Document of The World Bank FOR OFFICIAL USE ONLY · GEORGIA FOR A REGIONAL DEVELOPMENT PROJECT February 22, 2012 ... Environmental Assessment OP/BP 4.01 X Natural Habitats OP/BP 4.04

Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No: 66027-GE

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF US$60 MILLION

TO

GEORGIA

FOR A

REGIONAL DEVELOPMENT PROJECT

February 22, 2012

Sustainable Development Department

South Caucasus Country Department

Europe and Central Asia Region

This document has a restricted distribution and may be used by recipients only in the

performance of their official duties. Its contents may not otherwise be disclosed without World

Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective February 22, 2012)

Currency Unit = GEL

GEL1.66 = US$1

FISCAL YEAR

January 1 – December 31

ABBREVIATIONS AND ACRONYMS

ACHP

CHF

CPS

CPS-PR

DA

EMF

EMPs

EPI

FDI

FI

FM

FMM

GNTA

ICOR

IFAC

IFRs

ISA

ISP

LSGs

MRDI

MDF

OM

PAA

PDO

PSIA

RAPs

RMIDP

SAR

SECHSA

SIDA

TOR

Georgia Agency for Culture Heritage Preservation

Georgia Culture Heritage Fund

Country Partnership Strategy

Country Partnership Strategy Progress Report

Designated Account

Environmental Management Framework

Environmental Management Plans

USAID-funded Georgia Economic Prosperity Initiative

Foreign direct investment

Financial Intermediary

Financial Management

Financial Management Manual

Georgia National Tourism Administration

Incremental Capital to Output Ratio

International Federation of Accountants

Interim un-audited financial reports

International Standards on Auditing

Implementation Support Plan

Local Self-Governments

Ministry of Regional Development and Infrastructure

Municipal Development Fund Georgia (Project Implementing Entity)

Operations Manual

Georgia Protected Areas Agency

Project Development Objective

Poverty and Social Impact Analysis

Resettlement Action Plans

Regional & Municipal Infrastructure Development Project

Subproject Appraisal Report

Strategic Environmental Cultural Heritage and Social Assessment

Swedish International Development Agency

Terms of Reference

Regional Vice President: Philippe H. Le Houérou

Country Director: Asad Alam

Sector Director:

Acting Sector Manager:

Laszlo Lovei

Benoit Blarel

Task Team Leader: Ahmed Eiweida

GEORGIA

REGIONAL DEVELOPMENT PROJECT

TABLE OF CONTENTS

Page

I. STRATEGIC CONTEXT 1

A. Country Context 1

B. Sectoral and Institutional Context 1

C. Higher Level Objectives 4

II. PROJECT DEVELOPMENT OBJECTIVES 5

A. PDO 5

B. Project Beneficiaries 5

C. PDO Level Results Indicators 5

III. PROJECT DESCRIPTION 6

A. Project Components 6

B. Project Financing 7

C. Lending Instrument 7

D. Project Cost and Financing 8

E. Lessons Learned and Reflected in the Project Design 8

IV. IMPLEMENTATION 9

A. Institutional and Implementation Arrangements 9

B. Results Monitoring and Evaluation 10

C. Sustainability 10

V. KEY RISKS AND MITIGATION MEASURES 11

A. Risk Ratings Summary Table 11

B. Overall Risk Rating Explanation 11

VI. APPRAISAL SUMMARY 12

A. Economic and Financial Analyses 12

B. Technical 13

C. Financial Management 14

D. Procurement 15

E. Social (including safeguards) 16

F. Environment (including safeguards) 17

G. Other Safeguards Policies Triggered 18

H. Effectiveness Condition 18

Annex 1: Results Framework and Monitoring 19

Annex 2: Detailed Project Description 21

Annex 3: Implementation Arrangements 27

Annex 4: Operational Risk Assessment Framework (ORAF) 40

Annex 5: Implementation Support Plan 43

Annex 6: Team Composition 46

Annex 7: Procurement Plan 47

Annex 8: Economic and Financial Assessment 51

Annex 9: Maps 58

i

DATA SHEET

Georgia

REGIONAL DEVELOPMENT PROJECT (P126033)

PROJECT APPRAISAL DOCUMENT

EUROPE AND CENTRAL ASIA

ECSS6

.

Basic Information

Date: February 22, 2012 Sectors: General water, sanitation and flood

protection (60%), urban transport

(30%), local government

administration (8%), vocational

training (2%)

Country Director: Asad Alam Themes: City-wide infrastructure and

service delivery (25%), culture

heritage (25%), infrastructure

services for private sector

development (30%), urban

economic development (10%),

regional integration (10%)

Acting Sector

Manager/Director:

Benoit Blarel/Laszlo Lovei

Project ID: P126033 EA

Category:

F - Financial Intermediary

Assessment

Lending Instrument: Specific Investment Loan

Team Leader(s): Ahmed A. R. Eiweida

Does the project include any CDD component? No

Joint IFC: No

.

Borrower: Ministry of Finance

Responsible Agency: Georgia Municipal Development Fund

Contact: Mr. Levan Chichinadze Title: Executive Director

Telephone No.: 995-32-2437001 Email: [email protected]

.

Project Implementation Period: Start Date: 30-May-2012 End Date: 30-Jun-2016

Expected Effectiveness Date: 30-May-2012

Expected Closing Date: 31-Dec-2016

ii

.

Project Financing Data (US$M)

[X] Loan [ ] Grant [ ] Other

[ ] Credit [ ] Guarantee

Proposed term: A flexible loan with a variable spread and a final maturity of 25 years, including a grace

period of 10 years.

For Loan:

Total Project Cost (US$M): 75.00

Total Bank Financing (US$M): 60.00

.

Financing Source Amount (US$ Million)

Borrower 15.00

International Bank for Reconstruction and Development 60.00

Total 75.00

.

Expected Disbursements (in US$ Million)

Fiscal Year 2012 2013 2014 2015 2016

Annual 15.00 20.00 15.00 07.00 03.00

Cumulative 15.00 35.00 50.00 57.00 60.00

.

Project Development Objective(s)

The Project Development Objective is to improve infrastructure services and institutional capacity to

support the development of tourism-based economy and cultural heritage circuits in the Kakheti region.

.

Components

Component Name Cost (US$ Millions)

Infrastructure Investment 56.90

Institutional Development 3.10

.

Compliance

Policy

Does the project depart from the CAS in content or in other significant respects? Yes [ ] No [X]

.

iii

Does the project require any exceptions from Bank policies? Yes [ ] No [X]

Have these been approved by Bank management? Yes [ ] No [ ]

Is approval for any policy exception sought from the Board? Yes [ ] No [X]

Does the project meet the Regional criteria for readiness for implementation? Yes [X] [X] No [ ]

.

Safeguard Policies Triggered by the Project Yes No

Environmental Assessment OP/BP 4.01 X

Natural Habitats OP/BP 4.04 X

Forests OP/BP 4.36 X

Pest Management OP 4.09 X

Physical Cultural Resources OP/BP 4.11 X

Indigenous Peoples OP/BP 4.10 X

Involuntary Resettlement OP/BP 4.12 X

Safety of Dams OP/BP 4.37 X

Projects on International Waterways OP/BP 7.50 X

Projects in Disputed Areas OP/BP 7.60 X

.

Legal Covenants

Name Recurrent Due Date Frequency

Supervisory Board X Quarterly

Description of Covenant

The Borrower shall maintain the supervisory board of the Project Implementing Entity, chaired by the

Prime Minister of Georgia. (Loan Agreement: Schedule 2, Section I.A.2).

Name Recurrent Due Date Frequency

Safeguards X Quarterly

Description of Covenant

The Borrower shall ensure that the Project is carried out by the Project Implementing Entity in

accordance with the provisions of the EMF, EA(s), EMP(s), RPF and RAP(s). (Loan Agreement:

Schedule 2, Section I.D.1).

Name Recurrent Due Date Frequency

Social Safeguards X Quarterly

Description of Covenant

Prior to the commencement of works, Project Implementing Entity to ensure that the owners and users

of the land where works are to be implemented are fully compensated in accordance with the

iv

provisions of the RAP(s). (Loan Agreement: Schedule 2, Section I.D.2).

Name Recurrent Due Date Frequency

Resettlement Policy Framework X Quarterly

Description of Covenant

The Borrower shall ensure that the Project Implementing Entity prepares RAPs according to the RPF.

(Loan Agreement: Schedule 2, Section I.D.4).

Name Recurrent Due Date Frequency

Selection Procedures for, and Terms and

Conditions of, Investment Subproject

Financing

X Quarterly

Description of Covenant

Investment Subprojects shall be selected in accordance with the selection criteria set forth in the

Operations Manual and the Project Agreement. (Project Agreement: Schedule, Section I.C.1).

.

1

I. STRATEGIC CONTEXT

A. Country Context

1. Following four years of rapid growth, backed by far-reaching reforms and strong foreign

direct investment (FDI) inflows, Georgia experienced a sharp economic downturn resulting from the

twin shocks of the August 2008 conflict and the global financial crisis. As a result, authorities

launched a counter-cyclical fiscal stimulus and also realigned public expenditures to social and

infrastructure investments. As economic recovery takes hold, driven by higher exports and private

investment, authorities are reducing the stimulus and implementing fiscal adjustments to safeguard

sustainability. Although the recovery resulted in about 6.8 percent growth rate in 2011, there is

uncertainty about the pace of future growth due to global economic uncertainties. In response, the

authorities are addressing macro-economic vulnerabilities through well-designed fiscal, monetary

and debt management policies. The authorities have also maintained their economic reform program

backed by a strong public investment program. Georgia is also currently negotiating a Deep and

Comprehensive Free Trade Agreement with the EU, which is expected to enhance market access for

Georgia‘s goods and modernize industries.

2. Georgia has one of the world‘s most competitive business environments—ranked 16th out of

183 countries according to the ―Doing Business‖ Report, IFC 2012. In particular, it scores well in

terms of business start-ups, tax processes, investor protection, access to credit, enforcement of

contracts, registering property and issuing construction permits.

3. The Government refocused efforts in the past six years by launching several regional

development initiatives to attract private investors in various sectors. Georgia, however, has not yet

fully tapped its potential to promote sustainable tourism in promising regions, such as Kakheti. In

the framework of the Country Partnership Strategy Progress Report (CPS-PR) for FY10-FY13

presented to the Board in April 2011 (Report Number: 58287-GE), the Government asked the Bank

to support regional development by applying a programmatic approach.

4. The design of the Project– the blend of institutions, infrastructure, and targeted interventions

– is informed by both a comprehensive diagnostic and relevant international experience. The Project

will aim to support the local economy in the region by carrying out an integrated approach to

tourism development, focusing on infrastructure, urban regeneration, cultural heritage restoration,

skills development and enabling the environment to attract private sector investments. Follow-up

projects under the program may focus on other economic sectors in Kakheti and/or replicate this

approach in another region.

B. Sectoral and Institutional Context

5. Georgia Regional Development Strategy.1 In June 2010, the Government approved by

Resolution no. 172, the State Strategy on Regional Development for 2010-2017, prepared by the

Ministry of Regional Development and Infrastructure (MRDI). Its main objectives are to create a

favorable environment for regional socio-economic development and to improve living standards.

These objectives will be achieved through a balanced socio-economic development policy, increased

competitiveness, and greater socio-economic equality among the regions. The national and local

1 Georgia Regional Development Strategy: http://www.mrdi.gov.ge/?page=lawv&id=4&lang=2

2

governments intend now to invest in Kakheti so it can become a growth center through better

promoting the tourism and agriculture potential of the region and reducing internal socio-economic

disparities..

6. In 2010, the UNDP helped Kakheti‘s Administration and Regional Development Agency

prepared a Regional Development Strategy for Kakheti (2010-2014), which concluded that the

tourism and agriculture/agro-processing sectors offer significant potential and proposed a priority

action plan. 2 Building on this program, the Bank task team analyzed the value and supply chain for

tourism and agriculture. It also conducted a detailed economic analysis, drawing on the 2009 World

Development Report, Reshaping Economic Geography, to assess the institutional quality,

infrastructural adequacy/connections, and proposed targeted interventions to foster tourism. These

analyses are the basis for this Project design.3

7. Kakheti, with approximately 11,300 km², has eight municipalities/local self-governments

(LSGs) and about 404,000 inhabitants, about 9 percent of the total population, making it Georgia‘s

fourth largest region. Due to its mountainous terrain, it is sparsely populated, with 35 persons/km²

compared to 75 persons/km² for the entire country. Most live in the two valleys of Alazani and

Signagi. The region is sparsely urbanized, with only about 21 percent of the population in cities.

8. Kakheti has long been the heart of Georgia‘s ancient culture, history and economy.4 Records

from those living during the Stone Age have been documented and Kakheti was a key juncture on

the Great Silk Road. It is home to a unique cultural heritage which includes the Nekresi Church

Remnants (4th century AD), the David Gareja Caved Monastery (6th century AD), the Old Shuamta

Basilica (5-6th century AD), the Ninotsminda Citadel (7th century AD), the Alaverdi Cathedral

(11th century AD), the Bodbe Monastery (9-11th century AD), and the Gremi Archangel Monastery

Complex (16th century AD), among others. The ancient city of Telavi is its cultural and economic

capital, whose early records are cited by the Greek scholar Ptolemy (2nd century AD). Signagi and

Kvareli are renowned for their unique architecture, and Kakheti is the center of vineyards that cover

the scenic Alazani and Signagi valleys. Telavi, Signagi, Kvareli, and Akhmeta also have local food

processing plants.

9. Kakheti is also home to three protected areas: Tusheti in the north, Lagodekhi in the center,

and Vashlovani in the south. Tusheti has preserved its unique cultural heritage, traditions and

ceremonies over the years. It is renowned for its lush landscape and the historical villages of Dartlo

and Omalo, which are distinguished by their traditional architecture, where residents have

maintained their culture and pattern of life.

10. With respect to GDP per capita, Kakheti is considered a lagging region and below the

country average. In 2010, Kakheti‘s Gross Value Added per capita represented only about 60 percent

of Georgia national average Kakheti has not undergone any significant transformation of its

economy. Economic density (volume of investments per km²) in Kakheti is about GEL74,000/km²

compared to GEL409,000/km² in Adjara, and GEL52 million/ km² in Tbilisi. Agriculture, although

2 Kakheti Regional Development Strategy: http://www.kakheti.gov.ge/eng/index.php?cat=33&par=33

3 The Project economic and financial analysis is complemented by spatial economic analysis (using the WDR 2009

framework of economic geography analysis) and ICOR (investment to capital output ratio) analysis looking at the

relationship between public and private investment trends in Georgia generally. Full analysis is available in Annex 8. 4 Website of the Kakheti region: http://www.kakheti.gov.ge/eng/

3

declining in terms of its contribution to GDP and employment, still represents a large part of the

economy and is still less productive. Services, especially tourism, generate about 60 percent of

Kakheti‘s value added, while public administration still plays a dominant role. The service sector,

particularly hotels and restaurants, has become important.

11. The poverty rate in Kakheti is 25 percent, which is slightly above the Georgia average of 24

percent. Other poverty indicators such as poverty depth, severity, and incidence are also higher than

the Georgia averages. The figures are higher for urban households in almost all dimensions of well

being. The unemployment rate in Kakheti is 11 percent, which is below Georgia average of 16

percent and Tbilisi‘s rate of 30 percent. Such a relatively low unemployment rate results from the

rural character of the region, with intensive inclusion of the population in agricultural self-

employment and non-paid employments.

12. The Project‘s economic analysis has provided a framework within which policies with regard

to future development can be presented. It includes an analysis of the growth/employment impact of

the proposed investments with sectoral breakdowns.5

13. The findings from the tourism value-chain analysis reveal huge development potential, but

identify challenges, which include:

The vast majority of overnight visitors to Georgia spend little, coming for business or to visit

friends and relatives;

The need for urban renovations and improving the quality of municipal infrastructure in key

cultural centers (Telavi, Kvareli, and Dartlo);

The low quality of municipal infrastructure (water, sanitation, access roads and solid waste

disposal);

Limited hotel capacity;

Seasonality (lower number of visitors and lower hotels occupancy rate in winter months),

A lack of activities to promote visiting the region as an attractive tourism destination;

A lack of investor information, communications and cooperation among investors to achieve a

competitive edge; and

Inadequate service skills and limited proficiency in foreign languages.

14. The tourism strategy proposes to develop Kakheti as a high-quality destination year-round. It

seeks to attract both domestic and international tourists, building on its cultural heritage and bio-

diversity, as well as visitors who would spend more during their stays. The strategy describes an

integrated approach, using the concept of geo-tourism and comprehensive urban renewal in key

centers (Telavi, Kvareli and Dartlo). The goal is to attract private investments, promote public-

private partnerships, revitalize local business activity, define a full-fledged regional tourism circuit,

and foster two leisure travel clusters along the following concepts:

Cultural heritage/culinary tourism: This includes visits to monuments, monasteries, museums

and for visitors to experience the region‘s music, art, dance, cuisine, spas. The market is to

attract those from 45-65, who have higher levels of disposable income, education, and time for

5 The full economic analysis is available in Annex 8.

4

leisure travel than those who currently visit Kakheti. Activities will include promotion,

marketing, and event planning with improved facilities and services.

Eco-tourism/adventure: This includes the pristine, protected landscape and is designed to

attract those from 25-45, although they have less disposable income. Activities would include

developing the physical areas, marketing, and training for both soft (hiking, birding, trekking,

skiing, kayaking) and hard (mountaineering, paragliding, heli-skiing) experiences.

15. Launching these activities will require multi-faceted interventions. These include

infrastructure improvements to attract private sector investments; urban regeneration/renewal and

conservation activities in key cultural centers (Telavi, Kvareli, and Dartlo); upgrading cultural

heritage sites; improving travel connections; improving planning and organization, e.g.,

managing/organizing destinations; strengthening institutions and building capacity; developing

tourism clusters; mapping geo-tourism sites and developing circuits; improving visitor services,

improving signs and language services; and marketing activities. The proposed Project intends to

address several of the above-mentioned challenges and contribute to the proposed multi-faceted

interventions.

C. Higher Level Objectives

16. The Project supports both features of the Country Partnership Strategy (CPS) for Georgia for

FY10-FY13 (Report Number: 48918-GE), presented to the Board in September 2009. It focuses on

the CPS goals of economic and business growth, job creation and social services. The Project is also

included in the CPS Progress Report, presented to the Board in April 2011. It intends to help create

permanent jobs, as well as temporary ones during construction. The CPS and the Project recognize

the importance of building local infrastructure, to promote social welfare and stimulate growth. The

country has been improving its municipal infrastructure (water supply, wastewater management,

local roads and housing) by analyzing issues, setting priorities and financing projects through the

Municipal Development Fund (MDF). The Project objectives are referenced in the Government‘s

most recent Ten Points Priority Plan of Modernization and Employment for 2011-2015, adopted in

October 2011. Under the Plan, the Government intends to reduce the imbalance between urban and

rural development, create employment centers, improve public services and transport connections

among regions, and improve the tourism infrastructure. Its goal is to increase number of tourists

from 2 million in 2011 to 5 million by 2015.

17. The rationale for Bank involvement lies in the Project‘s contributing to (a) the huge tourism

potential, (b) the growth of under-developed areas, (c) leveraging public and private investment, and

(d) building on a series of World Bank interventions in the Region aimed at improving transport

connections (the East-West Highway and the Secondary and Local Road Projects, which have

significantly reduced travel time from Tbilisi) and improving municipal infrastructure (the Regional

& Municipal Infrastructure Development Project and its Additional Financing, which improved

water services and urban roads in several Kakheti cities and villages).

18. The Kakheti region benefits not only from great natural beauty, historic and culturally

significant sites, but is also the origin of ancient wine making called ―Qvevry‖; a 7,000 year old

tradition that continues today. Also, in the past three years, the central and regional governments

have invested in urban renewal by developing infrastructure in Signagi city. The Project will build

5

on these investments and lessons learned, yet focus more on tourism and cultural heritage, which

have the highest economic rates of return.

19. There is strong client ownership of the Project. A Supervisory Board of the MDF composed

of the Prime Minister, Head of President‘s Administration, key Ministers, the Governor of Kakheti,

parliamentarians and NGOs has been working closely with the Bank to identify and prepare the

Project. Meetings have been held regularly with the Prime Minister and the Minister of Finance, who

also leads donor coordination. A multi-agency Working Group has also been established and been

acting as a counterpart to the Bank team during identification and preparation. It will continue to

work during implementation.

20. The Government views the regional development program as a catalyst for its interventions

in the region, as it is expected to have a high impact and allow the country to leverage added

finances from the donor agencies, private sector, and state budget. To date, the German GiZ has

agreed to provide technical assistance to update the Regional Development Strategy, so as to create a

medium-to-long term participatory strategic investment plan that anticipates both public and private

capital needs. The EU has started a capacity-building program for the Georgia National Tourism

Administration (GNTA) on managing destinations, USAID and the Swiss Development Corporation

(SDC) are supporting the agricultural and rural development sectors. The Swedish International

Development Agency (SIDA) has provisionally agreed to provide parallel funds to the Project with

US$7-8 million, subject to signing the Administration Agreement between SIDA and the Bank.

II. PROJECT DEVELOPMENT OBJECTIVES

A. PDO

21. The Project Development Objective is to improve infrastructure services and institutional

capacity to support the development of tourism-based economy and cultural heritage circuits in the

Kakheti region.

B. Project Beneficiaries

22. The activities envisaged under the Project are expected to bring direct benefits to the

residents of, and tourists to, Kakheti. The implementation of the Project is expected to improve the

access, quality and reliability of public infrastructure; increase the volume of private sector

investment in the region; and increase points of sales in renovated culture heritage sites and cities.

The Government will benefit from improved institutional capacity of selected agencies and LSGs.

Overall, the population is expected to see improved welfare and incomes.

C. PDO Level Results Indicators

23. The key results expected from the Project are:

Infrastructure Services:

Increased weighted average number of hours per day of piped water services in Project areas

(from 8 hours/day to 24 hours/day).

6

Reduced weighted average vehicle operating costs due to improved urban roads (from 100

percent to 75 percent).

Tourism Economy:

Increased volume of private sector investment from US$0 to US$50 million in targeted areas.

Increased number of hotel beds in circuit route areas by 20 percent (from 1,610 to 1,932 beds).

Institutional Capacity

Increased points of sales in renovated culture heritage sites and cities by 30 percent (from 248

to 323).

III. PROJECT DESCRIPTION

A. Project Components

24. The Project has two components.

Component 1: Infrastructure Investment (IBRD: US$56.9 million; Borrower: US$14.2 million)

Component 1.1: Provision of financial resources to local-self governments (LSGs) to carry out

Investment Subprojects for the following activities:

Urban regeneration: An integrated approach is proposed for renewal of Telavi, Kvareli and the

heritage village of Dartlo. This includes a) the rehabilitation of municipal infrastructure and

utilities in the central historical areas, b) conservation and upgrading of public spaces and

cultural buildings, and c) conservation of building facades with vernacular architecture. The

proposed conservation and upgrading activities will help improve livability and hospitality in a

culturally-informed manner, enhance attractiveness for visitors, revitalize the urban and rural

nuclei, and attract increased volume of private sector investments.

Tourism circuit development: Integrated approach to culture heritage site upgrading and

improved management in the most attractive 11 cultural heritage sites located along the main

tourism circuit/route in Kakheti. These include a) improved urban landscaping and public

parking; b) construction of info kiosks, cafes and public toilets; and c) improving access roads.

The main tourism and culture heritage circuit has been identified in the Kakheti Tourism

Development Strategy connecting the following culture heritage sites, which are targeted for

upgrading: Ujarma, Old and New Shuamta, Ikalto, Alaverdi, Bodbe, Gurjaani, Akhtala,

Mirzaani, Ninotsminda, Khirsa and David Gareja.

The estimated cost of this sub-component, including physical and price contingencies, is about

US$58.6 million, of which the World Bank will provide US$46.9 million, the Borrower will provide

US$11.7 million counterpart funding.

Component 1.2: Provision of financial resources to LSGs to carry out Investment Subprojects for

public infrastructure to attract private sector investments in tourism and agro-processing.

7

To encourage private sector investments in the region, this component is to support, on a pilot basis, a

selected number of private sector entities which show interest and capacity to invest in Kakheti in

the tourism or agro-processing, but seek complementary public infrastructure necessary to make

their investments viable (e.g., public facilities within vicinity of the investments, road/sidewalk,

water/sanitation, etc). They would be subject to screening by a selection committee and there will be

appropriate conditions tied to that. Selection of private sector investments will be based on transparent and competitive processes. A

package of incentives will be provided to domestic and international investors to invest in Kakheti.

This would include streamlined business start up procedures and provisions of the public

infrastructure mentioned above.

The estimated cost of this sub-component, including physical and price contingencies, is about

US$12.5 million, of which the World Bank will provide US$10 million, the Borrower will provide

US$2.5 million counterpart funding.

Component 2: Institutional Development (IBRD: US$3.1 million; Borrower: US$0.8 million)

Enhancing the institutional capacity and performance of the Georgia National Tourism

Administration (GNTA), the Agency for Culture Heritage Preservation of Georgia (ACHP), the

Project Implementing Entity (MDF), and other local and regional entities to carry out the following

activities:

Destination management and promotion, including local outreach campaign;

Geo-tourism routes and tourism portal;

Skilled workforce development and capacity building;

Construction supervision and sustainable site management of cultural heritage; and

Performance monitoring & evaluation activities.

The design and implementation of these activities would be informed by a World Bank TA on

Georgia Kakheti Cultural Heritage Tourism, which would assess the quality of existing site

management plans and governance mechanisms, identify capacity gaps, and propose

recommendations to improve these plans and capacities. The Poverty and Social Impact Assessment

(PSIA) for the Kakheti Regional Development Program would also inform the activities on skilled

workforce development, capacity building, and performance monitoring by identifying vulnerable

and sensitive population to tourism development in the region, assessing opportunities to increase

their benefits from tourism development, providing policy recommendations for pro-poor tourism

development, and proposing a set of parameters to monitor the impact of tourism sector development

on local population.

B. Project Financing

C. Lending Instrument

25. The lending instrument is a Specific Investment Loan. The Borrower selected an IBRD

flexible loan denominated in US dollars, commitment-linked with a variable spread and a 25 year

maturity, including a grace period of 10 years and level repayments of principal.

8

D. Project Cost and Financing

Project Components Project cost

(US$ million) IBRD Financing

(US$ million) % Financing

1. Infrastructure Investment

2.Institutional Development

Total Baseline Costs

Physical contingencies

Price contingencies

67.35

03.90

71.25

1.875

1.875

53.90

03.10

57.00

01.50

01.50

80%

80%

80%

80%

80%

Total Project Costs

Total Financing Required

75.00

75.00

60.00

60.00

80%

80%

26. Retroactive Financing: Withdrawals up to US$12 million under the loan may be made for

payments made prior to the signing date of the legal agreements but on or after December 27, 2011,

for Eligible Expenditures under Categories 1 and 2 (Annex 3, para 17).

E. Lessons Learned and Reflected in the Project Design

27. Key lessons learned and innovations that have been considered in the design of the Project

are:

Integrated approach. When resources are limited and investors‘/citizens‘ expectations are high, the

Project must avoid having project resources stretched too thin, which would compromise the

Project‘s feasibility, visibility and results. Thus, it is vital to understand all aspects of the multi-

faceted effort. If done properly, it should help create jobs and increase economic activity, create

cross-sector links and attract tourism-related income. Lessons from similar projects in China,

Lebanon, Tunisia and Jordan show that the Project funds can be most effectively if used to maximize

the competitiveness, profitability, economic impact and value added (also referred to as productivity

or efficiency) at each link in the chain that delivers a product or service.

Historic sections of cities and cultural heritage villages can promote economic development. Projects that were successfully implemented in Morocco, Jordan and Lebanon show that the renewal

of historical parts of cities/heritage villages can be part of a spatial transformation that make these

areas more attractive for residents, visitors and businesses. Moreover, since the historical areas are

usually dense, upgrading them can support green growth by reducing the need for motorized

transport and conserving energy in existing buildings. Despite the relatively high-level investments

required to renew the building stock (most of which features heritage values), these areas have the

potential to stimulate the cities‘ economy, revitalizing the built environment, and its vitality and

attractiveness, which helps create permanent jobs. The Lebanon Cultural Heritage and Urban

Development Project, in particular, has created the conditions for local economic development in

five cities, which so far have seen mostly positive growth in employment and business development.

In Baalbeck, for instance, there has been a 105 percent increase in employment in cultural/tourism

industries and 90 percent increase in businesses around the historic core.

9

Renewal of central cities. Urban regeneration/renewal is a process requiring a complex, well-

integrated mix of uses, all within walking distance. Successful renewal implies that existing

buildings are properly conserved and adapted to accommodate new functions. Investing in restoring

facades encourages owners to improve their homes and open small businesses on the lower floors

(higher floors can accommodate housing at various income levels). A critical mass of these

pedestrian-scale activities requires an initial investment in public and private assets before the

renewal become self-sustaining. However, at that point, an upward spiral begins: more developers

invest in real estate, more businesses open and further investments are made. As a result, more

people locate in the area which causes rents, land and property values to increase, and the renewal

process becomes self-sustaining. As Georgia‘s experience in redeveloping old Tbilisi, Signagi and

Mtskheta shows, governments can indirectly recoup the cost of investments from increased taxes

from properties, personal income, profits and VAT, and property sales‘ transaction fees.

Stakeholders’ consultations. The success of the Project as well as the urban renewal of Telavi,

Kvareli and Dartlo will require maintaining the strong consultations with all stakeholders that started

during Project identification and preparation. Lessons learned from the Cities Alliance-funded

Tbilisi Strategic Development Plan for Sustainable Development (2011-2030) revealed the benefits

on involving stakeholders in all decision-making processes.

IV. IMPLEMENTATION

A. Institutional and Implementation Arrangements

28. Building on the successful experience of the Regional & Municipal Infrastructure

Development Project (RMIDP), the proposed Project will repeat the arrangements for

implementation, procurement, safeguards, financial management and disbursements. The MDF will

be responsible for all aspects of Project implementation including financial management. The MDF

has become a non-bank financial intermediary (FI) that plays a very substantial role in funding and

developing regional and municipal infrastructure. Due to the Project‘s multi-sectoral nature, a

Working Group was established which includes all the agencies involved- namely, the MDF,

Georgia National Tourism Administration (GNTA),6 Agency for Culture Heritage Preservation of

Georgia (ACHP),7 Culture Heritage Fund (CHF), Protected Areas Agency (PAA),

8 United Water

Company (UWC), Kakheti Regional Administration and LSGs, Ministry of Finance, the Ministry of

Regional Development and Infrastructure. The Working Group performed well during Project

preparation.

29. All agencies in the Working Group and LSGs in Kakheti have been actively involved with

the MDF in Project preparation activities, and will be involved in various aspects of bid evaluation

and supervision. Responsibility for each activity is as follows:

Component 1

Urban regeneration in Telavi and Kvareli: CHF, UWC and the MDF.

Renewal in Dartlo heritage village and upgrading and management in 11 cultural heritage sites:

ACHP, UWC and the MDF.

6 Website of GNTA: http://www.gnta.ge/?lan=en

7 Website of ACHP: http://heritagesites.ge/?lang=eng

8 Website of PAA: http://dpa.gov.ge/?site-path=news&page=3&site-lang=en

10

Screening proposed private sector investments: The MDF, with support from the working

group and consulting service. All proposed investments will be endorsed by the MDF‘s

Supervisory Board.

Component 2

Tourism related institutional development activities: GNTA, ACHP, and the MDF.

Performance monitoring & evaluation: the MDF.

Procurement, safeguards, financial management, disbursement, supervision of all Project

activities: the MDF.

As a standard practice established under the RMIDP, the MDF prepared Subproject Appraisal

Reports (SARs) for all proposed subprojects to be implemented during the first year of project

implementation, which discussed their feasibility, safeguards issues, and analyzed the availability of

funds for operations and maintenance of the restored assets to ensure sustainability. All SARs were

appraised and approved by the Bank.

30. The MDF‘s governance structure: To ensure the Project‘s proper coordination and execution,

the Government shall maintain the MDF‘s Supervisory Board, which is chaired by the Prime

Minister of Georgia, and includes the Head of President‘s Administration, the Minister of Finance,

the Minister of Economy and Sustainable Development, the Minister of Regional Development and

Infrastructure, the Minister of Agriculture, the Governor of Kakheti, parliamentarians and NGOs.

The Board‘s functions include: (a) overall supervision of Project implementation; (b) inter-agency

coordination to achieve the Project objectives; and (c) review and approval of the annual work

programs, budgets and reports for the MDF operations. The Supervisory Board met several times

during Project preparation and endorsed its design, cost, implementation arrangements and

procurement plan.

B. Results Monitoring and Evaluation

31. The MDF will be responsible for monitoring & evaluating the Project outcomes against

agreed indicators as presented in the Results Framework. The MDF will engage an international

consulting firm to help collect/analyze data, and also recruit one to help supervise construction. The

cost of these services, as well as raising the institutional capacity to sustain Project interventions, is

built into the Project design under Component 2. Baseline data has been gathered from the findings

of the Kakheti Tourism Development Strategy, while progress in meeting, or exceeding, targets will

be carefully monitored under the Project. The MDF will produce quarterly progress reports to assess

Project implementation and suggest any needs for adjustments.

C. Sustainability

32. A unique feature of the Project is that it emphasizes stakeholders ownership and

sustainability in the following ways:

Throughout Project preparation, all agencies involved at the national, regional and local levels

have been engaged in its design. They will continue to be part of implementation and

supervision. This will ensure that local knowledge is incorporated and that there is full buy-in.

11

Several consultation workshops have been held with communities, NGOs, elected and

executive local councils, religious establishments in charge of churches and monasteries along

the tourism circuits, and all national agencies involved.

An advance draft of Strategic Environmental, Cultural Heritage and Social Assessment

(SECHSA) has been prepared to assess, inter alia, a) the natural and physical environment in

the Project area, b) potential direct impacts of the main types of the Project interventions on the

environment, cultural heritage, and social strata of Kakheti, c) potential indirect, long term and

induced development impacts of tourism development in the region, and d) risks mitigation

plan.

All investment proposals will be screened against criteria in the Operations Manual (OM).

As a standard practice established under the RMIDP, the MDF will sign subproject investment

agreements with benefitting LSGs, which clearly assign the responsibilities for operating and

maintaining assets to LSGs.

V. KEY RISKS AND MITIGATION MEASURES

A. Risk Ratings Summary Table

RISKS RATINGS

Stakeholder Risk Moderate

Implementing Agency Risk

Capacity Low

Governance Moderate

Project Risk

Design Moderate

Social and Environmental Moderate

Program and Donor Moderate

Delivery Monitoring and Sustainability Moderate

Overall Preparation Risk Moderate

Overall Implementation Risk Moderate

B. Overall Risk Rating Explanation

33. The proposed overall Preparation Risk was rated as Moderate and Overall Implementation

Risk as Moderate. The impact of the described risks, if they materialize, on the achievement of the

PDO is Moderate. However, provided that the risk mitigation measures will be implemented, and

based on the Bank and the MDF‘s past experience in implementing municipal development projects,

the likelihood of those risks materializing is low. This suggests to rate the Overall Project Risk as

Moderate.

12

VI. APPRAISAL SUMMARY

A. Economic and Financial Analyses

34. For the Project‘s economic and financial analysis, a cost-benefit assessment was carried out.9

Cost and benefit streams were calculated based on the following available data and assumptions.

Benefit Streams:

Increase in tourists, overnight stays and spending. The Project-supported improvements to critical

infrastructure needs and destination management strengthening is expected to translate into (a) an

increase in domestic and international tourism arrivals to Kakheti by 20-25 percent; (b) based on

the configuration of the tourism circuits, overnight stays are projected to increase from 1.3 days to

2.05 days on average; and (c) spending on food, lodging, and new activities (e.g., guided tours), and

local products/handcrafts is projected to increase by 20 percent.

Increase in number and profitability of economic enterprises. The development of tourist attractions

and geo-tourism maps, destination management and marketing/promotion of Kakheti as a new

high-end destination, along with the improved infrastructure are expected to attract private

investors, who will create new enterprises or expand existing ones. The leverage factor for private

investments attracted by the public expenditures is assumed to be 3 to 1 based on data from other

Georgian cities where similar urban renewal projects occurred, i.e., old Tbilisi, old Mtskheta and

Signagi. The number of hotel rooms is expected to grow from 561 to 900 and the number of beds in

hotels, guest-houses and family-houses is expected to grow from 1,610 to about 1,932—to serve the

expected increased number of tourists from 200,000 to 250,000/year. Also, based on data from

other Georgian cities where similar urban renewal projects occurred, new enterprises and increased

profitability are assumed to raise the amount of corporate taxes collected by 15 percent, the VAT by

18 percent, and personal income tax by 20 percent.

Property and rental value appreciation. Tourism development and improved infrastructure will

create more opportunities for businesses to invest and will increase demand for real estate, which

should cause real estate and rental values to appreciate. Based on data from other Georgian cities

where similar urban renewal occurred, i.e., old Tbilisi, old Mtskheta and Signagi, the following

assumptions are made for Kakheti: (a) Property values are assumed to appreciate by 70 percent and

rental values by 100 percent; (b) property tax revenues are expected to increase by 20 percent; and

(c) income tax revenues from increased rental fees is projected to rise by 20 percent.

Temporary job creation. It is expected that while the Project is being implemented, temporary jobs

will be created. Based on analysis of MDF infrastructure projects over the past five years, as well as

global experiences in similar projects, the following assumptions were made. A large proportion of

conservation/restoration works (30 percent of the expenditures) are assumed to cover the cost of

labor. Thus, it is assumed that the government will obtain income tax (20 percent) from labor

expenditures.

9 The Project economic and financial analysis is complemented by spatial economic analysis (using the WDR 2009

framework of economic geography analysis) and ICOR (investment to capital output ratio) analysis looking at the

relationship between public and private investment trends in Georgia generally. Full analysis is available in Annex 8.

13

35. The cost-benefit analysis was prepared for the entire Project, rather than for each component.

The Net Present Value (NPV), Financial Internal Rate of Return (FIRR) and Economic Internal Rate

of Return (EIRR) were calculated for the next 20 years from 2012 up to 2031, including four years

of Project implementation. For the economic analysis, financial costs were corrected and conversion

factors were applied. The analysis assumed a 12 percent discount rate.

36. Secondary data was collected from various government entities, including the GNTA,

Ministry of Finance, Revenue Service, Public Register, GeoStat, as well as from real estate brokers

and studies from similar projects, e.g., USAID-funded Georgia Economic Prosperity Initiative.

Primary data was collected from small-scale surveys, using structured questionnaires that were

administered to various stakeholders (restaurants, cafes, hotels, guest-houses, and domestic and

foreign visitors). It also obtained information from in-depth interviews.

37. Overall, the Project is projected to yield net economic benefits from the following benefit

streams: An increase in tourist overnight stays and spending, the number and profitability of

enterprises, increased property values and temporary jobs.

38. Results: The economic and financial analysis shows that the Project‘s NPV at a 12 percent

discount rate amounts to US$19.79 million, with an FIRR of 19.85 percent, and an EIRR of 26.14

percent.

39. Sensitivity analysis. The NPV, FIRR and EIRR are most sensitive to the secondary sales

(direct and indirect sales) multiplier factor: A 10 percent increase or decrease in this multiplier will

raise or lower the NPV by US$3.14 million and the FIRR by about 1 percent. The largest impact will

be on the EIRR: A 10 percent increase or decrease in the secondary sales multiplier will raise or

lower the EIRR by 5.17 percent and 4.19 percent accordingly. At the minimum possible level of the

secondary sales multiplier (i.e., 1.0), and if other assumptions remain unchanged, the NPV will still

be positive, reaching US$2.18 million. The private investment leverage factor is the one with the

least influence: A 10 percent increase or decrease will raise or lower the NPV by US$453,596. If the

average overnight stay remains unchanged (at 1.32 days), and other assumptions are unchanged, the

NPV will still be positive, at US$8.32 million, the FIRR will be 16.00 percent and the EIRR will be

21.33 percent. The analysis confirms that even when subjected to these stress tests, the financial and

economic impacts of the Project remain robust.

B. Technical

40. Building on the successful experience of the RMIDP, the Project consists of the same two

components, but activities shift from providing municipal infrastructure across several regions and

LSGs, to focusing these activities, along with urban renewal, in on one region, Kakheti, to help

improve local economy and create jobs through tourism development. All the investment

components respond to the Kakheti Tourism Development Strategy (2012-2015) and were carefully

selected to boost the region‘s economic development and promote private sector investments.

41. The Project will help increase tourism in the region by carrying out a new integrated

approach. Rather than focusing only on infrastructure, urban renewal or cultural heritage

conservation/restoration, the Project involves an integrated geo-tourism development approach,

based on the following:

14

Identifying the most promising tourism possibilities (cultural heritage/culinary tourism and

eco-tourism/adventure), and producing a circuits map showing the most attractive sites, which

can provide tourists with rich experiences.

Carrying out integrated urban regeneration of the old quarters of Telavi and Kvareli cities, and

the historic village of Dartlo (rehabilitating all utilities, public space and parks, and restoring

old buildings with important architecture).

Integrated redevelopment and management of 11 cultural heritage sites with significant

monuments, such as monasteries, churches or museums (involving urban services, public

parking and toilets, souvenir shops and info kiosks).

Providing incentives (with infrastructure and the business environment) to attract the private

sector to locate in the region and support a wide variety of tourism-related enterprises.

Managing and promoting tourist destinations, internet portal development, developing a skilled

workforce, building capacity and monitoring/evaluating performance.

42. Readiness. Activities at all proposed urban renewal and culture heritage sites were designed

by the government and reviewed by the Bank. The MDF has been working closely with all agencies

concerned. The Bank team has appraised the following activities:

The designs of the urban regeneration activities in Telavi and Kvareli, prepared by the MDF

and the CHF;

The designs of the upgrading and conservation activities in Dartlo and all 11 culture heritage

sites, prepared by the MDF and ACHP;

The SARs and Bid Documents, prepared by the MDF;

The tourism-related technical assistance TORs, prepared by the GNTA;

Performance monitoring & evaluation activities, prepared by the MDF;

Construction supervision, prepared by the MDF;

Initial Procurement Plan, prepared by the MDF;

Operations Manual, prepared by the MDF;

Financial management framework, prepared by the MDF;

Resettlement Policy Framework (RPF), prepared by the MDF, reviewed and disclosed on

January 31, 2012; and

Environmental Management Framework (EMF) and an advance SECHSA, prepared by the

MDF, reviewed and disclosed on February 8, 2012.

C. Financial Management

43. The MDF‘s Financial Management (FM) arrangements have been reviewed periodically as

part of the Bank implementation support and supervision to the ongoing projects implemented by the

MDF, as well as during appraisal, and found to be acceptable to the Bank. An assessment of the FM

arrangements for the Project was conducted in December 2011, which confirmed that they are

satisfactory and acceptable for Project implementation.

44. The FM arrangements will mirror those of the ongoing Bank-financed projects implemented

by the MDF, which are acceptable to the Bank. The strengths that provide a basis for relying on this

FM system include: (a) significant experience of the MDF‘s FM staff in implementing Bank-

15

financed projects over the past several years; (b) the MDF‘s adequate accounting system and

software; (c) FM arrangements similar to the RMIDP (including its Additional Financing and Trust

Fund grants); and (d) an unmodified (clean) audit opinion expressed by the auditor regarding the on-

going projects and on the entity‘s financial statements.

45. While no major weaknesses were identified in the MDF, some weaknesses were observed in

the timeliness and quality of the interim un-audited financial reports (IFRs) of the on-going projects

submitted to the Bank. The MDF has taken action to enforce proper control procedures and ensure

that IFRs are submitted on time, and that quality control procedures are consistent. The quality and

timeliness of IFRs are being monitored closely by the Bank. The MDF has also updated the FM

manual to reflect the FM arrangements under the Project.

46. Since January 2006, the Treasury‘s foreign currency account at the National Bank of Georgia

(NBG) has been used for all new Bank-financed projects‘ Designated Accounts (DAs). Overall,

these arrangements are satisfactory and will remain in place during Project implementation.

D. Procurement

47. The MDF is conducting the procurement of the ongoing RMIDP, including its Additional

Financing, and will implement procurement under the proposed Project. Procurement progress of the

ongoing projects is satisfactory. The Bank procurement team updated the assessment of the MDF

and identified certain risks. However, the MDF has a qualified manager and procurement staff and

thus has the required capacity to implement the Project. The procurement risk is rated ―Moderate‖

after mitigation measures are applied as described in Annex 4.

48. Procurement under the Project will be carried out according to the ―Guidelines for

Procurement of Goods, Works, and Non-Consulting Services under IBRD Loans and IDA Credits &

Grants by World Bank Borrowers‖ (January 2011), the ―Guidelines for Selection and Employment

of Consultants under IBRD Loans and IDA Credits & Grants by World Bank Borrowers‖ (January

2011), and the provisions stipulated in Loan Agreement. The applicable procurement procedures,

along with the thresholds for Bank review, are described in Annex 3 and in the Procurement Plan

(PP). The PP will be updated with the Project team‘s agreement annually or as required, to reflect

the actual Project implementation needs.

49. Procurement will be carried out by the procurement division of the MDF. Its staff has

experience in carrying out procurement under World Bank guidelines, and attended several training

courses in Georgia and abroad. Its decision-making process is formalized. Decisions of the

evaluation group, as well as the tender commission, get approved by the Supervisory Board and

reflected in published minutes of the meetings.

50. The MDF has prepared an initial Procurement Plan for the Project, which was reviewed by

the Bank and approved during negotiations.

51. Under retroactive financing arrangements, the MDF began the procurement process for four

contracts on December 27, 2011, proposing that those contracts be subject to retroactive financing

up to US$12 million. The Bank procurement team reviewed the processes for these contracts and

confirmed that they were consistent with Bank guidelines.

16

E. Social (including safeguards)

52. The Project is expected to generate positive social impacts by creating employment, building

productive capital, and improving infrastructure and transport connections. The negative social

impacts are expected to be limited, including some temporary inconvenience to local population

during construction, and longer-term impacts related to increased influx of visitors.

53. Temporary impacts include dust, noise, limited access to the areas, and increased safety risks,

which will be addressed through the EMPs to be prepared for each subproject, as well as the

Environmental Management Guidelines for Contractors, both of which are included in the

Operations Manual.

54. Resettlement and land acquisition. Resettlement impacts that may occur should be limited to

temporary relocation and/or loss of income or productive assets during construction. Some

households may choose to live in temporary dwellings during the renewal period (in safe and

undisturbed conditions). In such cases, they will be compensated for their added outlays in line with

the entitlement matrix of the RPF. The MDF confirmed that none of the proposed investments to-

date would involve activities that may demolish residential or commercial structures, resulting in

permanent relocation. There are no visible instances of informal structures, occupants, or street

vendors observed in the buildings at the anticipated Project sites at the time of Project appraisal.

There were simple structures that serve as vending stands in areas adjacent to some cultural heritage

sites, e.g., in Ikalto, but these can be temporarily moved to another location during construction and

either returned after construction or maintained at the new location. There is a cemetery in the

vicinity of Ikalto, but the civil works to be carried out are not expected to affect it.

55. All anticipated construction works are within the territories owned by the benefiting LSGs or

the Ministry of Culture and Monument Protection. However, due to the demand-driven nature of the

Project, it cannot be ruled out that some LSGs may propose subprojects that may require land

acquisition, but significantly improve citizens‘ livelihoods. To address any possible temporary

impacts, and as a precautionary measure to address other possible resettlement issues, the MDF

prepared a RPF in line with OP 4.12. Prior to the preparation of a SAR for each investment

subproject, MDF shall submit to the Bank for its approval: (i) the proposed design and site for said

subproject; (ii) the proposed environmental assessment category assigned thereto; (iii) the proposed

environmental instrument to be prepared; and (iv) the assessment of whether a RAP would need to

be prepared for the said subproject. Prior to the subproject‘s approval, the MDF shall submit to the

Bank for its approval an Investment SAR which includes, among other things, the related EA, site-

specific EMP and/or RAP, as the case may be, in form and substance satisfactory to the Bank. Prior

to the issuance of the bidding documents for the works contract for each subproject, MDF shall

prepare and submit to the Bank for its approval: (i) the draft bidding documents; and (ii) the draft

contract for said works to ensure that the provisions of the site-specific EMP are adequately included

in said contract. Prior to the commencement of the works, MDF shall ensure that the owners and

users of the land where said works are to be implemented are fully compensated in accordance with

the provisions of the RAP(s).

56. The Project‘s possible long-term social impacts would be related to: (a) urban gentrification

in Telavi and Kvareli, resulting from increased prices of goods/services as well as property values;

17

and (b) a large influx of investors and migrants attracted by the new economic opportunities. These

impacts could affect the local population by (a) encouraging them to sell their properties and leave

the area, (b) producing a clash of lifestyles between the locals and new-comers, and (c)

compromising the authenticity of their live culture and traditions. Such changes may, subsequently,

affect cultural tourism resources, including traditional artisan activities and other types of intangible

cultural heritage. The influx of migrants and increased visitors may also increase vehicle traffic and

the demand for utilities and public services.

57. The design of the subprojects and the measures to address potential long-term impacts is

being addressed in studies and analysis, such as the SECHSA, conducted as part of Project

preparation. Complementary studies such as (a) Poverty and Social Impact Analysis (PSIA) for

Kakheti Regional Development Program, and (b) TA on Georgia Kakheti Cultural Heritage

Tourism, will also inform further poverty reduction measures, as well as intuitional measures to

strengthen the management practice of cultural heritage sites in a sustainable manner.

F. Environment (including safeguards)

58. The Project involves financing of physical works with possible environmental and social

impacts, and triggers the OP/BP 4.01 on Environmental Assessment. Due to the nature of the

Project, all investments to be financed under it cannot be determined upfront. Subproject

applications will be coming on the rolling basis after the approval of the Project. Subprojects will be

financed through the MDF, which is a non-banking financing institution. Therefore, the Project is

classified as environmental Category FI. The Project will finance infrastructure rehabilitation and

development activities that, according to the OP/BP 4.01, are classified as environmental Category B

or, less likely, C. Given that Category A subprojects are excluded, no large-scale adverse

environmental impacts are expected. Because the Project interventions are multi-sectoral, diverse,

and may directly or indirectly affect the natural environment, cultural heritage, and social strata of

the entire region of Kakheti, the Project preparation included the preparation of a SECHSA. The

SECHSA report laid basis for the development of the EMF, which provides detailed guidance for

subprojects‘ environmental classification, risk assessment, and preparation of subproject-specific

EAs and/or EMPs. The EAs/EMPs (as required) will be reviewed and approved by the Bank prior to

approval of individual investment subprojects and prior to issuance of bidding documents. The

OP/BP 4.04 on Natural Habitats is also triggered to ensure that works in the immediate area of the

natural heritage sites do not disrupt the natural balance of ecosystems.

59. The MDF has a long history of implementing Bank-financed projects with a good track

record of complying with safeguards. However, implementing the proposed Project is expected to be

more challenging due to its multi-sectoral nature and varied subproject activities planned in

historical settlements and cultural heritage sites. The MDF‘s capacity for meeting these challenges

has been enhanced through the formal involvement of the Government agencies responsible for

conservation of cultural heritage and natural environment in the designing, preparation and other

decision making processes. Such arrangements will continue during the Project implementation, and

be further supported by the hiring of an international consulting service for construction supervision,

including oversight of the environmental performance of works‘ providers.

18

G. Other Safeguards Policies Triggered

60. The OP/BP 4.11 on Physical Cultural Resources is triggered to ensure that no element of

cultural heritage is affected negatively during construction or operations of the infrastructure

provided under the Project. The Project will invest in the upgrading and development of

infrastructure in the historical settlements as well as in areas adjacent to the cultural and natural

heritage sites. Such interventions may carry additional risk of damaging monuments in the event that

designs and construction approaches used are unfit for conservation of the historical and aesthetic

value. Tourism visitation increases will need to carefully monitored and managed in a sustainable

manner. The cost of such monitoring activities, as well as raising the institutional capacity to ensure

sustainable development, is built into the Project design under Component 2.

61. The cumulative impacts of developing infrastructure in and around historical settlements and

in proximity to protected areas also add to the potential risks. An increased number of visitors may

expose cultural heritage sites to increased risk of destruction. The implementation of subprojects will

be closely supervised by the MDF and the ACHP. Once the civil works are completed, the ACHP

will take over and oversee the management of the cultural heritage sites in compliance with the laws

and regulations stipulated by the state beyond the life of the Project. The SECHSA provides an

assessment of the sufficiency of the above systems in place to meet induced development impacts. It

also provides recommendations for a) the development of detailed environmental and social

assessment and impact mitigation documents for the specific investments, and b) institutional

arrangements for the implementation and environmental and social sustainability perspective to

regional development strategies/planning/ decision making processes. Component 2 of the Project

would support the capacity building of the MDF and the ACHP for carrying out these activities.

H. Effectiveness Condition

62. The Condition of Effectiveness consists of the following: the Subsidiary Agreement has been

executed by the Ministry of Finance and the Ministry for Regional Development and Infrastructure

on behalf of the Borrower and the Project Implementing Entity, i.e., MDF.

19

Annex 1: Results Framework and Monitoring

Georgia Regional Development Project

Project Development Objectives

The Project Development Objective is to improve infrastructure services and institutional capacity to support the development of tourism-based economy and cultural heritage

circuits in the Kakheti region. .

Project Development Objective Indicators

Cumulative Target Values Data Source/

Responsibility

for Data

Indicator Name Core Unit of

Measure Baseline YR1 YR2 YR3 YR4 End Target Frequency

Methodology Collection

Increase weighted average number of hours

per day of piped water services in project

areas

Number 8 8 8 18 24 24 Annual Progress Reports MDF

Reduce weighted average vehicle operating

cost due to improved urban roads Percent 100 100 100 90 80 75 Annual Progress Reports MDF

Increase volume of private sector investments

Number

(US$ mln) 0.00 0 10 30 50 50 Annual Progress Reports MDF

Increase number of hotel beds in circuit route

areas Number 1610 1610 1700 1800 1900 1932 Annual Progress Reports MDF

Increase points of sales (tickets, souvenirs

shops, restaurants, hotels, guesthouse and

family houses ) in renovated culture heritage

sites and cities

Number 248 248 250 280 300 323 Annual Surveys MDF

Intermediate Results Indicators

Cumulative Target Values Data Source/

Responsibility

for

Indicator Name Core Unit of

Measure Baseline YR1 YR2 YR3 YR4 End Target Frequency

Methodology Data

Collection

Number of buildings restored in Telavi,

Kvareli and Dartlo Number 0.00 0 100 130 150 150 Bi-annual Progress reports MDF

Number of private investment proposals

approved Number 0.00 0 3 6 9 10 Annual Progress reports MDF

20

Project Development Objectives

The Project Development Objective is to improve infrastructure services and institutional capacity to support the development of tourism-based economy and cultural heritage

circuits in the Kakheti region.

Number of redeveloped culture heritage sites

along the tourist circuit Number 0.00 3 5 8 11 11 Bi-annual Progress reports MDF

Piped household water connections that are

benefiting from rehabilitation works

undertaken by the project

Number 0.00 100 300 400 500 500 Bi-annual Progress Reports MDF

Number of people in urban areas provided

with access to all-season roads within a 500

meter range under the project

Number 0.00 0 15,000 25,000 35,000 50,000 Bi-annual Surveys and

progress reports MDF

Production/Distribution of new maps based

on geotourism database Number 0.00 2,000 5,000 8,000 10,000 10,000 Annual Progress report MDF

Number of establishment and operating

destination management offices Number 0.00 0 2 3 3 3 Annual Progress report MDF

Project beneficiaries

Number 0.00 0 10,000 15,000 25,000 30,800 Annual Progress report MDF

Of which female (beneficiaries) Number 0.00 0 5,000 7,500 13,000 16,140 Annual Progress report MDF

21

Annex 2: Detailed Project Description

Georgia Regional Development Project

1. The proposed Project involves establishing Kakheti as a high quality, year-round geo-tourism

destination that will attract domestic and international visitors, building on its cultural heritage and

bio-diversity, and focusing on quality (tourist spending) rather than only on quantity (number of

visitors).

2. Based on global experience, achieving this goal will depend on an integrated approach that

has been proposed under the Project, and which is based on four groups of activities:

Integrated urban renewal in the cities of Telavi and Kvareli and one heritage village (Dartlo)

which will include rehabilitating all public utilities and space (including parks) and restoring

the facades of 150 publicly and privately owned buildings with historic architecture, located

along the main tourist routes;

Redeveloping 11 cultural heritage sites located along the main tourism routes (including public

parking and toilets, souvenir shops and information kiosks);

Providing incentives to the private sector to invest in tourism or agro-processing in Kakheti

(including free public infrastructure, streamlined business start up procedures, etc).

Promoting geo-tourism, managing the tourist destinations, and developing skills and M&E.

3. These activities should attract private investment, promote public-private partnerships,

revitalize local business activity, develop a full-fledged regional tourism circuit, and foster two

leisure travel clusters. These latter include:

Cultural heritage/wine tasting: Define and organize tourist routes to visit wineries, important

monuments, and monasteries, and experience the local culture (music, art, dance, and culinary

food and beverage). The market for these attractions involves the 45-65 year age group, who

has higher levels of disposable income, education, and time for leisure travel than the current

tourists to Kakheti. Packaging, marketing, special events and improved facilities and services

should be the primary focus.

Ecotourism/adventure: Organize tourism related to stunning landscapes, pristine, natural and

protected areas. The market for these attractions involves the 25-45 year age group, who has

less disposable income, which more closely fits the profile of current visitors. The focus should

be on developing the products and routes, marketing, and training, for both less difficult

(hiking, birding, trekking, skiing, kayaking) and more strenuous activities (mountaineering,

para-gliding, heli-skiing). These activities are to be done in parallel with measures to ensure

the protection of biodiversity and ecological values of these areas.

22

4. Developing the tourist activities and routes will require improving infrastructure to attract

private sector investments, improving planning and organization (e.g., destination management and

tourism offices); strengthening institutions and building capacity; mapping and arranging the geo-

tourism routes; and improving visitor and interpretation services, signage and marketing.

5. The Project has two components:

Component 1: Infrastructure Investment (IBRD: US$56.9 million; Borrower: US$14.2 million)

Component 1.1: Financing local governments (LSGs) to carry out the investment sub-projects for

the following activities:

Urban regeneration/renewal. An integrated approach is proposed for renovating Telavi, Kvareli and

the heritage village of Dartlo. This includes (a) rehabilitating municipal infrastructure and utilities in

the central historical districts; (b) preserving and upgrading public space and cultural buildings; and

(c) preserving historic building facades. The proposed activities will help improve the quality of life

and hospitality in a culturally-informed manner, enhance attractiveness for visitors, revitalize the

urban and rural centers, and increase private sector investments.

Creation of tourism routes/circuits. An integrated approach is proposed to upgrade cultural heritage

sites and improve the management of the 11 most attractive ones that are located along the main

tourist route in Kakheti. This will include (a) improving urban landscaping and public parking; (b)

constructing information kiosks, cafes and public toilets; and (c) improving access roads. The main

route, identified in the Kakheti Tourism Development Strategy, connects the following sites (which

are to be upgraded): Ujarma, Old and New Shuamta, Ikalto, Alaverdi, Bodbe, Gurjaani, Akhtala,

Mirzaani, Ninotsminda, Khirsa and David Gareja.

The proposed route will present a rich experience of cultural heritage/culinary and

ecotourism/adventure tourism, thus projecting an increase in average over-night stays and tourism

spending. The improvement of access roads is intended to upgrade and enhance the safety of road

users at dangerous spots, and will not include widening or promoting significant increase in traffic.

The estimated cost of this sub-component is US$58.6 million, including physical and price

contingencies, of which the Bank will provide US$46.9 million and the Borrower will provide

US$11.7 million in counterpart funds. The Swedish International Development Agency (SIDA) is

considering providing US$7-8 million of parallel financing to this sub-component, subject to

finalizing the Administration Agreement between SIDA and the Bank.

Component 1.2: Financing LSGs to provide the public infrastructure needed to attract private sector

investments in tourism and agro-processing.

To encourage private sector investments, this component will support, on a pilot basis, a selected

number of domestic and international private sector entities, which show interest and have the

capacity to invest/expand their businesses in Kakheti in tourism or ago-processing. To do so, the

component will provide the public infrastructure needed to make their investments viable (e.g.,

public facilities such as roads/sidewalks, water/sanitation, etc). The entities would be screened by a

selection committee and environmental, economic and governance conditions will need to be met.

23

Selection of private sector investments will be based on transparent and competitive processes. A

package of incentives will be provided to domestic and international investors to invest in Kakheti.

This would include streamlined business start up procedures and provisions of the public

infrastructure mentioned above.

The estimated cost of this sub-component is US$12.5 million, including physical and price

contingencies, of which the Bank will provide US$10 million and the Borrower will provide US$2.5

million in counterpart funds.

Investment Subprojects shall be selected in accordance with the selection criteria set forth in the

Operations Manual. When presenting an Investment Subproject Financing to the Bank for approval,

the MDF shall furnish to the Bank an Investment SAR, in form satisfactory to the Bank, which

includes: (i) the description of the proposed Investment Subproject and the respective expenditures

proposed to be financed out of the proceeds of the Loan; (ii) the related EA, site-specific EMP

and/or RAP, as the case may be, in form and substance satisfactory to the Bank; (iii) technical,

financial and economic analysis of the proposed Investment Subproject; and (iv) the proposed terms

and conditions of the Investment Subproject Financing to be used for the Investment Subprojects.

For purposes of Component 1.1 and 1.2 of the Project, the MDF shall: (a) prior to the issuance of the

bidding documents for the works contract for each Investment Subproject, prepare and submit to the

Bank for its approval: (i) the draft bidding documents; and (ii) the draft contract for said works to

ensure that the provisions of the site-specific EMP are adequately included in said contract; and (b)

prior to the commencement of the works, ensure that the owners and users of the land or buildings

where said works are to be implemented are fully compensated in accordance with the provisions of

the RAP(s).

Component 2: Institutional Development (IBRD: US$3.1 million; Borrower: US$0.8 million)

Strengthening the institutional capacity and performance of the Georgia National Tourism

Administration (GNTA), the Agency for Culture Heritage Preservation of Georgia (ACHP), the

Project Implementing Entity, and other local and regional entities to carry out the following

activities:

2.1 Destination management and promotion, including local community outreach (IBRD:

US$480.000; Borrower: US$120,000):

The aim of this activity is to help the Kakheti region to:

Establish three tourist management offices in Kakheti (one attached to each of the Visitors

Centers in Telavi, Signagi and Kvareli) and equip them with computers and other office

equipment.

Finalize a Kakheti tourist (destination management) strategy to attract visitors;

Design and launch a tourism network linking GNTA to regional and local level management

and promotional activities;

Launch an information outreach campaign to engage local communities in tourism

development;

Develop and implement an online and social media marketing campaign; and

24

Conduct targeted marketing and outreach.

Expected Results

A sustainable organization for the Kakheti region that will support the tourism industry in

terms of marketing the various attractions, developing the activities and providing quality

control;

Identified marketing requirements and a facility that will market the tourist attractions;

An awareness and marketing program that uses various forms of outreach, including online

social media;

Increased local government capacity, achieved through training and TA;

A tourist information program that will provide relevant data about the various attractions; and

Local communities engaged in developing the tourism sector.

2.2 Geo-tourism routes and website (IBRD: US$160.000; Borrower: US$40,000):

The aim of this activity is to design an inter-active website with maps of the cultural heritage routes:

Tell the story of the region (its cultural heritage, natural setting, live heritage, food and wines,

etc.) to attract visitors;

Provide information on sites, attractions, routes and visitor services, including lodgings, events,

trails, routes and other information through the region‘s database-fed website;

Serve as a platform for this first pilot project, but also as a general platform upon which the

geographic area could eventually expand beyond the region;

Serve as an all-inclusive point of entry for information about tourism in the region;

Incorporate media content from the region, including photography and videos that capture the

tangible and intangible heritage assets of Kakheti; and

Link this site into other social media channels.

Expected Results:

A functioning, financially-sustainable online marketing site that raises awareness of the

region‘s tourism assets to potential domestic and international markets;

A set of activities that can encourage cooperation among tourism stakeholders that will

ultimately attract tourists to the region; and

A catalogue/booklet (written and visual) about the region‘s tourism assets.

2.3 Develop a skilled workforce and build capacity (IBRD: US$160.000; Borrower: US$40,000):

The aim is to establish a targeted, integrated workforce development program to meet current and

future training needs at all levels, in tourism and tourism-related businesses and organizations in the

Kakheti region. This will help promote and strengthen tourism-related businesses and activities. All

efforts will be made to make local communities not only contribute to local economic development,

but also, and more importantly, benefit from it.

25

Expected Results

Better understand the workforce gaps in the region, including skills, numbers, and capacity to

educate;

Increase capacity within Kakheti and Tbilisi training facilities to provide world-class academic

training in hospitality management, marketing, customer service, cultural heritage

interpretation, and arranging tours, at various skill and managerial-levels;

Increase the knowledge about Georgian wines among restaurateurs, restaurant employees, tour

guides, and other frontline tourism employees; and

Encourage local communities to start new small and medium enterprises and points of sale.

2.4 Evaluating and monitoring performance (IBRD: US$240.000; Borrower: US$60,000):

The aim is to achieve a better understanding of the current state of tourism in Kakheti and introduce

mechanisms to monitor the effectiveness of activities undertaken over the next four years. By

measuring tourist arrivals/number of visitors, spending, opinion, occupancy rate and increase in

tourism-related investments, the Government would be more effective in doing adjustments and in

allocating resources for infrastructure, marketing, human resource development and policy reforms

more effectively. This would require (a) designing and conducting seasonal surveys to determine the

number and origin of visitors, spending activities, and satisfaction levels, and (b) gathering baseline

data from both formal and informal tourism enterprises about the length of tourist stays, and other

variables, as well as employment rates, tax revenues, estimates of gross revenues, expenditures, rates

of profitability, and other relevant variables through surveys, interviews and questionnaires. The

Government would learn what tourism-related enterprises spend on local goods and services in order

to measure the indirect/induced impacts of the tourism sector on the regional and national economy.

In addition, the survey will seek to identify the challenges that businesses face in their attempts to

expand and become more profitable.

Results Expected

To accurately draw a baseline database and determine the number of arrivals, occupancy rates,

average daily visitor spending, and satisfaction levels of visitors;

To compile a complete list of all tourism-related enterprises, volume of tourism related

investments and points of sale that are officially registered and operating;

To provide an accurate estimate of the number and size of informal businesses/individuals in

the tourism sector;

To gather economic information such as employment rates, tax revenues and estimates of gross

revenues and expenditures, so as to provide an overview of the direct and indirect economic

impact of the tourism sector; and

To identify and assess barriers preventing informal entrepreneurs from joining the formal

sector.

2.5 Supervising construction and sustainable management of cultural heritage sites (IBRD:

US$1.66 million; Borrower: US$0.42 million):

The aim is to strengthen the institutional capacity and performance of the MDF, LSGs, GNTA, and

ACHP. Activities include feasibility studies, detailed designs for construction supervision by an

26

international consulting firm to ensure quality implementation, sustainable management of cultural

heritage sites, and monitoring the implementation of the EMPs, RPF and RAPs.

2.6 Technical support to private sector evaluation and selection committee (IBRD: US$80,000;

Borrower: US$20,000).

2.7 Feasibility studies, designs, financial audit and goods (IBRD: US$320,000; Borrower:

US$100,000).

6. Readiness. The MDF has prepared an Investment SAR/feasibility study for each

subcomponent, which discussed the investment‘s viability, implementation plan, expected results,

EMP and analyzed the availability of funds to operate and maintain the restored assets to ensure

sustainability. All SARs have been appraised and approved by the Bank team. Additionally, all

activities/documented listed below have been appraised and approved by the Bank team:

The designs of the urban regeneration activities in Telavi and Kvareli, prepared by the MDF

and the CHF;

The designs of the upgrading and conservation activities in Dartlo and all 11 culture heritage

sites, prepared by the MDF and ACHP;

The SARs and Bid Documents, prepared by the MDF;

The tourism-related technical assistance TORs, prepared by the GNTA;

Performance monitoring & evaluation activities, prepared by the MDF;

Construction supervision, prepared by the MDF;

Initial Procurement Plan, prepared by the MDF;

OM, prepared by the MDF;

Financial management framework, prepared by the MDF;

RPF, prepared by the MDF, reviewed and disclosed on January 31, 2012; and

EMF and an advance SECHSA, prepared by the MDF, reviewed and disclosed on February 8,

2012.

7. Two World Bank funded TA activities, namely the TA on Georgia Kakheti Cultural Heritage

Tourism and the Poverty and Social Impact Assessment (PSIA) for the Kakheti Regional

Development Program will inform the contents of the capacity building, site and destination

management, as well as the promotion activities listed above. The first report would assess the

quality of existing site management plans and governance mechanisms, identify capacity gaps, and

propose recommendations to improve these plans and capacities. The PSIA would identify

vulnerable and sensitive population to tourism development in the region, assess opportunities to

increase their benefits from tourism development, provide policy recommendations for pro-poor

tourism development, and propose a set of parameters to monitor the impact of tourism sector

development on local population. These indicators may be monitored not as part of, but

complementary to the Results Framework of the Project.

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Annex 3: Implementation Arrangements

GEORGIA: REGIONAL DEVELOPMENT PROJECT

Project administration mechanisms

1. The Municipal Development Fund (MDF) will be responsible for project implementation.

The MDF has grown to become a solid non-bank financial intermediary (FI) that plays a very

substantial role in funding and implementing regional and municipal infrastructure development.

MDF has been successfully implementing a series of IDA and IBRD-financed regional and

municipal development projects since 1998. Its good performance is well appreciated and reflected

by the growing interest both of the Government and donors in using the MDF as the primary

organization for channeling grants and credits to the Georgian regions and LSGs.

2. MDF‘s governance structure. For the purpose of ensuring proper coordination and execution

of the Project, the Government shall maintain the Supervisory Board of the MDF, chaired by the

Prime Minister of Georgia, and comprising all ministers involved and the Governor of Kakheti. The

Board‘s functions include, inter alia: (a) overall supervision of Project implementation; (b) inter-

agency coordination to achieve the Project objectives; and (c) review and approval of the annual

work program budgets and reports for operating the MDF.

3. A Working Group has been established to prepare the Project. Each of the agencies in the

Working Groups and the LSGs in Kakheti have been actively involved with MDF in preparing their

respective investment subproject and will be involved in various aspects of bid evaluation and

supervision. The institutional and implementation arrangement are show in chart below.

Implementation and Institutional Arrangements

28

4. The detailed responsibility for each activity is shown in the table below.

Activities and Responsible Agencies

TA Activities Responsible Agencies Urban renewal in Telavi and Kvareli CHF, UWC and MDF Revitalization in Dartlo heritage village and upgrading in 11

cultural heritage sites ACHP, UWC and MDF

Screening of proposed private sector investments MDF and Working Group Evaluation of private sector proposed investments Working Group, MDF, with TA

provided by a hired expert.

Evaluation/selection reports to be

endorsed by the Supervisory Board Signing contracts with selected private sector entities with

clear obligations on each party LSGs, MDF and private sector entities

Destination management and promotion, including local

outreach campaigns GNTA and MDF

Geo-tourism routes and tourism website GNTA, ACHP and MDF Skilled workforce development and capacity building GNTA, ACHP and MDF Capacity building to LSGs LSGs and MDF Construction supervision and sustainable management of

cultural heritage sites MDF and ACHP

Performance monitoring & evaluation activities GNTA MDF Procurement, safeguards, financial management,

disbursement, supervision of all Project activities MDF

Preparation of SARs/feasibility studies MDF Subproject investment agreements (assigning the

responsibility for operation/maintenance of assets to LSGs) MDF and LSGs

Financial Management, Disbursements and Procurement

Financial Management

5. The financial management (FM) function will be handled by the MDF, which will be

responsible for the flow of funds, accounting, planning and budgeting, internal controls, financial

reporting, and auditing. MDF‘s FM arrangements have been reviewed periodically as part of the

ongoing projects‘ implementation support missions and found to be either moderately satisfactory or

satisfactory. An assessment of the FM arrangements for the Project was conducted in December

2011 and confirmed that they are satisfactory and acceptable for the Project implementation. The

MDF will enforce proper control procedures to ensure that IFRs are submitted to the Bank on time,

and quality control procedures of the IFRs are consistently maintained. The quality and timeliness of

IFRs will be constantly monitored by the Bank. The only action agreed during the assessment relates

to the update of the ongoing projects‘ FM manual (FMM), in order to cover these arrangements

under the Project. The MDF updated the FMM and it is now part of the OM. The overall FM risk for

the Project was assessed as Moderate, with inherent and control risks before and after mitigation

measures also rated as Moderate.

6. The MDF has acceptable planning and budgeting capacity. The financial manager, the head

of procurement and department managers are responsible for budget preparation, which is approved

29

by MDF‘s Supervisory Board. The procurement plan and monthly plans of works‘ execution are

developed based on the data provided by the contractors to the procurement and financial

management. The draft budget, in the form of budget requisitions (as established by the MOF), is

prepared in Excel spreadsheets, while the budget endorsed by MDF‘s Supervisory Board and

approved by the MOF is entered into the budget module of ORIS Manager Software

7. The MDF employs knowledgeable FM staff, with many years of experience in implementing

Bank-financed projects. The staff includes a financial manager, a chief accountant, four accountants

and two loan officers (one loan officer was hired recently). The financial manager, who has

substantial experience with Bank projects, was also the financial manager with the Education Project

Coordination Unit for several years before moving to the MDF. She is responsible for oversight of

statutory and other reporting under the projects, as well as for overall responsibilities for budgeting,

accounting and financial reporting. The chief accountant (also with many years of experience in

Bank-financed operations) is responsible for MDF general accounting and tax-related issues, while

the accountants are responsible for the RMIDP, its Additional Financing, TF grants and other donor-

financed projects (ADB, EBRD, EU and USAID). Accountants are also responsible for their

respective project‘s Treasury operations. Loan officers are responsible for monitoring the loans

issued under the two closed municipal projects, as well as under the on-going RMIDP (including its

Additional Financing) and other donor-financed projects, and follow up for the transfer of the

municipal shares and updates of the information due from municipalities. The accountants

participated in the May 2011 Joint Regional Fiduciary Workshop in Tbilisi as well as in the

International Financial Reporting Standards (IFRS) training in Turin, Italy in October 2011. The FM

staff arrangements in MDF are considered adequate to implement the new project. The financial

manager will have primary responsibility for the semi-annual IFRs and will prepare the annual

financial statements for audit.

8. The MDF‘s accounting books and records are maintained on an accrual basis. Project

financial statements, including semi-annual IFRs, are presented in US dollars (except for the EC TF

Grant, which is in Euro). It was agreed that the IFRS would be adopted for reporting purposes under

the new project, since the entity currently applies IFRS for accounting and financial reporting. The

chart of accounts being used is adequate and could be adapted for the purposes of the new project.

9. Overall, the MDF‘s internal control system is satisfactory. The auditor noted some

shortcomings in reconciling information between the accounting and economic departments, which

was due to staff rotation and some issues with the software for managing and tracking loans. In

addition, some inconsistency was noted with respect to the timeliness and quality of the interim un-

audited financial reports (IFRs) on the on-going projects submitted to the Bank. The MDF is taking

steps to address these issues as follows: (a) it plans to buy new tracking software and make the

system operational; (b) it will enforce control procedures that will ensure that IFRs are submitted to

the Bank on time, and quality-control procedures over IFRs are maintained. The Bank will routinely

monitor the quality and timeliness of the IFRs.

10. The MDF‘s Financial Management Manual (FMM) was updated in November 2011 and

adequately reflects FM arrangements under the projects implemented by the MDF. The ongoing

projects‘ FMM was also updated in February 2012 to cover the FM arrangements under the Project,

which are to be strictly followed. There is no internal audit function within the MDF‘s organizational

structure.

30

11. Project management IFRs will be used to monitor and supervise the Project and their formats

will be included in the MDF FMM. The IFR formats were confirmed during assessment and include:

(a) Project Sources and Uses of Funds, (b) Use of Funds by Project Activity, (c) Designated Account

Statements, (d) Balance Sheet, and (e) SOE Withdrawal Schedule. The MDF will produce a full set

of IFRs every semester throughout the life of the Project. These financial reports will be submitted to

Bank within 45 days of the end of each calendar semester. The first semester IFRs will be submitted

after the end of the first full semester following the initial disbursement.

12. The audit of the Project and the entity financial statements will be conducted (a) by

independent private auditors acceptable to the Bank, on TOR acceptable to the Bank, and (b)

according to the International Standards on Auditing (ISA) issued by the International Auditing and

Assurance Standards Board of the International Federation of Accountants (IFAC).

13. MDF‘s current auditing arrangements and findings are satisfactory to the Bank. Thus it was

agreed that similar audit arrangements will be adopted for the RDP. Particularly, the sample audit

TOR agreed with the Bank will be attached to the FMM, and the annual audited project and entity

financial statements will be provided to the Bank within six months of the end of each fiscal year,

and for the Project also at the close of the Project. If the period from the date of effectiveness of the

loan to the end of the borrower‘s fiscal year is no more than six months, the first audit report may

cover financial statements for the period from effectiveness to the end of the second fiscal year. The

Borrower has agreed to disclose the audit reports for the project within one month of their receipt

from the auditors, by posting the reports on the MDF website10

or by publishing in a national

newspaper. Following the Bank's formal receipt of these reports from the Borrower, the Bank will

make them publicly available according to World Bank Policy on Access to Information. The

contract for the audit awarded during the first year of project implementation may be extended from

year-to-year with the same auditor, subject to satisfactory performance. The cost of the audit will be

financed from the proceeds of the loan.

Disbursements

14. To facilitate timely disbursements for eligible expenditures, the MDF will establish a

Designated Account (DA) in US dollars and maintain it until project completion. The DA will be

opened as a Treasury‘s foreign currency account at the NBG, and on terms and conditions acceptable

to the Bank. The DA will be drawn upon to meet payments to contractors, suppliers and consultants

under the project. The Designated Account Statement will be audited in conjunction with the annual

audit of the project. Detailed instructions on withdrawal of IBRD Loan proceeds are provided in the

Disbursement Letter.

15. Funds will be disbursed similar to the ongoing RMIDP project, implemented by the MDF;

procurement and payments will be done by MDF. Transaction-based disbursements will continue to

be used. The Statement of Expenditure thresholds are as follows: Payments against contracts valued

at less than: US$4,000,000 equivalent for works, US$300,000 equivalent for goods, US$200,000

equivalent for consulting firms, and US$50,000 equivalent for individual consultants.

16. Project funds will flow from (a) the Bank, either through the DA, to be maintained in the

Treasury, which will be replenished on the basis of SOEs or full documentation, or on the basis of

10

Website of MDF: www.mdf.ge

31

direct payment withdrawal applications and/or special commitments, received from the MDF; and

(b) the Government, via the Treasury, through normal budget allocation procedures initiated by the

implementing agency, according to standard Georgian Treasury and Budget execution regulations.

The funds will be used to finance eligible expenditures under the Project. Withdrawal applications

documenting funds drawn from the DA will be sent to the Bank at least every three months. The

residual risk associated with funds flow is Moderate.

17. The disbursement categories and percentage of Bank financing are provided in table below.

Under retroactive financing, payments made prior to the date of signing the loan agreement, except

that withdrawals up to an aggregate amount not to exceed US$12 million equivalent, may be made

for payments made prior to the date of signing the loan agreement but on or after December 27,

2011, for Eligible Expenditures under Categories (1, 2 and 3).

Category Amount of the Loan

Allocated (expressed in US$)

Percentage of Expenditures to be

financed (inclusive of Taxes)

(1) Works and Goods 55,681,000 80% (2) Consultants‘ services and

Training 2,945,000 80%

(3) Operating Costs 1,224,000 80% (4) Front-end Fee 150,000 Amount payable pursuant to

Section 2.03 of this Agreement in

accordance with Section 2.07 (b)

of the General Conditions (5) Interest Rate Cap or Interest

Rate Collar premium 0 Amount due pursuant to Section

2.07(c) of this Agreement TOTAL AMOUNT 60,000,000

Procurement

18. MDF currently conducts the procurement for the RMIDP and RMIDP-AF and will continue

to do so under the Project. Procurement under the proposed Project will be carried out according to

the ―Guidelines for procurement of Goods, Works, and Non-consulting services under IBRD Loans

and IDA Credits & Grants by World Bank Borrowers‖ (January 2011), and ―Guidelines for

Selection and Employment of Consultants under IBRD Loans and IDA Credits & Grants by World

Bank Borrowers‖ (January 2011) and the provisions in the Legal Agreement.

19. The Bank‘s anti-corruption norms (―Guidelines on Preventing and Combating Corruption in

Projects Financed by IBRD Loans and IDA Credits and Grants‖) of October 15, 2006 and revised in

January 2011 will be applied.

20. Country and sector level risks: The latest country level risk assessment for public

procurement was carried out during the preparation of the Country Procurement Assessment Report

(CPAR) in 2009. It was conducted on the basis of the OECD-DAC/World Bank four pillars for

public procurement. The conclusion was that all four Pillars needed improvements in order for the

system to meet the international standards and best practices. A three year action plan was prepared

and Georgia is making slow progress towards fulfilling the proposed actions. One important

32

completed step was the introduction and implementation of an electronic procurement system for all

government contracts. The Bank is yet to assess the system before allowing it to be used for Bank-

financed projects

21. Procurement risk assessment and mitigation measures. MDF conducts several other projects

along with those financed by the Bank (from the state budget as well as other IFIs). Therefore, the

risk that MDF may not have sufficient staff and time to coordinate procurement under the Project

was identified. Also, the contract management function exists but needs to be strengthened to avoid

delays in the implementation phase. Thus, it has been agreed with MDF that the Deputy Head of the

Procurement Division will be assigned full time to the Project. This means that procurement will be

managed much more effectively, as the workload for the procurement specialist can be identified in

advance, and will not depend on the volume of financing from other donors. The Project

procurement risk is rated ―Moderate‖ after mitigation measures are applied.

22. Organization. Procurement will be carried out by the Procurement Division of the MDF,

which is the implementing agency for the Project. The Division consists of 12 staff (a division head,

deputy division head, two chief procurement specialists, two senior procurement specialists, and six

procurement specialists). In addition to the regular procurement functions, the division head is

responsible for overall monitoring and management of the unit. The procurement staff has

experience in carrying out procurement under World Bank guidelines, and attended training courses

in Georgia and abroad.

23. Decision-making process is formalized. Each decision of the evaluation group, as well as of

the tender commission, is described in minutes of meetings. The decree which describes each

department‘s responsibilities is approved by the Board of Directors.

24. Records. Generally, MDF‘s records are acceptable. All records are kept in the MDF

Procurement Unit. Files include copies of advertisements, minutes of bid openings, bid evaluation

reports and other documents related to procurement. Valuable documents (bid/performance

securities, originals of bids/technical/financial proposals etc.) are kept in a safe. After a contract is

completed, the contract as well as all supporting procurement documents is transferred to the

Procurement Archive. No special system is in place, but required documents can be easily obtained

manually. One procurement specialist is specifically assigned to handle the archive function.

Records in the Archive as well as the Procurement Unit are protected from loss or damage.

25. A post review of procurement actions shall be conducted once a year. At least one out of five

procurement packages not subject to Bank prior review will be examined ex-post.

26. Retroactive financing. Project activities, at a cost of US$12 million, have been identified for

retroactive financing. MDF started the procurement in December 27, 2011 for four contracts. The

Bank procurement team reviewed the process for contracts proposed for retroactive financing and

confirmed that they can be procured in line with the Bank‘s guidelines.

27. The procurement procedures along with the thresholds for Bank review are described below

as well as in the Procurement Plan (PP). The PP will be updated as agreed with the Project Team

annually or as required to reflect the actual project implementation needs.

33

28. Procurement of goods and non-consulting services. Goods and non-consulting services

estimated to cost US$300,000 equivalent and more will be procured through ICB. Goods, and non-

consulting services estimated to cost less than US$300,000 may be procured through NCB, and less

than US$100,000, through shopping.

29. Procurement of works: Works contracts estimated to cost more than US$4 million equivalent

will be procured through ICB. Those estimated to cost US$4 million or less may be procured though

NCB, and less than US$200,000 through shopping.

30. Selection of consultants. Consulting services will be procured according to the Bank‘s

Consultant Guidelines mentioned above and will include those needed to supervise civil works,

produce tourism routes, prepare feasibility studies and engineering designs, etc. The Bank‘s

Standard RFP (revised in October 2011) will be used to select all consulting firms. Consultant

selection methods will include Quality and Cost-Based Selections (QCBS), Fixed-Budget Selection

(FBS), Consultant Qualifications (CQS), Least-Cost Selection (LCS), Single-Source Selection (SSS)

and Individual Consultants (IC). The latter will be selected according to Section V of the Consultant

Guidelines. This method will require comparing at least three qualified and available candidates to

assume the assignments.

31. Short lists composed entirely of national consultants. Short lists of consultants for services

estimated to cost less than US$100,000 equivalent per contract may be composed entirely of national

consultants, according to the provisions of paragraph 2.7 of the Consultant Guidelines.

32. Operating costs. These expenditures, approved by the Bank on the basis of budgets

(acceptable to the Bank), will be carried out by the MDF for Project implementation, management

and monitoring, including the costs of support staff salaries (excluding salaries of the Borrower‘s

civil service staff), communication, editing, printing and publication, translation, vehicle operation

and maintenance, bank charges, local travel costs and field trip expenses, office rentals, utilities, and

office supplies.

Prior Review Thresholds

Category Prior Review Thresholds in US$

Works All DC; All ICB; First 1 SH; First 2 NCB; NCB ≥US$2

Million

Goods and non Consulting

Services

All DC; All ICB; First 1 SH; First 2 NCB

Consulting firms All QCBS; All ≥US$100,000; First 1 CQS; All SSS

Individual consultants All ≥US$50,000; All SSS

Particular Methods of Procurement of Goods and Works

Except as otherwise provided in table below, goods and works shall be procured under contracts

awarded on the basis of International Competitive Bidding (ICB).

Other methods: The following table specifies the methods of procurement, other than ICB, which

may be used for goods and works. The Procurement Plan shall specify the circumstances under

which such methods may be used.

34

Procurement Method (a) National Competitive Bidding, subject to the additional provisions set forth in below:

(i) ―Open competitive procedures‖ (i.e., ―public tender‖) shall be the default rule. A single

envelope procedure shall be used for the submission of goods, works, or non-consulting services.

(ii) Invitations to bid shall be advertised in at least one widely circulated national daily newspaper

allowing a minimum of thirty (30) days for the preparation and submission of bids. Advertisements

published in foreign language newspapers shall be in compliance with such a 30-day-minimum in

number of days for bids preparation and submission.

(iii) Bidding shall not be restricted to pre-registered firms. If registration is required, it shall not be

denied to eligible bidders for reasons unrelated to their capacity and resources to successfully perform

the contract (e.g., mandatory membership in professional organizations, classification, etc). Post-

qualification shall be conducted to verify that the bidder has the capability and resources to

successfully perform the contract.

(iv) Government-owned enterprises in Georgia shall be eligible to participate in bidding only if

they can establish that they are legally and financially autonomous, operate under commercial law

and are not a dependent agency of the Government. Government-owned enterprises will be subject to

the same bid and performance security requirements as other bidders.

(v) Procuring entities shall use the appropriate Bank‘s sample bidding documents, including pre-

qualification documents, for the procurement of goods, works, or non-consulting services, and such

documents shall contain draft contract and conditions of contract including clauses on fraud and

corruption, audit and publication of award, all acceptable to the Bank.

(vi) Bids shall be opened in public, immediately after the deadline for submission of bids. Bidder‘s

representatives shall be permitted to attend the bid opening.

(vii) Extension of bid validity shall be allowed once only for not more than thirty (30) days. No

further extensions should be requested without the prior approval of the Bank.

(viii) Evaluation of bids shall be based on quantifiable criteria expressed in monetary terms as

defined in the bidding documents, no merit point system and no domestic preference shall be used in

the evaluation of bids. Contracts shall be awarded to qualified bidders having submitted the lowest

evaluated substantially responsive bid and no negotiations shall be carried out prior to contract award.

(ix) Civil works contracts of long duration (e.g., more than eighteen (18) months) shall contain an

appropriate price adjustment clause.

(x) No bid shall be rejected purely on the basis that the bid price is higher than the estimated

budget for that procurement. All bids shall not be rejected and new bids solicited without the Bank‘s

prior concurrence.

(b) Shopping (c) Direct Contracting

35

Environmental and Social (including safeguards)

33. The Project includes investment components to help develop infrastructure and thus triggers

the OP/BP 4.01 Environmental Assessment. Due to the demand-driven nature of the Project, all

investments to be financed under it cannot be determined in advance, and subproject applications

will be made after the Project is approved. Sub-projects will be financed through the MDF, which is

a non-banking financing institution. Thus, the Project is classified as Environmental Category FI.

Most of investments to be financed are expected to qualify for Environmental Category B, a few

might be C. No Category A subprojects will be financed.

34. The intended Project interventions are viewed as the first operation under a broader regional

development program. Proposed investment subprojects are multi-sectoral, and not all of them were

known in detail ex-ante prior to appraisal. The EMF, disclosed in February 8, 2012, will thus guide

the preparation of subproject-specific EAs and/or EMPs. The SECHSA identifies risks and

opportunities associated with the overall development program in view of the existing conditions

and trends and will support the planning and decision-making processes underlying the selection and

prioritization of sub-projects to be financed. The SECHSA is to be applied at both the program and

project levels to support investments in sustainable tourism and other business developments and to

exclude or discourage investors interested in exploitative projects for short-term gain. The EMF

translates the main principles outlined in the SECHSA into technical guidance for day-to-day

application in the course of project implementation. It will be used to develop investment-specific

EAs and EMPs once the nature and detailed actions plans for such investments are provided in the

course of the Project implementation. These documents (as required) will be subject to Bank

approval prior to the approval of individual investments and prior to the issuance of the bidding

documents for the works contract for any investment subproject.

35. The Project will finance infrastructure rehabilitation and development activities which are,

according to the OP/BP 4.01, classified as environmental Category B or C. Since Category A

subprojects are excluded, no significant adverse environmental impacts are expected. Some of the

civil works are typical and carry environmental implications which are common for small-to-

medium scale infrastructure projects. An example of this is the rehabilitation of the water supply and

sanitation network in the central district of the provincial town of Telavi. Typical risks of such an

intervention are associated with the management of construction waste, the inconvenience for water

users and local residents in and around the project site, servicing the construction machinery, and

possible unearthing of archaeological artifacts. The Project implementing entity has vast experience

in preparing and applying environmental mitigation measures to such types of civil works. The

EAs/EMPs (as required) will be reviewed and approved by the Bank prior to approval of individual

investment subprojects and prior to issuance of bidding documents.

36. All anticipated construction works are within the territories owned by LSGs or the Ministry

of Culture and Monument Protection, and no land acquisition is anticipated. Due to the demand-

driven nature of the Project, it cannot, however, be fully ruled out that some LSGs may propose

subprojects that are likely to improve citizens‘ livelihoods but require land acquisition. To address

possible impacts such as temporary relocation and loss of income or productive assets during

construction work, and as a precautionary measure to address other possible resettlement issues, the

MDF has prepared and disclosed a Resettlement Policy Framework aligned with the OP 4.12. The

36

MDF will have an environmental and social specialist and a consultant to prepare RAPs that comply

with OP 4.12 for subprojects requiring ones, which will define necessary mitigation and

compensation measures through consultations with affected people. The LSGs will be responsible

for implementing the RAPs, while the environmental and social specialists, as well as consultants of

the MDF, will help with their development and implementation. The municipalities submitting

proposals for subprojects will be required to provide information related to affiliation and ownership

status of the selected sites based on available legal documents, as part of the sub-project summary,

which will be verified by the MDF in the process of preparing SARs.

37. In addition to the described subprojects, the Project will invest in the upgrading and

development of infrastructure in historical settlements as well as in the immediate areas around the

cultural and natural heritage sites. Such interventions may carry additional risks of damaging

monuments if the design and construction methods used do not preserve the historical and aesthetic

value of these sites, or if increased tourist visits to the sites are not managed in a sustainable manner.

Cumulative impacts of developing various elements of infrastructure in and around historical

settlements, near protected areas, and in or around natural sites also add to the potential risks.

38. The SECHSA report provides an overview of the medium and long-term risks which may

arise from development in the Project area and from cumulative impacts of its implementation. Such

risks are moderate in the medium-term perspective, because (a) economic activity and tourism in

most parts of Kakheti are currently lower than the levels during the Soviet era; (b) Project

interventions in Kakheti are based on the small and medium business model and will evolve around

a number of tourist routes as opposed to a model with concentrated resorts, involving large chain

hotels and satellite businesses, and (c) the project aims to support responsible tourism and target the

clientele interested in history, culture, fine arts, national cuisine, and adventurous natural settings,

and tend to create less social pressure and bring more benefits to the host areas as compared to other

types of tourism.

39. Nature tourism volumes are not going to increase significantly due to the Project

interventions, as the few activities which are planned or likely to be considered for Project financing

are aimed predominantly at increasing safety and sustainability of the present inflow of visitors. In a

longer term perspective, the general trend of the regional development of Kakheti and growth of its

popularity through other types of tourist visitation may lead to increased activity in and round its

protected areas, including tours to protected areas as well as infrastructural investments around them.

By that time the Protected Areas Agency (PAA) would need to upgrade its institutional capacity for

planning and management in order to ensure that increased visitor levels do not lead to ecological

degradation. Optimization of protected areas‘ zoning, which is an expected outcome of the ongoing

technical assistance from the US Department of Interior‘s Park Service, will be one building block

for improved management of protected areas. This assistance program also builds linkages between

the protected area administrations and local governing bodies, which is instrumental for their joint

decision-making on the investments and economic development around protected areas. The PAA

acknowledges the critical importance of improving the current practice of drafting and updating

management plans for individual protected areas. In August 2011 the Ministry of Environment of

Georgia approved guidelines for the development of management plans for protected areas, which is

expected to increase the PAA‘s ownership of the management planning process.

40. The SECHSA recommended improving methodology of management planning for the

natural protected areas and cultural heritage sites, so that it incorporates elements of assessing

37

carrying capacity of individual tourist destinations. With that in place, the presently dominating

effort of promoting destinations can later be coordinated within professionally estimated frames of

their sustainable use. The MDF and the Bank Task Team will work with partner donors (especially

GiZ which is currently providing TA to help update the Kakheti regional development strategy), and

stakeholders to fine-tune the SECHSA and integrate its findings into regional and sectoral planning

updates.

41. In addition to SECHSA, two World Bank funded TA activities, namely: (a) the TA on

Georgia Kakheti Cultural Heritage Tourism and (b) the Poverty and Social Impact Assessment

(PSIA) for the Kakheti Regional Development Program will be carried out to inform the formulation

of measures to make the tourism development in the region more sustainable and pro-poor. The first

report would assess the quality of existing site management plans and governance mechanisms,

identify capacity gaps, and propose recommendations to improve these plans and capacities. The

PSIA would identify vulnerable and sensitive population to tourism development in the region,

assess opportunities to increase their benefits from tourism development, provide policy

recommendations for pro-poor tourism development, and propose a set of parameters to monitor the

impact of tourism sector development on local population. The findings and recommendations of

these TA activities will inform the design and implementation of the institutional development and

capacity building activities to be carried out under Component 2 of the Project.

42. The OP/BP 4.04 on Natural Habitats and the OP/BP 4.11 on Physical Cultural Resources are

triggered to ensure that restoration/preservation of historical buildings and works close to the

cultural and natural heritage sites does not affect the structural stability of the buildings, depreciate

historical and aesthetic value of heritage sites, or disrupt the natural balance of eco-systems. Detailed

guidelines are provided for proper handling of possible findings, which may be encountered in the

course of earth work. If archaeological items are found, works contractors must immediately

suspend all physical activity and notify MDF. The MDF must then pass the information to the

Ministry of Culture and Monuments Protection. The Department for Cultural Heritage Strategy,

Coordination and Permissions of this Ministry assumes the lead in organizing archaeological

surveys, excavations, preservation of the finds, and formally approves the resumption of civil works

in the manner deemed possible.

43. The MDF has long history of implementing Bank-supported projects with a good record of

complying with safeguards. However, the Project is more challenging, due to its multi-sectoral

nature and planned interventions in the historical settlements, and nearby cultural heritage, natural

sites and protected areas. The MDF‘s institutional capacity for meeting these challenges will be

strengthened through the direct involvement of Government entities (e.g., ACHP responsible for

preserving cultural heritage through its involvement in decision making, designing and supervising

the implementation of related investments), and by using external consultants for technical

supervision of works (including environmental monitoring of works). In addition, the Bank will

review and approve all site-specific EAs, EMPs and RAPs as required, prior to approval of the

subprojects and issuance of bidding documents. Prior to the commencement of the works, MDF shall

ensure that the owners and users of the land where said works are to be implemented are fully

compensated in accordance with the provisions of the RAP(s).

44. The Project‘s main beneficiaries are the population of Kakheti, LSGs, tourism and cultural

heritage agencies, as well as the business community—all of which contribute to local economic

development. The MDF is the designated implementing entity and a stakeholder as well. Also, the

38

Government is directly involved in designing the Project and establishing the institutional

arrangements for its implementation. The Project is viewed as an integral part of the national

strategy for regional development. From the very first phase of Project preparation, the top

management and technical staff of the national line agencies as well as those of the regional and

municipal governments have been directly involved in designing/reviewing all aspects of the Project.

Involvement of local communities, NGOs and private sector entities located in Kakheti started in

March 2011 when consultations were regularly held to identify the project and prepare the regional

development program and the tourism development strategy. They were also involved in the course

of preparing the SECHSA, which included consultations on Project design and its implications on

the natural environment, cultural heritage, and social conditions. The draft SECHSA report and the

EMF were disclosed and presented to the general public for comments on February 8, 2012. The

site-specific EAs, EMPs, and RAPs (as required) will be subject to mandatory in-country disclosure

and consultation with the affected communities in the areas of individual subproject sites. The Bank

will review and approve all site-specific EAs, EMPs and RAPs as required, prior to approval of the

subprojects and issuance of bidding documents. Prior to the commencement of the works, MDF shall

ensure that the owners and users of the land where said works are to be implemented are fully

compensated in accordance with the provisions of the RAP(s).

45. Public consultations. Key stakeholders include residents of the Project areas, LSGs, elected

local councils, NGOs, tourism businesses, GNTA, ACHP, CHF, PAA, MRDI, Ministry of Economy

and Sustainable Development and Ministry of Finance. As part of the SECHSA conducted during

project preparation, a wide range of stakeholders including municipal authorities, local communities,

civil society organizations, and the representatives of tourism operators and hospitality businesses

were consulted about potential direct and indirect impacts of the Project, the details of which can be

found in SECHSA. Public consultation was also a key part of the process for developing the Kakheti

Regional Development Strategy as well as the Kakheti Tourism Development Strategy, on which

this project was based. Among the rounds of public consultations organized in preparation for the

Project, a week-long workshop for developing the tourism routes/circuits was particularly notable as

representatives from the GNTA, ACHP, CHF, PAA, the Archbishop of Kakheti, association of tour

operators, tourism associations, wine association, LSGs, and representatives of the business

community in Kakheti, gathered to identify key sites, design the tourism circuit and consider

economic as well as social and environmental impacts. Following the design of the circuit, GNTA

created a website in the social media to encourage public debate about the proposed circuits and

Project activities.11

It also printed out 2,000 blue print maps for distribution through its 3 visitors

centers in Kakheti as well as in Tbilisi and at the tourism desk at the airport.

46. The Ministry of Finance also held two meetings with the international donor community in

Georgia, where the Minister presented the regional development program and encouraged donor

coordination and the leveraging of additional parallel funding. Further local consultations will be

conducted as part of the planned two TA activities. In preparing the Subproject Appraisal Report,

using the Environmental Management Checklist included in the Operations Manual, the MDF will

also review whether necessary public consultations have taken place for each subproject. The MDF

has also agreed with local municipalities to inform residents of every structure to be affected by

urban renewal through individual visits and to obtain written consent before work begins. If an RAP

is required, the MDF will ensure that its preparation will meet the Bank‘s consultation and disclosure

requirements.

11

GNTA website of Kakheti in social media: http://www.facebook.com/#!/kakhetitourism

39

Monitoring & Evaluation

47. The MDF will be responsible for monitoring and evaluating the outcomes of the Project

against agreed indicators as set out in the Results Framework. The MDF capacity in data collection

and analysis will be strengthened by an international consulting firm whose services will be obtained

through Component 2.

48. The M&E consulting firm, together with the MDF, will compile the baseline data already

available in the SARs and economic analysis report, and collect additional data from the government

agencies, as well as through field visits and surveys. The Project‘s Intermediate Indicators, as

defined in the Results Framework, will also be monitored on an annual basis.

Role of Partners

49. The Swedish SIDA has provisionally agreed to provide parallel funds to the Project with

US$7-8 million, subject to signing a Trust Fund Administration Agreement between SIDA and the

Bank. The GiZ is updating the regional development strategy of Kakheti, including preparation of a

medium-to-long term participatory capital investment plan. The EU is implementing a TA program

to support GNTA with destination management activities at the national level. The USAID is

supporting wine tourism training and development through its Georgia Economic Prosperity

Initiatives. The Swiss SDC supports livestock development in Kakheti.

40

Annex 4: Operational Risk Assessment Framework (ORAF)

GEORGIA: Regional Development Project

Project Stakeholder Risks

1.1 Stakeholder Risk Rating Moderate

Description: Risk Management:

The project intends to reach large groups of beneficiaries with

varied interests including farmers and the business

community, which may create competition for scarce

resources.

There is a low risk related to potential resistance from certain

stakeholders who may not benefit directly from the project.

1. A Strategic Environmental, Cultural Heritage and Social Assessment (SECHSA) has been prepared during preparation and

disclosed prior to appraisal.

2. The SECHSA involved broad based consultations with all government agencies involved, NGOs as well as with affected

communities.

3. Consultation workshops will be held regularly under the project‘s framework.

Resp: Bank Stage: Implementation Due Date: Status: In Progress

Implementing Agency (IA) Risks (including Fiduciary Risks)

Capacity Rating Low

Description: Risk Management:

Despite MDF's solid implementation capacity, there is a risk

of delays or weak supervision of works due to increased work

load (MDF now implements several other projects financed

by ADB, USAID and EU).

1. MDF will put in place improved contract management procedures and dedicated staff.

2. MDF will assign separate procurement specialist for proposed project.

3. MDF will hire independent consultants to provide supervision support and write quarterly progress reports.

4. Quarter progress reports will be submitted to the Bank following specific template as per the OM.

Resp: Client Stage: Implementation Due Date: Status: In Progress

Governance Rating Moderate

Description: Risk Management:

There is a moderate risk of outside interference but this is

attenuated by the fact that MDF has proved to have a strong

standing that can effectively shield the project from outside

interference.

The political climate may be at least slightly affected by the

forthcoming parliamentary elections in 2012 and Presidential

election in 2013.

Establishment of a Supervisory Board chaired by the Prime Minister, which proved to be functioning well.

Resp: Client Stage: Preparation Due Date: Status: Completed

Risk Management:

1. The project will establish a formal internal control framework described in the OM. The Bank staff will closely monitor

performance during implementation. An FM capacity building activities will be implemented.

2. The Borrower shall ensure that the project is carried out in accordance with the provisions of the Anti-Corruption

Guidelines, stipulated in the loan agreement.

41

Resp: Client Stage: Implementation Due Date: Status: In Progress

Project Risks

Design Rating Moderate

Description: Risk Management:

Multiple activities with local and central level agencies may

hinder timely and quality implementation of the project.

1. During preparation, a thorough system of screening and evaluating project activities was established.

2. Only critical minimum activities that can directly contribute to achievement of project results with the highest impact were

selected.

Resp: Bank Stage: Preparation Due Date: Status: Completed

Social and Environmental Rating Moderate

Description:

1. Likely environmental and social issues arising from the

project may become multiple and complex due to multi-

sectoral nature of the project intervention.

2. There may not be full and detailed upfront vision of all

safeguards risks associated with the project implementation as

the works may evolve on rolling basis.

3. Supervision of contractors‘ environmental performance by

the Borrower has been a relative weakness in Georgia

portfolio in general in the past. Oversight of works in the

vicinity of the national cultural and natural assets under this

project will carry additional challenges for MDF.

4. Potential indirect impacts from expected induced

development.

Risk Management:

1. The SECHSA as well as Environmental Management Framework (EMF) were developed for the Project and disclosed prior

to the project appraisal.

The EMF will be used as a mandatory guide for environmental screening, classification, review, and approval of individual

investment proposals.

The Resettlement Policy Framework (RPF) was prepared and disclosed prior to the project appraisal. It sets out general

principles of handling possible types of resettlement, in the event they occur.

Resp: Client Stage: Implementation Due Date: Status: In Progress

Risk Management:

2. The Bank will review and approve all site-specific EAs, EMPs and RAPs, as required, prior to the preparation and approval

of the subprojects and issuance of bidding documents. Prior to the commencement of the works, MDF shall ensure that the

owners and users of the land where said works are to be implemented are fully compensated in accordance with the provisions

of the RAP(s).

Resp: Client Stage: Implementation Due Date: Status: In Progress

Risk Management:

3. MDF will be required to put in place and maintain throughout project implementation, arrangements for safeguards

supervision and reporting satisfactory to the Bank. This would include special provision for the technical supervision of works

in proximity to the sensitive receptors. An international consulting firm is being hired to assist MDF in construction

supervision, including all aspects of environmental and social safeguards compliance.

Resp: Client Stage: Implementation Due Date: Status: In Progress

Risk Management:

The SECHSA helps provide a better understanding of direct and indirect/induced risks and how to avoid and mitigate them

42

and to help steer future development in environmentally/socially beneficial directions was developed and disclosed prior to the

project appraisal. It sets out general principles of handling possible types of resettlement, in the event they occur.

Resp: Client Stage: Preparation Due Date: Status: Completed

Program and Donor Rating Moderate

Description: Risk Management:

Donors active in regional development may adopt

inconsistent approaches in different regions, or may

implement overlapping activities. Given past experience of

donor coordination in the sector, and the good role MDF and

its Supervisory Board play, the likelihood and impact of any

disagreements or overlap among donors are low.

1. There are ongoing good coordination mechanisms among donors in Georgia.

2. The Bank has already started to take the lead in organizing semi-annual donor coordination meetings, to ensure synergy

among interventions. The first meeting was held at the World Bank Tbilisi office in July 2011, and was attended by the

Minister of Finance. The second meeting was held at Ministry of Finance in November 2011 chaired by the Minister of

Finance.

3. Donor coordination meeting will continue through the implementation of the project.

Resp: Client Stage: Implementation Due Date: Status: In Progress

Delivery Monitoring and Sustainability Rating Moderate

Description: Risk Management:

Due to spread location of project activities, there is a

moderate risk that some outputs delivered under the project

will be of low quality.

Due to multi-agency and stakeholders‘ participation, there is a

moderate risk that the voice of some groups will not be heard.

1. The Bank Team agreed with the Government to hire an international construction supervision firm that would provide

quarterly supervision reports to MDF.

2. MDF will submit quarterly progress reports to the Bank.

3. The task team leader is located in Tbilisi CO and will carry out monthly site visits to implementation sites with locally hired

Consultants to provide implementation support.

4. Establishment of multi-agency working group will be stipulated in the OM.

5. Stakeholders consultation workshops will be held bi-annually to present Project implementation progress and future plans.

Resp: Client Stage: Implementation Due Date: Status: In Progress

Overall Risk

Preparation Risk Rating: Moderate Implementation Risk Rating: Moderate

43

Annex 5: Implementation Support Plan

GEORGIA: Regional Development Project

Strategy and Approach for Implementation Support

Implementation Support Plan

1. The implementation support strategy was developed considering the risks and mitigation

measures identified in the ORAF and targets provision of flexible and efficient implementation

support to the client.

2. Procurement: The procurement related implementation support will include: (a) timely

advice from the country office based procurement officer on various procurement related issues and

guidance on the Bank‘s Procurement Guidelines; (b) monitoring of procurement progress against the

procurement plan. The Procurement Specialist is based in Tbilisi and works with MDF on daily

basis.

3. Financial Management: The Bank will conduct risk-based financial management

implementation support and supervision mission within a year of the project effectiveness, and then

at appropriate intervals. In addition, the regular IFRs and annual project and entity audit reports will

be reviewed by the Bank. As required, a Bank-accredited Financial Management Specialist will

assist in the implementation support and supervision process. The Financial Management Specialist

is based in Yerevan and can provide support to MDF any time as needed.

4. Environmental and social safeguards: The Bank‘s environmental and social specialists will

provide regular support in strengthening the capacity of the MDF in tackling safeguards related

issues. Additionally, the Bank‘s safeguards specialists will closely monitor implementation of the

agreed EMP and will provide guidance to the client to address the issues that may arise. The

Environment Safeguard specialist is based in Tbilisi and can provide daily support to the client.

5. Operation support: The Bank Task Team Leader, who is also the Sustainable Development

Country Sector Coordinator for the South Caucasus, is based in the Georgia Country Office. He has

been on regular communication with the client during the identification and preparation of the

Project. Supported by an operations specialist, who is also based in the Georgia Country Office, and

local and international short-term consultants, he will continue to provide regular implementation

support during implementation, including monthly visits to all Project sites especially during the first

year of Project implementation. He will keep the Bank team appraised and provide implementation

support and guidance to the MDF on various aspects of interventions as needed.

Implementation Support Plan

6. The Project team will provide timely and effective implementation support through daily

supervision since the Task Team Leader and several team members are based in the region and local

offices. The task team will provide the following detailed inputs to support project implementation:

44

Technical inputs: Engineers, Tourism and Culture Heritage Consultants will carry out regular

site visits and review of documentation to ensure compliance to plans, quality, safeguards and

timetable.

Fiduciary requirements and inputs: The Procurement Specialist, based in the Georgia

country office, and the Financial Management Specialist, based in the Armenia country office,

will provide timely implementation support. The financial management specialist will conduct

risk-based FM missions within a year after the project effectiveness, and then at appropriate

intervals, while the procurement supervision will be carried out as per Bank‘s procurement

rules and guidelines.

Safeguards: The Environmental Specialist, based in the Georgia country office, and Social

Development Specialists, Based in HQ, will closely supervise implementation of the EMP and

RPF of the Project. The environmental and social specialists will conduct field visits on semi-

annual basis to monitor implementation of safeguards policies.

Time Focus Skills Needed Resource

Estimate (Support

Weeks/SWs) First

twelve

months

Technical review of the SARs TTL, culture heritage specialist,

water and road engineers, safeguards

specialists and economist

18 SWs

Procurement review of the

bidding documents Procurement specialist 12 SWs

Project implementation support Culture heritage specialist, water and

road engineers 24 SWs

Financial management and

disbursements Sr. Financial management specialist 4 SWs

Environmental and social

supervision Sr. Environmental specialist 12 SWs

Tourism institutional

development implementation

support

Tourism development consultants 8 SW

Skills development

implementation support Human development specialist 4 SW

Operation support with project

supervision and coordination Operations specialist 4 SWs

Task management Task Team Leader 12 SWs

12-48

months Project implementation support Culture heritage specialist, water and

road engineers 48 SWs

Procurement support Procurement specialist 24 SWs

Financial management and

disbursements Sr. Financial management specialist 12 SWs

Environmental and social

supervision Sr. Environmental specialist 48 SWs

Tourism institutional

development implementation

Tourism development consultants 12 SW

45

support

Skills development

implementation support Human development specialist 12 SW

Operation support with project

supervision and coordination Operation specialist 12 SWs

Task management Task Team Leader 32 SWs

Skills Mix Required

Skills Needed Number of Staff

Weeks 2012-2016 Number of Trips Comments

Task team leader (SD

CSC) 40 Field trips as required Country office based

Operations officer 40 Field trips as required Country office based Environmental specialist 30 Field trips as required Country office based Social specialist 30 Eight HQ based Procurement specialist 40 Field trips as required Country office based Financial management

specialist 20 Field trips as required Armenia country

office based Water engineer 30 Eight Based in Europe Road engineer 30 Eight HQ based Tourism development

specialists 30 Eight HQ based

Culture heritage specialists 30 Eight HQ based Human development

specialist (HD CSC) 12 Field trips as required Country office based

Economics (PREM CSC) 12 Field trips as required Country office based Short-term consultants for

supervision 32 Field trips as required Country office based

Program Assistants 60 Field trips as required Country office based

46

Annex 6: Team Composition

GEORGIA: Regional Development Project

.

.

Team Composition

Bank Staff

Name Title Specialization Unit UPI

Ahmed A. R. Eiweida Country Sector Coordinator Team Lead ECSSD 208777

Pedro L. Rodriguez Lead Economist Economic Analysis ECSP1 76439

Meskerem Mulatu Country Sector Coordinator Human Development/Skills Dev ECSH2 18476

Darejan Kapanadze Sr. Environmental Specialist Environment ECSS3 173396

Kosuke Anan Social Development Specialist Social Development and PSIA ECSS4 300595

Emilia Skrok Sr. Economist WDR Analysis ECSP2 272765

Ghada Youness Sr. Counsel Legal LEGEM 189118

Joseph Paul Formoso Sr. Finance Officer Disbursement CTRLA 18923

Sophie Devnosadze Operations Analyst Operation Support ECCU3 229476

Joseph Melitauri Sr. Operations Officer Transport ECSS2 231456

Arman Vatyan Sr. Financial Management Specialist Financial Management ECSO3 262032

Sandro Nozadze Procurement Specialist Procurement ECSOQ 400054

Kseniia Malenko Finance Analyst Finance Analyst CTRLA 296905

Deepal Fernando Sr. Procurement Specialist Procurement ECSO2 170242

Guido Licciardi Urban Specialist/Chair CH and

Sustainable Tourism TG

Culture Heritage & Sustainable

Tourism

EFUUR 346286

Nicolas Perrin Sr. Social Development Specialist Culture Heritage ECSS4 187579

Militsa Khoshtaria Program Assistant Program Assistant ECCGE 278958

Guy Tchakounte Tchabo Information Assistant Program Assistant ECSSD 160690

Non Bank Staff

Name Title Office Phone City

Donald Hawkins Tourism Value Chain Consultant Washington DC

Chris Seek Tourism Dev Consultant Washington DC

David Brown Tourism Circuits Dev Consultant Washington DC

Jim Phillips Tourism Private Sector Consultant Washington DC

Richard Podolske Transport/Road consultant Washington DC

Christopher Schmandt Water & Sanitation Consultant Zurich

Joseph Goldberg Agriculture/Food Processing

Consultant

Washington DC

Natia Gigiashvili Operation Support Washington DC

47

Annex 7: Procurement Plan

Works & Goods

Ite

m #

Pla

n v

s./ A

ctu

al

Name of Component /

ActivitiesName of Assignment/Contract

Ty

pe

-Ca

teg

ory

Note

#

Selection

Method

Review

by

Bank

Prior /

Post

Submission

to the Bank

Da

ys

In

terv

al

No

Objection

Da

ys

In

terv

al

Invitation

Da

ys

In

terv

al

Bid

Opening

Da

ys

In

terv

al

Evaluation

& Recomm.

Da

ys

In

terv

al

No

Objection +

PSC

Da

ys

In

terv

al

Contract

Award

Da

ys

In

terv

al

Contarct

Siganture

Da

ys

In

terv

al

Start

Da

ys

Ex

ec

uti

on

Completion

1 2/18/2012 23:32 3 4 5 9 10 11 12 13 14 15 16 17 18 19 20

1 - Infrastructure Investment

1.1 P1.1 - Investment sub-projects for

urban regeneration

Lot 1 - Restoration of buildings on Cholokashvili street

and Erekle II avenue in Telavi TownW-1 ICB Prior 28-Dec-11 9 6-Jan-12 3 9-Jan-12 42 20-Feb-12 7 27-Feb-12 9 7-Mar-12 1 8-Mar-12 28 5-Apr-12 15 20-Apr-12 360 15-Apr-13

A 28-Dec-11 6-Jan-12 9-Jan-12 20-Feb-12

1.2 P

Lot 2 - Restoration of buildings around Batonis Tsikhe

(Castle) area, Tavisupleba square and Nadikvari street

in Telavi Town

W-1 ICB Prior 28-Dec-11 9 6-Jan-12 3 9-Jan-12 42 20-Feb-12 7 27-Feb-12 9 7-Mar-12 1 8-Mar-12 28 5-Apr-12 15 20-Apr-12 360 15-Apr-13

A 28-Dec-11 6-Jan-12 9-Jan-12 20-Feb-12

2 PRehabilitation of Underground Utilities in Telavi Streets

(Central Part of Telavi Town)W-1 NCB Prior 28-Dec-11 9 6-Jan-12 3 9-Jan-12 30 8-Feb-12 14 22-Feb-12 9 2-Mar-12 0 2-Mar-12 28 30-Mar-12 15 14-Apr-12 180 11-Oct-12

A 29-Dec-11 5-Jan-12 9-Jan-12 8-Feb-12

3 PRehabilitation of Roads in Telavi streets (Central Part of

Telavi Town)W-1 NCB Prior 28-Dec-11 9 6-Jan-12 3 9-Jan-12 30 8-Feb-12 14 22-Feb-12 9 2-Mar-12 0 2-Mar-12 28 30-Mar-12 15 14-Apr-12 180 11-Oct-12

A 29-Dec-11 5-Jan-12 9-Jan-12 8-Feb-12

4 PRehabilitation of Outdoor Lightings in Telavi streets

(Central Part of Telavi Town)W-1 NCB Prior 30-Dec-11 9 8-Jan-12 1 9-Jan-12 30 8-Feb-12 7 15-Feb-12 9 24-Feb-12 0 24-Feb-12 28 23-Mar-12 15 7-Apr-12 180 4-Oct-12

A 30-Dec-11 5-Jan-12 9-Jan-12 8-Feb-12 15-Feb-12

5 PUrban Regeneration Works in Telavi Streets (Central

Part of Telavi Town)W-1 NCB Prior 1-Feb-12 21 22-Feb-12 1 23-Feb-12 30 24-Mar-12 7 31-Mar-12 11 11-Apr-12 1 12-Apr-12 28 10-May-12 15 25-May-12 300 21-Mar-13

A 1-Feb-12

6 P Rehabilitation of Nadikvari Park in Telavi Town W-1 NCB Prior 3-Feb-12 19 22-Feb-12 1 23-Feb-12 30 24-Mar-12 7 31-Mar-12 11 11-Apr-12 0 11-Apr-12 28 9-May-12 15 24-May-12 300 20-Mar-13

A 3-Feb-12

7 P Rehabilitation of Batonis Tsikhe (Museum) in Telavi

Town

W-1 ICB Prior 3-Feb-12 19 22-Feb-12 2 24-Feb-12 42 6-Apr-12 7 13-Apr-12 11 24-Apr-12 1 25-Apr-12 28 23-May-12 15 7-Jun-12 360 2-Jun-13

A 3-Feb-12

8 PRestoration of Buildings in Kvareli Streets (Central Part

of Kvareli Town)W-1 NCB Prior 10-Feb-12 11 21-Feb-12 1 22-Feb-12 30 23-Mar-12 7 30-Mar-12 11 10-Apr-12 0 10-Apr-12 28 8-May-12 15 23-May-12 210 19-Dec-12

A 10-Feb-12

9 PUrban Regeneration Works in Kvareli Streets (Central

Part of Kvareli Town)W-1 NCB Prior 10-Feb-12 11 21-Feb-12 1 22-Feb-12 30 23-Mar-12 7 30-Mar-12 11 10-Apr-12 0 10-Apr-12 28 8-May-12 15 23-May-12 180 19-Nov-12

A 10-Feb-12

10 P Rehabilitation of Underground Utilities in Kvareli Town W-1 NCB Prior 20-Feb-12 11 2-Mar-12 1 3-Mar-12 30 2-Apr-12 7 9-Apr-12 11 20-Apr-12 0 20-Apr-12 28 18-May-12 15 2-Jun-12 180 29-Nov-12

A

11 P Rehabilitation of Central Roads in Kvareli Town W-1 ICB Prior 16-Feb-12 11 27-Feb-12 3 1-Mar-12 42 12-Apr-12 7 19-Apr-12 11 30-Apr-12 1 1-May-12 28 29-May-12 15 13-Jun-12 180 10-Dec-12

A 16-Feb-12

12 PRehabilitation of Outdoor Lighting in Kvareli Central

Roads W-1 NCB Prior 16-Feb-12 11 27-Feb-12 1 28-Feb-12 30 29-Mar-12 7 5-Apr-12 11 16-Apr-12 0 16-Apr-12 28 14-May-12 15 29-May-12 180 25-Nov-12

A 16-Feb-12

13 PRestoration of buildings and arangement of tourist zone

in village Dartlo W-1 NCB Prior 24-Feb-12 11 6-Mar-12 1 7-Mar-12 30 6-Apr-12 7 13-Apr-12 11 24-Apr-12 0 24-Apr-12 28 22-May-12 15 6-Jun-12 360 1-Jun-13

A

14 P Construction of underground utilities in village Dartlo W-1 NCB Prior 24-Feb-12 11 6-Mar-12 1 7-Mar-12 30 6-Apr-12 7 13-Apr-12 11 24-Apr-12 0 24-Apr-12 28 22-May-12 15 6-Jun-12 180 3-Dec-12

A

15 P Intergrated revitalization of Akhtala mud site attraction W-1 NCB Prior 15-Mar-12 11 26-Mar-12 1 27-Mar-12 30 26-Apr-12 7 3-May-12 11 14-May-12 1 15-May-12 28 12-Jun-12 15 27-Jun-12 360 22-Jun-13

A

16 P Rehabilitation of Tusheti road W-1 1 NCB Prior 1-Nov-12 11 12-Nov-12 1 13-Nov-12 30 13-Dec-12 7 20-Dec-12 11 31-Dec-12 1 1-Jan-13 28 29-Jan-13 15 13-Feb-13 240 11-Oct-13

A

17 P Rehabilitation of David Gareja Road W-1 1 NCB Prior 1-Nov-12 11 12-Nov-12 1 13-Nov-12 30 13-Dec-12 7 20-Dec-12 11 31-Dec-12 1 1-Jan-13 28 29-Jan-13 15 13-Feb-13 240 11-Oct-13

A

18 P Rehabilitation of Vashlovani Road W-1 1 NCB Prior 1-Nov-12 11 12-Nov-12 1 13-Nov-12 30 13-Dec-12 7 20-Dec-12 11 31-Dec-12 1 1-Jan-13 28 29-Jan-13 15 13-Feb-13 240 11-Oct-13

48

Works & Goods (continued)

Ite

m #

Pla

n v

s./ A

ctu

al

Name of Component / Activities Name of Assignment/Contract

Ty

pe

-Ca

teg

ory

Note

#

Selection

Method

Review

by

Bank

Prior /

Post

Submission

to the Bank

Da

ys

In

terv

al

No

Objection

Da

ys

In

terv

al

Invitation

Da

ys

In

terv

al

Bid

Opening

Da

ys

In

terv

al

Evaluation

& Recomm.

Da

ys

In

terv

al

No

Objection +

PSC

Da

ys

In

terv

al

Contract

Award

Da

ys

In

terv

al

Contarct

Siganture

Da

ys

In

terv

al

Start

Da

ys

Ex

ec

uti

on

Completion

1 2/19/2012 0:17 3 4 5 9 10 11 12 13 14 15 16 17 18 19 20

1 - Infrastructure Investment

A

19.1 P1.2 - Investment sub-projects for

tourism Circuits development

Lot 1 - Integrated revitalization of cultural heritage sites

in Dzveli Shuamta, Akhali Shuamta and IkaltoW-1 ICB Prior 6-Feb-12 18 24-Feb-12 3 27-Feb-12 42 9-Apr-12 7 16-Apr-12 11 27-Apr-12 1 28-Apr-12 28 26-May-12 15 10-Jun-12 360 5-Jun-13

A 6-Feb-12

19.2 PLot 2 - Integrated revitalization of CH sites in

Nninotsminda, Ujarma and David-GarejaW-1 ICB Prior 6-Feb-12 18 24-Feb-12 3 27-Feb-12 42 9-Apr-12 7 16-Apr-12 11 27-Apr-12 1 28-Apr-12 28 26-May-12 15 10-Jun-12 360 5-Jun-13

A 6-Feb-12

19.3 PLot 3 - Integrated Revitalization of CH Sites in Gurjaani

and KhirsaW-1 ICB Prior 6-Feb-12 18 24-Feb-12 3 27-Feb-12 42 9-Apr-12 7 16-Apr-12 11 27-Apr-12 1 28-Apr-12 28 26-May-12 15 10-Jun-12 360 5-Jun-13

A 6-Feb-12

20 PIntegrated Revitalization of Cultural Heritage Sites in

Alaverdi and Bodbe W-1 NCB Prior 15-Mar-12 11 26-Mar-12 1 27-Mar-12 30 26-Apr-12 7 3-May-12 11 14-May-12 0 14-May-12 28 11-Jun-12 15 26-Jun-12 240 21-Feb-13

A

21 P 1.3 - Private sector investments Procurement package1 W-1 2 NCB Prior 3-Sep-12 9 12-Sep-12 1 13-Sep-12 32 15-Oct-12 7 22-Oct-12 9 31-Oct-12 1 1-Nov-12 28 29-Nov-12 15 14-Dec-12 360 9-Dec-13

A

22 P Procurement package 2 W-1 2 NCB Prior 3-Sep-12 9 12-Sep-12 1 13-Sep-12 32 15-Oct-12 7 22-Oct-12 9 31-Oct-12 1 1-Nov-12 28 29-Nov-12 15 14-Dec-12 360 9-Dec-13

A

23 P Procurement package 3 W-1 2 NCB Prior 3-Sep-12 9 12-Sep-12 1 13-Sep-12 32 15-Oct-12 7 22-Oct-12 9 31-Oct-12 1 1-Nov-12 28 29-Nov-12 15 14-Dec-12 360 9-Dec-13

A

24 P Procurement package 4 W-1 2 NCB Prior 8-Jan-13 9 17-Jan-13 1 18-Jan-13 31 18-Feb-13 7 25-Feb-13 9 6-Mar-13 1 7-Mar-13 28 4-Apr-13 15 19-Apr-13 360 14-Apr-14

A

25 P Procurement package 5 W-1 2 NCB Prior 8-Jan-13 9 17-Jan-13 1 18-Jan-13 31 18-Feb-13 7 25-Feb-13 9 6-Mar-13 1 7-Mar-13 28 4-Apr-13 15 19-Apr-13 360 14-Apr-14

A

26 P Procurement package 6 W-1 2 NCB Prior 8-Jan-13 9 17-Jan-13 1 18-Jan-13 31 18-Feb-13 7 25-Feb-13 9 6-Mar-13 1 7-Mar-13 28 4-Apr-13 15 19-Apr-13 360 14-Apr-14

A

27 P Procurement package 7 W-1 2 NCB Prior 8-Jan-13 9 17-Jan-13 1 18-Jan-13 31 18-Feb-13 7 25-Feb-13 9 6-Mar-13 1 7-Mar-13 28 4-Apr-13 15 19-Apr-13 360 14-Apr-14

A

28 P Procurement package 8 W-1 2 NCB Prior 3-Jun-13 9 12-Jun-13 1 13-Jun-13 32 15-Jul-13 7 22-Jul-13 9 31-Jul-13 1 1-Aug-13 28 29-Aug-13 15 13-Sep-13 360 8-Sep-14

A

29 P Procurement package 9 W-1 2 NCB Prior 3-Jun-13 9 12-Jun-13 1 13-Jun-13 32 15-Jul-13 7 22-Jul-13 9 31-Jul-13 1 1-Aug-13 28 29-Aug-13 15 13-Sep-13 360 8-Sep-14

A

30 P Procurement package 10 W-1 2 NCB Prior 3-Jun-13 9 12-Jun-13 1 13-Jun-13 32 15-Jul-13 7 22-Jul-13 9 31-Jul-13 1 1-Aug-13 28 29-Aug-13 15 13-Sep-13 360 8-Sep-14

A

2 - Institutional Development

31 PSupply of computers, equipment and office furniture to

the destination management officeG-2 NCB Prior 1-May-12 11 12-May-12 1 13-May-12 30 12-Jun-12 7 19-Jun-12 11 30-Jun-12 1 1-Jul-12 28 29-Jul-12 15 13-Aug-12 90 11-Nov-12

A

Notes: 1 Total Component 1 - PLANED Red Text Rows: = Actuals

Total Component 1 - ACTUALS Yellow Columns: Cell turns red if Planned Date has passed.

2 Cell turns white again if cell for Actual Date is filled in.

Total Component 2 - PLANED

Total Component 2 - ACTUALS

Tendering of procurement package

is subject to availability of funds and

possible savings under other

activities Actual cost for 10 proposed private

sector investment activities might

be less than USD 10 Mln of IBRD

financing, thus availing allocation to

other activities under Comp 1

49

Consultants Service

Ite

m #

Pla

n v

s./ A

ctu

al

Name of Component Name of Assignment/Contract

Ty

pe

-Ca

teg

ory

Not

e #

Selection

Method

Revie

w by

Bank

Prior /

Post

Ad of EOI

Da

ys

In

terv

al

Reception

of

Expressio

n of

Interest Da

ys

In

terv

al

Short

Listing/RFP

submssion

to the Bank

Da

ys

In

terv

al

No

Objection

Da

ys

In

terv

al

Invitation

for RFP

Da

ys

In

terv

al

Proposal

Submissio

n

Da

ys

In

terv

al

Technical

Evaluation

Da

ys

In

terv

al

No

Objection

+ PSC

Da

ys

In

terv

al

Final

Evaluation

Da

ys

In

terv

al

No

Objection

to Sign

Contract

Da

ys

In

terv

al

Contract

Signature

Da

ys

In

terv

al

Start

Da

ys

Ex

ec

uti

on

Completio

n

1 2/19/2012 0:20 3 4 5 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

1 - Infrastructure Investment

1 P Audit of 2012 and 2013 fiscal years CS-1 1 SSS Prior 1-Mar-13 0 1-Mar-13 0 1-Mar-13 0 1-Mar-13 0 1-Mar-13 7 8-Mar-13 0 8-Mar-13 0 8-Mar-13 7 15-Mar-13 11 26-Mar-13 3 29-Mar-13 3 1-Apr-13 ## 15-Jun-14

A

2 P Audit of 2014, 15, and 16 fiscal years CS-1 LCS Prior 1-Dec-14 14 15-Dec-14 14 29-Dec-14 14 12-Jan-15 1 13-Jan-15 30 12-Feb-15 21 5-Mar-15 11 16-Mar-15 21 6-Apr-15 9 15-Apr-15 7 22-Apr-15 2 24-Apr-15 ## 15-Oct-16

A

2- Institutional Development

3 P

Consulting services for supervision of

civil works to be implemented in

Kakheti region under Regional

Development Project

CS-2 QCBS Prior 1-Dec-11 14 15-Dec-11 14 29-Dec-11 11 9-Jan-12 1 10-Jan-12 30 9-Feb-12 21 1-Mar-12 11 12-Mar-12 14 26-Mar-12 11 6-Apr-12 7 13-Apr-12 14 27-Apr-12 ## 17-Apr-14

A 1-Dec-11 15-Dec-11 6-Jan-12

4 P

Preparation of Detailed Designs of

Vashlovani, David Gareja and Dartlo

roads

CS-2 2 CQS Prior 1-Mar-12 14 15-Mar-12 14 29-Mar-12 11 9-Apr-12 1 10-Apr-12 30 10-May-12 21 31-May-12 11 11-Jun-12 21 2-Jul-12 9 11-Jul-12 7 18-Jul-12 14 30-Mar-00 ## 21-Sep-01

A

5 PDestination Management and

PromotionCS-2 2 QCBS Prior 1-Mar-12 14 15-Mar-12 14 29-Mar-12 11 9-Apr-12 1 10-Apr-12 30 10-May-12 21 31-May-12 11 11-Jun-12 21 2-Jul-12 9 11-Jul-12 7 18-Jul-12 14 1-Aug-12 ## 23-Jan-14

A

6 P Geotourism Routes and Circuits Portal CS-2 2 CQS Prior 1-Mar-12 14 15-Mar-12 14 29-Mar-12 11 9-Apr-12 1 10-Apr-12 30 10-May-12 21 31-May-12 11 11-Jun-12 21 2-Jul-12 9 11-Jul-12 7 18-Jul-12 14 1-Aug-12 ## 23-Jan-14

A

7 PSkills Development and Capacity

BuildingCS-2 2 CQS Prior 1-Mar-12 14 15-Mar-12 14 29-Mar-12 11 9-Apr-12 1 10-Apr-12 30 10-May-12 21 31-May-12 11 11-Jun-12 21 2-Jul-12 9 11-Jul-12 7 18-Jul-12 14 1-Aug-12 ## 23-Jan-14

A

8 P Performance Evaluation and Monitorin CS-2 2 CQS Prior 1-Mar-12 14 15-Mar-12 14 29-Mar-12 11 9-Apr-12 1 10-Apr-12 30 10-May-12 21 31-May-12 11 11-Jun-12 21 2-Jul-12 9 11-Jul-12 7 18-Jul-12 14 1-Aug-12 ## 13-Mar-16

A

9 PTechnical support to private sector

selection committeeCS-2 2 CQS Prior 1-Mar-12 14 15-Mar-12 14 29-Mar-12 11 9-Apr-12 1 10-Apr-12 30 10-May-12 21 31-May-12 11 11-Jun-12 21 2-Jul-12 9 11-Jul-12 7 18-Jul-12 14 1-Aug-12 ## 26-Aug-13

A

Total Component 1 - PLANED Red Text Rows: = Actuals

Total Component 1 - ACTUALS Yellow Columns: Cell turns red if Planned Date has passed.

Cell turns white again if cell for Actual Date is filled in.

Total Component 2 - PLANED

Total Component 2 - ACTUALS Notes: 1 Justified on the basis of continuation of current assignment and relatively small cost estimate

2The exact dates will be defined later

50

Summary & Thresholds

Pla

n v

s./ A

ctu

al

Type of Cost Name of Assignment/Contract

No

te # Estimated

Cost/Actual

(GEL)

Estimated

Cost/Actual

(USD)

IBRD

Financing

(USD)

1 2 3 4 5 6 7

OTHER COSTS Procurement Method Procurement Prior Review

P Operational Costs 1 2,542,248 1,530,000 1,224,000 1 - Goods

A ICB: >US$ 300 K All contracts

NCB: ≤ US$300 K First 2 contracts

Total for Other Cost - ESTIMATE 2,542,248 1,530,000 1,224,000 SH: <US$100 K First contract

Total for Other Cost - ACTUALS 0 0 0 DC: None All contracts

2- Works

Total for Component 1 - ESTIMATE (USD) Works and goods 131,124,374 78,914,524 63,131,620 ICB >US$4 Mil All contracts

Consultant service 83,080 50,000 40,000 NCB ≤ US$4 Mil First 2 Contracts and all ≥US$2 Mil

Total 131,207,454 78,964,524 63,171,620 SH <US$200 K First contract

Total for Component 1 - ACTUALS (USD) Works and goods 0 0 0 DC None All contracts

Consultant service 0 0 0

Total 0 0 0 Thresholds for Selection and Employment of Consultants:

Total for Component 2 - ESTIMATE (USD) Works and goods 332,320 200,000 160,000 Procurement Method Procurement Prior Review

Consultant service 6,118,011 3,682,000 2,945,600 3 - Consulting Services Firms

Total 6,450,331 3,882,000 3,105,600 QCBS All contracts above US$100,000

Total for Component 2 - ACTUALS (USD) Works and goods 0 0 0 QBS All contracts above US$100,000

Consultant service 0 0 0 FBS All contracts above US$100,000

Total 0 0 0 LCS All contracts above US$100,000

GRAND TOTAL - PLAN 140,200,033 84,376,524 67,501,220 CQS ≤US$300,000 First contract

GRAND TOTAL - ACTUALS 0 0 0 SSS All contracts

PRICE AND WORKS CONTINGENCY - 5% OF TOTAL COST 7,010,002 4,218,826 3,375,061 4 - Consulting Services Individuals

TOTAL PROJECT COST INCLUDING PRICE AND WORKS CONTINGENCY 147,210,035 88,595,351 70,876,281 IC All contracts above US$50 K

SSS ALL

Price Convertion Rate, Date and Source:

USD/GEL: 1.6616

Thursday, February 16, 2012 http://nbg.ge/?lng=eng

Notes:

1 Costs is Lump Sum - Details will be defined during project implementation

Thresholds for Procurement of Goods, Works and Non-Consulting services:

51

Annex 8: Economic and Financial Assessment

GEORGIA: Regional Development Project

Spatial and Economic Geography Assessment:

1. Kakheti is considered a lagging region and below the country average. In 2010, Kakheti‘s

Gross Value Added per capita represented only about 60 percent of Georgia national average.

Economic density of Kakheti is about GEL74,000 per square kilometer, compared to GEL409,000

per square kilometer in Ajara and GEL52 million per square kilometer in Tbilisi. In addition, the

Kakheti region grew at only 2.5 percent per annum in the period 2006-2010, which is significantly

below the average for Georgia (4.3 percent). Only half of the Georgian regions were growing faster

than the national average (Adjara, Imeri, Racha-Lechkhumi, Kvemo Svaneti and Tbilisi).

Figure 1: GDP per capita 2010 and GDP growth,

2006-2010

2. The poverty rate in Kakheti is 25 percent, which is slightly above the Georgia average of 24

percent. Other poverty indicators such as poverty depth, severity, and incidence are also higher than

the Georgia averages. The figures are higher for urban households in almost all dimensions of well

being. The unemployment rate in Kakheti is 11 percent, which is below Georgia average of 16

percent and Tbilisi‘s rate of 30 percent. Such a relatively low unemployment rate results from the

rural character of the region, with intensive inclusion of the population in agricultural self-

employment and non-paid employments.

3. Several factors explain the relatively weak economic performance of the region. These

include the productive structure, the prevalence of SMEs, factor concentration (both physical,

including FDI and human capital) as well as underdeveloped rural infrastructure. Kakheti‘s

productivity is lower than many other regions in Georgia. Despite relatively low wages that helped

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

0 2000 4000 6000 8000

TBILISI

ADJARA

IMERETI, RACHA-LECHKHUMI AND KVEMO

GD

P G

ro

wth

20

06

-10

GDP per capita level 2010

KAKHETI

52

to contain unit labor costs, Kakheti‘s competitiveness is still quite low because several of its

endowments have not yet been fully utilized.

4. The existing inefficient structure of the economy hinders growth of the region. The

comparison between Kakheti and the country as a whole reveals that the most significant differences

in industry structure at an aggregate level comes from the primary sector and trade. Agriculture is

significantly more important in Kakheti while wholesale and retail trade sectors play a more

important role in Georgia. Although the share of agriculture in gross value added has been

systematically decreasing, it still accounts for 20 percent, as compared to 8.4 percent in Georgia on

average. The high share of the agriculture sector combined with its negative growth (-2.7 percent

over 2006-10) was one of the main reasons for the weak performance of the region in recent years.

5. The trade sector in Kakheti was much more dynamic than in Georgia as a whole, which

resulted in its significant positive contribution to growth of the region, despite its lower share in

value added. The contribution from other types of services (excluding health, education and

transport) to output growth looks almost the same for Kakheti and Georgia (Figure 2). Kakheti is

distinguished by its dynamic growth of tourism related activities.

Figure 2: Contribution to GDP growth, Kakheti and Georgia

Incremental Capital to Output Ratio Assessment (ICOR):

6. The proposed project aims to increase investment levels in the Kakheti region, both public

and private, aligning them with those observed in the country (but not with the investment levels

observed in the country‘s most vibrant region; the City of Tbilisi). Via its impact on investments, the

project is also expected to boost economic activity and income levels during the project

implementation period and beyond. This result hinges crucially on the pace and the effectiveness of

project implementation. The pace would determine the timing for the ‗stimulus‘ to be felt in the

region. The effectiveness would determine the degree at which the public investments supported by

the project will ―leverage‖ private investments, and the extent to which these investments will

expand economic activity.

1.50%

0.50%

0.10%

-10%

-5%

0%

5%

10%

15%

20%

25%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Gro

wth

of

real

GV

A 0

7-1

0 p

.a.

Average share in nom. GDP 07-10

Kakheti

GeorgiaTrade and repair

Agriculture

Industry

Construction

Public administration

Other type of services

Processing products by

households

53

7. Context: Total investments in the Kakheti region have been estimated to be around 20 to 25

percent of the region‘s GDP in the past.12

Kakheti‘s investment ratio has traditionally been slightly

below that for the country as a whole. The total investment ratio in Kakheti has not been that

different to that of Adjara, which has received substantial public investment for its development

(Figure 3). Household investment (broadly defined) dominates total investment in Kakheti, rather

than investment by corporations (like in Tbilisi) or by the public administration (as in Adjara). Since

according to the System of National Accounts, household investments by convention includes also

those made by the self-employed and microenterprises, the special composition of investment in

Kakheti reflects well the rural economic nature of the region, i.e., dominated by activities such as

small-scale animal raising, agriculture (specially grape growing, and trade and commerce (including

restaurants). The data suggest that a household‘s (narrowly defined) investment in Kakheti has been

negligible, i.e., there has been little if any renovation of the existing stock of housing (in parts other

than Signagi) and very little construction of new housing.

Figure 3: Investment ratios in Georgia and selected regions, percentage of GDP

Source: Geostat and World Bank staff estimations.

8. Project Impact: The Project will inject US$75 million dollars in investment over a period of

3 years. More importantly, the project has been designed to induce various types of private sector

investments. Firstly, the project will encourage private investments by providing public goods (e.g.,

road access) needed by the private investors. Secondly, improvements in tourism circuits and

cultural heritage sites in both rural and urban areas are designed to stimulate household investment

as broadly defined in National Accounts. In particular, uplifting of pedestrian walkways, provision

of parking space, and other public infrastructure; or funding façade renovation, should motivate the

establishment of new micro/small businesses (e.g., shops, restaurants, transport and other tourism

related services), as well as induce significant renovation of existing housing and the construction of

new ones.

9. The above impact can be summarily captured by an indicator of the amount of corporate and

household investments that public investments mobilize. During past booming periods (2006-7),

Kakheti leveraged up to 3 dollar in private investments for each dollar invested by the public

12

Data on investments (by household and corporations) came from GEOSTAT staff estimates, while the break-up of

public investments by region was estimated by the World Bank based weights derived from regional GDP and

population.

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

Geo

rgia

Kakh

eti

Tbili

si

Adj

ara

Geo

rgia

Kakh

eti

Tbili

si

Adj

ara

2006 2010

Government

Households, self-employed

Corporates

54

administration. More recently (2009-10), however, this ratio has been closer to one-to-one. The

expectation is for the project to target a one-to-four ratio, which would lift up the overall leverage

ratio of the public administration investments in the region. These expected dynamics for

investments with and without the project are illustrated in Figure 4 (panels 1 to 3).

Figure 4: Summary of the Expected Impact of the Project on Investments (Income and Growth)

Source: GEOSTAT and World Bank staff projections.

10. The impact of these investments on economic activity will be significant in the region. While

a proper Keynesian accelerator model (using modern econometric tools, such as an impulse-response

function)13

could not be estimated at this time, two parameters were applied to gauge this potential

impact: (a) an incremental capital to output ratio (ICOR) of around 4 (each unit of investment results

in a 25 percent permanent increase in output); and (b) a short term multiplier effect under which one

unit of investment results in one unit of additional output in the short-term. These two approaches

are complementary in that the short-term (immediate) impact of the project is likely to be closer to

the results offered by the short-term multiplier, while the medium-term impact of the project should

be closer to that coming out of the ICOR.

11. Using these parameters, it is estimated that growth in Kakheti during the 2012-2015 period

would be between 0.7 and 2.9 percentage points higher than otherwise expected, with the range

depending on whether the ICOR or multiplier assumption is used.14

Such growth will result in a

GDP per capita in US$ that would between 3 and 11 percent higher in 2015 than it otherwise would

have been.

13

An impulse response function could be estimated by using a Vector Auto regression Model if there were sufficient

observations for investments and output, which is not the case. 14

For simplicity growth in Kakheti without the project has been assumed to be the same as in Georgia as a whole, which

is a conservative assumption.

10.0

15.0

20.0

25.0

30.0

35.0

2007 2008 2009 2010 2011 2012 2013 2014 2015

Total Investments

Kakheti Kakheti, with project Georgia

0.0

2.0

4.0

6.0

8.0

10.0

2007 2008 2009 2010 2011 2012 2013 2014 2015

Investments by the Public Administration

Kakheti Kakheti, with project Georgia

5.0

10.0

15.0

20.0

25.0

2007 2008 2009 2010 2011 2012 2013 2014 2015

Investments by Corporates and Households

Kakheti Kakheti, with project Georgia

1000

2000

3000

4000

5000

2007 2008 2009 2010 2011 2012 2013 2014 2015

Per capita GDP in US$

Kakheti Kakheti, with project (ICOR)

Kakheti, with project (Multiplier) Georgia

-20.0%

-10.0%

0.0%

10.0%

20.0%

2007 2008 2009 2010 2011 2012 2013 2014 2015

Real GDP Growth, %

Kakheti Kakheti, with project (ICOR)

Kakheti, with project (Multiplier) Georgia

55

Figure 5: Background Information and Calculations

Note: the ratios to GDP are derived from data on constant 2006 prices and, thus, might differ slightly from the numbers

usually presented and derived from data at current prices.

2007 2008 2009 2010 2011 2012 2013 2014 2015

Population, thousands person

Kakheti 403 402 403 405 406 408 410 412 414

Georgia 4387 4382 4410 4453 4455 4457 4458 4459 4459

GDP growth

Kakheti (with out project) 3.3 12.5 -13.2 7.0 7.5 5.0 5.0 5.0 5.0

Georgia 12.3 2.3 -3.8 6.3 6.0 5.0 5.0 5.0 5.0

GDP deflator index (2006=1) 1.1 1.2 1.2 1.3 1.4 1.5 1.6 1.7 1.7

Nominal exchange rate 1.7 1.5 1.7 1.8 1.7 1.7 1.8 1.9 2.0

Project related parameters

Disbursements, USD million 0 0 0 0 0 15 23 23 15

Leverage ratio, units 3 2 1 1 1 2 2 3 3

ICOR (uses GDP at t+1)

Kakheti (with out project) 1.4 -1.2 2.3 2.6 3.9 4.0 4.1 4.2 -

Georgia 9.7 -5.4 2.3 3.2 3.0 3.0 3.0 3.1 -

Key Parameters and Assumptions

Investment by Region (% of GDP) 2006 2007 2008 2009 2010

Total Invesment

Kakheti 19.3 17.1 15.9 16.4 19.6

The city of Tbilisi 35.1 30.7 26.6 16.2 22.7

Shida Kartli and Mtskheta-Mtianeti 16.8 14.0 14.6 13.4 15.0

Kvemo Kartli 12.6 11.4 13.1 11.6 14.2

Samtskhe-Javakheti 10.2 12.4 12.7 13.0 17.9

Adjara 19.8 18.5 16.0 12.9 18.0

Guria 9.6 8.1 10.5 11.2 12.1

Samegrelo-Zemo Svaneti 20.3 18.1 17.5 13.8 17.6

Imereti, Racha-Lechkhumi and Kvemo Svaneti 20.6 15.3 14.4 12.8 15.6

Total Georgia 25.6 22.5 20.5 14.6 19.3

Public Investments

Kakheti 4.7 4.3 5.5 7.8 8.5

The city of Tbilisi 2.8 2.4 3.3 4.5 4.9

Shida Kartli and Mtskheta-Mtianeti 4.7 4.1 5.6 7.6 8.0

Kvemo Kartli 3.9 3.5 5.1 6.7 7.4

Samtskhe-Javakheti 4.3 4.0 5.4 7.4 8.0

Adjara 4.4 3.7 4.7 6.2 6.8

Guria 4.1 3.7 5.6 7.5 7.9

Samegrelo-Zemo Svaneti 4.4 4.0 5.4 6.8 7.7

Imereti, Racha-Lechkhumi and Kvemo Svaneti 4.7 4.0 5.1 6.7 7.5

Total Georgia 3.7 3.2 4.3 5.8 6.4

Corporate and Household Investments

Kakheti 14.6 12.8 10.4 8.6 11.1

The city of Tbilisi 32.3 28.3 23.3 11.7 17.7

Shida Kartli and Mtskheta-Mtianeti 12.1 9.9 9.0 5.8 7.0

Kvemo Kartli 8.7 7.9 8.0 4.9 6.8

Samtskhe-Javakheti 5.9 8.4 7.3 5.6 9.9

Adjara 15.4 14.8 11.3 6.7 11.2

Guria 5.6 4.5 4.9 3.7 4.1

Samegrelo-Zemo Svaneti 15.9 14.1 12.1 6.9 9.9

Imereti, Racha-Lechkhumi and Kvemo Svaneti 15.9 11.3 9.2 6.2 8.0

Total Georgia 21.9 19.3 16.1 8.8 13.0

Estimated Investments by Region

56

Cost-Benefit Assessment of Specific Investments:

12. For the investment project‘s economic and financial analysis, a cost-benefit assessment was

carried out. Benefit streams were calculated based on the following available data and assumptions:

Benefit Streams:

Increase in tourists, overnight stays and spending. The Project-supported improvements to critical

infrastructure needs and destination management strengthening is expected to translate into (a) an

increase in domestic and international tourism arrivals to Kakheti by 20-25 percent; (b) based on

the configuration of the tourism circuits, overnight stays are projected to increase from 1.3 days to

2.05 days on average; and (c) spending on food, lodging, and new activities (e.g., guided tours), and

local products/handcrafts is projected to increase by 20 percent.

Increase in number and profitability of economic enterprises. The development of tourist attractions

and geo-tourism maps, destination management and marketing/promotion of Kakheti as a new

high-end destination, along with the improved infrastructure are expected to attract private

investors, who will create new enterprises or expand existing ones. The leverage factor for private

investments attracted by the public expenditures is assumed to be 3 to 1 based on data from other

Georgian cities where similar urban renewal projects occurred, i.e., old Tbilisi, old Mtskheta and

Signagi. The number of hotel rooms is expected to grow from 561 to 900 and the number of beds in

hotels, guest-houses and family-houses is expected to grow from 1,610 to about 1,932—to serve the

expected increased number of tourists from 200,000 to 250,000/year. Also, based on data from

other Georgian cities where similar urban renewal projects occurred, new enterprises and increased

profitability are assumed to raise the amount of corporate taxes collected by 15 percent, the VAT by

18 percent, and personal income tax by 20 percent.

Property and rental value appreciation. Tourism development and improved infrastructure will

create more opportunities for businesses to invest and will increase demand for real estate, which

should cause real estate and rental values to appreciate. Based on data from other Georgian cities

where similar urban renewal occurred, i.e., old Tbilisi, old Mtskheta and Signagi, the following

assumptions are made for Kakheti: (a) Property values are assumed to appreciate by 70 percent and

rental values by 100 percent; (b) property tax revenues are expected to increase by 20 percent; and

(c) income tax revenues from increased rental fees is projected to rise by 20 percent.

Temporary job creation. It is expected that while the Project is being implemented, temporary jobs

will be created. Based on analysis of MDF infrastructure projects over the past five years, as well as

global experiences in similar projects, the following assumptions were made. A large proportion of

conservation/restoration works (30 percent of the expenditures) are assumed to cover the cost of

labor. Thus, it is assumed that the government will obtain income tax (20 percent) from labor

expenditures.

13. The cost-benefit analysis was prepared for the entire Project, rather than for each component.

The Net Present Value (NPV), Financial Internal Rate of Return (FIRR) and Economic Internal

Rate of Return (EIRR) were calculated for the next 20 years from 2012 up to 2031, including four

years of Project implementation. For the economic analysis, financial costs were corrected and

conversion factors were applied. The analysis assumed a 12 percent discount rate.

57

14. Secondary data was collected from various government entities, including the GNTA,

Ministry of Finance, Revenue Service, Public Register, GeoStat, as well as from real estate brokers

and studies from similar projects, e.g., USAID-funded Georgia Economic Prosperity Initiative.

Primary data was collected from small-scale surveys, using structured questionnaires that were

administered to various stakeholders (restaurants, cafes, hotels, guest-houses, and domestic and

foreign visitors). It also obtained information from in-depth interviews.

15. Overall, the Project is projected to yield net economic benefits from the following benefit

streams: An increase in tourist overnight stays and spending, the number and profitability of

enterprises, increased property values and temporary jobs.

16. Results: The economic and financial analysis shows that the Project‘s NPV at a 12 percent

discount rate amounts to US$19.79 million, with an FIRR of 19.85 percent, and an EIRR of 26.14

percent.

17. Sensitivity analysis. The NPV, FIRR and EIRR are most sensitive to the secondary sales

(direct and indirect sales) multiplier factor: A 10 percent increase or decrease in this multiplier will

raise or lower the NPV by US$3.14 million and the FIRR by about 1 percent. The largest impact

will be on the EIRR: A 10 percent increase or decrease in the secondary sales multiplier will raise

or lower the EIRR by 5.17 percent and 4.19 percent accordingly. At the minimum possible level of

the secondary sales multiplier (i.e., 1.0), and if other assumptions remain unchanged, the NPV will

still be positive, reaching US$2.18 million. The private investment leverage factor is the one with

the least influence: A 10 percent increase or decrease will raise or lower the NPV by US$453,596.

If the average overnight stay remains unchanged (at 1.32 days), and other assumptions are

unchanged, the NPV will still be positive, at US$8.32 million, the FIRR will be 16.00 percent and

the EIRR will be 21.33 percent. The analysis confirms that even when subjected to these stress

tests, the financial and economic impacts of the Project remain robust.

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MqinvartsveriMqinvartsveri(5047 m)(5047 m)

A J A R AA J A R A

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TkvarceliTkvarceli

DzvariDzvari

SenakiSenaki

SamtrediaSamtredia

TkibuliTkibuliSachkhereSachkhere

KhashuriKhashuri

MestiaMestia

OniOniKazbegiKazbegi

MarneuliMarneuliTsiteli-Tsiteli-TskaroTskaro

LagodehiLagodehi

AhalkalakiAhalkalakiKazretiKazreti

NinocmindaNinocminda

AkhmetaAkhmeta

OzurgetiOzurgeti

KutaisiKutaisi

TelaviTelavi

RustaviRustavi

MtskhetaMtskheta

AmbrolauriAmbrolauri

GoriGori

ZugdidiZugdidi

AkhaltsikheAkhaltsikhe

T'BLISIT'BLISI

SouthSouthOsset iaOsset ia

Gagra

Ochamchira

Tkvarceli

Dzvari

Senaki

SamtrediaPoti

Kobuleti

TkibuliSachkhere

Khashuri

Mestia

OniKazbegi

MarneuliTsiteli-Tskaro

Lagodehi

AhalkalakiKazreti

Ninocminda

Akhmeta

Ozurgeti

Kutaisi

Rustavi

Mtskheta

Ambrolauri

Gori

Zugdidi

Akhaltsikhe

Suhumi

Batumi

Chinvali

T'BLISIA D J A R A

SouthOsset ia

A B K H A Z I A

R U S S I A N F E D E R A T I O N

T U R K E Y

A R M E N I A A Z E R B A I J A N

Rioni

Inguri

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Kvirilk

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Alazani

B lack Sea

MingechevirReservoir

LakeSevan

To Soai

To Vladikavkaz

To Zagatala

To Yevlax

To Armavir

To Erzurum

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To Trabzon

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40°E 42°E

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44°N44°N

42°N 42°N

GEORGIA

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

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IBRD 39118

FEBRUA

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PROJECT CITIES

CITIES AND TOWNS

AUTONOMOUS OBLAST (AO) CENTER

AUTONOMOUS REPUBLIC (ASSR) CENTERS

NATIONAL CAPITAL

RIVERS

MAIN ROADS

RAILROADS

AUTONOMOUS OBLAST (AO) BOUNDARY

AUTONOMOUS REPUBLIC (ASSR) BOUNDARIES

KAKHETI REGION BOUNDARY

INTERNATIONAL BOUNDARIES

GEORGIA

REGIONAL DEVELOPMENT PROJECTKAKHETI REGION

Dartlo

TelaviSignahi

Kvareli

Dartlo

KA

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E

TI

KA

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Tusheti Protected Landscape

BatsaraNature Reserve

BatsaraNature Reserve

IltoManaged Reserve

IltoManaged Reserve

LagodekhiNature Reserve

Vashlovani NatureReserve

Vashlovani NatureReserve

Vashlovani National Park

Vashlovani National Park

TushetiNational

Park

TBILISI

LagodekhiMtskheta

Akhmeta

Marneuli Gardabani

Vakhtangisi

Gurjaani

Dedoplistskaro

Red Bridge

Rustavi

Zagesi

Ponitchala

P’shaveli

Sagaredzo

KA

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E

TI

LagodekhiMtskheta

Akhmeta

Marneuli Gardabani

Red Bridge

Vakhtangisi

Gurjaani

Dedoplistskaro

Agaiani

Rustavi

Zagesi

Ponitchala

P’shaveli

Sagaredzo

TBILISI

A R M E N I AA Z E R B A I J A N

A Z E R B A I J A N

R U S S I A NF E D E R A T I O N

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Telavi

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Kvareli

Dartlo

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KAZAKHSTAN

AZERBAIJAN

IRAQ

G E O R G I A

Area of main map

ARMENIA

SYRIAN ARAB REP. ISLAMIC REP. OF IRAN

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TBILISITBILISI

B l a c k S e aC a s p i a n

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IBRD 39037

JANUARY 2012

PROJECT CITIES

CITIES AND TOWNS

NATIONAL CAPITAL

URBAN AREA

SECONDARY ROADS

MAIN ROADS

RAILROADS

KAKHETI REGION BOUNDARY

INTERNATIONAL BOUNDARIES

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World Bank Group,any judgment on the legal status of any territory, or any endorsementor acceptance of such boundaries.

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