Report No. PIC690
Project Name                         Georgia-Institution Building Credit
Region                               Europe and Central Asia
Sector                               Non-Sectoral
Project ID                           GEPA8413
Borrower                             Government of the Republic of Georgia
Implementing Agency                  Project Implementation Unit
Date of PID                          June 23, 1994
Appraisal Date                       April 1994
Board Date                           July 1994 (tentative)
1.       Georgia is a relatively small country with a population of 5.4
million situated in the southern part of the Caucasus region. It was
the first of the non-Baltic states to declare independence from the
former Soviet Union (FSU), on April 9, 1991. Formal contacts between
the World Bank and the Republic of Georgia (hereinafter referred to as
Georgia) began in March 1992, and the country joined the World Bank in
August 1992. A Country Economic Memorandum, entitled "Georgia, From
Crisis to Recovery: A Blueprint for Reforms" (Report No. 11275-GZ) was
distributed to the Board in May 1993.
2.       Soon after its independence Georgia became embroiled in political
and civil strife which had a devastating effect on the economy. The
armed conflict abated in late 1993, and the government has since
refocused its attention on establishing law and order and rebuilding and
reforming the economy. The government has requested IDA support in its
efforts to design and implement stabilization and market reforms. The
proposed operation is in response to that request. It would constitute
the first operation by the World Bank Group in Georgia.
3.       Background.   Prior to the breakup of the FSU, Georgia was a
relatively well-off state with a strong tradition of entrepreneurship.
The Georgian economy's sources of strength included agriculture (citrus,
tea, wines) and agro-industries (processed food, fertilizers), tourism
(the Black Sea coast), and natural resources (e.g., manganese). Georgia
was also a relatively large producer of steel pipes, electric motors,
synthetic fibers, roofing materials, textiles, and shoes. Furthermore,
the country's location made it a primary transit conduit for goods
shipped elsewhere in the Caucasus. External trade, largely with the
republics of the FSU, played a large role in the economy. Georgia
relied heavily on imports of energy from other republics, notably Russia
(electricity, crude oil) and Turkmenistan (natural gas). Imported
energy amounted to about 95 percent of the total energy supply in 1992-
93. Wheat, sugar, and some heavy machinery were the other major
imports. Georgia's main exports included citrus, tea, tobacco, wine,
and mineral water.
4.       Since independence, Georgia has suffered from intense civil
conflict in Abkhazia and elsewhere which resulted in a large influx of



refugees to the other parts of Georgia, worsening the economic plight of
the country. A ceasefire is now in effect and negotiations are underway
to resolve the dispute. The war had a devastating effect on the
Georgian economy. It directly affected Georgia's main exports of tea
and citrus and aost wiped out earnings from tourism. In addition,
recession in the FSU, adverse terms of trade movements, the breakdown of
marketing channels and trade, an earthquake, and strikes and political
violence accelerated the economic decline. The per capita GNP is
estimated to have declined from US$1,640 in 1991 to US$850 in 1992;
output declined further by 40 percent in 1993. Not surprisingly, the
economic decline has resulted in a sharp deterioration of social
conditions. Living standards have plummeted. Rationing for basic
commodities was introduced in December 1993. Central heating in Tbilisi
was discontinued for the winter, and electric power has been rationed --
with more than 12 hours of daily power shutdowns. The shortage of fuel
and electricity has forced cuts in public transport, and the influx of
refugees from Abkhazia and western Georgia has aggravated the housing
situation.
5.       Since the beginning of 1994, the government has begun to
consolidate its control over the country. There is an improvement in
the law and order situation, and a new team is in place which has
renewed efforts to rebuild the economy through market oriented reforms.
Already progress has been made in implementing structural reforms in
several areas: virtually all housing has been privatized; progress has
been made in privatizing agricultural land; small-scale enterprise
privatization has been initiated; and most prices (except energy and
food products) have been liberalized. However, Georgia's transition to
a stable market economy will require strong monetary and fiscal measures
to ensure macroeconomic stability, further price and trade
liberalization, deeper structural changes in the enterprise and banking
sector, including acceleration of medium-scale and large-scale
enterprise privatization and financial sector reform. Better means to
protect the most vulnerable population during the transition period will
be necessary.
6.       Project Objectives. The Government of Georgia has requested the
World Bank's support to develop and help finance an Institution Building
Project to facilitate the design and implementation of reforms,
establish the institutional framework for the effective management of a
private market economy, and to develop a framework for coordination of
technical assistance.
7.       Project Description.   On the basis of the economic and sector work
already completed, further work undertaken in preparing the project, and
in agreement with the government, this Institution Building Project
would assist in the following areas.
a.      Financial Sector Reform
Financial Sector Infrastructure: The institution building and
technical assistance program will focus on preparing the
institutional framework for financial sector reforms. The IDA
project will finance consulting services and equipment to: (i)
introduce and implement Broadly Adapted Financial Statements
-2 -



(BAFS), an internationally acceptable accounting and auditing
system; (ii) conduct diagnostic studies of five state-owned
banks and make recommendations for further actions; and (iii)
review existing payment system and make recommendations for
steps to streamline the system. In addition, within the
framework of the proposed project, the Central Bank of the
Netherlands has agreed to provide technical assistance on a
grant basis for strengthening the banking supervision system
and the development of a legal framework for the banking
sector, and the IMF will provide a senior level advisor to the
President of the NBG. The project will be coordinated with
the on-going activities of the other donors: the EU is
conducting training seminars for banking and accounting
professionals; and USAID is developing a training program for
commercial bankers.
b.      Economic Management
Economic Policy Formulation: Support will be provided to the
Office of the Deputy Prime Minister (responsible for economic
reforms) to design a strategy for the restructuring and reform
of the government's economic management agencies, particularly
the Ministries of Finance and Economy, and to strengthen
economic policy formulation and analysis. The British Know-
How Fund has agreed to finance a short-term adviser to provide
an initial assessment for this restructuring. In addition,
the Government of the Netherlands has agreed to provide grant
funds to finance a sectoral economist to work as an adviser to
the Deputy Prime Minister. This adviser will be in addition
to the macroeconomist who was originally envisaged under the
proposed IDA project, and who has already been in place under
grant funding from USAID.
Statistical Services: The government has requested assistance
to strengthen its capacity for data collection and analysis.
The project will support consulting services, training, and
equipment to assist the Committee for Social and Economic
Information (CSEI) in (i) reviewing the methodology used for
generating and maintaining national accounts and initiating
steps to introduce the internationally acceptable System of
National Accounts (SNA); and (ii) designing and conducting an
improved household survey in the city of Tbilisi.
Tax Administration: Technical assistance is needed to help
the government design the tax modernization program, the
computerization of the tax offices and the training of the
State Tax Inspectorate (STI) staff. The project is expected
to be completed in two phases: a pilot project for the
modernization and computerization of the central STI and the
Tbilisi City Inspectorate; and extension of the
computerization and training to the rest of Georgia. The IMF
is helping to streamline the tax administration system,
develop a computerization plan, and oversee the implementation
of the modernization in the first phase, and is expected to
continue its support to the second phase as well. The IDA
- 3 -



project will finance computing equipment for the first phase.
Treasury: The government has decided to establish a modern
Treasury which will provide better expenditure management and
will also consolidate currently idle government balances with
the banks into a single Treasury account with the NBG. The
Ministry of Finance has been working with the IMF on the
design of the treasury system. The project is expected to be
carried out in two phases: in the first phase, a central
treasury function will be established in the Ministry of
Finance and a regional branch in the city of Tbilisi; in the
second phase, regional treasuries will be established
throughout Georgia. The IMF will oversee the initial work.
The IDA project will finance computers for the establishment
of the central Treasury office and the regional office in the
city of Tbilisi.
Debt Management and Economic Analysis: The Ministry of Finance
has requested assistance in strengthening its debt management
and economic analysis capacity. The project will finance
short-term advisers and equipment to assist the Ministry of
Finance in (i) setting up a debt management system, and (ii)
training the staff of the Department for Macroeconomic
Analysis.   UNCTAD is expected to execute the debt management
component of the project: a computerized system will be
installed in the Ministry of Finance, and hands-on training
will be conducted in maintaining a modern debt management
system. For the macroeconomic analysis, experts will assist
the Ministry staff in developing computer based economic
models, streamline data collection and analysis tools, and
prepare economic projections.
Strengthening of Customs Administration: This component will
assist in the establishment of a customs administration
suitable for a private, market economy. Support will be
provided to the Customs Committee in (i) simplifying and
reforming the organization and procedures of customs
operations; (ii) modernizing customs management;
(iii) training the customs staff in the customs management and
the computerization; and (iv) computerizing customs clearance
procedures, accounts, and statistics at Tbilisi headquarters
and at the Tbilisi airport as the first pilot site. This
component has been prepared with the assistance of and would
be executed by UNCTAD.
Aid Coordination: The government has decided that the newly
established Secretariat to the government's Aid Management
Commission will work as the Aid Management Unit (AMU) of the
country. The project will finance a long-term external
adviser and equipment to assist and train the staff of the AMU
in carrying out its functions. The adviser(s) will assist the
AMU in maintaining donor information, understanding donor
procedures, coordinating country's external aid priorities
consistent with the national development objectives, and
communicating those with the external aid agencies. Also, the
- 4 -



project will finance experts to assist the government staff in
analyzing sectoral information with an objective to design and
develop projects that will be acceptable to the donor
community. Both the EU and the UNDP have expressed interest
in supporting the initial establishment and functioning of the
AMU on a grant basis.
Project Administration: The project will finance: (i) an
external procurement consulting firm to assist the PIU with
the preparation of procurement and disbursement documents
under this project, and to ensure that all procurement under
the project follow the World Bank's procurement guidelines;
and (ii) a computerization expert to assist and train the
government staff in developing detailed computerization plans,
and implementing the equipment purchased under this project.
C.      Privatization and Enterprise Reform
Support for Privatization:    The credit will finance
activities which will help accelerate implementation of
privatization in Georgia. Since the government has already
made significant progress on small-scale privatization, this
project will focus on the development of a broad privatization
strategy and on initiating mass privatization. The project
will finance: (i) one short-term senior level adviser to
assist the Ministry of the State Property Management (SPM) and
the Office of the Deputy Prime Minister in reviewing the
current privatization plan, and in identifying impediments to
its progress; and (ii) experts and equipment to (a) assist in
formulating the mass privatization program and the voucher
scheme; (b) assist in the design and implementation of a
public information campaign to support the mass privatization
campaign; (c) assist in the development of a privatization
methodology and implementation through a pilot privatization
of selected large enterprises; (d) provide training aimed
strengthening the institutional capabilities of SPM in
carrying out privatization and enterprise diagnostics; and (e)
review and further develop a legislative framework for
privatization. The privatization component will be
coordinated with the already on-going activities of the EU and
the German Government. In addition, equipment will be
provided to both the SPM and the Ministry of Industry to
facilitate their work in the privatization process.
8.       Financing Plan: (US$ Million)
Estimated Project Cost:                  10.9
Financing Plan:            Government     0.2
IDA           10.1
Grants          0.6
9.       Project Implementation.   This credit will be administered in
Georgia by the Institution Building PIU, comprising a project manager
and two specialists -- one on procurement and another on disbursements.
- 5 -



In addition, the project will finance an experienced procurement
consulting firm to assist the PIU for the first 12 months of the
project. The administrative burden placed on government staff has been
minimized to the extent possible by packaging the operation into as few
contracts as possible. The project has provided extensive funding to
conduct in-country training as well as external training of the
government staff from all the beneficiary agencies. Two project
components will be executed under directed-source arrangements with a UN
specialized agency (customs administration and Debt Management: UNCTAD),
in accordance with World Bank guidelines, thereby further reducing the
administrative burden on the government.
10.      Parallel financing will be provided by the Government of the
Netherlands for a sector economist to support the Office of the Deputy
Prime Minister. The British Know-How Fund will finance a short-term
adviser for restructuring of the government economic management
agencies. Technical assistance has been arranged on a grant basis from
the Central Bank of the Netherlands for banking supervision and legal
infrastructure. The IMF will provide technical assistance for three
areas in the economic management component (Tax, Treasury, and adviser
for the NBG). The project will be coordinated with the on-going
activities of the USAID, Germany, and the EU in the areas of economic
analysis, bankers' training, and privatization. Further donor
coordination efforts will continue.
11.      Project Sustainability.   The assistance provided through this
project will train the government staff in the design and implementation
of stabilization policies and market reforms. It would thus strengthen
the institutional framework for managing a private market economy. It
would also provide a vehicle for coordinating technical assistance and,
through that assistance, accelerate the process of reform in Georgia.
12.      The risks relate to the possible consequences of a renewal of armed
conflict, political instability, and of implementation difficulties.
The government is still in the process of consolidating its power and
determining institutional responsibilities. To minimize potential
problems, the project has been kept small, focused on most important
needs, and concentrated on central institutions. Possible
implementation delays are being minimized by reducing the number of
contracts as much as possible, initiating procurement activities very
early in the project cycle, focusing on those core activities that can
have a demonstrable impact in a short time, and defining the program as
fully as possible prior to its initiation.
13.      Poverty Category.   Not Applicable
14.      Environmental aspects.   As this project is not expected to have any
significant negative environmental impact, it has been placed in
category C for the purposes of OD 4.01 on Environmental Assessment and
does not require an environmental assessment. Recognizing the
importance of environmental issues with respect to the process of
privatization, the operation would finance environmental audits for
early candidates for privatization as required. In addition, under the
privatization component, assistance would be provided to help the
government develop a strategy for settling environmental liability
- 6 -



questions.
15.      Program Objective Category.    Economic Management (EA) category.
Contact Point:             Public Information Center
The World Bank
1818 H Street N.W.
Washington D.C. 20433
Telephone No.: (202)458-5454
Fax No.: (202)522-1500
Note: This is information on an evolving project. Certain components
may not necessarily be included in the final project.
- 7 -