GEORGIAN REFORM PROGRESS TRACKING SYSTEM REFORM TRACKING PERIODIC ANALYTICAL REPORT

USAID GOVERNING FOR GROWTH (G4G) IN

September 12, 2018 This publication was produced for review by the United States Agency for International Development. It was prepared by Deloitte Consulting LLP. The author’s views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government.

GEORGIAN REFORM PROGRESS TRACKING SYSTEM 4TH REFORM TRACKING SEMI-ANNUAL ANALYTICAL REPORT

USAID GOVERNING FOR GROWTH (G4G) IN GEORGIA CONTRACT NUMBER: AID-114-C-14-00007 DELOITTE CONSULTING LLP USAID | GEORGIA USAID CONTRACTING OFFICER’S REPRESENTATIVE: PHILLIP GREENE AUTHOR(S): ISET-POLICY INSTITUTE PRIVATE SECTOR AND CIVIL SOCIETY CAPACITY STRENGTHENING COMPONENT: 5500 LANGUAGE: ENGLISH

SEPTEMBER 12, 2018

DISCLAIMER: This publication was produced for review by the United States Agency for International Development. It was prepared by Deloitte Consulting LLP. The author’s views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government.

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DATA

Reviewed by: Malkhaz Nikolashvili, Tamar Kapianidze

Project Component: Public Private Dialogue Component

Practice Area: Overall Institutionalized Framework for Public Consultations

Key Words: reform, progress tracking, methodology, outreach, dissemination, sustainability

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ACRONYMS

G4G Governing for Growth in Georgia AmCham American Chamber of Commerce in Georgia BCI Business Confidence Index BMA Bond Market Association CCI Consumer Confidence Index COSME Competitiveness of Enterprises and Small and Medium-sized Enterprises DFID Department for International Development DNA Deoxyribo Nucleic acid EBRD European Bank of Reconstruction and Development EMIS Education Management Information System EU European Union FDI Foreign Direct Investment G4G Governing for Growth in Georgia GDP Gross Domestic Product GEL GITA Georgian Innovation and Technology Agency GMRA Global Master Repurchase Agreements GoG Government of Georgia GRPTS Georgian Reform Progress Tracking System ICMA International Capital Market Association ICT Innovation and Communication Technology IFAD International Fund for Agricultural Development IMF International Monetary Fund ISET International School of Economics ISET-PI ISET Policy Institute LEPL Legal Entity of Public Law LLEL Lifelong Entrepreneurial Learning System LPIS Land Parcel Identification System MoA Ministry of Agriculture MoESD Ministry of Economy and Sustainable Development MoF Ministry of Finance NBG NSO National Statistics Office of Georgia “GeoStat” PMCG Policy and Management Consulting Group PPD Public Private Dialogue R&D Research and Development RIA Regulatory Impact Assessment S&P Standards and Poor’s SME Small and medium-sized enterprises TVET Technical Vocational Education and Training USAID United States Agency for International Development VES Vocational Education System VET Vocational Education and Training

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CONTENTS

1. EXECUTIVE SUMMARY ...... 5

2. BACKGROUND ...... 6

3. METHODOLOGY ...... 7

4. FINDINGS ...... 8

A. SME/INNOVATIONS DEVELOPMENT ...... 8

B. AGRICULTURAL DEVELOPMENT ...... 12

C. CAPITAL MARKET DEVELOPMENT REFORM ...... 14

D. PENSION REFORM...... 16

E. VOCATIONAL EDUCATION AND TRAINING REFORM ...... 19

APPENDIX A: REFORMETER INTERFACE ...... 22

APPENDIX B: OUTCOME INDICATORS OF SME/INNOVATIONS DEVELOPMENT ...... 23

APPENDIX C: OUTCOME INDICATORS OF AGRICULTURAL DEVELOPMENT ...... 33

APPENDIX D: OUTCOME INDICATORS OF CAPITAL MARKET DEVELOPMENT ...... 39

APPENDIX E: OUTCOME INDICATORS OF PENSION REFORM ...... 44

APPENDIX F: OUTCOME INDICATORS OF VET REFORM ...... 45

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1. EXECUTIVE SUMMARY

The Georgian Reform Progress Tracking System (“ReforMeter”) has finished its second phase of assessments for its first year of evaluations. All five reforms have been evaluated and the results are as follows: Small and Medium Enterprise (SME)/Innovation Development Reform: 39.2% of the reform is implemented according to the Government of Georgia (GoG); Stakeholders’ reform score: 4.33 (out of 10). Agricultural Development Reform: 74.9% of the reform is implemented; Stakeholders’ reform score: 5.63 (out of 10). Capital Market Development Reform: 67.7% of the reform is implemented; Stakeholders’ reform score: 5.00 (out of 10). Pension Reform (only one assessment): 38.8% of the reform is implemented; Stakeholders’ reform score: 4.10 (out of 10). Vocational Education and Training Reform: 52.1% of the reform is implemented; Stakeholders’ reform score: 7.37 (out of 10). The ReformVerdict is a summary score, derived as a weighted average of scores assigned to each reform, has increased since the last report from 5.26 to 5.46. On June 8 2018, the second phase of ReforMeter ended with an evaluation of the Pension Reform. The project team convened the Steering Committee meeting to analyze assessment results.

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2. BACKGROUND The Georgian Reform Progress Tracking System informs the general public on how the GoG’s reform efforts have progressed against their intended objectives. The transparency and acknowledgement also stimulates improved quality in reform processes on part of the GoG. Assessment of reforms is based on three components: a government survey, stakeholder survey and objective data (reform outcomes). On May 23, 2017, the Georgian Reform Progress Tracking System was launched and the project website – www.reformeter.iset-pi.ge – was presented to the public. The website presents reforms and their assessment results. Since the system’s launch, the following reforms have been assessed: 1. SME/Innovation Development; 2. Agricultural Development; 3. Capital Market Development; 4. Pension Reform; 5. Vocational Education and Training (VET) Reform. ReforMeter’s annual evaluation process is overseen by its Steering Committee consisting of: 1. Aleksi Aleksishvili - Chairman of the Board, Policy and Management Consulting Group (PMCG); 2. Jean-Frederic Paulsen - Chairman of the Governing Board of ISET, Businessman; 3. Bruno Balvanera - European Bank of Reconstruction and Development (EBRD) Director for the Caucasus, Moldova and Belarus; 4. Eric Livny (ex-officio member) - President, ISET and ISET Policy Institute (PI); 5. Giorgi Abashishvili – Head of President’s Administration; 6. Mariam Megvinetukhutsesi - Head the Secretariat of the Investors Council of Georgia; 7. Nato Beruashvili (ex-officio member) - Chief of Party at United States Agency for International Development, Governing for Growth (USAID G4G); 8. Sarah Williamson - Vice-President of American Chamber of Commerce in Georgia (AmCham). The Steering Committee has the following mandate:  To select the set of economic reforms to be tracked (up to six per year);  To guide the management team and make decisions of key operational issues;  To allocate weights to each reform in ReformVerdict;  To take part in the annual summary public-private dialogue (PPD) organized by ISET-PI, and nominate winners for the best government agencies and best reform;  To nominate members of specific reform stakeholder groups and moderate their meetings (up to two times per year). Each member of the Steering Committee, except the Government/Parliament representative, leads one reform-specific group of stakeholders. He/she nominates/approves stakeholders, liaises with relevant public sector agencies, reviews survey questionnaire design and contributes to the choice of reform progress indicators to be tracked. The Government/Parliament representative participates in the selection of reforms to be tracked and helps link the ReforMeter team with relevant public entities. The project team consists of ISET-PI staff and researchers that manage the system through day-to-day activities including data collection, questionnaire design, surveys, events, etc.

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3. METHODOLOGY Each reform is evaluated twice a year by a group of 15 stakeholders not affiliated with the GoG and directly affected by the reform under assessment. The stakeholders are convened at ISET to review the government survey results and objective data on reform outcomes. These are collected and analyzed by the project team. The government survey measures reform implementation progress based on indicators and timetables agreed upon with the reform’s implementing agencies. Objective outcome indicators, collected and analyzed by the project team, measure the outcomes and impacts of each reform. Each member of the group provides an anonymous quantitative assessment of the reform. Stakeholders answer three questions (each to be scored on a 0-to-10 scale): 1. What is your assessment of Georgia’s current performance in the area of [reform name]? 2. Is the economic reform agenda in the area of [reform] progressing as expected? 3. Is the economic reform likely to deliver adequate results? The total score for each reform is calculated as a simple average of individual assessments. Once a year, the stakeholder group meeting will be combined with a PPD, involving the GoG, private sector, civil society and media. The overall assessment of the reform process is automatically provided through the ReformVerdict – a summary score, derived as a weighted average of scores assigned to each reform. The score is adjusted on a monthly basis, following monthly stakeholder meetings.

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4. FINDINGS

The success of project is partially to be measured by the number of people permanently using the online platform. Since the inception, the project team started to monitor user statistics using Google Analytics. The statistical analysis of the past six months emphasized that the number of website-users is highly depended on project activities and availability of new information on the platform. Therefore, maintaining the frequency of activities at a high level will lead to increased number of users. To ensure the equally distributed engagement during a year, the assessments of the selected reforms have been scheduled twice in a year. Given the number of the reforms assessed, as a result once in a 1.5 month reform assessment was uploaded on the web. In addition, at the end of each month, outcome indicators were also updated depending on the availability of data. The success of the project is also the high number of attendees at the events (PPDs). The Grant Agreement RFA#2015-011 between G4G USAID and ISET PI has expired on September 1st 2018. Following on past activities, G4G plans to continue support to project implementation with number of additional activities, as specified below: . Reform assessment – The progress of each reform (5 for the moment) will be evaluated twice a year and one PPD per reform will be held at ISET. . Reform quality evaluation - The executive team will evaluate quality of individual reform implementation based on a defined methodology. The quality evaluation in this case will cover transparency, inclusivity, accountability and other aspects of the reform. . Award ceremony - By the end of the project (July, 2019) the Steering Committee will vote for the best initiatives, reforms and implementation agencies to be recognized for achievement. This will create a positive incentive for each state institution to improve their performance and increase the level of cooperation with ReforMeter team. . One pager – For each reform, the project team will publish one pager which will cover progress achieved in each reform area and will provide subjective judgment on the effectiveness and efficiency of the government reforms. They will be distributed among all external stakeholders and media, especially in regions where the access to the internet is limited. . Regional meetings - The PPDs of ReforMeter have been always held in . Almost all participants, including media, were usually also from the capital. In order to reach the people in regions, the project team will travel outside of capital city and meet interested groups. The meetings should provide information about ongoing reforms of GoG, their progress and challenges. They will be held in Kutaisi, Batumi and Telavi. Through the data analysis of app users, the project team came to a conclusion that this tool is less effective than publishing the ReforMeter news on Facebook. Therefore, the project team decided to increase the budget of Facebook promotions.

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A. SME/INNOVATIONS DEVELOPMENT

SME/Innovation Development Reform is implemented by the Ministry of Economy and Sustainable Development (MoESD) and supporting agencies: Produce in Georgia and Georgia's Innovation and Technology Agency (GITA), and is based on two main policy documents: 1. SME Development Strategy 2016-2020, and an action plan approved by the GoG containing the following elements: Goals: . Favorable business environment; . Increased innovation capacities; . Enhanced competitiveness. Objectives: . Enhance competitiveness; . Improve skills; . Support modernization. Targets 2020: . Productivity growth by 7%; . Growth of number of employees by 15%; . Output growth by average 10% annually. Five Strategic Directions: . Improvement of legislative, institutional, and operational environment; . Improvement of access to finance; . Skills development and promotion of entrepreneurial culture; . Export promotion and internationalization; . Facilitation of innovation and research and development (R&D). 2. Innovations Development Strategy 2020 and an action plan for years 2017-2020 drafted by the MoESD contain the following elements: Goals: . Improve access to information and knowledge; . Commercialize scientific research; . Creation of innovation economics; . Involve society in innovation. Objectives: . Improve Innovation and communication technology (ICT) infrastructure; . Develop appropriate legislative and institutional framework; . Promote education and R&D; . Build infrastructure for innovative ecosystem. Short-Term Priorities: . Legislative reform in the field of innovation; . Infrastructure for innovation ecosystem.

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Long-Term Priorities: . Strengthening of educational system; . Promotion of R&D; . Improving information and communications infrastructure

On January 2, 2018, implementation of the SME/Innovation Reform was assessed.

The Government Survey showed that at this stage, 39.2% of the reform, which is planned to be finalized by 2020, has been implemented. In the first phase (six-months ago), this indicator was 24.7%. It is notable that the rate of progress in the areas of institutional organization, capacity building and infrastructure are similar – in all of these areas, 40% of the reform has been implemented. It is noteworthy that the target indicators set by the strategy for 2020 were already achieved in 2016.

2020 2016

Annual growth of SME output 10% 14.8%

Increase in number of people employed by the SMEs 15% 20.5%

Increase in productivity of SMEs 7% 19.6%

It should be emphasized that Enterprise Georgia, together with Good Governance Fund and PwC, has implemented a project targeted at increasing the number of SMEs in Georgia. This project also involves linking local entrepreneurs with international entrepreneurs. Last year, Enterprise Georgia carried out research and based on the results, hotel and movie components were added to the program “Produce in Georgia.” In the area of capacity building, entrepreneurship education in vocational education centers has improved. Entrepreneurship has been added to vocational center programs’ curriculum, existing modules have been improved and instructor qualifications have been increased. It is also notable that there is more statistical data on the SME sector; in particular, research on the weaknesses of the SME sector has been carried out. In addition, the studies “ICT Usage in Enterprises” and “ICT Usage in Households” are carried out on a regular basis by the National Statistics Office of Georgia (NSO). Stakeholders assessed the reform at 4.33 points on a 10 point scale. This evaluation is slightly less than the result of the previous phase, where the reform received 4.78 points.

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At the PPD on the reform, which included stakeholders, the MoESD and other guests, the following important information on the implementation of the reform was shared: . The number of patents and useful model applications submitted to Sakpatenti are very low and decreasing annually. Links do not exist between the science and private sectors. This means fundamental, not applied sciences are developing. . The fact that Shota Rustaveli Foundation provides science grants is worth noting; however, grant volume is very small and will not significantly impact scientific development in the country. However, it is necessary to research which areas of science are financed, and how this funding contributes to the promotion of applied science. . From the standpoint of SME support, it would be rational if Georgia joins the Competitiveness of Enterprises and Small and Medium-sized Enterprises (COSME) program. COSME is an EU program that provides enterprises access to funding and EU markets. . GITA pointed out that, according to the latest study, the country has innovation potential; however, innovation is not commercialized. In order to address this issue, the establishment of a centralized technological transfer center is planned. . The NSO of Georgia has modified the definition of SME to be in line with the EU methodology. However, transition to the new system is gradual, and this complicates the comparison of statistical data during transition period. Starting in 2018, all entities should shift to the new methodology, which will enable comparison of Georgia with other countries. . GITA plans to increase private sector involvement in ongoing projects. Involvement implies engaging the private sector in projects and funding them in exchange for development and expansion of the private sector’s infrastructure. . As there is a lack of innovative products on the local market, as well as export barriers, it is necessary to encourage innovative products within the country and increase their share in state procurement. The objective and quantitative data of SME/Innovations Development reflecting reform outcomes can be found in Appendix B.

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B. AGRICULTURAL DEVELOPMENT Agricultural Development Reform is implemented by the Ministry of Agriculture (MoA) in the framework of the "Agriculture Development Strategy of Georgia 2015-2020," approved by the GoG in 2015. There are also other strategic documents that impact agriculture: . Rural Development Strategy of Georgia 2017-2020; . Plan of approximation with European Union (EU) legislation: . Food Safety 2015-2026; . Veterinary 2015-2027; . Plant Protection 2015-2026. The Agriculture Development Strategy of Georgia envisions the creation of an environment that increases competitiveness in the agro food sector, promotes stable growth of high quality agricultural production, ensures food safety and security, and eliminates rural poverty through sustainable development of agriculture and rural areas. The main strategic directions and measures are: . Enhanced competitiveness of rural entrepreneurs; . Institutional development; . Amelioration and soil fertility; . Regional and sectorial development; . Ensuring food security; . Food safety, veterinary and plant protection; . Climate change, environment and biodiversity.

On December 14, 2017, ReforMeter’s second phase evaluated Georgia’s agricultural development. According to the government survey, 74.9% of the Strategy is implemented. In the first phase, the same indicator was at 69.5%. Currently, the MoA is implementing the following projects: gene-bank development for the conservation of agro-diversity and endemic species; scientific research on storage and processing methods; and the rational use of soil. To support agricultural cooperation, the following new projects were introduced: cooperative support programs in the viticulture sector; a state program to support beekeeping agricultural co-operatives; and a program for the rational utilization of pasture and meadows. It was stated that the Agriculture Registry does not exist; the seed/planting material certification is still in process and a geo- information system, an analog to the Land Parcel Identification System (LPIS), does not exist either. The total area of irrigated land was increased by 2000 ha and drained land area by 1900 ha as well. In addition, the creation of a modern DNA laboratory and a seed/planting material certification system is in process.

Stakeholders assessed the reform with 5.63 points out of 10. The previous evaluation score was 5.41.

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In a debate attended by Deputy Minister Khanishvili, Reform Stakeholders and invited guests, the following points were raised: . The total amount of loans issued within the state agro-credit project (since 2013) is 1.5 Billion GEL. The number of financed projects is decreasing due to less demand and increased minimum loan limits (increased from 5,000 to 20,000 GEL). . Foreign direct investment (FDI) in the agriculture sector remains insignificant, but local investments are growing. Since 2014, the processing sector provides more added real value than the primary production sector. . Since 2014, agriculture exports have been decreasing. Accordingly, the number of exporters is not growing. Deputy Minister Khanishvili stated that the decreased value of total agriculture export was mostly affected by decreased nut exports. ISET-PI calculated export diversification indicators according to the Herfindahl-Hirschman Index methodology, and found that in 2017, export diversification by products improved, but deteriorated according to export destinations. MoA representatives claimed that exports decreased but self-sufficiency is increasing consistently. . Stink bug infestation was the primary issue in 2017 and will remain a challenge in 2018. The Ministry lacks an effective solution but recommends that farmers follow its preventative measures. . Agriculture Statistics was named as a significant issue as well. Data provided by NSO is not trustworthy and provides information only on existing trends. The outcome indicators of Agriculture Development can be found in the Appendix C.

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C. CAPITAL MARKET DEVELOPMENT REFORM Capital Market Development Reform is implemented by the National Bank of Georgia (NBG), Ministry of Finance (MoF) and MoESD. The reform is guided by the Capital Market Development Strategy and the related action plan was adopted by the GoG in 2016. The Strategy is based on the following elements: Importance of the Capital Market: . Effective for attracting financial resources; . Effective distribution of savings; . For population – additional instrument to place their savings; . For companies – additional instrument to attract investments; . Contributes to stable economic growth and citizens’ welfare. The role of the state in capital market development is defined as follows: . Simple and clear taxation regime; . Financial education; . Floating foreign exchange rate; . Stable macroeconomic environment; . Strong and independent central bank; . Protection of consumers/investor rights; . Highest standards of corporate governance. The practical steps which have to be made for capital market development are: . Harmonization with the EU Directives; . Change regulatory environment; . Other legislative changes; . Infrastructure development; . Educational activities. On March 12, 2018, Capital Market Development Reform was evaluated. The government survey revealed that at this stage, 67.7% of the reform is implemented. In Phase I, this indicator was 51%.

The greatest progress was achieved in legislative framework development. Last year, the German ranking agency Scope was added to the list of agencies (Moodys, S&P and Fitch) recognized by the NBG, which implies that the NBG will consider reliable rankings given by this body to the securities offered as collateral to the NBG. Also, the tax advantage for the so-called free-float was changed in the Tax Code and was replaced with wider advantages that are more convenient to investors. According to this advantage, capital gains are exempt from tax.

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With the help from International Monetary Fund (IMF) experts, a set of tax reforms were developed which imply taxing various financial instruments according to international best practice. In addition, taxation of instruments such as derivatives, repo and securities lending will be improved. Pension Reform is also a part of the capital market development plan; the legislative package for Pension Reform is already prepared. Stakeholders assessed the reform at 5.00 out of 10. The previous evaluation score was 3.85.

Stakeholders, the Deputy Minister of Finance, Nikoloz Gagua, and NBG representatives participated in a discussion wherein several important issues were voiced, in particular: . The NBG believes that it is necessary to improve the legislative and regulatory framework of the capital market at the initial stage. In addition, harmonization with EU legislation is in progress, and this process is planned to finish by 2024. . The MoF thinks that the low level of financial literacy is a challenge, which causes a low level of confidence in the financial market. . In order for Georgia to become a financial hub, it is necessary to obtain a competitive advantage. This can be achieved, for example, by creating a liberal tax environment and improving infrastructure. Focus should also be placed on neighboring countries in order to integrate them in Georgia’s financial market. However, the first objective is to develop the local market. . Low liquidity is the largest challenge for the capital market. . State companies should place their securities on Georgia’s Stock Exchange, which will encourage its development. . A pension fund will create a large institutional investor, i.e. demand on the capital market will grow. . Banks’ profit on corporate loans is minimal and this increases their interest in development of alternative sources of investment. . Before placing stocks on foreign stock exchanges, Georgian companies should be obliged to be listed on the Georgian Stock Exchange, as this will develop the Georgian Stock Exchange itself. . Pension funds should be invested in Georgia, in securities denominated in Georgian Lari (GEL). . The capital market development strategy is focused on development of banking instruments and less attention is paid to the development of nonbanking liquid instruments. The outcome indicators of Capital Market Development can be found in Appendix D.

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D. PENSION REFORM Pension Reform is implemented by the MoESD, MoF and NBG. The Reform is guided by the Concept of Georgian Pension Reform and an appropriate Action Plan adopted by the Government in 2017. The Concept is based on the following elements: Need for Reform: . Georgia’s demographic composition has significantly changed; . The universal pension now meets the poverty alleviation goal but needs to be adjusted with price inflation in order to continue to meet this objective; . Pension expenditures need to be increased considerably – 2060: 10% of Gross Domestic Product (GDP); . Additional savings mechanisms are needed for the working population to achieve adequate income, proportional to their earnings, in retirement; . Introduction of long-term individual pension savings can assist economic growth through capital market development. Reform objectives are defined as follows: . Retain and increase the purchasing power of social pension; . Improve the ration of pension income with respect to earned salaries; . Ensure financial sustainability of the social pension model. The steps which have to be made for market development are: . Introduce social pension indexation; . Develop a supplementary pension scheme. According to the GoG, 38.8% of the reform has been implemented, namely: Institutional setup is at 14.5%. The reform concept was elaborated by MoESD, MoF and NBG (regulator). Inter-ministerial meetings were conducted on a regular basis. Designing the pension system operating rules and development strategy is in process. The pension fund is not established. Also, the custodian bank and the asset managers have not been selected. Capacity building is at 50%. Research on understanding public perceptions has been conducted. A communication strategy has been developed. Preparation of materials and content is in process. An education and awareness campaign have not been conducted. Infrastructure and budgeting are at 11.4%. The state budget will need an additional 90 million GEL annually after reform enforcement. The source will be state budget and donors. The funds for implementation of an action plan are mobilized. Infrastructure (IT system, webpage etc.) does not exist. Legislation and regulations are at 72.6%. The reform concept is approved by the GoG. Pension fund functions and obligations are formulated. Pension system operating rules are designed. The private pension system and non-profit pension fund legislation is drafted. The regulatory body is defined. Requirements and requests for proposals for asset managers are designed. Regulatory requirements and rules have not been defined. Investment parameters and risk management regulation are not formulated. Identification and drafting of other relevant legislative changes, and social pension indexation are in process.

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On June 8 2018, the second phase of ReforMeter ended with an evaluation of the Pension Reform. The stakeholder meeting was attended by the Deputy Minister of Economy and Sustainable Development of Georgia, Eka Miqabadze, and representatives of the NBG, together with members of the private sector and NGOs. Several important issues concerning the reform process were discussed during this meeting, in particular:  Despite the support of the idea of reform, the Sector Economy and Economic Policy Committee was the only committee in the Parliament which did not support the draft Law on Accumulated Pension System and made several comments;

 The reliability of the pension fund is one of the issues of the presented draft law. Therefore, it is important to know what the investment policy of the fund will be and whether the long-term rate of inflation will be considered. The target rate of annual inflation set by the NBG and the value of currency in the given period shall be considered when determining investment policy;

 According to the presented draft law, the NBG will not carry out an assessment of investment decisions. It is also desirable to extend its supervision mechanism to the management of pension assets. The Bank shall annually report to the on the investment activities of the investment pension fund;

 The mechanism of guarantee return of the funds deposited by the beneficiaries in the Fund shall be clear in the main concept of the accumulated pensions. Ensure that the state guarantee is enacted if the fund can not ensure reimbursement / return of the funds.

 According to the MoESD, two types of risk shall be distinguished: market and institutional. In the case of market risks, it is difficult to imagine that the state will act as a guarantor.The capital market is characterized by significant fluctuations; for example, the Canadian Pension Fund has suffered during the global financial crisis, but today it is very successful in carrying out investment activities. Also, there are examples (including in Eastern European) when state guarantees negatively affect investment policy and it creates an inappropriate stimulus for the asset management company.  According to the NBG, their role in the pension reform is clearly defined.Two independent bords shall be created: Supervisory and Investment.The main function of the Supervisory Board is to carry out the daily activities of the Fund. The Investment Board is responsible for investment decisions. The existence of an independent Investment Board is a precondition for minimizing institutional risks.

 The Social Democratic Party of Parliament is developing its own version of the pension reform. It envisages the creation of a so-called solidarity fund that will allow unemployed population to be included in the pension system.

 Representatives of the private sector noted that the pension reform has not only social importance, but is also a significant economic reform as well. It shall have a positive impact on the development of the capital market.

 According to ISET researchers, the objectives and limitations of the pension system shall be considered.The major goal is poverty reduction and revenue distribution in the population of retirees. However, there are two main challenges - fiscal stability and social stability.

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Nowadays, the basic pension in Georgia is responding to its main objective - reduction of porverty. Over the last five years, the basic pension has exceeded the subsistence minimum. However, in terms of replacing the average wage, the basic pension reaches only 24%. This indicator is even lower for people with higher than average wages.If we evaluate the current pension system in terms of fiscal stability, we will see that the situation is not so dramatic. Considering demographic statistics and job market structure, it is assumed that pension expenditure does not exceed 7% of GDP and, on the contrary, will even decrease after a certain period. Therefore, even if the existing replacement coefficient is maintained, the problem of financial sustainability will not be created. The stakeholders rated reform with a score of 4.10 out of 10, which is higher than the previous phase, where the reform received 3.97 points.

The outcome indicators of Pension Reform can be found in Appendix E.

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E. VOCATIONAL EDUCATION AND TRAINING REFORM Vocational Education and Training Reform is implemented by the Ministry of Education and Science (MoES) and guided by the Vocational Educational and Training Development Strategy for 2013-2020, which is based on the following elements: Key Challenges of Georgia’s Vocational Education System (VES): . Lack of participation from social partners and civil society in VET; . A less than comprehensive network of public and private VET providers, in terms of geographic spread and coverage of a wide range of well-resourced disciplines/specializations; . Lack of VET relevance to the current and future labor needs of Georgia's economy; . Lack of professional development for VET educators. Lack of career prospects and incentives for teachers to enter VET; . The low quality and inconsistency of awarded VET qualifications and their lack of recognition by employers and education institutions both locally and internationally; . The variable nature of employability of VET graduates with limited access to sustained, well remunerated and personally fulfilling job opportunities; . VET is not highly regarded by the population, and is not a precondition for recruitment by employers. Strategic Objectives: . Support the GoG's socio-economic development and poverty reduction priorities by maximizing the potential of the country's human resources; . Creation of a nationwide flexible VET network promoting excellence in skills development; . Full and equal inclusion of all segments of the population in opportunities for personal development. Strategic Priorities: . Improvements to VET system regulations to meet labor market and economic development skill-based demands; . Establishment of effective funding mechanisms; . Preparation and training/re-training of VET teachers according to modern standards; increase the attractiveness of the teacher’s profession; . Reinforcement of partners’ participation at all levels of the system in decision-making as well as in the whole process of VET education; . Assurance of the quality and transferability of qualifications through improved quality assurance mechanisms at the system and institution level; . Strengthening of support mechanisms for all students including those with special educational needs or disabilities to ensure employment of VET graduates; . Promoting the role of entrepreneurship in VET in close cooperation with employers and the private sector. On April 25, 2018, in the second evaluation phase of the Vocational Education Reform, ongoing reform implementation was evaluated. The government survey showed that 83.3% of the 2013-2017 action plan has been implemented; this indicator was 80% during the first phase.

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According to the government survey, student loans and an agreement system for target groups were introduced in the last six months. In addition, self-evaluation tools were created for educational institutions. Pilot models of cooperation systems between education institutions and enterprises, as well as others for evaluation, are still being developed, although a credit system for the recognition of informal education has not been introduced. Vocational education teachers were trained according to the requirements that exist at the system level. A model of diversified financing has not been created and a minimum standard for involving the private sector in practice and examinations has not been determined. An official action plan of the reforms for 2018-2020 is planned for publication. As of April 2018, 52.1% of the reform plans have been implemented. Stakeholders scored the reform at 7.37 out of 10, and estimated the reform process as “ahead.” The previous evaluation score was 5.76. As shown below, stakeholders have high expectations from the reform (8.11 points).

During a discussion between stakeholders, the First Deputy Minister of Education and Science, Ketevan Natriashvili, and Vocational Education Department Head, Irina Tserodze following issues were emphasized: . In many TVET colleges, infrastructure has been improved, however, it is important that the colleges improve teaching methods to meet labor market requirements. One of the challenges of work-based learning is how to increase the scale; this implies that the government should attract large companies to vocational education. . Work-based vocational education sustainability is also important. When donor support ends, the state will have to bear financial responsibility and it should be ready for this. . In order to increase the quality of vocational education, cooperation between vocational colleges and private companies must improve. It is necessary to encourage teachers to work at vocational colleges. For example, when the remuneration of the teachers is calculated, time spent in communication with the partner companies should also be considered.

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. It is important to not only increase the scale of dual vocational education, but also to institutionalize it. A coordination institution (public or private) should be established. . Promotion is needed. Success story outreach campaigns should be conducted and GoG organizations should employ more VET graduates. . From the private sector standpoint, quality remains a problem. College graduates often overestimate their qualification and request high remuneration. Often, the private sector does not find it rational to bear such costs, as their retraining requires additional resources. The outcome indicators of Vocational Education and Training Reform can be found in Appendix F.

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APPENDIX A: REFORMETER INTERFACE

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APPENDIX B: OUTCOME INDICATORS OF SME/INNOVATIONS DEVELOPMENT

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APPENDIX C: OUTCOME INDICATORS OF AGRICULTURAL DEVELOPMENT

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APPENDIX D: OUTCOME INDICATORS OF CAPITAL MARKET DEVELOPMENT

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APPENDIX E: OUTCOME INDICATORS OF PENSION REFORM

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APPENDIX F: OUTCOME INDICATORS OF VET REFORM

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USAID Governing for Growth (G4G) in Georgia Deloitte Consulting Overseas Projects LLP Address: 5 L. Mikeladze st., 0162, Tbilisi Phone: +995 322 240115 / 16 E-mail: [email protected]