Georgia - Municipal Infrastructure Rehabilitation Project

D_m of The World Bank FOR O ICIAL USE ONLY Rqwt N. P-6445-GE mEI4ORhNDlU AND RECWMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVEPMN ASSOCIATION TO THE KXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 12.5 MILLION TO THE REPUBLIC OF GEORGIA FOR A MNIICIPAL IFRASTRUCTURE REHABILITATION PROJECT OCTOBER 17, 1994 MICROGRAPHICS Report No: P- 6445 GE Type: MOP This docment has a reicted disibution and may be ...d by recpies ony n the performnoe f their ofWicial duties Its contents may not otherwis be disloosed witout orla auhoizatdon.  CURRENCY EOUIVALENTS (as of August 1994) Currency Unit = Coupons I = US$0.0001cents US$1 = 1,500,000 AVERAGE EXCHANGE RATES 1,500,000 Coupons = US$1 December 1993 Janu=r 1994 April 1994 July 1994 120,000 200,000 1,200,000 1,500,000 WEIGHTS AND MEASURES Metric System FISCAL YEAR January I - December 31 ABBREVIATIONS AND ACRONYMS Agency Independent Agency for Development of Municipal Services BMIRP Batumi Municipal Infrastructure Rehabilitation Progiam EBRD European Bank For Reconstruction and Development FEC Foreign Exchange Costs GDP Gross Domestic Product GEF Global Environment Facility Georgia Government of the Republic of Georgia IBRD lnternational Bank For Reconstruction and Development ICB International Competitive Bidding ICZM Integrated Coastal Zone Management IDA Intemational Development Agency IMF International Monetary Fund IS International Shopping LCB Local Competitive Bidding LIB Limited International Bidding LS Local Shopping MIRP Municipal Infrastructure Rehabilitation Project NGO Non-governemntal Organization NMP Net Material Output PIP Project Implementation Plan PMIRP Poti Municipal Infrastructure Rehabilitation Program PPF Project Preparation Facility SIA Scientific Industrial Association SOE Statement of Expenditures STIP Short Term Investment Program TA Technical Assistance TIAP Tbilisi Immediate Action Plan TMIRP Thili.i Municpal Infrasturcture Rehabilatioan Program ULSAID United States Agency for International Development VAT Value Added Tax TCC Technical Coordination Committee  Republc of GeoriaFOR OFFICL USE ONLY Municidal Infraslructure Rehablitation Project CTedit and PEoject Summ=ar Borrower: Republic of Georgia Executing Agency: The Agency for the Development of Municipal Services Beneficiaries: Tbilisi, Batumi, Poti, and other municipalities Credit Amount: SDR 12.5 million Terms: Standard IDA terms (thirty-five years, including ten years of grace) Objectives: The project's major short-term objectives include: a) arresting further deterioration and stabilizing critical municipal infrastructure services evaluated as vital to public welfare in selected Georgian cities; b)improving overall management and delivery of municipal services in a sustainable, environmentally beneficial manner; and c) reinforcing credibility of local governments through visible interventions in key services in order to reinstate public confidence and ensure social stability. In the longer term, this assistance program will help to build an important foundation for future reform and restructuring efforts aimed at improving overall management and delivery of crucial municipal services. Description: The project will have two main components: (a) an infrastructure rehabilitation investment component aimed at protecting essential existing infrastructure from further decay and renovating some additional urgently needed economic and social services. This component includes five types of operations: (i) heating and energy-saving measures for schools and hospitals; (ii) urban transport; (iii) water supply; (iv) waste water; and (v) solid waste collection and disposal; and (b) an institutional development component aimed at: (i) implementing the project effectively; (ii) initiating a process to develop, over time, local capabilities in such critical areas as project and financial management, procurement, investment analysis, and environmental assessment and management; (iii) developing coherent strategies and action programs, mainly at the local levels, to deliver key municipal services and control or alleviate serious pollution problems along Georgia's Black Sea coast. This would represent a first intervention in Georgia to operationalize studies and analyses being done by the regional Black Sea Clean-up Program, financed by the Global Environment Facility (GEF). This document has a restricted distribution and may be used by recipients only in the performanc of their offrial duties. Its contents may not otherwise he disclosed without World Bank authorizatio.  Financing Plan: Law Foreign Tota (US$ million equivalent) Government 1.4 --- 1.4 IDA 1.1 16.9 18.0 USAID 0.3 0.3 Total 2.5 17.2 19.7 Estimated IDA Disbursement (by fiscal MOear. (US$ million) IDA Credit FY 1995 FYW 96 F 198 Y _ Annual 4.1 7.8 5.1 1.0 Cmnulative 4.1 11.9 17.0 18.0 ( : nurs may not ad up ue to rounding) Economic Rate of Return: Not applicable Po-verty Category: Not applicable Closing Date: December 1997 Staff Appraisal Report: Report No. 13543-GE IBRD 26136 and 26163  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF GEORGIA FOR A MUNICIPAL INFRASTRUCTU REHABILITATION PROJECT I. I submit for youi approval the following memorandum and recommendation on a development Credit to the Republic of Georgia for SDR 12.5 (US$18.0 million equivalent), on standard IDA terms with a maturity of 35 years, to help finance the rehabilitation of critical municipal infrastructure services in Georgia. 2. Baclground. Georgia is a relatively small country with a population of 5.5 million and a geographical area of 70,000 square Idlometers, situated in the southem part of the Caucasus region (See Map). The capital, Tbilisi, has a population of 1.5 million. Georgia was the first of the non-Baltic states to declare Independence from the Former Soviet Union (FSU), on April 9, 1991. Formal contacts between the World Bank and the Republic of Georgia (hereinafter referred to as Georgia) began in March 1992, and the country joined the World Bank in August 1992. One year later, in August 1993, Georgia joined IDA. A Country Economic Memorandum, entitled "Georgia, From Crisis to Recovery: Blueprint for Reforms" (Report No. 11275-GZ) was distributed to the Board in May 1993. 3. Soon after its Independence, Georgia became embroiled in political and civil strife. The consequences of civil wars have had a devastating effect on the economy and have compounded the difficult transition to market orientation. Only relatively recently, since the intensity of armed conflicts abated in late 1993, has the Government been able to refocus its attention on the task of maintaining law and order and rebuilding the economy. To help in this effort, the Government has requested IDA support, first, to arrest further deterioration and possible collapse of basic infrastructure and municipal services in selected cities, and, second, to begin to rehabilitate infrastructure and services deemed essential to public health, safety, and morale. The proposed operation has been designed in response to this request and would constitute the Bank's first investment operation in Georgia (an Institution Building Loan was approved by the Board in July 1994). 4. At the time of Independence, Georgia was a relatively well-off Republic with fairly good growth potential. The economy's sources of strength included a well-educated labor force, a strong tradition of entrepreneurship, agriculture and fertilizers, tourism on the Black Sea coast, mineral and natural resources, and production of steel and other commodities. The country's location made it a primary transit conduit for goods shipped elsewhere in the Caucasus. External trade, mainly with the republics of the FSU (96 percent of total exports), played a large role in the economy. Georgia relied heavily on imports of energy from other republics, notably Russia for electricity and crude oil, and Turkmenistan for natural gas. Imported energy comprised 95 percent of the total energy supply in 1992-1993. 5. The conflicts and disruption in payments and trade within the FSU have had a serious impact on the Georgian economy. At present, it ranks among the poorest countries of the FSU with GDP per capita estimated at US$563 in 1993. Between 1989 and 1991, net material product (NMP) fell by a cumulative total of 30%. Although production declines have affected all sectors, the most significant has occurred in construction, where economic activity practically halted in 1993. In the same year, agricultural production fell by 42% and industrial production by 21%.  -2- However, since Georgia has a strong underground economy, the actual decline may be overstated. 6. The budget deficit was about 28% of GDP in 1992 and 1993; it deteriorated further in the first quarter of 1994. Inflation accelerated from 80 percent per annum in 1991 to 8,400% per annum in 1993. The Georgian Coupon, introduced in April 1993 at a conversion rate of I Coupon per ruble and proclaimed as the only legal tender in August 1993, virtually collapsed by early 1994 as the rate of exchange for one U.S. dollar rose from about 7,000 Coupons in August 1993 to 1,500,000 by the end of July 1994. Increasingly, only Russian rubles and hard currencies (mainly the US dollar) are accepted as means of payment. 7. Georgia is largely an urbanized country, with 55 % of the total population living in urban settlements. Tbilisi, the capital, is the largest city, with a population of over 1.5 million. This constitutes 27% of the total, and 48% of the urban population. The remaining six largest cities are: Kutaisi (236,000), Rustavi (160,000), Batumi (137,000), Sukhumi (122,000), Poti (75,000) and Gori (60,000). Together with Tbilisi, their population represents approximately 75% of the urban population of Georgia. Due to recent military conflicts in the northwestern region of the country, an estimated 300,000 refugees have fled mainly to these large cities, placing additional strain on the already burdened municipal infrastructure systems. 8. The country's economic decline has placed the majority of the Georgian population under the official poverty line. Real wages, which remained practically constant in 1991, have declined by about 90% over the course of the last two years. Families now spend on average about 80% of their income on food and must rely to a large extent on sources of income other than wages to cover their basic expenditures. Impoverishment continues to worsen, especially for the most marginalized social groups, whose livelihoods rely more heavily on the government's system of social protection and welfare. 9. The combination of economic adjustment and civil war has diverted virtually all financial resources available for municipal services and has created a pervasive lack of maintenance and repair of basic infrastructure. This has caused public health problems and environmental degradation. Central heating was discontinued in many cities during the winters of 1992 and 1993 because of deteriorated infrastructure and lack of fuel. Additionally, electricity was rationed, with more than 12 hours of daily power shutdowns. As a result of these shortages and deteriorating infrastructure, municipal service delivery systems have been severely interrupted during the past few years. 10. Bank's Interim Strat4y. The overall aim of the Bank's assistance strategy is to support efforts to reverse the economic declines of the past few years, help stabilize the economy, and move to sustainable growth through private sector, market-based orientation. Through the end of 1993, however, given the civil conflict and resulting lack of focus and capacity in the government to implement economic reform, Bank lending was not practicable. Instead, the focus was on building macroeconomic and sector knowledge and providing limited technical assistance through Bank missions. Since the beginning of 1994, the situation has begun to stabilize politically and the Government has initiated small-scale enterprise privatization through auctions and leasing. Most prices have been liberalized, including public transport, bread, and residential utilities, and the import regime is relatively open. Interest subsidies have been eliminated and a cash management system has been adopted to limit monthly Government  - 3 - expenditures to revenues. Additionally, Georgia has initiated a comprehensive program of stabilization policies and structural reforms with stringent financial constraints. 11. With the Government's new focus on economic stabilization and reform, the Bank has initiated a broader program of lending development and sector work in municipal infrastructure, energy, health, agriculture, transport, and environment. Other vork is about to be undertaken on enterprise reform, including privatization, and the financial sector, augmenting efforts carried out under the Institutional Building Credit. The Bank organized and chaired an informal donors meeting in July 1994, which focussed on the - Government's efforts to put in place macroeconomic stabilization, structural reform, and planned assistance programs, including energy and transport development, ielecommunications, health and education, and municipal infrastructure. Additionally, an energy donors meeting was chaired by the Bank in August 1994 and a consultative group is planned for late November. 12. The proposed Municipal Infrastructure Rehabilitation Project and the recently approved Institution Building Credit represent the first steps in helping Georgia progress towards an environment of sustained growth and improved living standards for the people. These goals are at the core of the Bank's strategy for Georgia. In a program of two projects per year, the Bank will also prepare operations in agriculture, to build on the substantial potential for higher value, export-oriented production; in energy, to assist with the rehabilitation of facilities in this crucial sector and; in health, to build on the commitment of the Government to upgrade delivery of primary and maternal and child health care. Another project could also support upgrading of telecommunications systems. 13. Government Strate2y for Municipal Development. The Government has requested Bank assistance for a municipal infrastructure rehabilitation project to help meet urgent needs in key communities. This is part of a wider program of international community assistance requested by the Government to address humanitarian needs and priority infrastructure requirements at the local level. The Government program has essentially three aspects: (a) emergency shelter, food, and clothing for refugees and others displaced by war or earthquakes; (b) rehabilitation, on an urgent basis, of essential infrastructure services - heating, water supply, sewerage, urban transport, solid waste disposal -- in major cities and port areas, where most of the people live and economic activity takes place; and (c) formulation of a longer-term sti'ategy for rationalizing municipal services management and delivery. 14. The concentration of economic activities in certain cities, especially Tbilisi, where thousands of refugees have settled in the last two years, has placed a mounting obligation on public authorities to provide infrastructure and basic services. Unmet demand for these services has increased the cost of economic activity for households, commercial users, and the Government while also imposing heavy investment and replacement costs which will be increasingly difficult for the Government to afford. The urban sector is essential to the country's economic stabilization effort and future development strategy. However, at present, infrastructure deficiencies, a lack of funds, and weak local institutions seriously constrain the productivity of labor and investments in Georgia. 15. As part of the overall economic stabilization, municipal governments are beginning to redefine their overall sector strategy and objectives in response to the central Government's plan to reduce direct support of urban services, infrastructure development, and the provision of  -4- shelter which are to be taken over, to the extent possible, by local governments and the private sector. Simultaneously, the municipal governments are in the process of developing policies in order to guide investment priorities and cost recovery efforts, and to promote quality and efficiency of services. Notwithstanding certain recent positive developments in this field, there are still numerous unresolved problems, particularly pertaining to rapidly deteriorating municipal infrastructure, finance, administrative organization, and human resources which need to be stabilized before the decentralization process can be effectively achieved. 16. Justifigation for IDA Involvemept. Most external donors are focusing their assistance efforts in Georgia almnost exclusively on humanitarian aid. IDA is the only concessional source available to help finance programs to reduce deterioration of basic infrastructure services in municipalities. Concessional assistance is required because the economic crisis in the country is severely straining financial resources available for maintenance of basic community services, which are essential for public health and safety, environmental stabilization and effective functioning of the economy. 17. Basic infrastructural services have deteriorated critically m the capital, Tbilisi, and other key municipalities such as Batumi and Poti. All 400 schools in Tbilisi were forced to close for three months during the last two winters because of defective heating systems, a lack of fuel, and poorly insulated buildings. Hospitals were also without heat and hot water. The metro system poses dangerous public risks and has been exacerbated by the refugee problem. As untreated wastewater and eroding garbage landfills in Poti and Batumi wash into the Black Sea, both human and ecological health are increasingly jeopardized. Indeed, success of the Government's economic stabilization effort could well depend on arresting further deterioration in basic services, restoring public morale, and beginning the long process of municipal service rehabilitation. Assistance from IDA can thus help stabilize the situation and lay the foundation for improved future management and delivery of municipal services. 18. It must be emphasized that there is no complete assurance of the long-term sustainability of the proposed MIRP. The macroeconomic and structural dialogue is only beginning with Georgia. However, this emergency-track operation, the timing and priorities of which are deemed critical to help restore social and economic stability, will also strengthen the dialogue and emerging partnership between Georgia and the Bank. Given the extent of the crisis and the urgent need to prevent further deterioration of essential services, a rapid and innovative project is justified. Further breakdown in municipal and environmental systems appears unavoidable without immediate Bank intervention. 19. Project Objective. The project's three major short term objectives include: a) arresting further deterioration of critical municipal infrastructure services evaluated as vital to public welfare in selected Georgian cities; b) initiating a process aimed at improving overall management and delivery of municipal services in a sustainable, environmentally beneficial manner; and c) reinforcing the credibility of local governments through visible interventions in key services in order to reinstate public confidence and help ensure social stability. In the longer term, this assistance program will help provide an important foundation for future reform and restructuring efforts aimed at improving overall management and delivery of crucial municipal services.  20. Certain criteria were used in evaluating the priority needs of the municipalities. These criteria included those services: (a) on which the population depends for its health or survival; lb) deemed essential for sustaining labor mobility and economic activity; c) which can be stabilized, reactivated or rehabilitated through provision of spares and/or replacements in a relatively short period; and (d) in which the combination of social disruption and economic transition creates risks of unacceptably high social costs if not remedied immediately; and (e) for which alternative external assistance is not likely to be available in the short-term. After consultation with the Government, three cities were targeted for most of the project assistance -- Tbilisi, the capital, and two key Black Sea port cities of Batumi and Poti; some provision is made in the project for possible limited assistance for other qualifying cities identified during the course of implementation. 21. Project Descriptio . The proposed project has two main components: (a) an infrastructure rehabilitation investment component and an (b) institutional development component as described below. A. Infrastructure Rehabilitation Investment Component The Infrastructure Rehabilitation component has a total investment of US$15.3 million (base cost), which includes a US$0.3 million advance from the Project Preparation Facility (PPF). The investment program will be divided into the following two phases: 1. Tbilisi Immediate Action Plan (TIAP) (US$3.17 million) The objective of the TIAP is to address the most urgent municipal infrastructure needs in Tbilisi. The proposed elements include: (i) weatherization of all 200 schools buildings and 23 key hospitals (ie. deemed critical by the municipality based on vulnerable populations; maternity clinics, infectious disease hospital, infants hospital, etc); (ii) installation of dedicated electricity lines to 15 of the 23 hospitals without a continuous supply arrangement; and (ii) essential spares and equipment for the city metro system. a) Heating and Energy Services (US$2.11 million) Primary energy conservation investments will be achieved in all 200 schools and 23 priority hospitals by replacing damaged or missing window glass and frames and by repairing exterior doors. Currently, most schools are missing significant amounts of glass (50% or more per school), while wooden window frames have been pilfered for domestic fuel during the winter. It is anticipated that primary weatherization will reduce the period during which schools are closed for the winter by about 6 weeks, based on average winter temperatures (which run as low as -7 degrees C during the coldest part of the year). For the past two winters, the schools have been closed for 12 weeks. As a result of weatherization and the revised schedule, children will be able to attend school for more days this winter than in the recent past. These same improvements in hospitals will permit an increase in occupancy rates through the winter and correspondingly reduce the patient-load in currently overburdened ambulatory care facilities. In addition to the weatherization of hospitals, 15 of these facilities will be provided with dedicated power distribution lines from high voltage electrical sources to ensure that they have a continuous power supply and are protected from load-shedding occurrences.  -6 - b) Urban Transport Services (USW'.06 million) Essential spare parts will be procured for the underground metro, trolley, and diesel buses to reduce safety hazards. The emergency action program is also directed toward improvements in the central control room, pumping water away from the underground electrical system, returning to service about 20 cars, and providing essential spare parts for ailing in-service cars. The Tbilisi Immediate Investment Program will be partially financed by a US$500,000 advance (bridge loan) from the Soros Foundation and US$300,000 from a PPF. Both will be refinanced upon project effectiveness. This phase will also address urgent needs and accelerate development of local capacity in the areas of procurement and mobilization of local contractors/consultants. Experience in this phase will be closely monitored and the lessons learned applied to improve the efficiency and effectiveness of project implementation generally. 2. Short Term Investment Program (STU') (US$12.16 million) The STIP will build upon the TIAP and respond to additional urgently identified needs in Tbilisi, Batumi and Poti over a three year period. The STIP includes the following elements: a) Tbilisi Municipal Infrastructure Rehabilitation Program (US$9.7 million) (i) Heating (US$1.97 million) Secondary weatherization, consisting of double glazing and roof repairs to be carried out in all 200 schools and 23 hospitals. In addition, those schools or hospitals with existing independent heating systems (50 schools and 14 hospitals) will be rehabilitated, or replaced, if necessary. (ii) Irban Transport (US$3.03 million) For the metro, the assistance will: (a) improve ventilation, pumps, escalators, and electrical substations in the stations to enable dependable service; (b) repair track at strategic locations to keep the operation of trains safe; (c) overhaul a portion of the rolling stock; (d) complete restoration of the central control system destroyed by fire; and (e) modernize the fare collection system to eliminate losses in fare box income. For Tbiltrans, the above-ground system, the short-term investment will help reinstate 50 vehicles to service and repair or maintain existing vehicles. (iii) Water Supply (US$1.32 million) The short-term investment proposal will finance the purchase of essential spares, materials and equipment to reduce current stress on the system and ensure a more reliable water supply. The program wouId replace essential equipment (i.e. pumps, motors, switchgear, cabling, chlorination, short wave radio communication equipment, distribution pipework, and service reservoirs). (iv) Waste W r (US$0.61 million) Mechanical and electrical installations will be provided at sewage pumping stations; standby power generation will also be financed along with maintenance equipment to renovate the sewers (some 40% are in extremely  - 7 - poor condition), reduce sewerage flooding in the streets, and enable essential maintenance. (v) Sglid Wasit (US$0.32 million) The project will finance ,ompactor garbage transfer trucks and spare parts to better manage waste and reduce the generation of unauthorized dumps, some of which are on the hanks of the Kura River and are posing significant health and environmental hazards. b) Batumi Municipal Infrastructure Rehabilitation (US$2.13 million) (i) Waste Water (US$.93 million) In order to maintain the operational ii1tegrity of existing facilities and mitigate serious public health problems, the project will finance sewer cleaning equipment, renovation of sewers in urgent need of attention, spare parts, suction tankers for the improvement of septic tank emptying services, and the upgrading of 3 sewerage pumping stations. (ii) Solid Waste (US$0.48 million) In order to stabilize the landfill operation and reduce environmental threats to the Black Sea, the program will finance landfill and tractor equipment, waste containers, spare parts, and possibly river bank stabilization and channel modification. (iii) Water SuRy1X (US$0.72 million) The project will finance the refurbishment or provision of pumps and standby generator equipment to secure reliability of the city's potable water supply when the river intakes are closed; equipment to improve communication between pumping installations and treatment plants; leakage detection apparatus, and chlorination dosing equipment. c) Poti Municipal Infrastructure Rehabilitation (US$.95 million) (i) Waste Water (US$.73 million) To maintain operational integrity of the existing facilities, the project will finance, most significantly, the refurbishment of four sewerage pumping stations, vehicles and associated equipment for emptying septic tanks to maintain an adequate level of services for the majority of people (70%) who are not connected to a sewerage network. (ii) Solid Waste (US$0.21 million) To improve the efficiency of solid waste collection and landfill management, the project will finance spare parts for the existing collection and equipment for grading and capping existing solid waste with inert materials. d) Other Municipalities (US$ 1.8 million) During the appraisal process, the Government requested provision in the work program for high priority refurbishment of services in other cities. Accordingly, funds are earmarked for projects which may be identified during implementation.  The selection process for choosing such investments would be consistent with the rationale applied during project preparation. B. Institutional Development Component The project's second component has a total investment of US$ 1.94 million (base cost) which includes support to help develop local capabilities and formulate future strategies for the management and delivery of key municipal services, including an Integrated Coastal Zone Management program to help control serious pollution problems along Georgia's Black Sea coast (see Map 2). 1. Independent Agency for Development of Municipal Services (US$0.26 million) Given the urgency of the project, the Bank and the Government both agreed that an independent agency, unhindered by bureaucracy, would be essential for quick implementation of the project. Therefore, a non-profit, non-governmental Agency was created. The Agency is founded by three Georgian institutions: Chamber of Commerce, Academy of Sciences, and the Tbilisi Municipality. There was concern over a conflict of interest which may arise from the Tbilisi Municipality being both a founder and beneficiary of the project. However, it was noted that the Municipality will not have any direct ir.-olvement in project decisions since managenient of the Agency has been fully delegated to the General manager. All operational costs of the Agency would be financed throughi the Credit for the duration of the project. As agreed with the Government during negotiations, the Agency is meant to be a temporary facility, designed to respond to an emergency situation by facilitating project implementation outside normal Government channels; upon project completion in about three years, the Agency will cease to exist. 2. Technical Assitance and Studies (US$1.68 million) In addition to financing improvements in general project management, procurement, and accounting, the TA sub-component will be used to develop: (a) public awareness activities, related to the Black Sea coast and the emergency investments in Tbilisi; (c) future options for the household waste problem in Batumi; (d) better water supply management in Batumi and Tbilisi; (e) improved management of the urban transport system in Tbilisi; (t) specialized assistance for improved environmental assessment, monitoring, and management; (g) improved management of the waste water treatment facility in Tbilisi. Assistance would also be provided for the following technical studies: (a) Integrated Coastal Zone Management on the Black Sea coast; (b) a master plan for the Tbilisi water supply and household waste systems; (c) a sectoral study of municipal services (including housing) in Georgia. 22. Project bnplementation. The Borrower is the Republic of Georgia, represented by the Minister of Finance. In order to ensure an expeditious and efficient implementation, the proposed project would be carried out by the Independent Agency for the Development of Municipal Services, as described above, in collaboration with relevant municipal agencies/departments. During its life, the Agency will be staffed by a General Manager, an assistant General Manager (both Georgian nationals), a procurement advisor (expatriate specialist), local procurement officer, technical specialist, accountant, secretaries, and a driver. It will have its own office in Tbilisi. 23. Because of the economic, social, and environmental importance of the project, it was agreed that an appropriate liaison between the Agency and the Government should be  -9- established. For this purpose, a Technical Coordination Committee (rCC), chaired by the Ministry of Finance, with representatives from centra and local governennts as well as Ministry of Environment, will oversee activities of the Agency. 24. The Agency has bet; legally established. After reviewing candidates, a General Manager has been recruited by the TCC and approved by Il)A. The managing Agency is being set up with assistance from a PPF; pilot sub-projects will be carzied out to test internal and procurement procedures. Technical and financial audits will occur every six months as well as thorough annual reviews of sub-projects to monitor strict compliance with agreed procedures. The operation of the Agency is intended to have a demonstration effect, by showing a workable alternative to traditional procurement methods and introducing private sector efficiency and competitive procedures. 25. With respect to implementation of individual project components, the Agency will enter into sub-agreements or contracts with the municipalities which will delegate to the Agency all rights necessary for project execttion. The Agency will determine which municipal departnent, or private contractor if available, is most appropriate for implementing the works; a contract will then be signed to ensure that installation is completed to a specified quality and within an appropriately defined time frame. The municipalities will continue to be involved with the supevision of project components since representatives of each Tbilisi, Batumi, and Poti will be part of the TCC. 26. roject Financing. The total project cost is estimated at US$19.7 million. The proposed IDA credit of US$ 18.0 million will finance 91% of project costs, net of duties and taxes over a three-year period. The local currency requirements, equivalent of US$ 2.47 million, would be partially met by the Borrower from its own resources. The local contribution will come from the municipal budgets in the form of dedicated, retained budget allocations from the Ministry of Finance. The IDA credit would finance 100 percent of the foreign exchange costs and 80% of the local costs. The local contribution will be provided to the Agency in addition to thcse contribudons financed by IDA. 27. An IDA advance of US$300,000 from the PPF has been approved to finance project preparation. The PPF advance will be used primarily for: (a) specification studies to establish material and labor requirements for implementation works scheduled to begin before the onset of winter; (b) establishing the implementation Agency to ensure that procurement procedures and the capacity of local consultants and contractors are tesed before wider-scale implementation of the major project investments. 28. To meet material and labor requirements of the immediate investments, US$500,000 in bridge financing has been obtained from the Soros Foundation (miterest free loan) for the weatherization activity in schools and hospitals and for the purchase of spare parts for the metro system. The Soros Foundation has a resident office in Tbilisi and the resources will be available as soon as the contract with the government is finalized. Additionally, US$300,000 in co- financing, on a grant basis, will be obtained through USAID to augment the primary weatherization program. USAID has also indicated that additional funds may be available for the rehabilitation of heating systems during the course of project implementation.  - 10- 29. A breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and of disbursements, and the disbursement schedule are shown in Scheduie B. A timetable of key project processing events and the status of Bank Group operations in the Georgia are given in Schedules C and D, respectively. Maps of Georgia and its Black Sea coast are also attached. The Staff Appraisal Report, 13543-GE dated October 11, 1994 is being distributed separately. 30. Project Benefits. The project will have several direct benefits. It will help: a) essential infrastructure in key municipalities; (b) facilitate the Government's macro-economic stabilization efforts; (c) prevent environmental and health hazards; (d) help maintain crucial health and educational programs during the winter; (e) in the long term, provide the foundation for more efficiently managed municipal service delivery systems. 31. Prj.et Rks. The major risks include (a) the recent political instability in the country which has left the Govemment in the process of determining institutional responsibilities which may affect the commitment of local municipal authorities to carry out the project components in an effective manner; this risk has been mitigated to a large extent, by the establishment of an independent Agency that will manage project implementation; (b) the financial and technical capacity of local contractors to implement the project in a timely manner; this risk will be reduced by the fact that the project will be carefully scaled and spread over three years to take into account local absorptive capacity; (c) the risk that the Agency may misuse its independence will be mitigated by oversight of the TCC, frequent external audits, close monitoring of the implementation of the Manual of Procedures, and the selection of a well-qualified manager, whose appointment will be acceptable to IDA.; (d) lack of assurance regarding the long term sustainability of the operation given the absence of cost recovery mechanisms; this risk will be mitigated through the macroeconomic and structural dialogue now starting with Georgia, and reinforced through targeted technical assistance, which is intended to improve the management of municipal services. Risks will have to be reassessed during the mid-term review 32. Environmental Assessment. The project has been placed in the environmental screening category "B". The impact on the environment of investments to be financed under the project is expected to be beneficial, especially in terms of public health and Black Sea coastal improvement. No new construction or development is planned under the project and there will be no primary environmental or socio-economic negative impacts. 33. Actions Agreed. The Government has confinned the scope of work to be financed from the proposed project. During negotiations, agreement was obtained on the financing plan and implementation arrangements. Additionally, it was agreed that: (i) payment for all local contracts would be made in the local currency to uphold both an August 1933 National Bank resolution and recommendations by the IMF; (ii) in order to launch the work of the Agency, the Ministry of Finance will deposit US$ 20,000 as a minimum required amount to be used for the Agency's expenditures in the initial stage of project implementation.  - 11 - 34. Recommendation. I am satisfied that the proposed Credit would comply with the Articles of Agreement of Bank and recommend that the Executive Directors approve it. Lewis T. Preston President Washington, D.C. October 17, 1994 Attachments: Schedules A - D Maps 1 - 2  - 12 - Schedule A Republic of Georgia Municipal Infrastructure Rehabilitation Project Estimated Costs and Financing Plan (US$ million} Summary Projegt Cost Estimate % Foreign % Total Local Foreign Total Exchange Base Costs A. Infr ftcture Rehabilitation Component 1. Tbilisi Heating/Energy Saving 1.0 3.1 4.1 75 24 Urban Transport 0.4 3.6 4.1 90 24 Water Supply, Wastewater andI4ndfill 0.2 20 2.1 90 L Subtotal Ti. * si 1.6 8.8 10.4 84 60 2. Batumi Water Supply and Wastewater 0.2 1.9 2.1 93 12 3. Poti Wastewater and Landfill 0.1 0.8 0.9 90 6 4. Other Cities 0.2 I.G 1A 290 10 Subtotal Infrastructure Rehab Component 2.1 13.2 15.3 87 89 B. Institutional Development Component 1. Project Implementation 0.1 1.3 1,4 90 8 2. Studies 0.1 04 0 20 3 Subtotal hntitutional Development 0.2 1.8 1.9 90 11 Component Total BASELINE COSTS 2.3 15.0 17.3 87 100 Contingencies (Physical & Price) 0.2 L2 2.4 14 Total PROJECT COSTS 2.5 17.2 19.7 Finmcing Plan % of Total Local Foreign Total Project Cost Government 1.4 1.4 7.1 IDA 1.1 16.9 18.0 91.4 USAID -- 0.3 Q23 U TOTAL COSTS 2.5 17.2 19.7 100 Percentage 13 87 100  - 13 - Schedule B Page 1 of 2 Republic of Georgia Municipal Infrastructure Rehabitation Project A. Sununay of ProVed Procuremnt Arranaemenn (US$ million) ICB LCB OTHERS NBF TOTAL Goods 5.4 2.5 0.3 13.5 Equipment for water supply (5.0) (2.4)a Sewerage, landfill 2.4 (12.4) Urban transport, and (2.3)b Heating system 0.6 (0.5)c 2.3 ___________________________ ~(2.2)d ___ Works 2.6 2.3 - 4.9 (2.4) (2.0) (4.4) Consultancy - - 1.3 - 1.3 (1.2)e (1.2) TOTAL 8 2.3 9.1 0.3 19.7 of which IDA (7.4) (2.0) (8.6) (18.0) (a)LIB ($2.4) - Item available from a limited number of suppliers. (b)IS ($2.3) - Contracts below $250,000 each. (t)LS ($0.5) - Contracts below 20,000 each. (d)DC ($2.2) - Spare parts for buses, trans, and trolleys. (e)According to Bank's Consultant Guidelines.  - 14 - Schedule B Page 2 of 2 Republik of Georgia Municipal Infrastructure Rehabilitation Project B. Disbursement Schedule tby fiscal yr) (US$ million) IDA Credit FY 1995 FY 1996 FY 1997 FY 1998 Annual 4.1 7.8 5.1 1.0 Cumulative 4.1 11.9 17.0 18.0 C. IDA Disbursements by Cateeory Expenditure Amount % of Expenditures to be Financed 1. Goods 10.4 100 % of foreign expenditures Equipment/Material 100% of local expenditures (ex-factory) 80 % of local expenditures for other items procured locally 2. Works 3.5 100 % of foreign expenditures Public Works/Urban 80 % of local expenditures Services 3. Technical Assistance' 1.2 100% of expenditures 4. Operating Costs 0.2 100% of expenditures (the Agency) 5. PPF Refinancing 0.3 6. Unallocated 2.4 TOTAL 18.0 I/ Includes consulting services, studies, training, project monitoring, and auditing.  - 15 - Schedule C Republic of Georgia Municipal Infrastructure Rehabilitation Project Timetable of Key Project Processing Events (a) Time taken to prepare the project: 4 months, June 1994 - October 1994 (b) Prepared by: Government with IDA assistance (c) First Bank mission: June 1994 (d) Appraisal mission departure: September 12, 1994 (e) Negotiations: September 26-27, 1994 (f) Planned date of effectiveness: December 1994 (g) List of relevant PCRs and PPARs: Not applicable The project was prepared by Messrs/Mmes. Robert Maurer (Task Manager), Mats Andersson, Bidzina Imnadze, Martha Jarosewich, Dipika Mathur, and Betsy McGean (EC4HM), based on the findings of preparation (August 1994) and Appraisal (September 1994) missions. Other collaborators were: Messrs. Antti Talvitie (TWUTD) and Howard Carter (consultant). The Project Peer Reviewers were Messrs/Mmes. Maryvonne Plessis-Fraissard (AF3IN), George Russell (ACTCO), and Thakoor Persaud (LA3EU). The Department Director, Country Division Chief, and the Sector Division Chief are Basil Kavalsky, Wafik Grais, and Thomas Blinkhorn respectively.  - 16. Schedule D Republic of Georgia Municipal Infrastructure Rehabilitation Project Status of Bank Group Operations in Georgia A. Statement of World Bank Loans and IDA Credits [redit/Loan No. Fiscal Year Purpse Bank/IDA Credit 2641GE 95 Institution Building Loan IDA - SDR 7.3 million B. Statement of IFC Investments As of October 11, 1994, Georgia is not a member of the IFC.  MAP SECTION  The boundories, colors, denominotions ond ony other information GEORGIA shown on this map do not imply, on the part of The Worlcd Bank Group,any'jfudgmtnt on the legal sttus of any tetror anr MUNICIPAL INFRASTRUCTURE REHABILITATION endorsement o acceptance of such boundaries. PROJECT PROJECT CITIES O SELECTED CITIES O AUTONOMOUS OBLAST' (AO) CENTER ?b_ \ To Cherkessk ( t () AUTONOMOUS RFPUBLIC (ASSR) CENTERS < _ t \ R U S S I A N \ 49 NATIONAL CAPITAL t_ ABKHAZIA FEDERATION ROADS GudoLESni AZERBAIARAILROADS MTES \ a * AUTONOMWS OBLAST' (AO) BOUNDARIES \%_ S h~~~~~~~~~~~~~~~~~~oVl diflcok ( ' AUTONOMOUS ?rPUBLIC (ASSR) BOUNDARIES 9chdiW -\- f 1| _ ~~~~~~~~~~~~INTERNATiONAL BOUNDARIES B L A C K k iis hruo; timoli C 8 huri ~~~~g _ Tebv k hAkh l~~~~~~~~~~~~~~~~~~~~~~~~~~~~~k i kohX k -__~~~~T To osh kwni jl ~~~~~KILOMETERS T (:sOts 0 25 MIB 0 75 rro A A N i _~~~~ ~ ~~ ii IL 50 7 AZEBAJA . o1~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~c  IRD 26163 t- - -- RUS3AN FE1DERATION '~~~~~~~~~~~~~~~ gA 41L WASTEWATER -- 5{ LANDFLRo, i - Ch2 l MUNICIPAL INFRASTRUCrURE f ~~~ REHABIIJTATION PROJECT . .-- - . '. \ j W K l~~~BLAC B SEACOAS .~~~~~~~~~~~~~~N WErLANkD ARA ( %GIEOtGI :"1 __AAw__w 0MADMLOPDAea419 $aEM6 IWi