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Project Information Document (Pid) PROJECT INFORMATION DOCUMENT (PID) CONCEPT STAGE Report No.: PIDC82 Project Name REGIONAL DEVELOPMENT PROJECT (P126033) Region EUROPE AND CENTRAL ASIA Country Georgia Public Disclosure Authorized Sector(s) General water, sanitation and flood protection sector (60%), Urban Transport (30%), Sub-national government administration (8%), Voc ational training (2%) Lending Instrument Specific Investment Loan Project ID P126033 Public Disclosure Copy Borrower(s) Ministry of Finance Implementing Agency Georgia Municipal Development Fund Environmental Category F-Financial Intermediary Assessment Date PID Prepared 02-Nov-2011 Estimated Date of Appraisal Completion 31-Jan-2012 Estimated Date of Board Approval 20-Mar-2012 Concept Review Decision Track II - The review did authorize the preparation to continue I. Introduction and Context Public Disclosure Authorized Country Context Following four years of rapid growth, backed by far-reaching reforms and strong FDI inflows, Georgia experienced a sharp economic downturn resulting from the August 2008 conflict and the global financial crisis. Economic recovery is underway, with growth of an estimated 6.3 percent in 2010. The authorities responded to the downturn with a countercyclical fiscal stimulus coupled with a marked reallocation of public expenditures toward social and infrastructure investments. As economic recovery takes hold, driven by higher exports and private investment, the authorities are winding down the stimulus and implementing fiscal adjustment to safeguard sustainability. There is, however, uncertainty regarding the pace of economic recovery. Georgia will need to refinance a public debt amortization spike in 2013. The authorities are addressing these vulnerabilities through well designed fiscal, monetary and debt management policies. Infrastructure projects are considered by the Government as part of the physical stimulus package. The Government refocused efforts in the past six years by launching several initiatives to attract private investors in selected regions (Tbilisi, Adjara and Imereti) on various sectors. Georgia, however, has not yet fully tapped its potential to promote sustainable tourism in promising regions, such as Kakheti, or transform the rural economy through investment in agriculture supply Public Disclosure Authorized chains for both export and import substitution. There is also a need for skills development in order to provide the skilled labor needed for a growing economy and increased productivity. In the framework of the CPS-PR for the period of FY12-FY13 presented to the Board in April 2011, the Government has asked the Bank to support regional development in Kakheti by applying a vertical programmatic approach. The proposed program of Public Disclosure Copy interventions will emphasize tourism and agriculture as two key pillars and drivers of economic growth. The proposed initial project will focus on support for the tourism sector and enabling the environment for the private sector to invest in Kakheti. A follow up intervention will likely focus on agriculture, benefitting from a planned ESW to provide a roadmap to support regional development in Kakheti. The ESW will identify the targeted outcomes in terms of future economic growth, what needs to be done and what impediments need to be overcome. Sectoral and Institutional Context Public Disclosure Authorized Georgia Regional Development Strategy : The Government of Georgia approved in June 25, 2010 (Government resolution no. 172), the State Strategy on Regional Development of Georgia for 2010-2017, prepared by the Ministry of Regional Development and Infrastructure (MRDI). The main objective of the strategy is to create a favorable environment for regional socio-economic development and improve living standards. These objectives will be attained through a balanced socio-economic development, increased competitiveness and increased socio-economic equalization among the regions. The Government has been investing in Tbilisi as the growth pole of Georgia, as well as in Adjara and Kutaisi/Imereti (west of Georgia) as growth centers. In order to better utilize the tourism and agriculture potentials that exist in Kakheti (east of Georgia) and reduce internal socio-economic disparities, the Governments intends now to support development of Kakheti with World Bank support to enable it become one of Georgia#s most dynamic growth centers. Kakheti Regional Development Strategy : In 2010, UNDP assisted the Administration of the Governor of the Kakheti Region and the Kakheti Regional Development Agency to prepare a participatory Regional Development Strategy for Kakheti (2010-2014). The strategy concluded that tourism and agriculture in Kakheti offer significant development potentials and proposed a priority action plan. Public Disclosure Copy Kakheti Context: As part of the identification of this program, the task team launched two supplemental supply chain analyses - one for tourism and one for agriculture. A vigorous economic analysis, drawing on the 2009 World Development Report, Reshaping Economic Geography, is also underway to assess institutional quality, infrastructural adequacy/connectivity, and targeted interventions to foster growth in tourism and agriculture. These analyses have enriched the identification of the project and will further be enhanced by the planned ESW analytical work in FY12. Kakheti occupies the largest territory among all other regions of Georgia with approximately 11,300 km The region consists of eight municipalities/local self-governments (LSGs) and has a population of about 404,000, which is about 9% of the Georgia population, making it the fourth largest region. Due to high mountains in the north and south, Kakheti is sparsely populated, with 35 persons/ kmgross density, compared to 75 persons/kmGeorgia average, mostly living in the middle two valleys of Alazani and Signagi. The region is weakly urbanized, with about 21% of population living in cites. Kakheti has always been one of the most important players in the history and economy of Georgia. Kakheti is recognized worldwide as a region of ancient culture. The Stone Age residences have been detected there. Kakheti was on the cross of the Great Silk Road. It is home of several ancient and unique monuments in Georgia: Nekresi Church Remnants (4th century AD), Davit Gareja Caved Monastery (6th century AD), Old Shuamta Basilica (5-6th century AD), NinoTsminda Citadel (7th century AD), Alaverdi Cathedral (11th century AD), Bodbe Monastery (9-11th century AD), Gremi Archangel Monastery Complex (16th century AD), etc. The ancient city of Telavi is the capital of Kakheti, cultural and economic center. The first records about the city are found with the Greek scholar Ptolemy (II century AD). Signagi and Kvareli are the other most important cultural and economic centers of the region with unique architecture. Kakheti is also known as the cradle of vine and wine. The vineyards cover the best part of the Alazani and Signagi valleys, while several food processing plants are located in Telavi, Signagi, Kvareli, and Akhmeta. Kakheti is also home of three magnificent protected areas, Tusheti in the north, Lagodekhi in the center and Vashlovani in the south. Tusheti has maintained unique monuments of cultural heritage, traditions and ceremonies. Tusheti is particularly outstanding for its magnificent landscape. The two historical villages in Tusheti: Dartlo, and Omalo, are very unique from architectural and historical stands, where households still maintain their cultural endowments and pattern of life. Kakheti, in contrast to some other Georgian regions, has not yet undergone important transformation of its economy. Economic density in Kakheti is about GEL74,000/km compared to GEL 409,000 in Adjara and GEL 52m in Tbilisi. The role of agriculture, though declining in terms of contribution to GDP and employment, still represents a large part of the economy and remains less Public Disclosure Copy productive than elsewhere. Services, including tourism, generate about 60 percent of the value added in Kakheti, while public administration is still playing the dominant role. However, service sectors of higher productivity, such as hotels and restaurants, have become recently an important growth driver in Kakheti. Planned economic analysis during preparation of this Project will aim at providing an overarching framework within which policy thinking regarding future development of Kakheti can be organized. This will include an analysis of the growth/employment impact of the proposed investments with sectoral breakdowns. A simple analysis of growth shows that an increase of investment by about $10m in 2012 can increase VA growth rate from 5.4% to 7.2%, in real terms, in the same year. The proposed project is envisaged to invest $50m during the period 2012-2016, which can multiply such a growth estimate. The tourism value-chain analysis reveals huge tourism development potentials, but also some key challenges: - while the number of overnight visitors to the country is growing rapidly, at nearly 20 percent per year, the vast majority are coming from fairly low spending markets and coming for business or to visit friends and relatives (VFR); - need for urban regeneration and improve quality of municipal infrastructure in key cultural centers (Telavi, Kvareli, and Tusheti); - low quality municipal infrastructure (water, sanitation, access roads and solid waste disposal); - limited hotel capacity; - seasonality, particularly in the winter; - lack
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