Private sector and human-resource development in Georgia

Table 4.1.1.4 Average Number of Trades per Trading Session

Year	2000	2001	2002
Total Number of Trades	601	1,591	1,343
Number of Trading Sessions	80	102	102
Average Number of Trades per Session*	8	16	13
* Figures are Rounded to the Nearest Integer Source: GSE

In total, 309 trading sessions have been held during 2000 - 2003 and 3780 trades have been executed during this period. It then follows, that average number of trades per trading session (i.e. per day) is equal to 12. This figure gives some idea about the number of buyers and sellers participating in trades each day. Also note that the total number of the securities admitted for trading at the GSE is equal to 282. All these means that there are virtually no liquid shares at the GSE.

Composite Index. The poor performance of the GSE in terms of all the above-mentioned market indicators indicate that the nature of the composite index would be rather unreliable and would not reflect the true picture of market performance. One solution to the problem is to select only the leading companies (blue-chip companies) and construct the index for these companies. Indeed, such approach is employed by Georgian Investment Bank Galt & Taggart (G&T) Securities LLC, which publishes so-called G&T Blue-Chip Index. This is shown in Fig. 4.1.1.5:

Fig. 4.1.1.5 G&T Blue-Chip Index (GEL), 2002

The problems facing GSE. Below is the problem tree describing the set of problems currently facing GSE:

General recommendations for improving the performance of GSE. The fact that at present there is no sound and liquid capital market in Georgia can be attributed to two fundamental problems: (I) A low potential of the capital market in Georgia; and (II) A high unrealized potential of Georgian capital market. The government of Georgia (GoG) should undertake both, long-term and short-to-medium term measures in order to improve the performance of Georgian Stock Exchange (GSE).

(I) It is suggested that the potential of the capital market in Georgia could be increased by means of:

Long-term goals:

Increasing the rate of country's economic growth;

Reducing the size of the shadow economy;

Attracting higher Foreign Direct Investments (FDI).

short-to-medium term goals:

Conducting the 2^nd round of the privatization through GSE by involving investment funds into the privatization process;

Including the majority of leading Georgian companies into the listing of the securities traded at GSE.

(II) A high unrealized potential of Georgian capital market can be explained by low confidence (trust) amongst the investors towards the stock market, which in turn is the result of the problems existing in terms of protecting the shareholders' rights. In order to solve the latter problem, there is a need: (i) to improve the corporate governance practice, and (ii) to ensure the fairness of the market. These mainly are the goals that can be achieved in short-to-medium term.

The measures needed to improve the corporate governance practice in Georgia include:

To simplify the tax system;

To adopt the International Standards on Auditing (ISA) into law;

To enforce the International Accounting Standards (IAS).

These measures are designed to remove the incentives to pay bribes for the purposes of hiding profits and avoiding paying taxes, which would result in lower levels of corruption in tax administrations and increased transparency of corporate disclosure.

Another measure to improve the corporate governance practice in Georgia is:

To conduct an educational campaign amongst shareholders, company directors and the members of supervisory boards.

The objective of the educational campaign is to lessen the entrenched culture of abusive self-dealing and to give to shareholders sufficient knowledge about their rights. The entrenched culture of abusive self-dealing can also be alleviated by means of putting in place effective regulations and institutions for controlling the self-dealing. All these should lead to regular shareholder meetings and increase the role of the supervisory boards in giving the strategic direction to companies.

Another important factor for improving the corporate governance practice in Georgia is to have an active market for corporate control. Namely, there is a need:

To put in place an adequate legislation for investor protection. More specifically, to introduce the investment compensation schemes, strengthen the bankruptcy system and adopt the rules for takeovers;

To adopt the legislation regulating the financial intermediaries (such as private pension funds and mutual funds), which at present are absent in Georgia.

Properly functioning financial intermediaries would act as large domestic institutional investors and ensure that large volumes of capital resources are directed to the market. This, in turn, would facilitate the competition in the financial market and lead to an active market for corporate control.

The measures needed to ensure the fairness of the market include:

To Enforce a trading transparency;

To deter an unfair trading.

The last two objectives can be reached by means of ensuring an effective functioning of the National Securities Commission of Georgia (NSCG), which should be capable of ensuring an effective enforcement of the securities regulations. More specifically:

The NSCG should have an adequate Inspection, Investigation and Enforcement power, including the criminal prosecution authority;

The Government of Georgia (GoG) should increase the budgetary support of the NSCG to ensure a proper functioning of the agency;

The NSCG should be more accountable to GoG for its activities regarding the regulation of Georgian capital market;

The NSCG should develop a program to supervise the activities of Self_Regulatory Organizations (SROs); and

The NSCG has to develop a code of ethics for its staff.

Another measure needed to ensure the fairness of the market is:

To enforce adequately the rights of the shareholders, which should be done through the improved court system.

In order to improve Georgian court system, it is important to conduct training of judges in the topics concerning the corporate law and operation of the securities market

All the above-described measures are designed to achieve in future a sound and liquid capital market in Georgia.

Specific recommendations for improving the performance of GSE. More specific recommendations, together with the objectives to be achieved, performance indicators, responsible agencies, duration, etc., are presented in the next page. Objectives given in parenthesis correspond to the Problem Tree given in the above:

Recommendations	Objectives to be Achieved	Performance Indicators	Responsible Agencies	Duration	Comment
Conduct the 2nd round of the privatization process through GSE; Involve the Investment Funds into the privatization process.	Privatization process is improved (Objective 13); Potential of the capital market is increased (Objective 2).	· The companies included in the privatization list of the 2nd round should be privatized through GSE; · A number of (at least 3-5) Investment Funds take part into the privatization process.	DSPM NSCG GSE	1-2 years	With the technical assistance of the WB.
About 80% of the leading Georgian companies, which currently are not traded at GSE, have to be included into the list of the securities traded at GSE; Government of Georgia (GoG) must introduce some incentives (e.g. simplified tax regime) for those corporations that decide to be listed at GSE.	Majority of leading companies are traded at GSE (Objective 4); Potential of the capital market is increased (Objective 2).	· Majority of leading Georgian companies are listed at GSE; · Simplified tax regime is introduced for the corporations traded at GSE.	PoG MoF NSCG GSE	1-2 years	With the technical assistance of the WB
Prepare and adopt the amendments into the Tax Code of Georgia (TCG); Conduct the tax administration reform.	The tax system is simplified (Objective 7); There is an adequate tax code (Objective 6); Incentives for paying bribes/Hiding profits are reduced (Objective 11); The level of corruption is reduced (Objective 10); Transparency of corporate disclosure is increased (Objective 12); Reliability of financial disclosure is increased (Objective 28); Corporate governance practice is improved (Objective 17).	· Business-friendly tax code is in place; · Simplified tax regime for securities and corporations are established; · No frequent changes into the tax code are made; · Collection of taxes is increased; · Companies file more reliable information about their profits; · Companies increase the transparency and quality of corporate disclosure.	PoG MoF STD	6 months Ongoing	With the technical assistance of the WB; In consultations with NSCG.
Make amendments into Law on Audit Activity (LAA) to adopt International Standards on Auditing (ISA); Ministry of Finances (MoF), together with Parliamentary Council on Audit Activity (PCAA), requires audit companies to conduct audits in compliance with the International Standards on Auditing (ISA).	ISA is adopted into the law (Objective 34); There are adequate auditing standards (Objective 33); Incentives for paying bribes/Hiding profits are reduced (Objective 11); The level of corruption is reduced (Objective 10); Transparency of corporate disclosure is increased (Objective 12); Reliability of financial disclosure is increased (Objective 28); Corporate governance practice is improved (Objective 17).	· International Standards on Auditing is adopted into law; · Audits are conducted in compliance with International Standards on Auditing; · Companies file more reliable information about their profits; · Companies increase the transparency and quality of corporate disclosure.	PoG PCAA MoF	6 months Ongoing	With the technical assistance of the WB; In consultations with NSCG and GSIA.
National Securities commission of Georgia (NSCG) requires reporting companies to prepare their financial accounts in compliance with the International Accounting Standards (IAS).	IAS is enforced (Objective 9); There are adequate accounting standards (Objective 8); Incentives for paying bribes/Hiding profits are reduced (Objective 11); The level of corruption is reduced (Objective 10); Transparency of corporate disclosure is increased (Objective 12); Reliability of financial disclosure is increased (Objective 28); Corporate governance practice is improved (Objective 17).	· Reporting companies prepare their financial accounts in compliance with the International Accounting Standards; · Companies file more reliable information about their profits; · Companies increase the transparency and quality of corporate disclosure.	NSCG MoF	3 months Ongoing	In consultations with GSIA.
National Anti-Corruption Bureau of Georgia (NACB) conducts the assessment of the activities carried out by the tax administrations.	The level of corruption is reduced (Objective 10); Transparency of corporate disclosure is increased (Objective 12); Reliability of financial disclosure is increased (Objective 28); Corporate governance practice is improved (Objective 17).	· Index of corruption is lowered; · Companies file more reliable information about their profits; · Companies increase the transparency and quality of corporate disclosure.	NACB	Ongoing	With the technical assistance of the WB.
Georgian Securities Industry Association (GSIA) should conduct training courses, seminars, workshops, etc. amongst shareholders, company directors and members of supervisory boards on the best practices of corporate governance; NSCG enforces the corporate governance standards.	Educational campaign is conducted (Objective 27); Shareholders have sufficient knowledge about their rights (Objective 26); Entrenched culture of abusive self-dealing is lessened (Objective 16); Shareholders' meetings are held regularly (Objective 29); The role of supervisory boards is increased (Objective 35); Corporate governance practice is improved (Objective 17).	· Majority of company directors and members of supervisory boards, as well as interested shareholders take part in training courses; · NSCG conduct quarterly/annual audits of JSCs; · Shareholders' meetings are held annually; · Supervisory boards' meetings are held on a quarterly basis.	NSCG GSIA	1 year Ongoing	With the financial and technical assistance of the USAID.
Prepare and adopt the regulations for Pension Funds; Prepare and adopt the regulations for Mutual Funds.	Legislation for financial intermediaries is adopted (Objective 23); Financial intermediaries are well-developed (Objective 21); Large domestic institutional investors are present at GSE (Objective 20); Larger volumes of capital resources are directed to GSE (Objective 18); There is a competition at GSE (Objective 22); There is a strong market for corporate control (Objective 30).	· Private Pension Funds start functioning in the country; · Mutual Funds start functioning in the country; · Large domestic institutional investors take part in trading at GSE; · Volume of trades at GSE is increased substantially; · Number of participants in trading at GSE is increased; · Investment funds take active role in the work of supervisory boards/shareholders meetings.	PoG MoF NSCG GSE	1 year	With the technical assistance of the WB.
Adopt the investment compensation schemes; Strengthen the bankruptcy system; Adopt the rules for takeovers.	Adequate legislation for investor protection is adopted (Objective 24); Financial intermediaries are well-developed (Objective 21); Large domestic institutional investors are present at GSE (Objective 20); Larger volumes of capital resources are directed to GSE (Objective 18); There is a competition at GSE (Objective 22); There is a strong market for corporate control (Objective 30).	· Investment compensation schemes are in place; · Regulations for the bankruptcy system are in place; · Rules for takeovers are in place; · Large domestic institutional investors take part in trading at GSE; · Volume of trades at GSE is increased substantially; · Number of participants in trading at GSE is increased; · Investment funds take active role in the work of supervisory boards/shareholders meetings.	MoF NSCG GSE	1 year	With the technical assistance of the WB.
Assign an adequate Inspection, Investigation and Enforcement power, including the criminal prosecution authority to the National Securities Commission of Georgia (NSCG); Increase the budgetary support of the NSCG; Make the NSCG accountable to the President of Georgia; Develop the code of ethics for NSCG; Develop the program to supervise Self_Regulatory Organizations (SROs); NSCG installs the market surveillance and stock watch system.	Power of the NSCG is increased (Objective 40); Budgetary support of the NSCG is increased (Objective 37); Accountability of the NSCG is increased (Objective 36); Code of ethics for the NSCG staff is developed (Objective 38); Program to supervise Self_ Regulatory Organizations (SROs) is developed (Objective 39); The NSCG does function in an effective manner (Objective 39); Regulations are enforced in an effective manner (Objective 42); Trading transparency is enforced (Objective 43); Unfair trading is deterred (Objective 44); Fairness of Market is ensured (Objective 45).	· NSCG has the criminal prosecution authority; · Budget allocations to NSCG is increased; · Rules are in place that make the NSCG accountable to the President of Georgia; · The code of ethics for NSCG is in place; · The program to supervise SROs is in place; · Trades are conducted in a transparent manner/information is easily available; · Facts of unfair trading are detected and/or deterred.	PoG NSCG GSE	6 months - 1 year	In consultation with the IOSCO.
Special training courses are conducted for the judges dealing with corporate disputes/ protection of shareholders rights.	Georgian court system is improved (Objective 32); Shareholders rights are enforced adequately (Objective 31); Fairness of Market is ensured (Objective 45).	· Judges have sufficient knowledge of corporate/securities laws; · Number of complaints against judges is reduced.	MoJ NSCG GSIA	6 months

4.1.4 Joint Stock Companies not traded at Georgian Stock Exchange

Kazbegi JSC
Sector:	Consumer Goods
GSE Ticker:	KAZB
Summary Information: · Kazbegi JSC is the leading Georgian brewery and producer of non-alcoholic drinks, coffee, cigarettes, etc.; · Last year the company reported an impressive 75% increase in annual sales to GEL 9.4 mln., although the sales figure fell somewhat behind the management's ambitious estimate of GEL 12 mln.; · Net profit of the company increased by 18% to GEL 1.4 mln., translating into EPS of GEL 0.51; · Capital expenditures amounted to GEL 1.7 mln. that were mainly used for modernizing the existing facilities; · The company's assets grew by 21% over the year to reach GEL 7.7 mln.; · The company's equity increased by 25% and amounted to GEL 5.6 mln.; · The company continues to pay dividends, which amounted to GEL 240 thousand or GEL 0.086 per share. At current prices dividend yield amounts to 3%.
Source: Galt & Taggart

Kazbegi JSC - Summary
Current Price (GEL)	2.50
Year High (GEL)	2.50
Year Low (GEL)	2.50
Market Capitalization (GEL mln.)	7.0
Shares Outstanding (mln.)	2.8
Free Float (%)	42.7
Free Float (GEL mln.)	3.0
Source: Galt & Taggart

Kazbegi JSC - Key Figures (IAS)
Year Ending December 31	2001	2002
Net Sales (GEL mln.)	5.4	9.4
Net Income (GEL mln.)	1.2	1.4
EPS (GEL)	0.43	0.51
Total Assets (GEL mln.)	6.3	7.7
Equity/Assets (%)	70.8	73.2
ROA (%)	19.0	18.2
ROE (%)	26.8	24.9
Book Value per Share (GEL)	1.60	2.00
P/E	5.77	4.91
P/BV	1.57	1.25
Sources: Kazbegi, Galt & Taggart

Kazbegi JSC - Valuation (Refer to Annex 1)
Valuation Limits	True Value (GEL mln.)	True Value/Market Cap.
Low	15.0	2
High	22.5	3

BANK OF GEORGIA JSC
Sector:	Financial Services
GSE Ticker:	GEB
Summary Information: · Bank of Georgia JSC is the country's leading commercial bank; · Last year the company reported about 6% increase in annual sales to GEL 36.6 mln.; · Net profit of the company has decreased by about 7% in 2002 mainly due to higher administrative expenses; · The Earning Per Share (EPS) in 2002 was GEL 0.72; · The company's assets grew by remarkable 30% over the year to reach GEL 176.7 mln.; · The company's equity increased by 13% over the last year and amounted to GEL 46.6 mln.; · The company continues to pay dividends, which amounted to GEL 2 mln.or GEL 0.20 per share.
Source: Galt & Taggart

BANK OF GEORGIA JSC - Summary
Current Price (GEL)	1.55
Year High (GEL)	1.90
Year Low (GEL)	1.00
Market Capitalization (GEL mln.)	15.5
Shares Outstanding (mln.)	10.0
Free Float (%)	47.6
Free Float (GEL mln.)	7.4
Source: Galt & Taggart

BANK OF GEORGIA JSC - Key Figures (IAS)
Year Ending December 31	2001	2002
Net Sales (GEL mln.)	34.4	36.6
Net Income (GEL mln.)	7.7	7.1
EPS (GEL)	0.78	0.72
Total Assets (GEL mln.)	135.6	176.7
Equity/Assets (%)	30.5	35.8
ROA (%)	5.7	4.0
ROE (%)	18.6	16.5
Book Value per Share (GEL)	4.13	5.14
P/E	2.02	2.15
P/BV	0.38	0.30
Sources: Bank of Georgia, Galt & Taggart

BANK OF GEORGIA JSC - Valuation (Refer to Annex 1)
Valuation Limits	True Value (GEL mln.)	True Value/Market Cap.
Low	50.8	3.3
High	68.6	4.4

4.3 Human-Resource Development in the Private Sector

4.3.1 Business Schools/Universities

European School of Management (ESM).

Data Sheet.

1. European School of Management ESM-Tbilisi

2. 40, Vazha Pshavela Ave. 1077, Tbilisi, Republic of Georgia
Tel.: (995-32) 39 68 64
Fax: (995-32) 37 55 16
e-mail: esmtbs@gol.ge
Internet: esm-tbilisi.ge

3. Simon Kadagidze

4. Mission of European School of Management in Tbilisi (ESM-Tbilisi) is to create a new Georgian management elite - professionally thinking and professionally acting under market economy managers - providing high quality management education using modern and innovative teaching technologies and highly qualified faculty.

5. LTD, Nonprofit

6. Self financed through students tuition fees

7. 1992

8. 20

9. 87

10. 4 - Undergraduate Program, Graduate Program, Base Certificate Program, Foundation Program

11. 224+46+58+50

12. Look the attached sheets

13. Undergraduate - 4 years
Graduate - 2 years
Base Certificate Program - 7 months
Foundation Program - 1 year

14. Undergraduate - 224
Graduate - 46
Base Certificate Program - 58
Foundation Program - 50

15. School leavers and young professionals

16. Undergraduate Program - secondary school leavers with certificate
Graduate Program - young people with min bachelor
diplomas and min 2 years experience
Base certificate program - any person with high education
Foundation Program - secondary school leavers or students
in their last school year

17. Undergraduate - $ 2200/ year
Graduate - $ 3500
Base Certificate Program - $ 1200
Foundation Program - $ 1000

18. Entrance examinations, visiting schools with presentation, visiting educational fairs, marketing campaign through an advertising agency

19. Georgian with good command of either English or German languages.

20. Undergraduate - Bachelor of Business Administration
(General Management)
Graduate - Master of Business Administration
(General Management, Finance, Marketing)
Base Certificate Program - Certificate

21. $ 2000/yearThe ESM Evening & Weekend MBA Program, ^{A Curriculum} 2003-2005

4.3.2 Government Sponsored Training Programs

GEPA's In-Company Export Marketing Programme.
The objective of GEPA's new programme is to increase the export capabilities of Georgian companies. An integrated programme has been designed to assist Georgian companies to systematically plan and prepare for export marketing. The programme includes in-company export market development, training, the organisation of inward and outward missions and a cost sharing grant scheme. The in-company programme involves GEPA's Export Advisers working closely with individual companies to establish an export marketing function. Participating companies will be assisted and guided through the process of defining their objectives and capabilities, the first step in the process. They will be shown how to identify suitable markets and have access to all the information sources in the Export Information Centre. They will then be in a position to draw up a realistic export marketing strategy. GEPA staff will help them to prepare for exporting and to implement their defined strategy. In working through the programme, training needs will be identified and addressed and some financial assistance may be available to assist companies in financing eligible actions they need to take to prepare for exporting. Participating companies will have in place a system for reviewing and redefining their export marketing strategies on an on-going basis. This will enable Georgian companies to anticipate and to be prepared for the ever changing marketing environment, rather than just reacting to it. During recent weeks GEPA staff has been visiting companies to explain the programme in detail. Four companies have already begun the first stage of the programme and another four will be added over the next few weeks. Companies committed to developing an achievable export marketing strategy and willing to devote time and effort to the process are invited to contact GEPA.

5. Other Donors' Activities

5.1 The World Bank and IMF

5.1.1 List of the Active World Bank Projects in Georgia

Projects under implementation	Commitment (US$ million)	Develp't. Objective	Impl. Progress.	Approval Date	Signing Date	Closing Date
Social Investment Fund	25.0	S	S	12/11/97	06/05/98	12/31/03
Primary Health Care Dev.	20.3	S	S	08/01/02	05/06/03	12/31/07
Education 1 (APL)	25.9	S	S	03/20/01	12/03/01	06/30/05
Social Investment Fund 2	15.0	S	S	05/15/03	08/29/03	09/30/07
Roads Project	40.0	S	S	05/25/00	01/31/01	12/31/04
Electricity Market Supp.	27.4	S	S	05/03/01	09/26/02	12/31/05
Energy Transit Institution	9.6	S	S	03/13/01	11/19/01	07/31/05
Municipal Development 2	19.4	S	S	08/01/02	02/19/03	06/30/06
SAC3	40.0	S	S	06/29/99	08/02/99	10/30/02
Structural Ref. Support	16.5	S	S	06/29/99	09/22/99	03/31/04
Judicial Reform	13.4	S	S	06/29/99	09/22/99	12/31/04
Enterprise Rehabilitation	15.0	S	S	12/17/98	09/08/99	12/31/04
Agriculture Development	15.0	U	U	03/25/97	08/21/97	04/30/04
Forestry Development	15.7	S	S	08/01/02	04/22/03	06/30/09
Protected Areas Dev (GEF)	8.7		S	05/24/01	04/26/02	12/31/06
Integrated Coastal Mngmt	4.4	S	S	12/17/98	05/21/99	12/31/04
Irrig/Drainage Dev.	27.0	S	S	06/28/01	02/20/02	04/30/07
Cultural Heritage	4.5	S	S	02/13/98	05/18/98	12/31/03
Integrated Coastal Mngmt (GEF)	1.3		U	12/17/98	05/21/99	12/31/04
Agriculture Research Ext (GEF)	2.5	S	S	05/11/00	02/05/01	12/31/05
Agriculture Research Ext	7.6	S	S	05/11/00	02/05/01	12/31/05
Total	354.2

S - Satisfactory

U - Unsatisfactory

5.1.2 List of the Closed World Bank Projects in Georgia

PROJECT	AMOUNT (millions)
Rehabilitation Credit	US$ 75.0	Closed June 1996. Fully disbursed.
SAC	US$ 60.0	Closed December 1997. Fully disbursed.
SATAC	US$ 4.8	Closed December 1998. Fully disbursed.
Institution Building Credit	US$ 10.1	Closed June 1998. Fully disbursed
SAC II	US$ 60.0	Closed December 1998. Fully disbursed
Transport	US$ 12.0	Closed June 30, 1999. Fully disbursed.
SATAC II	US$ 5.0	Closed December 31, 1999. Fully disbursed.
Municipal Infrastructure Rehabilitation	US$ 18.0	Closed June 30, 2000. Fully disbursed.
Power Rehabilitation	US$ 52.3	Closed June 30, 2000.
Oil Institution Building	US$ 1.4	Closed December 31, 2000. Fully disbursed.
Energy Sector Adjustment Credit (ESAC)	US$ 25.0	Closed March 1, 2002. Fully disbursed.
Third Structural Adjustment Credit (SACIII)	US$ 60.0	Closed October 30, 2002. Fully disbursed
Total:	US$ 383.6

5.1.3 Description of the Closed World Bank Projects in Georgia

REHABILITATION CREDIT

Implementing

Agency Temuri Basilia, Chief Economic Advisor to the President of Georgia; State Chancellery, 7 Ingorokva str.

(99532)989953, (99532) 999757

Fax: (99532)995797

Task

Manager Michaelle Riboud, EC4C2

Phone: (202) 4738743

Fax: (202)4773387

Project

Objective The main objective is to support the government's economic reform program aimed at restoring macroeconomic stability and at promoting resumption of growth and improvement in living standards. The other objectives are to:

1. Provide budgetary support to maintain the level of basic public expenditures, in particular for wages and the social safety net;

2. Provide foreign exchange for the purchase of critical imports;

3. Improve the functioning of the foreign exchange market;

4. Provide a framework for assistance from other donor agencies.

Project

Description The reform program to be supported by the credit comprises three sets of policies:

a) those aimed at reducing and redefining the role of the public sector in the economy

b) those theta foster the development and increase efficiency of markets;

c) those that maintain a minimum social safety net through improved targeting of benefits.

Disbursement Fully disbursed

INSTITUTION BUILDING

Project Objective Assist the Georgian government in its efforts to move to a private market economy through strengthening public institutions on three functional areas: (a) financial sector, (b) economic management , (c) privatization and enterprise reform

Project Description 1. Financial Sector Reform (US$ 2.325 million)

(a) Financial Sector Infrastructure:

Consulting service and equipment:

-- to introduce and implement Broadly Adapted Financial Statement (BASF), and internationally acceptable accounting and auditing system;

-- to conduct diagnostic studies in five state-owned banks and make recommendation for steps to streamline the system;

-- review existing payment system and make recommendations for steps to streamline the system

2. Economic management (US$ 5.660 million)

(b) Economic Policy Formulation

Support will be provided to the Office of the Deputy Prime Minister (now Chief Economic Advisor to the President) to design a strategy for the restructuring and the reform of the government's economic management agencies, particularly the Ministries of Finance and Economy, and to strengthen economic policy formulation and analyses.

(c) Statistical Services:

Consulting services, training, and equipment to assist the Committee for Social and Economic Information in

-- reviewing the methodology used for generating and maintaining national accounts and initiating steps to introduce the internationally acceptable System of National Accounts (SNA);

-- designing and conducting an improved household survey in the city Tbilisi

(d) Tax Administration:

-- computerization of tax offices; IDA pilot project for the modernization and computerization of the central State Tax Inspectorate (STI) and the Tbilisi City Inspectorate;

-- training of the STI staff.

(e) Treasure:

-- first phase: a central treasury function will be established in the Ministry of Finance and regional branch in Tbilisi;

-- second phase: regional Treasuries will be established throughout of Georgia:

-- IDA will finance computers for the establishment of the Treasury offices.

(g) Strengthening of Customs Administration:

Support will be provided to the Customs Committee in

(i) simplifying and reforming the organization and procedures of customs operations: (ii) modernizing customs management ;

(iii) training the customs staff in the customs management and the computerization;

(iv) computerizing customs clearance procedures, accounts, and statistics at Tbilisi headquarters and at the Tbilisi airport as the first pilot site.

(h) Aid Coordination:

-- Project will finance long-term external advisor and equipment to assist and train the staff of Aid Management Unit (AMU) in maintaining donor procedures, coordinating country's external aid priorities consistent with the national development objectives, and communicating those with the external aid agencies.

-- Project will finance experts to assist the government staff in analyzing Sectoral information with the objective to design and develop project that will be acceptable to the donor community.

(i) Project Implementation: The project will finance:

-- an external procurement consulting firm to assist the PIU with the preparation of procurement an disbursement documents under this project, and to ensure that all procurement under the project follow the World Bank's procurement guidelines

3. Privatization and Enterprise Reform (US$ 2.27 million)

(j) Support for Privatization:

-- one short-term senior level adviser to assist the Ministry of the state Property Management and the Office of the Chief Economic adviser to the President in reviewing the current privatization plan;

-- experts and equipment to assist in:

a) formulation the mass privatization program and the voucher scheme

b) the design and implementation of a public information campaign to support the mass privatization campaign;

c) provide training aimed at strengthening the institutional capabilities of SPM;

d) review and further development of a legislative framework for privatization.

Implementing Agency Alex Sikharulidze, Head of PIU, 42, Kazbegi ave.,

Phone: (99532)950865

Fax: (99532)950865

STRUCTURAL ADJUSTMENT TECHNICAL ASSISTANCE CREDIT (SATAC)

Project Objective To support the Government's reform program to stabilize the economy and create the conditions for a resumption of growth and an improvement in living standards.

Project Description 1. Privatization and post-privatization (US$ 0.95 million)

(i) Continued support for the implementations of the privatization program and on support for the establishment of the share registries.

(ii) Introduction of cash auctions and an international tender program;

(iii) Strengthening of institutional capacities, elaboration of standard procedures, advise on structuring of transactions and bid evaluation, as well as legal assistance and licensing of private share registries.

(iv) Elaboration of operational guidelines, training of officials in securities market and in the starting-up of pilot registries.

2. Financial Sector ( US$ 0.78 million )

(i) Advisory services on supervisory issues as well as the development of training programs.

(ii) Audits if the three former state banks will be financed to dacilitate a realistic assessment of the financial position of each bank.

3. Energy sector reform ( US$ 0.86 million )

(i) Assistance in creating the capacity to monitor and manage payment performance, and in reviewing structural and tariff issues.

(ii) Assistance in reviewing the scope of the regulatory authority and its tariff policy functions.

4. Social Protection ( US$ 0.56 million)

(i) Assistance in the design of a program of social assistance which meets the needs of poor families that do not qualify under any existing program;

(ii) Facilitating the establishment of private pension schemes.

5. Resource mobilization and public information

( US$ 1.43 million)

(i) A program aimed at improving the revenue collection performance of the Customs Department through training, revision of procedures and controls, and anti-fraud measures;

(ii) A public information/education program on economic reforms, including mass media campaigns, round-tables/seminars on key issues, and the design of an education program focusing on skills in high demand in market economics

Implementing Agency Zaal Japaridze, Head of PIU, 12 Kazbegi Ave.

Phone: (99532) 950865

Ministry of Trade and Foreign Economic Relations

42, Kazbegi Ave.

Phone: (99532) 225186 / (99532) 389652

TRANSPORT REHABILITATION

Project Objective 1. To support policy reform in the transport sectoral and restructure its institutions to operate in a market economy.

2. To repair and maintain some of the most critical elements of the transport system.

Project Description (1) Institution Building Component (US$ 4.9 million):

(i) advice and support to teams preparing sector reforms;

(ii) technical assistance for the formulation of technical and legal framework necessary to the restructuring,

commercialization and privatization of sector entities;

(iii) managerial assistance for public and private transport enterprises;

(iv) a training program to update transport technical staff of the private and public sectors;

(v) project management.

(2) Investment Component ( US$ 13.2million )

(i) road maintenance program, including selected equipment and spares for road maintenance as well as emergency repairs and the necessary imported road building materials;

(ii) a railway sub-component, including bridge repairs and the required structural steel, track materials (ties, rails and fastenings), spares for locomotives, and communications and selected signaling equipment

Implementing Agency Gia Tsagareli, Head of PIU, 12 Kazbegi Ave.

Phone: (99532) 986385

Fax: (99532) 990461

STRUCTURAL ADJUSTMENT CREDIT (SAC)

Project Objective: The main objective is to consolidate stabilization, foster a strong and sustained growth recovery and reduce poverty.

The reform program aims at:

maintaining a tight monetary program supported by an improving fiscal position;

streamlining the Government sector and improving efficiency of public spending;

inducing a rapid adjustment of the productive sector to new market signals.

The other objectives are;

provide budgetary support to maintain the level of critical public expenditures;

provide foreign exchange for the purchase of critical imports;

provide a framework for financial assistance from other donor agencies.

Project

Description: 1. Maintaining a Tight Monetary Policy:

reduce inflation to 20-25 percent in 1996 and strengthen the international position of NBG;

increase the range of monetary instruments and enhance the capacity of the NBG to achieve monetary objectives.

2. Improving the Fiscal System:

ensure sustainability of stabilization;

increase tax revenue to 6.7 percent of GDP in 1996;

reach a revenue to expenditure ration of 70 percent in 1996 and maintain budget deficit at 3-4 percent of GDP in 1996.

3. Streamlining of the Government Sector and Improving the Efficiency of Public Spending:

to maintain critical public function within the framework of a tight expenditure program (expenditure maintained at about 13 percent of GDP in 1996);

reforming government pay and employment;

reforming the provision and financing of social services reforming social insurance and social protection;

eliminating energy subsidies;

4. Fostering Adjustment of the Productive Sector:

accelerating privatization;

restructuring the financial sector;

fostering export growth.

Disbursement: US$ 29.88 million

The disbursement of the loan is linked to agreed targets specified for each tranche release - to be met by the Georgian Government in implementing its structural reform program.



SECOND STRUCRUTAL ADJUSTMENT TECHNICAL ASSISTANCE CREDIT (SATAC II)

Project Description: The Government's structural reform program outline in the Letter of development Policy was presented with the Second Adjustment Credit (SACII), $60 million (which closed in December 1998). To facilitate the timely implementation of structural reforms, the Government requested a program of technical assistance to support the design and implementation of reform measures in the key areas. The institutional capacity of the Government to implement structural reform measures has been successfully strengthened under the Institutional Building Credit (IBC) and the Structural Adjustment Technical Assistance Credit (SATAC). Lessons learned from these two technical assistance projects were incorporated in the design of SATAC II.

The Core objective of SATAC II is to enhance the capacity of the Georgian Government to implement the structural reform program supported by SAC II.

The technical assistance is divided into seven broad categories:

judicial reform and anti-corruption initiative;

financial sector;

energy sector reforms;

social protection

health

resource mobilization

public information

5.1.4 The World Bank and IMF Cooperation in Georgia

The World Bank and IMF Partnership in Georgia's Development Strategy

1. The IMF has taken the lead in assisting Georgia in enhancing macroeconomic stability. In this regard, the Fund has encouraged the authorities to pursue a prudent fiscal policy, including by increasing tax revenues and reducing domestic expenditure arrears. The IMF Board approved a new three-year program under the Fund's Poverty Reduction and Growth Facility (PRGF) in January 2001. The first and the second reviews under the PRGF were completed in October 2001 and July 2002, respectively. Implementation of the 2002 macroeconomic program was broadly on track. Quantita-tive criteria and indicative targets were met, except for those on domestic arrears, fuel and excise tax collection and reserve money. At 2 percent of GDP, the fiscal deficit was slightly higher than programmed because of shortfalls in external financing, and revenue collection improved only slightly from 14.3 percent of GDP to 14.4 percent over the period. An IMF mission which visited Georgia in July 2003 to discuss completion of the postponed third review found that the fiscal pressures that emerged in early 2003 had continued, with tax revenue falling short of budget targets, and an accumulation of substantial new budget arrears. The IMF thus saw the need inter alia to introduce some tax reform measures, adjust electricity tariffs and revise the 2003 budget to close the fiscal gap. The authorities achieved the first two but were unable to secure parliamentary approval of a revised budget. The current PRGF will expire in the next several months and the IMF will soon be initiating discussions to assess prospects for a possible new three-year program to support Georgia's EDPRP.

2. The World Bank has taken the lead in the policy dialogue on structural issues, focusing on: (i) strengthening public expenditure management; (ii) deepening and diversifying sources of growth, (iii) protecting the environment; and (iv) reducing poverty. The table on page 53 summarizes the division of responsibility between the two institu-tions. In a number of areas - for example the social sectors, rural development, environment, and infrastructure - the Bank takes the lead in the dialogue and there is no cross conditionality with the IMF-supported program. The Bank is also leading the dialogue on private sector reform, and Bank analysis serves as inputs into the Fund program. In other areas - energy, the financial sector, public expenditure management, and revenue and customs - both institutions work together. Finally, in areas like monetary policy the IMF takes the lead with little Bank involvement.

Areas in which the World Bank leads and there is no direct IMF involvement

3. Areas in which the Bank leads and there is no direct IMF involvement include the social sectors, infrastructure and environment.

· In the social sectors the Bank conducts annual updates of Georgia's Poverty Assessment based on household data collected on a quarterly basis. The Bank's focus has been to improve the budget execution of expenditures for health, education and poverty benefits and to raise the efficiency in the use of scarce public resources. Through the Social Investment Fund Credits IDA is focusing in particular on areas with high poverty levels to provide basic infrastructure to the poorest communities. A recently approved Self-reliance Fund Grant will help authorities address the complex issues related to internally displaced people. IDA is also supporting a dialogue with the Government on social protection reform that may lead to an IDA-supported project.

· In education the Education Adaptable Program Credit aims at improving the learning out-comes of primary and secondary students, through curriculum reform, development of an examina-tion system, training of teachers, provision of learn-ing materials, and development of capacity to make better use of Georgia's physical, financial and human resources. While the investment needs of school buildings are substantially higher than is currently affordable for Georgia, the Social Investment Fund projects continue to assist in financing urgent repairs to school facilities in many communities.

· In health IDA Credits to support the Government in improving the health care financing system, exploring risk-pooling options, introducing a new system of primary health care and improving the focus of services funded through public funds on the poor and on priority public health interventions. In addition hospital restructuring has been supported by SAC 3 and the Structural Reform Support Credit.

· In infrastructure support is being provided through the Municipal Development and Decen-tralization Credit and the Social Investment Fund Credit. These projects are providing financing at the community level for critical infrastructure needs, primarily for school and health facili-ties heat-ing and repair, small hydropower schemes to provide electricity, drinking water and sanitation reha-bilitation, as well as transportation infrastructure rehabilitation.

· In rural development IDA credits have supported the development of private sector farming and agro-processing improvements, agricultural credit, irrigation and drainage, and agriculture research and extension. IDA has also been supporting the creation of local institutions such as rural credit unions and water users associations through its Credits.

Areas in which the World Bank leads and its analysis serves as input into the IMF program

4. The Bank has been leading the dialogue on structural reforms through SAC 3, approved by the Bank's Board of Executive Directors in June, 1999, and closed in October, 2002. Despite considerable delays, the core conditions of SAC 3 were met, but their impact was reduced by poor governance. Institution building and technical assistance has been supported through the Structural Reform Support Credit, also approved by the Bank's Board of Executive Directors on June 29, 1999. The Bank also leads in the areas of:

· Private sector development. SAC 3 supported improvements in the environment for private sector development, focusing on: (i) simpler licensing regulations; (ii) more transparent government procurement; (iii) reduced cost of entry for businesses; and (iv) privatization of state-owned commercial assets. IDA has also been supporting private sector participation in other areas such as energy, telecommunications, urban services and agriculture. The IMF has worked with the authorities to initiate audits of the 2002 accounts of three major state owned enterprises.

· Energy. The energy system is in poor condition, with unreliable supply, massive non-pay-ment and mounting debts. IDA has been working with other donors, including the IMF, to encourage more private management and ownership, and to implement a series of short-term action plans to improve the overall functioning of the sector. The IMF has also been focus-ing on improved payments for electricity.

· Public Sector Management. The Bank is supporting the development of a civil service reform program, while the Fund is providing technical assistance in support of tax and customs administration reform.

Areas of shared responsibility of the World Bank and IMF

5. The Bank and the Fund have been working jointly in the following main areas (supported by the Bank's SAC 3 and Structural Reform Support Credit, several investment operations and the Fund's PRGF):

· Poverty Reduction Strategy. Both institutions have been working closely with the Govern-ment to provide support to the development of the PRSP, through seminars and workshops, direct staff input, and a multi-donor Trust Fund to support the work of the PRSP secretariat..

· Budget Planning and Execution. The annual process-based Public Expenditure Reviews will provide the underpinnings for systemic changes in expenditure management, with the immediate aim being improved budget formulation in 2004. The IMF is focusing on Treas-ury reform within the Ministry of Finance.

· Financial Sector Reforms. The joint Financial Sector Assessment Program has supported: (i) strengthened banking and non-banking supervision; (ii) introduction of international accounting standards; (iii) and consolidation of banks through higher capital requirement ratios; and (iv) anti money-laundering legislation. The IMF has focused in particular on banking supervision.

· Debt Sustainability Analysis (DSA). Given Georgia's heavy external debt burden, the Bank and the Fund conduct joint Debt Sustainability Analysis on a regular basis.

Areas in which the IMF leads and its analysis serves as input into the World Bank program

· Fiscal Framework. The IMF's focus on prudent fiscal policy has served as an impor-tant framework for IDA's work on public expenditure management.

Areas in which the IMF leads and there is no direct World Bank involvement

· Monetary Framework. The IMF closely collaborates with the NBG in the design and implementation of a monetary program that aims at remonetization of the economy, while keeping inflation low and the exchange rate of the Lari stable

· Economic Statistics. IMF technical assistance has been conducive to improvements in national accounts, price, monetary and government financial statistics.

5.1.5 The World Bank Country Assistance Strategy for Georgia

Activities (as identified in the EDPRP)	Responsible Agencies	Focus of Bank Actions	Expected Results FY04-06

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