FINAL REPORT Market and Technical Feasibility Study for Development Project,

27 January 2016

Table of Contents 1 EXECUTIVE SUMMARY ...... 5 2 INTRODUCTION ...... 25 3 METHODOLOGY ...... 27 3.1 KEY PERFORMANCE INDICATORS AND DEFINITIONS IN THE HOTEL INDUSTRY ...... 28 3.2 REFERENCES ...... 29 4 GENERAL OVERVIEW OF GEORGIA ...... 30 4.1 GEORGIA – GENERAL OVERVIEW ...... 31 4.2 ECONOMIC OVERVIEW ...... 32 4.3 ACCESSIBILITY AND COMMUNICATIONS ...... 35 4.3.1 General ...... 35 4.3.2 Air Access ...... 36 4.4 INVESTMENT AND REAL ESTATE TRENDS ...... 40 4.4.1 Investment trends ...... 40 4.4.2 Investment projects in Georgia ...... 41 4.5 TOURISM ...... 45 4.5.1 Tourism in Georgia ...... 45 5 GENERAL OVERVIEW OF RACHA REGION ...... 49 5.1 GENERAL OVERVIEW ...... 50 5.1.1 General description of the region ...... 50 5.1.2 Accessibility ...... 51 5.1.3 Natural resources ...... 52 5.1.4 Infrastructure ...... 53 5.1.5 Economy ...... 55 5.1.6 Investment trends and projects - Racha ...... 58 5.2 TOURISM-SPECIFIC MARKET DESCRIPTION OF RACHA REGION ...... 61 5.2.1 Tourism of Racha region ...... 61 5.2.2 Touristic attractions ...... 63 5.2.3 Supply and demand analysis ...... 66 5.2.4 International Tourism trends ...... 69 5.3 CURRENT STATE AND MARKET READINESS OF RACHA AND IT KEY ASSETS ...... 72 6 GENERAL OVERVIEW OF SELECTED KEY DESTINATIONS ...... 74 6.1 SHAORI ...... 75 6.1.1 Status Quo ...... 75 6.1.2 Location ...... 76 6.1.3 Climate ...... 76 6.1.4 The Shaori Lake and the Cave ...... 76 6.1.5 Nature ...... 77 6.1.6 Tourism ...... 77 6.2 UTSERA ...... 78 6.2.1 Status Quo ...... 78 6.2.2 Location ...... 78 6.2.3 Climate ...... 78 6.2.4 Mineral sources ...... 79 6.2.5 Nature ...... 80

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6.2.6 Tourism ...... 80 6.3 SHOVI ...... 80 6.3.1 Status Quo ...... 80 6.3.2 Location ...... 81 6.3.3 Climate ...... 81 6.3.4 Mineral waters ...... 81 6.3.5 Nature ...... 82 6.3.6 Tourism ...... 82 7 GENERAL DEVELOPMENT OPPORTUNITIES AND BRANDING OF RACHA...... 84 7.1 SWOT ANALYSIS OF RACHA REGION ...... 85 7.2 OVERVIEW AND COMMENTS ON THE FORMER AND CURRENT STRATEGIES ...... 87 7.2.1 Development strategy of the region for 2014-2021 years ...... 87 7.3 DOMESTIC AND INTERNATIONAL COMPARABLE AREAS AND DEVELOPMENTS ...... 89 7.3.1 Domestic comparable areas ...... 89 7.3.2 International comparable areas ...... 93 7.4 RACHA AS A TOURISM BRAND ...... 96 7.4.1 Tourism Destination Management Organisations ...... 96 7.4.2 Creating of a place brand ...... 99 7.4.3 Best practice: Valais – ‘Engraved on my heart’ ...... 100 7.4.4 Branding of Racha in practice ...... 103 8 IDENTIFIED PROJECT DEVELOPMENT OPPORTUNITIES IN RACHA REGION ...... 108 8.1 BASE ASSUMPTIONS OF OUR DEVELOPMENT CONCEPT AND FINANCIAL PROJECTIONS ...... 109 8.2 SHAORI LAKE CONCEPT AND PRODUCT DEVELOPMENT ...... 111 8.2.1 Former Plans ...... 111 8.2.2 Development recommendations ...... 111 8.2.3 Financial projections ...... 115 8.2.4 Investment Costs ...... 122 8.3 UTSERA CONCEPT AND PRODUCT DEVELOPMENT ...... 125 8.3.1 Former Plans ...... 125 8.3.2 Development recommendations ...... 125 8.3.3 Financial projections ...... 128 8.3.4 Investment costs ...... 131 8.4 SHOVI CONCEPT AND PRODUCT DEVELOPMENT ...... 133 8.4.1 Former Plans ...... 133 8.4.2 Development recommendations ...... 133 8.4.3 Financial projections ...... 135 8.4.4 Investment costs ...... 140 8.5 IDENTIFIED OTHER TOURISM DEVELOPMENT OPPORTUNITIES ...... 143 8.6 ADDITIONAL REVENUE STREAMS OF SHAORI AND SHOVI ...... 148 8.6.1 Additional revenues streams of Shaori ...... 148 8.6.2 Additional revenue streams of Shovi ...... 149 8.7 SUMMARY OF REVENUES AND PROFITABILITY...... 150 8.8 SENSITIVITY ANALYSIS AND INVESTMENT COSTS ...... 151 8.8.1 Sensitivity analysis ...... 151 8.8.2 Investment costs ...... 151 8.9 PROJECT FINANCING AND RETURN ON INVESTMENT OF PROJECTS ...... 158

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8.10 ANTICIPATED DIRECT EFFECTS OF DEVELOPMENTS ...... 163 8.10.1 Hotel brands in Georgia ...... 163 8.10.2 Anticipated direct effects of developments ...... 163 9 INVESTOR ASSESSMENT ...... 165 9.1 GEORGIAN NATIONAL INVESTMENT AGENCY...... 166 9.2 PPP: PUBLIC-PRIVATE PARTNERSHIP ...... 167 9.3 FOREIGN INVESTORS ...... 168 9.4 LOCAL INVESTORS ...... 171 10 LIMITATIONS ...... 174 11 APPENDIX ...... 176

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1 EXECUTIVE SUMMARY

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EXECUTIVE SUMMARY

Introduction

. BDO Georgia and BDO Hungary were commissioned to provide consulting services for a Market and Technical Feasibility Study for Racha Development Project. The contract was signed on the 7th of September 2015, executed by and between JSC Partnership Fund (PF) and BDO LLC.

. Our main tasks are to inform PF on the current state and market readiness of Racha and its key assets, on the nature of supply deemed relevant to the development concept, on the market demand and on the nature of investor demand, to raise any barriers or constraints of relevance to the success of the project and to provide financial projections for the development.

. The group of experts with a relevant experience in multiple resort planning and tourism development projects supplemented with an architect visited Racha between the 21st and the 24th of September, 2015.

. Partnership Fund is also committed to develop general infrastructure of the subject region and to participate in the selected key investment projects.

General overview of Racha – and Kvemo

. Racha–Lechkhumi and Kvemo Svaneti region is located in the north-western part of Georgia on the southern slopes of the Central .

. The total area of the region is 4,954 square kilometres, accounting for 7.1% of the total territory of Georgia.

. The capital of the region is , situated 270 km far from on road.

. The region’s per capita income is the third-highest among Georgia’s nine regions.

. The main challenges hindering the development of Racha are the lack of the reproductive aged population and weakly developed infrastructure resulting in an unpredictable business environment.

. The government of Georgia approved a new law, ’the Mountain Law’ with the aim to encourage development and investment in mountainous regions and local people to work and live there. The following non-exhaustive list of benefits, included in the new law:

o Each family living in the country’s mountain regions will receive GEL100 financial aid from the state every month for two years after the birth of every new-born child. This financial aid will be increased to 200 GEL for every third, fourth and subsequent child;

o Mountain residents will enjoy a non-taxable income if their salary is GEL6,000 or lower;

o Individuals and legal entities in mountain regions will be exempt from profit tax for 10 years;

o People, living permanently in mountain regions will have exemption from paying property tax after lands, owned by them, and 50% of their electricity expenses will be covered by the Government;

o State-funded schools and other educational institution in mountain regions will be supported with increased amounts of aid;

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o Entrepreneurs, establishing businesses in the mountain regions, using local resources and employing local residents, will have exemption from paying taxes for three years.

. Racha possesses highly attractive natural environment, diverse flora and fauna, unique tourists attractions, great wines, water and mineral water sources and fossil resources.

. During the Soviet period Racha was famous as a summer and winter resort, due to the once significant inflow of tourists from the . Inflows of Russian tourists who used to enter through the Mamisoni Pass on the Georgian-Russian border have stopped, as the border crossing point has been closed and controlled by Russians and Ossetians. The re-opening of Mamisoni Pass (shortest way to ), which could contribute to the growth of tourism and trade, is a strategic goal, but the probability and time of its realisation can not be estimated.

. Racha is rich in cultural and natural resources, but due to the low level of infrastructural development, the lack of high-quality services and the relativly large distance from purchasing power the region is yet unable to turn these assets into tourist attractions that would generate significant revenue.

Tourism market of Racha

. General quality of commercial accommodation establishments just as the quality of restaurants lags behind the level of European and Georgian urban hotel and restaurants. Generally, most elements of tourism supply are open only in the peak season, thus Racha remains unserviced during the winter and tourism shoulder months.

. Tourism demand for the region is very low, in QI 2015, a toal of 23,839 domestic tourists visited the region.

. As of today, touristic attractiveness of the region lies in its natural environment, cultural heritage and abundance of mineral waters, creating unique conditions for development of tourism. Racha is famous for its mountains, mineral waters, the ‘Khvanchkara’ wine region, its cultural monuments, as well as its cuisine, stone relieves and sculptures, dating back to the VIIth–XVIIth centuries, exhibited in museum collections or incorporated in architectural monuments.

Branding of Racha

. The creation of marketing and branding strategies in order to promote a region and thereby attract residents, tourists, businesses, investments there and to differentiate the place in question from its competitors received significant attention in the recent years.

. The process of place branding underlines both the tangible and intangible values and qualities to which the brand must refer through the perception, image and reputation of the place or region. Communication strategy is implemented through the invention of, and adherence to, a ‘place narrative’, which in emphasising the values of the place, may generate emotions in addition to its certified qualities.

. Racha should appear in the tourism market as a brand that could compete with and differentiate itself from the established tourist resorts in Georgia, such as Bakuriani, Gudauri or Borjomi. The brand message shall not be similar to other well-known Georgian destinations.

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. In the brand communication, the following natural resources and features of the region shall be communicated: ‘The Lake, The River, The Mountains’ and ‘remote, untouched, adventurous and versatile’.

. Racha shall be branded as the ultimate place for families and friends for vacations – close to nature with modern services and quality environment.

. We recommend the introduction of the ‘Racha tourist card’, which, in addition to a set of free services, provide users discounts of between 8% and 15% off the end price of various services to facilitate growth in the number of visitations of service providers and increase average spending in Racha.

Identified Project development opportunities

. We have identified our development proposals in Racha based on the following assumptions:

o Rehabilitation of the 15-kilometre-long road between Utsera and Shovi;

o Installation of gas-, water-, electricity-, and wastewater networks, running to the identified development sites;

o Construction of slip roads to the identified development sites;

o Accessibility to the proposed themed routes all-year - Ensuring of roads’ de-icing and snow clearing;

o Development of public transport in the region and installation of bus stops around recommended project sites;

o Modern waste management should be introduced and maintained by the State;

o Installation of tourism information tables, promoting the tourist attractions of the region and marking the themed routes and the existing hiking routes;

o Installation of toilettes at each stop of the routes;

o Establishment of sales outlets such as gift shop and mini markets for traditional goods at every second stop of the routes;

o Installation of streetlights along the themed routes if it is not existing yet;

o Construction of parking facilities, also suitable for medium-sized buses;

o Developments are implemented until 2019.

o Establishment of tourist offices/tourist information points at Shaori Lake and in Shovi resort. Information points should be operated by the Georgian National Tourism Administration, with regards to the fact that GNTA has been operating some tourist centres across the country for several years. The offices should be open at least between 10:00 a.m. and 18:00 p.m. every day;

o The revenue and expense schedules and structures of the proposed internationally-branded hotels (Shaori Lakeside Hotel and Spa, Shovi Climatic Resort Hotel and Spa) are based on the globally used and accepted Uniform System of Accounts for the Lodging Industry.

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o Our financial projections have been prepared in USD and are shown in 2014 values without the benefits of inflation (non-inflated).

o Rooms Supply (Rooms Available) means the number of rooms in the hotel multiplied by the number of operating days in a year.

o Rooms Demand (Rooms Sold) means the number of rooms sold in a year.

o Number of room stocks of the proposed hotels were determined based on the following factors at each identified hotel development project, respectively:

. overall attractiveness of both the micro-area and the specific location;

. future tourism potential of the destinations;

. architecturally harmonising capacities;

. cap of capacity due to being an untested market;

. slower market penetration and performance build-up than in other emerging yet more established locations across Georgia;

. minimum room numbers were also determined based on the expectations of international hotel companies seeking schemes to allow for maximised profitability;

. best practice capacities for optimised operational effectiveness;

. avoidance of potential room oversupply.

o Based on our international experience and on the identified characteristics of each studied location, it is fair to say that whilst Shovi and Shaori both are in possession of the characteristics of becoming potential international hotel projects and be put on the radar- sreen of hotel companies, Utsera is a less ideal location for such development compared to Shaori and Shovi. Taking into account Utsera’s attributes as a tourism destination, we found it more prudent to recommend a property that could maximise the profitability potential of the selected development plot in a way of not being pressured by international overhead costs. As Utsera has a history of offering a sanatorium to domestic and Russian guests, we recommend the capitalisation on this history and be branded as a “MedHotel” offering balneo-treatments to its guests. Generally speaking, international hotel companies very rarely accept such non-standard facilities as medical facilities which at this case, being an untouched market for these companies, make the project non-market conform. Based on the above, an 80-room, independent hotel property is a fair and sound investment recommendation to make.

o We have been informed that the Government is continuing intense negotiations to introduce loan interest rate subsidies for hotel development projects under certain market circumstances. As at the time of the issuance of this report the bill is a draft bill, this subsidy is not materialised in our financial projections. However, we would like to note that shall such subsidy be introduced and shall the subject project be eligible, Internal Rate of Return (IRR) figures could noteably further improve.

o As the “Law of Georgia on the Development of High Mountainous Regions” comes in to force from the 1st January 2016, businesses are waived from profit tax payment for the first 10

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years of operation which subsidy is to support profitability of private businesses. Our financial calculations has been prepared without profit tax (excluding profit tax) as profit taxes are understood to be effected by various internal and external influences (other corporate conditions) therefore is not part of the international financial projections (prepared by the standards of the Uniform System of Accounts for the Lodging Industry).

. We have identified Shaori, Utsera and Shovi as key development destinations.

Shaori

. Shaori possesses the attributes to become one of the most frequented domestic year-round resort tourist destinations of Georgia and the ‘tourism hub’ of the region. The area of the Shaori Lake, the ‘Gate of Racha’ is the point of entry to the region en route from Tbilisi and . The distance from Shaori to Tbilisi is 240km.

. We have proposed the following development opportunities at Shaori Lake:

o Shaori Lakeside Hotel and Spa: an internationally branded hotel, lake-view, full-service 4- star hotel with 125 rooms;

o 40 private chalets of high build quality with private saunas/hot tubs for sale;

o Restaurant and Hotel with 100 seats and 10 hotel rooms above the restaurant.

. Besides constructing commercial real-estate properties, other general infrastructure and tourists attractions need to be built to achieve a complex development that possesses overall tourism attractiveness.

. The following elements of development are seen as necessary to ensure the future success of the main revenue sources:

o Construction of a 27.5 km long promenade around the lake with bicycle path;

o Next to the restaurant a tourist information centre and a kids playground of European standards should be constructed. The aims of the tourist information centre operated by GNTA are to provide information on tourist attractions of Racha, to sell Racha tourist card and to promote the whole region as a tourism destination;

o 4 small-to-mid-sized lake ports should be also constructed for electric and traditional boats. We envision that besides to the hotel guests, tourists, travelling to Racha would also stop at Shaori Lake. We propose also berths for rental for guests, possessing own boats;

o 3 bus stops for easy accessibility for local population should be constructed;

o Construction of a look-out tower, at the south lakeside adjacent to the bridge, crossing the lake at its narrowest point.

Utsera

. Utsera is rich in mineral water sources (28 types of mineral waters) but the potential of mineral water supplies has not been utilised yet. Utsera is located 300 km from Tbilisi. Utsera is a proper starting point for hiking tours and for other outdoor adventures and also has the potential to accommodate a medhotel with related facilities based on the availability of mineral springs and resources.

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. The identified available plot is a suitable and recommended place for the development of the subject project. Based on information received from our Client, that the State has (preliminary) plans for developing a water bottling plant on the subject site. In case this water bottling plant development plan would be finalised, we can state that our recommended development concept is general and can be implemented on a substitution land assuming similar physical attributes (accessibility, visibility, attractive environment) thus could also replace the select site and accommodate the same or very similar concept and facility mix.

. We propose the construction of an 80-key, independent (non-branded), midmarket hotel with spa and medical de department with mineral water based treatment rooms in Utsera (Medhotel Utsera – House of Gastronomy and Showroom).

. We suggest and encourage, that the State or Partnership Fund should invite the neighbouring investor and attempt to create a joint venture for the implementation of the proposed project or any other tourism related projects that fit the profile and characteristics of Racha and Utsera, in particular. The main pillars of the JV should be the provision of the land plot, state subsidies and the water concession with access to wells as contribution in kind by the State or Partnership Fund, whilst the input of the investor should be balanced accordingly (e.g. investment/development funds and activities). We strongly encourage the Georgian State and Partnership Fund to invite the neighbouring investor as any pending legal situation does no good to the perception of the State from an international point of view. The State should consider to grant or provide the required water concession and access to the wells with the primary intention to support and impetus measurable and equal private investment in return to strengthen Racha's economic and tourism potential. We also suggest that water bottling factory should be placed outside of the settlement of Utsera in order to avoid any negative visual and noise effects.

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Shovi

. During the Soviet-era, Shovi was renowned as a year-round resort destination primarily visited by Russian leisure tourists. Shovi is located 314 km from Tbilisi. The area could become a year-round mountain and climatic destination.

. We propose to develop a gated resort on smaller territory than its predecessor comprising the following key facilities:

o Shovi Climatic Resort Hotel and Spa: Internationally branded hotel, full service 4-star hotel with 105 rooms, in- and outdoor wellness facilities;

o 40 private chalets for sale of high build quality with private saunas/hot tubs.

. Besides commercial real-estate properties, other general infrastructure and tourist attractions need to be built to achieve complex development that possesses overall tourism attractiveness.

. The complex development shall comprise of the following facilities:

o A European standard kids playground, a large-scale adventure park and two tennis courts are proposed to be built both for owners of the chalets and hotel guests;

o Opposite the entrance a tourist information point should be operated by GNTA in order to provide information for the guests on organised tours and about the region.

. Currently the proposed territory of the developments mostly owned by private persons. In order to carry out the development, cooperation and agreement with land owners is crucial.

. In addition to the development projects, we recommend the development of complex tourism attractions and programmes as well, which could further strengthen the attractiveness of the region. Racha should appear on tourism market as a brand that could compete to an extent with the well-known tourist resorts in Georgia, as Bakuriani, Gudauri or Borjomi.

. We recommend the organisation of themed routes and excursions in the region. One key aim of these routes, apart from attracting tourists to Racha, is to connect several attractions that would independently not have the potential to entice tourists to spend time and money there. Good basis for such development in a region can be created through building up and maintaining collaboration agreements between the government and local councils, private enterprises and associations, the tourism industry and local communities.

. We propose the following excursions and themed routes of various motivations in Racha:

o Route1: Shaori – Nikortsminda - Shovi- Utsera: Culture & Climate;

o Route2: Shaori – Shovi: Relax in Shovi;

o Route3: Nikortsminda – Tsesi – (Utsera) – Oni: Culture of Racha;

o Route4: Khvanchkara: World of wines; o Route5: Shkmeri – off-road adventure.

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Financial projections and investment costs

. Our financial projections have been prepared in USD and are shown in 2014 values without the benefits of inflation (non-inflated).

. Total volume of anticipated revenues (non-inflated) amount to USD125,763,955 between 2018 and 2028 (11 years) accompanied by an estimated consolidated EBITDA flow of USD43,834,913.

RACHA CONCEPT DEVELOPMENT PLAN - BDO FINANCIAL PROJECTIONS SUMMARY

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Revenue Streams in USD

Total Revenues Shaori Lakeside Hotel and Spa 3,575,653 4,081,623 4,516,713 5,001,701 5,439,892 5,439,892 5,439,892 5,439,892 5,439,892 5,439,892 Shaori Restaurant and Hotel 277,583 314,320 377,848 443,530 484,903 484,903 484,903 484,903 484,903 484,903 484,903

Shaori Chalets 6,720,000 2,034,000 1,344,000 Shaori Additional Revenues 103,618 128,956 150,350 172,423 195,425 195,425 195,425 195,425 195,425 195,425 Utsera Restaurant and Hotel 576,970 976,736 1,137,482 1,293,309 1,382,897 1,382,897 1,382,897 1,382,897 1,382,897 1,382,897 Shovi Climatic Resort Hotel 2,781,627 3,034,954 3,362,770 3,677,609 4,001,222 4,001,222 4,001,222 4,001,222 4,001,222 4,001,222

Shovi Chalets 5,478,000 2,136,000 1,752,000 Shovi Additional Revenues 51,225 61,915 71,765 80,401 89,656 89,656 89,656 89,656 89,656 89,656 Estimated Total Revenues 12,475,583 11,573,413 11,758,032 9,682,610 10,710,347 11,593,995 11,593,995 11,593,995 11,593,995 11,593,995 11,593,995

Total EBITDAs Shaori Lakeside Hotel and Spa 619,901 831,622 1,010,150 1,248,989 1,501,603 1,501,603 1,501,603 1,501,603 1,501,603 1,501,603 Shaori Restaurant and Hotel 89,524 100,690 118,583 137,096 149,664 149,664 149,664 149,664 149,664 149,664 149,664 5,846,400 1,769,580 1,169,280 Shaori Chalets Shaori Additional Revenues 51,809 64,478 75,175 86,212 97,713 97,713 97,713 97,713 97,713 97,713 Utsera Restaurant and Hotel 166,929 281,729 321,681 358,118 390,191 390,191 390,191 390,191 390,191 390,191 Shovi Climatic Resort Hotel 481,087 499,094 606,224 751,993 935,640 935,640 935,640 935,640 935,640 935,640

4,765,860 1,858,320 1,524,240 Shovi Chalets Shovi Additional Revenues 25,613 30,957 35,883 40,201 44,828 44,828 44,828 44,828 44,828 44,828 Estimated Total EBITDA 10,701,784 5,073,928 4,519,984 2,186,208 2,635,176 3,119,639 3,119,639 3,119,639 3,119,639 3,119,639 3,119,639

. The respective and total investment volumes needed for the realisation of the identified development opportunities broken down to project elements are presented in Section 8.8.2 of our report.

. Total volume of assumed investment costs amount to USD59,393,326, broken down to USD33,397,202 supported by public sector and USD25,996,124 generated by private investors.

. Investment costs are estimated and are in line with international and Georgian benchmark data and BDO’s relevant research activities carried out in the period of September-November, 2015. Partnership Fund is also committed to develop general infrastructure of the subject region and to

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participate in the selected key investment projects. In the subject report the main foreign and local investors; active on the hospitality investment scene some of them with extensive and proven track record as possible investors are presented.

. The following table presents the key commercial investment targets and their estimated investment cost.

Summary of Key Commercial Investment Targets

Capacity/Number Estimated Investment Private involvement Facilities/ Type of investment Affiliation of Units Cost in USD requirement (in USD)

internationally operated Shaori Lakeside Hotel and Spa 125 15,000,000 7,500,000 & branded

interconnected with the Shaori Chalets 40 4,422,000 2,211,000 hotel

Riverside restaurant with 10 independent 100 412,500 412,500 hotel rooms

Medhotel Utsera independent 80 3,600,000 1,800,000

Shovi Climatic Resort Hotel internationally operated 105 10,500,000 5,250,000 and Spa & branded

interconnected with the Shovi Chalets 40 4,051,520 2,025,760 hotel

Total 37,986,020 19,199,260

. The following table presents the key cumulated indicators of the proposed development projects in Racha region between 2018 and 2028.

Key cumulated indicators Y0-Y10 (2018-2028) Racha Region Development all values in USD

Investment costs 59,393,326

Revenues 125,763,955

EBITDA 43,834,913

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. As per the request of our Client, we have prepared a fully functional Sensitivity Analysis Excel spreadsheet. The attached spreadsheet comprises financial projections of all revenue generating sources (identified development opportunities of commercial real estate and related services) respectively with a summarisation of revenues and anticipated profits.

. Based on international benchmarks and best practice, we have determined hotel development budgets on a per key (guestroom) basis, taking into consideration each hotel project’s attributes, future market positioning and service level. In the following, we present the breakdown of estimated development budgets based on our project experience and international hotel companies (non-published) development guidelines. The presented figures exclude costs of technical assistance provided by the future international operator (not identified at this stage of the project).

. The 125-key Shaori Lakeside Hotel and Spa has a project budget of US$120,000 per key (guestroom). With its proposed capacity of 125 guestrooms, gross total budget is estimated to achieve US$15 million comprising the following cost-breakdown:

Calculation of the Gross-Investment Costs for Shaori Lakeside Hotel and Spa in USD 1,000 per Room Number of guestrooms 125 Gross Investment Costs 120 Total Investment without Land 15,000 thereof in USD 1,000 % of Total in USD 1,000 Substructure 3.0% 450 Superstructure 34.0% 5,100 Internal Finishes 13.0% 1,950 Fittings, Furnishings & Equipment 10.0% 1,500 Services (utilities, technical infrastructure) 25.0% 3,750 External works 5.0% 750 Other (preliminaries, overheads) 10.0% 1,500 Total 100.0% 15,000

. The 100-key Shovi Climatic Resort Hotel has a project budget of US$105,000 per key (guestroom). With its proposed capacity of 100 guestrooms, gross total budget is estimated to achieve US$10.5 million comprising the following cost-breakdown:

Calculation of the Gross-Investment Costs for Shovi Climatic Resort Hotel in USD 1,000 per Room Number of guestrooms 105 Gross Investment Costs 100 Total Investment without Land 10,500 thereof in USD 1,000 % of Total in USD 1,000 Substructure 3.0% 315 Superstructure 35.0% 3,675 Internal Finishes 13.0% 1,365 Fittings, Furnishings & Equipment 10.0% 1,050 Services (utilities, technical infrastructure) 24.0% 2,520 External works 5.0% 525 Other (preliminaries, overheads) 10.0% 1,050 Total 100.0% 10,500

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. The independent 80-key Utsera MedHotel has a project budget of US$45,000 per key (guestroom). With its proposed capacity of 80 guestrooms, gross total budget is estimated to achieve US$3.6 million comprising the following cost-breakdown:

Calculation of the Gross-Investment Costs for MedHotel Utsera in USD 1,000 per Room Number of guestrooms 80 Gross Investment Costs 45 Total Investment without Land 3,600 thereof in USD 1,000 % of Total in USD 1,000 Substructure 4.0% 144 Superstructure 36.0% 1,296 Internal Finishes 12.0% 432 Fittings, Furnishings & Equipment 15.0% 540 Services (utilities, technical infrastructure) 23.0% 828 External works 5.0% 180 Other (preliminaries, overheads) 5.0% 180 Total 100.0% 3,600

. Albeit it is understood that prevailing general interest rates are slightly above 10 per cent, we applied 8.50 per cent for our preliminary loan calculations as we have assumed that parallel with the continuous strengthening of the Georgian economy and improving investor perception of the country, project loan interest rates will gradually decrease. This slightly more favourable debt service cost shall be achieved by a syndicate loan together with the participation of an international bank. We prepared our debt-service calculations based on the assumption that the project will access financing with the following conditions: annuity loan with a 12-year payback period and a 2- year grace period, 8.50 per cent interest rate. Based on indications from our Client, we have used a loan to equity ratio of 35% and 65% respectively.

. Based on our international project experience it can be concluded that internal rate of returns for 10 years does not sufficiently evaluate a hotel investment opportunity therefore we are presenting Return on Investment figures that we find more relevant to the subject internationally branded projects. Hotel developments of higher quality are long-term (often 15 year+) investments and shall be seen as strategic investments. The subject projects are understood to be located in not established, untested destinations which is reflected in our financial projections as well. The identified investment opportunities are seen as strategic investment projects that are not to be compared to Tbilisi international hotel projects whereas projects are understood to achieve a faster return on investment.

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Shaori Lakeside Hotel and Spa / Racha: Investment & Finance

Paymentplan in USD 1,000 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

Loan 1

Debt - Beginning 5,250 5,250 5,250 4,896 4,512 4,096 3,644 3,153 2,621 2,044 1,417 737

Principal Repayment 0 0 354 384 417 452 490 532 577 626 680 737

Interest 446 446 446 416 384 348 310 268 223 174 120 63

Total Payment 446 446 800 800 800 800 800 800 800 800 800 800

Debt – End 5,250 5,250 4,896 4,512 4,096 3,644 3,153 2,621 2,044 1,417 737 0

Shaori Lakeside Hotel and Spa / Racha: Investment & Finance in current USD 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Financial Ratios

ROI 4.5% 6.2% 7.7% 9.7% 12.0% 12.2% 12.5% 12.8% 13.1% 13.4%

Ø ROI 4.5% 5.3% 6.1% 7.0% 8.0% 8.7% 9.3% 9.7% 10.1% 10.4%

ROE 2.4% 1.3% 3.6% 6.8% 10.2% 10.6% 11.1% 11.5% 12.0% 12.4%

Ø ROE 2.4% 1.8% 2.4% 3.5% 4.9% 5.8% 6.6% 7.2% 7.7% 8.2%

ROLoan 12.9% 17.7% 22.0% 27.8% 34.2% 35.0% 35.8% 36.6% 37.5% 38.3%

Shaori Lakeside Hotel and Spa with Chalets /Racha: Investment & Finance

Paymentplan in USD 1,000 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

Loan 1

Debt - Beginning 6,798 6,798 6,798 6,339 5,842 5,303 4,718 4,083 3,394 2,646 1,835 955

Principal Repayment 0 0 458 497 539 585 635 689 748 811 880 955

Interest 578 578 578 539 497 451 401 347 288 225 156 81

Total Payment 578 578 1,036 1,036 1,036 1,036 1,036 1,036 1,036 1,036 1,036 1,036

Debt – End 6,798 6,798 6,339 5,842 5,303 4,718 4,083 3,394 2,646 1,835 955 0

Shaori Lakeside Hotel and Spa with Chalets/ Racha: Investment & Finance in current USD 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Financial Ratios

ROI 3.5% 4.8% 5.9% 7.5% 9.2% 9.5% 9.7% 9.9% 10.1% 10.4%

Ø ROI 3.5% 4.1% 4.7% 5.4% 6.2% 6.7% 7.2% 7.5% 7.8% 8.0%

ROE 61.1% 8.4% 0.9% 3.4% 6.0% 6.3% 6.7% 7.0% 7.4% 7.7%

Ø ROE 61.1% 34.8% 23.5% 18.4% 16.0% 14.4% 13.3% 12.5% 11.9% 11.5%

ROLoan 10.0% 13.7% 17.0% 21.5% 26.4% 27.0% 27.6% 28.3% 28.9% 29.6%

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 17

Shovi Climatic Resort Hotel and Spa / Racha: Investment & Finance

Paymentplan

2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

Loan 1

Debt - Beginning 3,675 3,675 3,675 3,427 3,158 2,867 2,550 2,207 1,835 1,431 992 516

Principal Repayment 0 0 248 269 292 316 343 372 404 439 476 516

Interest 312 312 312 291 268 244 217 188 156 122 84 44

Total Payment 312 312 560 560 560 560 560 560 560 560 560 560

Debt – End 3,675 3,675 3,427 3,158 2,867 2,550 2,207 1,835 1,431 992 516 0

Shovi Climatic Resort Hotel and Spa / Racha: Investment & Finance in current USD 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Financial Ratios

ROI 5.0% 5.3% 6.6% 8.4% 10.7% 10.9% 11.1% 11.4% 11.7% 11.9%

Ø ROI 5.0% 5.2% 5.6% 6.3% 7.2% 7.8% 8.3% 8.7% 9.0% 9.3%

ROE 3.1% 0.0% 1.9% 4.7% 8.2% 8.6% 8.9% 9.3% 9.7% 10.2%

Ø ROE 3.1% 1.5% 1.7% 2.4% 3.6% 4.4% 5.1% 5.6% 6.1% 6.5%

ROLoan 14.3% 15.2% 18.8% 23.9% 30.4% 31.1% 31.9% 32.6% 33.3% 34.1%

Shovi Climatic Resort Hotel and Spa with Chalets / Racha: Investment & Finance

Paymentplan in USD 1,000 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

Loan 1

Debt - Beginning 5,093 5,093 5,093 4,750 4,377 3,973 3,534 3,059 2,542 1,982 1,375 715

Principal Repayment 0 0 343 372 404 438 476 516 560 608 659 715

Interest 433 433 433 404 372 338 300 260 216 169 117 61

Total Payment 433 433 776 776 776 776 776 776 776 776 776 776

Debt – End 5,093 5,093 4,750 4,377 3,973 3,534 3,059 2,542 1,982 1,375 715 0

Shovi Climatic Resort Hotel and Spa with Chalets / Racha: Investment & Finance in current USD 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Financial Ratios

ROI 3.6% 3.8% 4.8% 6.0% 7.7% 7.9% 8.0% 8.2% 8.4% 8.6%

Ø ROI 3.6% 3.7% 4.1% 4.6% 5.2% 5.6% 6.0% 6.3% 6.5% 6.7%

ROE 71.0% 13.8% -0.9% 1.1% 3.6% 3.9% 4.2% 4.5% 4.7% 5.0%

Ø ROE 71.0% 42.4% 28.0% 21.3% 17.7% 15.4% 13.8% 12.6% 11.8% 11.1%

ROLoan 10.3% 10.9% 13.6% 17.3% 22.0% 22.5% 23.0% 23.5% 24.1% 24.6%

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 18

Medhotel Utsera: Investment & Finance in current USD 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Financial Ratios

ROI 5.1% 8.7% 10.2% 11.6% 13.0% 13.3% 13.6% 13.9% 14.2% 14.5%

Ø ROI 5.1% 6.9% 8.0% 8.9% 9.7% 10.3% 10.8% 11.2% 11.5% 11.8%

ROE 3.2% 1.2% 4.1% 7.0% 9.6% 10.2% 10.8% 11.5% 12.1% 12.8%

Ø ROE 3.2% 0.7% 1.8% 3.1% 4.4% 5.4% 6.2% 6.8% 7.4% 8.0%

ROLoan 14.5% 17.5% 20.4% 23.2% 25.9% 26.5% 27.1% 27.7% 28.4% 29.0%

Medhotel Utsera: Investment & Finance

Paymentplan

2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

Loan 1

Debt – Beginning 1,260 1,260 1,260 1,175 1,083 983 874 757 629 490 340 177

Principal Repayment 0 0 85 92 100 108 118 128 139 150 163 177

Interest 107 107 107 100 92 84 74 64 53 42 29 15

Total Payment 107 107 192 192 192 192 192 192 192 192 192 192

Debt – End 1,260 1,260 1,175 1,083 983 874 757 629 490 340 177 0

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 19

Internal Rate of Return Summary for selected International standard Hotel and Real Estate Projects - Racha Region, Georgia

All values are in 1,000 USD 10-year 15-year 20-year Projects scenario scenario scenario

Shaori Total of which 10-year cum cash 15-year cum cash 20-year cum cash Investment Equity flow flow flow Shaori Hotel & Chalets 19 422 12 624 14 512 24 253 36 331

Shaori Hotel and Chalets

IRR - equity 4.3% 11.8% 14.2%

Shovi Total of which 10-year cum cash 15-year cum cash 20-year cum cash Investment Equity flow flow flow Shovi Hotel & Chalets 14 551 9 458 10 493 16 433 23 957

Shovi Hotel and Chalets

IRR - equity 4.2% 11.9% 14.4%

Utsera Total of which 10-year cum cash 15-year cum cash 20-year cum cash Investment Equity flow flow flow

Utsera Hotel 3 600 2 340 2 413 5 021 8 160

Utsera MedHotel

IRR - equity 0.5% 8.6% 11.4%

Financing conditions

Interest rate 8.5%

Loan term 12 years

Grace period 2 years

Type of Loan Annuity

Equity:Debt 65%:35%

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 20

. In general, deeper state-involvment and engagement in such strategic development projects is not uncommon in untapped markets/emerging destinations.

. Such involvement can primarily be present in the form of state-provided subsidies for private investors of such “pioneer” projects mainly in the following forms:

o Subsidy of project loan interest rates up to 50 per cent;

o Initial investment support for general infrastructural development need of the project such as landscaping/utilities, access roads, etc;

o Supporting the operation of the hotel thus improving profitability of operation in the form of e.g. employee contribution and other tax reduction or remission.

. We conclude that the provision of subsidies could eventally result in the improvement of Internal Rate of Return (IRR) figures in the scale of between 1-5 percentage points.

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 21

Anticipated effects of our development recommendations

. The following diagram shows the anticipated direct and indirect effects of our development recommendations in the fields of the region’s tourism and economy. It can be anticipated that with the realisation of the identified development opportunities, the region’s economy would see a notable revival due to the development of tourism.

•Significant demand upswing for Racha as a tourist destination; •Prolonged average length of stay, soar in hotel guest nights; •Inflow of domestic tourists; Tourism •Contibution to the improvement of general service infrastructure quality in the region; •Increase of local demand for cultural institutions; •Ability to extend the season, reduce effects of seasonality.

•Heightened Tax income for the municipalties of Racha; •Directly created jobs in volumes as high as 250-350 full time employees; Economy •Additional job creation during the course of constructions; & •Improved investor perception of the region; •Tourism sector's growing contribution to the GDP; Social •Indirect growth of economy of the region due to tourism's "multiplier effect"; •Increased sales volume of local products;

•Increase of direct household earnings.

. We believe that with our investment recommendations, Racha will be able to compete with the select competitors due to its identified USPs and branding in the mid-to long-terms, representing a reasonable option for domestic and international travellers.

. On the following page we demonstrate 3 architectural concept drawings for the three major commercial hotel investment projects.

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 22

Shaori Lakeside Hotel and Spa

Medhotel Utsera: House of Gastronomy and Showroom

Shovi Climatic Resort Hotel and Spa

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 23

The report has been prepared by the following team members:

Ivane Zhuzhunashvili

Partner, Assurance & Advisory

BDO Georgia LLC

Maia Khachidze

Director, Corporate Finance

BDO Georgia LLC

Richárd Németh MRICS

Managing Director

BDO Hungary Hotel and Real Estate Services Ltd.

Márton Takács

Senior Consultant

BDO Hungary Hotel and Real Estate Services Ltd.

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 24

2 INTRODUCTION

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 25

. BDO Georgia and BDO Hungary were commissioned to provide consulting services for a Market and Technical Feasibility Study for Racha Development Project. The contract was signed on the 7th of September 2015, executed by and between JSC Partnership Fund and BDO LLC.

. JSC Partnership Fund (PF) is a state-owned investment fund, established in 2011. PF was created on the basis of consolidating the ownership of the largest Georgian state owned enterprises operating in the transportation, energy and infrastructure sectors. Main objective of the PF is to promote investment in Georgia by providing co-financing in projects at their initial stage of development.

. PF’s strategy is aimed at attracting and supporting private investors. Energy, agriculture, manufacturing, real estate/tourism and logistics/infrastructure sectors are on the top of the priority list as these sectors are largely untapped and have great potential for further development. PF co-invests in commercially viable investment projects with an experienced partner or specialised operator. PF acts as financial partner for private investors and provides mid to long-term financing.

. PF provides equity financing, mezzanine and in some cases subordinated loan (both convertible and non-convertible). PF’s participation in projects is limited to minority share (up to 50%). PF co- finances companies and assists its partners and management teams in developing plans to create sustainable long-term value.

. Our main tasks are to inform PF on the current state and market readiness of Racha and its key assets, on the nature of supply deemed relevant to the development concept, on the market demand and on the nature of investor demand, to raise any barriers or constraints of relevance to the success of the project and to provide financial projections for the development.

. The group of experts with a relevant experience in multiple resort planning and tourism development projects supplemented with an architect visited Racha between the 21st and the 24th of September, 2015.

. During our field visit we have undertaken the following activities in Racha:

o Physically visited and evaluated the main destinations and attractions of the region (Shaori Lake, Tsesi, Ambrolauri, Oni, Utsera, Shovi and Shkmeri etc.);

o Investigated and analysed the status quo in Racha – the current general status of the region with a special focus on tourism;

o Visited and analysed the hotel, restaurant and other tourism related service facilities available in the region at all levels;

o Personally interviewed the Governor of Racha-Lechkumi and Kvemo Svaneti region;

. On the 5th of November, we held an interim presentation for the Partnership Fund on the identified investment and development opportunities in Racha. The presented findings of BDO have been evaluated by PF and we have continued the delivery of our assignment accordingly.

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 26

3 METHODOLOGY

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 27

3.1 Key performance indicators and definitions in the Hotel industry

. Room Occupancy Rate (%): Room occupancy rate is one of the core performance indicators along with average daily rate in the lodging industry, indicating the ratio of number of rooms sold and number of rooms available in a given time period. It is also common to calculate bed-space occupancy rate.

. ADR (average daily rate): ADR is one of the core performance indicators along with room occupancy rate used in the lodging industry, showing the average realised net room revenue per sold room (average rate paid for rooms sold). ADR is calculated by dividing net rooms revenue (excluding VAT and breakfast) by the number of rooms sold.

. REVPAR (revenue per available room): REVPAR is one of the most commonly used performance indicators in the lodging industry. REVPAR is calculated by dividing a hotel’s net rooms revenue (after discount and sales taxes and net of breakfast or other meals) by the total number of available rooms in the analysed period or by multiplying a hotel's average daily room rate (ADR) by its occupancy. REVPAR is a useful tool in measuring a hotel’s performance, however, since REVPAR excludes revenues of other departmental units (e.g. food and beverage, wellness etc.), and does not reflect the efficiency of cost management, the performance of two hotels cannot be solely compared on the basis of REVPAR.

. Total Revenues: stand for the incomes of the hotel generated from hotel room sales, breakfast and other food and beverage incomes and other revenues (parking, wellness, miscellaneous). . Operating Expenses: those costs that incur during the operation of the hotel and contain goods purchased, cleaning of the hotel facilities, payroll, marketing, telecommunications, legal and financial costs related to operation, maintenance etc. . GOP (Gross Operating Profit): GOP is the second profit level in a hotel’s profit & loss statement. GOP is equal to total revenues minus departmental expenses and undistributed operating expenses (e.g. energy cost, sales & marketing costs, cost of administration etc.). GOP level indicates the percentage ratio of GOP and total revenues of a hotel. Higher GOP level indicates more profitable operation. . EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation): EBITDA is the third profit level in a hotel’s profit & loss statement. EBITDA is equal to GOP minus total fixed charges (including management fees, reserve for FF&E, rent, taxes and insurance). EBITDA level indicates the percentage ratio of EBITDA and total revenues of a hotel. Higher EBITDA level indicates more profitable operation. . FF&E reserve: The FF&E (Furniture, Fixtures & Equipment) of a hotel must be replaced at regular intervals in order to ensure undisturbed operation, maintain quality, image and income potential of a hotel. As such, a sinking fund is set up to accumulate capital for the periodic replacement of FF&E, typically a percentage of gross revenue.

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 28

. MPI (Market Penetration Index): MPI is a formula used to assess the success potential of a property by comparing its occupancy rate to the average occupancy rate of its competitors or with other words by dividing its market share (the property’s share from room nights spent on the relevant market) by its fair share (the property’s share from the total room capacity of the relevant market). In an ideal world, hotels would achieve market share on the basis of an equal distribution of demand as per their share within the supply. This is referred to as the base of fair share assessment. In reality, hotels seldom reach their fair share, some over perform (better quality, more recognised properties in better location) others underperform. This is reflected in their market share and MPI.

3.2 References

. Development strategy of Racha-Lechkhumi and Lower Svaneti for 2014-2021 years

. ‘Resort Shovi’

. The Land tenure General Plan of the Shaori Tourist-Recreation Complex

. Shovi former plan

. Annotation of Tourist Base ‘Shovi’

. Jacques Felix Michelet et Frédéric Giraut: Construction of a place brand – The Valais brand or the virtues and risks of place branding (2014)

. European Commission: Guidelines for successful Public-Private Partnerships

The Market and Technical Feasibility Study contains references to the attached Map and Picture Gallery. The architectural plans are preliminary; the elements could be implemented and adapted.

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 29

4 GENERAL OVERVIEW OF GEORGIA

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 30

4.1 Georgia – General Overview

The location of Georgia

. Georgia is bordered by the Russian Federation to the north, Azerbaijan to the east, Armenia and to the south and the Black Sea to the west. The total area of the country is 69,700 square kilometres with a 315-kilometre long coastline along the Black Sea. The country contains two occupied regions, and .

. The population of Georgia is about 3.73 million as of 2015.

. About 83.8% of the total population is Georgian, whilst Azeris account for 6.5%, Armenians 5.7% and Russians 1.5%. 2.5% of the population is made up of other ethnicities according to the 2002 Census.

. Tbilisi is the capital city with a population of 1.1 million. It is the administrative and economic centre of the country. It is one of the major road, rail and air transportation hubs of the Caucasus right in the junction of Eastern-, Russia, Middle-East and Central Asia.Geographically, the city is situated on the banks of the Mtkvari River and streches out 40 kilometers in north-south direction.

. The layout of the capital has been basically shaped by the Mtkvari River and the hilly landscape of the area.

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 31

4.2 Economic Overview

Key Economic Indicators for Georgia, 2010-2015 in USD

QI Q II CAGR 2015 2010 2011 2012 2013 2014 2015 2015 14/10 forecast

Real GDP growth (%) 6.2 7.2 6.4 3.3 4.6 3.2 2.5 -5% 2.0

GDP at current prices(million USD) 11,636.5 14,438.5 15,846.8 16,139.9 16,507.8 3,225.0 3,407.6 7% N/A GDP per capita, at current prices (USD) 2,623.0 3,230.7 3,523.4 3,599.6 3,676.2 891.5 913.7 7% N/A

FDI (million USD) 814.5 1,117.2 911.6 941.9 1,758.4 175.3 354.7 9% N/A

Unemployment (%) 16.3 15.1 15 14.6 12.4 N/A N/A -5% N/A

Inflation (CPI, %) 7.1 8.5 -0.9 -0.5 3.1 N/A N/A -15% 5.0

Source: National Statistics Office of Georgia

. The recession in Georgia seems to have been short-lived, with the country achieving a regionally outstanding gross domestic product (GDP) growth in 2010, 2011 and 2012, mainly as a result of the effects of the country’s business friendly policies Georgia’s GDP expanded by an estimated 4.8% in 2014, up from 3.3% in 2013. Favourable domestic conditions and strong external demand supported economic growth in the first half of 2014, demonstrating that regional economic tensions have not adversely affected Georgia. Based on data issued by Geostat, estimated real GDP growth for the first half of 2015 reached 2.6% y-o-y.

. In 2014, the largest share in the sectorial structure of GDP was held by Trade services (17.5%) and Industry (16.9%) followed by Transport and Communication services (10.4%), Public administration (9.9%), Agriculture, forestry and fishing (9.3%), Construction (7.1%), and Health and social work (6%).

. In July 2013, after imposing bans in 2006, Russia reopened its market for , mineral water and fruit, ensuring the growth of exports. In 2014, the top five trading partners of Georgia by turnover were Turkey (17.2%), Azerbaijan (10.3%), Russia (7.4%), China (7.2%) and (6%).

. Georgia’s economy has been hit by a combination of severe external shocks: the Russia-Ukraine conflict, the deepening recession in Russia and currency devaluations in trading partner countries. Because of these shocks, Georgia’s exports decreased by 30 per cent in the first two months of 2015 compared to the same period in the previous year.

. In the first ten months of 2015, exports of Georgia fell by 24%, reaching USD1.832 billion, while imports decreased by 10%, accounting for USD6.289 billion compared to the same period of the previous year according to the preliminary data of National Statistics Office.

. Due to the depressed economies of major trading partners, GDP growth rate is expected to slow to 2% in 2015 according to the forecast of the Asian Development Bank and the International Monetary Fund (IMF). According to a former IMF report (19 May, 2015), Georgian economy will still grow at a faster rate than in the neighbouring Armenia and Azerbaijan.

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 32

. In accordance with the above, the European Bank for Reconstruction and Development (EBRD) predicts a Real GDP Growth of 2.3% for 2015 and 2.6% for 2016 on annual basis.

. By the end of June 2015, gross external debt reached almost USD14.1 billion, increased by USD437.4 million during the second quarter of 2015, accounting for 90.9% of Georgia’s GDP. 94% of the country’s gross external debt was denominated in foreign currency.

. In 2009 and 2010, Foreign Direct Investments (FDI) numbers have seen a dramatic drop due to the 2008 August war and the global economic crisis. In 2011, FDI numbers have recovered almost to 2006 levels (USD1,190.4 million), according to the Georgian Government. In 2012, due to the political changes following the elections, Foreign Direct Investments (FDI) figures have seen a drop again, falling back to USD911.6 million (-18.4% compared to the previous year). From 2012 to 2013 this figure increased by 3.3%. According to the National Statistics Office of Georgia, FDI reached a five year high in 2014, accounting for USD1.758 million, meaning a significant increase of 86% from 2013.

. The biggest foreign investor countries in 2014 were the (USD373 million), Azerbaijan (USD341 million), China (USD218 million), the United States (USD182 million),) Luxembourg (USD110 million) and the United Kingdom (USD108 million). The share of FDI by major economic sectors in 2014 was as follows: transports and communication (25%), construction (18%), manufacturing (12%), energy sector (11%), real estate (7%), financial sector (7%), and other sectors (11%).

. By 2012, the relatively high level of unemployment slightly decreased from its peak of 16.9% in 2009, and it has shown a downward trend since then, reaching 12.4% as of 2014. Highlighting the problems caused by unemployment, in addition to addressing regional disparities and poverty, unemployment has been flagged as a key priority for intervention by the Government as stated the new Socio-economic Development Strategy of Georgia, 2020.

. In 2014 the sectors with the most employed people were the trade sector (23%), industry (20%), construction (10.5%), transport and communication (10%).

. In 2011, the annual rate of inflation (8.5%) was back to 2006-2008 levels. This can be traced back to two factors: a loosening fiscal policy (a relatively large budget deficit due to heavy investment in infrastructure to attract foreign investment) and the rise in world economy prices, especially food and fuel (of which Georgia is a heavy importer). The years of 2012 and 2013 were characterised by deflation. Annual inflation rate in 2012 was -0.9% and in 2013 it was -0.5%. As opposed to the deflation in 2012 and in 2013, annual inflation reached 3.1% in 2014. 2015 and 2016 inflation targets, set by the National Bank of Georgia and approved by the Parliament, are defined at the level of 5%, followed by an anticipated 4% in 2017 due to expected currency depreciation. In the long-term inflation target is anticipated to decrease to 3%.

. In 2014, the foreign trade turnover of Georgia was USD11.5 billion, an increase of 4.6% compared to 2013. According to preliminary data, exports from Georgia declined by 1.62%, while imports increased by 7% in 2014 compared to the previous year. The main export items of Georgia were cars (18.1% of total exports), ferro-alloys (10%), cooper ores (8.7%), nuts (6.4%) and wine (6.3%).

. The opposition party’s - Georgian Dream - victory at the parliamentary elections held in October 2012 is having a substantial effect on Georgia’s economic and investment environment. The 2012 October elections ended the 9-year rule of Mikheil Saakashvili’s party, the United National

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Movement. In December 2012, the new prime minister, Bidzina Ivanishvili announced that the new government will review some investment projects and deals signed by the previous government. After the parliamentary elections of 2012 the new parliament was relocated from the capital of Tbilisi to the country’s second largest city, to Kutaisi. Thirteen months after the inauguration of the new government, Ivanishvili stepped down - saying he had fulfilled his task after the presidential elections held in October (2013) – and appointed Irakli Garibashvili (former minister of internal affairs) as new prime minister on 2nd November, 2013. Garibashvili thus occupied the most powerful political office in the country as new constitution amendments had transferred power from the president to the prime minister and the government.

. Georgia’s president is Giorgi Margvelashvili, elected in 2013 as the candidate of the Georgian Dream’s Party.

. Parliamentary elections will be held in 2016. The governing party, Georgian Dream coalition will seek re-election for second term in office. Based on preliminary information the following parties will take part in elections: the United National Movement, the Free Democrats and the Alliance of Patriots of Georgia in addition to Georgian Dream.

. In June 2014 the EU and Georgia signed an Association Agreement, including the Deep and Comprehensive Free Trade Area (AA/DCFTA). It replaces the Partnership and Cooperation Agreement, the previous basis for EU-Georgia bilateral relations from 1999 and aims to deepen political and economic relations between Georgia and the EU, and to gradually integrate the country into the EU Internal Market.

. The EU and Georgia have also agreed an EU-Georgia Association Agenda in June 2014 to help implement the AA/DCFTA through joint priorities for 2014-2016, replacing the EU-Georgia ENP Action Plan of 2006.

. Volume of Georgia’s exports to the EU increased by 12% in the first six months of the Association Agreement.

. In 2015, the Government of Georgia started negotiations on signing a free trade agreement with the European Free Trade Association (EFTA - Switzerland, Norway, Island, and Lichtenstein).

. On the 1st July, 2015 the World Bank approved the Third Regional Development Project (RDP III) with the goal of improving infrastructure services and institutional capacity to support increased contribution of tourism to the local economy of the Samtskhe- and -Mtianeti regions. (International Bank for Reconstruction and Development-IBRD- Loan USD60 million)

. Since Georgia joined the World Bank in 1992, the World Bank’s commitments to the country has accounted for approximately USD2.27 billion in credits, comprising a total of 62 projects. In May 2015, two financial agreements on an IBRD loan, namely ‘Programmatic Private Sector Competitiveness Development Policy Operation for Georgia’ and the ‘Software Development Policy of Inclusive Growth in Georgia’, were signed in order to develop Georgia’s private sector, to raise competitiveness and to foster inclusive growth. The loans account for USD60 million, respectively.

. Economic growth prospects depend on Georgia’s ability to leverage the Deep and Comprehensive Free Trade Area and Association Agreement with the EU, which will improve market access and encourage FDI flow.

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. One of the potential sources of economic growth in Georgia is tourism, which has seen a rapid growth and has become an important source of job creation.

. Joining the EU and NATO are among the country’s top foreign policy objectives.

. We assume that further growth, although moderate will continue in Georgia in the coming years. According to the projections of the IMF, real GDP growth will constantly exceed European Union, Central and Eastern European and CIS growth rates, due to the competitive business environment, the strategic geographic location of the country and its favourable economic and tourism potential. Main risk factors remain the general perception of the country in terms of safety, state of infrastructure, geopolitical risks reoccurring social and ethnic tensions and the speed at which private sector investment resumes and credit and foreign direct investment pick up. 4.3 Accessibility and Communications

4.3.1 General

. Georgia has a vast infrastructure network: 20,300 kilometres of roads and 1,600 kilometres of railway tracks, both in need of modernisation though. The most important ports on the Black Sea are , , and Sokhumi. The country lacks major rivers as commercial routes.

. The World Bank and other institutions provided loans of approximately USD150 million to Georgia in the last years for the rehabilitation of nearly 700 km of roads. The World Bank also takes part in the funding of the East-West Highway project. The construction of the first East-West Highway Improvement started in 2006 and the project was closed in June 2013, providing better access to various cities across the country, enabling faster development of the regional economic centres. The second East-West Highway Improvement was started in 2007 and aimed to contribute to the gradual reduction of road transport costs and improve ease of transit and safety, through upgrading a section of the East-West Highway between Tbilisi and Rikoti. The project was completed in June 2012 and the total project cost was USD80 million. The third East-West Highway Improvement project started in 2009 and is expected to be completed in 2016; total project cost reaches almost USD185 million. The fourth East West Highway Improvement Project was started in 2013 and is anticipated to be finished in 2018 in order to upgrade the section of the E60 Highway between the end of the Agara bypass and the Gomi village bypass.

. Tbilisi is an important railway junction of the Caucasus. The city is an interim stop from the former CIS countries such as Kazakhstan, Uzbekistan and Azerbaijan to Russia in the north or Turkey, Armenia and to the south. The Baku-Tbilisi-Kars railway line connecting Turkey, Georgia and Azerbaijan is under construction and is planned to be completed by the end of 2015. The line is expected to have an annual volume of 6.5 million tonnes and one million passengers in terms of utilisation.

. The new railway station in Batumi, situated on Tamar Mepe highway was completed in July 2015. The project was implemented by the Government and JSC Georgian Railway in order to increase the tourism potential and serve public interests.

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4.3.2 Air Access

. In 2005, Georgia announced an ‘open sky’ policy in civil aviation and reconsidered its existing bilateral air service agreements to include countries such as EU member states, as well as the , Ukraine, Republic of Azerbaijan, Republic of Armenia, Republic of Belorussia, China, Russian Federation, Tajikistan, Canada, Qatar and Kuwait, USA, Republic of Turkey, Switzerland.

. In May 2006, Georgia signed the so called Horizontal Agreement with the European Union admitting EU air carriers to the Georgian aviation market without discrimination. Another milestone and a step towards direct flights between the USA and Georgia, is the agreement signed allowing full commercial rights to Georgian air carriers with the exception of domestic flights within the United States. Furthermore, in March 2010, Georgia has commenced to harmonise its legislation with European standards and implement aviation rules in order to be integrated into the new European Common Aviation Area.

. Georgia has three international airports and three operating domestic airports (Mestia, Natakhtari, Telavi airports). Tbilisi International Airport is the largest and most important airport of Georgia, followed by Batumi and Kutaisi International Airports in significance.

. In October 2015, the Georgian Civil Aviation Agency has announced a concept plan for renovation of unused, smaller airports in different regions of the country, namely Ingiri, Omalo, Chikhaqreshi and Ambrolauri airports.

. In the first eight months of 2015, Georgian international airports served a total of 1,501,748 passengers, which represented a growth of approximately 10% compared to the same period of the previous year. Airports registered a significant growth in the number of air passengers from Russia (179,602; 92% growth y-o-y), Israel (67,447; 32% growth y-o-y), the United Arab Emirates (54,559; 64% growth y-o-y) and Kazakhstan (33,649; 21% growth y-o-y) compared to 2014.

4.3.2.1 Tbilisi International Airport

. Tbilisi International Airport is owned by the state and operated under a concession agreement by a Turkish-led consortium (TAV Urban Georgia) that invested USD77 million in the construction of a new state-of-the-art terminal and upgraded the former facilities in 2007.

. The main runway and the terminal of Tbilisi International Airport are under reconstruction to completely meet international standards and to be able to receive all type of aircrafts. The construction was started in October, 2015 and is expected to be finished in June, 2016. During the time of reconstruction the airport operates without disruptions.

. The current capacity (around 2,000 passengers/hour) and service level of the Airport is sufficient to serve the increasing number of flights and passengers until 2020.

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Evolution of the number of air passengers, 2010-2014 Growth in the Number Year Number of Passengers of Passengers (y-o-y)

2010 822,728

2011 1,058,482 28.7%

2012 1,219,175 15.2%

2013 1,436,046 17.8%

2014 1,575,386 9.7%

Source: Georgian Civil Aviation Agency . After a remarkable comeback in 2010 (with a 17.1% growth over the previous year), air traffic has shown an exponential growth, reaching 1,058,679 passengers in 2011 amounting to a 28.7% increase y-o-y. In 2012 the upward trend continued, yet at a slower pace and the number of passengers dynamically increased by 15.2%, reaching 1,219,175 passengers. The number of passengers at the Tbilisi International Airport achieved a remarkable 17.8% growth in 2013 and 9.7% growth in 2014 suggesting strong, yet at a slightly decreasing growth rate although reaching an all-time peak.

. In 2011, three new airlines were introduced to the Tbilisi International Airport: in June, the Almaty- Tbilisi route was introduced by Air Astana, the Urumchi-Tbilisi flight was started by China Southern Airlines a few weeks later and Flydubai, Dubai’s low-cost carrier, started flights between Dubai and Tbilisi in the fall of 2011. Furthermore, in 2011 Georgia’s second national airline started its commercial operation. Fly Georgia has been operating since August 2011 and among its destinations Source: Tbilisi International Airport we can find countries such as , Iran, , Dubai, the Netherlands, or Ukraine.

. In February 2012, Qatar Airways started flights between Doha and Tbilisi. Estonian Air started a direct line between Tallinn and Tbilisi four times a week in April 2012. Starting from July 3, Alitalia commenced direct flights between Tbilisi and Rome, four times a week.

. In 2013 FlyGeorgia started to operate to Dubai from Tbilisi three times a week. From March 2014 Israel’s national airline EL AL launched a weekly flight to Tel Aviv, after visa restrictions were lifted. In August 2014, Ukraine’s airline YanAir started to operate from Kiev Zhulyany to Tbilisi International Airport twice a week.

. In October 2014 the low-budget Arabic Air Arabia started to operate between Sharjah and Tbilisi.

. Regular air traffic between the Russian and the Georgian capitals was launched after 6 years, as in October 2014, Aeroflot, Russia’s national carrier, started to operate from Moscow to Tbilisi. Now aircrafts on this route are operated by Airzena, Sibir Airlines and , too.

. In April 2015, ongoing negotiations were announced with Irish low-cost airline Ryanair, British low- cost airline EasyJet and Germany’s second largest airline, Air Berlin on new routes, but no specific agreements have been signed yet.

. On the 2nd of June, 2015 Air Astana started to operate to Astana twice a week reflecting Kazakhstan’s important role in Georgia’s tourism market, as tourist arrivals have been on the rise from Kazakhstan.

. In August 2015, Georgian Airways started to operate to Rostov from Tbilisi twice a week and to once a week.

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. The number of new air routes is anticipated to increase in the following year as well. In September 2015, negotiations were announced with the United Arab Emirates on new routes between the UAE and Tbilisi and Batumi. The Spanish low-cost airline, Vueling will be routed between Barcelona and Tbilisi with an Airbus 320 twice a week.

. Tbilisi International Airport has been named as one of the best airports in Eastern Europe by Skytrax World Airport Awards, on the basis of a survey among air travellers.

. Due to increased interest in the country’s investment potential and living and working abroad, the vast majority of demand originates from domestic and international business travellers, governmental, aid and state delegates, experts, technicians and managers working on various projects and the so-called visiting friends and relatives segment. The number of leisure passengers is on the rise though, with the majority of the newly opened airlines citing leisure visitors as a potential target segment when launching a new route.

4.3.2.2 Kutaisi Airport

. Kutaisi Airport, also known as ‘David the Builder International Airport’ is one of Georgia’s three international airports beside Tbilisi and Batumi International Airports. Kutaisi Airport was renovated. Reconstruction began in November, 2011 and the airport was reopened in September, 2012.

. Kutaisi is the second largest city of Georgia, approximately 225 km west of Tbilisi, about 145 km distance from Batumi.

. According to data of the Georgian Civil Aviation Agency, Kutaisi Airport served 7,446 passengers in 2010 (before renovation). In 2011, the number of passengers served by the airport fell to 4,527 pax as a result of the construction starting in November 2011. In the year of the reopening (2012) the number of passengers saw an increase of 173.5% compared to 2010, despite the fact that the airport reopened only in September. In 2013, the number of passengers increased significantly, reaching 144,014 pax by the end of October, which can be attributed to the advent of new air routes detailed overleaf. The number of passengers further increased in the last year as well as, although at a much slower pace than in the previous year.

Analysis of Kutaisi Airport, 2010-2014 Growth in the Number Year Number of Passengers of Passengers (y-o-y)

2010 7,446

2011 4,527 -39.2%

2012 12,932 286%

2013 187,939 1,453% 2014 218,003 116% Source: Georgian Civil Aviation Agency

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. WizzAir operates regular flights to Katowice, Warsaw, Vilnius, Budapest and Kiev from Kutaisi.

. The Turkey-based low-cost airline, Pegasus Airlines, launched its Kutaisi-Istanbul flight in May, 2015. Pegasus entered the market low airfare levels intending to quickly boost its market penetration.

. Kazakhstan’s airline, Bek Air introduced seasonal flights from Aktau and Atyrau to Kutaisi International Airport June and October.

. The management of Kutaisi International Airport is understood to have initiated negotiations on further destinations, although, new flights to these destinations have not been announced yet.

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4.4 Investment and Real Estate trends

4.4.1 Investment trends

. Georgia was recognised by the World Bank as ‘the number one reformer’ as a result of intense reforms, implemented during the period between 2005 and 2013.

. According to Doing Business 2016, (Measuring Regulatory Quality and Efficiency) Georgia is ranked as the 4th best economy in Europe and Central Asia, with Macedonia being the region’s highest ranking economy, followed by Lithuania and Latvia.

. In recent surveys, Georgia received the following ratings:

o Ranked 24th of the surveyed 189 countries in ease of doing business (2016) by the World Bank’s and International Finance Corporation’s current ranking, reaching the same place as last year; o Ranked 11th in dealing with construction permits out of 189 countries; o Ranked 40th in ease of paying taxes out of 189 countries; o According to the above survey Georgia is among TOP 10 countries in the following areas: ranked 3rd in worldwide in registering property, 6th in starting a business and 7th in getting credit. . In order to boost investment in the country, a state-owned fund, the ‘Partnership Fund’ was established in August 2011. The Fund aims to financially support commercially viable projects in the energy, manufacturing, agriculture and real estate sector targeting also hotel and tourism infrastructure development. The Fund has already financed several projects in the tourism sector, such as the five star Rixos Borjomi hotel, Royal Batoni in Kvareli and Gino Wellness in Akhaltsikhe. In the summer of 2015, two new hotel projects financed by the Partnership Fund in Kutaisi have been announced. A Hyatt Regency hotel is being developed in one of the most iconic buildings (the former Ministry of Justice building) of the Georgian capital. A new 3-star internationally branded hotel will be developed in the centre of Kutaisi.

. In September 2013, another co-investment fund was launched by the former Prime Minister, Bidzina Ivanishvili, the namely ‘Georgian Co-Investment Fund’, which is a USD6 billion private equity fund to finance projects in agriculture, energy, infrastructure, manufacturing, tourism and other business sectors. The main goal is to attract FDI in the country and help to further boost economic growth in Georgia. The fund intends to hold 25-75% equity share in investment projects. The eligible scale of potential projects is a minimum investment volume of USD5 million. With regards to the tourism sector, the Fund plans to focus on investing in the following project categories:

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. In May 2015, Georgia joined the Asian Infrastructure Investment Bank (AIIB) as a founder country. Georgia is one of the first countries in which AIIB will invest, providing benefits for local economy, mainly in the field of transport and energy.

. In 2015, the European Bank for Reconstruction and Development (EBRD) and the Government of Georgia signed a Memorandum of Understanding about the establishment of an Investors Council with the aim of providing a strong platform for dialogue between the private and public sectors. The members of the new institutions will be representatives of the government, state agencies, business associations, the business ombudsman and international investors. The activity of the Investor Council is financed from EBRD’s technical cooperation funds and Georgia’s support. The first meeting of the council was held in the end of October 2015 in Tbilisi.

. Strengthening cooperation illustrates the economic cooperation between Georgia and China, more and more companies (e.g. the global leader of ICT solutions, Huwaei) expressed their intentions in 2015 to invest in Georgia and the Government started to negotiate with China for a possible bilateral free trade agreement between the two countries. As an effect of the agreement, Georgia’s annual exports to China is expected to grow by 9%, China’s to Georgia by 1.7% and facilitates trade in services and FDI according to the study of Policy and Management Consulting Group. It also indicates the growing Chinese investment in Georgia, that in March, the two countries signed a Memorandum of Understanding regarding cooperation in the framework of the USD40 billion Silk Road Economic Belt project that China initiated in 2013.

. In order to attract more FDI in the country, the Government started to advertise in a form of an ’easy doing business’ campaign in the USA. The advertised best investment conditions are available for investors in the following sectors: banking, transport & logistics industry, energy sector, manufacturing and processing of agricultural products.

. The main messages the country intends to communicate are the open economy, steady development, liberal trade regime, low taxes, corruption-free country, ease of doing business and the ideal geographical location for reaching various markets. 4.4.2 Investment projects in Georgia

. After a temporary uncertainty surrounding the 2012 and 2013 elections, the continuation of major investments in the industrial, agricultural and tourism sector indicate that the positive investment climate in Georgia has returned, which is likely to continue in the short and mid-term.

. The following is a short, non-exhaustive list of current and anticipated major investment projects:

o The Baku-Tbilisi-Kars (BTK) railway line connecting Turkey, Georgia and Azerbaijan is estimated to cost USD600 million is planned to be finished by November 2016. The project, upon completion, will enable up to 17 million tons of cargo to be transported per year. As of the 30th July, 2015 the first test train was launched in Turkey; o On 15th April 2008, the Georgian government signed an agreement with the Investment Authority of the UAE’s Ras Al Khaimah (Rakeen Development) on the development of a free industrial zone (FIZ) in Georgia’s Black Sea port of Poti. Poti FIZ has experienced stable growth during recent years, currently more than 100 operating companies are expanding their business in Poti FIZ;

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o Energy sector is one of the promising sectors to invest in Georgia. A new multi-million Euro Khorga substation is being developed in , Akhalsopeli village. The EUR13 million project is supported by the Asian Development Bank, and expected to be finished by 2016. Another project is the Nenskra Hydro-Electric Power Plant (HPP) Project, related to the energy sector and planned to be finished in 2021. The 280 megawatt power station is expected to start producing electricity in four years. The project is worth approximately USD1 billion; o Agriculture sector is among the key sectors of Georgia’s economy. EUR530 million financial support is being provided by the European Investment Bank (EIB) with the aim to increase its international competitiveness; o The Ministry of Regional Development and Infrastructure of Georgia announced an infrastructure development project for Tskaltubo in March 2013. Ministry of Infrastructure has been implementing a project, aiming the development of the city infrastructure. With the support of the Ministry of Economy, Partnership Fund has the conceptual development plans prepared. The implementation of the plan is in progress, state-owned assets of the city are being privatised. The project budget is expected to reach USD750 million; o In Tbilisi a new warehouse as a regional logistic hub of Bosch will be opened in December 2015. o The Panorama Tbilisi investment project was published in March 2014. The tourism and real estate project will integrate four multi-functional complexes, bended lifts and ropeways. The project was initiated by Bidzina Ivanishvili. Loan of approximately USD0.5 billion would be provided by Georgian Co-Investment Fund (GCF) for the project. The multi-functional complex is planned to feature five and four star hotels, apartments, trade and office space, exhibition and conference halls, sport facilities and is expected to be completed in 4 years. The project faced strong opposition from various non-governmental organisations because of its possible negative impacts at a historical part of Tbilisi; o Georgia’s state-owned investment fund, the Partnership Fund, has signed an agreement with Israel’s Elbit Systems-Cyclone. The USD85 million deal is for a state of the art airplane parts factory creating 300 new jobs. The share of PF in this project is USD40 million. The factory is expected to open in 2017; o Anaklia Port Development project was announced in 2014. The Port will be capable of receiving larger sized Panamax and Post-Panamax ships, to process more than 100 million tons of mixed cargo and to become a crucial logistic hub for Caucasia and Central Asia. The construction of the port will be started in summer 2016; o Last year Gonio project was carried out by the Georgian National Investment Agency (GNIA) to develop a 266ha land pot into an integrated and internationally acknowledged resort, near Gonio on the Black Sea coast. The project is at the planning phase; o The development and rehabilitation of tourist infrastructure have begun in Bakuriani and in Mitarbi. The project is expected to be one of the largest investments in mountain tourism and will be implemented through public-private partnership. The government and the Georgian Reconstruction and Development Company are to co-finance the construction of the Kokhta and Mitrabi ropeways (GEL118 million.) The aim of the project is to develop a skiing resort internationally perceived as high quality.

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o The development of bike tracks in Gudauri and in Bakuriani has been begun by the Georgian National Tourism Administration, the Mountain Resorts Development Company and Slovenian company Alliance, with the goal of bringing additional tourist products to both ski resorts, contributing to the extension of the season. o Poti-Baku cargo train route, known as the Silk Bridge, was revitalised in June 2015. The transport time has been cut for cargo from several days to 34 hours; o ’Tbilisi Sea New City’ project is the largest project of the Chinese company, Hualing Group in Georgia. The project area is 420 hectares. The estimated cost of the project will be in the first three years USD150 million. The athletes’ village for the 13th European Youth Olympic Festival was one of the first parts of the project. The project focuses on economic and urban development of the district and contains apartment and villa complexes, recreational zones, International trade and logistic centre, customs warehouse, 5-star hotel, fitness centre, restaurant and other social and entertainment facilities. o The Sports Palace with a capacity of 10,000 seats was reconstructed in Tbilisi for European Youth Olympic Festival (EYOF) 2015. The venue meeting international standards offers several gyms, open and indoor exhibition areas, an office area and the adjacent territory, which upon accomplishment, may be turned into a commercial area. According to latest data approximately 25 local and international tournaments have been scheduled to be held in the new sport facility in the future; o Allocation of EUR140 million for Financial Sector Programme, Solid Waste Management Programme in Samegrelo and regions and construction of a high voltage power line were announced in Septermber 2015 by the KfW Development Bank; o Georgia’s Finance Ministry has signed an agreement with the German Federal Enterprise for International Cooperation (GIZ). The EUR16.3 million deal is for the development of the technical cooperation between Georgia and Germany. The GIZ aims to continue its ongoing regional projects in the field of sustainable economy development, energy and environmental protection; o The Chinese corporation, Dongfang Electric Corporation has signed an agreement on building a Thermal Power Plant (TPP) in Tkibuli, located in western part of Georgia. The investment cost is expected to reach USD200 million; o The construction of Hyatt Regency hotel has been begun by the Merrydow Development Holdings Ltd and Partnership Fund in Tbilisi. The project cost is estimated to reach USD65 million. The internationally branded 5-star hotel will feature 170 rooms, conference halls, four restaurants, spa and fitness centre. The expected opening date is 2018. o The construction of the new 3-star Best Western White Bridge hotel is under way in Kutaisi. The expected opening date is 2017. The hotel is going to be the first internationally branded hotel in Kutaisi. The Georgian financial organisation Capitol Holding and the state- owned investment fund, Partnership Fund are to co-finance the construction of the 45-room hotel. . As the demand for Georgia seems to have expanded in the last years there are a number of hotel openings in the pipeline for the following years. The new developments are primarily concentrated in Tbilisi and in Batumi, including 3, 4 and a few 5-star hotel projects.

. A number of hotel projects were announced in recent years, which reflects the vibrant investment environment. The realisation of pipeline projects is difficult to judge.

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. The table includes the publicly announced internationally branded hotel projects in Tbilisi and in the countryside:

Branded hotel projects Affiliation Name of the hotel Town Opening OPENED, Accor Hotel Mercure Tbilisi Old Town Tbilisi June

Hotels & Preference OPENED, (France) Hotels & Preference Hualing Tbilisi Tbilisi, October IHG Crowne Plaza Borjomi 2015 Millenium & Copthorne Millennium Hotel Tbilisi 2016 Hilton Hilton Garden Inn Tbilisi 2016 IHG InterContinental Tbilisi 2016 Rezidor Park Inn by Radisson Tbilisi 2017 Hyatt Hyatt Regency Hotel Tbilisi 2017 Marriott Moxy Tbilisi Hotel Tbilisi 2017 Best Western White Bridge Hotel Kutaisi 2017 Rezidor Radisson Blu Resort Tsinandali Hotel Tsinandali early 2017 IHG Crowne Plaza Batumi N/A IHG Holiday Inn Batumi N/A Kempinski Grand Hotel Kempinski Batumi Black Sea Batumi N/A

Rezidor Radisson Blu Mestia Mestia N/A Source: BDO Research . A new 4-star Hotel Mercure was opened in the end of June, 2015, being the first and only hotel of Accor in Georgia. The project budget is estimated to have reached USD16 million.

. In 2015 the Hilton Batumi featuring 247 rooms, expansive conference/event facilities (864 sqm), restaurants, casino, rooftop bar, fitness spa, indoor swimming pool and underground parking garage has been opened. The hotel is located directly on the coast of the Black Sea on Vatumi Seaside Boulevard, adjacent to the resort’s historical town centre. The property is operated by under a management agreement with Tourinvest Ltd.

. The new luxury hotel, Hotels & Preference Hualing Tbilisi was opened in October, 2015 as the part of ’Tbilisi Sea New City’ project. The project cost is estimated to reach USD73 million. The hotel features 247 guestrooms, 2 restaurants, a bar/lounge, an indoor swimming pool, Fitness Centre, Business centre and a total of approx. 800 sqm conference hall, being the largest conference hall of the country.

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4.5 Tourism

4.5.1 Tourism in Georgia

. During Soviet times, Georgia was a popular tourist destination based on its unique natural and resort conditions, especially resorts along the Black Sea coast such as Batumi and in the mountains like Bakuriani.

. The Black Sea attracts tourists due to its subtropical climate, with moderate winters and continuous hot summers. The sea climate is successfully used for treating patients with diseases of blood circulation Batumi Port and breathing and functional disorders of the nervous system.

. Ski tourism is gaining significance, with an increased emphasis on existing (Gudauri and Bakuriani) and up-and –coming (Mestia, ) destinations. The mountains are also popular among natural tourism FIT and –group segments alike.

. Georgia boasts various types of mineral waters. The number of springs exceeds 2,000. Mineral and thermal water-based spa tourism will play an The monastery of Gelati increasingly important role in the development of tourism of the country.

. In Georgia, there are more than 12,000 historical monuments. Since 1994, three monuments of Georgian culture have been included in the list of UNESCO, namely the historical monuments of Mtskheta – the ancient capital of Georgia, and Gelati Monastery in Kutaisi and the high-mountainous settlement of in Svaneti. In August 2015, Mtskheta was ranked among the 20 “most beautiful” UNESCO World Heritages sites by Condé Nast Traveler. Ushguli

. Due to the fairly underdeveloped domestic tourism and the low number of attractive tourist destinations with well-developed infrastructure generating considerable inbound visitation, the hotel and restaurant sector generated around 6.5% of the GDP of Georgia, with its share increasing each year since 2007. With a heavy emphasis on tourism development and marketing, the Georgian Government aims to increase this share to as much as 10-11% in the next few years.

. Since 2004, the political and economic reform process has attracted increasing numbers of visitors to Georgia. Especially the lifting of visa requirements for citizens of EU-member and other

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countries. Currently, visitors from the European Union, from the countries of Commonwealth of Independent Countries (CIS), National Atlantic Organisation (NATO) and Schengen are not issued a visa for entry. For Visa Nationals short term and long term visas have been introduced.

. The World Economic Forum's annual Travel and Tourism Competitiveness report published in 2013 ranked Georgia as the most competitive tourism destination in the region (66rd globally out of 140 countries). Competitive advantages include the attitude of the local population toward foreign visitors (17th), and the simplicity of visa requirements (28th).

. The share of tourism amounted to 10% of total employment in Georgia.

. The following table includes the number of arrivals of non-resident visitors at the National Borders of Georgia in the last 5 years and in the in the first nine months of 2015:

Arrivals of Non-Resident Visitors at National Borders of Georgia 2010 – 2014 Annual Year Visitor volumes Growth 2010 2,031,717 2011 2,822,363 38.9% 2012 4,428,221 56.9% 2013 5,392,303 21.8% 2014 5,515,559 2.3%

2015 (January-Septermber) 4,491,039

Source: Georgian National Tourism Administration . In 2010, Georgia registered approximately 2 million non-resident visitors. Demand in Georgia grew further by 38.9% in 2011 compared the previous year. 2012 registered a record growth, the number of international arrivals has seen a 56% year on year growth, reaching 4.4 million. Reasons for these extraordinary increases of 35%, 39% and 56% respectively, are the lifting of several visa regimes (e.g. Iran), increased business activity and the efforts of the Georgian National Tourism Agency in marketing the country as a leisure destination. A continued substantial growth was experienced in 2013 as well, albeit pace of growth was slower than in 2012, with a 21.8% increase in 2013 compared to the same period in the previous year. Total number of arrivals was nearing 5.4 million in 2013. Increase of tourist arrivals slowed down in 2014 achieving a growth rate of 2.3% in spite of the international advertising campaigns.

. With regards to destinations visited in Georgia, 46% of international arrivals were registered in Tbilisi, followed by 41% of arrivals to Batumi. Other destinations received a significantly lower number of tourists: (6%), Kobuleti (6%), Mtskheta (5%), Kutaisi (5%) and Borjomi (2%), based on a survey conducted by the Georgian National Tourism Agency in 2013.

. In 2014, 89% of non-resident visitors arrived in Georgia by land transport, followed by air transport (9%), sea transport (1%) and railway transport (1%). In the first eight months of 2015, 83% arrived by land transport, 15% by air transport.

. 4,491,039 tourists visited Georgia in the first nine months of 2015, representing a growth of 6.7% compared to the same period in 2014. Number of arrivals increased by 8% from Azerbaijan, Armenian figures rose by 13% and number of travellers from Russia grew by 14%, meanwhile arrivals from Turkey and Ukraine fell by 5% and by 3%. The sixth feeder country was Israel, Israeli guest

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number volume increased by a significant 38% in the first 9 months of 2015 compared to the same period of 2014.

. According to the Georgian National Tourism Administration, in 2014 the four major feeder countries were Turkey (1,442,695 travellers, 9.7% decrease y-o-y), Armenia (1,325,635; 2.6% growth y-o-y), Azerbaijan (1,283,214; 19.3% growth y-o-y), and Russia (811,621 up by 5.8% y-o-y). Following a six- fold increase in the number of arrivals from Iraq in 2013 - due to the introduction of direct flights in the direction of Iraq in March 2013- the number of arrivals decreased significantly, by approximately 50% in the last year compared to 2013. Georgia registered a significant growth in the number of arrivals from Poland (46,314; 25.4% growth y-o-y) and Ukraine (143,521; 13.2% growth y- o-y) too in the previous years due to the introduction of direct flights to Poland, and addition of flights in the direction of Ukraine.

. The highest number of arrivals in 2015 was registered in August with 852,377 visitors (10% higher compared to August 2014).

. Neighbouring countries account for most of Georgia’s international inbound tourism. Visitors from Azerbaijan, Armenia and Turkey account for approximately three quarters of the total number of international arrivals. Visitors from the countries listed above and from Russia make up 88% of international arrivals.

. According to the published data by National Statistics Office of Georgia the average length of stay of the visitors were 4.3 days.

. In terms of the most visited destinations among international tourists (according to data presented in the document ‘Georgia International Promotion’ prepared by the Ministry of Economy and Sustainable Development of Georgia) most popular destinations are the same: Tbilisi (86.3%), Batumi (33.9%) and Mtskheta (18.7%). Among mountain resorts the most visited resort is Bakuriani (5.7%), while Gudauri accounts for 2.3% of international arrivals, Mestia-Ushguli for 1.6%.

. According to the ‘International Visitor Survey’ conducted by ACT for GNTA, Russian and European visitors stay for the longest and the latter have the highest per-visitor spending. Visitors from the neighbouring countries have the shortest duration of stay (1-3 days). One-third of the visitors arriving from these countries did not spend a night in Georgia.

Source: International Visitor Survey conducted by ACT for GNTA

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. The following is a short, non-exhaustive list of recent and upcoming events, which are playing an important role in increasing in the number of international tourists.

o Georgia hosted the 13th European Youth Olympic Festival from July 25 to August 1, 2015. Up to 4,000 athletes from 50 countries took part in the international competition. Together with spectators Tbilisi hosted more than 10,000 visitors. The programme of EYOF included 9 sports: judo, tennis, artistic gymnastics, cycling, athletics, swimming, volleyball, handball and basketball; o In August 2015, Boris Paichadze Dinamo Arena in Tbilisi hosted first time the UEFA Super Cup, the annual football match between the winners of the Champions League and the European League; o In 2017, the Conference on Mountain Resorts in Europe and Asia will be hosted in Georgia. . Georgia, especially Tbilisi has hosted an increasing number of international events, from the annual Photo Festivals and Fashion Show to Conference of the European Bank of Development and Reconstruction. In order to maximise Georgia’s potential as a Meetings, Incentives, Conventions and Exhibitions (MICE) destination, the Georgian National Tourism Agency (GNTA) and Amcham Georgia, the largest international business chamber in Georgia, are working on creating a Georgian Convention Bureau (GCB). With the establishment of the GCB the proportion of business tourists within the total tourist number (currently 4%) as well as the contribution of tourism to Georgian GDP can be increased further.

. The 2016 state budget has been approved in December, 2015 by the Georgian Parliament. The consolidated budget revenues are expected to be approximately GEL8.5 billion while budget revenues and expenditures are expected to reach GEL10 billion. For the Ministry of Economy and Sustainable Development, responsible for tourism GEL95.1 million has been allocated.

. Georgia’s National Tourism Administration is estimated to spend approximately GEL10 million to promote the country as a tourism destination in the summer of 2015. The name of the campaign was ‘Summer in Georgia’. The country was being promoted in the following countries: Latvia, Azerbaijan, Turkey, Ukraine, Kazakhstan, Belarus, Hungary, Lithuania, Israel and Russia. Through a 30-second video, namely ‘Winter in Georgia’ the GNTA broadcasts Georgia’s winter tourism potential to the viewers of CNN and Euronews in more than 200 countries.

. In line with the findings above and the Association Agreement signed with the European Union above, we expect a further, dynamic growth of tourism in Georgia, especially in the leisure, MICE and business sectors.

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5 GENERAL OVERVIEW OF RACHA REGION

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5.1 General Overview

5.1.1 General description of the region

. Racha – Lechkhumi and Kvemo Svaneti region is located in the north-western part of Georgia on the southern slopes of the Central Caucasus, at wide range of elevations between 400 and 4,000 metres above sea level. The region is bordered by Samegrelo-Upper Svaneti to the west, by to the south, by Tskhinvali region to the east and by Russia to the north. The region can be divided into to two parts: lower (Kvemo) and upper (Zemo) Racha.

Please see Page 02 of the attached Map Changes in the population of Racha - and Picture Gallery. thousand persons (2011-2014) . There is only one official open border 47,5 crossing between Georgia and Russia, 47 near Kazbegi, located 320 km on road to 46,5 the east of Ambrolauri, the capital of the 46 region. 45,5

. During the Soviet period Racha was also 45 famous as a summer and winter resort, 2011 2012 2013 2014

thanks to lot of tourists from Soviet Population of Racha countries. Inflows of Russian tourists who used to enter through the Mamisoni Pass on the Georgian-Russian border have stopped, as the border crossing point has been closed and controlled by Russians and Ossetians. The re-opening of Mamisoni Pass (shortest way to Russia), which could contribute to the growth of tourism and trade, is included in the long-term plans, but the probability, and time of its realisation can not be estimated.

. The total area of the region is 4,954 square kilometres, accounting for 7.1% of the total territory of Georgia.

. The capital of the region is Ambrolauri, situated 270 km far from Tbilisi on road, which is the administrative centre of the region. The nearest international airport is in Kutaisi, 76 km from Ambrolauri, thus the region can be easily accessed by international travellers.

. The region of Racha-Lechkhumi is one of the most underdeveloped parts of Georgia, with the lowest population density of all regions of Georgia. As a result of uninterrupted migration, the region’s population has declined almost by half since the independence of Georgia, reaching as low as 45,900 people in 2014, accounting for only 1.04% of the population of Georgia.

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. The region consists of 4 administrative districts: Ambrolauri, Lentekhi, Oni and Tsageri Municipalities.

. 258 settlements (3 towns and 255 villages) can be found in the region. 80.6% of the population live in villages.

. Due to its diversity in elevation, the region has three different climates: warm humid continental (Dfb) being the prevailing climate, oceanic climate (Cfb) and subarctic climate (Dfc), depending on the elevation.

. The average temperature in January is below 0°C, decreasing with increase of altitude. Average temperature in July is +20°C and +22°C at the lowest altitudes, decreasing gradually at middle (+15.6°C) and high (7.6°C) altitudes.

. The average annual precipitation ranges between 800 and 1,000 mm. With the increase of elevation the amount of precipitation first increases and then decreases. 5.1.2 Accessibility

. By car: The region can be accessed by car in about 4-5 hours from Tbilisi from two directions on Gufta – – Oni road and on Kutaisi – Tkibuli – Ambrolauri road, depending on which direction Shaori – Khikhati Planned Managed Reserve is bypassed. The region can be accessed by car in about 1 hour from Kutaisi on Kutaisi – Tkibuli – Ambrolauri road and in about 3-4 hours from Batumi.

. By bus/ By Marshrutka (Minibus) service: The region can be accessed by direct bus from the Didube station, in Tbilisi. The bus runs on the following route: Tqibuli-Nikortsminda-Ambrolauri- Barakoni-Oni. There is minibus service to Oni from Kutaisi also.

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5.1.3 Natural resources

. The region is rich in water resources. The main river in the region is the 327 kilometre-long Rioni River, crossing the territory of western Georgia, originating in the Caucasus Mountains (in Racha) at an elevation of 2,960 metres above sea level, and running into the Black Sea.

. Due to abundant water resources, the area is of significance for hydropower plant installations. 99% of the abstracted source of water is used for hydro energy. The basic

energy supply installations of the region are The Rioni River two hydropower plants (HPP): the 6.1 MW Ambrolauri Ritseulahes and 112.5 MW Lajanurhesi in Tsageri, providing energy for the whole region.

. There are two reservoirs in the region, the Shaori water reservoir and the Lajanuri water reservoir. The Shaori Reservoir is designed to regulate the seasonal flows for Shaori HPP in Tkibuli. The Lajanuri water reservoir provides water for Lajanuri HPP.

. The main rivers of the region are (in Landscape in Racha descending order in terms of lengths): Rioni, Tskhenistskali, Lukhuni, Lajanuri, Tchantchakhi, Laskadura, Zeskho, Lektareshi, Krikhula, Kheoristskali and Leusheri.

. The development potential of mineral water supplies of the region has not been utilised yet and export to regional and international markets are very limited. Numerous mineral water springs are located in the mountains of Racha. These points are scattered across the region, often found adjacent to main roads. The different mineral waters contain iodine, calcium, iron and rich in other minerals as well.

. Racha-Lechkhumi-Lower Svaneti is famous for its forest resources, with 61% of its territory covered by forests. In addition to virgin forests, which are maintained in their original form and bio diversity, there are many decades’ old artificially planted coniferous woods. The main types of woods of the region are oak, fir, spruce, pine, birch and alder.

. Racha-Lechkhumi – Lower Svaneti Planned Protected Areas (PA) are located on the southern slope of Main Watershed of the Caucasus, in the territories of Kvemo Svaneti, Lechkhumi and Racha. It extends in the territories of Administration districts of Lentekhi, Tsageri, Ambrolauri and Oni within 500-4600 m above sea level. The territory of the Racha-Lechkhumi – Lower Svaneti PA is 229,532 ha and includes following categories: National Park (NP), 12 Natural Monuments (NM), 4 Managed Nature Reserves (MR) and Protected Landscape (PL).

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. The use of forests and their potential as an important resource is of special significance for the region. Existing woods, in case of proper planning and sustainable forest use, gives the opportunity for fulfilment of the local population requirements, as well as its usage for production opportunities.

. With regards to mining ferrous metal and non-metal fossil are extracted. Limestone, coal, gypsum, diabase, barite, magnum and gold are mined in the region. 5.1.4 Infrastructure

. According to the Development Strategy of the region, 1,544 kms of roads (121.2 km covered with asphalt, 1,414km dirt road, 8.2 km concrete roads) have been built in the region. There is no international road in the region. It should be noted that the majority of the roads leading across the region are not covered with asphalt or concrete, which makes it almost impossible to access some settlements in the winter period with a regular vehicle. Automobile transport is the only means of transport. One of the greatest obstacles of development of the region is the absence of direct transport road between Racha and Lechkhumi-Lower Svaneti.

. The only main road, crossing the region is the Kutaisi – Tkibuli – Ambrolauri road. Along the road there are no parking facilities or resting places.

. The table below contains infrastructure development projects finished recently and planned future developments in the region.

Total Project Building Source of Starting date-Finishing Cost Project name Status Contractor Funds date (in thousand Lari)

Rehabilitation- periodical maintenance

Ambrolauris Gufta-Oni road State 1 Avtogza N10' 17.03.2015-30.06.2015 Finished Km 63+200-Km 64+200 Budget 536,5 Ltd

Disaster

Maintenance work of the bridge, located State 2 at road sign 132 km on Kutaisi-Alpana- Besko' Ltd 13.02.2015- 31.08.2015 Finished Budget 148,3 Mamisoni Pass

Planned projects

Maintenance work of road, located on Preparation 3 km 50 - km 70 of Kutaisi-Alpana- phase Mamisoni Pass. Municipality of Tsageri The contract will be signed in November/December of 2015. The work will start from early spring of 2016 and is anticipated to be 4 Maintenance work of the road , located finished in 2017. Preparation on km 126 - km 141 of Kutaisi-Alpana- phase Mamisoni Pass (Utsera- Shovi)

Source: Roads Department of Georgia

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. Among the long-term plans the construction of a partly tunnel road altogether 18 kms linking Racha to Mestia has been marked, but given the fact that it would require significant public investment, the probability of the project realisation cannot be estimated.

. The construction of Sachkhere-Shkmeri-Oni road was identified in the Action Plan of Ministry of Regional Development and Infrastructure as a „Century Project” in 2014. Due to the lack of sufficient financing, the realisation probability of the project is very low. In the event of possible realisation of this project, Racha could be accessible in 2.5 hours from Tbilisi.

. Public water supply is serviced through water piping natural springs and draw wells. Sewage sytems have been only established in municipal centres of the region. There are no sewage treatment facilities in the rest of the region.

. Electrification of the region is of almost full coverage.

. The construction of the central gas pipeline in the direction of Ambrolauri–Chrebalo–Kvishari has been completed. It has been only partly completed in the direction of Ambrolauri–Oni.

. Another problem for the region is the lack of modern waste management. Waste is dumped to landfills without sorting domestic and industrial waste. Most of the landfills are located on riverbanks. As a result during rainy seasons the waste may be washed into rivers.

. Cellular communication mobile networks cover the major part of the region.

. Basic infrastructural underdevelopment hinders general economic growth of Racha.

. Further ongoing and planned infrastructure development projects are enclosed in the Appendix of this report.

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5.1.5 Economy

. Statistical data on Gross Domestic Product (GDP) of the region, published by National Statistics Office of Georgia also includes the data of Imereti region. As can be seen from the graph below, in nominal terms, GDP of Racha had seen an increase of GEL1,381.9 million between 2006 and 2013, with a slight set-back in 2009, which can mainly be attributed to the global economic recession. After 2009, nominal GDP started to increase again, reaching GEL 2,685.2 million in 2014, with an increase of GEL14.8 million compared to the previous year. In the period under review, GDP of Racha amounted to approximately 10% of the national GDP.

. The region’s per capita income is the 3rd highest among Georgia’s nine regions due to its low population.

. In 2014, the largest share in the sectorial structure of GDP in regions of Imereti and Racha- Lechkhumi and Kvemo Svaneti was held by Agriculture, fishing, hunting and forestry (13.9%) and Public administration (13.8%) followed by Industry (12.8%), Education (10.8%), Trade, repair of motor vehicles and personal and household goods (7.4%), Health and social work (6.9%), Product processing by households (5.2%).

. Both the turnover and production value of Racha region has seen an upward trend between 2010 and 2013, followed by a set-back of GEL7 million in turnover and GEL4.9 million in production value.

Changes in nominal GDP at current Changes in turnover and production prices, mil GEL value of Racha - GEL Mln. (2006-2014) (2010 - 2014)

30 000,0 3 000,0 45,0 25 000,0 2 500,0 40,0 20 000,0 2 000,0 35,0 30,0 15 000,0 1 500,0 25,0 10 000,0 1 000,0 20,0 5 000,0 500,0 15,0 0,0 0,0 10,0 5,0 0,0 2010 2011 2012 2013 2014 Georgia Imereti, Racha-Lechkhumi and Kvemo Svaneti Production value Turnover Source: National Statistics Office of Georgia Source: National Statistics Office of Georgia

. Based on 2014 data, the unemployment rate in the region was 10.1%, lower than the national average of 12.4% and data of Tbilisi’s 22.5% due to the low population. The graph besides illustrates the changes of the unemployment rate of the two regions, compared to the unemployment rates of Georgia and Tbilisi in the last five years.

. The number of employed persons saw an increase of 155 persons between 2010 and 2012, reaching 2,097 persons. The number of employed persons has seen a downward trend from 2012, reaching 1,771 persons in 2014. Most of the people worked in construction sector, while the sectors of education, health and social work provided the fewest workplaces.

. The average salary of employed persons has seen an increase between 2011 and 2014. Despite the fact that the growth rate of salaries in Racha exceeded the national growth rate of salaries, the

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salaries were much lower than the national average, reaching GEL391.6 in 2014. The average salary in Racha was approximately half of the national average (GEL800.5). Last year the highest average salary was in mining and quarrying sector, while the lowest average salaries realised in the sectors of fishing, transport and communication. The charts following show the changes in average salaries of employed persons.

Changes in unemployment rate Changes in average salaries of

(2010 - 2014) employed persons - GEL (2010 - 2014) 40,0% 900,0 30,0% 800,0 20,0% 700,0 10,0% 600,0 500,0 0,0% 400,0 2010 2011 2012 2013 2014 300,0 Imereti and Racha-Lechkhumi and 200,0 Kvemo Svaneti 100,0 Georgia - Tbilisi 2010 2011 2012 2013 2014

Racha-Lechkhumi and Kvemo Svaneti Georgia Source: National Statistics Office of Georgia Source: National Statistics Office of Georgia

. Due to the region’s location the economy is heavily based on agriculture, demonstrated by that the largest proportion of the region’s production (59%) is created by this sector. The total agricultural area of the region is 1,122 square kilometres, amounting to approximately a quarter of the region. The main agricultural activities in the region are potato growing, animal farming, especially cattle. Grape is also cultivated in some areas, especially in lowlands of Tsageri and Ambrolauri, where the most of wine production is concentrated.

. Approximately 50 small and medium enterprises operate in the region. Most of the people are employed by medium sized companies. The additional value in business sector amounted to GEL11.2 million in 2011. The peripheral location and the relative long distance from sales markets have a negative impact on the region’s business sector.

. With regards to the availability of financing, the interest rates on loans are high and varying between 17 and 24%.

. Due to the disintegration of the Soviet Union, the region lost its traditional markets, which sent the region’s industrial market into a negative spiral.

. The volume of direct foreign and local investment is very low in the region, hindering the economic progress and can be attributed among others to the lack of effective organisations, providing efficient support for investment projects, negotiating with potential investors, representing the region at international exhibitions, etc.

. The main export product of the region is the „Khanchkara” wine, exported to Ukraine, Poland, Germany and the USA.

. The main challenges hindering the development of Racha are the lack of the reproductive aged population and weakly developed infrastructure resulting in an unpredictable business environment.

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. Significant decrease of population in mountain regions of Georgia is one of the most critical issues of the country. In order to reduce the negative effects the government approved a new law, ’the Mountain Law’ with the aim to encourage development and investment in these regions and local people to work and live there. The following non-exhaustive list of benefits, included in the new law:

o Each family living in the country’s mountain regions will receive GEL100 financial aid from the state every month for two years after the birth of every new-born child. This financial aid will be increased to 200 GEL for every third, fourth and subsequent child;

o Mountain residents will enjoy a non-taxable income if their salary is GEL6,000 or lower;

o Individuals and legal entities in mountain regions will be exempt from profit tax for 10 years;

o People, living permanently in mountain regions will have exemption from paying property tax after lands, owned by them, and 50% of their electricity expenses will be covered by the Government;

o State-funded schools and other educational institution in mountain regions will be supported with increased amounts of aid;

o Entrepreneurs, establishing businesses in the mountain regions, using local resources and employing local residents, will have exemption from paying taxes for three years.

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5.1.6 Investment trends and projects - Racha

. There are a series of factors hindering foreign investments to the country, the most significant being the aforementioned relatively underdeveloped infrastructure. Currently the majority of investments are generated or supported by international organisations.

. In October 2015, one of the largest energy projects of Georgia was announced. The USD723 million Tskhenistskali cascade of hydro power plants (“HPPs”) project is supported by the Co-Investment Fund and located in Racha-Lechkhumi Kvemo Svaneti region, Lentekhi and Tsageri municipalities, on the river Tskhenistskali, including the installing of four hydro power plants (’HPPs’), with total installed capacity of 347.1 MW and annual generation of 1,743.7 M kWh. It means that the average annual production rate of the Cascade HPPs would be 17 percent more than Georgia’s current annual electricity consumption. Active phase of construction is estimated to begin in 2017.

. The Third ‘Secondary and Local Roads Project’ (SLRP III) was approved by the Board of the World Bank and aimed to reduce transport costs on project roads and improve the sustainability of road asset management in the secondary and local project road network in addition to improve access to schools, healthcare facilities and stimulate business developments and tourism. The USD93.75 million project includes the rehabilitation of 10 road sections with a total length of 100 km. The project contains the rehabilitation of the 16-kilometre-long road between Utsera and Shovi.

. The European Investment Bank has allocated EUR40 million for ’Water Modernisation Project II’ with the aim to improve the quality of water and provide the access to a constant supply of water for 200,000 citizens in 28 towns of the following regions: Samegrelo-Zemo Svaneti and ; Imereti, Racha-Lechkhumi and Kvemo Svaneti; Kakheti; Shida ; and Samtskhe-Javakheti. The Asian Development Bank (EUR32 million) and the EU (EUR8 million) also provided financial help to this project.

. In April 2015, the GEL43 million state-financed ’Strong Region for Strong Georgia’ project was announced, aiming to develop agriculture, soft-manufacturing and tourism in the region of Racha- Lechkhumi and Kvemo Svaneti region. The potential of four districts have been marked:

o Ambrolauri has the resource of developing a pine nursery farming and Rachian ham production;

o Lentekhi has the resource of gold extraction;

o Oni has possibilities of developing in the field of gold extraction, Rachian ham production and bottling Utsera mineral water;

o Tsageri has possibility of founding the ventures of mineral water extraction and bottling based on the mineral waters.

. Swiss Cooperation Office South Caucasus financed the two phases of Rural Development in Racha – Lechkhumi between October 2008 – December 2011 and February 2012 – January 2015. As an impact of the investment the farmers and small rural enterprises improved their skills and capacities in the field of dairy and beef production and are expected to achieve increased quality and volume of production. The project cost reached approximately CHF 5.5 million.

. In 2012, through USAID’s New Economic Opportunities (NEO) Project, the government of the USA supported Racha with USD260,000 to contribute to the economic development of the region.

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. As mentioned before, the Georgian Civil Aviation Agency announced a concept plan for renovation of unused, smaller airports in different regions of the country, namely Ingiri, Omalo, Chikhaqreshi and Ambrolauri airports in October 2015, which could have an effect on the development of economy and tourism, but no specific construction works have been announced yet.

. Based on information received from Partnership Fund (PF), one of the Chinese provinces is interested in development of Racha. In order to conclude the possible long–term cooperation, the parties met in November, 2015. On 11th November the PF and Administration of Racha-Lechkhumi and Kvemo Svateni signed a cooperation memorandum with Jilin province of China. The agreement envisages deeping relations in the following areas: culture, tourism, education and sports. The agreement also contains readiness to implement joint projects in Georgia in various economic sectors.

. The following tables contain the main investors and exporters in the Municipality of Oni and the main exporters and employers of .

Volumes of Name of investors in Oni Number of Sector investment (GEL) (In Municipality employees Thousands)

Enteli power engineering 100,000 N/A

Blonstein tradition and quality of cattle-rearing 2,300 60 Georgia

Energo pro Georgia energetics 144 27

JSC Caucasus Minerals mining industry 130 30

Hotel Sunset Sovi tourism N/A 19

Name of exporter in Oni Cost of investment Number of Sector Municipality (GEL) (In Thousands employees

Rioni Wood Ltd Timber treatment 407 40

Name of Employer Sector Comment Retailer Giorgi Khevanishvili Fir-cone procurement Exporter Sakhtyetesli Ltd Fir-cone procurement Exporter Herbesi Ltd Fir-cone procurement Exporter Geo-flora-fauna Ltd Fir-cone procurement Exporter Djadvari Abiesi Ltd Fir-cone procurement Exporter GeoPlant Ltd Fir-cone procurement Exporter Neitrali Ltd Fir-cone procurement Exporter SakhTkeservisi Ltd Fir-cone procurement Exporter Retailer Simon Titoshvili Fir-cone procurement Exporter Mana Ltd Fir-cone procurement Exporter Fea trees Ltd Fir-cone procurement Exporter Ir-tour Ltd Timber Production Exporter Rioni Wood ltd Timber Production Exporter Caucasus wood resource Ltd Timber Production Exporter

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Name of Employer Sector Comment Ecology and resource Ltd gypsum procurement N/A Nergebi Ltd gypsum procurement N/A Shoda Ltd gypsum-anhydrite procurement N/A Ambrolauris avtogza 10 Ltd Construction N/A Dani jgufi Ltd Construction N/A Racha 2005 Ltd Construction N/A Progresi ltd Mineral water bottling factory Exporter Rachafregi ltd Tourism N/A Ambrolauris avtogza 10 Ltd Construction N/A Ambrolauris avtogza 7 Ltd Construction N/A Rusmetali Ltd Power system N/A Tutseula hesi Ltd Power system N/A Racha hesi Ltd Power system N/A Aleksandreuli Ltd Wine Factory Exporter Rachuli Ghvino Ltd Wine Factory Exporter Khvanchkara Ltd Wine Factory Exporter

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5.2 Tourism-specific market description of Racha region

5.2.1 Tourism of Racha region

. As of today, touristic attractiveness of the region lies in its natural environment, cultural heritage and abundance of mineral waters, creating unique conditions for development of tourism. Racha is famous for its mountains, mineral waters, ‘Khvanchkara’ wine region, cultural monuments, as well as cuisine, stone relieves and sculptures, dating back to the 7th – 17th centuries, exhibited in museum Landscape in the neighbourhood of Resort Shovi collections or incorporated in architectural monuments.

. The most popular form of tourism is adventure tourism. Hiking/climbing and horse-riding tours are arranged to nearby mountains, such as Phasis Mountain (3.090m), Anchakhi Mountain (4.462m), Shovi and Samertskhle (3.584m), Chutkhari (3.562m), Kareta (3.354m), and Lukhunists- veri (3.216m). Cave tours are organised to Gogoleti, Tsakhi, Tskhrajvari, Sakinule and Landscape in Racha region Shaora-Sharauli underground caves.

. The main river of the region, the Rioni River provides opportunity for rafting, fishing and kayaking as well.

. As mentioned above, Racha is rich in mineral sources but the potential of mineral water supplies has not been utilised yet. In addition to Shovi and Utsera, mineral waters and sulphur waters can be found in Kveshvake, Sortuani, Khidikari, Bugeuli, Lashichala, Dzuguri, Akhachala, Zeskho and Muashi.

. Racha carpenters are famous for ’Sakvartskhuli’ a kind of chair with semicircular back and three legs, used by the head of family. The back of the chair is usually decorated with symbolic engravings. The tourists have opportunity to take part in the process of making traditional crafts.

. The region is one of the best known wine-producer regions of the country. This is also confirmed by the fact that in 2014

more than 800 tonnes of grapes were harvested in Racha. The Rioni river

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During the time of grape-harvesting the local wine producers teach the old methods of vine cultivation to tourists and so-called ’supras’ - huge picnics - are held for them in the vineyard.

. Generally it can be said, that the Georgian tourists travel twice a year, once to a Black Sea resort in summer and once to a domestic ski resort. The latest campaign of Georgia’s National Tourism Administration (‘Get to know Georgia’) aims to change this trend and revive domestic tourism in remote mountains regions. GNTA has started to work on developing more marked trails and tourist routes particularly in the following five regions: in Samtskhe-Javakheti, in Mtskheta-Mtianeti, in Samegrelo, in Racha-Lechkumi and in Upper and Lower Svaneti.

. A tourist information centre has been opened in Ambrolauri by the Georgian National Tourism Administration in 2012, with the aim to create tourist routes and seeking appropriate investment opportunities in the region.

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5.2.2 Touristic attractions

. One of the most well-known monuments in the region is the Nikortsminda Cathedral, a historic , built between 1010 and 1014 during the reign of King Bagrat III of Georgia, located in Nikortsminda, 11 kms from Ambrolauri and. The cathedral features stone carvings around, illustrating King Bagrat III and Jesus Christ while striking down on the pagan Roman Emperor Diocletian. The cathedral was reconstructed in 1634 and a three-storied bell-tower was built in the second half of the 19th century besides the Cathedral. The frescos inside the church were prepared in the 17th century. It is on the tentative of the UNESCO World Heritage Sites.

. The Barakoni church of the Mother of God is situated in Tsesi,

8 km from Ambrolauri on a top of a steep cliff, with a beautiful Nikortsminda Cathedral view on Rioni River, flowing into the Lukhuni River just below the mountain. In 1753 the Lord Rostom of Racha ordered the architect Avtandil Shulavreli to build a temple. The domed cruciform church, being one of the last important monuments of medieval Georgian architecture, was built of neatly trimmed stable stand stones and adorned with rich ornamentation. The church was closed and desecrated under the Bolshevik Rule. After having been damaged in the 1991 Racha earthquake, it was quickly reconstructed.

. Khotevi Chruch, the church of the Archangel, built in Khotevi during the 13th century, when the village was a significant trade centre and served as a connecting link between Imereti and Kvemo Racha regions. The name of the village was firstly mentioned in written documents of the 11th century.

The construction of the Church of Mravaldzali of St. George is . Barakoni Church linked to the name of Bagrat III. It is situated in the

village of Mravaldzali in . Limited information is available about the first images of the church, built during the 11th century. One of the images was the famous scene of praying at the conch according to legends: the Saviour on the throne with the gospel on the left knee, with the image of the Mother of God on his right and the fresco of John the Baptist on his left. Unfortunately, none of the frescoes have survived. Church of Mravaldzali of St. George

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. Oni-synagogue, the third largest synagogue in Georgia, was built in the 1880s by a Polish architect. At that time Oni was densely populated by Jewish people, now the Jewish community consists of only 16 inhabitants as most of them moved to Israel between the 1970s and 1990s.

. Khvanchkara wine region is famous for its naturally demi-doux red wine and it is the region where some of the most well-known Georgian wines are produced. Oni synagogue

The wines have been produced from local grape varieties, mainly from ‘Alexandreuli’, ‘Mujureuli’ and ‘Tetra’, which are of high quality, unique aroma and bouquet, growing along the Rioni river at an elevation of 700-800 meters above sea level in warm and humid climate. The average annual temperature is between - 11°C and +10°C and annual precipitation is 1000-1300 mm, which are optimal kind of soil-climatic conditions for producing high quality grapes. In addition to local grape varieties the fermentation bacteria, that exists ‘The Khvanchkara wine’ only in the close vicinity of Khavanchkara, giving the piquant bouquet to the wine, making the wine distinguishable from other wines of Georgia. The dark lilac wine is characterised by highly developed species bouquet, rich taste with raspberry tones, containing 10-12% of alcohol, 3-5% of sugar and 5-7gr/l. titrated acidity. The wine of ‘Khvanchkara’ for the first time was produced by the Georgian Prince Kipiani in the 70s" of the XIX century and it was called ‘Kipiani s

wine’. In addition to small farms, processing 1-10 tons Khvanchkara wine region of grapes a year, currently two factories operate in the region, producing the Khvanchkara wine. The oldest factory, the Khvanchkara Winery established in 1927, operating today under the name ’Khvanchkara Ltd’ and has the potential for processing about 100 tons of grapes annually. The other factory was built in 2009 in Bugeoli, owned by the ‘Aleksandreuli Ltd’. The company was founded in 1998 and evolved a full production cycle from viticulture to bottling of wine. Due to the latest technology and equipment the factory in Bugeoli has the capacity to process about 250 tons of grapes with an annual output of 1 million bottles of wine. The main brands of the two main factories are Kvanchkara, Tetra, Barkoni and Alexandrouli. The Khvanchkara wine has been awarded at international wine exhibitions for several times, it has already won among others 2 gold, 4 silver and 1 bronze medals.

. Currently four museums operate in Racha. One is a Fine Arts Museum, another is the Fustel School Museum in Ambrolauri Municipality, and a Local Museums in Oni, Lentekhi and Tsageri Municipalties. Various historical, ethnographical, archaeological and other exhibitions are kept in these museums.

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. The Ambrolauri Museum of Fine Arts houses the collection of paintings and drawings of well-known 20th-century Georgian artists such as Lado Gudiashvili, Elene Akhvlediani, David Kakabadze, Ucha , Koba Guruli, Avto Varazi, Levan Tsutskiridze, Natela Iankoshvili. The museum was established in 1965. The annual number of visitors is around approximately 800.

. The Fustel School Museum, established in 2003, exhibits collections of ethnographical materials, such as Fine Art Museum in Ambrolauri clothes, weapons, heraldic and archaeological items. The annual number of visitors is around approximately 330.

. The Oni Local Museum was established in 1937 and exhibits more than 15,500 items such as paintings and drawings of well-known 20th century artists, architectural details and fragments of St George and St. Trinity churches form the 10th and 11th centuries, ethnographic objects, manuscripts and printed books and samples of coins from the period between the 10th and Oni Local Museum 14th centuries. The annual number of visitors is 500 persons.

. The Lado Museliani Lentekhi Local Museum was established in 1937 and exhibits 3320 items. The museum houses archeological collections from Lechkumi region, most dating back to the Bronze Age. The annual number of visitors is 1000 persons.

. The region’s most visited and biggest museum is Varlam Makharoblidze Tsageri Historical Museum with annual Tsageri Historical Museum visitor numbers of 1864. The museum opened in 1937 and houses 10,000 items, which typically dates back to the Bronze Age and the period of Antiquity.

. The region is also famous for its smoked ham, namely lori and for Shkmeruli, a garlic and chicken dishes, originated from the small village of Shkmeri.

. Further tourist attractions of the region are the Shaori Lake and Shovi resort, the detailed description of these destinations is presented in Chapter 6. Resort Shovi

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5.2.3 Supply and demand analysis

5.2.3.1 Supply analysis

. The following chapter contains our analysis on the characteristics of commercial accommodation market, describing existing supply.

. The graph below shows the development of commercial accommodation establishment capacity in the Racha–Lechkhumi and the Kvemo Svaneti region.

. The number of commercial accommodation establishments in Racha showed a supply increase of 6 units between 2012 and 2014. Total capacity of commercial accommodation establishments was a total number of 308 rooms in Racha in 2014.

. There is no internationally-branded hotel in Development of commercial the region, the only hotel which meets to the accomodiation supply in Racha region, requirements of European hotel market is 2012 - 2014 the Sunset Shovi Hotel. Accommodation 25 330 market of Racha is dominated by guest 20 230 15 houses and holiday homes, offering generally 130 10 ‘bed and breakfast’ for tourists. 5 30 . The table overleaf is a comprehensive, non- 0 -70 2012 2013 2014 exhaustive list of existing accommodation Number of hotels and hotel type establishments supply in the region, evaluated by their size, Number of rooms location, general upkeep and attractiveness. Source: Department of National Statistics

. Published rates of the accommodation establishments shown are gross rate of standard rooms with double occupancy. Published rates by hotels can be considered to be often misleading and inconsistent in Racha from a market analysis point of view as at certain cases, published accommodation prices do not correlate with the actual quality of hotels and can be significantly higher than achieved rates.

. We have ranked the enlisted hotels into the following three broad categories examining their overall quality and upkeep compared to general supply of the Georgian hotel market:

o H – referring to as high quality;

o M - indicating medium quality;

o L – used to mark low quality properties;

o +/- have also been used for more sophisticated classification.

. We have ranked them also by location characteristics with A representing the best and C the worst location for accommodation operation. Classification of location includes assessment of both visibility and accessibility of the specific site.

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Number of Published Rate Overall Tier (Quality) Name Location Facilities and Services Rooms in USD quality

Upper- Sunset Shovi Glola - restaurant, bar, minibar, sport 35 60-100* M+ Midscale Hotel Shovi activities, WiFi outdoor swimming pool, WiFi, BBQ Hotel Metekhara Ambrolauri 16 90-250** M facilities Midscale WiFi, laundry service, concierge, Orion Hotel Oni 20 M minibar Lower - Glola - Hotel Racha 50 35-50* N/A M- Midscale Shovi Guest House Oni 8 38 Georgian meals, garden L Gallery shared kitchen and lounge, laundry Guest House M&B Oni 4 42 L service, WiFi Guest houses Khvamli Guest WiFi, TV, bar, shared kitchen, Tsageri 5 33 L+ House hairdresser's shared bathrooms, kitchen, WiFi, Guesthouse Elo Ambrolauri 4 23** L- jeep Holiday Home kitchen, TV, iron, outdoor pool, Holiday home Ambrolauri 2 55** L- Racha towel, bed linen

. Based on their general quality and market positioning, enlisted hotels have been categorised in tiers which are used worldwide in the hotel industry.

. The following tiers have been used for accommodation establishments of Racha region (starting from the highest quality/positioning):

o Upper-midscale;

o Midscale;

o Lower-midscale;

o Guest houses, and

o Holiday home.

. It should be noted that these categories have been created based on the relative quality of accommodation establishments, but these categories do not reflect European standards.

. We have classified one hotel as upper-midscale hotel, which is the Hotel Sunset Shovi. With regards to its quality and general upkeep, it can be stated that the hotel offers satisfying quality standards, but it would not be a competitor of any internationally branded properties.

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o Hotel Sunset Shovi, the first 4 star hotel is situated in Shovi resort, in the close vicinity of Glola village. The hotel opened in 2013 with 12 double rooms, 12 superior rooms, 6 executive suites, 5 additional rooms, a restaurant and a bar. The hotel also includes 4 independent cottages. All the hotel rooms are equipped with mini bar, phone, TV/Cable TV, free WiFi and hair dryer. The hotel offers various Hotel Sunset Shovi entertainment programmes such as: sports activites, rafting, fishing, hunting, horse riding. The hotel is open only during the summer season from mid-May to late August. The owner of the hotel is the Archi Group that attempted to restore the traditions of the resort that was lost after the 90s and support the development of the resort with the construction of a European–standard hotel. Before the opening the hotel was partly refurbished. In terms of profitability, the property is understood to generate a loss on an annual basis. Future plan of the owners include the construction of outdoor and indoor wellness facilities.

. Among the existing supply Hotel Metekhara and the Orion Hotel are considered to be midscale properties.

o Hotel Metekhara is situated in Ambrolauri, close to the Rioni River, not far from the centre, featuring 16 rooms, an outdoor swimming pool, restaurant, terrace and BBQ facilities. The hotel is opened all year round. The hotel both in quality and in interior design is similar to Orion Hotel in Oni. The hotel features a meeting room for 40 persons. The 16

letting units comprise 2 triple, 4 single, 10 Hotel Metekhara double and 1 family room, including 2 bedrooms, kitchen and a living room. The average length of stay is 2.5 nights. On average, altogether 20-25 tourists come from abroad during the summer season (Russia, Ukraine, Kazakhstan, Japan, Germany, Israel and Poland in 2015.

o The 20-key Orion Hotel is situated in the centre of Oni, located 30 km from Ambrolauri. The hotel operates on a seasonal basis between April and September. The company owns and operates four properties in Tbilisi under the same name, namely the Hotel Orion Tbilisi, Hotel Orion Old Town, Hotel Orion Hotel Orion

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Econom and Hotel Orion Hostel. Providing relatively high quality accommodation on regional level, the hotel enjoyes popularity among the occasional business-related guests, coming from Tbilisi.

. We have classified one hotel as lower-the Hotel Racha in Shovi.

o Hotel Racha is situated in Shovi, close to the entrance of the former fenced Resort Shovi and is open only in July and August. The hotel comprises 50 guestrooms, out of which 12 rooms are higher categories. In terms of capacity the hotel is the largest in the region, but as for quality it lags behind the above described Hotel Racha hotels. The average length of stay is as long as 7-8 nights. On average only, 5-10 tourists come from abroad during the summer season.

. Guest houses with an average room capacity between 2 and 8 play significant role in the accommodation market of the region, typically operated by families. This type of accommodation establishments, preferred by Georgian tourists is widely spread in the region, even so their presence on Online Travel Agencies (OTAs) is rare.

. Holiday homes: Holiday Home Racha, offers bed and breakfast for 6 persons. The house operates based on self-catering and contains 2 bedrooms, a kitchen and a private bathroom.

. In addition to accommodation facilities, restaurants are also an integral part of the tourism supply. The quality of restaurants just as the number and quality of accommodation establishments lag far behind the level of European and Georgian urban restaurants. Generally, most restaurants are open only in the peak season. Racha is unserviced during the winter and shoulder months.

. According to our research, there is no educational institution of any level in Racha specialising in tourism/hospitality/catering. Professional education is only available in Tbilisi, Batumi and Kutaisi, with the University of Georgia offering the only higher-education level, accompanied by shorter certificate-courses provided by other institutions. 5.2.4 International Tourism trends

. In the following Chapter we explain the most important tourism demand trends shaping the industry worldwide thus deemed relevant to our subject study as well. The summary is based on the findings of the World Tourism Organisation.

. Over the past six decades, tourism has experienced continued expansion and diversification, to become one of the largest and fastest-growing economic sectors in the world. International tourist arrivals worldwide are expected to increase by 3.3% a year between 2010 and 2030 to reach 1.8 billion by 2030, according to UNWTO’s long term forecast Tourism Towards 2030.

. International tourist arrivals (overnight visitors) hit a record 1,133 million worldwide in 2014, up from 1,087 million in 2013. Demand continued to be strong in most source markets and destinations, despite ongoing geopolitical, economic and health challenges in some parts of the world.

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. In 2014, slightly over half of all overnight visitors travelled to their destination by air (54%), while the remainder travelled by surface transport (46%) – whether by road (39%), rail (2%) or water (5%). The trend over time has been for air transport to grow at a somewhat faster pace than surface transport, thus the share of air transport is gradually increasing.

. In the last five years people around the world have been increasingly travelling abroad on holiday, although different trends regarding the types of holiday can be seen, according to the World Travel Monitor Sun & beach holidays have grown by 18% over the last five years and remain the most important category with 28% of all holiday trips. However, touring holidays have grown by 32% to a 23% share of the holiday market, thanks in particular to more tours by Asians. In contrast, countryside holidays have declined by 17% over the last five years and now only represent 11% of all holidays. The boom market segment, however, has been city trips which have soared by 58% over the five years to reach a 20% market share.

. Travel for holidays, recreation and other forms of leisure accounted for just over half of all international tourist arrivals (53%) in 2014. Some 14% of international tourists reported travelling for business and professional purposes, and another 25% travelled for other reasons such as visiting friends and relatives (VFR), religious reasons and pilgrimages, health treatment, etc. The purpose of visit for the remaining 6% of arrivals was not specified.

. In 2014 online bookings continued to boom with a further 7% rise to a 66% share of all travel bookings worldwide compared to the previous year. Meanwhile, there was a sharp increase in bookings by smartphone in 2015. Due to the spread of Online Travel Agencies (OTAs), the booking windows have been steadily shortening.

. Social media channels such as review portals, blogs and forums have also become very popular for planning trips, and are used intensively by more and more travellers around the globe.

. The average length of overnight stays are gradually shortening due to the shifting in guest behaviour of executing larger number, but shorter duration excursions, vacations and other travels, instead of the past trend of one long (up to two weeks) vacation.

. Cultural tourism motivations are shifting slowly towards a more general interest in culture, rather than very specific cultural goals, thus the combination of cultural and e.g. wellness tourism is growing.

. Generally, it can be stated that domestic tourism is on the rise. More and more travellers prefer to go on holiday in their own country of residence.

. The development of IT and particularly the Internet, facilitated the rise of the ’new tourist who is becoming knowledgeable and is seeking exceptional value for money and time, and participation in special interest activities. Thus, the relative importance of package tours, which are often based on low quality and prices are declining in favour of independently organised tourism.

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5.2.4.1 Demand analysis

. As the tourism department has started to collect statistical data on tourism demand of Racha from Q2 2014, earlier only information on the number of tourists in Racha is not available.

. The chart below shows the main purposes of domestic visits of Racha in QII-QIV 2014 (latest available information).

. As highlighted, the main purpose of domestic visits was ‘visiting friends and relatives’, followed by ‘vacation, entertainment, recreation’ and ‘visiting of second home’.

. In QI 2015, 23,839 domestic tourists visited the region according to the Department of National Statistics. 54.2%: visit of friends, relatives; 30.7% visit of second home; 15.1%: shopping.

Purposes of domestic visits in 2014 ( II - IV Quarters)

1,6% 1,3% 2,2% Visit of friends, relatives 4,1%

50,4% Vacation, Entertainment, Recreation 16,6% Visit of second home

Other

Business, Professional Activities Shopping

23,8% Religion

Source: Department of National Statistics

. Demand for the region is very low, which is also reflected in the number of participants of organised package tours, by Newkaz, a tourism development centre providing professional training programmes and package tours. In 2015, less than 100 persons participated in organised trips in Racha until October.

. There was a significant drop both in number of foreign and in domestic Number of tourists in Oni municipality

tourists, declining by 46.1% and 47.1%, 2500 2 205 respectively, compared to the previous 2000 1 785 years in Oni municipality. After 2013, 1 550 tourist demand showed a remarkable 1500 increase again. In 2014, the number of 945 1000 820 765 tourists increased by 217% compared to 600 500 350 2013, accounting for 2,550 tourists, also exceeding the data of 2012. It was 0 2012 2013 2014 2015 followed by a further growth of 23.5%, Number of foreign tourists Number of domestic tourists reaching 3,150 tourists so far in 2015. Source: Oni municipality Based on the information received from

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Oni Municipality, the proportion of Number of foreign tourists in Ambrolauri foreign tourists ranged between 27-30% Municipality

in the period of 2012-2015. 600 519 . We received the statistics on the 500 392 403 number of foreign tourists, who visited 400 Ambrolauri between 2013 and 2015. In 300 2013 and 2014, the Ambrolauri 200 Municipality was visited by 100 approximately 400 foreign tourists. In - 2013 2014 2015 2015, to-date a significant increase of Number of foreign tourists 28.8% has already been seen in the Source: Ambrolauri Municipality number of foreign tourists compared to 2014. The proportion of foreign tourists is negligible in Ambrolauri Municipality. 5.3 Current state and market readiness of Racha and it key assets

. The region of Racha-Lechkhumi is currently one of the most underdeveloped parts of Georgia, with the lowest population density of all regions of Georgia.

. The region is rich in water resources. The development potential of mineral water supplies of the region has not been utilised yet and export to regional and international markets are very limited.

. Racha-Lechkhumi-Lower Svaneti is famous for its forest resources. The use of forests and their potential as an important resource is of special significance for the region. Existing woods, in case of proper planning and sustainable forest use, gives the opportunity for fulfilment of the local population requirements, as well as its usage for production opportunities.

. The majority of the roads leading across the region are not covered with asphalt or concrete, which makes it almost impossible to access some settlements in the winter period with a regular vehicle. Automobile transport is the only means of transport. One of the greatest obstacles of development of the region is the absence of direct transport road between Racha and Lechkhumi-Lower Svaneti.

. Public water supply is serviced through water piping natural springs and draw wells. Sewage sytems have been only established in municipal centres of the region. There are no sewage treatment facilities in the rest of the region.

. Electrification of the region is of almost full coverage.

. The construction of the central gas pipeline in the direction of Ambrolauri–Chrebalo–Kvishari has been completed. It has been only partly completed in the direction of Ambrolauri–Oni.

. Another problem for the region is the lack of modern waste management. Waste is dumped to landfills without sorting domestic and industrial waste. Most of the landfills are located on riverbanks. As a result during rainy seasons the waste may be washed into rivers.

. Cellular communication mobile networks cover the major part of the region.

. Basic infrastructural underdevelopment hinders general economic growth of Racha.

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. Due to the region’s location the economy is heavily based on agriculture, demonstrated by that the largest proportion of the region’s production (59%) is created by this sector.

. The volume of direct foreign and local investment is very low in the region, hindering the economic progress and can be attributed among others to the lack of effective organisations, providing efficient support for investment projects, negotiating with potential investors, representing the region at international exhibitions, etc.

. The main export product of the region is the „Khanchkara” wine, exported to Ukraine, Poland, Germany and the USA.

. The main challenges hindering the development of Racha are the lack of the reproductive aged population and weakly developed infrastructure resulting in an unpredictable business environment.

. There are a series of factors hindering foreign investments to the country, the most significant being the aforementioned relatively underdeveloped infrastructure. Currently the majority of investments are generated or supported by international organisations.

. As of today, touristic attractiveness of the region lies in its natural environment, cultural heritage and abundance of mineral waters, creating unique conditions for development of tourism. Racha is famous for its mountains, mineral waters, ‘Khvanchkara’ wine region, cultural monuments, as well as cuisine, stone relieves and sculptures, dating back to the 7th – 17th centuries, exhibited in museum collections or incorporated in architectural monuments.

. General quality of commercial accommodation establishments just as the quality of restaurants lags far behind the level of European and Georgian urban hotel and restaurants. Generally, most elements of tourism supply are open only in the peak season, thus Racha remains unserviced during the winter and tourism shoulder months.

. There is no educational institution of any level in Racha specialising in tourism/hospitality/catering. Professional education is only available in Tbilisi, Batumi and Kutaisi, with the University of Georgia offering the only higher-education level, accompanied by shorter certificate-courses provided by other institutions.

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6 GENERAL OVERVIEW OF SELECTED KEY DESTINATIONS

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6.1 Shaori

6.1.1 Status Quo

. Shaori possesses the attributes to become one of the most frequented domestic year-round resort tourist destinations of Georgia and the ‘tourism hub’ of the region, however, to achieve this position, the region has to overcome several obstacles such as the general underdevelopments of infrastructure. It can be also called ‘Gate of Racha’, because the main road (Kutaisi-Tkibuli- Ambrolauri) leads through this area to the region. The name of the Shaori Lake is known throughout the country, based on information from local The Shaori Lake residents, the Lake is a popular fishing spot.

. Due to the absence of infrastructure the Lake cannot be bypassed on roads. main road runs on the northern side of Shaori Lake.

. The environs of the lake is undeveloped, besides to private households only a youth camp is located nearby. There are no operational commercial accommodation units at the Shaori Lake.

. The Youth Camp was opened as part of the ‘PATRIOT’ programme launched by the Ministry of Culture, Monument Protection and Sports of Patriot Youth Camp at Shaori Lake Georgia between 2005 and 2010. The programme aimed to provide a framework for successful and socially vulnerable pupils/students (age of 14-21) to be able to get acquainted with their peers from different regions, to develop their intellectual, creative and physical abilities. In addition to Shaori, other summer camps were also opened throughout Georgia, in Lagodekhi, in Bazaleti, in Tskaltubo, in Bakuriani, in Vartsikhe, in Khelvachauri, in Skuri, in Sagarejo, in Lakeside at Shaori Lake Gunmukhuri, in Kvavilnari, in Kodori and in Anaklia.

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6.1.2 Location

. The area of the Shaori Lake, the ‘Gate of Racha’ is the point of entry to the region from the way from Tbilisi and Kutaisi. The area is located 1,132 metres above sea level, being the biggest reservoir of Racha, the area is rich both in surface and in ground waters. The distance from Shaori to Ambrolauri is 19 km, 57 km to Kutaisi, and 240 km to Tbilisi. The Nakerala Pass, located at the border of Imereti and Racha provinces is close to the area. Shaori is well-known for its reservoir and for its caves throughout Georgia. Main villages in the area are Nikortsminda, Kveda Tlughi and Khotevi.

Ambrolauri – 19km Shaori

Kutaisi 57 km

Tbilisi – 240 km

6.1.3 Climate

. The humid subtropical climate of the area is characterised by cool summer seasons (average temperature: 14-18°C) and cold winter seasons (average temperature between -10 and -4°C). Sunshine duration in the area is relatively low in comparison with the Georgian average (1,900 hours per year). The average annual precipitation is 1,400-1,600 mm on the south coast of the water reservoir and 1,600-2,000 mm on the north coast.

. Weather is dry in the spring and the summer, however from November to the end of April there is much snow, creating good conditions for winter sports.

. Wind speed is 2-4 metre/second on an average annual basis. 6.1.4 The Shaori Lake and the Cave

. The Shaori Lake is the largest reservoir in Racha, with a water surface of 9.2 km2, fed by ground waters. The Lake is located in the south-western part of the Shaori cave.

. There are many karstic funnels, caves and caverns under the area. These formations offer favourable living conditions for fish and seaweed. The lowest point of the cave is at 1,109 m and the highest at 1,996 m.

. An underwater lake can be also found near to the reservoir.

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6.1.5 Nature

. The flora and fauna around Shaori Lake are also diverse. The neighbouring forest is home to several species of animals, birds, plants and mushrooms, which of several species are under the threat of extinction. 6.1.6 Tourism

. Shaori is known for its reservoir and for its fishing spots. Nikortsminda Cathedral is only a 10-minute drive from Shaori Lake. Another tourist attraction nearby is the unique vineyards of Khvanchkara and Tvishi. As of today the only accommodation facility around the Lake is Patriot Youth Camp, hosting pupils/students during the summer season. Due to the natural environment of the Lake it has the potential to become a year-round resort destination.

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6.2 Utsera

6.2.1 Status Quo

. Utsera is rich in mineral water sources (28 types of mineral waters) but the potential of mineral water supplies has not been utilised yet, despite the fact that in the Soviet period a mineral water bottling factory operated here, which competed with Borjomi’s mineral water bottling factory.

. Except for its mineral water resources, Private household in Utsera an 800-year-old ‘alley of trees’ and its favourable location (along the Rioni River) there are no other identified built or natural tourist attractions in Utsera.

. Due to the uninterrupted migration towards larger cities, number of students reached record lows in the local school, which recently was renovated with the support of USAID to improve physical conditions of the school. View from the local school 6.2.2 Location . Utsera is located 300 km from Tbilisi, 59.4 km from the Shaori Lake and 17.1 km from Shovi, at an elevation of 1,042 metres above sea level. Utsera is surrounded by pine woods, situated in the valley of the river of Rioni, providing opportunity for rafting.

Ambrolauri – Utsera 42km

Kutaisi - 117km

Tbilisi – 300 km

6.2.3 Climate

. The climate in Utsera is cold and temperate with significant rainfall. The average annual temperature is 7.7°C and the average rainfall is 962 mm. The warmest month is August with an average of 18°C and the coldest month is January with temperatures averaging -3.3°C.

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6.2.4 Mineral sources

. Utsera is famous for its healing mineral waters. 28 different mineral water types can be found here rich in calcium, iron, iodine and boron. These mineral waters are proven to be effective for treatment of various conditions, such as cholecystitis, cardiovascular disorders, chronic gastritis with normal and increased secretion, gastric and duodenal ulcer disease in remission phase, chronic colitis and enterocolitis, chronic hepatitis and angiocholitis, pancreatitis, chronic inflammation of the urinary system and peptic in postoperative period.

. The cold carbonaceous mineral water in Utsera is represented by three types of water: Utsera, Tersini and Darasuni, being suitable for bottling and balneotherapeutic purposes as well. The capacity of the three stations is 633m3 daily. The temperature of the waters range between 6°C and 14°C.

. One liter mineral water contains the following minerals:

o Cations: Sodium, Potassium, Magnesium, Calcium, Barium, Manganese, Copper and Titan;

o Anions: Fluorine, Chlorine, Bromine, Iodine, Sulfate and Bicarbonate.

. Remarkable specific components of the Utsera mineral waters are carbonic and metaboric acid. The water contains 6.5-11.0g sodium bicarbonate per liter. The Tersini mineral waters contain 4.6-5.7g bicarbonate sodium-calcium per liter, while the Darasuni mineral waters comprise 1.5-1.6g calcium bicarbonate per liter.

. Due to its medical benefits the mineral springs were used for balneotherapy and for extensive treatment. In the times of the Soviet Union the main consumers of these waters were pharmacy divisions of Ukraine, Kazakhstan and Crimea.

. In addition to mineral waters the high mountain climate presents the natural healing potential of Utsera.

Map of drill waters, located in Utsera

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6.2.5 Nature

. The village is surrounded by temperate forests of spruces, oaks, beech trees and chesnuts, serving home to deers, chamois, bears, wolves and other aninmals. Trout, salmon, common barbell and other fish species live in the river Rioni river. 6.2.6 Tourism

. Utsera is a proper starting point for hiking tours and for other outdoor adventures and also has the potential to accommodate a medhotel with related facilities based on the availability of mineral springs and resources. 6.3 Shovi

6.3.1 Status Quo

. The resort was founded in 1926 by Shamshe Lezhava, a doctor, who discovered the opportunities of the climate and mineral springs. Currently most of the territory is in private ownership.

. During the Soviet-era, Shovi was renown as a year-round resort destination primarily visited by Russian leisure tourists. After the dissolution

of the Soviet Union, visitation of Cottages in Resort Shovi Russian tourists has stopped resulting in the closure of the main service capacities leaving, the resort with all its facilities severely dilapidated. As of now, the Mamisoni Pass on the Georgian-Russian border is closed, making the resort’s accessibility rather cumbersome from Russia. Currently the resort serves 600-800 tourists per summer season.

. Besides the summer months, the once

frequented Shovi resort is completely Gate of former Resort Shovi abandoned. The buildings are in severely dilapidated condition, most of them in need of demolition.

. In addition to 2 hotels, operating only in the summer period, approximately 40 bungalows are situated there. Besides to Hotel Racha, the Hotel Sunset Shovi operates in Shovi resort. The property was opened in 2013, as the first hotel, representing higher quality in Racha, owned by Archi Group.

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6.3.2 Location

. Shovi-Resort is located in Oni Municipality, 1,520 metres above sea level, in the valley of Chanchakhi River, in close vicinity of village Glola. The resort is known for its alpine climate, high mountains, pine forests, fresh air and mineral springs. Shovi is officially named as a climatic destination. The climatic mountain health resort in upper Racha is 14 kilometres from Utsera, connected to Shovi by a dirt road crossing the central part of the Caucasus mountain range. Shovi can be accessed by car in about 1 hour from Utsera. The distance between Shovi and Ambrolauri is 56 km, 131 km to Kutaisi, and 314 km to Tbilisi.

Ambrolauri – 56 km Shovi

Kutaisi 131 km

Tbilisi – 314 km

6.3.3 Climate

. Shovi is surrounded by the mountains of the Caucasus and is characterised by subtropical climate. The area receives about 1,100 mm of rain each year. Most of the rain falls in spring and late autumn. According to the measurements of the meteorological station, located in Shovi, the sunshine duration in the area is 2,100-2,150 hours per year. Average relative humidity during the year is 60-70%. Wind direction changes by the season and the area often experiences Foehn winds. Due to the resort’s geographical location the average wind speed is, normally about 0.5-1 meter/second. 6.3.4 Mineral waters

. Shovi is famous for its mineral waters. Sixteen kinds of mineral water with different components were found in the area of Shovi. They are all rich in calcium but they all differ in their other components and their therapeutic properties. Shovi mineral waters contain calcium-, natrium-, magnesium hydro carbonates and also free carbonic acid gas. The climate and mineral waters are effective for treatment of respiratory, digestive and nervous system diseases.

. No.1 spring water source which is located on “Baristavi” on the north-west side of the resort territory and the spring water No.2 located 10 metres away from the No.1 spring, contains significant amount of sodium. No.11 spring water is located down the tourist base, on the left coast of the river Chanchakhi. This water contains larger amount of sodium than calcium. No.12 and No.11 waters contain largest amount of carbonic gas, about 1, 9-2, 2 gm. per liter water. No.8 water is located above the bridge on the right side of military road. No.3 (on “Baristavi”) near the No.1 water, No.12 (in the village Gloga), No.4, No.10 and No.5 waters are known as soda waters. No.13 water in Gloga is known as “stomach water”; No.7 located on the right side of river Buba is

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known as “radioactive spring water” but according to the analyses it contains very small amount of radio activeness. No.6 and No.9 waters also may be called as “high mineralisation waters”. Regarding the No.6, No.7 and No.9 waters, they are not used for treatment purposes as they contain low level of mineralisation and are soft drinking waters.

. Mineral waters of Shovi can be divided into two groups according to their treatment characterisation:

o Hydro Carbonate-calcium-sodium waters and;

o Carbon-dioxide-hydro carbonate-calcium waters.

. Besides of mineral waters Resort Shovi is also rich in cold rivers, streams and springs. There are rivers Chanchakhi, Chkhochuri, Buba and many little inflows. 6.3.5 Nature

. The resort is surrounded by mountains and forests, with a rich wildlife. Many wild animals live in the area, such as tur, chamois, roe, deer, bear, wolf, fox and lynx. 6.3.6 Tourism

. Besides of peak summer months the once frequented Soviet-style Shovi resort is completely abandoned, the hotels are opened only between June and October. The area could become a year- round mountain and climatic destination.

. There are three hiking routes, leading to the surrounding mountains:

Tourist Trail No.1: Shovi-Gurshevi o Easy;

o Distance: 4.3 km (one way);

o Duration: 3 hours;

o Season: June-September;

o Road signs: on trees, boulder, rocks, pole;

. The route begins near the bridge crossing the Chanchakhi river- where the border zone starts. The trail follows the ascent via the former settlement of Ghurshevi. Passing an old sanctuary, tombs and summer shelters, shepherds located on the way, the road leads to the right bank of the river Khamijauri all the way up to Ghurshevi glacier.

Tourist Trail No.2: Buba Glacier o Difficult;

o Distance: 7.8 km;

o Duration: 8 hours;

o Min. altitude: 1,490 m;

o Max. altitude: 2,505 m;

o Season: June-September;

o Road signs: on tree, stone, rock;

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o Mobile connection: partial.

. The route begins on the territory of the boarding house “Mamisoni” and follows the right slope of Bubistskhali (Buburi) River Valley. At 2,050 metres altitude from the dense forest the trail leads to the subalpine meadow, from which the Shodi massif Chkoshi valley and Buba mountain massif are observed. There are shepherds shelters at 2,170 metres altitude. The trail ends at the signed boulder on 2,300 metres altitude. Another 2 hour walk is needed to the bottom of the glacier.

Tourist Trail No.3: Shovi-Mamisoni Grasslands-Shepherds’ Shelter-The Tbilisa Glacier o Easy;

o Type: hiking, motor;

o Distance: 22.6 km (one way);

o Min. altitude:1,490 m;

o Max. altitude: 2,640 m;

o Season: June-September;

o Road signs: on the tree, stone, rock, pole;

o Mobile connection: N/A;

. The hiking trail begins in Shovi and follows the motor road leading to Chanchakhi river valley. The road leads to a serpentine and at 2,315 metres altitude divides in two directions. The route passes to the left side of the crossroad and leads to the Tbilisa Glacier. In good weather conditions, the shepherds’ shelter can be accessed by car passing Mamisoni Grasslands.

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7 GENERAL DEVELOPMENT OPPORTUNITIES AND BRANDING OF RACHA

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7.1 SWOT Analysis of Racha region

Highly attractive natural environment Peripheral location and cumbersome accessibility Water and mineral water resources Underdeveloped general infrastructure Fossil resources Challenging demographic situation Diverse flora and fauna Lack of qualified labour force Leisure/adventure/religious/sports tourism potential Low level of services/ absence of tourism related services Adventurous and versatile Closed border with Russia Unique and attractive local food and wines

Climatic and lake resort destination

Development of domestic leisure tourism Financial-economic crisis Utilisation of mineral water resources Destabilisation of political situation Large-scale investment opportunitites in cooperation with the Partnership Fund Permanent closure of the Mamisoni Pass border Increased attention and changing perception of Racha remains a remote touristic region Racha as both an investment opportunity and as a leisure tourism destination Construction of East-West Highway throughout Georgia which reduces the trip from Tbilisi to approximately 3-3.5 hours

. Based on information received from our Client, general infrastructural questions such as the road accessibility of Shovi will be resolved in the short to mid-terms.

. We also foresee that with generally improving physical conditions, the whole area would be perceived as an investor-friendly environment whereas businesses are not hindered by such external factors as e.g. roadblocks due to heavy snowfall.

. With regards to the challenging demographic satiation in Racha we believe that the ‘Mountain Law’ is a benefitial initiative to fight the overall weaknesses of the region, facilitate development and investment thus encouraging local people to work and live there. The effects of this law though will only be measurable in the long-run.

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. The question of qualified labour force should be addressed with the establishment of a high-school (secondary school) specialised in hospitality, hotel management and tourism.

. It is anticipated that after the major questions are addressed such as insufficient physical conditions of certain roads, with the advent of the first market entries, the whole region could anticipate to be stepping on the path of rapid economic growth. New businesses will attract not only tourists, but people who left their home towns for working in major cities.

. With regards to the closed border with Russia it is understood that long-term goals are reaching re- opening which could boost tourism in Racha.

. Factors identified as possible threats in our SWOT are general externalities which cannot be addressed in advance yet should be considered as potential risks prior to investment decisions.

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7.2 Overview and comments on the former and current strategies

. After the disintegration of the Soviet Union, governments have not focused on the existing and intensifying problems in the Georgian mountain regions for several years, leading to the current difficult social and economic situation of the regions. Formerly, a number of development concepts had been prepared in order to facilitate economic revival of the underdeveloped Racha region, but these generally failed due to funding problems. 7.2.1 Development strategy of the region for 2014-2021 years

. The government of Georgia approved the Development Strategy of the region in 2013. The document describes the Status Quo and main challenges of the region and reveals the main strategic directions of the development.

. The main development visions, strategic objectives, tasks and proposals are the following:

o Improvement of gradual extension of self-government authority and resources possibilities;

o Introduction of regional and municipal statistical data base and development of an effective monitoring and evaluation system in order to assess the achievements of the regional development strategy;

o More effective utilisation of natural resources: updating of the data base of existing natural resources, evaluation of the still unexplored resource potential, introduction of new management practices in order to protect natural heritage, development of forest management strategy;

o Supporting the development of the food industry in respect of the following products: mineral waters, fruits, ham, milk and wine;

o Supporting the development of extracting industry and the production of construction materials, decorating stones and plates;

o Supporting the development of wood processing and wood processing plants;

o Supporting the production and distribution of electricity and natural gas: supporting the utilisation of the renewable energy sources (e.g. sun energy, biogas resources), subsidisation of the construction and operation of small HPPs etc.;

o Supporting the development of the basic infrastructure and construction: complete the rehabilitation and regular maintaining of the road infrastructure, study the opportunities of the road construction between Mestia and Racha, creation of land development plans etc.

o Supporting the development of small and medium businesses development: increase availability of business education and different consulting services, supporting of labour resources training system, supporting local businesses to enter new markets, etc.;

o Preparation, management and implementation of programme and infrastructural initiatives: development of regional and municipal programmes, popularisation of different forms of tourism, establishment and operation of tourism information centres, construction of hotels, campings and restaurants;

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o Supporting the creation of the diverse tourist product and region advertising: development of tourist routes, organisation of sport events, popularisation of the local natural products, creation of special web sites, branners, maps and brochures, organisation of tourist exhibition etc.;

o Improvement of the tourist service level: Supporting the training of people working in tourism, award of the best tourism product, service;

o Development of the agriculture: Supporting of plant production and livestock breeding, Supporting of the special fund formation, the public-private partnership, introduction of food safety system, supporting of production and export of Racha wines etc.;

o Supporting the growth of foreign capital inflows: preparation of investment proposals in order to rise the investors’ interest towards the region, organisation of special business forums, creation, establishing of an institution, which will be responsible for the attraction of investors etc.;

o Place branding: Improvement of the region’s website, designation of the unique offerings of the region, creation of a brand name, slogan and logo etc.;

o Supporting the improvement of public services: development of drinking water supply, sewage system, power supply, public transport, communication services, educational institutions etc.;

. We believe that the Development Strategy properly identifies and summarises the current state of Racha and the development guidelines were accordingly marked. Nevertheless, it is considered inevitable designate measurement points, methods and to assign the responsible persons to each task.

. Our development concepts have been prepared and elaborated in accordance with the above development strategy goals.

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7.3 Domestic and international comparable areas and developments

. In this Chapter, we present the destinations playing a key role in the tourism of Georgia. We believe that all of the following destinations possess their own unique selling propositions and will present competition to Racha targeting the fairly limited domestic leisure tourism market of Georgia.

. However, we also believe that with our investment recommendations, Racha will be able to compete with the select competitors due to its identified USPs and branding in the mid-to long- terms, representing a reasonable option for domestic travellers. 7.3.1 Domestic comparable areas

Kazbegi Bakuriani

Tskaltubo Mestia

Borjomi Gudauri

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. Bakuriani is located about 175 km west of Tbilisi, on the northern slope of the Range, Bakuriani is one of the most important ski destinations in Georgia. At present, the total length of the ski runs amounts to approximately 8 kilometres with three difficulty levels. Winter season starts in December and lasts until April. Modern developed ski area Didveli (1,861m) and the oldest ski are Kokhta (2,155m). The destination is continuously upgrading its infrastructure, GRDC, the operator of one of the renovated ski lifts invested USD300,000 in the facility reconstructions in 2011. A private ski park (Joyland) also opened in that year, which offers an area for beginner skiers and a tube park. The development and rehabilitation of tourist infrastructure has begun in Bakuriani and in neighbouring village, Mitarbi. The aim of the project is to develop a skiing resort internationally perceived as high quality. The development of bike tracks in Bakuriani has also been begun with the goal of bringing additional tourist products to both ski resorts, contributing to the extension of the season. In addition to these developments a spa hotel also will be constructed owing to memorandum of agreement between Gino Invest and Partnership Fund. Bakuriani is not only visited in the winter, it is a four-season destination, offering tourists different attractions at all times of the year. The iconic ski resort is known for its climate as well: due to the coniferous forests in the area and high altitude, Bakuriani’s climate is known to have a beneficial effect on respiratory diseases.

. Mestia is situated in the Caucasus, near the Georgia-Russia border at an elevation of 1,450 metres. Mestia is an important cultural centre and a number of medieval monuments, churches and forts can be found here, which are part of the UNESCO World Heritage. Mestia itself is characterised by the medieval Svanetian towers, built mainly in the 9th- . The towers were built as protection from invaders and raiders. Instead of building a fortress or castle, each Svan family built their own defence tower. Mestia is also the starting point for trips to Ushguli, which is the highest altitude inhabited village of Europe. The region is popular among hikers; there are several trekking routes in the area. One of the most popular trips is the one to Mountain Ushba, the mountain offers dozens of hiking routes at different difficulty levels. Mestia has also started to emerge as a winter resort in the last years. More development projects are underway or have been recently announced in Mestia. The largest future investment is the development of Tetnuldi Ski Resort. The mountain resort will be open during all the seasons. The project started in 2013 and it is expected to be finish by the end of 2015. The project cost is estimated to reach EUR35 million, funded by Georgian and French governments. The resort will feature 5 cableway stations, 18 skiing paths (25km), administrative and other buildings, which are essential for mountain-skiing resort. In April, 2015 the development of Radisson Blu Mestia Hotel has been announced as well.

. Gudauri is located on the southern slopes of the Caucasus Mountain Range at an elevation of 2,196 meters above sea level, 120 km from Tbilisi. The resort is situated in the Stepantsminda District, along the Georgian Military Highway near the Cross Pass. Gudauri offers high-quality skiing opportunities, including free ride and heli-skiing from December to April. The total length of ski lifts in Gudauri amounts to around 10km. Gudauri has around 60 km of tracks with different levels of difficulty. The ultimate vision of the government of Georgia is the establishment of Gudauri-Kobi- Kazbegi as a world class mountain destination, with an outstanding leisure and recreation experience. Hotel Gudauri Marco Polo is the key market player in Gudauri, achieving average daily rate (ADR) well above the market average. The 123-key hotel offers a wide range of services, including a main restaurant, 3 bars (Lobby bar, Fit’o bar and Bowling bar), a Night Club, fitness

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centre and a spa area with and indoor pool, a conference hall and 5 meeting rooms, Sauna, Jacuzzi and Massage. The construction of the new Sheraton Hotel is under way in Gudauri. The expected opening date is winter season of 2016-2017. Sheraton Hotel is going to be the first internationally branded hotel in Gudauri. ‘Sheraton’ is part of Starwood Hotels & Resorts brand portfolio.

. Borjomi is situated in the southern-central part of Georgia, about 155 km west of Tbilisi at an elevation of 826 metres above sea level. The townlet is divided into two parts by the Kura river. Despite its small size, Borjomi is an important summer resort, where the famous mineral water spring and one of the largest National Parks of Europe can be found. Also the residence of Mirza Riza Khan, the ambassador of Persia to Georgia can be found here. The main natural resources of Georgia are mineral and thermal springs. Fifty resorts have been built across the country around springs, but the most famous is Borjomi in addition to Tskhaltubo. The more than 1,500-year old, naturally carbonated mineral water from spring in the Borjomi Gorge has made the town famous, especially in the ex-Soviet countries. The Borjomi water is recommended for intensive physical activity, working in hot climates or high temperature environments; for people living at high altitudes, for the treatment of diabetes and those on low calorie diets or who are underweight. ‘Borjomi’ TM is IDS Borjomi Georgia’s product, which is the biggest producer of natural mineral water in the CIS and the Baltics. Borjomi is also known for its sanatoria specialising in treatments of obesity, diabetes and gastronomic disorders. Due to the increasing demand in Borjomi two new internationally-branded hotels have been opened in 2015 and one of existing hotels, the Borjomi Palace Hotel & Spa has already expanded its capacity. The Rixos Borjomi was opened in May 2015, operating under a management agreement with Rixos. The construction of the new Crowne Plaza is under way on Baratshvili Street close to Borjomi Parki Railway Station. The expected opening date, that has been postponed already several times, is December of 2015.

. Tskaltubo is a spa resort in west-central Georgia, about 220 km from Tbilisi and 9 km from Kutaisi. It is famous for its radon-carbonate mineral springs, whose natural temperature of 33-35°C enables the water to be used without preliminary heating. The water chemical composition is very rare and complex and it does not change seasonally. The Tskaltubo water are effective for treatment of diabetes, indigestion, bronchial asthma, hypertension, gynaecological-, cardiovascular diseases and diseases of locomotor -, nervous and musculoskeletal systems. The first bath in Tskaltubo was opened in 1870. By the end of the 1980s the resort was the top tourist destination in the Soviet Union. Altogether 22 sanatoria, with a total bed supply of 5,800, operated there. In 1991, the development of the resort was halted. Today only one bath and a few hotels operate in the resort. Partnership Fund assigned an Austrian consulting company to prepare a development concept for Tskaltubo in 2014. The rehabilitation plans include restoration of thermal bathes, reconstruction of state-owned hotels, construction of modern hotels, development of spa and wellness tourism, construction of kids’ entertainment centres and water attractions etc. Tskaltubo has been marked as priority investment destination by Georgian National Investment Agency in 2015. The vision of GNTA is that Tskaltubo will be the number one medical and wellness destination in CEE for 2030.

. Kazbegi is located on the northern slopes of the Caucasus range. Kazbegi Mountain (Mkinvartsveri) is the third highest mountain in Georgia. Stepantsminda is a small town in the Mtskheta-Mtianeti region of north-eastern Georgia, located along the banks of the Terek River, 157 kilometres to the north of Tbilisi at an elevation of 1,740 metres above sea level. The Kazbegi border crossing point to Russia was opened in 2010. The only branded hotel in Kazbegi is the Rooms Hotel Kazbegi,

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featuring 156 rooms, lobby bar and restaurant with a terrace to the mountain view. The hotel is operated under Adjara’s ‘Rooms’ brand. Rooms Hotels are upscale design hotels aiming to target travellers seeking international ‘lifestyle’ products and atmosphere. We have identified a project, containing construction of a new 70-key 5-star hotel, a 4-star hotel with 120 rooms and 50 service apartments, a 200-key midmarket sports hotel, featuring gym, swimming pool and 400 chalets with service apartments in the pipeline. The estimated project costs amounts to USD100 million, co- financed by Partnership Fund and LTD Coordination Center for International Investment.

. The following table summarises three of the above described select destinations whereas we could source hotel market related data via market intelligence. Presented values are estimated market averages based on hotel properties found relevant to an assumed hotel project developed in the select destianations, respectively (relevant to our identified development recommendations in Racha):

Estimated Guest Volumes and Performance indicator ranges of comparable hotels in select destinations annually

Mestia Borjomi Gudauri

Relevant Hotel Room night sold 40-45,000 55-65,000 65-70,000

Relevant Net Average Daily Rates in Hotels USD 50-95 USD 65-140 USD 75-130

Estimated Hotel Occupancy 50-55% 45-65% 50-70%

Crowne Plaza in Radisson Blu Development pipeline opening phase, Park Sheraton Hotel Mestia Hotel Inn

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7.3.2 International comparable areas

. The following destinations are identified foreign destianations serving as an international outlook. These select destinations were deemed to have relevance to the subject project with regards to their physical, geogpraphical attributes or tourism potential.

Sovata- Bear LSovata Bear Lake,

The Skadar Lake, Montenegro-Albania The Red Lake, Romanianiahe

Issyk Kul Lake, Kyrgyzstan Sevan Lake, Armenia

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. The Red Lake is located in Romania in the Easter-Carpathians at an elevation of 983 metres above sea level. The lake with the surrounding forests is one of the most popular tourist destinations of the area. The water has reddish colour from the iron oxides and iron hydroxides in the alluvium. There has been a development of the tourist routes in the surrounding mountain hiking areas, but pollution of the water, caused by logging is a significant problem of the Red Lake area. Several hotels, guest houses and restaurants operate in the surrounding area and one of the most beautiful mountain sights in the Carpathians, Bicaz Gorge is also in the close vicinity of the location.

. Sovata is a spa resort in Mureş County, in central Romania with subalpine climate. The Bear Lake, the lake of the town is often called the “Dead Sea” of Transylvania, because of its high salt content. The water has a curative effect on mobility disorders, on inhalation and certain gynaecological or skin diseases. The mud from the water is also used for different medical treatments. The town has five more salty lakes: the Black Lake, the Green Lake, the Nut Lake, the Blackbird Lake and the Red Lake (not the same as the Red Lake mentioned before) Sovata is surrounded with hills and forests providing a perfect relaxation destination. The town with many hotels, guesthouses and restaurants serves as an excellent base for more-days Transylvania trips.

. Sevan Lake, the biggest lake of the Armenia, is situated in the central part of the country, in a mountain-enclosed basin, only 70 kms from Yerevan, the capital city. The surface of the lake is approximately 5,000 square km, which is 5% of Armenia’s territory. Since summers are extremely hot in the country, Sevan Lake is very popular among Armenians. Recently 11 public beaches were opened in the surrounding area with parking places, playgrounds and additional facilities, which are mostly free of charge. With the surrounding mountains and many ancient buildings and ruins in the area, the Sevan Lake is one of the most attractive destinations in Armenia. Sevanavank, the monastery in the peninsula of the lake is one of the most popular sights of the area. The peninsula also has an interesting history, since it once was an island and was reconnected with the land artificially during the Stalinist-era. Only the last year Sevan Lake experienced a number of 200,000 visitors.

. Lake Skadar is the biggest lake in the Balkan Peninsula (370-530 square kilometres depending on the season), located on the boarder of Albania and Montenegro. The area of the lake has a unique flora and fauna, for example it is a nesting place for more than 260 bird species. Nature on the Monetenegrin side is protected by a Natural Reserve. The karst lake is surrounded by mountains with little villages, picturesque roads and hiking routes and many historic villages. Lake Skadar as a destination offers several outdoor activities, such as biking, hiking, kayaking, boat-cruises, bird watching or caving in the neighbouring cave systems. The area is also a popular wine and gastro region, so it provides with indoor activities, too. The accommodation units are concentrated mainly in the bigger towns in the area primarily in Shkoder and Virpazar.

. Issyk Kul Lake is located in the North-Eastern part of Kyrgyzstan close to the Kazakh border, at an elevation of 1,600 metres above sea level, making the lake one of the highest of its type in the World. It is also the second largest saline lake after the Caspian-sea and was in ancient times a key location along the Silk Road. Issyk Kul Lake and its area is Kyrgyzstan’s most popular tourist destination. The lake and the Issyk Kul Region with its mountains offers various sports activities, such as wind-surfing, swimming, hiking, cycling, horse riding or skiing. The name of the lake name means “hot-lake” in Kirgiz, as it never freezes. The water temperature in summer on the surface is around 20-23 °C and in winter around 2-3° C. In order to save the lake from deterioration the

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government established the first natural reserve of the country, the Issyk Kul State Natural Reserve in 1948. Small hotels and guest houses operate all around the lake. Although the tourist season usually lasts from June until September, some of them are open throughout the year. The northern shore of the lake is for beach and spa tourists, while Karakol and the eastern shore is where trekking lines and ski routes can be reached. Tourism infrastructure development in the region is a named priority of the Kyrgyz Government.

Estimated Guest Volumes and Performance indicator ranges of comparable hotels in select destinations annually

Lake Skadar, Issyk Kul The Red Lake, Sovata, Sevan Lake, Albania - Lake, Romania Romania Armenia Montenegro Kyrgizstan

Relevant Hotel Room night sold 25-35,000 60-75,000 50-80,000 75-100,000 40-55,000

Relevant Net Average Daily Rates USD 25-50 USD 45-85 USD 60-85 USD 50-80 USD 30-55 in Hotels

Estimated Hotel Occupancy 55-70% 60-75% 50-65% 50-75% 40-60%

5-star hotel with 150-key 120-room no announced no announced 190 rooms Development pipeline international independent hotel hotel project hotel project (Turkmenian hotel investor)

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7.4 Racha as a tourism brand

7.4.1 Tourism Destination Management Organisations

. A destination is a physical location, where tourists spend at least one night and it offers tourist attractions, products and services. Destination has an image, perception and also has its physical and administrative limits, which are determining its management.

. ‘The Tourism Destination Management is the ensemble of activities which are necessary for a destination to attract visitors and to provide perfect travel experience for them during their stay. This should be done in such a way that the impacts of tourism are advantageous in the long term, for all the local stakeholders as well as for the natural environment’. (Lengyel,M.2007)

. Decisions are made with the contribution of persons being interested. TDMs have the suitable independence (own resources and means) needed to the execution of its decisions.

. Common characteristics of a TDM include the following:

o Being an independent, non-profit, self-maintaining organisation, financed by membership fees, municipalities and tender funding;

o Bottom-up organisational structure;

o A membership – based organisation comprised of a mixture of public, private, non-profit, and academic tourism stakeholders from the region;

o Managed by a board of directors or executive committee harmonising the membership and the composition of the destination;

o Comprehensive and detailed set of regulations and laws published and available to any interested party;

o Services mostly provided free to end users.

. The brand and image development process is usually financed by Municipalities of certain regions, and the more municipalities are interconnected under TDM umbrellas, the more easier the financing could become. In Georgia, at first, we suggest that the commissioning of the Brand Communication Agency could be considered to be facilitated jointly by the State and the respective regions.

. To present an operational TDM organisational structure, we shortly present the structure of the Hungarian TDM system: The Hungarian TDM system is a hierarchically structured organisational unit. Its base is formed by the community-based organisations (often on the level of smaller villages/cities). The micro-regional alliances unite the local organisations. The regional organisations are made of micro-regional alliances. The peak of the system is the national organisation.

. The structure of Hungarian TDM system and the possible structure of Georgian TDM system are presented in the following page.

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Hungarian National Tourist Georgian Tourism Office Board Regional Organisations

Regional Organisaitons: e.g. Racha region Micro-regional Organisations

Micro-regional and local Organisations could be merged in Georgia. Local Organisations

Structure of Hungarian TDM system Possible Structure of Georgian TDM system

. The presentation of the Hungarian TDM organisational and financing structure serves as an example (international outlook) whereas the presented approach and structure proves to be an operational and sustainable model which is also supported and funded by the European Union (larger value tenders for support of TDMs).

. At the same time we would encourage a further outlook and detailed analysis of international best practices of both vertical and horizontal TDM structure models before establishing the one in Georgia.

. The first local TDM organisation in Hungary was established in the village of Gyenesdiás in 2008, based on Austrian best practice example. The number of such organisations has reached approximately 85 by 2015. The relatively quick growth of TDMs was largely supported by available state and EU funding (tenders). The first regional TDM organisation was established around Lake Balaton in 2011 comprising the formerly independent community-based organisations.

. In Hungary, the government had approved 15 operational programmes in the framework of the “New Hungary Development Plan” (NHDP), with a total available fund of approximately USD23 milliard between 2007 and 2013 with the assistance of the European Union (EU).

. The Regional Operative Programmes (ROP) of the New Hungary Development Plan (NHDP) for 2007- 2013 included assistance to the establishment of TDM network in all regions.

. The EU also provides resources on the modernisation of the tourism institutional system in its budgetary period of 2014-2020.

. Currently within the framework of Economic Development and Innovation Operational Programme, co-financed by European Regional Development Fund and Hungarian government, the opportunity is opened to newly establish more TDM organisations in Hungary. The planned financial support amounts to approximately USD6.6 million. The applicant organisations apply for a non-refundable funding, between the minimum of USD34,000 and maximum of USD289,000 million.

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. The project has to contribute to the growth of tourists’ number and tourists’ expenditure, to the extension of the season, to the increase of business opportunities in the region and to the growth of the TDM organisation, with the involvement of further enterprises.

. The following, non-exhaustive list contains the activities of TDM organisations, which can be supported within the framework of above-mentioned Operational Programme:

o Product Development (Elaboration or update of a tourism development concept for a destination, appointment of thematic routes, construction of visitor centres etc.);

o Raising awareness, Education and Trainings (Participation in vocational trainings, specialised in tourism destination management, Foreign practice by a TDM organisation, Participation in a foreign field trip etc.)

o Marketing activities (Local promotion and marketing activities, Development of tourism database, Development of Information and Communication System, International promotion of the destination, Creation of thematic tour packages etc.)

o Monitoring (Creation and operation of a local monitoring database, Quarterly reports on activities of TDM organisation).

. Racha TDM organisation should be established by the participations of hotels, restaurants, children camp, transportation and any service provider companies, operating in the region.

. The estimated annual budget of Racha TDM organisation could be as follows:

Revenues of Racha TDM Organisation

Regional Government 50% USD15,000

Municipalities 25% USD7,500

Members of TDM Organisation 25% USD7,500 Costs of TDM Organisation

Salaries 27% USD8,000

Office rental 20% USD6,000

Advertisement,Marketing 30% USD9,000

Product development 13% USD3,900

Telecom 2% USD600

Other (Trainings) 8% USD2,400

. It is fair to state that during the first couple of years, the state/regional government has to have the leading role in financing this initiative in the absence of operational hotels, restaurants, taxi and travel companies, etc. Later on, as more private investments will be on track, those businesses, becoming members of the TDM, would be more and more involved in the contribution of financing (in a linearly growing share).

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7.4.2 Creating of a place brand

. Place branding (including place marketing and place promotion) is a new umbrella term encompassing nation branding, region branding and city branding.

. ‘Place brand’ is the network of associations in the consumers’ mind based on the visual, verbal, and behavioural expression of a place, which is embodied through the aims, communication, values, and the general culture of the place’s stakeholders and the overall place design.’ (Braun,E.2010)

. Creation of marketing and branding strategies in order to promote a region and thereby attract residents, tourists, businesses, investments there and to differentiate the place in question from its competitors received significant attention in the recent years.

. The process of place branding underlines both the tangible and intangible values and qualities to which the brand must refer through the perception, image and reputation of the place or region. Communication strategy is implemented through the invention of, and adherence to, a ‘place narrative’, which in emphasising the values of the place, may generate emotions in addition to its certified qualities.

. The branding of places and destinations can be more challenging process than the branding of goods and services. During the process the following components should be taken into consideration: community, heritage, history and culture of a region given the fact that a place brand is based on a complex assembly of cultures, places, milieus, products and scales of reference.

. The challenge of the process is to combine the involvement of numerous stakeholders and different organisations and to integrate the specificities of different places making up the particular geographic entity.

. Aims of place branding:

o Create a perception of one geographical entity in the minds of the target audiences;

o Unique selling proposition: creating something unique;

o Offer the same guarantees of quality;

o Strengthen the image of a destination;

o Contribute to the economic, political and cultural development of a region;

o Transfer positive associations from the single entities to the new interregional brand.

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7.4.3 Best practice: Valais – ‘Engraved on my heart’

. The following chapter presents the place branding of the Canton Valais in Switzerland.Valais is known as a successful and sustainable place branding case in Europe that can be utilised as a destination marketing best practice. With regards to its physical attributes there are parallel characteristics of the region with Racha and is in possession of USPs that we would emphasise in Racha as well (such Landscape in Canton of Valais as the nature – mountains, mountain

rivers, attractive local (regional) gastronomy, etc). Naturally “Valais” – just as any other selected destination – has different characteristics in many other aspects, such as socio-economic-political environment but we believe that the Swiss canton could serve as a good example when taking the first steps of creating a place brand in Racha.

. Valais is undoubtedly one of Switzerland’s most unique places, where most of the 4,000-metre mountains of Switzerland are situated. The French – German bilingual Canton is famous for its landscapes, its climate, its living traditions and its local products.

. The Canton Valais is a bilingual and mountainous Swiss canton, possessing several emblematic attractions (e.g. Matterhorn – one of the best known mountains of the world, Abbey of Saint- Maurice – the oldest monastery in the Western world, Grand Dixence – the world’s highest gravity dam) and unique productions those related to cheese, fruit and wine.

. The Valais brand is promoted by the non-profit association Marque Valais (AMVS) that was renamed the Association des Enterprises Valais Excellence (AVEX) in 2013. The origin of this change dates back to 1998, when the sustainable development chapter was adopted by the Valais Parliament, thereby providing the basis for the project. In 2003, it was decided to abandon the individual brands of the agricultural and tourism sectors for a single brand.

. During the creation of the Valais brand, the canton was to attempt to achieve a regional consensus. The organisational innovation of the Valais brand consists of getting around the problem of organisation in terms of sectors and associations and offers a direct contract to entrepreneurs who are ready to adapt to its requirements. The strength of the process lies in the fact that it is an individual and voluntary procedure for joining the ‘club’. The idea is to move forward with those who actively support the approach and accept it constraints.

. The Valais brand association combines two types of labelling: the Valais brand itself and the Valais excellence label, an international certification for local products and services. The aim of promoting the Valaisan economy outside the region, transferring the qualities of its local area and its inhabitants to the goods and services produced

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there. The Valaisan brand with the label and the brand are two complementary tools.

. The Valais excellence label was created to distinguish the most successful and the most citizen friendly companies in the Valais region. Its aim is to provide consumers with different guarantees on behalf of the certified business: the Valais region origins of the company, its management quality (ISO 9001 award for quality), its environmental responsibility (ISO 14001 award for environmental factors) and its commitment to corporate responsibility in environmental and social matters.

. The Valais brand is a collective and multi – sector trademark whose principle function is to promote the Valais region within the consumer and tourism markets and displayed by all emblematic products of the region (the idea of the basket of goods) and in all communications relating to them. Through the Valais brand the consumer can be sure about acquiring a product of high quality which also comes from a company aware of the value of its production line and conscious of its respect for the environment and of its social impact. To obtain the right to carry this emblem synonymous with quality, the products are subjected to a selective procedure, validated by an audit carried out by a qualified and neutral organisation.

. The brand logo, like the Swiss national flag, is more than an emblem; it is a communication tool and conveys the message that the canton is a concentrated version, possibly even the essence, of the Switzerland of mountains.

. The first objective of this multi-sector brand is to promote the Valais both among consumers and visitors. It is therefore a tool that provides its beneficiaries with support on terms of communications, enabling them to position themselves in the market through the reputation of the brand.

. By 2013, the Valais brand had thus attracted a little more than a hundred members from fields from administration and viticulture, included private schools, industrial firms, tourism offices and banks. The Valais brand appeals first and foremost to the tourism and agricultural sectors.

. In addition to the above, Valais provides practical assistance to help enterprises increase their competitiveness. To achieve this, the Government created the ‘Foundation The Ark’, promoting the development of new knowledge originating from Switzerland’s universities of applied sciences and from cantonal and national research organisations.

. For potential investors a Handbook was created in order to provide valuable and necessary information about technologies, production costs, taxes, financing, the legal system and infrastructure. The book, which is easily accessible on the internet, contains the key advantages of investing in Valais, which are the following: production costs, taxes, infrastructure, new technologies, financing and legal matters.

. Broschures were printed in order to promote the activities, destinations of the canton and to showcase regional products and dishes, culture and customs, industry and economy, education and research and hospitality, local tourist information centres are operated all year round in the canton.

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. The agency, Valais/Wallis Promotion (is in charge of the place branding strategy of Valais) operates as a competence centre in communication and promotional activities mainly for the tourism, agriculture, industry and business sectors. The following, non-exhaustive list contains the aims of the agency:

o Generate significant added value for the Valais economy;

o Develop awareness of the Valais brand;

o Create and operate a marketing and information centre for the Canton’s economy;

o Foster the quality of services offered in the Valais through the brand and the excellence label;

o Increase business opportunities for the Canton.

. As of today 323 companies, operating in Valais Canton are members of the agency.

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7.4.4 Branding of Racha in practice

. Racha should appear in the tourism market as a brand that could compete with and differentiate itself from the established tourist resorts in Georgia, such as Bakuriani, Gudauri or Borjomi. The brand message shall not be similar to other well-known Georgian destinations.

. In the brand communication, the following natural resources and features of the region shall be communicated: ‘The Lake, The River, The Mountains’ and ‘remote, untouched, adventurous and versatile’.

. Racha shall be branded as the ultimate place for families and friends for vacations – close to nature with modern services and quality environment.

. It is impossible to build and maintain a strong brand without collaboration agreements between the government and local councils, private enterprises and associations, the tourism industry and local communities.

. Based on the model of Valais a ‘Basket of local products’ should be created which are able to promote the region’s offerings and economy outside the region.

. In order to make the region and the brand itself fully accessible to partners, a highly strengthened online presence of Racha region is of crucial importance; therefore a modern website should be prepared.

. The welcome page has to reflect the innovative approach of the region by publishing fresh news about the region. The website should contain all the necessary information on tourist services (hotels, restaurants), tourist attractions and accessibility of the region.

. A short, but attractive and informative video should be uploaded to the new website, representing the region’s uniqueness. Professional media and social media (Facebook, Twitter, Foursquare and Youtube) management is necessary to create brand awareness.

. During construction periods, the region’s new logo and molinos should be present and clearly visible at the construction sites in Racha and at multiple locations of Tbilisi and Kutaisi as part of Racha’s new marketing campaign.

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. We recommend the introduction of the ‘Racha tourist card’, which, in addition to a set of free services, provide users discounts of between 8% and 15% off the end price of various services to facilitate growth in the number of visitations of service providers and increase average spending in Racha. The detailed description of the proposed Racha tourist card is presented in Chapter 8.5.

Please see Pages 04-05 of the attached Map and Picture Gallery.

. Creating brand merchandise is one of the ways to create brand awareness and facilitate spreading the brand name to potential tourists. Gifts such as fridge magnets, T-shirts, coasters, baseball caps, mugs and postcards shall be produced. The brand name and brand slogan shall be marked on them. These products should be accessible for tourists at tourist information centres and in hotels of the region.

. We believe that a professional Brand Communication Agency shall be assigned in order to create the unique Racha brand.

7.4.4.1 Brand pillars

. The primary stage of building the brand is defining its main components and values. Establishing the so called ‘Brand Pillars’ should serve as the basis for building the brand.

. These pillars summarise the region’s approach, its most important and unique characteristics and the principles that the company would like to communicate through the brand, that are consistent with the region’s long-term strategy.

. This is an internal process through which the TDM Organisation enlists its potential strengths, competitive advantages and creates the aforementioned ‘Brand Promise’ and image.

. Once the brand pillars are established, all company output (brochures, presentations, advertisements) should be aligned to reflect and communicate these elements, so a consistent image is achieved.

. After defining the pillars, continuous ongoing evaluation and possible recalibration and adjustments are also required.

. Brand Asset Valuation (BAV) is a method also based on Brand Pillars that reflects on the inter- relation of four of these pillars, and concludes, that a brand’s success depends on differentiation from the competition and the relevance of that differentiation.

. BAV methodology considers the common ground of how the brand is communicated and how it is perceived.

. This method should serve as the basis for constant evaluation of the Racha brand. The four listed pillars should be considered from time to time from the viewpoint of Racha, to implement necessary adjustments.

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Differentiation Relevance Esteem Knowledge •The brands point of •How appropiate the •How well regarded the •An intimate difference. brand is to you. brand is. understanding of the brand.

Whilst Differentiation summarises the product’s unique features, Relevance deals with how these features count for the potential customers, Esteem and Knowledge form the stature of the brand.

. The following section summarises the specific characteristics of Racha that can be also utilised through this ‘Brand Pillar’ concept in establishing a successful brand for Racha.

. The proposed Brand Pillars of Racha are the following:

o Highly attractive natural environment: ‘The Lake, The River, The Mountains’;

o Developed tourism infrastructure, high quality accommodation and restaurants, significant cultural and leisure offers;

o Local identity, Bonding to traditions;

o Openness and warm welcome.

7.4.4.2 Main messages

. The function of a region brand slogan is to get across the brand’s identity in a way that positions the brand in the perception of travellers. A good slogan is catchy, short; it conjures up positive imagery about the region and gives tourists a reason to visit it.

. The main messages of Racha shall mediate that the region is an ideal place for recreation, that it possesses an untouched nature and that it is a place where culture and recreation meet.

. The proposed brand slogan could be the following: ‘Racha – Relax – Recover’.

7.4.4.3 Target markets

. We believe that the main target market of our developments shall be domestic tourists.

. For the region under study, we have identified two key demand generating sectors: Leisure (including FIT, Curative and Tour Groups) MICE (Meetings, Conferences and Seminars)

. In the following we present the key characteristics of these sectors:

Leisure Demand (FIT, Curative and Tour groups)

. As earlier discussed and elaborated in our Report, Racha is – and will remain – a leisure destination with visitors and commercial accommodation guests accounting for at least 85-90% of the total demand on an annual basis.

. Leisure guests will represent the highest proportion in the business mix of the developments, accounting for about 90% of the arrivals. As long as our development proposals will be realised, the individual demand is likely to grow significantly.

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. Leisure demand is highly seasonal with peaks during April, May, June, July, August, September and October months, and international holidays (New Year’s Day, Orthodox Christmas Day, and Orthodox Easter). During weekends there can be a high concentration of FIT travellers in Racha, but during the peak months remarkable midweek volume occurs too.

. In terms of pricing, the e-channels and the Internet sources are playing roles of growing importance.

. This segment also includes the traditional coach groups and group of budget leisure travellers, students and seniors and also curative guests seeking better climate in a mountaineous environment. Leisure tourism segment includes adventure tourism (rafting, hiking, off-track) and also hunting as well.

Residential conference guests (MICE)

. With the advent of the proposed new hotel capacities, we foresee that MICE guests, primarily in the form of incentive and larger (at least 2-day-long) corporate trainings could take place in Racha in spite of its relatively distant location from the capital.

. With regards to the general demand characteristics of the MICE segment we can conclude that the segment as the one that consists of small business groups or individuals that participate at meetings, seminars, and conferences within the hotels’ premises.

. Organisers locate these events at quality hotels where high-technology services, efficient catering and additional leisure facilities (e.g. swimming pool, fitness/wellness area) are available.

. Demand is mainly concentrated in the weekdays, with the exception of private corporate parties that are primarily taking place at the weekends. The seasonality within the segment is also dependant on investment projects, activities and schedules of international organisations, state and municipal authorities, therefore, demand usually peaks in spring and autumn.

. The majority of these events are small and mid-scale seminars, symposia, meetings, training sessions, incentive trips and conferences (with 20-100 participants respectively) held by either domestic or international companies or organised by the Georgian state, the municipality of Tbilisi, international funds, financial institutions, embassies and aid organisations. The majority of demand originates from Tbilisi or other major cities.

. This segment will account for about 10-15% of the guests.

Business Demand . Based on our forecasts this segment will play a very marginal role in the tourism market of Racha in the short-to mid-terms. With a possible future strong and gradual economic growth and increasing volume of investments accompanied by the inflow of new companies, Business demand will appear in hotels offering higher quality.

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Market Target Subcategories of the Duration of Place of Proportion of Peaks customer segment stay origin demand April, May, June, July, August, Georgia, FIT, Curative, Tour September and Leisure 3-7 days Russia, 85-90% groups, Adventure October Azerbaijan months, and international holidays

Incentive guests and MICE 2-3 days Georgia 10-15% weekdays corporate trainings

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8 IDENTIFIED PROJECT DEVELOPMENT OPPORTUNITIES IN RACHA REGION

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8.1 Base assumptions of our development concept and financial projections

. We have identified our development proposals in Racha based on the following base assumptions:

o Rehabilitation of the 15-kilometre-long road between Utsera and Shovi;

o Installation of gas-, water-, electricity-, and wastewater network, running to the identified development sites;

o Construction of slip roads to the identified development sites;

o Accessibility to the proposed themed routes all-year - Ensuring of roads’ de-icing and snow clearing;

o Development of public transport in the region and installation of bus stops around recommended project sites;

o Modern waste management should be introduced and maintained by the State;

o Installation of tourism information tables, promoting the tourist attractions of the region and marking the themed routes and the existing hiking routes;

o Installation of toilettes at each stop of the routes;

o Establishment of sales outlets such as gift shop and mini markets for traditional goods at every second stop of the routes;

o Installation of streetlights along the themed routes if it is not existing yet;

o Construction of parking facilities, also suitable for medium-sized buses;

o Developments are implemented until 2019.

o Establishment of tourist offices/tourist information points at Shaori Lake and in Shovi resort. Information points should be operated by the Georgian National Tourism Administration, with regards to the fact that GNTA has been operating some tourists centres across the country for several years. The offices should be open at least between 10:00 a.m. and 18:00 p.m. every day;

o The revenue and expense schedules and structures of the proposed internationally-branded hotels (Shaori Lakeside Hotel and Spa, Shovi Climatic Resort Hotel and Spa) are based on the globally used and accepted Uniform System of Accounts for the Lodging Industry.

o Our financial projections have been prepared in USD and are shown in 2014 values without the benefits of inflation (non-inflated).

o Rooms Supply (Rooms Available) means the number of rooms in the hotel multiplied by the number of operating days in a year.

o Rooms Demand (Rooms Sold) means the number of rooms sold in a year.

o Number of room stocks of the proposed hotels were determined based on the following factors at each identified hotel development project, respectively:

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. overall attractiveness of both the micro-area and the specific location;

. future tourism potential of the destinations;

. architecturally harmonising capacities;

. cap of capacity due to being an untested market;

. slower market penetration and performance build-up than in other emerging yet more established locations across Georgia;

. minimum room numbers were also determined based on the expectations of international hotel companies seeking schemes to allow for maximised profitability;

. best practice capacities for optimised operational effectiveness;

. avoidance of potential room oversupply.

o Based on our international experience and on the identified characteristics of each studied location, it is fair to say that whilst Shovi and Shaori both are in possession of the characteristics of becoming potential international hotel projects and be put on the radar- sreen of hotel companies, Utsera is a less ideal location for such development compared to Shaori and Shovi. Taking into account Utsera’s attributes as a tourism destination, we found it more prudent to recommend a property that could maximise the profitability potential of the selected development plot in a way of not being pressured by international overhead costs. As Utsera has a history of offering a sanatorium to domestic and Russian guests, we recommend the capitalisation on this history and be branded as a “MedHotel” offering balneo-treatments to its guests. Generally speaking, international hotel companies very rarely accept such non-standard facilities as medical facilities which at this case, being an untouched market for these companies, make the project non-market conform. Based on the above, an 80-room, independent hotel property is a fair and sound investment recommendation to make.

o We have been informed that the Government is continuing intense negotiations to introduce loan interest rate subsidies for hotel development projects under certain market circumstances. As at the time of the issuance of this report the bill is a draft bill, this subsidy is not materialised in our financial projections. However, we would like to note that shall such subsidy be introduced and shall the subject project be eligible, Internal Rate of Return (IRR) figures could noteably further improve.

o As the “Law of Georgia on the Development of High Mountainous Regions” comes in to force from the 1st January 2016, businesses are waived from profit tax payment for the first 10 years of operation which subsidy is to support profitability of private businesses. Our financial calculations has been prepared without profit tax (excluding profit tax) as profit taxes are understood to be effected by various internal and external influences (other corporate conditions) therefore is not part of the international financial projections (prepared by the standards of the Uniform System of Accounts for the Lodging Industry).

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8.2 Shaori Lake concept and product development

8.2.1 Former Plans

. We have received the former ‘Master plan of land use of Shaori tourist-recreation complex Project compositions’. The plan summarises the general status of Shaori Lake and the general, especially legal conditions of tourism development opportunities at Shaori Lake, but it does not contain any concrete tourism development proposals (exception of some potential tourist routes). 8.2.2 Development recommendations

Proposed developments at Shaori Lake Internationally branded hotel, lake-view, full-service 4-star 1 hotel with 125 rooms

2 40 chalets

3 Restaurant and Hotel with 100 seats and 10 hotel rooms 4 27.5 km long, 3 m wide promenade around the Lake 5 Playground 6 Tourist Information Centre 7 4 ports 8 3 bus stops 9 Look-out tower 10 Phase II: Midmarket hotel with 100 rooms Please see Pages 07-11 of the attached Map and Picture Gallery.

. Adjacent to the main road (Kutaisi-Tkibuli-Ambrolauri) we have identified a state-owned plot where we identified the development opportunity of an internationally branded, full service, 4-star wellness hotel, under the proposed name of Shaori Lakeside Hotel and Spa.

. This site is situated at the north side of the Shaori Lake. The Lake has a good quality road access from direction of Kutaisi and Ambrolauri.

. The suggested site (plot No.: 86.11.26.137, the only potential development site at the Shaori Lake, the other unregistered lands are forest zones, defended by the law and it is prohibited cutting down of them, thus it is not available for commercial use and development) with its harmonious lakeside location, East-South-West orientation 86.11.26.137 and with the exciting view is suitable for the designed development with its outdoor wellness.

. Water supply and electricity are available. There is no information about gas and wastewater utilities.

. The proposed hotel could commence operation starting as of January 2019, 2019 being the first full financial year.

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. We have prepared our financial projections for 125 keys, taking into account the optimal size for an internationally branded, lake view, full service 4-star hotel considering the anticipated future demand and supply conditions.

Please see Pages 11-15 of the attached Map and Picture Gallery. Other possible architectural examples can be found on Pages 16-18.

. We assume the hotel will be run by an international management company, with various benefits, such as: o Being part of an organisation with an existing, extensive sales network; o Access to experienced, competent management staff and human resources; o Access to time-tested training programmes, policies and procedures; o Benefits of economies in scale in some instances of purchasing, marketing; o The benefit of support for the interior design and the time-to-time refreshment of the hotel and its rooms.

. We believe, the hotel should comprise of the following facilities:

o Bar/lobby bar with a terrace, and a main all-day restaurant;

o 125 hotel rooms;

o Limited conference facilities;

o Complex, lakeview indoor wellness and spa facilities;

. Based on our international experience, we propose the following room mix: 75 standard rooms, 43 deluxe rooms, 5 junior suites and 2 suites. The final room-mix should reflect the requirements set by the proposed international operator. We recommend that as many rooms should face the Lake as architecturally possible.

. In our opinion, the proposed internationally branded hotel will immediately be able to tap into the domestic hotel market in leisure guest segment due its unique location, anticipated international brand, general quality standards, complemented with highly attractive exterior and interior design. The business-mix of the hotel will be dominated by individual travellers, who have probably already visited the main leisure destinations (Borjomi, Kazbegi etc.) of Georgia.

. The future brand and international operation standards will all contribute to the hotel quickly achieving a competitive position.

. Food and beverage facilities should comprise a main all-day restaurant with terrace to cater for breakfast, lunch and dinner needs with 110 seats, a Bar/Lobby Bar with 50 seats and terrace and in- room minibars.

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Proposed location for Shaori Lakeside Hotel and Spa State-owned plot at Shaori Lake

. Based on our financial projections, the business-mix of the Shaori Lakeside Hotel and Spa will be as follows: 62.5% - FIT (Free Independent travellers), 20%- Tour groups, 13.5% - MICE, 2% - Business and 2% - Other.

. In an adjacent plot of the proposed hotel we recommend the development of 40 private chalets of high build quality with private saunas/hot tubs for sale. Three types (standard, deluxe and luxury) of chalets, differing in their sizes (60sqm, 90 sqm and 150 sqm) should be constructed.

. Northern from the proposed hotel where the main road almost reaches the shore, an independently operated restaurant & hotel enjoying excellent visibility and accessibility should be constructed.

. The restaurant shall have an attractive lakeside terrace.

. The development shall comprise of the following facilities:

o a 100 seat capacity restaurant;

o 10 hotel rooms above the restaurant.

. The 10 hotel rooms will represent no competition to the branded ‘Shaori Lakeside Hotel and Spa’ in any target segments. The small room capacity will rather aim to target transit guests and leisure/special interest travellers on smaller budget.

. Besides constructing commercial real-estate properties, other general infrastructure and tourists attractions need to be built to achieve a complex development that possesses overall tourism attractiveness.

. The following elements of development are seen as necessary to ensure the future success of the main revenue sources:

. We recommend the construction of a 27.5 km long promenade around the lake with bicycle path.

. Next to the restaurant a tourist information centre and a kids playground of European standards should be constructed. The aims of the tourist information centre operated by GNTA are to provide information on tourist attractions of Racha, to sell Racha tourist card and to promote the whole region as a tourism destination.

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. 4 small-to-mid-sized lake ports should be also constructed for electric and traditional boats. We envision that besides to the hotel guests, tourists, travelling to Racha would also stop at Shaori Lake. We propose also berths for rental for guests, possessing own boats.

. 3 bus stops for easy accessibility for local population should be constructed.

. We also recommend constructing a look-out tower, at the south lakeside adjacent to the bridge, crossing the lake at its narrowest point.

. We envisage that after the realisation of the proposed developments, further phased hotel and other service provider developments might follow and the Shaori Lake could gradually become an iconic place of leisure holidays in Georgia, “the little Garda Lake of Georgia”. The Shaori Lake will be famous for its high-quality services, water sport and outdoor activities.

Development recommendations at Shaori Lake

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8.2.3 Financial projections

8.2.3.1 Shaori Lakeside Hotel and Spa – internationally operated & branded hotel

. The table below summarises the key market and performance indicators for the property for its first five years operation, derived from our findings regarding the market of relevance, its evolution and the hotel’s performance.

Year 2019 2020 2021 2022 2023

Market Information

Supply (rooms) 306,410 319,010 319,010 319,010 319,010

Demand (roomnigths) 116,040 121,765 127,792 133,952 139,571

Market Occupancy 38% 38% 40% 42% 44%

Supply Growth Rate 48% 4% 0% 0% 0%

Demand Growth Rate 5% 5% 5% 5% 4%

Property Information

Rooms Available 45,625 45,625 45,625 45,625 45,625

Number of Rooms Sold 20,565 22,420 23,851 25,372 26,822

Occupancy 45.1% 49.1% 52.3% 55.6% 58.8%

ADR (USD) 94 100 106 112 116

RevPar (USD) 42 49 55 62 68 Revenue per Sold Room (USD) 174 182 189 197 203

Fair Share 13% 13% 13% 13% 13%

Market Share 15% 16% 16% 16% 16% Market Penetration Index (MPI) 116% 124% 126% 127% 129%

. The tables overleaf show the projected Profit & Loss Projections for the property for its first five years operation in non-inflated USD and for its first 10 years operation in inflated USD.

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Profit & Loss Projections Shaori Lakeside Hotel non inflated USD

2019 2020 2021 2022 2023

in USD 1.000 % in USD 1.000 % in USD 1.000 % in USD 1.000 % in USD 1.000 % Departmental Revenues Rooms 1 934,8 54,1% 2 247,7 55,1% 2 525,6 55,9% 2 832,2 56,6% 3 097,9 56,9% Food 1 009,7 28,2% 1 127,7 27,6% 1 224,8 27,1% 1 334,5 26,7% 1 442,1 26,5% Beverage 393,7 11,0% 441,1 10,8% 480,3 10,6% 524,8 10,5% 568,4 10,4% Other Rev. F&B 2,2 0,1% 2,6 0,1% 3,1 0,1% 3,5 0,1% 4,0 0,1% Communication 1,1 0,0% 1,2 0,0% 1,3 0,0% 1,4 0,0% 1,4 0,0% Minor Operating 198,4 5,5% 220,5 5,4% 236,5 5,2% 255,3 5,1% 271,6 5,0% Rental 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% Other Income 35,8 1,0% 40,8 1,0% 45,2 1,0% 50,0 1,0% 54,4 1,0% Total Revenues 3 575,7 100,0% 4 081,6 100,0% 4 516,7 100,0% 5 001,7 100,0% 5 439,9 100,0%

Cost of Sale Food 353,4 35,0% 383,4 34,0% 404,2 33,0% 427,0 32,0% 447,1 31,0% Beverage 98,4 25,0% 105,9 24,0% 110,5 23,0% 118,1 22,5% 125,1 22,0% Communication 0,3 25,0% 0,3 25,0% 0,3 25,0% 0,3 25,0% 0,4 25,0% Minor Operating 29,8 15,0% 32,1 14,5% 33,1 14,0% 34,5 13,5% 33,9 12,5% Total Costs 481,9 13,5% 521,6 12,8% 548,1 12,1% 579,9 11,6% 606,4 11,1%

Direct Labour Costs Rooms 207,3 10,7% 216,9 9,7% 231,8 9,2% 241,8 8,5% 249,6 8,1% Food and Beverage 382,9 27,2% 420,4 26,8% 456,0 26,7% 477,7 25,6% 477,7 23,7% Communication 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% Minor Operating 63,3 31,9% 70,6 32,0% 88,3 37,3% 89,2 34,9% 89,2 32,8% Other 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% Total Payroll 653,4 18,3% 707,9 17,3% 776,1 17,2% 808,7 16,2% 816,5 15,0%

Direct Departmental Expenses Rooms 143,2 7,4% 161,8 7,2% 176,8 7,0% 192,6 6,8% 201,4 6,5% Food and Beverage 132,1 9,4% 144,6 9,2% 153,7 9,0% 160,2 8,6% 167,2 8,3% Communication 0,0 1,0% 0,0 1,0% 0,0 1,0% 0,0 1,0% 0,0 1,0% Minor Operating 15,7 7,9% 16,8 7,6% 17,0 7,2% 17,9 7,0% 18,7 6,9% Rental 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% Other 2,3 6,5% 2,6 6,3% 2,7 5,9% 2,8 5,5% 2,7 5,0% Total Direct Departmental Expenses 293,3 8,2% 325,7 8,0% 350,2 7,8% 373,4 7,5% 390,0 7,2%

Departmental Profits Rooms 1 584,3 81,9% 1 869,0 83,1% 2 117,0 83,8% 2 397,7 84,7% 2 647,0 85,4% Food and Beverage 438,8 31,2% 517,2 32,9% 583,8 34,2% 679,8 36,5% 797,5 39,6% Communication 0,8 74,0% 0,9 74,0% 0,9 74,0% 1,0 74,0% 1,1 74,0% Minor Operating 89,7 45,2% 101,0 45,8% 98,1 41,5% 113,8 44,6% 129,7 47,8% Rental 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% Other 33,4 93,5% 38,2 93,7% 42,5 94,1% 47,3 94,5% 51,7 95,0% Total 2 147,0 60,0% 2 526,3 61,9% 2 842,3 62,9% 3 239,6 64,8% 3 627,0 66,7%

Undistributed Expenses Labour Costs Administration & General 254,7 7,1% 257,3 6,3% 259,8 5,8% 262,4 5,2% 262,4 4,8% POMEC 20,0 0,6% 20,2 0,5% 30,6 0,7% 30,9 0,6% 30,9 0,6% Sales & Marketing 123,2 3,4% 124,4 3,0% 125,7 2,8% 126,9 2,5% 126,9 2,3% Total Payroll 397,9 11,1% 401,9 9,8% 416,1 9,2% 420,2 8,4% 420,2 7,7%

Other Expenses Administration & General 175,2 4,9% 191,8 4,7% 194,2 4,3% 200,1 4,0% 206,7 3,8% Sales & Marketing 150,2 4,2% 163,3 4,0% 171,6 3,8% 180,1 3,6% 185,0 3,4% Energy and Utilities 429,1 12,0% 477,5 11,7% 514,9 11,4% 560,2 11,2% 587,5 10,8% POMEC 107,3 3,0% 118,4 2,9% 122,0 2,7% 130,0 2,6% 136,0 2,5% Total Other Expenses 861,7 24,1% 951,0 23,3% 1 002,7 22,2% 1 070,4 21,4% 1 115,2 20,5%

Total Undistibuted Expenses 1 259,6 35,2% 1 352,9 33,1% 1 418,8 31,4% 1 490,6 29,8% 1 535,4 28,2%

GOP (Gross Operating Profit) 887,4 24,8% 1 173,5 28,7% 1 423,5 31,5% 1 749,0 35,0% 2 091,6 38,4% Fixed Charges Management Fee 196,0 5,5% 239,8 5,9% 277,9 6,2% 325,0 6,5% 372,4 6,8% Rent, Taxes & Insurance 35,8 1,0% 40,8 1,0% 45,2 1,0% 50,0 1,0% 54,4 1,0% Reserve for FF&E 35,8 1,0% 61,2 1,5% 90,3 2,0% 125,0 2,5% 163,2 3,0% Total Fixed Charges 267,5 7,5% 341,8 8,4% 413,4 9,2% 500,0 10,0% 589,9 10,8%

EBITDA (Operating Net Income) 619,9 17,3% 831,6 20,4% 1 010,1 22,4% 1 249,0 25,0% 1 501,6 27,6%

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 116

Profit & Loss Projections Shaori Lakeside Hotel inflated USD

2019 2020 2021 2022 2023 1,091 1,116 1,142 1,169 1,196

in USD 1.000 % in USD 1.000 % in USD 1.000 % in USD 1.000 % in USD 1.000 % Departmental Revenues Rooms 2 111,4 54,1% 2 509,5 55,1% 2 884,7 55,9% 3 309,6 56,6% 3 703,6 56,9% Food 1 101,9 28,2% 1 259,1 27,6% 1 399,0 27,1% 1 559,5 26,7% 1 724,1 26,5% Beverage 429,6 11,0% 492,5 10,8% 548,7 10,6% 613,2 10,5% 679,6 10,4% Other Rev. F&B 2,4 0,1% 2,9 0,1% 3,5 0,1% 4,1 0,1% 4,7 0,1% Communication 1,2 0,0% 1,3 0,0% 1,5 0,0% 1,6 0,0% 1,7 0,0% Minor Operating 216,5 5,5% 246,1 5,4% 270,2 5,2% 298,4 5,1% 324,7 5,0% Rental 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% Other Income 39,0 1,0% 45,6 1,0% 51,6 1,0% 58,4 1,0% 65,0 1,0% Total Revenues 3 902,1 100,0% 4 557,0 100,0% 5 159,1 100,0% 5 844,8 100,0% 6 503,4 100,0%

Cost of Sale Food 385,7 35,0% 428,1 34,0% 461,7 33,0% 499,0 32,0% 534,5 31,0% Beverage 107,4 25,0% 118,2 24,0% 126,2 23,0% 138,0 22,5% 149,5 22,0% Communication 0,3 25,0% 0,3 25,0% 0,4 25,0% 0,4 25,0% 0,4 25,0% Minor Operating 32,5 15,0% 35,8 14,5% 37,8 14,0% 40,3 13,5% 40,6 12,5% Total Costs 525,9 13,5% 582,4 12,8% 626,0 12,1% 677,7 11,6% 725,0 11,1%

Direct Labour Costs Rooms 226,2 10,7% 242,2 9,7% 264,8 9,2% 282,6 8,5% 298,4 8,1% Food and Beverage 417,9 27,2% 469,3 26,8% 520,8 26,7% 558,2 25,6% 571,1 23,7% Communication 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% Minor Operating 69,0 31,9% 78,8 32,0% 100,9 37,3% 104,2 34,9% 106,6 32,8% Other 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% Total Payroll 713,1 18,3% 790,3 17,3% 886,5 17,2% 945,1 16,2% 976,1 15,0%

Direct Departmental Expenses Rooms 156,2 7,4% 180,7 7,2% 201,9 7,0% 225,0 6,8% 240,7 6,5% Food and Beverage 144,2 9,4% 161,4 9,2% 175,6 9,0% 187,2 8,6% 199,9 8,3% Communication 0,0 1,0% 0,0 1,0% 0,0 1,0% 0,0 1,0% 0,0 1,0% Minor Operating 17,1 7,9% 18,7 7,6% 19,5 7,2% 20,9 7,0% 22,4 6,9% Rental 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% Other 2,5 6,5% 2,9 6,3% 3,0 5,9% 3,2 5,5% 3,3 5,0% Total Direct Departmental Expenses 320,1 8,2% 363,7 8,0% 400,0 7,8% 436,4 7,5% 466,3 7,2%

Departmental Profits Rooms 1 729,0 81,9% 2 086,6 83,1% 2 418,0 83,8% 2 801,9 84,7% 3 164,5 85,4% Food and Beverage 478,8 31,2% 577,5 32,9% 666,8 34,2% 794,4 36,5% 953,4 39,6% Communication 0,9 74,0% 1,0 74,0% 1,1 74,0% 1,2 74,0% 1,3 74,0% Minor Operating 97,9 45,2% 112,8 45,8% 112,0 41,5% 133,0 44,6% 155,1 47,8% Rental 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% Other 36,5 93,5% 42,7 93,7% 48,5 94,1% 55,2 94,5% 61,8 95,0% Total 2 343,1 60,0% 2 820,6 61,9% 3 246,5 62,9% 3 785,7 64,8% 4 336,1 66,7%

Undistributed Expenses Labour Costs Administration & General 278,0 7,1% 287,2 6,3% 296,8 5,8% 306,7 5,2% 313,7 4,8% POMEC 21,8 0,6% 22,5 0,5% 34,9 0,7% 36,1 0,6% 36,9 0,6% Sales & Marketing 134,4 3,4% 138,9 3,0% 143,5 2,8% 148,3 2,5% 151,7 2,3% Total Payroll 434,2 11,1% 448,7 9,8% 475,2 9,2% 491,1 8,4% 502,4 7,7%

Other Expenses Administration & General 191,2 4,9% 214,2 4,7% 221,8 4,3% 233,8 4,0% 247,1 3,8% Sales & Marketing 163,9 4,2% 182,3 4,0% 196,0 3,8% 210,4 3,6% 221,1 3,4% Energy and Utilities 468,3 12,0% 533,2 11,7% 588,1 11,4% 654,6 11,2% 702,4 10,8% POMEC 117,1 3,0% 132,2 2,9% 139,3 2,7% 152,0 2,6% 162,6 2,5% Total Other Expenses 940,4 24,1% 1 061,8 23,3% 1 145,3 22,2% 1 250,8 21,4% 1 333,2 20,5%

Total Undistibuted Expenses 1 374,6 35,2% 1 510,5 33,1% 1 620,6 31,4% 1 741,9 29,8% 1 835,6 28,2%

GOP (Gross Operating Profit) 968,5 24,8% 1 310,1 28,7% 1 626,0 31,5% 2 043,8 35,0% 2 500,5 38,4% Fixed Charges Management Fee 213,9 5,5% 267,7 5,9% 317,4 6,2% 379,7 6,5% 445,1 6,8% Rent, Taxes & Insurance 39,0 1,0% 45,6 1,0% 51,6 1,0% 58,4 1,0% 65,0 1,0% Reserve for FF&E 39,0 1,0% 68,4 1,5% 103,2 2,0% 146,1 2,5% 195,1 3,0% Total Fixed Charges 292,0 7,5% 381,7 8,4% 472,1 9,2% 584,3 10,0% 705,3 10,8%

EBITDA (Operating Net Income) 676,5 17,3% 928,5 20,4% 1 153,8 22,4% 1 459,5 25,0% 1 795,2 27,6%

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 117

Profit & Loss Projections Shaori Lakeside Hotel inflated USD

2024 2025 2026 2027 2028 1,223 1,251 1,280 1,310 1,310

in USD 1.000 % in USD 1.000 % in USD 1.000 % in USD 1.000 % in USD 1.000 % Departmental Revenues Rooms 3 789,0 56,9% 3 876,4 56,9% 3 965,8 56,9% 4 057,2 56,9% 4 057,2 56,9% Food 1 763,8 26,5% 1 804,5 26,5% 1 846,1 26,5% 1 888,7 26,5% 1 888,7 26,5% Beverage 695,2 10,4% 711,3 10,4% 727,7 10,4% 744,5 10,4% 744,5 10,4% Other Rev. F&B 4,8 0,1% 4,9 0,1% 5,1 0,1% 5,2 0,1% 5,2 0,1% Communication 1,8 0,0% 1,8 0,0% 1,8 0,0% 1,9 0,0% 1,9 0,0% Minor Operating 332,2 5,0% 339,8 5,0% 347,7 5,0% 355,7 5,0% 355,7 5,0% Rental 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% Other Income 66,5 1,0% 68,1 1,0% 69,6 1,0% 71,2 1,0% 71,2 1,0% Total Revenues 6 653,4 100,0% 6 806,8 100,0% 6 963,8 100,0% 7 124,4 100,0% 7 124,4 100,0%

Cost of Sale Food 546,8 31,0% 559,4 31,0% 572,3 31,0% 585,5 31,0% 585,5 31,0% Beverage 153,0 22,0% 156,5 22,0% 160,1 22,0% 163,8 22,0% 163,8 22,0% Communication 0,4 25,0% 0,5 25,0% 0,5 25,0% 0,5 25,0% 0,5 25,0% Minor Operating 41,5 12,5% 42,5 12,5% 43,5 12,5% 44,5 12,5% 44,5 12,5% Total Costs 741,7 11,1% 758,8 11,1% 776,3 11,1% 794,2 11,1% 794,2 11,1%

Direct Labour Costs Rooms 305,2 8,1% 312,3 8,1% 319,5 8,1% 326,8 8,1% 326,8 8,1% Food and Beverage 584,3 23,7% 597,7 23,7% 611,5 23,7% 625,6 23,7% 625,6 23,7% Communication 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% Minor Operating 109,1 32,8% 111,6 32,8% 114,2 32,8% 116,8 32,8% 116,8 32,8% Other 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% Total Payroll 998,6 15,0% 1 021,6 15,0% 1 045,2 15,0% 1 069,3 15,0% 1 069,3 15,0%

Direct Departmental Expenses Rooms 246,3 6,5% 252,0 6,5% 257,8 6,5% 263,7 6,5% 263,7 6,5% Food and Beverage 204,5 8,3% 209,2 8,3% 214,0 8,3% 219,0 8,3% 219,0 8,3% Communication 0,0 1,0% 0,0 1,0% 0,0 1,0% 0,0 1,0% 0,0 1,0% Minor Operating 22,9 6,9% 23,4 6,9% 24,0 6,9% 24,5 6,9% 24,5 6,9% Rental 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% Other 3,3 5,0% 3,4 5,0% 3,5 5,0% 3,6 5,0% 3,6 5,0% Total Direct Departmental Expenses 477,1 7,2% 488,1 7,2% 499,3 7,2% 510,8 7,2% 510,8 7,2%

Departmental Profits Rooms 3 237,5 85,4% 3 312,1 85,4% 3 388,5 85,4% 3 466,7 85,4% 3 466,7 85,4% Food and Beverage 975,4 39,6% 997,9 39,6% 1 020,9 39,6% 1 044,5 39,6% 1 044,5 39,6% Communication 1,3 74,0% 1,3 74,0% 1,4 74,0% 1,4 74,0% 1,4 74,0% Minor Operating 158,6 47,8% 162,3 47,8% 166,0 47,8% 169,9 47,8% 169,9 47,8% Rental 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% Other 63,2 95,0% 64,7 95,0% 66,2 95,0% 67,7 95,0% 67,7 95,0% Total 4 436,1 66,7% 4 538,3 66,7% 4 643,0 66,7% 4 750,1 66,7% 4 750,1 66,7%

Undistributed Expenses Labour Costs Administration & General 321,0 4,8% 328,4 4,8% 335,9 4,8% 343,7 4,8% 343,7 4,8% POMEC 37,8 0,6% 38,6 0,6% 39,5 0,6% 40,4 0,6% 40,4 0,6% Sales & Marketing 155,2 2,3% 158,8 2,3% 162,5 2,3% 166,2 2,3% 166,2 2,3% Total Payroll 514,0 7,7% 525,8 7,7% 538,0 7,7% 550,4 7,7% 550,4 7,7%

Other Expenses Administration & General 252,8 3,8% 258,7 3,8% 264,6 3,8% 270,7 3,8% 270,7 3,8% Sales & Marketing 226,2 3,4% 231,4 3,4% 236,8 3,4% 242,2 3,4% 242,2 3,4% Energy and Utilities 718,6 10,8% 735,1 10,8% 752,1 10,8% 769,4 10,8% 769,4 10,8% POMEC 166,3 2,5% 170,2 2,5% 174,1 2,5% 178,1 2,5% 178,1 2,5% Total Other Expenses 1 363,9 20,5% 1 395,4 20,5% 1 427,6 20,5% 1 460,5 20,5% 1 460,5 20,5%

Total Undistibuted Expenses 1 877,9 28,2% 1 921,2 28,2% 1 965,5 28,2% 2 010,9 28,2% 2 010,9 28,2%

GOP (Gross Operating Profit) 2 558,1 38,4% 2 617,1 38,4% 2 677,5 38,4% 2 739,2 38,4% 2 739,2 38,4% Fixed Charges Management Fee 455,4 6,8% 465,9 6,8% 476,7 6,8% 487,7 6,8% 487,7 6,8% Rent, Taxes & Insurance 66,5 1,0% 68,1 1,0% 69,6 1,0% 71,2 1,0% 71,2 1,0% Reserve for FF&E 199,6 3,0% 204,2 3,0% 208,9 3,0% 213,7 3,0% 213,7 3,0% Total Fixed Charges 721,6 10,8% 738,2 10,8% 755,2 10,8% 772,6 10,8% 772,6 10,8%

EBITDA (Operating Net Income) 1 836,6 27,6% 1 878,9 27,6% 1 922,3 27,6% 1 966,6 27,6% 1 966,6 27,6%

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 118

8.2.3.2 Shaori Restaurant and Hotel

. The tables below show the key market and performance indicators for the Shaori Restaurant and Hotel with the capacity of 100 seats and 10 hotel rooms for its first ten years operation and the projected Profit & Loss Projections for its first 10 years operation.

Shaori Restaurant and Hotel

YEAR 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

No of rooms 10 10 10 10 10 10 10 10 10 10

Operating Days 365 365 365 365 365 365 365 365 365 365 Available Rooms 3,650 3,650 3,650 3,650 3,650 3,650 3,650 3,650 3,650 3,650

45% 48% 51% 54% 57% 57% 57% 57% 57% 57% Occupancy Double Occupancy 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 Factor

Total Room 1,643 1,752 1,862 1,971 2,081 2,081 2,081 2,081 2,081 2,081 Nights

Total Guest 2,464 2,628 2,792 2,957 3,121 3,121 3,121 3,121 3,121 3,121 Nights

Average Room 49.0 50.5 52.0 53.5 55.0 55.0 55.0 55.0 55.0 55.0 Rate (net, net)*

22.1 24.2 26.5 28.9 31.4 31.4 31.4 31.4 31.4 31.4 REVPAR*

Net Room 80,483 88,476 96,798 105,449 114,428 114,428 114,428 114,428 114,428 114,428 revenue* *all values in USD

Anticipated revenues of the restaurant component

Capacity: 100 seats

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Turnaround count 0.4 0.5 0.6 0.7 0.7 0.7 0.7 0.7 0.7 0.7

Covers per day 40 45 55 65 70 70 70 70 70 70

Covers per week 280 315 385 455 490 490 490 490 490 490

Average gross cover with bev* 13.5 13.8 14.0 14.3 14.5 14.5 14.5 14.5 14.5 14.5

Net revenues* 197,100 225,844 281,050 338,081 370,475 370,475 370,475 370,475 370,475 370,475

*all values in USD

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 119

Overall profitability of Shaori Restaurant and Hotel all values in USD 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 Room Revenues 80,483 88,476 96,798 105,449 114,428 114,428 114,428 114,428 114,428 114,428

F&B Revenues 197,100 225,844 281,050 338,081 370,475 370,475 370,475 370,475 370,475 370,475 Total Revenues 277,583 314,320 377,848 443,530 484,903 484,903 484,903 484,903 484,903 484,903

Total costs 178,343 202,629 246,040 290,911 318,267 318,267 318,267 318,267 318,267 318,267

Salaries 55,517 62,864 75,570 88,706 96,981 96,981 96,981 96,981 96,981 96,981

FC:Food 35,872 41,104 51,151 61,531 67,426 67,426 67,426 67,426 67,426 67,426

FC:Drinks 14,783 16,938 21,079 25,356 27,786 27,786 27,786 27,786 27,786 27,786

Utilities 27,758 31,432 37,785 44,353 48,490 48,490 48,490 48,490 48,490 48,490

Maintenance 5,552 6,286 7,557 8,871 9,698 9,698 9,698 9,698 9,698 9,698

Equipment and supplies 13,879 15,716 18,892 22,176 24,245 24,245 24,245 24,245 24,245 24,245

Marketing 8,327 9,430 11,335 13,306 14,547 14,547 14,547 14,547 14,547 14,547

Other 2,776 3,143 3,778 4,435 4,849 4,849 4,849 4,849 4,849 4,849

Administration and General 13,879 15,716 18,892 22,176 24,245 24,245 24,245 24,245 24,245 24,245 Gross Operating Profit 99,240 111,691 131,808 152,619 166,635 166,635 166,635 166,635 166,635 166,635

FF&E 6,940 7,858 9,446 11,088 12,123 12,123 12,123 12,123 12,123 12,123

Taxes and Insurance 2,776 3,143 3,778 4,435 4,849 4,849 4,849 4,849 4,849 4,849

EBITDA 89,524 100,690 118,583 137,096 149,664 149,664 149,664 149,664 149,664 149,664

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 120

8.2.3.3 Shaori Chalets

. The following tables summarise the investment cost of chalets around Shaori Lake and the anticipated revenues from the chalet sales.

SHAORI CHALETS

Net sellable area Gross area (sqm) Price per sqm Total sales price* (sqm)

Standard 60 48 4,000 192,000

Deluxe 90 72 4,250 306,000

Luxury 150 120 4,500 540,000

*all values in USD

Investment cost in USD/unit Gross area Net sellable Price per sqm Total sales price* (sqm) area (sqm)

Standard 60 48 1,300 78,000

Deluxe 90 72 1,600 144,000

Luxury 150 120 1,700 255,000

Real estate roll-out scheme

Types of units 2018 2019 2020 Total number per type

Standard 23 3 1 27

Deluxe 4 3 2 9

Luxury 2 1 1 4

Total number of units sold 29 7 4 40

Revenue projections - Net sales Proceeds (all 2018 2019 2020 values in USD)

6,720,000 2,034,000 1,344,000

Related costs 873,600 264,420, 174,720

Marketing (5%) 336,000 101,700 67,200

Legal (1%) 67,200 20,340 13,440

Other (0.5%) 33,600 10,170 6,720

Total costs 436,800 132,210 87,360

5,846,400 1,769,580 1,169,280

Total Sales Proceed w/o investment cost 8,785,260

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 121

8.2.4 Investment Costs

. The table overleaf shows the respective and total investment volumes needed for the realisation of the identified development opportunities broken down to project elements.

. Investment volumes of the respective project elements have been calculated based on international benchmarks and both Georgian and international project experience of our professional team.

. The investment summarisation also indicates our recommendation of the share and duties of investment between the public and private sectors whereas the public sector is primarily represented by the PF and the State, whilst the private sector is represented by the possible future international and Georgian private investors or development companies interested in the identified investment opportunities.

. “Estimated total investment volumes” column show the total investment need of the project elements which is broken down to shares in the adjacent columns in case of recommended joint venture financing structure. Financing structure and designated stakeholders of project elements are marked with an “x” in columns.

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 122

Indicative Investment Budget for the Identified Development Opportunities in Racha

Estimated Total Estimated Investment Volumes and Recommended Investment Sources of Financing Volumes

Quantity Unitary Destinations Facility Unit Price Total in USD Public Private Joint / volume Base

x in USD x in USD x Shaori

"Shaori Lakeside Hotel and Spa": a 125 rooms 120,000 USD/room 15,000,000 7,500,000 7,500,000 X 125-Room Internationally Branded Hotel Commercial USD/chalet Real Estate Chalets 40 chalets 110,550 4,422,000 2,211,000 2,211,000 X (avg.) Development Riverside restaurant 375 m2 1,100 USD/m2 412,500 X 412,500

(100 seats) Hotel rooms of riverside 10 rooms 35,000 USD/room 350,000 X 350,000

restaurant

Garden 40,000 m2 40 USD/m2 1,600,000 800,000 800,000 X

Kids 1,500 m2 150 USD/m2 225,000 X 225,000 playground View point 1 260,000 X 260,000 Service Infrastructure Port 4 38,000 USD/port 152,000 X 152,000

Development Tourist information 1 160,000 X 160,000

centre USD/bus Bus stop 3 3,200 9,600 X 9,600 stop Road (hotel 5,000 m2 95 USD/m2 475,000 X 475,000 access) Parking 3,000 m2 130 USD/m2 390,000 195,000 195,000 X

Walkway 2,000 m2 75 USD/m2 150,000 75,000 75,000 X (chalets)

Promenade (3m wide road 27,500 m 225 USD/m 6,187,500 X 6,187,500 around the General lake) Infrastructure Electric supply 10,000 m 80 USD/m 800,000 X 800,000 Development Water supply 1,500 m 80 USD/m 120,000 X 120,000 (min.) Gas supply 1,500 m 80 USD/m 120,000 X 120,000 (min.) Wastewater 1,500 m 95 USD/m 142,500 X 142,500 (min.) Transformer 1 64,000 USD/p 64,000 X 64,000

Fence 1,600 m 65 USD/m 104,000 52,000 52,000 X

Contingency 2,491,528 1,525,888 965,640 (8%)

Shaori Sub 33,635,628 20,599,488 13,036,140 Total . Total volume of assumed investment costs amount to USD33,635,628, broken down to USD20,599,488 supported by public sector and USD13,036,140 generated by private investors.

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 123

. Based on international benchmarks and best practice, we have determined hotel development budget on a per key (guestroom) basis taking into consideration the hotel project’s attributes, future market positioning and service level. In the following, we present the breakdown of estimated development budget based on our project experience and international hotel companies (non-published) development guidelines. The presented figures exclude costs of technical assistance provided by the future international operator (not identified at this stage of the project).

. The 125-key Shaori Lakeside Hotel and Spa has a project budget of US$120,000 per key (guestroom). With its proposed capacity of 125 guestrooms, gross total budget is estimated to achieve US$15 million comprising the following cost-breakdown:

Calculation of the Gross-Investment Costs for Shaori Lakeside Hotel and Spa in USD 1,000 per Room Number of guestrooms 125 Gross Investment Costs 120 Total Investment without Land 15,000 thereof in USD 1,000 % of Total in USD 1,000 Substructure 3.0% 450 Superstructure 34.0% 5,100 Internal Finishes 13.0% 1,950 Fittings, Furnishings & Equipment 10.0% 1,500 Services (utilities, technical infrastructure) 25.0% 3,750 External works 5.0% 750 Other (preliminaries, overheads) 10.0% 1,500 Total 100.0% 15,000

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 124

8.3 Utsera concept and product development

8.3.1 Former Plans

. Based on information received by the local government, no official development plans have been prepared yet for Utsera. 8.3.2 Development recommendations

. The proposed plot (plot No.: 88.09.28.007, the only one land in Utsera, owned by the government) for the development is a state-owned area, situated not far (200m) from the main road (Kutaisi-Tkibuli- Ambrolauri). Given the fact that access road is a dust road, the construction of the road is also a part of the development. 88.09.28.007 Please see Pages 20-21 of the attached Map and Picture Gallery.

. Thanks to its upper position a quite calm and interesting view is provided. We can see the snowy mountains over Shovi and the ridges towards Shkmeri.

. Due to the slope of the plot the view from the restaurant and the hotel is not disturbed by the parking area.

. Gas network is constructed up to Oni only. Other public utilities (electricity, water supply) are available but there is not certain information about wastewater utility.

. Utsera has an existing good quality road access from Ambrolauri and the road between Utsera and Shovi is going to be finished by the end of 2016.

. On the plot there is the ruin of a former sanatorium, in need of demolition.

. The identified available plot is a suitable and recommended place for the development of the subject project. Based on information received from our Client, that the State has (preliminary) plans for developing a water bottling plant on the subject site. In case this water bottling plant development plan would be finalised, we can state that our recommended development concept is general and can be implemented on a substitution land assuming similar physical attributes (accessibility, visibility, attractive environment) thus could also replace the select site and accommodate the same or very similar concept and facility mix.

. We suggest and encourage, that the State or Partnership Fund should invite the neighbouring investor and attempt to create a joint venture for the implementation of the proposed project or any other tourism related projects that fit the profile and characteristics of Racha and Utsera, in particular. The main pillars of the JV should be the provision of the land plot, state subsidies and the water concession with access to wells as contribution in kind by the State or Partnership Fund, whilst the input of the investor should be balanced accordingly (e.g. investment/development funds and activities). We strongly encourage the Georgian State and Partnership Fund to invite the neighbouring investor as any pending legal situation does no

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 125

good to the perception of the State from an international point of view. The State should consider to grant or provide the required water concession and access to the wells with the primary intention to support and impetus measurable and equal private investment in return to strengthen Racha's economic and tourism potential. We also suggest that water bottling factory should be placed outside of the settlement of Utsera in order to avoid any negative visual and noise effects.

. On the state-owned plot we propose the construction of an 80-key, independent (non-branded), midmarket hotel with spa and medical mineral water based treatment rooms.

. The moderate size, naturally lit wellness facilities, facing at the mountains include a larger spa treatment centre, offering revitalisation programmes and wellness treatments (drinking, bathing, tangentor etc.) based on the curative effects of Utsera mineral waters.

. The hotel should be surrounded by a relax garden for the hotel guests with benches, lights and a mineral water source.

. The hotel should also comprise of a parking space for cars of guests and tourist buses as well.

. Due to the development Utsera and the hotel will be known as the ‘home of rejuvenation’.

. Room sizes shall be between net. 21 and 38 sqms.

. The proposed ‘MedHotel Utsera’ could commence operation starting as of May 2019, 2020 being the first full financial year.

Former Sanatorium on the state-owned plot View from the development site, green surroundings

. Food and beverage facilities should comprise a main all-day restaurant of higher quality to cater for breakfast, lunch and dinner needs of hotel guests and the participants of the organised excursion, with 150 seats. The restaurant showcases Racha’s most traditional dishes and ingredients incorporating traditional preparation methods and equipment. If needed the territory of the restaurant should be divided into several parts by mobile walls.

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 126

. In a separate bigger naturally lit room a showroom and shop of local and merchandise products, wines, and mineral waters with a presentation of bottling of mineral waters of Utsera should be placed.

Please see Pages 22-27 of the attached Map and Picture Gallery.

. In order to utilise the mineral waters the service provider has to possess a licence. According to the law, the exact location of target area has to be announced to the Ministry of Environment and Natural Recourses. The licence can be acquired within the framework of auction. The price of license cannot be estimated in advance. After the acquirement of the license, according to the law, for using Utsera mineral waters in purpose of bottling (for drinking-curing) fee is GEL4,0 for 1m3 and for using Utsera mineral waters in purpose of external usage (healing baths) fee is GEL0,04 for 1m3. Payments should be made quarterly, but no later than the 15th day of the quarter’s following month.

. The license fee for mineral waters in Utsera is assumed to be a minor operating cost of the hotel.

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 127

8.3.3 Financial projections

8.3.3.1 Medhotel Utsera

. The tables below show the key market and performance indicators for the Medhotel Utsera for its first 10 years operation and the projected Profit & Loss Projections for its first 10 years operation.

Medhotel Utsera - House of Gastronomy and Showroom

Room Revenues Estimation

YEAR 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

No of rooms 80 80 80 80 80 80 80 80 80 80

Operating Days 245 365 365 365 365 365 365 365 365 365

Available Rooms 19,600 29,200 29,200 29,200 29,200 29,200 29,200 29,200 29,200 29,200

40% 43% 46% 48% 51% 51% 51% 51% 51% 51% Occupancy

Double Occupancy 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 Factor

7,840 12,556 13,432 14,016 14,892 14,892 14,892 14,892 14,892 14,892 Total Room Nights

14,112 22,601 24,178 25,229 26,806 26,806 26,806 26,806 26,806 26,806 Total Guest Nights

Average Room Rate 41 43 45 47 49 49 49 49 49 49 (net, net)*

16.4 18.5 20.7 22.6 25 25 25 25 25 25 REVPAR*

321,440 539,908 604,440 658,752 729,708 729,708 729,708 729,708 729,708 729,708 Net Room revenue* *all values in USD

F&B revenues

Capacity: 150 seats

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 turnaround count 0.4 0.4 0.5 0.6 0.6 0.6 0.6 0.6 0.6 0.6 covers per day 53 60 75 90 90 90 90 90 90 90 covers per week 368 420 525 630 630 630 630 630 630 630 average gross cover with bev.* 13.0 13.3 13.5 13.8 14.0 14.0 14.0 14.0 14.0 14.0 net revenues* 167,213 291,270 369,563 453,330 459,900 459,900 459,900 459,900 459,900 459,900 *all values in USD

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 128

Hotel Spa Treatment revenues

YEAR 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

17 19 20 21 22 22 22 22 22 22 No of guests per day

16 16 17 17 18 18 18 18 18 18 Average check*

67,738 110,518 119,679 128,667 140,729 140,729 140,729 140,729 140,729 140,729 total revenue* *all values in USD

Showroom revenues

YEAR 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

21 24 30 36 36 36 36 36 36 36 No of guests per day

Average spend (wines and merchandise)* 4 4 4 4 4 4 4 4 4 4

20,580 35,040 43,800 52,560 52,560 52,560 52,560 52,560 52,560 52,560 total revenue* *all values in USD

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 129

Medhotel Utsera - House of Gastronomy and Showroom all values in USD 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

321,440 539,908 604,440 658,752 729,708 729,708 729,708 729,708 729,708 729,708 MedHotel

67,738 110,518 119,679 128,667 140,729 140,729 140,729 140,729 140,729 140,729 Spa treatments

167,213 291,270 369,563 453,330 459,900 459,900 459,900 459,900 459,900 459,900 Restaurant

20,580 35,040 43,800 52,560 52,560 52,560 52,560 52,560 52,560 52,560 Showroom Total Revenues 576,970 976,736 1,137,482 1,293,309 1,382,897 1,382,897 1,382,897 1,382,897 1,382,897 1,382,897

Total Costs 389,848 660,821 775,989 889,925 944,305 944,305 944,305 944,305 944,305 944,305

138,473 234,417 272,996 310,394 331,895 331,895 331,895 331,895 331,895 331,895 Salaries

32,774 57,089 72,434 88,853 90,140 90,140 90,140 90,140 90,140 90,140 FC:Food

12,541 21,845 27,717 34,000 34,493 34,493 34,493 34,493 34,493 34,493 FC:Drinks

Spa treatment 23,708 38,681 41,888 45,033 49,255 49,255 49,255 49,255 49,255 49,255 COS

63,467 107,441 125,123 142,264 152,119 152,119 152,119 152,119 152,119 152,119 Utilities

14,424 24,418 28,437 32,333 34,572 34,572 34,572 34,572 34,572 34,572 Maintenance

Equipment and 28,849 48,837 56,874 64,665 69,145 69,145 69,145 69,145 69,145 69,145 supplies

20,194 34,186 39,812 45,266 48,401 48,401 48,401 48,401 48,401 48,401 Marketing

11,539 19,535 22,750 25,866 27,658 27,658 27,658 27,658 27,658 27,658 Other

Administration 34,618 58,604 68,249 77,599 82,974 82,974 82,974 82,974 82,974 82,974 and General

Showroom cost 9,261 15,768 19,710 23,652 23,652 23,652 23,652 23,652 23,652 23,652 of sale Gross Operating Profit 187,122 315,915 361,492 403,384 438,593 438,593 438,593 438,593 438,593 438,593

14,424 24,418 28,437 32,333 34,572 34,572 34,572 34,572 34,572 34,572 FF&E

Taxes and 5,770 9,767 11,375 12,933 13,829 13,829 13,829 13,829 13,829 13,829 Insurance

EBITDA 166,929 281,729 321,681 358,118 390,191 390,191 390,191 390,191 390,191 390,191

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 130

8.3.4 Investment costs

. The table overleaf shows the respective and total investment volumes needed for the realisation of the identified development opportunities broken down to project elements.

. Investment volumes of the respective project elements have been calculated based on international benchmarks and both Georgian and international project experience of our professional team.

. The investment summarisation also indicates our recommendation of the share and duties of investment between the public and private sector whereas the public sector is primarily represented by the PF and the State, whilst the private sector is represented by the possible future international and Georgian private investors or development companies interested in the identified investment opportunities.

. “Estimated total investment volumes” column show the total investment need of the project elements which is broken down to shares in the adjacent columns in case of recommended joint venture financing structure. Financing structure and designated stakeholders of project elements are marked with an “x” in columns.

Indicative Investment Budget for the Identified Development Opportunities in Racha

Estimated Total Estimated Investment Volumes and Recommended Investment Sources of Financing Volumes

Quantity Unitary Destinations Facility Unit Price Total in USD Public Private Joint / volume Base

x in USD x in USD x

Utsera

“MedHotel Utsera”: an Commercial Real 80-Room Estate 80 rooms 45,000 USD/room 3,600,000 1,800,000 1,800,000 X independent Development (non-branded) hotel

Service Infrastructure Garden 10,000 m2 55 USD/m2 550,000 X 550,000

Development

Walkway, 1,200 m2 75 USD/m2 90,000 X 90,000 terraces Parking 600 m2 130 USD/m2 78,000 X 78,000

Road (restaurant 1,200 m2 95 USD/m2 114,000 57,000 57,000 X

access) General Electric supply 150 m 80 USD/m 12,000 X 12,000 Infrastructure (min.) Development Water supply 150 m 80 USD/m 12,000 X 12,000 (min.) Gas supply 150 m 80 USD/m 12,000 12,000 (min.) Wastewater 150 m 95 USD/m 14,250 X 14,250 (min.) Fence 530 m 65 USD/m 34,450 17,225 17,225 X

Contingency 361,336 153,958 207,378 (8%)

Utsera Sub 4,878,036 2,078,433 2,799,603 Total

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 131

. Total volume of assumed investment costs amount to USD4,878,036, broken down to USD2,078,433 supported by public sector and USD2,799,603 generated by private investors.

. The independent 80-key Utsera MedHotel has a project budget of US$45,000 per key (guestroom). With its proposed capacity of 80 guestrooms, gross total budget is estimated to achieve US$3.6 million comprising the following cost-breakdown:

Calculation of the Gross-Investment Costs for MedHotel Utsera in USD 1,000 per Room Number of guestrooms 80 Gross Investment Costs 45 Total Investment without Land 3,600 thereof in USD 1,000 % of Total in USD 1,000 Substructure 4.0% 144 Superstructure 36.0% 1,296 Internal Finishes 12.0% 432 Fittings, Furnishings & Equipment 15.0% 540 Services (utilities, technical infrastructure) 23.0% 828 External works 5.0% 180 Other (preliminaries, overheads) 5.0% 180 Total 100.0% 3,600

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 132

8.4 Shovi concept and product development

8.4.1 Former Plans

. A preliminary development plan of Shovi has never been accepted for realistaion.

. The map of former plan is enclosed in the Appendix of this report. 8.4.2 Development recommendations

Proposed developments in Shovi resort Internationally branded hotel, full-service 4-star hotel with 105 rooms, 1 in-and outdoor wellness facilities

2 40 chalets

3 Kids playground and adventure park 4 Tennis court 5 Tourist Information Centre Please see Page 31 of the attached Map and Picture Gallery.

. We propose to develop a gated resort on smaller territory than its predecessor comprising the following key facilities:

. A 105-key internationally branded resort hotel, the ‘Shovi Climatic Resort Hotel and Spa’ with indoor and outdoor wellness and spa facilities.

. The suggested new resort site is located at the North-West part of an existing but only partly functioned resort (plot No.: 88.02.30.045). Shovi can be found at the junction of two vallies that is why the quite wide space enables enough sunshine during the day which is required for outdoor wellness and other sport activities.

Please see Pages 29-30 of the attached Map and Picture Gallery.

. This resort and Shovi village has an existing but not sufficient road network which is not suitable for normal road traffic because of its quality and the lack of bridges with sufficient carrying capacity.

. Based on our information this 14kms long road between Utsera and Shovi is going to be finished by the end of 2016, as the tender for the renovation has already been announced. . Water supply and electricity are available but the section between the hotel and the resort entrance (600m) has to be reconstructed. As in Utsera the gas network is not available in Shovi.

. We believe that the hotel should comprise of the following facilities:

o bar/lobby bar with a terrace, and a main all-day restaurant;

o 105 hotel rooms,

o larger sized complex indoor and outdoor wellness and spa facilities.

. The general style of the hotel should reflect the latest design both in the case if interior design and outer architecture, but also to blend into the mountains and forests.

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 133

. We propose the following room mix: 55 standard rooms, 43 deluxe rooms, 5 junior suites and 2 suites. The final room-mix should reflect the requirements set by the proposed international operator.

. Food and beverage facilities should comprise a main all-day restaurant with terrace to cater for breakfast, lunch and dinner needs with 100 seats, a Bar/Lobby Bar with 40 seats and terrace and in- room minibars.

. Based on our financial projections, the business-mix (in roomnights) of the Shovi Climatic Resort Hotel and Spa will be as follows: 64.1% - FIT (Free Independent travellers), 21.9%- Tour groups, 11.2% - MICE, 1.6% - Business and 1.2% - Other.

Please see Pages 32-34 of the attached Map and Picture Gallery.

. 40 private chalets for sale of high build quality with private saunas/hot tubs.

. Besides commercial real-estate properties, other general infrastructure and tourist attractions need to be built to achieve complex development that possesses overall tourism attractiveness.

. The complex development shall comprise of the following facilities:

. A European standard kids playground, a large-scale adventure park and two tennis courts are proposed to be built both for owners of the chalets and hotel guests.

. Opposite the entrance a tourist information point should be operated by GNTA in order to provide information for the guests on organised tours and about the region.

. Currently the proposed territory of the developments mostly owned by private persons, all the lands are registered. In order to carry out the development, cooperation and agreement with land owners is crucial. The list of private-owned lands and the name of their owners are enclosed in the Appendix of this report.

Former hotel in Shovi resort from the Former restaurant connecting the Soviet-style hotel

Road to Shovi from Utsera The main road in Shovi resort

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 134

8.4.3 Financial projections

8.4.3.1 Shovi Climatic Resort Hotel and Spa – internationally operated & branded hotel

. The table below summarises the key market and performance indicators for Shovi Climatic Resort Hotel and Spa for its first five years operation, derived from our findings regarding the market of relevance, its evolution and the hotel’s performance.

Year 2019 2020 2021 2022 2023

Market Information

Supply (rooms) 311,310 326,310 326,310 326,310 326,310 Demand (roomnigths) 116,040 121,765 127,792 133,952 139,571

Market Occupancy 37% 37% 39% 41% 43% Supply Growth Rate 50% 5% 0% 0% 0% Demand Growth Rate 5% 5% 5% 5% 4%

Property Information

Rooms Available 38,325 38,325 38,325 38,325 38,325 Number of Rooms Sold 16,112 17,244 18,648 19,911 21,271

Occupancy 42% 45% 48.7% 52% 55.5%

ADR 94 96 99 102 105

RevPar 39 43 48 53 58 Revenue per Sold Room 173 176 180 185 188

Fair Share 11% 11% 11% 11% 11%

Market Share 12% 12% 13% 13% 13% Market Penetration Index (MPI) 111% 118% 121% 123% 126%

. The tables overleaf show the projected Profit & Loss Projections for the property for its first five years operation in non-inflated USD and for its first 10 years operation in inflated USD.

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 135

Profit & Loss Projections Shovi Climatic Resort Hotel and Spa non inflated USD

2019 2020 2021 2022 2023

in USD 1.000 % in USD 1.000 % in USD 1.000 % in USD 1.000 % in USD 1.000 % Departmental Revenues Rooms 1 512,4 54,4% 1 655,6 54,6% 1 851,3 55,1% 2 032,5 55,3% 2 224,7 55,6% Food 783,6 28,2% 852,8 28,1% 934,9 27,8% 1 018,5 27,7% 1 101,6 27,5% Beverage 296,6 10,7% 322,8 10,6% 354,3 10,5% 386,6 10,5% 418,4 10,5% Other Rev. F&B 4,1 0,1% 6,1 0,2% 8,2 0,2% 10,4 0,3% 12,5 0,3% Communication 0,9 0,0% 0,9 0,0% 1,0 0,0% 1,1 0,0% 1,1 0,0% Minor Operating 156,3 5,6% 166,4 5,5% 179,4 5,3% 191,8 5,2% 202,9 5,1% Rental 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% Other Income 27,8 1,0% 30,3 1,0% 33,6 1,0% 36,8 1,0% 40,0 1,0% Total Revenues 2 781,6 100,0% 3 035,0 100,0% 3 362,8 100,0% 3 677,6 100,0% 4 001,2 100,0%

Cost of Sale Food 274,3 35,0% 289,9 34,0% 308,5 33,0% 325,9 32,0% 341,5 31,0% Beverage 74,2 25,0% 77,5 24,0% 81,5 23,0% 87,0 22,5% 92,0 22,0% Communication 0,2 25,0% 0,2 25,0% 0,2 25,0% 0,3 25,0% 0,3 25,0% Minor Operating 21,9 14,0% 22,5 13,5% 23,3 13,0% 24,5 12,8% 25,4 12,5% Total Costs 370,5 13,3% 390,1 12,9% 413,6 12,3% 437,7 11,9% 459,2 11,5%

Direct Labour Costs Rooms 169,0 11,2% 178,2 10,8% 200,4 10,8% 202,4 10,0% 202,4 9,1% Food and Beverage 334,6 30,9% 370,8 31,4% 403,3 31,1% 426,2 30,1% 433,1 28,3% Communication 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% Minor Operating 54,9 35,1% 63,9 38,4% 88,3 49,2% 89,2 46,5% 89,2 44,0% Other 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% Total Payroll 558,5 20,1% 612,9 20,2% 692,0 20,6% 717,8 19,5% 724,7 18,1%

Direct Departmental Expenses Rooms 111,9 7,4% 119,2 7,2% 129,6 7,0% 138,2 6,8% 144,6 6,5% Food and Beverage 101,9 9,4% 108,7 9,2% 116,8 9,0% 121,7 8,6% 127,2 8,3% Communication 0,0 1,0% 0,0 1,0% 0,0 1,0% 0,0 1,0% 0,0 1,0% Minor Operating 12,3 7,9% 12,6 7,6% 12,9 7,2% 13,4 7,0% 14,0 6,9% Rental 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% Other 1,8 6,5% 1,9 6,3% 2,0 5,9% 2,0 5,5% 2,0 5,0% Total Direct Departmental Expenses 228,0 8,2% 242,5 8,0% 261,3 7,8% 275,4 7,5% 287,8 7,2%

Departmental Profits Rooms 1 231,5 81,4% 1 358,2 82,0% 1 521,3 82,2% 1 691,9 83,2% 1 877,7 84,4% Food and Beverage 299,3 27,6% 334,8 28,3% 387,3 29,9% 454,6 32,1% 538,7 35,1% Communication 0,6 74,0% 0,7 74,0% 0,7 74,0% 0,8 74,0% 0,8 74,0% Minor Operating 67,1 43,0% 67,4 40,5% 54,8 30,6% 64,6 33,7% 74,3 36,6% Rental 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% Other 26,0 93,5% 28,4 93,7% 31,6 94,1% 34,8 94,5% 38,0 95,0% Total 1 624,6 58,4% 1 789,5 59,0% 1 995,9 59,4% 2 246,6 61,1% 2 529,5 63,2%

Undistributed Expenses Labour Costs Administration & General 254,7 9,2% 257,3 8,5% 259,8 7,7% 262,4 7,1% 262,4 6,6% POMEC 20,0 0,7% 20,2 0,7% 20,4 0,6% 20,6 0,6% 20,6 0,5% Sales & Marketing 73,3 2,6% 74,0 2,4% 74,7 2,2% 75,5 2,1% 75,5 1,9% Total Payroll 347,9 12,5% 351,4 11,6% 354,9 10,6% 358,5 9,7% 358,5 9,0%

Other Expenses Administration & General 136,3 4,9% 142,6 4,7% 144,6 4,3% 147,1 4,0% 152,0 3,8% Sales & Marketing 116,8 4,2% 121,4 4,0% 127,8 3,8% 132,4 3,6% 136,0 3,4% Energy and Utilities 319,9 11,5% 346,0 11,4% 380,0 11,3% 411,9 11,2% 432,1 10,8% POMEC 83,4 3,0% 88,0 2,9% 90,8 2,7% 95,6 2,6% 100,0 2,5% Total Other Expenses 656,5 23,6% 698,0 23,0% 743,2 22,1% 787,0 21,4% 820,3 20,5%

Total Undistibuted Expenses 1 004,4 36,1% 1 049,5 34,6% 1 098,1 32,7% 1 145,5 31,1% 1 178,7 29,5%

GOP (Gross Operating Profit) 620,2 22,3% 740,0 24,4% 897,8 26,7% 1 101,2 29,9% 1 350,8 33,8% Fixed Charges Management Fee 83,4 3,0% 165,1 5,4% 190,7 5,7% 220,4 6,0% 255,1 6,4% Rent, Taxes & Insurance 27,8 1,0% 30,3 1,0% 33,6 1,0% 36,8 1,0% 40,0 1,0% Reserve for FF&E 27,8 1,0% 45,5 1,5% 67,3 2,0% 91,9 2,5% 120,0 3,0% Total Fixed Charges 139,1 5,0% 240,9 7,9% 291,5 8,7% 349,2 9,5% 415,2 10,4%

EBITDA (Operating Net Income) 481,1 17,3% 499,1 16,4% 606,2 18,0% 752,0 20,4% 935,6 23,4%

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 136

Profit & Loss Projections Shovi Climatic Resort Hotel and Spa inflated USD

2019 2020 2021 2022 2023 1,091 1,116 1,142 1,169 1,196

in USD 1.000 % in USD 1.000 % in USD 1.000 % in USD 1.000 % in USD 1.000 % Departmental Revenues Rooms 1 650,5 54,4% 1 848,5 54,6% 2 114,6 55,1% 2 375,1 55,3% 2 659,7 55,6% Food 855,1 28,2% 952,1 28,1% 1 067,9 27,8% 1 190,2 27,7% 1 317,0 27,5% Beverage 323,7 10,7% 360,4 10,6% 404,7 10,5% 451,8 10,5% 500,2 10,5% Other Rev. F&B 4,4 0,1% 6,8 0,2% 9,4 0,2% 12,1 0,3% 15,0 0,3% Communication 0,9 0,0% 1,0 0,0% 1,1 0,0% 1,2 0,0% 1,3 0,0% Minor Operating 170,6 5,6% 185,7 5,5% 204,9 5,3% 224,1 5,2% 242,5 5,1% Rental 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% Other Income 30,4 1,0% 33,9 1,0% 38,4 1,0% 43,0 1,0% 47,8 1,0% Total Revenues 3 035,6 100,0% 3 388,4 100,0% 3 841,0 100,0% 4 297,5 100,0% 4 783,5 100,0%

Cost of Sale Food 299,3 35,0% 323,7 34,0% 352,4 33,0% 380,9 32,0% 408,3 31,0% Beverage 80,9 25,0% 86,5 24,0% 93,1 23,0% 101,7 22,5% 110,0 22,0% Communication 0,2 25,0% 0,3 25,0% 0,3 25,0% 0,3 25,0% 0,3 25,0% Minor Operating 23,9 14,0% 25,1 13,5% 26,6 13,0% 28,7 12,8% 30,3 12,5% Total Costs 404,3 13,3% 435,5 12,9% 472,4 12,3% 511,5 11,9% 548,9 11,5%

Direct Labour Costs Rooms 184,4 11,2% 199,0 10,8% 228,9 10,8% 236,5 10,0% 242,0 9,1% Food and Beverage 365,2 30,9% 413,9 31,4% 460,7 31,1% 498,1 30,1% 517,8 28,3% Communication 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% Minor Operating 60,0 35,1% 71,3 38,4% 100,9 49,2% 104,2 46,5% 106,6 44,0% Other 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% Total Payroll 609,5 20,1% 684,3 20,2% 790,5 20,6% 838,8 19,5% 866,4 18,1%

Direct Departmental Expenses Rooms 122,1 7,4% 133,1 7,2% 148,0 7,0% 161,5 6,8% 172,9 6,5% Food and Beverage 111,2 9,4% 121,4 9,2% 133,4 9,0% 142,3 8,6% 152,1 8,3% Communication 0,0 1,0% 0,0 1,0% 0,0 1,0% 0,0 1,0% 0,0 1,0% Minor Operating 13,5 7,9% 14,1 7,6% 14,8 7,2% 15,7 7,0% 16,7 6,9% Rental 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% Other 2,0 6,5% 2,1 6,3% 2,3 5,9% 2,4 5,5% 2,4 5,0% Total Direct Departmental Expenses 248,8 8,2% 270,7 8,0% 298,4 7,8% 321,8 7,5% 344,1 7,2%

Departmental Profits Rooms 1 343,9 81,4% 1 516,4 82,0% 1 737,7 82,2% 1 977,1 83,2% 2 244,8 84,4% Food and Beverage 326,6 27,6% 373,8 28,3% 442,4 29,9% 531,3 32,1% 644,0 35,1% Communication 0,7 74,0% 0,8 74,0% 0,8 74,0% 0,9 74,0% 1,0 74,0% Minor Operating 73,3 43,0% 75,2 40,5% 62,6 30,6% 75,5 33,7% 88,8 36,6% Rental 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% Other 28,4 93,5% 31,7 93,7% 36,1 94,1% 40,6 94,5% 45,4 95,0% Total 1 772,9 58,4% 1 997,9 59,0% 2 279,7 59,4% 2 625,3 61,1% 3 024,1 63,2%

Undistributed Expenses Labour Costs Administration & General 278,0 9,2% 287,2 8,5% 296,8 7,7% 306,7 7,1% 313,7 6,6% POMEC 21,8 0,7% 22,5 0,7% 23,3 0,6% 24,1 0,6% 24,6 0,5% Sales & Marketing 79,9 2,6% 82,6 2,4% 85,4 2,2% 88,2 2,1% 90,2 1,9% Total Payroll 379,7 12,5% 392,4 11,6% 405,4 10,6% 418,9 9,7% 428,6 9,0%

Other Expenses Administration & General 148,7 4,9% 159,3 4,7% 165,2 4,3% 171,9 4,0% 181,8 3,8% Sales & Marketing 127,5 4,2% 135,5 4,0% 146,0 3,8% 154,7 3,6% 162,6 3,4% Energy and Utilities 349,1 11,5% 386,3 11,4% 434,0 11,3% 481,3 11,2% 516,6 10,8% POMEC 91,1 3,0% 98,3 2,9% 103,7 2,7% 111,7 2,6% 119,6 2,5% Total Other Expenses 716,4 23,6% 779,3 23,0% 848,9 22,1% 919,7 21,4% 980,6 20,5%

Total Undistibuted Expenses 1 096,1 36,1% 1 171,7 34,6% 1 254,3 32,7% 1 338,6 31,1% 1 409,2 29,5%

GOP (Gross Operating Profit) 676,8 22,3% 826,2 24,4% 1 025,4 26,7% 1 286,8 29,9% 1 614,9 33,8% Fixed Charges Management Fee 91,1 3,0% 184,3 5,4% 217,8 5,7% 257,6 6,0% 305,0 6,4% Rent, Taxes & Insurance 30,4 1,0% 33,9 1,0% 38,4 1,0% 43,0 1,0% 47,8 1,0% Reserve for FF&E 30,4 1,0% 50,8 1,5% 76,8 2,0% 107,4 2,5% 143,5 3,0% Total Fixed Charges 151,8 5,0% 269,0 7,9% 333,0 8,7% 408,0 9,5% 496,3 10,4%

EBITDA (Operating Net Income) 525,0 17,3% 557,2 16,4% 692,4 18,0% 878,7 20,4% 1 118,6 23,4%

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 137

Profit & Loss Projections Shovi Climatic Resort Hotel and Spa inflated USD

2024 2025 2026 2027 2028 1,223 1,251 1,280 1,310 1,310

in USD 1.000 % in USD 1.000 % in USD 1.000 % in USD 1.000 % in USD 1.000 % Departmental Revenues Rooms 2 721,0 55,6% 2 783,7 55,6% 2 847,9 55,6% 2 913,6 55,6% 2 913,6 55,6% Food 1 347,3 27,5% 1 378,4 27,5% 1 410,2 27,5% 1 442,7 27,5% 1 442,7 27,5% Beverage 511,7 10,5% 523,5 10,5% 535,6 10,5% 547,9 10,5% 547,9 10,5% Other Rev. F&B 15,3 0,3% 15,7 0,3% 16,1 0,3% 16,4 0,3% 16,4 0,3% Communication 1,4 0,0% 1,4 0,0% 1,4 0,0% 1,5 0,0% 1,5 0,0% Minor Operating 248,1 5,1% 253,8 5,1% 259,7 5,1% 265,7 5,1% 265,7 5,1% Rental 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% Other Income 48,9 1,0% 50,1 1,0% 51,2 1,0% 52,4 1,0% 52,4 1,0% Total Revenues 4 893,8 100,0% 5 006,6 100,0% 5 122,1 100,0% 5 240,2 100,0% 5 240,2 100,0%

Cost of Sale Food 417,7 31,0% 427,3 31,0% 437,2 31,0% 447,2 31,0% 447,2 31,0% Beverage 112,6 22,0% 115,2 22,0% 117,8 22,0% 120,5 22,0% 120,5 22,0% Communication 0,3 25,0% 0,4 25,0% 0,4 25,0% 0,4 25,0% 0,4 25,0% Minor Operating 31,0 12,5% 31,7 12,5% 32,5 12,5% 33,2 12,5% 33,2 12,5% Total Costs 561,6 11,5% 574,6 11,5% 587,8 11,5% 601,4 11,5% 601,4 11,5%

Direct Labour Costs Rooms 247,5 9,1% 253,3 9,1% 259,1 9,1% 265,1 9,1% 265,1 9,1% Food and Beverage 529,7 28,3% 541,9 28,3% 554,4 28,3% 567,2 28,3% 567,2 28,3% Communication 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% Minor Operating 109,1 44,0% 111,6 44,0% 114,2 44,0% 116,8 44,0% 116,8 44,0% Other 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% Total Payroll 886,4 18,1% 906,8 18,1% 927,7 18,1% 949,1 18,1% 949,1 18,1%

Direct Departmental Expenses Rooms 176,9 6,5% 180,9 6,5% 185,1 6,5% 189,4 6,5% 189,4 6,5% Food and Beverage 155,6 8,3% 159,2 8,3% 162,8 8,3% 166,6 8,3% 166,6 8,3% Communication 0,0 1,0% 0,0 1,0% 0,0 1,0% 0,0 1,0% 0,0 1,0% Minor Operating 17,1 6,9% 17,5 6,9% 17,9 6,9% 18,3 6,9% 18,3 6,9% Rental 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% Other 2,4 5,0% 2,5 5,0% 2,6 5,0% 2,6 5,0% 2,6 5,0% Total Direct Departmental Expenses 352,0 7,2% 360,1 7,2% 368,4 7,2% 376,9 7,2% 376,9 7,2%

Departmental Profits Rooms 2 296,6 84,4% 2 349,5 84,4% 2 403,7 84,4% 2 459,2 84,4% 2 459,2 84,4% Food and Beverage 658,8 35,1% 674,0 35,1% 689,6 35,1% 705,5 35,1% 705,5 35,1% Communication 1,0 74,0% 1,0 74,0% 1,1 74,0% 1,1 74,0% 1,1 74,0% Minor Operating 90,9 36,6% 93,0 36,6% 95,1 36,6% 97,3 36,6% 97,3 36,6% Rental 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% 0,0 0,0% Other 46,5 95,0% 47,6 95,0% 48,7 95,0% 49,8 95,0% 49,8 95,0% Total 3 093,8 63,2% 3 165,2 63,2% 3 238,2 63,2% 3 312,8 63,2% 3 312,8 63,2%

Undistributed Expenses Labour Costs Administration & General 321,0 6,6% 328,4 6,6% 335,9 6,6% 343,7 6,6% 343,7 6,6% POMEC 25,2 0,5% 25,8 0,5% 26,3 0,5% 27,0 0,5% 27,0 0,5% Sales & Marketing 92,3 1,9% 94,4 1,9% 96,6 1,9% 98,8 1,9% 98,8 1,9% Total Payroll 438,5 9,0% 448,6 9,0% 458,9 9,0% 469,5 9,0% 469,5 9,0%

Other Expenses Administration & General 186,0 3,8% 190,3 3,8% 194,6 3,8% 199,1 3,8% 199,1 3,8% Sales & Marketing 166,4 3,4% 170,2 3,4% 174,2 3,4% 178,2 3,4% 178,2 3,4% Energy and Utilities 528,5 10,8% 540,7 10,8% 553,2 10,8% 565,9 10,8% 565,9 10,8% POMEC 122,3 2,5% 125,2 2,5% 128,1 2,5% 131,0 2,5% 131,0 2,5% Total Other Expenses 1 003,2 20,5% 1 026,4 20,5% 1 050,0 20,5% 1 074,2 20,5% 1 074,2 20,5%

Total Undistibuted Expenses 1 441,7 29,5% 1 474,9 29,5% 1 508,9 29,5% 1 543,7 29,5% 1 543,7 29,5%

GOP (Gross Operating Profit) 1 652,1 33,8% 1 690,2 33,8% 1 729,2 33,8% 1 769,1 33,8% 1 769,1 33,8% Fixed Charges Management Fee 312,0 6,4% 319,2 6,4% 326,6 6,4% 334,1 6,4% 334,1 6,4% Rent, Taxes & Insurance 48,9 1,0% 50,1 1,0% 51,2 1,0% 52,4 1,0% 52,4 1,0% Reserve for FF&E 146,8 3,0% 150,2 3,0% 153,7 3,0% 157,2 3,0% 157,2 3,0% Total Fixed Charges 507,8 10,4% 519,5 10,4% 531,5 10,4% 543,7 10,4% 543,7 10,4%

EBITDA (Operating Net Income) 1 144,4 23,4% 1 170,7 23,4% 1 197,7 23,4% 1 225,4 23,4% 1 225,4 23,4%

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 138

8.4.3.2 Shovi Chalets

. The following tables summarise the investment cost of chalets in Shovi resort and the anticipated revenues from the chalet sales.

SHOVI CHALETS

Net sellable area Gross area (sqm) Price per sqm* Total sales price* (sqm)

60 48 4,000 192,000 Standard

90 72 4,250 306,000 Deluxe

125 100 4,500 450,000 Luxury

*all values in USD

Investment cost in USD/unit

Net sellable area Gross area (sqm) Price per sqm* Total sales price* (sqm)

60 48 1,300 78,000 Standard

90 72 1,600 144,000 Deluxe

125 100 1,700 212,500 Luxury

Real estate roll-out scheme

Types of units 2018 2019 2020 Total number per type

23 4 2 29 Standard 2 3 3 8 Deluxe 1 1 1 3 Luxury 26 8 6 40 Total number of units sold

Revenue projections - Net sales Proceeds 2018 2019 2020 (all values in USD)

5,478,000 2,136,000 1,752,000

712,140 277,680 227,760 Related costs 273,900 106,800 87,600 Marketing (5%) 54,780 21,360 17,520 Legal (1%) 27,390 10,680 8,760 Other (0.5%) 356,070 138,840 113,880 Total costs 4,765,860 1,858,320 1,524,240

8,148,420 Total Sales Proceed w/o investment cost

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 139

8.4.4 Investment costs

. The table overleaf shows the respective and total investment volumes needed for the realisation of the identified development opportunities broken down to project elements.

. Investment volumes of the respective project elements have been calculated based on international benchmarks and both Georgian and international project experience of our professional team.

. The investment summarisation also indicates our recommendation of the share and duties of investment between the public and private sector whereas the public sector is primarily represented by the PF and the State, whilst the private sector is represented by the possible future international and Georgian private investors or development companies interested in the identified investment opportunities.

. “Estimated total investment volumes” column show the total investment need of the project elements which is broken down to shares in the adjacent columns in case of recommended joint venture financing structure. Financing structure and designated stakeholders of project elements are marked with an “x” in columns.

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 140

Indicative Investment Budget for the Identified Development Opportunities in Racha

Estimated Investment Estimated Investment Volumes and Recommended Volumes in Sources of Financing 2015 values

Quantity Unitary Total in Destinations Facility / Unit Price Public Private Joint base USD volume

x in USD x in USD x Shovi

“Shovi Climatic Resort Hotel and Spa”: a Commercial 105-Room 105 rooms 100,000 USD/room 10,500,000 5,250,000 5,250,000 X

Real Estate internationally Development branded resort hotel

USD/chalet Chalets 40 chalets 101,288 4,051,520 2,025,760 2,025,760 X (avg.) Garden 36,000 m2 40 USD/m2 1,440,000 720,000 720,000 X

Tennis court 4 60,000 USD/p 240,000 120,000 120,000 X

Tourist information 1 85,000 USD/p 85,000 X 85,000 Service centre & Infrastructure Entrance Development

Kids playground & 12,000 m2 130 USD/m2 1,560,000 780,000 780,000 X

adventure park

Road (hotel 3,500 m2 95 USD/m2 332,500 166,250 166,250 X access) Parking 3,300 m2 130 USD/m2 429,000 214,500 214,500 X

Walkway 2,200 m2 75 USD/m2 165,000 82,500 82,500 X (chalets) Electric supply 1,100 m 80 USD/m 88,000 X 88,000 General Water supply Infrastructure 1,100 m 80 USD/m 88,000 X 88,000 (min.) Development Gas supply 1,100 m 80 USD/m 88,000 X 88,000 (min.) Wastewater 1,100 m 95 USD/m 104,500 X 104,500 (min.) Transformer 1 64,000 USD/p 64,000 X 64,000

Fence 1,500 m 65 USD/m 97,500 48,750 48,750 X

Contingency 1,546,642 794,021 752,621 (8%) Shovi Sub 20,879,662 10,719,281 10,160,381 Total . Total volume of assumed investment costs amount to USD20,879,662, broken down to USD10,719,281 supported by public sector and USD10,160,381 generated by private investors.

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 141

. Based on international benchmarks and best practice, we have determined hotel development budget on a per key (guestroom) basis taking into consideration the hotel project’s attributes, future market positioning and service level. In the following, we present the breakdown of estimated development budget based on our project experience and international hotel companies (non-published) development guidelines. The presented figures exclude costs of technical assistance provided by the future international operator (not identified at this stage of the project).

. The 100-key Shovi Climatic Resort Hotel has a project budget of US$105,000 per key (guestroom). With its proposed capacity of 100 guestrooms, gross total budget is estimated to achieve US$10.5 million comprising the following cost-breakdown:

Calculation of the Gross-Investment Costs for Shovi Climatic Resort Hotel in USD 1,000 per Room Number of guestrooms 105 Gross Investment Costs 100 Total Investment without Land 10,500 thereof in USD 1,000 % of Total in USD 1,000 Substructure 3.0% 315 Superstructure 35.0% 3,675 Internal Finishes 13.0% 1,365 Fittings, Furnishings & Equipment 10.0% 1,050 Services (utilities, technical infrastructure) 24.0% 2,520 External works 5.0% 525 Other (preliminaries, overheads) 10.0% 1,050 Total 100.0% 10,500

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 142

8.5 Identified other tourism development opportunities

. Racha is rich in cultural and natural resources, but due to the low level of infrastructural development, the lack of high-quality services and the relative large distance from purchasing power the region is yet unable to turn these assets into tourist attractions that would generate significant revenue.

. In addition to the development projects, presented in the previous chapters, we recommend complex tourism developments as well, which could further strengthen the attractiveness of the region. Racha should appear on tourism market as a brand that could compete with the well-known tourist resorts in Georgia, as Bakuriani, Gudauri or Borjomi.

. In Europe the introduction of city-cards, providing access to services such as public transport and admissions to museums at discounted rates, has become a wide-spread practice. Based on this model we recommend the introduction of the “Racha tourist card”, which, in addition to a set of free services, provide users discounts of between 8% and 15% off the end price of various services to facilitate growth in the number of visitations of service providers and increase average spending in Racha.

. The Racha tourist card shall be distributed at hotels, new tourists information points organised by Georgian National Tourism Administration

. We recommend a price of USD10 for Racha tourist card.

. Free services:

o Free and unlimited use of public bus transport;

o One-off free admission to museums in Racha;

o Free mobile application download, providing information about the region. According to our proposal Georgian National Tourism Administration should be responsible for the development of this application.

. The Racha tourist card would provide the following discounts:

o 10% discount from restaurant consumption at the new restaurants of the Shaori Lake and in Utsera;

o 8% discount from the room price after the second night in all hotel;

o 10% discount from the entrance ticket of adventure park in Shovi;

o 10% discount off bicycle rent at Shaori Lake;

o 12% off organised trips.

. In addition to the introduction of the Racha tourist card, we recommend the organisation of themed routes and excursions in the region. In general, themed routes connecting natural or built attractions, based on a certain theme or activity, made accessible by some form of transport, seem to be a particularly good opportunity for less mature areas with high cultural resources that appeal

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 143

to special-interest groups. Themed routes can be developed over large distances (crossing more than one country) or over relatively short ones within a same region or country as well.

. One key aim of these routes, apart from attracting tourists to Racha, is to connect several attractions that would independently not have the potential to entice tourists to spend time and money there. Good basis for such development in a region can be created through building up and maintaining collaboration agreements between the government and local councils, private enterprises and associations, the tourism industry and local communities.

. With regards to the lack of public transport access to these routes, tourist information centres will have to service tourists without a car through organising group excursions leaving from the tourist information centre at Shaori Lake and from Shovi, which can establish itself as the mini-hub to the area and can be responsible for organised excursions and themed routes, crossing the region, as well.

. We have identified excursions and themed routes based on the following special assumptions:

o In summer two persons should be employed by the GNTA, one in Shovi and one at Shaori Lake, as part of the TDM office who would be responsible for providing information for tourists and for marketing activities of the region;

o The excursions should be organised once a week upon request (with designated minimum number of participants) on different days by GNTA, to provide opportunity for tourists to be able to participate in all of the organised excursions if they want.

. We propose the following excursions and themed routes of various motivations in Racha:

. We have prepared our calculations for the excursion participation fees and themed routes based on the following assumptions:

o Transportation of guests is organised with a bus for 20 + 2 passengers (tourist guide and bus driver). The bus fare is calculated on mileage base, as best practice for longer-distance trips. We assumed that the next bus rental company to Racha is located in Kutaisi;

o In case that the excursion programme contains lunch/early dinner, meals of the tourist guide and the bus driver is paid by the participants;

o A margin of 25% is added to the projection base. Any reseller commission is covered from this margin.

. Route1: Shaori – Nikortsminda - Shovi- Utsera: Culture & Climate

o The programme, recommended to hotel guests at Shaori Lake primarily, includes the visitation of Nikortsminda Cathedral and the newly built climatic Shovi resort, in addition to early lunch, wine-tasting and gastro-show in the new Medhotel and ’House of Gastronomy & local products’, in Utsera;

o The probable time of the excursion is approximately 8 hours.

o The programme could start after breakfast at 10:00 a.m. Travel time is approximately 1.5 hours to Shovi. The hotel offers the tourists takeaway dining packages, because the package contains only an early dinner. On the way tourists would visit the Nikortsminda Cathedral, which is on tentative list for status as a UNESCO World Heritage Site. After arrival in Shovi

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 144

at around 12:00 o’clock, the guests can visit the Shovi Resort, take a walk on one of the in neighbourhood established hiking routes. Backwards to the hotel at Shaori Lake, the programme would contain an early dinner with gastro-show and wine-tasting in Utsera.

o Estimated duration of the excursion is approximately 8 hours.

o The following table contains a sample for the calculation of participation fee. We have calculated:

Services Cost of goods sold (USD)

Bus fare 168

Tourist guide 70

Lunch 286

Projection Base 524

Margin (25%) 131

Total cost 686.4

Break-even point (no. of participants) 16

Participation fee/pax* 34 *VAT is not included

. Route2: Shaori – Shovi: Relax in Shovi

o One-day excursion to Shovi, the famous climatic- resort, recommended to the hotel guests at Shaori. The programme could start after breakfast at 10:00 a.m. Travel time is approximately 1.5 hours to Shovi.

o After the arrival in Shovi the tourist could explore the Shovi Resort and spend a half day using the in-and outdoor wellness facilities and adventure park of the Shovi resort in its beautiful outdoor setting, with lunch in the restaurant of the hotel.

o The participation fee should contain the cost of the journey, entrance ticket to the adventure park and to the wellness facilities of the hotel and the lunch and the dinner at the hotel;

o The programme should be recommended to families with little children too.

o Estimated duration of the excursion is approximately 10 hours.

o The table below contains a sample for the calculation of participation fee:

Services Cost of goods sold (USD)

Bus fare 168

Tourist guide 70

Lunch 220

Adventure park and wellness facilities 240

Projection Base 698

Margin (25%) 174.5

Total cost 872.5

Break-even point (no. of participants) 17

Participation fee/pax* 43 *VAT is not included

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 145

. Route3: Nikortsminda – Tsesi – (Utsera) – Oni: Culture of Racha

o This themed route is based on the most famous religious monuments of the region embracing more religions. The excursion contains the visitation of Nikortsminda Cathedral, (a Georgian Orthodox Church), Barakoni Church of the Mother of God and the Oni- synagogue;

o The conservators of the these monuments should ensure the accessibility for the tourists;

o Estimated duration of the excursion is approximately 8 hours.

o The programme could start after breakfast at 10:00 a.m. First programme point is the visit of Nikortsminda Cathedral and the Barakoni Church. After the two sights the group is transported to the Medhotel and ’House of Gastronomy & local products’, in Utsera to have lunch and take part in the offered mineral water bottling programme. After having a lunch tourist could visit the synagogue and other temple backwards to the hotel at Shaori.

o The following table contains a sample for the calculation of participation fee:

Services Cost of goods sold (USD)

Bus fare 150

Tourist guide 70

Lunch 220

Projection Base 440

Margin (25%) 110

Total cost 550.0

Break-even point (no. of participants) 16

Participation fee/pax* 27.5

*VAT is not included

. Route4: Khvanchkara: World of wines

o The aim of the one-day excursion to visit the famous Khvanchkara winery for a wine-tasting.

o During the time the grape-harvest, excursions could be organised to the local wine producers, shown the old methods of vine makings to tourists and so-called ’supras’ – huge picnics – can be held in the vineyards.

o Estimated duration of the excursion is approximately 8 hours.

o The following table contains a sample for the calculation of participation fee:

Services Cost of goods sold (USD)

Bus fare 130

Tourist guide 70

Entrance ticket 42

Lunch 220

Projection Base 462

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 146

Services Cost of goods sold (USD)

Margin (25%) 115.5

Total cost 577.5

Break-even point (no. of participants) 16

Participation fee/pax* 29

*VAT is not included

. Route5: Shkmeri – off-road adventure:

o Shkmeri is a very small village with a couple of self-sustaining households and beautiful landscape, located 1,730 metres above sea level;

o The aim of the half-day-long tour lets tourists explore the view from one of the highest accessible mountain viewpoint, explore the adventures of mountain off-road drive with a professional driver, the mountains and visit a self-sustaining household.

o Due to the lack of surfaced roads between Kutaisi–Alpana–Mamaisoni Pass and Shkmeri, Shkmeri can be accessed only by 4x4 jeeps under organised adventure tours, leaving from the tourist information centre at Shaori Lake.

o Estimated duration of the excursion is approximately 6 hours.

o The following table contains a sample for the calculation of participation fee:

Services Cost of goods sold (USD) Jeep fare 120 Lunch 20

Projection Base 140 Margin (25%) 35.0 Total cost 175.0

Break-even point (no. of participants) 3 Participation fee 45 *VAT is not included . The above presented routes should be also organised from the starting point of tourist information centre in Shovi except for one excursion day to Shaori.

Please see Page 35 of the attached Map and Picture Gallery.

Shkmeri One of the highest accessible mountain viewpoint

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 147

8.6 Additional revenue streams of Shaori and Shovi

8.6.1 Additional revenues streams of Shaori

. In the following tables we present the revenue generating potential of other minor development elements of which services we found inevitable to be carried out at Shaori Lake.

SHAORI

Year 2019 2020 2021 2022 2023

Shaori Hotel Total Guestnights 41,402 45,032 47,825 50,856 53,802

Shaori Chalets 810 1,440 1,800 1,800 1,800

Shaori Restaurant Hotel guestnights 2,464 2,628 2,792 2,957 3,121

Number of tourists not staying in any of the above 1,500 2,500 3,500 4,500 5,500

Number of tourists 48,195 53,620 57,938 62,135 66,246

Additional tourist services – Quantification of Demand – Absorbtion model

Year 2019 2020 2021 2022 2023 Boat rental (rate of absorbtion) 4.0% 4.5% 5.0% 5.5% 6.0%

number of guests 1,928 2,413 2,897 3,417 3,975

avg.check* 10 10 10 10 10

Revenue* 19,278 24,129 28,969 34,174 39,747

Souvenir shop 11% 12% 13% 14% 15%

number of guests 5,301 6,434 7,532 8,699 9,937

avg.check* 5 5 5 5 5

Revenue* 26,507 32,172 37,660 43,494 49,684

Tourist information centre Racha tourist card(rate of absorbtion) 4.5% 4.8% 5.2% 5.5% 6.0%

number of guests 2,169 2,574 3,013 3,417 3,975

avg.check* 10 10 10 10 10

Revenue* 21,688 25,738 30,128 34,174 39,747 Organised tours (rate of absorbtion) 3.0% 3.5% 3.7% 3.9% 4.0%

number of guests 1,446 1,877 2,144 2,423 2,650

avg.check* 25 25 25 25 25

Revenue* 36,146 46,917 53,593 60,581 66,246 TOTAL ADDITIONAL REVENUE* 103,618 128,956 150,350 172,423 195,425

EBITDA* 51,809 64,478 75,175 86,212 97,713 *all values in USD

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 148

8.6.2 Additional revenue streams of Shovi

. In the following tables we present the revenue generating potential of other minor development elements of which services we found inevitable to be carried out in Shovi resort.

SHOVI

Year 2019 2020 2021 2022 2023

Shovi Hotel Total Guestnights 32,888 34,788 37,370 39,845 42,264

Shovi Chalets 540 1,260 1,800 1,800 1,800

Number of tourists not staying in any of the above 500 750 900 1,000 1,100

Number of tourists 35,947 38,818 42,091 44,667 47,187

Additional tourist services – Quantification of demand – Absorbtion model

Year 2019 2020 2021 2022 2023

Tourist information centre

Racha tourist card (rate of absorbtion) 4.5% 4.8% 5.2% 5.5% 6.0%

number of guests 1,618 1,863 2,189 2,457 2,831

avg.check* 10 10 10 10 10

Revenue* 16,176 18,633 21,887 24,567 28,312

Organised tours (rate of absorbtion) 3.0% 3.5% 3.7% 3.9% 4.0%

number of guests 1,078 1,359 1,557 1,742 1,887

avg.check* 25 25 25 25 25

Revenue* 26,961 33,966 38,934 43,551 47,187

Adventure park (rate of absorbtion) 4.5% 4.8% 5.2% 5.5% 6.0%

number of guests 1,618 1,863 2,189 2,457 2,831

avg.check* 5 5 5 5 5

Revenue* 8,088 9,316 10,944 12,284 14,156

TOTAL ADDITIONAL REVENUE* 51,225 61,915 71,765 80,401 89,656

EBITDA* 25,613 30,957 35,883 40,201 44,828 *all values in USD

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 149

8.7 Summary of revenues and profitability

RACHA CONCEPT DEVELOPMENT PLAN - BDO FINANCIAL PROJECTIONS SUMMARY

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Revenue Streams in USD

Total Revenues Shaori Lakeside Hotel and Spa 3,575,653 4,081,623 4,516,713 5,001,701 5,439,892 5,439,892 5,439,892 5,439,892 5,439,892 5,439,892 Shaori Restaurant and Hotel 277,583 314,320 377,848 443,530 484,903 484,903 484,903 484,903 484,903 484,903 484,903

Shaori Chalets 6,720,000 2,034,000 1,344,000 Shaori Additional Revenues 103,618 128,956 150,350 172,423 195,425 195,425 195,425 195,425 195,425 195,425 Utsera Restaurant and Hotel 576,970 976,736 1,137,482 1,293,309 1,382,897 1,382,897 1,382,897 1,382,897 1,382,897 1,382,897 Shovi Climatic Resort Hotel 2,781,627 3,034,954 3,362,770 3,677,609 4,001,222 4,001,222 4,001,222 4,001,222 4,001,222 4,001,222

Shovi Chalets 5,478,000 2,136,000 1,752,000 Shovi Additional Revenues 51,225 61,915 71,765 80,401 89,656 89,656 89,656 89,656 89,656 89,656 Estimated Total Revenues 12,475,583 11,573,413 11,758,032 9,682,610 10,710,347 11,593,995 11,593,995 11,593,995 11,593,995 11,593,995 11,593,995

Total EBITDAs Shaori Lakeside Hotel and Spa 619,901 831,622 1,010,150 1,248,989 1,501,603 1,501,603 1,501,603 1,501,603 1,501,603 1,501,603 Shaori Restaurant and Hotel 89,524 100,690 118,583 137,096 149,664 149,664 149,664 149,664 149,664 149,664 149,664 5,846,400 1,769,580 1,169,280 Shaori Chalets Shaori Additional Revenues 51,809 64,478 75,175 86,212 97,713 97,713 97,713 97,713 97,713 97,713 Utsera Restaurant and Hotel 166,929 281,729 321,681 358,118 390,191 390,191 390,191 390,191 390,191 390,191 Shovi Climatic Resort Hotel 481,087 499,094 606,224 751,993 935,640 935,640 935,640 935,640 935,640 935,640

4,765,860 1,858,320 1,524,240 Shovi Chalets Shovi Additional Revenues 25,613 30,957 35,883 40,201 44,828 44,828 44,828 44,828 44,828 44,828 Estimated Total EBITDA 10,701,784 5,073,928 4,519,984 2,186,208 2,635,176 3,119,639 3,119,639 3,119,639 3,119,639 3,119,639 3,119,639

. Total volume of anticipated revenues (non-inflated) amount to USD125,763,955 between 2018 and 2028 (11 years) accompanied by an estimated consolidated EBITDA flow of USD43,834,913.

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 150

8.8 Sensitivity analysis and Investment costs

8.8.1 Sensitivity analysis

. Sensitivity analysis is a technique used to determine how different values of an independent variable will impact a particular dependent variable under a given set of assumptions. This technique is used within specific boundaries that will depend on one or more input variables. The main goal of sensitivity analysis is to gain insight into which assumptions are critical.

. Sensitivity analysis is a way to predict the outcome of a decision if a situation turns out to be different compared to the key prediction.

. As per the request of our Client, we have prepared a fully functional Sensitivity Analysis Excel spreadsheet. The attached spreadsheet comprises financial projections of all revenue generating sources (identified development opportunities of commercial real estate and related services) respectively with a summarisation of revenues and anticipated profits.

. The spreadsheet allows our Client to perform a full sensitivity analysis on our development recommendations at both revenue and cost levels.

. We have highlighted the Excel rows in colour that are designated to be adjusted to perform the sensitivity analysis as per our Client’s intentions.

. Any adjustments made in the respective charts (at highlighted rows) will be also reflected on the summarised revenue and profitability charts. 8.8.2 Investment costs

. The tables overleaf show the respective and total investment volumes needed for the realisation of the identified development opportunities broken down to project elements.

. Investment volumes of the respective project elements have been calculated based on international benchmarks and both Georgian and international project experience of our professional team.

. The investment summarisation also indicates our recommendation of the share and duties of investment between the public and private sector whereas the public sector is primarily represented by the PF and the State, whilst the private sector is represented by the possible future international and Georgian private investors or development companies interested in the identified investment opportunities.

. “Estimated total investment volumes” column show the total investment need of the project elements which is broken down to shares in the adjacent columns in case of recommended joint venture financing structure. Financing structure and designated stakeholders of project elements are marked with an “x” in columns.

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 151

Indicative Investment Budget for the Identified Development Opportunities in Racha

Estimated Total Estimated Investment Volumes and Recommended Investment Sources of Financing Volumes

Quantity Unitary Total in Destinations Facility / Unit Price Public Private Joint Base USD volume

x in USD x in USD x Shaori

"Shaori Lakeside Hotel and Spa": a 125 rooms 120,000 USD/room 15,000,000 7,500,000 7,500,000 X 125-Room Internationally Branded Hotel Commercial Real USD/chalet Estate Chalets 40 chalets 110,550 4,422,000 2,211,000 2,211,000 X (avg.) Development Riverside restaurant 375 m2 1,100 USD/m2 412,500 X 412,500

(100 seats)

Hotel rooms of riverside 10 rooms 35,000 USD/room 350,000 X 350,000

restaurant

Garden 40,000 m2 40 USD/m2 1,600,000 800,000 800,000 X

Kids 1,500 m2 150 USD/m2 225,000 X 225,000 playground View point 1 260,000 X 260,000 Service Infrastructure Port 4 38,000 USD/port 152,000 X 152,000

Development Tourist information 1 160,000 X 160,000

centre USD/bus Bus stop 3 3,200 9,600 X 9,600 stop Road (hotel 5,000 m2 95 USD/m2 475,000 X 475,000 access) Parking 3,000 m2 130 USD/m2 390,000 195,000 195,000 X

Walkway 2,000 m2 75 USD/m2 150,000 75,000 75,000 X (chalets)

Promenade (3m wide road 27,500 m 225 USD/m 6,187,500 X 6,187,500 around the lake) General Infrastructure Electric supply 10,000 m 80 USD/m 800,000 X 800,000 Development Water supply 1,500 m 80 USD/m 120,000 X 120,000 (min.) Gas supply 1,500 m 80 USD/m 120,000 X 120,000 (min.) Wastewater 1,500 m 95 USD/m 142,500 X 142,500 (min.) Transformer 1 64,000 USD/p 64,000 X 64,000

Fence 1,600 m 65 USD/m 104,000 52,000 52,000 X

Contingency 2,491,528 1,525,888 965,640 (8%)

Shaori Sub 33,635,628 20,599,488 13,136,140 Total

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 152

Indicative Investment Budget for the Identified Development Opportunities in Racha

Estimated Total Estimated Investment Volumes and Recommended Investment Sources of Financing Volumes

Quantity Unitary Total in Destinations Facility / Unit Price Public Private Joint Base USD volume

x in USD x in USD x

Utsera

“MedHotel Utsera”: an Commercial Real 80-Room Estate 80 rooms 45,000 USD/room 3,600,000 1,800,000 1,800,000 X independent Development (non-branded) hotel

Service Infrastructure Garden 10,000 m2 55 USD/m2 550,000 X 550,000

Development

Walkway, 1,200 m2 75 USD/m2 90,000 X 90,000 terraces Parking 600 m2 130 USD/m2 78,000 X 78,000

Road (restaurant 1,200 m2 95 USD/m2 114,000 57,000 57,000 X

access) General Electric supply 150 m 80 USD/m 12,000 X 12,000 Infrastructure (min.) Development Water supply 150 m 80 USD/m 12,000 X 12,000 (min.) Gas supply 150 m 80 USD/m 12,000 12,000 (min.) Wastewater 150 m 95 USD/m 14,250 X 14,250 (min.) Fence 530 m 65 USD/m 34,450 17,225 17,225 X

Contingency 361,336 153,958 207,378 (8%)

Utsera Sub 4,878,036 2,078,433 2,799,603 Total

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 153

Indicative Investment Budget for the Identified Development Opportunities in Racha

Estimated Investment Estimated Investment Volumes and Recommended Volumes in Sources of Financing 2015 values

Quantity Unitary Total in Destinations Facility / Unit Price Public Private Joint base USD volume

x in USD x in USD x Shovi

“Shovi Climatic Resort Hotel and Spa”: a Commercial 105-Room 105 rooms 100,000 USD/room 10,500,000 5,250,000 5,250,000 X

Real Estate internationally Development branded resort hotel

USD/chalet Chalets 40 chalets 101,288 4,051,520 2,025,760 2,025,760 X (avg.) Garden 36,000 m2 40 USD/m2 1,440,000 720,000 720,000 X

Tennis court 4 60,000 USD/p 240,000 120,000 120,000 X

Tourist information 1 85,000 USD/p 85,000 X 85,000 Service centre & Infrastructure Entrance Development

Kids playground & 12,000 m2 130 USD/m2 1,560,000 780,000 780,000 X

adventure park

Road (hotel 3,500 m2 95 USD/m2 332,500 166,250 166,250 X access) Parking 3,300 m2 130 USD/m2 429,000 214,500 214,500 X

Walkway 2,200 m2 75 USD/m2 165,000 82,500 82,500 X (chalets) Electric supply 1,100 m 80 USD/m 88,000 X 88,000 General Water supply Infrastructure 1,100 m 80 USD/m 88,000 X 88,000 (min.) Development Gas supply 1,100 m 80 USD/m 88,000 X 88,000 (min.) Wastewater 1,100 m 95 USD/m 104,500 X 104,500 (min.) Transformer 1 64,000 USD/p 64,000 X 64,000

Fence 1,500 m 65 USD/m 97,500 48,750 48,750 X

Contingency 1,546,642 794,021 752,621 (8%) Shovi Sub 20,879,662 10,719,281 10,160,381 Total

Grand Total 59,393,326 33,397,202 25,996,124

. Total volume of assumed investment costs amount to USD59,393,326, broken down to USD33,397,202 supported by public sector and USD25,996,124 generated by private investors.

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 154

. The following table presents the key cumulated indicators of the proposed development projects in Racha region between 2018 and 2028.

Key cumulated indicators Y0-Y10 (2018-2028) Racha Region Development all values in USD

Investment costs 59,393,326

Revenues 125,763,955

EBITDA 43,834,913

. The following table presents the key commercial investment targets and their estimated investment cost.

Summary of Key Commercial Investment Targets

Capacity/Number Estimated Investment Private involvement Facilities/ Type of investment Affiliation of Units Cost in USD requirement (in USD)

internationally operated Shaori Lakeside Hotel and Spa 125 15,000,000 7,500,000 & branded

interconnected with the Shaori Chalets 40 4,422,000 2,211,000 hotel

Riverside restaurant with 10 independent 100 412,500 412,500 hotel rooms

Medhotel Utsera independent 80 3,600,000 1,800,000

Shovi Climatic Resort Hotel internationally operated 105 10,500,000 5,250,000 and Spa & branded

interconnected with the Shovi Chalets 40 4,051,520 2,025,760 hotel

Total 37,986,020 19,199,260

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 155

. Based on international benchmarks and best practice, we have determined hotel development budgets on a per key (guestroom) basis taking into consideration each hotel project’s attributes, future market positioning and service level. In the following, we present the breakdown of estimated development budgets based on our project experience and international hotel companies (non-published) development guidelines. The presented figures exclude costs of technical assistance provided by the future international operator (not identified at this stage of the project).

. The 125-key Shaori Lakeside Hotel and Spa has a project budget of US$120,000 per key (guestroom). With its proposed capacity of 125 guestrooms, gross total budget is estimated to achieve US$15 million comprising the following cost-breakdown:

Calculation of the Gross-Investment Costs for Shaori Lakeside Hotel and Spa in USD 1,000 per Room Number of guestrooms 125 Gross Investment Costs 120 Total Investment without Land 15,000 thereof in USD 1,000 % of Total in USD 1,000 Substructure 3.0% 450 Superstructure 34.0% 5,100 Internal Finishes 13.0% 1,950 Fittings, Furnishings & Equipment 10.0% 1,500 Services (utilities, technical infrastructure) 25.0% 3,750 External works 5.0% 750 Other (preliminaries, overheads) 10.0% 1,500 Total 100.0% 15,000

. The 100-key Shovi Climatic Resort Hotel has a project budget of US$105,000 per key (guestroom). With its proposed capacity of 100 guestrooms, gross total budget is estimated to achieve US$10.5 million comprising the following cost-breakdown:

Calculation of the Gross-Investment Costs for Shovi Climatic Resort Hotel in USD 1,000 per Room Number of guestrooms 105 Gross Investment Costs 100 Total Investment without Land 10,500 thereof in USD 1,000 % of Total in USD 1,000 Substructure 3.0% 315 Superstructure 35.0% 3,675 Internal Finishes 13.0% 1,365 Fittings, Furnishings & Equipment 10.0% 1,050 Services (utilities, technical infrastructure) 24.0% 2,520 External works 5.0% 525 Other (preliminaries, overheads) 10.0% 1,050 Total 100.0% 10,500

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 156

. The independent 80-key Utsera MedHotel has a project budget of US$45,000 per key (guestroom). With its proposed capacity of 80 guestrooms, gross total budget is estimated to achieve US$3.6 million comprising the following cost-breakdown:

Calculation of the Gross-Investment Costs for MedHotel Utsera in USD 1,000 per Room Number of guestrooms 80 Gross Investment Costs 45 Total Investment without Land 3,600 thereof in USD 1,000 % of Total in USD 1,000 Substructure 4.0% 144 Superstructure 36.0% 1,296 Internal Finishes 12.0% 432 Fittings, Furnishings & Equipment 15.0% 540 Services (utilities, technical infrastructure) 23.0% 828 External works 5.0% 180 Other (preliminaries, overheads) 5.0% 180 Total 100.0% 3,600

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 157

8.9 Project financing and Return on Investment of projects

. Albeit it is understood that prevailing general interest rates are slightly above 10 per cent, we applied 8.50 per cent for our preliminary loan calculations as we have assumed that parallel with the continuous strengthening of the Georgian economy and improving investor perception of the country, project loan interest rates will gradually decrease. This slightly more favourable debt service cost shall be achieved by a syndicate loan together with the participation of an international bank. We prepared our debt-service calculations based on the assumption that the project will access financing with the following conditions: annuity loan with a 12-year payback period and a 2- year grace period, 8.50 per cent interest rate. Based on indications from our Client, we have used a loan to equity ratio of 35% and 65% respectively.

. Based on our international project experience it can be concluded that internal rate of returns for 10 years does not sufficiently evaluate a hotel investment opportunity therefore we are presenting Return on Investment figures that we find more relevant to the subject internationally branded projects. Hotel developments of higher quality are long-term (often 15 year+) investments and shall be seen as strategic investments. The subject projects are understood to be located in untested destinations and thus reflected in our financial projections as well. The identified investment opportunities are seen as strategic investment projects that are not to be compared to Tbilisi international hotel projects whereas those projects are understood to achieve a faster return on investment.

Shaori Lakeside Hotel and Spa / Racha: Investment & Finance

Paymentplan in USD 1,000 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

Loan 1

Debt - Beginning 5,250 5,250 5,250 4,896 4,512 4,096 3,644 3,153 2,621 2,044 1,417 737

Principal Repayment 0 0 354 384 417 452 490 532 577 626 680 737

Interest 446 446 446 416 384 348 310 268 223 174 120 63

Total Payment 446 446 800 800 800 800 800 800 800 800 800 800

Debt – End 5,250 5,250 4,896 4,512 4,096 3,644 3,153 2,621 2,044 1,417 737 0

Shaori Lakeside Hotel and Spa / Racha: Investment & Finance in current USD 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Financial Ratios

ROI 4.5% 6.2% 7.7% 9.7% 12.0% 12.2% 12.5% 12.8% 13.1% 13.4%

Ø ROI 4.5% 5.3% 6.1% 7.0% 8.0% 8.7% 9.3% 9.7% 10.1% 10.4%

ROE 2.4% 1.3% 3.6% 6.8% 10.2% 10.6% 11.1% 11.5% 12.0% 12.4%

Ø ROE 2.4% 1.8% 2.4% 3.5% 4.9% 5.8% 6.6% 7.2% 7.7% 8.2%

ROLoan 12.9% 17.7% 22.0% 27.8% 34.2% 35.0% 35.8% 36.6% 37.5% 38.3%

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 158

Shaori Lakeside Hotel and Spa with Chalets /Racha: Investment & Finance

Paymentplan in USD 1,000 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

Loan 1

Debt - Beginning 6,798 6,798 6,798 6,339 5,842 5,303 4,718 4,083 3,394 2,646 1,835 955

Principal Repayment 0 0 458 497 539 585 635 689 748 811 880 955

Interest 578 578 578 539 497 451 401 347 288 225 156 81

Total Payment 578 578 1,036 1,036 1,036 1,036 1,036 1,036 1,036 1,036 1,036 1,036

Debt – End 6,798 6,798 6,339 5,842 5,303 4,718 4,083 3,394 2,646 1,835 955 0

Shaori Lakeside Hotel and Spa with Chalets/ Racha: Investment & Finance in current USD 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Financial Ratios

ROI 3.5% 4.8% 5.9% 7.5% 9.2% 9.5% 9.7% 9.9% 10.1% 10.4%

Ø ROI 3.5% 4.1% 4.7% 5.4% 6.2% 6.7% 7.2% 7.5% 7.8% 8.0%

ROE 61.1% 8.4% 0.9% 3.4% 6.0% 6.3% 6.7% 7.0% 7.4% 7.7%

Ø ROE 61.1% 34.8% 23.5% 18.4% 16.0% 14.4% 13.3% 12.5% 11.9% 11.5%

ROLoan 10.0% 13.7% 17.0% 21.5% 26.4% 27.0% 27.6% 28.3% 28.9% 29.6%

Shovi Climatic Resort Hotel and Spa / Racha: Investment & Finance

Paymentplan

2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

Loan 1

Debt - Beginning 3,675 3,675 3,675 3,427 3,158 2,867 2,550 2,207 1,835 1,431 992 516

Principal Repayment 0 0 248 269 292 316 343 372 404 439 476 516

Interest 312 312 312 291 268 244 217 188 156 122 84 44

Total Payment 312 312 560 560 560 560 560 560 560 560 560 560

Debt – End 3,675 3,675 3,427 3,158 2,867 2,550 2,207 1,835 1,431 992 516 0

Shovi Climatic Resort Hotel and Spa / Racha: Investment & Finance in current USD 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Financial Ratios

ROI 5.0% 5.3% 6.6% 8.4% 10.7% 10.9% 11.1% 11.4% 11.7% 11.9%

Ø ROI 5.0% 5.2% 5.6% 6.3% 7.2% 7.8% 8.3% 8.7% 9.0% 9.3%

ROE 3.1% 0.0% 1.9% 4.7% 8.2% 8.6% 8.9% 9.3% 9.7% 10.2%

Ø ROE 3.1% 1.5% 1.7% 2.4% 3.6% 4.4% 5.1% 5.6% 6.1% 6.5%

ROLoan 14.3% 15.2% 18.8% 23.9% 30.4% 31.1% 31.9% 32.6% 33.3% 34.1%

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 159

Shovi Climatic Resort Hotel and Spa with Chalets / Racha: Investment & Finance

Paymentplan in USD 1,000 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

Loan 1

Debt - Beginning 5,093 5,093 5,093 4,750 4,377 3,973 3,534 3,059 2,542 1,982 1,375 715

Principal Repayment 0 0 343 372 404 438 476 516 560 608 659 715

Interest 433 433 433 404 372 338 300 260 216 169 117 61

Total Payment 433 433 776 776 776 776 776 776 776 776 776 776

Debt – End 5,093 5,093 4,750 4,377 3,973 3,534 3,059 2,542 1,982 1,375 715 0

Shovi Climatic Resort Hotel and Spa with Chalets / Racha: Investment & Finance in current USD 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Financial Ratios

ROI 3.6% 3.8% 4.8% 6.0% 7.7% 7.9% 8.0% 8.2% 8.4% 8.6%

Ø ROI 3.6% 3.7% 4.1% 4.6% 5.2% 5.6% 6.0% 6.3% 6.5% 6.7%

ROE 71.0% 13.8% -0.9% 1.1% 3.6% 3.9% 4.2% 4.5% 4.7% 5.0%

Ø ROE 71.0% 42.4% 28.0% 21.3% 17.7% 15.4% 13.8% 12.6% 11.8% 11.1%

ROLoan 10.3% 10.9% 13.6% 17.3% 22.0% 22.5% 23.0% 23.5% 24.1% 24.6%

Medhotel Utsera: Investment & Finance

Paymentplan

2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

Loan 1

Debt – Beginning 1,260 1,260 1,260 1,175 1,083 983 874 757 629 490 340 177

Principal Repayment 0 0 85 92 100 108 118 128 139 150 163 177

Interest 107 107 107 100 92 84 74 64 53 42 29 15

Total Payment 107 107 192 192 192 192 192 192 192 192 192 192

Debt – End 1,260 1,260 1,175 1,083 983 874 757 629 490 340 177 0

Medhotel Utsera: Investment & Finance in current USD 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Financial Ratios

ROI 5.1% 8.7% 10.2% 11.6% 13.0% 13.3% 13.6% 13.9% 14.2% 14.5%

Ø ROI 5.1% 6.9% 8.0% 8.9% 9.7% 10.3% 10.8% 11.2% 11.5% 11.8%

ROE 3.2% 1.2% 4.1% 7.0% 9.6% 10.2% 10.8% 11.5% 12.1% 12.8%

Ø ROE 3.2% 0.7% 1.8% 3.1% 4.4% 5.4% 6.2% 6.8% 7.4% 8.0%

ROLoan 14.5% 17.5% 20.4% 23.2% 25.9% 26.5% 27.1% 27.7% 28.4% 29.0%

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 160

. With regards to financing we suggest PF that the identified investment projects shall seek project loans with a minimum of 12-year payback period with a 2-year grace period with an interest rate lower than 10 per cent (annuity loan). . In general, deeper state-involvment and engagement in such strategic development projects is not uncommon in untapped markets/emerging destinations.

. Such involvement can primarily be present in the form of state-provided subsidies for private investors of such “pioneer” projects mainly in the following forms:

o Subsidy of project loan intereset rates up to 50 per cent;

o Initial investment support for general infrastructural development need of the project such as landscaping/utilities;

o Supporting the operation of the hotel thus improving profitability of operation in the form of e.g. employee contribution and other tax reduction or remission.

. We conclude that the provision of subsidies could result in the improvement of Internal Rate of Return (IRR) figures in the scale of between 1-5 percentage points.

. We have been informed that the Government is continuing intense negotiations to introduce loan interest rate subsidies for hotel development projects under certain market circumstances. As at the time of the issuance of this report the bill is a draft bill, this subsidy is not materialised in our financial projections. However, we would like to note that shall such subsidy be introduced and shall the subject project be eligible, Internal Rate of Return (IRR) figures could noteably further improve.

. As the “Law of Georgia on the Development of High Mountainous Regions” comes in to force from the 1st January 2016, businesses are waived from profit tax payment for the first 10 years of operation which subsidy is to support profitability of private businesses. Our financial calculations has been prepared without profit tax (excluding profit tax) as profit taxes are understood to be effected by various internal and external influences (other corporate conditions) therefore is not part of the international financial projections (prepared by the standards of the Uniform System of Accounts for the Lodging Industry).

. The following table demonstrates the IRRs of all key identified projects for 10-, 15- and 20-year horizon:

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 161

Internal Rate of Return Summary for selected International standard Hotel and Real Estate Projects - Racha Region, Georgia

All values are in 1,000 USD 10-year 15-year 20-year Projects scenario scenario scenario

Shaori Total of which 10-year cum cash 15-year cum cash 20-year cum cash Investment Equity flow flow flow Shaori Hotel & Chalets 19 422 12 624 14 512 24 253 36 331

Shaori Hotel and Chalets

IRR - equity 4.3% 11.8% 14.2%

Shovi Total of which 10-year cum cash 15-year cum cash 20-year cum cash Investment Equity flow flow flow Shovi Hotel & Chalets 14 551 9 458 10 493 16 433 23 957

Shovi Hotel and Chalets

IRR - equity 4.2% 11.9% 14.4%

Utsera Total of which 10-year cum cash 15-year cum cash 20-year cum cash Investment Equity flow flow flow

Utsera Hotel 3 600 2 340 2 413 5 021 8 160

Utsera MedHotel

IRR - equity 0.5% 8.6% 11.4%

Financing conditions

Interest rate 8.5%

Loan term 12 years

Grace period 2 years

Type of Loan Annuity

Equity:Debt 65%:35%

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 162

8.10 Anticipated direct effects of developments

8.10.1 Hotel brands in Georgia

. The Georgian hotel market has seen rapid development in terms of quality of overall hotel room supply with the advent of various international hotel brands entering the market. International hotel companies have been primarily concentrating to the capital and Batumi, there is a perceptible interest for development opportunities in rural destinations as well (e.g. Crown Plaza and Rixos in Borjomi). We believe that the further expansion of internationally branded hotel roomstock can be anticipated in the mid-to long-terms. We further believe that international hotel brands also increment general investor-appetite towards the country thus a possible upswing in foreign direct investments can be a realistic aim in the mid-to long-terms.

. In the following table, international hotel brands are shown that already operate at least one property in Georgia or has an undergoing development in progress.

Existing Pipeline

. Among the identified development opportunities, two development projects are recommended to become internationally branded hotels (Shaori Lakeside and Spa and Shovi Climatic Resort). 8.10.2 Anticipated direct effects of developments

. On one hand, tourism wields tremendous economic positive outcomes: it is one of the world’s most significant sources of economic outcomes and employment. However, tourism is a very complex industry involving numerous stakeholders (sometimes with opposite interests) and requiring significant amount of resources. As such, tourism can have very opposite effects according to the way activities are managed. Managed well, tourism can play a positive role in the socio, cultural,

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 163

economic, environmental and political development of the destination and as such represents a significant development opportunity for many countries and communities. One of the primary motivations for a region to promote itself as a tourism destination is the expected economic improvement.

. The following diagrams show the anticipated direct and indirect effects of our development recommendations in the fields of the region’s tourism and economy. It can be anticipated that with the realisation of the identified development opportunities, the region’s economy would see a notable revival due to the development of tourism.

•Significant demand upswing for Racha as a tourist destination; •Prolonged average length of stay, soar in hotel guest nights; •Inflow of domestic tourists; Tourism •Contibution to the improvement of general service infrastructure quality in the region; •Increase of local demand for cultural institutions; •Ability to extend the season, reduce effects of seasonality.

•Heightened Tax income for the municipalties of Racha; •Directly created jobs in volumes as high as 250-350 full time employees; Economy •Additional job creation during the course of constructions; & •Improved investor perception of the region; •Tourism sector's growing contribution to the GDP; •Indirect growth of economy of the region due to Social tourism's "multiplier effect"; •Increased sales volume of local products; •Increase of direct household earnings.

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9 INVESTOR ASSESSMENT

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9.1 Georgian National Investment Agency

. Georgia is continuously developing its infrastructure and simplifying licensing and permits to ease constraints on business. The total number of required licences and permit has been reduced by 84% since 2005. Georgia offers favourable general investment environment for investors.

. The following non-exhaustive list shows the main attractive characteristics of investing in Georgia:

o Low level of corruption;

o Strategic geographic location and developing infrastructure;

o Business friendliness, with a continuously growing and diversified economy;

o World’s leading reformer;

o Liberal trade regimes and immigration policies;

o Low taxes and easy business registration, simplified licensing and permitting procedures;

o Young workforce, available at competitive costs.

. The Georgian National Investment Agency, established in 2002, plays a role of moderator between foreign investors and the Government of Georgia. The aims of the Agency are the followings: to promote Georgia internationally, to support FDI inflows, to increase awareness of Georgia as an investment destination, to create an investment portfolio consisting of Government initiated projects, to provide a strong platform for dialogue between the private and public sectors and to promote investment climate and opportunities of Georgia abroad.

. The GNIA also manages the offline sales and marketing of investment opportunities and on investment environment (information materials, conference/exhibition’s attendance)

. General attractiveness of investing in Hospitality & Real Estate in Georgia were summarised in the following points by GNIA:

o Georgia is a regional centre;

o Fast growing sector;

o Continuous increase of international visitors, both in terms of air passengers and total guest nights;

o Incentives available;

o Various type of resorts;

o No real estate ownership restrictions;

o Very low crime-rate;

o Rich natural and cultural resources.

. Currently the GNIA’s portfolio of investment opportunities does not contain any investment opportunities in Racha.

. In our opinion the government’s engagement is absolutely necessary in the implementation of development projects in order to attract investors to the region.

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. We believe that state-engagement is inevitable through the activity of the Partnership Fund to put Racha on the radar screen of both domestic and international investors and facilitate investment. 9.2 PPP: Public-Private Partnership

. Public-Private Partnerships (PPP) are long-term contractual arrangement between government agencies (federal, state or local) and private parties for providing public assets and services, provided traditionally by the public sector. Such partnerships are characterised by the sharing of investment, risk, responsibility and reward between the partners.

. Within the framework of a PPP, the private sector offers a service traditionally offered by the public sector; accept a substantial transfer of risks, and looks for a reward against risk. In PPP schemes the private sector can provide additional finance in an environment of budgetary restrictions, alternative management and implementation skills, value added to the consumer and the public and better identification of needs and optimal use of resources for the public sector to exploit.

. On one hand, PPPs can mobilise additional sources of funding and financing for infrastructure, while on the other hand PPPs help to improve project selection, subjecting assumptions to the market test of attracting private finance.

. Cooperation with private sector, in PPP projects, is able to offer a number of advantages, including acceleration of infrastructure provision, faster implementation, reduced whole life costs, better risk allocation, better incentives to perform, improved quality of service, generation of additional revenues and enhanced public management.

. Under PPP arrangements, private sector contractors become long term providers of services rather than simply upfront asset builders, combining the responsibilities of designing, building, operating and possibly financing assets in order to deliver the services needed by the public sector.

. International interest in PPPs is attributable generally to the following main drivers:

o Investment in infrastructure: Economic growth is highly dependent on the development of infrastructure thus for many governments this is seen as the most pressing area for private sector involvement;

o Greater effectiveness in the use of resource: The experience of privatisation has highlighted that many activities can be undertaken more cost effectively with the involvement of private sector;

o Generating commercial value from public sector assets: significant amounts of public resources are invested in the development of assets that are then often used for a narrow range of applications within the public sector.

. There are a various types of structures and arrangements of PPPs, but all of them involve some degree of risk transfer away from public sector to private firms. Successful PPPs require an effective legislative and control framework to recognise the objectives and needs of the other. Development of PPP constructions is extremely dynamic and the features of them are adjusted to the specific circumstances.

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. There are a number of PPP schemes, all of which has accompanying strengths and weaknesses which need to be recognised and integrated into project design. The type of PPP structure must be selected according to the project type, needs and sector. There is no existing unique perfect model.

. PPPs require active participation of all partners, who must recognise and address the objectives and characteristics of each other. As the level of private sector participation increases, so do the number of participants and the requirements of all partners. For private sector participants, the one of the most important requirements for any type of involvement is the potential to derive a reasonable profit.

. Essential elements to achieve successful partnership:

o Partnerships require the will of all parties involved to work together;

o Effective user fee policies;

o Making of effective organisation and streamlined decision;

o Series of checks and balances;

o Providing creditability for the private partner;

o Strong political support.

. The Partnership Fund has participated in a number of developments within the framework of Public- Private Partnership. The following table contains some examples for investment projects:

Investment projects Name of the project Total Investment Fund Participation Nenskra HPP USD628 million Equity Black Sea Port USD500 million Equity Gardabani Thermal Power Plant USD220 million Equity Hotel Rixos Borjomi USD48 million Equity Construction Material Factory USD6 million Equity Source: http://www.fund.ge/eng/projects/ 9.3 Foreign investors

. In the following chapters the main foreign and local investors, active on the hospitality investment scene some of them with extensive and proven track record are presented.

. Hualing Group is a private enterprise group, established in 1988, Urumqi, Xinjiang, China. The company mainly operates in the field of developing, managing and renting of trade centers and wholesale markets as well as hotel construction and management. The company also takes part in sectors of foreign trade, modern livestock industry development and mining. Hualing Group started to invest in Georgia in 2007 and is to date the country’s largest single investor. By the end of 2014 it has created more than 3,000 workplaces and the amount of its total investment has reached USD500 million. Hualing has acquired forest-harvesting rights for the next 20 years and has obtained the exploration rights to mine gold and stone and it has also expanded its interests to high-end hospitality. In 2012, it bought a controlling stake in

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BasisBank and it has been in negotiations on acquiring another Georgian bank, The Hualing Free Industrial Zone, 1,000 acres of land in Kutaisi has been developed by Hualing Group. The biggest investment project of the company the ‘Tbilisi Sea New City’.

. Dhabi Group is one of the largest consortiums of the United Arab Emirates. The owner of the company is H.E. Sheikh Nahayan Mabarak Al Nahayan, State Minister of Education and Scientific Research. It has taken part in investment activities in various sectors of the economy (oil and gas exploration, mining, hospitality, communication, banking, automobile, construction etc.) in the and CIS countries for more than 40 years. It entered the Georgian market in 2008, when it founded ‘Kor Bank’ and purchased 100% of shares of the ‘Standard Bank’ and it was merged with ‘Kor Bank’. In Georgia the four largest investments of the company are: Kor Standard Bank (KSB), Millennium Biltmore Hotel complex in Tbilisi and ‘Varid Telekom’.

. The Silk Road Group (SRG) was established in the early 1990s after the dissolution of the former Soviet Union and since has developed into one of the leading oil and fuel transport and trading operators. The company serves a range of countries in the Central Asia region including: Afghanistan, Azerbaijan, Kazakhstan, Uzbekistan, Tajikistan and Turkmenistan. Since 2004, the company has expanded its business base including investments in the following sectors: transportation, infrastructure, trading, real estate, banking, telecommunications and sports. The business units of the Group are supported by corporate service professionals in Europe, Asia and North America. The holding company of SRG has investments in SILKNET, the leading fixed-line telecommunication service provider in Georgia, in JSC Wissol Petroleum Georgia, the leading chain of petrol stations of Georgia, in The Radisson Blu Iveria hotel in Tbilisi, in The Radisson Blu Batumi Hotel and in redevelopment of Tsinandali Estate, in Georgia’s wine region Kakheti.

. Verny Capital is one of the largest companies in Kazakhstan specialising in making direct equity investment is private companies. By acquiring a controlling or significant minority stakie in private companies in Kazakhstan and in other CIS countries. The company was founded in 2006 in Almaty and is actively involved in their strategic and operational management. Total volume of investment is approximately USD4 billion. The company mainly invests in the following sectors: mining, telecommunications&media, infrastructure projects and real estate.

. Africa Israel Investments Ltd. is an international holding and investments group. The Group is highly experienced and active in Israel and abroad in the fields of real estate, construction & infrastructure, industries and tourism & leisure. The strategy of the company includes focusing on the development and completion of a number of major projects in Russia, Europe, the USA and Israel, realising assets at good prices and worthy yields and operating the Group’s credit and financing activities and professional risk management in Israel and abroad.

. RAKIA (Ras Al Khaimah Investment Authority) was founded in the United Arab Emirates to reinforce the investment climate and to promote various economic

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sectors. The company has taken part in developments in various sectors (industrial parks, education and technology, real estate, transportation, manufacturing and energy). The foreign investments of the company included notably shares in Poti Sea Port, in the Sheraton Metechi Palace Hotel in Tbilisi and in the Poti Port Free Industrial Zone.

. DIA Holding, a joint-venture between IC Investment Holding (Turkey) and Intersun Holding (UAE), was founded in 2006 in the United Arabic Emirates. The company has signed numerous prestigious tourism and real estate projects since its foundation in Azerbaijan: Baku Flame Towers, Heyfar Aliev Centre, Shahdag ski resort, Academy Hotel Project, Mersin Integrated Health Campus Project etc.

. Pasha Construction is one of the foremost developers of international standard commercial and residential propery in Azerbaijan. The full service development and construction company was established in November 2006. The landmark projects of the company have made significant contribution to the transformation of the Baku cityscape. The Pasha Construction was the developer of Boulevard Hotel, Four Seasons Hotel, Intourist Hotel, JW Marriott Absheron Hotel, Park Chalet and Pik Palace Hotel in Azerbaijan.

. BAB Group was established by Bayram Ali Bayramoglu in 1990. Since its foundation the company has taken part in investment activities in various sectors (external trade, construction, chemistry, petro chemistry, finance, tourism and food). The Turkish Group owns the highest complex in Batumi, namely the Babylon Tower.

. Kazmunaigaz Service Ltd provides oil and gas exploration and production services. The company is based in Kazahstan and operates as a subsidiary of Joint Stock Company KazMunayGas National Company. Kazmunaigaz Service Ltd invested in the 125-key Rixos Borjomi. The hotel was opened in May 2015 and operates under a management agreement with Rixos. The Partnership Fund was also involved in the project.

. GIMG Ltd. was founded in 2006 and owned by the Austrian GAB resorts Holding GmbH, which is a Russian-Austrian joint-venture company. GIMG ltd. is responsible for the construction of Hotel & Entertainment Complex in Batumi. The project features a 232-key hotel complex, entertainment centre, multiplex/cinema centre, residential complex and and outdoor swimming pool. The project has been completed stage by stage. The hotel complex and entertainment centre is planned to be finished in 2016.

. LTD Coordination Center for International Investment is a Georgian-international joint-venture company. Limited information is available on the company, owning a development project in Kazbegi. The details of the project are presented in Chapter 7.3.

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9.4 Local investors

. Orbi Group is one of the leading building and development company in Georgia, founded in 1997. Approximately 5,750 people are employed by the companies of the group, namely the ’Orbi Betoni’ and the ’Orbi 2000’. The company has funded all projects from its own capital without any credit resources. It is the first company in Georgia, which started to construct apart-hotels. Finished projects of the company are the Golden Palace Batumi, 135, Parnavaz Mepe St Batumi, 82, Gorgiladze St Batumi etc. Ongoing projects of the company are Orbi Beach Tower Batumi, Orbi Residence Batumi, Orbi Palace Bakuriani, City Park Batumi etc.

. Block Geo Group (BGG) was founded in 1996, with the merge of Medimex, a Georgian construction company and Block a.s., a Czech engineering company. Since then, the company has entered other sectors as well: healthcare, development, hospitality, logistics, insurance, retail and energy. In 2007, the Group bought the 41-room hotel, in the center of Tbilisi, and some land plots in Tbilisi, Kutaisi, Zugdidi, Batumi and Poti. According to the plans the group wanted to create the first midscale hotel chain in the country, but because of the crisis all financial resources were reallocated for development of hospital network, thus this plan has been postponed. Currently the BGG ensures workplace for more than 5,000 people.

. Adjara Group Hospitality is the largest and the most rapidly -growing, privately held owner and management company in Georgian hospitality industry, providing as of total 600 jobs, owning and managing 3 hotels in the country: Holiday Inn Tbilisi, Rooms Hotel Tbilisi and Rooms Hotel Kazbegi. The company entered the local market in 2010, when it opened the 270-room Holiday Inn in Tbilisi. The company developed the unique upscale design hotelbrand, Rooms Hotel, the first Georgian hotel chain in 2012, aiming to target travellers seeking international ‘lifestyle’ products and atmosphere. Since 2014 within the Adjara Group, Limitless Hospitality, the Destination Management Company has been operated. In addition to two major hotel projects (Crowne Plaza Batumi and InterContinental Tbilisi) the company takes part in the installation of an artificial snow making system in the neighbourhood of Rooms Hotel Kazbegi. The company has excellent business relationships with the largest local and international financial institutions such as Bank of Georgia and European Bank for Reconstruction and Development. In 2014, the company positioned itself as an industry leader in terms of Corporate Social Responsibility (CSR). In addition to increasing and diversifying of CSR activities the aim of the company is to expand globally with its own hotel brand.

. Loyal Capital S.A. was established in 2015, in Grand Duchy, Luxembourg, functioning as the headquaerters of Local Captal Group, participating mainly in international real estate development projects and private equity investments. Argonuts LLC is a joint- venture of the Loyal Capital S.A. and EBRD, which majority owner (85%) is the Loyal Capital S.A. The factory started to operate in 2007 and the total investment cost was USD8 million. In 2011, the company bought the FC Dinamo Tbilisi and Rustavi Azot Ltd, producing two main export products of Georgia, namely ammonium nitrate and

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sodium cyanide. The value of overall sales is estimated to reach USD150million. The company owns 3 further projects, which are currently under development. The Shopping Centre ‘Morning Rise’ is a joint investment of Loyal Capital and its European partner and will contain residential towers as well. The territory of the development is 12 hectares. The total investment cost has already reached EUR25 million. The Hyatt Tbilisi Hotel and Residence Project is also owned by the company. The hotel will be situated in the building of the former Ministry of Justice, on Rustaveli Avenue, on the main street of the capital. Basen on our information the Developer is in possession of a signed management agreement with Hyatt International for the brand of Hyatt Regency (160-key hotel). The company owns another hotel development project as well, ‘Hyatt Regency Vilnius’ project in Lithuania.

. Red-co (Real Estate Development Company) is a dynamically evolving developer company, specialising in commercial real estate business, founded in May 2012. The company’s business portfolio contains hotels and restaurants is Batumi, aparthotels in Gudauri and Bakuriani and ‘multifunctional development in Tbilisi. One of the successful projects of the company is the aparthotels, offering high standard quality and premium services.

. Redix Ltd, is a Tbilisi based real estate development and asset management firm, founded in 2007. The company was the first development company on Georgian real estate market, which offered products meeting the European standards. Until now the major project of the company was an investment in the development of mixed- use property (BCV) on Vazha Pshavela Avenue in Tbilisi, included 170 apartments, 3- level parking space and 10,000sqm office and commercial space, completed in 2008. From its founding the company have taken part in hospitality investments also. Currently the main project of the company is the development of 180-room Hilton Garden Inn and a residential property on Chavchavadze Avenue, Tbilisi and there are a number of hotel openings in the pipeline for the following years: Hotel ’Kobuleti’, Hotel on Lermontovi Street in Tbilisi and Hotel Bakuriani. For the time being the real estate assets are estimated worth to approximately USD100 million and the management portfolio consists of more than 20 businesses with different concept.

. Archi Group, was founded in 2006 and contains of three main divisions: Development, Investment and Hospitality. Originally, the company concentrated on investment and consulting. In 2008 it entered Georgia’s real estate development market. Archi Group is the first company, using only energy efficient materials during constructions. Archi Group is involved in construction projects in almost all districts of Tbilisi. One of the its large scale projects is the Archi Tower, the 23-storey multifunctional residential complex, on Chavchavadze Avenue in Tbilisi. The company owns a network of hotels, operating throughout in Georgia: Sunset Kvariati, Sunset Shovi. The Silver 39. boutique hotel is under construction in Tbilisi currently. Archi Development, one of the three main divisions, offers wide range of services that are related to real estate market (real estate marketing and sales, property management etc.).

. GMT Group, established in 1996, is today one of Georgia’s leading private sector investment companies. The group activities range from real estat to the food and

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hospitality industries. Thorugh the efforts of the company, many foreign investors have been attracted to the region. GMT took part in the development of the first Class ’A’ offices in Tbilisi and have further similar projects underway. Hospitality is one of the company’s most successful areas of activity. The company introduced the Marriott and Courtyard by Marriott hotel brand to Georgia. The Tbilisi Marriott has been successfully operating for over 10 years. Another large-scale hospitality project of the group is the reconstruction of the Funicular Complex. The Group has already invested USD20 million and attracted significant investment from abroad, including private American investors and OPIC, the USA governmental finance institution.

. JSC Metro Atlas Georgia is an investment management company, founded in 2012. The mega project ‘MetroCity’ in Batumi on the Black Sea Coast is the biggest investment project of the company. The company is owned by the ‘Metro Holding’, disposing share on Istanbul Stock Exchange and employing more than 35,000 employees in more than 70 companies worldwide. The project includes two 5-star hotels, a shopping centre, yacht club, casino and two residential complexes, including 464 apartments. The constructios of the complex is expected to be finished in April 2017.

. GRDC – Georgian Reconstruction&Development Company is the leading private Georgian investor, developer and operator. With a property portfolio valued at USD70 million in December 2013. The two main business lines of the company are commercial (office) and real estate development. Grdc, founded in 2004 owns a portfolio of 18 projects (office, retail, residential and industrial facilities).

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10 LIMITATIONS

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BDO Ltd., as the consultant that prepared this report, assumes responsibility for the contents of this report with the following limitations:

. This report has been prepared based on information as of between September, October and November 2015 understood and available as and when. Events subsequent to this date have not been included in our study.

. We are not aware of any facts or circumstances, which would indicate that the facts and figures included in this report are not true and fair.

. Neither BDO Ltd., as a firm, nor the firm’s employees hold shares or have participating interest in the Project or the Project Sponsor which was subject to the feasibility study, therefore we have carried out this report on a completely independent basis, yet in full compliance with BDO standards.

. BDO Ltd. shall not be held responsible for information from other sources accepted on a bona fide basis.

. BDO Ltd. shall not be held responsible in legal matters.

. This study has been prepared exclusively for the purposes set out in this report and it should not be used for any other purpose whatsoever.

. This report, in full or in segment, must not be disclosed to third parties by ways of advertisement, PR or telecommunication without prior written consent of BDO Ltd. The report however may be used for raising financing and equity therefore could be presented to prospective lenders, banks and equity partners.

. For the purposes of the feasibility study, we have received information also on the project and its circumstances from the Sponsor. Such information has been relied on by ourselves without checking reliability.

. Our findings and projections should be considered as valid for a certain time interval and may be subject to regular updates. We are not in position to guarantee the realisation of any projections or estimates shown in the report, although they have been prepared with an utmost care and on the basis of the information presented to us by various sources during the research phase.

. We have not taken into consideration any negative, political, legislation or economic effects that may completely change the scene in Georgia or outside of the country. Furthermore we have disregarded any energy shortages, earthquake, diseases or other negative events drastically changing the market.

. We have assumed that the Project will be under competent and effective management therefore we shall not be held responsible for any efforts and actions that may lead to alternative and substantially different results.

. The liability of BDO Ltd. and its associates is restricted to the volume of the professional fee paid for the company’s services.

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11 APPENDIX

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. The following table contains the projects, which are in progress or planned or finished in Racha region. The projects which are in progress are anticipated to be finished by the end of 2015 according to the municipality of Racha.

Budget for project Budget for the Status of the Name documentation project project and expert services Acceptance Construction of kindergarden in village Bugeuli 121,919 Procedures are in process Water supply system arrangement In the villages Skhvava- Workings are in 233,400 Putieti progress Water supply mine line and central building workings in the Workings are in 173,890 village Khotevi progress Water-pipe rehabilitation workings in villages Bostana- Workings are in 225,000 Ghviari progress Rehabilitatio of Central water supply buding in the village Workings are in 240,000 Likheti and water supply workings in the district Beshidzeebi progress Accession of central building in the village Akhalsopeli and Acceptance rehabilitation of the district Khruashvilebi in the vilage 62,760 Procedures are in Khotevi and water-pipe process Rehabilitation of Bridge crossing in the village Khotevi ( 2 Workings are bridges on the river Khotura and footbridge on the river 64,987 finished Sharabidzeebi) Acceptance 54,100 Rehabilitation of the bridge Mukhli on the river Rioni 127,586 Procedures are in process Rural roads rehabilitation in the villages: Khotevi- Workings are 75,600 Kviriketsminda- Velevi finished Workings are Rehabilitation of regional roads in the village Khvanchkara 67,534 finished Coast-protecting workings in Barakoni Tample, In the village Workings are 47,850 Tsesi on the river Lukhuni. finished Workings are in Additional water supply workings in the village Nikortsminda 311,000 progress Acceptance Water-pipe rehabilitation workings in the village Upper 65,500 Procedures are in Ghvardia process Workings are in Water-pipe rehabilitation workings in the village Sadmeli 391,419 progress Acceptance Water supply rehabilitation workings in the village Agara, 69,839 Procedures are in district- Abutidzeebi process

Sum 2,332,384

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. The following table contains the projects of village support programme in Municipality of Ambrolauri in 2015. The estimated cost of the programme is GEL455,730 Territorial Village Project name Status Authority Bugeuli Bugeuli Rehabilitation works of road in Dvlebis district In progress Construction of road and drainage channel in Bugeuli Bugeuli In progress Imedadzeebis district Bugeuli Bugeuli Construction of main building water supply In progress Bugeuli Jvarisa Arrangement of outdoor lighting in Jvarisi village Completed Bugeuli Kedisubani Arrangement of outdoor lighting in Kedisubani village Completed Construction of dfrainage channel in Dvlebis and Bugeuli Abanoeti In progress Pataridzeebis districts Bugeuli Bareuli Gravel of cemetery road Completed Bugeuli Gorisubani Construction of water pipeline Completed Tsesi Tsesi Construction of Sewerage system In progress Rehabilitation of main building of water supply and Tsesi Mukhli Completed central magistral pipeline Rehabilitation of main building of drinking water of Ghadishi Ghadishi Completed vilage Ghadishi Ghadishi Rehabilitation of district roads Completed Ghadishi Baji Rehabilitation of district roads Completed Ghadishi Baji Rehabilitation of main building of water pipeline Completed Ghadishi Patara oni Arrangement of outdoor lighting Completed Ghadishi Tbeti Rehabilitation of cemetery road and district roads Completed Ghadishi Kveda shavra Rehabilitation of district roads Completed Construction of meeting area in centre of the village and Itsa Itsa Completed in Saneblidzeebis district Itsa Gori Construction of meeting area building Completed Itsa Kvemo krikhi Arrangement of outdoor lighting Completed Itsa Akhalsopeli Arrangement of outdoor lighting Completed Itsa Shua krikhi Arrangement of outdoor lighting Completed Itsa Shua krikhi Rehabilitation works of water pipeline Completed Itsa Zemo krikhi Continuing of outdoor lighting arrangement Completed Likheti Likheti Rehabilitation works of village club Completed Likheti Construction of meeting area building Completed Rehabilitation of old kindergarten for arrangement of Likheti Completed meeting area Namanevi Namanevi Arrangement of outdoor lighting Completed Namanevi Zede shavra Arrangement of outdoor lighting Completed Namanevi Khonchiori Rehabilitation of meeteng area Completed Namanevi Tkhmori Rehabilitation of meeteng area Completed Nikortsminda, Nikortsminda Finishing of works of ritual hall Completed Kharistvali Construction of main building of water supply and Nikortsminda Kachaeti Completed central magistral pipeline in Zemo dvlebis district Sadmeli Sadmeli Arrangement of outdoor lighting Completed Sadmeli Kldisubani Arrangement of outdoor lighting Completed Sadmeli Kldisubani Cleaning of drainage channels Completed Sadmeli Ghviara Arrangement of outdoor lighting Completed Sadmeli Bostana Arrangement of outdoor lighting Completed Sadmeli Bostana Rehabilitation of cemetery road Completed Sadmeli Dzirageuli Finishing of outdoor lighting works Completed

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Territorial Village Project name Status Authority Sadmeli Dzirageuli Rehabilitation of cemetery road and district roads In progress Improvements of meeteng area in Shua skhvavi and Skhvava Skhvava Completed Zemo skhvavi Skhvava Putieti Arrangement of inhabitants' meeteng area Completed Velevi Velevi Arrangement of meeteng area Completed Velevi Betlevi Rehabilitation of main building of water pipeline Completed Velevi Betlevi Rehabilitation of the road in Chikhradzeebi district Completed Velevi Shkhivana Fencing of "Midora" Completed Velevi Kviriketsminda Second-line works of meeting area rehabilitation Completed Cheliaghele Cheliaghele Rehabilitation of the road in Kotorishvilebi district Completed Cheliaghele Cheliaghele Rehabilitation of distric water pipelines Completed Arrangement of outdoor lighting in Momtsemlodzeebi Cheliaghele Agara Completed district Cheliaghele Ukeshi Continuing of building of ritual hall Completed Cheliaghele Kvemo tlughi Rehabilitation of the village road Completed Cheliaghele Zemo tlughi Rehabilitation of the village road Completed Khidikari Kvatskhuti Fencing of graveyard Completed Khidikari Kvatskhuti Rehabilitation of district roads Completed Outdoor lighting works in Archvadzeebi and Khidikari Khimshi Completed Giorgobianebi district Purchasing of materials for footbridge in Kvatashidzeebi Khidikari Khimshi Completed district Khotevi Khotevi Arrangement of outdoor lighting in the Village districts Completed Khotevi Tskadisi Construction of drainage channel of the village road Completed Khotevi Skhartali Construction of drainage channel of the village road Completed Rehabilitation-construction of district water pipeline in Kvakhadzeebi district, village Znakva. Construction of Znakva Znakva Completed water pipeline web in Zeda bakuradzeebi. Reabilitation of water basin. Znakva Motkiari Finishing of works of meeting area building Completed Znakva Saketsia Improvement of meeting area Completed Tsikhi Gogolati Purchasing of small aquipment (Motoblock) Completed Tsikhi Tsakhi Rehabilitation works of administrative building Completed Tsikhi Kvemo ghvardia Finishing of rehabilitation works of meeting area Completed Purchasing of wood materials and tin coverage for Tsikhi Zemo ghvardia Completed repairment of roof of club. Chrebalo Chrebalo Purchasing of fitness equipment In progress Chrebalo Kvemo Zhoshkha Arrangement of outdoor lighting Completed Chrebalo Zemo Zhoshkha Arrangement of outdoor lighting Completed Chrebalo Gendushi Purchasing of Agricultural machinery (Motoblock) Completed Arrangement of outdoor lighting of central road Chkvishi Kvishari Completed Kharkhari direction Finishing of outdoor lighting arrangement of central Chkvishi Kveda chkvishi Completed road Chkvishi Kveda chkvishi Construction of drainage channel Completed Chkvishi Zeda chkvishi Arrangement of outdoor lighting of central road Completed Khvanchkara Pirveli tola Construction of house of meetings Completed Khvanchkara Meore tola Rehabilitation of Village club Completed Rehabilitation of main building of water supply in Khvanchkara Khvanchkara Completed Gvimtali and Charbadzeebi district Khvanchkara Patyara chorjo Arrangement of stadium Completed Khvanchkara Didi chorjo Rehabilitation of Cemetery roads Completed

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. The following picture shows the former plan of Resort Shovi:

. The following picture shows the former plan of Resort Shovi on map:

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. The following table contains the list of private-owned lands and the name of their owners and the following pictures show the location of the lands in Shovi Resort:

Cadastral code Owner Size (sqm)

88.02.30.045 stock-company boarding house "Mamisoni" 162,772

88.02.30.013 Arkadi Chelidze 15,197

88.02.30.056 Nugzar Kvaxadze 500

88.02.30.010 Archil Jafaridze 300

88.02.30.009 Davit Nodarishvili 300 a 88.02.30.008 Shota Rekhviashvili 300

88.02.30.006 Marita Gutashvili 575

88.02.30.005 "Newstar" 501

88.02.30.004 Marita Gutashvili 1,262

88.02.30.024 Bakuri Gogrichiani 454

88.02.30.007 Ana Abiashvili 624

b 88.02.30.016 Jora Bakuradze 227

c 88.02.30.039 Irakli Lobjanidze 150

d 88.02.30.038 Tamar Jafaridze 150

e 88.02.30.033 Municipality of Oni 57

f 88.02.30.034 "United water supply company of georgia" 16

88.02.30.015 Nagizi Gvalia 1,313

g 88.02.30.014 Gigi Gutashvili 1,005

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Cadastral code Owner Size (sqm)

a 88.02.30.012 Nodar Abjanidze 530

b 88.02.30.017 Marita Gutashvili 1,277

c 88.02.30.003 Marita Gutashvili 2,310

d 88.02.30.046 Gela Gutashvili 7,155

i 88.02.30.036 Government 1,238

f 88.02.30.031 Sanset Shovi Ltd 14,999

g 88.02.31.014 Government 7,147

Market and Technical Feasibility Study for Racha Development Project, Georgia Page 183