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Document of The World Bank FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No: 66027-GE PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN Public Disclosure Authorized IN THE AMOUNT OF US$60 MILLION TO GEORGIA FOR A REGIONAL DEVELOPMENT PROJECT February 22, 2012 Public Disclosure Authorized Sustainable Development Department South Caucasus Country Department Europe and Central Asia Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Public Disclosure Authorized CURRENCY EQUIVALENTS (Exchange Rate Effective February 22, 2012) Currency Unit = GEL GEL1.66 = US$1 FISCAL YEAR January 1 – December 31 ABBREVIATIONS AND ACRONYMS ACHP Georgia Agency for Culture Heritage Preservation CHF Georgia Culture Heritage Fund CPS Country Partnership Strategy CPS-PR Country Partnership Strategy Progress Report DA Designated Account EMF Environmental Management Framework EMPs Environmental Management Plans EPI USAID-funded Georgia Economic Prosperity Initiative FDI Foreign direct investment FI Financial Intermediary FM Financial Management FMM Financial Management Manual GNTA Georgia National Tourism Administration ICOR Incremental Capital to Output Ratio IFAC International Federation of Accountants IFRs Interim un-audited financial reports ISA International Standards on Auditing ISP Implementation Support Plan LSGs Local Self-Governments MRDI Ministry of Regional Development and Infrastructure MDF Municipal Development Fund Georgia (Project Implementing Entity) OM Operations Manual PAA Georgia Protected Areas Agency PDO Project Development Objective PSIA Poverty and Social Impact Analysis RAPs Resettlement Action Plans RMIDP Regional & Municipal Infrastructure Development Project SAR Subproject Appraisal Report SECHSA Strategic Environmental Cultural Heritage and Social Assessment SIDA Swedish International Development Agency TOR Terms of Reference Regional Vice President: Philippe H. Le Houérou Country Director: Asad Alam Sector Director: Laszlo Lovei Acting Sector Manager: Benoit Blarel Task Team Leader: Ahmed Eiweida GEORGIA REGIONAL DEVELOPMENT PROJECT TABLE OF CONTENTS Page I. STRATEGIC CONTEXT 1 A. Country Context 1 B. Sectoral and Institutional Context 1 C. Higher Level Objectives 4 II. PROJECT DEVELOPMENT OBJECTIVES 5 A. PDO 5 B. Project Beneficiaries 5 C. PDO Level Results Indicators 5 III. PROJECT DESCRIPTION 6 A. Project Components 6 B. Project Financing 7 C. Lending Instrument 7 D. Project Cost and Financing 8 E. Lessons Learned and Reflected in the Project Design 8 IV. IMPLEMENTATION 9 A. Institutional and Implementation Arrangements 9 B. Results Monitoring and Evaluation 10 C. Sustainability 10 V. KEY RISKS AND MITIGATION MEASURES 11 A. Risk Ratings Summary Table 11 B. Overall Risk Rating Explanation 11 VI. APPRAISAL SUMMARY 12 A. Economic and Financial Analyses 12 B. Technical 13 C. Financial Management 14 D. Procurement 15 E. Social (including safeguards) 16 F. Environment (including safeguards) 17 G. Other Safeguards Policies Triggered 18 H. Effectiveness Condition 18 Annex 1: Results Framework and Monitoring 19 Annex 2: Detailed Project Description 21 Annex 3: Implementation Arrangements 27 Annex 4: Operational Risk Assessment Framework (ORAF) 40 Annex 5: Implementation Support Plan 43 Annex 6: Team Composition 46 Annex 7: Procurement Plan 47 Annex 8: Economic and Financial Assessment 51 Annex 9: Maps 58 DATA SHEET Georgia REGIONAL DEVELOPMENT PROJECT (P126033) PROJECT APPRAISAL DOCUMENT EUROPE AND CENTRAL ASIA ECSS6 . Basic Information Date: February 22, 2012 Sectors: General water, sanitation and flood protection (60%), urban transport (30%), local government administration (8%), vocational training (2%) Country Director: Asad Alam Themes: City-wide infrastructure and Acting Sector Benoit Blarel/Laszlo Lovei service delivery (25%), culture Manager/Director: heritage (25%), infrastructure services for private sector development (30%), urban economic development (10%), regional integration (10%) Project ID: P126033 EA F - Financial Intermediary Category: Assessment Lending Instrument: Specific Investment Loan Team Leader(s): Ahmed A. R. Eiweida Does the project include any CDD component? No Joint IFC: No . Borrower: Ministry of Finance Responsible Agency: Georgia Municipal Development Fund Contact: Mr. Levan Chichinadze Title: Executive Director Telephone No.: 995-32-2437001 Email: [email protected] . Project Implementation Period: Start Date: 30-May-2012 End Date: 30-Jun-2016 Expected Effectiveness Date: 30-May-2012 Expected Closing Date: 31-Dec-2016 i . Project Financing Data (US$M) [X] Loan [ ] Grant [ ] Other [ ] Credit [ ] Guarantee Proposed term: A flexible loan with a variable spread and a final maturity of 25 years, including a grace period of 10 years. For Loan: Total Project Cost (US$M): 75.00 Total Bank Financing (US$M): 60.00 . Financing Source Amount (US$ Million) Borrower 15.00 International Bank for Reconstruction and Development 60.00 Total 75.00 . Expected Disbursements (in US$ Million) Fiscal Year 2012 2013 2014 2015 2016 Annual 15.00 20.00 15.00 07.00 03.00 Cumulative 15.00 35.00 50.00 57.00 60.00 . Project Development Objective(s) The Project Development Objective is to improve infrastructure services and institutional capacity to support the development of tourism-based economy and cultural heritage circuits in the Kakheti region. Components Component Name Cost (US$ Millions) Infrastructure Investment 56.90 Institutional Development 3.10 . Compliance Policy Does the project depart from the CAS in content or in other significant respects?[ ] Yes No [X] . ii Does the project require any exceptions from Bank policies? [ ] Yes No [X] Have these been approved by Bank management? [ ] Yes No [ ] Is approval for any policy exception sought from the Board? [ ] Yes No [X] Does the project meet the Regional criteria for readiness for implementation? Yes[X] [X] No [ ] . Safeguard Policies Triggered by the Project Yes No Environmental Assessment OP/BP 4.01 X Natural Habitats OP/BP 4.04 X Forests OP/BP 4.36 X Pest Management OP 4.09 X Physical Cultural Resources OP/BP 4.11 X Indigenous Peoples OP/BP 4.10 X Involuntary Resettlement OP/BP 4.12 X Safety of Dams OP/BP 4.37 X Projects on International Waterways OP/BP 7.50 X Projects in Disputed Areas OP/BP 7.60 X . Legal Covenants Name Recurrent Due Date Frequency Supervisory Board X Quarterly Description of Covenant The Borrower shall maintain the supervisory board of the Project Implementing Entity, chaired by the Prime Minister of Georgia. (Loan Agreement: Schedule 2, Section I.A.2). Name Recurrent Due Date Frequency Safeguards X Quarterly Description of Covenant The Borrower shall ensure that the Project is carried out by the Project Implementing Entity in accordance with the provisions of the EMF, EA(s), EMP(s), RPF and RAP(s). (Loan Agreement: Schedule 2, Section I.D.1). Name Recurrent Due Date Frequency Social Safeguards X Quarterly Description of Covenant Prior to the commencement of works, Project Implementing Entity to ensure that the owners and users of the land where works are to be implemented are fully compensated in accordance with the iii provisions of the RAP(s). (Loan Agreement: Schedule 2, Section I.D.2). Name Recurrent Due Date Frequency Resettlement Policy Framework X Quarterly Description of Covenant The Borrower shall ensure that the Project Implementing Entity prepares RAPs according to the RPF. (Loan Agreement: Schedule 2, Section I.D.4). Name Recurrent Due Date Frequency Selection Procedures for, and Terms and X Quarterly Conditions of, Investment Subproject Financing Description of Covenant Investment Subprojects shall be selected in accordance with the selection criteria set forth in the Operations Manual and the Project Agreement. (Project Agreement: Schedule, Section I.C.1). iv I. STRATEGIC CONTEXT A. Country Context 1. Following four years of rapid growth, backed by far-reaching reforms and strong foreign direct investment (FDI) inflows, Georgia experienced a sharp economic downturn resulting from the twin shocks of the August 2008 conflict and the global financial crisis. As a result, authorities launched a counter-cyclical fiscal stimulus and also realigned public expenditures to social and infrastructure investments. As economic recovery takes hold, driven by higher exports and private investment, authorities are reducing the stimulus and implementing fiscal adjustments to safeguard sustainability. Although the recovery resulted in about 6.8 percent growth rate in 2011, there is uncertainty about the pace of future growth due to global economic uncertainties. In response, the authorities are addressing macro-economic vulnerabilities through well-designed fiscal, monetary and debt management policies. The authorities have also maintained their economic reform program backed by a strong public investment program. Georgia is also currently negotiating a Deep and Comprehensive Free Trade Agreement with the EU, which is expected to enhance market access for Georgia‘s goods and modernize industries. 2. Georgia has one of the world‘s most competitive business environments—ranked 16th out of 183 countries according to the ―Doing Business‖ Report, IFC 2012. In particular, it scores well in terms of business start-ups, tax processes, investor protection, access to credit, enforcement of contracts, registering property and issuing construction permits. 3. The Government refocused