Georgia - Agricultural Development Project

Document of The World Bank Report No. 15938-GE STAFF APPRAISAL REPORT GEORGIA AGRICULTURAL DEVELOPMENT PROJECT February 28, 1997 Natural Resources Management Division Country Department IV Europe and Central Asia Region  CURRENCY EQUIVALENTS (as of December, 1996) Currency Unit = Lari Lari I = US$ 0.78 US$1 = 1.28 Lari WEIGHTS AND MEASURES Metric System GEORGIA - FISCAL YEAR January I - December 31 ABBREVIATIONS AND ACRONYMS AB Administrative Bank BCC Bank Credit Committee CE Credit to Enterprises CEU Credit to Enterprises Unit of the PCU CF Contract for Consulting Firm Cl Contract for Individual Consultant CIS Commonwealth of Independent States CU Rural Credit Union CUDC Credit Union Development Center DLRC Department of Land Resources and Cartography in MAFI DGC Department of Geodesy & Cartography DO Development Officers EBRD European Bank for Reconstruction and Development EDC Enterprise Development Center EDI Economic Development Institute EIA Environmental Impact Assessment EU European Union EU (TACIS) Technical Assistance for CIS FAO Food and Agriculture Organization of the United Nations FSU Former Soviet Union GAAS Georgia Academy of Agricultural Sciences GIPC Georgian Investment Promotion Center GOG Government of Georgia IAS International Accounting Standards IBC Institution Building Credit ICB International Competitive Bidding IDA International Development Association IFAD International Fund for Agricultural Development IMF International Monetary Fund IS International Shopping LAA Land Administration Authority LIBOR London Interbank Offered Rate LRO Land Registration Office LRU Land Registration Unit NBF Non-Bank Financed NCB National Competitive Bidding NBG National Bank of Georgia MAFI Ministry of Agriculture and Food Industry MOF Ministry of Finance MoEP Ministry of Environmental Protection PB Participating Bank PCU Project Coordinating Unit PHRD Policy and Human Resources Development Japanese Grant Fund PPF Project Preparation Facility SCC State Coordinating Committee for Cooperation with International Financial Institutions in the Office of the President SL Supplementary Loans SOE Statement of Expenditure STF Systemic Transformation Facility UNDP United Nations Development Program USAID United States Agency for International Development VAT Value Added Tax Vice President: Johannes Linn, ECA Director: Basil Kavalsky, EC4 Division Chief: Geoffrey Fox, EC4NR Staff: lain Shuker, Amnon Golan, EC4NR (Appraisal): Ezriel Brook, EC4NR (Pre-appraisal).  STAFF APPRAISAL REPORT GEORGIA AGRICULTURAL DEVELOPMENT PROJECT CONTENTS CREDIT AND PROJECT SUMMARY ...................................... i CHAPTER 1. BACKGROUND ..................................... 1 A. Introduction .1 B. The Policy Agenda. 2 C. The Agriculture Sector. 5 D. Constraints to Increased Agricultural Productivity. 7 E. Bank's Experience and Strategy .10 CHAPTER 2. THE PROJECT ..................... 13 A. Project Origin and Formulation .13 B. Project Objectives and Description .13 C. Cost Estimates .18 D. Financing .19 E. Procurement .19 F. Disbursement .22 CHAPTER 3. PROJECT IMPLEMENTATION ........... ............... 25 A. Organization and Management .25 B. Lending Terms and Conditions .32 C. Accounts and Audit .37 D. Reporting and Evaluation .37 E. Supervision Arrangements .38 CHAPTER 4. BENEFITS, RISKS, AND ENVIRONMENTAL IMPACT .... ..... 39 A. Benefits .39 B. Risks ............................................ 41 C. Sustainability .42 D. Environmental Impact .43 E. Poverty ................... ....... 43 F. Gender Issues .43 G. Participation .44 CHAPTER 5. AGREEMENTS AND RECOMMENDATIONS .... ............ 45 A. Agreements Reached Before Negotiations .45 B. Agreements Reached During Negotiations .45 C. Conditions of Board Presentation .46 D. Conditions of Disbursement .46 E. Recommendation .46  ANNEXES A. THE BANKING SECTOR B. TERMS OF REFERENCE FOR THE PROJECT COORDINATING UNIT C. CREDIT UNION OPERATIONS AND THE CREDIT UNIONS DEVELOPMENT CENTER D. LAND REGISTRATION AND TITLING E. AGRICULTURAL SERVICES F. CREDIT TO ENTERPRISES UNIT G. MONITORING AND EVALUATION INDICATORS H. DISBURSEMENT SCHEDULE I. PROJECT IMPLEMENTATION SCHEDULE J. PROJECT PROCUREMENT SCHEDULE K. PROJECT SUPERVISION PLAN L. DOCUMENTS IN FILE MAP IDA No. 28234 TABLES Table 2.1 Project Cost Summary . ..................................... 18 Table 2.2 Project Financing .......................................... 19 Table 2.3 Summary of Proposed Procurement Arrangements ..... ............... 20 Table 2.4 IDA Disbursement Projections ......... ........................ 22 Table 2.5 Disbursement Categories . ................................... 23  GEORGIA AGRICULTURAL DEVELOPMENT PROJECT Credit and Project Summary Borrower: Georgia Implementing Agency: Ministry of Agriculture and Food Industry Beneficiaries: Private enterprises, mainly in the agro-processing sector, private small farmers, micro-enterprises, participating financial institutions and rural land owners. Poverty: Program of targeted interventions. Amount: SDR 10.4 million. Terms: Standard, with 35 years maturity, including a 10 year grace period. Commitment Fee: 0.50% on undisbursed credit balances, beginning 60 days after signing, less any waiver. Onlending Terms: Government of Georgia (GOG) would onlend dollars at an interest rate of LIBOR plus 3% and Lari at the National Bank of Georgia auction rate for 30 day funds. GOG would lend to Participating Banks (PBs) in dollar and Lari denominated loans, on request of the PBs. PBs would be required to onlend to the sub-borrowers in the same currency for a minimum term of 1 year and a maximum term of 5 years, at market determined interest rates. The PB would repay the principal to GOG within 3 months after the end of each sub-loan period, and interest semi-annually. GOG would lend to Credit Unions (CUs) in Lari for a maximum term of two years. CUs would be required to onlend to their members at market determined interest rates. CUs would repay the principal at the end of the loan period and interest semi-annually. Financing Plan: See Table 2.2. Net Present Value: None calculated, however, sub-projects under the Credit to Enterprises component would be required to have a financial rate of return of at least 15%. Map: 28234 Project ID Number: GE-PE-8415   CHAPTER 1 BACKGROUND A. Introduction 1.1 Georgia was one of the first republics to leave the former Soviet Union (FSU) when it became independent in April 1991. A small country located in the Caucasus region, Georgia has an area of 70,000 Ian. It is bordered by Turkey and Armenia to the southwest, and by Azerbaijan to the southeast. To the north, there are a number of autonomous republics that form part of the Russian Federation, and the Black Sea borders Georgia to the west. Since 1989, there have been tensions over the status of the autonomous region of Abkhazia, and in 1992 these erupted into open conflict. There have also been disputes with the South Ossetian Oblast since 1990. Currently, both South Ossetia and Abkhazia are outside the Georgian Government's control. 1.2 According to the 1989 census, Georgia's population of 5.4 million is growing at a rate of 0.8% per annum. Average population density is under 80 per km2, but much of the population is concentrated in towns and in the central flat lands. The urbanization rate is high, with over 55 % of the population living in towns; and 27% (1.5 million) live in Tbilisi. Georgia has one of the best educated labor forces in the FSU, with roughly 17.5% of the population having completed post-secondary education. 1.3 Following independence, the country experienced three years of sharp economic decline, financial imbalances leading to hyper-inflation, and political instability. Domestic security problems during this period resulted in severe disruptions of the domestic transport and marketing systems; road blocks and extortion were particularly bad in 1992/93. With the benefit of greater law and order and the restoration of political stability, the Government introduced a program to stabilize and reform the economy in mid-1994, with assistance from the IMF and the World Bank. Since then, considerable progress has been achieved in curbing inflation and stabilizing the external value of the currency. Other major achievements include: (a) the success in privatizing small, medium-sized, and large enterprises, and the decision to dismantle the largest state monopoly in the food and agriculture sector - the State Bread Corporation; (b) the downsizing of the government sector; (c) the adjustment of controlled prices for energy, public transport and bread to levels close to full cost recovery, in order to reduce or eliminate subsidies; (d) the gradual elimination of export restrictions while continuing to maintain a relatively free import regime; (e) the elimination of the state order system; (f) the introduction of a new currency, the Lari, in September 1995; (g) the issuing of new prudential regulations by the National Bank of Georgia along with a new law issued by Parliament guaranteeing the independence of the National Bank in formulating and implementing monetary and exchange rate policies; (h) improvements in the effectiveness of the foreign exchange market by abolishing all distinctions between cash and non-cash, and eliminating the surrender requirement, thus removing implicit taxation of foreign earnings; (i) the introduction of an auction system for foreign exchange; and (j) the introduction of several measures to improve targeting of social benefits in order to maintain a minimum social safety net. 1.4 Georgia has therefore made significant progress in creating a macroeconomic environment conducive to emerging private agriculture and agro-processing industry. The removal of direct state intervention in agricultural production, the abolition of the state order system in 1995, the liberalization of producer and consumer prices, the removal of most restrictions on imports and exports, and the  2 Chapter I demonopolization of agricultural markets make Georgia one of the least distorted macroeconomic environments in the CIS. The liberal price and trade regime, together with the first signs of overall economic recovery, and positive GDP growth in 1995 and 1996, provide an appropriate environment for the recovery of the food and agriculture sector and for IDA to initiate its first investment project in the sector. B. The Policy Agenda 1.5 Despite the initial success following introduction of the stabilization program described above, the economic situation remains fragile. The tax collection effort remains very weak; the transformation to a market economy is still in an early transition stage; and the productive sector has not fully adjusted to new economic signals. Major measures required to support the Government's continued ability to successfully manage the economy in the near term include: (a) maintaining a tight monetary program supported by an improved fiscal position; (b) streamlining the public sector and efficiently utilizing the limited fiscal resources at the Government's disposal; and (c) fostering a rapid adjustment of the productive sector to new market signals. These three elements are currently being addressed by Government with assistance from the Bank under the Structural Adjustment Credit. Aspects of the third element, which are particularly relevant to the recovery of the agricultural sector and to this project, are briefly described below. 1.6 Privatization of Enterprises. The privatization of state-owned enterprises is one of the most critical elements in the Government's structural reform program. An important step in support of the privatization process is the foreign investment law that was passed by Parliament in June 1995. Except for a selected number of enterprises that are essential to normal government functions, the vast majority of enterprises will be privatized. Rapid progress has been achieved in the privatization of small- scale enterprises, with nearly all such enterprises having already been transferred to private owners by mid-1996. Privatization of medium-and large scale enterprises began in early 1995 with the conversion of 840 enterprises to joint stock companies (which includes 187 out of a total of 440 agro-processing enterprises). Following conversion to joint stock companies, enterprises are privatized. By February, 1997, 515 medium- and large-scale joint stock companies had been privatized. A high priority for the Government at this point is to complete the corporatization of the remaining enterprises awaiting transformation, and the selling of the remaining shares in all medium and large enterprises. The primary method being used to privatize enterprises is voucher and cash auctions; in a few selected cases tenders are also being used. The program does not provide managers and employees special privileges to purchase controlling blocks of shares; they too must compete on an equal basis with all other interested buyers. One exception is the privatization and de-monopolization of the National Bread Corporation, where the Government is proposing to grant managers of mills and bakeries a ten year lease with the option to buy. Since this approach is unlikely to promote competitive behavior in the bread and milling industry, which would benefit the population at large, IDA has recommended to the Government that they reconsider this proposal and use privatization procedures that are consistent with the overall privatization program. Completion of the privatization process, and introduction of supporting legislation wherever necessary, is being assisted by IDA under the Structural Adjustment Credit. Financial support to privatized enterprises, many of which would be in the agro-processing sub-sector, would be provided under the Agricultural Development Project.  Background 3 1.7 Land Distribution and Privatization. During the Soviet period, about 729,000 families were employed in agricultural production by the state and collective farms. These farms occupied a total of 3,010,000 ha, comprising 797,000 ha of arable land, 320,000 ha under perennial crops, with the balance in pastures and meadows. During this period, 212,000 ha of the arable land was in small subsidiary household plots of up to 0.25 ha per family. The process of land privatization began in January 1992 with Government Resolution 42, generally known as the "Land Privatization Decree." Under this land privatization program, a "privatization reserve" of 852,000 ha (which included those areas already in household plots) was established for distribution to private ownership. While this represents only 33 % of all agricultural land, it includes 83 % of all arable land and 75 % of all land under perennial crops in Georgia. Land was distributed by granting, free of charge, a maximum of 1.25 ha to former employees of state and collective farms and 0.75 ha to other workers in the villages. Urban residents without any land holdings could apply to receive 0.15 ha per family. By the end of 1995, 620,000 ha or about 20% of all agricultural land, which includes 43 % of all arable land and 60 % of all land under perennials, had been distributed to private individuals. The approximately 230,000 ha remaining to be distributed under the 1992 land privatization program are largely in areas where the Government is unable to implement the land reform due to local government opposition in South Ossetia and Abkhazia. In March 1996, Parliament enacted an Agricultural Land Ownership Law that clarifies ownership rights as well as the right to buy, sell, or lease land, thus consolidating the property rights granted under the 1992 land privatization program. Measures supporting the development of a fluid land market by providing owners with a secured title to their land holdings would be introduced under this project on a pilot basis in two districts. 1.8 Land not earmarked for privatization under the 1992 land privatization program is still owned by the State and nominally controlled by State or collective farms. Decree No. 949 of September 1992 required that state and collective farms and enterprises restructure themselves, through the free choice of members and employees, into private farms, cooperative enterprises, or joint stock companies; and that the responsibility for social assets of the farms, such as health clinics, schools and public roads, be transferred to the local authorities. Research and experimental stations, livestock breeding farms, seed farms and other specialized farms were exempt from mandatory restructuring. This decree provided little guidance on the restructuring process itself, resulting in a relatively spontaneous process of restructuring, and a collapse of the State and collective farm system. Much of the land under the control of State and collective farms is presently being used as communal property, is lying idle, or is occupied or leased by individuals on an informal basis. In order to address this problem, the Parliament passed a law on Agricultural Land Leasing in July 1996, which provides for the leasing of State-owned land to individuals on leases of up to 49 years. The law came into force on January 1, 1997. This law is expected to place more agricultural land under private use, thus improving agricultural productivity. 1.9 Establishment of a Land Registration and Land Cadastre System. Under the land privatization program, lists of persons entitled to receive land were developed in many areas, and about 25% of the land owners were issued "Land Owner" certificates. In other areas, however, individuals were assigned users' rights to the land, but no records were kept. Also, where lists exist, they contain many errors, and in most cases, it is impossible to link the certificates to a land parcel. In order to reduce the cost of future disputes and increase the liquidity of land transactions (thus facilitating increased sales, rental, and mortgage agreements on land), it is important to develop a system of land registration and titling. The first step in this process is the establishment of a legal framework to support land registration. Aside from establishing a national land registration system, this law should also include provisions related to: (a) the mortgaging of property; (b) the guarantee of rights of the registered  4 Chapter I proprietor; (c) recovery of the registration and title costs; (d) penalties for failure to pay the registration fees; (e) treatment of payments made previously by owners for the "Land Owner" certificates; (f) provisions for adjudicating disputes between individuals, and between individuals and the state; (g) handling of decisions by the land committees that allocated to individuals land in excess of 1.25 ha; (h) establishment of a national Unique Parcel Reference System; (i) declassifying survey coordinates and maps required for the registration work; and where applicable, (j) resolving Sakrebulo' boundary disputes. 1.10 A special working group under the chairmanship of a Deputy Minister in Ministry of Agriculture and Food Industry (MAFI), and including senior experts from MAFI, and the Ministry of Justice and Parliament's Agrarian Reform Committee, has prepared a draft Land Registration Law based on similar laws from Albania and Slovakia and based on an extensive technical note prepared by an IDA land registration consultant who visited Georgia. The Land Registration Law was passed by Parliament in November 1996k meeting a condition for disbursement of the land registration component of this Credit. Regulations related to the law would assign to MAFI the overall responsibility for land registration in rural areas, maintaining a land cadastre system and for recovering the land registration and title costs until such time as an independent land registry is established. 1.11 An integral feature of a land registration system is a mechanism to adjudicate land disputes. Georgia's immediate land adjudication requirements are likely to be different from those of many other countries. While some disputes may arise between occupiers of adjacent plots of land, given the short interval since the occupiers started to cultivate the land, it should be possible to settle many of these disputes in the field during the survey process. Where such disputes cannot be resolved, the surveyors would demarcate the disputed boundary on the map and refer the dispute to the Government for resolution through the justice system. A more common, and potentially much more serious, source of dispute is likely to arise between the occupiers and the State. These disputes will most likely relate to occupiers' encroachment on state land, forest reserves, etc. There may even be boundary disputes between whole villages or adjacent Sakrebulos. This Project would provide training for surveyors in the area of dispute resolution to assist them in their field work. Training seminars for Government officials and the legal establishment on the resolution of land disputes would also be provided. 1.12 Restructuring the Banking Sector. Hyper-inflationary conditions prevailing in Georgia until late 1994 eroded the real values of nominal claims, including the banks' deposits and loan portfolios, as well as confidence in the currency and the banking system. Several measures aimed at restoring confidence in the banking system were recently introduced by the Government under a Bank/IMF financial sector restructuring program. Annex A presents further details on the banking restructuring program. A key feature of the program was the promulgation of a law establishing the independence of NBG to conduct and manage monetary policy. This was followed by a new Commercial Banking Law that gives NBG's supervisors sufficient authority to enforce prudential rules, regulations, and sanctions; regulate mergers and monopolies in the financial markets; and liquidate banks. These expanded powers imply a wider role for the NBG, and for accelerating the strengthening of the legal and regulatory framework for banking in general. 1.13 Government is aware that fostering savings mobilization and efficient intermediation by the banking sector are critical for the economy's recovery, and is therefore intent on furthering reforms. A local government administrative area comprising two or three villages.  Background 5 These reforms would entail: (a) completing the privatization and recapitalization of the former state banks; (b) restricting non-viable banks from expanding their balance sheets until they comply with all NBG's prudential requirements; enforcing NBG's standards and ratios without resorting to Government budgetary funds; and, (c) encouraging the orderly consolidation and merger of small private commercial banks that do not meet the minimum capital requirements. Under the Bank/IMF program, technical assistance will be provided to the NBG's banking supervision department to help strengthen its supervisory and regulatory capabilities and to implement these measures. As a result of this program, the conditions for lending have improved significantly: i) the average inflation since January 1996 has been below 2% per month; ii) forty five banks have been certified under the new NBG prudential regulations, agreed with the IMF; iii) four banks completed International Accounting Standards (IAS) audits by the end of 1996, and thereby became potential candidates of onlending under this Credit; and iv) significant progress in the privatization of medium and large scale enterprises (para 1.6) has improved the market conditions for lending. 1.14 Establishment of Rural Credit Union Cooperatives (CUs). Rural credit unions are recognized under the Banking Law as deposit taking institutions that are specifically exempt from this Law. They will be governed initially by the Presidential Decree Concerning the Establishment and Development of Rural Credit Unions and a set of related prudential regulations required by this Decree. This Decree was signed on September 19, 1996. satisfving a condition of negotiation for the proposed proiect. The CU prudential regulations follow closely normal banking prudential regulations but have a minimum equity requirement that is lower than that typically found in banking prudential regulations. A summary of these prudential regulations is provided in Annex C. The decree establishes Credit Union Development Center (CUDC) as an independent state-sponsored agency to administer these regulations, monitor the CUs' operations, and promote the credit union concept. After about two years of experience with their operations, a permanent credit union law will be promulgated with the appropriate prudential rules and regulations, and a permanent regulatory agency will be established to supervise and regulate the CUs. A program to support the establishment of the CUDC, refinement of prudential regulations and monitoring mechanisms for CUs, and the establishment of CUs is included in the proposed project. C. The Agriculture Sector 1.15 Agriculture has traditionally been the mainstay of Georgia's economy. In 1992, the sector employed nearly one third of the labor force and accounted for 33 % of net material product. The main crops grown were cereals, potatoes, horticultural products, and a number of perennials such as tea, grapes, and fruit. Livestock production was another important feature of the sector, accounting for about one third of agricultural output. Overall, however, Georgia experienced a deficit in most livestock products, and had to import substantial quantities of meat and milk. Traditionally, Georgia was a net exporter of food products to the rest of the Soviet Union, with exports exceeding imports by a factor of 7 to 1. Agricultural imports were mainly wheat, sugar, milk and meat. 1.16 Following the collapse of the FSU, the shocks experienced by the Georgian economy were especially pronounced in the agricultural sector, resulting in sharp declines in output and exports. Not only did Georgia lose a sizable segment of the secure and stable market that used to absorb its food products, but it also experienced a disruption of well established trade relationships, resulting in serious difficulties in the system of procurement (agriculture raw materials, energy, packaging materials, parts  6 Chapter 1 and components, etc.). The end result is that Georgia's trade in agriculture and food products and inputs have been reduced to a small fraction of their pre-independence levels. In response to these developments, the Government lifted many of the administrative restrictions on domestic marketing and movement of goods, and allowed market forces to determine the price of most goods. The remaining controls on the prices of energy are gradually being removed. Subsidization of irrigation water charges through energy is the last remaining producer subsidy in the sector. Agriculture imports are not subject to any restrictions apart from payment of a 12% import duty, which is applied uniformly to most imports. 1.17 The state order system, which underpinned agricultural trade and production, required enterprises producing specified commodities to deliver 65% of their products to the Government at negotiated prices2. By 1995, the system had virtually collapsed, mainly because the state was not able to make timely payments. Delayed payments made in coupons were almost worthless due to hyper- inflation. The system was officially abolished in June 1995. 1.18 Agro-processing and Marketing. The pre-independence agro-processing sector was largely focused on exports to the USSR. Most enterprises were large-scale and state-owned, primarily producing tea (147 companies) and wine (108 companies). Other significant export-oriented enterprises included fruit and vegetable canning, and mineral water bottling. Agro-processing industries geared to the domestic market included the giant State Bread Corporation, which operated a large number of flour mills, bread making plants, feed mills, and poultry raising units. With some exceptions, the machinery and processes used in the agro-processing units were outmoded, and internationally accepted food processing techniques were rarely used. These problems were compounded by the poor quality control and packaging that were tolerated in the captive domestic markets or in the FSU. With the disruption of traditional trading links with the FSU, almost all large-and medium-scale agro-processing units have ceased to function and overall capacity utilization was reported to be about 10% in mid-1996. The main processing activities still functional are flour and bread-making, which are mostly sustained by large amounts of foreign food aid, and a few private sector joint ventures in the areas of wine, fruit juice, and mineral water production and bottling. 1.19 Market Demand for Agricultural Products. While quality standards have been upgraded throughout the FSU region in recent years, and competition from various other countries has intensified, studies conducted by FAO and private consultants indicate that Georgia still has a conparative advantage in providing processed agricultural products to the CIS market. With the reduction in civil unrest in the country, conditions for transport are expected to improve, resulting in a resurgence of exports to the FSU. Good prospects also exist for products with import substitution potential. The most promising products for export and import substitution are in the following areas: wine and brandy production; fruit and vegetable processing; fresh fruits and vegetables; dairy production; cotton processing; mineral water; packaging industry; bread making; and tea processing. The annual export, or import substitution, potential of companies engaged in these areas is estimated to be close to US $1.0 billion. 1.20 Private Farming. Probably the most significant development in the sector since independence has been the emergence of small private farms as the main producers of food and agricultural products. A survey of small scale private farmers, conducted in two districts near Tblisi, 2 Commodities subject to the state order system in 1994 were wine, champagne, spirits, tea, mineral water, citrus juice, tobacco products, essential oils and canned vegetables. In 1993, the finns producing these products were required to deliver 75 % of their output to dhe state.  Background 7 as a preparation activity for this project, shows that on average, farm households have a land holding of 0.9 ha of which 67% is arable, 20 % is under perennials (orchards and vineyards), and 10% is under hay meadows and pasture. The average family size is four with the farm employing 2-3 members of the immediate family mostly on a part-time basis. All farms in the survey produce crops, with a diverse crop mix, and 70 percent of the farms have livestock. On average, farm households consumed 60 -70% of their produce and sold the balance, making them more than subsistence farmers. 1.21 Farms in the survey had an average gross revenue from sales of Lari 1,500 (US $1,250) per annum and an average net revenue of Lari 630 (US $525) per annum, before payments for family labor. Sales revenues are derived equally from crops and livestock. Farm households in the survey were found to derive a substantial proportion of their income from non-farm sources, with 60 % of households indicating that the farm provided less than 50% of the household income. A further 20% of households derived between 50 and 75 percent of household income from farming. Relative to the equity base and the potential revenue stream of these farms, both input and output levels were low, reflecting constraints in accessing high quality inputs, credit, and information on current technologies. The primary sources for funding farm operations in 1995 were retained earnings (80% of respondents) and interest free loans from relatives (20% of respondents). No commercial borrowing is reported. D. Constraints to Increased Agricultural Productivity Credit to Enterprises 1.22 Credit Constraints in Agro-processing and Marketing. With the removal of most of the legal and policy restrictions on trade (para 1.3) and privatization (para 1.6), the primary constraint facing agro-processing and other private enterprises in Georgia is a lack of credit for upgrading technology, and operating funds. A survey of almost 100 agro-processing and marketing enterprises was conducted by a team of consultants, as a preparation activity for this project, to identify the potential demand for credit. This survey identified sDecific project proposals from existing agro-processing and marketing firms which collectively required about US $75 million in credit. While many of these proposals represent relatively large scale projects, even if only sub-loans of less than US $500,000 are considered, the potential demand from 15 out of the 100 companies surveyed would be about US $6.0 million. The survey took into consideration only the current credit needs for existing agro-processing and marketing companies and did not include an analysis of the medium term demand for credit or demand for "greenfield projects." It also did not consider proposals from other sectors, such as agricultural transport, where the current demand for medium term credit is expected to be high. Since there is no loan size limit for onlending under the proposed Credit, the loan is not limited only to agro- processing companies, and new agro-processing companies are expected to emerge over the five year period of the loan, it is reasonable to expect that the effective demand for credit will far exceed the approximately US $10 million in credit available from the proposed IDA Credit and the expected contribution from Participating Banks (PBs), as well as the US $8 million line of credit to be provided by the European Bank for Reconstruction and Development (EBRD) under a separate project. This conclusion is further supported by an analysis of outstanding loan applications at five commercial banks in Georgia, carried out by an international consultant group in June 1996, which showed that the value of existing crdt applications at these banks was in excess of US $40 million (of which 70 % is in foreign currency).  8 Chapter 1 1.23 Capacity of the Commercial Banking System. A study of six commercial banks in Georgia considered to be potential participants for onlending under this Credit was carried out during Project preparation3. The conclusion of this study is that, collectively, these six banks have a debt capacity of US $60 million (based on capital levels in October 1995). Four of these banks have been appraised and found to substantially meet the conditions required by IDA for Participating Banks. The overriding constraint facing commercial banks in lending for investments is the lack of medium term deposits to match loans of an equivalent duration. This is the result of the recent macroeconomic instability and the lack of domestic depositor confidence in the commercial banking system. The proposed project would address these issues by: (a) pre-qualifying commercial banks to participate in the project after they have completed IAS audits; (b) directly providing them with a line of credit, with maturities from one to five years; and (c) providing, in cooperation with other bilateral donors, technical assistance to banks in all aspects of commercial bank management. Rural Credit 1.24 Background. During the Soviet period, the main supplier of credit to agriculture was the Agrobank, which had over 80 branches. However, the Agrobank was geared to channeling public funds to state enterprises and clearing payments between them, rather than carrying out retail banking operations. Following the breakdown of the FSU's banking system, the rural population lost access to institutional financial services. Over the past three years, there has been virtually no institutional credit available to state and collective farms, nor to individual farmers. Credit to farmns from the agro- processing sub-sector and marketing and input distribution enterprises was also reduced, since they were also facing credit shortages. Finally, self-financing was also reduced, since inflation generated strong upward pressure on prices of purchased farm inputs, while state orders placed a severe constraint on the upward movement of farm commodity prices, causing a severe cost-price squeeze on farm profits. Consequently, utilization of inputs, mainly fertilizers and chemicals, have decreased to an insignificant level, resulting in a sharp fall in crop yields and agricultural production. 1.25 Credit for Small Scale Agriculture. As a result of land distribution and privatization, one of the most critical remaining constraints facing private farms is access to credit. Experience from the one functioning CU in Georgia and the farmers' survey indicate a broad and substantial demand for credit on the part of the rural population, with 60 % of the farmers in the survey indicating that they had a need for credit, in varying amounts up to Lari 4,000 (US $3,333), with the most commonly requested credit terms being 12 - 24 months at interest rates of 1-2 percent per month. Given the size of these farm operations, loans of this size would be for on-farm investments, with loans of Lari 200 - 300 expected for seasonal input loans. Given the current nominal interest rates of 3-4% per month (and real interest rates of 1-2% per month), borrowing would be limited to short term seasonal input loans that yield significant marginal returns in 4 to 6 months. Investment borrowing is expected to increase over the five years of the project, as the nominal and real interest rates decline under the economic stabilization program. 1.26 Included in the farmers' survey was an analysis of the use and impact of the following selected purchased inputs (figures in parentheses indicate the percent of farms that purchased these inputs): fertilizers (28%), chemicals (34%), veterinary services and drugs (25%), and animal feed (47%). 3 Peter Marion, October 1995. Credit Component Preparation Consultancy Report. (Report on file)  Background 9 Comparing farms of equal size, net farm income (i.e., net of input costs and on-farm consumption) was between 190 and 330 Lari higher for farms using purchased inputs compared with those that did not purchase inputs. The only exception was the purchase of chemicals where the difference in income between those that purchased and those that did not purchase chemicals was just 100 Lari. Based on the results, net farm incomes can be expected to increase by the following percentage with the use of purchased inputs: fertilizers (35%), chemicals (10%), veterinary drugs and services (17%); and animal feed (47%). Except for farms purchasing chemicals, the percent of profitable farms was between 10 and 15% higher where purchased inputs were used when compared with those that did not purchase inputs. The substantial marginal returns from the use of purchased inputs at these levels of output provides an underlying basis for the results of the farmers' survey which indicate a strong demand for credit. It also demonstrates that farmers could pay interest rates of up to 3-4 % per month on seasonal credit for a typical input package costing between 200 and 300 Laris. 1.27 Formation of a Rural Credit System. Failure of the banking sector to serve individuals seeking credit has been particularly acute in the agriculture sector. In the few isolated cases where credit is available, interest rates are beyond the repayment capacity of most borrowers. At present, NBG's capital requirements for establishing new banks prevents the establishment of small rural banks. Furthermore, private banks in urban areas lack the resources and interest to expand their networks to the rural communities. At the same time, the former state banks have no experience in lending to large numbers of small farmers and lack the financial resources to operate the branches at their command. Underlying these actions is the reluctance of the banking sector to lend to farms because of: (a) the high transaction cost of small scale rural lending; (b) the lack of secure collateral; and (c) inexperience in assessing the risk of agricultural lending. The proposed project would address these constraints by promoting the establishment of small rural CUs, which would rely on local knowledge of the borrower to assess risk, reduce the need for collateral, and reduce transaction costs. Experience in other countries with similar rural traditions, such as Albania, has shown that CUs can play a vital role in mobilizing local financial resources to make small individual loans to their members (typical loans are less than US $500 and for periods of 3 to 12 months), which often include not only farmers, but small traders and micro- entrepreneurs. Lending to non-farm enterprises and the fact that farm households derive a substantial proportion of household income from non-farm sources (pjar 1.21), combined with training in portfolio management for CU managers, will enable the CUs to significantly reduce the covariance risk typically faced by specialized agricultural lending institutions. The proposed land registration component of the project would also improve access to credit by providing a more secure form of collateral if needed for larger capital investments. Land Markets 1.28 In order to achieve efficient use of agricultural land, through market allocation to the most efficient users, there is a need to establish a land market that permits the low cost transfer of land on a permanent basis, through sales, or on a temporary basis through the rental agreements. A system that provides low cost verification of ownership and encumbrances on land, and the transfer of title in the event of default, provides the basis for mortgage based lending. The land reform program being undertaken in Georgia has established the basis for a land market in agricultural land, through the privatization of land under the Land Privatization Decree of 1993 and the Agricultural Land Leasing Law of 1996, and the confirmation of private property rights under the Agricultural Land Ownership Law of  10 Chapter 1 1996. However, the lack of clearly defined title to land in Georgia, increases the uncertainty associated with land sales or rental agreements, thus increasing the transaction cost of land transfers and restricting the market for land. The high cost of ownership verification and the difficulty of transferring untitled land make mortgage lending on land prohibitively expensive for commercial banks. A title registration system to reduce the transaction cost of land transfers and mortgage lending would be developed under the project. Agricultural Support Services 1.29 The lack of appropriate technologies for private agriculture, including farming methods, inputs, machinery, and management techniques, will continue to be a major constraint on agricultural productivity, unless the Government makes a concerted effort to provide support services to farmers. The structure of the current research and information dissemination system, which was designed to support large scale state managed agriculture, is not well suited to supporting small scale private farms and is currently on the point of collapse. An extension system per se never existed in the planned economy. Animal health services and sanitary inspection previously provided by MAFI have also ceased to function. The proposed project would support the development of an agricultural sector strategy and investment program through training for government officials in economic policy analysis and a series of studies and small pilot operations to identify the constraints to increased agricultural productivity. E. Bank's Experience and Strategy Bank's Role and Past Assistance to Georgia 1.30 The main objectives of the World Bank's assistance to Georgia are to: assist in the transition to a market economy; alleviate poverty that has emerged as a result of structural changes; and reverse the economic decline of recent years. More specifically, the Bank's Country Assistance Strategy (CAS) includes: (a) Redefining the role, and improving the efficiency, of the public sector; (b) developing human resources and institutional capabilities; (c) strengthening the social safety net; and (d) reform programs aimed at promoting private sector development and growth. The agricultural sector has been identified in the CAS as the primary source of expected growth in the early stages of the transition. The proposed Agricultural Development Project would be the Bank's first operation in Georgia to support the revival of this important sector. Assistance from the World Bank to other parts of the economy commenced in 1994 and are listed below. (a) The Institution Building Credit (IBC) in the amount of US $10.1 million to help with privatization efforts, financial sector reforms, strengthening of the tax and customs administration, and economic policy development. This project was approved by the Board in July 1994. (b) The Municipal Infrastructure Rehabilitation Credit of US $18 million aimed at addressing the severe deterioration of municipal infrastructure in Tblisi and other large cities. The project was approved in November 1994.  Background 11 (c) The Transport Rehabilitation Credit of US $12 million to assist in the reconstruction of the road and railway systems was approved by the Board in January 1996. (d) The Rehabilitation Credit of US $75 million in support of a major structural adjustment program was approved by the Board in March 1995 and was successfully completed. It was aimed at transforming the public sector, improving conditions for development of markets, and creating a social safety net. (e) The Structural Adjustment Credit in the amount of US $60 million to support, inter alia, the agricultural sector by accelerating adjustments in the productive sector. This project was approved by the Board in April 1996 and is fully disbursed. The Structural Adjustment Technical Assistance Credit in the amount of US $4.8 million was approved to support implementation of the Structural Adjustment Credit. (f) The Health Project in the arnount of US $14 million was approved by the Board in April 1996. It will assist the reorientation of the health sector toward primary health care and preventative medicine. This will be achieved by providing a universal package of health services and essential clinical care in a financially sustainable manner. Experience from the successful implementation of the projects listed above and the pilot operations under the Project Preparation Facility for this Project have shown that there is strong implementation capacity in Georgia and that the Governmnent has a commitment to satisfactory project implementation. Strategy for Assistance in the Agricultural Sector 1.31 The Bank completed an Agriculture and Food Sector Review Report in August 1995 that recommends a set of actions to facilitate recovery in the sector. It also provides guidelines for replacing the present spontaneous and unstructured sectoral reforms with a structured and consistent program for transition to a market based agriculture. Specific policy recommendations included in the report cover the following aspects: (a) completing land reform and farm restructuring by: (i) completing the distribution of land to private owners; (ii) clarifying the legal status of land distributed under the 1992 land reformn decree; (iii) transferring the remaining state-owned land and the non-land productive assets to private users and operators; and (iv) creating conditions for a functioning land market; (b) developing a working competitive domestic market for agricultural products and agriculture sector services, required to accelerate the: (i) privatization of farming and agro-industrial enterprises; (ii) de-monopolization of the distribution, input supply, and product markets; and (iii) facilitation of the entry of foreign capital and firms into domestic agro-processing, input distribution and support services; (c) creating a financial intermediary system that can meet the agricultural sector's credit needs; and  12 Chapter 1 (d) developing an institutional framework that is consistent with the needs of a market-based agriculture and includes: (i) changing the Government's role in the sector from one that has traditionally administered and managed a command economy, to a more hands-off role of supporting the private sector through regulation, research and analysis, and the provision of public goods and services; (ii) creating a new institutional framework for a working agricultural market, including commodity exchanges, market information systems, etc; and (iii) developing an extension service, research, and education focused on the needs of privatized agriculture. 1.32 Specific measures to implement the policy recommendations outlined above are incorporated in the Structural Adjustment Program. The Agricultural Development Project proposed in the following chapter would reinforce these policy changes by providing direct financial assistance to the land reform program, the privatization and restructuring of enterprises, the development of a financial intermediary system, the development of a system to provide credit to small farmers, and the development of an agricultural development and investment program to improve agricultural services through a series of studies, pilot operations and training. Lessons Learned from Past Operations in the Agticultural Sector 1.33 The proposed project is IDA's first operation supporting Georgia's agricultural sector. A number of projects in the ECA Region were examined during the design phase of this project. The most important one was a 1994 Agricultural Reform Implementation Support Project in Russia that is designed to accelerate agricultural reforms; strengthen agricultural support services, including the creation of a land administration and management service; build-up institutional capacity to prepare and implement agricultural and agri-business projects by the private sector; and to develop market information systems and farmers' advisory services. Design of the Georgia project also took into account the experience gained under the 1993 Rural Poverty Alleviation Pilot Project in Albania and a subsequent 1995 Rural Development Project. Both of these projects contain small-scale credit components and their experience was taken into consideration during the design phase of this project. Implementation of the pilot small- scale credit component in Albania was judged by OED to be satisfactory, its sustainability assured, and its impact on institutional development substantial. Significant design elements of the above mentioned projects, especially in the area of loans to agro-industries and facilitating credit to small farmers, were built into the proposed Georgia project.  CHAPTER 2 THE PROJECT A. Project Origin and Formulation 2.1 The Agriculture and Food Sector Review, published by the Bank in 1995, recommended intensified financial assistance to the agriculture sector for investment activities that would support the policy measures instituted by Government to revive production and exports. This recommendation led to the preparation of materials for the proposed project during 1995, by consultants engaged under a Policy and Human Resources Development (PHRD) grant from the Government of Japan. Major issues considered during project preparation and appraisal were as follows: (a) the most appropriate and cost effective system of land registration; (b) the capacity of the banking system to meet the credit needs of small farmers and the justification for introducing CUs; (c) enterprises' demand for investment loans and the capacity of private banks to meet this demand; (d) appropriate institutional arrangements for project implementation; and (e) the identification of studies to be conducted under the project to facilitate the sector's longer term development and investment program. 2.2 Pilot activities for the Project commenced in December 1995 using an IDA Project Preparation Facility (PPF) of US $500,000. The PPF's objectives were to: (a) maintain the momentum developed during project preparation by keeping the Project Preparation Unit operational; (b) initiate the formation of CUs and the CUDC; (c) collect additional information on the land registration process and carrying out aerial photography; (d) provide training in the use of digital mapping and surveying equipment; and (e) test the use of survey equipment to be used on the project, and develop procedures for carrying out the work with private contractors. Activities under (e) above have been carried out in conjunction with a pilot land registration project being implemented with assistance from TACIS. Progress to date under the PPF has been very promising, and with the experience gained, there should be fewer delays during project implementation. B. Project Objectives and Description 2.3 The overall objective of the Agricultural Development Project is to increase agricultural productivity in Georgia by supporting the development of private sector farming and agro-processing. The specific goals of the project are to develop an agricultural credit system; facilitate increased liquidity in land markets; and identify, through training, a series of studies and pilot operations, an agricultural development and investment program to address major constraints to increasing agricultural productivity. This would be achieved by: * providing loans to private enterprises engaged in economic activities in rural areas, through private commercial banks, for working capital and investments - most of these loans are expected to assist agro-processing enterprises since they make up a large proportion of the enterprises in Georgia, and will be receiving direct technical assistance from the proposed Project, and the Georgia Investment Promotion Center, in preparing business plans and loan applications; * developing a network of rural credit unions that would mobilize resources and provide loans and financial services to small farmers, micro-enterprises and the rural population;  14 The Project * supporting the land reform program through the establishment of an institutional framework and the development of implementation capacity to register and issue land titles to individuals and firms; and * developing an agricultural sector development and investment program to provide agricultural services to small farmers, improve agricultural policy making, and encourage agricultural exports, by training economists in government on policy analysis, preparing a series of studies and conducting pilot operations. 2.4 To support the above objectives, the proposed project would provide financing to the Project Coordinating Unit (US $ 0.3 million) and to four free-standing components. Three of these components: (a) Credit to Enterprises; (b) Credit Unions; and (c) Agricultural Services, would have a nation-wide coverage. The Land Registration component, would be limited to two rayons (administrative districts) in the vicinity of Tbilisi. A summary of these four components is presented below. Component 1: Credit to Enterprises (US $12.0 million) 2.5 The Line of Credit. The line of credit to enterprises (CE) would be supervised by the Credit to Enterprises Unit (CEU) under the Project Coordination Unit (PCU) and made available to participating banks (PBs) who would sign subsidiary loan agreements with the Ministry of Finance. A PB would be accredited by IDA to participate in the project after meeting a set of predetermined accreditation criteria (para. 3.23), which would assess the bank's financial viability measured against international accounting standards (IAS), adequate management strengths, capability to assess credit and risks, credit absorptive capacity, and adherence to the NBG's prudential banking standards. The line of credit to enterprises would finance fixed investments and associated working capital. Proposed on-lending terms and conditions to the PBs are described below. In addition, a portion of the CE would be used to finance the PCU's expenses related to the management of this component and the engagement of an internationally experienced advisor who would assist the CEU to manage the CE. The operating costs for the CEU would be funded from the Special Account for Project Administration (the same way as the rest of the PCU) and CE allocation, which would be for onlending to commercial banks. While this line- of-credit is available to any private enterprises engaged in economic activities in rural areas, it is expected that a majority of the funds will be used by agribusiness companies since they make up an estimated 75 percent of all enterprises in Georgia, and, in addition, there will be an aggressive program to assist agriculture related companies prepare business plans and loan applications, thus gaining access to the line- of-credit. The goal of the project is to promote the demand for credit by agro-processing companies rather than impose supply side restrictions (targeting) by limiting its use to these companies. 2.6 Government On-lending Terms and Conditions. PB's would have the option of borrowing (and lending) project funds in either dollars or Laris. The PB would be required to onlend in the same currency as it was borrowing and the term of each loan to a PB would be the same as the underlving loan to a private enterprise plus 3 months. Dollar denominated borrowings by PBs would be at a floating rate, to be adjusted semi-annually, of LIBOR plus 3.0 percentage points, of which 0.3 of a percentage point would cover the CEU's administrative costs and 2.7 percentage points would be for a risk fund to provision for PBs potential payment default. Interest rates on Lari denominated loans would be adjusted quarterly on the basis of the average weighted interest rate for the previous 3 months of the 30 day funds auctioned under NBG's Credit Auction. Although the nominal interest rate is currently high (3045% per annum), it is expected to decline as more funds become available and as inflationary expectations  Chapter 2 15 decline. For both Lari and dollar denominated loans, PBs would repay interest semi-annually, with the first payment after six months, and the principal at the end of the loan period. The interest rate anchors for both Lari and dollar denominated loans would be reviewed periodically by the MOF and IDA, and revised, if considered necessary and appropriate. IDA funds would account for up to 70% of the cost of each sub-project. PBs would be free to decide how to finance the remaining 30% from their own funds and contributions from the enterprises, with a minimum of 10% of the sub-project cost being funded by the enterprise. PBs may apply to the CEU for advanced commitment of funds (no more than 3 months for a commitment fee of 0.5 of a percentage point). The maximum credit available to each PB would be three times its capital and reserves (equity) measured according to international accounting standards. IDA would review the first five loans for each bank, and thereafter all PB sub-loan applications above US $500,000. The CEU would be responsible for reviewing all sub-loans. The review process would only determine if the loans made are in compliance with the objectives of the project, that the environmental assessment has been satisfactorily completed, and that the documentation is complete. The CEU would not assess the bankability of the loans, since the participating banks are taking the full commercial risk for lending. 2.7 PB On-lending Terms and Conditions. The line of credit to enterprises would be for sub-loans with term-to-maturities of up to five years for fixed investments and working capital. To participate in the project, private sector enterprises would have to be registered and operating in Georgia and engaged in activities such as agro-business, construction, transportation and manufacturing. The PB's on-lending margin over its cost of funds would be determined by market conditions. Funds collected from sub-loans repayment, less the interest due to the MOF, would be retained by the PB for the term of the sub-loan plus three months. PBs would maintain a separate account for each sub-loan to permit the CEU to monitor for compliance under the terms and conditions of the CE. A special account (SA) would be established in the NBG to handle repayments from PB's. Whenever the balance in the SA is greater than US $300,000, the PCU would disburse funds out of the SA, rather than withdrawing further funds from the IDA Credit. Disbursements under this SA would require the signature of the head of the CEU and the designated representative of the MOF. The SA would be used for the sole purpose of funding lending operations of PBs. The line of credit to enterprises would be used for this purpose for a period of five years; thereafter the GOG would be free to use the funds at is discretion. 2.8 Training. Training for participants under this component was organized and partly financed in advance of project implementation by the Banks' Economic Development Institute (EDI). Specific activities included the training of managers and key personnel from commercial banks and private enterprises. Training for bankers covered the following key bank operational topics: the entire life cycle of credit administration and risk management; the economics of project appraisal and analysis; financial management; treasury operations; deposit mobilization and marketing; information technology and management information systems; and compliance with NBG prudential rules and regulations. For enterprises, training included: organization and management; accounting and finance; project preparation; marketing and sales; legal and contractual practices and procedures; corporate restructuring; and banking practices and corporate relationships. Technical assistance would also be provided to PBs through experts retained and financed by TACIS and EBRD under separate projects. Enterprises requiring assistance with project preparation, including feasibility studies and business plans, would be able to obtain such assistance from the CEU, the Georgian Investment Promotion Center (GIPC) funded by UNDP, and from several national private consulting firms that have recently established operations in Tbilisi.  16 The Project Component 2: Credit Unions (US $7.5 million) 2.9 The project would support the development of rural credit unions in Georgia. Since credit unions are new to Georgia, this project would first pilot the development of CUs for a period of two years under temporary regulatory procedures of the Presidential Decree on the Establishment and Development of Rural Credit Unions (para. 1.14) before adopting more permanent procedures and structures, and expanding more rapidly. A maximum of 120 CUs are expected to form during the five year period of project, however, the maintenance of high prudential standards and well managed CUs would take precedence over achieving these numerical targets. Ten CUs are already being supported under the PPF. The project would also support the regulatory body for CUs, the Credit Union Development Center (CUDC) which would regulate and supervise the operations of the CUs, provide training to the staff of the CUs once they become eligible to participate in the program, and assist farmers to join the CUs and to take advantage of the services being provided by the CUs. The CUDC would also monitor CUs' compliance with the interim prudential regulations presented in Annex C. A detailed description of the financial operations of the CUs, including a simple deposit insurance scheme, is presented in Chapter III. A law regulating the establishment of CUs and the development of a more permanent set of prudential requirements will be prepared and submitted to Parliament for approval within the next two years. The law would be largely based on the experience of the CUs established under this Project. Credit unions that meet pre-specified eligibility criteria would be able to obtain a start-up grant to cover establishment and operating costs, an initial equity grant to serve as an insurance fund until sufficient member equity is accumulated, and project funds on a loan basis. These funds would supplement the membership's contributions and would be used for making loans to members (mainly small private farmers, micro-enterprises and small traders), for needed productive investments and services in the rural sector. At the beginning, lending would be for short-term purposes, but once the CUs gain experience with resource mobilization and short-term lending, they may opt to expand operations to also serve the members' medium-term investment needs. 2.10 Credit Union Start-up Grants and Onlending Conditions. Each CU would receive an administrative grant of the equivalent of US$ 3,000 for organization, start-up operations, and current expenditures. They would also receive a grant of US$ 2,000 as an initial equity contribution to be retained in an escrow account in the Administrative Bank (AB) until such time as the CU has accumulated a total share equity of an equivalent of US $25,000. Prior to reaching this share equity level, the US $2,000 equity contribution from the project, plus any interest accrued, may only be used to pay out depositors, on a prorated basis, in the event that the CU is declared bankrupt by the CUDC. Thereafter, a CU would be obligated to use these funds for onlending. This equity contribution thus serves as a temporary deposit insurance program during the start-up phase of the CU. CUs would be eligible to receive the grant funds once they have at least 30 registered members, 300 Lari worth of paid-in share capital, and the CUDC's approval of the CU's charter, and operating policies and procedures. The grants would be disbursed over a two year period with US $4,000 being disbursed in the first year and US $1,000 in the second year. CUs would be eligible to obtain supplementary loans under the project, once a CU has been in operation for at least 3 months, has a total paid-in share capital of 1,000 Lari, a membership of at least 50, and the CUDC is satisfied that the CU is properly managed and complies with the appropriate prudential guidelines and regulations. The ratio of the value of supplementary loans to the value of share capital would be limited to a maximum of 1:1 in the first year, 1:2 in the second year, and 1:4 in the third year, and thereafter. Loans would be for a period of two years and are renewable at the end of the two year period if the CU is in good standing. Interest rates on these Lari denominated loans would be fixed on the basis of the average weighted interest rate for the previous 3 months, of the  Chapter 2 17 30 day funds auctioned under NBG's Credit Auction. Rates on these loans would be adjusted quarterly. CUs would pay interest semi-annually and repay the principal at the end of the loan period. Component 3: Land Registration (US $6.0 million) 2.11 Following the introduction of private land ownership, the development of a market for land requires a land registration system and an authority that can issue land titles to individual landholders. The project would initiate a land registration program in Gardabani and Mtskheta rayons (administrative districts) by concentrating on privately held rural house lots and farm lands. Approximately 199,000 parcels would be registered under the project and 130,000 land ownership titles would be issued to individuals in the project area. Each title would record all land parcels held by an individual land holder in a rayon. Experience with land registration to be accumulated under this program would be critical to the subsequent expansion to other parts of the country, and the establishment of a Land Administration Authority. A condition of disbursement for this component is approval by Parliament of a Land Registration Law (para. 5.4 (b)). This condition has been met. 2.12 Survey of land parcels in the project area would be carried out on a systematic basis (surveying groups of adjacent land parcels) in the two districts covered by the project. Sporadic surveying (individual parcels) would also be done on a trial basis outside these two districts with the land holder paying the full cost of the survey. Surveys would be completed with the aid of existing maps and recent aerial photos prepared under the PPF. All parcels in the area would be surveyed by private survey companies that would be established with technical assistance to be provided under the project. These survey companies would also play a major role in the adjudication of land disputes. Land Registration Offices, to be established in each of the two project rayons, would be responsible for registering the holdings. Expenses associated with this first phase of the program would be financed in parallel by the IFAD and IDA credits. However, land owners in the area would contribute in the form of registration fees (see para. 3.19). To prepare for the next phase of the land registration program, the project would also finance aerial photography (US $0.4 million) over other parts of Georgia. Details are provided in Annex D. Component 4: Agricultural Services (US $0.5 million) 2.13 During discussions of the Agriculture Sector Report with Government, it was agreed that the Government should formulate the next phase of its development strategy and investment program for the agricultural sector. This will be achieved through a series of studies to identify priority agricultural services for which there is effective demand, and to define the respective roles of private and public sectors in their delivery. This would assist the restructuring of the sector and lead to the formulation of future investment programs and projects. These activities, for which detailed TORs are available in Annex E, are expected to identify investment programs that would support the development of private sector agriculture, particularly small farmers, and are as follows: (a) A study of the options available for developing a national export improvement program; (b) A pilot program to develop and test a new system of collection and publication of agricultural statistics by the various government agencies engaged in this area;  18 The Project (c) Develop and pilot a system of agricultural extension and research that caters to the needs of small farmers and that relies heavily on the private sector to provide such services; (d) Develop and test farm management training programs to assist owners of newly privatized farms, including the formation of farmers cooperatives; (e) Conduct a socio-economic study to monitor the land reform and land markets; (f) Prepare a study to examine the options and desirability of deposit insurance scheme for rural credit unions; (g) Train economists in government in the area of agricultural policy analysis; and (h) Prepare a proposal for financing and implementation of an irrigation and soil amelioration program. The net result of these activities would be a strategy and investment program, acceptable to IDA, for the next phase of the agricultural development program. The report outlining the program would be presented to IDA by the mid-term review. C. Costs Estimates 2.14 The total cost estimate of the project is US $26.3 million. The Credit to Enterprises component includes approximately US $ 0.2 million for administration and equipment, and the balance for a line of credit. The Credit Union component includes US 0.9 million for administration of the program, equipment and TA and the US $6.6 million for grants and credits to CUs. Included in the cost estimates for the Land Registration sub-component are funds for aerial photography (US $ 0.5 million) and mapping and surveys (US $3.5 million), and registration, project management, technical assistance, training and contingencies (US $2.0 million). A summary of costs by component is presented in Table 2.1 below. Table 2.1: Project Cost Summary (US $ million) National Foreign Total %Foreign Exchange % of Cost Credit to Enterprises 4.2 7.8 lZ.0 65 45 Credit Unions 5.1 2.4 7.5 32 29 Land Registration 3.1 2.9 6.0 48 23 Agricultural Services - 0.5 0.5 100 2 Project Coordinating Unit 0.3 - 0.3 - 1 Total project cost 12.7 13.6 26.3 52 100  Chapter 2 19 D. Financing 2.15 The proposed SDR 10.4 million (US $15.0 million equivalent) IDA Credit would be lent to Georgia at standard IDA terms, with 35 years maturity and a 10 year grace period. IDA's share in the funding of each component would be as follows: (a) 70% of the cost of sub-projects to be financed under the Credit to Enterprises, with at least 10% of the sub-project cost funded by the enterprises and the balance by participating banks; (b) about 58% of the cost of the Land Registration program, with the balance being financed by IFAD (33%) and Government (9%) using registration fees and land tax revenues that are specifically earmarked for this purpose; (c) 100% of the cost of studies under the Agricultural Services sub-component; and 100% of the cost of the Project Coordinating Unit (PCU). (See Table 2.2). Approximately US $ 12.0 million, or 80 % of the IDA credit would be used to fund foreign expenditures. 2.16 The International Fund for Agricultural Development (IFAD) would provide US $6.0 million in co-financing to fund the Credit Unions (CU) sub-component (US $4.0 million) and the land registration cost of small farmers (US $2.0 million). Effectiveness of the IFAD loan by June 30, 1997 would be a dated covenant under the IDA Credit (para 5.4 (c)). Table 2.2 Project Financing (US $ million) Project Component IDA IFAD Banks Gov't Beneficiaries/ Total Enterprises A. Credit to Enterprises 8.7 - 1.1 - 2.2 12.0 B. Credit Unions 2.0 4.0 - - 1.5 7.5 C. Land Registration 3.5 2.0 - 0.5 - 6.0 D. Agricultural Services 0.5 - - - - 0.5 E. Project Coordinating Unit 0.3 - - - - 0.3 Total Project Cost 15.0- 6.0 1.1 0.5 3.7 26.3 * Estimated Foreign Expenditures are US $12.0 million or 80 % of IDA fmancing. E. Procurement 2.17 Procurement arrangements for goods and services to be financed under the project, their estimated costs and proposed methods of procurement are presented in Table 2.3 below and in Annex J. All procurement of goods to be financed from the IDA credit proceeds would be procured in accordance with the World Bank Guidelines for Procurement (January 1995), and using the Bank's Standard Bidding Documents. A "General Procurement Notice" containing information about bidding opportunities has been prepared and will be published in the March, 1997, issue of "Development Business." The Bank will be executing agent for IFAD and therefore all contracts financed by IFAD will be procured in accordance with the World Bank procurement procedures. Goods and services procured under the Credit to Enterprises sub-component and involving contracts less than or equal to US $1.0 million would be procured following commercial practices, provided that such commercial practices include obtaining quotations from more than one supplier or contractor. Contracts higher than US $1.0 million would use ICB. A draft Country Procurement Strategy Paper for Georgia has been prepared and is presently under review.  20 The Project Table 2.3: Summary of Proposed Procurement Arrangements (US $ millions) Item ICB NCB Othera N.B.Fb Total Cost Credit to - 8.5 3.3 11.8 Enterprisesc (8.5) (8.5) Credit Uniond - - 1.4 5.5 [4.0] 6.9 (1.4) (1.4) Land Registratione 0.7 1.3 0.6 2.5 [2.0] 5.1 (0.7) (1.3) (0.6) (2.6) Agricultural Studies - - 0.5 - 0.5 (0.5) (0.5) Project Coordinating - - 0.3 - 0.3 Unit (0.3) (0.3) Recurrent Costs' - - 1.2 1.2 (1.2) (1.2) PPF5 - - 0.5 - 0.5 (0.5) (0.5) Total 0.7 1.3 13.0 11.3 26.3 (0.7) (1.3) (13.0) - (15.0) NOTE: Figures in parentheses ( ) are financed by IDA and amounts in brackets [ ] are financed by IFAD. a/ Other: Includes international shopping (US $0.55 mill.) and selection of consultants according to Bank Guidelines (US$1.2mill.) and recurrent costs for each component (US $1.2mill.). b/ Not Bank Financed (NBF). Includes amounts financed by IFAD (US $6.0 mill.) and by contribution from sub-borrowers and PBs (US$4.8 mill.) and government fees for land registration (US $0.5 million) c/ Credit to Enterprise component includes credits (US $8.3 million), equipment for CE (US $40,000), and consultancies (US$ 0.16 mill.). d/ Credit Union component includes US$5.1 mill. for grants and loans to CUs and equipment for CUDCs (US$0.25 mill.). The US $ 1.5 million from members deposits will also be used for onlending. e/ Land Registration component includes aerial photography (US $.44 mill.), mapping and surveys (US $ 3.5 mill.), equipment (US$0.65 mill.) and consultancies (US $ 0.5 mill.). fl Recurrent cost includes consumables, salaries, rents and utilities. g/ PPF includes US $0.3 million for the Land Registration component, including Aerial Photography (US $60,000), Equipment (US $123,000) and recurrent costs(US$ 117,000); and US $0.2 million for the Credit Union and PCU equipment and recurrent costs. 2.18 Apart from the line of credit to enterprises, which is discussed above, the following procurement thresholds would be followed when purchasing goods and services under the project: (a) International Competitive Bidding (ICB) procedures would be followed for all contracts valued at US $200,000 and above. To the extent practicable, contracts would be grouped in packages large enough to attract international competition and to enable benefit from economies of scale in bid prices; and  Chapter 2 21 (b) International Shopping (IS), based on a comparison of price quotations obtained from at least three suppliers from at least two eligible countries, would be used for procurement of equipment estimated to cost less than US $200,000, with an aggregate limit of US$ 550,000. 2.19 Equipment and Technical Services. Goods and equipment (estimated to cost US $1.1 million) to be purchased under the project would consist of computers and office equipment for all components of the project and survey, mapping and registry equipment for the land registration component. (see Annex D for details). Part of the equipment needed for the land registration component (US $123,000) was financed under the PPF. Equipment would be procured using ICB, IS procedures. Aerial photography of the project area (US $60,000), was financed under the PPF. The second package of aerial photography (US $0.4 million) would be for the next phase of the registration program and would be procured through ICB. Procurement activities under the Land Registration sub- component would also include the award of land survey contracts. Taking into consideration the surveyors' equipment requirements, the rate at which land disputes could be adjudicated in the field, and climatic restrictions on survey work, it is estimated that the average size of a survey contract would be about US $60,000. Execution of the survey contracts would involve adjudication of land boundaries, which requires intimate knowledge of national conditions, customs and language. Because of these aspects, and the relatively small size of each contract, the survey contracts are unsuitable for ICB and would therefore be tendered following national competitive bidding procedures (NCB). All IFAD procurement under the Land Registration component will be for land surveying and will also follow national competitive bidding procedures. 2.20 Consultant Services. Technical assistance requirements under the project would amount to US $1.2 million. Included in this total are: 32 staff-months for the Land Registration sub-component (for details see Annex D); 16 staff-months to carry out the studies under the Agricultural Services sub- component (Annex E); 10 staff-months for the CEU (Annex F); and 7 staff-months of consulting services to assist CUDC with implementation of the Credit Unions component (Annex C). Consultants would be selected in accordance with the "Guidelines for use of Consultants by World Bank Borrowers and by the World Bank as Executing Agency (August 1981)." 2.21 Review by the Bank. All ICB contracts, the first two national competitive bidding and the first three international shopping contracts regardless of their value, and all contracts for consulting services valued in excess of US $100,000 for firms and US $50,000 for individual consultants, would be subject to prior review and approval by IDA. Contracts of a lesser amount would be subject to ex- post review by IDA. Terms of Reference for all consultant contracts would be reviewed in advance by IDA. Procurement information would be included in the quarterly project progress reports to be prepared by the Project Coordinating Unit (para. 3.48). 2.22 Project Launch. During the Project Launch workshop, scheduled for April 1997, the Borrower would be provided with an overview of the Bank's procurement practices. The efficiency and capability of the Borrower to carry out the procurement in accordance with the Bank's procedures would be strengthened through ongoing training and use of the Standard Bidding Documents. Agreement was reached during Negotiations that all procurement activities under the project would follow the procedures outlined in paras. 2.17 to 2.21 (para. 5.2 (a)).  22 The Project F. Disbursement 2.23 The proposed IDA Credit of SDR 10.4 million (US $15.0 million equivalent) would be disbursed over a period of five years, with April 30, 2002, being designated as the project's closing date. There is no disbursement experience at this time to prepare a disbursement profile for Georgia, but based on experience gained during project preparation, it is reasonable to assume that the Credit's proceeds could be fully disbursed over a five-year period. Due to the experimental nature of some of the components of the project there will be three supervision missions per year for the first two years of the project, of which one each year will be a complete evaluation of all aspects of the project. Changes in project design will be made as a result of these missions, if necessary. The mid-term evaluation to examine all aspects of project implementation would be undertaken by IDA and the Borrower by June 30, 1999, or when disbursements reach 50% of the total credit amount, whichever is earlier. Commitments for major contracts would be approved through April 30, 2001. Estimated annual disbursements under the IDA Credit are shown in Table 2.4. Table 2.4: IDA Disbursements Projections (US $ million) FY 97 FY 98 FY 99 FY 2000 FY 2001 FY 2002 Annual 0.3 1.4 2.3 5.5 4.0 1.5 Cumulative 0.3 1.7 4.0 9.5 13.5 15.0  Chapter 2 23 2.24 The proceeds of the credit would be disbursed as shown in Table 2.5 below: Table 2.5: Disbursement Categories (US $ million) Disbursement Category Allocation Disbursement Basis (US $ mil.) (1) Goods 1.1 100% of foreign expenditures, 100% of national expenditures (ex factory cost) and 80% of national expenditures for other items procured nationally (2) Training and Consultant 2.5 100% Services (3) Land Survey and Mapping 1.0 [2.0]' 100% of foreign expenditures, and 90% of national expenditures (4) Sub-loans for Credit to 8.0 100% (70% of cost of sub-projects) Enterprises component (5) Grants under Credit Unions 0.2 [0.4] 100% component (6) Loans under Credit Union 0.9 [3.6] 100% component (7) Refinancing of Project 0.5 Amount due pursuant to Section Preparation Advance 2.02 (c) of the Credit Agreement (8) Project Operating Costs 0.3 100% (9) Unallocated 0.5 Total 15.0[6.0] a/ IFAD contribufion presented in parerinlses I I. 2.25 Direct payment procedures from IDA to suppliers would be used. Disbursements against the categories described in Table 2.5 would be made upon receipt by IDA of fully documented applications, except for contracts valued at less than US $200,000 for goods, US $100,000 for consulting firms and US $ 50,000 for individual consultants, which would be made against certified statements of expenditures (SOE). Supporting documentation for SOEs would be retained by the Borrower and made available to IDA during supervision. The minimum size of application for direct withdrawals and issuance of commitments from the IDA Credit account would be 20% of the amount of the Authorized Allocation to the Special Account. All withdrawals for training would be done on the basis of an SOE, with all TORs for training subject to prior review. 2.26 To facilitate project implementation, the Borrower would establish a Special Account in the National Bank of Georgia on terms and conditions satisfactory to IDA. During the early stage of the Project, the initial allocation to the Special Account would be limited to US $500,000. However, when the aggregate disbursements under the Credit have reached the level of US $3,000,000, the initial allocation may be increased up to the Authorized Allocation of US $1,000,000. Documentation  24 The Project requirements for replenishment of the Special Account would include reconciled bank statements and other appropriate supporting documents. 2.27 At Negotiations, agreement was reached that disbursement arrangements wouldfollow the procedures described in paras. 2.23 to 2.25 and that the Special Account would be established and operated as described above (para. 2.26) (paras. 5.2 (b) and (c)).  CHAPTER 3 PROJECT IMPLEMENTATION A. Organization And Management 3.1 The Ministry of Agriculture and Food Industries would be the implementing agency for the project. The Minister of Agriculture and Food Industries would provide monthly project progress reports to a working Committee of the State Coordination Committee for Cooperation with International Financial Institutions (SCC). The SCC falls under the office of the President and has the responsibility for overseeing all IDA projects. The day-to-day implementation of the Project would be carried out by the Project Coordinating Unit (PCU). The Ministry of Finance, as fiscal agent for the Government will be responsible for approving and monitoring all government related financial transactions for the CE component of the project. This would include, inter alia, withdrawal of Credit funds in accordance with procedures established in the Credit Agreement, onlending of Credit funds to participating private commercial banks (PBs) and collecting from them the principal and interest, and maintaining a Government risk fund in the NBG. The NBG, as banker to the Government, will open an account in the name of the Ministry of Finance to administer repayment of loans from the CE component and for maintaining a risk fund. A project implementation schedule is presented in Annex I. Detailed implementation arrangements are presented below. Project Coordinating Unit 3.2 A Project Coordinating Unit (PCU) was created by Government to coordinate and oversee implementation of the four components of the project. It is headed by a full-time Project Director, and includes technical and administrative staff (see Annex B for details). The PCU would be responsible for: (a) providing information to and seeking guidance about project implementation issues from MAFI, SCC, MOF and NBG; (b) coordinating and managing the recruitment of foreign and national consultants required by CUDC, the CEU and the Agricultural Services sub-component; (c) ensuring that all procurement contracts are in conformity with IDA's guidelines; (d) preparing and submitting for IDA's review the annual work plans and consolidated semi-annual progress reports; (e) maintaining an account of project activities and expenditures; (f) coordinating the preparation of studies under the Agricultural Services sub-component; and (g) coordinating the monitoring and evaluation of project activities. Aside from being responsible for overall coordination of project activities, the PCU would also assume direct responsibility for the work of the CEU (para. 3.3) and the CUDC (para. 3.7). Both of these centers would remain under the PCU until such time as they can be established as independent agencies either in the public or private sector. Project funding for these centers would continue for the duration of the project, even if they are transferred out of the PCU. All staff in the PCU would be hired on one year contracts renewable annually for the duration of the project. The PCU would be disbanded at the end of the project.  26 Chapter 3 Credit to Enterprises Unit 3.3 A Credit to Enterprises Unit (CEU) would be established in the PCU to manage and administer the IDA credit to enterprises through accredited PBs. The CEU would be staffed by four full time national professionals and one international advisor and have the following responsibilities: (a) prepare quarterly reports for the PCU and IDA on the status of PBs, using information from the NBG's supervision department to monitor the banks' compliance with eligibility criteria, as described in para. 3.23; (b) maintain the project's accounts for the Credit to Enterprises component and provide administrative services, including monitoring the flow of funds. The CEU would prepare quarterly reports providing details of funds channeled to PBs, sub-loans outstanding, and the status of repayments; (c) ensure that sub-loans to enterprises comply with environmental and onlending criteria for the Project; and (d) promote the line-of-credit to agro-processing enterprises by encouraging them to use the services of the Georgian Private Investment Center, providing them with limited direct assistance in the preparation of business plans and loan applications, and encouraging PBs to finance agriculture related sub-projects. 3.4 The CEU would be headed by a nationally recruited individual with relevant experience in banking and industry. It would be staffed with the necessary experienced national staff and one internationally experienced adviser. The Terms of Reference of the CEU and its national and internationally recruited experts are included in Annex C. The foreign expert would be a banking specialist who would assist the CEU to accredit the banks, monitor their operations, and set up the system to administer and manage the credit on-lending function. Training of the CEU staff would be funded under the project. 3.5 Thefunctions of the CEU and its management of the CE component, as described in paras. 3.3 -3.4, were agreed to during Negotiations (para. 5.2 (d)). Georgian Investment Promotion Center 3.6 A Georgian Investment Promotion Center (GIPC) has been established and legally registered in Georgia, and will receive financial assistance from UNDP. This center will promote and facilitate new investments in existing and new industries in Georgia. If UNDP elects not to finance this center, or the center is not achieving the desired results, the project management would need to increase the capacity of the CEU to fill this role. The GIPC would assist enterprises to secure loans and equity capital through screening, assessment and preparation of projects and investment proposals. The CEU would engage one full time national expert who would work closely with GPIC. In addition, the CEU's expert would:  Project Implementation 27 (a) meet with potential borrowers and perform a quick diagnosis of their technical assistance needs and provide them with a "short-list" of pre-qualified Georgian consultants who could assist them in the preparation of business plans and loan applications; and (b) promote the credit line to potential borrowers, particularly agribusiness companies, and encourage the PBs to participate and market the credit funds. Credit Union Development Center 3.7 The CUDC has been established as a regulatory body for CUs. Until such time as a decision is taken on the long term status of CUDC, it will be a division of the PCU and the management of the CUDC will report directly to the manager of the PCU. As part of its oversight function, the CUDC would carry out prudential supervision of the operations of CUs, and develop principles and guidelines for licensing, monitoring and inspection, accounting and auditing requirements, and operating policies and standards. It would also regulate the growth in the number of CUs formed and manage the technical assistance for the CU component. Since rural credit unions are new to Georgia, the approach adopted in this Project is to incorporate the design and pilot phase into the project itself. This will be followed by an expansion of the program as the absorptive capacity permits. The experience of the Albania Rural Poverty Alleviation Project (1993) and the subsequent Rural Development Project (1995) would suggest that "learning by doing" approach to the development of a rural credit union system is highly successful. The process of developing credit unions is as follows: (a) A Presidential Decree has been signed, providing the legal basis for CUs and the CUDC. Minimum prudential requirements have also been established. (b) The CUDC would adopt an operations manual, acceptable to IDA, that would specify the CUDC's operating procedures, registration procedures applicable to CUs, and the terms and conditions of grants and loans to CUs. A large number of the supporting documents have been developed already, such as model bylaws, a savings policy, accounting forms, loan instructions and other contracts. The adoption of an operations manual by CUDC would be a condition of disbursement for the CU component. (c) For a period of two years, the CUDC will supervise and assist CUs to get established, and adapt and improve both its own operating procedures and prudential requirements and those of the CUs. (d) On the basis of the first two years of experience with rural CUs, a law on rural Credit Unions will be drafted and submitted to Parliament, and a decision will be made on the permanent role and status of the CUDC. 3.8 The future role of CUDC would be determined after a significant number of CUs are established and it has demonstrated its effectiveness in oversight responsibilities. Some of the alternatives that could be considered in a later phase are: (a) converting CUDC into an APEX financial institution to link CUs with the financial sector, and to provide interlending among CUs; (b) transforming the CUDC into a national cooperative bank serving the financial needs of individual  28 Chapter 3 farmers and small businesses in the community; and (c) empowering the CUDC as a free-standing regulatory and supervisory state agency. 3.9 In collaboration with national organizations such as rayon and village offices, farmers' associations and employers, CUDC would work to promote and publicize the idea of CUs by adopting an experimental and participatory approach. It would also organize training programs for key members of the CUs, including overseas study tours to learn from the experience of other countries. All CUs participating in the project would be expected to sign a participation agreement indicating their readiness to abide by CUDC's rules and regulations. CUDC's duties would include the following: (a) promote the establishment of CUs in rural areas; (b) guide and assist CUs in preparation of by-laws statutes and other legal documents required for registration and licensing; (c) prepare all operational guidelines, legal documents, ledgers, vouchers, accounting records, etc. and any other documents required for the operation of a CU. These would be adopted and uniformly applied by all CUs; (d) provide technical assistance and guidance, including special training programs and on- the-job training for elected officials and managers/accountants; (e) regulate the operations of the CUs, and ensure compliance with statutes, prudential regulations and operational guidelines; (f) establish eligibility for supplementary loans to CU's, prepare subsidiary loan agreements between CUs and MOF; (g) manage the activities of the Administrative Bank (para 3.13); (h) collect principal and interest due on supplementary loans (SL); (i) evaluate eligibility for administrative grants and submit disbursement requests to IDA; (j) maintain a data base with complete and up-to-date financial and statistical information on CUs; and (k) perform supervisory and regulatory functions as required, and intervene when problems arise in the operations of a CU. 3.10 The estimated cost of CUDC's establishment and the first five years of its operations is US $885,000 (see Annex C for details). These costs are being funded by the Government out of the proceeds of the PPF (during 1996), and the combined IFAD-IDA credits thereafter. At the end of the project, CUDC's operating costs are expected to be fully covered through charges/fees from the CUs that have received CUDC services.  Project Implementation 29 3.11 During the project period, CUDC's head office staff would include a manager, about eight credit specialists, an accountant, and support staff. In addition to head office staff, CUDC would establish regional representation by posting credit unions development officers (DO) in rural centers. In 1996, two DOs were working in rural areas selected by CUDC after carrying out a market assessment and identifying the regions with highest potential and interest of the population in the establishment of CUs. It is projected that the number of DOs could grow to eight during the five years of project implementation; they would be located in about five rural centers. Each DO would be in charge of guiding and supervising no less than ten CUs. 3.12 The CUs would obtain project funds through administrative grants and supplementary loans (paras. 3.32 and 3.34). All supplementary loans would have to be approved by a Credit Committee for Credit Unions consisting of representatives from CUDC, Ministry of Finance and the Administrative Bank. (para. 3.13). 3.13 Administrative Bank. A local commercial bank would be selected on a competitive basis by the CUDC to be the AB. In order to be the AB, a commercial bank would have to meet the same eligibility criteria as are required for PBs under the CE component of the project (para 3.23). The responsibility of the AB would be to disburse funds to CUs on behalf of the MOF and the CUDC, and to receive reflows (interest and principal) from CUs. The AB would not lend its own funds to CUs, nor would it assume any risk associated with the lending. It would receive an administrative fee from the CUDC, which would be determined at the time of selection through competitive bidding. Every three months, CUDC would present to the Credit Committee for CUs, for its approval, a projection of the CUs' demand for supplementary loans during the upcoming quarter. After obtaining the Credit Committee's approval, the projection would be submitted to the PCU who in return would authorize disbursements of the required funds out of the Special Account (para 2.26) to the AB. In addition, the AB would hold, in an interest bearing account, the CUs' insurance funds (para 3.33). Liquid funds of the CUs would be held in the AB or any other commercial banks to be selected by the CUs. The CUDC would negotiate on behalf of the CUs with the selected banks in order to obtain the best possible rates (regarding interest on deposits and fees payable for transactions) for accounts held by a CU. CUs would not be permitted to maintain an account in a bank that has not been certified by the NBG. 3.14 A condition of disbursement for the Credit Union component of this project would be the signing of an Administrative Bank Agreement between CUDC and a commercial bank accredited by IDA for onlending (para 5.4 (a) (i)). Land Registration Unit 3.15 As originally conceived, the land registration component was to have been implemented by a newly created and independent Land Administration Authority (LAA), under the Cabinet of Ministers. Aside from assuming responsibility for land registration and titling, LAA was to assume responsibility for administering the land reform, land valuation and management, leasing of all government lands throughout Georgia, and providing advice on land policy. Unlike the IDA assisted land registration component, which is limited to two rayons, the LAA's mandate would have extended to all of Georgia. Although there are clear benefits from establishing such an authority, given the uncertainties about the disposition of the remaining state lands, the limited amount of IDA resources  30 Chapter 3 available for this component, Government's budgetary constraints, and the need to involve various ministries besides MAFI in the formation of LAA, the creation of such an authority goes well beyond the scope of the present project. It was therefore decided to implement this component of the project through a Land Registration Unit (LRU) to be established in the Department of Land Resources and Cartography (DLRC) of the Ministry of Agriculture and Food Industry. The authority of MAFI to execute land registration is reflected under regulations related to the Land Registration Law (para. 1.10). Whenever the government decides to proceed with the establishment of LAA, the LRU's functions and staff would be transferred to the authority. 3.16 A key to the success of the land registration program is the establishment of a technically competent and administratively strong implementation unit to facilitate the recruitment of qualified staff. To this end, Government has agreed to remunerate LRU's staff outside the Government's normal administrative salary structure. The LRU would be headed by a project manager, reporting directly to the Deputy Minister in MAFI, who would also be the director of LRU. The LRU would have a staff of 10 professionals at headquarters and about 4 professionals to be located in two rayon level offices. LRU would assume responsibility for all procurement activities, overseeing the survey work to be carried out by private national companies, adjudicating land disputes, and administering the land registry at the rayon level. The LRU would conduct periodic checks to ensure that dispute resolution procedures are being followed. If dispute resolution is not being adequately administered, consideration would be given to hiring an independent auditor to monitor dispute resolution problems. An information campaign would be conducted through the radio, television and local newspapers in the two districts concerned to educate the general public. Staff of the LRU would also be required to conduct village meetings in villages a few weeks ahead of the survey team to educate project participants on the survey process. These activities would be funded out of the general LRU budget. 3.17 Both the Agroservices Department of MAFI and the Department of Geodesy and Cartography (DGC) are currently engaged in cadastral surveys. The most significant is DGC, with a technical staff of about 700 surveyors and 100 cartographers. Cadastral surveys require modem survey equipment (a small amount of which DGC has just acquired under a GTZ-assisted Tbilisi Municipal Project), and are best carried out by private survey companies. To assist with the promotion of private surveyors, all survey contracts under the project would be awarded to national contractors following competitive bidding procedures. Several such companies already exist in Georgia and once the project starts, a large number of surveyors from DGC are expected to leave the department and set themselves up as private surveyors. To help these new survey companies, the project would organize training programs for surveyors to be conducted by national trainers who were previously trained under a TACIS-assisted pilot land registration project, and foreign experts to be recruited under the project. The training program would be carried out during the first year of project implementation. Only individuals who have successfully completed the training course would be qualified to bid for survey contracts under the project. Since these newly created firms will lack the required equipment, survey contracts under the project would permit successful bidders to obtain a mobilization advance of up to 25% whenever they demonstrate that the funds will be used to purchase survey equipment. The LRU would retain the equipment title until it has been fully paid through deductions from the contractors progress payments. A similar approach has proven to be successful under a large land registration project funded by USAID in Bulgaria.  Project Implementation 31 3.18 Under the proposed project, each land parcel would be registered separately and allocated a unique identification number. In the absence of experience in Georgia with cadastral surveys carried out by private contractors, it is difficult to estimate with any degree of precision the cost of such work. Cost estimates received from DGC indicate unit prices of about US $40 per parcel and 6 - 8 parcels surveyed per day by one surveying party. Experience from Bulgaria and from World Bank assisted projects in Thailand and Indonesia, along with independent cost estimates prepared for the project, point to a cost of around US $24 per parcel (based on an average of 2 parcels per hectare). In view of this uncertainty, and in an effort to keep costs down, it is proposed as far as practical to limit the survey work to summer houses, villages (i.e. houses and household lots) and privatized farm land. 3.19 Recently introduced legislation requires all farmers in Georgia to annually pay a land tax of about US $18 per hectare of arable and perennial land, and US $1 per hectare of pasture land. Annual collections under this tax would amount to US $22.0 million. The legislation establishing this tax earmarks 5% of all collections for land registration. Annual tax collections in the project area would amount to US $1.36 million per year, and the amount earmarked for land registration would be US $68,000 per year or US $340,000 over a five year period. Aside from the land tax, the Land Registration Law provides for a one time registration fee. 3.20 Allocating all the Land Registration sub-component's cost to the 199,000 parcels to be registered under the project, the registration cost per parcel would be about US $28, and the cost per land owner about US $43 (since the average land holder has more than one land parcel). Taking into consideration one time start-up costs of this project, it is reasonable to limit the cost recovery to the actual cost of the land surveys, mapping, and operations of the two Land Registration Offices. This would reduce the required level of cost recovery, through registration fees and increased tax collection, to US $28 per owner and total collections to about US $3.6 million. In order for the registration process to become self sustaining, it was agreed during negotiations that the US $3.6 million in registration fees and additional taxes to be collected under the project would be retained by MAFI and used to fund an extension of the program to other parts of Georgia. 3.21 A Land Registration Law acceptable to IDA has been passed by Parliament satisfying the condition of disbursement for this sub-component of the project (para 5.4 (b)). Agreement was reached at Negotiations that the Government would levy land registration fees and taxes sufficient to cover the full cost of the registration program and that these fees would be used to extend the program to other parts of Georgia (para. 5.2 (e)). Agricultural Services 3.22 The PCU, in collaboration with MAFI, would be responsible for engaging foreign experts and national counterparts for studies to be prepared under the project. Terms of Reference for additional studies that may be proposed by Government later on would be prepared by the PCU in consultation with the appropriate ministries and departments. A report on the agricultural development strategy and investment program for the next series of investments in the sector would be presented to IDA at the mid-term review. Draft Terms of Reference for priority studies selected by the Government of Georgia are presented in Annex E.  32 Chapter 3 B. Lending Terms and Conditions Accreditation Requirements for PBs 3.23 To be accredited as a participating bank under the project, interested banks would have to meet the following criteria: (a) have an audit of the bank's activities covering one full year of operation, including a portfolio review. All such audits would have to be prepared by an internationally recognized auditor and in accordance with International Accounting Standards (IAS); (b) have sound financial policies, particularly with regard to credit administration and asset and liability management, and a capital structure conforming with NBG's requirements; (c) if considered necessary, agree to engage in an institutional development program that would address operational deficiencies identified in the IAS audit. Assistance in implementing such programs is currently being provided through programs funded by EBRD and TACIS; (d) obtain a Certificate from NBG stating that it has a valid banking license, that the NBG is not aware of any criminal proceeding ongoing against the bank or any shareholders with voting rights in excess of 10%, and that the bank is in compliance with all relevant banking laws and regulations; (e) total assets (as defined under IAS) equivalent to at least US $2 million; (f) a minimum equity capital (as defined under IAS) equivalent to US $500,000; (g) exposure limits to any one borrower as a percent of its IAS equity capital of no more than 25 %; and (h) aggregate exposure limits to insiders (defined as members of the governing bodies of the bank board and/or council of directors and management board), employees in a management position, and shareholders with voting rights in excess of 10%) of no more than 60% of IAS equity capital. 3.24 ExDosure Limit. NBG's regulations limit exposure to a single borrower to no more than 25% of capital. Any balance of existing loans, made prior to a loan proposed for financing under the project would be included in the above exposure limit. PBs would have to make consortium arrangements for projects requiring financing that is above the individual PB's exposure limit. 3.25 At Negotiations agreement was reached that theparticipation criteriafor the PBs would be as described in para. 3.23 and 3.24 (para. 5.2 (f)). Two PBs have signed subsidiary loan agreements meeting the condition for Board Presentation that subsidiary loan agreements be signed between Ministry of Finance and at least two qualified PBs (para. 5.3 (a)).  Project Implementation 33 Lending Terms to Private Enterprises 3.26 Repayment periods of sub-loans would be established on the basis of cash flow projections for each investment but would not exceed the useful life of the goods being financed. In no case, however, would maturities of sub-loans be less than one year or more than five years. The grace period on sub-loans would be a maximum of six months for sub-loans of less than three years and one year for sub-loans of three years and longer. PBs and sub-borrowers would be required to contribute from their own resources not less than 30% of total investment costs, with not less than 10% being provided by the sub-borrower. 3.27 Eligible sub-loans would be made according to lending decisions of PBs who will assess the lending risks. Lending decisions would be based on PB's appraisal and other documentation necessary to assess the technical and financial viability of the proposed investment and the credit worthiness of the borrower. Once a loan is approved by a PB, the loan documentation would be submitted to the CEU for review. The first five sub-loans submitted by each PB, irrespective of size, and all subsequent sub-loans above US $500,000 would be subject to review and approval by IDA. After obtaining the CEU's approval, and, if required, also IDA's approval, funds would be released to the PB. The review process would only determine if the loans made are in compliance with the objectives of the project, that the environmental assessment has been satisfactorily completed, and that the documentation is complete. 3.28 Eligibility for Financing. In order to be eligible to receive loans under the project, sub- projects would have to satisfy the following eligibility criteria: (a) borrowing enterprises must have a private ownership of 51 % or more; (b) financial projections should demonstrate debt service coverage ratio of at least 1.3 over the life of the project, calculated on the basis of the entity's total debt; (c) financial rates of return on proposed sub-projects should exceed 15 %; (d) cash flow is adequate to meet debt servicing; and (e) certification from the relevant local or national authorities that the proposed sub-project meets all environmental laws and standards in force in Georgia. 3.29 Appraisal Methodology. Sub-loan applications would be supported by detailed business plans covering the following: (a) technical feasibility, financial viability, and commercial soundness of the proposed investment. Particular emphasis would be placed in each plan on assessing the availability of raw materials and the export-marketing possibilities for the incremental production of the enterprise; (b) an evaluation of the proposed scale of the sub-project, the need for, and adequacy of, civil works and equipment to be financed, the location of the enterprise, its layout and design and the estimated investment costs in domestic and foreign currencies;  34 Chapter 3 (c) an environmental assessment certifying that the proposed sub-project would operate within the guidelines set by the relevant authorities; and (d) an evaluation of the sub-borrower's credit worthiness, organization, management and financial structure, and of the technical staff and know-how available for implementing and operating the sub-project. 3.30 PBs would be responsible for evaluating the loan applications submitted to them by enterprises. Loan evaluation procedures would include, as applicable: (a) review and assessment of the viability and financial soundness of the enterprise and its capacity to service the loan in convertible currency; and (b) verification that the equipment, spare parts, and materials to be purchased are appropriate and are intended to be used for productive purposes such as the introduction of a new production process, improving marketing and sales, breaking any existing production bottlenecks, increasing the efficiency of an existing process, or improving quality standards. 3.31 Agreement was reached on a standard subsidiary loan agreement that includes the appraisal methodology and terms and conditions for on-lending under the project as specified in paras 3.26 - 3.30 (para 5.2(g)). Eligibility Criteria and Prudential Requirements for Credit Unions 3.32 Eligibility for Administrative Grants. To be entitled to receive the administrative start- up grant, a CU must have at least 30 registered members, 300 Lari worth of paid-in shares and CUDC's approval of it's charter, operational policies, and procedures. Each eligible CU would receive from the project an administrative grant of US $3,000 equivalent. Up to US $800 of the grant would cover establishment expenses, including registration fees and expenses, some office furniture, calculator, safe, initial stock of CU stationery, etc., and the balance of about US $2,200 would cover current expenditures, including the salary of a manager, travel and other office expenses. In order to receive these grants, a CU would be required to sign a Participation Agreement with the CUDC. 3.33 Deposit Insurance Fund. In addition to the administrative grant of US $3,000 each CU would receive an equity contribution of US $2,000 to be used as an insurance fund to cover members' net deposits in the CU. This amount would be retained in an interest bearing, dollar denominated, escrow account for each CU at the AB until such time as the CU has accumulated a total share equity (members deposits) of US $25,000. Prior to reaching this share equity level, the US $2,000 equity contribution from the project, plus any interest accrued, may only be used to pay out depositors, on a prorated basis, in the event that the CU is declared bankrupt by the CUDC. Thereafter, a CU would be permitted to use these funds for onlending. This equity contribution thus serves as a temporary deposit insurance program during the start-up phase of the CU. A study would be initiated by the CUDC under the Project to identify a more comprehensive and self sustaining insurance scheme for deposits held in a CU.  Project Implementation 35 3.34 Supplementarv Loans. Once a CU has been in operation for at least three months, has achieved a total initial share capital of 1,000 Lari, and a membership of at least 50, and provided that CUDC is satisfied that it is properly managed and complies with the guidelines, and prudential regulations, the CU would be eligible to receive a supplementary loan equal to its level of shares (i.e. at least 1,000 Lari) in order to increase its lending potential. During a CU's first year of operation, the ratio of 1:1 (shares to supplementary loan) would not be increased. However, based on CUDC performnance criteria (primarily demonstrating loan repayment performance, size of membership and total shares), this ratio could be increased in the second year to 1:2, and to 1:4 in the third year, and thereafter. Supplementary loans would be disbursed in multiples of 1,000 Lari. In cases where a CU no longer complies with the established ratios (1:1 in the first year), it would be required to bring its account into compliance with the required minimum ratio by repaying a portion of the supplementary loan. The CU's supplementary loans would be administered under a CU subsidiary loan agreement between the CU and the Ministry of Finance and disbursed by an AB (para. 3.13). Each new loan would be subject to review and approval by the Credit Committee for CUs (para. 3.10). 3.35 Exposure Limit to a Single Borrower. A CU's maximum exposure limit to a single borrower would be 10% of the CU's capital (not including supplementary loans and the reserve fund) up to 3,000 Lari. Once the capital exceeds 3,000 Lari, the exposure limit would be 600 Lari or 10% of paid-in capital, whichever is larger. Credit unions could set lower exposure limits and revise the by-laws accordingly. In cases where several members of one household are members of the CU, individual members would be entitled to borrow funds only when each of those individual borrowers has separate sources of income (for example, husband operates a farm and the wife is a teacher). The national currency amounts specified in paras. 3.32-3.35 would be adjusted by the CUDC on a periodic basis to reflect inflation. 3.36 Registration Procedures and Prudential Requirements. All CUs would be registered under the Presidential Decree enabling the establishment of rural credit unions, which was signed in September, 1996. All CUs participating under this Project would be required to sign a Participation Agreement with CUDC, which requires compliance with the prudential regulations established under the Presidential Decree. A summary of the prudential regulations is attached in Annex C. Signing of the Presidential Decree on the Establishment and Development of Rural Credit Unions and the introduction of related prudential regulations, suitable to IDA, was a condition of Negotiations for the Credit (para 5.1 (a)). This condition was met. 3.37 Chart of Accounts. A draft chart of accounts for CUs was developed during project preparation. Currently, an international accounting and auditing firm (Deloitte Touche) is preparing a manual for NBG to convert the present accounting systems of banks to western standards. CUDC will consult and review with NBG and its external consultants before finalizing the CU's chart of accounts. 3.38 At Negotiations agreement was reached that CUDC and the CUs would operate as described in paras. 3.32 to 3.37 (para 5.2 (h)).  36 Chapter 3 On-Lending to Credit Unions and Credit Unions' Members 3.39 Onlending _ the CUs would be denominated in national currency with the foreign currency risk being borne by the Government. The credit risk would be borne by the CU. Interest rates on supplementary loans to CUs would be equal to the average weighted interest rate, for the previous 3 months, of the 30 day funds auctioned under NBG's Credit Auction. Rates on these loans would be adjusted quarterly. Loans would be for a period of two years and are renewable at the end of the two year period if the CU is in good standing with CUDC. CUs would pay interest semi- annually and repay the principal at the end of the loan period. In order to provide the incentive for CUs to actively engage in collection of the overdue amounts, their share capital would be used as collateral for loans received under the project. Members' loans would be considered non-collectible in case of arrears, principal or interest, dating back more than 12 months. 3.40 A subsidiary loan agreement, to be signed between MOF, CUDC and each participating CU, would specify eligibility criteria for borrowers, loan evaluation standards, and principal terns and conditions for sub-loans. Funds would be disbursed to CUs through the AB under authorization from CUDC. Repayment of principal and interest on supplemental loans would also be made to the AB. 3.41 In order to ensure sound lending decisions by the CUs, and to protect their financial viability, CUDC would prepare detailed credit guidelines, to be applied to all lending activities of the CUs, regardless of the source of funds. The CUDC would receive a service fee from CUs to cover its expenses. This fee would be set at a level to cover the actual cost of processing and administering the sub-loans. During the first year of operation, the service fee would be set at 1 %; thereafter the fee would be negotiated annually between CUs and CUDC. 3.42 Lending to CU Members. All lending and share mobilization would be conducted in Lari and be limited to registered members of the CU. During an initial period of at least two years after establishment, CUs would make only short-term loans with repayment periods not exceeding one year. Repayment schedules would generally be set according to the projected cash flow; for example, loans financing inputs for crop production would be repayable soon after harvesting or after the expected date of payment for the produce. Other loans would, generally, be repayable in monthly installments. At least 80 % of the total amount of loans made by a CU would be for production loans and the balance could be for other loans. 3.43 The interest rate to be paid by members would be set to cover the cost of funds to the CU and to defray operating costs. Until a CU can demonstrate to the CUDC that it can cover all its administrative costs and loan loss provisions without grant assistance, the margin over the cost of funds would be at least 1 % per month. Loan applications would be evaluated on the basis of the borrowers' financial and commercial viability, supported by appropriate information requested by the CUs. While commercial-type collateral would be accepted by CUs, every effort would be made to promote group lending principles and group liability for loans. 3.44 Agreement was reached at Negotiations that the terms and conditions of lending by credit unions would follow procedures described in paras. 3.39 to 3.43 (para 5.2 (i)). As a condition for disbursement of the CU component, the CUDC would prepare and adopt an operations manual, satisfactory to IDA, specifying: (a) the procedures to be followed by the CUDC; (b) registration procedures applicable to CUs; (c) terms and conditions of the grants to CUs; (d) the terms and  Project Implementation 37 conditions of the loans provided to CUs, for the purpose of onlending to members; (e) the terms and conditions of the loans to be made by CUs to their members; and if minimum requirements for an operations manual to be adopted by CUs prior to their registration with the CUDC. (para 5.4 (a) (ii)). C. Accounts and Audit 3.45 Separate accounts would be set up for each project component. Accounts of the Credit to Enterprises sub-component would contain detailed records of each loan approved by the PBs, and information on the amount and source of funds disbursed under each sub-loan. Information to be compiled under the CUs' account would include the amount given to each CU and their interest obligations. Separate project accounts would be maintained by the LRU for the Land Registration sub- component. Semi-annual statements of all these accounts would be submitted to the manager of the PCU who would use them as a source of information for management reports on the status of project implementation. 3.46 Independent auditors acceptable to IDA would conduct an annual audit of the project's accounts to be maintained by the PCU and NBG. Certified copies of these audits would be submitted to IDA within six months of the end of the Government's fiscal year. All participating PBs would be subject to annual IAS audits that would be reviewed by MOF and IDA. CUDC would arrange to have the CUs accounts and financial statements audited annually in accordance with international auditing standards by independent auditors. The scope and content of the audits would be agreed in advance with the IDA. Certified copies of the auditors' report would be retained by CUDC for subsequent review by IDA missions and as a source of information for monitoring sub-borrowers' financial performance. The cost of these audits during the first five years would be borne by the project. Agreement was reached on the above at Negotiations (para. 5.2 ()). D. Reporting and Evaluation 3.47 The CEU, CUDC and the LRU would be responsible for monitoring and evaluating the impact of the project. CUDC would review the performance of member CUs through field visits and review of the corresponding accounts and auditor's reports. The CEU would monitor the performance of the PBs and perform random evaluation of sub-projects funded under the project. The LRU would monitor the Land Registration program and the contractors' performance. A baseline survey of existing conditions in the two rayons selected for the Land Registration program was carried out by experts from the Department of Statistics in cooperation with the Institute of Agricultural Economics, with funding provided by the PPF. This survey includes household demographic characteristics, production and financial information. There would also be two follow-up socio- economic surveys as part of project monitoring. These socio-economic studies would monitor inter alia, gender bias in registration, dispute resolution, and the volume of land transactions. Performance monitoring indicators for the project are described in Annex G. 3.48 Reporting. CEU, CUDC and the LRU would prepare semi-annual progress reports to be consolidated by the PCU into a progress report to be submitted to IDA within 60 days of the end of the period under review. These progress reports would include a summary statement of the project's  38 Chapter 3 overall financial status, a brief descriptive section on the accomplishments of each of the project's components, and highlights of problems encountered during implementation. 3.49 Implementation Completion Report. Promptly after completion of the project, the CEU, CUDC and the LRU would prepare a report on the execution of their sub-component, its costs, and the benefits to be derived from the project sub-component. The PCU would consolidate these reports and add a section evaluating the performance of the various institutions who took part in project implementation. The consolidated report would be submitted to IDA not later than six months after the closing date. Agreement of the above as reflected in paras. 3.47 - 3.49 was reached at Negotiations (para. 5.2 (k)). E. Supervision Arrangements 3.50 Due to the experimental nature of some of the components of the project there will be three supervision missions per year for the first two years of the project, of which one each year will be a complete evaluation of all aspects of the project. Changes in project design will be made as a result of these missions, if necessary. There will be two missions per year thereafter. The skill mix of supervision staff would ensure the presence of adequate IDA experts in banking, enterprise development and restructuring, CUs' operations, and land registration, as well as knowledge of Bank/IDA procurement and disbursement rules, as necessary. A mid-term review is planned for June, 1999, or earlier if considered necessary, at which time progress towards meeting Project objectives would be assessed. Resident mission staff will assist with supervision of the project on a continuous basis. A supervision schedule is attached in Annex K. 3.51 IDA's monitoring would focus on: (a) the performance of the CEU and the PBs, including their continued compliance with the eligibility criteria, financial performance and the rate at which they are making sub-loans, as well as the repayments characteristics of such sub-loans; (b) the performance of enterprises receiving sub-loans under the credit line; (c) CUDC's performance, the financial performance of CUs, the extent to which loans by CUs respond to the credit needs of members; (d) the impact of loans by CUs on production and productivity; (e) the rate and cost of parcels' survey and the adjudication of disputes; (f) the rate of land registration, the collection of registration fees and the issuing of titles; (g) preparation of socio-economic surveys to evaluate the impact of the land registration program; and (h) the preparation of studies to improve agricultural services.  CHAPTER FOUR BENEFITS, RISKS, AND ENVIRONMENTAL IMPACT A. Benefits 4.1 The primary beneficiaries of this project are expected to be private enterprises engaged in economic activities related to the rural sector, including agribusinesses, small-scale rural businesses, small-scale private farmers and rural landholders. The line of credit, which would be used primarily by agribusiness companies, is expected to result in large gains in productivity by allowing firms to upgrade their technology and providing them with operating capital. The establishment of CUs in rural areas would benefit both small farmers and small-scale rural businesses by establishing a low cost mechanism for non-collateral based lending. An estimated 46,000 farm owners who live in the project area, 36,000 urban dwellers who received small parcels of land under the land reform program, and 48,000 part time rural residents who received small land allocations during the soviet period would be the main beneficiaries of the land registration component. With an average farm size of 0.9 hectares, most of the farm families are in the bottom half of the income strata in Georgia. Land titling would be a particularly important social safety net for older land owners, who could generate income by leasing their land, knowing that they have secure title. In the longer run, title registration is expected to increase the liquidity of the land market by reducing the cost of land transactions, thus increasing the productivity of small-scale agriculture in Georgia. 4.2 Although the project is expected to generate substantial benefits, it is not possible to measure these benefits with a conventional economic analysis. However, with the removal of financial distortions and subsidies agreed recently under the Structural Adjustment Credit, and with sub-loans to enterprises required to have a minimum financial rate of return of 15%, the project is expected to yield a rate of return higher than the opportunity cost of capital. The project would also have a positive impact on Government's revenues due to the increase in the tax base to be brought about by the land registration program and the improved incomes of both enterprises and farmers. A qualitative list of expected benefits from each of the project's sub-components is presented below. Enterprises: (a) Rehabilitation of enterprises, thus increasing productivity of existing investments; (b) Increase in foreign investments and the creation of joint ventures leading to the transfer of technology to Georgia; (c) Development of a capacity to expand exports, compete in foreign markets, and enable enterprises to be more efficient and productive; and (d) Improvements in the revenue, management, and productivity of enterprises.  40 Benefits, Risks and Environmental Impacts Banks: (a) Development of a capacity to evaluate and administer short-and medium-term loans to enterprises; (b) Improvements in the financial management of PBs; (c) Improvements in the quality of bank intermediation by strengthening: (i) the legal and regulatory environment in which banks operate; (ii) the capacity of the NBG to effectively regulate and supervise banks; and (iii) the institutional capability and capital base of a core group of private banks, enabling them to initiate and expand their term lending; and (d) Normalization of bank interest rates by introducing additional capital into the system and expanding the scope of financial intermediation to include production based enterprises. Credit Unions: (a) Introduction of a sustainable system of providing financial services to the rural sector that has thus far been neglected by financial intermediaries; (b) Accelerating the rate of resource mobilization in the rural sector, thereby providing higher returns on capital to CU members, and lower costs of borrowing; (c) Expansion of economic activities in the rural sector along with an increase in output and productivity of small farms; and (d) Development of the financial management skills of CU officials. Land Registration: (a) Introduction of a system that would facilitate the efficient sale and rent of land at fair market prices, by reducing the cost of land transactions; (b) Improved security of ownership rights to land and property, thereby enhancing the development of a land market, increased land rental markets, and also increased the levels of private investment in land; (c) Development of a more objective and equitable tax base from the records at the land registry; (d) Increased government tax collections without having to increase the land tax rates;  Chapter 4 41 (e) Improved access to institutional credit arising out of the ability to use land and property as collateral; and (f) Introducing a formal, low cost method of resolving land disputes. Agricultural Services: (a) Creation of a framework for agricultural services that can cater to the needs of small- scale private farms; and (b) Identification of priority measures that are necessary to improve agricultural productivity and exports. 4.3 Fiscal Impact. If executed as planned, the fiscal outlay required from Government during project implementation is no more than the US $0.5 million used in the initiation of the land registration component. However, over the five year implementation period for the project, the Land Registration Component is expected to yield US $3.6 million from registration fees and US $0.4 million per annum from the incremental improvement in the rate of land tax collections in the two pilot areas. This would be the result of an increase in land tax collection rate from 50% to 80%. Before the IDA ten year grace period is completed, the cost of the land registration component is expected to be fully recovered. The Credit to Enterprises and Credit Union components are expected to have a significant positive fiscal impact as a result of the spread between the IDA lending rate and onlending rates to commercial banks and CUs respectively. The Credit Union Development Component is expected to result in no fiscal outlays during the five year implementation period of the project and a net cost to Government of about US $1.5 million, after recovery of supplemental loans. The fiscal outlay of the Agricultural Services component of the project is zero during the five year period of the project and US $0.5 million net cost to Government. This cost would be more than compensated for by the Credit to Enterprises and CU components by the end of the ten year IDA grace period. Therefore, apart from the US $0.5 million maximum fiscal exposure initially, the net fiscal impact over the term of the Credit is expected to be positive. B. Risks 4.4 Project-related risks are summarized below: (a) Resurgence of macro-economic instability that could deter enterprises from borrowing and commercial banks from lending. Agreements reached last year under the IMF Enhanced Structural Adjustment Facility and the IDA Structural Adjustment Credit should help alleviate this risk. In the event of a serious regression in the macroeconomic reform program, serious consideration would need to be given to cancelling the credit components of the project. (b) Participating PBs failing to promote the project's line of credit because of inexperience with investment lending. Technical assistance and training to be provided through the  42 Benefits, Risks and Environmental Impacts CEU, special training courses to be organized by EDI, and direct technical assistance from EBRD to four PBs, are expected to decrease this risk; (c) Agro-processing enterprises failing to regain export markets in the FSU and to penetrate new ones in the West. Active promotion of joint ventures with foreign investors that have marketing experience, and training programs for enterprise managers and staff, are expected to help overcome this risk; (d) Inability of the newly created rural CUs to mobilize adequate funding from members and to develop the required management capability. These risks would be addressed through technical assistance and training to be provided by CUDC; (e) The CU concept is not widely understood and therefore may not be accepted in rural areas. Providing critical technical assistance to CUDC, simplifying the operational procedures of CUs, and ensuring that members are in control of the CUs' management should help make them attractive to the rural population and encourage new members to join; and (f) Lack of future commitment and funding by the Government to the introduction of a modern land registration and administration system. The successful completion of the registration program under the present project, and the generation of revenues from registration and land transactions should reduce this risk as the resulting benefits become apparent and increased demand is generated. C. Sustainability 4.5 The project's basic rationale is that the agriculture sector should, over time, become self- sustaining without having to rely on govermnent subsidies and protective measures. Thus, loans to enterprises would be at positive real interest rates, with private banks bearing the full commercial risk. Similarly, loans to members by CUs would be structured so as to minimize current distortions in rural credit by making them positive in real terms and linking interest rates to the cost of funds and to the CUs' operating expenses. Except for an initial grant to help establish the CUs, and funding shortfalls in the CUDC, interest rates would be structured so as to cover all operating costs. Efforts would also be made to establish a foundation of agricultural services based as far as possible on the principle of full cost recovery. 4.6 Over time, sustainability of the land registration program would depend on the capacity to recover the registration costs from land owners and the ability to mobilize the private sector to undertake the survey work. Both of these aspects are an integral feature of the project and if they are successful, it should be possible to make the program self financing and to expand it rapidly to other parts of the country.  Chapter 4 43 D. Environmental Impact 4.7 The project is classified as category "B" in the Bank's environmental rating. Loans to be extended under the project would be primarily to existing enterprises who already possess the required permits indicating compliance with existing environmental regulations. The CEU would assist PBs to confirm that all sub-borrowers have the required environmental permits from the Ministry of Environmental Protection (MoEP). The MoEP is in the process of preparing a National Environmental Action Plan (NEAP) as required by IDA for all IDA-recipient countries as well as reviewing a variety of policies and regulatory standards. The CEU would consult with the MoEP to ensure that enterprises participating in the project comply with existing and new environmental guidelines. The remaining components of the project are not expected to have a detrimental impact on the environment. Land registration would provide the incentives, along with improved access to credit sources, that would make it possible for private farmers to invest in measures that prevent soil erosion. 4.8 A number of manuals for Environmental Impact Assessment (EIA) and Investors' Guidelines for performing environmental due diligence were developed by the Bank for several FSU republics. Similar manuals were also prepared by EBRD and TACIS. Using these manuals as a base, the PCU would prepare a manual suitable for use in Georgia. This manual would provide the guidelines to ensure that each sub-project to be financed under the Credit to Enterprises comply with national environmental laws and regulations. EDI would provide training to commercial banks and PCU staff on the preparation of EIAs. The preparation of a manual acceptable to IDA, and its appropriate use in conducting EIA would be required as part of the documentation to be presented to IDA with the first five sub-loan applications of each PB (para. 3.29). Agreement to that effect was reached at Negotiations (para. 5.2 (1)). E. Poverty 4.9 The Credit Union component, a portion of the Land Registration component and studies to be conducted under the Agriculture Services component are targeted at assisting small private farms. With an average size of 0.9 hectare, most of these farm families are in the bottom half of the income strata in Georgia. Thus, about US $10.0 million, or roughly 38% of the project cost, would be directly focused on poverty alleviation. A baseline study of the socio-economic conditions facing small scale farmers in the two districts included in the Land Registration component has been completed to enable the monitoring of farm incomes, demographics of the farming population, and major constraints facing small-scale farmers. Further monitoring will be done during project implementation. F. Gender Issues 4.10 In the socio-economic study of rural areas conducted as preparation for this project, women were found to have less education than men in the age group older than 60. The rest of the population has benefited from the education policy of the USSR, which gave equal access to education, and 95% have completed secondary school or higher in equal proportion by gender. Of those respondents that had managerial jobs off the farm, 52 percent were men and 48 percent were women. Legally, there are also no impediments to women owning land or having access to credit. Further analysis is required to determine if women defacto have received an equal allocation of land under the  44 Benefits, Risks and Environmental Impacts land reform program. The continued monitoring of socio-economic factors during project implementation would monitor for gender bias in the issuing of titles and take corrective actions if necessary. There is currently no formal credit to small scale farmers in rural areas, but it would also be monitored and corrective action taken to ensure that women have equal access to credit under the program. Evidence from the existing credit unions in Georgia is that a large number of the members are women, and they play an active role in the management of the Credit Unions. G. Participation 4.11 Stakeholders have been involved in the project preparation process. A survey of the socio-economic status of small farmers in the project area was conducted by a local institute as a basis for understanding the views and needs of the rural community. This survey is expected to be repeated during project implementation to monitor the project impact on stakeholders. Pilot Credit Unions, formed using funds from the PPF, were established through community discussions facilitated by the PCU and this is expected to continue during project implementation. The Land Registration component is designed to have local companies conduct the land surveys and have local communities directly involved in boundary dispute resolution.  CHAPTER FIVE AGREEMENTS AND RECOMMENDATIONS A. Agreements Reached Before Negotiations 5.1 The Presidential Decree on the Establishment and Development of Rural Credit Unions was signed and the related prudential regulations, suitable to IDA, were introduced, meeting the condition for negotiation for the project (para 3.36). B. Agreements Reached During Negotiations 5.2 Agreement was reached during negotiations that: (a) all procurement activities under the project would follow the procedures outlined in paras. 2.17 to 2.21; (b) disbursement arrangements will follow the procedures described in paras. 2.23 to 2.25; (c) establishment of the special account will follow the procedures described in para. 2.26; (d) the functions of the CEU and its management of the CE component would be as described in paras 3.3 and 3.4; (e) the Government would levy land registration fees and taxes sufficient to cover the full cost of the registration program and that these fees and taxes would be used to extend the program to other parts of Georgia (para. 3.21); (f) participation criteria for PBs would be as described in paras. 3.23 and 3.24; (g) a standard subsidiary loan agreement specifying the appraisal methodology, interest rates, and the other terms and conditions for on-lending under the project as specified in paras. 3.26 - 3.30; (h) the CUDC and CUs would be operated under conditions described in paras. 3.32 to 3.37; (i) lending terms and conditions for CUs would follow procedures described in paras. 3.39 to 3.43; (j) all projects accounts would be audited as described in paras. 3.45 to 3.46; (k) reporting and evaluation of project activities would be as described in paras. 3.47 to 3.49; and (1) the preparation of an EIA manual which includes operating procedures for its appropriate use in conducting EIA (para. 4.8).  46 Agreements and Recommendations C. Conditions of Board Presentation 5.3 During negotiations it was agreed that the following would be a condition for Board presentation: (a) the signing of subsidiary loan agreements between Ministry of Finance and at least two qualified PBs (para. 3.25). Two PBs have signed subsidiary loan agreements meeting the condition for Board presentation. D. Conditions of Disbursement 5.4 Conditions of disbursement for the Credit are as follows: (a) The are two conditions for disbursement of the Credit Union Component. (i) the signing of an Administrative Bank Agreement between CUDC and a commercial bank accredited by IDA for onlending (para 3.14). (ii) the CUDC would prepare and adopt an operations manual, satisfactory to IDA, specifying (i) the procedures to be followed by the CUDC; (ii) registration procedures applicable to CUs; (iii) terms and conditions of the grants to CUs; (iv) the terms and conditions of the loans provided to CUs, for the purpose of onlending to members; (v) the terms and conditions of the loans to be made by CUs to their members; and (vi) minimum requirements for an operations manual to be adopted by the CU prior to their registration with the CUDC (para. 3.44). (b) a condition of disbursement for the Land Registration component is the passage by Parliamnent of a Land Registration Law (paras. 1.10, 2.11, 3.21). This condition has been met. (c) if the IFAD loan fails to become effective by June 30, 1997, and the Government fails to find alternative sources of funding, IDA would have the option to suspend disbursements under this Credit (para 2.16). E. Recommendation 5.5 Subject to the above assurances and conditions, the project would be suitable for an IDA credit of SDR 10.4 million (US $15.0 million equivalent) made to Georgia, at the IDA standard terms, including 35 years' maturity and 10 years' grace period for repayments.  GEORGIA AGRICULTURAL DEVELOPMENT PROJECT ANNEXES Annex A The Banking Sector Annex B Terms of Reference for the Project Coordinating Unit Annex C Credit Unions Operations and the Credit Unions Development Center (CUDC) (i) Credit Unions and CUDC (ii) Terms of Reference for a Consultant in CUDC (iii) Credit Union Prudential Standards Annex D Land Registration and Titling Annex E Agricultural Services Annex F Credit to Enterprises Unit Annex G Monitoring and Evaluation Annex H Disbursement Schedule Annex I Project Implementation Schedule Annex J Project Procurement Schedule Annex K Project Supervision Plan Annex L Documents in File   Annex A The Banking Sector Introduction 1. An ambitious program of stabilization and structural reforms was launched by the Government in March 1994, with the assistance of the Bank and the IMF. The restructuring of the financial sector was central to this program. The approach of the Government to restructuring the financial sector has been to rapidly privatize all state owned banks, establish a set of prudential regulations to regulate all banks, restrict the activities of non-compliant banks, and implement an agreed timetable for the restructuring of the three Former State-owned Banks (FSBs). Status of the Banking Sector 2. A major weakness in the banking sector has been the distressed financial position of the remnants of the FSBs, which control a significant proportion of the assets in the sector. Diagnostic studies and audits of these banks -- United Georgian Bank (the merged Savings Bank, Industrial Bank,and Exim Bank), Bank of Georgia, and Agro Bank-- show that they have high levels of bad loans. Their poor financial performance can be attributed to their role as state banks, a failure to carry-out adequate risk assessment and creditworthiness analysis of borrowers, and their inability and unwillingness to enforce the collateral liquidation procedures and security collection on non-performing assets. Weak management, inappropriate organizational structures, and outmoded operating systems have also contributed to their current situation. Given the potential economy-wide implications of the failure of one of these institutions, and the implicit guarantees that their deposits carry, the Government has agreed to a timetable of targets which each bank should meet in order to move towards compliance with the NBG prudential requirements. In the last year, two of these banks, United Georgian Bank and Bank of Georgia have made significant progress toward meeting these prudential requirements. Agro Bank has been slower to adjust. 3. Many small, private commercial banks have emerged since early 1992 and have been gaining market share. They currently control between 35 and 50 percent of the total assets in the banking system. There has also been a significant consolidation of the banking sector due to the introduction of NBG's banking prudential standards, including a US$100,000 minimum capital requirement for all banks. As of November 1996 there were 65 banks operating in Georgia compared to 88 in April 1996 and 229 in March 1995. Of the 65 banks operating, 45 have been certified by the National Bank of Georgia. A further decline in the number of banks is expected over the next few years as a result of the continued implementation of the NBG bank certification program and the new US$500,000 minimum capital requirement that will become effective in June, 1998. The impact of such a sharp reduction in the number of banks is not expected, however, to lead to sector-wide systemic risks since most of the liquidated or reorganized banks had very few customers or assets. Assessment of the Banks 4. The Former State Banks: Many of their current problems stem from poor portfolio performance during their tenure in the public sector. These problems have been compounded by poor lending decisions based on inadequate risk assessment policies, failure to carry-out adequate loan  Annex A Page 2 of 3 underwriting and loan servicing procedures, and their unwillingness and inability to enforce collateral liquidation procedures and collection on non-performing assets. It is estimated that over 60 percent of the total loan portfolio of FSBs is non-performing. While two of the FSBs have undergone restructuring and have made significant strides toward meeting the NBG prudential requirements, Agro Bank continues to have major problems with its portfolio and with its capital adequacy. As part of the restructuring process, Bank of Georgia has been fully privatized and the privatization of United Georgian Bank is almost complete. Agrobank is also in the process of being privatized but the Government still owns 27 percent of its shares. Investors and donors are being sought to obtain the necessary funds for the private recapitalization and restructuring of these banks. The equity position of United Georgian Bank improved last year with a significant foreign investment in the Bank. It was also able to write down a significant proportion of its bad debt during 1996. 5. The Private Commercial Banks: Data from the four commercial banks appraised for this project suggest that there are a small but growing number of well managed and sufficiently capitalized banks that could operate profitably under the current difficult environment. As of December 1, 1996 each of the four banks had completed International Accounting Standards (IAS) audits and were found to substantially meet the minimum requirements for participation under the line of credit (para 3.23). These banks will still require heavy technical assistance to bring them up to western banking standards. They will also continue to have IAS audits; undergo improvements in their operating policies and procedures, as required by the conditions of their respective subsidiary loan agreements; and conform with NBG prudential standards. At least four additional banks are expected to convert to IAS auditing procedures in 1997. Strategy for the Banking Sector 6. The banking strategy addresses three sets of issues: (a) the restructuring of the former state banks; (b) preventing non-viable banks from expanding until they have met NBG's prudential requirements; and (c) the strengthening of NBG and its supervisory and regulatory powers. 7. The large size of the FSBs in relation to the private banks and the fact that they carry an inheritance of non-performing loans from their time in the state sector means that a number of additional issues must be factored into the strategy for their restructuring. This strategy is defined by a set of procedural rules ( i.e. IAS audits, portfolio due-diligence, loan work-outs, institutional building, and capital raising) and a timetable for complying with these regulations. In the application of these rules, there is a recognition that the strategy will take time to implement and that these banks may only return to financial health in the medium term, if at all. During this restructuring period the NBG might be placed in a position of having to provide ad-hoc financial intervention until these problems are resolved. 8. The strategy for the restructuring of private commercial banks will be the strict enforcement of minimum capital and prudential standards thus raising the standards of the banking system. This will be achieved through (a) strengthening of NBG bank certification procedures; (b) introducing IAS audit and portfolio due-diligence requirements; (c) enforcing strict compliance with prudential rules and regulations; and (d) providing training for banks in loan analysis and credit administration designed to prevent the re-emergence of a large number of non-performing assets. The liquidation and merger of smaller banks will result from the need to increase minimum capital requirements and  Annex A Page 3 of 3 improve management, and NBG should to continue to force small banks that persistently disregard critical prudential standards into liquidation or merger with stronger banks. Banks where the capital position and the receptivity of management to change is acceptable should be given access to ad-hoc forms of technical assistance and training, to be provided by the multi-national lenders and donors, to strengthen individual features of bank operations. Support for Structural Reform 9. The NBG Law, developed with the assistance of the IMF, was approved in June, 1995. However, the ability of NBG to conduct an independent monetary policy remains a critical issue. Article 3 of the new NBG law, which deals with the independence of the National Bank, needs to be strengthened. Other amendments to strengthen the NBG law relate to accounting and reporting issues, and the removal of provisions in the Constitution that deal with the power of Parliament to approve or disapprove NBG reports. 10. Legal reform in the banking sector continues to be a high priority. A new Commercial Banking Law has been approved. The previous Commercial Banking Law had a number of deficiencies in NBG's supervisory powers, specifically the imposition of its prudential rules, sanctions and enforcement procedures, as well as the resolution of failed banks. Similarly, approval of the draft bankruptcy law for banks is desirable as it addresses issues of liquidating banks and financial institutions. The approval of a bankruptcy law for banks is of particular importance in view of the large number of banks that have had their licenses withdrawn and would have to be liquidated. 11. Accounting reform at the NBG and in the commercial banks is in progress. International Accounting Standards audits have been completed for the NBG and the at least four commercial banks. The number of Banks completing IAS audits is expected to double in 1997. This will be important for the future transparency of the banking sector. 12. The pavments and clearing system in Georgia has improved significantly. Initially it had involved cumbersome paper documentation processing but has since moved to an electronic mail system. The next step will be to transform this into a more efficient and cost-effective telecommunication-based system. Such a system is currently being installed under a USAID funded project, and draft regulations for the electronic payment system have been prepared.   Annex B Terms of Reference for the Project Coordinating Unit 1. The PCU will be managed directly by the Minister of Agriculture, who in turn will report the activities of the PCU to a sub-committee of the State Committee for Coordination with International Financial Institutions (SCC). The PCU will also be expected to provide information directly to the SCC. 2. The functions of the Project Coordinating Unit (PCU) are to: (a) provide information to, and seek guidance from, the Ministry of Agriculture and Food Industries, the State Coordinating Committee for Coordination with International Financial Institutions, Ministry of Finance and the National Bank of Georgia on all issues concerning progress in project implementation; (b) coordinate the recruitment of foreign and local consultants for implementation of the Credit Unions, Credit to Enterprises and Agricultural Services components of the project; (c) develop a unit within PCU, to be called Credit to Enterprises Unit, to manage the Credit to Enterprises component (for details see Annex F); (d) ensure that the financial accounts of each of the sub-components are audited annually as stipulated in the Credit Agreement; (e) maintain a consolidated account of all the project's components to be available to IDA's supervision missions; and (f) monitor and evaluate the performance and indicators described in Annex F of this report and using these indicators, prepare a semi-annual evaluation report for the Government, IDA and IFAD. 3. The PCU will be composed as follows: (a) a manager; (b) an accountant; (c) a specialist in charge of preparing semi-annual progress report and monitoring and evaluation; (d) a administrative secretary, who would manage the office and recruit short term interpreters and translators as the need arises; (e) a driver; and (f) support staff, including ad hoc consultant for office technology, and a cleaning person.  Annex B Page 2 of 2 4. CUDC would be located in the PCU, until Govemment decides to establish it as an independent agency. The functions of CUDC are described in Chapter IH. The staff of CUDC would be as described in Annex C. The functions of the Credit to Enterprises Unit are described in Annex F. It would be located in the PCU.  Annex C Credit Union (CU) Operations and the Credit Unions Development Center (CUDC) Credit Unions 1. Under the project, about 120 credit unions (CUs) will be established over a period of six years(one year being financed under the PPF) with membership per credit union growing at an average yearly rate of about 43%, and totalling some 34,800 by the end of the sixth year. The estimated level of savings per member is projected to increase from US $50 in the first year to US $180 in the fifth year. Tables I - 3 detail the number of credit unions in operations and grant disbursements during the project period, membership and savings growth, and the level of total borrowing. These tables are based on the following: (a) Each CU will receive an administrative grant of the equivalent of US$ 5,000 of which US$ 3,000 is allocated for organization, start-up operations, and current expenditures. The balance of US$ 2,000 would be retained in a special account in the Administrative Bank (AB) and used as an insurance fund for depositors of a bankrupt CU. Total insurance coverage for any CU will be $2,000. CUs will be eligible to receive the grant once they have at least 30 registered members, 300 Lari worth of paid-in share capital (members' deposits), and the CUDC's approval of the CU's charter, and operating policies and procedures. The grants will be disbursed over a two year period with US $4,000 being disbursed in the first year and US $ 1,000 in the second year. (b) CUs will be eligible to obtain supplementary loans under the project. These loans will initially be limited to an amount equal to a CU's level of share capital (members' deposits). Once a CU has been in operation for at least 3 months, has a total paid-in share capital of 1,000 Lari, a membership of at least 50, and the CUDC is satisfied that the CU is properly managed and complies with the appropriate prudential guidelines and regulations, the CU may apply for supplemental loans. (c) The ratio of the value of supplementary loans to the value of share capital (members' deposits) will be limited to a maximum of 1:1 in the first year, 1:2 in the second year, and 1:4 in the third year, and thereafter. Credit Union Development Center 2. The function of the CUDC will be to encourage the development of rural CUs, approve onlending to CUs, and ensure that CUs comply with prudential regulations established under the Presidential Decree on the Establishment of Rural Credit Unions. 3. The estimated cost for establishing the CUDC and for covering the first six years of its operations is US $885,000 (CUDC's operating costs prior to Credit signing, will be paid by IDA under the PPF). Of this total, US $630,000 or 71.0% will be for staff; technical assistance and operating expenses, and the balance for equipment, fumiture and supplies. During the project period, the CUDC's staff will include the office manager, up to eight credit specialists, an accountant, and support staff. In addition, the CUDC will establish regional representative units posting credit union development officers in rural centers, who will each be responsible for guiding and supervising at least 10 credit unions. Details of the cost break-down is presented in Tables 4 - 7 of this Annex.  Annex C Page 2 of 7 4. A foreign expert will be engaged to assist the CUDC during the early stages of the project. This expert will assist in preparing standards for appraisal reports of individual loans by CUs. In addition the expert will assist CUDC to prepare other standards relevant to the lending cycle ( e.g. sub-loan supervision check list), consolidated reporting fornats, for all loans granted by the CUs;  Annex C Page 3 of 7 Terms of Reference for a Consultant in CUDC The consultant providing TA to the CUDC, will provide 12 weeks of consulting in the first year and 7 weeks in the second year of operation of the CUDC. This consultant will report directly to the manager of the CUDC. Il. 'The functions of the consultant in CUDC are as follows: (a) assist in preparing standards for appraisal reports of individual sub-loans by credit unions. In addition, the consultant will assist to prepare other standards relevant to the project cycle, e.g. project supervision check list, and shall also prepare consolidated reporting formats for all loans granted by the credit unions. The preparation of standards/formats include procedures to be followed by the credit unions in their use; (b) assist to arrange training for CUDC and credit unions as needed, in activities such as management, accounting, financial and economic evaluations of sub loans, and environment; (c) review the technical supervision conducted by the credit unions of sub-projects financed under the project, and assist the credit unions to identify required skills to conduct technical supervision of the sub-projects, as may be needed; (d) ensure the soundness of CUDC's supervision of credit unions; (e) ensure the minimization of exposure risk in the lending of credit unions, by limiting the percentage of lending to a single borrower and introducing adequate provisions for potential loan losses; (f) assist to maintain in CUDC and the credit unions data base, accounting systems and other information systems for managing and reporting credit; and (g) assist CUDC in advising credit unions regarding their financial management based on the cost of funds and lending interest rate. 2. Experience and qualifications of the consultant should be as follows: (a) MBA or equivalent, with at least 10 years experience in banking activities and solid knowledge of lending and project financing; (b) hands on experience in assessing credit worthiness of individual borrowers; (c) hands on experience in lending to a wide variety of different industries especially micro-industries in the private sector, and (d) hands on experience in working with line of credit to customers and negotiating loan agreements.  Annex C Page 4 of 7 Credit Union Prudential Standards The following minimum prudential standards are to be met by credit union elected officials, managers and employees to protect member savings and external creditors from losses. The Board of Directors is responsible for including these standards in the credit union's internal regulations, the credit committee and the manager for implementing them in the daily operating procedures and the Supervisory Board for verifying the credit union's compliance with them. 1. MANAGEMENT a. Accounts balanced and current (10 days after close of month). b. Loan delinquency reports complete and current (10 days after close of month). c. CUDC supervisory examination completed and recommendations implemented. d. Annual budget prepared and performance evaluated monthly. e. Key ratios calculated and evaluated monthly (per section B, below). f. Written credit and savings policies approved and implemented. g. Written internal control guidelines approved and implemented. All the reports must be prepared based on the uniform reporting format development and approved by the CUDC. 2. ASSET QUALITY a. Loan quality: the sum of reserves plus loan loss provision (allowance) is greater than or equal to the delinquent and refinanced loans. b. Exposure Limit to a Single Borrower: A credit union's maximum Exposure Limit to a Single Borrower is 20% of the credit union's capital up to 3000 Lari, and 60 Lari or 10% of the credit union's capital more than 3000 Lari, whichever is larger. c. Collections: The percent ratio of the amount of repayment collected (principal and interest) to the amount of the total repayment due (principal and interest) must exceed 95%. 3. CAPITAL ADEQUACY a. Protection: Amount of loan loss provision is equal to or exceeds the sum of aged delinquent loan balances weighted according to the following schedule: i 1-3 months: 10% ii 4-6 months: 25% iii 7-9 months: 50% iv 10-12 months: 75 % v 12 month or more: 100% b. Capital Reserves: A minimum 10% of gross income is transferred to the capital Reserve account until this account equals 25% of the share capital; thereafter, the minimum transfer shall be the percentage of gross income not exceeding 10% actually necessary to maintain the ratio of 25% of share capital. 4. LIQUIDITY a. Liquid assets (cash on hand and due from banks plus government securities) are greater than or equal to 20% of total share capital.  Annex C Page 5 of 7 5. BORROWING A credit union can borrow from external sources based on its share capital after the amount of paid-in capital exceeds 1000 Lari, a membership of at least 50 and the credit union has been in operation for at least 3 months. The maximum limits as follows (share capital to amount of borrowing): a. in the first year - a ratio of 1:1 b. in the second year - a ratio of 1:2 c. in the third year - a ratio of 1:4  Annex C Page 6 of 7 Annex C - Tables Table 1. CUs in Operation and Grant Disbursements 1996 1997 1998 1999 2000 2001 New CUs (No.) 10 16 20 24 25 25 CUs in Operation (No.) 10 26 46 70 95 120 Grants Disbursed (US$) 40,000 74,000 96,000 116,000 124,000 150,000 Grants Cumulative (US$) 40,000 114,000 210,000 326,000 450,000 600,000 From 1996 to 2001 grants' disbursements will be US$ 4,000 in year 1, of which US$ 2,000 will be for the insurance fund, and US$ 1,000 in year 2. In 2001 the entire US$ 5,000 grant is assumed to be disbursed in one year. Table 2. CU's Membership and Savings' Growth Rate Years in Operation 0 1 2 3 4 5 Members (No.) 60 90 120 150 180 210 Savings/member (US$) 25 50 75 100 140 180 Total savings (US$) 1,500 4,500 9,000 15,000 25,200 37,800 Incremental savings (US$) 0 3,000 4,500 6,000 10,200 12,600 Borrowings (US$) 1,500 6,000 18,000 24,000 40,800 50,400 Borrowing ratio-K 1 2 4 4 4 4 Table 3. Annual Demand for Borrowings from Project Total New CUs 10 16 20 24 25 25 120 Year/borrowings (US$) 96' 15,000 0 0 0 0 0 15,000 97' 60,000 24,000 0 0 0 0 84,000 98' 180,000 96,000 30,000 0 0 0 306,000 99' 240,000 288,000 120,000 36,000 0 0 684,000 00' 408,000 384,000 360,000 144,000 37,500 0 1,333,500 01' 504,000 652,800 480,000 432,000 150,000 37,500 2,256,300 TOTAL Borrowings (US$) 1,407,000 1,444,800 990,000 612,000 187,500 37,500 4,678,800 Assumptions: To equate borrowing amount with fund availability, total borrowing was reduced to US$ 4,515,000 in Tables 8 and 9. Table 4. CUDC's Staff Position/No. 1996 1997 1998 1999 2000 2001 Manager 1 1 1 1 1 1 Specialists 3 3 4 5 6 8 Accountant 1 1 1 1 1 1 Field OfficeSpec. 2 2 3 4 6 8 Support Staff 3 3 5 5 8 8 Total 10 10 14 16 22 26  Annex C Page 7 of 7 Table 5. CUDC's Staff Salaries and Administrative Expenses (US$) (annual salaries in parenthesis represent the expected cost over the six year period) 1996 1997 1998 1999 2000 2001 Manager ( US$ 7,200) 4,000 7,200 7,200 7,200 7,200 7,200 Specialist (US$ 5,000) 4,000 15,000 20,000 25,000 30,000 40,000 Accountant (US$ 5,000) 0 5.000 5,000 5,000 5,000 5,000 Field Spec.(US$ 5,000) 5,000 10,000 15,000 20,000 30,000 40,000 Support Staff (US$ 4,000) 0 12,000 20,000 20,000 32,000 32,000 TA (US$ 180,000) 0 45,000 30,000 0 0 0 Administrative Expenses 0 20,800 24,800 24,800 24,800 24,800 Total 13,000 115,000 122,000 102,000 129,000 149,000 Table 6. CUDC's Equipment List Item No. of CostV Total Cost Units Unit (USS) (USS) PC & Software 8 4,000 32,000 Laser Printer 2 2,000 4,000 Office Copier 1 10,000 10,000 UPS 2 1,000 2,000 Phone/Fax 1 3,000 3,000 Generator 1 1,000 1,000 4x4 Vehicle 1 15,000 15,000 Vehicle 1 10,000 10,000 Office Supplies LS 10,000 10,000 Office Furniture LS 10,000 10,000 Office Refurbishing LS 20,000 20,000 Sub-total 117,000 Spare parts & maintenace (20%/yr) 6 years 23,000 138,000 Total 255,000 Table 7. CUDC's Total Operating Cost Item USS Staff & Administrative Expenses 630,000 Equipment 255,000 Total 885,000 Table 8. Credit Unions Total Cost Item USS Borrowings 4,515,000 Grants 600,000 CUDC 885,000 Total 6,000,000 Table 9. Annual Disbursements (USS) Item/Year 0 1 2 3 4 5 TOTAL Grants 40,000 74,000 96,000 116,000 124,000 150,000 600,000 Borrowings 15,000 84,000 306,000 680,000 1,300,000 2,130,000 4,515,000 CUDC's Expenses 45,000 222,000 140,000 144,000 156,000 178,000 885,000 Total 100,000 380,000 542,000 940,000 1,580,000 2,458,000 6,000,000   Annex D Land Registration and Titling A. Introduction 1. Two rayons (administrative districts) in the vicinity of Tbilisi were chosen for the Land Registration and Titling sub-component. These rayons (Gardabani and Mtskheta) were selected primarily because of their proximity to Tbilisi, the existence in the area of a large number of parcels belonging to city dwellers, and the work under the TACIS-ITAGA project in Gardabani. Table 1 contains details of these two rayons. 2. Under a European Union-TACIS project for Integrated Technical Assistance to Georgian Agriculture (ITAGA), it was concluded that privatization of agricultural land in Georgia was initiated without proper mapping, titling, registration or supervision. The Bank's Agricultural Sector Review arrived at the same conclusions. TACIS subsequently decided to assist the government to implement an 8,000 hectares trial project for land registration, adjudication and cadastral surveys in one sakrebulo in Gardabani rayon. Objectives of this project are to: (i) develop and test procedures for cadastral mapping, adjudication of land disputes, land registration and land titling; (ii) provide a basis for developing taxation lists; (iii) upgrade Georgia's survey technology; (iv) experiment with the use of private survey companies (v) introduce a system of contract and quality management; and (vi) train staff in the new survey technology and procedures. 3. After a slow start due to budgetary constraints, the project made good progress and was completed by the end of 1996. With the aid of survey equipment purchased under the PPF (see table 2 for details), the project will test different approaches to land registration, train local staff in the use of new survey equipment, prepare contract documents for the purchase of survey equipment, develop contracting procedures and introduce quality management procedures for both private contractors and government experts. Though brief in duration, this pilot project will provide invaluable experience and will permit early and rapid implementation of the Land Registration sub-component. 4. Activities to be carried out under the Land Registration and Titling sub-component would include: mapping; survey and adjudication; registration (at rayon level); and project management. The total estimated cost of this sub-component is US$ 6.0 million (Table 3). A brief description of each of these activities and cost estimates are presented below. B. Mapping 5. During the Soviet period, Georgia established a good network of stable Geodetic survey marks with reliable coordinates. In the project area, the distance between existing geodetic survey marks is between 10 and 15 kilometers. For parcel surveys, even when using geodetic and kinematic GPS, as will be done under the project, the existing density of the survey marks would have to be increased by placing and determining the co-ordinates of a series of reference marks (Rm's). The expanded system of Rm's would be established at a density of approximately 1.0 km intervals. To facilitate this work, it would be necessary to obtain security clearance for use of the geodetic network.  Annex D Page 2 of 16 6. The land registration cadastral maps to be prepared by the project have the potential to be used by all Georgian land related agencies and service providers as a base to which they can add their own information. Similarly the grid chosen for control of the surveys and cadastral maps should provide the spatial reference system for all civilian land related information. For security reasons access to topographic maps and to the geodetic survey and geographic grid on which they are based, is limited to approved persons. The most suitable grid for cadastral and general civilian use is a rectangular grid in meters east and meters north from an agreed origin. It is strongly recommended that a cadastral and civilian reference grid be established in Georgia. The selection of this grid, in cooperation with other interested agencies should be a high priority activity for the LRU. One suitable projection which could be considered is a 6 degree wide Transverse Mercator rectangular grid. However the adoption of one of the various options for a rectangular grid is more important than which grid is adopted. The adoption of a new grid will require recomputation of the co-ordinates of control points. One advantage of a new grid is that the conversion parameters between the existing, (restricted) geographic grid and the new cadastral grid could remain confidential to the Department of Geodesy and Cartography. 7. Aerial photography carried out under the PPF covers an area of 2,800 sq.km, which is somewhat larger than the area of the two rayons (Gardabani and Mtskheta) to be surveyed under the project. The contact photos' scale for the aerial photography is 1:20,000, resulting in a four times enlargement to obtain 1:5,000 rectified photos. To obtain a photo scale of 1:20,000 required a flying height of 10,000 feet with a 152 mm lens. Ten villages were photographed at a contact scale of 1:8,000 to allow for a four times enlargement go give 1:2,000 rectified photographs. Taking advantage of the presence in Tbilisi of a plane engaged in aerial photography for a project funded by the German government, it was possible to carry out this work with funding from the PPF at a cost of US$ 60,000 (US$ 21.4/sq.km). Allocating the cost over the 120,000 ha to be surveyed under the project, this works out to be US$ 0.5/ha. 8. Within those areas where the topography is suitable, the air photographs will be rectified and enlarged to a scale of 1:5,000. It is estimated that with 600 rectified maps, the entire area would be covered. The estimated cost of field control is US$ 40,000 while that of rectifying the maps is US$ 81,000 (US$ 135 per map). To rectify the photos, the project will recommission a Zeiss Rectimat C rectifier at a cost of US$ 13,000. The rectifier is owned and operated by the Department of Geodesy and Cartography (DGC). The total cost of this part of the program will be US$ 134,000 (600xUS$135+US$40,000+ US$ 13,000). 9. Georgia has currently a mix of national topographic maps at different scales. All these maps are very much out of date (most of them were prepared 10 to 20 years ago), and the scales are too small to adequately show individual land parcels. However, the 1:10,000 maps could be enlarged to a scale of 1:5,000. At this scale, they would provide a suitable cadastral index base map for land title registration. Enlargement of the 400 maps required for the project would be carried out by DGC at a cost of US$ 40,000 (US$ 100 per map). 10. The enlarged maps would be superimposed on the rectified aerial photography maps and updated. The estimated cost for 400 maps is US$ 60,000 (US$ 150 per map). Aerial photography of the two project's rayons was funded under the PPF (US$ 60,000). To help prepare the next phase of the land registration program, the project would also finance US$ 400,000 (Table 4) of aerial photography covering other parts of Georgia. A breakdown of the  Annex D Page 3 of 16 cost of the mapping portion of the program (US$ 681,000) is summarized in Table 4. The cost of aerial photography and mapping would be equivalent to US$ 2.34 per hectare for the 120,000 hectares to be surveyed under the project. C. Adiudication and Survey l1. Two approaches to land boundary survey are possible. One is a "General Boundary" approach. This approach is suitable where boundaries between parcels of land are physically occupied on the ground by features such as fences, walls, ditches or banks and where these features are identifiable on an aerial photograph. In the two rayons of Gardabani and Mtskheta, it is estimated that the 94,000 parcels comprising Summer Houses and Rural Families Holdings in Villages, have physically marked boundaries most of which will be identifiable on rectified aerial photographs. It was therefore decided to survey these parcels with "General Boundaries". Using this approach, boundary corners will be identified on the ground and marked on the aerial photographs. Land holders would be invited to join the surveyors and any disputes regarding the location of the boundary will be settled in the field. The boundaries will be digitized from the photographs to determine co-ordinates and areas, and a line-map of all parcels will be produced. Owners who require more precise survey measurements of their boundaries will be free to employ a surveyor to undertake that task. Survey results would subsequently be maintained in a Land Registry Office. The advantages of this approach are low costs, speed and simplicity. 12. The second approach to land boundary survey to be utilized by the project is a "Coordinate Based Field Survey" system. Under this system the dimensions and areas of individual holdings would be measured and calculated and corner markers placed in the ground. With the help of the Geodetic Survey Coordinates, surveyors would determine the boundary coordinates of each parcel. An estimated 105,000 parcels in the two project rayons comprise agriculture land holdings belonging to urban residents and rural families. The boundary of these parcels are not physically marked and will need to be surveyed in the field. Here too, disputes would be adjudicated in the field by the surveyors and the survey results maintained in the Land registry. Both the "general boundary" and the "co-ordinate based" system would have the capability to store the deeds and the parcels' layout in a computer. A system of parcel numbering would be developed to ensure that each parcel is allocated a number that is unique to it. The numbering system will be on a village basis. The estimated cost for field survey and production of titles for general boundaries is US$ 8.6 per parcel (Table 7a) and for co-ordinate based field survey US$ 20.5 per parcel (Table 7b). 13. Land disputes normally occur between owners of adjacent parcels. While such disputes are bound to occur in Georgia, a more frequent source of dispute is likely to find individuals challenging the state, one village challenging another over land to be distributed, and disputes between sakrebulos over boundaries. Such potential disputes arise from the manner in which land was distributed. In many area where the land was divided, there are lists of persons entitled to receive land, though in most cases there are no maps of the privatized parcels, and only 25 percent of the owners have received an "ownership certificate". Recent experience on the TACIS-ITAGA project shows that the existing lists and the certificates contain numerous errors, and it is often impossible to link the certificates to land parcels. In other areas individuals have received parcels but no records have been kept. Under these circumstances, encroachment by individuals into state owned right of way, forest reserves and other public  Annex D Page 4 of 16 lands is becoming a major issue. Without a demarcation of boundaries on a map, resolving such disputes will be cumbersome. Adjudication and acceptance by adjoining landowners (including the State) of the location of boundaries must be finalized before the survey of any parcel can proceed. Initially adjudication will be undertaken by the surveyor in the field after having given due notice to all landholders of the date and time when he will adjudicate a particular dispute. An appointed village representative will be involved in the adjudication process, representing the village interests to minimize encroachment into public lands. In difficult cases where the surveyor determines that further consideration should be given or additional evidence obtained, the surveyor will refer that particular boundary for adjudication at a later date. 14. Using maps prepared under the project, surveyors will survey the agricultural land and the villages, adjudicate disputes and prepare a line map showing all land parcels, together with a parcel number and a list showing the owner and any rights over each land parcel. The holdings will subsequently be registered in a rayon level Land Registration Office. Currently, all survey work in Georgia is being carried out by some 700 surveyors who are employed by DGC. A few private survey firms were established in the past couple of years but these firms are small and lack capital and equipment. On the basis of experience with the development of private survey companies in Bulgaria, it is proposed to contract the survey work to private companies to be established with project assistance. With the knowledge that survey contracts would be awarded to private companies, enterprising surveyors from DGC are expected to leave the department and set themselves up as private contractors. Before becoming eligible to participate in the project, all private surveyors would have to undergo training and be certified (see Section E for details). 15. A total of 50 survey contracts would be awarded under the project. This total includes 24 "Village Contracts" and 26 "Rural Contracts." Each of these contracts will include about 4,000 parcels. Adjudication and general boundary survey under village contracts are estimated to cost US$34,300 per contract (Table 7a), while adjudication and co-ordinate based field survey under rural contracts are estimated to cost US$ 82,000 (Table 7b). These 50 contracts will be let over a period of four years. The tendering will be based on local competitive bidding procedures. Accredited contractors will be expected to post a bank guarantee equal to 5 percent of the contract's value. To assist with the purchase of required survey equipment, contractors could apply to receive a mobilization advance of up to 25% of the contract's value, with the cost being deducted prorata from each progress payment. COG will retain the title to the equipment until it has been fully paid, at which time the title will be transferred to the contractor. 16. It is planned to let contracts for groups of about 4,000 parcels. This will require about 24 contracts for adjudication and general boundary survey (village contracts) at an estimated cost of US$ 34,300 per contract (Table 7a), and about 26 contracts for adjudication and co- ordinate based field survey (rural contracts), at an estimated cost of US$ 82,000 per contract (Table 7b). Experience from the TACIS pilot project is that village contracts are being tendered and completed are at a cost slightly lower than the costs indicated here. These 50 contracts will be let over a period of four years. The tendering will be based on local competitive bidding procedures. Accredited contractors will be expected to post a bank guarantee equal to 5 percent of the contract's value. To assist with the purchase of required survey equipment, contractors could apply to receive a mobilization advance of up to 25% of the contract's value, with the cost being deducted prorata from each progress payment. GOG  Annex D Page 5 of 16 will retain the title to the equipment until it has been fully paid, at which time the title will be transferred to the contractor. 17. It is expected that most of the new private companies will consist of a single survey team. A general boundary team will comprise a lead surveyor, a car and driver and a part-time computer specialist. Including a 43% allowance for social and income tax, the monthly staff cost of a survey team will be US$ 1,850. Details are presented in Table 5a. A co-ordinate field survey team will comprise a lead surveyor, two assistant surveyors, a computer specialist, and a driver with a car. Including a 43% allowance for social and income tax, the monthly staff cost of such a survey team will be US$ 3,300. Details are presented in Table Sb. A fully equipped co-ordinate field survey team may require surveying equipment and materials at an estimated cost of US$ 28,000. Details are presented in Table 6. In most instances, however, surveyors involved in coordinate based field survey are expected to use traditional plane table survey equipment. While the use of such equipment is slower than the rate that can be achieved with more up to date equipment, the accuracy of the survey is just as good and by retaining extra surveyors, contractors could accelerate the process without increasing the cost. 18. Aside from the survey equipment, each contractor would also require access to a digitizer (unit cost US$ 8,000), a plotter (unit cost US$ 9,000) and a dyeline printer (unit cost US$ 15,000). Two sets of each of these items would be purchased, owned and operated by the LRU, with contractors engaged under the project having first claim on the use of this equipment. Annual operating cost of this equipment (US$ 16,000) consists of operators, materials and spare parts. Over the project's life, the cost of purchasing and operating this equipment would be US$ 112,000 (US$ 32,000x2+US$ 16,000x3yrs). Dividing this cost over 50 contracts, the cost per survey contract would be US$ 2,240. 19. Each contractor would be expected to adjudicate and survey 20 parcels per day. (The village contract teams will be using a general boundary approach with the aid of rectified aerial photographs and the rural contract teams would comprise three surveyors, making this feasible.) With 20 working days per month, it will require 10 working months to complete a 4,000 parcel contract. With 199,000 parcels to be registered under the project, 50 survey contracts would have to be awarded in order to register all the parcels in the project area. Supervision of the contractors' work in the field would rest with a Land Registration Unit (LRU) in the Ministry of Agriculture and Food Industry (see paragraph 24 for details). During the first year of the project only a few contracts will be awarded, with most of the LRU's efforts being concentrated on training and developing adjudication procedures. Fifty survey contracts, with an estimated total cost of US$ 2.95 million, would be awarded at the following rate: Rural Contracts Village Contracts Total Contracts (4000 Parcels) (3 Villages) Year 1 4 3 7 Year 2 6 7 13 Year 3 8 7 15 Year 4 8 7 15 Total 26 24 50  Annex D Page 6 of 16 20. A breakdown of the US$ 34,300 and US$ 82,000 estimated cost of a survey contract consisting of 4,000 parcels (approximately 2,000 ha) is presented in Tables 7a and 7b. Survey companies that will be the successful bidders on contracts awarded during year I and 2 of the project, can be expected to win most of the contracts in year 3 and 4 as well. Whenever a survey company fails to win a second contract, it is expected that the company will be able to sell or lease any equipment purchased under the project to another survey company. 21. Survey of parcels in the project area will be based on the recent aerial photos prepared with funding from the Project Preparation Facility. These photos would be rectified and enlarged to a scale of 1:5,000. Existing old maps of the project area would also be enlarged to a scale of 1:5,000. The enlarged maps would be superimposed on the rectified air photo maps and updated. With the aid of these maps, private surveying companies would survey the holdings in the field. Adjudication of disputes would be carried out by the survey teams. Land Registration Offices, one to be establish at each of the two project's rayons, would be responsible for registering the holdings. 22. Priority will be given in the project area to the survey and registration of privatized land and property, and to communal land. Whenever disputes are encountered, they will be adjudicated in the first instance by the survey teams in the field. This will require the close cooperation of all land owners with the registration process. All contractors will receive training in procedures for settling such disputes. Whenever the survey company should fail to resolve a dispute, the disputed boundary would be demarcated on the map for later adjudication. Under the existing practice in Georgia, if the surveyors should fail to resolve a dispute, the next step would be to present it to officials at the sakrebulo (village administration) level. If this too fails, the matter should be referred for decision to a committee appointed jointly by the rayon registration office and the LRU. In every case of boundary adjudication, an aggrieved landowner will have the right to appeal to the court. An appeal system would be established under the proposed Land Registration Law. 23. While the program in the two project districts will be conducted using systematic survey techniques (i.e. surveying groups of adjacent parcels), sporadic surveying (i.e. surveying individual parcels on the basis of demand) will be conducted on a trial basis in other parts of the country. It will be conducted on demand, and the recipient of the title would be expected to pay the full cost of the survey. These surveys will be organized through the LRU. 24. An information campaign will be conducted through the radio, television and local newspapers in the two districts concerned to educate the general public. Staff of the LRU also will be required to conduct village meetings in villages a few weeks ahead to the survey team to educate project participants on the survey process. These activities will be funded out of the general LRU budget. D. Registration 25. A Land Registration Office (LRO) would be established in each of the two project's rayons. These offices would maintain the cadastral database for the area. The database would include the geodetic reference marks, cadastral index maps, cadastral survey of individual land holdings and the coordinates of each parcel. Each office would be equipped to handle the  Annex D Page 7 of 16 registration of all parcels in that Rayon to be surveyed under the project. In order to test the ability the LROs to handle information in a digitized form, the two project LROs will be provided with digital mapping and computer graphics capability. The estimated cost of equipment required to operate the land registration system at the two LROs, together with spare parts for three years, amounts US$ 180,000. Details are presented in Table 8. Three professional staff plus three support staff would be engaged at each of the Land Registration Offices. Operating costs of these two offices over a three year period would be US$ 187,000. For details see Table 9. 26. Once the Government decides to establish a national Land Administration Authority, the LROs will be transferred to the Authority together with their records. E. Proiect Management 27. Overall responsibility for the Land Registration and Titling sub-component of the project would rest with a Land Registration Unit (LRU), to be established in the Department of Land Resource and Land Cadastre (DLRLC) of the Ministry of Agriculture and Food Industry (MAFI). Currently DLRLC is headed by a Deputy Minister who reports to the Minister, and has a technical staff of 20 professionals. Staff of the LRU (for details see below) would be selected from the various government's agencies and ministries whose activities have a bearing on land registration. To monitor and supervise the work of the survey contractors, the LRU would require a complement of survey equipment (Table 10). Staff of the LRU would consist of 10 local experts plus support staff and the unit's total operating costs would amount to US$ 404,000. Additional details are provided in Table 11. 28. An estimated 32 staff-months of technical assistance would be required under the project. Experts to be recruited include a project advisor, a land registration specialists, a digital mapping expert and miscellaneous short term experts. In an effort to contain the costs of this assistance, the project will engage individual experts to be recruited at large. Estimated costs per expert are US$ 8,000 per month salary, plus US$ 4,500 per month allowances and US$ 3,000 per assignment for transportation (see Table 12 for details). The Project Advisor should be recruited under the project and should arrive in Thlisi for about six months commencing in 1997. 29. Training with the aid of local trainers who were trained under the TACIS-ITAGA project, and technical experts to be retained under the ADP, would be provided to selected surveyors from DGC and the private sector. Subjects to be covered under the training program would include the use of survey equipment acquired under the project, adjudication procedures, and business management. Surveyors who have successfully completed the training program would be accredited jointly by the Director of DGC and DLRLC and become eligible to participate in the project as private contractors. F. Cost Recovery 30. Under a recently introduced legislation, farmers in Georgia are expected to pay annually a land tax on all agricultural land. Details of the land tax in the project area are presented in Table 13. According to the provisions of the land tax, 50 percent of all collections  Annex D Page 8 of 16 are earmarked for the GOG's budget, with 10 percent of this amount being earmarked for land registration. The other 50 percent are earmarked for the rayons' budget. Assuming an average tax rate for the entire country of US$ 18.0 per hectare of arable and perennial land, and US$ 1.0 for pastures, annual collections would amount to US$ 20.1 million and US$ 1.9 million, respectively. The share of the land registration in this total would be US$ 1.1 million per year. Out of an annual tax collection of US$ 1.36 million in the project area, the amount earmarked for land registration would be US$ 68,000 per year or US$ 340,000 over a five year period. 31. Aside from the land tax, it is proposed that the draft Land Registration Law should also provide for a one time fee to be collected from all land owners once their land has been registered. Allocating all the project costs of US$ 5.6 million (this excludes the US$ 0.4 million for aerial photography of the next phase of the program) to the 199,000 parcels to be surveyed, the registration cost per parcel would amount to about US$ 28 and the cost per land owner (130,000) to about US$ 43. Expecting land owners in the project area to pay the entire cost of this first phase program is clearly unreasonable. A more reasonable rate would be the actual cost of the mapping, land surveys and the cost of the LROs (US$ 3.6 million). This would be equivalent to US$ 18 per parcel and about US$ 28 per land owner. All holdings in the area would be registered and receive title deeds. Expenses associated with the survey and issuing of titles would be paid by the land owners through registration and increased land taxes. To alleviate hardship, provision may be made for payment of registration fees to be spread over a period of three years. A somewhat lower charge of say US$ 16 per ownership would permit recovery of about 36% of the cost of the project, or 58% of the cost of mapping, land surveys and the LROs. The exact amount of the land registration fees, and the handling of payments made previously for land ownership titles, would be addressed by the Land Registration Unit. G. Benefits and Risks 32. Benefits. Based on other countries' experience with similar land registration and titling programs, the main benefits to be derived from the project include: improved tenure security against unfair land acquisition; ability to sell land at fair market prices; increased access to institutional credit arising out of the ability to use land as collateral; more intensive use of farm inputs; acceleration in the rate of on-farm investments; more efficient land markets and hence improved resource allocation; higher land productivity and beneficiary income; and reduction in conflicts over land rights. 33. The project would also provide the foundation for GOG's long-term land registration and land management program. Over time such a program is expected to foster a more efficient and equitable land market in Georgia in terms of: more efficient and transparent land transactions; reduced risks in land-related investments; mobilization of financial resources through the use of land as collateral; a more objective basis for land valuation and a standardized land information system; and encouragement to longer term investments in land improvements leading to more productive land use. The introduction of an efficient land registration system also has a fiscal impact. Socio-economic studies conducted in various counties show conclusively that the introduction of land registration results in substantial increases in revenues collections. Thus land registration can become a cost effective way to increase government's revenues without raising the unit rates of land taxes and transfer fees.  Annex D Page 9 of 16 34. Although it is impossible to calculate precise benefits for this program, some approximation may be in order. If each beneficiary would pay US$ 28 for a title deed, even a small increase in the land's value as a result of the program would be substantially higher than the cost of registration. For those not interested in selling their land but in obtaining either a mortgage or a loan, the ability to use the land as a collateral would reduce interest rates by a significant amount. For a land owner taking out a two-year loan for US$ 1,000, a reduction of 1.4 percentage point in interest payment would cover the cost of land registration. As for Government, the returns on a subsidy of US$ 3.3 million to land holders in the project area (based on the lowest contemplated charge level of US$ 16 per ownership), would be recovered in about eight years if land tax collections in the area would increase from say 50 percent of the assessed value to 80 percent. Many countries who have instituted similar programs have registered an even higher increase in tax collections. 35. Risks. Implementation of the land registration and achievement of the expected benefits could encounter the following risks: (a) the costs of land registration would be higher than current estimates. Should unit costs nevertheless exceed the present estimates, land owners may be requested to pay additional fees, or the number of holdings to be registered would be reduced; (b) land owners would refuse to pay the land registration fee thereby creating a cash shortage for expanding the program to other areas- with this being a real possibility, it was decided to limit the project to a test program and to set the collection fees' levels below the program's full cost; (c) failure to grant timely security clearance for mapping and survey control network's coordinates for private companies; (d) private contractors would encounter difficulties in managing the new equipment and technology- to safeguard against this risk, the project is based on the use of traditional survey equipment as well as a training and accreditation program in advance of contracts' award. 36. Beneficiaries. An estimated 46,000 farm owners who live in the project area, 36,000 urban dwellers who received small parcels of land under the land reform program, and 48,000 part time rural residents would be the main project beneficiaries. With an average farm size of 0.9 hectare, most of the 46,000 farming families in the area are poor and unable to support themselves solely from farming activities. According to data collected by the socio-economic survey, only 10% of the farm families in the area report that most of their income is derived from farning activities, and for 60% of the respondents, farming income accounts for less than half of the household income. Improved security of tenure and stability to be brought about by the project would support the introduction of small scale industry and expansion of the service sector thereby providing the population with alternative employment opportunities. With the introduction of a land registry, the project would also benefit women in the project area by reducing the freedom of husbands to sell the land without the wives' consent. 37. Socio-economic survey. A base-line survey of the project area was conducted under the PPF in order to establish benchmark for monitoring the project's economic, social and financial impact. The impact of land registration and titling on land use and agricultural production will be determined on the basis of the following data: changes in land tenure and land ownership; land purchases and land leasing; land prices; changes in average size of holdings; land improvements; capital investments; use of agricultural inputs; land use intensity; access to institutional credit; changes in cropping patterns; changes in marketing channels; farm income; and off-farm employment opportunities. The survey will also examined the attitudes of Georgians farmers in the area to land reform and land registration, and assessed their views of future prospects in the agricultural sector. The base-line survey will be followed  Annex D Page 10 of 16 by a similar socio-economic survey to be conducted once 75 % of the registration program has been completed. Salient results of the survey are presented in Table 14.  Annex D - Tables Annex D Page II of 16 Table 1. Existing Conditions in the Project Area Indicator Rayon Gordabani Rayon Mtskheta No. of Sakrebulos 20 10 No. of Villages 40 30 No. of Summer Houses 28,000 20,000 No. of Urban Residents Holdings 21,000 15,000 No. of Rural Families Holdings in Village 30,000 16,000 No. of Rural Families Parcels in Rural 45,000 24,000 Total No. of Holdings 79,000 51,000 Total No. of Parcels* 124,000 75,000 Agricultural Land (ha) 78,100 29,000 Arable & Perennial 46,800 18,800 of which in private hands 16,100 11,600 Pastures&Meadows 31,300 10,200 Other Land (ha) 72,400 51,300 of which in private hands 1,800 1,300 Total Area (ha) 150,500 80,300 * Estimate based on one parcel per summer house and urban residents' holding, and two and one half parcels per rural familys' holding Table 2. Equipment Purchased under the PPF Item No. of Units Cost/Unit (US$) Total Cost (US$) GPS Geodetic Equipment 2 15,000 30,000 GPS Software 1 5,000 5,000 PC & Software 1 5,000 5,000 UPS I 1,000 1,000 A/O Plotter 1 9,000 9,000 Al /A2 Digitizer 1 8,000 8,000 Dyeline/diazo Printer 1 15,000 15,000 Software (operating system, GIS, and survey data processing) LS - 15,000 Spare parts & Freight LS - 22,000 Commission DGC Zeiss rectifier 8,500 Power supply for rectifier 3,500 Photographic film for training 1,000 Total 123,000  Annex D Page 12 of 16 Table 3. Summary Cost Estimates (US$ '000) Component Local cost Foreign exchange Total Cost Aerial Photography (additional areas) 0 400 400 Mapping 193 88 281 Land Surveys 2,014 941 2,955 LRU 331 588 919 Land Registration Offices 167 200 367 Technical Assistance 112 360 472 Contingencies (11%) 300 306 606 Total (US$) 3,117 2,883 6,000 Percent 52 48 100 Table 4. Cost Estimates for Mapping Item No. of Units Cost/Unit (US$) Total Cost (US$) Aerial Photography (project area)* 2,800 sq.km 21.43/sq.km 60,000 Rectification 600 maps 135 81,000 Field Control 400 points 100 40,000 Enlargement 400 maps 100 40,000 Preparation of New Maps 400 maps 150 60,000 Sub-Total 281,000 Aerial Photography (outside project area) 17,000 sq.km 23.53/sq.km 400,000 Total 681,000 *Under the PPF the cost of positioning the aircraft (about US$ 50,000) was paid by GTZ. This explains the difference in the unit price between the project area and the new areas. Table 5a. Monthly Salaries for Contractors' General Boundaries Survey Team Staff Position Salary (US$) Chief Surveyor 800 Computer Specialist 50% 250 Driver and Car 800 Total 1,850  Annex D Table 5b. Monthly Salaries for Contractors' Co-ordinate Page 13 of 16 Based Field Survey Team Staff Position Salary (US$) Chief Surveyor 800 Two Assistant Surveyors 1,200 Computer Specialist 500 Driver and Car 800 Total 3,300 Table 6. Co-Ordinate Survey Team's Equipment Equipment Unit Price (US$) Electronic Total Station 15,000 Computer & Software 4,000 CAD Program 2,000 Laser Printer 2,000 Materials 3,000 Control Markers 2,000 Total 28,000 Table 7a. Cost Estimates for a 4,000 Parcels' General Boundaries Survey Contract (Village Contracts) Item Local costs Foreign exchange Total Cost (US$) Survey Team ($1850 x 9) 12,650 4,000 16,650 1 00% Contractors Profit & Overhead 14,650 2,000 16,650 Joint Equipment 200 800 1,000 Total 27,500 6,800 34,300 Table 7b. Cost Estimates for a 4,000 Parcels' Co-ordinate Based Field Survey Contract (Rural Contracts) Item Local costs Foreign exchange Total Cost (US$) Survey Team ($3,300 x 10) 26,000 7,000 33,000 Equipment (28,000/3 x 1.25) 0 11,700 11,700 110% Contractor's Profit & Overhead 26,300 10,000 36,300 Joint Equipment 200 800 1,000 Total 52,500 29,500 82,000  Annex D Page 14 of 16 Table 8. Equipment Requirements for Two Land Registration Offices (one unit of each item/office) Item Unit Cost (US$) Total Cost (US$) PC & Software 4,000 8,000 UPS 1,000 2,000 Laser Printer 2,000 4,000 Office Copier 10,000 20,000 Land Registration PC 25,000 50,000 4x4 Vehicle 15,000 30,000 Sub-total 114,000 Spare parts & maintenance (20%/yrx3yrs) 66,000 Total 180,000 Table 9. Three Years' Operating Expenses of Two LRO Item Unit Rate Total Cost (US$) Technical Experts (6) US$ 400/m x 36m 86,400 Support Staff (6) US$ 300/m x 36m 64,800 Operating Expenses (2) US$ 500/m x 36m 36,000 Total 187,200  Table 10. LRU's Equipment List Annex D Page 15 of 16 Item No. of Units Cost/Unit (US$) Total Cost (US$) PC & software 1 4,000 4,000 Laser Printer 1 2,000 2,000 Office Copier I 10,000 10,000 UPS I 1,000 1,000 Dyeline/diazo Printer 1 15,000 15,000 Phone/Fax 1 3,000 4,000 4x4 Vehicle 2 15,000 30,000 Plotter I 9,000 9,000 Digitiser 2 8,000 16,000 Digital Map System 1 44,000 44,000 Office Supplies LS 10,000 10,000 Office furniture & storage LS 10,000 10,000 GPS Processing PC & Software 1 5,000 5,000 Misc. Survey Equipment LS 20,000 20,000 Office Refurbishing LS 20,000 20,000 Sub-total 200,000 Spare parts & maintenance (20%/yr) * LS 64,000 x 3yrs 192,000 Total 392,000 *This category includes spare parts for US $120,000 worth of equipment purchased under the PPF(i.e.US $120,000*20%). Table 11. LRU's Monthly and Total Operating Costs Salaries Staff (US$/month) No. of months Total Cost (US$) Project Manager 600 48 28,800 Survey Contract Managers (3) 1,200 36 43,200 Technical Specialists (2) 800 40 32,000 Land Registration Specialists (2) 800 40 32,000 Adjudication Expert 400 37 14,800 Accountant 400 48 19,200 Interpreters (2) 600 48 28,800 Support Staff (8) 2,400 48 115,200 Subtotal 7,200 314,000 Administrative Expenses (local staff) 1,500 48 72,000 Administrative Expenses (TA experts) 1,000 18 18,000 Total 9,700 404,000  Annex D Page 16 of 16 Table 12. Technical Assistance Unit Rate Expertise US$/month No. of Months Total Cost (US$) Project Advisor 10,000 18 180,000 Land Registration 8,000 4 32,000 Digital Mapping 8,000 4 32,000 Miscellaneous Experts 8,000 6 48,000 No. of air trips (12) 3,000 36,000 Local allowances 4,500 32 144,000 Total 472,000 Table 13. Land Tax Rates Rayon Gardabani Land Category Tax/ha Area Total Revenues (US$) (ha) (US$) Arable and Perennial 21.4 46,800 1,001,520 Meadows 3.5 1,263 4,420 Pastures 1.1 30,065 33,070 Total 1,039,000 Rayon Mtskheta Tax/ha Area Total Revenues (US$) (ha) (US$) Arable and Perennial 16.6 8,804 312,150 Meadows 3.0 405 1,210 Pastures 1.0 9,761 9,760 Total 323,120  Annex E Agricultural Services 1. ImRroving the Collection of Agricultural Statistics Obiective. A system of statistical data collection is an essential public good to be provided by Government. Reliable up-to-date statistics are needed for proper decision making and performance evaluation at all levels, starting with government ministries and down to the farm level. Unfortunately, the Georgian agricultural statistical system is in disarray, mainly because of inadequate funding, shortage of equipment, and overlapping responsibilities among several agencies involved in data collection. The 1993 Statistical Abstract has not been published (only a German version exists), the 1994 data are only estimates, and there are no plans to produce definitive data for 1994 or 1995. There was virtually no survey work or field data collection in 1994, and none was conducted in 1995. Another difficulty is that the traditional system of Soviet statistics is inadequate for covering the activities of the new privatized agriculture. A new methodology must be introduced, similar to that used in market economies. The objective of this exercise is to develoR and test a new system. ScoRe of the work. I. Review the current state of statistical data collection in the agricultural sector, paying close attention to the following factors (10% of funds): Available data and quality of information provided by the current system; Scope of, and methods used in, data collection; Present institutional arrangements (Dept. of Statistics and other institutions) for data collection; Technology utilized in the process of data collection; and Financial and human resources available to agencies engaged in data collection; 2. Development of proposal and pilot of the new system of statistical data collection and distribution, covering the following aspects (20% of funds): Assessment of demand for statistical information under market conditions; Institutional arrangements and appropriate methods, techniques and technology to support an improved system of data collection and dissemination; Staff and budget requirements for an improved statistical data system; A phased implementation plan for introducing the new system; and  Annex E Page 2 of 10 Proposals for a training program to upgrade local staff and an assessment of the need for, and cost of, a technical assistance program to help implement the new system. 3. Pilot Program (70% of funds) On a pilot basis, conduct surveys and prepare and agricultural statistics yearbook, with the accompanying detailed instructions on the methods used. Resources Foreign Consultants, 16 person-weeks National Consultants, 40 person-weeks Cost Estimate US$ 100,000  Annex E Page 3 of 10 11. ProRosal on an Improved Research and Extension System for Privatized Agriculture Obiective The breakdown of the system of state collectives and farms and the transfer of almost 50 % of all arable and perennial crop land to private small scale farmers has increased the need for research, extension and farm management advice that is appropriate for private small holders. The newly created small scale private farms must be able to obtain timely and technically appropriate advice on a wide range of farming issues. Most of the human resources required to build a modern agricultural extension service already exist in Georgia in the form of large numbers of well trained and experienced agricultural specialists. In addition, some of the traditional functions of an extension service are performed by a number of formal and informal channels such as TV and radio, farmers' clubs, agricultural associations, local government institutions, and schools. There is a need, however, to rationalize the existing heavily-staffed government extension and research services and to complement this with special training programs. Existing education programs for agriculture, veterinary and farm management services, should be adjusted to accommodate the proposed changes. There is also a need to introduce an incentive system that would encourage the private sector to provide extension services for both smallholders and commercial producers. These incentives should help alleviate the many risks involved in providing such services during the early development stages. The principles and the operational features of this new extension system need to be developed and possibly demonstrated with the aid of a pilot regional program. Georgia was an integral part of the large Soviet agricultural research system, with research activities being conducted by 27 major research institutes. Technical backup and guidance were usually provided through Moscow, which also acted as a clearing house for new ideas and technologies. Currently, the research institutes suffer from an acute shortage of funds and many of them have resorted to using their facilities for commercial activities. Animal health services and sanitary inspection previously provided by the MAFI have now ceased to function. In most instances, the existing systems of education and research institutes meet international standards, but they are undergoing an unprecedented period of budgetary stress that threatens their core activities. Their most important asset, the human capital embodied in scientists and faculty, could be lost if the situation is not corrected soon. The proposed study would address this problem by setting priorities and identifying specific funding options for developing an program agricultural research of public agricultural support services. Scope of the work. I. Review of proposals prepared by various international and local organizations to create a new agricultural research and extension service in Georgia (10% of funds). 2. Prepare a comprehensive program for introducing a research and extension system that supports the development of private sector farms in Georgia, with a particular emphasis on small scale agriculture. Preparation of this program should take into account the following factors: (20% of funds) * . Potential role for the private sector in providing the required extension services, and services that must be provided by the Government;  Annex E Page 4 of 10 Institutional arrangements and staffing requirements for the restructured research and extension service; Budgetary implications of the recommended research and extension system and arrangements for cost recovery of services to be provided by the private sector; Training requirements to upgrade and strengthen the research system and extension services; A timetable for introducing the recommended research and extension system and training program; and Evaluation of foreign technical assistance requirements. 3. Outline a proposal for a pilot regional program to demonstrate the operation of the new system and start implementation of the pilot (70% of funds). Resources: Foreign Consultants, 10 person-weeks National Consultants, 40 person-weeks Cost Estimates: US$ 75,000  Annex E Page 5 of 10 III. Study on Improving the Qualitv of Agricultural Exports Objective Georgia was a major exporter of Agricultural Products to the USSR, but exports have dropped to about 20% of their pre-independence levels. One of the reasons for this decline is increased competition in the Russian market, and the low quality standards for Georgian processed agricultural products. The proposed study would examine the options available to Georgia for promoting higher quality standards for exported goods. Scope of Work Identify the major constraints to the expansion of Georgian agricultural exports and make recommendations to address these problems, inter alia Recommend improvements in the sanitary and phytosanitary standards for agricultural products that meet international standards, thus expanding the potential markets for Georgian agricultural products. Evaluate the benefits of Georgia joining international trade organizations, such as World Trade Organization or International Seed Trade Association. Consider options for promoting Georgian products in international markets, through international promotions, upgrading of trade offices, etc. Examine the transport and loading facilities for exports and make recommendations for improvement. Resources Foreign Consultants, 6 person-weeks National Consultants, 10 person-weeks Cost Estimates US$ 35,000  Annex E Page 6 of 10 IV. Socio-Economic Studies to Monitor the Effects of Land Reform Obiective Two studies, one conducted shortly before the mid-term review and the second after project implementation completion, will be used to monitor the progress of the land reform program. The study will review a broad spectrum of issues related to land reform. Scope of the work 1. Conduct a national survey to ascertain the status of the land reform program. Results from this survey should, inter alia, provide information on: progress in land privatization, leasing of state lands, and the development of land rental and land mortgage markets, the proportion of land held by the private sector, the size of land holdings, the proportion of leased to owned land; information on land titling and dispute resolution; the use of land as collateral; the number of land sales and rentals on titled and untitled land; the distributional effects of land reform, including the impact of the reform on women and elderly; farmers access to credit and inputs; status of public services (health, education, roads); and improvement in productivity. 2. Prepare a report summarizing the findings of the survey. Resources Foreign Consultants, 12 person-weeks National Consultants, 80 person-weeks Cost Estimates US$ 100,000  Annex E Page 7 of 10 V. Training Program for Small-Scale Rural Entrepreneurs Obiective With the privatization of agriculture in Georgia, a majority of ex-employees of state and collective farm are participating in private sector business activity, including farming. While most of these people are well educated and some have good technical agriculture training, they have had little or no exposure to managing a private sector enterprise. The objective of this study is to develop and test a program of business training, both formal and informal, for small scale rural entrepreneurs, including farmers. Scope of the work. 1. Review and evaluate the quality and quantity of existing formal and informal training programs in farm management. 2. Evaluate the management training needs of small-scale rural entrepreneurs. 3. Recommend a management program for small-scale business that would include: Proposals for a training of trainers program; Outline of short and long term training courses (including course curriculum, appropriate text books and training materials, teaching methods, etc.); and Organizational arrangements for delivering the training, together with staffing requirements, budgets, sources of financing; number of persons to be trained and an initial four year training program. Resources: International Consultant, 3 person-weeks National Consultant, 10 person-weeks Cost estimates: US$ 20,000  Annex E Page 8 of 10 VI. Study to Develop a Depositors' Insurance Scheme for Rural Credit Unions Objective The objective of this study is to develop an insurance scheme that would insure a proportion of depositors deposits in the event that a rural credit union is declared bankrupt. Scope of Work 1. Analyze the structure and experience of existing rural credit unions in Georgia and make recommendations on whether a deposit insurance scheme is necessary. If so, recommend the most appropriate program, taking into consideration the moral hazard issues inherent in insurance schemes, and the impact that this would have on the group lending discipline of Credit Unions; the risk of political interference and moral hazard associated with having a government backed insurance program; the lack of a developed private sector insurance industry in Georgia; the effect that an insurance program(or lack thereof) would have on depositor confidence and therefore on the level of deposits collected by CUs; 2. Recommend appropriate institutional structures, laws and prudential regulations for managing the deposit insurance scheme. 3. Conduct a detailed financial and actuarial analysis of the expected risk of default for Rural Credit Unions and appropriate insurance fees needed to cover these risks, in order to ensure that the insurance program is sustainable. Resources: International Consultant, 3 person-weeks National Consultant, 10 person-weeks Cost Estimate: US$ 20,000  Annex E Page 9 of 10 VII Training Program for Agricultural Policy Analysis Objective To train a core team of economists in government and in academia, on the principles of agricultural policy analysis in a market economy. This program would improve the analysis capabilities in Georgia, thus reducing the need for expensive international technical assistance in the area of policy analysis. Scope of Work 1. Organize a series of workshops in Georgia to train a core group of policy analysts in the fundamentals of agricultural policy analysis for a market economy. 2. As part of the training program and in coordination with the training workshops, a series of studies will be prepared by the core group of policy analysts as a training exercise. These studies will cover the areas of Pricing Policy, Budgetary Policy, Agricultural Credit Policy, and Agricultural Taxation and Subsidization. Resources Foreign Consultants, 6 person-weeks National Consultants, 10 person-weeks Cost Estimates US$ 35,000  Annex E Page 10 of 10 VI. Preparation of an Irrigation and Soil Amelioration Program Objective The Irrigation and Soil Amelioration will present concrete proposals for investments. Preparation of this program will build on the British Know-How Fund report prepared in 1996. Scope of Work 1. A program of priority investments in irrigation and soil amelioration will be identified. 2. Each component of the project will gave a complete presentation of the rational for the component; a detailed technical description; and an economic justification. Resources Foreign Consultants, 8 person-weeks National Consultants, 70 person-weeks Cost Estimates US$ 75,000  Annex F Credit to Enterprises Unit Function of Credit to Enterprises Unit (CEU) 1. The functions of the CEU are to: (a) Facilitate the signing of subsidiary loan agreements between MOF and PBs that will onlend funds under the IDA credit line, monitor their on-going eligibility in close consultation with the NBG Supervision Department, and propose remedies and impose corrective measures and sanctions on PBs falling out of compliance with the terms and conditions of the Subsidiary Loan Agreements. (b) Develop and maintain the operating policies and procedures, manuals, database, accounting systems and other information systems for managing and reporting on the line of credit. (c) Facilitate and monitor the technical assistance (TA) and other technical support provided to the PBs. (d) Implement and advise on disbursement and procurement procedures and arrangements, ensuring compliance with IDA rules, and provide disbursement and procurement reports to IDA based on agreed schedules. (e) Maintain the project accounting records, and arrange for regular audits of the project accounts. (f) Monitor repayments of funds on-lent to PBs by MOF under the terms and conditions of the subsidiary loan agreements, and ascertain that the repayments will be available for further on-lending. (g) Confirm that disbursement requests comply with all eligibility requirements, the required legal documents and signatories, and approve requests for disbursements under the project. (h) Conduct post-facto reviews, and report findings to IDA according to specific agreements, on the PBs' accounting of the sub-loans and the utilization of the credit line. (i) Ensure that all other compliance requirements under the IDA line of credit are met. (j) Provide advisory services to agribusiness companies in the areas of business planning and preparation of loan applications.  Annex F Page 2 of 4 Organizational Structure 2. The CEU will be established within the PCU and will report to the Project Manager. The CEU will be staffed by a full time team of four local staff, composed of the Head of the CEU, the Credit Line Manager, Accounting Manager and a support staff. In addition, the CEU will be supported by one foreign advisor who will assist in accrediting PBs, monitoring their on-going eligibility and setting up systems and procedures for managing the line of credit. 4. The duties of the local staff and foreign advisor are as follows: (a) The Head of the CEU will have overall executive and administrative responsibility for the efficient operations of the unit, providing leadership, direction, and guidance to all the CEU's activities under the specified terms of reference. (b) The Credit Line Manager will be responsible for: Ex-post sub-loan eligibility reviews and reporting; Review of the standard sub-loan agreements of the banks with the enterprises; Analysis and consolidation of the sub-loan portfolio performance reporting; Referral to IDA on sub-loan applications requiring its approval for funding; Referral to IDA for disbursement of the loans after proper verification of the documents and the necessary approvals. (c) The Accounting Manager will be responsible for: Setting up the project accounts, accounting system and related documentation controls; Authorizing disbursements to/from the 'special account' based on loan payments; Arranging for IAS audits on all sub-project accounts by an acceptable independent audit firm; Collecting repayments from subsidiary loans; and Reporting, as required, on project disbursement and collection performance under the credit line. (d) Enterprise Manager The enterprise manager will be responsible for: Assisting agribusinesses prepare business plans; Assisting agribusinesses prepare loan applications for the IDA line of Credit; Advise agribusiness companies on available private sector consultants; and Advise agribusiness companies on the availability of the Georgian Private Investment Center. (e) Local Support Staff will include a secretary, and a driver.  Annex F Page 3 of 4 (f) The Foreign Advisor will be responsible for assisting the CEU with: Accrediting the PBs and monitoring their on-going eligibility for participation in the IDA project; Coordinating with other donors and the Government on the technical assistance services being provided to PBs (primarily EBRD and EU TASIS) to improve the institutional development of the banks who are participating and those who wish to meet and comply with the eligibility criteria for participation under the CE; and Compliance reviews of the CE, including compliance with IDA's environmental requirements. Oualifications of the Local Staff of the CEU 4. In general, the qualifications of the local staff of the CEU are as follows: (a) The Head of the CEU needs to have worked in a bank or have a similar type of organizational background, be well respected in the banking and enterprise community, and must have extensive management, operations, and Government and donor coordination experience. (b) The Credit Line Manager needs to be experienced and trained in the project finance and credit structuring and evaluation methodologies. Prior experience in credit administration department, or a strong training in this area, in a commercial bank would be necessary. (c) The Accounting Manager needs to have an accounting degree and practical background, experience, and training in bank accounting preferably under international standards and applications. The Accounting manager will also work closely with the PCU on procurement procedures and practices. (d) Enterprise Manager needs to be an expert in business planning and preparing loan applications for banks. This person should preferably be an agribusiness specialist. (e) The local support staff which will be comprised of a Secretary and a Driver. Cost of Operating the CEU 5. The CEU needs to be fully operational for the duration of the credit line. However, after full disbursement under the CE has been made, the CEU staff will have mainly monitoring activities. The foreign advisor financed by IDA is expected to be in place for 10 person-months during the first two years of the project. Extension of his contract will depend on project's needs and the availability of funds.  Annex F Page 4 of 4 6. The administrative cost for operating the CEU to meet the needs of the IDA Credit is estimated to be as follows: CEU's Administrative Costs Us $ 000 1. Local Staff Salaries (6 persons, to include: Head of CEU, Credit Line Manager, Accounting Manager, Enterprise Specialist, Secretary and a Driver) 200 2. Banking Advisor ( 10 Months) 160 3. Equipment (to include: computer hardware and software, printer and office equipment and supplies, and Car) 40 TOTAL 400 Reporting Requirement of the CEU 6. The CEU will report semi-annually on the sub-loan portfolio performance and progress, and the post-lending review for the compliance of the sub-loans with the terms and conditions as specified in the Subsidiary Loan Agreements. Key reporting requirements include, compliance reviews on environmental rules, disbursements and repayments of the CE, the on-going eligibility of the PBs, status of the technical assistance provided and received by the PBs, and the post-facto reviews of the utilization of the CE.  Annex G Monitoring and Evaluation Summary of Objectives and Key Performance Indicators Overall Objective: Increase agricultural productivity in Georgia by supporting the development of private sector farming and agro-processing. Project Objectives Inputs Outputs Risks and Assumptions Outcomes and Impacts Facilitate the Development of an Credit to Enterprises Agricultural Credit System TA to banks Loans to enterprises* Macroeconomic instability Increased productivity Assistance with business plans Good loan recovery rates for agro-processors that for enterprises* and sound banking practices Interest rate for lending in Lari- borrowed from the credit Line of medium term credit to based loans is unstable due to a facility (measured as a banks thin market in credit auctions rate of return >1 5%)* Credit to Small-Scale Farmers * Fund Mobilization Credit unions are not formed as * Increased number of * TA to rural credit unions and Loans to farmers quickly as expected due to lack small farmers with CUDC Regulatory framework for of demand access to formal credit * Credit Unions formed with Credit Unions (measured as the number operating grants* of CU members)* Pilot the Development of a Land * TA to land registries Establishment of 2 land Demand for titles lower than Increased number of land Registration System to Increase * Contracts for land survey* registries in first year of expected transactions on titled Liquidity of Land Markets project land* * Titles issued* Govemment collection of * Land registration fees registration fees is lower than Increased use of titled collected* expected land as collateral Increase Agricultural Productivity Studies and project proposals Proposal for an Agricultural A strategy and through Addressing Critical commissioned Development Strategy and investment program for Constraints in Agricultural Investment Program based the increasing Services on studies or project productivity in the next proposals completed* phase of agricultural development in Georgia * Numerical targets are presented in the attached table of Monitoring and Evaluation Indicators.  Annex G Page 2 of 3 Project Performance Indicators Indicator Calendar Year 1997 1998 1999 2000 2001 2002 Credit to Enterprises Development Indicator Increased Productivity Measured as Average Rate of Return for Enterprise Loans for >15 >15 >15 >15 completed projects (percent) Output Indicator Sub-loans Disbursed to Enterprises (US$ 0.5 2.0 2.5 3.5 million/year) Input Indicator Business Plans Submitted to PCB's 30 30 30 Credit Unions Development Indicator Rural Population with Access to Credit (Credit Union Membership) 2000 3,900 6,700 10,300 14,600 Output Indicator Total Deposits Held by CUs (cumulative) 69,000 192,000 420,000 817,000 1,450,000 Total Funds Lent by CUs 169,000 600,000 1,500,000 3,200,000 6,000,000 Input Indicator 26 46 70 95 120 Number of CUs In Operation _  Annex G Page 3 of 3 Land Registration Development Indicator Ratio of land transactions, including rentals and >1 sales, on titled vs untitled land Output Indicators Land Registration Fees Collected ($ ,000) 140 280 700 1120 1400 Number of Holdings Registered (,000) 5 10 25 40 50 Number of Contracts Awarded 7 13 15 15 Agricultural Services Investment Program Design Completed I Note: All figures indicate the level to be achieved by the end of the calendar year.   Annex H Page I of I Disbursement Schedule IDA Quarter Disbursement by Cumulative Cumulative Fiscal Year Ending Quarter Disbursement by Disbursement (% (US$ mln) end of Quarter of total) (US$ mln) FY 97' Jun-97 0.3 0.3 2.0 FY98 Sep-97 0.2 0.5 3.3 Dec-97 0.2 0.7 4.7 Mar-98 0.5 1.2 8.0 Jun-98 0.5 1.7 11.3 FY99 Sep-98 0.3 2.0 13.3 Dec-98 0.3 2.3 15.3 Mar-99 1.0 3.3 22.0 Jun-99 0.7 4.0 26.7 FY2000 Sep-99 0.9 4.9 32.6 Dec-99 1.4 6.3 42.0 Mar-2000 1.7 8.0 47.6 Jun-2000 1.5 9.5 63.3 FY2001 Sep-2000 1.0 10.5 70.0 Dec-2000 1.0 11.5 76.6 Mar-2001 1.0 12.5 82.0 Jun-2001 1.0 13.5 90.0 FY2001 Sep-2001 0.8 14.3 95.3 Dec-2001 0.7 15.0 100.0 Mar-2002 0.0 15.0 100.0 1/Includes Refmancing of PPF.   0 r ~~~~~~~~~~~~~~~~~~I 4.> I Q ~ ~~~~~~~~~~~~~~~~~. ....... ........ .... ...... .. ......... ....................... .......... ., ....... , LLE t _ ... _ t~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~. . . .. . . . . . o 1l,sl5l''l",ll!',t,i ,,1',',,c w -~~~~~ ~~~~~~~ I~~~~~~~~~~wl - .~~~~~~~~~~~~~~~~ .~ ~ ~ ~ ~ ~ ~ f Iri ~~~~~~9  .. . ... ... . . . .. .. .. .. .. .... .. ... ....I .. ... ..................... .. .. ... . .. .... ... ... ...' .... ........... ............ ... . .. . .. .... .. .. ... .. ... . . 11'~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~............... ......... *II~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.............. .....  Annex J Page 1 of 1 Procurement Plan: Republic of Georgia - Agricultural Development Project (expressed in US$OOO) Description Type No. of Estimated Procurement Document Invitation Contract Contract contracts cost method preparation to bid signing completion Equipment Equipment for LRU G 3 435 ICB1IS Sep-96 Dec-96 Feb-97 Apr-97 Equipment for LROs G 3 200 IS Dec-96 Jan-97 Jan-97 Feb-98 Equipment for CUDC G 4 255 IS Sep-96 Dec-96 Feb-97 Apr-97 Equipment for CE G 1 40 IS Sep-96 Dec-96 Feb-97 Apr-97 Sub-total 930 Technical Assistance Consultancies/TA CE CF/Cl 1 160 IC Sep-96 Dec-96 Feb-97 Dec-01 Consultancies/TA LRU CF/Cl 6 524 SSF/IC Sep-96 Dec-96 Feb-97 Dec-01 Studies CF/Cl 7 500 SSF/IC Sep-96 Dec-96 Feb-97 Dec-01 Sub-total 1184 Technical Services Boundary Surveys TS 18 1060 NCB Jan-97 Mar-97 May-97 Dec-01 Boundary Surveys TS 32 2220 NBF Jan-97 Mar-97 May-97 Dec-01 Mapping TS 9 245 NCB Jan-97 Mar-97 May-97 Dec-01 Aerial Photography TS 1 444 ICB Sep-99 Dec-99 Apr-01 Dec-01 Sub-total 3969 Credit Line Credit to Enterprises/CU Loans G 12815 NS/IS Jan-97 Mar-97 - Dec-01 Credit to Enterprises/CU Grants G 5400 NBF Jan-97 Mar-97 - Dec-01 Sub-total 18215 Project Operating Cost Sub-total - 1546 PPF PPF - Surveing equipment for LRU G 3 123 IS Apr-96 Jul-96 Jul-96 Jul-96 PPF - Office equipment for PCU G 1 40 IS May-96 Jun-96 Jul-96 Jul-96 PPF - Aerial Photography TS 1 60 IS Jun-96 Jun-96 Jul-96 Dec-96 PPF - Consultancies PCU Cl 6 60 SSI Sep-96 Oct-96 Nov-96 Dec-96 PPF - Project Implementation CF/Cl 4 220 SLF/IC Sep-96 Oct-96 Nov-96 Dec-96 Sub-total 503 TOTAL 26347 Note: Type: G -goods; CF - consulting firms; Cl - individual consultants; TS- technical services Procurement Method: ICB - intemational competitive bidding; NCB - national competitive bidding; IS - intemational shopping; SSF - sole-sourcing of consulting firms; IC - individual consultants   Annex K Page 1 of 1 Project Supervision Plan Approximate Activity Expected Skill Requirement Staff Dates Weeks FY-97 Project start up Task Manager (Economist) 6 4/97 Credit Specialist FY-98 Supervision Task Manager (Economist) 8 8/97 Review overall progress and the Credit Specialist implementation of procurement and Land Registration Specialist accounting procedures Procurement Specialist 12/97 Supervision Task Manager (Economist) 4 Review overall progress Credit Specialist 04/98 Supervision Task Manager (Economist) 4 Review overall progress Credit Specialist FY-99 Supervision Task Manager (Economist) 4 08198 Review overall progress Credit Specialist 12/98 Supervision Task Manager (Economist) 6 Review overall progress Credit Specialist Land Registration Specialist 06/99 Supervision Task Manager (Economist), 12 Review overall progress Credit Specialist, Land Registration Mid Term Review Specialist, Ag. Services Specialist FY-2000 Supervision Task Manager (Economist) 4 12/99 Review overall progress Credit Specialist 06/2000 Supervision Task Manager (Economist) 6 Review overall progress Credit Specialist Land Registration Specialist FY-2001 Supervision Task Manager (Economist) 4 12/2000 Review overall progress Credit Specialist 06/2001 Supervision Task Manager (Economist) 6 Review overall progress Credit Specialist Land Registration Specialist FY-2002 Supervision Task Manager (Economist) 4 11/2001 Review overall progress Credit Specialist 05/2002 Supervision and Implementation Task Manager (Economist), 12 Completion Report Credit Specialist, Land Reform Specialist, Ag. Services Specialist   Annex L Page 1 of 1 Documents in File The following documents are available in project file. 1. Georgia, Agriculture Sector Adjustment Loan, Identification Report, Two Volumes, June 30, 1995 2. Project Preparation Report, Land Reform Component (April-August 1995), by J. G. Price 3. World bank: Georgia - Agricultural Development and Privatization Project, Privatization and Restructuring Assignment, Final Report, Ben Shahar Associates, September 20, 1995 4. Recommendations for Strengthening Agricultural Research, Extension, and Support Services in Georgia, Submitted to the World Bank by Duane Acker, September 30, 1995 5. Agriculture Privatization and Development Project, Credit Component Preparation, Consultancy Report, By J. Peter Marion, October 1995 6. Private/SME Sector and Project Evaluation, Report by Coopers and Lybrand Consultants for European Bank for Reconstruction and Development, May 1996.   MAP SECTION   IBRD 28234 40- 41- 42 4j. 44 i'2 40 GEORGIA AGRICULTURAL DEVELOPMENT PROJECT R t RUSSIAN FEDERATION AND REGtSTRATION PLOT DISTRICS <> BUw WILT-UP URB AN AREA r SELECTED CITIES (D AUTONOMPOUS REPUIBUC (ASSR) CENTERS XJ-, WC f 0 X . x, x, * NAIONALCARlTAL~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~NTNA CPIA N.~~~~~~~~N..N...'1 '. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~RIVERS GLACIER AREAS '3' ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~MAIN ROADS SECONDARY ROADS 42 To ~~~~~~~~~~~ ~~AUTONORMOUS REPUBLIC fASURI BOUNDARIES Sec U~ R K E T />Si;t,t/ ),_g a z Gr:p.rn, , gment:nth 75KILOMET ' A R M E N I A , U.IA N _<9 or an7 endorsement or J {t J A Z E R B A I J A N~~~~~~~~~~~~~~~~~~~~~~~~~~~~F DE RA I0 e a~~~~~ TV ARE V j L z :dre I~IIo,ooye IS S U VRLUEES R E I _ * JSYRIAN ARA5 REP RU