The World Bank Kakheti Integrated Mobility Project (P173782) Public Disclosure Authorized Public Disclosure Authorized Project Information Document (PID) Concept Stage | Date Prepared/Updated: 10-Mar-2021 | Report No: PIDC29788 Public Disclosure Authorized Public Disclosure Authorized Jan 28, 2021 Page 1 of 16 The World Bank Kakheti Integrated Mobility Project (P173782) BASIC INFORMATION A. Basic Project Data OPS TABLE Country Project ID Parent Project ID (if any) Project Name Georgia P173782 Kakheti Integrated Mobility Project (P173782) Region Estimated Appraisal Date Estimated Board Date Practice Area (Lead) EUROPE AND CENTRAL ASIA Jul 07, 2021 Sep 29, 2021 Transport Financing Instrument Borrower(s) Implementing Agency Investment Project Financing Ministry of Finance Ministry of Development and Regional Infrastructure Proposed Development Objective(s) The Project Development Objective (PDO) is to improve connectivity along the Sagarejo-Badiauri section of the Tbilisi- Bakurtsikhe-Lagodekhi highway and logistics efficiency in Georgia with private sector participation. PROJECT FINANCING DATA (US$, Millions) SUMMARY-NewFin1 Total Project Cost 125.00 Total Financing 125.00 of which IBRD/IDA 125.00 Financing Gap 0.00 DETAILS-NewFinEnh1 World Bank Group Financing International Bank for Reconstruction and Development (IBRD) 125.00 Environmental and Social Risk Classification Concept Review Decision Substantial Track I-The review did authorize the preparation to continue Jan 28, 2021 Page 2 of 16 The World Bank Kakheti Integrated Mobility Project (P173782) Other Decision (as needed) B. Introduction and Context Country Context 1. Georgia’s economy has a solid track record of economic growth and poverty reduction. During the 10-year period between 2010 and 2019 following the global economic crisis of 2009, economic growth averaged 4.9 percent in real terms. In the process, aided by economic reforms and a system of targeted social transfers, the percentage of the Georgian population living with less than US$3.2 per day in purchasing power parity terms nearly halved, from 28.9 percent in 2009 to 15.5 percent in 2018. In 2019 growth accelerated to 5.1 percent, driven by consumption and exports1 underpinned by regional recovery and coupled with fiscal reforms. With labor market improvements, the unemployment rate also decreased, from 12.7 percent in 2018 to 11.6 percent in 2019.2 By the end of 2019 Georgia was considered to be among the seven countries in the world with the most favorable business climate, according to the Bank’s Doing Business in 2020 database. 2. The onset of the global coronavirus disease 2019 (COVID-19) pandemic interrupted Georgia’s period of 10 consecutive years of economic growth. The pandemic and associated disruptions in economic activity have adversely affected all sectors of Georgia’s economy. It is estimated that real GDP growth declined to negative 5.0 percent in 2020 as the impact of COVID-19 added to an already challenging external environment. The Government of Georgia (GoG) has borrowed to the tune of US$1.5 billion from International Financial Institutions (IFIs) to address the immediate health and social impacts of COVID-19, as well as to support post-crisis recovery measures and broader development needs.3 3. Prior to the pandemic, Georgia faced the challenge of translating successful adoption of business climate reforms into improved economic performance along key prosperity drivers like productivity gains, and the urgency of meeting this challenge will be even higher after the pandemic. Few productivity-inducing sectors highlight this ‘reformer vs. performer’ divide in starker terms than transport and logistics. International experience shows that improvements in transport and logistics facilitate productivity growth, exports, and improved standards of living through more equitable access to opportunities. Yet, even as Georgia ranks 7th in the Bank’s Doing Business (DB) ranking next to global powerhouses like the U.S., South Korea, Denmark, Hong Kong, and Singapore, it ranks 119th out of 160 countries in the Bank’s Logistics Performance Index (LPI) standard. Across the entire world, Georgia is the country with the single largest differential between their DB and LPI rankings, adjusted for sample size between the two databases; and this is true by a large margin: Georgia’s differential (112 rungs) is 1.6x the differential of the second-highest country in the differential list (Moldova, 69). Likewise, Georgia’s international maritime connectivity has only marginally improved since 2008, according to UNCTAD, at a time of major connectivity improvements globally. Domestically, rural areas continue to lag behind leading, largely urban, regions in both connectivity and income/poverty outcomes. As a result, while Georgia has been successful in sustaining high levels of foreign direct investment (FDI), averaging 8.6 percent of GDP annually between 2010 and 2019—among the highest investment rates in Europe—this has led over time neither to meaningful 1 World Bank, Fighting COVID-19: Europe and Central Asia Economic Update, April 2020. 2 National Statistics Office of Georgia (GeoStat) 2019. 3 About 60 percent of public debt reflects borrowing for infrastructure projects, with majority allocations to the roads sector (39 percent) and municipal infrastructure (19.4 percent). Jan 28, 2021 Page 3 of 16 The World Bank Kakheti Integrated Mobility Project (P173782) gains in export performance (Georgia runs a sizable current account deficit, which averaged 9.3 percent of GDP annually during 2010-2019) nor to productivity growth (the contribution of productivity gains to Georgia’s economic growth has plummeted in recent years, particularly in the 8 years since 2012, compared to the late 1990s and mid 2000s). As the Bank’s 2018 Strategic Country Diagnostic points out, “strengthening connectivity to further open up the country to trade, international competition, and FDI will be the single most critical driver of efficiency gains [for Georgia going forward]”4. Transportation and logistics improvements are at the core of attaining this goal. 4. The GoG has identified infrastructure development as a driver of economic recovery from the pandemic and as a long-term means to sustain gains in living standards. To move forward and mitigate the social and economic impact of COVID-19, the government intends to expand employment creation in the post-crisis period by supporting development of infrastructure. Such a stance is consistent with Pillar 3 of the Bank’s COVID-19 crisis response approach paper. As part of its post-pandemic recovery plan, which prioritizes increased employment opportunities, the government intends to support tourism, the agriculture sector, and its health and education systems. Given the impact of COVID-19, the GoG will develop a new national investment strategy with a greater focus on emerging competitive advantages to maintain FDI flows and minimize the negative effects of the crisis on the private sector. 5. Sustaining Georgia’s growth will depend to a meaningful degree on the competitiveness of its goods and services in international markets, and on its ability to serve the movement and handling of goods to/from other countries. Since Georgia does not have substantial natural resources or a large domestic market, future GDP growth and job creation will hinge on its ability to produce and sell goods and services competitively in global markets, and to facilitate other countries’ trade, taking advantage of regional integration and its geographic position. The country’s strategic location at the confluence between Europe and Asia, between the Black and Caspian seas, presents an opportunity for investment in growth sectors that are not limited by a relatively small domestic market. However, Georgia needs improvements in hard and soft connectivity—transport, logistics, and digital development—to bring down the costs of trade and promote greater integration. 6. Inspired by the prospect of applying for full membership in the European Union (EU) by 2024, a cornerstone of Georgia’s foreign and domestic policy, the GoG unveiled its Development Program for 2021-2024. The program highlights Georgia’s potential as a regional hub and the strategic role this can play in bringing the country closer to EU partners. Relations between the EU and Georgia are currently guided by the 2016 EU-Georgia Association Agreement. Through its Deep and Comprehensive Free Trade Area (DCFTA), the Agreement aims at gradual economic integration of Georgia into the EU’s internal market and creates new prospects for raising Georgia’s private sector competitiveness. In addition, Georgia has signed Free Trade Agreements with CIS countries, China, and Turkey, providing opportunities for greater use of the Trans-Caucasus Transit Corridor (CTC) linking Asia and Europe. 7. Georgia’s EU integration aspirations have created policy momentum towards increasing the participation of the private sector in its national infrastructure program, which to date has been driven primarily by IFI support. In 2018, Georgia approved a Public-Private Partnerships (PPP) Law, which has led to the subsequent establishment of a centralized PPP unit. Despite progress on its PPP framework, Georgia’s implementation of PPP projects has been constrained by a moratorium on new projects, under the terms of the International Monetary Fund (IMF) Extended Fund Facility. The moratorium has now been lifted with the approval of PPP Guidelines that contain value-for-money