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Report and Recommendation of the President
to the Board of Directors
Sri Lanka
Project Number: 41198
August 2008
Proposed Loan
Georgia: Municipal Services Development Project
CURRENCY EQUIVALENTS
(as of 1 August 2008)
Currency Unit – lari (GEL)
GEL1.00 = $0.710257
$1.00 = GEL1.407904
ABBREVIATIONS
ADB – Asian Development Bank
CSO – civil society organization
CWRD – Central and West Asia Department
EARF – environmental assessment and review framework
EBRD – European Bank for Reconstruction and Development
EIA – environmental impact assessment
EMP – environmental management plan
FWPCA – Future Without Poverty Civil Alliance
GSIF – Georgian Social Investment Fund
IEE – initial environment examination
IFA – investment financing agreement
LAR – land acquisition and resettlement
MCC – Millennium Challenge Corporation
MDDP – Municipal Development and Decentralization Project
MDF – Municipal Development Fund
NCB – national competitive bidding
O&M – operation and maintenance
RIDP – Regional Infrastructure Development Project
RSDD – Regional and Sustainable Development Department
SAR – subproject appraisal report
SSR – subproject summary report
WSC – water supply company
WSS – water supply and sanitation
NOTES
(i) The fiscal year (FY) of the Government and its agencies ends on 31 December.
FY before a calendar year denotes the year in which the fiscal year ends, e.g.,
FY2008 ends on 31 December 2008.
(ii) In this report, "$" refers to US dollars
Vice-President B.N. Lohani, Vice-President-in-Charge, Operations 1
Director General J. Miranda, Central and West Asia Department (CWRD)
Director M. Westfall, Social Sectors Division, CWRD
Team leader I. Keum, Principal Urban Development Specialist, CWRD
Team members S. Aman-Wooster, Senior Civil Society and Participation Specialist,
Regional and Sustainable Development Department (RSDD)
L. Blanchetti-Revelli, Social Development Specialist (Resettlement),
CWRD
A. Chiplunkar, Senior Water Supply and Sanitation Specialist, RSDD
L. Nazarbekova, Senior Counsel, Office of the General Counsel
Y. Yong, Urban Economist, CWRD
C. Yu, Senior Safeguards Specialist, CWRD
CONTENTS
Page
LOAN AND PROJECT SUMMARY i
MAP
I. THE PROPOSAL 1
II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES 1
A. Performance Indicators and Analysis 1
B. Analysis of Key Problems and Opportunities 3
III. THE PROPOSED PROJECT 7
A. Impact and Outcome 7
B. Outputs 8
C. Special Features 8
D. Project Investment Plan 8
E. Financing Plan 9
F. Implementation Arrangements 10
G. Municipal Development Fund of Georgia 14
IV. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS 15
A. Economic 15
B. Financial and Institutional 16
C. Environmental 16
D. Social 17
E. Risks 18
V. ASSURANCES AND CONDITIONS 19
A. Specific Assurances 19
B. Conditions for Loan Disbursement 20
VI. RECOMMENDATION 20
APPENDIXES
1. Urban Sector Problem Analysis 21
2. Major Ongoing Projects and Programs in Water Supply and Sanitation Sector 22
3. Design and Monitoring Framework 23
4. List of Indicative Subprojects 25
5. Detailed Cost Estimates and Financing Plan 26
6. Flow of Funds 27
7. Municipal Development Fund of Georgia 28
8. Eligibility Criteria for Investment Subprojects 38
9. Investment Project Preparation and Appraisal 40
10. Implementation Schedule 43
11. Procurement Plan 44
12. Municipal Development Fund Reform Action Plan 46
13. Economic Analysis Framework 47
14. Environmental Assessment and Review Framework 49
15. Summary Poverty Reduction and Social Strategy 55
SUPPLEMENTARY APPENDIXES (available on request)
A. Financial Review of Municipal Governments
B. Municipal Development Fund Problem Analysis
C. Financial Management Assessment of the Municipal Development Fund of Georgia
LOAN AND PROJECT SUMMARY
Borrower Georgia
Classification Targeting Classification: Targeted intervention (TI-M)
Sectors: Multisector (water supply, sanitation, and waste
management; transport and communications)
Subsectors: Water supply and sanitation, waste management, and
roads and highways
Themes: Inclusive social development, environmental sustainability,
capacity development
Subthemes: Human development, urban environmental
improvement, institutional development
Environment Category: Financial Intermediation. Environmental concerns will be
Assessment addressed through the environmental assessment and review
framework agreed with the Municipal Development Fund (MDF) of
Georgia for selection and implementation of investment projects.
Project Description The Project primarily aims at increasing the effectiveness of
participating municipal governments in their identification, planning,
delivery, and cost recovery of municipal infrastructure and utility
services. The types of projects to be implemented will include
rehabilitation of water supply and sewerage, development of solid-
waste management systems, rehabilitation of municipal roads, and
improvement of municipal transportation. The Project will finance (i)
capital resources to MDF to help it develop its lending program for
municipal government investments in repair and rehabilitation of
municipal infrastructure and local utility services, and (ii) institutional
development of participating municipal governments, including
water supply companies, through capacity-development activities
including municipal services development programs and training
programs.
Rationale Municipal services—including water supply and sanitation, solid-
waste management, road repair, and urban transport—in Georgia
have deteriorated due to economic collapse, political instability, and
a vitiated policy and institutional environment since the dissolution
of the former Soviet Union. Capital investments in infrastructure and
operation and maintenance (O&M) have been neglected
nationwide.
As a result, the quality of municipal services is low. Ownership and
delivery of these services belongs to municipal government.
Although municipalities have a mandate to deliver these services, in
many instances they do not have the financial and technical
resources to do the job. Key service targets—such as coverage,
quality, and continuity—have been falling or are already at
unreasonably low levels. This situation affects the quality of life of
ii
people but also constrains investment, business development, and
ultimately the creation of jobs. Most principal and secondary towns
are equally affected by this problem.
The Government understands the issue and has started to put
together a strategic framework and support actions to address it.
The most effective of the measures taken is the establishment of
the MDF. This fund provides finance and technical advice to
municipal governments. Its work so far has been effective but
coverage needs to be expanded further. To date, more than 10
municipalities have benefited from MDF operations.
Decentralization was seen as central to achieving the objectives.
Since 1997, the Government has carried out local government
reforms in two stages, and in that time MDF has managed to extend
finance to local governments while generating enough revenues to
convert it into effectively a revolving fund.
The Project will focus on improving basic municipal services and
the rehabilitation, repair, and extension of dilapidated urban
infrastructure. It will also provide technical assistance to assist the
participating municipalities in improving local revenues, financial
management, and reporting systems. Moreover, an integral part of
the Project is to provide institutional strengthening and capacity
development to municipalities to ensure the sustainability of project
benefits.
The Asian Development Bank (ADB) is not the only international
financing institution working with the Government and MDF. The
World Bank has already financed two municipal development
projects. The European Bank for Reconstruction and Development
has also participated in several large water supply projects, some of
them cofinanced with the Millennium Challenge Corporation on a
parallel basis. The Millennium Challenge Corporation is the largest
bilateral source of grant aid for Georgia, and is mainly involved in
the rehabilitation of water supply, sewerage, and irrigation systems.
The other bilateral aid agencies are involved in the municipal
sectors, mostly through technical cooperation by cofinancing with
multilateral financial agencies.
The Project is the first ADB intervention in the country. It will build
on the experience of other multilateral and bilateral financial
institutions’ projects. Cooperation with other financial institutions is
critical and the Ministry of Finance has taken an impressive lead in
ensuring such cooperation. This is particularly important for the
institutional strengthening activities under the Project, which will be
designed in consultation with other international aid agencies. This
will maximize benefits, avoid unnecessary and costly overlap, and
prevent confusion in policy matters.
Impact and Outcome The expected overall impact of the Project will be improved
municipal environment and public health in Georgia. The outcome
iii
is improved municipal infrastructure and service delivery.
The Project comprises two components: an investment projects
financing facility, and project management and capacity
development. The output of the first component is (i) increased
quality, coverage, and reliability of water supply, sanitation, and
solid-waste management; and (ii) improved roads.
The outputs of the project management and capacity-development
component are (i) improved capacity of municipal governments to
prepare and appraise feasibility, engineering design, environmental,
social, and other related studies; (ii) improved capacity in project
management at municipal level; (iii) strengthened corporate and
business planning processes within MDF; and (iv) improved
capacity of MDF for studies and training.
Project Investment The total cost of the Project, including physical and price
Plan contingencies, is estimated at $63.25 million equivalent, including
$9.30 million in taxes and duties.
Financing Plan ($ million)
Source Total %
Asian Development Bank 40.00 63
Municipal Development Fund 10.20 16
Municipal Governments 9.80 16
Central Government 3.25 5
Total 63.25 100
Source: Asian Development Bank estimates.
It is proposed that ADB provide a loan in various currencies
equivalent to Special Drawing Rights 24,642,000 ($40 million
equivalent) from ADB’s Special Funds resources. The loan will have
a 32-year term, including a grace period of 8 years, and interest
charge of 1.0% per annum during the grace period and 1.5% per
annum thereafter.
Allocation and The Government will make the proceeds of the ADB loan available
Relending Terms to MDF as a grant. Under the investment component, the proceeds
of the ADB loan and MDF funds will be passed on to eligible
municipal governments. There will be two financing windows: (i) a
combination of loans and grants to the financially stronger municipal
governments and local utilities which have the capacity to borrow,
and (ii) grants to the financially weaker municipal governments
which have limited or zero capacity to borrow. Eligibility criteria for
borrowing are based upon the creditworthiness of each municipal
government.
Loans from MDF to municipal governments will be in lari and will be
repayable in the same currency over a period of up to 10 years,
including a grace period of up to 1.5 years to cover the construction
iv
period. MDF will charge interest on these loans at 12% per annum
to include provisions for credit defaults, the cost of MDF
administration and other operational expenses, and a margin of
profit.
Period of Utilization Until 30 June 2013
Estimated Project 31 December 2012
Completion Date
Implementation MDF, under the overall direction and guidance of its supervisory
Arrangements board headed by the prime minister, will coordinate project
implementation work through consultants and participating
municipal governments responsible for day-to-day project
management.
Executing Agency Municipal Development Fund of Georgia
Procurement All procurement financed under the Project will be carried out in
accordance with ADB's Procurement Guidelines (2007, as
amended from time to time). Contracts for civil works that are
estimated to cost more than $1 million equivalent, and contracts for
goods that are estimated to cost more than $500,000 equivalent,
will be procured using international competitive bidding procedures.
Civil works contracts estimated to cost $1 million equivalent or less,
and contracts for procurement of goods estimated to cost between
$100,000 and $500,000 equivalent, will be carried out through
national competitive bidding. Prior to commencement of any
procurement activity under national competitive bidding, ADB and
the Government will update their review of the public procurement
law to ensure that it is consistent with ADB's Procurement
Guidelines. Any necessary modifications and clarifications to the
public procurement law will be agreed between ADB and the
Government and included in the procurement plan. Goods contracts
estimated to cost less than $100,000 equivalent will be carried out
through shopping procedures. Goods valued below $10,000 and
civil works valued up to $10,000 may be purchased directly from the
supplier and contractor.
Consulting Services The selection and engagement of consulting services to be
financed under the Project will be in accordance with ADB's
Guidelines on the Use of Consultants (2007, as amended from time
to time) and the procurement plan. The following methods of
selection will be applied: (i) quality- and cost-based selection; (ii)
quality based selection; (iii) consultants’ qualifications selection for
small consultancy assignments that cost less than $200,000 per
contract; (iv)) least-cost selection for very small consultancy
assignments that cost less than $100,000; (v) fixed budget
selection; and (vi) single source selection and ADB individual
consultant selection procedures for individual national or
international consultants for the following types of assignments:
v
environmental, social, tariff, and O&M studies.
Project Benefits and Due to the nature of the Project, it is not possible to determine in
Beneficiaries advance the municipalities that will be participating in the Project,
nor the investment projects for which these municipalities will
ultimately request MDF financing. Therefore, a quantitative project
benefits analysis has not been prepared at this stage.
The Project will directly benefit the municipal population in terms of
health and living conditions resulting from (i) safer and more reliable
water supply, (ii) improved environmental sanitation through better
sewerage and solid-waste management services, (iii) time savings
associated with collecting water, and (vi) improved road conditions.
The economies of these municipalities will benefit indirectly from
enhanced productivity as a result of health improvements and
increased efficiency from improved roads and public transport.
The Project will result in significant municipal infrastructure O&M
cost savings as a result of the rehabilitated systems, and more
efficient O&M procedures. The Project will also have a positive
impact in terms of employment creation from the work involved in
construction and rehabilitation, together with O&M. Training and
technical assistance under the Project will enhance the productivity
of municipal governments and MDF personnel.
Risks and The potential risks associated with the Project include that (i)
Assumptions municipal governments are unable to provide required counterpart
contributions for MDF investments, and (ii) arrangements for the
O&M of subproject assets are not implemented effectively.
The Project includes measures to mitigate these risks. For the first
risk, financial eligibility criteria for participating municipal
governments during preparation as well as procurement and
contract payment procedures during implementation will ensure
counterpart contributions (i.e., representatives from MDF and
municipal government sign contracts and disbursement
documents). For the second risk, the capacity-development
component of the Project is designed to provide consulting services
covering legal and/or technical aspects of O&M planning and
funding, including measures to increase cost recovery, tariff
collection, and metering. Any risk associated with overall project
implementation is mitigated by MDF’s considerable experience in
implementing internationally funded projects. Moreover, ADB review
missions will monitor these mitigation measures and ensure
sustainability of the Project.
41o00'E 45o 00'E
GEORGIA
MUNICIPAL SERVICES DEVELOPMENT PROJECT
Bzyb R.
Gagra
Pitsunda
ABKHAZETI
Omarishara
Gudauta Lata Kodori R. Mestia
RUSSIAN F E D E RATI O N
43 o00'N Sukhumi
Otap Inguri 43o 00'N
R.
Gulripsh Khaishi
Tqvarcheli Lentekhi
Ochamchira Jvari
Gali Khvanchkara
Zugdidi
Pichori Rioni R. Mleta
Kvaisi
Tqibuli Pasanauri
Tskhaitubo
Black Sea Senaki Chiatura
Rion
i R.
Kutaisi R. Tskhinvali
Poti la
iri
Samtredia Qv
Lanchkhuti
Chokhatauri Zestaponi Akhmeta
Supsa R. Ala
Khashuri M zan
Ozurgeti Gori tkvari Mtskheta Telavi iR
.
Lagodekhi
Borjomi (Ku
Kobuleti ra)
R.
Atskuri Bakuriani Gurjaani
T'BILISI
Batumi
AJARA
Akhaltsikhe
Khulo Io Tsnori
Keda Lake Tabatskuri Rustavi ri
Vale R.
Marneuli
Dedoplis Tsqaro
Lake Paravani
Kazreti
Ninotsminda
TURKEY
41 o00'N 41o00'N
National Capital ARMENIA
Oblast Capital AZERBAIJIAN
City/Town
National Road
Other Road N
Railway
River
Oblast Boundary 0 20 40 60 80
International Boundary Kilometers
Boundaries are not necessarily authoritative.
07-4439 RM
41o00'E 45 o00'E
I. THE PROPOSAL
1. I submit for your approval the following report and recommendation on a proposed loan
to Georgia for the Municipal Services Development Project.
II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES
A. Performance Indicators and Analysis
2. The urban population of Georgia has remained stable at about 2.3 million, or about 52%
of the total, from 2000 to 2006. 1 Estimates for 2015 indicate little change. Most population
movements have been from smaller towns to larger centers, rather than from rural to urban
areas. Because of the relatively stable urban population, government investment is to focus on
the rehabilitation of deteriorating basic infrastructure. For many years, investments in
infrastructure assets and their maintenance were neglected, and today urban areas have
inadequate water supply and sanitation, inefficient solid-waste management, and poor public
transport, and they lack basic road maintenance. Annual investments required to improve urban
infrastructure nationally have been estimated to be about $136 million,2 including $47 million for
water supply and sanitation.3
3. Most urban water supply systems are more than 40 years old, and some date back to
the 1930s–1940s. Nearly all the water supply and sanitation infrastructure requires immediate
rehabilitation simply to maintain a minimal level of service. Most of the pumps and equipment
are now at the end of their usable life, and more than 50% of the water supply networks need
major rehabilitation or replacement. Sewer pipes are broken and systems clogged. Only five out
of the 29 wastewater treatment plants are in operation and these are limited to physical
(mechanical) treatment; none of the biological treatment systems are in operation.
4. Water supply and sanitation services are provided in all municipalities by 40 state-owned
and four recently privatized utility companies. Service coverage varies significantly, with water
supply from 30% to nearly 100% and sewerage from 0% to 90%. Only a few consumers have
supply 24 hours and 7 days a week; others receive intermittent supply for 2–8 hours several
times a week. The population not connected to a centralized water supply relies on local wells
and springs. There is no regular water quality testing, and local laboratory facilities are largely
defunct because of the lack of investment since 1992.
5. There is no reliable data on unaccounted-for water, but experience from a number of
ongoing rehabilitation projects shows that this ranges from 40% to 60%. Water charges remain
a political issue and tariffs are set at very low levels, which are often not sufficient to cover the
operation and maintenance (O&M) costs. The billing collection rate is low at about 58%, and
consumption is high compared to other European countries. 4 Since metering is limited and
because of the low prices, poor payment discipline, and unreliable service provision, very few
1
ADB. 2007. Key Indicators 2007. Manila.
2
Total per capita investment requirement for urban infrastructure for low-to-middle income countries in Asia (Source:
Operations Evaluation Department, ADB. 2006. Urban Sector Strategy and Operations. Manila. Special Evaluation
Study, inflated to 2007 prices, and multiplied by the estimated urban population of Georgia.
3
2003 estimate for capital repair and rehabilitation adjusted to 2007 prices. (Source: OECD. 2006. Financing
Strategy for the Urban Water Supply and Sanitation Sector in Georgia. Paris.)
4
For instance, about 800 liters per person per day in Tbilisi, compared with 110–140 liters per person per day in
Western Europe. (Source: OECD. 2006. Financing Strategy for the Urban Water Supply and Sanitation Sector in
Georgia. Paris.)
2
water supply companies (WSCs) are financially viable and most require government subsidies,
often sourced by the municipal government.
6. All municipalities provide solid-waste collection and disposal services, although
coverage varies. Nevertheless, solid-waste collection is generally inadequate and many
vehicles are in very poor condition. Disposal sites are not properly designed and managed,
resulting in the pollution of underground and surface water bodies and the surrounding
environment. Most main roads in municipalities are in a reasonably good condition, although
they need improved drainage. Many secondary and tertiary roads need substantial surface
improvement as well as improved drainage; most roads are easily flooded.5 Public transport
remains a serious problem in many municipalities because of poor road conditions and
management deficiencies. There has been some outsourcing of solid-waste collection and
disposal and road maintenance services through management contracts, but the poor condition
of equipment and dilapidated infrastructure have prevented providers from improving services.
7. In the late 1990s, the Government began to (i) decentralize municipal administrative
responsibilities, (ii) strengthen the legislative and regulatory framework for municipal services,
(iii) restructure sector institutions, and (iv) mobilize financial resources for the improvement of
municipal infrastructure. These reforms were undertaken in two stages. The first stage involved
local council elections and better identification of responsibilities among the levels of
government, and encouraged greater financial accountability. The second stage, undertaken in
the early 2000s, provided the legal and legislative framework to address issues that impeded
the functioning of the new local government system. This reaffirmed the rights and roles of
citizens’ participation in local government and clarified the devolution of responsibility for local
utility services.
8. There are now 69 municipal governments, including five self-governing cities whose
mandates are outlined in the Organic Law on Local Self-Government (2006). The Law on Local
Budgets (2006) sets new intergovernmental fiscal relations and implies better consistency
between the functions and resources provided to the local governments. It aims to ensure fiscal
autonomy of local budgets and sets a clear mechanism for equalization of central transfers
through a formula-based system. Actions in late 2007 have led to the centralizing of individual
income tax receipts (previously a major local revenue source for municipal governments) and
the enhancement of the central transfer system. These changes will reinforce the financial
control of the Government and will result in lower local revenues for all municipalities.
9. Most municipal governments are small and currently 62 municipal governments (90%)
have populations of less than 100,000; 34 municipal governments (49%) have fewer than
40,000 people. Revenues too are low, and in 2007, half had total revenues of less than GEL3
million.6 Local tax revenues made up on average about 50% of the total in 2007, but when
Tbilisi is excluded the proportion fell to about 42%. The amounts, however, are low and five
municipal governments had annual local revenues of less than GEL10 per capita in 2007; 57
municipal governments (83%) collected less than GEL100 per capita. Only 12 municipal
governments have outstanding loans with MDF, and estimates show that between 14 and 18
municipal governments currently have the potential to borrow.7 A financial review of municipal
governments is in Supplementary Appendix A.
5
Most secondary and tertiary roads do not have side drains, or if provided they are not functioning properly.
6
Figures provided by the Ministry of Finance.
7
Source: ADB estimates.
3
10. The management and use of water resources in Georgia is governed by the Water
Resources Law (1997, as amended in 2000). The central Government—currently through the
Ministry of Economic Development—is tasked with developing sector policy, setting service
standards, and mobilizing financing. From November 2007, the approval of water tariffs became
the responsibility of the National Energy and Water Supply Regulatory Commission.8 However,
the lack of tariff guidelines means that all pending increases are on hold. The basic principles
that tariffs should cover (i) operating, repair, rehabilitation, and maintenance costs; (ii) capital
recovery; and (iii) profit, have been established. The final guidelines are scheduled for approval
in the fourth quarter of 2008.
11. The Government’s main goal is to improve people’s living standards through better basic
services, particularly safe and reliable water supply and improved sewerage facilities. The first
priority is to rehabilitate and replace deteriorated equipment and works, followed by
improvements in the management of municipal services. The latter involves enhancing capacity
within municipal governments and WSCs, focusing on (i) devolution, (ii) improving financial
planning and management, (iii) establishing mechanisms to ensure system repair and
maintenance, and (iv) engaging the private sector in the management and delivery of services.
These basic policy directions are unlikely to change, and are expected to be reflected in the
future urban sector strategy.
12. To improve the availability and use of development finance by municipal governments,
the Government established a Municipal Development Fund (MDF) under the World Bank’s
Municipal Development and Decentralization Project (MDDP) in 1997. MDF was tasked to
support (i) strengthening of the institutional and financial capacity of local governments, (ii)
investing financial resources in municipal infrastructure and services, and (iii) improving the
primary economic and social services for the local population on a sustainable basis.
B. Analysis of Key Problems and Opportunities
13. A major challenge for the Government is how to improve municipal infrastructure and
services in a sustainable way. Municipal infrastructure is deteriorating, coverage is inadequate,
and poor levels of service delivery are common. Services are trapped in a vicious circle of poor
performance—the tradition of subsidies has left tariffs and charges low, but the current poor
service quality means people are reluctant to pay more. Furthermore, payment discipline is lax
and collection rates are low. In government, salaries are low, making it difficult to attract or
retain staff and aggravating the problems of local skills shortages. This further weakens the
ability of municipal governments and WSCs to provide services. An analysis of urban sector
problems is in Appendix 1.
14. Poor Municipal Service Provision. The Government does not have a national urban
sector development strategy, an overall urban policy, or a long-term investment program,
although it does have an outline program for the water and sanitation sector prepared by the
Organisation for Economic Cooperation and Development.
15. The lack of effective urban planning is also a problem. A number of municipalities have
city development plans, but most are inappropriate and outdated. They lack a vision for the
future of the city, and do not include time-bound investment programs, spatial growth strategies,
8
Previously the Georgian National Energy Regulatory Commission, with responsibility for regulating the electricity
and natural gas industries, including the approval of tariffs.
4
or action plans for implementation. There is inadequate information on which to plan, and a lack
of public participation in the planning process.
16. Interest in private sector participation in municipal services is growing, and it is
understood that four WSCs have been privatized (those of Gardabani, Rustavi, Mtskheta, and
Tbilisi). The State Enterprise Management Agency under the Ministry of Economic Development
is preparing all WSCs for privatization, including proposals to amalgamate some of the
uneconomic systems within the smaller municipalities into a few regional authorities. Low
household incomes limit the ability of the people to pay for economically priced services.
17. Weak management and low technical capacity of municipal governments and WSCs is
widespread. Many have inadequate business planning systems, poor asset inventories, and
generally weak management procedures. Funding and technical capacity constraints limit
preventive maintenance and lead to poor operational efficiencies. Unresponsive management
information systems make financial and performance monitoring difficult. The uneconomic size
of some municipal governments and WSCs also inhibits efficiency.
18. Limited Financial Resource Mobilization Capacity. Local revenue generation by
municipal governments and WSCs needs substantial improvement. Inadequate financing limits
improvements in service delivery. Most municipal infrastructure is financed by national
government grants, except within a few municipalities where there have been some loans from
MDF, largely under the World Bank-funded MDDP. Neither MDF nor municipal governments
have accessed private financial and capital markets. Internal cash generation within
municipalities and WSCs is poor because of low revenues—low tariffs, charges, taxes, and
revenues, poor collection systems, and inadequate asset inventories or tax bases—and an
inability of many to borrow. Investment financing from the Government is limited.
19. MDF directly implements subprojects. It has only just begun to develop its long-term
vision for future operations but is still uncertain of its role in the municipal finance market. Much
of this stems from the lack of strategic business planning and budgets, which lack a longer-term
horizon and are prepared on strictly financial lines for only 1 year. There is little experience
within MDF for raising development finance and operating as a development bank, although it
has extensive project implementation experience.
20. In practice, MDF operates as a disbursement agency for international and local funds
rather than as a financial intermediary. It has a number of project implementation units for these
projects and largely runs these as separate project implementation and/or management offices,
often with different funding and implementation arrangements for each. Actual subproject
implementation, including bidding and award of contracts and supervision, is undertaken by
MDF and not the borrowing municipal governments or WSCs. The MDF problem analysis is in
Supplementary Appendix B.
21. Opportunities. The above-mentioned problems will be addressed through intervention
at the local level to improve service delivery by making more financing available and developing
the management, financial, and technical capacity of municipalities and WSCs. This calls for
interventions to (i) provide finance for the rehabilitation of urban infrastructure and urban
services though MDF, (ii) strengthen municipal governments and WSCs by increasing financial
resource mobilization and technical capacity, and (iii) transform MDF into a more sustainable
municipal financing institution.
5
22. Investments for rehabilitation of physical infrastructure are also a key element of
municipal service delivery. This will prevent deterioration of assets and bring about
demonstrable improvements in performance in ways that are meaningful to customers. With a
number of relatively small investments, the service level could be increased substantially.
Municipal services affect the daily life of citizens, and improvements will be quickly perceived
and recognized. Public awareness about the improvements, associated costs, and implications
can be further enhanced through proper campaigns, which can lead to the acceptance of tariff
increases and other financial reforms.
23. The Project will focus on the improvement of basic municipal services by rehabilitating,
repairing, and extending the currently dilapidated infrastructure. It will also provide technical
assistance to help the participating municipal governments and WSCs reform their tariffs and
charges and accounting, financial management, and reporting systems. Moreover, it will provide
institutional strengthening and capacity development to the municipal governments and WSCs
to ensure sustainable project benefits.
24. For the capacity development of MDF, the Project will focus on (i) raising and attracting
some financing from other sources beyond Government and international financial agencies, (ii)
encouraging participation of financially weaker municipalities in the process of change, (iii)
providing financing to many small subprojects and allowing flexibility in subproject preparation
and implementation, and (iv) providing opportunities for the project municipalities to attract
cofinancing and private sector investment.
25. Policy Dialogue. In support of the Project, policy dialogue involved (i) cost recovery,
tariff reform, and privatization; (ii) improving the capacity of MDF and increasing lending to
municipal governments; and (iii) a national urban sector road map. The policy dialogue will
continue during implementation.
26. The Government is formulating guidelines for water and wastewater tariffs and these will
promote the economic use of resources and meet financial objectives, including full cost
recovery and profitability. However, to protect poor people from water tariff increases, most
municipal governments have implemented a social assistance or minimum living standard
scheme for households below the poverty line. While it is Government policy to prepare all
WSCs for future privatization, polices for public–private partnerships require strengthening.
27. MDF needs to prepare a corporate plan that clearly sets a vision for the future and
strategies that lead to it becoming a more sustainable lending institution. To increase lending to
municipal governments, it is essential to make the current decentralization efforts work better for
municipal governments. There is a need to raise more revenue from local taxes, tariffs, fees,
and charges, so that municipal governments become more financially independent. However,
there is a large number of very poor small municipal governments, and these require
strengthening to better enable them to provide services and eventually become borrowers. The
central transfer system, through the equalization formula, works well but there are still many
other transfers that are applied on an ad hoc basis. More rationalization of the central transfer
system is required.
28. A national urban sector strategy for Georgia is required in order to provide a vision or
mission for the sector, identify objectives, and include an action plan for development. A
national urban spatial strategy would form a key part of the strategy. How cities and towns fit
into this national strategy sets the context for future urban development including rehabilitation
of basic urban infrastructure. The strategy should address the key issues of (i) investment
6
needs and priorities, (ii) the alignment of government policies and actions, (iii) a financing plan,
(iv) the definition of appropriate service standards, and (v) the identification of public–private
partnership opportunities.
29. External Assistance. To help the Government develop and improve basic municipal
services, external assistance has been provided by the World Bank, the European Bank for
Reconstruction and Development (EBRD), the Millennium Challenge Corporation (MCC), the
European Union, and bilateral aid agencies from Canada, Germany, the Netherlands, the
United Kingdom, and the United States. The World Bank has participated in two MDDPs and a
third similar project is being prepared. EBRD has also financed several large water supply
projects, some of them cofinanced with MCC on a parallel basis. MCC is the largest bilateral
source of grant aid to Georgia and is involved in the rehabilitation of water supply, sewerage,
and irrigation systems. The other bilateral aid agencies provide technical assistance and
cofinancing with multilateral financial agencies. The major ongoing programs and projects in the
water sector are described in Appendix 2.
30. The Project is ADB’s first intervention in Georgia, and has built on the experience of
other multilateral and bilateral financial institutions’ projects. Cooperation with other agencies
including the World Bank is critical, and the Ministry of Finance has taken the lead in ensuring
coordination. This will maximize benefits, avoid unnecessary and costly overlaps, and prevent
confusion in policy matters. The Project is designed to complement the third World Bank project,
and be consistent in sector policy, capacity development, lending, and operational
requirements. Close coordination with the World Bank will continue during implementation.
31. Lessons. This is ADB’s first project in Georgia and the lessons learned from previous
projects financed by other international financial agencies are reflected in the project design.
These include (i) the importance of developing the capacity of municipal governments to identify
and prepare investment projects, (ii) the need to link MDF operations to the decentralization
status, and (iii) close coordination with other international financial agencies.
32. ADB’s three strategic focuses for Georgia9 are (i) improving service delivery in municipal
infrastructure within the evolving decentralization process, (ii) reducing road transportation
constraints on economic activity, and (iii) upgrading and developing energy infrastructure.
Proper management of basic urban infrastructure and providing adequate municipal services
are essential to sustaining levels of social development and enhancing the living standards and
productivity of the urban population. In the urban sector, ADB is focusing on (i) sector reforms to
ensure the sustainability of infrastructure assets, (ii) strengthening the link between financing
local infrastructure and decentralization reforms, (iii) stimulating local economic development,
and (iv) improving the quality of life of the urban population. The Project is consistent with ADB’s
interim operational strategy for the country (footnote 9).
33. Lending Modality. To date, the traditional forms of ADB intervention in the urban sector
are the project loan, sector loan, and sector development program loan modalities.10 None of
these lending models appear to satisfy Government constraints and the requirements of the
Project, the major component of which is the infrastructure project financing facility. Because a
new approach would be required, the Project has adopted the financial intermediation loan
9
ADB. 2008. Georgia: Interim Operational Strategy (2008–2009). Manila.
10
ADB. 1999. Urban Sector Strategy. Manila.
7
modality as the best fit. 11 However, it should be noted that standard ADB financial
intermediation loan requirements 12 (the participation of eligible financial institutions and
commercial entities as well as relending and onlending arrangements) will not be applicable for
reasons discussed below.
34. MDF is not a financial institution. The Government has been using MDF (a special
purpose vehicle, the sole purpose of which is to provide funds to municipalities on a grant or a
mix of loan and grant basis) to finance the rehabilitation of dilapidated urban infrastructure. MDF
is not a commercial entity. Since its establishment in 1997, MDF has been operating as a
project implementation and disbursing agency for funds provided under foreign-assisted and
locally funded projects. MDF has experience and necessary capacity for identifying, appraising,
selecting, implementing, and monitoring development subprojects under well established rules,
policies, and procedures.
35. End recipients of the ADB funds are not commercial entities. The Government needs to
provide scarce public resources to a wide range of municipalities, including those with limited
borrowing capacity. The municipal governments are not commercial entities and they do not
have access to commercial finance. The Project will provide additional working capital to MDF
to ensure it continues to meet the investment needs of municipal governments. This is the
current practice in Georgia and has been proven to be an effective mechanism for providing
municipal governments with affordable long-term credit and the recovery of such investments.
36. The new approach will not distort financial markets. ADB loan proceeds will be provided
by the Government to MDF entirely as a grant. The loan proceeds will then be onlent or
ongranted to end users at below market rates. However, this will not distort the financial markets
as the end users under the Project do not have any access to commercial financing. Due
diligence of development subprojects to be financed under the investment component will be
carried out by MDF in accordance with established rules and procedures.
37. The potential risk associated with the new approach includes the lack of change within
MDF to make it a more sustainable financing entity. This risk will be mitigated through the
implementation of a time-bound action plan under the Project. The capacity-development
component will provide the assistance needed to support the development of MDF’s long-term
vision, corporate strategy, and revised business model.
III. THE PROPOSED PROJECT
A. Impact and Outcome
38. The expected overall impact of the Project will be an improved municipal environment
and public health in Georgia. The outcome is improved municipal infrastructure and service
delivery. The design and monitoring framework is in Appendix 3.
11
This approach is in line with ADB’s urban sector strategy, which advocates using a greater variety of lending
modalities given the rapidly changing context of financial markets. This will also contribute to promotion of
development effectiveness by harmonizing ADB assistance with that of its partners and with country priorities and
systems. The World Bank has adopted a similar approach in Georgia under its two loans to MDF (MDDP I and II),
which has proven to be effective. As a result, the World Bank is preparing a third project.
12
ADB. 2003. Operations Manual. Section D6/BP: Financial Intermediation Loans. Manila.
8
B. Outputs
39. The Project comprises two components: an investment projects financing facility, and
project management and capacity development. The output of the first component is increased
quality, coverage, and reliability of water supply, sanitation, solid-waste management, and
roads. The indicative list of investment subprojects is in Appendix 4.
40. The outputs of the project management and capacity-development component are (i)
improved capacity of municipal governments to prepare and appraise feasibility, engineering
design, environmental, social, and other related studies; (ii) improved capacity in project
management at municipal level; (iii) strengthened corporate and business planning processes
within MDF; and (iv) improved capacity of MDF for conducting studies and training.
C. Special Features
41. Reforms. The Project will address reforms aimed at decentralized service delivery and a
more sustainable MDF. These will be addressed under the capacity-development component of
the Project. In support of decentralized service delivery, the Project will help, on a pilot basis, at
least one municipal government identify, plan, prepare, and implement subprojects. This pilot
approach, managed by MDF, will serve as a model for possible replication. The Project will
assist MDF in becoming a more sustainable financing institution by addressing organizational
and operational improvements, including (i) expanded lending operations; (ii) resource
mobilization; and (iii) a long-term vision, business plan, strategy, and investment plan.
42. Value-Added Support by ADB. While MDF has evolved from multidonor support, the
Project demonstrates ADB’s value-adding in several key areas. The Project will enable MDF to
improve its operations and expand its lending over time. It will also encourage financially weaker
municipalities to participate in the Project and in future help these municipalities borrow through
technical assistance in order to improve local revenues and financial management.
D. Project Investment Plan
43. The total cost of the Project is estimated at $63.25 million equivalent. A summary of the
cost estimates is in Table 1, and detailed cost estimates are in Appendix 5.
Table 1: Project Investment Plan
($ million)
Item Amounts
A. Base Costa
1. Investment Projects Financing Facility 54.00
2. Project Management and Capacity Development 3.54
3. Incremental Administration 3.14
Subtotal (A) 60.68
B. Contingenciesb 0.67
C. Financing Charges During Implementationc 1.90
Total (A+B+C) 63.25
a
In end 2007 prices and includes $9.30 million equivalent in taxes and duties.
b
Contingencies computed at 10% for capacity development and incremental administration.
c
Includes financing charges on Asian Development Fund loan during the grace period at 1.0% per
annum.
Sources: Asian Development Bank estimates.
9
E. Financing Plan
44. The Government has requested a loan of $40.0 million equivalent from ADB’s Special
Funds resources to help finance the Project. The loan will have a 32-year term, including a
grace period of 8 years, and an interest charge of 1% per annum during the grace period and
1.5% per annum thereafter. The Government and municipal governments will finance $23.25
million (37%). The financing plan is summarized in Table 2, and details are in Appendix 5.
Table 2: Financing Plan
($ million)
Source Total %
Asian Development Bank 40.00 63
Municipal Development Fund 10.20 16
Municipal Governments 9.80 16
Central Government 3.25 5
Total 63.25 100
Source: Asian Development Bank estimates.
45. The Government will make the proceeds of the ADB loan available to MDF as a grant.
Under the investment projects financing facility, the proceeds of the ADB loan and MDF funds
will be passed on to eligible municipal governments. There will be two financing windows: (i) a
combination of loans and grants to the financially stronger or more creditworthy municipal
governments, which have the capacity to borrow; and (ii) grants to the financially weaker
municipal governments, which have limited or zero capacity to borrow. Both windows will have
the same amount of ADB loan proceeds.
46. Under the first window, MDF will require that a minimum of 20% of the subproject cost
be contributed by a municipal government, and will finance the balance as a loan and a grant;
50% of a subproject cost will be financed by a loan from MDF, and 30% as a grant from MDF.
Under the second window, 85% of a subproject cost will be financed by a grant from MDF and
the remaining 15% will be a contribution by the municipal government. ADB loan proceeds will
be used to finance the grant portion, plus 40% of the loan portion or 50% of a subproject cost
under the first window, and 85% of a subproject cost in the second window. MDF will finance
60% of the loan portion under the first window (representing 30% of the subproject cost) from its
own resources. It is able to provide the required resources for the Project from the accumulated
repayments of loans by the municipal governments.
47. Eighty percent of the cost of the project management and capacity-development
component of the Project will be financed by MDF using ADB loan proceeds; the balance will be
provided by the Government, and 100% of the incremental administration costs of MDF
excluding taxes and duties will be financed by ADB. The Government does not wish that the
interest during construction be capitalized and will finance this itself. The flow of funds is in
Appendix 6.
48. Loans from MDF to municipal governments will be in lari and will be repayable in the
same currency over a period of up to 10 years, including a grace period of up to 1.5 years to
cover the construction period. MDF will charge interest on these loans at 12% per annum to
include provisions for defaults, costs of MDF administration and other operational expenses,
and profit.
10
F. Implementation Arrangements
1. Project Management
49. MDF will be the Executing Agency responsible for overall implementation. MDF is a
public legal entity established by a public law in 1997. The main responsibilities include (i)
providing funds for development of municipal infrastructure and services, and (ii) strengthening
institutional and financial capacity of local governments. As a financial intermediary, MDF
mobilizes funds from multilateral and bilateral financial institutions, international aid agencies,
and central and local governments. It is a multidiscipline organization staffed with 93
experienced and qualified specialists, and it plans to increase staff numbers based on needs in
the near future. It has considerable capacity for project implementation and has performed well
in implementing several foreign-funded projects. The details of MDF are in Appendix 7.
50. A detailed description of the arrangements for MDF operations for project
implementation will be provided in the operations manual to be prepared by MDF. This manual
will include the policies and procedures to be followed during the implementation of the Project
and also describe the rules and procedures governing MDF business activities and MDF
relations with its clients as they relate to financing of the Project. It was agreed that a single
manual will be prepared and used for the ADB and the World Bank projects.
2. Selection Criteria for Municipal Governments and Subprojects
51. Eligible Municipal Governments. All municipal governments within Georgia are eligible
to participate in the Project. MDF has developed the criteria to determine which municipal
governments will be eligible to borrow under the first financing window, and which will be eligible
for the grant window. The criteria are based upon the creditworthiness of the municipal
government, including its own revenues (local taxes, fees, non-tax revenues, capital revenues,
and equalization transfer and grants), central transfers, expenditures, outstanding debts, and
the population of the municipality.
52. Eligible Investment Projects. Because of the nature of the Project, it is not possible to
determine in advance the types of investment projects that will be financed. Nevertheless, a
preliminary pipeline of subprojects has been discussed and it indicates the need for the
rehabilitation of municipal infrastructure and local utility services, in the following categories: (i)
water supply, including resource development and improvement; (ii) sewerage collection and
treatment; (iii) sanitation and solid-waste collection and disposal; (iv) local road improvement
including drainage and street lighting; and (v) other municipal services. Subprojects for other
categories may be considered by prior agreement with ADB. General eligibility criteria for
subprojects including ADB safeguards are in Appendix 8.
53. For municipal governments that can borrow, there will be no ceiling for subproject cost.
However, for administrative purposes, the minimum cost of an investment subproject to be
financed will be $500,000. Pooling of smaller but related and contiguous projects may be
allowed to meet the minimum investment requirement. For the municipal governments whose
subprojects will be grant financed, the minimum subproject cost will be $100,000 and the
maximum $1,000,000. Any investment project falling outside these limits can only be considered
with prior consultation and concurrence with ADB.
11
3. Investment Project Preparation and Appraisal
54. The investment project cycle follows that already in operation by MDF and comprises (i)
preliminary review of the proposal and signing of project development agreement, (ii) carrying
out required feasibility work, (iii) appraisal by MDF of the proposed investments, (iv) preparation
of a financial proposal and request for approval by the MDF supervisory board, (v) signing of
financing agreement with the municipal government or utility company, (vi) procurement and
implementation of the subproject, and (vii) monitoring and evaluation. Appraisal of investment
projects by MDF will be undertaken on the basis of quantitative and qualitative criteria to be
defined in the operations manual and will cover the technical, financial, economic,
environmental, social, and institutional aspects. This will provide adequate justification for
acceptance or rejection for financing by MDF. The appraisal report for the first subproject and
for any subproject exceeding $2 million will be sent to ADB for approval on a no-objection basis.
The detailed steps for preparation and appraisal of subprojects and necessary studies to be
prepared are in Appendix 9.
4. Implementation Period
55. The Project will be implemented over 5 years from mid-2008 to mid-2013 (Appendix 10).
This is considered realistic because the project implementation structure is already in place and
preparatory works, including the operations manual, are underway.
5. Procurement
56. All procurement financed under the Project will be carried out in accordance with ADB's
Procurement Guidelines (2007, as amended from time to time). Contracts for civil works that are
estimated to cost more than $1 million equivalent and contracts for goods that are estimated to
cost more than $500,000 equivalent will be procured using international competitive bidding
procedures. Civil works contracts estimated to cost $1 million equivalent or less, and contracts
for procurement of goods estimated to cost between $100,000 and $500,000 equivalent, will be
carried out through national competitive bidding. The national competitive bidding will be
conducted in accordance with the Government’s State Procurement Law, subject to the
clarifications of the Law agreed to with ADB.
57. Goods contracts estimated to cost less than $100,000 equivalent will be carried out
through shopping procedures. Goods valued below $10,000 and civil works valued up to
$10,000 may be purchased directly from the supplier and contractor. In such cases, ADB should
be satisfied that the price paid is reasonable. The award of all contracts will be subject to prior
approval by ADB, except small contracts under the shopping and direct contracting procedures.
Experience under the other projects implemented by MDF shows that it is able to handle
procurement effectively and in a timely manner. The procurement assessment report has been
prepared by the World Bank and has determined MDF capable of handling procurement under
the similar project. Due to the nature of the Project, the scope of individual subprojects will be
known only during project implementation. However, estimates of required goods, works, and
services have been carried out and a preliminary procurement plan has been prepared
(Appendix 10). This will be revised and updated annually or as needed throughput project
implementation.
12
6. Consulting Services
58. The selection and engagement of consulting services to be financed under the Project
will be in accordance with ADB's Guidelines on the Use of Consultants (2007, as amended from
time to time) and the procurement plan. The following methods of selection will be applied: (i)
quality- and cost-based selection; (ii) quality-based selection; (iii) consultants’ qualifications
selection for small consultancy assignments that cost less than $200,000 per contract; (iv) least
cost selection for very small consulting assignments that cost less than $100,000; (v) fixed
budget selection; and (vi) single source selection and ADB individual consultant procedures for
selection of individual national or international consultants for the following types of
assignments: environmental, social, tariff, and O&M studies.
7. Advance Contracting and Retroactive Financing
59. In order to avoid start-up delays, the Government has requested, and ADB has
approved, advance contracting and retroactive financing for recruitment of consultants for
feasibility studies, detailed engineering designs, and preparation of bidding documents for
subprojects and associated civil works.13
60. Advance contracting allows the Government and MDF to undertake procurement
procedures, at its own risk, prior to the loan becoming effective. The Government and MDF
were informed that, for expenses incurred under advance contracting to be eligible for ADB’s
retroactive financing, such procedures (including advertising) must comply with ADB’s
Procurement Guidelines and Guidelines on the Use of Consultants. Once the loan becomes
effective, up to 20% of the amount may be used to finance eligible expenditures incurred,
pursuant to advance contracting, during the period not exceeding 12 months prior to signing the
Loan Agreement. Alternatively, the Government and MDF may opt for advance contracting
without retroactive financing, in which case the procurement procedures completed under
advance contracting do not conclude with the award of contract until after the loan becomes
effective. The Government and MDF acknowledged that such advance contracting will be
undertaken at their own risk, and that any concurrence by ADB with the procedures,
documentation, or proposal for award of contract does not commit ADB to finance any such
expenditures or the Project. The ADB project team will orient Government and MDF staff
regarding the Procurement Guidelines and Guidelines on the Use of Consultants.
8. Anticorruption Policy
61. ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed
with the Government and MDF. Consistent with its commitment to good governance,
accountability, and transparency, ADB reserves the right to investigate, directly or through its
agents, any alleged corrupt, fraudulent, collusive, or coercive practices relating to the Project.
To support these efforts, relevant provisions of ADB’s Anticorruption Policy are included in the
loan regulations and the bidding documents for the Project. In particular, all contracts financed
by ADB in connection with the Project will include provisions specifying the right of ADB to audit
and examine project-related records and accounts of MDF, contractors, suppliers, consultants,
and other service providers as they relate to the Project.
13
This was reported in the business opportunities section of ADB’s website on 7 May 2008.
13
9. Disbursement Arrangements
62. The loan proceeds will be disbursed in accordance with ADB’s Loan Disbursement
Handbook (2007, as amended from time to time). MDF, as the Executing Agency, upon loan
effectiveness will establish and operate an imprest account in the Treasury or a bank
acceptable to ADB. The imprest account will be exclusively used to finance the ADB share of
eligible expenditures. Disbursements from the imprest account will be supported by an
appropriate withdrawal application and related documentation. Such documentation will
demonstrate that the works, goods, and services (i) were produced and procured from ADB
member countries, and (ii) were eligible for ADB financing. The initial amount to be deposited
into the imprest account will not exceed the estimated project expenditures to be financed from
the imprest account for the next 6 months, or 10% of the loan amount, whichever is lower. To
expedite funds flow and simplify the documentation process, the statement of expenditures
process will be used for replenishment and liquidation of the imprest account and
reimbursement of eligible expenditures, not exceeding $200,000 per individual payment. The
payment in excess of the statement of expenditures ceiling will be reimbursed, liquidated, or
replenished based on the full supporting documentation process.
10. Accounting, Auditing, and Reporting
63. MDF will maintain a separate account for the Project acceptable to ADB. MDF will have
its account and financial statements (balance sheet, income statement, and statement of
sources and application of funds) audited annually in accordance with sound and internationally
accepted auditing standards by independent external auditors acceptable to ADB. MDF will
submit to ADB, not later than 6 months after the close of each financial year, (i) its audited
financial statements, and (ii) the auditor's report relating to supplementary information on MDF's
accounts, including an assessment of the quality of its long-term loans, the adequacy of the
provision for doubtful loans, and MDF's corporate and financial governance practices. A
separate audit opinion on the use of the imprest account and statement of expenditure
procedures should be included in the audit report. Delay in submission of audited financial
statements of acceptable quality may result in ADB suspending loan disbursements.
64. MDF will provide ADB with (i) a quarterly progress report on project performance within 2
weeks after the end of each quarter that will include information on the loan funds utilization,
subloans and grants, procurement activities, and other matters relating to the Project; (ii) a
projected annual disbursement schedule, broken down by quarters by 15 December each year;
(iii) a project completion report within 6 months of the loan closing date detailing project
implementation, project costs, subloan repayments, financial conditions of MDF, and other
details that ADB may consider necessary; and (iv) updated 3-year financial projections of MDF
by 31 December each year.
11. Project Performance Monitoring and Evaluation
65. MDF will ensure that a project management and information system is maintained at the
start of project implementation. This will help monitor and evaluate the technical performance
and social and economic benefits of the Project at 6-monthly intervals. The performance
monitoring indicators and procedures will be established, and revised as necessary. At the start
of the Project, MDF, together with participating municipal governments, will identify baseline
indicators that focus on project municipal services delivery and financial capacity.
14
12. Project Review
66. Review missions will be undertaken twice a year for the first 2 years and once a year
thereafter. ADB and the Government will undertake a midterm review 2 years after the project
implementation begins. This will include a detailed evaluation of the scope, implementation
arrangements, and progress in achieving scheduled targets, and compliance with loan
covenants. Feedback from the project processing monitoring system will also be analyzed.
G. Municipal Development Fund of Georgia
67. Background. MDF was established in 1997 under Presidential Decree Number 294 “On
Management of Funds Designated for the Development of the Municipal Sector in Georgia” as a
legal entity of public law. It operates in accordance with its charter, the provisions of the Law on
Legal Entity of Public Law of 1999, other relevant laws, orders, and decrees and in accordance
with agreements of the Government and a number of international multilateral and bilateral
financial institutions and its various operations manuals. MDF is a government-owned
corporation, operates its own special and current accounts, prepares independent financial
statements, and has its own seal. Its head office is in Tbilisi.
68. MDF is accountable through a supervisory board chaired by the prime minister and
including nine other members: the ministers of Finance, Economic Development, Education and
Science, and Agriculture; the heads of the Regional Issues Department of the State Chancellery
and the Committee for Agrarian Issues of the Parliament; the deputy finance minister; and the
executive directors of the Association of Young Economists (nongovernment organization
representative) and the Millennium Challenge Georgia Fund. All members of the board are
appointed and dismissed by the Government. MDF is headed by an executive director who
reports to the supervisory board and there are four senior managers of departments of irrigation,
social investment, investment and loans, and administration.
69. MDF was set up to support the strengthening of institutional and financial capacities of
municipal governments by financing local infrastructure investments and capacity-development
projects. MDF disburses loans and grants to municipal governments using funds from other
international financial agencies. MDF essentially functions as a project implementing agency for
a number of foreign-assisted and locally funded projects. Since 2002, MDF has generated it
own revenue from loan repayments by municipal governments and is now relending some of
these funds. The total assets of MDF as at 31 December 2006 were about GEL46 million; loans
to municipalities accounted for just over 70% of assets (GEL32 million). The accumulated
surplus or reserves (equivalent to government equity) amounted to GEL43 million (93%) of total
net assets and liabilities at the end of 2006. MDF has no outstanding long-term debt. It is a
profitable organization which in 2006 had a net income before tax of GEL3.4 million.
70. Financial Management Assessment. A financial management assessment of MDF
was undertaken during the ADB mission. The Finance Department of MDF is well run with
qualified and experienced financial specialists and accountants, and staff turnover is low. The
department is headed by the financial manager who is assisted by three staff who are well
versed in the procedures and reporting requirements of international funding agencies, including
those of the World Bank, EBRD, Kreditanstalt für Wiederaufbau, and Millennium Challenge
Georgia. The accounting system is computerized using an off-the-shelf software package.
Spreadsheet reports, using data from the accounting system, however, are prepared for
international agencies rather than being an output of the system. There is a written financial
management manual that is regularly updated, most recently in January 2008. Financial reports
15
are prepared on time and are accurate; accounts for each project in 2007 were submitted to the
auditor in February 2008.
71. MDF uses commercial accrual-based accounting, has a standard chart of accounts, and
reports according to the International Financial Reporting Standards. The accounts are audited
annually by an external private auditing company and for the past 3 years there have been
unqualified audit reports. Adequate safeguards are in place to protect the integrity of data. MDF
has no cash; all transactions are undertaken electronically through bank transfers. There is an
internal audit service unit comprising the head and a procurement auditor. Annual budgets are
prepared on time and approved by the supervisory board. Monitoring of actual expenditures and
budgeted allocations is undertaken monthly but better linkages are required between physical
and financial targets. The details of the financial management assessment are in
Supplementary Appendix C.
72. Based on the balance sheets and income statements projected for the period 2007–
2117, MDF has sufficient cash to support the required contributions to the Project, and also
continues to be profitable. They also indicate that MDF needs to undertake more lending to
municipal governments to ensure further growth in net income. Current lending programs are
reaching completion and new ones (in addition to the Project) are needed.
73. Reform Agenda. Following an internal workshop in January 2008, MDF has initiated the
preparation of a strategic plan and, as an initial document, this represents a good start. The
strategic plan will be further improved following the recommendations of the fiduciary
assessment of MDF by the World Bank. The strategic plan will form the basis of a business plan
to be prepared by MDF. It will also have a long-term vision for MDF that supports a financially
sustainable entity, which over time will become less dependent on donor financing. Strategies
will be outlined and financial projections included. Action plans for the first 3 years of the plan
will be prepared. MDF will annually update its medium-term strategic plans including action
plans.
74. Assistance is to be provided under the Project to help transform MDF into a more
sustainable municipal financing institution. The major actions to be taken and the transition
process are in Appendix 12. This involves developing MDF’s long-term vision and business
model and institutionalizing strategic and business planning so that during the project
implementation period, annual business plans are prepared and executed. MDF will also include
a plan for the preparation and implementation of at least one subproject by a municipal
government in its 2009 business plan. A project implementation unit will be established in the
participating municipal government. Assistance will also be provided to develop the future
market for MDF’s financial operations by increasing the financial capacity of municipal
governments and utility companies. This will increase the number of potential borrowers.
IV. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS
A. Economic
75. The Project will directly benefit the municipal population in terms of health and living
conditions resulting from (i) a safer and more reliable water supply, (ii) improved environmental
sanitation through better sewerage and solid-waste management services, (iii) time savings
associated with collecting water, and (iv) improved road conditions. The economies of these
municipalities will benefit indirectly from enhanced productivity as a result of health
improvements and increased efficiency resulting from improved roads and public transport.
16
76. As a result of the rehabilitated systems, the Project will result in significant savings in
municipal infrastructure O&M costs and more efficient O&M procedures. The Project will also
have a positive impact in terms of employment creation from the work involved in construction
and rehabilitation, together with O&M. Training and technical assistance under the Project will
enhance the productivity of municipal governments and MDF personnel.
77. A quantitative economic analysis could not be undertaken because it was not possible to
determine in advance the participating municipal governments and the investment projects for
MDF financing. Instead, an economic analysis framework (Appendix 13) has been prepared that
covers the scope of economic analysis, quantifiable benefits expected from each type of
investment, identifiable externalities, and methodologies for conducting the economic analysis.
This will be incorporated into the operations manual to guide the economic analysis of each
subproject. All subprojects to be financed under the Project are required to demonstrate an
expected positive economic outcome in line with ADB’s guidelines on economic analysis.14
B. Financial and Institutional
78. Participating Municipal Governments and Local Utility Companies. The Project will
benefit about 20 municipalities through the provision of loans, grants, and technical assistance.
The Project reinforces the role of local participation that will enhance accountability and
transparency. It will help build capacity at the local level by providing hands-on training and
specialist advice. Capacity development of municipal governments has at least two fiscal
impacts: (i) it encourages better cost recovery through more appropriate user charges that will
release an equivalent amount of local revenue for other activities, and (ii) it enhances tax
revenue generation because of the implementation of subprojects. The Project will help
participating municipal governments improve their local revenues and financial management so
that more of them will be able to borrow in future.
79. Municipal Development Fund. MDF will increase its exposure to structuring projects
and ADB operations. Project support for coordination and implementation will increase the
capacity of MDF to manage fund flows and specialist services to municipal governments. As
MDF's project portfolio grows, some additional training and technical assistance in financial
management is to be provided so that MDF can transform itself into a more sustainable
municipal financing entity. The format of the audited annual financial statements will enable
better disclosure of operating and administrative costs in the income statement. The provision of
loans will strengthen the involvement of MDF as the prime agency in the municipal credit
market. The Project will assist MDF to strengthen its financial mechanisms and operations.
C. Environmental
80. The Project is designed to maximize environmental and public health benefits. The
project net environmental benefits are positive and these include (i) more and better drinking
water from water supply subprojects; (ii) better public health, particularly fewer waterborne
diseases, through water supply, sewerage, drainage, and solid-waste management
investments; (iii) improved aesthetics as a result of sewerage, drainage, and solid-waste
management works; (iv) reduced flooding through drainage improvements; and (v) reduced
exposure to suspended particles and noise pollution through urban transport and urban roads
components. The negative environmental impact during construction and operation will not be
14
ADB. 1997. Guidelines for the Economic Analysis of Projects. Manila
17
significant because (i) larger facilities will be built in low-density and nonsensitive areas, (ii) the
works are generally small in scale and can be quickly constructed, and (iii) simple technologies
with low maintenance requirements will have preference. However, exceptions may be made to
include some environmentally sensitive investments provided that the needs for such
investments are well justified.
81. A detailed description of the environmental assessment and review framework (EARF)
for the investment subprojects is in Appendix 14. ADB’s environmental classification includes
four categories of projects depending on the significance of environmental impact: category A
(covering projects that have significant adverse environmental impacts), category B (with lesser
degree or significance of environmental impact than those in category A), category C (covering
projects that are unlikely to have adverse impact), and category FI (covering financial
intermediary projects). The Project is categorized as financial intermediary. For each investment
subproject, MDF and the municipal governments will be responsible for applying the prescribed
EARF to (i) conduct environmental scoping, screening (including environmental categorization
using checklists provided by ADB), and assessment; and (ii) implement the environmental
management plan (EMP) that ensures the adverse impacts are minimized and mitigated.
82. The Project may include investments which may have significant environmental impacts
(i.e., category A) when the needs for such investments are well justified. The EARF has a
number of additional requirements—for category A subprojects, a full environmental impact
assessment (EIA) will be conducted in accordance with ADB’s environmental assessment
guidelines,15 while only the initial environmental examination (IEE) is required for category B
subprojects. The EIA is more comprehensive and rigorous, and involves quantitative
assessment of the baseline environmental conditions and predicted environmental impacts. In
terms of requirements for public consultation, for category A investments MDF will ensure that
consultation will take place at least twice: once during the early stage of EIA field work, and
once when the EIA report is available. On the requirements for information disclosure, ADB’s
120-day rule16 requires that summary environmental assessment reports for a category A or a
category B sensitive investment project are available to the general public at least 120 days
before subproject approval by MDF or ADB, as appropriate.
D. Social
83. Inadequate municipal infrastructure and services contribute to urban poverty and social
insecurity in Georgia. The benefits in addressing municipal infrastructure and services deficits
will be (i) significant improvement in the living conditions of the urban population due to
increased availability of clean potable water and better environmental and sanitary hygienic
conditions, and a reduction in waterborne diseases; (ii) improvements in economic development
through encouraging investment and job creation; (iii) improvements in road safety and reduced
time and cost for traveling; and (iv) a reduction in the workload of women and children.
84. The Project is expected to (i) strengthen public trust in participating municipal
governments as a result of the rehabilitation of municipal infrastructure; (ii) improve access to
municipal services by local populations, including the most vulnerable groups (women, children,
and poor households); (iii) increase employment opportunities and incomes as a result of the
rehabilitation of local infrastructure; and (iv) increase participation and ownership by municipal
governments and communities.
15
ADB. 2003. Environmental Assessment Guidelines. Manila.
16
ADB. 2006. Operations Manual. Section F1/OP: Environmental Considerations in ADB Operations. Manila.
18
85. The main stakeholders will be MDF, participating municipal governments, communities,
and civil society organizations. MDF and participating municipal governments will ensure that for
all subprojects the results of social assessments and stakeholder consultations will be
adequately taken into account in identifying investment priorities. Consultation will be carried out
through public hearings, surveys, workshops, and other meetings during project implementation
and monitoring.
86. MDF will be responsible for undertaking and providing adequate resources for project
monitoring, including social development outcomes. Indicators will be developed under the
Project and will be included in the operations manual. The assessment of social issues cannot
be completed until the start of subproject feasibility. MDF will ensure that a social assessment is
carried out in cooperation with the participating municipality to (i) identify possible social issues,
including gender, vulnerability, labor, affordability, and other social risks, if applicable; (ii) identify
measures to avoid or minimize these risks; and (iii) ensure that the proposed subproject is
tailored to the needs and priorities of the participating community as identified through the
consultation process.
87. The Project will not trigger ADB's Involuntary Resettlement Policy (1995) since
subprojects will mainly involve (i) the repair or rehabilitation of existing facilities located in public
right-of-ways free of encroachment, and (ii) activities which are not expected to require land
acquisition and resettlement (LAR). Any subproject involving LAR will not be eligible for
financing. Each subproject will be approved only after it has been screened for LAR effects by
MDF. The Project will also not trigger ADB's Policy on Indigenous Peoples (1998) since
generally it is not expected to cause negative social impacts and specifically will not involve
population fitting the policy’s definition of indigenous peoples. In Georgia there are several
minority groups but they are either in control of local political-economic systems or are not
indigenous to the country. For equity purposes, MDF will ensure that, if a subproject is carried
out in a multi-ethnic locality, its benefits are distributed among all local groups. A summary
poverty reduction and social strategy is in Appendix 15.
E. Risks
88. The potential risks associated with the Project include that (i) municipal governments are
unable to provide required counterpart contributions for MDF investments, and (ii) arrangements
for the O&M of subproject assets are not implemented effectively.
89. The Project includes the measures to mitigate these risks. For the first risk, financial
eligibility criteria for participating municipal governments during preparation (as well as
procurement and contract payment procedures during implementation) will ensure counterpart
contributions (i.e., representatives from MDF and the municipal government will sign contracts
and disbursement documents). For the second risk, the capacity-development component of the
Project is designed to provide consulting services covering legal and/or technical aspects of
O&M planning and funding, including measures to increase cost recovery, tariff collection, and
metering. Any risk associated with overall project implementation is mitigated by MDF’s
considerable experience in implementing internationally funded projects. Moreover, ADB review
missions will monitor these mitigation measures and ensure sustainability of the Project.
19
V. ASSURANCES AND CONDITIONS
A. Specific Assurances
90. In addition to the standard assurances, the Government and MDF have committed to the
following, which will be incorporated in the Project’s legal documents:
(i) The Government, MDF, the participating municipal governments will make available
and release in a timely manner all counterpart funds necessary for project
implementation.
(ii) MDF will adopt the operations manual for the Project that will cover the policies and
procedures to be followed during project implementation and also describe the rules
and procedures governing MDF business activities and its relations with its clients
and as they relate to project financing. MDF will carry out the Project in accordance
with the operations manual and will ensure that no revisions to the operations
manual are made effective without ADB’s prior approval.
(iii) Subprojects to be financed under the Project will meet the eligibility criteria set forth
in Appendix 8.
(iv) MDF will ensure that each investment project under the Project (a) is selected and
appraised in accordance with the agreed eligibility criteria, and (b) carried out in
compliance with the applicable environmental laws and regulations of the
Government and ADB’s Environment Policy (2002). Appraisal reports for the first
subproject and those estimated to cost more than $2 million will be submitted to ADB
for approval.
(v) EARF (as described in Appendix 13) will be followed during project implementation.
Specifically, the environmental assessment of subprojects will be conducted at each
of the subproject identification, appraisal and implementation stages; subproject
categorization and screening shall be conducted by MDF following ADB agreed
checklist, EMPs for subprojects will be developed, as necessary; necessary permits
and approvals will be obtained by MDF; necessary logistical and technical support
for conducting the assessments will be provided by municipal governments.
(vi) Each subproject will be implemented in accordance with sound administrative, social,
environmental, and governance principles.
(vii) All subprojects under the Project will be carried out within the existing right-of-ways
and no subprojects will involve any land acquisition/resettlement that would trigger
the ADB’s Involuntary Resettlement Policy (1995). Any subproject that involves land
acquisition/resettlement will not be eligible for ADB financing.
(viii) Social assessment of subprojects will be carried out in a socially responsible manner
seeking mitigation of any potential social risks.
(ix) MDF will annually update its medium-term strategic plans including action plans.
(x) All contracts financed from the loan proceeds under the Project will include
provisions specifying the right of ADB to audit and examine Project-related records
and accounts of MDF, all contractors, consultants, and other service providers. In
furtherance of the principles of transparency, accountability and anticorruption, the
MDF will enhance and further develop its website to provide the public with
information on the Project, major activities, procurement activities, lists of
participating bidders and consultants, names of the winning bidders and consultants,
basic details on bidding and recruitment procedures adopted, amounts of the
contracts awarded, the list of goods/services purchased, and their intended use.
(xi) MDF will ensure that the project management and information system will be
maintained within MDF and each of the participating municipal governments. At the
20
start of the Project, MDF together with participating municipal governments will
identify baseline indicators that focus on project municipal services delivery and
financial capacity.
B. Conditions for Loan Disbursement
91. Unless ADB may otherwise agree, no proceeds will be disbursed from the loan account
until:
(i) A duly executed Project Implementation Agreement between the Government
and MDF have been submitted to ADB;
(ii) MDF has adopted the operations manual, satisfactory to ADB; and
(iii) MDF has submitted to ADB at least one appraisal report for a subproject, and the
related Financing Agreement and Project Development Agreement entered into
with an eligible municipal government, on terms and conditions satisfactory to
ADB.
92. No withdrawals will be made for any subproject estimated to cost more than equivalent
of $2 million until MDF has submitted to ADB the appraisal report for the subproject, in a form
and substance satisfactory to ADB.
VI. RECOMMENDATION
93. I am satisfied that the proposed loan would comply with the Articles of Agreement of the
Asian Development Bank (ADB) and recommend that the Board approve the loan in various
currencies equivalent to Special Drawing Rights 24,642,000 to Georgia for the Municipal
Services Development Project from ADB’s Special Funds resources with an interest charge at
the rate of 1.0% per annum during the grace period and 1.5% per annum thereafter; a term of
32 years, including a grace period of 8 years; and such other terms and conditions as are
substantially in accordance with those set forth in the draft Loan and Project Agreements
presented to the Board.
Haruhiko Kuroda
President
21 August 2008
URBAN SECTOR PROBLEM ANALYSIS
Poor living Environmental
Effects Poor public health
conditions degradation
Deteriorating municipal infrastructure, inadequate coverage, and poor levels of
Core Problem service
Inadequate Weak management
Inadequate policy Lack of effective Limited private Inefficient provision
Causes financing for urban and technical
support sector planning sector participation of urban services
services capacity of MGs
Low tariffs, charges,
Inadequate legal Inadequate business Poor maintenance of
local taxes, and
framework planning local roads
revenues
Lack of national urban Water supply–lack of
sector development Inappropriate / Inconsistent PPP Poor collection metering, high levels
Uneconomical size of Poor asset inventories
strategy, policy, outdated city/town strategy for urban procedures and of UFW, wasteful
infrastructure systems and management
investment program, development plans services systems within MGs consumption, and
and road map poor quality
Ineffective tariff Poor operational
Lack of city/town Lack of sanitary solid
policies for water, Ineffective sector Inadequate asset data efficiencies/lack of
investment waste disposal
sewerage, and solid regulation base preventive
programs facilities
waste maintenance
Limited and
Inadequate local Lack of public unsustainable Unresponsive Inadequate
Technical assistance
revenue generation participation in external financial management wastewater
by USAID
(MGs and WUCs) planning financing/MDF systems management
operations
Technical assistance
WB/EBRD/MCC
by OECD, USAID, Uneconomic size of
Uncreditworthy MGs projects with different
and policy dialogue in some MGs
geographic focuses
parallel with the
proposed Project
Appendix 1
Proposed Project
EBRD = European Bank for Reconstruction and Development, MCC = Millennium Challenge Corporation, MDF = Municipal Development Fund, MG = municipal government, OECD = Organisation for Economic
Cooperation and Development, PPP = public–private partnership, UFW = unaccounted-for water, USAID = United States Agency for International Development, WB = World Bank, WUC = water utility company.
Source: Asian Development Bank estimates.
21
22 Appendix 2
MAJOR ONGOING PROJECTS AND PROGRAMS
IN WATER SUPPLY AND SANITATION SECTOR
Cost
Institution Project/Program Description (million)
A. World Bank
Municipal Development Rehabilitation of urban $20
and Decentralization infrastructure including
Project II water supply and sanitation
B. European Bank for Reconstruction and Development/Swedish International Development
Cooperation Agency
Kutaisi Water Supply Rehabilitation of water €13
Project transmission and distribution
system
Poti Water Supply Improvements to water €12
Project supply system
Tbilisi Water Utility Rehabilitation of water €15
Rehabilitation Project supply system
C. European Commission
TACIS Capacity building for the €1.23
Clean Development
Mechanism
TACIS Monitoring water sector €1.5
reforms
TACIS Reduction of water-related €3.3
pollution in the Black Sea
TACIS Water investment support €0.8 (Rustavi water
facilities supply rehabilitation)
D. Organisation for Economic Cooperation and Development
Capacity strengthening Development of a national €0.05–€0.08 (for 1 year)
to achieve the water- strategy, investment plans,
related Millennium and financing strategy
Development Goals
E. United Nations Development Programme/Global Environmental Facility/Swedish
International Development Cooperation Agency
Regional partnership Development of a regional $1.6
for prevention of trans- strategic action program
boundary degradation
of the Kura-Aras river
basin
F. Millennium Challenge Georgia
Regional Infrastructure Rehabilitation of $60
Program infrastructure
G. United States Agency for International Development
Water sector reform Development of an overall $0.7
program action plan for water sector
reforms
H. Kreditanstalt für Wiederaufbau (Reconstruction Credit Institute)
Water supply and Batumi water supply and €18.6
service improvements wastewater disposal
TACIS = grant-financed technical assistance to 12 countries of Eastern Europe and Central Asia.
Source: Asian Development Bank estimates.
Appendix 3 23
DESIGN AND MONITORING FRAMEWORK
Design Performance Data Sources/Reporting Assumptions
Summary Targets/Indicators Mechanisms and Risks
Impact Assumption
• The central Government
Improved municipal Population with access MOED statistics pursues strategy of
environment and public to improved water ADB key indicators growth with equity
health. supply and sanitation (annual) Risk
increases from 96% in Economic sector work • Improved utility services
2006 to 100% in 2020. (occasional) are not effective and will
not be sustained
Outcome Assumption
Improved municipal 100,000 people have Socioeconomic surveys • Political and economic
infrastructure and access to improved MDF progress reports stability.
service delivery. municipal services by
2015. MDF monitoring reports Risk
• Lack of involvement of
MDF project completion smaller municipal
report governments
ADB project completion
report
Outputs
Part A - Investment
Projects Financing
Facility
Increased quality, Nine rehabilitation Baseline survey of Assumptions
coverage, and reliability projects completed in at conditions within • Stronger municipalities
of water supply, least 8 municipalities by participating municipalities are willing to borrow to
sanitation, solid-waste 2013. improve local
management, and infrastructure.
roads. ADB quarterly project • Central Government
performance reports supports improved fiscal
framework for municipal
Part B – Project ADB review mission governments.
Management and reports
Capacity Risks
Development MDF technical and • Participating municipal
financial reports governments are
Improved capacity of Nine project feasibility reluctant to implement
municipal governments studies prepared and institutional and/or
to prepare and appraise recommendations financial reforms
feasibility, engineering implemented by 2013. emerging from the
design, environmental, Project.
social, or other related Design and supervision
studies. contracted out in at • People are unwilling to
least 5 municipalities. pay for improved
services and
infrastructure.
24 Appendix 3
Design Performance Data Sources/Reporting Assumptions
Summary Targets/Indicators Mechanisms and Risks
Improved capacity of At least one municipal
municipal governments government selected by
in project management. 2009 for project
management and at
least one subproject
implemented by a
municipal government
by 2010.
Strengthened corporate New vision for MDF
and business planning approved by December
within MDF. 2008.
Improved budgeting,
finance, and operations
procedures in place
from January 2010.
Improved capacity of Study reports and
MDF for studies and training completion
training of MDF staff, reports by 2010
municipal staff, and
utility staff to develop
MDF capacity.
Improved operational Long-term corporate
and long-term planning plan prepared before
capacity within MDF. end of 2008, and
annual business plans
prepared thereafter.
Activities with Milestones Inputs
1.1 Criteria to define creditworthy municipalities approved mid-2008. ADB: $40.00 million
1.2 First project development and loan and/or grant agreements entered into, equivalent loan from Special
end 2008. Funds resources
1.3 Rehabilitation of municipal infrastructure in 24 municipalities by June 2013.
Government
2.1 Operations manual approved by MDF, end 2008. counterpart financing:
2.2 MDF corporate plan approved, end 2008. • Government: $3.25 million
2.3 Implementation of action plans within municipalities start in June 2009. • MDF: $10.20 million
2.4 PIT established within one municipality by mid-2011. • Participating
2.5 Institutional strengthening activities, including training, completed by June municipalities: $9.80
2011. million
ADB = Asian Development Bank, PIT = project implementing team, MDF = Municipal Development Fund. MOED =
Ministry of Economic Development.
Appendix 4 25
LIST OF INDICATIVE SUBPROJECTS
Project Name Description Municipality
A. Water Supply and Wastewater
1. Rehabilitation of water supply Rehabilitation of water supply Abastumani
and wastewater system network and sewer network
2. Rehabilitation of water supply Rehabilitation of water supply Dedoplistskaro
system network
3. Rehabilitation of wastewater Rehabilitation of sewer network Dusheti
system
4. Rehabilitation of wastewater Rehabilitation of wastewater Dusheti (Pasanauri)
system network and reconstruction of
the wastewater treatment facility
5. Rehabilitation of water supply Rehabilitation of headwork, Gurjaani
system wells, and main pipeline
6. Rehabilitation of water supply Rehabilitation of chlorine station, Martvili (Balda and Skurdi)
system water supply network, and
reservoirs
7. Rehabilitation of water supply Rehabilitation of headwork, Tsageri
system reservoirs, and main pipeline
B. Local Roads
1. Rehabilitation of roads Rehabilitation of local roads Akhalgori
2. Rehabilitation of roads Rehabilitation of local roads Ambrolauri
Source: Municipal Development of Georgia estimates.
DETAILED COST ESTIMATES AND FINANCING PLAN
26
Table A5: Detailed Cost Estimates by Expenditure Category and Overall Financing Plan
($ million)
Appendix 5
ADB Government
ADF National Government MDF Local Government Total
Total % of Cost % of Cost % of Cost % of Cost % of Cost
Item Cost Amount Category Amount Category Amount Category Amount Category Amount Category
A. Investment Program
1 Investment Program - Strong Municipalities
Base cost 28.81 17.00 59.00 0.00 0.00 10.20 35.40 1.61 6.00 11.81 41.00
Taxes and duties 5.19 0.00 0.00 0.00 0.00 0.00 0.00 5.19 100.00 5.19 100.00
Subtotal 34.00 17.00 50.00 0.00 0.00 10.20 30.00 6.80 20.00 17.00 50.00
Investment Program - Weaker Municipalities
Base cost 17.00 17.00 100.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Taxes and duties 3.00 0.00 0.00 0.00 0.00 0.00 0.00 3.00 100.00 3.00 100.00
Subtotal 20.00 17.00 85.00 0.00 0.00 0.00 0.00 3.00 15.00 3.00 15.00
2 Project Management and Capacity Development
Base cost 2.95 2.84 96.00 0.12 4.00 0.00 0.00 0.00 0.00 0.12 4.00
Taxes and duties 0.59 0.00 0.00 0.59 100.00 0.00 0.00 0.00 0.00 0.59 100.00
Subtotal 3.55 2.84 80.00 0.71 20.00 0.00 0.00 0.00 0.00 0.71 20.00
Subtotal (A) 57.55 36.84 64.00 0.71 1.00 10.20 17.72 9.80 17.00 20.71 36.00
B. Incremental administration
1 Base cost 2.62 2.62 100.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
2 Taxes and duties 0.52 0.00 0.00 0.52 100.00 0.00 0.00 0.00 0.00 0.52 100.00
Subtotal (B) 3.14 2.62 83.00 0.52 17.00 0.00 0.00 0.00 0.00 0.52 17.00
C. Contingencies 0.00
1 Physical 0.67 0.55 82.00 0.12 18.00 0.00 0.00 0.00 0.00 0.12 18.00
2 Price 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Subtotal (C) 0.67 0.55 82.00 0.12 18.00 0.00 0.00 0.00 0.00 0.12 18.00
D. Interest Charges During Implementation 1.90 0.00 0.00 1.90 100.00 0.00 0.00 0.00 0.00 1.90 100.00
Total 63.25 40.00 63.24 3.25 5.14 10.20 16.13 9.80 15.49 23.25 37.00
ADF = Asian Development Fund, MDF = Municipal Development Fund.
Source: Asian Development Bank estimates.
Appendix 6 27
FLOW OF FUNDS
Asian Development Bank
Government of Georgia –
Ministry of Finance
Other MDF project loan repayments
Municipal Development Fund
Investment component Capacity development
Payments Payments
Project agreement
Suppliers and Consultants and
contractors suppliers
Assets turned over Provide services
Municipal governments or
local utility enterprises
Key to arrows
Releases and payments
Loan repayments
Project development agreement
Activities
MDF = Municipal Development Fund.
Source: Asian Development Bank estimates.
28 Appendix 7
MUNICIPAL DEVELOPMENT FUND OF GEORGIA
A. Introduction
1. This appendix summarizes the review of the Municipal Development Fund (MDF) of
Georgia, the Executing Agency for the Project. It starts with a background on the origin and legal
basis of MDF, follows with an outline of the organizational structure and management
procedures, continues with a review of MDF’s activities and business procedures, and ends with
a brief financial assessment and projections of the financial statements for the next 10 years.
B. Background
2. MDF was established on 7 June 1997 by the Government under Presidential Decree
Number 294 (On Management of Funds Designated for the Development of the Municipal
Sector in Georgia) as a legal entity of public law. It was set up to implement the first Municipal
Development and Decentralization Project (MDDP) financed by the World Bank. MDF’s charter
has been revised since then on a number of occasions, when new projects were negotiated or
activities transferred. 1 The latest revision was under Presidential Decree Number 118 (On
Approval of the Charter and the Supervisory Board of the Municipal Development Fund) in 2005.
3. MDF operates in accordance with (i) its charter; (ii) the provisions of the Law on Legal
Entity of Public Law of 28 May 1999; (iii) other laws, orders, and decrees; (iv) agreements of the
Government and a number of international multilateral and bilateral financial institutions; and (v)
its operations manual. MDF is a financially autonomous entity, operates its own special and
current accounts in a commercial bank, prepares independent financial statements, and has its
own seal. Its head office is in Tbilisi and the financial year is from 1 January to 31 December.
4. The main responsibilities of MDF include (i) providing funds for development of municipal
infrastructure and services, and (ii) strengthening institutional and financial capacity of municipal
governments. MDF functions as a project implementing agency for a number of foreign-assisted
and locally funded projects. It accesses funds from multilateral and bilateral funding bodies,
international aid agencies, and central and local governments. Foreign funds are usually
released to MDF through the Ministry of Finance as grants in the currency of the financer. MDF
onlends or releases these funds as grants in lari for capital investments and capacity
development of municipal governments. MDF has extensive experience of, and considerable
capacity for, project implementation. It has performed well in implementing a number of foreign-
funded projects.
5. MDF is a government institution. It is neither a commercial nor a development bank; it
receives no customers’ deposits and receives most of its funds as grants from central
government and through collection of loan repayments from municipal governments. It has no
outstanding long-term debts.
1
For example, the charter was revised under Presidential Decrees Number 210 of 3 May 2002 and Number 409 of
24 September 2002 to implement MDDP II. Under Presidential Decree Number 1027 of 6 December 2005 the
Georgian Social Investment Fund was merged with MDF. Presidential Decree Number 246 of 8 June 2006 added
the Japanese Non-Project Grant. Later, under Presidential Decree Number 128 of 30 June 2006, the Irrigation and
Drainage Consumers Organizations Development Project was merged with MDF.
Appendix 7 29
C. Organizational Structure and Internal Management Procedures
1. Organization and Staffing
6. MDF is accountable to the Government through its supervisory board. Coordination and
overall management of its activities is undertaken by the supervisory board appointed by the
Government and chaired by the Prime Minister. The role and responsibilities of the supervisory
board are defined by decrees of the President of Georgia number 210 of 3 May 2002 and
number 409 dated 24 September 2002. The latest composition of the supervisory board has
been prescribed in Government of Georgia Decree Number 269, dated 5 December 2007 with
the prime minister as the chairman and nine other members2 all of whom are appointed and
dismissed by the president of Georgia. MDF is headed by an executive director who reports to
the supervisory board and is supported by four senior managers of the departments of irrigation,
social investment, investment and loans, and administration. MDF has a total of 93 employees
as of mid-November 2007, but there are plans to increase staff numbers based on the
requirements of new projects including that of the Asian Development Bank (ADB) and on an
institutional assessment to be conducted in the near future. The present organization and
staffing chart is shown as Figure 1.
2. Management Policies
7. Management policies are set out in several operations manuals prepared for different
programs. For example, MDF has an operations manual for the World Bank-funded MDDP, the
Georgian Social Investment Fund (GSIF) Project and the Regional Infrastructure Development
Project (RIDP) of the Millennium Challenge Georgia. MDF does not have a core operations
manual, but the World Bank has agreed to harmonize its requirements with those of ADB
through a joint operations manual.
8. The operations manuals are comprehensive documents and set out MDF's
organizational structure and internal management procedures covering a general overview of its
(i) activities; (ii) organizational structure and staffing plan; (iii) personnel management
procedures, involving general principles, employment contracts, professional responsibility,
conflict of interest, and code of behavior; (iv) financial management, and (v) reporting. They also
detail MDF's activities and business procedures, including (i) the nature of business products; (ii)
investment project financing and technical assistance financing; (iii) investment financing; (iv)
eligibility criteria for projects and entities; (v) project preparation cycle; (vi) project
implementation, covering procurement guidelines, implementation supervision, and monitoring
and evaluation; and (vii) project financial management focusing on special accounts, local
currency accounts, and accounting procedures.
2
These are (i) the ministers of Finance, Economic Development, Education and Science, Agriculture, and Regional
Affairs; (ii) the head of the Committee for Agrarian Issues of the Parliament; (iii) the deputy ministers of Finance and
Regional Affairs; and (iv) the executive directors of the Association of Young Economists (nongovernment
organization representative) and of the Millennium Challenge Georgia Fund.
30 Appendix 7
Figure A7: Organization and Staffing Chart of the Municipal Development Fund
Supervisory Board
Executive Director
Assistant Head, Internal Audit
Internal Audit Specialist
Head, Irrigation Manager, Social Investment Manager, Investment and Manager, Administration
Department Department Loans Department Department
Secretary Assistant Public Relations Assistant
Specialist-Assistant
Manager, CIUAD Head, SIP Division Head, Technical Manager, Finance
Department Department
Coordinator (2) PM Specialists (2)
Work Supervisors (6) Financial and
Support Specialists (5) Financial and Economic Economic Analyst
Analyst Head, PMMD
Monitoring Specialist Chief Accountant
Monitoring Group Senior PM
Head, Technical Coordinator Specialists (2) Accountants (3)
Department
Monitoring Specialists Interpreter Head, IT
Work Supervisors (4) (6) Department
Head, PMMD Interpreter IT Chief Specialist
Head, Technical IT Specialists (2)
Senior PM Specialists (2) Department
Lawyer
PM Specialists (2) Work Supervisors (13)
Chancellery
Interpreter
Head, Procurement
Department
Senior Procurement
Specialists (2)
Procurement
Specialists
Head,
Administrative
Support
Administrative Support
Officers (3)
Drivers (7)
Cleaners (4)
CIUAD = Community Irrigation Users Associations Department, PM = project management, PMMD = project management and monitoring department, IT = information
technology, SIP = social investment project.
Source: Municipal Development Fund.
Appendix 7 31
9. Also, a well-drafted and comprehensive financial management manual (updated January
2007) is in use by the Finance Department. This outlines (i) the organizational management
structure, roles, and responsibilities for financial management; (ii) the legal requirements for
financial reporting, and internal regulations for things such as time sheets, vacation and sick
leave, travel allowances, and vehicle expenses; (iii) flow of funds arrangements, including
special account operational procedures and flows of documents; (iv) budgeting procedures,
including the time frame and responsibilities; (v) the accounting system covering objectives and
principles, accounting policies and rules, loans, payroll processing, and a description of the
computerized accounting system and the treatment of operational expenditures; (vi) financial
reporting and monitoring, describing reports to be produced and their frequency; (vii) internal
control procedures that set out the principles, appropriate documentation of policies, separation
of functions, fixed asset control, and pay and payroll matters; and (viii) external control,
prescribing the annual audit and selection of auditors, and the requirements of financers and the
Georgian authorities.
3. Financial Management Assessment
10. A financial management assessment of MDF was undertaken using a questionnaire and
interview approach. It focused on the finance and internal audit departments. Supplementary
Appendix C provides a summary of the assessment together with the completed questionnaire
and details of each member of the finance and internal audit staff, key qualifications, experience,
responsibilities, and supervising arrangements.
11. The Finance Department of MDF is well run with qualified and experienced financial
specialists and accountants; staff turnover is low. The department is headed by the financial
manager who is assisted by three staff well versed in the procedures and reporting requirements
of international funding agencies, including those of the World Bank, European Bank for
Reconstruction and Development, Kreditanstalt für Wiederaufbau (Reconstruction Credit
Institute), and Millennium Challenge Georgia. For example, for MDDP II, the World Bank
requires that annual financial statements be audited each fiscal year in accordance with the
International Standards on Auditing and that separate audit opinion is required for all. For the
MDDP II these comprise (i) a summary of sources and uses of funds showing the World Bank
and counterpart funds, including contributions in kind, separately as of the end of each fiscal
year; (ii) a summary of uses of funds by project activities (statement of expenditure detail) as at
the end of each fiscal year; (iii) a balance sheet; (iv) a statements of expenditures withdrawal
schedule for each fiscal year; and (v) a special account statement for each fiscal year. Annual
financing statements for MDF comprise (i) a balance sheet as at the end of each fiscal period,
(ii) an income statement for each fiscal year, (iii) a cash flow statement for each fiscal year, and
(iv) a funds flow statement for each fiscal year. MDF has no difficulties in producing these
reports on time.
12. The accounting system is computerized using an off-the-shelf software package from the
Russian Federation. With the merger of GSIF and the Irrigation and Drainage Community
Development Project subprojects with MDF in 2006, there were three different accounting
packages in use.3 Late in 2006, MDF opted for one package, and from 1 January 2007 all
departments have been using the latest version of 1C Accounting. Spreadsheet reports, using
data from the accounting system, however, are prepared for international agencies rather than
being an output of the system. There is a written financial management manual that is regularly
3
The Municipal Development Fund used Oris, the Irrigation and Drainage Community Development Project used a
self-made system based on Cooper software, while GSIF used an older version of 1C Accounting.
32 Appendix 7
updated, most recently in January 2008. Financial reports are prepared on time and are
accurate; unconsolidated accounts for each project in 2007 were submitted to the auditor in mid-
February 2008.
13. MDF uses commercial accrual-based accounting, has a standard chart of accounts, and
reports according to the International Financial Reporting Standards. The accounts are audited
annually by an external private auditing company, and for the past 3 years there have been
unqualified audit reports. Adequate safeguards are in place to protect the integrity of data. MDF
has no cash; all transactions are undertaken electronically through bank transfers. There is an
internal audit service comprising the head and a procurement auditor. Annual budgets are
prepared on time and approved by the supervisory board. Monitoring of actual expenditures and
budgeted allocations is undertaken monthly but better linkages are required between physical
and financial targets.
14. MDF is a project implementation and disbursement agency for funds of foreign-assisted
and locally funded projects. It is neither a commercial bank nor a development bank, has no
deposits, and receives all of its funds as grants from central government. It has no outstanding
debts. Most of its funds are passed on to municipal governments as grants, although it has
provided some loans to creditworthy municipalities under the World Bank MDDP I and II
projects. Assistance proposed under the Project will improve its business model, corporate
objectives, and strategy.
D. Programs, Loans, and Business Planning
1. Major Programs
15. The objective of MDF is to support the strengthening of institutional and financial capacity
of municipal governments by (i) investing financial resources in local infrastructure and services,
and (ii) improving on a sustainable basis primary economic and social services for local
communities. It accomplishes this by financing local infrastructure investments and capacity-
development projects. In 2004, MDF disbursed loans and grants of about GEL3.8 million; in
2005 this increased to GEL23.5, and in 2006 to GEL70.3 million. Estimates for 2007 are that
GEL50.4 million will be disbursed. Funds have been sourced from the World Bank, the
Millennium Challenge Cooperation, and other international financial agencies. Since 2002, MDF
has generated it own revenue from loan repayments by municipal governments and is now
relending some of these funds.
16. The first major project of MDF was the World Bank-funded MDDP I that involved the
financing of 89 investment projects. MDDP II followed and provided investments and supporting
technical assistance to more than 20 municipal governments. In 2005, the GSIF merged with
MDF, expanding MDF’s activities into social infrastructure rehabilitation. Under GSIF I and II,
rehabilitation works of $29.3 million were carried out, largely for education facilities. Both
projects involve World Bank and Kreditanstalt für Wiederaufbau financing.
17. Since 2005, MDF has been implementing the $60 million RIDP financed by the
Millennium Challenge Corporation. This includes rehabilitation works in water supply and
reservoirs, and irrigation system improvements. The RIDP is scheduled for completion in 2010.
MDF, with the Ministry of Education and the Science Ministry, is also implementing the
Education System Realignment and Strengthening Program 2, financed by a World Bank loan of
$15 million. Recently, under the Japanese Non-Project Grant, $2 million equivalent was
allocated to MDF to finance the acquisition of equipment for basic infrastructure services by
Appendix 7 33
municipal governments. In 2006, the Irrigation and Drainage Consumers Organizations
Development Project was transferred to MDF.
18. MDF is currently negotiating with the World Bank for a further $10 million loan to finance
the extension of MDDP II. The arrangements will be the same, where the World Bank finances
60% of the project cost and MDF and municipal governments equally finance the balance. The
total project cost is estimated to be $16.7 million and of this 40% ($6.7 million) will be released
as loans to municipal governments. It is expected that this project will start in mid-2008 and will
be implemented over 3 years.
2. Operating Modality
19. Capital investments of MDF follow a clearly defined project cycle that matches the
requirements of international financing agencies. This investment project cycle comprises the
following steps: (i) preliminary review of the proposal and carrying out of required feasibility
work, (ii) approval by MDF of the proposed investments, (iii) preparation of a financial proposal
and request for approval by the MDF supervisory board, (iv) procurement and implementation of
the Project, and (v) monitoring and evaluation. Project or financing agreements are entered into
by MDF and the concerned municipal government, and once a loan project is completed and
final costs are known a formal loan agreement is signed.
20. MDF short-lists contractors or suppliers, requests bids, selects the winning contractor or
supplier, and approves and disburses progress payments. Municipal governments are involved
throughout this process and sign off on all contract approvals and payments. Participating
municipal governments are required to pay their contribution to MDF before the commencement
of the construction contract. Upon completion of each subproject MDF turns over the assets to
the concerned municipal government for operations and maintenance and, where appropriate,
sets up a loan account for repayment by the municipal government.
3. Lending Operations
21. To date MDF has made loans to 13 municipal governments, one of which has repaid in
full, and the outstanding balances of the others at 31 December 2006 was GEL32.3 million.
Loans are not secured but payments are enforced through the legal system, if necessary.
Penalties are charged for late payments at 0.06% per day of arrears on the amount due.4
Collection rates are generally good and 10 municipal governments are paying regularly on time.
Two,5 however, are in arrears, and discussions are taking place to resolve the problems, which
are inherent in the limited local budgets of both. Nevertheless, the two municipal governments
will be paying once resources become available. One loan (to Ozurgeti municipality) was
suspended because the municipal government refused to sign the final hand-over agreement on
account of questions on disbursements. The loan amount cannot be agreed upon. It is
understood that the problems are now being resolved and the loan will be reinstated soon. The
only other problem was with Kazbegi municipality which did not pay; however, after legal action
by MDF, the loan is to be repaid.
4
Loans are due from the 25th to the end of each month. Any payment received during this period is considered
current. Payments after this date are considered in arrears and charged the daily penalty from the 25th to the actual
date that payment is received by MDF.
5
As at 21 November 2007, the arrears for Ambrulauri were GEL147,356 and for Samtredia they were GEL13,483.
34 Appendix 7
4. Business Planning
22. MDF does not have an approved corporate or business plan, but undertook a planning
exercise in January 2008. The output of this workshop was submitted to ADB and is to be the
basis of a business plan to be prepared by MDF on or before 31 December 2008. The plan will
modify the long-term vision for MDF, targeting a more financially sustainable entity. Outline
strategies will be refined and more comprehensive financial projections prepared. Detailed
action plans for the first 3 years of the plan period will be included.
E. Financial Performance and Projections
1. Financial Performance
23. The total assets of MDF as at 31 December 2006 were GEL45.8 million, increasing from
GEL30.3 million at the end of 2005. Loans to municipalities accounted for just over 70% of
assets (GEL32.3 million) at the end of 2006, an increase from GEL24.8 million (almost 81% of
total assets) at the end of 2005. An accumulated surplus of GEL42.5 million represents 93% of
total net assets and liabilities at the end of 2006, against GEL28.9 million (95% of total net
assets and liabilities) at the end of 2005. MDF has no outstanding long-term debts, and has not
borrowed.6
24. Total revenue in fiscal year of 2006 was GEL83.1 million, an increase over the GEL32.3
million for 2005. But this is deceptive, since most (i.e., GEL78.5 million in 2006 and GEL29.3
million in 2005) is related to transfers from project financers—funds released by these agencies
for project development expenditures. Interest income amounted to GEL4.6 million in 2006
against GEL3.0 million in 2005. When set against operating expenses of GEL1.2 million in 2005
and 2006, there was a net profit before tax of GEL3.4 million in 2006 and GEL1.8 million in
2005.
25. MDF has not prepared long-term financial projections, and the only forecasts of revenues
and expenditures are made for the annual budget. Latest estimates for the 2007 budget indicate
total expenditures of GEL59.6 million, of which 76% is for Millennium Challenge Georgia, the
European Bank for Reconstruction and Development, GSIF, and the Irrigation and Drainage
Community Development Project. Funding for 2007 is largely from grants7 and cofinancing
(86%), but interest income and principal loan repayments are estimated to contribute 11% of
total financing. The 2008 budget has been prepared and approved.
2. Projected Financial Statements, 2007–2117
26. To establish the likely financial results over the Project period, financial projections were
prepared with the assistance of MDF. The results are summarized in Table A7 and show that
MDF has sufficient cash to support the required contributions to the Project and it realizes an
annual net profit over the period. Sensitivity tests involving different capital investment programs
and varying the grant-loan ratios for municipal government projects show that it is essential for
MDF to undertake more lending so that the interest earned continues to grow. Current lending
programs are reaching completion and new ones are needed.
6
To date all proceeds of loans from international funding agencies have been released to MDF as grants and in local
currency.
7
Including proceeds of foreign loans to the Government of Georgia, but released to MDF as grants.
Appendix 7 35
27. To project MDF’s financial statements (balance sheets and income statements), a
computer model was developed and tested. Projections were made from 2007 to 2116, using
base data as supplied by MDF that supplemented the closing account balances as at 31
December 2006.8 Financial statements for 2007 were projected through the input of the latest
2007 budget forecast as provided by the head of the Finance Division.
28. The following were the key assumptions used to project the financial statements.
(i) Property, plant, and equipment. Future investments for computers, vehicles,
office equipment, and furniture were assumed to be GEL0.212 million for 2007,
GEL0.1 million in 2008 and beyond but adjusted for inflation.
(ii) Investment program. MDF has a number of ongoing programs9 but at this stage
it was not possible to establish projections of sources and applications of these
funds. Apart from the investment figures of all programs for 2007, the ADB project
was input according to the project financing plan, along with assumptions made
for the proposed World Bank-funded MDDP III.10
(iii) Salaries and other operating expenses. Increases in salaries of 7% were
assumed for 2008 to account for the changes in withholding taxes and for the
new staff to be hired for the ADB project. Thereafter, an annual rate of growth of
3% (half the inflation rate) was assumed. Other operating expenses were
assumed to increase at 5% per annum.
(iv) Loan repayments from municipalities. Although MDF generally has 100%
collection rates, some slippage has been introduced in the model and a collection
rate of 95% was assumed. New loans were restricted to those under the ADB
project, the proposed new World Bank loan, and the Japanese Non-Grant
Project. All of these were phased according to the likely disbursement plans for
the projects.
(v) Inflation. An annual rate of 6% per annum from 2007 to 2016 was used.
(vi) Income tax. Calculated at 20% of net income for the year.
F. Conclusions
29. Past financial statements and projections show that MDF has adequate funds for its
operations. Since 2004, MDF’s current assets are about 5 times current liabilities, and there has
been an annual profit. Loans made by MDF to municipal governments are being repaid, mostly
on time. Annual financial statements are externally audited by private auditors and MDF has
detailed operations manuals together with a comprehensive and updated financial management
manual. The operations manuals describe the organizational structure and internal management
procedures, the rules governing its business activities and its relations with its clients, mandatory
reporting requirements, operating procedures, and credit and risk management policies.
8
Those recorded in the Municipal Development Fund of Georgia, Independent Auditor’s Report, Financial Statements
for the year ended 31 December 2006, August 2007.
9
Final payments under MDDP II; continuation of the Social Infrastructure Project, the RIDP of MCG and EBRD, the
Irrigation and Drainage Community Development Project, the Japanese grant for the purchase of equipment (such
as garbage skips, and tractors) for municipal governments, and the Education Realignment and Strengthening
Program. Only the Japanese grant-funded project involves new loans to municipal governments; all other projects
involve either grant releases or, under the RIDP where funds flow directly from EBRD and MCG to contractors and
suppliers, processing of invoices and monitoring by MDF.
10
The World Bank projects follow the same financing principle as the ADB project—50% of the cost of municipal
government subprojects is financed as a loan, 30% as a grant, and the remaining 20% represents the contribution
of the municipal governments.
36 Appendix 7
Financial procedures are specified in the financial management manual. The supervisory board
approves loans to municipal governments and the terms and conditions—interest rates and
repayment periods. The manuals and the experience of the World Bank and other foreign-
assisted projects show that MDF has adequate policies, systems, and procedures to assess and
monitor the economic, social, and environmental impact of subprojects.
Table A7: Municipal Development Fund, Actual and Projected Balance Sheets and Income Statements, 2004–2017
(GEL million)
Balance Sheet 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Assets
Current Assets
Cash and Cash Equivalents 4.37 2.51 9.92 11.40 15.71 17.84 18.31 19.16 22.04 26.29 33.16 39.49 43.44 46.99
Current Portion of Loans to Municipalities 1.97 2.30 2.97 3.59 4.23 4.91 6.14 4.74 5.84 6.50 6.56 4.95 5.25 5.86
Other Current Assets 0.08 2.91 3.03 4.08 2.95 3.27 3.81 4.18 2.91 1.52 0.66 0.32 0.18 0.12
Total Current Assets 6.43 7.72 15.92 19.06 22.90 26.02 28.27 28.08 30.79 34.32 40.38 44.76 48.86 52.97
Noncurrent Assets
Property, Plant and Equipment, Net 0.05 0.06 0.53 0.63 0.58 0.54 0.49 0.44 0.38 0.33 0.27 0.21 0.14 0.07
Loans to Municipalities, Portion
ADB Project 0.35 2.18 6.08 12.03 18.12 19.85 18.59 16.63 14.44
Others 14.98 22.52 29.33 25.86 25.00 23.22 25.59 31.48 34.55 31.00 25.87 22.57 19.06 15.13
Subtotal 14.98 22.52 29.33 25.86 25.00 23.57 27.77 37.56 46.58 49.12 45.72 41.16 35.69 29.57
Total Noncurrent Assets 15.03 22.58 29.86 26.48 25.59 24.11 28.26 38.00 46.97 49.45 45.99 41.36 35.83 29.63
Total Assets 21.46 30.31 45.78 45.55 48.48 50.12 56.53 66.07 77.76 83.77 86.37 86.12 84.69 82.61
Net Assets and Liabilities
Current Liabilities
Retentions on Project Expenditure 0.13 0.90 2.76 2.76 3.00 3.76 4.17 4.33 3.94 3.06 2.76 2.76 2.76 2.76
Payables - 0.52 0.47 0.70 1.12 2.62 3.57 4.07 3.69 1.88 1.24 0.93 0.70 0.52
Other Current Liabilities 0.03 0.03 0.01 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Total Current Liabilities 0.16 1.46 3.23 3.45 4.11 6.37 7.75 8.40 7.63 4.94 4.00 3.69 3.45 3.27
Accumulated Surplus
Net Project Funds and Expenditures 15.24 21.68 31.94 28.97 28.97 26.26 29.13 35.64 44.81 49.65 49.46 46.40 42.72 38.90
Retained Earnings 6.05 7.17 10.61 13.12 15.40 17.49 19.65 22.03 25.32 29.17 32.91 36.03 38.51 40.43
Total Accumulated Surplus 21.29 28.85 42.55 42.09 44.37 43.75 48.78 57.68 70.13 78.82 82.38 82.44 81.24 79.33
Total Net Assets and Liabilities 21.46 30.31 45.78 45.55 48.48 50.12 56.53 66.07 77.76 83.77 86.37 86.12 84.69 82.61
Income and Expenditure Statement 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Income
Interest Income
ADB Project 0.02 0.16 0.43 1.15 1.94 2.49 2.56 2.38 2.17
Other Projects 2.45 2.94 4.56 4.63 4.21 4.03 4.06 4.14 4.95 4.95 4.36 3.59 3.09 2.71
Penalty Income 0.04 0.02 0.02 0.03 0.03 0.04 0.03 0.03 0.04 0.04 0.03 0.03
Service Fee 0.07 0.32 0.32 0.32 0.32
Provisions/Recovery Doubtful Debts (0.03) (0.04) (0.04) (0.05) (0.06) (0.05) (0.06) (0.06) (0.05) (0.05) (0.06)
Total Income 2.45 2.98 4.56 4.69 4.51 4.35 4.51 4.86 6.08 6.87 6.83 6.15 5.45 4.86
Expenditures
Salaries Charged to Expenses 0.58 0.72 0.60 0.78 0.84 0.86 0.89 0.92 0.94 0.97 1.00 1.03 1.06 1.09
Other Current Operating Expenditures to Expenses 0.44 0.28 0.33 0.65 0.68 0.71 0.75 0.79 0.83 0.87 0.91 0.96 1.01 1.06
Depreciation 0.01 0.02 0.06 0.12 0.14 0.16 0.17 0.18 0.20 0.22 0.24 0.26 0.28 0.31
Other Expenses (2.29) 0.10 0.12 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Appendix 7
Total Expenditures (1.26) 1.12 1.12 1.55 1.66 1.73 1.81 1.89 1.97 2.06 2.15 2.25 2.35 2.46
Net Income for Year Before Tax 3.71 1.86 3.44 3.14 2.85 2.61 2.70 2.97 4.11 4.81 4.68 3.90 3.10 2.40
Income Tax 0.51 0.64 0.63 0.57 0.52 0.54 0.59 0.82 0.96 0.94 0.78 0.62 0.48
Net Income for Year After Tax 3.71 1.35 2.80 2.51 2.28 2.09 2.16 2.38 3.29 3.85 3.74 3.12 2.48 1.92
( ) = negative, ADB = Asian Development Bank.
Source: ADB estimates.
37
38 Appendix 8
ELIGIBILITY CRITERIA FOR INVESTMENT SUBPROJECTS
A. General Eligibility Conditions
1. Investment subprojects financed by the Municipal Development Fund (MDF) loans and
grants from the project resources will be for rehabilitation, construction, repair, and extension of
the existing municipal infrastructure in the following categories: (i) water supply including
resources development and improvement, (ii) sewerage collection and treatment, (iii) sanitation
and solid-waste collection and disposal, (iv) local road improvement including drainage and
street lighting, and (v) other municipal services and goods.
2. Proposed investment subprojects within participating municipal governments must meet
the following conditions.
(i) Serve the purpose of improving the quality of life by helping to meet basic social,
environmental, and public health standards, and/or promoting local economic
development.
(ii) Be identified primarily on the basis of locally determined needs communicated to
MDF by municipal governments.
(iii) Demonstrate that they can yield benefits that can be quantified or otherwise
identified with an acceptable degree of certainty.
(iv) Be in full compliance with all relevant provisions of Georgian legislation and
regulations, including environmental legislation.
(v) Be in compliance with the Asian Development Bank's (ADB’s) Environment
Policy (2002).
(vi) Not trigger ADB’s Involuntary Resettlement Policy (1995).
B. Program Eligibility Conditions
3. The following conditions also apply to subproject eligibility under the grant and loan
financing window for financially stronger or creditworthy municipal governments.
(i) The participating municipal government must deposit with MDF a minimum of
20% of the estimated subproject cost.
(ii) No subprojects costing less than $500,000 equivalent in local currency in current
prices will be eligible for financing.
(iii) The participating municipal government must have a borrowing capacity to repay
debt based upon the criteria outlined in paragraph 6.1
(iv) The participating municipal government should not have any outstanding arrears
with MDF.
4. The following conditions also apply to subproject eligibility under the grant financing
window for financially weaker or noncreditworthy municipal governments.
(i) The participating municipal government must deposit with MDF a minimum of
15% of the estimated subproject cost.
1
For 2008, MDF has identified these municipal governments to be: Akhalkalaki, Batumi, Bolnisi, Borjomi, Dusheti,
Gardabani, Gurjaani, Khelvachauri, Khobi, Kobuleti, Lagodekhi, Marneuli, Mckheta, Poti, Rustavi, Tbilisi, Telavi,
Zestafoni, and Zugdidi,
Appendix 8 39
(ii) No subprojects costing less than $100,000 equivalent in local currency in current
prices will be eligible for financing.
(iii) No subprojects costing more than $1 million equivalent in local currency in
current prices will be eligible for financing.
(iv) The participating municipal government should not have any outstanding arrears
with MDF.
(v) The participating municipal government should not have borrowed under the
Project.
5. The borrowing capacity for each municipal government is determined according to the
following criteria.
(i) Total annual debt service payments (principal, interest, and any other charges)
on all outstanding and proposed loans for the current year should not exceed 6%
of the forecast resources for the same year.
(ii) Forecast resources are the sum of tax, non-tax, and capital revenues, and the
unconditional equalization grant from the national government for the current
year as recorded in the approved annual budget.
(iii) Total outstanding debt should not exceed 100% of forecast resources.
(iv) The municipal government should have the capacity to repay at least GEL
182,000 per annum in debt service and forecast resources of more than GEL
3.037 million.2
6. The above criteria and conditions will be adopted for 2008 and will be replaced in 2009
by new criteria to be developed by MDF and agreed by ADB.
C. ADB Safeguard Policies
7. The Project will focus on subprojects with no significant3 adverse environmental impacts.
However, in some exceptional cases where the needs for financing environmentally sensitive
projects, e.g., landfill sites, are well justified, the Project can include such investments provided
that both ADB and the Government’s environmental assessment and management procedures
are strictly followed, and environmental risks are minimized to an acceptable level as a result of
a properly assessed and planned mitigation program. More details on environmental safeguards
procedures are provided in Appendix 14.
8. No subproject that involves involuntary resettlement will be eligible for financing.
2
This is based on the assumption of debts of GEL1 million, with an average interest rate of 12% per annum and an
average repayment period of 10 years with a 1-year grace period.
3
For the environment, significant means any subproject classified as category A in accordance with ADB’s
environmental guidelines (Source: ADB. 2003. Environmental Assessment Guidelines, Manila).
40 Appendix 9
INVESTMENT PROJECT PREPARATION AND APPRAISAL
A. Investment Project Preparation and Appraisal
1. Preparation and appraisal of an investment project by the Municipal Development Fund
(MDF) will involve the following steps.
2. Step 1. The participating municipal government applying for the financing of a specific
investment project submits a request to MDF for financing, together with a project summary, the
form of which will be provided in the operations manual to be prepared by MDF.
3. Step 2. MDF reviews the financing request with a view to determining whether
(i) the proposed subproject is consistent with MDF financing principles;
(ii) the applying municipal government is eligible for funding under window one
(loan-grant-cofinancing combination) or window two (grant-cofinancing
combination);
(iii) the applying municipal government has the necessary borrowing capacity if
funding is to be under window one;
(iv) documentation available for the subproject is sufficient for preparation of the
subproject summary report (SSR);
(v) the proposed project will require any land acquisition and involuntary
resettlement;1 and
(vi) The proposed project will have significant adverse environmental impacts or
have an environmental category A (determined using the Asian Development
Bank’s [ADB's] rapid environmental assessment checklists2).
4. Step 3. The proposed subproject will be deemed unsuitable for MDF financing if it
requires any land acquisition and involuntary resettlement. If the project is deemed unsuitable
for MDF financing, MDF notifies the municipal government of the rejection of the request.
5. Step 4. MDF prepares the SSR for financing window two subprojects and the SSR
provides information on (i) short description of the proposed subproject, (ii) investment plan
(amount of the proposed investment and structure), (iii) financing plan (subloan amount, terms,
grant, amount, and cofinancing need), (iv) description of all possible benefits, and (v)
implementation arrangement.
6. Step 5. For window one subprojects, 3 MDF prepares the subproject appraisal report
(SAR). If documentation is deemed insufficient to prepare the SAR, MDF agrees with the
municipal government on the scope, terms of reference, implementation conditions, and
schedule of required feasibility, design, and other complementary studies and assessments
required for project appraisal. The SAR provides information on (i) the scope of the subproject;
(ii) investment and financing plans; (iii) environmental screening; and (iv) environmental,
economic, financial, social, and other benefits and risks. To provide the information, the SAR
should answer the following questions.
1
ADB defines involuntary resettlement as social and economic impacts that are permanent or temporary and are
caused by (i) acquisition of land and other fixed assets, (ii) change in the use of land, or (iii) restrictions imposed on
land as a result of an ADB operation.
2
ADB. 2003. Environmental Assessment Guidelines. Manila.
3
Estimated to cost $2 million and more.
Appendix 9 41
(i) Have the possibilities to address the problem in different ways been given
adequate consideration and discussed with the population?
(ii) What has been the MDF experience with similar projects?
(iii) Is the municipal government capable of providing up-front the 20% contribution to
project financing?
(iv) Is the municipal government capable of making the loan repayments?
(v) Will the municipal government ensure sustainable operation and maintenance
after proposed investment?
(vi) Who are the beneficiaries of the project (in both qualitative and quantitative
terms)?
(vii) Has an environmental impact assessment been carried out and, if necessary,
have adequate impact mitigation measures been identified and incorporated into
the design of the project?
(viii) Does the proposed project conflict with any other ADB safeguard policy?
(ix) Is the technical solution proposed adequate and does it comply with Georgian
laws and regulations?
(x) Is the proposed project part of a larger investment program for the same area,
and if so, how does it fit into that program in terms of technical aspects, costs,
and implementation schedule and how will the other elements of the program be
financed?
(xi) Are the preparatory studies (including final design studies and other documents)
required for project execution of a quality and completeness that are sufficient to
evaluate the actual technical and financial feasibility of the project and will allow
its subsequent implementation, or are complementary studies required?
(xii) Is the technical quality of the documents consistent with standard engineering
practices?
(xiii) Are the cost estimates reliable and do they allow determination of the project cost
with a reasonable degree of certainty?
(xiv) Are the implementation time estimates realistic?
(xv) What are the tangible and intangible benefits of the project? Have they been
adequately determined and evaluated?
(xvi) Was the economic evaluation methodology that has been used appropriate?
How have the costs and benefits been calculated? Are the results allowed to
make valid judgment in line with ADB’s guidelines on economic analysis?4
7. Step 6. If the SAR or the SSR is accepted by the MDF supervisory board, MDF sends it
to ADB.
8. Step 7. MDF prepares an investment financing agreement (IFA) and forwards it to the
municipal government for review. The IFA for the subproject that requires the SAR will be
prepared upon ADB’s no-objection to the SAR. MDF signs the IFA with the municipal
government.
B. Preparatory Studies
9. If requested by the municipal government applying for financing, MDF will finance on a
grant basis all preparatory studies (including feasibility, preliminary, final design, and other
related studies) and the costs will be financed up to 80% from the loan proceeds. There will be
no minimum or maximum cost requirement for any preparatory study. MDF or its clients may
4
ADB. 1997. Guidelines for the Economic Analysis of Projects. Manila
42 Appendix 9
decide to pool similar preparatory study proposals to meet the minimum requirement if it
determines that multiple clients can be served under a joint program.
Appendix 10 43
IMPLEMENTATION SCHEDULE
2008 2009 2010 2011 2012 2013
Activity Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
A. Preparatory Work
Preparation and Adoption of the Operations Manual
Imprest Account Opened
B. Investment Projects
Selection of Municipalities
Feasibility and Other Studies Conducted
Municipal Financial Agreements Signed
Design and Preparation of Bidding Documents
Bidding and Evaluation
Construction and Commissioning
C. Capacity Development
Technical and Engineering Management
Institutional and Managerial Development
Financial Management
Operation Management
Project Performance Monitoring
Environmental Management and Reporting
Training and Workshop Conducted
Loan Effectiveness Midterm Review Physical
Completion
Q1 = first quarter, Q2 = second quarter, Q3 = third quarter, Q4 = fourth quarter.
Source: Municipal Development Fund of Georgia estimates.
44 Appendix 11
PROCUREMENT PLAN
Country: Georgia Name of Borrower: Ministry of Finance
Project Name: Municipal Services Development Loan Amount: $40 million
Project
Executing Agency: Municipal Development Date of Approval:
Fund of Georgia
Date of first Procurement Plan: February 2008 Date of this Procurement Plan: February 2008
A. Project Procurement Thresholds
1. Except as the Asian Development Bank (ADB) otherwise agrees, the process
thresholds shown in Table A10.1 will apply to procurement of goods and works.
Table A10.1: Process Thresholds for Procurement of Goods and Works
Method Threshold
ICB for Works > $1,000,000
ICB for Goods > $500,000
NCB for Works < = $1,000,000 > $100,000
NCB for Goods < = $500,000 > $100,000
Shopping for Works < = $100,000
Shopping for Goods < = $100,000
Direct Contracting for Works < = $10,000
Direct Contracting for Goods < = $10,000
ICB = international competitive bidding, NCB = national competitive bidding.
B. ADB Prior or Post Review
2. Except as ADB may otherwise agree, the following prior or post review requirements
apply to the various procurement and consultant recruitment methods used for the project
(tables A10.2 and A10.3).
Table A10.2: Prior or Post Review Requirements for Procurement of
Goods and Works
Procurement Method Prior or Post Comments
ICB Works Prior
ICB Goods Prior
NCB Works Prior/Post Usage subject to review of the
NCB Goods borrower’s public procurement laws
and regulations. Prior review applies
to the procurement of the first NCB
contract by the PMU. If first contract
procured satisfactorily, thereafter
post review.
Shopping for Works Post
Shopping for Goods Post
Direct Contracting for Works Post
Direct Contracting for Goods Post
ICB = international competitive bidding, NCB = national competitive bidding, PMU = project management unit.
Appendix 11 45
Table A10.3: Prior or Post Review Requirements for Consultant Recruitment
Procurement Method Prior or Post Comments
A. Recruitment of Consulting Firms
Quality- and Cost-Based Selection (QCBS) Prior QCBS based on 80:20 quality-
cost weighting, applied in
accordance with Section 2.2-
2.22, Guidelines on the Use of
Consultants (2007, as
amended from time to time)
Other selection methods: Quality-Based Selection, Prior
Consultants Qualifications Section, Least Cost Selection,
Fixed Budget Selection, and Single Source Section
B. Recruitment of Individual Consultants
Individual Consultants Prior Applied in accordance with
Section 2.34, Guidelines on the
Use of Consultants (2007, as
amended from time to time)
C. Goods and Works Contracts
Table A10.4: Goods and Works Contracts
Contract Prequalification
General Advertisement
Valuea of Bidders
Description Procurement Method Date
($ million) (Y/N) Comments
Goods and NCB/Shopping/Direct 3rd quarter 2008 – Multiple
8.61 N
Services Contracting 4th quarter 2012 Contracts
Civil Works ICB/NCB/Shopping/Direct Y for ICB and N 3rd quarter 2008 – Multiple
48.80
contracting for the others 4th quarter 2012 Contracts
ICB = international competitive bidding, NCB = national competitive bidding
a
Contract value includes total cost estimates including ADB and non-ADB financing.
.
D. Consulting Services Contracts
Table A10.5: Consulting Services Contracts
Contract International
General Advertisement
Valuea Recruitment Method or National Comments
Description Date
($ million) Assignment
Subprojects 3rd quarter 2008 Firms,
QCBS/QBS/CQS/ International/
Feasibility Studies 3.27 – 4th quarter multiple
LCS/FBS/SSS national
2012 contracts
CQS = consultants qualifications section, FBS = fixed budget selection, LCS = least-cost selection, QBS = quality-
based selection, QCBS = quality- and cost-based selection, SSS = single source selection.
a
Contract value includes total cost estimates including ADB and non-ADB financing.
E. National Competitive Bidding Annex
3. This section has been posted in the ADB website.1
1
Georgia, Procurement Plan Template. 2008. Asian Development Bank. Available:
http://coso.asiandevbank.org/modules/tinycontent4/index.php?id=10.
MUNICIPAL DEVELOPMENT FUND REFORM ACTION PLAN
46
What will the Project
Where are we Where do we want
Action achieve by 2011 and how it How?
now? to be in 2020?
will be accomplished?
Appendix 12
A. Goal: Transform Municipal Development Fund (MDF) into a more sustainable municipal financing institution
1. Long-term Unclear vision Clear vision; strategic plan Clear vision; • MDF will develop a long-term vision and
vision and and strategic prepared and system strategic planning strategic plan within 6 months after loan
strategic plan. institutionalized. institutionalized. effectiveness.
planning
2. Business Only undertaken Annual business plans Annual business • The first business plan will be prepared and
planning as part of annual routinely prepared. plans routinely submitted to the Asian Development Bank
budget process. prepared. (ADB) for information by the middle of
December 2008.
• Advisory support will be provided under
component B for the preparation of the first
annual business plan.
3. Business Project Change towards a more Raises some • The 2009 business plan will identify a pilot
model, management sustainable financial institute; resources on subproject.
functions, office, reform-based pilot project financial and capital
and implementation, preparation and markets; focuses on
activities and fund implementation by at least one lending; projects
disbursement municipal government or a prepared and
agency. cluster of smaller municipal implemented by
governments. municipal
governments.
4. Lending Limited market At least five additional Most municipal • MDF will assist the participating municipal
operations (13 municipal municipal governments enter governments are governments, if necessary, in conducting a
and market governments to into loans with MDF. able to borrow and study or studies to improve local revenue
development date). repay loans. generation and operation efficiency.
• Building capacity within MDF to provide
technical assistance to municipal
governments under component B.
Source: Asian Development Bank estimates.
Appendix 13 47
ECONOMIC ANALYSIS FRAMEWORK
A. Introduction
1. Due to the project nature, it is not possible to determine in advance the municipalities
that will be participating in the Project, nor the investment projects for which these municipalities
will ultimately request Municipal Development Fund (MDF) financing. Therefore, a quantitative
economic analysis for the Project can not be done at the project appraisal stage.
2. This economic analysis framework is prepared in accordance with the guidelines for the
economic analysis of projects of the Asian Development Bank (ADB),27 to guide the economic
analysis to be conducted for each subproject in conjunction with a feasibility study during the
project implementation. The framework covers the scope of economic analysis, quantifiable
benefits expected from each type of investment, identifiable externalities, and methodologies for
conducting the economic analysis.
B. Rationale for Government Intervention
3. The rationale for Government intervention results from increasing concern over the poor
condition of municipal services. The municipal services in Georgia are trapped in a vicious circle
of poor performance. The physical condition of municipal infrastructure has deteriorated
significantly since dissolution of the former Soviet Union due to the lack of capital investments
and maintenance. Traditional low tariffs or charges for municipal services, aggravated by poor
payment discipline, has jeopardized the financial condition of utility companies and leaves them
with few resources for regular system maintenance. However, with the current very poor quality
service levels, people refuse to pay higher tariffs or charges and even resist paying the existing
charges. Utilities operate under very difficult circumstances against a background of low salaries
(often delayed or not paid at all), which makes it difficult to attract new staff and even to retain
existing qualified staff, adding to the problems of already weak managerial, financial and
accounting, and technical capacities in the utilities. These problems, in turn, further impair the
ability of utility companies to provide their services.
4. To break out of this vicious circle, demonstrable improvements in service provision are
needed. There is significant scope to improve municipal services through financial and technical
support to rehabilitate the infrastructure, reform the tariffs and collecting procedure, and develop
the capacities of the utilities, and this support can only be provided by the Government at
present. It is also incumbent upon the Government to attract further external financial resources
to complement its own limited resources in order to meet the priority demands of the sector.
C. Scope of the Economic Analysis
5. Any subproject with a cost of $2 million or more requires economic analysis which
should be conducted in conjunction with its feasibility study. Smaller subprojects costing less
than $2 million will be evaluated on the basis of cost effectiveness.
D. Major Benefits and Cost-Benefit Analysis
6. The major benefits and required cost-benefit analysis are outlined below for each
specific category of subproject to be covered by the Project.
27
ADB. 1997. Guidelines for the Economic Analysis of Projects. Manila; and ADB. 1998. Guidelines for the
Economic Analysis of Water Supply Projects. Manila.
48 Appendix 13
7. Water Supply. The major benefits that can be considered in the economic analysis
include (i) utilities’ operation and maintenance cost savings, (ii) the willingness to pay or
reduction in health costs due to a reduction in waterborne diseases (whichever is higher) for
currently connected customers; and (iii) the willingness to pay or avoided water collecting and
storage costs or reduction in health costs due to a reduction in waterborne diseases (whichever
is highest) for costumers to be connected under the Project.
8. Solid Waste and Wastewater. The solid waste and wastewater treatment subproject
will reduce the pollution of ground and surface water bodies. As a result, public health benefits,
i.e., the reduction of waterborne diseases, are expected. However, these benefits will accrue to
the public as a whole, particularly the users of these water bodies, rather than to direct
recipients of services. Practical quantification of the benefits is difficult and costly. Therefore, no
quantitative cost–benefit analysis is required for this type of subprojects. The subprojects falling
into this category will be evaluated on the basis of cost effectiveness.
9. Urban Road and Public Transport. The major benefits that can be considered in the
economic analysis include (i) utilities’ operation and maintenance cost savings, (ii) vehicle
operating cost savings due to improved road conditions and reduced detours, (iii) decreased
travel time due to reduced congestion and detours, and (iv) reductions in pollution and hazards.
E. Methodologies
10. The methodologies adopted in subproject economic analysis should be in line with those
stipulated in ADB’s Guidelines for the Economic Analysis of Projects (footnote 1), including,
among other things, (i) demand assessment and projection, (ii) distinguishing incremental and
non-incremental demands, (iii) identification and quantification of costs and benefits, and (iv)
conversion of financial costs to economic costs. Sensitivity analysis should examine the impact
of cost increase, benefits decrease, and completion delays on a subproject’s economic viability.
A sensitivity indicator and switching value should be calculated for each of these uncertainties
and risks.
F. Criteria
11. To be eligible for financing under the Project, for a subproject which requires a cost–
benefit analysis, the economic internal rate of return should be at least 12%. For a subproject
which does not require a cost–benefit analysis, the subproject should have been justified as the
least-cost solution to achieve the subproject objectives, based on cost effectiveness.
G. Review Procedure and Institutional Capacity of the Municipal Development Fund
12. MDF will review the adequacy of the economic analysis included in the feasibility study
report and verify (i) the assumptions and data used in the economic analysis, (ii) the
appropriateness of the methodologies adopted by the analysis, and (iii) the economic eligibility
of the subproject to be financed by the Project. The results of the review will be presented in a
board memo, which will form the basis for the supervisory board to discuss and consider the
subproject’s eligibility for MDF financing.
Appendix 14 49
ENVIRONMENTAL ASSESSMENT AND REVIEW FRAMEWORK
A. Description of the Financial Intermediary
1. The Municipal Development Fund (MDF) of Georgia, as the executing agency and
financial intermediary for the Project, is a legal entity of public law whose purpose is to mobilize
financial resources from donors—including international and domestic financial institutions,
donor agencies, and Government agencies—for investments in local infrastructure and
services. MDF was established by a presidential decree for the purpose of managing the
investment component of the World Bank’s First Municipal Development and Decentralization
Project (MDDP I) and, subsequently, MDDP II and other development agency-funded projects.
2. In carrying out its activities, MDF acts in accordance with the provisions of the Law on
Legal Entity of Public Law of 28 May 1999, the provisions of other relevant laws of Georgia,
orders and decrees of the president of Georgia, agreements of the Government of Georgia with
international financial institutions, MDF's charter, and the instructions in its operations manual.
MDF is financially autonomous.
B. Description of the Proposed Project
3. The Project comprises two components: an investment projects financing facility, and
project management and capacity development. The output of the first component is increased
quality, coverage, and reliability of water supply, sanitation, solid-waste management, and
roads. The outputs of the project management and capacity-development component are (i)
improved capacity of municipal governments to prepare and appraise feasibility, engineering
design, environmental, social, and other related studies; (ii) improved capacity in project
management at municipal level; (iii) strengthened corporate and business planning processes
within MDF; and (iv) improved capacity of MDF for studies and training.
C. Overview of the Environmental Management System
1. Assessment of Capability of Environmental Management Officers and Staff
4. Presently, MDF has one environmental specialist under the management monitoring and
evaluation division. The specialist is responsible for providing technical assistance to the
borrowing municipalities and supervising environmental assessment for all the investments
financed under the World Bank’s MDDP II and by the Millennium Challenge Corporation (MCC).
The approval and implementation of the Project is likely to impose substantial additional strain
on the single specialist’s capacity, particularly considering that ADB’s procedures, despite broad
similarities with the World Bank procedures, are new to Georgia and MDF, and the Project is
likely to include more environmentally sensitive investments than those financed by the World
Bank and MCC so far.
2. Overview of Financial Intermediary’s Environmental Policy
5. MDF does not have a separate environmental policy. However, its operation has been
governed by both the environmental laws in Georgia and the World Bank’s environmental
safeguards policy for investments financed under MDDP I and II and the safeguards policies of
other development agencies, including MCC. In particular, the constitution of Georgia states that
“Any person has the right to live in a healthy environment, use the natural and cultural
environment. Any person is obliged to take care of the natural and cultural environment." (Article
50 Appendix 14
37, Part 3). Article 37, Part 5 further states that “an individual has the right to obtain full,
unbiased and timely information regarding his working and living environment".
3. Description of Environmental Performance Monitoring and Reporting
System
6. There are three distinct stages of environmental assessment during a typical MDF
project cycle: identification, appraisal, and implementation.
7. Preliminary Environmental Assessment at Identification Stage. The main objective
of the preliminary environmental screening of projects proposed for MDF financing is to ensure
that proposals for projects with potentially adverse effects that cannot be effectively mitigated
are excluded from financing. During this stage, the following steps will be taken by the MDF.
(i) Carry out desk environmental assessment using available documents to identify
proximity of the project impact area to protected areas, resorts, or other restricted
or extremely sensitive zones.
(ii) Collect evidence that the proposed project does not violate environmental
regulations.
(iii) Evaluate evidence of unavoidable and adverse environmental impacts which can
not be mitigated, and explore possible design alternatives and mitigation
measures. If such alternatives and effective mitigation measures are not
available or are deemed unfeasible at a reasonable cost within the limits set by
the local government’s borrowing capacity, declare the project ineligible and/or
direct local government to other possible financing sources.
8. The results of the environmental screening and assessment should be summarized
using statements such as "no significant environmental impacts are anticipated", "possible
adverse environmental impacts can be effectively mitigated", "proposed subproject violates
existing environmental regulations", or "project will lead to positive environmental impacts". The
written comments of the evaluation should include a brief description of the affected
environment, potential impacts, and recommendations on (i) the involvement of environmental
consultants; (ii) the need to consider alternative technical, siting, and other solutions; (iii) the
need for specific prevention and mitigation measures; and (iv) the desired level of environmental
assessment and public involvement at further stages.
9. Environmental Assessment at Final Appraisal Stage. The tasks of the MDF during
appraisal include
(i) visiting the project site and carrying out field assessment, including participating
in public hearings and consultations;
(ii) comparing results and recommendations of the preliminary environmental
assessment with the final project documentation; ascertaining that necessary
environmental permits (including land use, resources use, debris disposal, and
sanitary inspection) and approvals are in place or can be obtained;
(iii) preparing the environmental assessment including, where needed, an
environmental management plan (EMP);
(iv) consulting and disclosing the relevant information on the project’s environmental
impacts in a form and manner understandable to those being consulted;
(v) examining the project documentation to check that (a) environmental assessment
was performed in accordance with regulations and that it followed the
Appendix 14 51
recommendations of the preliminary environmental assessment, (b) the
documentation includes all the necessary permits and approvals required at
appraisal stage, (c) appropriate prevention and mitigation measures have been
planned and necessary resources have been allocated, and (d) the project
documentation and findings of the final site visits have been presented to the
public and that the project does not draw public objections; and
(vi) making recommendations on the level and mechanisms of environmental
monitoring during construction and subsequent operations of the project facilities.
10. Implementation of Environmental Management Plan. During project implementation,
MDF will monitor the implementation of the EMP, as well as the mitigation of any unexpected
adverse environmental impacts. In the case of major change in project scope, the MDF will
ensure that the environmental assessment is triggered, and the project proponent undertakes
the environmental assessment process.1 MDF will prepare the semi-annual monitoring report
which will describe the EMP implementation and results, compliance with ADB loan covenants
and applicable government environmental laws and regulations, and the overall performance of
MDF’s environmental management system and any needed improvements.
D. Proposed Environmental Assessment and Review Procedures for Investments
1. Overview of Type of Investments to be Assessed
11. Investment projects financed by MDF loans and grants from the project resources will be
limited exclusively to rehabilitation and repair of existing basic municipal service infrastructure
and facilities and replacement of equipment for services delivery. The main sector coverage for
the proposed project will be water supply and wastewater treatment, urban transport, solid-
waste management, and coal gasification and district heating. While the investments in general
will potentially bring about significant environmental benefits, some of them may cause adverse
environmental impacts during project implementation and operation. As an example,
wastewater treatment helps improve water quality, which has a positive impact on human
health, while improper disposal of sludge may cause environmental damage and harm human
health. Similarly, solid-waste disposal projects can have beneficial impacts on human health
and living conditions, but poorly designed and implemented landfill sites may pollute
underground water.
2. Country Environmental Assessment and Review Procedures
12. At present, environmental permit procedures are set out in two laws—the laws of
Environmental Impact Permit (2008) and Ecological Expertise (2008). Until 2005, the two
principal environmental laws in Georgia were the Law on Environmental Permits and the Law on
State Ecological Expertise, both of which came into effect in 1997. The Law on Environmental
Permits regulated procedures for issuing permits, and covered environmental permits,
environmental impact assessments (EIAs), and public information and participation issues in
decision-making procedures. In accordance with the law, all projects were divided into four
categories based on their size, importance, and potential impact on the environment. While all
categories of projects must undergo Law on State Ecological Expertise (Review) in order to be
issued a permit, the requirements of the environmental permit process are different for different
categories of projects.
1
ADB. 2006. Operations Manual. Section F1/OP: Environmental Considerations in ADB Operations. Manila.
52 Appendix 14
13. On 24 June 2005, the Law on Licenses and Permits was adopted by Parliament. The
new law regulates legally organized activities posing certain threats to human life and health,
and addresses specific state or public interests, including usage of state resources. It also
regulates activities requiring licenses or permits, determines types of licenses and permits, and
defines the procedures for issuing, revising, and canceling of licenses and permits. A new law
on environmental impact permit has replaced the 1997 Law on Environmental Permits.
14. A major difference between new and old procedures is that, unlike the old procedures
which classified projects into four categories, the new procedures have been further simplified to
include only two categories, i.e., those activities that require an EIA and those which do not.
There are 24 categories of activities—including construction of facilities for recycling of solid
domestic wastes (e.g., incineration plants) and/or landfill sites, wastewater treatment facilities
and sewerage pipes, and water supply facilities—which are subject to the EIA procedures in
order to be issued an environmental permit, while all the others do not require an EIA. The new
Government procedures are different from ADB requirements which categorize projects into
three categories (A, B, and C, see para. 21). Furthermore, in determining appropriate
environmental standards for ADB-supported projects, ADB follows the standards and
approaches laid out in the World Bank’s Pollution Prevention and Abatement Handbook. 2
However, with proper justification, the environmental assessment for any individual project may
recommend adoption of alternative emission levels and approaches to pollution prevention and
abatement in order to better reflect national legislation and local conditions (footnote 1).
15. Under the current procedures, the proponent of a project who seeks an environmental
permit is expected to conduct an environmental assessment and public consultations within the
desired time frame and according to the required procedure. The proponent will involve the
Ministry of Environment Protection and Natural Resources in the process of conducting the
environmental assessment. Upon completion of the environmental assessment, the proponent
may apply to the ministry for an environmental permit. The ministry will carry out state ecological
expertise of the Project (for which the EIA has already been conducted) and issue a permit
within 20 days.
3. Specific Procedures to be Used for Investments Under the Project
16. Responsibilities and Authorities. MDF as the Executing Agency of the Project will
bear the overall responsibility of ensuring full compliance of the Project with the environmental
regulations and policies of Georgia and ADB. This includes (i) conducting preliminary
environmental assessment including environmental categorization and screening, (ii) ensuring
the environmental assessment is conducted in a satisfactory manner during the appraisal stage,
(iii) ensuring all the environmental permits and approvals have been obtained, and (iv)
conducting monitoring during project implementation. MDF will be responsible for coordinating
with ADB’s Central and West Asia Department (CWRD) in applying and satisfying ADB’s
environmental safeguard procedures.
17. The Ministry of Environment and its regional offices will be responsible for issuing the
environmental permits or consents when all the conditions are met, and may participate in the
environmental monitoring to be conducted by MDF during project implementation. MDF will be
responsible for (i) conducting the environmental categorization using ADB’s rapid environmental
assessment checklist, (ii) conducting the required environmental assessment, (iii) preparing the
EMP if required, (iv) obtaining all the necessary environmental permits and approvals, and (v)
monitoring the implementation of the environmental mitigation measures as specified in the
2
World Bank. 1998. Pollution Prevention and Abatement Handbook. Washington DC.
Appendix 14 53
EMP. The main responsibilities of CWRD will be (i) reviewing and clearing environmental
assessment reports for category A and category B subprojects deemed sensitive by ADB, and
(ii) conducting review missions to monitor implementation of the EMP—ADB reserves the right
to review any subproject proposal and its EIA or IEE. In addition, CWRD will provide technical
support on ADB environmental safeguards policy and procedures.
18. Environmental Criteria for Subproject Selection. The Project will primarily focus on
investments with no significant adverse environmental impacts. However, in some exceptional
cases where the needs for financing environmentally sensitive subprojects (e.g., landfill sites)
are well justified, such subprojects may be considered. ADB and the Government’s
environmental assessment and management procedures will be strictly followed, and
environmental risks will be minimized to an acceptable level as a result of properly assessed
and planned mitigation program.
19. Environmental Classification. MDF will undertake the environmental categorization
process of the investments using ADB’s rapid environmental assessment checklists. 3 The
categories are described as follows.
(i) Category A. Investments with potential for significant adverse environmental
impacts. An EIA is required to address significant impacts.
(ii) Category B. Investments judged to have some adverse environmental impacts,
but of lesser degree or significance than those for category A projects. An initial
environmental examination (IEE) is required to determine whether or not
significant environmental impacts warranting an EIA are likely. If an EIA is not
needed, the IEE is regarded as the final environmental assessment report.
(iii) Category C. Investments unlikely to have adverse environmental impacts. No
EIA or IEE is required, although environmental implications are still reviewed.
20. Preparation of Initial Environmental Examinations. For category B subprojects, an
IEE will be prepared as per requirements outlined in the ADB Environmental Assessment
Guidelines. The IEE should be undertaken as part of the feasibility study, and the environmental
assessment team should work closely with the technical planning and design group to ensure
that environmental considerations are integrated into the project design. The IEE must decide
whether or not significant environmental impacts warranting an EIA are likely. If the EIA is
warranted, the IEE must provide a recommendation on scope and terms of reference for the
EIA. Where no further EIA is recommended, the IEE must include an EMP for each predicted
impact, and this will outline identified mitigation measures with (i) cost estimates, (ii) responsible
parties for implementation, (iii) type of monitoring to be conducted, (iv) frequency and location of
the monitoring, and (v) responsible parties for the monitoring. All the strategic alternatives (e.g.,
principal water sources for water supply projects and possible routes or sites for wastewater
treatment and solid-waste management facilities) should be assessed and decisions should be
taken at the feasibility study stage. Further, the EIA should be focused on the preferred
alternative(s).
21. Preparation of Environmental Impact Assessments. For any category A investments
included for project financing, an EIA will be conducted as per requirements outlined in the ADB
Environmental Assessment Guidelines. The EIA, which will generally have a broader and more
detailed scope of work than an IEE, should be undertaken as part of the feasibility and detailed
design, and the environmental assessment team should work closely with the technical planning
3
ADB. 2003. Environmental Assessment Guidelines. Manila.
54 Appendix 14
and design group to ensure that environmental considerations are integrated into the project
design. The EIA must include an EMP for each predicted impact, and this will outline identified
mitigation measures with (i) cost estimates, (ii) responsible parties for implementation, (iii) type
of monitoring to be conducted, (iv) frequency and location of the monitoring, and (v) responsible
parties for the monitoring.
22. Requirements for Public Consultation. For category A and B investments, MDF must
consult with groups affected by the proposed investments and local nongovernment
organizations. The consultation should take place as early as possible in the project cycle so the
views of the affected people can be taken into account in project design and mitigation
measures included. For category A investments, MDF will ensure that consultation takes place
at least twice: once during the early stage of EIA fieldwork, and once when the draft EIA report
is available.
23. Requirements for Information Disclosure. Summary EIA reports for category A
subprojects and summary IEE reports for category B sensitive subprojects are required to be
posted on MDF and ADB websites. ADB’s 120-day rule (footnote 1) requires that the full EIA for
a category A subproject or the full IEE for a category B sensitive subproject be available to the
general public at least 120 days before subproject approval.
24. Review of Environmental Assessment Reports. MDF will submit an EIA for category
A subprojects or IEE for category B sensitive subprojects to CWRD for review and clearance,
and to the Ministry of Environment for review and approval. MDF will submit the IEEs for all
other category B subprojects to the Ministry of Environment for review and approval. The
Ministry of Environment will issue the environmental permit.
25. Monitoring Environmental Performance. MDF, the borrowing municipalities, and in
some cases the Ministry of Environment, conduct the environmental monitoring in accordance
with the plans and schedules outlined in the EMP. The monitoring results will be included as
part of the progress report and submitted to ADB on a semi-annual basis.
Appendix 15 55
SUMMARY POVERTY REDUCTION AND SOCIAL STRATEGY
Country/Project Title: Georgia/Municipal Services Development Project
Lending/Financing Department/ Central and West Asia Department/
Financial Intermediation
Modality: Division: Social Sectors Division
I. POVERTY ANALYSIS AND STRATEGY
A. Linkages to the National Poverty Reduction Strategy and Country Partnership Strategy
Poverty reduction and economic development have been one of the top priorities for the Government of Georgia for a number
of years. The Government has elaborated a draft general strategy for the eradication of extreme poverty. Several reforms
have been launched for the achievement of the Millennium Development Goals (MDGs) and relevant institutions have been
created. As poverty reduction was a key priority for the Government’s reform program, social spending was increased by 5%
of gross domestic product (GDP) between 2003 and 2005, pension and wage arrears were eliminated, and a targeted poverty
benefit was introduced in 2006. The links between the governance and growth reform agendas and their impact on
employment and poverty reduction suggest that Georgia’s reform program is on the right track. Poverty is expected to decline
as the economy’s capacity to generate new jobs develops and a well-targeted and fiscally sustainable social safety net is
implemented. Under the Poverty Reduction Support Operation III, the Government expanded the coverage of the targeted
poverty benefit to about 90,000 extremely poor households and will expand it to 130,000 households under the Poverty
Reduction Support Operation IV.
Inadequate municipal infrastructure—including transport, waster management, sanitation, and drinking water—is a significant
contributing factor to the incidence of urban poverty in Georgia, and this contributes to social insecurity. Supporting
participating municipal governments in providing and improving the above public services, could significantly improve the
living condition and economic development of municipal populations. The rehabilitation of water supply and sewerage
services and improved management of solid waste and concomitant public and environmental health improvements will see
benefits spread to the entire municipal population, including the poor and especially women, for whom water supply and
waste management are among the most critical needs. Improved transport will enhance public safety and the quality of the
urban environment and specifically provide opportunities for women to travel for health, education, and employment purposes.
Investments in the infrastructure sectors will additionally create employment for poor people.
Georgia only became an Asian Development Bank (ADB) member country in February 2007; consequently Georgia and ADB
have not prepared a country partnership strategy and any sector analysis or sector road map yet. However, ADB has
prepared the Georgia interim operational strategy (2008–2009).a ADB and the Government have identified two projects that
will constitute the core program for 2008–2009: the municipal services development project, and the regional roads
development project.
B. Poverty Analysis Targeting Classification: Targeted intervention (TI-M)
1. Key Issues
Poverty incidence in Georgia rose by an estimated 5.7% during 2004–2005 to 32.9%. Although official figures for 2006 have
yet to be released, a recent World Bank document indicates that poverty has fallen to 31%. Recent strong growth has yet to
translate into sustained trends in declining unemployment and failing poverty rates. The unemployment rate was 13.9% in
2006. Poor people tend to have larger households and have less access to essential infrastructure and services, including
electricity, water supply, and sanitation. In 2004, a new phase of social policy started in Georgia which was characterized by
the transition from having a universal social safety system to having a poverty reduction system. On this basis, the
government established a social assistance and employment agency in 2006 with the main function of implementing a poverty
reduction program.
The Government aims to reduce overall poverty incidence by half to 15% and extreme poverty to less than 4% by 2015. It will
do this by strengthening the social assistance system, improving access of the poor to affordable basic services, and raising
net job creation rates. Sustained high growth of more than 7% per year is to be pursued through adherence to
macroeconomic prudence, economic diversification, and infrastructure development. The national objective of reducing
extreme poverty to below 4% by 2015 is likely to be achieved with the successful reform of a social assistance program that
aims to reach the poorest and most vulnerable segments of the population. The social sectors now account for about a third
of public spending. However, achieving the MDG for access to safe drinking water is likely to be more challenging as there
are significant differences in access to infrastructure services between rural and urban areas, and between the poorer and
more developed regions of the country.
With respect to water supply and sanitation, the 2004 study on the water supply and sanitation (WSS) sector by the World
56 Appendix 15
Bank and the Government summarized the following: (i) water, sanitation, and wastewater conditions in most cities and towns
range from poor to very poor; (ii) water supply to homes is unstable and in most cases the hours or supply are declining and
many households use multiple water sources to meet their daily water demand; (iii) wastewater treatment plans are not
operational, except partially in Tbilisi; (iv) public health risks are increasing due to discharge of non-treated wastewater and
insufficient treatment of piped water; (v) water supply facilities are at least 40 years old and suffer from deferred maintenance
and repair, except in a few cases in major cities funded mainly through the Municipal Development Fund (MDF); and (vi)
almost all WSS utilities have significant debts due to unpaid electricity and taxes.
2. Design Features
Inadequate urban infrastructure, including transport, is a significant contributing factor to urban poverty in Georgia. The benefit
in addressing the urban infrastructure of the proposed project for the participating municipal governments will be significant
improvements in living conditions (including crucial public health benefits) and significant poverty reduction through improved
service provision, and stimulation of economic development by encouraging investment, job creation, and labor mobility. In
addition, investment will bring faster and more comfortable transport for all sectors of the city population, and reduced traffic
jams and air pollution. Finally, the program will target vulnerable communities such as elderly and poor people.
II. SOCIAL ANALYSIS AND STRATEGY
A. Finding of Social Analysis
The main stakeholders in this Project will be the MDF, participating municipal governments, the private sector, utilities
companies, and communities.
Basic municipal infrastructure and services have suffered considerable neglect since the collapse of the Soviet Union. Very
little investment has been available from the central government for rehabilitation of infrastructure or the adequate provision of
services. Preexisting mechanisms and systems for maintenance and service provision have collapsed or are no longer
appropriate. The total dependence on central government (by both local governments and communities) for the provision of
all infrastructure and maintenance services during the Soviet era remains strongly ingrained and will be a key issue for the
project to deal with.
The major challenges for the municipal governments are: (i) how to improve very badly neglected basic municipal
infrastructure and services in a sustainable way, (ii) how to build the internal capacities necessary to plan and implement
appropriate infrastructure interventions and develop sustainable service provision, and (iii) how to engage local communities
to mobilize their own human and financial resources in support of infrastructure projects. The third challenge will require
changes in attitude and behaviors with regard to payment for and maintenance of the system after rehabilitation. Civil society
organizations (CSOs) are likely to be key partners for the municipal governments in achieving changes in behavior through
community mobilization, awareness raising, and technical training.
B. Consultation and Participation
1. Provide a summary of the consultation and participation process during the project preparation.
The civil society sector is quite active in poverty eradication. CSOs’ activities include business development programs,
employment creation, health and sanitation education, public awareness, and good governance. The Future Without Poverty
Civil Alliance (FWPCA) has been established, which currently brings together up to 70 CSOs and individuals. The FWPCA
attempts to support the implementation in Georgia of the millennium development goal and eradicate poverty through public
awareness building and activities directed towards increasing Government accountability. Public awareness campaigns to
better educate customers about essential infrastructure services could lead to improved collection rates, protection of
watersheds, and conservation of natural assets. As the process of decentralization continues, more administrative and
service-delivery responsibilities—including solid-waste management, water supply, road maintenance, and street lighting—
become a function of local government. Involving communities and CSOs is important to (i) ensure that participating municipal
governments are using MDF support on important infrastructure and (ii) improve the prospect for sustainable implementation.
The main stakeholders in this project will be MDF, participating municipal governments, private sector/utilities companies,
communities, and CSOs including community-based organizations. MDF and participating municipal governments will ensure
that the results of social assessment and stakeholder consultations will be adequately taken into account in determining
investment priorities, making related financial decisions, and implementing investment projects. Participating municipal
governments will consult representatives of all stakeholders in identifying investment priorities and assessing the financial
effects and affordability of loan financing for improvement of infrastructure and services. The consultation will be carried out in
accordance with the provision of the laws of Georgia in public, and during the period of social monitoring and project
implementation. As part of the preparation of any investments under this project, MDF will (i) ensure that a social assessment
is carried out in close cooperation with the participating municipal governments; (ii) identify potential social issues associated
Appendix 15 57
with investment, carry out adequate public and municipal government participation and consultation, including consultation
with CSOs and community-based organizations in the areas; and (iii) ensure that arrangements are made for carrying out
appropriate levels of participation and consultation during project implementation. The operations manual will include a
requirement that social assessments and public and participating municipal government consultations be an integral part of
the application for investment financing.
2. What level of consultation and participation (C&P) is envisaged during the project implementation and monitoring?
Information sharing Consultation Collaborative decision making Empowerment
3. Was a C&P plan prepared? Yes No
If a C&P plan was prepared, describe key features and resources provided to implement the plan (including budget,
consultant input, etc.). If no, explain why.
C. Gender and Development
1. Key Issues. Georgian legislation declares the equality of men and women in regards to civil and political rights, but in
reality women are poorly represented in local government agencies and currently make up 8.8% of the members of city
councils. None of the cities or districts of Georgia have a woman in the position of mayor or district governor.
The labor market in Georgia is segmented from the gender point of view. Women are mainly employed in the public sector
with the proportion of 117 women per 100 men, whereas the proportion in the non-public sector is 57 women in hired
employment per 100 men. Women in the non-public sector are mostly employed in agriculture, education, health care, and
small manufacturing, which have been most negatively affected by economic transition. The privatization process in particular
has led to a significant decrease in job opportunities and salaries for women. Most women manage their households—
including water, sanitation, and solid waste—and are the most affected by the inadequate nature of WSS infrastructure.
The program will directly and indirectly benefit women through promoting improved infrastructure, including waste
management, sanitation, potable water, roads, and transport. The primary concerns of women need to be addressed in the
program design and will be part of the consultative process, which should specially target women’s participation in design,
implementation, and monitoring of projects. ADB’s investment tackling these service delivery and infrastructure needs is
critical to reducing the time spent by women on WSS chores and thus freeing time for engagement in income-generating
activities or leisure and family time. The initial discussion with CSOs working on gender issues revealed support for the
proposed projects since they are perceived as necessary improvements in the urban living environment and critical for
reducing health hazards like waterborne diseases.
2. Key Actions. Measures included in the design to promote gender equality and women’s empowerment—access to and
use of relevant services, resources, assets, or opportunities and participation in decision-making process:
Gender plan Other actions/measures No action/measure
Summarize key design features of the gender plan or other gender-related actions/measures, including performance targets,
monitorable indicators, resource allocation, and implementation arrangements.
III. SOCIAL SAFEGUARD ISSUES AND OTHER SOCIAL RISKS
Significant/Limited/ Strategy to Address Plan or Other Measures
Issue No Impact Issue Included in Design
The Project will finance only projects
Involuntary entailing the repair or rehabilitation of Full Plan
Resettlement existing facilities and infrastructure Short Plan
which do not require land acquisition or Resettlement
resettlement. The ADB policy on Framework
involuntary resettlement will not be No Action
triggered by this project.
In Georgia, there is no group fitting the
Indigenous Peoples definition of indigenous peoples under Plan
the ADB indigenous peoples policy. Other Action
The policy therefore will not be Indigenous Peoples
triggered by this project. Framework
No Action
58 Appendix 15
Significant/Limited/ Strategy to Address Plan or Other Measures
Issue No Impact Issue Included in Design
Labor The selection criteria for the contractors
Employment or utilities companies for civil works in Plan
opportunities the projects will include strict Other Action
Labor retrenchment adherence to the applicable labor laws No Action
Core labor standards and regulations of Georgia. MDF and
participating municipal governments
will furthermore ensure that there is no
differential payment between men and
women for work of equal value and
utilities companies do not employ child
labor in the construction or
maintenance activities.
The provision of affordable services to
Affordability the majority of communities, and the Action
need to cover the cost of operation and No Action
maintenance of urban services, will
need to be balanced and involve
consultation with various stakeholders.
Initial information suggests that
payment for potable water at existing
tariff rates is affordable since it will
reduce payments for getting water from
other resources. Excluding the very
poor and vulnerable groups, the
customer costs should be affordable for
the majority of the population in project
areas, depending on an acceptable
level of services.
Other Risks and/or Civil unrest in Tbilisi may hinder the
Vulnerabilities timeliness of project implementation. Plan
HIV/AIDS Furthermore, MDF and participating Other Action
Human trafficking municipal governments will ensure No Action
Others(conflict, political adequate engagement and dialogue
instability, etc), please with the dominant service sector
specify providers to ensure optimal results of
the project. Strong monitoring and
evaluation for the project will be
ensured. Additionally, ongoing
stakeholder involvement will be
undertaken so as to ensure the
realization of maximum benefits,
especially for the poor and women,
under the program.
IV. MONITORING AND EVALUATION
Are social indicators included in the design and monitoring framework to facilitate monitoring of social development activities
and/or social impacts during project implementation? Yes No
a
ADB. 2008. Georgia: Interim Operational Strategy (2008–2009). Manila.
