92412 December 15, 2005
Roads to Recovery: Improving Infrastructure in Georgia's Cities
RUSTAVI, Georgia, 1 November 2005 - Megobroba Street extends half-paved between rows of
working class apartment blocks in Rustavi, Georgia's third largest city.

It's pouring rain so the road crew has taken a break. Pedestrians duck for cover as buses splash
their way through the street's rough patches.

But push open the door of a supermarket on the same half-finished street, and you'll find Lea
Pataridze, a young saleswoman at the pastry counter, all patience and smiles.

“It's great,” she says of the construction work at her doorstep. “I just wish they would do the same everywhere. In the 12th district, the
neighborhood where I live, there is no asphalt at all. There are puddles large enough to swim in. My son comes home from school covered
in mud.”

Eventually, the municipality of Rustavi may well repave Pataridze's street. It plans to rehabilitate virtually all of the city's water and road
networks by collecting revenue from privatizations and taxes, and borrowing additional cash from Georgia's Municipal Development Fund.

                                         This fund, known as MDF, was created under the World Bank-financed Municipal Development
                                         and Decentralization Project (MDDP) launched in 1997, and supported by a follow-up project in
                                         2002. The idea was to allow credit-worthy municipalities to finance infrastructure work on
                                         advantageous terms. In the process, local administrations would learn how to identify priorities,
                                         handle money and repay loans.

                                        “It's crucial to build administrative skills outside the capital,” explains Tamara Sulukhia,
                                        infrastructure specialist at the World Bank's Georgia Country Office. “All economic and social
                                        resources are concentrated in Tbilisi. But we need to do something about the rest of the country
where the other seventy-five percent of Georgians live.”

Support from the MDF is part-grant, part-loan, repayable in 10 years after a two-year grace period. “We want to encourage them to build
fiscal and repayment discipline,” she says.

As of November 2005, 11 municipalities, including the capital, had borrowed money to spruce up their streets and lay down water and
sewerage pipes. In Rustavi alone, the fund has helped finance nine separate infrastructure projects.

These infrastructure upgrades have made a strong impact in a city still roiling from the death of
the command economy. Rustavi was built from scratch in 1948 to house the workers of a massive
metallurgical plant, one of the Soviet Union's largest. Since the Union's collapse, dozens of
factories have shut down and the metallurgical plant, now privatized, has slashed its staff from
over 11,000 to a few hundred workers.

Repaved streets and more reliable water supplies are key to the city's recovery. “Better roads
trigger development. People want to open there shops there. And businesses function better
where there are roads and sidewalks,” says Zaza Suladze, Rustavi's recently-appointed vice-
mayor, who notes an up-tick in the city's economic activity in the past few years.

                                         Giorgi Alhanasvhili's small business is a case in point. The barrel-chested man in his forties was
                                         unemployed when he decided to open a car wash two years ago on a major street that had just
                                         been repaved with MDF funding.

                                         His business immediately thrived while his nearest competitor, a car wash located on a bumpy
                                         and muddy side-street, went bankrupt. Alhanashvili chose his business location with care. He
                                         says customers would not come if it were hard to reach. “However,” he adds with a smile, “if mud
                                         didn't exist, I wouldn't have this business...”

                                         On a larger scale, better infrastructure could help draw foreign investors, already lured by
Rustavi's proximity to Tbilisi (the two cities are separated by a 20-minute car drive). Although thousands of skilled workers left Rustavi
when activity at the metallurgical factory ground to a near halt, the municipality has plans to revive its reputation as an attractive industrial
zone by creating a high-caliber vocational school. This type of strategic thinking is exactly what the project's backers had in mind when
they launched the Municipal Development Fund.

Since 2002, MDF generates its own resources. “It's now a revolving fund with a long-term vision,” says Giorgi Meskhishvili, head of the
fund's Investment and Loan Department. “It's a sustainable Georgian institution whose staff will be able to assist any municipality,” concurs
Sulukhia, the infrastructure specialist. A further sign of the fund's credibility, the Millennium Challenge Corporation has asked MDF to
manage a USD 60 million grant earmarked for infrastructure.