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									           Best Practices for the Business Environment


               Comprehensive Land Registration Reform
May 2006




                 Lessons from Georgia
Issue 3




                                                Executive Summary:
              This Best Practice was adapted
                                                Following the Rose Revolution, which provided the framework to implement
              from “Doing Business 2007:
                                                political changes not previously possible, the new Georgian government imple-
              How to Reform Case Study:
                                                mented much-needed reforms to the land registration process through the es-
              Georgia Property Registration,”
                                                tablishment of a self-financing, streamlined system to provide secured and stable
              prepared by Booz Allen Hamilton
                                                land property rights. These institutional changes, coupled with property-related
              in cooperation with USAID for
                                                tax reforms, resulted in the elimination of corruption and, in turn, a reduction
              the World Bank Group’s 2007       in the overall real cost and time required to register real property in Georgia.
              Doing Business Reformers Club
                                                Introduction                                       side the context of sweeping political changes
              Conference.
                                                Secure private property rights are an es-          associated with the Rose Revolution, which al-
                                                sential ingredient for sustained economic          lowed for wholesale institutional change, new
                                                growth. It is critical, therefore, that the pro-   legislation, and new management that would
                                                cess for securing such land rights be simple,      not have been possible under the former ad-
                                                cost-effective, and free from corruption.          ministration. The priorities for land registration
                                                                                                   reform were consistent with the objectives of
                                                In 2004, the new Georgina government,
                                                                                                   the new administration’s broader reform pro-
                                                elected following the Rose Revolution, initi-
                                                                                                   gram, which extended across nearly all sectors
                                                ated reforms to establish a self-financing,
                                                                                                   of governance, including reducing permit re-
                                                streamlined mechanism to provide secure and
                                                                                                   quirements and implementing “one-stop” prin-
                                                stable land rights. The result has been the es-
                                                                                                   ciples for government services; strengthening
                                                tablishment of a new independent registry,
                                                                                                   property rights; increasing the role of the pri-
                                                the National Agency of the Public Registry
                                                                                                   vate sectors in providing public services; and
                                                (NAPR), which in 2006 became a fully self-
                                                                                                   centralizing oversight of government services.
                                                financing entity responsible for land registra-
                                                tion through the country. Although property        Need for Reform in Land Registration
                                                registration fees have risen slightly under the    Even before the change of government in
                                                new system, by streamlining the functions of       2004, there was a broad-based consensus
                                                the registry, clarifying legislation, and virtu-   among international organizations, NGOs,
                                                ally eliminating corruption, the overall effect    and the private sector on the need for change
                                                has been to reduce the real costs and time         in the Georgian land registration system. At
                                                required to register property. The time to         that time, much of the responsibility regarding
                                                register property has dropped from an av-          land management and registration was vested
                                                erage of 39 days to an average of 10 days.         in a government agency known as the State
                                                                                                   Department for Land Management (SDLM).
                                                Context                                            The SDLM, which was responsible directly to
                                                Like other recent reforms in Georgia, property     the president, had authority over a wide range
                                                registration reform cannot be analyzed out-        of functions including privatization of state-


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           Comprehensive Land Registration Reform


                                owned land; leasing of state-owned land; catego-        these proposals required. Accordingly, reforms in
                                rization of land for tax purposes; mediation of land    the area of land registration did not commence
                                disputes; and other land management activities.         until 2004, after the election of the new Geor-
                                                                                        gian government, following the Rose Revolution.
                                Several aspects of the SDLM’s opera-
                                tions were identified as areas of concern:              Approach
                                ■■ Conflicts of interest. The multiple func-
                                                                                        Legislation
May 2006




                                     tions played by the SDLM regarding land            The first phase of the reform process focused on
                                     privatization and management created               the drafting of new legislation. It was completed
                                     conflicts of interest within the department.       in stages and took approximately 10 months to
                2               ■■ Political influence. At the local level, the
                                                                                        complete. The signing of the Law on State Registry
                                     SDLM’s offices were directly accountable           in June 2004 served to dissolve the old SDLM and
                                     to the local government, resulting in politi-      establish the new National Agency of Public Reg-
Issue 3




                                     cal influence on land categorization, dispute      istry (NAPR). The NAPR, organized as a legal enti-
                                     mediation, and the registration process.           ty under public law, operated under the guidance
                                ■■ Multiple registrations. In some cases, the Bu-
                                                                                        of the Ministry of Justice. This structure allowed
                                     reau for Technical Inventory (BTI), the entity     the NAPR to be self-managed and independent
                                     responsible for surveying and providing land       from political influence. A second piece of legisla-
                                     cadastre sketches, acted as a double registra-     tion, the Law on Registration Fee for Services of
                                     tion system, resulting in secondary fees for       National Agency of Public Registry was signed on
                                     services and conflicting property registrations.   December 2004. This law defined the fees charge-
                                ■■ Chamber of Public Notaries. The role of no-
                                                                                        able by NAPR for its services and established
                                     taries in issuing certificated declaring par-      specific time frames for the provision of services.
                                     cels free from encumbrances added an ex-
                                     tra step to an already confusing procedure.        Institutional Change
                                ■■ Funding and resources. Both SDLM and                 Institutional change began in parallel with the leg-
                                     BTI were 100 percent dependent on state            islative efforts, with the installation of new man-
                                     funding, but lacked resources to effi-             agement. In February 2004, David Egiashvili, previ-
                                     ciently administer all its responsibilities.       ously head of the Office of International Relations
                                                                                        of the SDLM and active in the working group that
                                In 2002–2003, realizing that the SDLM was ripe
                                                                                        identified possible reforms before the revolution,
                                for corruption, in that it was underfunded, un-
                                                                                        was tapped to be the new chairman of the NAPR.
                                derstaffed, and subject to the influence of local
                                                                                        Many of the new managers brought on board to
                                power fiefdoms, the chairman of SDLM took the
                                                                                        manage change, including First Deputy Chairman
                                initiative to convene a working group to iden-
                                                                                        Tea Dabrundashvili and Tbilisi Registry Office head
                                tify strategic priorities for the department. This
                                                                                        Nino Bakhtadze were also involved in the early
                                working group included representatives of the
                                                                                        reform efforts and had experience within both
                                SDLM, numerous international organizations in-
                                                                                        SDLM and international donor-funded projects.
                                cluding KfW (a German Banking Group), GTZ,
                                SIDA, USAID, and the World Bank/IFAD, the               In addition to the dissolution of the SDLM, lim-
                                Association for the Protection of Landowners’           ited aspects of the functions of the BTI were
                                Rights (APLR), and local groups. This working           absorbed into the NAPR, specifically the main-
                                group consolidated support for broad structural         tenance and issuance of land sketches. As a re-
                                changes in the operations of the land registry.         sult, the role of the BTI is now limited to serv-
                                                                                        ing as the repository of the registry archives
                                In early 2003, a concept paper was submitted to
                                                                                        in Tbilisi. Other land management functions
                                the chairman of the SDLM outlining the follow-
                                                                                        were shifted to the Ministry of Environment and
                                ing core objectives: simplification and clarification
                                                                                        Ministry of Agriculture, and surveying services
                                of the registry process; the streamlining of the
                                                                                        were envisioned as a role for the private sector.
                                functions of SDLM; and the establishment of a
                                transparent, self-financing registry through differ-    In addition, the NAPR maintains land encum-
                                entiated user fees. At that time, however, the po-      brance information and issues lien certificates,
                                litical environment did not encourage risk taking,      replacing the Chamber of Notaries in this func-
                                and SDLM was not ready to take the steps that           tion and reducing the office visits for custom-

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                                                                            Comprehensive Land Registration Reform


ers. While this function does not generate               Registration software called NAPReg has been de-
sizable revenues, individual notary offices con-         veloped employing an Oracle database interface
tinue to play a central role in preparing and            with mapping information produced through an
notarizing real estate transaction, where fees           ESRI (GIS software provider) based format. Instal-
are a percentage of the transaction value.               lation began in Tbilisi in 2005 with the technical
                                                         support of GTZ and is expected to be fully opera-
Centralization of Information
                                                         tional in 2006. An online searchable database to




                                                                                                                                      May 2006
NAPR began the process of centralizing infor-
                                                         determine existence of liens on properties will also
mation and structuring the registry. Centraliza-
                                                         be available in the near term in Tbilisi. Extension
tion included the shifting of accountability of
                                                         of digital services is limited to a few district offices
local offices from the local government to the                                                                                3
                                                         that received specific support from international
NAPR central office, the maintenance of a cen-
                                                         donors, such as Gardabani and Mkskheta through
tral information management center, and the




                                                                                                                                      Issue 3
                                                         the World Bank/IFAD project. National installation
streamlining of accounting and procurement
                                                         of the NAPReg is optimistically targeted for 2008.
through the NAPR. The 68 local offices were
retained to provide service at the local level.          Tax Reform
                                                         With the objectives of simplifying procedures and
Staffing
                                                         increasing efficiency of tax collection, the new
As required by the new law, human resource plan-
                                                         Tax Code of Georgia, signed December 2004,
ning commenced in 2004, and the new agency
                                                         established a new tax structure by replacing
was staffed through a transparent recruitment
                                                         the previous 13 national and local taxes under
process. NAPR conducted over 3,000 examina-
                                                         the old code with 6 national and 2 local taxes.
tions, ultimately trimming a combined 2,100 per-
sonnel employed at the SDLM and the BTI to ap-           The most significant and direct impact on land
proximately 600 staffers. Increased salaries of the      ownership derives from the abolition of the 2
NAPR staff created keen competition for positions        percent property transfer tax. As this transac-
with the agency. The average salary of the SDLM          tion tax was enforced in practice at the land
staff in 2003 and 2004 of 41 GEL/month (US $23)          registration stage, this reform has the effect of
rose to 740 GEL/month (US $411) in 2005. The             reducing the costs of the transaction and the
Tbilisi Registry Office has also established an in-      registration of property. Real estate brokers
centive system with performance-based bonuses.           also report cases where clients had avoided
                                                         registering property in order to avoid this tax.
Fee System
The new salary system would not have been pos-           One stipulation in the tax code, however, creates
sible without the design of a fee system, which          a similar effect to the one solved by the aboli-
was implemented in 2005. With the exception of           tion of the transfer tax. According to the law, the
the initial agricultural registration, the fees un-      sale within two years of acquisition obligates the
der the new law are slightly higher than the of-         seller to pay income tax (20 percent in the case
ficial fees charged by the SDLM. There are also          of business) on the difference between the pur-
specific time frames for service. And while there        chase and sales price. The payment of all land
are no specific guarantees of service timelines,         taxes continues to be enforced at the registra-
the effect of the law has been to reduce cor-            tion stage. While this has not been reported to
ruption, as the customer has the ability to refer        be a structural obstacle to closing real estate
to the schedule and payment terms in the law.            deals, it continues to place the NAPR in the po-
                                                         sition of enforcing tax payments and seems to
Information Technology
                                                         depress the officially reported property values.
The development and improvement of information
management technologies continue to be a high            Costs
priority for the NAPR leadership. An initial working     Although its is difficult to capture all the costs
group at NAPR, established in early 2004, identi-        of reform with certainty, the costs can be cat-
fied the following needs: continued development          egorized as capital costs, training costs, new
of NAPR registration software; development and           personnel costs, and time lost to prepare
maintenance of a centralized database; integration       for and implement the transition. As a refer-
of all registration offices into a digital information   ence point, the official state budget contribu-
network; and the provision of on-line operations.        tion to the SDLM was US $670,000 in 2003.
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           Comprehensive Land Registration Reform


                                                        Table 1 provides a breakdown of capital costs:        larger market reform initiative of the new gov-
                                                      Table 1: Capital Expenditures (Sept 2004-2005)          ernment. Notable aspects of the reform include:
                                                                      NAPR        Donors        Total         ■■ The Rose Revolution provided the frame-
                                                                                                                   work to implement political changes not
                                                      Renovations    $301,603    $534,433       $836,036
                                                                                                                   otherwise possible.
                                                      Software            $212      $3,461         $3,673
                                                                                                              ■■ International funding and technical support
                                                      Computers        $85,974    $159,252      $254,226
May 2006




                                                                                                                   played an important role in the reforms.
                                                      Furniture       $154,708                  $154,708      ■■ Georgian leadership generally took the lead

                                                      Total         $542,497 $697,145 $1,239,643                   in debating the strategies and designing
                                                                                                                   responses.
                 4
                                                                                                              ■■ A Georgian model taking into account
                                                        The differential personnel cost between the
                                                                                                                   various aspects of Georgian reality was
                                                        SDLM and the NAPR are also substantial. In
                                                                                                                   developed.
Issue 3




                                                        2003, the budget for personnel salaries for the
                                                                                                              ■■ Sustained leadership at the responsible
                                                        1,100 staff at SDLM (not including BTI) totaled
             About BizCLIR:                                                                                        organizations has provided a consistent,
                                                        US $468,000. In 2005, NAPR expended over US
             BizCLIR, or the Business Climate Le-                                                                  stable framework for policy.
                                                        $2.4 million for the staff of over 600 consultants.
             gal & Institutional Reform Project, is                                                           Conclusions
                                                        Over the long term, however, these costs, while
             a multi-year initiative of the United                                                            The approach followed by the new Georgian
                                                        substantial, need to be placed within the context
             States Agency for International De-                                                              government has created momentum for fur-
                                                        of NAPR’s current and potential revenue stream.
             velopment with the goal of improv-                                                               ther reform. “The situation is better, but it is
                                                        In 2005, NAPR received a state budget contribu-
                                                                                                              not enough,” reflected David Egiashvili, chair-
             ing the efficiency and impact of as-       tion of US $325,000. At the same time, however,
                                                                                                              man of the NAPR. Egiashivili recognized that
             sistance programs intended to help         NAPR collected registration fees totaling over US
                                                                                                              infrastructure conditions and service at local
             developing countries improve their         $4.5 million, of which NAPR—an independent
                                                                                                              offices are not consistent, and he is planning
                                                        entity—contributed approximately US $1.5 mil-
             business enabling environments.                                                                  necessary investment for equipment and train-
                                                        lion to the state in value-added tax (VAT) and
             This series, Best Practices for the                                                              ing. Further, in anticipation of the stress that
                                                        employee tax contributions. In 2006, NAPR,
             Business Environment, represents                                                                 will be placed on the existing system by the in-
                                                        which does not receive revenue from local prop-
             one of many knowledge manage-
                                                                                                              creased volume of registration, the Tbilisi office
                                                        erty taxes, is expected to be operationally self-
                                                                                                              is revamping its computer program to improve
             ment components of the BizCLIR             sustaining based on fees charged for services.
                                                                                                              searchability of its database and restructuring
             project. The goal of the series is to                                                            its staff to separate front-office client interface
                                                        Results
             highlight the known best practices,                                                              from the back-office information management.
                                                        The most widely agreed-upon reform success is
             case studies, lessons learned, and         the reduction in the culture of corruption. One       The Law on Registration of Rights over Real Prop-
             in some cases worst practices, so          commenter from the private sector stated, “To-        erty, approved in March 2006, also attempts to
             that the lessons can benefit other         day, there are no bribes.” Additionally, as noted     clarity aspects of the registration procedure. Spe-
             practitioners in the field. All issues     previously, the NAPR was scheduled to achieve         cifically, it allows for the registration of “virtual
             are available at www.bizclir.com.
                                                        the objective of self-financing by 2006. Increased    properties” such as apartments in buildings under
                                                        speed of the registration process and clarity re-     construction. Additional regulations are expected
                                                        garding the institutions involved are also high-      to be issued by the Ministry of Justice in order
                                                        lighted as a positive result. Previous estimate of    to implement these changes. Zara Bibliashvili of
                                                        time required for the process averaged 39 days.       BGI Law believes that the system is moving in
                                                        In practice, however, there were no specific time     the right direction. “The laws are manageable,”
                                                        requirements for services, which had opened the       Bibliashvili confirmed. “Now is the time also for
                                                        door to “additional” payments to secure timely        society and members of the business commu-
                                                        services. NAPR is now recognized by the public as     nity in particular to demand improved services
                                                        the responsible entity for land registration, and     in these and others areas of the government.”
                                                        standard registration procedures take 10 days.
                                                        Broadly speaking the specific objectives identi-
                                                        fied by international and Georgian specialists
                                                        in land registration were consistent with the


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