D_m of

The World Bank

FOR O ICIAL USE ONLY

Rqwt N. P-6445-GE

mEI4ORhNDlU AND RECWMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL DEVEPMN ASSOCIATION

TO THE

KXECUTIVE DIRECTORS

ON A

PROPOSED CREDIT OF SDR 12.5 MILLION

TO THE

REPUBLIC OF GEORGIA

FOR A

MNIICIPAL IFRASTRUCTURE REHABILITATION PROJECT

OCTOBER 17, 1994

MICROGRAPHICS

Report No: P- 6445 GEType: MOP

This docment has a reicted disibution and may be ... d by recpies ony n the performnoe ftheir ofWicial duties Its contents may not otherwis be disloosed witout orla auhoizatdon.

CURRENCY EOUIVALENTS(as of August 1994)

Currency Unit = CouponsI = US$0.0001cents

US$1 = 1,500,000

AVERAGE EXCHANGE RATES1,500,000 Coupons = US$1

December 1993 Janu=r 1994 April 1994 July 1994120,000 200,000 1,200,000 1,500,000

WEIGHTS AND MEASURESMetric System

FISCAL YEARJanuary I - December 31

ABBREVIATIONS AND ACRONYMSAgency Independent Agency for Development of Municipal ServicesBMIRP Batumi Municipal Infrastructure Rehabilitation ProgiamEBRD European Bank For Reconstruction and DevelopmentFEC Foreign Exchange CostsGDP Gross Domestic ProductGEF Global Environment FacilityGeorgia Government of the Republic of GeorgiaIBRD lnternational Bank For Reconstruction and DevelopmentICB International Competitive BiddingICZM Integrated Coastal Zone ManagementIDA Intemational Development AgencyIMF International Monetary FundIS International ShoppingLCB Local Competitive BiddingLIB Limited International BiddingLS Local ShoppingMIRP Municipal Infrastructure Rehabilitation ProjectNGO Non-governemntal OrganizationNMP Net Material OutputPIP Project Implementation PlanPMIRP Poti Municipal Infrastructure Rehabilitation ProgramPPF Project Preparation FacilitySIA Scientific Industrial AssociationSOE Statement of ExpendituresSTIP Short Term Investment ProgramTA Technical AssistanceTIAP Tbilisi Immediate Action PlanTMIRP Thili.i Municpal Infrasturcture Rehabilatioan ProgramULSAID United States Agency for International DevelopmentVAT Value Added TaxTCC Technical Coordination Committee

Republc of GeoriaFOR OFFICL USE ONLYMunicidal Infraslructure Rehablitation Project

CTedit and PEoject Summ=ar

Borrower: Republic of Georgia

Executing Agency: The Agency for the Development of Municipal Services

Beneficiaries: Tbilisi, Batumi, Poti, and other municipalities

Credit Amount: SDR 12.5 million

Terms: Standard IDA terms (thirty-five years, including ten years of grace)

Objectives: The project's major short-term objectives include: a) arrestingfurther deterioration and stabilizing critical municipal infrastructureservices evaluated as vital to public welfare in selected Georgiancities; b)improving overall management and delivery of municipalservices in a sustainable, environmentally beneficial manner; and c)reinforcing credibility of local governments through visibleinterventions in key services in order to reinstate public confidenceand ensure social stability. In the longer term, this assistanceprogram will help to build an important foundation for future reformand restructuring efforts aimed at improving overall management anddelivery of crucial municipal services.

Description: The project will have two main components: (a) an infrastructurerehabilitation investment component aimed at protecting essentialexisting infrastructure from further decay and renovating someadditional urgently needed economic and social services. Thiscomponent includes five types of operations: (i) heating andenergy-saving measures for schools and hospitals; (ii) urbantransport; (iii) water supply; (iv) waste water; and (v) solid wastecollection and disposal; and (b) an institutional developmentcomponent aimed at: (i) implementing the project effectively; (ii)initiating a process to develop, over time, local capabilities in suchcritical areas as project and financial management, procurement,investment analysis, and environmental assessment and management;(iii) developing coherent strategies and action programs, mainly atthe local levels, to deliver key municipal services and control oralleviate serious pollution problems along Georgia's Black Sea coast.This would represent a first intervention in Georgia to operationalizestudies and analyses being done by the regional Black Sea Clean-upProgram, financed by the Global Environment Facility (GEF).

This document has a restricted distribution and may be used by recipients only in the performanc oftheir offrial duties. Its contents may not otherwise he disclosed without World Bank authorizatio.

Financing Plan:Law Foreign Tota

(US$ million equivalent)Government 1.4 --- 1.4IDA 1.1 16.9 18.0USAID 0.3 0.3

Total 2.5 17.2 19.7

Estimated IDA Disbursement (by fiscal MOear.(US$ million)

IDA Credit FY 1995 FYW 96 F 198 Y _Annual 4.1 7.8 5.1 1.0

Cmnulative 4.1 11.9 17.0 18.0( : nurs may not ad up ue to rounding)

Economic Rate of Return: Not applicable

Po-verty Category: Not applicable

Closing Date: December 1997

Staff Appraisal Report: Report No. 13543-GE

IBRD 26136 and 26163

MEMORANDUM AND RECOMMENDATION OF THE PRESIDENTOF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE EXECUTIVE DIRECTORSON A PROPOSED CREDIT

TO THE REPUBLIC OF GEORGIAFOR A MUNICIPAL INFRASTRUCTU REHABILITATION PROJECT

I. I submit for youi approval the following memorandum and recommendation on adevelopment Credit to the Republic of Georgia for SDR 12.5 (US$18.0 million equivalent), onstandard IDA terms with a maturity of 35 years, to help finance the rehabilitation of criticalmunicipal infrastructure services in Georgia.

2. Baclground. Georgia is a relatively small country with a population of 5.5 million anda geographical area of 70,000 square Idlometers, situated in the southem part of the Caucasusregion (See Map). The capital, Tbilisi, has a population of 1.5 million. Georgia was the firstof the non-Baltic states to declare Independence from the Former Soviet Union (FSU), on April9, 1991. Formal contacts between the World Bank and the Republic of Georgia (hereinafterreferred to as Georgia) began in March 1992, and the country joined the World Bank in August1992. One year later, in August 1993, Georgia joined IDA. A Country Economic Memorandum,entitled "Georgia, From Crisis to Recovery: Blueprint for Reforms" (Report No. 11275-GZ)was distributed to the Board in May 1993.

3. Soon after its Independence, Georgia became embroiled in political and civil strife. Theconsequences of civil wars have had a devastating effect on the economy and have compoundedthe difficult transition to market orientation. Only relatively recently, since the intensity of armedconflicts abated in late 1993, has the Government been able to refocus its attention on the taskof maintaining law and order and rebuilding the economy. To help in this effort, theGovernment has requested IDA support, first, to arrest further deterioration and possible collapseof basic infrastructure and municipal services in selected cities, and, second, to begin torehabilitate infrastructure and services deemed essential to public health, safety, and morale.The proposed operation has been designed in response to this request and would constitute theBank's first investment operation in Georgia (an Institution Building Loan was approved by theBoard in July 1994).

4. At the time of Independence, Georgia was a relatively well-off Republic with fairly goodgrowth potential. The economy's sources of strength included a well-educated labor force, astrong tradition of entrepreneurship, agriculture and fertilizers, tourism on the Black Sea coast,mineral and natural resources, and production of steel and other commodities. The country'slocation made it a primary transit conduit for goods shipped elsewhere in the Caucasus. Externaltrade, mainly with the republics of the FSU (96 percent of total exports), played a large role inthe economy. Georgia relied heavily on imports of energy from other republics, notably Russiafor electricity and crude oil, and Turkmenistan for natural gas. Imported energy comprised 95percent of the total energy supply in 1992-1993.

5. The conflicts and disruption in payments and trade within the FSU have had a seriousimpact on the Georgian economy. At present, it ranks among the poorest countries of the FSUwith GDP per capita estimated at US$563 in 1993. Between 1989 and 1991, net material product(NMP) fell by a cumulative total of 30%. Although production declines have affected all sectors,the most significant has occurred in construction, where economic activity practically halted in1993. In the same year, agricultural production fell by 42% and industrial production by 21%.

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However, since Georgia has a strong underground economy, the actual decline may beoverstated.

6. The budget deficit was about 28% of GDP in 1992 and 1993; it deteriorated further inthe first quarter of 1994. Inflation accelerated from 80 percent per annum in 1991 to 8,400%per annum in 1993. The Georgian Coupon, introduced in April 1993 at a conversion rate of ICoupon per ruble and proclaimed as the only legal tender in August 1993, virtually collapsedby early 1994 as the rate of exchange for one U.S. dollar rose from about 7,000 Coupons inAugust 1993 to 1,500,000 by the end of July 1994. Increasingly, only Russian rubles and hardcurrencies (mainly the US dollar) are accepted as means of payment.

7. Georgia is largely an urbanized country, with 55 % of the total population living in urbansettlements. Tbilisi, the capital, is the largest city, with a population of over 1.5 million. Thisconstitutes 27% of the total, and 48% of the urban population. The remaining six largest citiesare: Kutaisi (236,000), Rustavi (160,000), Batumi (137,000), Sukhumi (122,000), Poti (75,000)and Gori (60,000). Together with Tbilisi, their population represents approximately 75% of theurban population of Georgia. Due to recent military conflicts in the northwestern region of thecountry, an estimated 300,000 refugees have fled mainly to these large cities, placing additionalstrain on the already burdened municipal infrastructure systems.

8. The country's economic decline has placed the majority of the Georgian population underthe official poverty line. Real wages, which remained practically constant in 1991, have declinedby about 90% over the course of the last two years. Families now spend on average about 80%of their income on food and must rely to a large extent on sources of income other than wagesto cover their basic expenditures. Impoverishment continues to worsen, especially for the mostmarginalized social groups, whose livelihoods rely more heavily on the government's system ofsocial protection and welfare.

9. The combination of economic adjustment and civil war has diverted virtually all financialresources available for municipal services and has created a pervasive lack of maintenance andrepair of basic infrastructure. This has caused public health problems and environmentaldegradation. Central heating was discontinued in many cities during the winters of 1992 and1993 because of deteriorated infrastructure and lack of fuel. Additionally, electricity wasrationed, with more than 12 hours of daily power shutdowns. As a result of these shortages anddeteriorating infrastructure, municipal service delivery systems have been severely interruptedduring the past few years.

10. Bank's Interim Strat4y. The overall aim of the Bank's assistance strategy is to supportefforts to reverse the economic declines of the past few years, help stabilize the economy, andmove to sustainable growth through private sector, market-based orientation. Through the endof 1993, however, given the civil conflict and resulting lack of focus and capacity in thegovernment to implement economic reform, Bank lending was not practicable. Instead, thefocus was on building macroeconomic and sector knowledge and providing limited technicalassistance through Bank missions. Since the beginning of 1994, the situation has begun tostabilize politically and the Government has initiated small-scale enterprise privatization throughauctions and leasing. Most prices have been liberalized, including public transport, bread, andresidential utilities, and the import regime is relatively open. Interest subsidies have beeneliminated and a cash management system has been adopted to limit monthly Government

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expenditures to revenues. Additionally, Georgia has initiated a comprehensive program ofstabilization policies and structural reforms with stringent financial constraints.

11. With the Government's new focus on economic stabilization and reform, the Bank hasinitiated a broader program of lending development and sector work in municipal infrastructure,energy, health, agriculture, transport, and environment. Other vork is about to be undertakenon enterprise reform, including privatization, and the financial sector, augmenting efforts carriedout under the Institutional Building Credit. The Bank organized and chaired an informal donorsmeeting in July 1994, which focussed on the -Government's efforts to put in placemacroeconomic stabilization, structural reform, and planned assistance programs, includingenergy and transport development, ielecommunications, health and education, and municipalinfrastructure. Additionally, an energy donors meeting was chaired by the Bank in August 1994and a consultative group is planned for late November.

12. The proposed Municipal Infrastructure Rehabilitation Project and the recently approvedInstitution Building Credit represent the first steps in helping Georgia progress towards anenvironment of sustained growth and improved living standards for the people. These goals areat the core of the Bank's strategy for Georgia. In a program of two projects per year, the Bankwill also prepare operations in agriculture, to build on the substantial potential for higher value,export-oriented production; in energy, to assist with the rehabilitation of facilities in this crucialsector and; in health, to build on the commitment of the Government to upgrade delivery ofprimary and maternal and child health care. Another project could also support upgrading oftelecommunications systems.

13. Government Strate2y for Municipal Development. The Government has requestedBank assistance for a municipal infrastructure rehabilitation project to help meet urgent needsin key communities. This is part of a wider program of international community assistancerequested by the Government to address humanitarian needs and priority infrastructurerequirements at the local level. The Government program has essentially three aspects: (a)emergency shelter, food, and clothing for refugees and others displaced by war or earthquakes;(b) rehabilitation, on an urgent basis, of essential infrastructure services - heating, water supply,sewerage, urban transport, solid waste disposal -- in major cities and port areas, where most ofthe people live and economic activity takes place; and (c) formulation of a longer-term sti'ategyfor rationalizing municipal services management and delivery.

14. The concentration of economic activities in certain cities, especially Tbilisi, wherethousands of refugees have settled in the last two years, has placed a mounting obligation onpublic authorities to provide infrastructure and basic services. Unmet demand for these serviceshas increased the cost of economic activity for households, commercial users, and theGovernment while also imposing heavy investment and replacement costs which will beincreasingly difficult for the Government to afford. The urban sector is essential to thecountry's economic stabilization effort and future development strategy. However, at present,infrastructure deficiencies, a lack of funds, and weak local institutions seriously constrain theproductivity of labor and investments in Georgia.

15. As part of the overall economic stabilization, municipal governments are beginning toredefine their overall sector strategy and objectives in response to the central Government's planto reduce direct support of urban services, infrastructure development, and the provision of

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shelter which are to be taken over, to the extent possible, by local governments and the privatesector. Simultaneously, the municipal governments are in the process of developing policies inorder to guide investment priorities and cost recovery efforts, and to promote quality andefficiency of services. Notwithstanding certain recent positive developments in this field, thereare still numerous unresolved problems, particularly pertaining to rapidly deteriorating municipalinfrastructure, finance, administrative organization, and human resources which need to bestabilized before the decentralization process can be effectively achieved.

16. Justifigation for IDA Involvemept. Most external donors are focusing their assistanceefforts in Georgia almnost exclusively on humanitarian aid. IDA is the only concessional sourceavailable to help finance programs to reduce deterioration of basic infrastructure services inmunicipalities. Concessional assistance is required because the economic crisis in the countryis severely straining financial resources available for maintenance of basic community services,which are essential for public health and safety, environmental stabilization and effectivefunctioning of the economy.

17. Basic infrastructural services have deteriorated critically m the capital, Tbilisi, and otherkey municipalities such as Batumi and Poti. All 400 schools in Tbilisi were forced to close forthree months during the last two winters because of defective heating systems, a lack of fuel,and poorly insulated buildings. Hospitals were also without heat and hot water. The metrosystem poses dangerous public risks and has been exacerbated by the refugee problem. Asuntreated wastewater and eroding garbage landfills in Poti and Batumi wash into the Black Sea,both human and ecological health are increasingly jeopardized. Indeed, success of theGovernment's economic stabilization effort could well depend on arresting further deteriorationin basic services, restoring public morale, and beginning the long process of municipal servicerehabilitation. Assistance from IDA can thus help stabilize the situation and lay the foundationfor improved future management and delivery of municipal services.

18. It must be emphasized that there is no complete assurance of the long-term sustainabilityof the proposed MIRP. The macroeconomic and structural dialogue is only beginning withGeorgia. However, this emergency-track operation, the timing and priorities of which aredeemed critical to help restore social and economic stability, will also strengthen the dialogueand emerging partnership between Georgia and the Bank. Given the extent of the crisis and theurgent need to prevent further deterioration of essential services, a rapid and innovative projectis justified. Further breakdown in municipal and environmental systems appears unavoidablewithout immediate Bank intervention.

19. Project Objective. The project's three major short term objectives include: a) arrestingfurther deterioration of critical municipal infrastructure services evaluated as vital to publicwelfare in selected Georgian cities; b) initiating a process aimed at improving overallmanagement and delivery of municipal services in a sustainable, environmentally beneficialmanner; and c) reinforcing the credibility of local governments through visible interventions inkey services in order to reinstate public confidence and help ensure social stability. In thelonger term, this assistance program will help provide an important foundation for future reformand restructuring efforts aimed at improving overall management and delivery of crucialmunicipal services.

20. Certain criteria were used in evaluating the priority needs of the municipalities. Thesecriteria included those services: (a) on which the population depends for its health or survival;lb) deemed essential for sustaining labor mobility and economic activity; c) which can bestabilized, reactivated or rehabilitated through provision of spares and/or replacements in arelatively short period; and (d) in which the combination of social disruption and economictransition creates risks of unacceptably high social costs if not remedied immediately; and (e)for which alternative external assistance is not likely to be available in the short-term. Afterconsultation with the Government, three cities were targeted for most of the project assistance-- Tbilisi, the capital, and two key Black Sea port cities of Batumi and Poti; some provision ismade in the project for possible limited assistance for other qualifying cities identified duringthe course of implementation.

21. Project Descriptio . The proposed project has two main components: (a) aninfrastructure rehabilitation investment component and an (b) institutional developmentcomponent as described below.

A. Infrastructure Rehabilitation Investment ComponentThe Infrastructure Rehabilitation component has a total investment of US$15.3 million (basecost), which includes a US$0.3 million advance from the Project Preparation Facility (PPF). Theinvestment program will be divided into the following two phases:

1. Tbilisi Immediate Action Plan (TIAP) (US$3.17 million)The objective of the TIAP is to address the most urgent municipal infrastructure needs in Tbilisi.The proposed elements include: (i) weatherization of all 200 schools buildings and 23 keyhospitals (ie. deemed critical by the municipality based on vulnerable populations; maternityclinics, infectious disease hospital, infants hospital, etc); (ii) installation of dedicated electricitylines to 15 of the 23 hospitals without a continuous supply arrangement; and (ii) essential sparesand equipment for the city metro system.

a) Heating and Energy Services (US$2.11 million)Primary energy conservation investments will be achieved in all 200 schools and 23priority hospitals by replacing damaged or missing window glass and frames and byrepairing exterior doors. Currently, most schools are missing significant amounts of glass(50% or more per school), while wooden window frames have been pilfered for domesticfuel during the winter.

It is anticipated that primary weatherization will reduce the period during which schoolsare closed for the winter by about 6 weeks, based on average winter temperatures (whichrun as low as -7 degrees C during the coldest part of the year). For the past twowinters, the schools have been closed for 12 weeks. As a result of weatherization andthe revised schedule, children will be able to attend school for more days this winter thanin the recent past. These same improvements in hospitals will permit an increase inoccupancy rates through the winter and correspondingly reduce the patient-load incurrently overburdened ambulatory care facilities.

In addition to the weatherization of hospitals, 15 of these facilities will be provided withdedicated power distribution lines from high voltage electrical sources to ensure that theyhave a continuous power supply and are protected from load-shedding occurrences.

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b) Urban Transport Services (USW'.06 million)Essential spare parts will be procured for the underground metro, trolley, and dieselbuses to reduce safety hazards. The emergency action program is also directed towardimprovements in the central control room, pumping water away from the undergroundelectrical system, returning to service about 20 cars, and providing essential spare partsfor ailing in-service cars.

The Tbilisi Immediate Investment Program will be partially financed by a US$500,000advance (bridge loan) from the Soros Foundation and US$300,000 from a PPF. Bothwill be refinanced upon project effectiveness. This phase will also address urgent needsand accelerate development of local capacity in the areas of procurement and mobilizationof local contractors/consultants. Experience in this phase will be closely monitored andthe lessons learned applied to improve the efficiency and effectiveness of projectimplementation generally.

2. Short Term Investment Program (STU') (US$12.16 million)The STIP will build upon the TIAP and respond to additional urgently identified needs in Tbilisi,Batumi and Poti over a three year period. The STIP includes the following elements:

a) Tbilisi Municipal Infrastructure Rehabilitation Program (US$9.7 million)(i) Heating (US$1.97 million)

Secondary weatherization, consisting of double glazing and roof repairs to becarried out in all 200 schools and 23 hospitals. In addition, those schools orhospitals with existing independent heating systems (50 schools and 14hospitals) will be rehabilitated, or replaced, if necessary.

(ii) Irban Transport (US$3.03 million)For the metro, the assistance will: (a) improve ventilation, pumps, escalators,and electrical substations in the stations to enable dependable service; (b)repair track at strategic locations to keep the operation of trains safe; (c)overhaul a portion of the rolling stock; (d) complete restoration of the centralcontrol system destroyed by fire; and (e) modernize the fare collection systemto eliminate losses in fare box income. For Tbiltrans, the above-groundsystem, the short-term investment will help reinstate 50 vehicles to serviceand repair or maintain existing vehicles.

(iii) Water Supply (US$1.32 million)The short-term investment proposal will finance the purchase of essentialspares, materials and equipment to reduce current stress on the system andensure a more reliable water supply. The program wouId replace essentialequipment (i.e. pumps, motors, switchgear, cabling, chlorination, short waveradio communication equipment, distribution pipework, and servicereservoirs).

(iv) Waste W r (US$0.61 million)Mechanical and electrical installations will be provided at sewage pumpingstations; standby power generation will also be financed along withmaintenance equipment to renovate the sewers (some 40% are in extremely

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poor condition), reduce sewerage flooding in the streets, and enable essentialmaintenance.

(v) Sglid Wasit (US$0.32 million)The project will finance ,ompactor garbage transfer trucks and spare parts tobetter manage waste and reduce the generation of unauthorized dumps, someof which are on the hanks of the Kura River and are posing significant healthand environmental hazards.

b) Batumi Municipal Infrastructure Rehabilitation (US$2.13 million)(i) Waste Water (US$.93 million)

In order to maintain the operational ii1tegrity of existing facilities and mitigateserious public health problems, the project will finance sewer cleaningequipment, renovation of sewers in urgent need of attention, spare parts,suction tankers for the improvement of septic tank emptying services, and theupgrading of 3 sewerage pumping stations.

(ii) Solid Waste (US$0.48 million)In order to stabilize the landfill operation and reduce environmental threats tothe Black Sea, the program will finance landfill and tractor equipment, wastecontainers, spare parts, and possibly river bank stabilization and channelmodification.

(iii) Water SuRy1X (US$0.72 million)The project will finance the refurbishment or provision of pumps and standbygenerator equipment to secure reliability of the city's potable water supplywhen the river intakes are closed; equipment to improve communicationbetween pumping installations and treatment plants; leakage detectionapparatus, and chlorination dosing equipment.

c) Poti Municipal Infrastructure Rehabilitation (US$.95 million)(i) Waste Water (US$.73 million)

To maintain operational integrity of the existing facilities, the project willfinance, most significantly, the refurbishment of four sewerage pumpingstations, vehicles and associated equipment for emptying septic tanks tomaintain an adequate level of services for the majority of people (70%) whoare not connected to a sewerage network.

(ii) Solid Waste (US$0.21 million)To improve the efficiency of solid waste collection and landfill management,the project will finance spare parts for the existing collection and equipmentfor grading and capping existing solid waste with inert materials.

d) Other Municipalities (US$ 1.8 million)During the appraisal process, the Government requested provision in the workprogram for high priority refurbishment of services in other cities. Accordingly,funds are earmarked for projects which may be identified during implementation.

The selection process for choosing such investments would be consistent with therationale applied during project preparation.

B. Institutional Development ComponentThe project's second component has a total investment of US$ 1.94 million (base cost) whichincludes support to help develop local capabilities and formulate future strategies for themanagement and delivery of key municipal services, including an Integrated Coastal ZoneManagement program to help control serious pollution problems along Georgia's Black Sea coast(see Map 2).

1. Independent Agency for Development of Municipal Services (US$0.26 million)Given the urgency of the project, the Bank and the Government both agreed that an independentagency, unhindered by bureaucracy, would be essential for quick implementation of the project.Therefore, a non-profit, non-governmental Agency was created. The Agency is founded bythree Georgian institutions: Chamber of Commerce, Academy of Sciences, and the TbilisiMunicipality. There was concern over a conflict of interest which may arise from the TbilisiMunicipality being both a founder and beneficiary of the project. However, it was noted thatthe Municipality will not have any direct ir.-olvement in project decisions since managenient ofthe Agency has been fully delegated to the General manager. All operational costs of the Agencywould be financed throughi the Credit for the duration of the project. As agreed with theGovernment during negotiations, the Agency is meant to be a temporary facility, designed torespond to an emergency situation by facilitating project implementation outside normalGovernment channels; upon project completion in about three years, the Agency will cease toexist.

2. Technical Assitance and Studies (US$1.68 million)In addition to financing improvements in general project management, procurement, andaccounting, the TA sub-component will be used to develop: (a) public awareness activities,related to the Black Sea coast and the emergency investments in Tbilisi; (c) future options forthe household waste problem in Batumi; (d) better water supply management in Batumi andTbilisi; (e) improved management of the urban transport system in Tbilisi; (t) specializedassistance for improved environmental assessment, monitoring, and management; (g) improvedmanagement of the waste water treatment facility in Tbilisi. Assistance would also be providedfor the following technical studies: (a) Integrated Coastal Zone Management on the Black Seacoast; (b) a master plan for the Tbilisi water supply and household waste systems; (c) a sectoralstudy of municipal services (including housing) in Georgia.

22. Project bnplementation. The Borrower is the Republic of Georgia, represented by theMinister of Finance. In order to ensure an expeditious and efficient implementation, theproposed project would be carried out by the Independent Agency for the Development ofMunicipal Services, as described above, in collaboration with relevant municipalagencies/departments. During its life, the Agency will be staffed by a General Manager, anassistant General Manager (both Georgian nationals), a procurement advisor (expatriatespecialist), local procurement officer, technical specialist, accountant, secretaries, and a driver.It will have its own office in Tbilisi.

23. Because of the economic, social, and environmental importance of the project, it wasagreed that an appropriate liaison between the Agency and the Government should be

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established. For this purpose, a Technical Coordination Committee (rCC), chaired by theMinistry of Finance, with representatives from centra and local governennts as well as Ministryof Environment, will oversee activities of the Agency.

24. The Agency has bet; legally established. After reviewing candidates, a General Managerhas been recruited by the TCC and approved by Il)A. The managing Agency is being set upwith assistance from a PPF; pilot sub-projects will be carzied out to test internal andprocurement procedures. Technical and financial audits will occur every six months as well asthorough annual reviews of sub-projects to monitor strict compliance with agreed procedures.The operation of the Agency is intended to have a demonstration effect, by showing a workablealternative to traditional procurement methods and introducing private sector efficiency andcompetitive procedures.

25. With respect to implementation of individual project components, the Agency will enterinto sub-agreements or contracts with the municipalities which will delegate to the Agency allrights necessary for project execttion. The Agency will determine which municipal departnent,or private contractor if available, is most appropriate for implementing the works; a contract willthen be signed to ensure that installation is completed to a specified quality and within anappropriately defined time frame. The municipalities will continue to be involved with thesupevision of project components since representatives of each Tbilisi, Batumi, and Poti willbe part of the TCC.

26. roject Financing. The total project cost is estimated at US$19.7 million. The proposedIDA credit of US$ 18.0 million will finance 91% of project costs, net of duties and taxes overa three-year period. The local currency requirements, equivalent of US$ 2.47 million, wouldbe partially met by the Borrower from its own resources. The local contribution will come fromthe municipal budgets in the form of dedicated, retained budget allocations from the Ministryof Finance. The IDA credit would finance 100 percent of the foreign exchange costs and 80%of the local costs. The local contribution will be provided to the Agency in addition to thcsecontribudons financed by IDA.

27. An IDA advance of US$300,000 from the PPF has been approved to finance projectpreparation. The PPF advance will be used primarily for: (a) specification studies to establishmaterial and labor requirements for implementation works scheduled to begin before the onsetof winter; (b) establishing the implementation Agency to ensure that procurement procedures andthe capacity of local consultants and contractors are tesed before wider-scale implementation ofthe major project investments.

28. To meet material and labor requirements of the immediate investments, US$500,000 inbridge financing has been obtained from the Soros Foundation (miterest free loan) for theweatherization activity in schools and hospitals and for the purchase of spare parts for the metrosystem. The Soros Foundation has a resident office in Tbilisi and the resources will be availableas soon as the contract with the government is finalized. Additionally, US$300,000 in co-financing, on a grant basis, will be obtained through USAID to augment the primaryweatherization program. USAID has also indicated that additional funds may be available forthe rehabilitation of heating systems during the course of project implementation.

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29. A breakdown of costs and the financing plan are shown in Schedule A. Amounts andmethods of procurement and of disbursements, and the disbursement schedule are shown inScheduie B. A timetable of key project processing events and the status of Bank Groupoperations in the Georgia are given in Schedules C and D, respectively. Maps of Georgia andits Black Sea coast are also attached. The Staff Appraisal Report, 13543-GE dated October 11,1994 is being distributed separately.

30. Project Benefits. The project will have several direct benefits. It will help: a) essentialinfrastructure in key municipalities; (b) facilitate the Government's macro-economic stabilizationefforts; (c) prevent environmental and health hazards; (d) help maintain crucial health andeducational programs during the winter; (e) in the long term, provide the foundation for moreefficiently managed municipal service delivery systems.

31. Prj.et Rks. The major risks include (a) the recent political instability in the countrywhich has left the Govemment in the process of determining institutional responsibilities whichmay affect the commitment of local municipal authorities to carry out the project componentsin an effective manner; this risk has been mitigated to a large extent, by the establishment of anindependent Agency that will manage project implementation; (b) the financial and technicalcapacity of local contractors to implement the project in a timely manner; this risk will bereduced by the fact that the project will be carefully scaled and spread over three years to takeinto account local absorptive capacity; (c) the risk that the Agency may misuse its independencewill be mitigated by oversight of the TCC, frequent external audits, close monitoring of theimplementation of the Manual of Procedures, and the selection of a well-qualified manager,whose appointment will be acceptable to IDA.; (d) lack of assurance regarding the long termsustainability of the operation given the absence of cost recovery mechanisms; this risk will bemitigated through the macroeconomic and structural dialogue now starting with Georgia, andreinforced through targeted technical assistance, which is intended to improve the managementof municipal services. Risks will have to be reassessed during the mid-term review

32. Environmental Assessment. The project has been placed in the environmental screeningcategory "B". The impact on the environment of investments to be financed under the projectis expected to be beneficial, especially in terms of public health and Black Sea coastalimprovement. No new construction or development is planned under the project and there willbe no primary environmental or socio-economic negative impacts.

33. Actions Agreed. The Government has confinned the scope of work to be financed fromthe proposed project. During negotiations, agreement was obtained on the financing plan andimplementation arrangements. Additionally, it was agreed that: (i) payment for all localcontracts would be made in the local currency to uphold both an August 1933 National Bankresolution and recommendations by the IMF; (ii) in order to launch the work of the Agency, theMinistry of Finance will deposit US$ 20,000 as a minimum required amount to be used for theAgency's expenditures in the initial stage of project implementation.

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34. Recommendation. I am satisfied that the proposed Credit would comply with theArticles of Agreement of Bank and recommend that the Executive Directors approve it.

Lewis T. PrestonPresident

Washington, D.C.October 17, 1994

Attachments: Schedules A - DMaps 1 - 2

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Schedule A

Republic of GeorgiaMunicipal Infrastructure Rehabilitation ProjectEstimated Costs and Financing Plan (US$ million}

Summary Projegt Cost Estimate

% Foreign % TotalLocal Foreign Total Exchange Base Costs

A. Infr ftcture Rehabilitation Component1. Tbilisi

Heating/Energy Saving 1.0 3.1 4.1 75 24Urban Transport 0.4 3.6 4.1 90 24Water Supply, WastewaterandI4ndfill 0.2 20 2.1 90 L

Subtotal Ti. * si 1.6 8.8 10.4 84 60

2. BatumiWater Supply and Wastewater 0.2 1.9 2.1 93 12

3. PotiWastewater and Landfill 0.1 0.8 0.9 90 6

4. Other Cities 0.2 I.G 1A 290 10Subtotal Infrastructure Rehab Component 2.1 13.2 15.3 87 89

B. Institutional Development Component1. Project Implementation 0.1 1.3 1,4 90 82. Studies 0.1 04 0 20 3

Subtotal hntitutional Development 0.2 1.8 1.9 90 11Component

Total BASELINE COSTS 2.3 15.0 17.3 87 100Contingencies (Physical & Price) 0.2 L2 2.4 14

Total PROJECT COSTS 2.5 17.2 19.7

Finmcing Plan% of Total

Local Foreign Total Project Cost

Government 1.4 1.4 7.1IDA 1.1 16.9 18.0 91.4USAID -- 0.3 Q23 U

TOTAL COSTS 2.5 17.2 19.7 100

Percentage 13 87 100

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Schedule BPage 1 of 2

Republic of GeorgiaMunicipal Infrastructure Rehabitation Project

A. Sununay of ProVed Procuremnt Arranaemenn(US$ million)

ICB LCB OTHERS NBF TOTAL

Goods 5.4 2.5 0.3 13.5Equipment for water supply (5.0) (2.4)aSewerage, landfill 2.4 (12.4)Urban transport, and (2.3)bHeating system 0.6

(0.5)c2.3

___________________________ ~(2.2)d ___

Works 2.6 2.3 - 4.9(2.4) (2.0) (4.4)

Consultancy - - 1.3 - 1.3(1.2)e (1.2)

TOTAL 8 2.3 9.1 0.3 19.7of which IDA (7.4) (2.0) (8.6) (18.0)

(a)LIB ($2.4) - Item available from a limited number of suppliers.(b)IS ($2.3) - Contracts below $250,000 each.(t)LS ($0.5) - Contracts below 20,000 each.(d)DC ($2.2) - Spare parts for buses, trans, and trolleys.(e)According to Bank's Consultant Guidelines.

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Schedule BPage 2 of 2

Republik of GeorgiaMunicipal Infrastructure Rehabilitation Project

B. Disbursement Schedule tby fiscal yr)(US$ million)

IDA Credit FY 1995 FY 1996 FY 1997 FY 1998

Annual 4.1 7.8 5.1 1.0

Cumulative 4.1 11.9 17.0 18.0

C. IDA Disbursements by Cateeory

Expenditure Amount % of Expenditures to be Financed

1. Goods 10.4 100 % of foreign expendituresEquipment/Material 100% of local expenditures (ex-factory)

80 % of local expenditures for other itemsprocured locally

2. Works 3.5 100 % of foreign expendituresPublic Works/Urban 80 % of local expendituresServices

3. Technical Assistance' 1.2 100% of expenditures

4. Operating Costs 0.2 100% of expenditures(the Agency)

5. PPF Refinancing 0.3

6. Unallocated 2.4

TOTAL 18.0

I/ Includes consulting services, studies, training, project monitoring, and auditing.

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Schedule C

Republic of GeorgiaMunicipal Infrastructure Rehabilitation Project

Timetable of Key Project Processing Events

(a) Time taken to prepare the project: 4 months, June 1994 - October 1994

(b) Prepared by: Government with IDA assistance

(c) First Bank mission: June 1994

(d) Appraisal mission departure: September 12, 1994

(e) Negotiations: September 26-27, 1994

(f) Planned date of effectiveness: December 1994

(g) List of relevant PCRs and PPARs: Not applicable

The project was prepared by Messrs/Mmes. Robert Maurer (Task Manager), Mats Andersson,Bidzina Imnadze, Martha Jarosewich, Dipika Mathur, and Betsy McGean (EC4HM), based onthe findings of preparation (August 1994) and Appraisal (September 1994) missions. Othercollaborators were: Messrs. Antti Talvitie (TWUTD) and Howard Carter (consultant). TheProject Peer Reviewers were Messrs/Mmes. Maryvonne Plessis-Fraissard (AF3IN), GeorgeRussell (ACTCO), and Thakoor Persaud (LA3EU). The Department Director, CountryDivision Chief, and the Sector Division Chief are Basil Kavalsky, Wafik Grais, and ThomasBlinkhorn respectively.

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Schedule D

Republic of GeorgiaMunicipal Infrastructure Rehabilitation Project

Status of Bank Group Operations in Georgia

A. Statement of World Bank Loans and IDA Credits

[redit/Loan No. Fiscal Year Purpse Bank/IDA

Credit 2641GE 95 Institution Building Loan IDA - SDR 7.3 million

B. Statement of IFC Investments

As of October 11, 1994, Georgia is not a member of the IFC.

MAP SECTION

The boundories, colors, denominotions ond ony other information GEORGIAshown on this map do not imply, on the part of The Worlcd BankGroup,any'jfudgmtnt on the legal sttus of any tetror anr MUNICIPAL INFRASTRUCTURE REHABILITATIONendorsement o acceptance of such boundaries. PROJECT

PROJECT CITIES

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