Georgia - Structural Adjustment Technical Assistance Credit Project (SATAC)

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-6808-GE MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED STRUCTURAL ADJUSTMENT TECHNICAL ASSISTANCE CREDIT IN AN AMOUNT OF SDR 3.3 MILLION TO THE REPUBLIC OF GEORGIA MARCH 20, 1996 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EOUIVALENTS (as of February 27, 1996) Currency Unit = Lari US$1.00 = 1.26 Laris WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS CIS - Commonwealth of Independent States EU - European Union EU TACIS - EU Technical Assistance to the CIS FSU - Former Soviet Union GDP - Gross Domestic Product GNP - Gross National Product IBC - Institution Building Credit IBRD - International Bank for Reconstruction and Development ICB - International Competitive Bidding IDA - International Development Association IFC - International Finance Corporation IMF - International Monetary Fund IS - International Shopping MIGA - Multilateral Investment Guarantee Agency NBG - National Bank of Georgia PIU - Project Implementation Unit SAC - Structural Adjustment Credit SATAC - Structural Adjustment Technical Assistance Credit SDR - Special Drawing Rights SPM - Ministry of State Property Management STF - Systemic Transformation Facility UNDP - United Nations Development Program USAID - United States Agency for International Development GEORGIA - FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY REPUBLIC OF GEORGIA STRUCTURAL ADJUSTMENT TECHNICAL ASSISTANCE CREDIT Credit and Project Summary Borrower: Republic of Georgia Implementing Agencv: Ministry of Trade and Foreign Economic Relations Beneficiaries: Ministry of Finance; Ministry of Economy; National Bank of Georgia; Ministry of State Property Management; United Fund for Social Security; participating banks and private enterprises; Customs Department Poverty Category: N/A Amount: SDR 3.3 million (US$4.8 million equivalent) Terms: Payable over 35 years, including 10 years of grace, on standard IDA terms Commitment Fee: 0.50 percent on undisbursed credit balances, beginning 60 days after signing, less any waiver Financing Plan: See Schedule A Net Present Value: N/A Staff Appraisal Report: N/A Objectives and Description: The primary objective of the proposed credit is to support the Government's reform program to stabilize the economy and create the conditions for a resumption of growth and an improvement in living standards. This will be achieved through financing technical assistance necessary for the implementation of the Government's reform program. A Structural Adjustment Credit (SAC) of SDR 41.3 million (US$60 million equivalent) is being prepared in parallel to the proposed credit and would provide import and budgetary support. The project includes technical assistance in support of privatization and post-privatization, strengthening of the financial sector, reforming social protection, mobilizing resources, disseminating information on economic reforms, and strengthening the regulatory framework for the This document has a restricted distribution and may be used by recipients only in the perfornuaice of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  ii Benefits: The technical assistance financed by the project will facilitate the implementation of the structural reforms supported by the proposed SAC. The implementation of these reforms should consolidate recent economic achievements, accelerate the transition to a market economy, and lead to sustained growth recovery and improvements in living standards. The program would lead to further downsizing of the state- controlled sector and induce adjustment of enterprises to new market signals. Risks: Implementation capacity to undertake technical assistance programs is strong in Georgia as demonstrated by the good performance of the Institution Building Credit. Therefore, the main risks associated with the project are risks to the overall reform program identical to those of the proposed SAC. The main risk is that adequate and timely external assistance of the magnitude required will not be forthcoming. The failure to achieve a fully funded program would force a much stronger domestic adjustment and a lower growth path, imposing additional social costs to the population. To address this problem, the Bank will not only provide continuous financial support, but will also assist Georgia in mobilizing external resources through the Consultative Group process and other donor coordination efforts. A second risk is that the terms at which bilateral creditors agree to reschedule existing claims may be inconsistent with the country's capacity to pay, lowering the prospects for the attainment of external viability over the medium term. This risk is being addressed through a debt strategy developed in agreement with the IMF, including on- going negotiations with bilateral creditors. A third risk is delayed implementation due to weak institutional capacity within the Government and other executing agencies. To date, technical assistance has been essential in assisting the Government in the design and implementation of reforms. The proposed credit addresses directly this risk by further strengthening the Government's capacity to implement reforms. Proiect ID Number: GE-PA-44388 This report is based on missions which visited Georgia in June and December 1995, comprising Messrs./Mmes. Michelle Riboud (Sr. Country Economist, Mission Leader), John Nash (Trade), S. Ramachandran (Financial Sector), Stuart Bell (Privatization), Barbara Evans (Energy), Gary Burtless (Social Protection), Arup Banerji (Civil Sector Reform), Francois Orivel (Education), Ana Revenga (Public Expenditure) and Cyril Muller (Technical Assistance, Economic Management). Rosario Hablero provided secretarial support. Peer reviewers were Martha de Melo and Cheryl Gray. Basil Kavalsky and Wafik Grais are, respectively, the Director of the Country Department, and Division Chief of the Country Operations Division, responsible for Georgia in the Europe and Central Asia region.  MEMORANDU1M AND RECOMMENDATION OF THE PRESIDENT OF IDA TO THE EXECUTIVE DIRECTORS ON A PROPOSED STRUCTURAL ADJUSTMENT TECHNICAL ASSISTANCE CREDIT TO THE REPUBLIC OF GEORGIA 1. I submit for your approval the following memorandum and recommendation on a proposed development credit to the Republic of Georgia for SDR 3.3 million (amount equivalent to US$4.8 million) to finance technical assistance in support of the Government's economic reform program. The credit would be on standard IDA terms with a maturity of 35 years including a grace period of 10 years. It has been prepared in parallel with a proposed Structural Adjustment Credit (SAC) (SDR 41.3 million) and an Enhanced Structural Adjustment Facility (SDR 166.5 million) from the IMF. 2. Georgia became a member of IBRD in August 1992, of MIGA in December 1992, of IDA in August 1993, and of IFC in June 1995. Background 3. Georgia is a relatively small country with a population of 5.4 million people situated in the southern part of the Caucasus region. At independence in April 1991, Georgia appeared to be among the best placed of the former Soviet states to make a successful and rapid transition. It had a highly educated labor force, a long tradition of entrepreneurship, a successful agricultural sector, substantial natural resources, and only a few of the large, heavy industrial complexes with doubtful economic viability. The country's location made it a primary transit corridor in the Caucasus, and its climate and scenic variety offered great potential for tourism. 4. Soon after independence, Georgia became embroiled for more than two years in political and civil strife which had a devastating effect on the economy. In addition, disruption of traditional payments and trade links, and a large terms of trade shock for energy imports, aggravated economic contraction. As a result, Georgia suffered from one of the sharpest economic declines in the Former Soviet Union (FSU): between 1990 and 1994 recorded output is estimated to have fallen by 70 percent. Although the informal economy may have cushioned the impact of this decline on the population, living standards fell precipitously, and by 1994, GNP per capita (estimated at US$410) had shrunk to the second lowest among FSU countries. 5. The civil conflicts severely eroded the Government's authority and ability to conduct sound economic policy. Tax revenues collapsed, falling to around 2-3 percent of GDP in 1993/1994. The resulting large budget deficits led to hyperinflation and to a sharp depreciation of the domestic currency. By end-1993 annual inflation had reached 8,400 percent and the coupon had fallen to less than 1 percent of its January 1993 value. Substantial currency substitution resulted. In order to maintain massive subsidies for energy and bread, the Government let its external debt grow to unsustainable levels and increased its reliance on humanitarian aid. By the end of 1994 total external debt (including arrears) represented almost 80 percent of GDP and grants amounted to about 45 percent of government revenues. 6. A marked change in the political and economic situations occurred in 1994 following the establishment of a cease-fire in Abkhazia. With the benefit of an improved political situation, the Government designed a programn to stabilize and reform the economy. Implementation of this program has been sustained since September 1994. In July 1995 the Parliament approved a new Constitution which establishes a strong executive presidency. Presidential and parliamentary elections held on November 5, 1995, confirmed the Government's pro-reform platform. Mr. Shevardnadze  was elected president with about 75 percent of the vote. Recent Economic Developments 7. Stabilization is taking hold. The stabilization strategy relies on drastic fiscal adjustment and tight monetary policies. The budget deficit, on a accrual basis, was reduced from 26 percent of GDP in 1993 to about 6 percent in 1995. Results have been impressive: the average monthly rate of inflation fell from an average of 64 percent in the first three quarters of 1994 to an average of 3 percent in the first nine months of 1995. The Georgian coupon appreciated from about 5 million coupons per U.S. dollar in unofficial trading in mid-September 1994 to 1.3 million coupons at the end of 1994, and then stabilized at that level. This laid the ground for the introduction of a new national currency, the lari, on September 25, 1995. The population converted about US$50 million of foreign currency within a month, leading to a fourfold increase of the domestic currency in circulation and growth in the international reserves of the National Bank of Georgia (NBG). The lari has since become the sole legal tender and has appreciated slightly against the U.S. dollar (the exchange rate was 1.26 lari in February 1996, compared with 1.30 in September 1995). 8. Economic decline is slowing. There are signs that Georgia's economic decline has slowed. The area of cultivated land in 1995 is about 14 percent higher that the area cultivated the previous year. Industrial output is reported to have stabilized except in the large Rustavi metallurgical and chemical plants. Available data suggest output recovery in the service sector, particularly in transport and retail trade. Preliminary estimates indicate that the output decline in 1995 will not exceed 5 percent. In addition, the sharp reduction of the labor force in state enterprises (over 35 percent since 1991) is indicative that restructuring has begun. 9. Structural reforms are accelerating. Implementation of the structural reform measures supported by the Rehabilitation Credit has been generally strong with major achievements in privatization of small-scale enterprises', downsizing of the Government sectori, elimination of subsidies3, improvements in the targeting of social benefits, trade liberalization, and development of a legal framework to support private sector development. Structural Reforns - Challenges and the Agenda Ahead 10. In spite of these initial successes, the economic situation remains fragile, with many key reforms still at an early stage. The privatization of medium and large enterprises has just begun and firms have yet to make the critical adjustment to market signals. The development of agriculture remains constrained by the lack of well-defined property rights and incomplete land reform. With most banks either insolvent or inactive, the banking sector fails to intermediate savings efficiently. The shortage of energy remains a critical constraint to output recovery. Energy imports declined significantly in 1995 as the Government stopped procuring gas. Because of continued problems in I As of December 1995, 6,432 small enterprises (90 percent of the universe) had been privatized up from 1,657 in October 1994. 2 The number of positions in the budgetary sector was reduced by 40 percent. The largest reduction of about 130,000 positions occurred in the health sector as part of a radical reform program. 3 Price increases have been huge, especially for consumers, ranging from 5 times (gas for heating) to 13,000 times (gas for cooking). The price of bread, the main staple in Georgia, rose 1,500 times.  collecting payments from final consumers, producers too were unable to finance energy imports. Urgent energy sector reforms are needed to foster efficiency and growth of domestic production. 11. The primary objective of the next phase of structural reform, to be supported by the proposed Structural Adjustment Credit and Structural Adjustment Technical Assistance Credit, is to ensure the sustainability of the stabilization measures and to foster a strong and sustained recovery of growth. The program includes measures aimed at: (i) maintaining a tight monetary policy supported by an improving fiscal position; (ii) streamlining the government sector and improving the efficiency of public spending; and (iii) inducing a rapid adjustment of the productive sector to new market signals. 12. Maintaining tight monetary and fiscal policies. The Government intends to reduce the inflation rate to 20-25 percent in 1996 and 8-9 percent in 1997, and to strengthen the international reserves position of the NBG. To enhance its capacity to achieve its monetary objectives, the NBG will increase the range of its monetary policy instruments, introduce government securities and develop the interbank credit auction market. The Government is aware that the sustainability of stabilization depends crucially on mobilizing budgetary resources and gradually reducing reliance on external grants and loans. The goal is not to rebuild a large state sector, but to ensure that the Government has the resources it needs to perform critical functions. The Government intends to increase tax revenues from 3.7 percent of GDP in 1995 to 6.7 percent in 1996. To reach that objective the Government has recently expanded the tax base by removing most tax exemptions (VAT, customs, excises and profit taxes). During 1996, it will also strengthen tax and customs administration. 13. Streamlining the Government Sector. Even with improved revenue performance, the Government will have to maintain a tight expenditure program. This implies maintaining only critical functions - undertaking labor retrenchment and radically reforming the administration and financing of activities that were financed from the budget, mostly social services and social protection. It also implies eliminating all subsidies - even implicit ones - which can jeopardize the sustainability of the adjustment. In terms of reforming social insurance and social protection, measures will be taken to restrict pension eligibility, to shift responsibility to employers for paying sickness pay, to introduce private pension plans, to build a three-pillar pension system, and to establish a back-up program of social assistance. 14. Fostering Adjustment of the Productive Sector. Adjustment of the productive sector requires rapid completion of privatization, enforcement of hard budget constraints, restructuring of the financial sector, and a trade policy conducive to export growth. The Government's privatization strategy envisages privatizing the vast majority of state-owned enterprises; only a small group of entities which carry out normal government functions will remain 100 percent state-owned (primarily statutory bodies, such as research institutes, social services and military units). To foster recovery in the agriculture sector, the Government intends to expedite the process of land reform. Parliament has adopted a law on land ownership and will implement during 1996 and 1997 a program for privatizing part of the remaining cultivated land. The Government strategy to enforce harder budget constraints on enterprises relies on banking sector reform and enforcement of payment discipline for energy consumption. 15. The Government's structural reform program is outlined in the Letter of Development Policy presented with the proposed SAC. Preparation of the program has involved considerable public information and consultation, particularly in the areas of social safety net targeting and privatization.  16. The institutional capacity of the Government has been significantly strengthened through the support provided under the Institution Building Credit. The Government has received assistance in economic management, specifically donor coordination, macroeconomic management and public investment programming from UNDP, USAID, and the EU Technical Assistance to the CIS (EU TACIS). Assistance with the implementation of the privatization program is being provided by EU TACIS and the Bank, while support on social safety net and employment issues is being provided by the Bank. Assistance in strengthening the legal framework has been extended by Germany. Finally, extensive support for resource mobilization is being provided by the IMF and the Bank. The Proposed Project 17. Credit amount and borrower. The proposed Structural Adjustment Technical Assistance Credit (SATAC) of SDR 3.3 million (equivalent of US$4.8 million) would be made to the Republic of Georgia represented by the Ministry of Finance. The credit would be on standard IDA terms, including a 35 year maturity and a 10 year grace period. 18. Project description. Successful implementation of the measures supported by the proposed SAC requires further technical assistance in a number of areas. At the request of the Government, this will be financed from the proposed SATAC. A detailed description of the activities to be financed from the SATAC is provided in Annex 1. Terms of Reference and detailed budgets for all activities have been agreed with the Government at negotiations, and are available in the Project Files. The technical assistance program would be divided in the following components: Privatization and post-privatization. [US$950,000] This component will focus on continued support for the implementation of the privatization program and on support for the establishment of share registries. In privatization, the assistance will focus on the introduction of new privatization methods for medium and large scale enterprises, i.e. cash auctions and an international tender program. Strengthening of institutional capacities, elaboration of standard procedures, advice on structuring of transactions and bid evaluation, as well as legal assistance will be key areas of support. The legal framework has been established for the development and licensing of private share registries. Assistance is required to elaborate operational guidelines, to train officials in securities market regulations and in the starting-up of pilot registries. Financial sector. [US$780,000] Banking supervision has been strengthened over the last 18 months. However, to further improve the effectiveness of the NBG in carrying its supervisory functions, its Bank Supervision Department will be strengthened to effectively deal with the certification process and the resolution of problem bank situations. Assistance would include advisory services on supervisory issues as well as the development of training programs. In addition, audits of the three former state banks will be financed. The objective of this sub-component would be to facilitate a realistic assessment of the financial position of each bank. It is expected that the banks themselves would share some of the costs of these audits. Energy sector reform. [US$860,000] The objectives of this component would be to foster improved payment discipline and financial management in the energy sector, and to strengthen the regulatory institutions. To improve payment discipline, assistance wou!d be provided in creating capacity to monitor and manage payment performance, and in reviewing structural and tariff issues. Assistance in reviewing the scope of the regulatory authority (including the  institutional set-up) and its tariff policy functions would be provided. Social Protection. [US$560,000] This component would focus on assisting in the design of a program of social assistance which meets the needs of poor families that do not qualify under any existing program, and on facilitating the establishment of private pension schemes. Resource mobilization and public information. [US$1,430,000] Improving revenue collection and information sharing about economic reforms are crucial to the sustainability of the reform process in Georgia. The following two components would be envisaged: (i) a program aimed at improving the revenue collection performance of the Customs Department through training, revision of procedures and controls, and anti-fraud measures; and (ii) a public information/education program on economic reforms, including mass media campaigns, round-tables/seminars on key issues, and the design of an education program focussing on skills in high demand in market economies. 19. Project administration. Overall coordination of project activities and general loan administration will be the responsibility of the Project Implementation Unit (PIU), comprising a project manager and two specialists - one on procurement and another on disbursements. Supervision of the PIU will be the responsibility of the Ministry of Trade and Foreign Economic Relations. The project manager (who is currently managing the implementation of the Institution Building Credit) will be responsible for undertaking procurement, preparing applications for disbursement, maintaining project accounts and arranging for their timely audit, and monitoring overall credit implementation. The operating costs of implementing the project will be funded from the proposed credit. On the basis of the information from the various agencies involved in the implementation of this credit, the project manager will prepare the Borrower's contribution to the Project Completion Report within six months of the closing date. 20. Procurement. Procurement expertise has been provided under the IBC. The capacity of the PIU to handle procurement under the proposed SATAC is expected to be good as the same project team that has been responsible for implementation of the IBC will be handling the SATAC. All procurement under the proposed SATAC project will be according to Bank guidelines on procurement and on use of consultants. Schedule B summarizes the procurement arrangements. Consultant services and training of an estimated value of US$3.9 million would be procured under the project (about 15 contracts are involved). For consultant contracts, terms of reference for the activities to be financed under the proposed Credit have already been prepared by the Government and have been agreed with IDA during negotiations, and are available in the Project Files. The Bank's standard forms of consultant contract would be utilized. Prior review would be mandatory for consultants' contracts above US$100,000 for firms and US$50,000 for individuals. Goods to be procured under the credit include an estimated US$900,000 in office, computer and customs-related equipment. These will be procured as follows: (i) International Competitive Bidding (ICB) for contracts valued at more than US$250,000, using Bank standard bidding documents; (ii) International Shopping (IS) for contracts valued at less than US$250,000 (not exceeding US$500,000 in the aggregate). Prior review will be mandatory for all ICB procurement as well as for the first contract procured through IS. Statistics regarding procurement administration would be collected and recorded, and would comprise prompt reporting of contract status, award information by the Borrower, and quarterly reports to IDA by the Borrower. The General Procurement Notice has been issued. 21. Disbursement. Statements of expenditure will be used for disbursements against contracts of up to US$100,000 with firms and up to US$50,000 with individuals in the case of consulting services  and training; and contracts up to US$250,000 for goods and operating expenditures of the PIU. As detailed in Schedule B, disbursements would be made against 100 percent of the costs of local and foreign consultants; 100 percent of training expenses; 100 percent of the CIF cost of imported goods; and 80 percent of the cost of locally-procured goods. To facilitate project implementation, a Special Account will be established by the Borrower in one of the major foreign commercial banks on terms and conditions acceptable to IDA to cover IDA's share of eligible expenditures. The Authorized Allocation will be US$450'000 representing about four months of average expenditures made through the Special Account. Applications for replenishment of the Special Account would be submitted monthly or when one-third of the amount has been withdrawn, whichever occurs earlier. Documentation requirements for replenishment would follow the standard Bank procedure as described in the Disbursement Handbook Chapter 6. Monthly bank statements of the Special Account which have been reconciled by the Borrower will accompany all replenishment requests. 22. Reporting, Accounting, and Auditing. The project manager will maintain all project accounts, which will be audited annually by independent auditors acceptable to the World Bank in accordance with the Bank's guidelines on auditing and financial reporting. Audit reports will be submitted to the World Bank not later than six months after the close of each year or the date of final disbursement. The project manager will also prepare monthly progress reports detailing the status of all disbursement requests. In addition to this financial reporting, a full progress report will be prepared and submitted to IDA every six months. This report will detail all project and related activities, report on progress in relation to agreed schedules, and identify any problems which may have been encountered and which could adversely affect the overall impact of the project. 23. Closing date. The technical assistance activities are expected to be completed by October 1997. The closing date of the proposed credit will therefore be March 31, 1998. 24. Environmental category. The proposed credit will have no direct impact on the environment. For the purposes of OD 4.01, the proposed credit has been placed in Category C which does not require an environmental assessment. 25. Poverty Category. N.A. 26. Lessonsfrom previous Bank experience. The implementation of the Institution Building Credit has been strong, despite the lack of experience with projects of this nature in the implementing agencies. The availability of Institution Building Credit funds has proved critical for the implementation of certain elements of the reform program supported by the Rehabilitation Credit. The parallel presentation of the proposed SATAC and SAC reflects this experience. Rationale for Bank involvement 27. A limited country assistance strategy for Georgia was presented to the Board on March 30, 1995, as part of the President's Report for the Rehabilitation Credit. The objectives of the strategy are to help reverse the sharp economic decline of the past few years, to accelerate the transition to a market economy and to alleviate the poverty that has recently emerged in Georgia. Given Georgia's difficult fiscal situation, much of the Bank's program concentrates on improving the cost-effectiveness of government programs and on redirecting public sector involvement in the economy, with the aim of providing a favorable environment for private sector development. The proposed SAC and SATAC are consistent with that strategy. A full Country Assistance Strategy (CAS) will be prepared in FY97.  -7 - Benefits and Risks 28. Benefits. The technical assistance financed by the project would facilitate the implementation of the structural reforms supported by the proposed SAC. The implementation of these reforms would ensure the sustainability of the stabilization process and deepen the structural changes initiated a year and a half ago after a long period of economic and political turmoil. The deepening of the reform process would accelerate the transition to a market economy, and lead to sustained growth and improvements in living standards. The program would lead to further downsizing of the state- controlled sector and induce adjustment of enterprises to new market signals. 29. Risks. Implementation capacity to undertake technical assistance programs is strong in Georgia as demonstrated by the good performance of the Institution Building Credit. Therefore, the main risks associated with the project are risks to the overall reform program identical to those of the proposed SAC. The main risk is that adequate and timely external assistance of the magnitude required will not be forthcoming, threatening public support for reforms and the success of the reform program. The failure to achieve a fully funded program would force a much stronger domestic adjustment and a lower growth path, imposing additional social costs to the population. To address this problem, the Bank will not only provide continuous financial support, but it will also assist Georgia in mobilizing external resources through the Consultative Group process and other donor coordination efforts. A second risk is that the terms at which bilateral creditors agree to reschedule existing claims may be inconsistent with the country's capacity to pay, lowering the prospects for the attainment of external viability over the medium term. This risk is being addressed through a debt strategy developed in agreement with the IMF and on-going negotiations with bilateral creditors. A third risk is delayed implementation due to weak institutional capacity within the Government and other executing agencies. To date, technical assistance has been essential in assisting the Government in the design and implementation of reforms. The proposed credit addresses directly this risk by further strengthening the Government's capacity to implement reforms. Recommendation 30. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve it. Gautam S. Kaji Acting President Attachments Washington, D.C. March 20, 1996   -9- Schedule A Republic of Georgia Structural Adjustment Technical Assistance Credit Estimated Costs and Financing Plan Estimated Costs Local Foreign Total Privatization and Post-Privatization Implementation Support for 1996/97 Program $100,000 $600,000 $700,000 Establishment of Share Registries $25,000 $225,000 $250,000 Financial Sector Commercial Bank Auditing $20,000 $320,000 $340,000 Bank Supervision $50,000 $390,000 $440,000 Energy Sector Reform Payment Discipline $60,000 $500,000 $560,000 Institutional and Regulatory Reform $35,000 $265,000 $300,000 Social Protection Targeting of Family Benefits $15,000 $210,000 $225,000 Pension Reform $35,000 $300,000 $335,000 Public Information & Resource Mobilization TA to the Customs Department $200,000 $770,000 $970,000 Public Information $100,000 $360,000 $460,000 Operating Costs of PIU $35,000 $95,000 $130,000 (including Procurement Support) Total Base Costs $675,000 $4,035,000 $4,710,000 Price & Physical Contingencies $500,000 $500,000 TOTAL PROJECT COST $675,000 $4.535.000 $5.210.000 FINANCING PLAN Government $410,000 $410,000 IDA $265,000 $4,535,000 $4,800,000   - 11 - Schedule B Page 1 of 2 Republic of Georgia Structural Adjustment Technical Assistance Credit Procurement Method Category ICB Other NBF Total ----------- -----------------------------------------------------(US$ million)---------------------- Technical Assistance (Consultants, 3.30* 3.30 Advisors, Studies) Equipment (incl. logistical support 0.40 0.50** 0.90 and operating costs) Training 0.60* 0.60 Operational Expenditures 0.41 0.41 Total 0.40 4.40 0.41 5.21 * Short-listing of consultants, firms/training institutions ** International Shopping  - 12 - Schedule B Page 2 of 2 Republic of Georgia Structural Adjustment Technical Assistance Credit IDA Disbursements Category Amount % of Expenditures to be Financed (US$,000) Consultants' services and training 3,900 100% of expenditures Equipment and operating costs 900 100% of foreign expenditures 100% of local expenditures (ex-factory costs) 80% of other local costs Total 4,800 Estimated IDA Disbursements - (US$ 000)- FY96 FY97 FY98 Annual 100 2,700 2,000 Cumulative 100 2,800 4,800  - 13 - Schedule C REPUBLIC OF GEORGIA STRUCTURAL ADJUSTMENT TECHNICAL ASSISTANCE CREDIT Timetable of Key Processing Events (a) Time taken to prepare: 6 months (b) Prepared by: Government of Georgia with the assistance of IBRD staff (c) Preparation Missions: September 6-23, 1995 December 3-20, 1995 (d) Negotiations: February 19-23, 1996 (e) Planned Board Presentation: April 18, 1996 (f) Planned date of effectiveness: May 3, 1996 (g) Expected Program Completion: March 31, 1998 (h) Appraisal Report Not applicable   Schedule D Status of Bank Group Operations in Georgia IBRD Loans and IDA Credits in the Operations Portfolio Difference Original amount in tlSS millions between expected Projcct Loan or Fiscal and actual ID Credit No. Year Borrower Purpose IBRD IDA Cancellations t'ndisbursed disbursements' Number of Closed Loans/Credits: I Active Loans CE-PA-39892 C28090 1996 GOVERNMENT OF GEORGIA 'I'RANSPOR'T 12.00 11.95 GE-PA-8413 C26410 1995 GOVERNMEN'I OF GEORGIA INSTITUTION BtiLDING 10.10 4.94 GE-PA-8417 C26580 1995 GOVERNMENTOF GEORGIA MUINICIPAL.INFRASTRUICTURE 18.00 12.49 2.75 TOTAI. 0.00 40.10 0.00 29.38 0.38 Active Loans Closed Loans lotal Total disbursed (IBRD anid IDA) 12.03 77.44 89.47 Of which repaid 0.00 0.)0 0.00 Total now held hy IBRD and IDA 40.10 75.() 115t10 Amount sold 0.00 0.0(1 0.00 Of which repaid 0.00 0.00 0.0( Total undisbursed 29.38 0.00 29.38 a. Intended disbursements to date minus actual disbursements tso date as protected at appraisal. Nole L)isbLirsernemt data is updated at the end if the first veek of the nonth. Data as ot I'-, /   - 17 - Annex 1 TECHNICAL ASSISTANCE PROGRAM The institutional capacity of the Government has been significantly strengthened through the support provided by the Bank and by other donors, especially USAID, UNDP, the German Government, and the European Union (TACIS). A program of technical assistance is proposed to facilitate the implementation of the measures included in the proposed Structural Adjustment Credit. The following are the technical assistance priorities and activities supportive of the measures included in the SAC and identified with the assistance of the ministries and institutions responsible for their implementation. These activities complement technical assistance programs from other donors. The proposed technical assistance program amounts to US$4.8 million. Terms of Reference and detailed budgets for all activities have been agreed with the Government, and are available in the Project Files. Project administration will be handled by the Project Implementation Unit of the Institution Building Credit. The Government of Georgia will contribute directly to the program through the provision of a small amount of in-kind and local financing to cover operational expenditures. The following activities will be financed: I. Privatization and Post-Privatization Implementation Support for the 1996/97 Program Obiectives: The Government's strategy for the 1996/97 privatization program will include the introduction of several new transaction methods for medium and large enterprises: (i) cash auctions; and (ii) commercial and investment tenders. The cash auction program will follow the completion of the voucher-based program. For any given enterprise in the cash auction program, a failure to sell will lead the concerned enterprise to be reorganized or subject to bankruptcy proceedings. The Ministry of State Property Management (SPM) lacks the experience in this segmentation process and assistance is required to develop operational procedures. The Government has also initiated an international tender program for a select group of enterprises with potential to attract foreign investors. This program will require the establishment of new institutional arrangements within SPM to organize and implement the transactions, in addition to the preparation of a new legal basis for the program. Scope of work: Implementation support for the 1996-97 program comprises three components. First, legal assistance will be provided to prepare the legal framework necessary to implement the new program and advise SPM on legal issues related to tender sales. Second, consultants will assist SPM in establishing a new institutional structure to provide direct support in organizing and implementing auctions, tenders, reorganizations and bankruptcies, and assist SPM in producing an English language book which brings together all laws, regulations and other relevant privatization material of interest to potential investors. Third, consultants will organize and implement a program of targeted overseas marketing to attract potential investors to Georgian auctions and tenders. Amount: US$700,000  - 18 - Establishment of Share Registries Objectives: The Ministry of Finance (Securities Department) and SPM have jointly developed a strategy for the establishment of privately-operated share registries and prepared guidelines for licensing these registries. Assistance is required to develop the regulatory framework for private registries, build supervisory capacities, and initiate a pilot program through which the Ministry of Finance and the registry operators would receive advice on how to establish and operate 2-3 pilot registries. Scope of work: Support for this component will include: (i) legal advice to develop the regulations for operation of share registries and the requirements for share issuers to register; (ii) overseas training in securities market regulation; (iii) assistance in establishing the operations of the pilot registrars; and (iv) establishment of a registrar support center. Amount: US$250,000 II. Financial Sector Commercial Bank Auditing Objective: An effective enforcement of the new prudential regulations requires that banks be audited. The objective of this technical assistance component is to ensure that the audits of the major banks, in particular the three forwer state banks, meet internationally recognized standards and could therefore provide the basis for a realistic assessment of the financial position of each bank. The National Bank of Georgia would provide oversight of the scope of the audits and review the quality of the audit reports. Scope of work: The work would require the use of a reputable accounting firm to undertake full audits of the selected banks, most probably the three former state banks. It is expected that the banks themselves would share some of the costs of these audits. Assistance would also be provided to the National Bank of Georgia to strengthen its capacity to initiate the audit program and to review actual audits. Amount: US$340,000 Banking Supervision Objective: A new unit within the Supervision Department of the National Bank of Georgia has been proposed to deal effectively with the certification process and resolution of problem bank situations. This bank resolution unit would resolve problems through the issuance of corrective remedial supervision action, including informal memoranda of understanding, cease and desist orders, penalties, mergers, management and license removal, and liquidation proceedings. Scope of work: The assistance would involve the financing of one full-time foreign advisor, training courses for the Banking Supervision Department, and the hiring, on a ad hoc basis, of additional specialists in banking resolution techniques. Amount: US$440,000  - 19 - III. Energy Sector Payment Discipline and Financial Management Objective: This assistance would have two objectives. The first would be to create an institutional capacity to monitor and manage payment arrears through the introduction of sound administrative practices, technical systems, and financial management policies. The second objective would be to address structural and tariff problems to improve the commercial viability of Georgia's electric power distributors. Scope of work: The program will include three sub-components: (i) assistance in evaluating the needs to upgrade the utilities' internal procedures and systems to record deliveries, issuing bills and monitoring payment performance; (ii) the development of sound payment rules and collection guidelines; (iii) support a program aimed at promoting the consolidation/merger of non-viable distributors. Amount: US$560,000 Institutional and Regulatory Reform Obiective: Assist in the establishment of the regulatory agency that will be needed to license energy operators, to regulate wholesale tariffs, and to promote inter-fuel competition and prevent monopoly abuses. Scope of work: Legal and regulatory expertise will be needed to assist the Government in defining the scope of regulatory authority that is needed under the reform program of the gas and power industries. Assistance in drafting the appropriate decrees and legal acts, in overseeing the reform of tariffs and tariff administration will be provided. A training program for the personnel of the regulatory authority will also be supported. Amount: US$300,000 IV. Social Protection Improved Targeting of Family Benefits Objective: The economic crisis and the curtailing of many kinds of social protection have placed many Georgian families in distress. The objective of this component would be to assist in the design of a back-up program of social assistance which meets the needs of poor families that do not qualify under any existing program. Eligibility will be determined by the presence in a family of at least one person in vulnerable circumstances, as well as by incomes and assets. Scope of work: The assistance will focus on: (i) the design of the proposed family benefit, including eligibility criteria; (ii) benefit administration, including tests for continued eligibility and control mechanisms; and (iii) undertaking the necessary family surveys that would complement available information. Amount: US$225,000  - 20 - Pension Reform and Establishment of Private Pensions Objective: The present pension system no longer offers adequate pensions and the Government is preparing a regulatory framework to encourage workers, enterprises, and financial institutions to establish voluntary, privately funded pension schemes. The objective is to facilitate the emergence of private pension schemes which will eventually provide retirement incomes closely linked to individual workers' contributions and average earnings. Assistance is required to define the proper regulatory framework and review the respective roles of the public social security and private pension schemes. Scope of work: The assistance would cover: (i) a review of the role of the public social security system and its financing, including developing administration guidelines and design of a revenue enhancement program; (ii) a study of the integration of public social security and private pensions; (iii) the development of the legal framework for private pension schemes; and (iv) a review of the supervisory functions and financial oversight of private pension schemes. Amount: US$335,000 V. Public Information & Resource Mobilization Assistance to the Customs Department Objective: Increasing revenue collection is crucial to the success of the reform program in Georgia. This component will focus on improving the revenue collection performance of the Customs Department. The Customs Department is responsible not only for collecting customs duties but also, since the beginning of 1996, for collecting the value added tax on imports and exports. The purpose of this assistance is to accelerate the development of core competencies within the Customs Department and to strengthen its capacities to fight customs fraud. Scope of work: The proposed assistance program to the Customs Department will include three components and will complement the ongoing customs automatization program financed under the IBC. The first component will support the establishment of a training center within the Customs Department to meet training needs at the vocational, management, and continuing education levels. The assistance will focus on curriculum development, training of trainers, program management, and operational support to launch the first set of training courses. The second component will strengthen the capacity of the Customs Department to fight customs fraud. The Customs Department has adopted a three-pronged strategy to fighting customs fraud: (i) mobile customs investigation units will be created to spot-check customs processing at the border points, within the country (for instance on major highways), and at the customs clearance points; (ii) a risk management system will be developed identifying high risk transactions and enterprises suspected of customs fraud; and (iii) closed (fenced) customs clearance areas are being created in major cities to simplify the customs clearance process and to improve control of individual transactions. This strategy will be supported through extensive technical assistance in designing and implementing these three revenue enhancement programs. The third technical assistance component would focus on reviewing customs procedures and functions to accelerate the process of integration of the Customs Department in the overall resource mobilization effort of the Government, including cooperation with the State Tax Inspectorate. Amount: US$970,000  - 21 - Public Informnation on Economic Reforms Objective: Public information campaigns targeted at decision makers and at the population at large are critical to raise awareness about issues related to the transition to a market economy. The Government of Georgia has been active in building popular support for economic reforms through public information and education initiative. The sustainability of economic reforms will depend to a large extent on continued public support and deepening of the understanding of the key challenges that Georgia is facing and will face over the medium-term. The first objective of the proposed assistance is to expand existing programs to cover issues critical to the 1996 economic reform program, such as energy adjustment, financial sector restructuring, and social protection. The second objective is to initiate broad-based public education programs targeted at key audiences, such as policy-makers, media, universities, members of parliament, and regional authorities and representatives. Scope of work: Assistance would be provided to organize media campaigns, including the production of documentaries reviewing experiences in other transition economies, to disseminate widely information on the economic reform program, and to organize round-tables and seminars on key reform issues. In addition, the Government intends to put in place a special training program for young professionals to strengthen their skills in sectors important in a market economy and for which existing programs is Georgia are deficient. Assistance will be provided to the Government in designing this program and in mobilizing resources for its implementation. Amount: US$460,000    I MAl I N G Eeport No: P-- IB