National Study INFRASTRUCTURE FINANCING FOR SUSTAINABLE DEVELOPMENT IN GEORGIA David Lezhava The study was developed under a United Nations Development Account project entitled “Financing strategies for inclusive, equitable and sustainable development in Asia and the Pacific”, which is implemented by the Macroeconomic Policy and Financing for Development Division, ESCAP. The views expressed in this document are those of the author and do not necessarily reflect the views of the United Nations Secretariat. The report benefited from extensive comments from Mathieu Verougstraete, Economic Affairs Officer, Financing for Development Section, UNESCAP. This publication has been issued without formal editing.
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National Study
INFRASTRUCTURE FINANCING FOR SUSTAINABLE DEVELOPMENT IN GEORGIA
David Lezhava
The study was developed under a United Nations Development Account
project entitled “Financing strategies for inclusive, equitable and sustainable
development in Asia and the Pacific”, which is implemented by the
Macroeconomic Policy and Financing for Development Division, ESCAP. The
views expressed in this document are those of the author and do not
necessarily reflect the views of the United Nations Secretariat. The report
benefited from extensive comments from Mathieu Verougstraete, Economic
Affairs Officer, Financing for Development Section, UNESCAP. This
publication has been issued without formal editing.
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Table of Contents
Executive Summary 4
1. Introduction 5
1.1. Purpose of the study 5
1.2. Infrastructure financing needs 5
2. Country overview 6
2.1. General overview 6
2.2. Macroeconomic overview 9
3. Infrastructure Sector Overview 13
3.1. Transport 13
3.2. Energy 14
3.2.1. Oil and Gas 14
3.2.2. Power 15
3.3. Water 16
3.4. ICT 16
4. Infrastructure Financing Strategies 17
4.1. Leveraging External / Donor Finance 18
4.2. Mobilizing State Budget Resources 20
4.3. Reforming State Owned Enterprises (SOEs) 21
4.4. Tapping Domestic Capital Market and the Financial Sector 24
4.5. Attracting private investment through public-private partnerships (PPPs) 27
Reforms conducted by successive governments aimed to make Georgia an attractive destination for
doing business and capitalize on the countries transit potential by demonstrating easy and transparent
border crossing procedures. Government acknowledges though that these reforms have to be
accompanied by infrastructure investment to deliver their results.
2.2. Macroeconomic overview
Adverse external shocks such as low oil prices and global slowdown have affected economic growth
rates, but the economy proved to be resilient. With 2.9 and 2.7 percent respectively in 2015 and 2016,
the growth in Georgia has been higher than those of all trading partners, except China and Turkey.
The economic growth is expected to pick up in the coming years reaching 5.5 percent in the medium
term based on the impact of fiscal reforms and already implemented growth-friendly measures (IMF,
2017).
In 2015, the relative poverty in Georgia was 20.1% (25.3% in rural areas and 14.7% in urban areas)
and the GDP per capita is at USD 3,852 (the country is classified as an “Upper-middle income”
country by the World Bank). The Gini coefficient, representing the degree of inequality in wealth
distribution, is at 41% (low numbers represent greater equality).5
In 2015, unemployment rate in Georgia decreased by 0.4 percent and reached 12 percent, which is
the lowest rate ever reached. Increase in employment was mainly due to hired employment (i.e. non-
4http://www.ebrd.com/what-we-do/economic-research-and-data/data/forecasts-macro-data-transition-indicators.html 5 National Statistics Office of Georgia www.geostat.ge
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self-employment) as self-employment has decreased slightly although its share in total employment is
still very high at 57 percent. 6
Trade balance
External imbalance is one of the major structural weaknesses of the Georgian economy. Country has
been running a double digit Current Account Deficit (CAD). Although high CAD is worrisome, it
should be noted that the main part of CAD is driven by FDI.
Tourism sector is playing key role in addressing this problem. During the last five years tourism has
formed as one of the important sectors of the economy. Between 2011 and 2016 tourism revenues in
USD terms have more than doubled and exceeded USD 2 billion in 2016.7
Figure 2: Tourism Revenues (USD million)
Source: National Bank of Georgia; Balance of Payment
Georgia is also considered to be well-positioned between Europe and Asia to play a transit role. In
2016, volumes of transit of goods across the country are almost of the same size as Import and Export
goods combined.
Table 4: Transit Through Georgia; Export and Import (2016)
000’ Tons
Except Transit
through
Railway
Transit through
Railway
Transit
Total Export Import
January 124.4 429.5 553.9 116.5 448.9
February 214.6 652.1 866.7 149.2 667.5
March 243.5 548.9 792.4 145.7 653.9
April 267.1 461.4 728.5 155.3 680.8
May 251.1 475.7 726.9 151.1 705.3
6 National Statistics Office of Georgia www.geostat.ge 7 Georgian National Tourism Administration http://gnta.ge/statistics/
955
1,411
1,719 1,787 1,936
2,166
44.8 47.7
21.8
4.0 8.3
11.9
0
10
20
30
40
50
60
-
500
1,000
1,500
2,000
2,500
2011 2012 2013 2014 2015 2016
Revenues from International Tourism Growth Rate % (right-hand scale)
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June 230.6 476.3 707.0 137.7 614.6
July 235.5 507.7 743.2 166.1 552.0
August 270.6 764.2 1,034.8 169.2 584.2
September 256.2 624.8 881.0 187.3 526.3
October 301.6 587.2 888.8 119.0 649.1
November 295.1 456.1 751.2 227.4 561.2
December 231.8 437.3 669.1 210.3 687.3
TOTAL 2,922.2 6,421.1 9,343.3 1,934.8 7,331.1
Source: MoF
Fiscal Policies and Public Finance
Georgia has extremely liberal tax policies. Through reforms, the number of taxes and tax rates were
reduced significantly. Currently Georgia has only 6 taxes instead of 27 initially and all of them are
flat. Tax reduction was coupled with improved tax administration, removal of administrative barriers
and fight against corruption. These efforts led to improved tax compliance. As a result, tax revenues
to GDP increased from 11 percent in the beginning of 2000s, to 26 percent in 2016. Georgia is
considered to have one of friendliest taxation system and administration in the region. Nevertheless,
Capital and Lending Social Expenditure Other Current Expenditure Fiscal Deficit
Domestic
21%
Multilate
ral
57%
Bilateral,
13% Eurobond
, 9%
External
79%
SDR
43,1%
USD
35,8%
EUR
16,6%
Other
4,6%
Fixed
70%
Varia
ble
30%
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Georgia’s fiscal rule is a restriction on tax rate increase. No tax increase (except excise and property
tax) is allowed unless it is supported by a public referendum.
Debt Sustainability Analysis (DSA) shows that under different shock scenarios the public debt
remains well below 60 percent of GDP (threshold established by the fiscal rule), but the biggest risk is
the foreign currency denominated debt. In the medium term, it is projected to maintain the public
debt to GDP ratio below 45% level.
3. Infrastructure Sector Overview
Global Competitiveness Report (GCI) (2016-2017) ranks insufficient supply of infrastructure to be the
third largest impediments for doing business in Georgia, with only adequately educated workforce
and access to finance ranking higher. The overall quality of infrastructure Georgia stands at 75th
position among 138 countries. To provide a better picture, the following sections review the main
sectors in detail.
3.1. Transport
Among the different transport sub-sectors, the quality of railroad is at the rather favorable 38th
position in international comparisons. With the ambition to be a transit and logistics hub, the
country still need to further improve the quality of its transport infrastructure, a fortiori for road,
port and air transport, which stand respectively at the 78th, 71st and 88th position in global ranking.9
Therefore, it is no surprise that the Government is prioritizing transport investments. Development
of transport infrastructure aims at achieving multiple goals: take advantage of Georgia’s transit
potential; facilitate economic growth; improve access from rural to urban areas; and boost tourism
development.
Regarding road transport, Georgia’s entire network is about 21,800 km, including around 1,500 km of
international roads, 5,300 km of secondary roads and 15,000 km of local roads. The central
government is responsible for international and secondary roads, while local roads are managed by
the local authorities. Regarding the quality of the network, 86 percent of international roads (2014)
are in good or fair condition. The same ratio increased for secondary roads from 30 percent in 2004
up to 60 percent in 2015 (WB, 2016). Such increase was made possible due to a significant rise in road
maintenance spending. Following the breakdown of the Soviet Union there were practically no
rehabilitation or maintenance works done until 2001. Maintenance and rehabilitation expenditures
increased though from GEL26.8 million (equivalent to USD13.5 million) in 2000 to more than
GEL250 million (equivalent to USD 140 million) on average for the last 10 years, peaking at GEL400
million (equivalent to USD220 million) in 2010. However, 84% of people living in the highlands still
complain about the quality of roads.
9 World Economic Forum, Global Competitiveness Indicators (2016-2017) http://www3.weforum.org/docs/GCR2016-2017/05FullReport/TheGlobalCompetitivenessReport2016-2017_FINAL.pdf
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Overall, road sector expenditures on construction, rehabilitation and maintenance for international
and secondary roads have grown from 0.7 to 2.30 percent of GDP during 2004-2015. The largest
expenses were directed to the construction of the East-West Highway Corridor – the main transit
route. Out of the USD4 billion planned investments, half of them will be spent on East West
highway. Two South-North corridors are also envisaged to improve regional connectivity. Currently,
Georgia doesn’t use tolling on its roads, but the construction of alternative bypassing routes in some
of the major highway sections may allow toll collection. The introduction of tolling and private
sector’s participation in the sector could ease burden on the state budget (WB, 2016).
Besides roads, the Government also plans investments in building ports, airports, and railways,
including through the private sector. For example, the management of seaports and major airports are
given to private companies under long-term contracts. Likewise, the construction of a deep-sea port
in Anaklia is envisaged through a PPP arrangement. The new port will have the capacity of 100
million tons annually and be capable of accommodating Panamax type cargo vessels. The cost of the
project is estimated at USD 2.5 billion. Also, the government is willing to develop an international
airport in Kutaisi as well as other local airports that are operated by the state-owned United Airports
of Georgia (ADB, 2016).
3.2. Energy
3.2.1. Oil and Gas
Georgia is a transit country for four international pipelines: two gas pipelines – North-South Caucasus
Pipeline (NSCP) and South Caucasus Pipeline (SCP); and two oil pipelines – Western Route Export
Pipeline (WREP) and Baku-Tbilisi-Ceyhan (BTC) oil pipeline.
NSCP is operational since 1994 and delivers gas from Russia to Armenia. While Georgia was receiving
10% of the transited gas for free, the country will receive cash payments instead as from the second
half of 2017.
WREP is operated by British Petroleum (BP) under a 50-year concessional agreement. The pipeline
transports oil from Baku to Supsa terminal in western Georgia. The rehabilitation/reconstruction
conducted by the private consortium led by BP costed USD 600 million. Annually Georgia receives
about USD 8 million for oil transportation through this pipeline.
BTC is used for transportation of Caspian crude oil to deep see port in Ceyhan, Turkey. The pipeline
became operational in 2005. Annual income received by Georgia is roughly USD 35 million per year.
SCP follows the same route as BTC. SCP is operational since 2006, however works are on-going to
expand the pipeline’s capacity. Expansion works will be completed in 2018 and USD 2 billion will be
spent in Georgia. In exchange for transit, Georgia will receive cash payment which in turn can be
used to purchase gas under the same agreement at below market price.
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There are also discussions regarding new projects that aim to deliver oil and gas from Caspian basin to
Europe. International pipelines passing through Georgia bring not only revenues to the country but
also political dividends.
3.2.2. Power
The quality of electricity supply has significantly improved in Georgia over the last 15 years after
strong deteriorations following the collapse of the Soviet Union in the nineties (power generation in
the year 2000 was only half of 1990 level). Although transmission lines were reaching 95 of
population, power outages for several days were a common phenomenon (WB, 2012). However, the
period of week-long blackouts affecting a large part of the population is over. Currently, the system
average interruption frequency index (SAIFI) shows two outages per year with the duration index
(SAIDI) at 3.6 hours per year (WB, 2017). This improvement was possible due to a major privatization
in the sector, followed by investment in infrastructure and improved bill collection from 20 percent
to nearly 100 percent (WB, 2014). In the nineties, many citizens considered that guaranteed
employment and income of the households was an obligation of the government. Thus, many didn’t
want to pay for electricity and used illegal connections while electricity meters were out of order.
The willingness to pay for electricity was further hindered by the frequent interruptions. Investments
in transmission infrastructure were necessary to improve the situation. Likewise, the installation of
meters (collective meters for the community initially and individual meters for households
subsequently) was critical.
The electricity balance of the country is close to zero but the country still depends on import during
winter and the energy independence is a sensitive issue for Georgia due to historical reasons. In that
context, the government intends to achieve self-sustainability around the year and increase the
power generation capacity of the country, which mostly depends on private investment in HPP.
Georgia has ample hydro resources, of which only 18% is utilized for power generation, and has a
liberal regulatory framework with simplified one-stop shop access for all investment-related matters
(OECD/IEA, 2015). It is expected that HPPs worth USD3.3 billion will be constructed by the private
sector but the Government is likely to have to build the transmission lines for connecting HPPs to
the grid. In addition, private investors usually request power purchase agreements and a guaranteed
access to the transmission lines to be able to export the generated electricity to Turkey. Currently
there is only one line connecting to Turkey. This line uses back-to-back station that allows power
synchronizing between the Georgian and Turkish grids. Although the line is currently not
overloaded, there is a chance that with more power generated the line capacity might not be
sufficient to entirely evacuate surplus power to Turkey – a country which has high demand for
electricity. Hence, private investors require guarantees from the State that electricity will be sold
either within Georgia or there will be enough capacity to allow export to Turkey.
Overall, power generation is expected to increase by 2.3 times from 11.37 billion KWh in 2016 to
26.3 billion KWh in 2027 as indicated in the Ten Year Network Development Plan of Georgia (2017-
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2027) (GSE, 2017). The power generation target is 60 percent higher than the forecasted consumption
in 2027, leaving room for exports.
For building the required transmission lines, the Government will on-lend funds obtained from
donors to the state-owned enterprise: Georgian State Electrosystem (GSE). Around USD800 million
of investment is required in transmission lines for the next 8 years in order to meet the requirements
of the 10-year plan. Construction of transmission lines aim at strengthening the transmission system,
guaranteeing easy evacuation of electricity from newly constructed HPPs and allowing trade with the
neighboring countries.
3.3. Water
Infrastructure development needs are large in the water sector as the sector has suffered from
underinvestment. 24-hour water supply is still a problem not only in rural areas but also for major
cities. Central water supply is available to only 41% of rural population. Only about 35 percent of
Georgia’s population is served via sewage systems (WB, 2015). In certain cities there were
infrastructure rehabilitation works conducted in water supply and sanitation, but as a whole, quality
and coverage of services remain suboptimal (WB, 2015).
The financial sustainability of the sector is low with tariffs covering only about 40 percent of
operational expenses while the remaining 60 percent has to be financed through public subsidies
(WB, 2015). The government benefits from donor assistance (WB, ADB, KfW, EIB) to improve
country’s basic water supply and sewerage infrastructure. Donor financed projects often include
covenants designed to improve the system sustainability, for example through gradual adjustment in
tariffs with due consideration to water supply quality and affordability. For instance, a loan
agreement with ADB obliges a water company to gradually reduce the ratio of operating expenses to
operating revenues below 1 by 2019.
To improve the sector situation, the Ministry of Regional Development and Infrastructure has
developed a sector development plan, under which continuous and reliable water supply and access
to improved sanitation is planned to be achieved for all urban residents by 2020. On top of 19 on-
going projects in the water sector, 46 projects are planned to be implemented mostly in cities to
improve water supply and sanitation. As a result of these projects, 500,000 subscribers (almost half of
Georgia’s population) will be supplied with 24-hour uninterrupted water.
3.4. ICT
Significant improvements have been observed with Georgia’s GCI ranking in this sector rising from
103rd to 48th position. Progress was particularly noticeable in mobile services – the sector in which
there are only private operators. During the last six years, subscriptions have doubled. Fixed
broadband subscriptions also increased from 1.06 (per 100 people) in 2007 to 14.6 in 2015 (WB,
2016). The Government acknowledges that ICT development is an important factor for ensuring
inclusive growth and providing economic opportunities. For instance, the Government has created
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the “Georgian Innovation and Technology Agency” that is promoting innovation and IT use in
businesses across the country. The use of ICT in the industry is though limited compared to
international standards. Only half of businesses surveyed in 2013 had their own website (versus 66
percent in Tunisia and 84 percent in Poland).
Government’s involvement in this sector is typically limited and doesn’t go beyond regulatory
function. However, there is one important ongoing project with government’s participation that
intends to cover entire Georgia with broadband services. The project is being implemented by the
State but financed by the charity fund “Cartu” (the cost of it is about USD150 million). The project
will enable private operators to provide internet service to customers in 2000 villages and is expected
to be finalized in 2018.
4. Infrastructure Financing Strategies
To implement the Government’s plan to accelerate infrastructure investments, capital spending will
increase to around 10 percent of GDP from the current 6.5 percent. Due to these investments
Ministry of Finance expects GDP to grow by three percentage points during next four years.