FOR OFFICIAL USE ONLY Report No: PAD3933 Public Disclosure Authorized
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
PROJECT APPRAISAL DOCUMENT
ON A
PROPOSED LOAN
IN THE AMOUNT OF EUR 85 MILLION (US$102.9 MILLION EQUIVALENT)
Public Disclosure Authorized TO
GEORGIA
FOR
GEORGIA RELIEF AND RECOVERY FOR MICRO, SMALL, AND MEDIUM ENTERPRISES
APRIL 20, 2021 Public Disclosure Authorized
Finance, Competitiveness and Innovation Global Practice Europe and Central Asia Region
Public Disclosure Authorized This document is being made publicly available prior to Board consideration. This does not imply a presumed outcome. This document may be updated following Board consideration and the updated document will be made publicly available in accordance with the Bank’s policy on Access to Information.
CURRENCY EQUIVALENTS
(Exchange Rate Effective as of February 28, 2021)
Currency Unit = Georgian Lari (GEL) GEL 3.96 = EUR 1 GEL 3.32 = US$1 EUR 0.83 = US$1
FISCAL YEAR January 1 - December 31
ABBREVIATIONS AND ACRONYMS
AEP Anti-Crisis Economic Plan API Application Program Interface ARDA Agricultural and Rural Development Agency CDD Customer Due Diligence CPF Country Partnership Framework CRC Caucasus Research Center DA Designated Account DFIL Disbursement and Financial Information Letter E&S Environmental and Social ECL Expected Credit Loss EFF Extended Fund Facility EG Enterprise Georgia ESCB European System of Central Banks ESCP Environmental and Social Commitment Plan ESG Environmental, Social, and Governance ESMF Environmental and Social Management Framework ESMS Environmental and Social Management Systems EU European Union FDI Foreign Direct Investment FM Financial Management GDP Gross Domestic Product GENIE Georgia National Innovation Ecosystem Project GEOSTAT National Statistics Office of Georgia GHG Greenhouse Gas GITA Georgia’s Innovation and Technology Agency GoG Government of Georgia HoReCa Hospitality, Restaurant, and Catering IDP Internally Displaced Person IFC International Finance Organization IFI International Financial Institution IFR Interim Financial Report IMF International Monetary Fund IRR Internal Rate of Return IPF Investment Project Financing
IPS Instant Payment System KYC Know-Your-Customer LEPL Legal Entity of Public Law M&E Monitoring and Evaluation MFI Microfinance Institution MIGA Multilateral Investment Guarantee Agency MOESD Ministry of Economy and Sustainable Development MOF Ministry of Finance MOJ Ministry of Justice MSMEs Micro, Small, and Medium-size Enterprises NAPR National Agency of Public Registry NBG National Bank of Georgia NGO Nongovernmental Organization NPL Nonperforming Loan NPV Net Present Value PBC Performance-Based Condition PCG Partial Credit Guarantee PDO Project Development Objective PFI Participating Financial Institution POM Project Operations Manual PIE Project Implementing Entity PPSD Project Procurement Strategy for Development PwC PricewaterhouseCoopers ROA Return on Assets ROE Return on Equity RTGS Real-Time Gross Settlement System SEP Stakeholder Engagement Plan STEP Systematic Tracking of Exchanges in Procurement SMEs Small and Medium-size Enterprises TF Trust Fund USAID United States Agency for International Development WBG World Bank Group
Regional Vice President: Anna M. Bjerde Country Director: Sebastian-A Molineus Regional Director: Lalita M. Moorty Practice Manager: Ilias Skamnelos Task Team Leader(s): Nadeem M. Karmali, Natasha Kapil
The World Bank Georgia Relief and Recovery for MSMEs (P173975)
TABLE OF CONTENTS
DATASHEET ...... 1 I. STRATEGIC CONTEXT ...... 6 A. Country Context...... 6 B. Sectoral and Institutional Context ...... 6 C. Relevance to Higher Level Objectives ...... 10 II. PROJECT DESCRIPTION...... 11 A. Project Development Objective ...... 11 B. Project Components ...... 12 C. Project Beneficiaries ...... 22 D. Results Chain ...... 23 E. Rationale for Bank Involvement and Role of Partners ...... 24 F. Lessons Learned and Reflected in the Project Design ...... 24 III. IMPLEMENTATION ARRANGEMENTS ...... 25 A. Institutional and Implementation Arrangements ...... 25 B. Results Monitoring and Evaluation Arrangements...... 26 C. Sustainability ...... 27 IV. PROJECT APPRAISAL SUMMARY ...... 27 A. Technical, Economic and Financial Analysis (if applicable) ...... 27 B. Fiduciary ...... 29 C. Legal Operational Policies ...... 31 D. Environmental and Social ...... 31 V. GRIEVANCE REDRESS SERVICES ...... 32 VI. KEY RISKS ...... 32 VII. RESULTS FRAMEWORK AND MONITORING ...... 34 Annex 1: Implementation Arrangements and Support Plan ...... 53 Annex 2: Overview of the Private and the Financial Sector ...... 58 Annex 3: Impact of COVID-19 on Firms and Policy Response ...... 64 Annex 4: Financial Intermediary Assessment ...... 68 Annex 5: Performance-Based Conditions Summary ...... 73 Annex 6: Assessment of Shifts in the CPF ...... 74
The World Bank Georgia Relief and Recovery for MSMEs (P173975)
DATASHEET
BASIC INFORMATION BASIC INFO TABLE Country(ies) Project Name
Georgia Georgia Relief and Recovery for Micro, Small, and Medium Enterprises
Project ID Financing Instrument Environmental and Social Risk Classification
Investment Project P173975 Substantial Financing
Financing & Implementation Modalities [ ] Multiphase Programmatic Approach (MPA) [✓] Contingent Emergency Response Component (CERC) [ ] Series of Projects (SOP) [ ] Fragile State(s) [ ] Small State(s) [✓] Performance-Based Conditions (PBCs) [ ] Fragile within a non-fragile Country [✓] Financial Intermediaries (FI) [ ] Project-Based Guarantee [ ] Conflict [ ] Deferred Drawdown [ ] Responding to Natural or Man-made Disaster [ ] Alternate Procurement Arrangements (APA) [ ] Hands-on Enhanced Implementation Support (HEIS)
Expected Approval Date Expected Closing Date
11-May-2021 30-Jun-2026
Bank/IFC Collaboration
No
Proposed Development Objective(s)
The Project Development Objective (PDO) is to provide relief to micro, small, and medium-size enterprises and support their recovery, including by strengthening the enabling environment for access to finance.
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The World Bank Georgia Relief and Recovery for MSMEs (P173975)
Components
Component Name Cost (US$, millions)
Component 1: Financial relief and recovery for MSMEs 82.30
Component 2: Digital payments and financial infrastructure upgrading 14.50
Component 3: Project management and monitoring 5.80
Component 4: Contingent Emergency Response Component (CERC) 0.00
Organizations
Borrower: Georgia Implementing Agency: Ministry of Economy and Sustainable Development - Enterprise Georgia Ministry of Economy and Sustainable Development National Bank of Georgia
PROJECT FINANCING DATA (US$, Millions)
SUMMARY-NewFin1
Total Project Cost 102.90 Total Financing 102.90
of which IBRD/IDA 102.90 Financing Gap 0.00
DETAILS -NewFinEnh1
World Bank Group Financing
International Bank for Reconstruction and Development (IBRD) 102.90
Expected Disbursements (in US$, Millions)
WB Fiscal Year 2021 2022 2023 2024 2025 2026
Annual 0.00 17.30 21.20 20.30 24.20 19.90
Cumulative 0.00 17.30 38.50 58.80 83.00 102.90
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The World Bank Georgia Relief and Recovery for MSMEs (P173975)
INSTITUTIONAL DATA
Practice Area (Lead) Contributing Practice Areas Agriculture and Food, Poverty and Equity, Social Protection & Finance, Competitiveness and Innovation Jobs
Climate Change and Disaster Screening This operation has been screened for short and long-term climate change and disaster risks
SYSTEMATIC OPERATIONS RISK-RATING TOOL (SORT)
Risk Category Rating
1. Political and Governance Moderate
2. Macroeconomic Substantial
3. Sector Strategies and Policies Substantial
4. Technical Design of Project or Program Moderate
5. Institutional Capacity for Implementation and Sustainability Moderate
6. Fiduciary Substantial
7. Environment and Social Substantial
8. Stakeholders Moderate
9. Other Moderate
10. Overall Substantial
COMPLIANCE
Policy Does the project depart from the CPF in content or in other significant respects?
[ ] Yes [✓] No
Does the project require any waivers of Bank policies?
[ ] Yes [✓] No
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The World Bank Georgia Relief and Recovery for MSMEs (P173975)
Environmental and Social Standards Relevance Given its Context at the Time of Appraisal
E & S Standards Relevance
Assessment and Management of Environmental and Social Risks and Impacts Relevant
Stakeholder Engagement and Information Disclosure Relevant
Labor and Working Conditions Relevant
Resource Efficiency and Pollution Prevention and Management Relevant
Community Health and Safety Relevant
Land Acquisition, Restrictions on Land Use and Involuntary Resettlement Not Currently Relevant
Biodiversity Conservation and Sustainable Management of Living Natural Not Currently Relevant Resources
Indigenous Peoples/Sub-Saharan African Historically Underserved Traditional Not Currently Relevant Local Communities
Cultural Heritage Not Currently Relevant
Financial Intermediaries Relevant
NOTE: For further information regarding the World Bank’s due diligence assessment of the Project’s potential environmental and social risks and impacts, please refer to the Project’s Appraisal Environmental and Social Review Summary (ESRS).
Legal Covenants
Sections and Description Loan Agreement, Schedule 2, Section I.E.1 and I.E.2. The Borrower shall, and shall cause EG and the NBG to, ensure that the Project is carried out in accordance with the Environmental and Social Standards, and implemented in accordance with the Environmental and Social Commitment Plan (“ESCP”), all in a manner acceptable to the Bank.
Sections and Description Loan Agreement, Schedule 2, Section IV. The Borrower shall ensure that EG, not later than ninety (90) days after the Effective Date, has introduced a module within its existing accounting system for Project accounting and reporting, in a manner satisfactory to the Bank.
Sections and Description Loan Agreement, Schedule 2, Section I.B.5 (a).The Borrower shall ensure that the NBG adopts the Payment Systems Manual no later than thirty (30) days after the Signature Date, in a manner acceptable to the Bank.
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The World Bank Georgia Relief and Recovery for MSMEs (P173975)
Conditions
Type Financing source Description Effectiveness IBRD/IDA Loan Agreement, Article IV.4.01. The Additional Condition of Effectiveness consists of the following, namely the EG Subsidiary Agreement has been executed on behalf of the Borrower (represented by the Ministry of Finance), MOESD, MOJ, and EG.
Type Financing source Description Disbursement IBRD/IDA Loan Agreement, Schedule 2, Section III.B.1(d). Applicable for Category (6). The NBG Subsidiary Agreement has been executed on behalf of the the Borrower, represented by the Ministry of Finance, and the NBG, in a manner acceptable to the Bank.
Type Financing source Description Disbursement IBRD/IDA Loan Agreement, Schedule 2, Section III.B.1(c). Applicable for Categories (1), (2), (3), and (4). EG (i) has the necessary staffing all with terms of reference satisfactory to the Bank, (ii) has conducted training on the Bank’s Environmental and Social Standards (ESS) and environmental and social instruments for EG staff, and (iii) conducted training and awareness sessions for Contractor Organizations and Selected PFIs on the ESS and environmental and social instruments.
Type Financing source Description Disbursement IBRD/IDA Loan Agreement, Schedule 2, Section III.B.1(e). Applicable for Category (9) if an Eligible Crisis or Emergency occurs. (A) The Borrower has determined that an Eligible Crisis or Emergency has occurred, and has furnished to the Bank a request to withdraw Loan amounts under the Contingency Emergency Response Component (CERC); and (B) the Bank has agreed with such determination, accepted said request and notified the Borrower thereof; and the Borrower has adopted the CERC Manual and Emergency Action Plan, in form and substance acceptable to the Bank.
Type Financing source Description Disbursement IBRD/IDA Loan Agreement, Schedule 2, Section III.B.1(b). Applicable for Categories (1), (2), (3), (4), (5), (7), and (8). EG and MOESD have adopted the Project Operations Manual, in a manner acceptable to the Bank.
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The World Bank Georgia Relief and Recovery for MSMEs (P173975)
I. STRATEGIC CONTEXT
A. Country Context
1. Georgia’s economy has grown rapidly over the past decade and it has recently been classified as an upper-middle-income country. Georgia is a small, open economy of 3.7 million people. In 2019, the country graduated to the World Bank’s upper-middle-income category with a per capita gross domestic product (GDP) of US$4,696. Despite major shocks over the past decade, such as the global financial crisis (2008–09) and the drop in commodity prices that affected key trading partners (2014), Georgia’s economy grew robustly at 5.3 percent per year between 2005 and 2019, driven by capital deepening and wide-ranging reforms to improve governance and the business environment. This robust growth, coupled with social transfers, has helped nearly halve the national poverty rate from 37.4 to 19.5 percent between 2007 and 2019.
2. The COVID-19 pandemic has dislodged the country’s growth trajectory, threatening the progress made in both economic development and poverty reduction. Following a strong start to the year 2020, economic activity collapsed after March as the authorities introduced pandemic-related containment and social distancing measures. The shock has been broad based, but the transport, tourism, and construction sectors suffered the largest impacts. These measures caused a deterioration in the external position given the effects of the crisis on exports, tourism, and remittances. The easing of measures in the summer contributed to a significant second surge in late 2020—Georgia became one of the 20 most affected countries in the world in terms of reported cases per million population. The authorities enacted a second strict lockdown from end of November to early February 2021. As a result, the economy fell into recession in 2020, contracting by 6.2 percent. The gradual reopening since February 2021 has supported some economic recovery. Acceleration of the immunization process, which started in mid-March, is critical to the recovery and avoidance of renewed restrictions. Under a baseline scenario where there are no further severe waves of COVID-19 infections that necessitate additional lockdowns, Georgia’s economy is projected to recover in 2021, growing by 4 percent.
3. A strong government response partially mitigated the impact of the pandemic. In collaboration with development partners, the health spending was bolstered, and social assistance was expanded rapidly as the Government of Georgia (GoG) introduced a number of temporary relief measures for households and firms. The GoG immediately launched an Anti-Crisis Economic Plan (AEP) totaling GEL 3.5 billion (US$1.1 billion), estimated at 6.5 percent of GDP, which includes support for households, as well as grants and co-financing support packages for firms and additional targeted measures for the tourism, agriculture, real estate, and construction sectors. In response to the second wave of COVID-19 cases, in November, the Government announced another assistance package of GEL 1.1 billion (US$354 million) for households and businesses, building on the instruments and programs announced under the first round of AEP. Poverty is estimated to have risen by 5.4 percentage points in 2020 (using the national poverty line), even as the Government’s sizable support package likely prevented a greater increase in poverty.1
B. Sectoral and Institutional Context Access to Finance Constraints for MSMEs before the COVID-19 Pandemic 4. Despite Georgia’s success in improving its business environment, access to finance constraints for micro, small, and medium-size enterprises (MSMEs) have persistently hampered firm growth and survivorship,
1 Calculations prepared by the World Bank based on the Household Income and Expenditure Survey (HIES) 2018.
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even before the COVID-19 pandemic. Trade, manufacturing, real estate, and construction are the largest economic sectors in Georgia, representing 45 percent of GDP and 48 percent of employment. Before the pandemic, tourism was the fastest growing service export, accounting for 8 percent of GDP. MSMEs in Georgia are mainly in the trade and service sectors with low value-added activities, such as wholesale and retail trade and real estate and renting activities. MSMEs accounted for 99.7 percent of active enterprises, 64.0 percent of employment, and 61.0 percent of value added in 2018. The country is among the most business-friendly countries globally, having undertaken several financial and private sector reforms, including in the taxation regime, innovation policies, and investment climate, as well as in capital market development, deposit insurance, and the pension and insurance sectors. Nevertheless, access to finance for MSMEs is a persistent obstacle identified by firms. According to the 2019 Enterprise Survey, access to finance is the second top obstacle for firms, only behind political instability, with 22.4 percent of firms identifying it as a major constraint (versus 16 percent in Europe and Central Asia). This is despite enterprises having observed improvements in commercial debt availability (43.3 percent of firms reported having a bank loan compared to 37.1 percent in Europe and Central Asia). Access to finance remains more restricted for small (38 percent of firms with a bank loan) and medium firms (48.5 percent) compared to large firms (58.4 percent).
5. Access to finance, especially for MSMEs, is still affected by macro-financial structural factors, which are likely to become more pressing due to the COVID-19 crisis. Combined with financial institutions’ risk aversion toward certain segments, gaps in the existing credit market infrastructure contribute to higher borrowing costs and excessive collateral requirements. In Georgia, collateral requirements are equivalent to 194.2 percent of loan values, compared to 175 percent for the Europe and Central Asia region. Despite amendments in the Civil Code, which improved the secured transactions framework, the registry is rarely used by lenders due to gaps in legal and enforcement framework. Lending rates in the country are comparably higher than some countries in the Europe and Central Asia region as well. On the demand side, access to finance is constrained by high levels of informality and unreliable financial reporting which contribute to information asymmetries and weak managerial and financial management skills, especially with regard to knowledge transfer and the technology adoption needed to sustain and scale up a business. Relatedly, only 30 percent of businesses survive beyond four years, while many young firms do not survive beyond 2–3 years. The shock from the COVID-19 pandemic will exacerbate those challenges due to the uncertain economic environment and heightened risk aversion by lenders, especially toward new borrowers. While credit origination has recently resumed its growth, the volume of originated loans to legal entities decreased by 30 percent on average in the months following the declaration of the pandemic compared to the previous year’s levels.
Impact of COVID-19 on the Private and Financial Sectors 6. The COVID-19 crisis has severely affected firms and employment in Georgia through several channels. A follow-up Enterprise Survey in 2020 Q2 found that 22 percent of firms were closed temporarily and 3 percent permanently. On average, monthly sales dropped by 47 percent year-on-year, while 26 percent of firms reduced their employee headcounts and 62 percent reduced working hours. Those initial impacts were more concentrated among small and medium enterprises (SMEs) in globally hard-hit sectors, such as hospitality, restaurants, and catering (HoReCa) businesses. The combination of the drastic reduction in demand, difficulties in collecting cash payments, and changes in consumer behavior has squeezed firm liquidity. Roughly 70 percent of firms experienced decreased cash flow availability, with many having to reduce headcounts and delay payments to suppliers, landlords, or tax authorities (32 percent). According to the survey, 11 percent of firms reported having overdue financial obligations, and 28 percent of them anticipated falling in arrears on outstanding liabilities. In this context, the survey also reported that 33 percent of enterprises received state support. A second round of
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The World Bank Georgia Relief and Recovery for MSMEs (P173975)
the same survey conducted in October and November 2020 showed a recovery in sales and workhours but a worsening of liquidity constraints and ability to meet financial obligations likely expected due to the second wave.2
7. Firms are having challenges in adjusting their operations to current conditions, particularly in terms of the migration to e-commerce. Only 19 percent of firms have increased the use of digital platforms, far lower than the global average, which surpassed 30 percent. The slower transition to online platforms and the adoption of digital solutions have been affected by the relatively low levels of electronic payment usage. According to the 2019 Global Findex Database, only 13.5 percent of adults reported having used the internet to pay bills or buy online, compared to 30.6 percent in Europe and Central Asia. Although the volume of electronic transactions has been rapidly growing and payment card ownership is high, cash payments continue to dominate transactions— even more so in rural areas. Low levels of digital skills might also be an obstacle for higher adoption of digital solutions. According to the 2019 World Competitiveness Report, Georgia ranked 107 out of 141 nations in the digital skills among the working age population. Digital solutions as an adjustment mechanism are therefore critical. According to the follow-up Enterprise Survey, firms that have started or increased business activities online in response to the COVID-19 crisis had a smaller decrease in revenues compared to those that did not.
8. The crisis could widen preexisting gender gaps in economic participation. Evidence suggests there were significant gender gaps in economic participation in Georgia before the COVID-19 pandemic. According to the National Statistics Office of Georgia (GEOSTAT), only 2.6 percent of women engage in entrepreneurship and 29 percent of newly established firms were owned by women, compared to 6.5 percent and 52 percent for men, respectively.3 According to the 2019 Enterprise Survey, only 22 percent of firms had female participation in ownership, compared to 32 percent in Europe and Central Asia and 38 percent in upper-middle-income countries. Female participation in entrepreneurship is more prevalent in smaller firms and in sectors, such as HoReCa, which have been severely hit by the crisis and continue to be more likely to cease operations. According to the follow- up Enterprise Survey, female-led firms were more likely to report temporary closures and more extended closures, decreased demand and reduced sales, higher reduction in employment, filing for insolvency, less adjustments through remote work or online sales, and more liquidity and related financial difficulties. Challenges associated with accessing assets and finance might be exacerbated by the pandemic. According to a qualitative study conducted in 2015, many families prefer passing on an inheritance to sons rather than daughters.4 Differences in asset ownership may exacerbate gaps in access to finance. Despite high account ownership, only 12 percent of women reported borrowing to start, operate, or expand a farm or business, compared to 22 percent of men.5 Similarly, 35.8 percent of female-led firms had access to a bank loan compared to 44.7 percent of male-led firms, and 45.4 percent of firms with female owners had access to a loan compared to 51.1 percent without. Overall, out of the total firms with access to a loan, only 24 percent had female ownership and only 16 percent were female-led, according to the Enterprise Survey.
9. The banking sector entered the crisis with strong buffers, but high dollarization, uncertainty, and the delayed impact of forbearance measures will continue to present headwinds. As of December 2019, deposit- taking institutions reported system nonperforming loans at 1.9 percent and system capital adequacy at 19.5
2 The first round of the follow-up Enterprise Survey was conducted in June 2020, and the second round in October/November 2020. The second round shows: (a) a decrease in monthly sales of 29 percent; (b) a reduction of headcounts of 31.4 percent and reduction of workhours of 37.4 percent; (c) 82.4 percent of firms reporting decreased liquidity and cash flow availability; (d) 46 percent of firms reporting delaying payments to suppliers, landlords or tax authorities. The share of firms with overdue financial obligations increased to 13.7 percent and 34.6 percent of them expected to fall in arrears on outstanding liabilities. 3 UN Women. 2020. Country Gender Equality Profile of Georgia. Note that 18 percent of newly established firms had unidentified owners. 4 World Bank. 2015. Missing Women’ in the South Caucasus: Local Perceptions and Proposed Solutions. 5 World Bank. 2018. Global Findex Database.
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percent. The National Bank of Georgia (NBG) leveraged this position to make countercyclical adjustments in capital and liquidity thresholds, which released resources equivalent to 3 percent of GDP. Georgia took a more conservative approach to regulatory forbearance and frontloaded a portion of expected loan losses at the end of 2020 Q1, following which banks were allowed to offer three-month grace periods on their portfolios. At the onset of pandemic, the NBG introduced additional liquidity supply instruments, including foreign exchange swaps, in response to elevated liquidity risks. The forbearance measures expired for some part of the banks’ loan portfolios at the end of 2020 Q3—this has increased uncertainty and is likely to affect important firm decisions, such as on employment and investment. Following the hit on profits as expected loan losses were frontloaded at the end of 2020 Q1, deposit-taking institutions have improved their profitability ratios while maintaining adequate capital levels. By end-2020, nonperforming loans had increased only moderately but currently there are signs suggesting potential asset quality deterioration in the future.6
Government Response to COVID-19 and the Expansion of Existing MSME Programs 10. Although the real economy relief measures were announced promptly, there have been design challenges and implementation delays. The relief and stimulus package announced in June 2020 included GEL 500 million to support the expansion of existing co-financing of interest payments and microgrant programs, as well as a significant expansion of a recently revamped credit guarantee scheme. These programs are administered by Enterprise Georgia (EG), the national business and export promotion agency under the Ministry of Economy and Sustainable Development (MOESD), under a government umbrella program called ‘Produce in Georgia’. The parameters of these programs, including size, coverage, and purpose of funds, have already been adjusted to cater to the unique challenges that this crisis presents, also reflecting input from the World Bank during project preparation. However, there is still room to customize these programs further based on emerging evidence and address COVID-related implementation challenges.
11. A resilient recovery will require a suite of instruments that strengthen the existing ecosystem for MSME development, ranging from financial instruments that alleviate access to finance constraints to adjustment mechanisms, which include technology adoption and the use of digital financial services. A critical recovery pillar is addressing access to finance constraints, including strengthening and expansion of existing support programs, and confronting long-standing structural bottlenecks. In particular, EG has a strong suite of programs for MSMEs that are critical for jobs and economic output in Georgia. In the short term, there is a need for expanded liquidity and a plan for a resurgence in COVID-19 cases and the necessity for more concessionary relief in such an eventuality. As the country transitions toward the recovery phase, there is an opportunity to strengthen these programs based on evidence and robust monitoring and evaluation (M&E) systems to improve their targeting and outcome orientation. In addition, the crisis presents an opportunity to pursue reform of secured transactions and deliver a robust solution through coordination across multiple agencies. A second important pillar is helping firms transition and make the necessary adjustments to their operations, including through digitization and COVID- proofing. This will require building managerial skills and support beyond financial instruments. Finally, from a structural perspective, there is a need to further develop digital financial services and the migration toward a cashless economy. Improvements in the financial infrastructure such as the retail payments system and a unified know-your-customer (KYC) registry to facilitate digital identification will contribute to the development of e- commerce.
6 Non-performing loans to gross loans (according to the International Money Fund [IMF] methodology) increased from 1.9 to 2.3 percent between 2019 and 2020.
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C. Relevance to Higher Level Objectives
12. The Project is aligned with the World Bank Group (WBG) Georgia Country Partnership Framework (CPF) for 2019-2022, namely Focus Area 1: Enhance Inclusive Growth and Competitiveness.7 Endorsed by the Board of Executive Directors in 2018, the overarching objective and three focus areas of the CPF (inclusive growth and competitiveness, human capital, and resilience) continue to be highly relevant in the COVID-19 context. The Project design is aligned with the following CPF objectives: (a) diversifying sources of financing and strengthening innovation capacity and (b) strengthening the resilience of households. The Project also reflects the priorities of the Socio-Economic Development Strategy of Georgia (‘Georgia 2020’), which set out the medium-term strategy for the country’s economic development based on three pillars: strengthening competitiveness of the private sector, developing human capital, and deepening access to finance (see Annex 2).
13. Over the last fiscal year, the World Bank worked with the GoG to refine the lending program for the remainder of the CPF period and put together a comprehensive COVID-19 support package, in close coordination with the International Monetary Fund (IMF) and other development partners. Building on the WBG’s COVID-19 Crisis Response Approach framework, the following operations were included under the CPF in addition to the proposed Project: (a) Emergency COVID-19 Response Project under the Fast Track COVID-19 Facility and (b) Supplemental Financing for the Economic Management and Competitiveness Development Policy Operation. The pipeline projects are being refocused to respond to the COVID-19 impact on Georgia. The Project will complement these operations.
14. The Project is designed to reflect the priorities and measures announced by the Government’s AEP building on response measures announced under the plan. In doing so, the Project strives to structure firm performance targets in line with two pillars of the WBG’s COVID-19 Crisis Response Approach: (a) ensuring sustainable business growth and jobs creation and (b) rebuilding better.
15. Georgia is vulnerable to several natural hazards (landslides, floods, mudflows, earthquakes, avalanches, and heavy winds, among others) and some Project activities aim at strengthening resilience to climate change. The projected impacts from climate change will exacerbate risks of the majority of these, making Georgia increasingly vulnerable to heavy precipitation, landslides, mudflows, avalanches, heavy winds, and floods. These effects could be more severe in rural and remote mountainous regions, where agriculture is still the major economic activity. The GoG has identified adaptation priorities for the country’s agriculture, forestry, water resources, natural hazards, and energy sectors, which will be paired with economic planning to support the development of resilience of capabilities.8 In addition, current efforts to promote economic recovery post-COVID present an opportunity to promote ‘grow back better and greener’, in alignment with the European Union (EU) approximation policies and the European Green Deal.9 Through the different programs implemented by EG (grants, co-financing of interest payments, and guarantees), the Project will promote investments in climate change adaptation measures by MSMEs through the inclusion of specific windows dedicated to climate change adaption and resilience building measures, as a vehicle for channeling a percentage of financial resources under more favorable terms for these purposes. The Project will target that at least 15 percent of financial resources disbursed to beneficiaries of the Project will be used in investments in the green economy and climate financing
7 The World Bank Group. 2018. Country Partnership Framework for Georgia for the Period FY19-FY22 (April 25, 2018). Washington DC. Report No. 121853-GE. 8 Georgia submitted its Nationally-Determined Contribution in 2015 and has pledged to reduce its greenhouse gas (GHG) emissions by 15 percent below the business-as-usual scenario by 2030. Georgia also completed and submitted its Third National Communication (NC3) in 2015. 9 World Bank. 2020. Georgia: Towards Green and Resilient Growth (draft).
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measures, in an effort to pilot and inform efforts in the MSME space to contribute to a transition to a low-carbon circular economy.10 In addition, earmarking resources for these purposes presents an opportunity for increased dialogue about transition risks that the private sector might face—and the importance of looking forward.
II. PROJECT DESCRIPTION
A. Project Development Objective
PDO Statement
16. The Project Development Objective (PDO) is to provide relief to micro, small, and medium-size enterprises and support their recovery, including by strengthening the enabling environment for access to finance.
PDO Level Indicators
17. The proposed PDO indicators are the following:
(a) Volume of financial support provided to MSMEs affected by the COVID-19 pandemic
(b) Survivorship ratio: ratio of inactive enterprises to total beneficiaries of Enterprise Georgia, divided by ratio of inactive enterprises to total active enterprises in the economy
(c) Revenue multiplier: ratio of revenue-weighted average annual change in MSME revenue of Project beneficiaries, divided by the average change of revenue in their respective sector11
(d) Number of digital transactions facilitated through the new instant payment system
(e) Establishment of an upgraded movable collateral registry
18. The Project envisions that EUR 30 million in disbursements will be conditional on the achievement of performance-based conditions (PBCs). These disbursements are equivalent to roughly 51 percent of Component 1 expenditures. The design of the Project recognizes the importance of building on existing government programs to promote a timely crisis response for a faster recovery, as an initial priority for the Project. Nevertheless, there is room to improve EG’s institutional capacity for evidence-based programming and the overall effectiveness and sustainability of programs. Aiming at increasing the results orientation of the Project, the proposed PBCs are linked to activities that are critical for the achievement of the PDO, especially as it relates to supporting a resilient recovery through improvements in the institutional environment for SME development. The PBCs aim at motivating counterparts to undertake activities that will have lasting effects on policies and programming for firm support beyond the project cycle. PBC indicators were structured around a three-phased logic for achieving these goals: (a) improving M&E frameworks for better collection, monitoring, and use of data that mirror the overall strategic goals of EG; (b) incorporating evidence-based decision-making for better program designs and
10 These activities will be defined in the Project Operations Manual (POM). Adaptation measures might include investments that reduce MSMEs’ exposure to climate change related risks or recover from damages incurred by impacts of climate change. Mitigation measures include investments that reduce, capture, or sequester GHG emissions (renewable energy, energy audit, energy efficiency, sustainable forest management, climate-smart agriculture, waste management). Articles 10 and 11 of the EU Taxonomy for sustainable activities published in June 2020 may be used as a reference (https://eur-lex.europa.eu/eli/reg/2020/852/oj). 11 Indicators (b) and (c) rely on publicly available information published on GEOSTAT’s website.
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The World Bank Georgia Relief and Recovery for MSMEs (P173975)
implementation arrangements; and, (c) laying the foundation for the expansion of programs that are oriented to strategic and sustainable outcomes.
Table 1. Logical Framework for PBCs (b) Evidence-based (c) Strategic Growth and (a) M&E Frameworks Programming Sustainability Development of M&E frameworks and Adjustments to program designs monitoring systems, including the to reflect new evidence, with introduction of key performance indicators emphasis on targeting Proposals and tools to ensure better (KPIs), measures and tools, improvements in (beneficiaries and sectors, and more sustainable outcomes data systems, stakeholder engagement national priorities12), eligibility mechanisms, process for incorporating data criteria, and implementation into decision-making arrangements
B. Project Components
19. The proposed financing instrument comprises a EUR 85 million (US$102.9 million equivalent) Investment Project Financing with Performance-Based Conditions (IPF-PBCs), with EG and the NBG as project implementing entities (PIEs). The Project components are listed in Table 2.
Table 2. Project Components and Costing Components (in EUR, millions, unless otherwise stated) PIE Existing PBC IBRD Component 1 - Financial relief and recovery for MSMEs 68.0 Subcomponent 1.1 - Grants for micro and small firms EG 25.2 Subcomponent 1.2 - Co-financing of interest payments EG 12.8 Subcomponent 1.3 - Partial credit guarantees EG 25.0 Subcomponent 1.4 - Support for COVID-proofing and digitization EG 5.0 Component 2 - Digital payments and financial infrastructure upgrading 12.0 Subcomponent 2.1 - Upgrading payments infrastructure NBG 6.0 Subcomponent 2.2 - e-KYC and Know-Your-Customer registry EG/MOESD/ MOJ 4.3 Subcomponent 2.3 - Secured transactions reform EG/MOESD/ MOJ 1.7 Component 3 - Project management and monitoring EG n.a. 4.8
Component 4 - Contingency Emergency Response Component n.a n.a. 0.0
Front-end fee n.a n.a. 0.2 Total Project Cost 85.0
Component 1. Financial relief and recovery for MSMEs (EUR 68.0 million, equivalent to US$82.3 million)
20. The objective of this component is to alleviate the financial constraints of firms and help them adjust their business to the post-COVID-19 scenario. The primary goal is to preserve productive assets and existing economic relationships (with workers, suppliers, and customers) that are costly and time-consuming to build while also ensuring that firms undertake necessary changes to build resilience for the recovery phase. While the focus
12 For example, authorities may want to consider creating formal specific windows with more incentives and favorable terms to address gender and climate change priorities. For climate change, authorities might consider adding specific performance indicators linked to energy efficiency and sustainability, as well as development climate-smart eligibility criteria.
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is to increase the level of immediate financial relief, the component will also support investments in business expansion, reequipping, and new projects of entrepreneurs that seek opportunities in growing and more dynamic sectors, especially as the country transitions to a recovery phase. The component will support the expansion of the following financial instruments implemented by EG: (a) grants for MSMEs through EG’s Micro and Small Entrepreneurship Support Program (under the state program ‘Produce in Georgia’); (b) co-financing of interest payments managed by EG under the access to finance component of the Industrial Section of ‘Produce in Georgia’;13 and (iii) partial credit guarantees (PCGs), through EG’s Credit Guarantee Scheme program.14 The component will also provide nonfinancial support in the form of training and technical assistance to help firms adjust to new conditions, improve their business skills, and increase their resilience.
21. Given the importance of the climate change and green recovery agenda, the Project will have a target of at least 15 percent of the component’s disbursements to MSMEs channeled to support investments in the green economy and climate financing measures.15 The Project will explore the creation of specific windows with additional incentives and favorable terms to incentivize MSMEs (for example, a specific window for climate-smart businesses). This Project aims at contributing to a dialogue about the climate change agenda in the MSME space through climate change roundtables with project beneficiaries.
Subcomponent 1.1: Grants for micro and small firms (EUR 25.2 million, equivalent to US$30.5 million)
22. The objective of the subcomponent is to provide grants to micro and small firms affected by the COVID- 19 pandemic to help them address immediate financial needs and adjust their operations to new conditions, as well as entrepreneurs seeking new business opportunities. The subcomponent is targeted at firms that most likely did not have access to bank financing before the Government-imposed lockdown. The intervention is expected to support firms in hard-hit sectors and those adapting their businesses to a post-COVID-19 scenario.
23. EG recently revised its Micro and Small Entrepreneurship Support Program in response to the crisis. Under this program, the agency provides grants to enterprises selected through business competitions conducted by contractor organizations, including nonprofit nongovernmental organizations (NGOs), procured by EG for each of the five defined geographic lots. In response to the crisis, authorities increased the program’s annual budget to GEL 40 million (US$14 million) from GEL 10 million (US$3.3 million) and adjusted its design to increase its geographical outreach. The program will support business expansion and reequipping, as well as new enterprises. The upper limit of the grant size was increased to GEL 30,000 (US$9,000) from GEL 20,000 (US$6,000), and the co- financing requirement for new beneficiaries was lowered to 10 percent of the investment size from 20 percent.16 Importantly, the revised program also allows beneficiaries to use up to 10 percent of the grant for working capital needs related to the crisis.
13 The state program Produce in Georgia, which covers the grants and co-financing of interest payments, is governed by Resolution 365 of the Government of Georgia, dated May 30, 2014. 14 The scheme is governed by Resolution 163 of the Government of Georgia, dated March 29, 2019, with amendments from Resolution 457 of July 23, 2020 and Resolution 539 of August 27, 2020. 15 As defined in the POM. 16 This requirement was lowered to 5 percent for beneficiaries in mountainous regions according to the Law of Georgia on the Mountainous Regions. For MSMEs that have participated in the program in the past, the co-financing requirements are 25 percent (15 percent for mountainous regions).
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Figure 1. Workflow of Subcomponent 1.1
EG issues Selected EG Selected RFP for EG-led NGOs micro firms processes NGO NGOs and NGOs and marketing screen sign disburse- conducts EG sign then a campaign applications contracts ment after monitoring contract tender with EG co-pay
Note: EG works through contractor organizations. Non-profit NGOs have been the most common partner organizations.
24. The subcomponent will finance the provision of grants to MSMEs and costs associated with the administration of the grants, including the procurement of contractor organizations (largely NGOs). The subcomponent will support the expansion of the program to respond to the increase in demand, including increasing its geographical coverage to Tbilisi. EG expects that the program will benefit roughly 2,000 beneficiaries in priority sectors through its latest round. While the program covers an extensive list of sectors in manufacturing, retail, and services, the priorities of the most recent round of proposals are intellectual services, accommodation and tourism, inclusive sectors, female entrepreneurs, projects in villages/mountainous regions, and internally displaced persons (IDPs). The primary criterion of selection is the quality of the business plan, but attention is also paid to the aforementioned priorities. Beneficiaries must consent to registration as individual taxpayers if they are not registered already. In 2018, EG supported 899 projects, mostly in manufacturing, tourism, and secondary agriculture. Out of 25,000 applications, roughly 1,200 had their business plan evaluated as part of the application process. The program has already received 26,307 applications following the launch of the latest round of the program in October 2020. The Project may retroactively finance a portion of the program conditional on compliance with environment and social policies as well as anti-corruption guidelines.17
25. The Project proposes a PBC to promote the strengthening and strategic orientation of the grants program. Roughly 44 percent of disbursements under this subcomponent (EUR 11.2 million) will be linked to the PBCs. The PBC will be linked to (a) the adoption of a M&E framework to improve the methodology for monitoring the impact of the program on MSME beneficiaries, including by improving data collection through beneficiary surveys and incorporating outcome-based indicators to support evidence-based programming; (b) amendments of the resolution governing the program to reflect improvements, especially with regards to the adoption of improved eligibility criteria for MSMEs, based on evidence from the upgraded M&E framework and as detailed in the POM; and (c) launch of a pilot graduation scheme to identify MSME beneficiaries based on their performance and provide institutional support to them for applying for commercial financing, including by connecting them with financial institutions, as further elaborated in the POM.18 In addition to the PBCs, the Project will earmark resources to ensure that at least 50 percent of beneficiaries are female entrepreneurs. Between 2015 and 2019, the share of female entrepreneurs among grant recipients has steadily increased from 32.8 to 45.1 percent (average of 40.3 percent). In partnership with UN Women, EG has already approved its gender equality strategy and three-year action plan. In support of EG’s gender equality goals, the Project will promote completely closing the gender gap in the grants program from 10 percentage points to zero by the end of the Project (a target of 50 percent).
17 Applied to eligible expenditures incurred on or after July 1, 2020. 18 Graduation programs have become popular as an effort to help the poorest transition out of poverty by sequencing safety nets, livelihoods and access to finance, inspired by the model adopted by BRAC in Bangladesh. The proposed graduation program will aim to create a pathway for MSMEs from receiving a grant to applying to a loan. The program activities may include: (i) identifying and promoting successful beneficiaries under the grants programs; (ii) disseminating information to grant recipients about applying to loans and financial institutions, such as microfinance institutions (MFIs); and (iii) connecting beneficiaries with selected financial institutions.
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Subcomponent 1.2: Co-financing of interest payments (EUR 12.8 million, equivalent to US$15.5 million)
26. The objective of the subcomponent is to reduce borrowing costs and to provide financial relief to SMEs through co-financing of interest payments to address their immediate liquidity constraints. The subcomponent is expected to largely benefit registered SMEs with an annual turnover of up to GEL 20 million (US$6.0 million) that likely had conditions to access finance from financial institutions before the Government-imposed lockdown. The Project’s initial support to this form of subsidy is justified by (a) the unprecedented nature of the global COVID- 19 crisis and its impacts on the real economy and (b) the need to build on existing programs to provide immediate relief. Market conditions will be monitored on a continued basis to ensure the adequacy and relevance of this form of subsidy. The Project will develop a framework to assess the relief phase and pace of recovery by sector based on annual supervision missions, which will be complemented by the introduction of a M&E framework supported by the PBC. The framework will include a process for evaluating quantitative measures (economic activity, exports and tourism revenues, and consumer and business confidence indicators), but it will also rely on qualitative assessments and feedback mechanisms for market participants, including the MSMEs supported by the Project. A detailed discussion of this subcomponent’s alignment with the World Bank’s Guidance for Projects involving Financial Intermediary Financing is included in the annex 4.
27. This subcomponent will finance the existing mechanism for co-financing interest payments implemented by EG under the umbrella program ‘Produce in Georgia’. The objective of the program is to support business expansion, reequipping, and/or new enterprises. The program can also support the refinancing and restructuring of loans. Implemented through commercial banks and leasing companies responsible for the loan appraisal and monitoring, the program co-finances interest payments of SMEs in the amount equivalent to the NBG refinancing rate plus 300 basis points up to 36 months.19 The program does not impose eligibility criteria for participating financial institutions (PFIs), allowing all regulated and licensed commercial banks in good standing with the NBG to participate, as well as leasing companies, which are currently not regulated nor supervised by the NBG.20 The Project will support EG in introducing a tighter regime for breaches and sanctions based on asset quality indicators and business practices of PFIs.21 The regime will create incentives for adequate levels of risk- taking by PFIs and will mitigate risks undertaken by unregulated leasing companies. The program has a comprehensive positive list of eligible economic sectors but primarily covers manufacturing, hotels and related services, tourism services, health sector, and medical services. Loan sizes range from US$16,000 to US$3.3 million. Up to 50 percent of the loan may be used for working capital.22 The average loan size under the program is GEL 1.3–1.4 million (~US$450,000). In response to the crisis, the annual budget of the program was increased to GEL
19 The NBG refinancing rate stood at 8.5 percent in March 2021. As such, the co-financing was equivalent of 11.5 percent, compared to a weighted interest rate of 15.3 percent on bank loans in local currency in 2020. For leasing companies, the program co-finances the NBG refinancing rate plus 500 basis points. 20 Exceptions are applied to leasing companies that are subsidiaries of banks and whose financial statements are consolidated with their parents. Currently, the two leasing companies participating in the program fall into that category. 21 Currently, the participation agreement signed between EG and PFIs includes certain provisions for sanctions and termination, which relate to breaches in loan purpose, incorrect or incomplete information, and other requirements under the program. A tighter regime of sanctions and breaches will include new provisions based on PFI financial performance, especially with regards to asset quality. The regime, which will be ringfenced and applied to the EG portfolio only, will define specific thresholds which will be mapped to a layered system of sanctions, that could range from initial warnings, request of corrective plan on the EG portfolio, temporary EG program suspension, and finally exit from the EG program. 22 The features of the existing programs were recently adjusted to respond to the crisis: (a) the minimum loan size was lowered to GEL 50,000 (US$16,000) from GEL 150,000 (US$50,000); (b) the duration of the co-financing was extended to 36 months from 24 months; (c) the support, now equivalent to the NBG refinancing rate + 3 percent, was increased to 11 percent from 7 percent;22 (d) up to 50 percent of the loan value may be used for working capital purposes, which previously was not allowed; and (e) six new economic activities were included in the list of priority sectors.
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40 million (US$13.3 million) from GEL 15 million (US$5 million).23 Since its reintroduction in response to the COVID- 19 crisis, the program has supported 93 projects in industry (mostly in construction) and hospitality.24 EG expects to support 300 SMEs under the renewed program parameters that will run from June 2020 to June 2021. The Project may retroactively finance a portion of this subcomponent, conditional on compliance with environment and social policies as well as anti-corruption guidelines.
28. The Project proposes a PBC to promote the strengthening and strategic orientation of this program. Roughly 44 percent of disbursements of this subcomponent (EUR 5.6 million) will be linked to PBCs. The PBC aims at the adoption of an effective measurement system that allows the frequent review of the performance and adequacy of the program. The PBC will be linked to (a) the adoption of a M&E framework to improve the methodology for monitoring the impact of the program, especially in terms of measuring financial and economic performance of beneficiaries and repayment performance of loans and leases, especially by improving data- sharing between EG and PFIs and incorporating an outcomes-based indicators; (b) the completion of an evaluation of the co-financing program to measure its functionality, efficiency, and effectiveness against its intended goals, based on financial and economic performance of MSME beneficiaries, loans and other relevant metrics, as further specified in the POM; and (c) the amendments of the resolution governing the program to reflect improvements, especially with regards to the adoption of revised eligibility criteria for MSME beneficiaries, including to improve targeting based on evidence from the upgraded M&E framework and evaluation of the program, and as further elaborated in the POM. In addition to the PBC, the Project will earmark resources so at least 40 percent of beneficiaries are women-inclusive firms, that is, owned or managed by women or actively promote female employment.25 The target of 40 percent was defined considering country-level indicators and an initial review of EG’s portfolio.26
Figure 2. Workflow of Subcomponent 1.2
Note: For loans, the co-financing is disbursed directly into beneficiaries’ bank accounts; for leases, the co-financing is disbursed directly to lease companies.
23 Another GEL 70 million (US$20 million) was allocated in the initial phase of relief measures to provide temporary support to small and medium-size hotels. 24 Between 2014 and 2019, the industry component supported 359 projects, representing GEL 495 million in loans (US$157 million) and GEL 783 million in investments (US$248 million), in sectors such as construction, paper and packaging, and food and beverage. The cost of the program for these 359 projects for EG was GEL 59 million (US$19 million). In the same period, the hotel component of the program supported 136 projects, representing GEL 177 million in loans (US$56 million) and GEL 351 million in investments (US$111 million). 25 Women-inclusive firms are defined as follows: (i) owned by women (that is, with at least one female shareholder with a properly documented representative and managing powers); or, (ii) managed by women (that is, with at least one female chief-level (c-level) manager or with at least 25 percent female representation in mid-level management); or, (iii) employing a ratio of women that is higher than the average ratio observed in the respective sector; or, (iv) has increased the share of women employment by at least 5 percent the previous year. 26 In Georgia, 45.4 percent of the 22.4 percent of firms that had female ownership had access to credit, that is 10 percent of firms. Similarly, 35.8 percent of the 16.5 percent of firms that had a female top manager had access to credit, that is 6 percent of firms. Overall, out of the total firms with access to a loan, 24 percent had female ownership and 16 percent were female-led, according to the Enterprise Survey. An initial review of EG’s portfolio indicated that 30 percent of beneficiaries were businesses founded by women.
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Subcomponent 1.3. Partial credit guarantees (EUR 25.0 million, equivalent to US$30.3 million)
29. The objective of the subcomponent is to address high collateral requirements and the heightened risk aversion of financial institutions through PCGs, as a way to unlock financial intermediation to SMEs. The subcomponent is expected to largely benefit registered SMEs with an annual turnover of up to GEL 20 million (US$6.0 million) that likely had the conditions to access finance from financial institutions before the Government- imposed lockdown. The Project will finance the provision of PCGs and will support technical assistance to strengthen the existing credit enhancement mechanism offered by EG.
30. In response to the crisis, the GoG has announced the allocation of GEL 330 million (US$100 million) to EG’s credit guarantee mechanism. Before the COVID-19 global pandemic, the GoG had decided to revamp its credit guarantee program in 2019. However, the program had not been operationalized and no guarantee was issued, partially due to its reliance on annual budgets, which were not enough to raise interest from financial institutions. In response to the crisis, authorities reviewed certain parameters of the program and announced an up-front allocation of GEL 330 million (US$100 million). Resources will be allocated to commercial banks (GEL 300 million) and MFIs (GEL 30 million). The program, which adopts a hybrid portfolio approach, will support new loans (at least 40 percent of resources) and restructured loans for investment and working capital purposes. The mechanism provides coverage of 90 percent for new loans and 30 percent for restructured loans, with a portfolio cap of 35 percent. Loan sizes range from US$16,000 to US$1.6 million. The guarantee scheme charges a fee of 0.3 percent per year on the guaranteed amount. These features are transitional provisions in the scheme’s design that is applicable to loans issued or restructured before December 31, 2020. After this date, the guarantee coverage for new loans will be decreased to 80 percent and the scheme will not support restructuring of loans. In addition, after this date, up to 20 percent of the guaranteed loan will be allowed for working capital. Since the announcement of the revised program, 91 loans (85 new and 6 restructured) were supported in the amount of GEL 77 million (US$26 million), with an average size of GEL 850,000 (US$280,000).27 Main beneficiaries include restaurants, food processing, wine production, and the construction and health sectors. The program could potentially support up to 1,000 SMEs and GEL 2.3 billion in loans (US$690 million).
Figure 3. Workflow of Subcomponent 1.3
EG disburses If default, PFI PFI applies PFI selects cash on a PFI pays If no default, EG reviews can claim up to the loans to retail basis monthly fee EG gets and signs to 35% of its guarantee cover under to EG for loans money & contract exposure at scheme the scheme account at covered interest 90% PFI
31. For the provision of PCGs, the Project will seek to build on the ongoing expansion of the program and include components to strengthen it. The scheme operates in a decentralized fashion with resources being transferred directly to PFIs, which are responsible for the credit risk analysis and the FM of resources. Financial institutions return resources as loans are repaid and guaranteed amounts diminish, as well as transfer interest income earned over the allocated resources. Like Subcomponent 1.2, the program does not impose eligibility criteria for PFIs and EG does not assess their creditworthiness.28 The agency also does not evaluate the credit risk of MSME beneficiaries. The Project will support the introduction of a tighter regime for breaches and sanctions
27 The program’s resolution specifies a GEL 330 million allocation. In 2020, the unused amount from the allocation was returned to the state budget. In 2021, the state budget included a GEL 100 million allocation to the scheme. 28 For MFIs, there is a requirement that business loans portfolios must be at least GEL 2 million by March 31, 2020.
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based on asset quality indicators and business practices of PFIs, following the same approach adopted under Subcomponent 1.2.29 Feedback from stakeholders suggests the need for more awareness about the parameters of the program and other areas of improvements including (a) simplification of eligibility criteria and clarification about allowed sectors since the program is based on an extensive positive list, instead of a negative list; (b) continued support to working capital; (c) addressing of the perception of complex provisions in the program’s resolution with regard to the eligible activities and other implementation aspects; (d) addressing of perception that the allocation of guarantees based on existing SME portfolios limits small banks’ ability to expand their guaranteed portfolio; (e) sustained support given the uncertainty surrounding COVID-19; and (f) defining of the pricing structure and sustainability based on a sound financial model.
32. The Project proposes a PBC to promote the strengthening and strategic orientation of this program. Roughly 45 percent of disbursements of this subcomponent (EUR 11.2 million) will be linked to PBCs. Building on an initial assessment of the scheme in 2018–2019, the Project proposes a PBC to strengthen the PCG program, especially its risk management approach, through (a) introduction of measures to engage with PFIs, including the design and launch of a public campaign to raise awareness about the scheme, including among PFIs, and the introduction of a risk monitoring system to collect information from PFIs regarding profile of beneficiaries and loans, financial performance of loans and overall portfolio, and financial performance of PFIs;30 (b) amendment of the participation agreements signed with PFIs to specify that EG has the right to impose sanctions on PFIs, invoke remedies against them, and terminate agreements based on financial performance of PFIs, as further elaborated in the annex 4 and POM; and (c) adoption of a financial modelling tool to monitor the financial sustainability of the scheme and inform any pricing changes. This proposed phased approach takes into account the need for flexible Project design and provides immediate relief while taking advantage of opportunities to strengthen institutions and programs beyond the crisis environment. The activities will inform decisions needed to adjust program features to fit into new conditions beyond the relief phase. In addition to the PBC, the Project will earmark resources so at least 30 percent of beneficiaries are women-inclusive firms, that is, owned or managed by women or having actively promoted female employment. The target was defined considering country-level indicators and an initial review of EG’s portfolio.
Subcomponent 1.4. Support for COVID-proofing and digitization (EUR 5.0 million, equivalent to US$6.1 million)
33. This subcomponent will support both the design and the provision of technical assistance for firms to adjust to the new normal through the adoption of relevant managerial, digital, and other COVID-proofing practices. The objective is to supplement the financial support under other subcomponents with technical assistance to address outstanding firm needs in key sectors, informed by participatory needs assessments established with beneficiary MSMEs. Recent global surveys indicate firms are building resilience, to the shocks posed by the pandemic, through greater uptake of digital platform technologies and other digital solutions. Therefore, this component will focus on the identification of key skills needed to facilitate digitization and any outstanding COVID-proofing measure in key sectors, with consideration for the needs of female entrepreneurs.
29 Currently, the participation agreement signed between EG and PFIs includes certain provisions for sanctions and termination, which relate to breaches in loan purpose, incorrect or incomplete information, and other requirements under the program. A tighter regime of sanctions and breaches will include new provisions based on PFI financial performance, especially with regards to asset quality. The regime, which will be ringfenced and applied to the EG portfolio only, will define specific thresholds which will be mapped to a layered system of sanctions, that could range from initial warnings, request of corrective plan on the EG portfolio, temporary EG program suspension, and finally exit from the EG program. 30 For example, guarantee approvals, default rates of guaranteed and non-guaranteed portfolio, concentration limits, and feedback from users of the scheme.
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34. This subcomponent also aims to gauge the feasibility of establishing and eventually scaling relevant managerial capability and digitization programs, as well as creating a local market for firm consultancy services. It is proposed that this subcomponent pilots three sets of activities that validate the need for similar productivity- and resilience-building activities well beyond the pandemic. The first set of activities is proposed to strengthen capabilities of microgrant beneficiaries, supported under Subcomponent 1.1, through just-in-time training modules on digitization and COVID-proofing. These modules (several hours maximum) will supplement the existing business plan training modules currently delivered under the microgrant program. These sector-specific trainings could be devised and delivered digitally. These could be delivered by the contractor organizations that administer the grants, in partnership with MFIs, industry associations and Growth Hubs, to devise, adapt, and disseminate emerging practices rapidly. The second set of activities would target managerial and digital skills in small, medium, and export-oriented firms. These businesses would share the profile of, but not be limited to, firms supported under Subcomponents 1.2 and 1.3. Designing the scope of this program will require significant firm outreach by EG, likely in partnership with the commercial banks, industry associations, trade representative of export partners, and so on. The programs for this set of beneficiaries is typically more involved (up to two weeks) and often includes a funnel two-stage program that includes cohort-based trainings that progress into consultancy support to individual firms, pending successful accomplishment of agreed milestones. Given the outsized impact of the pandemic on the hospitality industry, firms in the tourism sector could be considered for the pilot with the benefits stemming from the adoption of digital solutions and other customer confidence- building COVID-proofing measures. The third set of pilot activities would support the development of a marketplace of local consultants by building their capacities and ensuring that the right incentives are in place for them to also extend their reach to firms beyond Tbilisi. Across these three sets of activities, to reach the widest audience, promote social distancing, and ensure cost efficiency of the program, the use of creative digital tools will be promoted.
Table 3. Allocation for Component 1 by Calendar Years with PBC Breakdown (EUR, millions)
Financing 2021 2022 2023 2024 2025 2026 Total
1.1 Grants for micro and small firms 0.0 7.2 5.0 5.0 5.0 3.0 25.2 Start of Project o/w PBC 0.0 5.6 2.8 2.8 0.0 0.0 End of Project 11.2 1.2 Co-financing of interest payments 0.6 1.5 3.0 3.1 3.1 1.5 12.8 o/w PBC 0.0 0.0 2.6 1.5 1.5 0.0 5.6 1.3 Partial credit guarantees 1.0 4.0 5.5 5.5 5.5 3.5 25.0
o/w PBC 0.0 0.0 3.4 3.7 4.1 0.0 11.2 1.4 Support for COVID-proofing and digitization 0.5 1.7 0.8 0.8 0.8 0.4 5.0
IBRD Total 2.1 14.4 14.3 14.4 14.4 8.4 68.0 Note: The timeline for PBC achievement is indicative.
Component 2. Digital payments and financial infrastructure upgrading (EUR 12.0 million, equivalent to US$14.5 million)
35. The Project will finance investments to strengthen the financial infrastructure and increase the use of digital financial services. The objective of this component is to strengthen the financial sector’s infrastructure that enables access to and use of digital financial services. A stronger financial infrastructure facilitates the
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adoption of digital platforms for payments and expands access to finance to MSMEs through a wider use of movable collateral. The activities under this component will increase the resilience of MSMEs, individual entrepreneurs, and households since they support the expansion of financial services and adjustment mechanisms needed in a crisis environment (for example, electronic transfers, disbursement of government benefits and remittances, a wider range of loan products tailored to SMEs, and transition to digital platforms). The component includes three subcomponents: (a) payments infrastructure, (b) KYC registry, and (c) secured transactions reform.
Subcomponent 2.1. Upgrading payments infrastructure (EUR 6.0 million, equivalent to US$7.3 million)
36. This subcomponent will finance investments, operational costs, and technical assistance primarily for the introduction of an instant payment system (IPS) (EUR 6 million) to promote more efficient electronic payments. Perceived as the new essential retail payment systems, IPSs are being implemented at a fast pace across the globe to facilitate instant access to funds for the payee, across different use cases and access channels, and in a cost-efficient way for the end user. Fast payments benefit financial institutions, merchants, consumers, and society by promoting cashless payments, enabling better cash management, and helping firms better manage day-to-day liquidity. Implemented by the NBG, the subcomponent will finance investments (including hardware, software, and professional services) and operational costs (including financial audit costs) associated with the infrastructure (including ongoing maintenance) of the system (EUR 5.6 million), as well as technical assistance to support outreach and connections of users to the system (EUR 0.4 million). The build-out will be done in a modular fashion. At its initial stage, the IPS will be established under the NBG and operations will likely continue under the NBG. Governance arrangements will be put in place to ensure proper consultation with the private sector. In the future, the NBG may explore joint private sector models for operations, as other countries have done once a new payment system stabilizes and has reliable revenue streams. During Project implementation, the World Bank will continue to provide advice on options for a private-led model. The subcomponent will be complemented by ongoing technical assistance under the European Union Trust Fund (EU TF) to support financial inclusion and accountability, which has worked on selected payments and fintech interventions, including on basic accounts and regulatory sandboxes. These will facilitate innovations for new payment options and increase the speed of retail transactions.
37. The subcomponent will also support possible upgrades to the real-time gross settlement system (RTGS). The investment and operational costs of the IPS will also look to provide enhancements to the RTGS, including automated clearing house components of the national payments infrastructure to provide additional functionalities as required for optimizing liquidity use, using standardized international message standards and application program interfaces (APIs), which would be in sync with the new IPS component. This would contribute to boosting the overall efficiency and safety of the Georgian national payments infrastructure.
Subcomponent 2.2. e-KYC and Know-Your-Customer registry (EUR 4.3 million, equivalent to US$5.2 million)
38. This subcomponent will finance investments for the establishment of an e-KYC infrastructure and a KYC registry. Identity verification is critical for individuals and MSMEs to fully participate in the economy. Lack of documentation and verification processes are primary barriers to the onboarding of customers and access to financial services. An e-KYC infrastructure enables financial institutions to digitally and remotely validate the identity of their prospective customers before onboarding them and authenticating of specific remotely initiated high-risk transactions. A KYC registry built on a unique ID system refers to a centralized and inter-usable repository of customer due diligence (CDD) records, which reduces the burden of producing CDD documents and getting them verified each time a customer creates a new relationship with a financial entity. The registry facilitates the identity verification and CDD of individuals by financial institutions and would also help them validate and register
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their businesses. Opening business accounts and applying for specific financial services like a new credit is often costly and cumbersome given the CDD requirements. The registry facilitates the identity verification of staff and directors responsible for opening and transacting business accounts for MSMEs. The subcomponent will finance investment for the establishment of the e-KYC infrastructure and KYC registry, which will build on the existing unique ID system, MyGov.GE service, and centralized authentication system operated by the Public Service Development Agency of the Ministry of Justice (MOJ). The MOESD will be the technical lead for this subcomponent, in coordination with the MOJ, with the responsibility of advancing the reform and convening the meetings of a working group that will include relevant stakeholders. EG will perform the fiduciary functions for this activity, as an agent of the MOESD, including procurement and FM. Activities will be complemented by ongoing technical assistance under the Financial Inclusion and Accountability Project funded by the EU TF and are aligned with the World Bank’s ID4D (Identification for Development) initiative.
Subcomponent 2.3. Secured transactions reform (EUR 1.7 million, equivalent to US$2.1 million)
39. This subcomponent aims at strengthening the regime for movable collateral registration and execution, so that the current overreliance on land and real estate collateral by lenders can be curtailed. The COVID-19 pandemic highlighted the importance of MSMEs having access to the formal financial sector for relief and recovery. In this context, the crisis has renewed interest in completing the secured transactions reform, which requires coordination among different government stakeholders. The reform aims at increasing the use of movable collateral for MSME finance, such as vehicles, equipment, and intellectual property. The Georgian secured transactions framework contains elements of best practice, yet gaps exist with international standards, which has created significant legal risks for creditors and has hampered the development of the credit market, especially for SME finance. There is a need to enhance the legal and institutional frameworks, especially with regard to the public registry and enforcement mechanisms. The low levels of awareness and local stakeholders’ capacity to implement and promote secured lending is also a challenge. This subcomponent will finance technical assistance and investments for (a) improvements in the legal and regulatory framework for secured lending, including support to the drafting of legal amendments (EUR 0.6 million); (b) modernization of the collateral registry, including the preparation of technical specifications of the online registry and procurement of a customized software solution (EUR 0.8 million); and (c) capacity building for users (EUR 0.3 million). The MOESD will be the technical lead for this subcomponent, in coordination with the MOJ, with the responsibility of advancing the reform and convening the meetings of a working group that will include relevant stakeholders, such as the MOJ, NBG, and the National Agency of Public Registry (NAPR), as well as needed experts.31 EG will perform fiduciary responsibilities for this subcomponent, as an agent of the MOESD, including procurement and FM. The subcomponent is informed by previous assessments conducted under the Georgia Financial Sector Deepening and Inclusion technical assistance, funded by the Financial Sector Reform and Strengthening Initiative (FIRST).
Component 3. Project management and monitoring (EUR 4.8 million, equivalent to US$5.8 million)
40. Component 3 will finance the project management, implementation, and monitoring needs. The component will finance expenses related to (a) implementation costs of EG, including operational expenses and additional staff needs to perform the overall project implementation and comply with EG’s fiduciary responsibilities, as well as environmental and social (E&S) standards responsibilities; (b) M&E activities, including enterprise surveys and costs associated with impact assessments; (c) technical assistance and training activities
31 The MOESD and MOJ have experience working together to advance economic reforms through working groups, such as the development of SME strategy and the Insolvency Law.
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The World Bank Georgia Relief and Recovery for MSMEs (P173975)
for participating financial institutions (PFIs) interested in upgrading their environmental and social management systems; and (d) other institutional strengthening activities in support of PBCs.
Component 4. Contingency Emergency Response Component (CERC) (EUR 0 million)
41. This is an unfunded contingency component that can be activated in case of a relevant emergency event. Following an eligible crisis or emergency, the borrower may request the World Bank to reallocate Project funds to support an emergency response. Once triggered, this component will draw from the then uncommitted loan resources under the Project to address the emergency. The CERC may be used for temporary support to poor and vulnerable households. The CERC may also be used for MSME relief measures if a rapid deployment of liquidity is required, beyond the programs listed in Component 1. This component might cover measures such as utility subsidies and other short-term cash transfers for both households and MSMEs. This design considers the context of the COVID-19 pandemic and the recent geopolitical risks in the region whereby additional social protection measures may be required, as well as response to any other large shocks that may manifest. Therefore, the CERC is not limited to certain sectors, regions, or specific activities. The definition of eligible emergency and a positive list of activities will be in the CERC annex in the POM.
C. Project Beneficiaries
42. The expected project beneficiaries are private MSMEs that have been affected by the COVID-19 pandemic. Georgia has different definitions for MSMEs for accounting, tax, and statistical purposes. For this Project, eligible MSMEs are individual entrepreneurs and private legal entities whose annual turnover qualifies for categories 3 or 4 of the Law on Accounting, Reporting and Auditing, that is, annual turnover of up to GEL 20 million. For monitoring purposes, indicators in the Results Framework will be disaggregated by firm size and by gender, as described in the POM. The project will support MSMEs in the hardest hit sectors, including those that can demonstrate their past economic viability before the crisis and have productive assets to enable their recovery. MSMEs investing in strategic and dynamic sectors are also a priority. MSMEs will benefit from a reduction of financial constraints and increased availability of financing, which will help alleviate cash flow constraints and support recovery plans. This will allow MSME beneficiaries to preserve jobs, maintain viable operations and economic relationships, and adjust their operations through the economy’s recovery. MSMEs will also benefit from overall improvements in the enabling environment for access to financial services, such as credit and digital payments. Firms will also benefit from training and technical assistance that will increase their capacity to adjust their business models to a new context. In addition, the expected beneficiaries under Component 2, including MSMEs and individuals, will benefit from the gains associated with increased digital payments. MSMEs and financial institutions will also benefit from improvements in financial infrastructure and gains from increased access to finance.
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D. Results Chain Figure 4. Results Chain
Note: KYC = Know-Your-Customer; and TA = technical assistance.
43. The critical assumptions of the Project’s results chain are linked to identification and support of relief and recovery nodal points. Specifically, these assumptions are the following: (a) the proposed targeting and implementation arrangements of relief measures adequately support the identification of economically viable firms; (b) the disbursements of financial support under Component 1 are timely enough to support firms before they take measures with lasting negative implications (default on suppliers or financial institutions or sell productive assets); (c) there are sufficient and suitably equipped NGOs and contractor organizations to support the expansion of the existing grants program and the provision of technical assistance; (d) complementary government interventions are properly designed and implemented on a timely basis; and (e) secured transactions reform and upgrades in the collateral registry are sufficient to expand the use of movable collateral. The COVID- 19 crisis may last for an extended period, which would stretch Project resources further to prevent firm closure. In the scenario of a longer crisis, additional financing from the World Bank and other development partners would be required, in addition to the GoG’s own resources.
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E. Rationale for Bank Involvement and Role of Partners
44. In the aftermath of the declaration of the COVID-19 pandemic, the WBG announced it will be providing up to US$160 billion financing globally tailored to the health, economic and social shocks. The World Bank brings international and institutional expertise, as well as technical support to such post-disaster situations. In addition, the World Bank has had a strong engagement in finance and private sector development topics in Georgia over the last decade. This existing program is supported by a EUR 4.5 million TF to support financial inclusion and accountability, as well as a EUR 2.7 million TF to support institutional capacity for innovation, both funded by the EU and complementary to this Project’s activities. The Project’s design is also informed by a World Bank assessment conducted in 2018–2019 of EG’s PCG mechanism. Further technical assistance on the needed secured transactions reform and retail payments market were conducted in 2019. This Project also builds on knowledge and lessons learned from the World Bank’s ongoing US$23.5 million Georgia National Innovation Ecosystem (GENIE) project, approved in March 2016 and restructured in April 2019.
45. Given the circumstances, the World Bank is one of the few development partners that brings a combination of implementation support, technical assistance, and funding to Government programs. EG has worked with UN Women and the United States Agency for International Development (USAID) on technical assistance, but the recommended measures from these assessments are yet to be financed. Further, the European Bank for Reconstruction and Development, European Investment Bank, Agence Française de Développement (French Development Agency; AFD), and USAID support MSMEs and lenders in Georgia, but this has been through smaller bilateral programs or private investments. Currently, no other partner is engaging with government agencies on large-scale institutional strengthening and funding where MSMEs are the principal beneficiaries.
46. The Project complements other interventions supported by the WBG in Georgia. Given the predominance of informal microenterprises and self-employed individuals in Georgia, the Project was prepared in coordination with the Social Protection and Jobs, Agriculture and Food, and Poverty and Equity Global Practices to strengthen the complementarities across these topics and buttress the support that is being provided by the Georgia Emergency COVID-19 Response Project under the World Bank’s Global Fast Track COVID-19 Facility. This Project provides support in line with the Government’s AEP while continuing the sectoral focus in the 2019 World Bank Economic Management and Competitiveness Development Policy Operation. The Project was also prepared in coordination with the IMF to ensure consistency with the framework adopted under the augmented Extended Fund Facility (EFF). The team has also consulted with International Finance Organization (IFC) and the Multilateral Investment Guarantee Agency (MIGA) to ensure opportunities to leverage their response package to support the private sector. In addition, the Project will build on IFC’s experience in conducting due diligence of PFIs, especially with regard to environmental, social, and governance (ESG) and corporate governance.
F. Lessons Learned and Reflected in the Project Design
47. Acknowledging the unprecedented nature of the COVID-19 pandemic crisis, the Project design incorporates lessons learned from other post-disaster scenarios that demanded a fast and flexible approach. Development partners have used different mechanisms to support private sector development in post-disaster recovery, ranging from microfinance, matching grants, and capacity building to sector-based approaches. Many development partners’ interventions have been multidimensional and combined several instruments.32 Regardless of the approach used, lessons learned suggest that interventions must be data driven, transparent, and market aware, especially with regard to targeting and selection criteria. It is also important to build on existing
32 Walton, Oliver. 2012. Incentives to the Private Sector and Early Recovery. Governance and Social Development Resource Centre.
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local markets, structures and systems, and robust M&E frameworks that support flexible and adjustable program designs.33 In particular, past crises showed the importance of (a) rapid project preparation while ensuring the design of effective systems for targeting; (b) drawing on existing knowledge about the business environment; and (c) longer-term planning focused on an enduring restoration of growth, employment, and sustained response, in recognition that private sector support will still be needed beyond the crisis period.34
48. The Project also reflects lessons from ongoing efforts globally to support the private sector. The following principles emerging from global consensus guided the Project design: (a) timely support is essential to prevent persistent harm of otherwise-healthy firms; (b) firms that receive financial support returned to normal faster; (c) informal firms matter for the stock of employment but less for job growth; (d) targeting of support should be kept as simple as possible during the response phase and gradually evolve during the recovery phase to focus on productivity-driven and resilient growth; (e) when providing support, policy makers should consider a range of instruments to ensure that particularly vulnerable firms are not left out of the support net; and (f) immediate measures should focus on cash flow problems of MSMEs, to support the preservation of productive assets and economic relationships, which are costly and time-consuming to rebuild.35
III. IMPLEMENTATION ARRANGEMENTS
A. Institutional and Implementation Arrangements
49. The overall responsibility for project implementation resides with the MOESD. The PIEs are EG, which has the mandate to promote and support the private initiative in the country, and the NBG, which is the main financial sector authority and operates an RTGS. EG will play a dual role in the Project, implementing activities under Component 1 and performing the fiduciary functions of Subcomponents 2.2 (e-KYC and KYC registry) and 2.3 (secured transactions), as an agent of the MOESD. EG was established in 2014 by government decree as a legal entity of public law (LEPL) directly subordinated to the MOESD.36 For Subcomponent 1.1 (microgrants), EG will procure and sign contracts with contractor organizations that will be responsible for selecting and monitoring beneficiaries, as well as providing capacity building, in exchange for commissions.37 EG will disburse grants directly to beneficiaries. For Subcomponents 1.2 and 1.3 (co-financing of interest payments and PCGs), EG will sign participation agreements with commercial banks, MFIs, and leasing companies that will be responsible for loan appraisal, monitoring, and collection efforts. EG will transfer the co-financing of interest payments directly into beneficiaries’ accounts (for loans) or leasing companies’ accounts (for leases). For guarantees, the agency will deposit the guarantee amount into its account at the respective PFIs.38 With regard to Subcomponent 2.1, the NBG will be responsible for the procurement of the IPS (including hardware, software, and professional services), initial IPS operations (including maintenance), and technical assistance activities. The MOESD will be the technical lead for Subcomponent 2.2 on the KYC registry, in coordination with the MOJ, with fiduciary responsibilities undertaken by EG, including procurement and FM. The MOESD will be the technical lead for Subcomponent 2.3 on secured transactions reform, in coordination with the MOJ, with the fiduciary responsibilities being undertaken
33 The SEEP Network. 2017. Minimum Economic Recovery Standards (Third Edition). The SEEP Network, Washington D.C., and Practical Action Publishing, Rugby, UK. 34 World Bank Group (Independent Evaluation Group). 2020. Keeping the Private Sector Alive during the Coronavirus (COVID-19): 4 Lessons from Past Crises. 35 Cruz, M., et al. 2020. Assessing the Impact and Policy Responses in Support of Private-Sector Firms in the Context of the COVID-19 Pandemic. Internal paper, World Bank. 36 Government of Georgia, Decree No. 173 of February 19, 2014. 37 In the future, EG may choose to provide grants directly to beneficiaries, without the involvement of contractor organizations. 38 For leasing, the amounts are transferred directly into PFIs’ accounts.
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by EG. The PIEs were selected based on their respective mandates. In particular, implementation through EG also took into consideration its track record in implementing MSME support programs, given that there is neither a development bank in Georgia nor a commercially oriented institution that could perform this role. Annex 4 includes more information about EG and PFIs.
50. This will be the first time both EG and the NBG act as implementing entities for a World Bank project. Separate subsidiary agreements will be entered into between the borrower and each of the PIEs. The entities will adopt separate operations manuals. The limited experience of EG in implementing World Bank IPF is to some extent offset by (a) the project design which builds on existing program implementation arrangements and monitoring systems already in place and (b) the close coordination with the MOESD, which can build on the experience of Georgia’s Innovation and Technology Agency (GITA) in implementing the World Bank-financed GENIE project. The technical capacities of EG are complemented by its implementation partners, NGOs, and PFIs, which are responsible for identifying, appraising, and training potential beneficiaries. As Component 1 builds on existing programs, its implementation arrangements will be based on the existing organizational structure, namely the SME development department and M&E department, which will be expanded with the support of the Project. For Project implementation, the agency will add staff to increase monitoring and perform E&S risks’ screening. With regard to Subcomponent 2.1, the NBG has a robust internal organizational structure and has been assessed as capable of FM and procurement for the tasks in this Project.
B. Results Monitoring and Evaluation Arrangements
51. EG and the NBG will each oversee data collection and reporting on the Results Framework separately and the World Bank will consolidate these inputs. The PIEs shall furnish to the World Bank a Project Report twice a year, including indicators of the Results Framework, not later than 60 days after the end of each calendar semester. EG has recently strengthened its M&E capacity through the automation of the application system and interface with partners and is planning to hire new staff. The implementation partners will provide EG with data on an ongoing basis related to grants, co-financing of interest payments, and guarantee programs. In the semiannual Project Reports, EG will assess progress on Project activities and the need for any adjustments based on Results Framework data and feedback from stakeholders discussed during the WBG implementation support missions. An analyst within EG will be responsible for overseeing M&E for the Project, including data collection and reporting. EG will benefit from a collaboration with the national statistical institute, GEOSTAT, which performs quarterly business surveys, to get inputs for the Results Framework and about current economic conditions that will help assess the transition from the relief to recovery phase, as per annex 4. EG will provide additional evidence for meeting the PBCs, which will be verified by the World Bank Project team.
52. The Project will support the strengthening of citizen engagement mechanisms. Project implementation will continue the consultations with the private and financial sectors, as well as civil society organizations, which provided feedback on the impact of COVID-19 on MSMEs and communities during Project preparation. The strengthening of citizen engagement monitoring mechanisms and incorporation of feedback from beneficiaries into program design is central to the proposed PBCs. The PBCs will provide incentives for strengthening the M&E framework and promoting evidence-based improvements to existing programs, including feedback from MSME beneficiaries and communities. The primary citizen engagement activities will be: (a) engagement with MSMEs through participatory needs assessments to better understand the impacts of COVID; (b) a beneficiary survey at mid- term to enable feedback from project beneficiaries on the functionality (access, quality) of the grant program; (c) MSME dialogues/roundtables (face-to-face, virtual) regarding climate change to encourage climate-smart businesses; as well as feedback from market participants on the M&E regarding the adequacy of co-financing of interest payments. Citizen engagement mechanisms will also build on existing practices for outreach and
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engagement developed by EG, such as through information desks and officers within regional public service halls, NGO staff, web platforms, and social media. The Project design will explore options to strengthen two-way citizen engagement mechanisms through digital means. It will also place additional attention on transparency mechanisms in the use of funds and the inclusiveness of project benefits. In addition to the PBC indicators, the Project will integrate a beneficiary feedback indicator to measure satisfaction with the engagement process and overall transparency of the program, and obtain results within 3 years of Board approval.
C. Sustainability
53. The sustainability of the Project’s objectives is grounded on the track record of EG and the central role of MSMEs in the country’s AEP. The Project supports existing programs that have been consistently funded and implemented by EG over the last five years. The Project aims at strengthening these programs through PBCs. Upon completion of the Project, the agency will rely on its regular annual budget to continue supporting these programs. The agency has traditionally worked through NGOs and PFIs to implement its programs, which reinforces the sustainability of objectives beyond the Project’s closure. The financial instruments supported under the Project include features to minimize mistargeting to non-viable firms and support firms’ resilience, including the requirement of a matching contribution by beneficiaries, selection of beneficiaries based on analysis of proposals, and appraisal by PFIs. The lending rate for beneficiaries are determined by PFIs at prevailing market conditions. Subsidies provided under the co-financing of interest payments will be time-bound and limited to the relief phase.
54. Project activities under Component 2 will support structural changes in financial infrastructure that will have long-lasting effects beyond the closure of the Project. The Project supports the strengthening and modernization of the payment system and reforms to upgrade the secured transactions framework, which will benefit the country beyond the COVID-19 crisis recovery. These activities will increase the availability of financial products and services to segments of the population – including individuals in rural areas or in the informal economy, MSMEs—that were previously unbanked and underserved by the financial sector.
IV. PROJECT APPRAISAL SUMMARY
A. Technical, Economic and Financial Analysis (if applicable)
55. The economic and financial analysis is focused on the Project’s objective to support working capital and investment needs of firms through the relief and recovery phase. Although firm survivorship is a key outcome of the project, estimating failure and survivorship rates for MSMEs is complicated, especially so in an emerging market where leverage is lower. The analysis herein builds on the 2019 Enterprise Surveys and the 2020 follow-up Enterprise Surveys due to COVID-19 in Georgia. Table 4 shows the production function estimates for sales pre- COVID. Column (2) controls for firms which have access to working capital from financial intermediaries, column (3) controls for firm size, while columns (4) and (5) condition the post 2020Q1 COVID status of the firm. The results show the marginal returns to additional capital, labor as well as an indicator variable for the presence of working capital from financial intermediaries.
56. Using these results along with the Project’s disbursement schedule yields a EUR 5.0 million economic benefit in net present value (NPV). The estimates above show that for firms in Georgia, the marginal investment into capital yields a marginal benefit of an increase of sales of 20 percent from column (3). This specification also shows that firms with working capital from financial institutions have, on average, sales of 34 percent higher than those without working capital. Although this latter result is not causative, it does suggest that working capital
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provides additional benefits, though these may be through firm characteristics that are beyond the simple access to such a working capital facility. Using the Project disbursements and the projected number of MSME beneficiaries, Table 5 estimates the marginal annual benefit of investment capital as well as access to working capital. These are done separately using assumptions of the parameters of the EG instruments. This yields an internal rate of return (IRR) of 19 percent and an NPV at 8 percent of EUR 5.0 million. Table 4. Production Function Estimates for Manufacturing in Georgia
(1) (2) (3) (4) (5) Log Sales Log Sales Log Sales Log Sales Log Sales Log Capital 0.22*** 0.22*** 0.20*** 0.18** 0.67** (3.96) (3.89) (3.50) (2.96) (3.89) Log Labor 0.81*** 0.79*** 0.69*** 0.64*** 0.46+ -13.05 -12.61 -8.12 -6.48 -2.15 Has FI WC 0.33+ 0.34+ 0.43* 0.93 (1.72) (1.82) (2.08) (1.51) Observations 135 135 135 110 13 R2 0.75 0.75 0.77 0.75 0.91 Size FE No No Yes Yes Yes Covid status All All All Open Closed Note: Student t statistics in parentheses. +p < 0.10, *p < 0.05, **p < 0.01, ***p < 0.001. Data are combined from 2019 and post-COVID in 2020. Firms are limited to manufacturing firms given the role of capital in their production function. COVID status is the status of the firms in 2020 Q3 in terms of open or close (temporarily or permanently). Has FI WC = firms with working capital from a financial institution, which is an indicator variable. Sales, capital, and labor are all measured pre-COVID. Estimates of post-COVID sales yield similar results on the margin for capital. Table 5. Economic IRR and NPV Estimates US$, millions unless otherwise noted Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Project annual disbursements — 16.3 17.0 11.1 11.5 12.1 Number of MSME beneficiaries (number) — 3,300 3,300 3,300 3,300 3,300 Annual marginal benefit on sales of investments — 2.8 2.9 1.9 2.0 2.1 Cumulative annual marginal benefit on sales of investments — 2.8 5.7 7.5 9.5 11.6 Annual marginal benefit on sales of working capital — 2.8 2.8 2.8 2.8 2.8 Cumulative annual marginal benefit on sales of working capital — 2.8 5.6 8.4 11.2 14.0 Total annual marginal benefit — 5.6 11.3 16.0 20.7 25.6 Net annual disbursement minus benefit — -10.7 -5.7 4.9 9.2 13.5 Economic IRR 19% Economic NPV (at 8%) 5.0 Note: Investments are assumed to represent 80 percent of project disbursements. All components (microgrants, interest payment co- financing, and the PCG) are combined into a joint estimate and are less conservative than in the Results Framework. Working capital assumptions apply a median annual sales of US$2,500 per year, which is equivalent to GEL 8,125. This is a conservative estimate as the working capital formulation is an indicator variable. Enterprise data from GEOSTAT show that median sales in 2019 was GEL 700,000 for small, medium, and large sized firms and GEL 72,000 for micro firms.
57. The entire Project is expected to accrue additional benefits above and beyond those estimated above. The analysis above focuses mainly on the first three subcomponents of Component 1. The project also has Subcomponent 1.4 as well as Component 2. Component 1.4 through technical assistance for digitization and COVID-proofing will support firms to diversify their income sources and become more resilient. Component 2 invests in key long-term structural access to finance challenges in Georgia, and the secured transactions
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framework will unlock several key benefits for the real economy for several years. Collateral requirements are a binding constraint and this reform will help firms improve their access to finance and thereby contribute to economic growth and job creation. The payment system investments will support the digitization process and help both households and firms with faster and more secure retail payments. Some of these financial architecture investments could also spur additional investment into other innovative fintech investments and products. Finally, the CERC will strengthen, if required, Georgia’s resilience.
B. Fiduciary
(i) Financial Management
58. EG and the NBG will both be responsible for FM and disbursement aspects during Project implementation including planning, budgeting, accounting, financial reporting, funds flow, internal controls, and auditing. Neither EG nor the NBG has any experience in implementing World Bank-financed projects and projects financed by other international financial institutions (IFIs). The FM arrangements in EG and the NBG will meet minimum World Bank FM requirements with the support of capacity-building activities provided by the World Bank team.39 Therefore, the overall residual FM risk for the project is Substantial.
59. EG and the NBG will be responsible for FM of specific Project components. EG and the NBG will each be responsible for submission of quarterly unaudited interim financial reports (IFRs) and will coordinate to jointly submit audited annual Project financial statements to the World Bank. EG and the NBG will each produce a full set of IFRs every calendar quarter and submit to the World Bank within 45 days after the end of each calendar quarter. These will then be consolidated by the World Bank. The format of IFRs has been agreed during the FM assessment and includes (a) project sources and uses of funds, (b) uses of funds by project activities, (c) designated account (DA) statements; (d) disbursement summary; and (e) a statement of expenditure (SOE) and withdrawal schedule.
60. The annual audited project financial statements together with the auditor’s opinion and the Management Letter will be provided to the World Bank within six months after the end of each fiscal year and at the closing of the project. The audit of the Project’s financial statements will be conducted (a) by the State Audit Office of Georgia or by an independent private auditor acceptable to the World Bank in accordance with terms of reference acceptable to the World Bank and (b) according to the International Standards on Auditing issued by the International Auditing and Assurance Standards Board of the International Federation of Accountants. EG will be responsible for the selection and appointment of the project auditor and the financial audit may be financed from the loan proceeds. The NBG can use its regular auditor to audit their portion of the project provided that the procurement and terms of reference of this are acceptable to the World Bank. EG and the NBG will then need to coordinate among their auditors for the final annual project audit. The NBG and EG will publicly disclose audit reports on their websites within one month after receiving them from the auditor. After formally receiving the joint audit reports from EG and the NBG, the World Bank will make the audited project financial statements publicly available in accordance with the World Bank Policy on Access to Information.
61. The NBG will open a DA internally and EG will open a DA at the Treasury Account of the Ministry of Finance (MOF) held at the NBG on terms and conditions acceptable to the World Bank. These DAs will receive funds denominated in euro. Both PIEs will also open project accounts in the local currency, to which funds can be transferred to make payments in local currency, including any project operating costs. Throughout
39 In particular, EG will need to introduce a module within its existing system for Project accounting and reporting.
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implementation, Project funds will be maintained at the entities’ individual DAs and their respective project local currency accounts. These funds will not be pooled with other funds.
62. The loan will be disbursed through the World Bank’s standard disbursement methods, which include (a) advances to the DA using SOEs, (b) payments against special commitments, (c) reimbursement of eligible expenditures, and (d) direct payments. The project will be required to adopt e-disbursements, and the minimum value of applications as well the frequency of reporting of the SOEs will be specified in the Disbursement and Financial Information Letter (DFIL).
(ii) Procurement
63. Procurement under the Project will be carried out in accordance with the World Bank’s Procurement Regulations for IPF Borrowers (November 2020). The project will be subject to the World Bank’s Anti-Corruption Guidelines, dated October 15, 2006 (revised in January 2011 and as of July 1, 2016). For the Project, EG will be considered a financial intermediary that will transfer World Bank loan proceeds through PFIs to eligible enterprises for Subcomponents 2.2 and 2.3. As per Section II. General Considerations, the Procurement Regulations do not apply to the procurement of goods, works, non‐consulting services, and consulting services financed by the World Bank through loans made by eligible financial intermediaries to private borrowers.
64. Procurement implementation arrangements. Procurement is planned to be conducted by EG and the NBG. EG will be responsible for all procurements to be conducted under Component 1, as well as Subcomponents 2.2 and 2.3 that will be undertaken together with staff of working group with relevant government stakeholders (MOESD and MOJ). The NBG will be responsible for all the procurements conducted under Subcomponent 2.1. Both EG and the NBG are expected to oversee procurement under their respective components and activities. The procurement and contract management processes will be tracked through the Systematic Tracking of Exchanges in Procurement (STEP) system. As required by the Procurement Regulations, a Project Procurement Strategy for Development (PPSD) and Procurement Plan have been prepared, setting out the selection methods to be followed by the borrower during implementation in the procurement of goods, works, and non-consulting and consulting services financed by the World Bank (details in Annex 1). The documents will be continuously updated to reflect evolving needs during implementation.
65. Major procurement categories under the Project. The project’s total value is EUR 85 million, of which approximately EUR 13.2 million will be procurement conducted by EG and the NBG combined. According to the PPSD, the major procurements to be conducted under the Project include (a) selection of contractor organizations, including nonprofit NGOs, with responsibility to conduct business competitions to select MSMEs to receive grants from EG under Subcomponent 1.1; (b) procurement of an IPS (licensing, implementation, support and maintenance) as well as associated hardware acquisition, software upgrades (for RTGS), and technical assistance (to support outreach and connection of users to the system) that will be conducted under goods and services procurement by the NBG in total EUR 6.0 million under Subcomponent 2.1; (c) procurement of a KYC registry and associated technical support that will be conducted under goods and services procurement by EG on behalf of the MOESD and MOJ in the amount of EUR 4.3 million under Subcomponent 2.2; (d) procurement of a customized software solution for Subcomponent 2.3 under goods procurement by EG (in the amount of EUR 0.8 million) and likely operated by the NAPR once it is set up.
66. Retroactive financing will be considered under the Project, subject to the conditions defined in 5.1 and 5.2 of the Procurement Regulations. The borrower undertakes such advance procurement at its own risk and any concurrence by the World Bank on the procedures, documentation, or proposal for award of contract does not
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commit the World Bank to finance the Project. Expenditures incurred on or after July 1, 2020, until the date of the Loan Agreement may be eligible for retroactive financing, provided that the procurement procedures and other World Bank policies are complied with. Total retroactive financing will not exceed 15 percent of the project cost.
67. Procurement risks and mitigation measures. The major risks to procurement are the following: (a) EG and the NBG have no experience in implementing similar projects financed by the World Bank; (b) the drafts of the POM and PSM have been prepared but have yet to be finalized; (c) no knowledge of the World Bank’s procurement procedures may cause slow procurement processing and decision-making, with potential implementation delays; and (d) a poor contract management system could lead to time and cost overruns and poor-quality deliverables. The procurement risk mitigation measures include (a) ensuring oversight by the World Bank teams in close coordination with the borrower’s oversight agencies; (b) using the electronic Government Procurement platform, which is well developed and actively used by Project Implementation Units implementing World Bank-financed projects in Georgia; (c) providing training on the World Bank’s Procurement Regulations to existing personnel of EG and the NBG; (d) conducting customized training on fraud and corruption; (e) conducting bidder’s awareness and setting qualification requirements to ensure better completion ; and (f) introducing KPIs in the contracts.
. C. Legal Operational Policies . Triggered? Projects on International Waterways OP 7.50 No Projects in Disputed Areas OP 7.60 No .
D. Environmental and Social
68. E&S risks are assessed as Substantial. The majority of MSME activities supported by the Project are likely to be of Low or Moderate E&S risks, while some Substantial risk activities may also be supported. Risks are mostly related to Component 1 and may involve construction-related risks; labor and occupational health and safety risks; and risks related to pollution, resource extraction, or inefficient use of resources, such as water or energy use, waste management, community health and safety, equitable provision of information, and opportunity for all eligible MSMEs. Given the size of the microgrants, it is not anticipated that major acquisitions will be conducted with grant funds. Other Project activities will focus on training and technical assistance to support digitization and COVID-proofing, which will not trigger environmental or social risks. MSME activities rated with a High E&S risk, as well as activities that entail involuntary resettlement, land acquisition, or land use restrictions will not be eligible for financing. Component 2 activities are not expected to create environmental or social risks. To mitigate E&S risks, EG has prepared a comprehensive Environmental and Social Management Framework (ESMF) and Stakeholder Engagement Plan (SEP) for the Project. Key E&S commitments are also specified in the Project’s Environmental and Social Commitment Plan (ESCP).
69. EG will collaborate closely with contractor organizations and PFIs to conduct outreach, training, mobilization, and consultations with citizens and prospective beneficiaries to ensure that all social groups, specifically the ones prone to exclusion, will have the opportunity to benefit from the Project. Similarly, the NBG will ensure that consultations and outreach for the new payment system is developed in an inclusive manner, ensuring equal and proportional access to the new payment system by all types of financial institutions, subject to risk management considerations. Engagement with stakeholders started during Project preparation and will
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continue throughout the life cycle of the Project. Citizen engagement mechanisms will build on existing practices for outreach and engagement developed by EG, such as through information desks and officers within regional public service halls, NGO staff, web platforms, and social media. The Project design will place additional attention on transparency mechanisms in the use of funds and the inclusiveness of Project benefits. The Project will integrate a beneficiary feedback indicator to measure satisfaction with the engagement process and overall transparency of each program supported by the Project. For the NBG, the establishment of the IPS and its operationalization will benefit from engagement with potential users of the system, including commercial banks.
70. The borrower has prepared and disclosed drafts of the ESCP, ESMF, and SEP, and has conducted official consultations. Substantive consultations with potential PFIs had been initiated before disclosure and official consultations have been completed. EG will ensure that contractors under Subcomponent 1.1 and PFIs under Subcomponents 1.2 and 1.3 will consistently identify and manage E&S risks, in accordance with the ESCP, ESMF, and SEP. The ESMF provides a differentiated approach to risk management to be followed by PFIs and by contractors. While PFIs will be required to adapt and/or adopt institutional Environmental and Social Management Systems (ESMS) for managing the World Bank-supported financial intermediation, contractors selecting microgrant recipients will use a streamlined E&S screening tool. The NBG has recently imposed an ESG disclosure requirement as part of its corporate governance requirements and 2020 is the first year for ESG reporting for licensed commercial banks. As a result, approximately half the commercial banks already have an ESMS and EG will be able to work with the NBG (responsible for the ESG disclosure requirements) to ensure that compliance with guiding principles is maintained for Project funds.
71. Additional consultations with PFIs during the Project implementation phase will be undertaken in order to support EG in developing its ESMS, as well as clarifying environmental and social risk management requirements with the PFIs. For example, some PFIs with existing ESMSs have slightly different ratings systems for incident reporting and use loan size thresholds for E&S screening. Efforts will be made to harmonize E&S approaches across the PFIs in collaboration with EG and PFIs; if this is not possible, the PFIs will not receive Bank financing.
V. GRIEVANCE REDRESS SERVICES
72. Communities and individuals who believe that they are adversely affected by a World Bank (WB) supported project may submit complaints to existing project-level grievance redress mechanisms or the WB’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to address project-related concerns. Project affected communities and individuals may submit their complaint to the WB’s independent Inspection Panel which determines whether harm occurred, or could occur, as a result of WB non-compliance with its policies and procedures. Complaints may be submitted at any time after concerns have been brought directly to the World Bank's attention, and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the World Bank’s corporate Grievance Redress Service (GRS), please visit http://www.worldbank.org/en/projects-operations/products-and-services/grievance-redress- service. For information on how to submit complaints to the World Bank Inspection Panel, please visit www.inspectionpanel.org.
VI. KEY RISKS
73. The overall Project risk rating is Substantial. Four out of nine risk categories have been rated as Substantial. These risks partially reflect the unprecedent nature of the COVID-19 pandemic and associated high-
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level degree of uncertainty during Project preparation. The political and governance, technical design, institutional capacity, stakeholders and other risks are all rated Moderate. In addition to E&S risks described above (section D. Environmental and Social), the main risk factors are described in the following paragraphs.
74. Macroeconomic - Substantial. The immediate challenge facing the Project is the impact of the COVID-19 pandemic on the private sector, especially in sectors more exposed to external shocks, as well as on the financial sector through macro-financial links. Those impacts might carry implications on the take-up of programs, as well as appetite of PFIs to lend to MSMEs. A weaker-than-expected economic recovery might create additional demand for grants and subsidies, beyond the budget of existing programs. In addition, the COVID-19 pandemic might exacerbate preexisting fiscal risks, which might shift budget priorities and allocations. Macroeconomic risks are mitigated by the good performance under the IMF’s EFF as well as by the close dialogue between the Government and development partners, but residual risk remains Substantial.
75. Sector strategies and policies - Substantial. The private and financial sectors face the risk of a prolonged crisis. In a scenario where the COVID-19 crisis lasts longer than initially forecasted by authorities, Project resources allocated to financial support measures might become insufficient and the ability of the financial sector to support the economy might become limited. Prolonged uncertainty, reduced business and consumer confidence, and lower household income pose additional credit risks to the enterprise and financial sector. In the scenario of a longer crisis, additional financing from the WBG and/or other development partners would be required to achieve the Project’s objectives. Several development partners are currently engaged and/or expressed interest in supporting private sector development, especially agriculture and MSMEs. Residual risk, therefore, is rated Substantial.
76. Fiduciary - Substantial. EG and NBG have no experience in the implementation of the World Bank- financed projects and projects financed by other IFIs. The FM arrangements at both EG and NBG will meet minimum World Bank FM requirements once capacity-building activities are implemented. Therefore, the residual fiduciary risk for the project is Substantial. .
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VII. RESULTS FRAMEWORK AND MONITORING
Results Framework COUNTRY: Georgia Georgia Relief and Recovery for Micro, Small, and Medium Enterprises
Project Development Objectives(s) The Project Development Objective (PDO) is to provide relief to micro, small, and medium-size enterprises and support their recovery, including by strengthening the enabling environment for access to finance.
Project Development Objective Indicators
RESULT_FRAME_TBL_ PD O Indicator Name PBC Baseline End Target
Relief for MSMEs
Volume of financial support provided to MSMEs affected by the 0.00 450.00 pandemic (GEL million) (Text)
Survivorship ratio: ratio of inactive enterprises to total beneficiaries of Enterprise Georgia, divided by ratio of inactive NA <1 enterprises to total active enterprises in the economy (Text)
Resilient Recovery of MSMEs
Revenue multiplier: ratio of revenue-weighted average annual change in MSME revenue of Project beneficiaries, divided by the NA >1 average change of revenue in their respective sector (Text)
Number of digital transactions facilitated through the new 0.00 17.00 instant payment system (million) (Number)
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RESULT_FRAME_TBL_ PD O Indicator Name PBC Baseline End Target
Strengthening the enabling environment for access to finance for SMEs
Establishment of an upgraded movable collateral registry No Yes (Yes/No)
PDO Table SPACE
Intermediate Results Indicators by Components
RESULT_FRAME_TBL_ IO Indicator Name PBC Baseline End Target
Component 1: Financial relief and recovery for MSMEs Number of MSMEs supported by grants under the Project 0.00 5,000.00 (Number) Volume of grants disbursed to MSMEs under the Project (GEL 0.00 70.00 million) (Text) Number of enterprises supported by co-financing of interest 0.00 200.00 payments under the Project (Number) Volume of loans supported by co-financing under the Project (GEL million) (Text) 0.00 83.00 Number of guarantees issued under the Project (Number) 0.00 200.00 Volume of loans guaranteed with support of the Project (GEL 0.00 420.00 million) (Text) NPL ratio in the co-financing loan portfolio should be below NPL ratio of co-financing of interest payments program (%) (Text) The historic NPL ratio for EG's programs is 0.6% 8% NPL ratio of the partial credit guarantee program (%) (Text) The historic NPL ratio for EG's programs is 0.6% NPL ratio of the PCG program should be below 8% Number of MSMEs receiving training and/or technical assistance 0.00 300.00 for digital transformation and/or COVID-proofing (Number)
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RESULT_FRAME_TBL_ IO Indicator Name PBC Baseline End Target
Share of volume of financial support under the Project channeled to investments in the green economy and climate financing (%) 0.00 15.00 (Percentage) EG Citizen Engagement: share of MSMEs reporting that programs 0.00 60.00 reflected their needs (%) (Percentage) EG does not have an effective M&E system that allows the EG has adopted a robust M&E framework and used frequent review of the performance and outcomes of its Institutional actions to strengthen the grants program (Text) PBC 1 evidence to improve the design of its grants program and grants program, which would provide evidence and develop sustainable options for its development. technical grounds for improvements in the program. EG does not have evaluation systems and measures in EG has adopted a robust M&E framework and conducted Institutional actions to strengthen the co-financing of interest place to assess the effectiveness of its co-financing of an evaluation of its co-financing program, using evidence PBC 2 payments program (Text) interest payments on an frequent basis and better align its to propose amendments to improve targeting, eligibility targeting towards strategic sectors and/or thematic areas. criteria and other aspects of the program. EG currently does not have a monitoring system, a risk EG has strengthened the design and implementation Institutional actions to strengthen the partial credit guarantees management framework, and an outreach strategy to arrangements of the program, including more robust risk PBC 3 program (Text) evaluate the performance and risks of the program and monitoring, awareness campaigns, stronger participation propose improvements in its design. agreements with PFIs, and financial modelling tool. Introduction of a managerial skills program (Yes/No) No Yes Share of financial resources (grants, co-financing, guarantees) under the Project channeled to women-inclusive firms 24.00 35.00 (Percentage) Component 2: Digital payments and financial infrastructure upgrading Volume of retail transactions recorded in the IPS (GEL billion) 0.00 10.00 (Number) Share of instant payment transactions (%) (Number) 0.00 15.00 Establishment of a functional KYC registry (Yes/No) No Yes Approval of amendments to legal framework for secured No Yes transactions (Yes/No)
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RESULT_FRAME_TBL_ IO Indicator Name PBC Baseline End Target
Establishment of a working group for KYC Registry (Yes/No) No Yes Preparation of technical specifications for the modernization of No Yes the collateral registry (Yes/No)
IO Table SPACE
UL Table SPACE
Monitoring & Evaluation Plan: PDO Indicators Methodology for Data Responsibility for Data Indicator Name Definition/Description Frequency Datasource Collection Collection Volume of financial support provided to MSMEs affected by the pandemic Project (cumulative, in GEL million). reports Volume of financial support provided to Analysis of Volume of financial support Semi-annual produced by EG MSMEs affected by the pandemic (GEL beneficiaries' data is the sum of: (i) grants; (ii) EG and million) co-financing of interest partners payments; and (ii) volume of approved guaranteed loans supported by the Project Survivorship ratio: ratio of Project Analysis of Survivorship ratio: ratio of inactive inactive enterprises to total reports beneficiaries' data and enterprises to total beneficiaries of beneficiaries of Enterprise Annual produced by review of publicly EG Enterprise Georgia, divided by ratio of Georgia, divided by ratio of EG and available data by inactive enterprises to total active inactive enterprises to total partners and GEOSTAT enterprises in the economy active enterprises in the GEOSTAT
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economy business statistics data
Project reports produced by Ratio of revenue-weighted Analysis of Revenue multiplier: ratio of revenue- EG and average annual change in beneficiaries' data and weighted average annual change in partners and MSME revenue of Project Annual review of publicly EG MSME revenue of Project beneficiaries, GEOSTAT beneficiaries, divided by the available data by divided by the average change of revenue business average change of revenue GEOSTAT in their respective sector statistics in their respective sector. data
Number of digital transactions through the Analysis of NBG reports Number of digital transactions facilitated new instant payment Annual NBG on cashless retail NBG through the new instant payment system system (annual). Note: the payments (million) actual number might be
higher if government payments are included. Launch of the upgraded Establishment of an registry and analysis of Establishment of an upgraded movable Annual MOESD MOESD upgraded movable collateral movable collaterals collateral registry registry. registered
ME PDO Table SPACE
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Monitoring & Evaluation Plan: Intermediate Results Indicators Methodology for Data Responsibility for Data Indicator Name Definition/Description Frequency Datasource Collection Collection Number of enterprises supported by Enterprise Semi- Analysis of Number of MSMEs supported by grants EG EG and partner NGOs Georgia's Micro and Small annual beneficiaries' data under the Project Entrepreneurship Support Program (cumulative). Volume of grants disbursed under Enterprise Georgia's Semi- Analysis of Volume of grants disbursed to MSMEs Micro and Small EG EG and partner NGOs annual beneficiaries' data under the Project (GEL million) Entrepreneurship Support
Program (cumulative, in GEL) Number of enterprises supported by co-financing of Number of enterprises supported by co- interest payments provided Semi- Analysis fo EG EG and PFIs financing of interest payments under the by Enterprise Georgia's annual beneficiaries' data
Project Produce in Georgia program (industrial component) (cumulative) Volume of loans in GEL supported by co-financing of interest payments provided Semi- Analysis of PFIs' Volume of loans supported by co- by Enterprise Georgia's EG EG and PFIs annual portfolio data financing under the Project (GEL million) Produce in Georgia program
(industrial component) with support of the Project (cumulative, GEL million)
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Number of guarantees Semi- Analysis of PFIs' Number of guarantees issued under the EG EG and PFIs approved by Enterprise annual portfolio data Project Georgia (annual). Volume of loans supported by the guarantee Semi- Analysis of PFIs' Volume of loans guaranteed with support EG EG and PFIs mechanism provided by annual portfolio data of the Project (GEL million) Enterprise Georgia in GEL (annual). Percentage of NPLs in the portfolio of loans that received co-financing of Semi- Analysis of PFI's NPL ratio of co-financing of interest EG EG and PFIs interest payments. NPLs as annual portfolio data payments program (%) reported by PFIs according to NBG prudential definition. Percentage of NPLs in the portfolio of loans that Semi- NPL ratio of the partial credit guarantee partial credit guarantees. Semi-annual Analysis of PFIs' data EG and PFIs annual program (%) NPLs as reported by PFIs
according to NBG prudential definition Number of MSMEs receiving training and/or technical Number of MSMEs receiving training Analysis of assistance for digital Annual EG EG and partners and/or technical assistance for digital beneficiaries' data transformation and/or transformation and/or COVID-proofing COVID-proofing (cumulative) Share of volume of financial support Share of volume of financial Semi- Analysis of PFIs' under the Project channeled to support under the Project EG EG and PFIs annual portfolio data investments in the green economy and that is channeled to climate financing (%) investments in the green
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economy and climate financing (mitigation and/or adaption measures) (%) Adaptation measures might include investments that reduce MSMEs’ exposure to climate change related risks or recover from damages incurred by impacts of climate change. Mitigation measures include investments that reduce, capture, or sequester GHG emissions (renewable energy, energy audit, energy efficiency, sustainable forest management, climate-smart agriculture, waste management). Share of MSME beneficiaries reporting that programs reflected their needs. Based on survey of all beneficiaries EG / EG Citizen Engagement: share of MSMEs Project supported under the summary of Survey of beneficiaries EG reporting that programs reflected their mid-term Component 1 of the Project, survey needs (%) to be conducted by EG before project midterm, in coordination with World Bank. Institutional actions to strengthen the Institutional actions to Semi- EG Analysis of EG's EG grants program strengthen the grants annual documentation and
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program program include: systems (1) the adoption of a robust M&E framework, which improves the methodology for monitoring the impact of the program on MSME beneficiaries, including by improving data collection about beneficiaries and incorporating outcome- based indicators to support evidence-based programming; (2) the amendments of the resolution governing the program to reflect improvements, especially with regard to eligibility criteria for MSMEs, based on emerging evidence from the upgraded M&E framework and as detailed in the POM; and (3) launch of a pilot graduation scheme to provide institutional support to selected high- performance beneficiaries in applying for commercial financing, including by connecting them with financial institutions and
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assist them to apply for other avenues of financing, as elaborated in the POM.
Institutional actions to strengthen the co-financing of interest payments program include: (1) the adoption of a robust M&E framework, which improves the methodology for monitoring the impact of the program, including in terms of financial and economic performance of beneficiaries, repayment of Analysis of EG's financial obligations, Semi- Institutional actions to strengthen the co- EG documentation and EG including by improving data- annual financing of interest payments program systems sharing between EG and
PFIs and incorporating an outcomes-based approach; (2) the completion of an evaluation of the co- financing program based on data of beneficiaries, loans and other relevant metrics, to assess the program’s functionality, efficiency, and effectiveness against its intended goals; (3) the amendments of the
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resolution governing the program to reflect improvements, including with regard to targeting and eligibility criteria, based on emerging evidence from the upgraded M&E framework and as detailed in the POM.
Institutional actions to strengthen the partial credit guarantee programs include: (1) introduction of measures to engage with PFIs, including the launch of an information and awareness campaign among PFIs, as well as the Analysis of EG's introduction of a risk documentation and Semi- Institutional actions to strengthen the monitoring system to EG systems, participation EG annual partial credit guarantees program improve data collection agreements, and
from PFIs regarding their financial model financial performance, profile of beneficiaries, and financial performance of loans and overall portfolio; (2) amendment of the participation agreements signed with PFIs to specify that EG can impose sanctions, remedies, and
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termination on PFIs based on financial performance requirements, as detailed in the POM; (4) adoption of a financial modelling tool to monitor the financial sustainability of the scheme and inform pricing changes. The introduction of a new managerial capabilities program includes the development of the design of the program, preparation and presentation of concept paper to MOESD and MOF, if applicable, including Analysis of EG's Semi- Introduction of a managerial skills economic justification EG documentation and EG annual program grounded on evidence systems
collected from stakeholders consultation, incorporation of design and implementation arrangements in relevant regulation, and adoption of a M&E framework for implementation. Share of financial resources Review of data Share of financial resources (grants, co- (grants, co-financing, Semi- EG collected from NGOs EG financing, guarantees) under the Project guarantees) under the annual and PFIs channeled to women-inclusive firms Project channeled to
women-inclusive firms.
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Women-inclusive firms are defined as: (i) owned by women (i.e., with at least one female shareholder with a properly documented representative and managing powers); or, (ii) managed by women (i.e., with at least one female chief-level (c-level) manager or with at least 25 percent female representation in mid-level management); or, (iii) employing a ratio of women that is higher than the average ratio observed in the respective sector; or, (iv) has increased the share of women employment by at least 5 percent in the previous year.
The baseline is based on team's calculations of % of firms with access to a loan that were female-owned, using 2019 Enterprise Survey data. Volume of retail transactions recorded in Volume of retail Annual NBG Analysis of NBG reports NBG the IPS (GEL billion) transactions recorded in the on non-cash payments
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IPS (annual, in GEL billion). Note: the actual number might be higher if government payments are included. Number of instant payments Analysis of NBG's transactions divided by the Annual NBG reports on non-cash NBG Share of instant payment transactions (%) total number of non-cash payment transactions retail payment transactions
(%). Verification of KYC Establishment of a KYC Annual MOESD MOESD/EG Establishment of a functional KYC registry registry registry
Proposed amendments to Review of amended Approval of amendments to legal the legal framework for Annual MOESD MOESD relevant legislation framework for secured transactions secured transactions are
approved. Formal confirmation of Establishment of a working Semi- establishment of Establishment of a working group for KYC group formed by MOESD, MOESD MOESD annual working group by Registry MOJ and other MOESD stakeholders.
Preparation of technical Preparation of technical specifications for Semi- Review of technical specifications for the MOESD MOESD the modernization of the collateral annual specifications modernization of the registry collateral registry ME IO Table SPACE
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Performance-Based Conditions Matrix
DLI_TBL_MATRIX PBC 1 Institutional actions to strengthen the grants program
Type of PBC Scalability Unit of Measure Total Allocated Amount (USD) As % of Total Financing Amount
Process No Text 13.60 13.20
Period Value Allocated Amount (USD) Formula Baseline EG does not have an effective M&E system that allows the frequent review of the performance and outcomes of its grants program, which would provide evidence and technical grounds for improvements in the program.
CY 2021 NA 0.00 NA
CY 2022 EG has adopted a robust M&E framework to 6.80 NA monitor impact, including by improving data collection and incorporating outcome-based indicators.
CY 2023 The Cabinet of Ministers has amended the 3.40 NA program's resolution to reflect improvements proposed by EG based on evidence, including with regards to eligibility criteria for MSMEs, as detailed in the POM.
CY 2024 EG has launched a pilot graduation scheme to 3.40 NA provide institutional support to selected beneficiaries in applying for commercial financing, including by connecting them with
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financial institutions.
CY 2025 NA 0.00 NA
DLI_TBL_MATRIX PBC 2 Institutional actions to strengthen the co-financing of interest payments program
Type of PBC Scalability Unit of Measure Total Allocated Amount (USD) As % of Total Financing Amount
Process No Text 6.70 6.50
Period Value Allocated Amount (USD) Formula Baseline EG does not have evaluation systems and measures in place to assess the effectiveness of its co-financing of interest payments on an frequent basis and better align its targeting towards strategic sectors and/or thematic areas.
CY 2021 NA 0.00 NA
CY 2022 NA 0.00 NA
CY 2023 EG has adopted a robust M&E framework to 3.10 NA monitor impact, including by improving data collection and incorporating outcome-based indicators.
CY 2024 EG has conducted an evaluation of its co- 1.80 NA financing program to assess its functionality, efficiency and effectiveness against its intended goals.
CY 2025 The Cabinet of Ministers has amended the 1.80 NA
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program's resolutions to reflect improvements proposed by EG based on evidence, including with regards to targeting and eligibility criteria, as detailed in the POM.
DLI_TBL_MATRIX PBC 3 Institutional actions to strengthen the partial credit guarantees program
Type of PBC Scalability Unit of Measure Total Allocated Amount (USD) As % of Total Financing Amount
Process No Text 13.60 13.20
Period Value Allocated Amount (USD) Formula Baseline EG currently does not have a monitoring system, a risk management framework, and an outreach strategy to evaluate the performance and risks of the program and propose improvements in its design.
CY 2021 NA 0.00 NA
CY 2022 NA 0.00 NA
CY 2023 EG has: (i) launched a campaign to share 4.10 NA information and raise awareness about the scheme among PFIs and (ii) introduced a risk monitoring system to collect information from PFIs.
CY 2024 EG has amended participation agreements signed 4.50 NA with PFIs to specify that EG can impose sanctions, remedies and termination on PFIs based on financial performance requirements, as detailed
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in the POM.
CY 2025 EG has adopted a financial modelling tool to 5.00 NA monitor the financial sustainability of the scheme and inform pricing changes.
Verification Protocol Table: Performance-Based Conditions
PBC 1 Institutional actions to strengthen the grants program Actions taken to strengthen the program, including the introduction of a robust M&E framework, amendments of the Description program's resolution, and launch of a pilot graduation scheme. Data source/ Agency EG Verification Entity World Bank project team The following evidence of the adoption of a M&E framework will be reviewed: (i) development of a concept paper / internal procedures identifying KPIs mirroring strategic objectives, M&E measures, performance targets, stakeholder engagement mechanisms, and processes for incorporating data from the framework into decision-making; (ii) introduction of Procedure information systems that generate, maintain, process and analyze data. Other procedures include: (i) review of the amendments of the program's resolution (Resolution No 365 on approving the State Program Produce in Georgia and/or other relevant resolution); (ii) the launch of a pilot graduation scheme.
PBC 2 Institutional actions to strengthen the co-financing of interest payments program Actions taken to strengthen the program, including the introduction of a robust M&E framework, the completion of a Description evaluation of the program, and amendments of the program's resolution. Data source/ Agency EG
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Verification Entity The World Bank project team The following evidence of the adoption of a M&E framework will be reviewed: (i) development of a concept paper / internal procedures identifying KPIs mirroring strategic objectives, M&E measures, performance targets, stakeholder engagement mechanisms, and processes for incorporating data from the framework into decision-making; (ii) introduction of information systems that generate, maintain, process and analyze data. Procedure Other procedures include: (i) review of the terms of reference, methodology and results of the program's evaluation; and (ii) review of amendments of the program's resolution (Resolution No 365 on approving the State Program Produce in Georgia and/or other relevant resolution).
PBC 3 Institutional actions to strengthen the partial credit guarantees program Actions taken to strengthen the program, including the launch of an awareness campaign, the introduction of a risk Description monitoring system, the review of the regime of sanctions, remedies and termination, and the development of a financial modelling tool. Data source/ Agency EG
Verification Entity World Bank project team The following evidence of measures to engage with PFIs will be reviewed: (i) launch an information and awareness campaign with PFIs, including review of communication materials and training sessions, as well as feedback from PFIs; (ii) evaluation of the risk monitoring system, which allows the active monitoring of guarantee approvals, default rates of guaranteed and non-guaranteed portfolio, concentration limits, and other relevant information of PFIs. Other procedures include: (i) review of proposed amendments to the participation agreement for PFIs to specify that EG can Procedure impose sanctions, remedies and termination based on asset quality indicators and business practices of PFIs, as detailed in the POM. The regime will define specific thresholds which will be mapped to a layered system of sanctions, which would range from initial warnings, request of corrective plan on the EG portfolio, temporary EG program suspension, and exit from the EG program; and (ii) review of the financial modelling tool.
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Annex 1: Implementation Arrangements and Support Plan
COUNTRY: Georgia Georgia Relief and Recovery for MSMEs
1. The MOESD will have the overall responsibility over the project implementation and the PIEs are EG (Component 1 and Subcomponents 2.2 and 2.3) and the NBG (Subcomponent 2.1). The MOESD will be the technical lead for Subcomponents 2.2 (KYC registry) and 2.3 (secured transactions), responsible for convening other relevant counterparts. For these two subcomponents, EG will undertake fiduciary responsibilities, as an agent of the MOESD. For the implementation of Component 1, EG will be a beneficiary and will sign (a) contracts with contractors hired to conduct the selection of beneficiaries, provide training, and monitor their activities under Subcomponent 1.1 and (b) agreements with PFIs for the provision of co-financing of interest payments and PCGs. For the implementation of the Project, each PIE will sign a subsidiary agreement with the borrower. EG with MOESD and MOJ input will prepare a POM and the NBG will prepare a Payment Systems Manual (Figure 1.1).
Figure 1.1. Legal Flowchart
World Bank
Loan Agreement Loan
Georgia
Subsidiary Agreement Subsidiary Agreement On-grant On-grant
Enterprise National Bank Georgia of Georgia
MSME Support MOESD / MOJ Programs
Participation Agreement Participation Contract Contract & Partial Interest Guarantees Rate Payments & Reflows
Sub-grant Interest PFI PFI Contractor Agreement Co-payment (interest rate (guarantees) Organizations Agreement co-financing)
PFI Loan PFI Loan Screening & Agreement Agreement Monitoring
MSME MSME MSME
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2. As Project activities build on existing programs and activities, implementation will occur through the existing systems and structures under EG as well as expanded capacity supported by the Project. Implementation of Component 1 will be done by the Entrepreneurship Department, which reports to the Deputy Director of the agency, in coordination with other relevant departments (Department of Analysis and M&E, Donor Coordination Office, Department of Strategic Development and Communication). In 2019, EG established its M&E Department, with four staff currently working in this department. The Project will support the hiring of five full- time analysts to support project coordination, E&S, communication/outreach, and fiduciary responsibilities. EG staff will be trained and equipped to manage Project activities. For Subcomponent 2.1 (upgrading payments infrastructure), project activities will be implemented using the existing NBG procurement team.
Figure 1.2. EG Organization Chart
Director
Deputy Director Deputy Director Deputy Director
Department of Department of International Analysis, Entrepreneurship Administrative Investment Strategic Export Relations and Monitoring and Department Department Department Development and Department Donor Coordination Evaluation Communication Office
Public Relations Service Center and Marketing Office
Source: EG.
Financial Management and Disbursement
3. The overall residual FM risk for the project is Substantial. Both EG and the NBG have no experience in implementing World Bank-financed projects and projects financed by other IFIs. The FM arrangements in EG and the NBG will meet minimum World Bank FM requirements with the support of capacity-building activities provided by the World Bank team. The following activities should be implemented by EG and the NBG to meet minimum World Bank FM requirements.
Table 1.1. FM Implementation Timeline Actions for Capacity Building Responsible Completion Date 1. Develop the FM chapter of the POM and PSM to reflect the Project- EG As a disbursement condition related internal control, budgeting, external auditing, financial reporting, NBG for each PIE’s components and accounting policies and procedures. 2. Introduce a module within the existing accounting system for Project EG Within 90 days after accounting and reporting. The accounting system shall have functionality effectiveness of automatic generation of SOEs and IFRs for the Project and have the functionality for dual-currency accounting, with inbuilt controls to ensure data security, integrity, and reliability. 3. The World Bank team to organize training on World Bank FM and The World Timing to be agreed disbursement requirements. Bank team bilaterally
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The World Bank Georgia Relief and Recovery for MSMEs (P173975)
4. The disbursement procedures will be described in the DFIL. The main arrangements include the following:
(a) EG will open a Designated Account (DA-A) at the Treasury Account of the MOF held at the NBG on terms and conditions acceptable to the World Bank. The DA will receive funds denominated in euro. EG will also open project accounts in the local currency, to which funds can be transferred to make payments in local currency, including any project operating costs. For Subcomponents 1.1 (grants) and 1.2 (co-financing of interest payments), funds will be transferred to beneficiaries’ and financial institutions’ accounts in local currency. For Subcomponent 2.3 (guarantees), funds will flow from the project account to EG’s accounts at commercial banks in local currency. The reflows from this subcomponent will be deposited and maintained in the project account.
(b) The NBG will open a Designated Account (DA-B) internally on terms and conditions acceptable to the World Bank. The DA-B will also receive funds denominated in euro directly from the World Bank and these will be treated as funds transferred from the MOF through an on-grant arrangement described in the subsidiary agreement. The Project will disburse through the following disbursement methods: (i) direct payments, (ii) reimbursements, (iii) payments against special commitments and (iv) advance to DAs.
5. The loan will be disbursed through the World Bank’s standard disbursement methods, which include (a) advances to the DA using SOEs, (b) payments against special commitments, (c) reimbursement of eligible expenditures, and (d) direct payments. The project will be required to adopt e-disbursements, and the minimum value of applications as well the frequency of reporting of the SOEs will be specified in the DFIL.
Figure 1.3. Flow of Funds
International Bank of Reconstruction and Development (World Bank) (in EUR)
Ministry of Finance (in EUR)
Reimbursement, direct Enterprise Georgia National Bank of Georgia Reimbursement, direct payment and special Advances Designated Advances Designated payment and special commitments Account A (DA-A) (in EUR) Account B (DA-B) (in EUR) commitments
National Bank of Georgia Enterprise Georgia Project Goods, services and Project Account Account (in GEL) works (in EUR) (in GEL)
Goods, services, Interest rate Grants Guarantees Goods, services and works works and payments (in GEL) (in GEL) (in GEL) operating costs (in GEL) [PFIs] (in GEL) [PFIs]
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Note: For Subcomponent 2.1 (payments), the NBG will receive funds directly from the World Bank in practice. The MOF is included in the flow of funds as representation of the borrower.
Procurement
6. The Project will use STEP. All procurement transactions for post and prior contract review under the Project must be recorded in or processed through the World Bank’s planning and tracking system, STEP. This ensures that comprehensive information on procurement and implementation of all contracts for goods, works, non-consulting services, and consulting services awarded under the whole Project are automatically available. This tool will be used to manage the exchange of information, such as bidding documents, bid evaluation reports, no-objections, and so on, between the implementing entities and the World Bank. Both PIEs will have the same platform in STEP; however, each agency will have its own Procurement Plan to oversee procurement under its components and activities. The World Bank team has provided training to the borrower on how to establish its account and on the use of STEP.
7. PPSD. With support from the World Bank, the PIEs have elaborated the PPSD and detailed Procurement Plan. The open, competitive approach is preferred by the World Bank in achieving the core values. All the selection methods defined in the Procurement Regulations can be used. The PIEs will use the procurement document samples provided by the World Bank. The World Bank will continue to guide the NBG through different procurement activities as part of Project implementation.
8. Procurement risks are Substantial. The major risks to procurement are the following: (a) EG and the NBG have no experience in implementing similar projects financed by the World Bank; (b) the procurement personnel are yet to be hired or trained; (c) the POM and Payment Systems Manual are yet to be finalized; (d) no knowledge of the World Bank’s procurement procedures may cause slow procurement processing and decision-making, with potential implementation delays; and (e) a poor contract management system could lead to time and cost overruns and poor-quality deliverables.
9. The procurement risk mitigation measures include (a) ensuring oversight by the World Bank teams in close coordination with the borrower’s oversight agencies; (b) using the electronic Government Procurement platform, which is well developed and actively used by Project Implementation Units implementing World Bank- financed projects in Georgia for national and international procurements; (c) providing training on the World Bank’s Procurement Regulations to the existing personnel of EG and the NBG; (d) conducting customized training on fraud and corruption, bidder awareness on fraud and corruption, and its remedial measures as part of pre-bid meeting; (e) conducting bidder’s awareness and set qualification requirements to ensure better completion; and (f) introducing KPIs in the contracts.
Implementation Support Plan and Resources Requirements
10. The following implementation support plan is proposed:
• Technical support. The World Bank implementation support will include two financial sector specialists at World Bank HQ and one based in the Tbilisi country office to support the overall Project implementation. Two global specialists in payments infrastructure and secured transactions will provide guidance to Project activities under Component 2, in coordination with ongoing technical assistance under the EU TF. On-site or virtual implementation support missions (depending on travel restrictions due to COVID-19) will be conducted at least twice per calendar year.
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• FM. The World Bank team will supervise FM arrangements through the review of quarterly unaudited IFRs and annual audited Project financial statements, as well as implementation support missions. A FM specialist based in Tbilisi will support Project implementation.
• Procurement. The World Bank team will use the STEP system to track all procurement transactions. A World Bank procurement specialist based in Tbilisi will support Project implementation.
• Environmental and Social Framework. Implementation support will be provided as needed by the team’s E&S specialists, based in Tbilisi and Baku.
Table 1.2 Implementation Support Resources by Project Year Resource Estimate Time Focus Skills Needed (Staff Weeks) Year 1 Task management Project management (HQ based) 8 Technical reviews Financial Sector Specialist (HQ based) 3 Technical reviews Financial Sector Specialist (Tbilisi based) 3 Payments Financial Sector Specialist (HQ based) 4 Secured transactions Financial Sector Specialist (HQ based) 2 FM supervision FM Specialist (Tbilisi based) 2 Procurement supervision Procurement Specialist (Tbilisi based) 4 Safeguards Safeguards specialists (Tbilisi and Baku based) 3 Year 2-4 Task management Project management (HQ based) 6 per year Technical reviews Financial Sector Specialist (HQ based) 2 per year Technical reviews Financial Sector Specialist (Tbilisi based) 2 per year FM supervision FM Specialist (Tbilisi based) 2 per year Payments Financial Sector Specialist (HQ based) 4 per year Procurement supervision Procurement Specialist (Tbilisi based) 2 per year Safeguards Safeguards specialists (Tbilisi and Baku-based) 3 per year
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Annex 2: Overview of the Private and the Financial Sector
COUNTRY: Georgia Georgia Relief and Recovery for MSMEs
Overview of the Private Sector
1. Trade, manufacturing, real estate, and construction are the largest sectors in Georgia, which together represent 45.0 percent of GDP and 47.8 percent of employment (Figure 2.1). Trade and real estate represent 14.4 percent and 11.5 percent of total GDP, respectively, as of December 2019, while manufacturing accounts for 10.1 percent and construction for 8.6 percent. The agricultural sector has significant potential but is lagging behind and represents only 7.2 percent of GDP despite being the largest employer in the country with more than 40 percent of the workforce.40 In terms of active businesses, 34.0 percent operate in the trade sector, while 7.0 percent are in manufacturing and 4.4 percent in construction.41
Figure 2.1. Sectoral Distribution of GDP, % Figure 2.2. Distribution of Firms by Size, %
0.3% 100% 14.4% 1.3% 80% 33.1% 39.5% 29.4% 11.5% 60% 21.8% 98.5% 25.9% 10.1% 40% 5.4% 45.1% 6.5% 8.6% 20% 34.5% 6.8% 7.2% 0% Wholesale and retail trade Real estate activities Number of Employment Value Added Manufacturing Construction Enterprises Agriculture, forestry and fishing Public administration and defence Transportation and storage Financial and insurance activities Small Medium Large Other sectors Source: GEOSTAT, 2019. Source: GEOSTAT, 2018. Note: Wholesale and retail trade includes repair of motor Note: Data for number of enterprises are from 2017. vehicles and motorcycles, and public administration and defense includes compulsory social security.
2. Tourism is the fastest growing service export and is estimated to represent 8.1 percent of GDP in 2019. Georgia’s tourism sector has seen significant growth in recent years: international visitor arrivals have increased from 5.3 million to more than 7.7 million in 2019, a 50 percent increase in only four years. Georgia’s neighboring countries are the main countries of origin of tourist arrivals, although tourism from countries further away is actually growing at a faster pace (from a smaller base). While most of Georgia’s current tourism offering is marketed toward tourist from neighboring countries at a lower per capita expenditure, the GoG is targeting high- growth, higher per capita spending tourists with the objective of increasing the value and importance of tourism in the economy. This is part of its 10-year strategic plan ’Georgia Tourism 2025’. As Georgia’s tourism market
40 This also includes self-employed subsistence farmers. The World Bank 2018 Georgia Systematic Country Diagnostic indicated that too few Georgians have formal jobs. Less than 20 percent of Georgians—only 700,000 people—are waged workers. 41 As of April 2020.
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evolves, new global value chain structures necessary to serve this evolution will also emerge, and Georgian firms have the opportunity to compete in those higher-value-added activities, including before and post trip activities.
3. SMEs play a significant role in Georgia’s economy in terms of both value added and employment. According to the GEOSTAT, SMEs account for 99.7 percent of active enterprises, 66.9 percent of employment, and 60.5 percent of value added.42 Their importance in the economy has grown significantly since 2012, increasing the aggregate value added almost fivefold, while employment in the sector has more than doubled. Not uncommon for developing countries, SMEs in Georgia are highly concentrated in the trade and services sector and have low value-added activities, with nearly half of them engaged in wholesale and retail trade, real estate, and renting activities. This is a challenge for sustainable and inclusive growth.
4. In 2014, the GoG initiated a series of reforms aimed at fostering entrepreneurship and SME growth by enhancing skills and boosting higher-value-added exports to new destinations. In 2014, the public agencies EG and GITA were created to facilitate SME and innovation growth, respectively. Furthermore, Georgia signed an Association Agreement with the EU in 2014 and has entered into several free trade agreements including the Deep and Comprehensive Free Trade Area agreement with the EU in 2016 and the Free Trade Area with China in 2017. However, to foster greater productivity growth and enhance the competitiveness of Georgian exports, new productive investments into skills and technologies are necessary combined, with access to private investments and finance being two of the key priorities for the success in these reforms areas.
5. The government’s vision for achieving higher and more inclusive growth is embedded in the Four-Point Reform Plan and Socioeconomic Development Strategy of Georgia, that is, Georgia 2020.43 The Georgia 2020 economic strategy sets out Georgia’s medium-term strategy for economic development and is based on three pillars: (a) strengthening competitiveness of the private sector, (b) developing human capital, and (c) deepening access to finance. This acknowledges that limited access to finance, including long-term finance, is an impediment to SME development and growth. As a result, it is a top strategic priority for reform.
6. Many structural reforms have been initiated or implemented in the private sector and the financial sector over the past six years to support economic growth and deepen access to finance. These include, but are not limited to, efforts to introduce deposit insurance for commercial banks, pension and insurance market reform, capital market development, and measures to support SME growth and access to finance. Continued private sector reforms, including tax, innovation, investment climate, and other related business environment reforms, helped Georgia further improve its 2020 Doing Business score from 83.5 in 2019 to 83.7 and the country is now seventh best economy out of the 190 participating economies in the ease of doing business ranking. Nevertheless, significant challenges—including access to finance, low skills and productivity, high youth unemployment, low savings and limited productive investments, and a large informal economy—remain to be addressed.
7. There are both demand-side and supply-side constraints to improving access to finance. On the demand side, SMEs are particularly constrained by weak business skills and financial planning, while on the supply side, cost of funding remains rather high due to low transparency, high collateral, a shallow non-banking lending market, and legal risks dealing with movable assets.
8. On the demand side, SME financing is constrained by weak business skills and poor financial capability of borrowers, low transparency in the corporate and SME sector, small scale, and lack of eligible collateral.
42 As of the end of 2018. 43 Government of Georgia. 2020. Socio-economic Development Strategy of Georgia – Georgia 2020.
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Many smaller SMEs and new businesses operate in traditional sectors of the economy (such as retail trade, hospitality, or car repair) with limited knowledge transfer, technology, or business management skills to sustain the business to scale up. Putting together a valid business proposal and presenting it to a formal lender remains a challenge for enterprises, which is an impediment to obtain bank financing, particularly for new or young enterprises. Continued support to SMEs in developing skills and fostering access to affordable finance can serve as important incentives for higher business transparency and job creation. This is in addition to the flat 2 percent tax introduced by the authorities in 2018 for smaller entrepreneurs as part of efforts to reduce the incentives to remain informal.
9. On the supply side, lending to SMEs has increased steadily since 2015; however, it remains insufficient and requires further structural reforms to reduce credit risk and the cost of lending. Low transparency and higher business risks translate into larger credit risks for lenders and subsequent higher costs of funds for SMEs. Collateral requirements often exceed 2.5–3.0 times the loan value; non-bank lenders are not very active in the SME lending market. There are also legal risks in dealing with movable assets and higher costs of loss recovery that need to be addressed to enhance access to finance. Overview of the Financial Sector 10. The financial sector of Georgia is bank-centric and characterized by high concentration. Financial sector assets stood at GEL 49.5 billion or 110.6 percent of GDP as of the end of 2019. Banking sector assets represent 95.3 percent of total financial sector assets (see Table 2.1). The banking sector is highly concentrated, with the two largest banks accounting for 73 percent of total banking sector assets, 72 percent of loans, and 75 percent of total deposits. These banks also have leading positions in the non-banking financial sector, including payment services, insurance, leasing, and the capital market (investment services, custodian, and brokerage), as well as in nonfinancial companies. The third largest bank accounts for approximately 5 percent of banking assets. The NBG identifies these three banks as the only systemically important banks (SIBs) in Georgia. In total there are 15 commercial banks, 14 of which are foreign owned.
Table 2.1. Financial Sector Structure Figure 2.3. Dollarization, percent
90% Share of Assets, Share Financia Number of 80% GEL of l Sector Institution Billion GDP, % Assets, s 70% % 60% 62.2% Commercial banks 47.18 105.4 95.3 15 57.5% MFIs 1.38 3.1 2.8 48 50% Insurance companies 0.80 1.8 1.6 17 o/w Pension schemes 0.01 0.0 0.0 4 40% Pension funds 0.01 0.0 0.0 4 Jun-17 Jun-12 Oct-15 Oct-10 Apr-18 Apr-13 Feb-19 Feb-14 Dec-19 Dec-14 Dec-09 Aug-16 (schemes) Aug-11 Financial auxiliaries 0.13 0.3 0.3 851 FX loans, % of total loans Total 49.51 110.6 100.0 935 FX deposits, % of total deposits Source: NBG 2019. Source: NBG 2019. Note: Financial auxiliaries include brokerage companies, exchange bureaus and stock exchanges.
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11. The banking sector balance sheet reflects a traditional lending business model, with a relatively high share of retail deposits on the funding side. The loan portfolio accounts for 63 percent of total assets, cash and balances on corresponding accounts accounted for 19 percent and investment securities for 11 percent. The funding structure consists of 61 percent in customer deposits, 19 percent in borrowed funds, and 11 percent in equity capital. The loan portfolio is roughly split between retail (22 percent mortgage, 13 percent consumer credit, and 15 percent other retail) and corporate (25 percent trade loans and the remaining 25 percent distributed among manufacturing, construction, energy, agriculture, transport and others). As a result of COVID-19, bank loan origination from March 2020 plummeted, with year-on-year decreases of up to 60 percent in April and May. However, there has been a significant improvement since June, with local currency loan originations growing at 12.7 percent year-on-year in September 2020, with new foreign currency loans only 12.6 percent lower than in September 2019.
12. The banking sector entered the COVID-19 crisis with solid capital and liquidity buffers. In 2019 Q4, the banking sector reported system-wide regulatory capital to risk-weighted assets of 19.5 percent, clearly above minimum requirements. Liquidity, although trending downward, also stood at comfortable levels, with liquid assets to total assets at 19.6 percent and the liquidity coverage ratio at 134 percent. As shown in Table 2.2, financial soundness indicators, with the exception of profitability, entered and have remained at healthy levels.
Table 2.2. Financial Soundness Indicators, percent
2015 2016 2017 2018 2019 2020 Q1 2020 Q2 Capital adequacy Regulatory capital to risk-weighted assets 16.7 15.1 19.1 18.4 19.5 17.0 18.0 Regulatory Tier 1 capital to risk-weighted assets 12.0 10.5 14.0 13.5 14.6 11.8 12.8 Liquidity Liquid assets to total assets 23.4 22.8 21.3 21.6 19.6 20.0 21.4 Liquidity coverage ratio (LCR) — — 127 124 134 134 138 Profitability and earnings Return on assets 2.7 3.1 3.1 3 2.5 -7.1 -2.4 Return on equity 17.6 22.1 23.3 23.3 20.3 -64.4 -21.7 Interest margin to gross income 60.8 58 58.9 61 58.1 56.5 58.1 Asset quality Non-performing loans to total gross loansa 2.7 3.4 2.8 2.7 1.9 2.2 2.4 Currency risk Net open position in foreign exchange to capital -0.4 7.3 6.9 9.8 -1.4 1.8 -2.6 Source: NBG. Note: a. Nonperforming loan (NPL) defined by IMF’s methodology; 90 days past due.
13. Banking sector profitability has been competitive over the past few years, although it has suffered in 2020 partly due to increased loan loss provisioning. As per the NBG’s recommendation, commercial banks frontloaded expected losses resulting from COVID-19, increasing provisioning expenses by GEL 1.2 billion (US$400 million) in March alone, despite low NPLs of 2.2 3 percent in March 2020. As a result, quarterly banking sector profitability plummeted in the first two quarters of 2020. In 2020 Q2, NPLs have increased by 0.2 percentage points to 2.4 percent, while the profitability ratios of return on assets (ROA) and return on equity (ROE) have seen an improvement but remain negative, improving from -7.1 percent and -64.4 percent in 2020 Q1 to -2.4 percent and 21.7 percent, respectively, in 2020 Q2.
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14. However, high dollarization and concentration in the banking system pose significant risks. The high market share of the top two banks combined with high dollarization levels are risks, particularly in a country with bank resolution and crisis preparedness frameworks that are currently being strengthened. Responsible lending and borrowing practices still need to be further enhanced. Various measures have been introduced since 2016 to support the reduction in dollarization; however it still remains high. As of September 2020, 62.2 percent of total deposits and 57.5 percent of loans were in foreign currency, down from around 71.6 percent and 64.7 percent respectively at the end of 2016. In addition to dollarization, high concentration in the banking sector poses significant systemic risks besides the longer-term market competition and viability test for smaller banks. The two largest banks account for 73 percent of banking assets. Their size brings scale benefits and greater risk diversification that helps sustain profitability and access to international financing at a competitive funding cost. However, lack of access to local currency liquidity (as domestic deposits and IFI financing are skewed toward the largest banks) constrains smaller banks’ margins and organic growth. This market dominance may also affect competition and exacerbate access to finance challenges.
15. Prolonged uncertainty and reduced business and consumer confidence, combined with lower household income, pose additional credit risks to the financial sector. According to the NBG, the Georgian financial system has maintained its stability against current shocks while acknowledging the possibility that some banks may suffer losses in 2020, which could be recovered soon thereafter.44 Despite the immediate impact of the COVID-19 pandemic on financial intermediation, real credit growth in 2020 was positive. Asset quality will likely deteriorate significantly in the upcoming months. According to the scenario analysis conducted by KPMG Georgia about the potential impact of COVID-19 on expected credit losses (ECLs) in the corporate and retail credit portfolios, the total Tier 1 capital ratio could fall to 7.8 percent in a base-case scenario and all the way to 2.9 percent in a pessimistic scenario. The base-case scenario assumes ECLs would rise by 2.7 and 3.8 times in the corporate and retail credit portfolios, respectively. In this scenario, ECLs would amount to GEL 3.7 billion (US$1.2 billion), or roughly 10 percent of banking sector loans. In the worst-case scenario, these losses could reach 23 percent of total loans, which would result in negative Tier 1 capital ratios at a number of banks.45
Access to Finance
16. Despite being the backbone of the Georgian economy, SMEs face difficulties in accessing finance, that inhibits their growth and contribution to economic development. Rapid development of financial intermediation has fueled the growth of consumer finance, while SME lending remains underdeveloped. Banks’ products are poorly tailored to meet the needs of younger and smaller SMEs. Most SMEs continue to rely on internal funds, retained earnings, and family and friends for financial support, some even in their fourth or fifth year of operation. Despite welcome improvements in SME finance, challenges persist for the ecosystem to further develop and mature. Informality and unreliable financial reporting, as well as gaps in the existing credit market infrastructure, reduce lenders’ ability to overcome information asymmetries, which translates into high cost and excessive collateral requirements. Average interest rates of SME loans are approximately 300 basis points higher than that for business loans to large enterprises, while collateral is required for 80.5 percent of SME loans for an average value of 194.2 percent of the loan amount.46 Alternative finance markets for SMEs, including non-bank lending, start-up, or angel financing, are underdeveloped. Access to debt/equity financing from capital markets is available for the largest Georgian firms (about 100) but is constrained by the lack of instruments and non-transparency of issuers. Most SMEs are too small and unsuitable to tap capital markets and depend on conventional financial
44 NBG. 2020. Financial Stability Committee’s Decision – May 27, 2020. 45 KPMG. 2020. COVID-19 Potential Impact on Georgian Banking Sector – Scenario Analysis (May 2020). 46 World Bank. 2020. Georgia Enterprise Survey (2019).
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intermediation, which remains largely inaccessible. These difficulties have been exacerbated with the COVID-19 pandemic. As firms experience growing financial distress, they are suffering from liquidity issues, with 31.5 percent of SMEs reporting delaying payments by more than one week due to COVID-19 and around 71 percent of firms experiencing decreased liquidity or cash flow availability in the Enterprise Survey COVID-19 follow-up survey.
Non-bank Sector
17. The non-bank lending sector is composed of 40 MFIs, 119 loan issuing entities and one credit union, and has stalled in the past few years, partly due to the liquidation of several MFIs. MFIs and loan issuing entities account for 2.7 percent and 1.0 percent of total financial assets, respectively. After reporting solid growth from 2012 to 2016, the sector has shrunk in the past few years, as a result of the liquidation of several MFIs, the trading of the credit portfolios of a number of MFIs, and the prohibition in January 2017 to underwrite foreign currency loans less than GEL 100,000 to private individuals. MFIs’ credit portfolio is dominated by consumer loans with over 70 percent of the total portfolio.
18. The insurance sector has been growing but remains severely underdeveloped with gross non-life insurance premiums equal to only 1.1 percent of GDP. The insurance consumption for all non-life business lines (including health and personal accident) per person was US$44.6 in 2018, which is on par with the other Eastern Partnership countries but far less than in several other eastern European countries. The life insurance market is small, accounting for only 6.9 percent of total market gross premiums in 2018. There are 17 insurance companies licensed to operate in Georgia; however, the market is dominated by two major groups. Insurance companies’ product offerings remain limited, although they are expanding, especially through introduction of new types of liability insurance in 2018–2019. Medical (health) insurance is the most common (45.8 percent), followed by motor (25.6 percent), and property (16.8 percent). Motor premiums were the fastest growing sector in 2018, largely due to the introduction of compulsory motor third-party liability insurance for foreign-registered vehicles entering the country from March 2018. The sector is regulated by the Insurance State Supervision Service of Georgia, which is an independent LEPL under the Prime Minister.
19. The rest of the non-banking sector is underdeveloped. Leasing is underdeveloped with total assets of less than 1 percent of GDP, while factoring is limited with no registered factoring companies and few factoring services offered by commercial banks. The equity market is shallow with market capitalization of about 5 percent and only 22 equities listed, while the corporate bond market is growing rapidly, boosted by several domestic corporate issuers who are diversifying their funding base and IFIs who increasingly provide lending to local banks and the economy in lari as part of the larization policy.
Payment Systems
20. Payment systems and payment services are steadily developing in Georgia. As of October 2020, there are 30 payment service providers and 2 payment system operators registered at the NBG. The RTGS is working effectively, with continuous NBG enhancement and protection of the system. Since 2015, the NBG endorsed numerous changes to enhance the retail payment system, in line with the World Bank/IMF 2014 Financial Sector Assessment Program recommendations and World Bank 2014 Retail Payments System Report. In early 2019, with World Bank guidance, the NBG completed a self-assessment against International Organization of Securities Commissions Principles/Committee on Payments and Market Infrastructures Principles for Financial Market Infrastructures and identified a further road map for reform. The NBG’s immediate priorities include further enhancement of retail payments infrastructure and development of an instant payment system.
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Annex 3: Impact of COVID-19 on Firms and Policy Response
COUNTRY: Georgia Georgia Relief and Recovery for MSMEs
1. COVID-19 has plunged the global economy into one of its deepest recessions over the past century. Economic activity in the emerging and developing countries of Europe and Central Asia contracted by 2.0 percent in 2020. In Georgia, real GDP contracted by 6.2 percent in 2020. Beyond the loss of life, the COVID-19 pandemic and the social distancing measures are having significant negative effects on domestic demand across the region, which are compounded by the decline of tourism, remittances, and exports, as well as supply chain disruptions and possible instability in financial markets.
Measures to Contain Spread of the Virus
2. Georgia declared a state of emergency on March 21, 2020, following the declaration of the COVID-19 global pandemic by the World Health Organization on March 11, 2020. The GoG proactively introduced numerous containment measures,47 including social distancing, a lock down of high-risk districts, a travel ban for foreign visitors, mandatory quarantine for nationals returning to Georgia, and closure of shops (except for grocery stores and gas stations). Under the state of emergency, all educational institutions and many public venues were closed. Strict transportation restrictions were introduced.48
3. The country announced an ambitious fiscal stimulus package but direct relief measures to support the real economy might not be enough. The GEL 3.5 billion anti-crisis package (US$1.1 billion) is estimated at 6.5 percent of GDP, which is above the global average of 4.4 percent.49 Nevertheless, relief measures announced by the GoG to directly support the real economy are equivalent to roughly 1 percent of GDP (GEL 500 million), which is low in comparison to other economies and below some businesses’ expectations solicited through business associations in Georgia. The GEL 3.5 billion (US$1.1 billion) AEP included both expenditure and revenue measures covering health, households, and SMEs, including GEL 1.8 billion for the economy and assistance to entrepreneurs per the updated 2020 Budget and COVID-19 Response. The implementation of the anti-crisis package will be frontloaded in 2020, however most of the targeted sectoral support will be implemented in 2021. It is estimated that 43 percent of the agriculture plan, 54 percent of the tourism plan, and roughly 90 percent of the real estate development plan will be implemented in 2021 or after.
Impact on the Georgian Economy and Firms
4. Containment measures to address the health crisis have negatively impacted employment. According to a business pulse survey conducted on May 2020 by PricewaterhouseCoopers (PwC) and the Investors Council of 1,938 firms, 56 percent of firms said they have reduced their staff and/or sent their employees on unpaid leave in March and April, with 27 percent of respondents reporting a complete reduction of its headcount to zero.50 In
47 Flights from China and Wuhan had already been cancelled and additional screening of Chinese passengers had been introduced on January 27, 2020. 48 As part of preventative measures, to curtail the spread of the virus in the country, special checkpoints have been set up in Tbilisi, Batumi, Kutaisi, Rustavi, Poti, Zugdidi and Gori cities of the country to screen people and carry out better control of the situation. 49 Elgin, C., G. Basbug, and A. Yalaman. 2020. “Economic Policy Responses to a Pandemic: Developing the COVID-19 Economic Stimulus Index.” Covid Economics: Vetted and Real Time Papers 3: 40-54. Version as of June 7th, 2020. 50 The survey was conducted on April 16-27, 2020. Out of the 1,938 responses, 46 percent were micro-enterprises (including self- employed) and 25 percent were small enterprises (10 – 49 employees).
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addition, while 40 percent of firms reported were not expecting any staff reduction, 35 percent of surveyed firms expected a reduction in staff by at least 50 percent.51 Similarly, according to a May 2020 survey by the Caucasus Research Center (CRRC) Georgia with 1,002 individuals, almost a third of adults reported having lost a job at some point during the crisis.52 Roughly 54 percent of respondents reported a lower expected income for May compared to precrisis levels and 13 percent anticipated no household income.53
5. Georgian firms are facing severe liquidity shortages. According to the PwC survey, 65 percent of respondents reported that revenues had already dropped by more than half. Roughly 48 percent of firms had to suspend business activities. The combination of the drastic reduction in demand, difficulties in collecting cash payments, and changes in consumer behavior, has squeezed the liquidity of firms. While 28 percent of respondents have already reported liquidity shortages, roughly half of surveyed firms expect challenges in the next 1 to 6 months. Only 32 percent of respondents said they would be able to maintain their liquidity beyond three months. In response to this liquidity crunch, firms have started to reduce headcounts. Roughly 80 percent of respondents said they needed additional financing, with 85 percent of firms reporting not having approached a financial institution yet. Only a portion of large firms were able to obtain additional financing from banks. The main reasons behind financial needs included: financing raw materials and or working capital (27 percent of respondents), paying any other existing financial liabilities (24 percent), paying taxes (20 percent), and financing wages (18 percent). Challenges will persist in the upcoming months, with roughly half of the firms across sectors expecting a 50 percent reduction in revenues in the coming three months and another 16 percent expect a 25–50 percent reduction.54 Other challenges included: increase in prices and lower availability of raw materials (partially due to the lari depreciation), rise in rent costs, and limited skills and resources to transition to digital platforms and to comply with new phytosanitary requirements.55
6. Evidence suggests that MSMEs in the trade and service sectors have been disproportionately affected by the COVID-19 crisis. The more vulnerable economic sectors include: tourism and travel, aviation, cafes and restaurants, and durable consumer goods. The hotel, restaurant, and catering businesses sector (HoReCA), which is significantly composed by MSMEs, was particularly hit. Roughly 50–60 percent of microenterprises—self- employed and firms with 2–9 employees—have suspended their activities in response to emerging difficulties, compared to 25-35 percent of medium-sized and large firms. According to the survey, 45, 30, and 20 percent of self-employed businesses, microenterprises, and small enterprises were already facing liquidity challenges, respectively. In addition, micro and smaller firms might experience additional difficulties adjusting their business models in response to the new scenario, especially with regard to the transition to digital operations.56
7. Tourism was the sector most affected by COVID-19 and associated containment measures. Georgia relies heavily on the tourism and travel sectors, which directly and indirectly account for roughly 33.7 percent of GDP and 29.5 percent of employment (520,000 jobs). According to the PwC survey, 78 percent of firms in the accommodation and food services activities reported a decrease in revenues in March and April of at least 50 percent compared to the previous year and 71 percent of them forecasted an additional drop in revenues of at least 50 percent in the coming three months, compared to the same period in the previous year.57 Roughly 46 percent of firms in this sector had furloughed all staff. Further, tourism revenues are expected to drop by 65
51 PricewaterhouseCoopers Georgia and Investors Council. 2020. Georgian business in the face of COVID-19 pandemic – May 2020. 52 The Wave 4 survey was conducted on May 21–23, 2020. 53 CRRC Georgia. 2020. COVID-19 Monitor: Knowledge, Attitudes, Practices and Impacts of COVID-19 – Wave 4. 54 PricewaterhouseCoopers Georgia and Investors Council. 2020. Georgian business in the face of COVID-19 pandemic – May 2020. 55 Compiled from interviews and surveys from Business Association of Georgia and Georgian Chamber of Commerce and Industry. 56 PricewaterhouseCoopers Georgia and Investors Council. 2020. Georgian business in the face of COVID-19 pandemic – May 2020. 57 Ibid.
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percent on annual basis in 2020.58 The decline in visitor expenditures will impact the accommodation sector, but also other related activities, such as entertainment, food and beverage, shopping, and domestic transportation.59
8. The agriculture sector has shown more resilience, with export-oriented agricultural firms being the most affected by the COVID-19 crisis. The sector is supported by the inelasticity of food demand for staples and the limited effect of the crisis on overall consumption of food products. In this context, however, export-oriented agricultural firms have observed higher decrease in sales, compared to firms serving the domestic market. Firms in the agriculture sector have started to gradually introduce sales through online platforms to offset some of the supply chain challenges.60
9. The policy response in Georgia will be challenged by the high level of fragmentation and informality in the private sector. Self-employment is prevalent in Georgia, representing 43 percent of the economically active population.61 Individual and micro-enterprises (below 10 employees) represent almost 90 percent of firms in Georgia, with 50 percent of it being in the wholesale and retail sector.62 Roughly 44 percent of microenterprises report competing against unregistered or informal firms.63 Reaching self-employed or informal firms and/or workers through transfers is considerably more challenging because they are often outside the financial and tax systems, but they should not be left out of support measures as they are often the most vulnerable segments of the population.64 Hence the importance of expanding the microgrant program.
Response Projects and Programs for the Real Economy
10. Following the announcement of economy-wide measures in the initial stage of the crisis, Georgian authorities announced subsequent anti-crisis plans for key sectors in May 2020. This comprises (a) a GEL 200 million (US$67 million) package for the tourism sectors, which includes the launch of a mechanism to co-finance up to 80 percent of interest rate payments on hotel business loans to about 3,000 hotels, further property and income taxes exemptions and deferrals, and subsidies to travel agencies and travel guides; (b) a GEL 300 million (US$100 million) anti-crisis plan for the agriculture which aims at supporting about 200,000 farmers. This includes the subsidizing up to 150 liters of diesel per hectare by GEL 1 below the market price, an irrigation tax exemption, and a range of grants and co-financing mechanisms; and (c) a GEL 434 million (US$145 million) anti-crisis plan for the construction and real estate development sector, including related businesses such as manufacturing of construction materials and furniture, and trade of equipment). The plan includes interest rates subsidies of up to four percentage points for five years on mortgage loans for newly built residential apartments, a five-year credit guarantee of up to 20 percent of the mortgage loan, purchase of residential apartments for IDPs, and a state guarantee for the completion of a residential real estate project.
11. EG has adjusted and scaled-up its existing instruments under the umbrella program ‘Produce in Georgia’ to respond to cash flow constraints and working capital needs of impacted firms. Established in 2014 under the MOESD, EG is an agency specialized on entrepreneurship support, export promotion and Investment, responsible for promoting entrepreneurial culture in Georgia by supporting the creation of new enterprises and the expansion
58 TBC Capital. 2020. COVID-19 Impact on Georgian Economy – 14 May 2020. 59 This has been confirmed with feedback from business association in consultations from April and May, 2020. 60 Georgian Farmers’ Association. 2020. COVID-19 Impact on Georgian Farmers and Agriculture. 61 GeoStat. 2020. “Statistical Yearbook of Georgia – 2019.” 62 Posadas, P, M. Makovec, R.F. Jaef, C. Gruen, and M.I. Ajwad. 2018. Georgia at Work: Assessing the Jobs Landscape. World Bank, Washington, DC. 63 World Bank. 2020. Georgia Enterprise Survey (2019) – Microenterprises Module. 64 World Bank. 2020. COVID-19 Notes – Finance Series: Assessing the Impact and Policy Responses in Support of Private-Sector Firms in the Context of the COVID-19 pandemic.
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or refurbishment of existing enterprises. In 2014, the Government launched the umbrella program ‘Produce in Georgia’ to be implemented by EG and the Agricultural and Rural Development Agency (ARDA). The main programs implemented by EG included: (a) microgrants of up to GEL 20,000 (US$6,300) to support fixed asset acquisition, which were provided through contractors, mostly NGOs, contracted to select and train beneficiaries throughout a business plan competition; and (b) co-financing of interest rates on investment loans provided by commercial banks under the parameters of ‘Produce in Georgia’ to support the industry and hospitality sectors. Before the crisis, the program co-financed seven percentage points of the lending rate charged by banks for up to 24 months. In response to the effects of the COVID-19 pandemic, EG has increased the share, coverage, and duration of this program and has allowed for a higher percentage of the loan to be channeled to working capital needs. The agency also announced a substantial—fourfold—expansion of its grant program and a GEL 300 million (US$100 million) injection into its recently revamped credit guarantee scheme.65
12. ARDA has introduced a range of different programs in response to the COVID-19 crisis. In addition to the State Program for Maintaining Prices of Basic Consumer Food Products (GEL 4.8 million, US$1.6 million), ARDA implemented the State Program of Subsidizing Wheat Imports, which provided a subsidy of up to US$40 per ton of wheat imports (for a total of GEL 5.2 million, US$1.7 million). The agency is currently developing two new components under its flagship program, ‘Preferential Agro-Credit’ to include (a) a new subcomponent for working capital, (b) a new subcomponent for the food industry to support fixed assets, and (c) a new matching grant (50 percent grant) program for fixed assets in primary agriculture production (mainly focusing on machinery, drip irrigation and greenhouses).
13. On June 1, 2020, the NBG launched a new tool to support lending to SMEs by lenders. Acknowledging the high uncertainty and increased risk aversion by financial institutions toward SMEs, the NBG introduced the SME liquidity supply tool. This tool has two components: (a) provision of liquidity support to commercial banks against collateral of SME loan portfolio; and (b) provision of funding to MFIs from commercial banks with support of the NBG, within the limits of their SME loan portfolios meeting certain eligibility criteria. The new liquidity management mechanism will operate until the end of 2023 (decreasing in scope from 2022), with the possibility of monthly revisions. The price will be determined by the TIBR1M one-month index.66
14. The announced relief measures for the private sector are largely bank-centered, which will likely exclude a significant portion of enterprises that would otherwise be viable and that would not qualify for social assistance. In 2020, only GEL 20 million (US$6.7 million) have been allocated to microgrants for non-agricultural MSMEs to be implemented outside the financial sector. Georgia does not have a development finance institution and implements SME support programs through government agencies that, in turn, implement projects through contractors, such as nonprofit organizations (NGOs), and financial institutions. The implementation track record and outreach of the SME support programs can be strengthened and it will be important to substantially enhance these programs to meet the immense needs of the sector, through measures such as graduation schemes and better M&E for evidence-based programming.
65 World Bank. 2020. Assessment of EG’s Partial Credit Guarantee Scheme – June 2020. Washington, DC. 66 Agenda.ge. 2020. “The NBG launches a new tool to support lending to small and medium-sized businesses.” Accessed on June 1, 2020.
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Annex 4: Financial Intermediary Assessment
COUNTRY: Georgia Georgia Relief and Recovery for MSMEs I. Details on Project Design
1. Although the PIU, EG, is not a financial institution from a legal perspective, it functions as one in many aspects and therefore the Financial Intermediary Assessment is being undertaken. Subcomponents 1.2 (co- financing of interest payments) and 1.3 (PCGs) support greater availability of credit for MSMEs beneficiaries through EG and, as such, are treated as financial intermediary financing. The provision of this financing is facilitated by EG, which acts as an intermediary channeling resources to PFIs, including commercial banks, leasing companies, and MFIs. These components will be implemented through the following flow of funds shown in Figure 4.1.
Figure 4.1. Proposed Flow of Funds for Subcomponents 1.2 and 1.3 Flow of funds for Subcomponent 1.2
Beneficiary’s account at World Bank MOESD Enterprise Georgia Participating Financial Institution
Flow of funds for Subcomponent 1.3
Enterprise Georgia’s World Bank MOESD Enterprise Georgia account at Participating Financial Institution*
Note: *For Subcomponent 1.2, funds are transferred to beneficiary’s accounts (loans) and PFIs’ accounts (leases). With regard to Subcomponent 1.3, for MFIs, the funds are transferred to a MFI account at a commercial bank , which will transfer the funds to the account of the MFI, as MFIs are not allowed to accept deposits. Subcomponent 1.3 has a reflow for any unsued guarantee payments. There are no reflows for Subcomponent 1.2. II. Eligibility Criteria for PFIs
Assessment of EG
2. EG is a state agency under the MOESD. EG has been identified as the PIE for Component 1 of the Project given that there is no development bank, state-owned commercial bank or any commercially oriented institution that can perform this role. This is in line with the provisions of the Guidance Note for IPF projects with financial intermediary financing. Given the risks that EG bears and its project modalities, the agency currently does not perform complete assessments of creditworthiness of either MSME beneficiaries or PFIs. Instead it relies on the NBG’s capacity to regulate and supervise them. All EG’s partner commercial banks are regulated and licensed financial institutions, that are in good standing with the financial regulator. The agency also works with leasing
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companies,67 which are currently nor regulate nor supervised, and MFIs which are just registered with the NBG. The participation of these unregulated institutions reinforces the need for stronger risk management practices at EG. While the agency will not be subjected to common requirements for PFIs, the Project will support the strengthening of the institutional capacity of EG, with focus on: strengthening its M&E framework, improving its risk management, the introduction of incentives for PFIs to adhere to the programs’ guidelines as well as increased capacity to evaluate the creditworthiness of PFIs, to ensure the agency can perform its intermediation role.
3. Established in 2014 as a LEPL, EG has the mandate of promoting entrepreneurship, investment, and exports in the country. The statute of EG is established by Order No. 1-1/217 of the MOESD. As a legal entity under the purview of the MOESD, EG does not have its own corporate governance framework, and relies on its parent ministerial one. The Director of EG is appointed by the MOESD and reports directly to a MOESD deputy minister. The mandate of the agency includes fostering entrepreneurship and increasing private sector competitiveness; promoting exports; facilitating investments; and attracting FDI. The agency currently has 62 employees, including administrative staff, distributed across six departments (Investments, Entrepreneurship Development, Exports, M&E. Strategic Communication, and Administrative).
4. Before the COVID-19 crisis, EG had an annual approved budget of GEL 40 million (US$13 million) to run a key government flagship program. Alongside the ARDA, EG is one of the implementing agencies of the government’s ‘Produce in Georgia’ program. This flagship program aims to support entrepreneurship in Georgia, strengthen businesses, facilitate the establishment of new businesses, expand and reequip existing ones, and increase competitiveness of private sector. The program also includes three components: (a) access to finance; (b) access to real estate, managed by the State Property Agency; and (c) technical assistance which is implemented jointly with GITA. EG is responsible for the light industry and hotel (hospitality) development programming. Under the access to finance component, EG provides co-financing of interest payments through commercial banks and leasing companies, focusing on five industries (manufacturing, film making, hotel, spa, and tourism service). The co-financing of interest payments program represented 50 percent of EG’s planned budget in 2020 pre-COVID-19, including both the light industry and hotel development programs. In addition to co-financing of interest payments, ‘Produce in Georgia’ also includes the ‘Micro and Small Business Program’ (representing 25 percent of the pre-COVID-19 2020 budget), which provides microgrants through business plan competitions. This program is largely administered by NGOs that are procured by EG through a competitive process.
5. EG has been working with external partners (including USAID and GEZ) to improve its organizational structure. According to a 2019 institutional assessment, USAID identified the following areas of improvements for EG: organization performance management, information systems, management of key processes, and human resource management.68 The agency has an M&E department that reports directly to the EG Director. EG has, according to the USAID report, yet to develop an effective performance measurement system grounded on (a) identification of outcome measures and KPIs that mirror strategic objectives; (b) sound information systems that would help the organization consistently generate, maintain, process, and analyze performance data; and (c) M&E measures and performance targets. In this context, EG has recently automated its application processes for ‘Produce in Georgia’ and ‘Micro and Small Business Program’ and its partner-facing interface, which should enable the introduction of a more robust M&E system based on data from MSME beneficiaries. Despite these recent initiatives to automate processes and the partner-facing interface, the next step for EG is to develop a centralized
67 There are two participating leasing companies which belong to banking groups. 68 In the past, EG faced organizational instabilities caused by frequent changes in leadership and the resulting staff turnover. This has been recently addressed as deputy ministers of MOESD have worked closely with EG leadership.
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repository for critical beneficiaries and programs data, which integrates existing databases.69
Eligibility Criteria for PFIs
6. The existing co-financing of interest payments and guarantee programs currently do not impose eligibility criteria for individual financial institutions. EG screens groups of financial institutions depending on their type. Currently, all licensed commercial banks and operating leasing companies may choose to participate in the co-financing program, while all licensed commercial banks can participate in the guarantee program. EG is currently working to admit all registered and regulated MFIs with assets above GEL 2 million to the guarantee program. Given its current assessment capacity, EG relies on the regulatory and supervisory capacity of the NBG to alert EG of any individual bank-level risks. To date, none have been received given the stability of the Georgian financial sector and the prudential indicators. The Project seeks to strengthen this capacity. The agency currently has cooperation contracts signed with 13 banks and two leasing companies.70
Table 4.1. Financial Soundness Indicators from Banks in Georgia, percent Regulatory Tier-1 NPL to Total Liquid Assets to Total Assets ROA Capital to RWA Gross Loans Total Assets GEL, million % Sep 19 Sep 20 Sep 19 Sep 20 Sep 19 Sep 20 Sep 19 Sep 20 TBC Bank 20,966 38.58 14.7 12.7 2.3 -0.4 3.4 5.3 22.8 19.8 Bank of Georgia 19,342 35.59 13.3 12.0 2.4 -0.6 4.9 5.9 21.4 24.4 Liberty Bank 2,764 5.09 12.4 9.6 1.1 -1.0 5.6 6.4 31.1 37.4 VTB Bank Georgia 1,949 3.59 13.4 10.6 0.7 -1.6 7.0 8.6 25.7 25.3 ProCredit Bank 1,744 3.21 13.7 12.9 1.2 -0.5 3.3 3.8 24.5 23.2 Basis Bank 1,738 3.20 16.3 15.1 1.3 -0.1 5.6 6.2 32.6 27.2 Cartu Bank 1,407 2.59 15.1 12.9 2.2 -3.1 39.5 36.7 29.7 30.9 Credo Bank 1,307 2.41 13.3 11.5 2.7 0.6 1.2 0.9 12.5 13.1 Tera bank 1,238 2.28 12.3 9.6 2.8 -1.8 6.6 5.2 25.7 20.0 HALYK Bank 604 1.11 18.8 14.6 1.4 -4.2 9.6 9.2 18.1 19.4 Pasha Bank 465 0.86 19.9 15.2 -1.7 -5.5 0.2 8.1 28.0 11.0 Is Bank 325 0.60 27.3 22.6 2.7 0.2 4.4 3.4 30.9 13.6 FINCA 280 0.52 15.2 13.8 0.8 -1.9 6.2 7.2 20.0 24.2 Ziraat Bank 124 0.23 45.2 45.5 3.5 0.5 2.1 11.0 62.3 52.5 Silkroad Bank 89 0.16 77.6 83.6 -0.6 0.4 26.2 28.1 52.1 46.7 System Total 54,342 n.a 14.4 12.5 2.4 -0.9 5.3 6.4 22.9 21.5 Source: NBG. Note: NPLs using the NBG’s methodology.
7. Before the COVID-19 pandemic, financial institutions in Georgia reported adequate prudential indicators. The main users of EG’s programs are Bank of Georgia and TBC Bank—and this reflects the size of their SME loan portfolios. Since the pandemic, commercial banks were encouraged by the NBG to frontload potential losses and, as a result, reported negative profitability indicators for 2020Q2 and 2020Q3. However, banks have been able to maintain adequate liquidity and capital ratios, as shown in Table 4.1. EG disbursed co-financing interest payments supporting GEL 97 million in 2019 and has guaranteed GEL 69 million in loans since the announcements of the
69 USAID. 2019. HICD Performance Assessment of EG. 70 BasisBank; ProCredit Bank; Tera Bank; TBC Bank; Bank of Georgia; Liberty Bank; VTB Bank Georgia; FINCA Bank; Cartu Bank; Halyk Bank Georgia; Ish Bank Georgia; Bank Georgia; Credo Bank; PASHA Bank Georgia; TBC Leasing; and Georgian Leasing Company.
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revisions of the program. The total loans supported—GEL 166 million—is small compared to the outstanding balance of SME loans in local currency (GEL 3.8 billion) and the overall annual volume of loans approved for legal entities by commercial banks (GEL 8.8 billion in 2019). Therefore, EG programs are not a systemic risk to the financial sector.
8. Given the challenges of immediately introducing eligibility criteria for individual banks for existing programs, the Project will support the strengthening of EG’s risk management system, as well as its regime for breaches and sanctions. The Project will support the agency in developing a framework for collecting and monitoring data from EG portfolios and PFIs. This will seek to separately address the particular risks of an interest payment co-financing mechanism and a new guarantee scheme that currently has less than 100 loans guaranteed. Since there is not large liquidity transfer or credit lines, such an approach to risk management is commensurate with individual PFI risk. The focus therefore will be on introducing a tighter regime for breaches and sanctions for each subcomponent, in coordination with the NBG. This regime, which will ringfenced and applied to the EG portfolio only, will be based on asset quality indicators and business practices. The regime will define specific thresholds which will be mapped to a layered system of sanctions, which would range from initial warnings, request of corrective plan on the EG portfolio, temporary EG program suspension, and exit from the EG program. The Project will collaborate with IFC, to leverage its knowledge of such a due diligence process.
III. Market Efficiency Issues
9. Interest rates: the NBG started loosening monetary policy as inflation started to decline in April 2020. The authority lowered the policy rate three times by a cumulative amount of 100 bps between April and August 2020. From September 2020 until March 2021, the NBG has kept rates at 8.0 percent given continued exchange rate depreciation which could, if sustained, feed into inflation expectations.71 On March 17, 2021, the NBG increased the refinancing rate to 8.5 percent in response to risks of high inflation expectations. In 2020, the weighted interest rates on commercial banks’ loans were 15.3 and 6.9 percent for loans in lari and in foreign currency (mainly US$) respectively, while the deposit rates were 9.4 and 2.8 percent by the same currency groupings.
10. Directed credit: the Project will target private MSMEs in Georgia in economic sectors, with a focus on priority sectors as defined in the resolutions of the programs supported by the Project. Access to finance for MSMEs in Georgia are constrained due to a range of reasons, such as high collateral requirements, limited offer of tailored products, informality, weak business skills, unreliable financial reporting, and underdeveloped alternative finance markets. These findings were confirmed in the most recent Enterprise Surveys from 2019. To promote sustainable improvements in access to finance for MSMEs, the Project will support the reform of the secured transactions framework and the upgrade of the movable collateral registry. The Project will complement reforms supported by ongoing technical assistance under the EU TF, which addresses other constraints in access to finance, such as financial inclusion and financial literacy.
11. Subsidies: the Project will finance the co-financing of interest payments targeted to MSMEs equivalent to the NBG refinancing rate + 300 basis points (currently 11.5 percent) up to 36 months.72 Interest rates on loans of final beneficiaries are determined by PFIs at the prevailing market rate. The Project’s initial support to this form of subsidy is justified by (a) the unprecedented nature of the global COVID-19 crisis and its impacts on the real economy and (b) need to build on existing programs to provide immediate relief. This mechanism is transparent and measurable, with PFIs being responsible for monitoring the use of loan proceeds by beneficiaries and they
71 IMF. 2020. Georgia: Seventh Review under the Extended Fund Facility Arrangement and Request for Modification of Performance Criteria. Washington DC. 72 For leasing: NBG refinancing rate plus 500 basis points.
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bear the credit risk. Market conditions will be monitored on a continued basis to ensure the adequacy and relevance of this form of subsidy. The Project will develop a framework to assess the relief phase and pace of recovery by sector based on annual supervision missions. The framework will include a process for evaluating quantitative measures (economic activity, exports and tourism revenues, and consumer and business confidence indicators), but it will also rely on qualitative assessments and feedback from market participants. The Project will motivate the development of an evaluation program by introducing a PBC linking disbursement to the completion of this activity, which should provide inputs about the effectiveness and continued relevance of the instrument.
12. Guarantees: The Project aims at strengthening the existing guarantee scheme, with focus on improving risk management, the participation criteria for PFIs, and the operational features of the schemes. Nevertheless, there are market efficiency issues that will likely not be addressed within the project cycle. Namely, the scheme operates in a decentralized fashion and deposits funds directly into PFIs, as opposed to pooling resources in a fund as capital. While EG still earns the interest income on PFIs’ account, this decentralized feature limits the leverage of the scheme and use of public funds, which is an attractive feature of PCGs scheme across the globe.
IV. Terms and Conditions
13. Table 4.2 summarizes the subcomponents involving financial intermediation of the proposed Project. In particular, the design features of the PCG scheme are applicable to loans issues and/or restructured before December 31, 2020. After this date, the coverage for new loans will decrease to 80 percent and the program will no longer support the guarantee of restructured of loans. Through the introduction of PBCs, the Project will support the strengthening of the scheme and adjustments of its features to fit market conditions beyond the relief phase. In particular, the introduction of an evaluation framework and risk monitoring system, as well as the development financial model will provide inputs for the definition of acceptable levels of credit risk as well as sustainable pricing. This will be based on projected demand and market needs.
Table 4.2. Summary of Subcomponents 1.2 and 1.3 Co-Financing of Interest Payments PCGs Eligible areas No geographical limits No geographical limits Eligible MSMEs Up to GEL 20 million turnover (US$6.0 Up to GEL 20 million turnover million) (US$6.0 million) Eligible sectors Focus on manufacturing, hotels and Various sectors (restaurants, wine production, food tourism, healthcare sector processing, construction, health sector) Loan purpose Investments and working capital (up to Investments and working capital (no restrictions) 50% of loan for the latter) At least 40% of total guarantee allocation for new loans Currency Loans in GEL only (refinancing of FX loans Loans in GEL only (refinancing of FX loans allowed allowed under certain conditions) under certain conditions) Main features NBG rate + 300 basis points during first 36 New loans: coverage 90% months of loan, grace period ends after 36 Restructure loans: coverage 30% months after which principle payments Portfolio PFI default limit: 35% are due Fee: 0.3% p.a. on guaranteed amount Loan sizes US$16,000–US$3.3 million US$16,000–US$1.6 million On-lending rates Determined by PFIs Determined by PFIs to MSMEs M&E Evaluation of eligibility criteria upon Evaluation of eligibility criteria upon application + application + post-review of use of funds post-review of use of funds by sample of loans by sample of loans
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Annex 5: Performance-Based Conditions Summary
COUNTRY: Georgia Georgia Relief and Recovery for MSMEs
Targets/Milestones (indicative for each year) Summary CY 2022 CY 2023 CY 2024 CY 2025 PBC 1: Institutional actions to EG has developed and The Cabinet of EG has launched a pilot n.a strengthen the grants adopted a robust M&E Ministers has amended graduation scheme to program framework the program’s connect selected resolution to reflect beneficiaries with Baseline: EG does not have an improvements financial institutions effective M&E system that Value: EUR 5.6/US$6.8 proposed by EG allows the frequent review of million the performance and outcomes Verification: review of Value: EUR 2.8/US$3.4 Value: EUR 2.8/US$3.4 of its grants program, which (a) concept paper million million would provide evidence and describing M&E Verification: review of Verification: launch of a technical grounds for framework and (b) program resolution pilot graduation improvements in the program. evaluation of M&E (Resolution No 365 on scheme system Produce in Georgia) PBC 2: Institutional actions to n.a EG has developed and EG has conducted an The Cabinet of strengthen the co-financing of adopted a robust M&E evaluation of its co- Ministers has amended interest payments program framework financing program the program’s resolution to reflect Baseline: EG does not have improvements evaluation systems and proposed by EG measures in place to assess the Value: EUR 2.6/US$3.1 effectiveness of its co-financing million Value: EUR 1.5/US$1.8 Value: EUR 1.5/US$1.8 of interest payments on a Verification: (a) concept million million frequent basis and better align paper describing M&E Verification: review of Verification: review of its targeting toward strategic framework and (b) the terms of reference program resolution sectors and/or thematic areas. evaluation of M&E and program’s (Resolution No 365 on system evaluation Produce in Georgia) PBC 3: Institutional actions to n.a EG has (a) launched a EG has amended EG has developed and strengthen the partial credit campaign to share participation adopted a financial guarantees program information and raise agreements of PFIs to modelling tool to awareness among PFIs strengthen its regime of monitor financial Baseline: EG currently does not and (b) introduced a sanctions, remedies sustainability of the have a monitoring system, a risk monitoring system and termination PCG scheme and inform risk management framework, for EG supported loans pricing and an outreach strategy to evaluate the performance and Value: EUR 3.4/US$4.1 Value: EUR 3.7/US$4.5 Value: EUR 4.1/US$5.0 risks of the program and million million million propose improvements in its Verification: review of: Verification: review of Verification: review of design. (a) awareness activities, participation financial viability model including feedback from agreements signed with PFIs and (b) evaluation PFIs of risk monitoring system
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Annex 6: Assessment of Shifts in the CPF
COUNTRY: Georgia Georgia Relief and Recovery for MSMEs Impact of the COVID-19 Pandemic
1. The GoG was one of the first to take immediate and decisive measures to stem the spread of COVID-19, among other things, by instituting nationwide restrictions on movement and gatherings, closing international borders, suspending schools, and shuttering businesses. A gradual 6-step reopening of the economy started in June 2020, and new infections remained low throughout the summer months. Beginning in early September Georgia has started to observe a second wave of COVID-19, with a dramatic increase in new cases from 23 on September 1 to 5,450 by December 5, 2020. This prompted a renewed round of restrictions which have resulted in daily infection rates steadily decreasing since mid-December. As of March 19, 2021, Georgia had reported over 276,000 infections (6.9 percent of the population) and 3,683 confirmed deaths.
2. The economic and social impact is already being felt and likely to be far reaching. After a sustained period of positive economic growth (Georgia's GDP grew at an average annual rate of 4.8 percent the past ten years), real GDP contracted by 6.2 percent in 2020. Key challenges stem from declines in tourism, trade, domestic consumption and investment. Declines in the tourism industry in particular, which contributed 8.1 percent of GDP in 2018, will substantially slow economic growth. Unemployment has risen and some share of the employed have seen their incomes reduced due a slowdown in economic activity. The World Bank estimates that the simultaneous effects of a decrease in labor income and household remittances could increase the national absolute poverty rate by 5.4 percentage points. Over 600,000 people — around 16 percent of the population— would suffer downward mobility. 73 The recovery will be gradual, with output projected to expand by 4 percent in 2021 and recover to pre-COVID levels only in 2022.
3. The fiscal deficit widened to around 9 percent of GDP in 2020, as revenues declined due to the economic slowdown and the introduction of tax exemptions and deferrals, and spending increased to contain the outbreak and offset its social and economic impact. As the economy recovers and anti-crisis measures expire, the deficit is expected to gradually decline to around 7.5 percent of GDP in 2021 and below 3 percent of GDP (the level prescribed by the fiscal rule) by 2023.
4. Estimates suggest that fiscal financing needs had doubled relative to pre‐COVID‐19 projections to almost 12 percent of GDP for 2020 and 10 percent of GDP for 2021. Sizable donor financing from donors, including the World Bank, have helped fill this urgent financing needs. The IMF EFF of US$285 million, initially approved in April 2017, was augmented by US$380 million, out of which approximately US$200 million was budget support and the remaining amount as balance of payment support to the NBG. Additionally, the World Bank worked closely with development partners to effectively leverage financing to support Georgia’s COVID-19 response. The Asian Infrastructure Investment Bank is co-financing the Emergency COVID-19 Response Project (US$100 million), and also extended a parallel project aligned with the Supplemental Economic Management and Competitiveness Development Policy Operation (US$50 million). KfW also extended a policy-based loan (€EUR 180 million) largely based on the Development Policy Operation policy matrix. The public debt‐to‐GDP ratio will increase temporarily
73 These estimates include the simulated effect of government mitigation policies. In the absence of government action, the counterfactual scenario would yield a potential increase in the national absolute poverty rate of 10 percentage points and a downward mobility of close to 800,000 people (around 20 percent of the population).
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The World Bank Georgia Relief and Recovery for MSMEs (P173975)
to above 60 percent of GDP in 2020 but is projected to decline to 52 percent of GDP by 2025 as the budget consolidates and growth resumes.
Government Response
5. The GoG’s response to the economic and social impact has been similarly swift and comprehensive. In March 2020, the GoG announced a GEL3.5 billion (US$1.1 billion) anti-crisis stimulus package (estimated at 6.5 percent of GDP) that included: support to workers that have lost their jobs for the period of up to 6 months; 6- month moratorium on the payment of personal income tax for salaries up to GEL 750; accelerating and expanding the VAT refund program; deferring personal income tax and property tax payment in the tourism and hospitality sector; expanding coverage of the Targeted Social Assistance program, and a utility subsidy announced for gas and electricity bills. The NBG also implemented a number of financial sector support measures: simplified—and in some cases—relaxed lending regulations; lowering the capital and liquidity requirements, thus releasing around 3 percent of GDP to help banks absorb potential losses; and stepped-up liquidity provisioning during the early months of the crisis. Commercial banks have offered to restructure loans to affected individuals and businesses, with the NBG extending some regulatory leniency in the provisioning for restructured loans. In May 2020, the GoG released two anti-crisis plans: the Anti-crisis Plan for the Tourism Industry, a sector that has been substantially affected and is critically important for the health of the economy; and the Agriculture Support and Development Plan, given that 42 percent of the population is employed in the agriculture sector.
6. In response to the second wave of COVID-19 cases, the government announced a new package of assistance for businesses and citizens. On November 27, 2020 the Prime Minister announced a GEL 1.1 billion (US$354 million) package of additional funding to existing support instruments, including: (a) GEL 545 million (US$182 million) for households in utility subsidies, unemployment assistance, and other social transfers to vulnerable individuals; and (b) GEL 515 million (US$172 million) for businesses in income and property tax exemptions, write-off of previously deferred income tax payments for the tourism industry, grants for micro- businesses, interest rate subsidies, and PCGs.
Adjustments in the CPF
7. The CPF for Georgia (FY19-22) was endorsed by the Board of Executive Directors on May 22, 2018. The overarching objective of the CPF is to support inclusive and sustainable economic growth, with a direct line of sight to improving development outcomes for the bottom 40 percent of the population. The program is structured around three interconnected focus areas: (a) enhancing inclusive growth and competitiveness; (b) investing in human capital; and (c) building resilience. The CPF also proposed an increased focus on digital connectivity. The overarching objective as well as three focus areas remain highly relevant in the COVID-19 context.
8. The CPF lending program included a notional list of 10 potential engagements without defining the lending volumes. The lending program was expected to be developed gradually, depending on the evolution of IBRD lending capacity, progress on the structural reform agenda, and satisfactory implementation of the country program in Georgia, and once agreement on the IBRD capital increase was reached. Out of this notional list, three projects were delivered: Georgia I2Q - Innovation, Inclusion and Quality Project, Energy Supply and Reliability Project and Economic Management and Competitiveness Development Policy Operation.
9. Over the last FY, the World Bank has worked with the GoG to refine the lending program for the remainder of the CPF period as well as put together a comprehensive COVID-19 support package, which was closely coordinated with the IMF and other development partners. It includes new operations not planned under the CPF.
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The World Bank Georgia Relief and Recovery for MSMEs (P173975)
The lending program aligns with the four pillars detailed in the WBG COVID-19 Crisis Response Approach paper (‘Approach Paper’):
• Pillar 1: Saving Lives and Pillar 2: Protecting the Poor and Vulnerable: The Emergency COVID-19 Response project of US$80 million IBRD (approved in FY20) under the Fast Track COVID-19 Facility is helping to mitigate the health and social impacts of the pandemic, protect the poorest and most vulnerable, and support workers who have lost their jobs due to the crisis. As of April 5, 2021, 79 percent of the loan has been disbursed. Additional Financing for the Emergency COVID-19 Response Project (US$24.5 million IBRD) to support vaccine rollout is under preparation and expected to be delivered in FY21.
• Pillar 3: Sustainable Growth and Job Creation: The Georgia Relief and Recovery for Micro, Small and Medium-Sized Enterprises project (US$100 million IBRD; expected in FY21) will support MSMEs that have been negatively impacted by the pandemic. The proposed IPF operation also includes a CERC that if triggered will allow for uncommitted loan resources to be reallocated to respond to an emergency (the component might cover measures such as utility subsidies and other short-term cash injections for both households and MSMEs).
• Pillar 4: Policies, Institutions, and Investment: Rebuilding Better. The Supplemental Economic Management and Competitiveness Development Policy Operation (US$50 million IBRD; approved in FY20 and disbursed in September 2020), coupled with the original loan amount of US$50 million, provides US$100 million in budget support to the GoG amidst a sharp decline in tax revenues and an unanticipated increase in expenditures to cover anti-crisis measures.
10. Approved on August 28, 2020, the Log-In Georgia project (US$40 million IBRD) cuts across all four pillars and will ensure that people and businesses in rural areas have access to affordable broadband internet. The importance of digital connectivity—and digital resilience—has been highlighted during the pandemic, as schools closed and moved to remote learning, businesses relied on e-commerce, and medical facilities on telemedicine.
11. The remaining CPF pipeline projects are being refocused to respond to COVID-19’s impact on the Georgian economy and its people, without losing sight of long-term development objectives. The Human Capital project will support GoG reforms in education and health with the aim of shoring up the good progress already made and recovering what is likely to be lost human capital outcomes as a result of the pandemic (learning outcomes and individual productivity are expected to decrease). The Kakheti Integrated Mobility and Integrated Regional and Local Development projects (planned for FY22 delivery) will continue to focus on key CPF pillars, but also on short- term employment generation measures to offset the expected job-losses due to COVID-19. Finally, the World Bank continues to work closely with the GoG to identify possible cancellations and/or reallocation of financing within the ongoing portfolio to make room for additional targeted support for the COVID-19 response.
12. The proposed ASA program for FY21 includes a more pronounced focus on health, social protection, and education, as well as macro-financial issues—all highly integral to the three phases of support and the pillars of the “Saving Lives, Scaling-up Impact and Getting Back on Track” approach paper—as well as activities to support the recovery of the private and financial sectors. A planned Country Economic Memorandum will help assess short, medium- and long-term needs in response to the economic crisis.
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