Georgia - Transport sector memorandum (Vol. 2 of 2) : Technical paper

Report No. 1 3978-GZ Georgia Transport Sector Memorandum (In Two Volumes) Volume Il: Technical Paper January 16, 1996 Countrv Departmzent IV Europe and Central Asia Region Document of the Wod BaOil*  CURRENCY UNITS and EQUIVALENTS US$ 1 3323 Russian rubles (as of December 9, 1994) US$1 0.82 ECU (as of December 9, 1994) WEIGHTS, MEASURES and OTHER UNITS bln billion km kilometer mln million pass passenger km2 square kilometer vpd vehicles per day CONVERSION FACTORS I mile = 1.609 km 1 kg = 2.205 lbs 1 US gallon = 3.785 liters GLOSSARY OF ACRONYMS AND ABBREVIATIONS ATC Air Traffic Control CLAU Caucasus Logistics Advisory Unit CMEA Council for Mutual Economic Assitance DC Direct Current DWT Deadweight Tons EBRD European Bank for Reconstruction and Development EC European Community ECU European Currency EMU Electric Motorized Unit FSU Former Soviet Union GDI Gross Domestic Investment GDP Gross Domestic Product GSC Georgia Shipping Co. ICAO International Civil Aviation Organization IMF International Monetary Fund LT Long Term MOT Ministry of Transport NGO Non Governmental Organization PHRD Policy and Human Resources Development SITA Societe Internationale de Telecommunications Aeronautiques ST Short Term TA Technical Assistance TACIS Technical Assistance for Comnmonwealth of Independent States TDB (United States) Trade and Development Bureau TEU Twenty-foot Equivalent Unit USAID United States Agency for International Development WFP (United Nations) World Food Program  ACKNOWLEDGEMENTS The Sector Memorandum is based on the findings of a World Bank mission which visited Georgia in August 1993. The findings were updated in June 1994 by P. N. Taborga (mission leader, transport economist), and P. Malone (transport specialist). It also incorporates the results of the discussions between D. Lallement (EC4IN, division chief) and the Government of Georgia on investment and borrowing priorities, in December 1994. In addition, Alexis Bonnel (financial analyst), Stephane Grandguillaume (highway engineer), S. Yoon (operations assistant) and Christine Gochard (financial analyst) refined the report and graphs, and C. Hogge provided secretarial support. The study has relied heavily on official sources of information - statistics as well as interviews and meetings with Government ministries and agencies. It also draws on earlier sector work by P. Malone and T. Neuner, recent project preparation material, on-going Bank work on the macro economic conditions of the country, and reports sponsored by USAID and UN-WFP.   TABLE OF CONTENTS I. Introduction A. Background .............................................. 1 B. Purpose of the Study . ........................................ 2 C. Organization of the Study . ...................................... 2 II. Geography and Economy A. Geographic and Demographic Considerations .......................... 4 B. Current and Perspective Economic Activities .......................... 4 III. The Transport System: Current Situation A. General Observations ......................................... 11 B. The Sector ............................................... 13 IV. Railways A. Infrastructure, Equipment and Staff ................................ 16 B. Operations ............................................... 17 C. Main Issues ............................................... 19 V. Ports and Shipping A. Ports ................................................ 21 B. Shipping ............................................... 26 VI. Road Transport A. Road Infrastructure ........................................... 28 B. Freight Transport . .......................................... 33 C. Urban Transport ............................................ 37 VII. Civil Aviation A. Overview ............................................... 39 B. The Aviation Authority ........................................ 39 C. The Carriers .............................................. 40 D. The Airports .............................................. 40 VIII. Mission Findings and Recommendations A. The Transport Sector ......................................... 42 B. The Reformed Transport Sector - A Vision ........................... 43 C. How to Get There - A Strategy for Change ........................... 44 D. The Priority Areas ........................................... 47 E. The Evolution in the Medium Term ................................ 48 F. Sub-Sectoral Recommendations ................................... 51 G. Assistance Strategy .......................................... 53 H. World Bank Assistance ......................................... 55 MaD 1. Map of Georgia (IBRD Map # 26918)   I. INTRODUCTION A. Background 1.1 Since independence, April 9, 1991 Georgia has suffered political and civil strife. War in Abkhazia in 1992 and in 1993, resulted in a substantial flow of refugees away from it. During this period, the Government also fought with the supporters of the deposed president. With cessation of hostilities, the Government's attention is now being focused on economic issues. 1.2 The civil disturbarnces badly affected an economy already made fragile, by the dissolution of economic ties under the FSU. This affected main exports, tea and citrus, and drastically reduced earnings from tourism. Recession in the FSU, adverse changes in the terms of trade, breakdown of marketing channels and physical links supporting trade, strikes, random political violence, lingering effects of an earlier earthquake in neighboring Armenia, and civil conflicts in the Caucasus, have combined to drastically decrease transit traffic and accelerate economic decline. 1.3 Georgia's per capita income was estimated at $850 for 1992 and $560 in 1993, making it one of the poorest countries of the FSU. The declining trends up to 1992 have worsened however, and the urgency of the problems identified in 1993, have since become larger. The cessation of data collection for most purposes in the economic sectors, has prevented the presentation of up-to-date time series in this report. Its basic findings however (Chapter II below), are in no way affected by the lack of data. 1.4 In June 1994 economic malaise in Georgia persisted, manifested by an almost complete absence of economic activity, and in the case of transport, a break down of most functions, price controls and a pervasive shortage of fuel at official prices (fuel was available at market determined rates in the informal economy). The political turmoil and the effects of active separatist movements, however, appear to have abated somewhat. The most notable development in the political sphere was the settlement, albeit tenuous, of unrest in Abkhazia although land links, road and rail to and from Russia, remain closed, and access to the port of Sukhumi for all practical purposes remains denied to Georgia. 1.5 The downturn in activity in the state controlled economy and runaway inflation until the second half of 1994, has inflicted painful social costs on the population of this once-prosperous country. At the same time, flight from the currency as a hedge against inflation, has given the active population the incentive to shift to private economic activities remunerated in foreign exchange (rubles or western currencies). A major, albeit informal, structural adjustment would seem to be underway. This amounts to an opportunity to reestablish economic growth, provided that the underground economy can be brought to the surface and continue its growth. 1.6 The regularization of the private economy requires, besides the reduction of inflation, legal frameworks to institutionalize the changes underway, liberalize markets and remove controls still legally in force. The resulting tax base would in turn help the government to reduce its fiscal deficits. This process would provide the context and the opportunity to address the more urgent structural issues facing the transport sector, and move towards a market based system which will respond to future needs.  2 1 Introduction B. Purpose of the study 1.7 While drawing from previous Bank work' this report presents the information in the following areas: (a) trade constraints hindering Georgia's economic recovery; (b) current traffic profiles in all relevant transport modes; (c) possibilities for cost recovery; (d) impact of internal security in Georgia on the movement of freight and people; and (e) priorities for Bank assistance in the sector. 1.8 The current situation in the sector has been examined to the extent practicable. Each subsector's situation, its planning, budgeting and operations, and main issues have been identified and recommendations presented. C. Organization of the Study 1.9 This study is presented in eight chapters and a statistical appendix. The chapters are as follow: Geography and Economy. Chapter II reviews geographical setting of Georgia, the current extreme economic situation, and recent political developments, specifically those in the Abkhazia region. Transport Perfonnance. In Chapter III the general situation of the sector is discussed, the nature of the issues cutting across modes and the prospects for its recovery. Railways. Chapter IV addresses the many issues faced by Georgian railways. It gives a description of its physical condition, nature and quality of its operations, current traffic trends and prospects, and main issues affecting the railway. Ports and Shipping. Chapter V gives an account of the current situation and operations the main ports, followed by a discussion of shipping and its prospects. The Road Sub-Sector. Chapter VI covers the current situation, main issues and problems of the sub-sector. The presentation is organized as follows: a) Infrastructure; b) Freight Transport; and c) Passengers and Urban Transport. 1/ See Back-to-Office report on "Georgia: Transportation Component of Municipal Services" by Antti Talvitie, TWUTD, dated June 21, 1994 and the report "Republic of Georgia, Transport Sector Reconnaissance", by P. Malone and T. Neuner, dated, November 24, 1993.  I Introduction 3 Civil Aviation. Chapter VII gives and account of the present situation of civil aviation, its organizational characteristics, investmnent priorities and main institutional issues. Recommendations. Chapter VIII presents the priority actions and specific recommendations for each sub-sector.  II. GEOGRAPHY AND ECONOMY A. Geographic and Demographic Considerations 2.1 The Republic of Georgia occupies the western portion of the isthmus between the Caspian and Black Seas; the eastern portion is the Republic of Azerbaijan while the land-locked Republic of Armenia takes up a part of the southern portion. The three republics together constitute a buffer region between Russia to the north and Iran and Turkey to the south. Two major mountain ranges (the Main and Lesser Caucasus Chains) run through this region in an east-west direction and constitute major barriers to north- south movements. Georgia controls most of the valley between the two ranges, and the pass (of less than 1000 m) that separates the east and west portions of the isthmus. Georgia provides important access to and from the Black Sea for Armenia, Azerbaijan and, beyond, for Central Asia in the east, and Iran in the south (Map 1). 2.2 Georgia is a relatively small country of 70,000 km2 (corresponding in size to Belgium and Holland combined) extending about 450 km from east to west and 150 km from north to south; in addition, a 50 km wide strip extends for some 150 km to the northwest along the Black Sea coast. Most of the country is mountainous, and population and economic activity are concentrated in the remaining flat areas. The western plains are close to sea level, humid and semi-tropical, while the eastern flat lands are between 600 and 1000 m above sea level with rainfall decreasing toward the Azerbaijan border where precipitation is only 400 mm per year. 2.3 In 1992, more than half of Georgia's population of roughly 5.4 million was urbanized, with the capital Thilisi and the nearby (roughly 20 km away) industrial center of Rustavi accounting for nearly 1.5 million. This population is likely to have grown with the influx of refugees from Abkhazia. The people are characterized by high standards of health and education and by a long tradition, extending to before the Christian era, in trade and commerce. Unlike its neighbor Armenia, Georgia has only a small diaspora, mainly in Russia. 2.4 The country is divided into 65 districts, and strong local and clan loyalties are common within the 70% of the population who are ethnic Georgians. Social cleavages result from a number of minority populations, among whom Armenians, Russians and Azeris are the most important, constituting together some 20% of the inhabitants of the Republic. As a Soviet republic, Georgia included two autonomous republics, Abkhazia, centered on the port of Sukhumi, and Adzhar, centered on the port of Batumi. 2.5 Local government extends at the district level ministerial structures and responsibilities. However, some important functions (e.g., administration of the City of Tbilisi, the State Concern of Highways, the Fuel Imports concern) are not entrusted to individual ministries, but report directly to the Council of Ministers. B. Current and Perspective Economic Activities Background 2.6 During the period following independence, Georgia suffered from one of the sharpest economic declines in the FSU: between 1990 and 1994, recorded output is estimated to have fallen by 70% and by 1994, GNP per capita (estimated at US$410) had become the second lowest among FSU countries (see Figure .I.1 below). The causes of the recession are many and to a large extent inter-linked: civil war;  11 Geogaphy and Economy 5 disruption of traditional trade patterns; lack of foreign exchange; hyper-inflation until July 1994; and an all pervasive shortage of energy. I Growth Rates of GDP* and GDI** (%) 20T L1-U-GD I 'GDP- Gross Domestic Product *-GDI Gross Dosestic Invesatnent Figures for 1995 are IMFprojection.x Figure 11.1 Sources: Trends in Developing Economies, The World Bank, 1994 Georgia Recent Economic Development, IMF, 1995 2.7 GDP estimates are not fully reliable because of serious data deficiencies. In addition, the growth of the informal economy is not adequately captured in the official statistics. It is unquestionable however, that real incomes have contracted sharply and that a reversal of this trend seems about to happen as a result of economic reforns and increased activity in the private sector (paras. 2.17-2.20). 2.8 Until early 1993, Georgia used the Soviet ruble as its currency (inflation rates are shown in Figure 11.2 below). As a step towards creating its own currency, the Government issued "coupons" valued at par with the ruble while circulating in parallel with it. The "coupon" soon lost its value and by August 1993 had sunk to 1/6 of the ruble. The depreciation of the coupon thereafter accelerated, and by mid- August 1994 the exchange rate had fallen to 2,000 coupons to the ruble, or 2,000,000 to the dollar. In early Fall of 1994, a stabilization program was initiated. By May 1995, the exchange rate was back to 230 coupons to the rouble and 1,300,000 to the dollar. However, only the ruble, the ,ow dollar and other hard currencies were r - being used for trade transactions and as __ units of account, and very few I_0_ commodities besides food stuffs could 0 be purchased with the coupon. Since l f i6 1997 19U 1989 1990 595 1992 1993 1994 1995 the introduction of the new national currency, the Lari, in September, 1995 (see paras 2.18 and 2.19), the Lari has become the sole legal tender. Figure 11.2 Inflation Rate, 1985-1995 Source: Georgian authorities, World Bank and IMF estimates  6 11 Geography and Economy Economic Structure 2.9 During the period 1989-1991, agriculture represented about 30% of GDP, and industry - under the soviet production allocation system - 37%. Other sectors shares were as follows: transport 5%; construction 11 %; trade and catering 6 %, and others 8%. Economic contraction significantly changed the relative importance of sectors, with agriculture exceeding 70% in 1993, albeit of a much smaller base (see Figure 11.3 below). Shares of GDP by Sector (%) 100 901 80 70 50 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ndufer 40 - 30- 20 10 0 1980 1985 1991 1992 1993 Figure I.3 Source: Trends in Developing Economies, The World Bank, 1994 2.10 Transport flows and demand reflect the decrease in economic activity. The Highways Concern, for example, reports that traffic on the nation's principal highway, the so-called "magisterial" running from the Black Sea ports through Tbilisi to the Azeri border, is no more than one-third of 1990 levels. Up to mid 1994, weak internal security and lack of law and order, and the worsening condition of the roads, discouraged economic activity. Substantial economic recovery was slowed down by: (i) absence of a legal framework for private commercial activities, resulting in lack of foreign investment; and (ii) slow progress toward privatization, thus ensuring that effective control of plants and equipment remained in the hands of former managers. 2.11 At the time of initiating the stabilization program in the Fall of 1994, the Government indicated to the donor community its commitment to economic reforms, and specifically, its intention to: maintain tight fiscal and monetary policies; complete the liberalization of prices initiated in 1992; remove export restrictions; and accelerate privatization. In addition, improvements in political and regional stability (para. 2.14) would also help the resurgence of regional trade.  II Geography and Economy 7 Foreign Trade 2.12 External trade (intra FSU trade) used to play a significant role in the Georgian economy. Total external trade (average of imports and exports) amounted to almost 43% of GDP in 1988-1990, with inter-republican trade accounting for about 86% of total trade. Georgia relied heavily on imnports of energy from other republics, notably Russia (for electricity and crude oil) and Turkmenistan (natural gas). Imported energy amounted to about 80% of the total energy supply in 1990. Wheat, sugar, and some heavy machinery were the other major imports. Georgia's main economic activities before the collapse of the FSU were: semi-tropical agriculture, (e.g., tea and citrus) and temperate zone agriculture, (e.g., wheat, grapes and other fruit); - mining, particularly manganese (near Kutaisi); - nmanufacturing, including steel (at Rustavi), fighter planes and electric locomotives (at Tbilisi); - tourism, offering the mild climate of the Black Sea coast, the health benefits of various mineral spas and the sports opportunities of the high mountains; and - transit, including petroleum from Azerbaijan, bauxite to Azerbaijan and various supplies to Armenia. Foreign Trade, 1992-1995 w00 -200 FM 0i -200 4001 -6M- Exports Imporu Balace Expons Imporu Balane Export Inpors Balum Eapors Inqmrt Balanrc 1992 1993 1994 1995 Figure 11.4 Source: Georgia Recent Economic Development, IMF, 1995, and World Bank estimates  8 II Geography and Economy 2.13 The orientation to "external" trade resulted from deliberate decisions over decades of Soviet economic planning. The proportion of trade with countries outside the FSU was small (see Figure II.4 below). In 1991 and 1992, Georgia's trade with countries in and outside the ruble area collapsed. Evidence based on railroad freight volume and customs data suggest that the volume of imports may have fallen by half between 1991 and 1992, although official statistics report a much larger decline. By 1994, some improvement was evident as active trade with non FSU and neighboring countries in particular Turkey, was taking place, although some of it remained unrecorded. 2.14 The cease fire with the Abkhazia separatists in early 1994, achieved with Russian assistance, was also a useful step in improving political and economic relations with Russia. In the near-term, Georgia undoubtedly expects to benefit from this rapprochement. It is unlikely however, that trade between Russia and Georgia will return to the level observed during the FSU. Georgians are confident that these markets will be open to them again in the future. Nevertheless, both parties to the trade (but Russia probably more so than Georgia) believe that they now have other options to satisfy their needs, and presumably will henceforth move to develop them. 2.15 Changes in Georgia's trade and patterns of economic activity are inevitable, (see Figures 11.5 and 11.6 below for the historic evolution of imports and exports by sector3). Given the country's climate, Georgia's agriculture is expected to play a significant role, and given its human resources, Georgia should continue to have an important, though reconfigured, industrial sector. The potential of the tourist industry wili continue to exist, although the Black Sea suffers from serious environmental damage. A service- oriented international business such as tourism could clearly benefit from the country's substantial human potential. Imports by Sector, 1987 - 1992 100% 90% 809% 70% _ 40% tl NOAg,n,d9aor 30%Si iii ; l l0nutg *SflP,odLl 60%j 101, 20% 1987 1990 1991 1992 m,cIdn, P.-, Oil .,a Gm,. C.aL. Chnn,kl and .ooe,nad Oilb, F.1l Figure 11.5 Source: Statistical Handbook, States of the former USSR, The World Bank, 1994 31 From 1991 onwards, imports and exports are not inclusive of informal trade.  11 Geography and Economy 9 Exports by Sector, 1987 - 1992 '90% 90% 60% 70% 60% 50% %rg 40% a Ingsub1 Prmidsu 30% 20% 0:%. 1987 1990 1991 1992 irludc. Poe,. Oil r,rd G., Co.l. Cheinc.1 nd Petroleun, mr Od6er Fuie Figure 11.6 Source: Statistical Handbook, States of the former USSR, The World Bank, 1994 2.16 Georgia served as a western terminal for trade between Europe and China in the long-distant past. Since independence from the FSU, it has aspired to return to a role as the western and crucial link in a land corridor for trade between Europe and Asia, by providing transit facilities for oil and gas pipelines from central Asia, and container transit traffic between Europe and central Asia, eastern Asia, and the Persian Gulf. Georgia envisages not only the transit revenues but also the impetus to domestic ancillary activities that transit trade would generate. The possible competition by corridors through Russia, and through Turkey and Armenia needs to be kept in mind, although Georgia could offer in many instances the most cost effective routing. Recent Developments 2.17 Since the beginning of 1994, the Government has consolidated its control over the country. There is improvement in law and order, and a new governmental team is committed to continue efforts to rebuild the economy through market-oriented reforms. Besides macroeconomic stabilization, progress has already been made in implementing structural reforms in several areas (see para. 2.19). Small-scale enterprise privatization is almost completed, most prices have been liberalized, and the import regime is relatively open. Georgia is implementing its economic reform program under difficult conditions and stringent financial constraints. Willingness to take drastic measures, as well as strong commitment to reforms on every level of Government, point to a real possibility to achieve success in the reform process. 2.18 In July 1995, the Parliament approved a new constitution, giving enhanced executive powers to the office of the President of the Republic, and revised foreign investment legislation to liberalize entry and remove unnecessary controls. Currency substitution has practically disappeared since the introduction of the new currency the Lari in September 1995, following a successful stabilization effort. Within the transport sector, the road transport privatization program started in April is being implemented according to schedule, and is expected to be completed in May 1996. Presidential and parliamentary elections were held last November 5, and the structure of the Government has been modified to strengthen inter-ministerial coordination.  10 11 Geograpbv and Economy 2.19 The policy achievements since mid-1994 have been substantial. Briefly enumerated they are the following: (i) stabilization, drastic fiscal adjustment and tight monetary policies brought down the fiscal deficit from 26% of GDP in 1993 to about 6% in 1995 - the stabilization program involved reducing subsidies, increasing taxes, controlling domestic credit expansion and improving the efficiency of its allocation; and (ii) structural changes, since the second half of 1994, significant progress has been made in privatization, downsizing the Government sector, removing price distortions, developing a legal framework for private sector development, liberalizing trade, strengthening the financial sector and improving the targeting of social expenditures. 2.20 The initial results of the reform program speak for themselves. * Inflation has been curtailed to about 169% for 1995, with a monthly rate of 2.5 % at the end of the year. * The dollar exchange rate has stabilized in 1995, while the rouble exchange rate appreciated slightly from May 1995 onwards. * The new national currency the Lari has become the sole legal tender. * Economic decline has slowed, and there are indications of increased activity in agriculture, transport and retail trade. Still, income has been reduced by more than a third during the last five years. This translates into generalized hardship for the population at large, and poverty for its most vulnerable segments. Wages in the Government sector are about ten times lower than those in the private sector. Those who can find something more remunerative to do move on, with the predictable result that institutional capacity may be reduced in a haphazard and disruptive fashion, faster than the level of Government employment. 2.21 In summary, Georgia seems to be at the point of obtaining the benefits of the resolute reform path followed in the last year and a half, provided that remaining obstacles to recovery are removed. The obstacles are: (i) an inefficient allocation of public expenditure; (ii) the continuing weak fiscal performance; (iii) the fact that some reforms are still at an early stage, and consistency of application for an extended period of time is required; (iv) a weak trade position, which translates, inter alia, into shortages of energy; and (v) the absence of significant foreign investment.  III. THE TRANSPORT SYSTEM: CURRENT SITUATION A. General Observations 3.1 Prior to independence, Georgia's transport system was closely integrated with that of the FSU. Of all imports into Georgia in 1988, only 25% by value came from outside the FSU and a mere 7% of all exports from Georgia went abroad. By contrast, Russia itself indulged relatively more in foreign trade outside the FSU, with 51 % of its imports and 31 % of its exports being ex-FSU. Within the FSU, Russia was Georgia's most important trading partner (accounting for roughly half of the rail tonnage) followed by the other Caucasus Republics and by Ukraine (see Figure 11.4). 3.2 Land trade with the FSU was mostly by rail, estimated in 1988 at 37.8 mln tons, but another 2 mln tons moved by truck. Georgia's two principal cargo ports (Batumi and Poti)3 moved 11.5 mln tons of cargo in 1988; 85% of this cargo, in value terms, was cabotage traffic to other parts of the FSU. It is not possible to determine how much of the overland and sea cargo was transit traffic nor whether data on overland and sea movements was duplicative. It is obvious, however, that when Georgia was part of the FSU, it served as an important transit channel for the other republics. 3.3 Not only was Georgia's transport system oriented to the FSU but the system's characteristics were determined by central authorities in Moscow and reflected patterns encountered throughout the FSU. Thus much of the analysis and the findings in the (Bank) Sector Report, Russian Federation, Transport Sector Strategy, May 1993, (Report No. 11895-RU) applies equally to Georgia. These included: (a) overuse of transportation because of specialization of production in a few locations; (b) over-reliance on rail transport, especially for short hauls and for bringing cargo to and evacuating it from ports; (c) centralized control of investments including all international transport; (d) undoubted technical competence of administrative and managerial structures, but coupled with their unfamiliarity of benefit/cost or other market-based analyses; and (e) the almost exclusive use of transport equipment made within the Council for Mutual Economic Assistance (CMEA) trading area, equipment that typically was not efficient by world market criteria. 3.4 Georgia also made use of the same institutional arrangements for its transport system that were the pattern generally in the FSU: maritime and aviation fleets were based in ports or airports and operated as combined enterprises with them; freight booking and follow-up was handled through central organizations; transport enterprises typically provided many social services (health, education etc.,) to their staff at little or no cost; and the design, construction and maintenance of roads and other infrastructure was carried out by semi-independent units that were not subject to competitive discipline. 3.5 Up to 1990, Georgian statistical authorities compiled summaries of the performance of the transport system based on reports from various operators, whether they functioned on a "for hire" or "own account" basis. With some privatization and with a general decline in discipline, the reporting system has now broken down and sample surveys have not yet been instituted on a routine basis. Moreover, data were lacking to make proper estimates of value added in the transport sector although rough estimates of costs are made and a 10% allowance for profit is taken. Accordingly, the most credible production data in this sector are the series for total ton.km and persons carried that is reproduced in Figures 111.1 and III.2 below. They show more than doubling of ton.km over the past 20 years and an increase of nearly 40% in the number of persons carried over the same period. However, this latter series completely disregards travel by private automobile which increased greatly during the 3/ The third port Sukhumi, located in Abkhazia, was essentially a passenger port. (para 5.3).  12 III The Transport System interval. The freight transport series shows a continuous decline in railway traffic after 1980 and a modest growth of goods transport by road until 1988 and a decline thereafter. Ton bn carried by Genema Purpoe Tnnsport 90,000 - 70,000 / 40.000 70,000 PL____nr 10,000 O 1970 1980 1968 1966 1987 1966 1989 1990 1 199T Figure 111.1 Persons Carried by Generel Purpose Trnnsport rmln pan U Air * Train * Railways 200 1970 1990 19I6 1866 1967 166 169 1990 Figure 111.2 3.6 Energy consumption in transport historically is shown in Figure 111.3 below. Transport primarily used diesel and gasoline and these accounted in 1990 for 96 and 77% respectively of consumption of each. Over the fifteen years from 1975, despite road transport traffic decline, diesel consumption had remained essentially static chiefly because of increased use of diesel trucks. Current consumption is unrecorded, although it is understood to be as low as 40% of 1990 levels.  111 The Transport System 13 Energy Use In Transport % of 1975 consumpton 180% 160% 140% 120% U 1975 100% 1 960 80% 1965 60% U iooo 40% 20% + 0% cowi NaUWa Gas Heatlng Oil Diesel Gasoline EIscIildy Figure mf3 3.7 Subsectors have suffered serious declines in turnover over the past three to four years. Transit traffic also fell drastically from 204,000 tons in 1989 to 22,800 tons in 1991 and with further reductions since. Transit traffic has recovered somewhat due to shipment of humanitarian assistance to Armenia through Georgia. With independence, a shift in external trade relations developed, and the quantity, range and origins of the commodities handled at Poti port have become more diversified. The outward shipment of ores through Poti has now stopped, and trade with Turkey and countries in the Mediterranean has increased. 3.8 Georgia's budgetary situation is confused, especially after introduction of coupons to replace rubles early in 1993, and after rejection of the proposed budget by Parliament in July 1993. However, the rejected budget provided no more than 1 % for the transport sector and the general impression remains that entities in transport are receiving little money from the budget in any case, and rely instead on what they earn. Since they earn little under controlled prices and mounting inflation, it has become almost impossible to operate outside the private, informal, economy, yet its expansion is not explicitly assisted. B. The Sector 3.9 Formal control over Georgia's transport system (excluding the roads sub-sector) was until early 1994 vested in a Ministry of Transport (MOT). This level of "Ministry" (of Transport) has now been abolished, and the four Departments - railways, road transport, shipping and aviation - now report directly to the Deputy Prime Minister in charge of the infrastructure sectors (see Figure III.4 below). 3.10 Prior to the dissolution of the FSU, this Ministry of Transport functioned in the manner of the central organs of the Soviet administration by receiving budgetary proposals of various enterprises in the transport sector, setting their charging policies and the level of mandatory payments to the Government, authorizing investments and providing support from general government finances if revenues were inadequate. As the general income of the Government is now small, most transport enterprises are having to rely on self-generated funds to cover their needs and, with the exception of urban transport, are not  14 III The Transvort System receiving official "subsidies".! The budgeting arrangements for the four transport modes of the erstwhile Ministry, now that they directly report to a Deputy Prime Minister, are not clear. What is clear however, is that under present conditions all transport enterprises in Georgia, whatever the formal designation of their financial status, are not maintaining their assets and are depleting their capital stock. S' State Concan Of Fuel bIport | |MapM kiq|es Lbw,Ti Il H Concem Figure III.4 3.11 MOT also had control over the assets of the transport system (excluding national roads) and shared responsibility for their corporatization and privatization with the Ministry of State Property Management. MOT, however, had not been aggressive in promoting structural reform of transport enterprises and so far only about one-third of the vehicles of the Department of Road Transport fleet has been privatized. Under an economic reform scenario, the role of transport departments would change significantly, from being fully involved in management and operations to an essentially regulatory and supervisory role. 3.12 Reorganization of the transport system is linked to the restructuring of sector institutions and will probably need to be addressed together. The desirable inclusion of the roads sub-sector into the policy framework of the sector is an unresolved issue, particularly as roads had been relatively free of central control from Moscow under the Soviet system. These major institutional changes, necessary as they may 4/ The terms "profit" "loss" and "subsidy" as used in the former Soviet system do not correspond to accounting concepts in the industrialized world, most notably because Soviet accounting made no provision for either compensation of capital or reserves for depreciation.  III The Transport System 15 be, are not required as a matter of immediate urgency. 3.13 MOT's latest policies were driven by the then - current exigencies, especially the shortage of budgetary funds, and the urgent need to provide essential spares and replacements for maintenance of existing operations. Longer-term plans still referred to projects that were conceived during Soviet times, many of them of massive dimensions and dubious economic merit, such as a new Moscow-Teheran railway connection, expansion of Poti port to 40 mln ton annual capacity and complete reconstruction of the main west-east road across Georgia. Issues such as road user charges and regulation of entry into road transport remained unaddressed. It is not clear to what extent, and by whom, these issues and transport policy as a whole are being addressed, if it all. The whole area of policy needs to be clarified and a policy formulation mechanism established. Main Issues 3.14 Although the Soviet Union collapsed some years ago, Georgia still retains a Soviet-style transport system, concerning institutions and procedures, but without the funding that it enjoyed in the Soviet era. Physical manifestations of the shortcomings of this system abound across the sector: * lack of resources for all the modes; a an eroding asset base; * lack of technical innovation and upgrading; * absence of a meaningful statistical base for the sector; and * absence of reliable financial indicators. 3.15 The main issues are: (a) financial management; (b) sector management; (c) physical deterioration of the asset base; and (d) staffing and manpower development. Financial management questions include lack of investment budgets, insufficient cost recovery, price regulations, and lack of generally accepted accounting standards. Sector management problems relate to organization of ministerial functions, unclear reporting and lines of responsibility, and need for Technical Assistance (TA) to develop requisite policy making skills (see para. 3.17). Physical deterioration is mostly due to lack of programs of timely maintenance, rehabilitation and renewal, and insufficient funds. Staffing and manpower development are related to the implosion of the civil service, and the need to develop the necessary skills to mange the sector in a market oriented economy. These issues could be collapsed into two over-arching questions for all subsectors: ownership and pricing. 3.16 The sector may need to move toward privatization and much greater use of the market mechanism than previously. This will lead to greater efficiency, availability of finance, new investments and improved maintenance. The present lack of economic activity provides a convenient window in which to effect the institutional changes necessary. The time available before the economy recovers may be limited, and the sector may need to be restructured and market-oriented to be able to perform under increasing traffic volumes. There are indications that officials are beginning to accept the logic and the inevitability of the changes that will be needed. There is also evidence that they may not fully realize the extent to which their roles and responsibilities will be altered. 3.17 The legacy of the Soviet era is apparent also in the areas of planning and the formulation of policy. Planning and policy-making was carried out from Moscow, and the abrupt cessation of this centralized activity has created a void not yet satisfactorily filled. It is not evident whether policy-making for the sector as a whole is being addressed by the Deputy Prime Minister and his team.  IV. RAILWAYS A. Infrastructure, Equipment and Staff 4.1 Georgia has 1570 km of railways. The main line between Poti and Tbilisi dates back to 1872 but other lines were built as recently as 1970; currently most of the country lies within 50 km of a railway line, and the densely populated areas are in the 20 km catchment of the railways. During Soviet times, railways in Georgia were closely integrated with those in Armenia. The principal lines have many short branches penetrating into the valleys of the two Caucasus ranges. Today Georgian Railways is completely independent and has agreements with the railways of Azerbaijan and Armenia for transit and exchange of traffic. 4.2 About 80% of the network is in mountainous terrain with grades reaching 4.9%; 247 km have curves with radii of less than 300 m. The main lines are all electrified with 50 cycle AC at 25 KV. There are small inland container terminals at Samtredia and Tbilisi, and the latter station has a 2000 Twenty-foot Equivalent Units (TEU) container facility under construction. Cargo handling and cold storage facilities are available at about a dozen other stations. 4.3 The condition of the network and related civil engineering structures is poor. Tracks are old, embankments are not well maintained, overhead lines are in need of repair; most structures and buildings are more than 80 years old. Many sections are subject to slow orders and communications are difficult because of stolen wires. The Railways, particularly, were adversely affected by the unrest in Abkhazia; the track remains closed because of physical damage, specifically the destruction of two bridges. Russia has offered a credit to repair the bridges, the work to be done by Russian army engineers; the repair is scheduled for completion, and this rail link with Russia re-established, in the near future. 4.4 The rolling stock of Georgian Railways was supplied from the erstwhile Soviet system, which purchased its requirements not only within the FSU but from suppliers elsewhere in the CMEA and even in Western Europe and Japan. Little of this non-CMEA equipment, however, was passed on to Georgia. The main traction equipment consists of 225 diesel locomotives and 200 electric locomotives mostly assembled at a plant in Georgia; only 95 of the 425 locomotives are in working condition. Data on passenger car holdings were not obtained. Figure IV. 1 below shows holdings of freight wagons through 1992, and the operational status of this fleet in early 1993 (and roughly corresponding to the current situation). Of nearly 19,000 freight wagons in 1991, about 5,000 are said to be out of use but the 1,200 grain cars (under "others") and the 2,600 tank cars are all in service. The biggest problem is in open- wagons where about 30% are not operational. 4.5 In addition to its own wagons, Georgian Railways has the use of wagons from neighboring railways for which hire charges are payable. The low availability of rolling stock is due to delayed maintenance (about 90% of locomotives need periodic overhaul, work that was normally done in Russia but has until recently been impossible due to political conditions) and to lack of spares (the Railways do not have the hard currency to procure them).  IV Railways 17 Freight Wagon Holdings of Georgian Railwkys 250OO 20D000OOtters :. : :. .:.....X.[;3 Reeer :. :. :. : , . ,. . . . . . . . . . .- .- ..::,::.:::.:Y 1U~~~~~DCO Iij!ii 0~~~~~~~~~~~~~E Platform I] Open-wagons 5.00U Closed 0. 1987 199 1989 1993 1991 19MiearIy 1993 Figure IV.1 4.6 The Railways at its peak had 41,000 employees - 18,000 in operations, and 23,000 in support and social functions. Currently, by hiving off some of these support activities, total staffing is down to 32,000, and the projection is to 28,000 by the end of 1994. This reduction of 13% results from staff leaving voluntarily, sometimes without collecting any severance payments, to pursue more lucrative activities. The Railways plans to retain two schools for specialist instruction and its hospitals, most of which serve the community at large, and intends to divest itself of the remaining non-operational activities. The operational side of the system is likely to remain state property in the foreseeable future. B. Operations 4.7 In 1988, nearly 13 billion ton.km in Georgia moved by rail; originating tonnage that year was nearly 38 million tons, excluding purely domestic traffic (for which data were not made available). By 1992 total ton.km had dropped to 4.2 billion, about one-third of the 1988 level, and originating tonnage went down by a corresponding proportion. By the middle of 1993, ton.km had declined by a further 50% and originating tons by nearly as much. The most important traffic components in both years were liquid fuel, grain and flour -- traffic which is indispensable for maintaining energy and food supplies for Georgia, Armenia and Azerbaijan. 4.8 Collapse of traffic on Georgian Railways reflects weak demand (Chapter II) and lack of railway capacity; both have been declining but not necessarily on parallel paths. The problems in railway operations include slow-orders on track and unserviceable rolling stock, both of which reduce movement of trains and the supply of wagons to customers. For example, a typical transit time from Poti to Tbilisi is 17 hours for 324 km, an average operational speed of l9km/hr, and the railways cannot supply more that 28 grain wagons per day to either Batumi or Poti port for unloading of ships. Wagon turn-around times (in days) also have deteriorated sharply from 1992 to 1993:  18 IV Railwavs Wagon turn-around times (in days): 1992 1993 all wagons 9.8 15.5 fuel wagons 5.5 11.6 grain wagons 7.3 7.6 4.9 These statistics, and the complaints from users in 1994, point to the possibility of further declines of railway service in Georgia and raise two basic issues: whether the existing reduced capacity will continue to be adequate to cover basic needs such as fuel and food supply, and whether adequate performance can be expected from the existing system without major capital investment once economic activity picks up. 4.10 In view of the shrinkage of traffic, railway finances in 1992 were remarkably good, showing a "profit" of roughly 10% of revenues. This is interesting in view of the experience during the Soviet period that the railways in this area were "unprofitable" due to the mountainous terrain, and required subsidies and assistance for capital expenditures. Revenues in 1992 from operations nearly covered expenses, and wages were only about 20% of all expenses (see Figure IV.2 below). It is impossible to judge whether the amount set aside for depreciation was adequate or whether revenues would have covered a normal maintenance regime. All appearances would indicate that this has not been the case. In the first six months of 1993, the Railways incurred a loss of nearly 1 billion rubles (roughly the equivalent of US $1 million at that time), and it hoped to return to profitability within a year or so. This has not happened. Expenses of Georgiam Rilways, 1992 wages ~~~~~~ ~~21Jv 42% electricity depreciaiein fuel Figure IV.2 4.11 The allocation of "profit" is shown in Figure IV.3 below.  IV Railways 19 Allocation of sofita 1992 Bonuses 11% , ~~~~~~~~~~~State Social deelopmntmer 21% Reinvesting in Railkeys 33% Figure IV.3 4.12 The Railways spent about half a billion rubles (about US$ 0.5 million) for capital construction (line doubling, a new station, and the new container terminal near Tbilisi) in the first seven months of 1993 and planned to spend about twice that amount by the end of the year. It has requested 150 billion rubles from the budget for locomotives and rolling stock items to be bought from suppliers in the FSU; the budget which was rejected in July 1993 had included 10 billion rubles for this purpose. Any such amounts allocated under the budget would have to be converted to hard currency to pay the suppliers. The Railway indicated that its cash and reserves amounted to only US $300,000 in 1994. 4.13 The Railways is benefitting significantly - both financially and operationally - from the United Nations World Food Program (WFP), and specifically from the work of its Caucasus Logistics Advisory Unit (CLAU); the latter has representatives in Tbilisi, Batumi, Yerevan and Baku. Through its primary concern for movement of food shipments, WFP/CLAU is impacting beneficially on operation of the railway system (and of the ports) by its continuous and obviously very professional and "hands-on" diagnoses of operational shortcomings. WFP, to add force to its diagnoses, has made a grant of US$10 million to the Caucasus region, of which US$2.3 million is earmarked for Georgia. The Railways hopes to use some of this funding to procure the most urgently-needed spares. 4.14 CLAU issues periodical "Situation Reports" analyzing the general logistical situation in the Caucasus, and specifically the situation in the ports and on the railways. These situation reports have become the only reliable source of current information on transport. C. Main Issues 4.15 The Railway summarizes its operational problems as follows: - the condition of the track is poor, and there is a lack of track materials including ties; - equipment for communications and signaling has been stolen or damaged, and these  20 IV Railways systems consequently are not functioning satisfactorily; - locomotives are old, and in any case, need maintenance and repair; - there is no workshop in Georgia for locomotive overhauls and no spare parts for such work; - single-line working is difficult between Poti and Samtredia, and between Kasuri and Samtredia; and - the Abkhazia section remains closed (and thus the direct-link with the Russian railway system is also closed). 4.16 To solve its problems the Railways proposes the following: - reconstruction of telecommunications and signaling with fiber-optic cables and state-of- the-art equipment; (this is already under discussion with Siemens (Germany) although the source of funding is unclear). - purchase of radio equipment for the line between Tbilisi and Samtredia; - purchase of new locomotives and passenger cars; - rehabilitation of existing facilities for repair of locomotives and passenger cars, and of the two locomotive assembly plants, with the aim to supply locomotives to all the Caucasus region; and - nmodernization of freight wagon control through a real-time computerized system. 4.17 In the World Bank's view, the implicit priorities are questionable, and the proposed investments ignore the immediate restoration of urgently needed capacity, in much the same way as the 1993 investments did (para. 4.12). The issue facing the railway is to determine how best to maintain essential freight service, not least that to and from the ports, at a time when infrastructure and rolling stock have been denied adequate funding for essential maintenance and renewals for a period of four or five years. The situation is aggravated by the fact that virtually all stock and infrastructure were sourced from the CMEA, thus the railway is faced, at least in the short term, with sole suppliers for most maintenance needs, and payment is required in hard currency.  V. PORTS AND SHIPPING A. Ports Institutional Framework 5.1 Georgia's ports together with its shipping fleet are under the jurisdiction of the Shipping Department; the head of the Shipping Department is also President of the Georgia Shipping Co. (GSC), this latter being responsible for all out-bound Georgian cargo. The relationship between the ports, GSC and the Shipping Department remains to be elaborated but, in general, the ports have considerable independence although subject to overall control of the Department. 5.2 The legal status of the ports is, currently, unclear but the ports are now mainly self-financed for current expenses, can execute their own contracts and set tariffs (with the concurrence of Government). The port managers continue to be appointed by Government. The Shipping Department allocates state- owned cargo among the ports but private property, including transit property, is handled by the ports themselves, for their own account. The Role of Georgia's Ports 5.3 Georgia has three ports, Batumi near the Turkish border, Sukhumi in the West, not far from the Russian border, and Poti in the central coastal plain. Sukhumi is in Abkhazia and is reported to have been used in the past primarily for passenger traffic and to have only limited cargo facilities. Operations at Sukhumi have been affected by the unrest in Abkhazia. The territory around the other two ports is also subject to some political unrest. Batumi is the capital of the (former Soviet) Adzhar autonomous Republic, which still has certain differences with the Central Government, while Poti lies in the Mingrelia region, the home base of the deposed (now deceased) first President of independent Georgia and still the location of significant upheaval. These facts have had considerable influence on the Government's port policy and on discussions as to which port to improve and where any new ports should be located. 5.4 Before dissolution of the Soviet Union, the ports of Batumi and Poti together handled about 11.5 mln tons of cargo (1988 throughput). By 1990 this total had fallen to 10.2 mln tons and throughput has dropped steadily since (see Figures V.1 and V.2 below). WFP/CLAU reports only about 5-6 mln tons were handled in the first eleven months of 1993. Both ports were handling mostly bulk cargo. Batumi's throughput in 1988 of 6.9 mln tons was about three-quarters in petroleum and petroleum products and the rest of Batumi's cargo in 1989 (no data available for 1988) was nearly all in grain and alumina with only 0.2 mln tons represented by other dry cargo. By contrast, Poti handled no bulk liquids, but 70% of the 4.4 mnn tons of dry cargo in 1989 was in four commodities (grain, ores, bauxite and coal); in that year Poti also handled about 0.2 mln tons of break-bulk dry cargo. Neither port moved any significant number of containers until recently, Poti claiming to have handled 10,000 TEU's in 1992. Batumi's liquid cargo has been predominantly outbound while its dry cargo was mostly inbound. Poti's movements (inbound and outbound) have been nearly in balance.  22 V Ports and Shippin2 Dry cargo turnover In Batumi and Potil MilonD" tons tri1-- 1988--: l- a of Pod 1990 r__=-_ ~Bawml 1991 1992 Figure V.1 Total Cargo Volumes In 199O (thousand tons) 12,000 T 10,600 10,0009- 8,200 8,~~~~~~~~~~~~~~~~~~~,0 6,000 4,300 4,001 f 2.000 0 Bakw (Azerbaljan) Krasnovodsk Batumi Poff (Turklnenstan) Figure V.2 5.5 The role of all the ports is likely to change. During the era of the FSU, Batumi and Poti served mainly traffic to and from other Soviet republics, but now they are expecting to provide a channel for an increasing volume of imports to the Caucasian republics from the world market and for exports of the products of these republics, most importantly oil. The ports are expecting also to serve the transit traffic to and from central Asia and beyond, and to and from Iran and other countries in the near and middle East, although re-emergence of Russian influence in those areas may lead to a scaling back of these expectations. Specific developments that would impact on the ports and that can be foreseen include the following:  V Ports and Shipping 23 (a) In the near term, increased imports of petroleum products until supply and processing facilities are established in Georgia, based on Azeri and Central Asian crude; (b) In the near term, import of grain in large quantities to supplement the meager production in the Caucasian republics and, in the longer term, import of grain to these Republics in increasing quantities due to insufficient internal production; (c) In the near and long term, imports and exports in containers and roll on-roll off vehicles of a variety of products to and from the world market; and (d) In the longer term and less certain, export of oil and oil products from Azerbaijan and Central Asia based on a pipeline across Georgia and a refinery drawing stock from this pipeline to produce products for Georgia (and possibly for Armenia). 5.6 The extent to which these developments will be affected by restoration of trade relations with Russia is unclear, but certainly: - the near term needs for oil and petroleum products may be supplied from Russia (some of the fuel for Armenia already comes from Russia) but import will be by sea; - Russia, purely in economic terms, will be unlikely to offer oil and petroleum products more favorably than could be supplied by a trans-Georgian pipeline with an associated refinery (although political considerations may override economic considerations); - Russia is likely to remain a grain-deficit country for many years, and overland supply to Georgia by railway from Russia is thus improbable; and - the three Caucasian republics are receiving, and will continue to receive, emergency relief from the world at large. Some reorientation of their production systems away from Russia is already occurring and may increase. Increased container and roll on-roll off traffic is thus likely both in the near-term and beyond. Without formally articulating an analysis as above, the Government's current activities in the port sector tend, nevertheless, to be addressing these potential developments. 5.7 In theory, privatization is being considered at both ports, yet Government appears to be adamant that in the foreseeable future it will retain control. In this contradictory context, "privatization" seems to imply corporatizing the entities, and selling minority shares to the private sector, primarily users of the port, including governments and agencies in the transit countries. The Government appears reluctant to allow private parties to own specialized facilities in the ports, apparently because it feels that national control would thereby be diluted. 5.8 "Privatization" may in fact evolve differently at each port. Batumi being the capital of an autonomous republic, port facilities there are doubtless perceived very much as a local asset, and central government may be reluctant to force the issue of privatization; the only move to privatize so far has been restricted to a few local government-owned vehicles. At Poti on the other hand there is less of a political constraint, and Tbilisi may feel freer to move there on privatization.  24 V Ports and Shipping Current Situation at Batunii and Poti 5.9 This assessment of the situation at Batumi and Poti is based on World Bank findings in 1993 and reflects the remedies suggested by the US Embassy in Tbilisi and WFP/CLAU.5 Both of these sources rightly touch on the role of the railway as it affects port operation. 5.10 At both ports, the general impression remains that the facilities available, if properly operated to maximum capacity, should be able to accommodate current traffic, and any traffic growth foreseeable in the medium-term, without the need for major investments. The longer-term flows at the ports will depend on (i) the timing and magnitude of the economic recovery and (ii) the extent to which Georgia will be used as a transit corridor for trade to and from central Asia, (para 5.5). In this context it should be noted that Georgian ports may face competition from Turkish ports on the Black Sea, the latter sending their traffic by rail through Armenia by-passing Georgia. Certainly for movement of oil from Georgian ports, the concern of Turkey over the passage of laden tankers through the Bosphorus will also need to be addressed. 5.11 At Batumi (five oil berths and one off-shore oil terminal, four dry cargo berths, an offshore mooring for lightering, and a small container handling capacity) there is limited dry cargo storage, hence virtually all discharging is direct, primarily to rail. This is a shortcoming of port design, the lack of railway wagons (para. 4.8) constraining port throughput. The oil pipeline across Georgia is corroded and remains closed, hence oil too must move by rail. The principal operational problems at Batumi persist as (i) inability of rail to provide adequate and timely wagonage for evacuation of cargoes, (ii) a work force with little motivation, (iii) an inadequate and unpredictable electric power supply and (iv) lack of spares for cranes and handling equipment. 5.12 At Poti, the cargo terminal has ten berths (two for grain, six for other bulk, one for containers, and one for general cargo) all served by rail. There are additionally a passenger berth, two fishing piers, one berth for coastal traffic and one being rehabilitated. The principal operational problems are similar to those at Batumi - the inability of the railway to adequately serve the port, and uncertainties and interruptions in the electric power supply. The port has as stand-by generator, but this in turn is beset by problems of lack of fuel. Poti has the advantage over Batumi that the working areas behind the berths are more spacious than those at Batumi, which is surrounded by a densely-settled community and hemmed in at the foot of steeply-rising mountains. Unlike Batumi, however, Poti has the problem of littoral drift, and maintenance dredging is needed. In 1993 Poti had contracted a foreign company to dredge the approach channel to 12m and to make corresponding adjustments alongside the berths. Port Finances 5.13 No information is available regarding the finances of Batumi port. Poti port's income for the first six months of 1993 (the last published figures) was the equivalent of roughly US$ 2 million with expenses of about US$1 million. Half of the income was in foreign exchange, about one-third of which was to have been paid to the (Central Government) Treasury. 5/ See Georgian Sea Ports. 1994, US Embassy in Georgia, Ref. 93 USDOC 19 439; and Situation Report. 17 February 1994: External Transport, Caucasus Logistics Advisory Unit, World Food Program.  V Ports and Shipoing 25 5.14 In 1992, total port charges levied were US$ 0.273 per ton of capacity of which nearly one-half was tonnage dues. Loading and unloading charges per cargo ton ranged in 1992 from 80 rubles for bulk commodities, such as bauxite and coal, to 1,050 rubles for container traffic. Based on these charging levels, total revenues from port dues in 1993 were expected to range between 0.7 and 1.0 million ECU6 with total cargo handling revenues between 5.1 and 6.3 million ECU. Of the latter two figures, bulk cargoes, other than metals, would represent more than one-half of all revenues, and break-bulk roughly a quarter. This level of charges, coupled with rising traffic, would be adequate to support the urgent repairs and rehabilitation, although competition from neighboring ports might limit what Poti could charge (para. 5.10 and Figure V.2). Main Issues 5.15 Problems besetting the ports can be categorized as (i) immediate/short term, having an impact on the day-to-day running and logistics of the operations, (paras. 5.11 and 5.12), and (ii) those of the longer- term. The immediate problems are being tackled very impressively by WFP/CLAU, the ports being perceived as just one link (but one that requires attention) in the overall delivery chain of humanitarian supplies. The CLAU has representatives in Tbilisi and Batumi, both are experienced in port operations, and are providing on-the-spot, hands-on, practical technical assistance. Moreover, they are working to acquire, using the funds from WFP (para 4.13), supplies of the most urgently-needed spares and equipment, i.e., pallets, gear for handling light cargo, possibly shunting locomotives and, most of all, fuel to keep everything running. The port authorities unfavorably contrast the studies, reports and visits of the private firms and international agencies', out of which nothing tangible has so far emerged, with the practical results-oriented work of the CLAU. The report quotes that "port managers are leery of more assessments, more visitors. The desire is for action, not more discussions". 5.16 No policy for the future of Georgia's ports has yet been formulated, although certain themes and topics recur in discussions on the ports, notably a scheme elaborated in the Soviet period to expand Poti to handle 40 million tons annually, so that the port could accept, inter alia, transit traffic on a large scale. Increases in capacity measured in tonnage, and without reference to the nature of the throughput, are still projected in gross amounts, as had been the practice in the FSU. 5.17 The Georgian authorities would like the handling capacity for oil, grain and containers to be increased; the latter two movements were also the principal thrust of the consultant's report on Poti. There was consensus among port officials that railway operations need to be improved and that connections to Europe through ferry and roll on-roll off services should be established. The need for reliable supplies of spares was emphasized and, in the case of Poti, the need to maintain the dredged depth. 5.18 The capacity to move petroleum is important for two reasons: it would provide Georgia (and Armenia) with a reliable fuel supply, and provide Georgia with a significant and steady source of foreign exchange. In the near term they would wish to have two berths for liquid cargo at Batumi restored to 6/ According to the Port of Poti study by The Rogge Marine Consulting GMBH, completed in early 1993. The study used ECU's for the financial projections and US dollars and rubles for its analyses of the port's charging practices, in accordance with the currency in which the port requires payment. 7/ The Bank must be a member of this select group.  26 V Ports and Shipping working order and one of the deep-draft berths at Poti likewise converted. Within one to two years they envisage a new oil terminal developed, based on a trans-Georgian pipeline (for oil, natural gas or both--the gas would be liquified and exported). The pipeline would be built by joint venture with private interests, and negotiations underway in 1993 to determine the route and the terms of operations have proven inconclusive so far. T he new terminal would likely be separate from the existing ports; it would be sited either at Enguri, somewhat north of Poti, or at Supsa, a few kilometers south of Poti. The former site is at a natural marine deep trench with no foreseen dredging requirements, while the latter is subject to the same siltation as Poti. However other considerations and politics may weigh decisively in the selection if unchecked. 5.19 For grain imports, the Government has initiated rehabilitation of presently unused grain elevators and the adjoining flour mill at Poti, damaged some years ago by an earthquake. In addition, the Government wants to add elevators which would increase capacity from 24,000 to 60,000 tons, and to reconstruct the grain berth for larger vessels with deeper drafts. The consultant's report had not envisioned expansion of the Poti grain facilities until 1997. EBRD may be interested in this project to increase grain handling, and has already visited the site. 5.20 For containers, improvements have already been made at both Batumi and Poti to facilitate container handling. The consultants to Poti port have recommended a full container terminal be completed by 2003 on the site of the current rarely-used passenger pier. The Government also plans by end 1994 to install roll on-roll off facilities at Poti berth #7 to provide scope for the use of unitized cargo. B. Shipping 5.21 The GSC in the Soviet era was one of six Soviet entities engaged in maritime services in the Black Sea. As of January 1990, it owned 58 vessels with Deadweight Tons (DWT) of 1.1 million tons, about 5% of the total Soviet merchant marine. By 1992 GSC had only 44 vessels with about 1,000,000 DWT. Some GSC ships thus had been transferred to other Georgian owners and to foreign flags. In addition to GSC, 38 fishing boats, 5 tug boats and a number of smaller vessels registered under the Georgian flag. 5.22 More than a third of GSC's vessels, representing nearly 40% of the DWT, is at least 15 years old (see Figure V.3 below). Such vessels are expensive to operate, they need more repairs and are technologically obsolete. To meet repair needs GSC has signed joint venture agreements with foreign firms for 19 vessels. The terms of these agreements have not been provided to the Bank, but would constitute a form of partial privatization, by providing for participation by a private (foreign) party in vessel operations and business risks. However, GSC as a whole remains a state-owned enterprise and no plans have been formulated to privatize it other than to convert it to a shareholding company. Some of the smaller vessels under the Georgian flag are privately owned. 5.23 As with the ports, the Government has not yet formulated a policy for its merchant marine. Specifically, there is a need to address issues such as to what extent a merchant marine under the Georgian flag is required to serve the essential needs of the country, to what extent the merchant marine should be deployed effectively in competitive international service, and to what extent foreign or private interests should be allowed to own Georgian ships to serve Georgian trade.  V Ports and ShipDing 27 Meohant fle grouped by age, 1992 100% 90% 80% 70%{ 50%{i 5-14yeara Q% ~~~~~~~~~~~~~~~~~~~U0-4yeara Dry cago Tank.s Figure V.3  VI. ROAD TRANSPORT A. Road Infrastructure "The State Concern of Highways" 6.1 The dominant institution in the roads sub-sector is the "State Concern of Highways", a body that operates independently of the rest of the transport sector, reporting only to the Council of Ministers. There are 13 regional road authorities in Georgia, nine of them under the jurisdiction of the State Concern, the remaining four being under the direct control of major municipalities. The responsibility of the Concern is the design, construction and maintenance of the principal road network of Georgia outside Tbilisi; this charge translates into a responsibility for about 21,600 km of road of various categories. The Concern organizationally comprises: - a "construction and repair" department (with 14 units nationwide); - a maintenance department (88 units nationwide); - a production department responsible for winning of sand and aggregates, and for fabrication of concrete and metal products; and - a scientific and research department. 6.2 The principal officials of the Concern appear to be experienced professionals. The President and one of the Vice-Presidents are experts in tunnelling; the Vice-President in charge of scientific and research activities was a member of the Soviet Academy of Sciences. 6.3 The Concern, as with other entities in the public sector, is operating under legislation carried over from the Soviet era, supplemented by legislation of a general nature applicable to all public sector entities that was passed three years ago in the early days of Georgian independence. Specific legislation that would cover the Concern's responsibilities and operations in the post-Soviet era was drafted in 1993 for submission to Parliament. The current status of that draft is not clear. 6.4 A 1993 Bank mission, using a specially-prepared questionnaire completed by the Concern, obtained initial information on the extent and condition of the road network in Georgia, and on the institutional arrangements for funding, and for execution of maintenance, rehabilitation and construction. A brief inspection of part of the "magisterial" (para 6.8 and following) in June 1994 confirmed that the road condition is essentially the same as that of a year ago, not a result of attentive maintenance (none is taking place), but rather, the consequence of negligible traffic. 6.5 Work on the road system as a whole is virtually non-existent, a result of a lack of funds, which is a reflection of the more fundamental issue of (lack of) cost recovery from users. Currently the funding available from central government covers salaries, taxes paid back to government, and then no more than about 5% of the funds required for routine maintenance. A road fund has been proposed that would collect user charges for road work, but nothing definite has emerged. Contracting of maintenance and construction of new roads would help to lower unit costs, but privatization of these operations would require that the appropriate and steady level of funding would be available.  VI Road Transport 29 The Road System 6.6 The road system of Georgia in the Soviet era was oriented essentially for trade with other republics of the Union, to the east (Azerbaijan), but more importantly to the north (the Russian Federation). This latter orientation comprised two principal routes: (i) to the west, skirting the Black Sea to Sochi, Novorossiysk and beyond; and (ii) to the north, the so-called Military Highway, (the shortest crossing of the main Caucasus range, the highest pass being at 2,160 m above sea level) connecting Tbilisi, through Kazbeg, with Vladikavkaz (recently renamed Ordzhonikidze) capital of the North Ossetian Autonomous Republic. 6.7 The aspirations of Georgia as an independent nation, and specifically the possibility of becoming part of an east-west corridor linking the Caucasus and central Asia with the Black Sea, require a radically different emphasis for the road system from that previously envisaged, one in which the road from the Azeri border to Georgia's Black Sea ports would play the dominant role. The physical characteristics of the existing road network, its present condition, the institutional framework, the funding, and the plans for development, were therefore examined with this orientation in mind. The Principal Road Through Georgia: The "Magisterial" 6.8 Location. The principal road in Georgia, measuring about 728 km, runs from the Azeri border, through Tbilisi, to the Black Sea (Sukhumi), and on to the Russian border. This road was numbered M27 in the Soviet system, today it has been renumbered in the Georgian network as M4 from the Azeri border to Tbilisi, and MI from Tbilisi to Sukhumi and the border. There is a trifurcation of the system at Saintredia, close to the Black Sea, where two roads take off from the MI to provide access to Poti and Batumi (whence in turn the road continues to Sarpi and the Tuirkish coastal highway) and the third runs westward through Abkhazia to the Russian frontier. 6.9 The Ml/M4 system (termed in Georgia the "magisterial" because of its central importance) runs generally along the valley between the two ranges of the Caucasus; except for a short, rather mountainous section some 100 km west of Tbilisi, and a short, less difficult section between the Azeri border and Tbilisi (in the area of Rustavi, the major industrial complex), the valley provides little difficulty for location of a major highway. 6.10 Outside the city limit, and therefore within the responsibility of the Highway Concern, the pavement was generally acceptable, again localized potholing and one short section in cutting where the pavement fornation had failed and the pavement consequently had heaved - the only example of this type of failure observed in the whole length to the Azeri border. The City and the Highway Concern should be tackling these isolated minor trouble spots before they become major trouble spots; an insignificant input of materials and equipment usage would be required, largely it would be a case of labor, and the planning, organization, and most of all, the motivation to do the necessary maintenance; regrettably there was no evidence of any maintenance at all taking place. 6.11 Geometry. Alignment of this principal highway is generally acceptable except for the two sections mentioned in the previous paragraph. It is however beset by long tangents (straights) that doubtless cause problems from headlights at night and that certainly encourage speeding by drivers of automobiles. Longitudinal gradients are, likewise, generally acceptable, except for the same two sections -- the section east of Rustavi, for example, has posted gradients of 12%.  30 VI Road Transport 6.12 There are a few sections of slope instability on the M1/M4 system, the most obvious being between Batumi and Sarpi. Here the road, heavily trafficked, particularly with buses to and from Turkey, clings to the mountain slope at the edge of the Black Sea, spectacular from the tourist viewpoint but obviously difficult for maintenance crews trying simultaneously to clear the debris from slides at the inner edge of the road, and to prop up the outer edge against collapse into the sea. If it were decided eventually to reconstruct this important section, there may be an alternative alignment available a short distance inland. 6.12 Pavement. Apart from a few short concrete sections in and adjacent to the cities, the M1/M4 pavement is of flexible construction. The bituminous surfacing looks dry and tired, and there is some evidence of use of uncrushed gravel, and of stripping, but there is no widespread deformation of surface that would indicate base or formation failure; probably the relatively high embankments on which the road has been constructed have helped to keep the critical pavement strata dry and hence conserve their strength. The lane markings likewise appear jaded. The standard design for the pavement is a total depth of 30 cm., (5 cm of carpet, 5 cm of bituminous base and a stone base of 20 cm). This construction is adequate for today's reduced traffic, and less so if and when previous traffic levels return or if there were to be an increase in heavy traffic from the central Asia region. 6.13 Structures. Structures, principally bridge decks, piers, abutments and wing walls, are characterized by thoroughly poor concrete. The side elevations of the decks exemplify the problem -- crumbling concrete and reinforcement exposed. This shortcoming carries over even to the railway overpasses on the M4, for example. The condition of the concrete could be attributable to working in frosty conditions, or to use of ingredients that have chemicals inimical to concrete, or to skimping on the cement content, but more likely the condition is the result of poor compaction or even the total absence of compaction. Certainly the poor quality of construction on site contrasts oddly with the claimed high quality of research and design in the office. 6.14 A further negative feature associated with the bridges, is inattention to the side drains in the cuttings that form the approaches to the structures. These approaches, and therefore the side drains, are often steep, but there appears to be no practice to protect the drains either by lining or by use of scour checks, with the consequence that the drains are deeply scarred into the shoulders of the road, and the wing walls of abutments tend to be undercut. Other Roads 6.15 The other roads in Georgia comprise the secondary/tertiary roads leading off the M1 /M4 system, and low class feeder/agricultural roads and tracks. The secondary/tertiary system, from fairly cursory observation, appears to be in fair to poor condition. However, the Concern noted that the limited means now at its disposal are concentrated on the "magisterial" road in preference to the other roads. 6.16 The lowest class roads (feeder roads, agricultural roads and tracks) are important in terms and movements of agricultural inputs and produce. Some of these roads fall within the responsibility of the State Concern of Highways, and are nominally maintained for the Concern by Municipalities, the latter, in theory at least, being reimbursed for the work by the Concern, which currently has no funds to cover this maintenance. In practice therefore these vital roads and tracks are not being maintained. Indeed NGO's staff assisting road development with whom the missions met confirmed that apart from suffering from other factors - lack of fertilizers, pesticides and energy - production from the high Caucasus region was difficult to transport to market because of the poor state of the roads.  VI Road Transport 31 6.17 Figures VI. I and VI. 2 below indicate the category breakdown as well as pavement characteristics of the Georgian road network. Georgian Roads, 1994 Total Length: 21,600 kn nahonal (ma stelal) collecor (republic) h gravel or earthPI , w SSDMD w pav4e5dO'Droads~~~road local (regional) 71%- Figure VIA Figure VI.2 Traffic 6.18 Reports on current and previous traffic flows (see Figure Vl.3 below), were obtained from the Concern's engineers whose construction/maintenance units are positioned along the Ml. They report current levels in the range 250-500 vehicles per day (vpd), down from previous levels of up to 10,000 vpd. These latter flows could materialize again as agricultural activity in eastern Georgia and in the western plain, and industrial activity in Kutaisi, Tbilisi and Rustavi resumes; however, there is no credible evidence that this recovery is imminent. The concept of Georgia being part of the Central Asia- Black Sea corridor, if it materializes, would obviously augment the flow on the magisterial, probably with container traffic, but at best and certainly in the short term, this through traffic would only be a small proportion of the locally-generated flow; it should however, be a factor to be considered when studying the upgrading of this most important road in Georgia. Tratic on the "Magisterial" Road (728 km) Hundreds ot car.km per day 120,000 T 100,000 80,000 60,000 40,0004 20,000 1990 199tcapa3yo th rnd Figure VI.3  32 VI Road TransDort Maintenance Units and Equipment 6.19 Maintenance equipment appears of rather heavy design and not well matched to the actual needs. For example, capacity to mix and lay bituminous base and carpet is far larger than the construction and maintenance function would dictate. Possibly road maintenance units in the past had received equipment that happened to be available and not necessarily that which was needed. The maintenance units have been supplied over the years with an ample supply of graders and spreader boxes. A major effort to improve the quality of construction would be appropriate. Cross-sections tend to be flat, and the pavements are probably saved from drainage-related problems only by the longitudinal falls. 6.20 Construction work and major overlays are designed and ordered from Tbilisi. Local staff appear to understand the theory but do not have the means to evaluate the strength of pavements or to design the overlays. Privatization 6.21 The road department at Marneuli (14 engineers and technicians, 88 other staff) a year ago was planning to become a limited liability company; the timetable is still not clear. This aggregate winning/crushing/screening and hot-mix plant located some 30 km east of Tbilisi has been "privatized" in the sense that the workers have taken out a one-year lease on the whole venture. On that basis, they have entered the business of supplying crushed stone on a commercial basis, with sales to as far away as Tbilisi. They have shown much ingenuity in the use of equipment, e.g., building a crusher on their own and re-engining a Russian truck by installing a diesel motor, from a static generator set, in the chassis. 6.22 There appear to be no other plans for privatization of road construction or of maintenance, or plans for privatization of design. Georgia is a young country, still in turmoil and there are doubtless many urgent institutional and operational problems facing the road sub-sector. In these circumstances, coupled with the need to "hold the line" and prevent further deterioration, even collapse, of the existing road system, the officials may feel understandably that experimenting with privatization is a luxury that can await more settled times. Nevertheless, the current, enforced level of comparative inactivity on the roads may be the appropriate occasion to propose and introduce a well-conceived and coherent national plan for privatization of design, supply, construction and maintenance in the sub-sector. Main Issues 6.23 The objectives, as voiced by the Concern, remain: (i) to prevent the collapse of the existing road system; (ii) to reconstruct "the magisterial", as and where needed; and (iii) to develop access to the tourist centers. Given these, the officials stated their problems as: (i) a shortage of critical materials, notably bitumen and cement, and a shortage of foreign exchange to buy them (at least the bitumen; cement is produced in two existing plants in  VI Road Transport 33 Georgia if fuel is available; a third plant is being constructed); (ii) over-age equipment; no renewals for years, and no foreign exchange to purchase new equipment; (iii) no spares and no foreign exchange to purchase them; virtually all equipment is of erstwhile CMEA origin. 6.24 Officials of the Concern have some feel for the relative importance within these objectives, and presented lists of first and second priorities (see Figure VI.4 below). The first priority comprised pavement overlays, fencing (a major item), road signs and marking, for a total estimated cost of US$86 million in 1984 prices (the ruble being taken at par with the dollar). The second priority comprised construction, notably 15 km of tunnel through the rather difficult hilly section, for a total of US$761 million, again in 1984 prices. This would suggest that little or no revisions of the dated plans has taken place to date. Given the current economic situation, it is also obvious that the planning for the complete system of ten years ago, does not hold today, does not take into account the technical advances in highway planning and design now available, and does not reflect credible traffic forecasts nor availability of resources. Works needed on the Intercontinental Roads ~1 * first prliurty wok.l- C second pulorlty wort- 19B4 US$ millon t lo maintain rn minimum safety to reach lntemalonal standards BOO T 7001 US$761.1 millon 500 US$86.4 million 400~ 200T Poll-Kh1di Potim-Sarpi Mteldhata.Laral Kf,ashurt-Tuvte TOW Figure VI.4 B. Freight Transport The Fleet 6.25 In 1990, there were more than 600,000 vehicles in Georgia (see Figure VI.5 below). Trucks and buses had remained at about the same level since 1985 (roughly 100,000), but cars had increased by nearly 100,000 units in the five year period to reach almost one-half million units, or roughly one car for every ten inhabitants. Nearly all the cars were privately owned, representing a high level of motorization and implying a level of prosperity greater than that of the Soviet Union as a whole (an  34 VI Road TransDort average of one vehicle for every 20 inhabitants). There are no current estimates of the magnitude of passenger movement in private cars, and as a consequence there may be a sizeable distortion in the description of the transport sector, and of the share of road transport in the overall output of the sector. The apparent absence of a credible data base for the sector as a whole, and for the modes, should be an area to be addressed in context of ministerial functions yet to be determined. Motor Vehicles: Fleet and Ownership 700,000 Tuli 200,000 100,000 0 - 985 1900 1991 Figure VI.5 6.26 Georgia's trucking fleet is described in detail in Figure VI.6 below. Data for 1992 are only estimates, they show a significant decline over previous years in vehicles on road due to non-replacement of overage units or cannibalization to keep other units in operating condition. The vehicles are overwhelmingly of low capacity (10 tons or below), with less than 10% in numbers and 20% in cargo capacity represented by trucks exceeding that limit. The trucks are mostly of makes originating in the FSU, the commonest being: KAMAS (Tataria) MAS (Minsk) GAS (Gorki) GRAS (Grementchuk) BELAS (Minsk) Compared with vehicles on the world market, these brands are thought to be fuel-inefficient and to have low durability (see Sector Report, Russian Federation Transport Sector Strategy, Annex E, referred to in para. 3.3 of this Report). The relative inefficiency of gasoline vis-a-vis diesel trucks is causing potential buyers to hesitate before purchasing gasoline powered trucks (presently the bulk of the fleet).  VI Road Transport 35 Repertition of Road Cargo Vehicles ccording to Capacity tons 14001 % X 120,00 24 100,~ 80 075o5 6 lL 444,00 WMn 40 37%1 D* l992TOIiICap*- 40,000 - - 1 353,O tom^p 20,000 M M1% =* 7 i 0~~~_ _ i ^ m 0.75 3.5 a8.5 12.5 17.5 40 tons Figure VI.6 6.27 The trucking fleet remains 93 % in public ownership (see Figure VI.7 below); among state-owned vehicles own-account units far outnumber those operated by for-hire trucking organizations, roughly five to one. The publicly-owned for-hire organizations operate under the direction of the Road Transport Department and control about 12,000 trucks. Ownership of Trucks and Bus 90,000 80,000 7 70,000 60,000 W." ~~~~~~~~~~~~~~~DPM~ 30,000 10,00 10f % Trtud( 1985 Trudns 1991 Busshi 98 Busm 1991 Figure VI.7 6.28 Information is not available on road passenger transport other than in the city of Tbilisi (discussed under "Urban Transport"). In general, municipal passenger services have been turned over by the erstwhile MOT to the local administrations but the Road Transport Department continues to control about 3,500 other buses. Entry into road passenger service is alleged to be free but there is control over tariffs.  36 VI Road Transport Privatization 6.29 Road transport represents the largest and most complex element of the privatization task in the transport sector. The number of vehicles potentially subject to privatization is about 130,000 units organized in roughly 200 enterprises, of which about 50 are under the Road Transport Department and the rest under municipalities and other ministries. Under the Soviet system, enterprises were grouped in unions for the supply of fuel and parts. Government has announced its intention to privatize road transport, both freight and passenger, and including urban transport, although it recognizes that there may still be a case for (limited) own-account trucking for some enterprises in the industry and agricultural sectors. Certainly the situation is favorable for privatization, particularly if accompanied by economic liberalization - of entry/exit, rates and routes. 6.30 Privatization is envisaged either as sale of individual vehicles to employees of state enterprises, or as corporatization of enterprises and unions of enterprises with eventual transfer of the corporatized bodies to private ownership. Both forms of privatization will require introduction of market mechanisms to persons previously unfamiliar with them. Skills in planning, operations and accounting need to be developed accordingly. Nothing less than a radical cultural change will be necessary, and there are already indications (para 6.33) that this may be difficult to effect at the enterprise level. 6.31 In addition, progress in privatization of road transport has been slow because of concern by the Road Transport Department and others that transfer of vehicles to the private sector would put them out of reach of Government in the event of a security emergency. The Government's fear that private bus owners would raise fares unconscionably has likewise caused a pause in privatizing them. Nevertheless, senior officials in the Government confirmed their support for privatization in this sub-sector. A precise current estimate of privatization of road transport is not available. As late as 1993, about 8,400 trucks were reported to be in private ownership, as well as 1,300 buses. According to the privatization agency, some 3,500 out-of-order vehicles had been sold to employees of state enterprises. In addition, all of the 3,000 taxis in Tbilisi had been transferred to private ownership but none were in operation allegedly because of problems in the supply of fuel and parts, and because of security concerns on the part of the drivers.8 6.32 The Road Transport Department is being assisted in the movement towards privatization by Denmark, specifically by technical assistance focusing on technical regulation aspects. The following paragraph summarizes findings and recommendations to date, and the expectations for the remainder of the program. 6.33 The basis for technical regulation of road transport is currently a 30-year old Soviet document, and the Department is struggling (with just one lawyer, not well-versed in modem transport systems) to develop regulations that would address Georgia's needs today, and would be compatible with world practice and conventions. Seemingly, there is not the comprehension in the department of what is involved, possibly lack of commitment, given that technical deregulation will impact so radically on the Department's way of working. This assumes that economic regulation, i.e., pricing, entry, and allocation of traffic, would be eliminated by governmental executive action. 8/ This points to one of the difficulties in privatization of motor transport enterprises, namely to provide the newly privatized owners with access to sources of supply of inputs when the suppliers continue in public ownership. The privatization agency has begun a program for the transfer of the five Tbilisi garages that had been servicing the city's taxis.  VI Road Transport 37 Operations 6.34 According to Soviet accounting methods, road freight transport had been a profitable business during the times of the FSU. Trucking enterprises that currently are in operation are still reported to be making money as they are free to set their charges. However, many vehicles are out of service due to the lack of fuel and spares. In addition, many vehicles stay off the road because of theft. The supply of fuel represents particular difficulties; whereas privately-owned vehicles must buy their fuel from tank trucks parked on the street, at a market price, Government-owned vehicles obtain fuel (provided it is available) at one-tenth of the market price, from the official fuel import enterprise or its agents. While this system ensures that emergency transport needs of ambulances, police vans, bread trucks etc., are met, it also unfairly favors public over private operations. Main Issues 6.35 Road freight transport is characterized by: (a) excess capacity; (b) disappearing traffic at state controlled prices; (c) official statements as to intentions to privatize; (d) a policy framework which discourages privatization; and (e) elimination of the civil service, i.e., Ministry of Transport, responsible for the formulation of a new policy framework. A sense of drift and a wait and see attitude pervades the industry. C. Urban Transport 6.36 The urban context and the urban problems in Georgia relate in large measure to Tbilisi. The greater Tbilisi area represents nearly 30% of the nation's population, at 1.5 million inhabitants. Before the outbreak of civil unrest and the inflow of refugees from Abkhazia, population was 1.3 million. The problems of other cities are relatively less significant compared with those of the capital. Its importance is such that the municipality of Tbilisi reports directly to the Council of Ministers, whereas other cities of Georgia report to the appropriate ministries, i.e., Finance, Interior, etc. 6.37 Tbilisi is situated in a narrow valley, that of the river Kura, running from east to west. The river runs through the center of the city, and it is a dominant feature of the urban space. The main arteries and the Metro run east to west as well. The proximity to the river causes water intrusion through rock fissures into Metro tunnels. About 10,000 m3/day need to be pumped out. The urban density is low and within a linear urban structure, there is a spread of the population into the adjacent rolling hills to as much as ten kilometers from the river. 6.38 Urban transport today is limited to Metro services operating under visual rules following the destruction by arson of its traffic control center in 1993. Line capacity has been halved, and train sets have lacked spares. The World Bank's Municipal Services Emergency Project has financed spares for traffic control and train sets. 6.39 Surface public transport has disappeared. The 22% of a fleet of 950 buses which was operational in 1993 had been reduced to four units in June 1994. Trolley buses do not operate either, a fleet of 240 had been reduced to 50% in operation in 1993, and with cannibalization of parts the service eventually died out. Parts have not been purchased since 1990. A total of 5000 employees has been idled. 6.40 Surface public transport was lost and Metro deteriorated (arson not withstanding) when an  38 VI Road Transport "affordable transport " policy was carried out ad absurdum by refusing to adjust tariffs under hyper- inflation. Full cost recovery for surface transport and recovery of working expenses for Metro would amount to a welfare maximizing proposition. The lack of transport is imposing real costs on would-be riders, which are valued in excess of the tariff levels necessary to recover the cost of services. 6.41 The affordability question itself is related to real as opposed to nominal incomes. In Moldova for example, official salaries cover 25 to 30% of household incomes, the rest coming from the informal economy. Given Georgian hyperinflation and the migration of labor away from Government service, the proportion of income from the real economy in Georgia may be even higher. A household income and expenditure survey would be necessary to avoid unsubstantiated claims in what is a delicate policy and political subject. 6.42 The population that would choose to use the service at fares recovering costs would realize an "income effect" if such transport was available. Those not able to afford the services would be no worse than today since none is available. Income distribution and safety net issues would be better addressed as targeted subsidies in the form of direct income supplements as is being considered in Moldova. Main Issues 6.43 The problems identified as early as 1993 have worsened and exacted heavy social costs. They are summarized as follows: - a tariff structure in transport that in no way reflects the costs of providing the services; - ridership, of which 50% is exempt from paying a fare; - lack of renewals and no significant purchase of spares; - a public transport sector service hampered by regulation; and - a street system maintenance also affected by lack of funds: within the city limit there was standing water at the curbs, and a few localized potholes. The same remarks would apply to the "pave" pavements. The municipal officials concur that these are the critical problems facing the transport system in Tbilisi.  VII. CIVIL AVIATION A. Overview 7.1 The collapse of the Soviet Union left the Russian Federation with the lion's share of the Union's aviation sub-sector assets, i.e., AEROFLOT and the air traffic control system. Georgia was left with some airplanes, runways, but virtually no air traffic control equipment. Since then, they have managed to acquire spares to keep the system running. The Aviation Department is keenly aware of the need to develop its aviation sector. 7.2 The situation confronting officials in Georgia was further complicated by the fact that some 13 airfields throughout the country were occupied by the armed forces of Russia until 1994. An example is the aerodrome at Senaki, close to the port of Poti, which has been handed back to Georgia. Senaki apparently was one of the biggest bomber fields in the Soviet Union. Georgia has tentative plans to establish a Special Economic Zone in the Poti/Senaki area, but these were delayed because of the military occupation. Today, the Senaki aerodrome is scheduled to become a center for air freight and transhipment. 7.3 The aviation sub-sector is the responsibility of the Aviation Department, one of the departments of the former MOT. In February 1994, Georgia acceded to ICAO. This membership should bring a wide range of assistance and advisory services, and Georgia has already participated in ICAO regional meetings; it should serve also to diminish Georgia's technical dependence on Moscow. The Department is now aggressively pursuing development of the sub-sector, probably with more enthusiasm and appreciation of what is required in a market economy than is apparent in the other transport sub-sectors in Georgia. It is convenient to consider this development, and the approach of the Department, under three headings: (i) the aviation authority; (ii) the carriers; and (iii) the airports. B. The Aviation Authority 7.4 The Department prepared a legislative framework for the sub-sector, a "Decree on Air Transportation", which was approved by the Cabinet of Ministers in March, 1994. This legislation ensures a clear distinction between the regulatory and operational functions in the sub-sector, and establishes new responsibilities for the Aviation Department. These include (i) regulation and (ii) provision and operation of "aviation infrastructure". Regulation is limited to physical/safety regulation (setting and checking of maintenance standards, certification of crews, etc.) and intervention wherever monopolistic conditions might arise. Entry of foreign carriers into Georgia is not restricted as Georgia subscribes to an "open skies" policy. 7.5 As to the provision of "aviation infrastructure" - navaids and air traffic control - the Department benefited from a grant of $300,000 from the U.S. Trade and Development Bureau (TDB) which carried out a feasibility study in both of these areas. The study identified a 3 step project9 including (i) the renewal of radar systems and computers compatible with European standards; (ii) the rehabilitation of telecommunication systems; and (iii) the setup of a satellite telecommunication system. Funding to put 9/ Current estimate of cost is of about $100 min for all 3 steps, of which $40-$50 min for the first phase, i.e., the radar system and computer network renewal.  40 VII Aviation the system in place is not yet identified, but the Department is expecting to attract private investors for both, the installation, and operation of the system. The return to the investors will come from full cost recovery from the users either serving Georgia or over-flying it. C. The Carriers 7.6 Georgia has two major carriers (a) ORBI, designated as the national carrier, a joint venture between Georgia, the Russian Federation and a British firm, and serving both the international and domestic markets and (b) AIRGEORGIA, a joint venture of Georgian and German investors, serving only the international market. Three other small carriers (one equipped only with helicopters) with leased aircraft, each serving specific international routes. All Georgian carriers are using former AEROFLOT equipment. All accept cargo but there are no special cargo aircraft; there are no bonded facilities in Georgia but ORBI and other carriers have small warehousing areas at Tbilisi. There are also foreign carriers providing charter services, particularly from Europe. 7.7 All Georgian carriers are affected adversely by: - little or no investment over the past four years; - lack of timely maintenance; - fuel inefficient and over-age aircraft; and - lack of fuel, all compounded by a reduction in passenger demand, some 50% compared with 1990 levels. The cumulative effect is planes grounded, and a reduction in frequency of flights. The Department, perceiving that it has an operational role to play pending the coming into effect of the desired structure for the sub-sector, is encouraging introduction of modern equipment, including leasing of Boeing 737's aircraft. Meanwhile ORBI has arranged for six two-man crews to go to the USA for conversion training to 737's. 7.8 External contacts are not limited to ICAO, and bilateral arrangements are developing. DELTA (US) is a partner in the reservation system, and the Societe Internationale de Teleconrmunications Aeronautiques (SITA) (France), used by most carriers for inter-company communications, was scheduled to open a regional office in Tbilisi. D. The Airports 7.9 There are six airports with paved runways available for civilian aircraft in Georgia, clearly Tbilisi and to a lesser extent Batumi and Sukhumi being the most important. The country, in the aviation context, is not large and with the probable exception of service to the ports from Tbilisi, scheduled domestic services would have little comparative advantage compared with travel by road. 7.10 The focus therefore must be on Tbilisi. The existing terminal building could be utilized better than it is now, simply by plotting the desired passenger flows and making whatever minor, low-cost improvements to improve the passenger and baggage handling. An EBRD-financed project of about $13 mln for the refurbishing and modernization of the Tbilisi terminal building was recently approved. Rehabilitation works started in May 1995 and are scheduled to be completed by February 1996. Nevertheless the Department, planning for moderate growth in passenger traffic and doubtless  VII Aviation 41 contemplating a modem terminal for the capital airport of a sovereign country, has been planning for a new building. Initial designs called for a construction cost of US$400 million, but the designs have been scaled down, and the estimate is now US$150 million (source and reliability of the estimates not established). Neither investment seems justified. 7.11 The Department is looking to involve the private sector in airport development, and for Tbilisi is envisaging a 10-year concession, with a 20% stake in the concession thereafter. The Department avers that two potential concessionaires are interested, but currently there is no firm financing. Involvement of the private sector, apart from conforming with the general philosophy that is appropriate for Georgia as it moves to a market economy, would also be beneficial in that the concessionaires would inevitably scrutinise the plans, the overall scale of the project vis a vis traffic and its likely development. The approach being followed would contribute a business-like approach to airport development, which is not always evident in the public sector. 7.12 Runways, taxiways and aprons appear generally adequate to handle projected traffic; major investment should not therefore be needed in the short-term unless there are safety concerns or unless additional length/strength would be needed to accommodate more demanding equipment.  VIII. MISSION FINDINGS AND RECOMMENDATIONS A. THE TRANSPORT SECTOR 8.1. The transport sector shows significantly reduced traffic flows in all modes compared with those of only a few years ago. About one fourth of 1990 levels were observed in 1993. Little, if any, maintenance (even basic routine maintenance) was being done. The impression is that the transport system is "existing on its capital stock". The asset base is eroding and may, within the next five years, deteriorate to the point at which maintenance and rehabilitation are no longer possible. If this occurs, the only option will be costly and complete reconstruction. Worsening the picture, the conflict in Abkhazia severely damaged road and particularly railway infrastructure: several bridges were blown on the critical link between the Black Sea ports and eastern Georgia; railway electric wires were vandalized and the signalization system was destroyed. The effects of this deterioration of the transport system would be felt by other economic sectors that rely upon it. 8.2. The sector, with the exception of the aviation sub-sector, still operates under the organizational and policy structures of earlier days. Pervasive in the sector is the absence of meaningful cost recovery and resource mobilization, with the inevitable consequence of unfunded operating entities, poor service and a degradation of infrastructure and equipment. The sector itself is in disarray: four modes report directly to a Deputy Prime Minister responsible for the infrastructure sectors, and a fifth, (the road infrastructure sub-sector) reports to the Council of Ministers. There is no reliable, consistent information base, and transport statistics are not being collected any longer. Since there is no Ministry of Transport, there is no sectoral focus at the policy making level. 8.3. The disappearance of the Ministry of Transport needs to be seen in the context of a needed contraction in the civil service, with more and more responsibilities concentrated in fewer and fewer hands. However, this trend carried to an extreme has adversely affected the policy-makers' ability to formulate sector policy, carry out reforms and adjust to new realities. Since the restoration of the Soviet- style civil service would not be advisable, this presents a unique opportunity to organize reforms and privatize the sector. 8.4. The sector needs to move toward privatization and much greater use of the market mechanism than previously. In this regard, the recent reorganization of the aviation sub-sector is demonstrative of how such a program of reforms leads to greater efficiency, availability of finance, new investments and improved maintenance. The present lack of economic activity provides a convenient window in which to effect the institutional changes necessary. The time available before the economy recovers may be limited, and the sector may need to be restructured and market-oriented to be able to perform under increasing traffic volumes. There are indications that officials are beginning to accept the logic and the inevitability of the changes that will be needed. There is also evidence that they also realize the extent to which their roles and responsibilities will be altered. 8.5. There is only one choice to improve efficiency, which is to operate commercially across transport modes. In addition, the Government of Georgia does not have the resources to operate the transport sector. The size of the Government is likely to remain limited and this, in turn, implies that regulatory controls and ownership would be relinquished. At an initial stage, the process of privatizing the sector could be vested in ministries implementing the economic reform program.  VIII Findings and Recommendations 43 B. THE REFORMED TRANSPORT SECTOR - A VISION 8.6. The future transport sector of Georgia is likely to rest on the privatization of all transport services. Public provision of infrastructure such as roads, airports, and navigation aids for sea and air transport would take place on the basis of full cost recovery. The transformations that would take place in the transport sector would respond to the changing role of the State, the opening of the economy, and the recovery of economic activity. The number of operators, clients and, more generally, decision makers will grow. Initial beneficiaries of the opening and expansion of the sector will be its users, operators and specialized commerce and financial intermediators. 8.7. The transport sector will continue to be an incubator of entrepreneurial activity. Small enterprises will be launched, and significant amounts of labor will be absorbed. The main areas of expansion are going to be in trucking and bus transport, freight forwarding, regional aviation (8 independent airlines already operate in Georgia) and, to a lesser extent railways and shipping. Recurrent maintenance and rehabilitation will represent a new market for the local civil works contracting industry. This activity, as the beneficiary of the application of cost recovery flows, would not be dependent on the central government budget. 8.8. The successful commercial operation of the sector calls for a financial framework suitable to sustain operations in a market economy and mobilize resources. The allocation of private investment resources would take place within this framework. The allocation of public investments being a part of the public expenditure would require different mechanisms. 8.9. Financial Framework. An acceptable financial framework for the transport sector would be compatible with the goal of privatizing services and achieving a current net public revenue position for the sector as a whole. Under such a financial framework, the transport sector would be able to expand in concert with the economy, and would cease being a drain of scarce public resources. Key aspects of the financial framework are the following: (a) Realistic valuation and periodic adjustments of the foreign exchange rate; (b) Reduction and uniformity of custom duties; (c) Elimination of foreign exchange controls and freedom to buy (and sell) foreign exchange from the banking system at the prevailing commercial rate; (d) Liberalization of commercial banking; (e) Managerial freedom to purchase necessary equipment, software and technical assistance, subject only to the financial constraints of a market economy; (f) Elimination of State subsidies; (g) Freedom to set levels of service, and select routes and frequencies of service; (h) Liberalization of prices; (i) Unrestricted entry for private investors into the transport markets; and (j) Recovery of the cost of public infrastructure. 8.10. Allocation Mechanisms. Private Investments. For private investments, market forces, prices, costs and access to commercial credit will influence the flow of resources to the transport sub-sectors of Georgia. Global "allocation" of private investment would follow the pace of de-regulation, liberalization and privatization of the economy. The stronger the pace of change, the stronger the response from the private sector. In the end, there is little for policy makers to do to assign private sector flows because the price system, once liberalized, becomes the allocation mechanism. Each private activity in the sector  44 VIII Findings and Recommendations will have a return resulting from the difference between the cost of production and the prices charged for the output. If prices are not fixed and there is no interference with what can be produced or who can produce it, the supply of goods and services will tend to grow and will attract investment until all unsatisfied demand has been met. 8.11. Public Investments. The case of direct government expenditure or public debt guarantees is different. A choice amongst sectors is required first, followed by an allocation to possible uses within that sector. This requires a thorough evaluation of all possible uses for these resources against their benefits. It is necessary to determine the social and economic returns for each option, followed by a descending ranking according to the contribution of each to development. The cut-off rate (i.e., the rate of return below which projects will become ineligible for government support), will be given by the level of resources available. It is the rate of return of the last project which can be financed prior to exhausting the resources available . Only projects showing a return in excess of the cut-off rate of return will become candidates for direct government investment or benefit from debt guarantees. C. HOW TO GET THERE - A STRATEGY FOR CHANGE 8.12. The strategy for recovery in the transport sector includes the following elements: * Privatization of transportation services. * Deregulation and price liberalization. * Cost recovery on public investments to ensure financial sustainability. * Removal of bottlenecks for an immediate development response. T_he Private Sector Role - Actions on Privatization 8.13. Initially, services that can be provided by one or a small group of individuals should be transferred first to the private sector (both operating and ownership rights). This would affect large and small buses, taxis, light trucks, related auxiliary services, and maintenance in the road and rail sectors. 8.14. Services which are simple to provide and do not require large capital sums, sophisticated technology, or major investments should follow. This would include specialized transport services (e.g., for schoolchildren, tourists, personnel, valuables, mail, etc.) and those of a certain size providing auxiliary services (e.g., airline caterers, ship chandlers, cleaning/maintenance/repair firms). 8.15. Subsequent phases would focus on enterprises and/or services that utilize advanced technology and require heavy investment and whose promoters must have the financial capacity to cover both. In this group would be companies that: provide stevedoring and cargo-handling services at ports and airports; offer locomotive, ship and aircraft maintenance and repair services; hold concessions to provide port and rail services; and own (or hold shares in) airlines, trucking companies and shipping lines. 8.16. The transfer of enterprises from the State to the private sector would take place by any of the following methods:  VIII Findines and Recommendations 45 (a) Sale of assets. Since the individual assets are sold separately there can be a number of small purchasers. (b) Sale on a turnkey basis. The enterprise is sold as a whole, with all its assets and liabilities. In this case, the sale should be by public auction, on realistic and well publicized conditions published sufficiently in advance to attract the maximum number of potential buyers. Enterprises that are not sold at or over reserve after more than one attempt can be knocked down to the highest bidder. (c) Liquidation. The state enterprise disappears, making way for its replacement through efforts by private entrepreneurs. (d) Partial sales. Where large enterprises have ancillary activities (such as inputs they provide themselves, maintenance and repair shops, vehicle fleets) these can be sold off first, leaving basic activities to be sold at a later stage. (e) Conversion into a stock company with sale of shares. One way of selling large enterprises is to first convert them into stock companies and then to sell blocks of shares that will enable the new stockholders to familiarize themselves with the enterprise and to then participate in its management. (f) Sale for cash or on credit. This relates to the method of payment for the enterprise sold. In the case of enterprises where the workers' skills and expertise are important, this makes them desirable to potential buyers and sale on credit may enable the workers themselves to obtain ownership. (g) Auctioning of supervisory or control functions. The State would still have certain control functions in the fulfillment of its public duties. These functions themselves could be the subject of contracts with the private sector. An example is compliance with rules on pollution control. In such cases, bids would be sought from contractors to perform such control functions. Deregulation/Regulation 8.17. The areas where deregulation under consideration would assist the development of the transport sector are the following: (a) Decontrolling of prices. Georgia's de facto price freedom needs to be formalized. The alternative, i.e., the power to fix prices, entails: subsidies; support for and shoring up of inefficient industries and/or producers; shortages; black markets; and prevents prices from assisting in resource allocation. (b) Free foreign exchange and financial services markets. The price of foreign exchange should be based on the amount of foreign exchange held by the economy and access to it generalized. (c) Opening of foreign trade. With the price of foreign exchange set at its real value, there would not be any need to protect foreign exchange saving activities. Informal trade and  46 VIII Findings and Recommendations smuggling would be reintegrated into the formal economy, and intensive production would be undertaken in areas of comparative advantage to be able to buy those goods that cannot be produced efficiently. (d) Free access to economic activities. One of the real prerequisites for a free economy is the removal of those barriers which prevent citizens from producing what they want. Existing regulation not being enforced would be abolished. Applications, permits, studies, demanded under cover of the argument that there has to be "order" in the activities concerned amount to artificial barriers and additional costs . (e) Elimination of economic controls. Another source of distortions and efficiency losses is needless controls. It can be argued that the best control known is that exercised by consumers and the checks and balances produced by competing interests. The only regulations expected to remain or be developed relate to international safety and environmental standards. This applies, for instance, to the current fuel distribution and retailing system which, although liberalized, does not operate under strictly enforced safety and environmental regulations. Cost Recovery of Public Investments 8.18. A combination of user charges such as fuel taxes, licenses and direct usage charges would be established to recover the costs of developing, maintaining and rehabilitating public investments in the sector. This would be the case of roads, railroad trackage, and navigation aids for air and sea transport. Such a system would be necessary to address significant issues currently faced by Georgia which are common to most FSU countries. They are the following: the risk of loss of valuable infrastructure and mounting rehabilitation needs; accelerating de-capitalization from maintenance backlogs; obsolete equipment; and shortage of spare parts. Georgian roads and railway tracks have not been maintained in the last 4 years. Port dredging at Poti, delayed for several years, is only now being partially addressed, at a much higher cost than the one of periodic maintenance. Removal of Bottlenecks 8.19. A short term minimal rehabilitation phase could be seen as a launching platform to the implementation of the strategy. Removing transport bottlenecks would give the leverage to bring back into use unusable or inaccessible infrastructure. The priority is to be given not to massive reconstruction or rehabilitation of complete road, port or rail infrastructure, but to the minimum investments required to allow through traffic. This would be done independently of whether a full cost recovery system for public investments is operational. It would focus on roads or railways where traffic is constrained, and where the likelihood of overloads is strong once the traffic starts developing. This short-term minimal rehabilitation phase could end as soon as in 1996, when most of the economic transformation of the sector would be well underway and when a road user charge system would be implemented. 8.20. Regarding overloading of vehicles, the most advisable approach is to initially set road user charges on the premise that overloading will take place (this is already the case with Turkish trucks going to or transiting through Georgia), and that an additional infrastructure cost needs to be collected. The reason for this approach lies in the fact that axle loads limits are, by and large, unenforceable, and the marginal revenue to the transporter is likely to remain far higher than the marginal cost he might face.  VIII Findings and Recommendations 47 In fact it may be in the interest of economic development that some initial overload takes place, provided that the cost of the earlier rehabilitation of the road is recovered from the commercial users. D. THE PRIORITY AREAS 8.21. The priority areas are road transport (both passengers andfreight), ports and road infrastru cture. Trucking needs to be privatized as soon as possible to bring into operation the existing fleet and support the emerging private economy; the thrust for this reform is not likely to come from the state owned enterprises themselves. The reform should be placed in the short term divestiture of State property under the proposed strategy, combined with liberalization of entry and tariffs, and the elimination of Government subsidies, direct or indirect. This would put all operators at the same footing and, inter alia, eliminate official prices for fuel. Passenger transport would be privatized and liberalized at the same time and under the same conditions as freight. It would include urban transport which would be auctioned off or liquidated at the same time that tariffs are liberalized. 8.22. The Government has recognized the need for reform in the road transport sub-sector by recently issuing two pieces of legislative action: (i) a decree on privatization including road transport services, which calls for the privatization of road transport entities by October 1995; and (ii) an April 4, 1995 law on road transport which liberalizes road transport and reorganizes the road transport department. The department would become the regulatory body of the sub-sector, dealing with road transport licensing as well as environmental and safety issues. The priority now is the acceleration of this privatization process. 8.23. Ports (Poti and Batumi) are key to foreign trade and presently represent a high cost Government monopoly. Their reorganization would include separation into independent port authorities, commercially operated and with ownership vested in regional or national governments, with optional privatization at a later stage. All port services would be privatized, and the ports allowed to compete among themselves. Port specialization, if any, would become an outcome of successful competition and physical advantages of port sites, as opposed to the result of good planning decisions. Today, there exists excess port capacity. 8.24. Road Infrastructure managed by the State Highway concern is of particular importance to the support of local production and distribution. The Highway concern should: (a) develop a program of maintenance and rehabilitation of the core (priority) network; (b) reopen rural links to reopen access to markets for local agriculture; (c) establish a cost recovery system to fund maintenance and rehabilitation works; and (d) develop a program of technical assistance addressing: (i) the reorganization of the concern, by privatizing its construction units and reorienting the institution to financial resource management, and management of work contracts (the programming of works and their supervision is a function which could be itself privatized); (ii) definition of priority maintenance and rehabilitation works; (iii) road user charges; (iv) review and adjustment of technical specifications of road infrastructure including bridges; (v) regulations and training on competitive procurement; and (vi) a sample work program to pilot improvement of local procurement and of the local construction industry. 8.25. The priorities indicated above correspond to areas of concentration, if exclusive choices were to be faced by the decision makers elaborating the economic reforms. Such choices could be the result of lack of resources, institutional capacity, actual delays in launching preparation work or similar difficulties resulting in nothing else being possibly done. True as this may be, the assignment of priorities is not an advocacy to postpone action on shipping, the railways and aviation, or to give these sub-sectors a status  48 VIII Findines and Recommendations of exception from the adjustmetit process. The assignment of priorities only reflects the fact that the railways' main role is as a transit service for inland destinations, and as such its level of traffic and ultimate survival is related to the political and economic situation of its neighbors. Similarly, if the ports are operational and exports are reestablished, local shipping's turn to change ownership would come under the privatization initiative. Aviation and its institutions are well in the way towards reform and commercialization and an open skies policy is being followed. E. THE EVOLUTION IN THE MEDIUM TERM 8.26. This section presents the numerous actions involved in implementing the reform strategy. These actions are best summarized as four concurrent chains of events, and associated processes. They concern the following areas: (i) change in the role of government; (ii) evolution of the legal and regulatory framework; (iii) strengthening of sector institutions; and (iv) private sector participation. Subject to launching by the government of an economic reform program in 1995, the restructuring of the transport sector could be practically completed by 1999, with further refinements and adjustments thereafter. This process over time is structured as a matter of convenient presentation in tranche or phases grouping specific actions according to whether their nature is immediate or preparatory (1995-1996); structural (1996-1997); and consolidating (1998-1999). 8.27. The measures enumerated below are in no way novel to Georgia. As indicated earlier, a de facto privatization with a reduction of the size of Government is underway and therefore the actions proposed might appear to be superfluous. However, the fact is that the natural responses observed, healthy as they may be, are technically illegal and could be reversed, while Government assets go unused or used inefficiently to a significant extent. Because economic activity is already taking place beyond the limits established by traditional statutes, measures that regularize existing practice or facilitate it further are not likely to be resisted. The opportunity may exist for swift change without major resistances to it. Accordingly, the presentation under time slices of the suggested reforms should be considered only as indicative, i.e., those structural reforms which may be ready for implementation earlier than others (e.g., in the road transport sub-sector) should go forward without delay. 8.28. The World Bank's recommendation is that, concurrent with broader economic reformns, resources should be engaged to prepare and carry out the structural reform and privatization of all transport services as follows: PHASE I - Imrediate Actions (1995-1996) (i) Evolution of the Govermnent's Role (a) Formal announcement of the intent to move the sector towards a market economy; (b) Periodic adjustments to the foreign exchange rate, to reflect real depreciation of the local currency, and market liberalization ; I0/ Proper valuation of foreign exchange in combination with reduction and simplification of duties are necessary to facilitate the development of the private sector along lines of comparative advantages. Hl This is already part of the Government Economic Reform Program.  Vill Findings and Recommendations 49 (c) Public communication of a deficit elimination program in the sector, implementation of its first phase and adjustment of prices and tariffs; (d) Preparation of bid documents for the divestiture of assets by enterprises in the sector"; (e) Announcement of studies to prepare measures under Phase II below; and (f) Simplification of import and export procedures. (ii) Evolution of the Legal and Regulatory Framework (a) Reform of taxation applicable to enterprises generally and to the sector in particular; (b) Simplification and revision of commercial legislation codes; (c) Review and revision of legislation ruling foreign investments; and (d) Announcement of the modifications under consideration for introduction in 1996- 1997. (iii) Strengthening of Sector Institutions (a) Determination of the personnel needs in downsizing the public administration related to the transport sector; (b) Determination of the market conditions under which qualified staff can be attracted and retained; and (c) Liberalization of markets for vocational training. (iv) Private Sector Participation (a) Further expansion of private participation in ownership of transport enterprises and elimination of State monopolies; (b) Initiation of deregulation of routes and levels of services; (c) Measures to expand the availability of financial services; (d) Monitored liberalization of prices; (e) Reduction of Custom duties'"; and (f) Simplification of applicable taxation. PHASE II - Structural Reforms (1996-1997) (i) Evolution of the Government's Role (a) Continuation of the deficit elimination program; (b) Announcement and publication of revised bidding and procurement procedures for the State; (c) Call to bids for divestiture of assets by state enterprises in the sector; (d) Publication of Environmental and Safety regulations; (e) Reduction in employment in state enterprises in the sector; (f) Reform and simplification of custom duties; (g) Completion of liberalization of tariffs and routes; and (h) Sale of 50% of shares of state enterprises.  50 VIII Findings and Recommendations (ii) Evolution of the Legal and Regulatory Framework (a) Reform and update Banking legislation and liberalization of Banking services; (b) Legislation on contracting, bidding and procurement by the State; (c) Reform and restructure custom duties; (d) Revocation of the State's authority to set prices; (e) Legislation on capital markets. (iii) Strengthening of Sector Institutions (a) Introduction of investment appraisal for all investments having either public funds or benefiting from a public guarantee; (b) Announcement of the cut-off economic rate of return for the financial year; and (c) All enterprises in the sector operate in a competitive environment. (iv) Private Sector Participation (a) Continuation of Phase I actions to cover remaining sub-sectors and services. PHASE III - Consolidating Actions (1998-1999) (i) Evolution of the Govermnent's Role (a) Complete sale of shares and asset divestiture in sector enterprises; (b) Completion of the deficit elimination program; (c) Publication of reporting obligations of sector enterprises; and (d) Reorganization of the public administration and Ministries related to the sector. (ii) Evolution of the Legal and Regulatory Framework (a) Establishment of appeals mechanisms under the new legal and regulatory framework. (iii) Strengthening of Sector Institutions (a) A program of personnel development for the reorganized public administration related to the sector; and (b) A program of technological innovation to continue the reduction of the public administration of the sector. (iv) Private Sector Participation (a) Completion of substitution of the State by the private sector in transport enterprises; and (b) Investment levels in transport by the private sector in response to demand under market determined prices and subject to financial constraints.  VIII Findings and Recommendations 51 F. SUB- SECTORAL RECOMMENDATIONS 8.29. The following section lists recommendations by mode of transport, in line with the actions and reforms defined above. The main issues and the corresponding recommendations are summarized in a table (see end of Chapter VIII). Railways 8.30. The railways should accept the need to restructure and focus on how to improve their management, and target scarce resources to the main priorities of the institution as follows: * restore minimum operational conditions for freight services to respond to current demand; * raise funds and reduce costs: review freight tariffs, lease or sell railway property not needed for production, close railway lines wherever they are demonstrated to be commercially non-viable, reduce stations and yard tracks; * ensure the operations of essential freight service, at least to and from the ports - foreign currency, essential for maintenance, could come initially from property sales; and * restructure the sub-sector: make a further reduction in the work-force, transfer social welfare responsibility to other ministries, define the assets which will be carried in the balance sheet, and allow rail operations on a commercial basis. 8.31. These should be priority tasks: the first two are essential to respond to current needs as well as transit traffic of fuel supplies, which could develop in the relatively near term, and the third and fourth ones are necessary steps towards the survival of the railway in a market economy. None of these tasks, if well prepared, should require major investments. Instead, they would call in all likelihood for technical assistance, possibly on a grant basis and some selected purchases of equipment and spares. Ports 8.32. After finalization by the Government of legislation to give the ports autonomy, establish their regulatory framework to work as commercial entities, and determine their land holdings, the ports should: * address the backlog of equipment repairs and maintenance; and * begin to restructure, i.e., adjust port charges to achieve cost recovery; introduce accounting and financial systems for each port; and develop an action program to expedite freight throughput. 8.33. Equipment repair and maintenance would require some investments. Current expenses and debt service would need to come from the foreign exchange earnings of the ports. Under the autonomous commercial port operations, other arrangements such as trade free zones attacned to a port would also be allowed.  52 Vill Findings and Recommendations Road Infrastructure 8.34. In accordance with the priorities indicated in para. 8.24, the State Highway Concern should: * develop a program of technical assistance addressing: (a) reorganization and restructuring of the Concern, by privatizing construction units and orienting it to financial resource management, programming of works and their supervision, and management of works contracts; (b) definition of priority maintenance and rehabilitation works; (c) cost recovery mechanisms; (d) review and adjustment of technical specifications; (e) procurement regulations and training; and (f) sample works to pilot improvements of local procurement and of local construction industry. This program, if linked to an eventual World Bank maintenance project, could be financed by a grant (such as Policy and Human Resources Development - PHRD); * maintain and rehabilitate the priority network. This will be expensive (a preliminary rehabilitation program for international roads can cost as much as US$50 million over a six year period) but it may well be inevitable; * rehabilitate the rural links to reopen market access to local agriculture; and * establish a cost recovery system to fund maintenance and rehabilitation works. This is likely to prove difficult to accomplish for as long as hyper-inflation persists, and some minimum budgetary transfers may be required in the transition to a more stable currency. 8.35. The technical assistance pointed out is of particular importance because privatization and cost- recovery in the sub-sector are key to its role in support of domestic production. Road Transport 8.36. The Road Transport Department should: * accelerate the privatization of the road transport industry (both passengers and freight), breaking up state monopolies, and selling their assets, liberalizing entry and exit into markets, with the benefit of specialized technical assistance being provided by TACIS; and * privatize the suppliers of spares and maintenance services to the industry which remain in state hands, while removing entry controls to stimulate competition. 8.37. These points are essential: this sub-sector is the one where privatization would be most helpful, since private services could have a rapid response to economic incentives where services are most urgently needed. They do not require major funding and would give further impulsion to employment creation in the sector.  VIII Findinas and Recommendations 53 Urban Transport 8.38. The municipality of Tbilisi should urgently consider the following tasks: * urban transit rehabilitation (rehabilitation of the bus and trolley-bus fleet) and privatization; * restart a program of street maintenance. This may require the re-equipment and privatization of two asphalt mixing plants (the plants could be privatized and the overlaying would be carried out by private contractors); * adjustment of tariffs to recover costs and keep-up with inflation, prior to liberalization of entry to private operators. This will call for the gradual elimination of fare exemptions and for income assistance targeted to vulnerable segments of the population; and * postponement of new investments. 8.39. The hardship being imposed on the population by the combination of hyper-inflation and controlled prices needs to be addressed, quite possibly in the same context as road transport privatization. Aviation 8.40. The Aviation Department should: * study and propose the elimination of discriminatory tariffs in the sub-sector; and * continue the open skies policy currently in force and continue to press for the carriers to operate on a commercial basis, free to adjust their tariffs to match changing costs. The Aviation Department is already well aware of these recommendations. G. ASSISTANCE STRATEGY 8.41. The need for assistance to Georgia's transport sector is substantial. The situation is quite desperate, aggravated by institutional breakdowns, financial imbalances, and stoppage of practically all maintenance work. Were it not for the technical assistance and other grant support from bilateral donors to the ports and railways, emergency assistance to Georgia and neighboring countries would have not reached its destination. 8.42. There are many obstacles to overcome. The absorptive capacity is limited, debt capacities small, and revenues limited. Technical assistance and training, so far accepted and welcomed by the Government, have an obvious role to play. The continuation of current technical assistance and direct operational support to maintain the flow of humanitarian aid to both Georgia and Armenia may be needed for as long as a more comprehensive approach to the sector is not forthcoming. In addition, any financing made available to the sector would need to be on concessional terms.  54 Vill Findings and Recommendations 8.43. As the needs to reorganize and rehabilitate the transport sector are extremely large, the priorities are to strengthen the institutional and regulatory framework for the sector and to finance the rehabilitation and maintenance of key infrastructure. It is proposed to structure the donor community's strategy for the transport sector into: (a) A medium-term strategy including: * Sector Institution Building The sector institutions which would be assisted range from the ministries formulating the sector's reform program, to sub-sector entities such as ports, railways, and the Highway Concern. The assistance would cover: legal frameworks; attributions and functions of the sector institutions in a market economy; restructuring of public enterprises in the sector to enable their independent operation in a competitive environment and prepare their privatization; liberalization of transport and of freight forwarding markets; and privatization of road freight and passenger transport. * Privatization or Commercialization of Sector Enterprises The privatization and commercialization of sector operations, and attendant restructuring, will give incentives to the determination of corporate structure and costs of viable transport enterprises. If left untouched, these enterprises would not be credit worthy, would be unable to raise capital to assure their sustainability, and would be candidates to liquidation. - Cost Recovery for Transport Services and Infrastructure Cost recovery by means of restructuring, does not guarantee minimum transport costs. This can only result from competition among suppliers of transport services within and across sub-sectors. The need to ensure competition and have market determined prices leads to the liberalization of entry and prices for transport services. i Rehabilitation of key infrastructure Georgia should start considering investment in new infrastructure only when the existing services are brought back to a reasonable level of operation and traffic has started flowing again. Today, the humanitarian food aid cargo makes up for most of the port and rail traffic. Such traffic is temporary. Significant transit traffic for the railways and ports such as it once existed is not likely for as long as the Caucasus region remains unsettled. (b) A short-term assistance strategy including: * Initiation of institutional strengthening * Rehabilitation and maintenance of the most critical transport infrastructure bottlenecks  VIII Findings and Recommendations 55 H. WORLD BANK ASSISTANCE Short Term Assistance 8.44. Given the urgent needs to assist the Government of Georgia with the rehabilitation of the transport infrastructure, it is proposed to start with an IDA credit for a Transport Rehabilitation Project. The project would address directly existing bottlenecks and be a catalyst for the adjustment of the sector and restructuring of its institutions. It would have two main components, institution building and investments, as follows: Institution Building Component, which could include (i) support to teams preparing sector reforms; (ii) assistance for the formulation of technical and legal frameworks necessary to the restructuring, commercialization and privatization of sector entities; and (iii) managerial assistance for public and private transport enterprises. This component could be financed through donor grants. Investment Component, which could include the financing of selected equipment, spares, and rehabilitation works to remove existing bottlenecks in the transport sector, e.g. critical loading intermodal infrastructure at the ports, the most deteriorated bridges, and critical sections of the railroad and road networks. This component, oriented to restore existing physical capacity to address current needs, would not cover new investments in transport. These actions would amount to a necessary first step, and would lay down the basis on which to develop a program of financial assistance for transport once economic recovery is established. 8.45. The Transport Rehabilitation Project would be prepared in close collaboration and coordination with USAID, WFP, EU-TACIS and EBRD. Given the severity of current transport dysfunctions, it is also recommended that the short term phase of World Bank assistance be accelerated to the maximum extent possible under the Country Assistance Strategy for Georgia. Medium Term Assistance 8.46. The rehabilitation, restructuring, and orientation towards a market economy of operations in the sector could be assisted with additional lending over the following five year horizon. The extent of this medium term assistance, would be subject to: (a) the successful implementation of the Transport Rehabilitation Project; (b) economic recovery in neighboring countries and demand for transit services; and (c) increased economic activity and transport demand. Possible World Bank and/or other donors assistance should be targeted as follows: * RehabUitation of the Core Road Network. Clearance of Georgia's severe backlog of maintenance and rehabilitation of international roads would require initially US$55 million. It would help launch the system of bidding to private construction companies for road works and maintenance, establish cost recovery systems, and would help establish a mechanism for the rehabilitation of rural roads.  56 Vill Findings and Recommendations * Restructuring the Railways. Under the current financial conditions, and institutional and organizational structure, the railways will find it difficult to compete in the future market. A corporate strategy addressing privatization needs to be formulated, accounting systems need to be updated, and the fare structure revised for cost recovery and generation of debt capacity to carry out investments. Asset management strategies need to be formulated, including divestiture where applicable. This project would include, in addition to specific technical assistance, training of technical and management staff, and investments for rehabilitation of selected assets. * Restructuring Urban Transport Services. Technical assistance is needed to privatize the urban transport sub-sector. In addition, investment is necessary to renew buses and procure spare parts for the bus fleet on a continuing basis. Implementation of liberalization of fare structures to allow operation by private operators would also be necessary. * Port Rehabilitation and Implementation of Autonomous Port Operations. The implementation of the legal framework recommended above would introduce autonomous commercial port operations with participation of the private sector, and competition among ports. This may result in clear specializations along comparative advantages. Investment may be required to rehabilitate, upgrade and even expand some port facilities. Once identified and evaluated, these investments and training necessary would become eligible for financing. * JUpgrading of Air Traffic Control. Carefully selected expenditures now under identification with USAID support, are needed to remove the current isolation of Georgia from the main international overflight routes and improve access. 8.47. Investments to be undertaken by the public sector over the next five years, should concentrate on rehabilitating the existing infrastructure, rather than on new construction, subject to cost-benefit analysis. Investment by the World Bank would be open to co-financing by other multi- and bilateral organizations. 8.48. Under the current situation of Georgia, it would seem advisable to postpone consideration of any substantial investments for the trans-Caucasus corridor until transit traffic is reestablished on the existing transport capacity. In so doing the Government and the international finance institutions would be concentrating their energies on the most urgent problems facing Georgia's transport sector.  Recommendations for the Transport Sector in Georgia Short-Term Fidd Main Ises Recommendadons TA hnvuslannt The former Ministry of Transport was abotished; all transport subsectors directly Assist in sector privatization and support the re-establishment of the Institution BudniNg report to a Deputy Prime Minister. The absence of an institutional body makes it Ministry of Transport to be structured according to its new role under a Yes No impossible for the sector to be roorganized and restructured. market-oriented economy. Basic services, energy imports and humanitarian aid transport needs suffer from the Restore minimal operational conditions for freight serices in the railways, Transport Bottlneck mounting backlog of equipment repairs and maintenance in both ports and railways, accelerate the privatization of the road transport industry, rehabilitate the priorty Yes Yes and from the collapse of the road system and of the bus and trolleybus services. road network and finance specific spares and materials in all sub-sectors to remove . .______________________________________________________________________ transport bottlenecks now in evidence or likely to develop in a near future. Medium-Term (classified per sub-sectors) Sub-Sector Main issuss Recommendations TA Investnt Maintenace of essential freight service and of minimum operational conditions Ensure sufficient maintenance and repairs. Foreign currency, essential for Yes Some Railways to respond to demand, at least to and from ports. maintenance, could come from property sales. The railways are over-staffed, tariffs do not meet costs and uneconomic Restructure and meet cost-recovery, and raise funds by selling unnecessary Yes No services are operated. property. Ports Backlog of equipment repairs and maintenance Ensure repairs and maintenance by restructuring and setting charges to meet costs Yes Some Ensure basic service lmainiy for energy imports and humanitarian aid) and meet demand. Maximize capacity given the existing infrastructure Yes Some Meintenace and rehabilitation of the priority network and of rural links to reopen access to Prortize needs and raise funds for maintenance and rehabilitation by raising taxes No Some Road Infrastructure local agriculture. and other revenue measures, Address the need of a private local construction industry. Reorganize and restructure the 'Highway Concern' by privatizing construction units Yes No and orient it to financial resource management, programming and supervision of works and management of work contracts. Excess capacity in the sub-sector. Auction and/or sell unnecessary assets. No No Road Transport Privatization process underway. Accelerate the privatization of the freight transport industry, break up monopolies, and privatize suppliers and services to the industry. Yes No Tariff structure not meeting costs; 50% of riders exempted to pay fares. Adjust tariffs end eliminate f are exemptions. No No Urban Transport Lack of maintenace and renewals in urban transport: poor street maintenance. Pand rehabilitat of two asphalt mixing plants. No No Public service hampered by regulation. Move towards rehabilitation and privatization of urban transit. Yes No Aviation _Discrimn Study and propose the elimination of discriminatory tariffs. Yes No   MAP SECTION   IBRD 26 9 1 * GEORGIA ECONOLAC ZONES RUSSIAN FEDERATION - R~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~UILT UPURBAN AREA > / _' s . n ~~~~~~~~~~~~~~~R U S S I A N F E D E R A T I O N- tI L ue is o SELECTED CITIES ), ALUTONOMCOUS RiLUBIIC ISSR CLENTERS * NATIONAL CAITAL RIERS CZ2Z) G,,ACIER AREAS - /UAIN ROADS SECONLDAR ROADS 450 R~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~IAILROADS D DSTRICT BOUNADARIES _ ,. AITONOI.OUS REPUBUC IASSRE BOUNDARIES INT-EJTRNATIONAL BOUNDARIES Block '\, zA . 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