Global Environment Facility granted to Georgia. The most active bilateral donors include Germany and the Netherlands. World Wildlife Fund (WWF) and International Union for Nature Conservation (IUCN) are international NGOs that continue to be active in Georgia, providing advice and assistance in biodiversity conservation, protected areas development, and forest management. IV. Implementing the Strategy A. Bank Group Instruments 82. The CPS envisages a focused use of Bank instruments. Bank efforts would center around the Development Policy Operations, a set o f 11 ongoing investment projects which would largely complete disbursement during the CPS period, and new infrastructure (primarily transport) projects. Knowledge services would be central to enabling the CPS to aid the Government in making policy choices and undertaking appropriate actions to meet the objectives o f addressing vulnerability and strengthening competitiveness. IFC would provide critical support for both the financial and real sectors, using debt, equity and other risk management products to flexibly support both i t s counter-cyclical and longer term role. Bank and IFC trust funds would further help to strengthen analytic support. Close coordination between the Bank and IFC will support effective implementation. MIGA also remains open for further projects in Georgia and in coordination with IFC i s in active discussions with the Ministry of Finance on greater engagement to support more FDI. 83. A series o f three annual DPOs, within a programmatic framework, will provide both immediate budget support to the Government while supporting reforms in selected areas - improving public finances, strengthening social safety nets, and building external competitiveness. The cross-sectoral content of the DPOs and their leveraging (directly or indirectly) o f budget support operations from other partners, such as the Netherlands, ADB or the EC will give them high prominence. The CPS Completion Report highlights the benefits o f the programmatic approach, not just for budget support operations but also on the analytic side, to deliver just-in-time advice, and this practice will continue throughout the program. 84. Strong synergy between programmatic support under the DPOs, investment lending, and analytic support (from both the Bank and IFC) will continue to be a hallmark of Bank operations. The importance o f this synergy i s highlighted under the CPS Completion Report. I t will be important to harness the power o f all o f the Bank instruments to support reforms, institutional change and making efficient use of Bank resources - a was done under the previous CPS. In light of the tight focus of Bank s 25 investment operations, it w i l l also be important to bring other donor-supported operations into this complementarity. For example, on public expenditures, the DPO-supported actions will be complemented by the Public Sector Financial Management Reform Support Project which itself coordinates technical assistance across different donors, as well as a*programmatic annual public expenditure review. In the field o f health, the DPO-supported policy action to widen the medical insurance coverage to the poor i s complemented by technical assistance through the restructured health project to build an information system to enable this to occur as well as analytic support. In the field o f agriculture exports, the DPO supports the Government in strengthening food standards to help build export markets. The Rural Development Project will reinforce this through practical support in rehabilitating food safety laboratories and veterinary offices, as well as training for food safety staff. Bank staff w i l l also work closely with IFC, which i s engaged in identifying product competitiveness as well as development o f a food safety program, and Sweden, which i s providing analytic work on food safety and testing. In the field o f business environment, the DPO will leverage knowledge and advice from IFC. 85. The 11 ongoing operations will enable the Bank to stay engaged in critical areas. These include health, education, agriculture, transportation, public financial management, and energy. The total amount remaining in these projects i s about $135 million. This i s expected to be largely disbursed over the first two years o f the CPS (by end-FY 11). The CPS provides for the Bank to continue to provide analytic support in these areas as needed after these projects close, and also the flexibility to consider follow-on investment lending should additional funding become available. Table 4: Georgia - Ongoing IBRD and I D A Operations Undisbursed Amount (%m) Health Reform (restructured) 9.2 Avian Influenza 5.4 Regional and Municipal Development 27.2 Rural Development 4.1 Highways Iand I1 19,4 Secondary and Local Roads 52.3 Infrastructure Pre-Investment Facility 1.1 Education APLII 8.1 Public Financial Management 3.0 Electricity Market Development 5.6 Total Ongoing 135.4 86. New investment operations by the Bank would be mainly focused on transportation. The Government has a made a clear priority for the Bank in this sector for reasons discussed earlier. As the lead donor in transport, the Bank will continue to convene regular donor meetings to ensure that all o f the different parts o f the transport corridor mesh together seamlessly. Beyond roads, the Bank will stay engaged on a variety o f other sectors through ongoing and potential new projects, and could provide some additional support to these, in line with any change in the financial envelope o f the CPS. Interventions will also be closely coordinated with IFC and other partners to ensure that assistance i s provided in a coherent and effective manner. The Bank and the LFC w i l l stay engaged with other key donors such as the EBRD to ensure financial sector sustainability. Infrastructure i s a key area where the Bank and the IFC have roles to play in cooperation with EBRD, USAID, MCC, JICA and other I F I s and donors. This tight focus i s an outcome o f strong donor coordination to avoid overlaps, as provided for in the Joint Needs Assessment. 26 87. Most World Bank Group operations will serve both strategic pillars. While the Bank's strategy i s a two pillar approach o f addressing immediate vulnerability while better assuring long term competitiveness, most of the specific Bank interventions serve both functions (see Figure 5). The Transport projects will provide both immediate jobs and will improve overall competitiveness and productivity. The DPO series will help the Government widen safety nets and access to health insurance for the poor, but will also work with the Government on improving trade and business competitiveness. The Municipal Development Project will provide both housing and support for IDPs, while also addressing the need for longer term municipal infrastructure. IFC's investments and advisory services will help clients both survive the crisis and become more competitive in the long run. Figure 5 below illustrates this overlapping situation. The balance between the two pillars has been developed in close collaboration with the authorities and reflects their strategic directions. 88. The proposed new lending will be heavily frontloaded. Given the short-term financing needs, the Government has requested maximum frontloading o f financial flows from both IDA and IBRD sources. Frontloading i s possible in Georgia with a high confidence of good results because o f the strong implementation performance o f the Government-both on policy and institutional reforms, and on roads projects. The frontloading i s driven by the recognition o f the need and Government commitment to put a stronger emphasis on countercyclical support and safeguarding social and economic outcomes in 2009 and 2010. IFC has also delivered a very large program ($224 million) in FY09 in response to the crisis, and while it will deliver a significant amount in the CPS period, on an annual basis this may be less than the FY09 level. 89. I n terms o f amounts of lending, the World Bank Group financing is currently estimated at about $740-900 million during the FY10-13 period. The absolute amount o f new IDA and IBRD lending i s currently estimated to be at least $396 million, comprising $130 milliong utilizing the last two years of IDA- 15 (IDA- 16 eligibility i s not yet determined) and $266 million in indicative IBRD funding (see Tables 5-6). IFC financing i s expected to be about $210-360 million over the period, depending in part on how the crisis unfolds. In addition, there are currently 11 ongoing IDA and IBRD operations with an undisbursed balance of about $135 million. Figure 5: H o w Different Bank Activities Fit Into the Two Pillars -- DevelopmentPolicy Operations -- Electricity Market Dev Project -- Public Financial Management Project -- IFC advice on PPP in Energy -- Peace-BuildingGrant --Fiduciary Benchmarking -- Avian Flu Project -- TA on Trade and 9 The IDA-15 resource envelope i s indicative and actual allocations are calculated annually based on IDA'S performance based formula, total IDA available, and exchange rates. IFC lending levels also depend on the identification and negotiation o f appropriate private sector projects. 27 Table 5: World Bank Group Finance During the CPS ($ millions -July, 2009 to June, 2013) Onrroing Estimated New Estimated Estimated 1 Undisbursed IFC Total IDAABRD IDA IBRD I 135 130 266 210 - 360 740 - 900 90. Given the lending envelope and frontloading, the program laid out has only been fully elaborated for FY10, and will need to be further elaborated at mid-term. Georgia has started the process o f graduating from IDA to IBRD, but has done so during an uncertain economic period. As such, the resource envelope has been estimated conservatively, without pre-judging the potential for either continued access to IDA under IDA-16, or a change in the amounts o f IBRD access. A t current estimated levels, the Bank would not be able to provide much, if any, new IDA and IBRD funding in the outer years o f the CPS. The levels o f IDA and IBRD support will be reviewed at mid-term and may be adjusted to reflect the evolving economic situation and ensure program continuity. The actual amount o f the envelope will depend on the IDA-15 performance based allocation framework, possible IDA-16 eligibility, IBRD headroom availability and IFC's identification and negotiation o f appropriate private sector projects. 91. The current unallocated amount of $56 million, and any additional funding that may become available at mid-term, would be allocated in the light o f evolving priorities. The Bank will maintain flexibility in programming FY 11- 13. Priority areas for possible future support include further financing for the two areas - budget support and roads - which are the emphasis o f the CPS, as well as continuing funding in certain areas where ongoing projects are winding down and new lending support would enable the Bank to continue to provide an active level o f engagement -- e.g. municipal development, the social sectors (health, education), agriculture, or energy. Proposed New I B R D and I D A Operations FYlO I FYll-13 * DPO Series 85 45 Transport (E-W Highways and Kakheti Roads) 210 Other Unallocated 56 Total New I B R D and I D A IFC Investments 295 60-100 1 101 150-260 ~ * Amount o f lending in F Y I 1-13 depends on IDA-15's performance based allocation formula, IDA-16 eligibility, IBRD headroom availability, and IFC's identification and negotiation o f appropriate private sector projects. 92. Knowledge services are central to the Bank Group's strategy. While lending i s necessary to meet investment needs, knowledge services are equally important to aid policy choices and suggest appropriate actions for addressing vulnerability and strengthening competitiveness. Knowledge services would be augmented by the use o f about 20 Bank and IFC trust funds. These trust funds are well integrated into Bank activities, either directly attached to Bank projects (for example, on rural development, education and avian influenza) related to achieving CPS objectives (for example: peace- building grant for IDP integration, Cities Alliance grant to support municipal planning in Tbilisi, a FIRST grant to help strengthen the financial sector, and a grant to support produce testing and standards). The Bank will also seek to use its knowledge services to look at practices across countries, for example in addressing the impact o f the global economic crisis or in the area o f trade facilitation. 28 93. Knowledge support will provide critical support on addressing post-conflict and vulnerability issues. Post-conflict monitoring and reporting will be essential to ensuring donor funding i s on track and well coordinated. In July 2009, the Bank and the UN issued the first progress report on the JNA and made this available to the public. A critical area of vulnerability will be to ensure adequate support to the poorest during the current downturn. The Bank will build on the recently prepared Poverty Assessment (completed in April 2009) with annual program support in this area to help strengthen the analytic base. We will also provide technical assistance in the fields of health and education to complement investment and DPO policy assistance in these areas. Programmatic public expenditure work will assist the Government in making critical fiscal choices in line with the evolving needs for fiscal adjustment. Another critical vulnerability area i s the financial sector where both the Bank and IFC will work together and with the IMF to provide assistance in further strengthening both the risk framework within banks and the framework for supervision. The Bank will also work closely with the Government and other donors on supporting IDP economic integration. 94. Analytic and advisory work will be equally critical for supporting the medium term growth and competitiveness strategy. The Country Economic Memorandum on Growth (expected in the first half o f FY 10) and the recently completed WBG Georgia Manufacturing Sector Competitiveness Assessment facilitated by IFC will provide important foundations for future work. The Bank will continue policy support in both transportation and energy regulation. The Bank and IFC will also support the work under the DPO on facilitating trade through helping the Government develop a strategy as regards agriculture product certification. The Bank will also work with the Government to follow-up on fiduciary benchmarking exercises in public expenditures, procurement, and financial reporting processes recently completed (PEFA, CPA, and Accounting and Auditing ROSC). The Bank will provide additional support to the Government on improving monitoring and evaluation and communications. IFC will continue i t s work on deepening the financial markets (including new lending instruments such as energy efficiency financing) and improving the investment climate with a particular focus on Public-Private Partnerships (PPPs) in energy and transport, as well as on SMEs. The Bank and the IFC will further explore ways o f examining and addressing policy barriers to increased agriculture production. Box 1: Key Non-Lending Services: AAA and TA I.Addressing Vulnerability - Programmatic fiscal work, including policy choices in public expenditure allocations - Financial sector advisory - including bank portfolio management (IFC) and possible FSAP - Programmatic poverty monitoring and distributional analysis o f policy implications - Health and Education Sector Reviews - Communications - IDP community development grant - Economic crisis impact on IDPs - Youth Voices - Periodic JNA Progress Reports - Debt Management TA (Treasury) 11. Strengthening Competitiveness for Post-Crisis Growth Country Economic Memorandum on growth Rural development strategy (part of CEM) Rural investment climate and agricultural supply chain analysis Energy investment strategy (part o f CEM) and regulations Trade and competitiveness- strengthening export quality standards Strategy for strengthening agriculture produce testing and certification (with IFC) Advisory assistance to banks, including on NPLs and possibly housing finance, energy efficiency (IFC) Advisory support to SMEs (IFC) PPPs in infrastructure- probably energy or transport related (IFC) Competitiveness assessment and possible follow-up (IFC) Public Expenditureand Procurement (PEFNCPA) follow-up analytic work Accounting and Auditing (ROSC/CFAA) follow-up analytic work Monitoring and evaluation 29 95. Finally, the Bank Group will seek to provide technical assistance in two cross-cutting areas of governance - communications and monitoring results. In communications, the Bank Group will work closely with the Government to assist it in i t s communications and dialogue around key policy n issues. I Monitoring and Evaluation, the Bank will consider supporting statistical improvements both within the Department o f Statistics and within line Ministries. This would include technical assistance to the Roads Department to monitor progress and the achievement o f results. 96. IFC will provide both direct investment to private companies and investment through financial intermediaries. I F C has already committed the bulk o f i t s planned crisis-response program in Georgia's banking sector in FY09 and will prioritize reaching key sectors in the real economy over the ensuing period. At the same time it will continue to support the financial sector with other international partners including EBRD and will respond flexibly to needs that may emerge as the crisis unfolds. IFC and IDNIBRD programs are already well integrated in Georgia and this will be further developed as new opportunities open up (see B o x 2). I F C will provide advisory services to support the further development o f the banking sector and improvements to the business environment, including corporate governance. 97. M I G A has no currently active projects in Georgia but remains open for business in the country, seeking to reassure investors through i t s political risk insurance product. MIGA's standard covers address risk o f Transfer Restriction, Expropriation, Breach o f Contract and War and C i v i l Disturbance. MIGA i s also currently exploring building closer links with Georgia's Investment Risk Management Agency (IRMA), including in areas such as risk assessment, marketing cooperation, and possible training and technical assistance. Box 2: One Bank - IFC and I D M B R D Integrated Programs IFC and IDNIBRD will explore joint approaches and programs in the following key sectors which would have a particularly high pay-off over the CPS period: In the financial sector, The Bank, working with the IMF, will provide analytic support and analysis on the overall financial sector. IFC will in parallel provide financing and advice mainly to specific systemic banks both with an eye to ensuring that they are financially strong as well as providing advice on non- performing loan (NPL) management. IFC will also promote a range o f financing tools including potentially providing financing for microenterprises and SMEs, household (mortgage) lending, and energy efficiency lending. By working at both the macro and at the individual bank level and sharing information across them, subject to investor confidentiality, it i s expected that the effectiveness o f both will be enhanced. In the business enabling environment, IFC will complete i t s advisory services program on decreasing the cost o f doing business. These efforts may be reinforced through inclusion o f related targeted results in the Bank's DPO series which will help support improvement in tax and customs administrations and also support addressing non-tariff barriers to trade including technical barriers to trade. IFC measurement efforts will be used to help monitor progress under the DPO, while the DPO provides a tool to enhance dialogue over IFC analysis and proposals. Further, IFC i s likely to provide advisory services on improving practices related to food safety, complementing the DPO supported framework for improved food standards and the practical strengthening o f testing laboratories under the Rural Development Project. In infrastructure, the World Bank will be investing heavily in transport infrastructure through various highway and road projects, and IFC will explore private investments as well a how public-private s partnerships in the transport sector can extend this effort. Similarly, in energy the World Bank and IFC will work together to explore the potential for catalyzing private investment and public-private partnerships in hydropower. B. Portfolio management and performance 98. Total Bank exposure to Georgia amounts to the equivalent o f $1.1 billion, with disbursements amounting to $973 million. The active portfolio consists o f 10 IDA credits, and one IBRD loan for a total 30 commitment of $295 million, of which about $135 million i s undisbursed. The Bank i s also administering about 20 trust funds in support of programs. 99. Portfolio performance has been moderately satisfactory. The disbursement ratio'' of the portfolio -- a key indicator of overall portfolio performance -- was over 75 percent by end-FY09, well above the Bank average of about 20 percent. The disbursement rate accelerated during FY09 (from 50 percent at end-FYOS), reflecting the Government's capacity to implement projects and the urgency to provide countercyclical support during the current downturn. There are currently no projects in unsatisfactory status, though several were restructured in FY09 (Avian Influenza, Health Reform, Rural Development). These movements are symptomatic of the fast paced Georgia policy environment, where Bank programs designed in different circumstances have had to adapt to changing approaches and priorities. The CPS Completion Report highlights the importance of the Bank remaining agile in a fast paced environment. It i s clear that in this environment, very active monitoring and supervision will be necessary to maintain portfolio quality during the new CPS period. Over the CPS period, it i s expected that the total number of projects in the portfolio will decline significantly. Even considering potential project extensions, almost all of the ongoing projects are expected to close by the end of the CPS period. 100. Continued strong attention to portfolio and enhanced implementation support will be required. Infrastructure investments will represent a higher share of portfolio,, requiring more focused supervision to address quality issues and corruption risks. Supervision would be enhanced through (i) introduction of risk-based approaches; (ii) more resources for risky projects; (iii)better physical verification of works; and (iv) a greater reliance on civil society organizations in monitoring and implementation. Results will be monitored through a series of Portfolio Performance Reviews, to be conducted regularly with the government. 101. I n addition, country program management has been decentralized , The Country Director for the South Caucasus relocated to Tbilisi, Georgia, in late FY09. Three additional international staff at the level of Country Sector Coordinators will also be decentralized by end 2009. IFC has also strengthened i t s management presence in Tbilisi. Greater effort will be taken to strengthen operations task management in the field and reinforce program synergies across the South Caucasus countries. Proximity to client and greater country presence will likely strengthen implementation, policy dialogue, and results on the ground. 102. As regards country systems, in line with the Bank's overall strategic direction it would be important to continue progressively to move towards these in Georgia, recognizing that it will take time. The CPS Completion Report highlights the movement away from autonomous project implementation units towards a more integrated approach in the last CPS, and this evolution will continue under this CPS. Bank projects currently use the Treasury system for maintaining designated accounts. The Treasury system has been assessed and complies with basic Bank requirements. Other financial management responsibilities are handled through regular Bank procedures and project implementing agencies have overall satisfactory financial management arrangements. As Government improves i t s financial management systems, the Bank will assess i t s ability to utilize them. This includes the potential for greater reliance on country accounting systems with the introduction of IPSAS and the potential for greater reliance on country auditing systems based on improved capacity. 103. I F C has a committed portfolio o f $312 million, of which $242 million i s disbursed (as of June 30, 2009). The portfolio includes 8 clients, primarily in the banking sector but also includes several real sector clients. Portfolio performance overall has been satisfactory, but the portfolio has been impacted negatively by the conflict and the current financial crisis and staff i s managing it closely. lo Disbursementsduring the fiscal year as a percentage o f undisbursedbalances at the beginning o f the fiscal year (investment operations only) 31 C. Results-Based Monitoring and Evaluation 104. The Bank will use results-based monitoring and evaluation (M&E) to assess how Bank activities are contributing to results on the ground. Monitoring progress will also enable corresponding adjustments in the Bank's lending and non-lending programs. The Bank will also contribute to Georgia's own capacity to manage for results. The Bank will support this through the following: 0 Strengthening project supervision, including better physical verification o f works, and use o f country office staff; 0 Analytical work on impact simulation o f public policies and investments, for example, in health; Annual CPPRs based on results monitoring based upon this CPS; 0 Use o f evidence-based analysis, including benchmarking from international surveys (BEEPS, Doing Business), and performance ratings (CPA, PEFA); 0 Improved multimedia efforts to raise awareness about results through stories o f successful impact. 105. Statistics: Reliable statistics are essential to an effective and transparent development program. As noted, the Government has recently submitted a new law in Parliament to strengthen statistics including making the Statistics Agency an independent agency, adoption o f internationally recognized statistical methods and standards, and improvement in institutional and staff capacity. The DPO series will support adoption and implementation of this policy, and annual Poverty Assessments will also support such improvements. The Health and Education Projects are also working on strengthening the statistical databases in these two fields. D. Communications Strategy 106. While Georgia has pursued an impressive and speedy public policy reform approach, it needs to continue deepening its communication on the rationale for these choices and involve society in these discussions so as to promote sustainable development. Improved transparency and participation are fundamental for voice, accountability and good governance. Social awareness and involvement through communications and outreach can build support that will ultimately enhance the sustainability of reforms. 107. T o this end, many o f the Bank's projects will support increased stakeholder feedback and involvement in order to improve development outcomes. Further, many policies - for example in social and health sector reforms -- would benefit from transparency and public participation on how they are being implemented and how citizens can make most use o f them. Therefore, the Bank will scale up i t s communications strategy on its own work, and assist the Government in doing so more broadly. This could, for example, include working with the Government and other donors to regularly host workshops and seminars around key policy issues for a wide audience. E. Partnerships 108. Building and maintaining partnerships with other donors and international institutions will be critical to the success of the CPS. The CPS Completion Report highlights the importance partnerships have made during the last CPS to leveraging resources and knowledge and this emphasis will continue and deepen under this CPS. There are two main elements in this. 0 Post-Conflict Support Follow-up and Coordination: First, the Bank i s playing a leadership role in following up and coordinating donor flows following the October donors conference. To this end it will periodically work with other donors to prepare a progress report. The first one was 32 prepared in July 2009 and has been made available to the public. Ensuring that these pledges are met in a timely and coordinated manner will play a large role in the overall sustainability o f Georgia's development strategy. At the donors conference, 38 countries and 15 international institutions participated and pledged a total o f $4.5 billion over three years. In the period from August 2008 through April 2009, a total o f $1.7 billion has already been committed. Sector Specific Coordination: Second, the Bank's program i t s e l f i s quite focused. Working closely with other donors w i l l therefore be essential to ensure that the Bank's operations are n implemented within a wider context o f support. I light o f these efforts, the Bank i s strengthening coordination in a wide range o f areas as discussed below. 109. Transportation Infrastructure: The Bank i s perhaps most active in supporting coordination in the area o f transportation. Several international institutions and donors, including ADB, JICA and M C C are providing support for various segments o f the transportation sector. USAID also has a project in road safety that it i s coordinating with the World Bank. While these are not directly cofinanced with the World Bank, the Bank plays a leadership role in convening periodic donor discussions and ensuring this work i s designed and implemented in a coherent manner. This coordination i s particularly important in ensuring that donors are providing support within a medium term approach to roads, use common standards in road construction, and coordinate their approach to road safety as well (see Box 3 for details). Box 3: The Bank's Leadership Role in Coordinating Transport Investments in Georgia The Government's program to rehabilitate i t s transport corridor and feeder roads i s a multi-donor effort which requires strong coordination. In the last few years the Bank has taken the lead in organizing annual transport donor conferences for Georgia and the South Caucasus. The latest Georgia meeting, specifically dedicated to the road sector, was held in May 2009 co-chaired by the Bank and the Minister of Regional Development and Infrastructure. The Government's strategy for the development and financing of the road sector was presented, and donors' programs and ways of addressing financing gaps were discussed. The Bank and the Government have been organizing such meetings on a regular basis in order to keep close coordination between the donors and the Government. The Bank i s committed to keep leadingthe effort with the government. Coordination i s particularly important to ensure that each of these segments i s financed with compatible technical standards, social and environmental safeguards, and road safety measures. For example, the Bank has developed very close cooperation with two key financiers, the ADB and JICA, on a number of important matters: (i) ADB i s considering undertaking a similar road safety activity in their upcoming project on the The E-70 to the one proposed under the Bank-financed Third East-West Highway Improvement Project for the E-60 highway; (ii) The Bank, ADB and JICA agreed to apply similar implementation arrangements developed by the Bank and the Government, and (iii) the three organizations will coordinate approach on overall TA and training. The Bank also sponsors an annual transport donor coordination meeting for the three South Caucasus countries held in Paris. These meetings target all key modes of transport: railways, roads, maritime, and aviation. T h e most recent such meeting was held in June 2009 and was attended by all key donors active in the region. Donors have confirmed the high value they see in this cross-country effort and have expressed hope that the Bank will continue leading this effort. 110. Macroeconomic Suuuort: The Bank i s working closely with the IMF in development policy lending and overall economic policy dialogue. The SBA has played a critical role in supporting Georgia's overall macroeconomic situation. The Bank's DPO program i s also being cofinanced by the Netherlands. The EU and the ADB also provide substantial parallel budget support. The World Bank w i l l continue to monitor the macroeconomic situation in close collaboration with the IMF, including periodically updating i t s joint debt sustainability analysis, as well as fiscal efficiency. 33 111. IDPs: A wide range o f donors are assisting in providing support to IDPs in the aftermath o f the conflict including the UN, USAID, KfW, the EU and the World Bank. The Government has taken the lead in coordinating these efforts to ensure compatibility in housing and related assistance, with the IDP Steering Committee convened by the Ministry o f Refugees and Accommodation playing a key role. 112. Financial and Private Sector: The IMF and the World Bank are working together on the financial sector, which plays a critical role in the IMF program. This i s complemented by lending, equity and technical assistance support,by IFC, EBRD and ADB. IFC and EBRD have been working particularly closely in providing coordinated investment funding to the largest systemically important banks. IFC also relies on CIDA and BP for their support for advisory work on the business enabling environment and corporate governance. 113. Public Sector Management: The World Bank finances the Public Sector Financial Management Reform Support Project together with other donors including DFID, SIDA and the Netherlands. The Bank and the EU also jointly prepared a Public Expenditure and Financial Accountability (PEFA) analysis and benchmarking. The EU i s also providing parallel technical assistance to assist the Government in meeting DPO benchmarks on multi-year budget planning. GTZ i s providing parallel technical assistance to the Chamber o f Control to assist in aligning audit methodology as per the requirements o f the new law. 114. MuniciDal Infrastructure: The World Bank helped to establish the Municipal Development Fund (MDF) which has since evolved into the premier channel by which various donors channel funds. Through this mechanism the ADB and the EBRD are providing parallel support to Bank funds through the MDF. The US MCC i s also providing funds through the MDF, and has contracted with the World Bank to supervise implementationo f i t s funds for a fee. Sweden i s also providing support on water supply. 115. Enerm Infrastructure: The World Bank Group has been preparing a feasibility study for a particular hydropower operation along the Khudoni River. In parallel, the EBRD and EIB have been reviewing the potential o f other hydropower operations and KfW, EBRD and EIB are considering supporting the construction o f a large regional high voltage power transmission line to Turkey. USAID i s reviewing the potential for gas storage. The Government i s taking the lead in coordinating these efforts to ensure all o f these pieces fit together in a coherent strategy. 116. Education: The Japanese funded PHRD fund i s providing an implementation grant attached to the Bank project that provides critical technical assistance funds to complement Bank provided investment funds. Other donors providing parallel technical assistance, including in the field o f vocational education, include USAID, KfW, EC, UNICEF, UNDP, SIDA, and the Netherlands. 117. Health: Health care reform agenda i s being supported by different donors and international organizations, e.g. USAID, EC, Open Society, Global Fund, and various UN agencies. 118. Agriculture: The World Bank's Rural Development Project i s cofinanced with F A D and a Japanese funded PHRD grant. Other donors providing significant assistance in this area include USAID, EC, FAO, UN, SIDA and MCC. Sweden will provide analytic support for land registration and food safety and testing, and this will be coordinated with the Bank's DPO and agriculture efforts. V. Creditworthiness and Risks 119. The largest risk is that the downturn could be longer and deeper than anticipated. The proposed strategy i s premised on a temporary downturn, during which it would be appropriate to support an economic stimulus to enable Georgia to maintain priority investments and social programs. Continued deep reforms would enable growth and foreign investment to pick up after this period with less 34 governmental and donor financing needed. However, investor confidence, key to the Government's strategy of mobilizing private capital inflows, has been weakened by the global downturn and i s sensitive to political developments, both domestic and regional. In the event of weaker than anticipated foreign investment and hence a more prolonged downturn than anticipated, the Government would need to adjust its approach in the following areas, and the Bank would need to support this adjustment, in close coordination with the IMF: 0 Fiscal: The large fiscal deficit in FY09 i s an appropriate countercyclicalmeasure that i s supported by increased donor funding. However, if there i s a longer than anticipated downturn, the Government will need to further prioritize expenditures and undertake fiscal adjustment. This i s one reason that the Bank has made the improvement o f resource management, including the introduction o f results based budgeting, a central part o f its strategy. The Bank will continue to monitor the situation closely and will as part of its dialogue around the DPO provide advice to the Government on the public investment program, ensuring that continued support for basic social assistance i s maintained. The IMF-supported program provides a framework for an orderly adjustment in the medium-term. 0 &: j t Public external debt going into the crisis had come down to about 18 percent o f GDP in 2007, providing a cushion for the Government to take on more debt to support fiscal expenditures. Increased donor and international institutional financing i s not generally expected to overburden the Government - about half o f donor funding pledged in October 2008 are grants and the rest i s either concessional or long term market-based loans. As a result, though public debt to GDP i s expected to rise to the range o f 40 percent in the next few years, debt levels are projected to stay within prudential thresholds. However, difficulties in restoring market access would complicate a challenging debt service profile due to the fact that a peak o f repurchases to the IMF coincides with a $500 million Eurobond maturing in 2013. With an expected pickup o f growth and foreign investment over the medium term, these repayments are manageable. However, if growth and foreign investment continue to be constrained over the medium term, the Government will need to engage in careful debt management to ensure sustainability. Debt management will remain a central part of our dialogue with the Government. The Bank and the IMF will continue to work on the Debt Sustainability Analysis (DSA) during 2009 to further build the basis for good hebt management policies. The Bank's Treasury Department i s also providing support on debt management. 0 Financial: During FY09, IFC, EBRD and others provided strong support to systemically important commercial banks to ensure that immediate repayment obligations were met. Near term risks have thus receded but the sector remains vulnerable to an extended downturn. IFC i s providing technical support directly to banks on managing liquidity and non-performing loans. Although IFC will seek to diversify its support towards real sector investments during the CPS period, it remains committed to supporting the financial sector as needed. The ADB i s also discussing possible support to the banking sector. If foreign private investment i s not available at past levels to support lending growth, the Bank Group will work with the Government to help expand domestic resource mobilization. 120. Economic uncertainties will also affect Georgia's creditworthiness: Prior to the August conflict, Georgia's creditworthiness had been improving and it was able to issue a large Eurobond in 2008 that was significantly oversubscribed. Notwithstanding Georgia's impressive achievements in macroeconomic policy and performance and structural reforms prior to the dual crises, Georgia's creditworthiness since then has been constrained by domestic and regional tensions which have undermined investor confidence and private capital inflows. Prospects for a medium term recovery and 35 improved creditworthiness in the post-crisis period would be promoted by adequate policy adjustment and an easing o f regional and domestic tensions. 121. The availability of Bank resources represents another source of risk. The current resource envelope has been frontloaded and has been set conservatively, without pre-judging the potential for either continued access to IDA under IDA-16, or improved access to IBRD. As a result, without a change in this envelope, the Bank would have very little new resources (outside o f IFC funding) to make available to Georgia in the outer years o f the CPS. If growth increases as planned, and Georgia's creditworthiness indicators improve, access to market based resources could be strengthened. On the other hand, if the situation develops where increased access to market based resources including IBRD i s more limited, access to IDA-16 might be considered. Ensuring adequate resources across the Bank Group will be a key element o f the mid-term review o f the CPS to ensure that the Bank continues to have adequate instruments to support Georgia. 122. Beyond these key risks, there are other issues that bear watching. While the Government's commitment to move forward on policy reforms i s clear, there i s a need to continue strengthening communications and dialogue with civil society to ensure that policy reforms have a strong foundation of support across the political spectrum. Improving communications i s therefore a central element o f the CPS. On the portfolio side, while all projects are currently in satisfactory status the speed at which policy reforms have been implemented have led to significant restructuring needs in the past, and this i s expected to continue to be the case in the future. Close attention to portfolio matters i s therefore needed and will be facilitated by greater decentralization and field presence. Finally, Georgia i s vulnerable to natural resource risks such as flooding, drought, earthquakes and cross-border diseases. The Bank will remain flexible in i t s approach to respond to any such emergency. 36 .. 3 Georgia: FY10-13 CPS Results Matrix CPS OBJECTIVE 1: MEETING POST-CONFLICT AND V U L N E U I L I Y NEEDS Key Government Goals Maintain macro and fiscal stability. Promote growth in 20 10 and beyond (to be monitored in growth rates, inflation rates, public external debt) Increase bank lending and build a strengthened banking and supervision system, capable o f supporting private sector growth (to be monitored in increase in bank lending, level o NPLs) f Create and maintain jobs (to be monitored in the overall unemployment rate) Enhance learning outcomes (to be monitored by TIMSS and PIRLS) Increase social support and services, including social safety nets, health and IDP support (to be measured in poverty levels) Key Issues and Obstacles: Contraction o f external trade, remittances and capital inflows i s reducing growth and fiscal space The August conflict and impact o f the fall in GDP growth may lead to a rise in the poor Public administration, expenditure management, and procurement practices in need o f improvement Lower growth i s reducing job creation in the private sector and leading to rising unemployment Financial intermediation impacted and may be inadequate to maintain vibrant private sector. As health care i s privatized, access to affordable care needs to be ensured and services improved The targeted poverty benefit, which i s operating well, needs to be expanded to cover more o f the poor Progress in improving general education needs to be maintained through further expanding curricula reform, more teacher training, upgrading primary and secondary schools poor physical infrastructure as this limits learning outcomes Local infrastructure (water. roads, etc) needs sustainable improvement. MILESTONES WORLD BANK GROUP PROGRAM A N D PARTNERS Results Area 1: Preserve Economic Stability and Create Jobs Outcome 1: Improved public resource management -- Gradual reduction in the fiscal deficit while -- Primary Indicator: Fiscal deficit i s maintaining support for managed in a non-inflationary way, key social services Ongoing loans: Public Sector Fin while maintaining support for key Management Project, Regional and social services (2009 baseline: fiscal -- Public Finances Municipal Dev Project deficit = 9 percent. Target = gradual Management Policy New loans: DPO Series -on fiscal and reduction consistent with fiscal Reform Policy Vision budget policies, sustainability. Share o f social services adopted. AAA: Country Economic in state budget was 36 percent in 2009. Memorandum on increasing growth. Target = no decrease in real terms). -- Results oriented Public expenditure review. Follow up budgets o f at least three on PEFA, CPA, AA ROSC. -- Primary Indicatory: Introduction o f spending units Key international partners: IMF, EU, performance based budgeting (baseline incorporated as an ADB = none. Target = 5 ministries) information annex in the 201 1 Annual Budget -- Primary Indicator: Establishment Law. and rollout o f local government budget system (baseline = none, target = 69 LGUs use this) 38 Outcome 2: Improved performance Ongoing lending: Rural Development of key financial institutions Project -- Continued financial AAA: Financial Sector Advisory, -- Primary Indicator: Financial health health o f supported Payment System TA, FIRST grant to and lending levels o f systemic banks banks as evidenced by strengthen the FSA. supported by IFC (various banking regular portfolio reviews IFC: Coordinated IF1 effort to ensure indicators including lending levels and and compliance with IFC bank capital and liquidity, trade and NPLs) covenants, micro-finance lines o f credit, providing advisory to individual banks on risk management and NPL workouts and other banking advisory products. Key International Partners: IMF, EBRD, ADB, OPIC, FMO, KfW, DEG, ADB Outcome 3: Increased employment through Bank financed projects Ingoing Loans: RegionaVMunicipal , )ev Project, Local Roads, Highways I I1 I -- Primary Indicator: Number of new job-months created in World Bank Group financed projects (baseline = 0, To be reviewed regularly within selected projects New Loans: 3rd East-West Highway, Lakheti Roads AAA: Labor market analysis in Poverty Lssessment; impact o f crisis on real ector IFC: new investments in the real ectors, competitiveness study. Support ISMEs Outcome 4: Improved quality of education -- Improved national curriculum introduced in 1 On-going: Education APL 1 ; grants on -- Primary Indicator: Percentage of all grades higher education children learning according to the AAA: Education Sector Review on improved national curriculum (2006 -- Completionof 7 skills and human development baseline = about 2 percent; target = at urgent school Key International Partners: Japan, least 75 percent by 2012) rehabilitations by 201 1 Denmark, Sweden, Netherlands, EU, USAID, UNICEF -- Teacher certification launched in 20 1 1 Results Area 2: Improve Social Services -- Budget allocation to the TSA increased (30% increase target from Outcome 1: Increased coverage and 2008 to 2010) efficiency of TSA -- Monitoring report on New Loans: DPO series -- safety net -- Primary Indicator: Percent of the the performance o f the TSA program prepared AAA: Poverty Assessment extreme poor that receive poverty by end-2009 Key International Partners: UN benefits through TSA (2009 baseline = 30percent; target = at least 50) -- Adjusting targeting mechanism and periodic recertification of TSA beneficiaries in 20 10 and beyond. 39 Outcome 2: Wider health coverage facilitated through improved budgeting, infrastructure and information systems. -- Key health clinics On-going: Primary Health Care -- Primary Indicator: Share o f bottom builthehabilitated (25 (Restructured) two quintiles with access to subsidized bed high mountain New Loans: DPO Series on health health insurance (2007 baseline = 20 clinic, PHC training care percent; target = over 45 percent) center in Gori) AAA: Poverty Assessment IFC: Possible investment in private -- Primary Indicator: Better targeting -- Increased numbers o f health facilities o f services through the development o f doctors trained (project Key International Partners: UN an effective health care information target i s 1000) Agencies data base -- HMIS system -- Primary Indicator: Health care designed by 20 11 service utilization as measured b y number o f out-patient visits per capita (2009 baseline = 1.8; target = 2.3) Outcome 3: Improved Municipal Services in Supported areas (water, local roads etc) On-going: RegionaliMunicipal Project, -- Primary Indicators -- 41 subprojects under Cities Alliances Grant for Tbilisi - 20% reduction in KWh consumed per implementation b y 201 AAA: Municipal services annum due to introduction o f energy Key International Partners: ADB, efficient water production methods EBRD, MCC, KfW, GTZ, UNDP - 3-6 hours increase in piped water service per day - 30% reduction in trip timeivehicle 1 costs due to improved urban roads Outcome 4: Improved I D P housing and welfare -- 700 durable houses constructed (end-2009) Ongoing Loans: RegionaliMunicipal --Primary Indicator: Number o f bev Project, IDP Peace-Building Grant beneficiaries from completed post- -- IDP settlements AAA: Poverty Assessment conflict rehabilitationlconstruction supported by Bank Key International Partners: UN, (2008 baseline = 0 target = 3,600 by provided as appropriate USAID, KfW, EC end-2009) with basic electricity, water, sewage (end- -- Primary Indicator: Impact on broader 20 10) support to IDPs beyond housing, e.g. electricity, water, sewage, community development (2009 baseline = 0) 40 CPS Objective 2: Strengthening Competitivenessfor Post-Crisis Growth Key Government Goals Strengthen Georgia's role as a regional transport corridor and improve connectivity within Georgia (to be measured by increased transit traffic) Continue to deepen Georgia's private sector friendly environment for higher business growth (to be measured by the level o growth o foreign investment, SMEs). f f Build a more efficient and productive rural sector. (to be measured by increase in agriculture exports, farm income) Establish greater energy security and efficiency (to be measured by amount o energyproduced and f exported) Key Issues and Obstacles: 0 Transport: E-W corridor needs improvement. Black sea ports need modernization. Road safety needs improvement 0 Tremendous progress achieved in the business environment to be sustained through further strengthening o f several areas (tax, customs) 0 The financing system remains shallow. SMEs have limited credit access and households to mortgages Energy: Increased potential for hydropower needs to be developed Households, businesses and farmers need improved mechanisms to cope with natural disasters 0 Agriculture - need to improve agriculture productivity, food certification and processing, irrigation framework, crop and livestock disease risk 2013 CPS RESULT AREAS, MILESTONES OUTCOMES, AND TARGETS Results Area 3: Upgrade Transport Corridor and Increase Connectivity Outcome 1: Transport time and costs reduced along key transport routes Primary Indicator: Transit time and vehicle operating costs along various -- 400 km of roads supported segments improved by over rehabilitated/widened by Ongoing: E-W Highway 25%: end FY 11 Improvement 1&2, Secondary and (Transit time to Rikoti and to Telavi Local Roads. InfrastructurePre- - baseline and targets to be -- Rikoti Tunnel Investment Facility determined in new projects) rehabilitation works New loans: Third E-W Highway (Transit time from Agaiani to Igoeti successfully underway Project, Kakheti Roads Project 2006 baseline = IO; target = 7 - in AAA : capacity building to Roads minutes) Dept.; donor coordination (Transit time from lgoeti to Sveneti IFC: Exploring direct investments 2007 baseline = 19; target = 12 in- and PPP support in transport and minutes) logistics. Explore possible support -- Corridor Road Safety to the railways through the IFC- Outcome 2: Improved road safety action plan prepared and World Bank Subnational Finance under implementation Program. Primary Indicator: B o f fatalities per Key International Partners: ADB, 10,000 cars (2008 baseline = 13.9 target -- Target o f at least 10 JICA, MCC hazardous locations improved each year -- Roads Dept adequately staffed. trained in safetv 41 Results Area 4: Accelerate Business Outcome 1: Sustained improvement in Business environment -- Primary Indicator: Selected business environment indicators including: -- "Paying Taxes" rank in Doing -- Regular reporting o f Business (2009 baseline = 110; various business indicators target = improvement in ranking) (DB, BEEPS, WBI etc) -- # of days required to import and export from Doing Business (2009 -- E-filing system baseline = 12 days to export, 14 available to all tax payers days to import; target = reduction by end 2009 New loans: DPO - focus on tax, by 10%) customs, trade promotion -- -- "Access to finance" rating in Risk management AAA : advisory on trade. BEEPS (2008 baseline = 55% o f system introduced at IFC: Ongoing SME lines of credit, f m s indicated a problem, target = customs by end-2009 leasing finance support, advisory on under 40%) investment climate, Corporate Governance advisory, Key international Partners: Outcome 2: Increased support to EBRD, CIDA, BP Small and Medium Enterprises -- Primary Indicator: Portfolio o f SME Commercial banks resume credits extended by IFC-supported significant SME lending banks. Target i s to return to pre-crisis (2007) level o f $750 million. Outcome 3: Improved agriculture production, testing, and sales -- Primary Indicator: Sales o f -- 5 supply chains designed New loans: DPO - focus on food enterprises supported by rural dev -- 35 farmer groups certification, Kakheti Roads Project project. (2008 baseline = 20 enterprises supported by supply chain On-going: Rural Development supported; target = Double # o f grants Project, Avian Flu Project, supported enterprises) -- improved access to rural Secondary and Local Roads, :redit under project AAA: Note on rural development in -- Primary Indicator: Reduced transport Georgia. Further work on rural time in the Kakheti region (baseline to .-50 Km of local roads investment climate be established under the Kakheti Roads improved in the Kakheti IFC: Explore investments in agri- Project) Region by 2012 business, advisory on product competitiveness, food safety -- Primary Indicator: Increased use of .-upgraded food safety standards food certification to boost agriculture aboratories Key international Partners: exports. .- Introduce international EBRD, IFAD, EU standards for food safety in irivate sector 42 Annex 2: GEORGIA -- CPS COMPLETION REPORT: FY06-09 1. This Country Partnership Strategy Completion Report (CPSCR) evaluates Bank Group assistance to Georgia for FY06-FY09. The CPS (report number 33295-GE) was discussed by the Board in September 2005. A CPS progress report (report number 43354-GE) discussed by the Board in June 2008 assessed progress in implementing the CPS and indicated were revisions of the program were needed. This Completion Report examines the relevance of the CPS to Georgia's longer term goals, the achievement of CPS outcomes, and Bank Group performance in furthering the CPS outcomes. The report draws on project appraisal, supervision and completion reports and the evaluations o f IEG, including an CAE prepared in 2007. Other sources include the Government's own assessments, the IMF program documents, various national and international studies and surveys, as well as inputs from former and current Government officials, other stakeholders in Georgia, and the Bank country team. I. Relevance o f CPS Background 2. The Rose Revolution in November 2003 was a defining moment for Georgia. The new Government o f Mikhail Saakashvili that was swept into power inherited a near failed state. Georgia under President Eduard Shevardnadze was an early reformer. From 1992 to the turn o f the century a range o f economic and political reforms were implemented to set Georgia on the path to a market economy and democracy. However, by the early 2000s, reform momentum sputtered to a halt. Political power was increasingly fragmented, corruption and crime had skyrocketed and tax revenues had plummeted giving rise to massive arrears in pension payments and teacher's salaries. Also, infrastructure f e l l into a state o f near collapse, with most o f the country without power, and the road network increasingly deteriorated. 3. The new Government moved quickly to reverse the deterioration. They quickly restored macro-economic stability and improved fiscal discipline and revenue collection which enabled them to eliminate arrears and pay bills. The Government also launched aggressive reforms in the social sector and o f the administrative and regulatory regime facing the private sector. Importantly, the Government signaled a major war on corruption by sacking the entire traffic police force and replacing it with a completely new patrol police structure and followed up by holding Minister's accountable for cleaning up corruption in their ministries, and developing a comprehensive national anti-corruption strategy. The early reforms yielded remarkable results. Growth rebounded by 2005,' tax revenues grew from 14 % in 2003 to nearly 20% in 2005, and external debt f e l l sharply. Moreover, CPIA scores improved dramatically for both 2004 and 2005. 4. Nevertheless key challenges still faced the Government in the 2006 - 2009 period. First, Growth, though accelerating had yet to increase employment, particularly in the rural areas. Second, the poor state o f infrastructure, particularly roads and energy supply, continued to have a detrimental impact on the economy and public welfare. Third, far reaching reforms in education, health and social protection were progressing but further work was needed to sustain the momentum in these key areas. Finally, public administration reforms needed to progress further, particularly in budgeting and expenditure management, intergovernmental fiscal relations, procurement and financial management, the judicial system, and civil service management. The Government Strategy 5. The previous Government had completed a PRSP, entitled the Economic Development and Poverty Reduction Program (EDPRP) just prior to the Rose Revolution. The new Government 43 acknowledged the EDPRP and broadly accepted the analysis in the report, To help direct expenditures to priority areas, the new Government developed a Basic Data and Directions document (BDD) that was used to kick o f f each year's budget cycle in the context o f a newly adopted medium- term expenditure framework. The BDD spelled out the Government's strategy over a three year rolling time frame, and contained strategic priorities that were all broadly in line with the EDPRP. Priority areas identified in the BDD were rehabilitation o f the road network, reform o f basic education, improvements in the social protection system, strengthening of public sector management and improvement o f the business environment through regulatory and administrative reform. An overarching objective was to continue Government wide efforts to eliminate corruption. - The 2006 2009 CPS Design 6. The CPS design supported the Government's long terms goals o f reducing extreme and overall poverty and improving living standards. Support for these goals focused on two areas where it was felt the World Bank Group had comparative advantage: (i) enabling income and employment generating growth; and (ii)improving human development and social protection. The CPS also focused on one intermediate objective -- improving efficiency in public services. These three areas formed the pillars o f the CPS. Addressing corruption and governance issues was seen as an overarching theme that was to be addressed in each o f the three pillars. 7. The program consisted o f a mix o f policy based and investment lending supported by analytical work. The Bank and the Government agreed to narrow the focus o f Bank assistance to a few key areas as it was felt the portfolio going into the new CPS period was too fragmented. As a result, the number o f investment loans under implementation declined from 19 to 11 over the CPS period. Identified R i s k s 8. The CPS identiJedJive risks, all o which were considered to be moderate. First, a slowing f o f the reform process was deemed a risk arising from a possible lack o f political will to overcome vested interests or political instability. This possibility weighed heavily on the minds o f the Government, which believed it only had a limited window o f opportunity to act before political costs began to limit its ability to act boldly. Second, the CPS identified a fiduciary risk given past Government failure at expenditure management. The quick and substantial progress in expenditure management and fighting corruption was the product of strong leadership and commitment across the Government and broad public support. The concern was whether political and popular support for strong anti-corruption measures could be sustained. Third was the risk o f civil conflict. The CPS noted that existing regional tensions would continue until a permanent resolution to the crisis was found and as a result a degree o f uncertainty would exist that would affect the welfare o f the people and act a a drag on the investment and business environment. Fourth, the CPS saw a risk of a s s deteriorating external environment. The CPS cited a examples o f such risk the possible collapse in external markets or disruptions in oil gas, or energy supplies. Thefinal risk indentified by the CPS was natural calamities. In the previous CAS period Georgia had been afflicted at various times by floods, drought and earthquakes all o f which set back development progress. Overall Assessment of CPS Relevance 9. This CPSCR rates the CPS design and the identiJcation o risks as Satisfactory. The CPS f design was fully consistent with the new Government's priority and reflected high Government ownership of the program. Overall, the Bank was able to deliver significantly more resources and a larger number o f investments then anticipated in the CPS due both to Georgia's excellent results in n the performance based allocation mechanism and i t s quick accession to IBRD status. I fact Georgia went from receiving half i t s resources in FY05 as IDA grants due to its status as a fragile state, to 44 IBRD eligible in three years. Overall, nearly $337 million in credits and loans were approved during the CPS period compared to the $143 programmed in the CPS report. Moreover, the design o f the CPS proved to be robust. It was able to accommodate Georgia's rapidly evolving reform program, allowed the Bank Group to ramp up lending as more resources became available and provided crucial support to Georgia in the aftermath o f the August 2008 crisis in the context of a coordinated multi- donor response. The risks identified by the CPS were relevant especially the risk o f regional conflict and the risk o f deteriorating external environment. While in hindsight the risk rating for these two factors could have been set higher then moderate, the design of the CPS has proven to be sufficiently resilient to help mitigate the effects o f the twin calamities that befell Georgia. Remarkably, most targets in the CPS were achieved, and many exceeded despite the twin shocks showing both the strength o f the CPS design and the determined efforts o f Government to overcome the obstacles thrown its way. 11. Results Assessment 10. The CPS period covers two distinct time segments - the first 38 months up to August 2008 where reforms, growth, investments were all on a strong upward trajectory - and the last 10 months where the August 2008 conflict, followed closely by the global economic crisis created a serious challenge for the Government in terms o f declining economic growth, falling FDI and tax revenues, and increases o f poverty and unemployment. The Government's ability to meet this challenge i s bolstered by strong performance in macro-economic management and i t s aggressive reform agenda. Strong donor support following the August crisis i s also helping to mitigate the impact of the twin shocks. A. Overall Development Outcomes 11. Enabling Income and Employment Generating Growth. With the exception o f the last 10 months, long term growth exceeded expectations in the CPS. In fact, growth in the first three years covered by the CPS (FY06-FY08, was more than double projections in the CPS and for the overall CPS period average growth exceeded expectations. The growth did create jobs, particularly in the financial and construction sectors, but gains were offset by labor shedding elsewhere, particularly in the public sector so that overall employment levels stayed stable, while labor productivity likely increased. Growth in the rural sector also continued to lag. Since the twin shocks, economic growth has slipped and unemployment has increased. But Government actions to increase public investments, restart credit flows in the banking system and expand targeted benefits are helping to mitigate the impact of the events o f the last few months. Moreover, debt levels are quite low which i s helping create some space in dealing with the crises. More importantly the CPS' medium term outcomes were for the most part achieved or exceeded laying a strong foundation for job creation once the Georgian economy begins recovery. That said the down-side risks are substantial. A further deterioration in the global economic climate, an unexpected crisis in the financial sector, or continued political tensions could prolong the economic slide significantly and delay Georgia's recovery. 12. Fostering Human Development and Improving Social Protection. Social sector reforms have been significant, and in many instances the reforms outstripped what had been envisaged in the CPS. Expenditures for health education and social protection increased steadily throughout the CSP period with the share o f the state budget going to the social sectors increasing to 36 percent in the 2009 budget, up from less than 30 percent in the 2005. For education outcomes, assessments o f student learning based on international exams are just beginning, so it i s not possible to draw conclusions at this time about trends in education outcomes. Nevertheless, the nearly completed introduction of the new curriculum, continued extensive teacher training, improved assessments, and greater local autonomy in financing and management o f schools all point to a strong likelihood of improvement in outcomes in the coming years. Health sector reforms were characterized by f i t s and 45 starts early in the CPS, followed by a major reform push in the last two years that has emphasized private provision o f health services and a limited role for the state as a regulator and policy formulation. Significant progress has been made in health care financing with the launching o f three tiered health care financing approach including a basic benefit package funded by the state for the poor, state insurance for certain civil servants, voluntary participation in private plans partially subsidized by the state, and private insurance for those in the formal sector. Social protection measures have also been improved with the introduction o f targeted social benefit package aimed at the extreme poor consisting o f a cash payment and a basic medical benefits package. Pensions have also been increased. 13. Improving Efficiency of Public Services. Solid outcomes were achieved in improved public budgeting and expenditure management and better inter-governmental fiscal relations. Judicial reforms have progressed, especially in the last two years, though a widespread perception still persists that courts lack independence. Bank-Group involvement in judicial system during CPS period was limited and confined to the first year o f the CPS. Other donors, namely the US, UNDP and EU have continued to support judicial reform and their efforts appear to be gaining traction. Progress has been made on financial management and procurement though issues s t i l l remain to be tackled. 14. Reducing Extreme and Overall Poverty. The three goals covered by the three pillars of the CPS aimed at helping achieve the Government's overall goal o f reducing extreme and overall poverty. The just completed Georgia Poverty Assessment uses available data to measure poverty levels and trends. A Living Standards Measurement Survey (LSMS) financed by the Bank in 2007 shows overall poverty at 23.7 percent and extreme poverty at 9.3 percent. Poverty i s concentrated in rural areas, specifically in the northern mountainous arc. While these numbers are lower than those reported by the Department o f Statistics, they are not directly comparable. Other data, namely on real household monetary incomes, however, strongly suggest declining poverty over from 2003 through 2007. Over this period Real Household Monetary income grew on average 7.9 percent. Increases were larger in rural areas then in urban areas and were largest for the lowest quintile o f the population largely as a result o f the introduction o f the targeted social assistance program. Non-income indicators o f poverty such as access to infrastructure and social services also improved significantly over the period. Improved supplies o f power, available on a two-tier pricing structure with low tariffs for low consumption levels, better roads, access to the basic benefits package for health, and improved administration o f social benefits all made life a bit easier for the poor. 15. Impact on Poverty of the August Events and the World Economic Crisis: The double shocks o f the August 2008 conflict and the global financial crisis risk undermining Georgia's poverty reduction efforts. As a result o f these shocks the poverty headcount i s forecasted to go up from 23.7 percent in 2007 to 27.8 percent in 2009. Were it not for the negative welfare impacts o f the twin crises, the poverty headcount in Georgia could have been expected to decline from 23.7 percent in 2007 to 19.2 percent at the end o f 2009. This 2009 gap in the "crisis" poverty headcount versus "a no crisis" poverty headcount represents in absolute terms about 350,000 poor people. 16. Progress toward the Millennium Development Goals. Prior to the impact o f the twin shocks, Georgia was on a path to achieve most, if not all millennium goals, and despite the recent setbacks it may well achieve all goals, though the impact o f the crises on poverty i s indeed substantial and will be difficult to overcome in the near term. In other areas, good progress have been made in reducing infant and maternal mortality, and with the educational reform underway Georgia stands poised for a significant improvement in education outcomes. Gender equality also broadly exists. 46 B. Overview of Results Delivered by the CPS program. 17. The CPS program had three pillars; (i)Enabling Income and Employment Generating Growth; (ii)Improving Human Development and Social Protection; and (iii) Improving Efficiency in Public Service. This CPS Completion Report finds that the results for each o f the three pillars were satisfactory. Pillar 1: Enabling Income and Employment Generating Growth 18. Within Pillar 1, the CPS focused on six specific areas: (i) Addressing corruption and governance issues; (ii) removing administrative barriers to PSD; (iii) improving electricity and gas infrastructure; (iv) improving highway infrastructure; (v) improving access to rural infrastructure and services; and (vi) sustainable uses o f forestry and other natural resources. The Beeps surveys for 2002 showed problems in nearly all these areas, which, while beginning to be addressed at the outset o f the CPS period were all still relevant areas of focus. 19. The operational instruments to deliver the assistance included a Poverty Reduction Support Operation (PRSO) series o f credits and grants, investment operations in the power, transport, municipal infrastructure, rural, forestry and natural resources sectors and analytical work. Among the analytical work, the Programmatic Poverty Assessment supported Government efforts to improve social protection measures and better target assistance to the poor. IFC provided financing to commercial banks, and for airport construction and real estate development. IFC technical assistance and advisory services were provided to improve the business environment through FIAS and PEP. The four PRSO operations, plus one Supplement following the August 2008 conflict focused on four areas - (i)strengthening public sector accountability, efficiency and transparency; (ii) improving electricity and gas sector services; (iii) improving the environment for private sector development and (iv) improving social protection, health and education. 1A. Addressing Corruption and GovernanceIssues Affecting the Business Environment 20. The CPS highlighted that corruption had so tainted the business environment that it drove up the cost of doing business, limited foreign capital inflows and distorted resource allocation. To improve the business environment the CPS identified measures aimed at reducing the opportunities for corruption at points of service such as customs, inspections, licensing, taxation, and the court system. The CPS results matrix uses BEEPS 2002, 2005 and 2008 to measure results. The analysis i s complicated by the fact that the 2008 results are not comparable to the earlier surveys due to changes in methodologies and in the questionnaire. Surveys of voter attitudes conducted by the International Republican Institute (IRI) also provide useful information on the level o f corruption. Doing Business and other surveys compliment the analysis. Finally, Transparency International's corruption perception index provides a good snap shot o f evolving corruption perceptions in Georgia. 47 CPS Outcomes that the Status Additional Achievements Bank Expects to help realize by mid-2009 ecline in incidence of Achieved. Beeps showed a Annual anti-corruption bribery attempts of dramatic drop in bribe frequency implementation reports are public officials at key from 38% in 2002 to 8% in prepared, an External GRECO points of service delivery 2005. The 2008 Beeps showed review was completed. that affect operation of continued low corruption in all business (as measured by categories. A survey in February Anti-Corruption Council Beeps) 2009 by the IRI showed 97% o f established in January 2009, the respondents had not paid any chaired by the Minister of bribes in the last 12 months. Justice. Charged with the Similar results were recorded responsibility for updating the over the last 3 years suggesting Government's strategy and that anti-corruption efforts have action plan. remained robust during the CPS period. Transparency International's Corruption Perception Index Achieved With IFC assistance, shows Georgia moving from 133 law on protection o f minority place out of 146 with a score o f Improvement in rights passed in 2007. IFC also 2.0 out o f 10, to 67* place in Corporate Governance helped to improve financial 2008 and a score of 3.9 reporting and develop a voluntary corporate governance code for banks 2 1. The evidence is unequivocal. Corruption as a corrosiveforce on the business climate has been greatly reduced. A strong commitment across Government and a willingness to act boldly to fight corruption sent a signal that reverberated throughout society that the old ways o f doing business were over. The abrupt firing o f the traffic police was the first shot in a continuing war to end corruption in the provision o f public services for businesses. Other key achievements including: streamlining customs and overhauling licensing, permits, and inspections eliminated many opportunities for rent seeking behavior. Overall, beginning in 2004 and carrying through the CPS period there has been a dramatic drop in the incidence o f bribe taking, the level o f bribe tax, unofficial payments for services, and the percentage o f f i r m s reporting corruption as a problem o f doing business. IFC assisted in the area o f corporate governance by providing technical assistance to the securities commission to help improve financial reporting by firms, and to the Georgian Stock Exchange and the Georgian Association o f Banks to develop a voluntary corporate governance code for Georgian Banks. 1B. Removing Administrative Barriers to Private Sector Development CPS Outcomes that the Status. Additional Achievements Bank Expects to help realize by mid-2009 Reduced processing time Achieved Time for export System o f inspections improved between selected border went from 54 to 12 days, time and the number of inspection points and clearance for import reduced from 52 to agencies reduced from 46 to 30. facilities by at least 50 14 days percent compared to 2004, IFC helped streamline licensing requirements for mining that i s Internationally accepted Achieved. Laws on estimated to reduce costs for accreditation and standard certification, standardization, businesses by about $1.2 million certification systems in and metrology passed, two annuallv. 48 place agencies for standardization and Accreditation established, technical committee for Overall Ranking in Doing elaboration o f standards set- Business Surveys improved up, and system of laboratory throughout CPS period from 1 18 accreditation for quality in 2005 to 15 in 2008. control introduced. Customs code revised in 2006 Achieved. Time to start a and 2007 to streamline business in 2005 was 2 1 days procedures and reduce bands and and cost as a % of income was rates, Reduced costs and time for 46.8%. In 2008 the figures establishing and operating were 3 days and 4%. CEM underway in 2009 to help business. identify a framework for future Achieved. Costs to import and competitiveness and growth. export container in 2008 was about $1380 which i s slightly Reduced Transport costs less then the regional average- caused by corruption and $1393 for export and $1551 inefficiency at customs for import. points. Achieved. FDI increased from 8.3 % o f GDP in 2004 to 19.8 % in 2007 before falling back to 10.1% in 2008due to Strengthened FDI and the twin crises. Share o f increased share o f the private sector rose from 65% private sector in GDP in 2004 to 75% in 2008. Instruments. PRSO series, I1 1 PEP Program 22. f Sweeping reforms o administrative regulations, licensing requirements, and inspections f reduced the costs o doing business and jump-started the flow o foreign and domestic investments. f Legislation at the beginning o f the CAS period slashed the number o f licenses and permits from about 900 to 150 and introduced one stop shops for licenses and permits and adopted the principle o f "silence i s consent". In 2006 the customs tariffs were abolished on about 90 percent o f imported items b y reducing the number o f tariff bands from 16 to three (0,512 percent) and a new customs code was passed in January 2007 which provided the framework for overhauling and streamlining customs procedures. The customs department was also reorganized and restaffed. The combination o f simplified customs regime, streamlined procedures and improved technical capacity o f the customs service has reduced corruption, and significantly reduced processing time. Significant progress was also made in establishing internationally accepted accreditation and standard certification mechanisms in line with WTO and EU standards. Georgia also passed a new Company law and introduced a new property registry. Overall, at the beginning o f the CPS period Georgia was mired near the bottom o f the D o i n g Business rankings, wallowing in 118" place out o f 178 countries in 2005. It was the top reformer in the world 2006 moving up to 37 and it cracked the top 20 in 2007 at 18. In 2008 it moved to 15" place and as a result o f its performance over the last five year's Georgia was named the region's top reformer. In many categories Georgia was ranked with or even ahead o f many O E C D countries. For ease o f registering property it was number 2 in the w o r l d and it was number 4 for ease o f starting a business. 49 1C. Increasing Access to Financial Services CPS Outcomes that the Bank Status. Additional Achievements Expects to help realize by mid-2009 Strengthened payment systems I n Process. New RTGS Several foreign banks enter the payment system, Securities market --HSBC, Societe settlement, Reserve General, KOR (UAE), Halyk management and accounting (Kazakhstan) software being procured with TA from the Bank. Legislation passed in 2008 Improved credit information created framework for united allowing lower collateral Achieved. Credit Bureau fully supervision o f financial markets requirements and margins (IFC) functioning. 13 of 18 Banks in Georgia, including banking, share negative credit history to insurance, securities f m s and the Credit Information Bureau micro-finance organizations. and 4 Banks share positive credit information on small In FY08, IFC's financial sector Higher levels o f private equity loans. portfolio clients provided over investments in companies from 64 thousand SME and Georgian individuals, pension Partially Achieved. Some microfinance loans for a total funds and foreign investors growth in corporate bond and amount o f almost $850 million. (W equity markets, though both In addition, IFC's client banks markets remain heavily helped to facilitate the dominated by one player. development o f housing finance Progress on increasing loans by providing 7,400 mortgage and decreasing interest rates loans for a total amount of $2 12 Achieved. Loans to GDP million. increased from 9% in 2004 to 3 1.5% by end of 2008. After August Conflict and world economic crisis loan portfolio of banks tailed off. Deposits took a hit immediately after the August conflict but have since stabilized. Over the period they grew from 11% of GDP in 2005 to 20% at the end of 2008, interest rates for dollar loans declined from 17.4 percent in 2004 to 15.2 in 2007, but increased by end of 2008 to 18.3%. Improvements in banking supervision (with IMF) Achieved. Supervision o f all financial markets consolidated under new Financial Supervision Agency in 2007. instruments: TA for payment system, IFC operations with client banks 23. The Financial Sector experienced strong growth in thefirst three and a halfyears o the f CPSperiod, growing by more than three fold. The twin shocks o f the August 2008 conflict and the international economic crisis have led to a contraction in the Banking sector in the last 10 months, but financing from IFC, EBRD, FMO and OPIC to the two largest banks, aggressive provisioning and careful supervision by the Financial Supervision Agency (FSA) have positioned Georgian banks well to weather the crisis and resume prudent expansion o f lending as the crisis abates. IFC supports four 50 banks with financing (TBC, Procredit, Bank o f Georgia, and Bank Republic) and has products aimed at financial leasing and mortgage financing. It i s also providing direct financing for a major shopping and residential center in Tbilisi and helped finance construction o f Tbilisi's new airport. Societe General (Bank o f Republic), HSBC, K O R bank (UAE) and two Kazakh Banks continue to operate in the market, helping to make the banking sector in Georgia among the healthiest and strongest in the region. Financial market supervision i s being strengthened on the basis o f a set o f financial laws approved by the Parliament in early 2008. The FSA i s also charged with the responsibility o f supervising banking, micro finance organization and insurance and securities firms. The Bank i s currently undertaking a TA program with the NBG to upgrade the payment systems. ID. Improving Electricity and Gas Infrastructure CPS Outcomes that the Bank Status. Additional Achievements Expects to help realize by mid- 2009 Improved financial o f entities in Achieved. The sector has Major components of a modem the power sector moved from massive non- dispatch system for the payments to collection rates near electricity grid are being 100 percent and a situation installed (SCADA). System to where financial flows cover the be inaugurated in October 2009. sector's ongoing costs Will provide real time operational data. A regulatory commission i s Energy and gas tariffs regulated. Improved regulatory operational and has implemented Step-functiontariffs for environment for energy, a methodology for monitoring electricity allow affordable rates including as a first step quality o f electricity service for low income customers. monitoring of power service quality to consumers Target met. System wide New wholesale electricity outages reduced to near 0 for market mechanism established Improved reliability of electricity paying customers and quality o f and functioning, supply: system-wide outages service has improved. from 20 hrslyr to 25 hrslyr Target met. Losses below 5% Reduced losses in transmission system from 15% to less then Achieved. Financial flows 10% adequate to meet payment obligations. Improved financial and corporate management in the wholesale electricity market. Achieved, New sources of gas supply introduced. Increased competition and flexibility in gas supply options Achieved. Khudoni technical New hydropower potential and environmental assessments explored. underway. Private investment in two other hydropower sites underway. Instruments: PRSO Series, Elec -icity Market Support Project, 24. "From Collapse to Rebirth" could be the headline for the story o the transformation o f f Electricity and Gas Infrastructure in Georgia. Progress in rehabilitating and improving management o f the energy infrastructure has been remarkable. Under the PRSO program the Government prepared a medium-term strategy for the energy sector and updated it regularly. The 51 strategy provided a blue print o f actions including urgent rehabilitation o f distribution and transmission infrastructure for electricity and for the north-south gas pipeline, which at the beginning o f the CPS period was dangerously close to total collapse. The action plan also called for extensive metering o f both the gas and electricity distribution systems which when combined with strong political support for energy companies' efforts to instill payment discipline dramatically improved revenue inflows. Payment rates went from less than 20 percent o f billed consumption in the regions to over 90 percent during the CPS period, and the improved revenue stream helped finance further renovations o f the system. System outages steadily improved in the power sector going from 20 hours per day to virtually 24/7 power supply for paying customers. The turnaround in the sector allowed the Government to privatize energy generation and distribution in 2007; with the state assuming a largely regulatory role (the Government still owns the transmission system for electricity, the main gas pipelines, and some generation capacity deemed to be strategic). Ongoing private investment in power generation capacity has transformed Georgia from a power importer to a power exporter in the last two years. Bank financing for the energy sector has helped to rehabilitate the power distribution system and the gas pipeline. World Bank and other IF1 financing o f three international management contractors for the major power sector utilities was essential for the sector's return to financial viability and 24 hours o f electricity supply. An ongoing operation i s helping to improve the efficiency o f the electric transmission system through the implementation of a modern electricity dispatch system. 1E. Improving the Transport Infrastructure CPS Outcomes that the Bank Status Additional Achievements Group expects to help realize by mid 2009 Reduction in transport time and Achieved. Transport time along Construction under the Highway costs and improved access in area built under the highway 1 I1 project including additional Georgia's major traffic corridors. project reduced by 30 percent. financing approved in FY09 i s underway. Construction Steady and adequate level o f Achieved. Steady and adequate completed and underway to date funding for road maintenance funding for road maintenance i s cover xx km o f roads and design based on charges related to road supplied through increased works completed for another xx use and road access. funding from the central budget. km to be constructed starting in FY10. Cost effective and sustainable Achieved. 750 km o f paved Additional financing was secondary and local road network secondary and local roads were to approved in FY09 (Georgia's first in target areas be rehabilitated under the IBRD loan) to fmance the Secondary and Local Roads remainder o f the original scope o f project. However, the project had. work and construction i s now to be restructured and the PDO underway. changed due to higher costs for construction materials. In total about 250 km o f roads were covered by the initial project. The Govenhent helped fill the gap financing some 100 Km o f rehabilitation from budget resources. Achieved. IFC, with EBRD, Air traffic improvements (IFC) Financed construction o f the new rbilisi airport. Instruments. Secondary and Local oads Project, Highways Iand 11, I F ~ Loan 52 25. Rehabilitation o the road network is one o the Government's biggest priorities and a f f major success. Surveys indicate that improvements o f the road network, along with improved power supply are rated as the Government's major successes. Government believes that a rehabilitated and well-maintained road network i s key to Georgia's development as a transit corridor and important especially for the rural economy where access to markets i s crucial. A major focus o f the Government's roads program i s the East-West highway from the Azerbaijan border t o Poti, where it joins the North-South road running along the Black Sea Coast, through Adjara to Turkey and the Bank's program during the CPS period supported for road rehabilitation, both for the East-West highway and for local and secondary roads, many o f which feed into the East-West corridor. The Roads Department proved to be an experienced and capable client that ensured that the three Bank- financed projects were implemented on time and to high quality standards. The investments also contributed significantly to the Road's Department's planning capacity, including state o f the art maintenance management systems. The Bank projects also supported development o f a road safety strategy, and included financing for investments to correct "black spots" where there was a high incidence o f accidents. Finally, the roads program has been one element o f the Government's economic stimulus package initiated this year in response tp the August 2008 conflict and world economic crisis. With Georgia's first IBRD loan, the Government continued the program o f secondary and local rehabilitation based on designs developed under the first phase. The quick start- up o f this "shovel-ready" project i s expected to have significant employment impact. 1F. Improving Access to Rural Infrastructure and Services CPS Outcomes that the Bank Status Other Achievements Group expected to help realize bv mid-2009 More efficient and cost-effective Partially Achieved. A more agricultural knowledge systems viable horticulture and viticulture knowledge system i s in place through investments in a lead institution. The model, however, has not been fully exported to other fields o f agriculture research., though the system o f competitive grants has been adopted system wide Partially Achieved. Prior to Expanded coverage and reach o f August 2008, commercial Banks financial institutions in rural areas expanded lending to rural firms. Financing through micro-finance organizations also launched Achieved. Total ha rehabilitated Irrigation and drainage in line with project estimates. rehabilitated on 86,000 ha o f land. Not Achieved. The number of effective AAs i s far less than Effective implementation o f new planned; the new irrigation approach to operation and companies work poorly due to a maintenance involving four state- lack o f technical staff and funds; owned irrigation companies with collection o f irrigation fees i s links to AAs. low. Sustainability o f rehabilitated irrigation and drainage systems i s doubtful. Not Achieved. Interventions to 53 1 improve market supply chains not I yet started. Increased farm income due to marketing channels. Achieved. A l l flood protection works finished and operating effectively. More than 20 villages with a population o f over Improved flood protection 40,000 have increased security control. against flooding. The newly reconstructed infrastructure also provides protection to the water Isupply system o f Tbilisi,. Instruments. Agricultural Research Extension and Training Prqject, Rural Development Project, - . Irrigation and Drainage Community Development Project 26. Progress remains modest in improving rural services and fostering growth in the rural economy. Growth in agriculture, which employs about half the workforce, has been slow, even negative at times, over the CPS period. The break-up o f the Soviet U n i o n made Georgia a nation o f small farmers which helped to cushion the shock o f economic collapse. Government agricultural services were slow to adapt to the new agricultural regime, and efforts to find a correct balance o f public and private sector provision o f services have gained little traction over the years. Bank assistance for Agriculture focused on improving the system for agricultural research, creating a system o f financing rural enterprise, helping to develop agricultural markets, including export markets, through supply chain interventions, and rehabilitating irrigation and drainage infrastructure and creating sustainable structures for the operation and maintenance o f rehabilitated system. Outcomes are mixed and uncertain. 27. Support for agricultural research was successful in creating a state-the-arts wine and horticultural institute that today i s at the heart o f Georgia's efforts to diversify its wine markets after the Russian market was closed to Georgian wines. It also succeeded in introducing a method o f competitive grant financing o f scientific research that n o w has been adopted nationwide. In general, though, agricultural research remains underfunded, and the model introduced for the Wine and Horticultural Institute has not been exported to other fields o f research. 28. The Irrigation and Drainage Community Development Project, the first operation in an A P L series, closed on April 30, 2009. I t was successful in completing rehabilitation o f all the planned irrigation and drainage works, and with additional financing was able to help with urgent reconstruction o f flood control works following the floods o f 2005. The sustainability o f the investments is, however, at risk. Amelioration Associations (AA) were not developed under the project into fully technically and financially sustainable organizations that could take charge o f the management o f lower-order infrastructure and would be able to increasingly pay for the irrigation and drainage services. The Government revised its policy mid-way through project implementation which led to reduced support for AAs. The government agency responsible for the operation and maintenance o f higher-order infrastructure was abolished at the end o f 2006 and instead four state- owned self-financing water management companies (LTDs) were established in an effort to improved service delivery and ensure sustainability. 29. At project closure, few A A s were functioning w e l l and there might be a risk that much o f the lower-order infrastructure rehabilitated by the project will deteriorate for lack o f funds and a reliable management organization. The LTDs had limited working capital and remit to function as profitable enterprises. The performance during the past two years has shown that the LTDs do not have the staff and funds to adequately carry out its functions. As a result, satisfactory systems for collection o f water user fees and maintenance o f the systems have yet to be developed. The situation continues to evolve, and it i s hoped that the Bank, by staying engaged in the sector through dialogue and possibly 54 further investment, could help to develop satisfactory arrangements t o assure the sustainability o f the investments. 30. The work on rural financing and supply chain development continues. Components o f the Rural Development project dealing with financing through commercial lenders and microfinance institutions are proceeding well, though the financial crisis has slowed lending in the last six months. Work on the supply chain has gotten o f f to a slower start but it i s hoped that changes in project design now being considered will help get this aspect o f the project moving. I G. Enabling Sustainable Use o Forestry and Other Natural Resources f CPS Outcomes that the Bank Status Additional Achievements Group expected to help realize by mid-2009 Improved contribution o f Not Achieved. Government Despite these concerns, one clear Georgia's forests to economic planned to pursue this aim area o f improvement i s the development on an through long term forestry leases. dramatic drop-off in illegal environmentally sustainable Bank felt plans did not provide logging as a result of basis. for proper safeguards, Government anti-corruption procedures. Lack o f up-to date measures. forestry inventories also considered a problem. Forestry Project suspended and cancelled due to these differences Achieved. Protected Areas in Eastern Georgia sustained under Protected areas in eastern adequate protection with Two National Parks legally Georgia under hll prot.ection management plans under demarcated and one Nature with management plans under implementation. Reserve expanded and implementation, totals 185,000 demarcated. Two other National ha. Partially Achieved. Limited Parks under management introduction o f tools for planning planning. Effective inter sectoral planning and management o f coastal and management o f coastal resources, but legal, institutional Limited stake holder resources. and enforcement structures need participation in coastal hrther strengthening. development, and though Bank project improved national capacity to monitor water quality and biodiversity this capacity i s not being utilized h l l y . Instruments: Forestry Project, Protected Areas Project, Integrated Coas IZone Management Project. 31. Progress in enabling sustainable use o forestry and other natural resources was f inadequate. A bright spot was the Protected Areas Development Project ((GEF), which was successful in strengthening Georgia's capacity for managing a national network o f protected areas, and help in the establishment o f several new protected areas. Infrastructure, institutional capacity, and the legal framework for Georgia's protected areas have all been improved as a result o f the pro-ject. 55 32. The Coastal Zone Management Project made progress towards improving environmental planning along the Black Sea, but the project closed without ensuring a strong legal and institutional framework for coastal zone planning and management. 33. The forestry project had made a good start at the beginning and look poised to help strengthen forestry management and foster sustainable utilization o f forest resources. But the project stalled when the Government decided to embark o n a radical shift in policy directions. The Government basically wanted to move to long term leases as the principal management tool for commercial forests. While the new approach was basically consistent with the projects development direction, Bank management concluded that important pre-conditions for success o f the new approach were not in place, namely completion o f a nationwide forestry inventory, and adequate lease monitoring mechanisms. As the policy differences could not be bridged, the project was suspended and ultimately cancelled. Interestingly, in recent months the Government has begun the process o f drafting a forest sector development policy, and redrafting the forest lease legislation. The policy draft and revised legislation, if adopted, would likely address most o f the Bank's concerns with the earlier approach. Rating o Pillar One - Satisfactory f 34. The CPSCR rates outcomes under Pillar One as satisfactory. The pillar was intended to create an enabling environment for income and employment generating growth and the outcomes, particularly for corruption and governance, removing administrative barriers, improving Jinancial services, and improvements in gas, power and transport infiastructure, were highly satisfactory and contributed to an improved environment for business and private sector-led growth. The Bank programs contributed to the success o the reforms, both through the PRSO series but also through f investment lending in infiastructure and energy. Growth in incomes was indeed strong through mid- 2008 due to Government reforms supported by the Bank, and employment creation in growth sectors such asjnance, telecoms and construction was strong, though masked by labor shedding in other sectors. The fallout f i o m the August 2008 conflict and the global economic downturn has slowed growth, and reversed some employment gains, but the reforms o the last four years has helped f position Georgia to weather the crisis and return to a positive growth path as global conditions improve. Growth in agriculture remained low throughout the CPS period resecting the dlfJicult challenges facing the rural sector and perhaps the low priority given to agriculture by the Government. I n this context it is not surprising that the elements o the pillar dealing with the rural f economyfared less well than others. I Pillar I.Improving Human Development and Social Protection 35. T o support Government priorities in social services, the CPS was designed to assist structural improvements in health, education and social protection. The long term objectives o f the Bank's interventions in human development were: (i) improved health and education outcomes; (ii) improved protection o f the poor and vulnerable through an efficient and effective targeted social assistance system; and (iii) establishment o f a sustainable solution for protection against poverty in old age. Medium t e r m objectives focused on increased quality and quantity o f public expenditures for social services; improved access to high quality and affordable public social services; and improved targeting o f social assistance. The instruments to meet these objectives were investment projects in health and education, the PRSO series which had improvement o f social services as one o f i t s four pillars, and a programmatic poverty assessment, 56 2A. Addressing Corruption and Governance Issues in Social Services CPS Outcome that the Bank Status Other Achievements. Group Expected to Help Realize by mid-2009 Decline in incidence of bribery Achieved. Beeps 2005 showed Introductionof standardized attempts o f public officials at key dramatic drop from 2002 in bribe University Entrance Exams points o f social service delivery frequency. BEEPS 2008, while (UNE) at beginning o f CPS not comparatile to earlier surveys, period eliminated wide-spread shows continued low frequency practice o f bribery to secure o f bribes. . IRI survey shows placement in universities and continued low levels o f bribe institutes. According to 2006 T I frequency. Doing Business post-exam public opinion survey results continued to improve in 8 1% o f students believe that UNE 2008, with Georgia moving to helped to eliminate corruption in 15* from 18 the year before.. the admission process. 2007 public opinion poll conducted by BCG shows that 78% o f respondents support UNE. Standardized exams for master's degree programs introduced in May 2009 (similar to GRE and GMAT formats) Instruments: PRSO series, Educati n APLs, Health Project, 36. Corruption and governance in the social services has been sharply reduced at the point o f service delivery. The standardized university entrance exam, in part financed by the Bank, was one o f the first anti-corruption salvos fired by the new Government which virtually eliminated bribery in the entrance process. N o w the exam system i s being extended to master's program. Another initiative by the Government that provided greater oversight was decentralizing financial and management control to the school level with oversight provided by local school boards. Improvements in the system for social transfers reduced opportunities for theft and rent seeking activities. 2B. Improving the Management o f the Education System CPS Outcome that the Bank Status Additional Achievements Group Expected to Help Realize by mid-2009 Reliable mechanism for assessing Achieve A regular cycle o f The Education Management the quality of education services national assessments o f student Information System (EMIS) i s and student outcomes in place learning achievement has been able to generate basic education established: sample based data to inform policy making assessments in Math and Georgian language was Teacher training i s underway and conducted in grade 4 in 2003. teacher certification exams under Follow-up national assessments preparation for grade 9 i s being carried out in 2009. Strong capacity has been Institutional accreditation system built in the National Assessment for higher education institutions Center which will continue in place international student assessments, namely PIRLS 20 11, TIMSS 201 1 and TEDS 2011. Improvement in the 2003 Partially achieved. Modest New curriculum i s student 57 baseline reading and improvement recorded between centered and outcomes based. comprehension assessment as 2003 and 2006 scores, though Designed to be flexible and measured by the PIRLs 2006 scores were low compared adapted on basis o f assessments assessment. to other countries. o f outcomes. Reforms accompanied by creation of new Achieved. New curriculum has teaching materials and extensive Outcome-based national been developed and i s being teacher training curriculum for primary and implemented, including in general secondary education in minority schools. place. Achieved. The per capita financing mechanism was New per capita financing introduced in 2005. I t has mechanism in place, improving encouraged greater efficiency in efficiency and reducing the allocation of secondary mismanagement and informal education financing. payments. Instruments: PRSO series, Educal and n APL I APL I1 37. Deep and abiding commitment to reform o f the education management system is yielding results. The Bank through i t s PRSO series and the Education APLs has been a key partner i s assisting the Government with i t s sweeping and ambitious reform efforts for basic education. The curriculum has been overhauled and i s now in the final stages o f implementation, with the new curriculum introduced in all classes except 4, 5 and 6, where phased piloting and implementation o f the new curriculum i s underway. In parallel, teachers are now much better paid and are being trained in the new curriculum, exams for teacher certification are under preparation and new class room materials and text books have been prepared. Some 72 education resource centers situated throughout Georgia are assisting in the roll-out and training. 38. Student assessments are an integral element o f the reform process, and with Bank support a National Assessment Center has been established and it i s spearheading an effort to introduce international assessments o f student learning outcomes. The Center did its first assessment o f reading skills o f Children 9 to 10 years old in 2003 based on the PIRLS framework and methodology, followed by Georgia's first participation in the PIRLS and TIMSS (Math). The PIRLS results for 2006 showed a small improvement over 2003 but showed that Georgia still scored poorly in international comparisons, which i s not surprising given that the reforms were in early stages. Participation in international assessments in 20 1 1 should give the first real gauge o f progress. 39. Education management and financing has been overhauled with the implementation o f pre- capita financing and decentralization o f school management and accountability. Over 800,000 parents participated in the first elections o f local school boards in 2007. 40. The Bank also assisted the Government in preparing an education strategy for 2007 - 20 1 1 on the basis o f which i t was admitted into the Education Fast Track Initiative in 2007. Finally, the Bank help establish an International School o f Economics (ISET) which offers a Master's Degree in Economics based on international standards. ISET has just graduated i t s second class with students from Georgia, Armenia and Azerbaijan. 58 2C. Improving Management of the Health Sector CPS Outcome that the Bank Status Additional Achievements Group Expected to Help Realize by mid-2009 Increased Proportion o f licensed, Achieved. At present 55% o f The population covered by re- accredited and certified providers, family medicine personnel have trained family medicine providers personnel and medical schools. been retrained.(over 1000 increased by 7% in 2008 reaching doctors/nurse teams. Remainder a 28% coverage rate. to be trained in 2009/2010. Decrease in number o f hospitals I n Progress. Some reduction from 275 in 2004. achieved. Number o f hospitals to The number o f hospital beds, has be reduced to about 100 new dropped from about 25,000 in private hospitals based on the 2004 to 13,600 now, or a ratio o f Government's hospital people to beds o f 330, rationalization program. comparable to other countries in the region. The end target i s Likely Achieved. Overall, visits 7,800 beds or a ratio o f 177. Increase in utilization rates of to PHC facilities have increased. PHC services for the two lowest An Impact Evaluation in progress income quintile groups that will show utilization rates by (monitored through Household poor. Surveys) Partially Achieved. Preliminary evidence suggests the new Geographic access has improved. Measures to ensure continued medical insurance program (MIP) The percentage o f people living access by both the poor and non- has improved access to health within 15 min and 30 minutes poor. care for the poor.. For non-poor, from a medical facility now MIP covers the police, military, equals 42% and 80% and teachers. For others, the state correspondingly. Overall 103 provides subsidies for private PHC facilities rehabilitated, voluntary insurance for essential equipped and staffed with health services (emergency care, retrained and certified staff with urgent care and basicPHC). I ~dfinancing 41. Health care reforms are beginning to have an impact after a slow start. The new Government inherited a health system where the state was nominally the provider and financier o f most health services, but where in fact most services were rendered for informal, out-of pocket expenditures (over 70 percent o f total expenditures in 2006). In 2006 Government launched a radical reform o f the health care system, where the private sector would be the primary provider o f health care services and where financing would come from a mixture o f public and private health insurance. For health facilities, Government has introduced a program t o replace outmoded and derelict public facilities with a smaller number o f modern private facilities. For, financing, the Government has initiated a state financed Medical Insurance Program for the poor, and certain classes o f public employees and about 900,000 people are expected to receive benefits in 2009. This scheme i s being supplemented by a voluntary insurance scheme where the Government subsidizes private insurance premiums for those enrolling in the system. The M I P accounts for over 50% o f the total health care budget and likely represents a significant improvement in access to and affordability o f health care by poor households because o f effective targeting. The Primary Health Care Project (renamed the Health Project) was restructured in April 2009 to assist Government in implementing i t s revised reform program. Overall during the CPS period, and despite the radical shift in policy orientation key health outcomes have begun to improve, namely rates o f infant and maternal mortality appear to be on track in achieving MDG targets. Also there has been some progress in reducing the incidence o f l o w birth weights. 59 2D. Improving Management o f Pensions and Social Security Systems CPS Outcome that the Bank Status Additional Achievements Group Expected to Help Realize by mid-2009 Improved targeting accuracy - at Achieved. In 2007 about 30% of Targeting mechanism launched in least 60 percent of target group the poor and 19 % o f the extreme 2006. In 2009 about 140,000 covered with inclusion error of poor received targeted social households with 400,000 less then 20 percent assistance(TSA) (8% of total beneficiaries receive the TSA. population) Since then funding Overall, about 40% o f the for TSA nearly doubled and those Georgian population i s registered receiving TSA increased to 13% in Social Service Data system o f total population. which i s used to target several programs including the TSA and Achieved. Pension reformed in the MIP. Poverty among elderly does not 2005, levels increased by 15% in deteriorate, or shows 2009. The elderly beneficiaries Without pensions overall and improvement compared to 2004 represent around 78% of total extreme poverty rates would (based on HBS data analysis number o f pension recipients. increase 40 and 95 percent Poverty Assessment shows that respectively. . pensions are the most important social transfer in preventing poverty. Instruments: PRSO series, Programmatic Poverty Assessment 42. The social security system i s better targeted and effective in alleviating poverty. The targeted social assistance program (TSA) launched in 2006 with World Bank assistance along with the existing pension system i s proving to be effective buffers against poverty. The impact i s even more pronounced in the case o f extreme poverty: Without TSA, the extreme poverty rate would increase by 17 percent, the extreme poverty gap by 50 percent and the severity o f poverty index would double, indicating that TSA significantly decreases inequality among the extreme poor. The impact on the extreme poverty gap and poverty severity i s particularly important as it reflects good targeting performance. Pensions are also very effective in reducing poverty among the poor. 2E. Improving Municipal and Community Provision of Basic Infrastructure CPS Outcome that the Bank Status Other Achievements Group Expected to Help Realize by mid-2009 Improved LGU effectiveness in Achieved. Principles of good Reduced Costs - Water utilities identifying, designing, and governance introduced via a benefited from reduced O&M implementing investment project participatory process in selecting costs due to decreased leakage for local infrastructure and utility investment projects (under and less frequent breakages in the services with adequate cost MDDPII). Best practice system. Street lightning projects recovery introduced for preparing, benefited Tbilisi immensely due appraising, and implementing to the introduction o f the high municipal infrastructure in 11 quality economic fixtures, bulbs A long term City Development cities and cables. Strategy (CDS) established for Tbilisi Underway. The Cities Alliance Under the Bank financed MDDP has approved the grant to Tbilisi I1 project the short-term Local for development o f CDS. Economic Development Plan Consultants are being selected. (LED) was developed for Tbilisi, Improved Water supply, roads which will serve as an and other public services in Achieved. The MDDPII fmanced appropriate starting point for the selected major cities investments in roads water and long term CDS development and sanitation and street lighting in imDlementation. 60 Improved capacity to reach remote and vulnerable groups nine municipalities. Achieved. Improved services in I I with public services and borrowing municipalities have infrastructure. benefited the population, Instruments: PRSO Series, MDDF 43. Capacity in municipal and local Government units to provide improved infrastructure and services i s improving along with the access to basic infrastructure services for the extreme poor and remote and vulnerable groups. The capacity o f the Municipal Development Fund to oversee the process o f municipal investment has also greatly improved. I t now handles funding from I the state budget and numerous donors including the Bank, MCC, KFW and EBRD. f Rating o the Second Pillar: Satisfactory. 44. Overall the CPSCR rates the outcomes under the second pillar as satisfactory. The commitment to education reforms is beginning to show results and laying the groundwork for sustained improvements in education outcomes in the years to come. After a slow start, and then an abrupt shift in Government Health care strategy, the Government reforms in the health sector have begun to gain traction. Overall services improved and critical health indicators have begun to show improvements. Good progress in reforming the social assistance system and improvements in the pension regime has served to expand coverage and better target assistance, and as a result many thousands o Georgians have been kept from slipping into extreme poverty. Finalb, changes in the f organization and management o local Government units and steady improvements in the capacity o f f municipalities and local government units to design deliver and maintain infrastructure and services are having a positive impact. Overarching all these improvements were concerted efforts to eliminate corruption in service provision. The uniform university entrance exam, consolidation o benej2 f programs and the introduction o the targeted social assistance program and delegation o f f management and accountability to local school directors were important steps in the war on corruption. Pillar 3. Improving Efficiency in Public Services 45. A key Government priority was to improve public sector management. The Government was focused on streamlining public services, eliminating those deemed to be unnecessary, privatizing services where possible, and strengthening capacity and performance in those that were left. The CPS focused on six areas including: (i) addressing corruption and governance in public service; (ii) improving public expenditure management; (iii)improving Country Financial Management and Procurement Systems; (iv) modernizing the judiciary; (v) Strengthening Inter-Governmental Fiscal Relations; and (vi) Improving the Management of the Civil Service. 3A. Addressing Corruption and Governance Issues in Public Services CPS Outcome that the Bank Status Additional Achievements Group Expected to Help Realize by mid-2009 Strengthened civil society voice Partially Achieved. The Anti corruption strategy and and participation in anti- external GRECO report was action plan updated annually. corruption effort. prepared and made public. Anti-corruption Council chaired While the Government has by Minister o f Justice established provided NGOs with more public in 2009 information and has held public discussions, civil society engagement could be improved further. Routine surveys to measure Improved oversight and Partially Achieved. corruption in delivery o f public institutions and functions Restructuring of CoC underway, services not yet done. Survey in audits and reporting being aligned 2006 by Ministry of education with international standards. concluded that informal payments to teachers detrimental to education outcomes. Anti-corruption policy Dept Partially Achieved. There i s no Drafts o f annual anti-corruption (ACPD) monitoring role specific anti corruption policy are discussed with NGO's. In strengthened and annual department, but Government does GAC consultations, civil society monitoring report published annually update its anti- expressed the view that more corruption strategy and action interaction with Government was plans. The new Anti-corruption needed on anti-corruption issues. Council i s a step towards institutionalizing Government anti-comption efforts. Instruments: PRSO series, PSFMI IP 46. The new Government adopted an approach to corruption that relies more heavily on actions and modeling acceptable behavior in each Government agency then on special commissions or Government bodies to fight corruption. The new Government's initial approach to anti-corruption was action oriented and highly successful. Early reorganization o f the traffic police, creation o f the standardized university entrance exam, reorganization o f customs and tax departments, simplification o f licensing and permits, and aggressive prosecution o f corruption cases removed opportunities for corruption and imposed s t i f f sanctions for those who engaged in corrupt practices. The Government i s now paying more attention to institutionalizing anti-corruption programs through the establishment o f the anti-corruption council chaired by the Minister o f Justice, and recent efforts to engage c i v i l society more fully in public discussion o f Government programs i s a promising sign that dialogue with civil society will receive greater attention going forward. 3B. Improving Public ExpenditureManagement CPS Outcome that the Bank Status Additional Achievements Group Expected to Help Realize by mid-2009 Improved budget execution by Partially achieved. Budget Following the 2008 events, reducing deviations between execution improved though expenditures for social services actual and budgeted expenditure deviations remain over 15 percent increased from 28% o f the total reflect acceptable international due to better then expected budget in 2008 to over 35% in levels revenue collection prior to 2008 2009. In the same period, defense and higher then expected and security expenditures spending related to the 2008 dropped from 24% to 15%. conflict. Clear national expenditure Public investment in priorities indentified and Achieved. Sector strategies for infrastructure increased from 7% allocations to priorities defended line ministries presented in Basic o f GDP in 2007 to nearly 8% in in budget Data and Directions document 2009 and shifted towards civilian which feeds in to MTEF. infrastructure. Work on developing Public Investment Introduction of performance I n Progress. In 2009 three Program launched. based budgeting system ministries have begun working on results oriented budgets, 62 I including strategic directions, costing and performance indicators and these are expected to be enhanced in 20 10-11. All major public investments included in the MTEF Achieved. All major public I investments included in MTEF. I Instruments: PRSO Series, PSFMRSP, PEFA 47. Public Expenditure management has improved markedly over the CPS period and remains a key area o f focus for the Government. A medium term expenditure framework (MTEF) was introduced which provides for budget planning on a four year rolling average. The annual budgeting exercise i s launched by the publication o f the Government's Basic Data and Directions (BDD) which spells out sector priorities. Line ministries have improved capacity for budgeting throughout the CPS period and the focus now i s shifting to a more results oriented approach focused on outcomes and towards introduction o f a public investment program. 3C: Improving Auditing and Procurement CPS Outcome that the Bank Status Additional Achievements Group Expected to Help Realize by mid-2009 Percent of public procurement Achieved. Nearly 79 percent o f Data base created on contract contracts above threshold contracts awarded on basis o f awards by procurement methods. awarded on basis o f open open competition, shopping or Hotline in State Procurement competition to exceed 75 percent other competitive processes Agency provides guidance on procurement questions. CPA completed, action plan agreed and being implemented. CoC operating according to Achieved. New law passed that international standards. i s broadly in line with international standards. Chamber restructured and restaffed. All central government entities I n progress. Law passed audited using international includes this requirement. From auditing standards October 1 2009 CoC will gradually apply international audit standards of the International Organization of Supreme Audit Institutions All major public entities submit fiscal reports including audited I n progress. Requirement of accounts to central governments - new law. at least annually PRSO, PSFMRSP, PEFA 48. Some initial steps made in auditing and procurement but further progress i s needed. A key element supported by the PRSO and the Bank's analytic work has been the restructuring and restaffing o f the Chamber o f Control and the passage o f the new law under which the Chamber o f Control w i l l gradually introduce international auditing standards for central government entities. Clearly, however, implementation i s key. The Bank and the EU prepared a joint Public Expenditure and Financial Accountability assessment (PEFA) and the Bank prepared a Country Procurement 63 Assessment (CPA) both o f which lay out improvement needed and provide initial benchmarks against which to assess future progress. 3D. Modernizingthe Judiciary ~ CPS Outcome that the Bank status Additional Achievements Group Expected to Help Realize by mid-2009 Improved public trust of legal Not Achieved. Public perception 15 court facilities rehabilitated system as measured by increase o f judiciary had improved in positive focus group responses somewhat between 2002 and f?om 11% in 2002 to 80% in 2005 according to BEEPS. The 2007 2008 BEEPS shows that businesses still consider courts to be a problem Partially Achieved. Removal o f High School o f Justice Improved competence and ethical old judges, and training of new establishedto train new behavior ofjudges (BEEPS) judges has improved the generation ofjudges. Training o f competence and ethical behavior about 320 judges and 100 other o f judges, but some high profile court personnel per year. cases continue to taint public perception o f the judicial system. . Instruments: Judicial Reform Project 49. Judicial reform was implemented at a slower pace than anticipated. While some progress has been achieved in training and infrastructure, public perception o f the judicial system has remained poor, due in part to some high profile rulings. The CPS had set rather robust outcome targets for judicial reforms, and in hindsight they were perhaps too ambitious given that the Bank's only intervention in judicial reforms was a court modernization project, which was approved in the previous CAS period and which closed shortly after the CPS was approved. The project did rehabilitate critical court infrastructure, built and equipped the High School o f Justice, financed judicial training and fostered a dialogue on Judicial Reform that was carried forward by other donors who remained active in the field, namely USAID, UNDP and EC. While the project was deemed to be moderately unsatisfactory by IEG for failing to improve public perceptions about the judiciary, it was a precursor for continuing donor and Government support for judicial reform which may be gaining momentum. 3E. Strengthening Inter-GovernmentalFiscal Relations CPS Outcome that the Bank Status Additional Achievements Group Expected to Help Realize by mid-2009 New transparent Achieved. New Law on Local Self Government intergovernmentalfiscal relation intergovernmental budget Budgets adopted in June 2006 system in budget process relations established in 2007 on basis o f law developed with financing from MDDP I1 Improved transparency o f Local Achieved. Transparency New Budget system adopted in Government Unit (LGU) budget improved by new law that 2008. Budget implementation formulation and execution establishes a simple equalization supported by a monitoring and formula for LGU budget reporting system for municipal transfers. budgets. 64 Implementationof a more effective territorial administrative Achieved. New territorial structure for local s e l f administration structure has been governments. implemented. 72 new territorial units established replacing over 1100 atomized local administrations 50. Intergovernmental Fiscal Relations were improved significantly with the passage o f the Law o f Local Self Government Budgets. The law, which defined fiscal relations between the center and local government units, was instrumental in making such relationships more transparent and predictable. An equalization formula i s used to determine the amount o f the transfers and the formula i s being fine tuned as experience i s gathered. Along with the change in how LGU's are financed, the number o f such units was rationalized, creating a smaller and more manageable number o f such units. 3F. Improving Management of the Civil Service CPS Outcome that the Bank Status Additional Achievements Group Expected to Help Realize by mid-2009 Narrower gap between public and Achieved. In 2003 the average Minimum and maximum levels private sector employment monthly earnings in the private for civil servant pay established conditions sector were 60% higher then in by presidential decree. Ministries the public sector. This gap was and Government agencies have cut to 25% in 2006, and has since wide latitude for setting salaries been kept at that level. within these ranges. Achieved. The single treasury Annual payroll audit reports have Efficient and transparent public account system i s operating on a not yet been produced but will be payment systems that facilitate real time basis linked to part o f new system of audits to be effective human resource settlement with the national introduced by the CoC in October management. Banks. The system i s being 2009. increasingly automated allowing for submission o f payment documents electronically. PRSO. PSFMRSP 51. The new Government chose not to pursue system wide civil service reform, instead allowing individual ministries and public agencies considerable latitude to devise personnel management systems best suited for their particular operations. As a result many agencies were able to restructure, rejuvenate staffing, adjust salary structures and introduce training programs. This approach was accompanied by a significant downsizing in Government agencies and the outsourcing to the private sector o f some activities including power generation (completed) and medical services (underway). Some restructurings, however, may have left agencies in weaker positions with fewer experienced staff and less services, for example in the Ministry o f Agriculture which downsized considerably. 52. The CPSCR rates performance under pillar 3 as moderately satisfactory. Achievements in improving public expenditure management and intergovernmental Jiscal relations were particularly impressive as the Government moved quickly to improve the budget process, introduce multi-year budget pameworks and initiate a shift to results oriented budgeting and public investment programs. For local government units the law on local government budgets in 2006 made transfers to local budgets more transparent and facilitated the move to consolidate the number o local government f units into a more manageable number. After a late start some progress has been made in improving 65 public procurement and preparing an action plan following the CPA. Financial management reforms have been somewhat slower, but the recent adoption o a new law on the Chamber o Control f f elevating it to the status o a supreme audit agency and requiring it to conduct audits on the basis o f f international principals show promise for acceleration o reforms in this area. Outcomes in judicial f reforms were weaker, though the level o the Bank involvement in this area was limited. Nonetheless, f with support o other donors, judicial and legal reform may be gaining momentum raising f expectations that the outcomes hoped for in Judicial reform can still be achieved. The CPS anticipated a more centralized approach to civil service reform then the Government eventually adopted, nonetheless the Government is now in a better position to hire qualiJied workers and individual agencies have the leeway to adopt personnel management systems best suited to their circumstances. 1. 11 World Bank Performance 53. Overall the Bank delivered the CPS program on time, and with high quality operations and analytical work. The Bank fielded high quality teams, worked effectively with development partners and forged a strong working relationship with the Government. The CPS employed a balanced mix of development policy credits, investment operations, and analytical work to deliver an effective program o f assistance to reform minded and action oriented Government. Lending 54. Implementation of ongoing projects and proactive supervision has contributed to achievement o f project objectives in most instances. The portfolio of projects under implementation during the CPS period decreased substantially following the decision o f the Government and the Bank to focus assistance on a few key sectors. Most of the 12 projects that excited the portfolio during the CPS period exited with satisfactory ratings in the ICRs and by IEG, with particularly good performance by projects in transport and municipal development. O f the four projects exiting with unsatisfactory rating, Judicial Reform exited at the beginning o f the CPS period and suffered from the initial focus o f Government o f areas o f reform other then the judicial sector. The other three projects, integrated coastal zone management (closed in FY06) and forestry (cancelled in FY08) and Irrigation (closed in FY09) were all approved under the previous Government. Despite the best efforts o f Bank staff, differences in opinions on the policy stance and institutional arrangements in the rapidly evolving policy environment, were too wide to bridge and as a result the projects did not wholly met their development objectives.. It i s interesting to note, however, that after Forestry and Irrigation projects closed the Government's policy views actually evolved to a point closer to the Bank's view. In both cases the Bank has found ways to stay engaged with the Government as its policy stance continues to evolve. Overall, ratings for proactivity, and realism for Georgia are at 100 percent. Disbursements have been high reaching over 52 percent in FY08 and 77 percent in FY09. The fast delivery o f the series o f roads projects, which were "shovel ready" when approved, was the main driving force behind the high disbursement rates. 55. Delivery of new operations has been timely, and in line with the CPS. The number o f operations and total amount committed during the CPS exceeded programmed amounts as the Bank and Government were able to take advantage o f Georgia's increased IDA allocation from the performance based allocation system and i t s transition to LBRD to add projects for Avian Influenza, and the East-West corridor, and to provide additional financing for the Secondary and Local Roads project. Financing available for the Municipal Development Project (FY09) was also increased over CPS estimates. 56. The PRSO Series was particularly successful in advancing the policy dialogue and the Government's reform program. The improved resource picture available to Georgia during the CPS period enabled the addition of a fourth PRSO operation in FY08 in addition to the three 66 operations anticipated in the PRSO, and a supplement to PRSO IV also in FY09 in response to the events of August 2008. The PRSO operations focused on four priority reform areas for the Government including: Public Sector Management; Energy; Social Sectors; and Private Sector Development. These were all identified as key areas in the CPS matrix and the availability o f the development policy series strengthened the policy dialogue and reform efforts. The PRSO series also complemented and was complemented by investment lending. The Electricity market support project helped to finance metering equipment which was critical to the reforms in the power sector, and the health and education projects, along with AAA work on the social benefit helped achieve reform objectives in the social sectors. Finally, the Public Sector Financial Management Reform Support Project complements reforms in the first pillar of the PRSO. Analytical and Advisory Services 57. Analytical and Advisory Services were in line with the CPS and delivered substantial results to the Client. Particularly important throughout the CPS period was PHRD Grant support for the PRSO program and for the education reforms where the grants continue to support curriculum development, teacher training, and testing and assessments. Other advisory support that has been successful in supporting PRSO reforms are the Programmatic Public Expenditure work and the Programmatic Poverty Assessment, which helped in the development o f the TSA. Complementing the programmatic poverty work was a full scale poverty report in FY09 which reported on the basis o f a L S M S survey of over 7000 households. For public sector management, the Bank in partnership with the EU completed a Public Financial Management Assessment (PEFA) in FY08 which systematically reported on over 50 areas of public management in x key areas, and which will provide the basis for further reform efforts in PFM going forward. A Country Procurement Assessment was also undertaken and an action plan agreed with the State Procurement Agency which i s now overseeing i t s implementation. Finally, a Country Economic Memorandum (CEM) which i s looking at factors affecting growth i s under preparation. These core activities were supplemented by sector studies including: (i)the financial sector (The Financial Sector Assessment Program (FSAP) jointly undertaken by the Bank and the IMF; (ii) Education Policy Note that led to Georgia's inclusion an into the Education Fast Track Initiative (FTA; and (iii) Accounting and Auditing ROSC. Finally, an the Bank supports Georgia's Youth Voices Group which implemented a Bank grant in support of an international youth conference on youth issues in conflict affected areas of ECA and a local conference on IDP youth issues following the August 2008 events. Overall, the CAE concluded that the Bank's analytic and advisory activities were relevant, o f high quality and well connected with the lending program and that the quality o f the policy dialogue was good. Working with Government 58. The Bank has a close and productive working relationship with Government forged on the basis of mutual respect, solid and professional teams and largely congruent views on reform priorities. The relationship was strengthened by the fact that there was continuity in key teams working on macro-economic issues, public sector financing and social sectors that allowed for close professional relationships to develop where focused, spirited and substantive policy dialogue could take place in an atmosphere o f mutual respect. The relationship benefited as well by the Bank's ability to respond quickly in response to urgent situations, beginning with i t s response to the new Government's accession to power by quickly ramping up assistance and.helping to convene a donor's conference within six months of the new Government coming to power. The Bank's ability to provide just in time assistance during the floods at the beginning of the CPS period, later during the Avian Influenza outbreak, and most importantly after the events of 2008 has also helped to solidify the working relationship with Government. Finally, the role o f the country office with i t s cadre o f experienced and skilled staff has contributed to a productive working relationship with Government. The recent trend o f moving task management responsibilities to country office staff has improved the Bank's over responsiveness, particularly in day-to-day portfolio management issues. 67 59. The decision early in the CPS period to begin integrating PrUs into the implementing ministry's structure has also contributed to better Government ownership o f Bank investment operations and greater oversight by the Government o f project implementation. Responsibility for project implementation now rests solely with the implementing ministries with consulting support as needed only for those functions directly related to Bank requirements for procurement and financial management. Not all changes in implementation were advantageous, however. For the irrigation project the decision to move responsibility for irrigation works to the Municipal Development Fund assured adequate supervision o f the civil works contracts, but it reduced the involvement o f Ministry o f Agriculture in project management and weakened the focus on maintenance and sustainability issues. Working with Other Partners 60. Donor support for Georgia following the Rose Revolution has been substantial, sustained and reasonably well coordinated. The donor's conference in June 2004, six months after the new Government took power, pledged $1.1 billion in support for the period 2004 -2006. Actual donor support exceeded this amount, totaling about $1.6 billion, as a result o f higher commitments by the U through the MCC compact, by the EC through Georgia's participation in the European S Neighborhood Program and from IDA due to Georgia's strong performance. Bilateral assistance, notably from Germany, Japan and the Netherlands also was higher then pledged. 61. International support for Georgia was reaffirmed following the August 2008 crisis. A Joint needs assessment co-managed by the Bank and the UN with participation o f other key donors including the EC, IFC, EBRD and ADB and working closely with Government parties was completed within weeks o f the end o f the conflict, enabling the Bank and EC to convene a donor's conference in October. The resulting pledges o f $4.5 billion exceeded expectations and a recent assessment shows good progress in realizing donor pledges. 62. The donors coordinate among themselves through a donor coordination framework group which meets regularly to exchange information on individual programs. The framework group i s supplemented by sector coordinating groups in a large number of sectors. These groups are usually donor led though Government participation at the sector level i s routine. Since the JNA, the Government has further strengthened i t s role in leading the donor coordination effort, with the Minister of Finance responsible for chairing periodic donor meetings to review progress in implementing programs identified in the JNA, and overseeing the operation of key sub-sector groups dealing with transport, internally displaced persons (IDPs) and the financial sector. 63. The Bank also coordinates with key donor partners on individual operations. Several projects during the CPS had direct or parallel co-financing. The Public Sector Financial Management Reform Support project (PSFMRSP) involves a unique pooled funding arrangement with funding from IDA, DFLD, SIDA, the EC and the Netherlands. The PRSO program was co-financed by the Netherlands, and the EC provided parallel financing in support o f complementary reforms. The education projects have benefited from PHRD funding for critical technical assistance, and the Rural Development project i s receiving similar PHRD funding as well as parallel financing from IFAD. Finally, LFC advisory services have received critical support from Canada, British Petroleum and partners under the Regional Development Program and the International School of Economics at Tbilisi State University (ISET) was established with financial support from the Bank, British Petroleum, SIDA and Norway. 68 Management of Risks 64. The identification o f risks unfortunately proved to be prophetic, with regional conflict and the external economic crisis combining as twin shocks to the economy affecting both growth prospects and poverty levels in the last 10 months of the CPS period. The donor response to the August crisis, the Government's strong record o f macro-economic management, and the solid base of reform provide a good basis for Georgia to withstand these shocks and return to a solid growth stance once the international economic crisis eases, Two caveats are needed however. Donors will need to work to fulfill their entire pledge amounts both in quantity and timing and if possible increase assistance in support o f Georgia's recovery efforts. Second, efforts are needed to ease tensions between Government and some opposition parties, which if left to fester could keep investor confidence from improving and stymie quick recovery. Rating Bank Performance: Satisfactory 65. The CASCR rates Bankperformance as satisfactory. Overall, the CPS was well-aligned with Government priorities and represented a welcome narrowing o the Bank Group's focus. The CPS f included an appropriate balance between the series o annual policy based credits and related f investment operations, and analytical work, particularly the programmatic poverty and economic work which was key in supporting on-going reforms. Seasoned and professional teams supported by a strong country office offered continuity and professionalism that cemented a close working relationship with the Government. The CPS proved to be flexible in adapting to changing priorities, sh@s in reform stance, and emerging crises. The assistance program was able to expand to accommodate the extra resources that became available to Georgia because o its strong reform f performance, and the Bank was able to respond quickly both to the changing resource picture and the f challenges that arose during the CPSperiod. O particular note was the quick response o the Bank f and development partners to the August 2008 events in working with the Government to produce a comprehensivejoint needs assessment, and convene the Brussels Donor 's conference that delivered badly needed assistance at a time when Georgia was reelingfiom the effects o conflict and emerging f world economic crisis. The CPS was marked by innovation as well including the unique pooling arrangement for the PSFMRSP, the service agreement with MCC, and restructuring o the health f project to accommodate the major shift in health care reform. There were some setbacks as well. Several operations failed to have the expected development impact mostly due to policy diferences between the Government and the Bank that were too wide to bridge. But even in the case o forestry f and irrigation constructive dialogue with the Government onhture policy directions has continued.. IV. Lessons and Recommendations 66. Selectivity - Prior to the CPS, the Bank had built a diverse portfolio of small projects in numerous sectors. In preparation for the CPS, Bank Management had grown concerned about the fragmented portfolio and wanted to explore with Government options for making it more focused. This view was shared in the CAE which noted the Bank's "enthusiastic foray into many sectors at once" in the period 1998 - 2003 that "stretched the scarce IDA envelope, weakening interventions in important areas". In early discussions it was quickly apparent that the new Government had the same view. I t was agreed that new operations and analytical work would concentrate on a few sectors. As a result as older project closed, the number o f operations and the sectors where the Banks was involved were reduced considerably. The success in making Bank Group assistance more selective was largely due to the Government being on exactly the same page about the importance of focus and depth. 67. Balance among instruments -The balance between quick disbursing and investment lending worked very well. The PRSO series was used to elevate key policy/institutional decisions and the 69 investment operations assisted in defining the issues and implementing solutions. There i s a caveat however. These complementarities were possible partly because the Bank had a diversified portfolio for much of the CPS period and this meant the Bank had expertise and in-depth knowledge o f a number o f sectoral issueshstitutions. Projecting forward, this could be more difficult if the Bank reduces i t s activities to a more narrow set of areas. 68. Implementation arrangements - Another area o f early convergence o f views between the Bank and the new Government was the desire to move from projects led by autonomous project implementation units to ones in which the beneficiary Government entity was very much in charge, with only limited project specific staffing, mainly to handle fiduciary tasks. In Georgia this approach works well, because the Government recognizes the importance of ownership and control o f the implementationprocess and i s ready to take on this responsibility. 69. Programmatic support - The programmatic approach worked well, not only with the PRSO series, but also with the AAA program where the focus was on keeping it light in terms of big formal reports, but making it replete with lots o f just-in-time technical advisory help on a wide range o f issues. 70. Agility vs. Speed -The new Government set ambitious targets for itself both in the scope o f its reforms and the timeframe for their implementation. The Bank was successful in calibrating its support to the Government's ambitious timeframe in many instances while at other times insisting on taking more time where it was essential for a successful outcome. The Bank moved very quickly with a lot o f interventions, particularly the PRSO series, and the various roads projects, not to mention the additional financing for irrigation to repair flood damage in 2005, and the accelerated processing of the municipal development project in 2008 in response to the August conflict. At the same time, the Bank, very selectively, insisted on more time when more groundwork was essential. Examples include the privatization o f electricity distribution and the introduction o f the targeted social assistance. Finally, at times views on policy directions were just too wide to bridge in the context o f investment operations and the best approach was to disengage. 71. Staffing -- Bringing in new staff to the team i s very important as it brings renewed vitality and fresh perspectives to issues. But, continuity o f staff in key areas (country economist, sector TTLs, IFC staff, and much o f the country office) provided the in-depth knowledge o f the country and sector issues that was essential for the success o f the program. Finding the right balance between rejuvenation and continuity will be a challenge going forward. 72. Decentralizing project management to country office staff can facilitate problem solving and speed implementation. Even where task management has stayed with headquarters staff, enhanced roles for local staff in day to day administration has yielded positive results. 73. Partnerships with other donors leveraged our resources, led to more effective project interventions and made the policy dialogue more coherent and effective. Partnerships in Georgia have been particularly innovative, including a service agreement between MCC and the Bank whereby the Bank for a fee supervises MCC investments in infrastructure. Also a pooled funding arrangement between four donors for the Public Sector Financial Management Reform Support Project has resulted in a coordinated approach to reforms and simplified arrangements for procurement and disbursement. Bank quick disbursing operations were cofinanced by one bilateral donor, and were coordinated with other providers o f budget support and the PEFA exercise was carried out jointly by the Bank and the EC. Finally, strong partnerships across the donor community and with the Government were critical in the quick completion o f the Joint Needs Assessment following the August 2008 crisis and for the timely convening o f the Donors conference in October 2008. 70 74. Repeater Projects. Repeat operations or additional financing in roads and municipal development over the years have built extensive implementation capacity in the respective implementing agencies. It also eased project preparation and assured quick start up o f follow-on investments as much o f the preparation was done under the preceding operation. 71 CPSCR Table 1: Planned projects and Actual Deliveries FY CPS Plan Actual Deliveries Project US%M Project US%M 2006 PRSO I 20 PRSO I 20 PSRSP 3 PSFMRSP 3 Infrastructure Pre-Invest. 5 Infrastructure Pre-Invest. 5 Education APL 2 15 Avian Flu 7 2007 PRSO I1 20 Education APL 2 15 Transit Corridor I 20 Highway Improvement I 19 PRSO I1 20 PRSO I11 20 2008 PRSO I11 20 Highway Improvement I1 35 Transit Corridor I1 20 PRSO IV 22.7 2009 Infrastructure 20 Highway Improvement I1 20 (additional financing) PRSO IV 40 Regional & Municipal Infra Dev 40 SeciLoc Roads (additional 70 financing Total 143 336.7 72 CPSCR Table 2: Planned and Realized Analytic Work Underway at time of CPS Status Rural Infrastructure Study FY06 Financial Sector Assessment Program FY07 Water Resource & Risk Management TA Ongoing Through FY 10 Kokheti National Park TA Dropped Planned at time o f CPS Country Economic Memorandum FY09 - To be delivered FY 10 Country Procurement Assessment FY08 Programmatic PER - Ongoing Annually Programmatic Poverty Assessment Ongoing - Annually Education Sector Note FY07 Agriculture Sector Update Agric. Note part o f CEM for FY 10 Energy Sector Update Power Note part of CEM for FY 10 Business Environment TA - Ongoing Annually Youth Voices Ongoing - Annually Not in the Original CPS Document TA to Establish ISET FY06-07 Accounting and Auditing ROSC FY07 PEFA-PFMA FY08 - delivered FY09 Full Poverty Report FY08 -delivered FY09 Joint Needs Assessment (JNA) FY09 73 Annex 3: Consultations on the CPS Consultations with the civil society representatives, including NGOs, academia, think-tanks, private/banking sector representatives and the media were held in late May 2009. A series o f presentations o f the proposed Country Partnership Strategy were made to various audiences in order to gain feedback and comments. OVERALL COMMENTS: 9 There was widespread agreement with the assessment o f the difficult economic situation in Georgia, related to the August conflict, the global downturn and the tense domestic situation all o f which had undermined investor confidence and growth. There was also support for the two- pillar approach proposed by the Bank to address both the immediate vulnerability needs as well as long term competitiveness. 9 There was strong appreciation for including governance as a cross-cutting theme in the forthcoming strategy by a l l groups o f stakeholders. Georgia has made progress in reducing corruption and liberalizing the economy and there i s a need for checks and balances and adequate regulation. Other priorities relate to the increased communication and dialogue, sanctity o f property rights, and the independence o f the judiciary. 9 The World Bank and other donors should carefully monitor their assistance to Georgia, and condition this (for example on better transparency and disclosure, strong monitoring and evaluation system in place). The World Bank approach i s particularly important, as one o f the most reputable international organizations. World Bank fiduciary controls are helpful. The World Bank should also strengthen its communications and dialogue outside the Government. SECTOR-SPECIFIC COMMENTS: 9 Transport Infrastructure: Participants agreed on the priority of transportation for Georgia's development. However, such issues as monitoring the quality o f the roads and road safety need to be carefully addressed. With regard to road safety, there are EU standards that could be applied to Georgia as well. 9 Energy and Environment: There was wide agreement that the Government had made strong gains in providing reliable energy supply. Promoting energy-efficiency programs i s o f utmost importance to the country. 9 Rural Development: There was strong support for doing more in this area as exports and agriculture production had not increased a fast as imports. 50% of labor i s in agriculture so it i s s an important sector. The need to increase the scale o f farms, to strengthen marketing, and improve infrastructure including storage for vegetables were all mentioned. 9 Health/Social: Tremendous importance i s attributed to health management improvement. At the same time, more professional training for staff and communication of benefits and modalities with the public i s needed. While higher pensions did help reduce poverty, more targeted funding through the TSA would be more efficient. + l Education: Education reform i s a top story in the country. I spite o f many innovations in basic n education, there were continuing needs including appropriate teaching manuals at secondary schools, access to Internet, and improved quality o f teaching. Although Internet access has been improving, now there i s a need to strengthen and improve the content. Higher education management in Georgia requires further sustained improvements and quality upgrades. 74 > Annual Poverty Assessment: Participants were surprised at the level of poverty noted in the - CPS - 23.7% which was different from that measured by the Statistics Agency. The Bank shared the Poverty Assessment with participants who acknowledged it as a very useful report. 9 Private Sector: There was recognition that the Government had become much more business friendly. Moreover, the global economy and the domestic political tensions were undermining investor confidence. Government interference with businesses in the areas o f tax and judiciary, and possible targeting o f certain businesses based on politics, were mentioned as a concern. A concern was raised about monopolies in certain fields (like pharmaceuticals) and the need to support small and medium enterprises. Some participants expressed concern that Private-Public Partnerships (PPTs) could reduce public accountability. 9 Financial Management: There was strong support for the Bank continuing i t s efforts to benchmark and report on progress in public financial management and procurement. There was also a need to strengthen transparency in corporate accounting. > Trade and Investment: There was a concern that Georgia not become overly reliant on foreign aid and investment, and that the Government needed to support local business growth with local management. There was also a need to strengthen trade systems and information on Georgia to facilitate trade and investment. > Construction sector: The situation was serious with a 40% o f labor force reduction (including professional staff), and active sales coming to a halt. At the same, earlier investment was too focused on purchasing assets rather than creating jobs and productivity. There was a clear need for renovation (80% o f structures in need o f renovation) > Banking Sector: There were concerns on the level o f interest rates, now up to 20%. This can be explained because banks have to pay high rates of about 12% on deposits. There was a need to strengthen confidence in deposits and improve domestic capital markets. Other concerns included i)lack o f credit; ii)lack o f liquidity; iii)fear of non-performingloans. 75 4nnex 4: Expected Progress toward the Millennium Development Goals Current Baseline National MDG Targets Status Poverty level o f Target 1: Halve, by 2015, the proportion o f people Poverty will likely rise in 23.7 percent in living below the poverty line 2008/2009 but then fall back Goal 1: Eradicate 2007' Target 2: Halve, by 2015, the proportion o f people to or below its 2007 level by extreme poverty that have unbalanced diets 2012113 Target 3 : Ensure Socio-economic rehabilitation and civil integration of population affected and displaced as a result o f conflicts & natural calamities Goal 2: Achieve Primary Target 4: By 2015 maintain universal primary Enrollment rates to remain universal primary completion rate at education; ensure the transformation of school high, and quality as measured education 92 percent (as YO education into 12 year cycle; inclusion into the by TIMSS and PIRLS to rise. o f relevant age International Systems o f School Education Quality group) in 2007"; Assessment; achievement of institutional coherence School education fully Progress sought with modern school education systems transformed into 12 year in quality. Target 5 : By 2015 ensure establishment o f cycle. accreditation system for tertiary education institutions; achievement o f institutional coherence with modern tertiary education systems Target 6: By 20 15 ensure the transformation o f vocational education into the one focused on labor market needs; facilitate the establishment o f institutional support to private vocational education Target 7: By 2015 ensure the function o f inclusive and integrated educational programmes; incorporate the principles o f inclusive education into national study programmes. Goal 3: Promote Ratio o f girls to Target 8: Ensure gender equality in employment Laws and regulations provide gender equality and boys in primary Target 9: Ensure equal access to activity in the equal protection to men and empower women and secondary political domain and all levels o f management women, although women education at 96 in sometimes have fewer 2007**; Gender protections de facto due to equality exists weak enforcement share o f wage mechanisms employment. Goal 4: Reduce Infant mortality Target 10: Reduce by two-thirds, by 2015, the infant Overall progress i s on track to child mortality has dropped from mortality rate (2015 MDG target goal = 7 per 1000 achieving this MDG. Further 20 per 1000 births live births). gains possible due to in 2001 to 14 in strengthening access to health 2007*** services by the poor Goal 5: Improve Maternal Target 11 : Reduce by three-quarters, by 201 5, the Overall progress i s on track to maternal health mortality rate per maternal mortality ratio (2015 MDG target goal = achieving this MDG. Further 100,000 live 12.3) gains possible due to births decreased strengthening access to health from 58.7 in 2001 services by the poor to 15.6 in 2007"' World Bank PPA Report of 2008 ** World Bank Online Atlas o f the MDGs *** Georgia Health System Performance Assessment 2008 **** World Development Indicators Database, The World Bank Group, 2008 76 Goal 5: Combat HIV/AIDS rate Target 12: Have halted by 2015, and begun to Georgia remains a low HIV/AIDS, malaria, low at 0.1 percent reverse, the spread of HIVIAIDS prevalence country for and other diseases o f pop in 2007** Target 13: Have halted by 2015, and begun to HIV/AIDS, though some reverse, the incidence of malaria and other major increase i s reported. Trends TB incidence per diseases are improving in malaria and year per 100,000 TB as well. =84.3 in 2007** Goal 7: Ensure Efforts to Target 14: Integrate the principles of sustainable National parks are proceeding environmental integrate development into country policies and programmes professionallybut forestry i s sustainability sustainable use and reverse the loss o f environmental resources not yet being managed limited to date Tareet 15: Halve, by 2015, the proportion of people according to best international without sustainable access to safe drinking water practices with impartially Target 16: Harmonization o f the housing sector with prepared inventories. 99 percent o f international standards, including the development of population with municipal (social) tenure component access to Water supply rehabilitation i s improved water ongoing. source in 2006** Goal 8: Develop a Donors pledged Target 17: Develop further an open, rule-based, Thus far, on track and pledges global partnership $4Sb over three predictable, non-discriminatory trading and financial are being closely monitored. for development years in Oct 2008 system Target 18: Deal comprehensively with the debt problems of Georgia through national and Telephone lines international measures in order to make debt per 100 pop.= 20 sustainable in the long term Cellular subsc. Target 19: Ensure improved accessibility to per 100 pop. = 51 communication systems countrywide, minimize Internet users per digital inequality between urban and rural areas 100 pop. =2 1.8 (2007) ***' * World Bank PPA Report o f 2008 ** World Bank Online Atlas o f the MDGs *** Georgia Health System Performance Assessment 2008 **** World Development Indicators Database, The World Bank Group, 2008 77 STANDARD CAS TABLES CPS Annexes 78 Georgia a t a glance 6/30/09 Europe & Lower Key D e v e l o p m e n t I n d i c a t o r s Central middle Age distribution, 2007 Georgia Asia income (2008) Female Population, mid-year (millions) 4.4 446 3,435 Surface area (thousand sq. km) 70 23,972 35,510 Population growth (Oh) -0.8 0.2 1.o Urban population (% of total population) 53 64 42 GNI (Atlas method, US$ billions) 0.0 2,697 6,543 GNI per capita (Atlas method, US$) 2,480 6,052 1,905 GNI per capita (PPP, international $) 4,760 11,262 4,585 GDP growth (%) GDP per capita grovdh (Oh) (mart recent estimate, 2003-2008) 2.1 2.9 6.9 6.7 10.2 9.1 L percent oftolal population Poverty headwunt ratio at $1.25 a day (PPP, %) 13 4 Jnder.5 mortality rate (per 1,000) Poverty headwunt ratio at $2.00 a day (PPP, %) 30 9 Life exqectancyat birth (years) 71 70 69 Infant mortality (per 1,000 live births) 39 21 36 6o 1 Child malnutrition (Oh of children under 5) 25 50 40 Adult literacy, male (% of ages 15 and older) 99 88 30 Adult literacy, female (% of ages 15 and older) 96 77 Gross primary enrollment, male (% of age group) 95 98 112 20 Gross primary enrollment, female (% of age group) 95 96 109 10 0 Access to an improved water source (%of population) 99 95 88 1890 1895 2000 2007 Access to improved sanitation facilities (% of population) 93 89 55 0 Georgia Europe (L Central Asia Net A i d Flows 1980 1990 2000 2008 ' (US$ millions) Net ODA and official aid 0 169 382 Top 3 donors (in 2007) United States 0 75 87 Austna 0 1 55 Germany 0 19 38 A d (% of GNI) 0.0 5.3 3.7 A d per capita (US$) 0 36 87 Long-Term Economic Trends Consumer pnces (annual % change) 3.3 4.1 10.1 GDP impiiut deflator (annual % change) 1.o 22.4 4.7 9.9 85 05 -GDP -GDP per capita Exchange rate (annualaverage local per US$) 0.0 2.0 1.5 Terms of trade index (2000 = 100) 100 88 1980-90 1990-2000 20008 (average annual gmwth %J Population, mid-year (millions) 5.1 5.5 4.7 4.4 0.7 -1.5 -1 .o GDP (US$ millions) 1,738 3,057 12,864 0.4 -7.1 8.1 (% of GDP) Agriculture 24.3 31.5 21.9 10.0 1.3 industry 35.6 33.5 22.4 21.2 11.3 Manufacturing 27.9 24.2 9.1 12.0 12.5 Services 40.1 35.0 55.7 68.8 9.7 Householdfinal consumption expenditure 55.8 64.8 90.5 84.9 23.1 5.8 General g o t t final consumptionexpenditure 13.0 10.2 8.5 14.3 32 1 23.4 Gross capital formation 29.1 30.7 26.6 30.3 23.6 10.2 Exports of goods and services 39.9 23.0 28.7 17 6 12.7 Imports of goods and services 45.7 39.7 58.3 14.2 15.1 Gross savings 9.2 8.1 Note: Figures in italics are for years other than those speMied. 2008 data am preliminaly. .. indicates data are not available. a. Aid data are for 2007. DevelopmentEconomics, DevelopmentData Group (DECDG). 79 Georgia Balance of Payments and Trade 2000 2008 (US$ rniilions) IGovernance indicators, 2000 and 2007 Total merchandise exports (fob) 459 2,426 Total merchandise imports (df) 97 1 6,265 Voice and accountability Net trade in goods and services -521 -3,799 Politics stability Current account balance -269 -2.862 as a % of GDP -8.8 -22 2 Regulatory quality Rule of law Workers' remittances and compensation of employees (receipts) 274 696 Control of corruption Reserves. including gold 109 1,499 0 25 50 75 100 m2007 Countrys percentile rank (0 loo) Central Government Finance nigher w l w s rmply betler ralrgs 02000 (% of GDP) Current revenue (including grants) 15 4 30.7 Tax revenue 14 6 24 9 Current expenditure 16 7 28 5 Technology and Infrastructure 2000 2007 Overall surplusldeficit -1 7 -6 3 Paved roads (% of total) 93 4 38 6 Highest marginal tax rate ( O h ) Fixed line and mobile phone individual 20 25 subscribers (per 100 people) 15 72 Corporate 20 15 High technology exports (% of manufactured exports) 10.8 71 External Debt and Resource Flows Environment (US$ miliionsj Total debt outstanding and disbursed 1.638 5,345 Agricultural land (% of land area) 43 43 Total debt service 118 119 Forest area (% of land area) 39.7 39 7 Debt relief (HIPC, MDRI) - - Nationally protected areas (% of land area) 23 Total debt ( % of GDP) 53 6 41 5 Freshwater resources per capita (cu. meters) 12,600 13,216 Total debt service (% of exports) 12 5 32 Freshwater withdrawal (billion cubic meters) 16 Foreign direct investment (net inflows) 131 1,239 CO2 emissions per capita (mt) 0.96 11 Portfolio equity (net inflows) 0 118 GDP per unit of energy use (2005 PPP $per kg of oil equivalent) 3.8 52 Composition of total external debt, 2008 Energy use per capita (kg of oil equivalent) 61 1 754 Short-term 0 , ,40RD 0 riDA 995 Private 1 312 0ilatsral 549- - Private Sector Development 2000 2008 Time required to start a business (days) - 3 Cost to start a business ( % of GNI per capita) - 40 Time required to register property (days) - 3 Ranked as a major constraint to business 2000 2007 (% of managers surveyed who agreed) Economic and regulatory policy uncertainty .. 44.7 Anticompetitive or informal practices .. 38.2 Stock market capitalization (% of GDP) 0.8 13.6 ' Bank capital to asset ratio (%) 30.5 20.4 Note: Figures in italics are for years other than those specified. 2008 data are preliminary. 6130109 .. indicates data are not available. -indicates observation is not applicable. Development Economics, Development Data Gmup (DECDG) 80 Millennium Development Goals Georgia With selected targets to achieve between 1990 and 2015 (esbmate closest to dafe shown, +/- 2 years) _________ thelakes foLext2me poverty an.ma&utrition Goal 1 halve : _ _ Poverty headcount ratio at $1 25 a day (PPP % of population) Poverty headcount ratio at national poverty line (% of population) Share of income or consumption to the poorest qunitile (%) Prevalence of malnutntion (% of children under 5) -~ 2: ~ Goal _ _ ensure that childrenare abe tpco_mpkteg_rimary schooling_ Primary school enrollment (net %) Pnmary completion rate (% of relevant age group) Secondary school enrollment (gross %) Youth literacy rate (% of people ages 15-24) -- --_ Goal 3: eliminate genderdisparity in e ~ u ~ a t i ~ a n d c % m p owomen wer Ratio of girls to boys in pnmary and secondary education ( )I Women employed in the nonagncultural sector (% of nonagncultural employment) Proportion of seats held by women in national parliament (%) GOa34: red_uceufnder-5mortality by twoAhlvs-- - - - - - - - ___ - Under-5 mortality rate (per 1 000) Infant mortality rate (per 1 000 live births) Measles immunization (propomon of one-year olds immunized %) Goa1 5: reduce maternal mortality by three-fourths Maternal mortality ratio (modeledestimate per 100 000 live births) Births attended by skilled health staff (% of total) Contraceptive prevalence (% of women ages 15-49) ____ - -ha_ltLndbeg! Goal 6: to revers? theSpEad of HlV/@DLand other major diseases Prevalence of HIV (% of population ages 16-49) Incidence of tuberculosis (per 100 000 people) Tuberculosis cases detected under DOTS ( ) I to Goal7: hðe_prCportion ofge_qple_wlthoutsustainable Kccc_eis basic needs Access to an improved water source (% of population) Access to improved sanitation facilities (% of population) Forest area ( h of total land area) O Nationally protecledareas (% of tolal land area) CO2 emissions (metnc tons per capita) GDP per unit of energy use (constant 2005 PPP $ per kg of oil equivalent) ___ Goal 8 : d e v e l o p a ~ o ~ l p _ a ~ ~ ~ s h i ~ f o I _ d e v e ~ p m ~ n ~ .- ___ __ Telephone mainlines (per 100 people) Mobile phone subscribers (per 100 people) Internet users (per 100 people) Personal computers (per 100 people) iducation Indicators (%) Measles immunization (Oh of 1-year olds) ICT indicators (per 100 people) 125 100 80 1W 70 75 60 75 50 50 50 40 25 30 25 20 0 10 2000 2002 2004 ZOOB 2N 0 0 l9SU 1995 2WO 2007 +Primary net enrollment ratio -Ratio of girls to boys In primary B secondary education WGeorgia Europe 8 Central Asia I I 0 Fixed + rrobile subrcnben uIers I Note: Figures in italics are for years other than those specified. .. indicates data are not available. 6/30/09 Development Economics, Development Data Group (DECDG) 81 Georgia Social Indicators Latest single year Same regionlincome group Europe & Lower- Central middle- 1980-85 1990-95 2002-08 Asia income POPULATlON Total population, mid-year (millions) . 5.3 5.0 4.4 445.6 3,434.5 Growth rate (% annual average forpariod) 0.8 -1.6 -0.9 0.1 1,l Urban population (% of population) 53.8 53.9 52.5 63.6 41.6 Total fertility rate (births per woman) 2.3 1.7 1.4 1.7 2.3 POVERTY (% of population) National headcount index 21.3 Urban headcount index 20.1 Rural headcount index 22.3 INCOME GNI per capita (US$) 510 2,480 6,052 1,905 Consumer price index (2000=100) 51 174 159 142 Food price index (2000=100) INCOMElCONSUMPTlON DISTRIBUTION Gini index 41.0 Lowest quintile (% of income or consumption) 5.6 Highest quintile (% of income or consumption) 46.4 SOCIAL INDICATORS Public expenditure Health (% of GDP) 1.o 3.6 2.0 Education (% of GNI) 3.6 3.2 Net primary school enrollment rate (% of age group) Total 97 93 91 90 Male 97 93 92 91 Female 97 92 90 90 Access to an Improved water source (% of population) Total 99 95 88 Urban '100 99 96 Rural 97 88 83 Immunization rate (% of children ages 12-23 months) Measles 61 86 97 82 DPT 79 78 96 79 Child malnutrition (% under 5 years) 25 Life expectancy at birth (years) Total 70 70 71 70 69 Male 66 67 67 65 67 Female 74 74 75 74 71 Mortality Infant (per 1,000live births) 48 41 39 21 38 Under 5 (per 1,000) 52 45 42 23 50 Adult (15-59) Male (par 1,000 population) 210 195 219 303 197 Female (per 1,000population) 94 90 84 125 125 Maternal (par 100,000 live births) 30 44 300 Births attended by skilled health staff (%) 95 69 CAS Annex B5. This table was produced from the CMU LDB system. 05/27/09 Note: 0 or 0.0 means zero or less than half the unit shown. Net enrollment rate: break in series between 1997 and 1998 due to change from ISCED76 to ISCED97. Immunization: refers to children ages 12-23 months who received vaccinations before one year of age or at any time before the survey. 82 - Georgia K e y Economic Indicators Actual Estimate Projected Indicator 2005 2006 2007 2008 2009 2010 2011 2012 National accounts (as YOo f GDP) Gross domestic product' 100 100 100 100 100 100 100 100 Agriculture 17 13 11 IO 9 10 9 9 Industry 27 25 24 21 20 21 20 19 Services 56 62 65 69 70 70 71 72 Total Consumption 84 94 93 99 95 101 100 98 Gross domestic fixed investment 28 26 26 22 19 20 22 22 Government investment 4 5 7 8 9 7 6 6 Private investment 24 20 19 15 11 14 15 16 (GNFS)~ EXPO~~S 34 33 31 29 27 31 33 33 Imports (GNFS) 52 57 58 58 50 55 55 54 Gross domestic savings 16 6 7 1 5 -1 0 2 Gross national savings' 22 15 14 8 12 7 7 8 Memorandum items Gross domestic product 6411 7762 10227 12864 10981 10762 11311 12291 (US$ million at current prices) GNI per capita (US$, Atlas method) 1320 1670 2090 2480 2600 2700 2700 2830 Real annual growth rates (%, calculated from 94 prices) Gross domestic product at market prices 9.6 9.4 12.3 2.1 -4.0 2.0 4.0 5.0 Gross Domestic Income 9.6 9.4 12.3 -0.4 -1.9 2.5 4.5 5.2 Real annual per capita growth rates (%, calculated from 94 prices) Gross domestic oroduct at market orices 10.7 10.4 13.3 2.9 -3.2 2.9 4.6 4.9 Total consumptibn 6.9 23.2 11.5 5.7 -2.8 8.9 3.3 3.6 Private consumption 1.2 29.8 1.8 5.3 -4.1 10.6 5.2 3.5 Balance o f Payments (US%millions) EXPOITS (GNFS)~ 1 2 87 2552 3182 3695 2943 3299 3684 408 1 Merchandise FOB 1472 1667 2088 2426 1708 I 9 11 2154 2394 Imports (GNFS)~ 3318 4413 5917 7495 5469 5878 6273 6672 Merchandise FOB 2687 3686 4984 6265 4448 4797 5126 542 1 Resource balance -1131 -1861 -2734 -3799 -2525 -2578 -2589 -2591 Net current transfers 359 524 689 990 838 873 845 893 Current account balance -709 -1 I74 -2006 -2924 -1770 -1772 -1800 -1830 Net private foreign direct investment 542 1186 1675 1512 910 1040 1220 1380 Long-term loans (net) -88 360 113 893 593 484 558 361 Official -4 -46 12 205 453 493 294 254 Private -84 406 102 687 140 -8 264 107 Other capital (net, incl. emors & omissions) 346 35 696 469 99 202 125 279 Change in reservesd -9 1 -407 -479 51 168 46 -103 -189 Memorandum items Resource balance (% o f GDP) -17.6 -24.0 -26.7 -29.5 -23.0 -24.0 -22.9 -21.1 Real annual growth rates ( YR94 prices) Merchandise exports (FOB) 19.1 4.9 5.2 7.3 -15.0 8.2 8.3 8.7 Merchandise imports (CIF) 18.1 27.9 12.2 7.9 -10.2 5.0 3.6 2.7 (Continued) 83 Georgia - Key Economic Indicators (Continued) Actual Estimate Projected Indicator 2005 2006 2007 2008 2009 2010 2011 2012 Public finance (as % o f GDP at market prices)e Current revenues 23.7 26.1 28.9 30.0 28.5 26.4 26.2 25.3 Current expenditures 20.1 22.2 25.0 28.4 29.8 27.4 25.5 24.0 Current account surplus (+) or deficit (-) 3.6 3.8 3.9 1.5 -1.3 -1.0 0.7 1.3 Capital expenditure 5.9 7.6 9.0 8.6 9.3 6.9 6.3 5.8 Foreign financing 0.2 0.2 0.6 6.2 5.3 5.2 3.2 2.4 Monetary indicators M2IGDP 16.4 19.3 23.4 22.3 22.8 25.2 25.0 25.0 Growth of M2 (%) 26.4 39.3 49.6 7.0 -2.0 15.0 8.3 10.3 Private sector credit growth / 171.4 414.8 115.7 251.5 -266.1 136.5 229.8 127.3 total credit growth (%) Price indices( YR94 =loo) Merchandise export price index 131.5 141.9 169.0 183.0 151.5 156.7 163.0 166.7 Merchandise import price index 134.7 144.5 174.2 202.9 160.4 164.7 169.9 174.9 Merchandise terms o f trade index 97.6 98.2 97.0 90.2 94.5 95.2 95.9 95.3 Real interest rates Consumer price index (% change) 8.3 9.2 9.3 10.1 1.8 3.2 4.0 5.0 GDP deflator (YO change) 7.9 8.5 9.7 9.9 0.0 2.0 5.0 5.0 a. GDP at factor cost b. "GNFS" denotes "goods and nonfactor services." c. Includes net unrequited transfers excluding official capital grants. d. Includes use o f I M F resources. e. Consolidated central government. 84 - Georgia K e y Exposure Indicators Actual Estimated Projected Indicator 2005 2006 2007 2008 2009 2010 2011 2012 Total debt outstanding and 191 1 2107 3610 5345 6018 6866 7364 7522 disbursed (TDO) (US$m)a Net disbursements (US$m)a 30 -1 8 90 1050 778 55 1 330 -54 Total debt service (TDS) 187 268 181 149 239 279 409 5 06 (Us$m)a Debt and debt service indicators (%I TDO/XGS~ 75.1 88.9 93.3 119.1 164.9 168.4 163.0 151.5 TDOiGDP 29.8 34.9 35.3 41.6 54.8 63.8 65.1 61.2 TDS/XGS 7.4 8.8 4.1 3.3 6.5 6.8 9.1 10.2 Concessional/TDO 65.3 48.5 39.3 30.4 33.9 36.0 36.5 38.4 IBRD exposure indicators (%) IBRD DS/public DS 0.0 1.2 3.6 3.4 3.1 Preferred creditor DSipublic 48.1 44.8 43.2 61.9 57.8 59.0 65.5 14.4 DS (%)' IBRD DS/XGS 0.0 0.1 0.2 0.3 0.3 IBRD TDO (US$m)d 0 0 0 0 60 147 24 1 321 Of which present value o f guarantees (US$m) Share o f IBRD portfolio (%) 0 0 0 0 0 0 0 0 IDA TDO (US$m)d 679 785 885 995 1119 1200 1274 1326 a. Includes public and publicly guaranteed debt, private nonguaranteed, use of IMF credits and net short- term capital. b. "XGS" denotes exports o f goods and services, including workers' remittances. c. Preferred creditors are defined as IBRD, IDA, the regional multilateral development banks, the IMF, and the Bank for International Settlements. d. Includes present value o f guarantees. e. Includes equity and quasi-equity types of both loan and equity instruments. 85 CAS Annex B2: Georgia Selected Indicators* o f Bank Portfolio Performance and Management A O f Date 7/6/2009 s Indicator 2007 2008 2009 Portfolio Assessment Number o f Projects Under Implementation a 19 15 11 Average Implementation Period (years) 4.4 3.9 3.8 Percent o f Problem Projects by Number a, 5.3 13.3 9.1 Percent o f Problem Projects by Amount a, 4.9 9.3 3.4 Percent o f Projects at Risk by Number 5.3 20 9.1 Percent ofprojects at Risk by Amount 4.9 10.5 3.4 Disbursement Ratio (%) e 33.5 52.9 77.7 Portfolio Management CPPR during the year (yesino) Supervision Resources (total US$) Average Supervision (US$/project) Memorandum Item Since FY 80 Last n w F Y S Proj Eva1by OED by Number 26 8 Proj Eva1by OED by Amt (US$ millions) 614 154.1 YO f OED Projects Rated U or HU by Number o 23.1 37.5 YO f OED Projects Rated U or HU by A M o 34.8 22.7 a. As shown in the Annual Report on Portfolio Performance (except for current FY). b. Average age o f projects in the Bank's country portfolio. c. Percent ofprojects rated U or HU on development objectives (DO) and/or implementation progress (IP). d. As defined under the Portfolio Improvement Program e. Ratio ofdisbursements during the year to the undisbursed balance ofthe Bank's portfolio at the beginning ofthe year: Investment projects only. * All indicators are for projects active in the Portfolio, with the exception ofDisbursement Ratio, which includes all active projects as well as projects which exited during the fiscal year. 86 - CAS Annex B3 IBRDIIDA Program Summary Georgia As Of Date 512612009 Proposed IBRD/IDA Base-Case Lending Program a Strategic Rewards b Implementation Fiscal year Pmj ID. US$(M) (H/M) b Risks ( H M ) 2010 E W HIGHWAY IMP 3 147.0 KAKHETI ROADS 40.0 Georgia DPO-1 85 HIGHWAYS - AF 23.0 * Result 295 2011-12 Georgia DPO-213 45 Other 56.0 Result 101 2013 TBD Overall Result 396 Note: Rus Indicative IFC lending over N 10-13 210-360 Indicative IBRD lending totaling $266 million 87 Annex B3: Georgia: IFC Investment Operations Program 2006 2007 2008 2009* Commitments (US$m) Gross 35.75 2.48 42.69 223.65 Net** 35.75 2.48 42.69 223.65 Net Commitments by Sector (%) Agribusiness Equity Funds Financial Markets 24.48 100 100 84.51 General Manufacturing 15.49 Health & Education Infrastructure 75.52 IT & Telecoms Oil, Gas, Mining 8, Chemicals Sub-national Finance 100 100 100 100 Net Commitments by Investment Instrume nt (%) Equity 24.48 100.00 16.83 30.62 Loan 75.52 66.77 57.08 Quasi-Equity (Loan Type) 16.40 12.30 Total 100 100 100 100 As of June 30,2009 ** IFCs Own Account only 88 Annext B4: Georgia -- Summary o f Nodending Sexvices As Of Date 03/09/2009 Product Status in FY Cost (US$OOo) Audiencea Objective Recent cornpietions Financial Sector Assessment Program FY07 75 G,D,B K,PS Accounting and Auditing ROSC FY07 50 G,D,B,PS K,PS, PD Education Sector Note FY07 100 G,D,B, PS K,PS Country Procurement Assessment FY08 100 G,D,B,PS K,PS,PD PEFA (Joint with EU) FYO9 150 G,D,B K, PS Full Poverty Assessment FYO9 200 G, D,B, PS K,PS Joint Needs Assessment (JNA) FYO9 400 G,D, B,PS K,PS,PD JNA Progress Report FYI0 100 G, D,B, PS K,PS,PD Financial Sector Payments Systems FYI0 100 G,D,B K,PS UnderwaylPianned Country Economic Memorandum FYI0 300 G,D,B,PS K,PS,PD Including Rural Dev. Strategy FYI0 Including Energy Strategy FYI0 Youth Voices Ongoing 25 pa G, D,B K,PS Annual P o w t y Assessment Ongoing 100 pa G,D K,PS Public Expenditure ReJew (incl PEFA) Ongoing 100 pa G,D,B K, PS Financial Sector Support Ongoing 100 pa G, D,B K, PS Health Sector TA Ongoing 50 pa G,D,B,PS I ,PS,PD Competitiveness Assessment (IFC) Ongoing 100 G,D,B,PS K,PS,PD Education Sector Reuew FYll 150 G, D,B,PS K,PS,PD TA on Monitoring and Emluation FY 10-13 50 pa G K,PS TA on Communications FY 10-13 50 pa G K,PS, PD Dialogue on PPPs in infrast (IFC) FY 10-13 100 G, D,B,PS K,PS,PD Business Climate Dialogue (IFC) FY 10-13 100 G,B,PS K,PS,PD Adbisory to banks: NPLs, Housing (IFC) FY 10-11 100 G,B,PS K,PS,PD Strengthening trade & quality standards FY 10-11 30 GIB PS Improving Energy Regulation FYll 100 G, D,B,PS K, PS JNA Progress Report 2 FYIO-I1 50 pa G, D,B,PS K,PS,PD Acounting/Auditing ROSC follow-up FYI2 50 G K, PS Rural lnvestm Climate and supply chains FYll-12 50 G,D, B,PS K,PS,PD a. Government, donor, Bank, public dissemination. b. Knowledge generation,public debate, Problem-solvina. 89 0 0 0 0 0 0 0 0 , h! lnG 0 f 3 5 5 O 0 8 O o o 0 v) a ! ? v) ni N oi b A - a a 0 0 0 0 0 0 a ni c 8 I ? 8 8 '2 53 ri d d d r d Q P) N OD 0 0 0 0 0 0 3 0 0 0 0 0 0 0 0 21 40°E 42°E 44°E G EO R G IA 44°N 44°N SELECTED CITIES AND TOWNS AUTONOMOUS OBLAST (AO) CENTER R U S S I A N F E D E R A T I O N AUTONOMOUS REPUBLIC (ASSR) CENTERS To NATIONAL CAPITAL Soai GEORGIA RIVERS C MAIN ROADS Gagra a RAILROADS u c AUTONOMOUS OBLAST (AO) BOUNDARY a AUTONOMOUS REPUBLIC (ASSR) BOUNDARIES ABKHAZIA s Mestia To INTERNATIONAL BOUNDARIES Suhumi u Vladikavkaz s Kol Tkvarceli k This map was produced by the Map Design Unit of The World Bank. M The boundaries, colors, denominations and any other information hi Mqinvartsveri shown on this map do not imply, on the part of The World Bank Ochamchira Dzvari da o (5047 m) Group, any judgment on the legal status of any territory, or any uri Kazbegi endorsement or acceptance of such boundaries. Ing Oni u n Low Zugdidi Ambrolauri ni t Rio li South a a land Sachkhere sck Senaki Tkibuli ilk Ossetia i eni Kvir Kutaisi Tsk Chinvali Ts'khinvali n Iori Black Sea Poti s Rioni Samtredia 42°N Akhmeta 42°N Gori Telavi Khashuri Mtkv a ri (K Ozurgeti ura) Al Lagodehi Mtskheta a za Kobuleti ni ADJARA AJARA T'BLISI Gurjaani Batumi Akhaltsikhe Iori To Rustavi Zagatala Marneuli Ahalkalaki Tsiteli- Kazreti Tskaro Ninocminda Mt kva ri Io ri To Trabzon (Ku ra) T U R K E Y To Yevlax Mingechevir 0 20 40 60 Kilometers Reservoir To AZERBAIJAN 0 10 20 30 40 50 Miles Erzurum To A R M E N I A Erzurum To Armavir Lake Sevan 40°E 42°E 44°E 46°E NOVEMBER 2004 IBRD 33410