introduction of road maintenance microenterprises in georgia · introduction of road maintenance...

Report I: First findings

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69277 Introduction of road maintenance microenterprises in Georgia

REPORT I: FIRST FINDINGS

Serge Cartier van Dissel

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Introduction of road maintenance microenterprises in Georgia

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April 2010

CONTENTS

Introduction ................................................................................................................................. 3

1. Road maintenance practice in Georgia .............................................................................. 4 1.1 Road network ................................................................................................................. 4 1.2 Maintenance management and funding .......................................................................... 4 1.3 Maintenance procurement and implementation............................................................... 5 1.4 Maintenance activities ..................................................................................................... 7

2. Road maintenance microenterprises ................................................................................. 9 2.1 Maintenance activities ..................................................................................................... 9

Maintenance of the road structure .............................................................................. 9 Maintenance of artificial constructions ...................................................................... 11 Maintenance of the roadway ..................................................................................... 12 Maintenance of technical means of traffic regulation ................................................. 13 improvement of road supported property and small scale works ............................... 14 Road reserve vegetation management ..................................................................... 14 Winter road maintenance .......................................................................................... 14 Tools and equipment ................................................................................................ 15

2.2 Legal organizational modalities ..................................................................................... 16 Individual Enterprise ................................................................................................. 17 Limited Liability Company (LLC) ............................................................................... 18 Joint Stock Company (JSC) ...................................................................................... 20 Registered Cooperative (RC) .................................................................................... 21 Joint Liability Company (JLC) ................................................................................... 23 Union (Association) ................................................................................................... 24 Foundation ................................................................................................................ 26 Overview and conclusions ........................................................................................ 28

2.3 Procurement of microenterprises .................................................................................. 30 Competitive bidding .................................................................................................. 30 Contract packaging and division ............................................................................... 32 Guarantees and other financial requirements ........................................................... 32 Qualification data and tendering documentation ....................................................... 33 Performance-based contracting ................................................................................ 34

2.4 Maintenance funding..................................................................................................... 36 Costs of routine maintenance by microenterprises .................................................... 36 Available funding ...................................................................................................... 37

3. Conclusions and recommendations ................................................................................. 39 Next steps ................................................................................................................. 40

Annex 1: Allocations to local road maintenance .................................................................... 42

Annex 2: Routine maintenance activities ................................................................................ 44

Annex 3: Annual balance sheet ............................................................................................... 51

Annex 4: Statement of profit and losses ................................................................................. 53

ABBREVIATIONS GEL Georgian Lari GoG Government of Georgia JLC Joint Liability Company JSC Joint Stock Company LLC Limited Liability Company MRDI Ministry of Regional Development and Infrastructure PPIAF Public-Private Infrastructure Advisory Facility RC Registered Cooperative RD Roads Department


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In this report an exchange rate is used of USD 1 = GEL 1.75

INTRODUCTION

The condition of the local road network in Georgia is very poor, mainly as a result of insufficient maintenance over the past 20 years. Since 2007, the maintenance of these roads is the responsibility of the local municipal authorities (Rayoni), which have limited resources and capacities to carry out proper maintenance. Although the condition of the local road network is improving as a result of a number of rehabilitation projects, proper maintenance to ensure the improved roads stay in good condition is still not being carried out. The Government of Georgia (GoG) has therefore requested the World Bank for support in improving the maintenance of local roads. This support will focus on the introduction of the concept of microenterprise-based road maintenance, whereby local people are assisted to form microenterprises which are subsequently trained and contracted to carry out basic maintenance activities aimed at preventing (serious) damage and slowing down the deterioration of the roads, as well as ensuring continued access. This concept has been successfully promoted and replicated in numerous Latin American countries1 with the help of the World Bank and other international organizations. The concept was also piloted by the World Bank in China in 2008 as part of a PPIAF funded pilot project2, the results of which were presented to representatives of the GoG. They considered this approach to have great potential for improving local road conditions as well as contributing towards employment generation and poverty alleviation in rural areas. The Public-Private Infrastructure Advisory Facility (PPIAF) has approved a grant for the piloting of this approach in Georgia. The first phase of the pilot project will be carried out in the course of 2010 and will look at current maintenance mechanisms and the general context within which the maintenance microenterprises will have to operate, developing an adapted version of the microenterprise-based maintenance concept suitable to Georgia. The second phase will be carried out in the course of 2011 and will aim to pilot the developed maintenance system in a number of roads, creating and training microenterprises for this purpose. The current report is the first in a series of reports, and presents the first findings of the consultant based on an initial visit to Georgia in February 2010, during which several local roads were visited and discussions were held with the Roads Department (RD) under the Ministry of Regional Development and Infrastructure (MRDI), local municipal authorities, and local contractors responsible for the maintenance of international, secondary and local roads. The report aims to present the potential for introducing road maintenance microenterprises in Georgia, identifying existing opportunities as well as possible obstacles. The report starts by presenting current maintenance practice in Georgia, describing the road network, the responsibilities for its management and available funding sources, the procurement methods and means of implementation and the maintenance activities carried out. The second chapter looks specifically at the potential for introducing maintenance microenterprises, determining the activities that the microenterprises could be responsible for, identifying the possible organizational modalities that the microenterprises could use, defining the procurement processes that could be applied and discussing the funding issues of relevance to the introduction of maintenance microenterprises. The final chapter gives the main conclusions and recommendations, as well as the next steps to be undertaken during the next and subsequent missions.

1 For more information, see: “Team-based routine maintenance of rural roads - Experiences from Latin America”, Cartier

van Dissel, S., World Bank/PPIAF, 2007 (http://www.cartierconsult.com/publications). 2 The relevant reports and manuals can be found at http://www.cartierconsult.com/publications.

http://www.cartierconsult.com/publications

http://www.cartierconsult.com/publications


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1. ROAD MAINTENANCE PRACTICE IN GEORGIA

This chapter looks at the current maintenance practices in Georgia. It starts by presenting the general characteristics of the road network in Georgia. This is followed by a description of the management responsibilities for the different road types and the funding situation regarding road maintenance. It goes on to describe the procurement processes and implementation mechanisms applied. The last section looks at the different maintenance activities carried out, the importance awarded to them and their cost.

1.1 ROAD NETWORK

1. Georgia’s road network consists of 1,495 km of international roads, 5,446 km of secondary roads and an estimated 15,479 km of local roads3, giving a total classified road network of 22,420 km. Almost all international roads are paved (asphalt or cement concrete), as are two thirds of the secondary roads, and almost all the remaining international and secondary roads have a gravel surface. Of the local road network, only one quarter is paved and two thirds have a gravel surface, with the remainder being earthen roads4.

Table 1: Road network characteristics in Georgia (km and %)

Road category Asphalt Concrete Gravel Earth Total

International roads1 1,414 95% 53 4% 28 2%

0% 1,495

Secondary roads1 3,314 61% 63 1% 1,902 35% 167 3% 5,446

Local roads2 4,012 26% 15 0% 10,303 67% 1,149 7% 15,479

Total 8,740 39% 131 1% 12,233 55% 1,316 6% 22,420 1 Road Department data 01 January 2010

2 Road Department data 01 January 2007

2. According to an assessment of road conditions carried out in 20085, 81% of assessed international roads were found to be in good or fair condition as were 55% of secondary roads6. The conditions of local roads in Georgia are very poor, with much of the paved roads in a state of disrepair. This is mainly a result of the fact that from independence in 1991 up to 2005 hardly any maintenance was carried out. Only some 15-20% of local roads, which were recently rehabilitated, are considered to be in good condition.

Table 2: Road network conditions in Georgia (km and %)

Road category Good Fair Poor Very poor Total

International roads 770 60% 271 21% 50 4% 192 15% 1,283

Secondary roads 700 43% 190 12% 95 6% 660 40% 1,645 Source: Plan for road infrastructure development and welfare improvement in Georgia: 2009-2013

1.2 MAINTENANCE MANAGEMENT AND FUNDING

3. The international and secondary roads are managed by the Roads Department. The maintenance budget of the Roads Department has been steadily increasing since 2004 and was GEL 170 million in 2009 for a total of 6,941 km of international and secondary roads. As a result of the economic crisis, however, it was decreased to GEL 138 million in 2010. This relates to an annual average investment of GEL 24,500 (approximately US$ 14,000) per kilometre based on the 2009 data.

3 This figure is based on data from the Roads Department from 2007. A number of these roads have been upgraded to

secondary roads since then, however. Other sources estimate the local road network at just over 13,000 km. 4 Note that this data is from 2007, after which the local roads where transferred to the local authorities and summary data

is not readily available. 5 Source: “Plan for road infrastructure development and welfare improvement in Georgia: 2009-2013”, based on IRI

values. 6 Note that only 30% of secondary roads were assessed.


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4. The local roads used to also be the responsibility of the Roads Department, but in 2007 their management was transferred to the local authorities of the 67 municipalities (Rayoni) in Georgia. In Georgia there are also 10 regional governments (Regioni), but these have no responsibility for the road network. The decentralization of the local roads in 2007 was not accompanied by a transfer of funding and as a result the resources available to the municipalities for maintaining the local roads are very limited.

5. The municipalities have local revenue from property tax, profit tax, local fees and fines, in addition to which they receive an equalization transfer from central government. The use of this funding is not earmarked, however, and its use is at the discretion of the municipalities. The municipalities also receive extra budget from central government according to specific budget lines, but this is for capital investments, and although part is spent on the rehabilitation of local roads (and urban streets), maintenance is not included. Example revenue amounts for Gori municipality are approximately GEL 6 million local revenue, GEL 2 million equalization transfer and GEL 2.5 million extra budget.

6. It depends on the municipality whether any maintenance is budgeted and carried out. Actual allocations to local road maintenance totalled just over GEL 12 million in 2009, and were reduced to just under GEL 11 million in 2010, probably as a result of the economic crisis (a complete list of allocations by municipality can be found in Annex 1). This means that the local road maintenance budget is approximately 7-8% of that for international and secondary road maintenance. In terms of funding per kilometre, however, for local road maintenance only GEL 790 is spent per kilometre per year7, while for international and secondary roads GEL 24,500 is spent per kilometre per year8. This means that only 3% of the funding per kilometre for international and secondary road maintenance is available for local road maintenance, which is extremely low. The amounts available are insufficient for the routine maintenance of the whole local road network, let alone if periodic maintenance is also included.

Table 3: Municipal allocations to local road maintenance (GEL)

2008 2009 2010

10,725,081.5 12,220,739.6 10,799,086.8

7. There used to be a Road Fund, but this was abolished in 2003 and there is currently no interest to resurrect it. Earmarked funds and special accounts are also not being used. The Roads Department is currently preparing legislation allowing it to intervene in important local roads, using left-over funding for the maintenance of such roads. The RD is currently legally prohibited from acting in the local road network, and such legislation would allow it to assist the municipalities in the important local roads.

1.3 MAINTENANCE PROCUREMENT AND IMPLEMENTATION

8. For the international and secondary roads managed by the Roads Department, separate contracts are signed for each of the 33 areas with approximately 200 km per contract, and awarded through public bidding. These are input-based annual contracts with estimated work amounts for the whole year (BoQ), based on which the contractors prepare their bids. Each month, workplans are prepared for the contractors to carry out. During these monthly visits, the work of the previous month is also inspected, and the contractors are paid according to the actual work carried out in line with the workplan and the agreed unit prices. The preparation of workplans and inspection of work is carried out by the 5 regional offices of the Roads Department.

9. Many of the contractors are former staff of the Roads Department maintenance stations who formed their own company in the late nineties when road maintenance was privatized, generally purchasing the equipment from the Roads Department. Open bidding is used for contracting with some limited competition for main and secondary roads, and according to the Roads Department

7 Based on 2009 funding data and 2007 road length data.

8 Based on 2009 funding and road length data.


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there is a change of contractors each year of approximately 20%. Due to limited profits in maintenance, competition is usually limited to the contractors already active in the area concerned. From interviews with local contractors, there also seems to be some agreement between the local contractors as to who will bid for each contract. The contracts run from May to April and require the contractor to first finish the money from the previous contract before using the money of the current contract, implying that it is assumed the same contractor will be awarded the contract.

10. The maintenance contracts are not very profitable to the contractors who are more interested in rehabilitation contracts (more money and less time and administration). The maintenance contracts often form only 5-10% of the total business turnover. The low contract amounts and the short duration also mean that the contractors are unable to invest in better equipment, and use old and suboptimal equipment to carry out the maintenance works. However, the main benefit of the maintenance contracts is that they allow the continued use of the staff and equipment of the contractor when work is less, especially in the case of winter maintenance when rehabilitation and construction contracts are not available due to the winter season. The contractors tend to work with a lot of heavy equipment and skilled workers (who are generally fixed staff), although some unskilled labour is also contracted at certain times of the year. The maintenance contract allows them to pay their skilled staff and keep them occupied throughout the year, avoiding the risk of them finding other employment if they would need to be laid off during the winter season.

11. Where maintenance of the local roads is carried out, this is also contracted out by the municipal authorities, generally to the same contractors who bid for the international and secondary roads. Bidding here is a lot less competitive, however, and often limited to one bidder. The contract amounts are lower, and due to the dispersed nature of local roads, logistically more complicated to carry out.

12. The same contracts appear to be used for international, secondary and local roads. The contracts themselves are traditional input-based contracts, although not fully so. Instead of simply listing the unit costs per activity, a number of activities are replicated whereby the implementation modality is varied (i.e. defining the use of labour or different types of equipment). An extreme example is snow removal, where different activities exist for snow removal by grader, by bulldozer, by heavy duty bulldozer, by rotor, by heavy duty rotor, and by motor based or caterpillar tractor. It is not clear whether the decision on the implementation modality to be used lies with the procuring entity (RD) or with the contractor, and on what criteria this decision is based. Ideally this decision should lie with the contractor, and the RD should be more concerned with the end result than how it was obtained, but it would appear that this is decided by the RD upon preparing the contract and the monthly workplans. As a result of this replication of activities, there are a total of 109 possible activities, out of which a selection is made for inclusion in the contract (generally around 75-80). The requirements for specific equipment, both through the selection of activities defining the equipment to be used and through the table defining the exact equipment the bidder should have, are very detailed.

13. According to the general provisions of the contract, the contractors are required to present a bank guarantee of between 2% and 5% of the contract sum for the proper execution of the contract in cases where the contract sum exceeds GEL 1,000,000. In practice, however, guarantees of 5% are required, even for contract amounts below GEL 1,000,000. The contractors are also required to present third-party civil liability insurance in the amount of GEL 40,000.

14. Subcontracting is allowed for up to 40% of the contract sum, with the approval of the procuring entity. The contractor will remain liable for subcontracted portions of the contract. Inspections will be carried out before the 30th of each month, and payments will be made within 28 days according to the contract (this was not verified in the field). Advance payments are possible against an unconditional bank guarantee. The advance will be deducted from consecutive payments.

15. The contractors mentioned that they would be interested in using performance-based contracts, where the decision on the implementation mechanisms is up to the contractor and only the end result is evaluated by the client. However, they foresaw some problems regarding roadway


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maintenance due to the poor condition of most local roads. Also, they foresaw significant problems with the tax authorities where they would have to justify their expenses. Currently these are justified through the inspection report issued by the client, which approves the inputs used. Under performance-based contracts, however, such a justification would not be automatically given, as the inspection report would only look at the end result and not at the inputs. Justifying the amount of inputs used and with that the expenses and more importantly the profits and profit tax, may therefore be very problematic under performance-based contracts, especially since in Georgia the tax office is very strict and has already put a number of contractors and even government staff in jail.

16. The contractors also mentioned being interested in larger and longer term contracts, allowing them to invest in better equipment and thus improving their profits (as well as lowering costs for the client). Especially investment in equipment for asphalt repairs and snow removal and salt spreading were mentioned. In the case of multi-annual contracts, however, proper price adjustment formulas would need to be used.

1.4 MAINTENANCE ACTIVITIES

17. In Georgia, budget lines for the road sector distinguish four types of road interventions: i) routine and winter maintenance, ii) periodic maintenance and rehabilitation, iii) emergency maintenance and iv) new construction. For the purpose of this study, we are mainly interested in the first type.

18. As mentioned above, the standard contract documents used by RD distinguish 109 possible maintenance activities. These are subdivided into eight categories of activities (a full list of activities can be found in Annex 2).

Categories of routine maintenance activities

Maintenance of the road structure This includes repairs to the road shoulders, cutting of grass, clearing side drains9 and culverts, removing landslides, physical slope stabilisation by timber, gabion and dry stone masonry walls.

Maintenance of the artificial constructions This includes the painting of bridge metal parts, the laying of culverts, constructing cement masonry or concrete walls and bridge repairs.

Maintenance of the roadway This includes pothole patching, filling cracks and joints, sealing, regravelling, repairing the road base, and removal of old asphalt.10

Maintenance of the technical means of traffic regulation This includes painting, washing, repairing and placement of vertical signalisation and reflectors, barriers and horizontal and vertical marking.

Improvement of road supported property This includes the construction of walls and roofs, as well as wall plastering and painting for buildings.

Small-scale works This is no more than a list of inputs from different types of heavy equipment (hoisting crane, bulldozer, heavy duty bulldozer, truck, excavator, grader, compressor, self-loading vehicle) and does not appear to be used much.

9 This encompasses numerous activities, depending on whether labour or some type of heavy equipment is used and

whether the removed material needs to be transported elsewhere. 10

The clearing of the roadway with a “special” vehicle is also included, although it is not clear what is meant by this.


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Road reserve vegetation management This includes the cutting and watering of trees, shrubs and bushes (it does not include grass cutting).

Winter road maintenance This includes daily winter inspections, spreading salt and sand (manually or by machine) and snow removal (using different types of machines).

19. By far the major part of the contract amount is used for repairs to the roadway (mainly patching) and winter maintenance, with these two types of activities taking up approximately 80% of the contract amount. It is also these activities which most interest the contractors, as they allow for the use of existing equipment11 and skilled staff.

20. Of the two maintenance contracts studied, the cost per kilometre of routine maintenance came down to respectively GEL 3,300 and GEL 8,800 (including VAT and contingencies). It is not clear, however, if this large price difference is the result of the road conditions or snowfall being significantly different, or whether it is simply due to available funding for each zone.

Table 4: Costs of routine maintenance activities for international and secondary roads (GEL and %)

Maintenance activities Zone N13 (217.1km) Zone N14 (217.7km) Average

Maintenance of the road structure 37,130 6.4% 54,100 3.5% 4.3%

Maintenance of the artificial constructions 7,000 1.2% 3,500 0.2% 0.5%

Maintenance of the roadway 302,905 52.0% 504,500 32.6% 37.9%

Maintenance of the technical means of traffic regulation 78,070 13.4% 144,760 9.3% 10.5%

Improvement of supported property 2,000 0.3% 6,600 0.4% 0.4%

Small scale works 630 0.1% 1,800 0.1% 0.1%

Road reserve vegetation management 10,900 1.9% 30,000 1.9% 1.9%

Winter road maintenance 143,900 24.7% 804,000 51.9% 44.5%

Total (excluding VAT and contingency) 582,535 100.0% 1,549,260 100.0% 100.0% Source: Routine maintenance contracts

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Interesting, for instance, is the fact that all the machinery listed for snow removal includes mainly machinery that can be used for other activities (apart from the rotor), but does not include the basic snow plough that is most common in other countries.


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2. ROAD MAINTENANCE MICROENTERPRISES

21. Maintenance microenterprises refer to (groups of) local people living along the road(s) to be maintained, who are organized as an enterprise and contracted to carry out the (routine) maintenance of the road(s). Generally they have unskilled workers who have received basic training in routine maintenance and in enterprise management. The microenterprises are usually labour-based and depend on their own labour to carry out the maintenance activities they are responsible for, using basic hand tools, although they may use some light equipment for certain tasks. They generally have little capital and most of their earnings go towards paying the salaries of the workers. The activities they are responsible for generally include basic cleaning and clearing of the roadway, the drainage system, the road reserve and any existing road structures. Minor repairs to the roadway and road structures are sometimes also included.

22. The microenterprises are generally contracted on a performance basis. This means that they are paid according to the completion of certain tasks or activities, and not according to the inputs required to carry out those tasks. Approval of work is therefore based on the satisfactory completion of the activities and generally evaluated in comparison with the workplan and certain quality or performance indicators. The list of inputs is of no relevance for the inspection or approval of works. Performance-based contracts are used because they result in less administrative hassle for both the microenterprise and the procuring entity and lead to improved efficiency and generally better quality. The microenterprise does not need to record its inputs and is free to decide how to carry out the work as long as the quantity and quality objectives are met, thus allowing for efficiency improvements and profit gains. On the other side, the procuring entity no longer needs to carefully review the list of inputs and verify that it is in line with the amount of work carried out, and only needs to verify that the contracted work has been completed in the quantity and quality stipulated in the contract. Especially for performance-based maintenance, payments are also facilitated and standard monthly payments can be applied which only vary in exceptional cases when additional (emergency) work has been carried out or when work was not satisfactory and deductions are applied. This predictability greatly facilitates budgeting and payment processes.

23. This chapter will look at the potential for the introduction of such maintenance microenterprises, identifying opportunities as well as possible obstacles. It first gives a description of the possible maintenance activities that could be carried out by the labour-based microenterprises, taking into account the current maintenance activities carried out by the larger equipment-based contractors in some local roads and most international and secondary roads. It goes on to look at the possible organizational modalities that could be used by the microenterprises allowing them to be contracted, followed by a section on the procurement process itself. The final section of this chapter looks at the ever important issue of funding and its impact on the sustainability of the microenterprise-based maintenance concept.

2.1 MAINTENANCE ACTIVITIES

24. As mentioned above, the microenterprises are generally labour-based and have little capital. As such they will be most suited for labour-intensive activities which require little equipment and material inputs. The suitability of the different routine maintenance activities for execution by microenterprises will be analysed for each of the eight categories of maintenance activities mentioned earlier.

MAINTENANCE OF THE ROAD STRUCTURE

25. Upon looking at the activities mentioned in section 1.4, this means that especially the first set of activities related to the maintenance of the road structure will be very suited to execution by microenterprises. It is also these activities which will most help prevent further deterioration of the road. Although a number of activities listed under this heading refer to the use of heavy equipment (mechanized compaction, grader, excavator, self loading vehicle), the use of such equipment is not necessary to obtain the required result. These activities are generally included under the responsibility of microenterprises in other countries and are well within their ability to carry out.


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Furthermore, in local roads, the use of equipment will not be as straightforward as in the case of international and secondary roads. The activities under this category recommended to be carried out by microenterprises are the following:

Maintenance of the road structure (by microenterprises)

Filling and compacting the road shoulder Filling material must be available locally or transported to the road side thus allowing local transport using wheelbarrows. Compaction can be carried out using an earth rammer.

Cutting grass and other vegetation It is recommended to include all vegetation in the road reserve. Use can be made of machetes or motorised grass cutters.

Clearing of road ditches (and transport of removed material) This can be done using simple handtools. Where transport of the removed material is necessary this can usually be done by wheelbarrow.

Clearing of culverts and bridges (and transport of removed material) This generally requires the use of labour anyway. Where transport of the removed material is necessary this can be done by wheelbarrow.

Removing landslides (and transport of material) This can be done using labour for landslides up to 10m3. Where transport of the removed material is necessary this can usually be done by wheelbarrow.

Construction of physical stabilisation measures (loose stone, gabion walls, timber walls, dry stone masonry walls)

This can be carried out by microenterprises in as far as the required timber and stones are readily available nearby or are transported to the roadside. The microenterprises will not be able to quarry the rock using drilling or explosives. Gabion netting will also need to be provided.

Vegetation control (using machete and mower) Side drain clearing


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Road shoulder filling Construction of dry stone masonry wall

MAINTENANCE OF ARTIFICIAL CONSTRUCTIONS

26. Regarding the second set of maintenance activities, maintenance of artificial constructions, most of these activities are less suitable for execution by microenterprises as they require a higher technical expertise (cast concrete walls) and significant material inputs (culvert pipes). However, the activities related to painting of metal bridge parts and timber or concrete repairs to bridges can be easily carried out by microenterprises.

Maintenance of artificial constructions (by microenterprises)

Painting of bridge beams This is easily carried out by microenterprises. It is recommended that the paint be provided to ensure quality and quantity.

Rehabilitation of the bridge guard rails and railings This can be carried out by microenterprises in the case of reinforced concrete railings, although this will require extra training. Rehabilitation of steel railings will be too complicated as this will require welding skills and equipment.

Painting of the bridge guard rails and railings This is easily carried out by microenterprises. It is recommended that the paint be provided to ensure quality and quantity.

Repairing of the bridge roadway with timber This is also easily executed by microenterprises. It is recommended to provide the required timber although the microenterprises can also be made responsible for its purchase.

Repair of concrete bridge railings Repair of bridge roadway with timber


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MAINTENANCE OF THE ROADWAY

27. With respect to the third set of maintenance activities, maintenance of the roadway, the main problem facing the microenterprises is the access to proper materials, especially asphalt and bitumen. This can be provided, in which case the microenterprises could carry out pothole patching and joint/crack sealing. However, given that this is currently being carried out satisfactorily by the larger contractors who have their own asphalt factories, it is recommended to leave the paved road surface under their responsibility. One option is to include temporary repairs to paved roads using gravel or stones to fill potholes. For concrete roads, repairs can easily be carried out by microenterprises using cement concrete.

28. For unpaved gravel and earth roads (or paved roads where the pavement has completely deteriorated), however, the microenterprises can be a very interesting alternative. Again the provision of gravel will be a problem, although the general solution is to provide gravel heaps along the road where gravel is not locally available. Compaction is another problem. For small areas (potholes) this can be done using manual earth rammers, and for larger areas compaction by traffic is an option if the moisture content is appropriate.

Maintenance of the roadway (by microenterprises)

Repairing the road surface with gravel or stones (earth may be used in the case of earthen roads)

This can be carried out by microenterprises as long as the required materials are locally available and the area requiring immediate compaction is not very large. This includes pothole patching using rocks and gravel for paved roads, as well as general road surface repairs to gravel and earthen roads (potholes, ruts, rills). Patching using cement concrete is also optional. The use of bitumous materials, however, is best left to the larger contractors due to the problems of access to these materials and the equipment and skills required for their proper use.

Pothole patching using asphalt Pothole patching using cement concrete


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Pothole patching using rocks and earth Gravel road pothole patching

MAINTENANCE OF TECHNICAL MEANS OF TRAFFIC REGULATION

29. The fourth category refers to the maintenance of technical means of traffic regulation. This basically includes the cleaning, repair and placement of signalization, both horizontal and vertical, and safety measures. The main problem here is the access to the required materials, especially where specific types of reflective paint or reflecting studs are required. Where these materials can be provided to the microenterprises, these will have little difficulty placing them as this is a very labour-based activity. The making of the signs may be a bit more complicated as there are generally very strict standards that need to be followed. It is therefore recommended to limit the activities for the microenterprises to the cleaning of signalization, and the placement of vertical signalization (whereby the items requiring placement are provided to the microenterprise). Vertical marking with paint can also be carried out by microenterprises. Horizontal marking can be carried out manually, but especially for longer stretches it is recommended to use proper equipment for this.

Maintenance of technical means of traffic regulation (by microenterprises)

Cleaning and painting road signs and boards This can easily be carried out by microenterprises. Where painting is necessary and the required paint is not readily available, this should be provided to the microenterprise.

Installing orientation posts, sign posts and prepared signs/boards This can easily be carried out by microenterprises. The posts and signs/boards should be provided to the microenterprise.

Washing and painting of reflecting studs, barriers and other road elements This can easily be carried out by microenterprises. Where painting is necessary and the required paint is not readily available, this should be provided to the microenterprise.

Vertical marking with paint This can easily be carried out by microenterprises. Where the required paint is not readily available, this should be provided to the microenterprise.


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Road sign placement Barrier painting

IMPROVEMENT OF ROAD SUPPORTED PROPERTY AND SMALL SCALE WORKS

30. The fifth category of routine maintenance activities, improvement of road supported property, is not very important in the case of local roads. Although these are primarily labour-based activities, they are not included here as they are unlikely to be required (even for international and secondary roads this category forms only a very minimal part of the contract). Regarding the sixth category of maintenance activities, small-scale works, the name is misleading as this actually refers to the use of different types of heavy machinery by the hour. As such it is not suited for microenterprises.

ROAD RESERVE VEGETATION MANAGEMENT

31. The seventh category of road reserve vegetation management refers primarily to the cutting and trimming of vegetation other than grass (which is included in the first category). This also includes the whitewashing of tree trunks and the watering of plantation. It may be clear that these activities are very much labour-based and as such easily executable by microenterprises. The only exception may be the watering of the plants, where generally it will be necessary to use a water bower to supply the water.

Road reserve vegetation management (by microenterprises)

Cutting and trimming vegetation in the road reserve This can easily be carried out by microenterprises using machetes, axes, sawa and possibly grass trimmers.

WINTER ROAD MAINTENANCE

32. The final category, that of winter road maintenance, is one with which there is not much experience in using microenterprises. Although some limited experience exists, this is more with removal of unforeseen snow than with regular seasonal snowfall in high quantities. Although technically the microenterprises are capable of removing snow, in the quantities present in Georgian winters it makes more sense to use heavy equipment. The role of the microenterprises would thus be limited to assisting the equipment and carrying out snow removal in case of light snow, but especially in the spreading of salt and sand. This is already partially carried out manually for international and secondary roads (as much as one third of the total amount), and for local roads manual spreading could be a technically and economically justifiable alternative. Also the daily road inspection (which forms 15-20% of the total winter maintenance cost) could easily be carried out by microenterprises, probably more easily and efficiently than by larger contractors.

Winter road maintenance (by microenterprises)

Road inspection in winter This can easily be carried out by microenterprises, informing the larger contractor or municipality when necessary.


15

Spreading of salt and/or sand This can be carried out by microenterprises. The salt and sand will need to be provided to the microenterprise in heaps along the road side from where the microenterprise can further distribute it using wheelbarrows or by hand.

Snow removal This is only possible for limited areas or in case of limited snowfall. The use of light snow removal equipment or a truck/tractor mounted snow plough could be considered. In general, however, this activity may be best done using heavier equipment by the larger contractor.

Snow removal on mountain pass

TOOLS AND EQUIPMENT

33. To carry out the different activities listed above, the microenterprises will require some basic tools, safety equipment and possibly some light machinery. The tools are basic hand tools which are available locally. In addition to these hand tools, some light equipment may be needed to either ensure quality or the productivity. To ensure safety, basic safety equipment is also required. Common and possible hand tools and equipment for microenterprises are listed below.

Possible tools and equipment for microenterprises

Tools

Wheelbarrow

Shovel

Pickaxe

Hoe

Rake (extra strong)

Long handled shovel

Sledgehammers

Chisels

Crowbars

Machetes/bush knives

Brooms

Rope

Buckets

Files

Paintbrushes

Earth rammers

Light equipment

Grass trimmer

Snow blower

Truck/tractor mounted snow plough

Safety equipment

First-aid kit

Safety vests

Safety cones

Hats

Boots

Rain gear

Masks


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2.2 LEGAL ORGANIZATIONAL MODALITIES

34. In order to make it possible to hire the microenterprises, these have to adopt a legal organizational modality, preferably creating a legal person12. Such an organizational modality will allow a contract to be signed between the client and the microenterprise (through its legal representative). It will also allow for a bank account to be opened in the name of the microenterprise. Although experience exists on a pilot basis with informal microenterprises, where the microenterprise members are registered in the contract document itself or an annex to it, this is not recommendable as any change to the microenterprise would require the contract document to be adapted. It is preferable to keep the registration of the microenterprise and its contracting separate. The main issue is then to find a suitable legal organizational modality.

35. Legal organizational modalities for maintenance microenterprises can be either for-profit (enterprise, company, cooperative, etc.) or non-profit (association, foundation, etc.). The for-profit modalities are preferable, as these permit any profit arising from efficiency improvements to be shared amongst the microenterprise members, thus motivating such improvements. However, in most countries where experience with maintenance microenterprises exists, the non-profit modalities have been prevalent. This has been because the registration of for-profit modalities has been very complicated and costly, both in terms of money as well as time. The operation of these for-profit modalities has also been complicated and costly, due to the need to submit regular tax declarations, formal bookkeeping, etc. This prompted the programmes to adopt non-profit modalities which did not have such problems, although they did face the serious problem of being unable to distribute any profit made by the microenterprise. This section will look at both for-profit and non-profit modalities.

36. One problem with the use of non-profit modalities for road maintenance microenterprises in Georgia, as in many other countries, is that if the objective of the (legal) person is entrepreneurial/commercial, it must be created in accordance with the Law of Georgia on Entrepreneurs (i.e. for-profit modalities)13. The same Civil Code of Georgia states that it will revoke the registration of non-profit modalities (Unions and Foundations) if its activity has become entrepreneurial. Entrepreneurial activity is defined as a “legitimate and repeated activity carried out independently and in an organized manner to gain profit” by the Law of Georgia on Entrepreneurs. Therefore, as long as profit creation is not the objective, and better still if there is no profit, there appears to be no problem with using non-profit modalities. The Tax Code of Georgia, however, defines activities as entrepreneurial if they are carried out on a continuous basis and represent a professional activity, or if services are provided, which appears to include road maintenance. However, the same code includes employment as a non-entrepreneurial activity. Therefore, as long as the road maintenance microenterprises are seen as a means of organising the microenterprise members in order to allow them to access employment, and not as a real entrepreneurial activity aimed at gaining profit, it can be seen as a non-entrepreneurial activity. This issue will need to be clarified with the relevant authorities before non-profit modalities are used. A ministerial decree may be required to allow for the use of such non-profit modalities in the case of road maintenance microenterprises (this has been done in other countries).

37. The organizational modalities can also be either individual (single owner) or associative (multiple owners). In most experiences in Latin America, associative forms have been used, whereby the workers are at the same time owners of the microenterprise (some additional temporary workers may be hired from time to time). In Africa and Asia, however, experience exists with so-called petty contractors, which are in fact single-owner microenterprises which are responsible for hiring the workers according to need. The advantage of associative modalities is that the different owners often collectively have the required skills to properly manage the enterprise and the maintenance work (with some basic training), while in the case of the individual enterprise, the single owner needs to have all these management skills. In Georgia, however, skill

12

A legal person is an organized entity, created for the accomplishment of a certain object and having its own property under its ownership, that is independently liable with its own property, acquires rights and duties in its own name, makes transactions and can sue or be sued (Civil Code of Georgia, 1991). 13

Civil Code of Georgia, 31 May 1999.


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levels are relatively high and single-owner enterprises will be more feasible than they were in Latin America in the 80’s and 90’s.

38. This section will look at different legal organizational modalities in existence in Georgia, both profit and non-profit oriented, single and multiple owner, identifying their strengths and weaknesses as organizational modalities for road maintenance microenterprises. In this section the following legal organizational modalities will be analysed based on the Law of Georgia on Entrepreneurs (25 May 2006) and the Civil Code of Georgia (31 May 2001).

Profit modalities14

Individual Enterprise

Limited Liability Company (LLC)

Joint Stock Company (JSC)

Registered Cooperative (RC)

Joint Liability Company (JLC)

Non-profit modalities

Union (Association)

Foundation

INDIVIDUAL ENTERPRISE

39. An individual entrepreneur is defined as a “physical person whose entrepreneurial activity requires an organization arranged in entrepreneurial manner and regulated cash and bookkeeping”. As such no separate legal person is created.

40. Number of members. The Individual Enterprise may have only one member, the individual entrepreneur. This means that it is only suitable for single owner microenterprises.

41. Liability and minimum authorized capital. The individual entrepreneur bears full, direct and unlimited personal responsibility before creditors for any and all obligations arising from its entrepreneurial activity. There is therefore no minimum authorized capital required. Although the fact that no inlay capital is required is an advantage, the fact that the entrepreneur is personally liable is a serious disadvantage. Especially in the case of road maintenance microenterprises, where the maintenance workers are generally unskilled and relatively poor, and where damages can be costly, a limited liability is highly recommended, even where suitable insurance is acquired.

42. Registration. For the registration of individual enterprises, an application form can be obtained from the local tax office, which should be submitted in twofold, both copies being notarized. The application should include the firm name15, the name and surname, place of residence, ID number and personal number of the individual entrepreneur, the business address and the signature of the individual entrepreneur. Registration of the individual enterprise will be completed in 1 business day and is free. Registration is therefore very simple and cheap, of great importance for the creation of numerous microenterprises and to stimulate future competition between microenterprises.

43. Management. The Individual Enterprise is managed by the individual entrepreneur. As he/she is the only member, he/she is able to make all the decisions without calling for meetings of partners or shareholders. There is also no supervisory organ.

44. Tax payments and accounting. The individual entrepreneur is seen as a physical person and the possible profit of the enterprise is seen as additional income. He/she is only required to pay 12% income tax over his/her wages and any possible profit (which is treated as income). The standard 20% profit tax does not need to be paid. An income tax return needs to be filed once a year before April 1st. Individual Enterprises having been in operation the previous year, are required to pay quarterly tax instalments based on the annual tax of the previous year. Instead of

14

Limited Partnerships are not treated in this section, as these have as objective to create partnerships between individuals and enterprises for the joint execution of multiple and independent entrepreneurship, something that is not very relevant for microenterprises. 15

The name should be the name or surname of the individual entrepreneur with possible additions.


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the balance sheet and the statement of profit and losses, small enterprises may draw up an inventory list and profit-and-loss account in compliance with the tax legislation. Where an Individual Enterprise carries out more than GEL 100,000 worth of VAT taxable transactions per annum, it is required to register as a VAT taxpayer and has to charge 18% VAT over the services provided and submit a VAT tax return each month. The individual entrepreneur is furthermore obliged to withhold 12% income tax from any wages paid to employees and transfer this to the GoG and to pay 20% social tax over the wages of the employees (to be withheld at the source) and the income of the entrepreneur. Especially the issue of profit tax is much simpler for Individual Enterprises, as all net earnings are seen as income. Although this means that 12% income tax is paid instead of 20% profit tax, it also means the profit cannot be paid out as dividend for which the tax percentage is only 10%. Accounting is also a lot simpler for the Individual Enterprise. The other taxes are the same for almost all legal organizational modalities.

45. Distribution of profit. The profit of the Individual Enterprise is seen as income of the individual entrepreneur and as such he/she is able to do with it as he/she pleases.

46. Change of members. As the Individual Enterprise only has one member, the change of members is not an issue.

LIMITED LIABILITY COMPANY (LLC)

47. A Limited Liability Company is one whose liability before the creditors is limited to its whole property.

48. Number of members. A Limited Liability Company may be established by a single person as well as by multiple persons. The maximum number of members is 50, after which it should be transformed into a Joint Stock Company. As such it is suitable for both individual and associative microenterprises.

49. Liability and minimum authorized capital. The liability of the Limited Liability Company is limited to the property of the company. A partner of a LLC is not personally responsible for the obligations of the company. The authorized capital of the LLC must be at least GEL 200. The contributions for the minimum authorized capital can only be made in monetary form. Additional authorized capital may be made in non-monetary form, but the value must be assessed independently. The limited liability of the LLC is a great advantage over the Individual Enterprise, and the required inlay capital is also low enough to be easily affordable by the foreseen microenterprise member(s).

50. Registration. The Limited Liability Company has to be registered with the local tax office, which will take 3 workdays and will require payment of the registration fee. To register they have to draw up a Charter and submit the notarized documents listed in the table below. These documents are easily obtainable, although their notarization will imply certain costs as will the registration itself. It is recommended to draw up templates for the Charter and other documents to facilitate the registration process. In similar programmes in other countries a legal specialist often formed part of the promotional team, who would take care of the registration and the legal documents required.


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State and tax registration of Limited Liability Companies

An application form with o Name of the firm16 o Business entity o Legal business address o Name, surname, place of residence, citizenship, ID name, ID number and personal

number of each founding partner o Powers of representation o Amount of authorized capital and certificate of contribution o Name, surname, place of residence and citizenship, ID name, ID number and

personal number of the director(s)

2 copies of the Charter

A certificate of evaluation for non-cash contributions

Documents regarding the appointment of the director(s)

A document confirming payment of the registration fee

Sample signatures of the company representatives and directors

51. Management. Limited Liability Companies are managed by a director, who is appointed by the partners and may represent the company in legal relations with third persons. Such an appointment and any decisions beyond the routine operation of the company have to be made by a simple majority of partners during a meeting unless otherwise stipulated in the Charter. These decisions need to be notarized. Only the fact that such decisions need to be notarized may turn out to be a bit complicated, although the change of directors and other major changes to the structure of the company will not take place often.

52. Tax payments and accounting. Upon registration a taxpayer identification number and tax registration certificate will be received. The LLC is required to pay 20% profit tax over the net profit. Part of the profit may be paid out as dividend to the partners, over which 10% tax needs to be paid. No further income tax needs to be paid over such dividends. A profit tax return needs to be filed once a year before April 1st. LLC’s having been in operation the previous year, are required to pay quarterly tax instalments based on the annual tax of the previous year. Accounting and auditing must be carried out in accordance with the laws of Georgia. This entails the keeping of a proper cashbook and accounting books and the preparation of an annual balance sheet, statement of profit and losses, and business report. Examples of the annual balance sheet and statement of profit and losses can be found in Annexes 3 and 4. The business report should reflect the course of economic activities of the company and its economic state, also reporting the events of special significance for the company expected to take place after the end of the year. Where a LLC carries out more than GEL 100,000 worth of VAT taxable transactions, it is required to register as a VAT taxpayer and has to charge 18% VAT over the services provided and submit a VAT tax return each month. The LLC is furthermore obliged to withhold 12% income tax from any wages paid to employees and transfer this to the GoG, and to pay 20% social tax over the wages of the employees (to be withheld at the source). The fact that LLC’s need to pay profit tax and carry out formal accounting and auditing, means that an accountant will most likely need to be hired.

53. Distribution of profit. The distribution of profits may be defined in the Charter. If allowed by the charter, the full profits may be paid out, as long as the authorized capital remains above the minimum level. Distribution of profits is therefore not an issue under this modality. It is recommended to ensure this is included in the Charter, however.

54. Change of members. Shares in an LLC can be transferred without the approval of the other partners, but a notarized agreement is needed and the transfer has to be registered in the Entrepreneurial Register. The transfer of a part of the share is only possible by permission of all partners. The Charter of the company may include other terms and conditions for the transfer of

16

The name of the Limited Liability Company may include the names of the partners, a name that reflects the activity of the company or any other name, but must include “Limited Liability Company” or “LTD”.


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the share. In particular, a permission of the company or a resolution of the partners may become necessary. Although this allows for an easy change of microenterprise members, it does imply some costs. It is furthermore recommended to include in the Charter that the approval by the majority of partners is required to ensure partners do not simply change without the other partners’ approval.

JOINT STOCK COMPANY (JSC)

55. A Joint Stock Company is a company with the authorized capital divided into the shares similar in par value. A share is a bond confirming the obligations of a Joint Stock Company before the partner (stockholder) and the rights of the stockholder in the Joint Stock Company.

56. Number of members. Shares of a Joint Stock Company may be held by a single person as well as by multiple persons. There is no maximum number of shareholders or partners. As such it is suitable for both individual and associative microenterprises.

57. Liability and minimum authorized capital. The responsibility of a Joint Stock Company before the creditors is limited to all of its property. A shareholder of a Joint Stock Company is not responsible for the obligations of Joint Stock Company. The minimum authorized capital of a JSC is GEL 15,000. This is very high and will be difficult for microenterprises to provide. It is also out of proportion with respect to the foreseen turnover and profit of the microenterprises, making this a less suitable modality.

58. Registration. The Joint Stock Company has to be registered with the local tax office, which will take 3 workdays and will require payment of the registration fee. To register they have to draw up a Charter and submit the notarized documents listed in the table below. These documents are easily obtainable, although their notarization will imply certain costs as will the registration itself. It is recommended to draw up templates for the Charter and other documents to facilitate the registration process. It is also recommended to have a legal specialist draw up all legal documents and assist in the registration process.

State and tax registration of Joint Stock Companies





A certificate of evaluation for non-cash contributions

Documents regarding the appointment of the director(s)



59. Management. The Joint Stock Company is managed by a director who is appointed by the company partners and may represent the company in legal relations with third persons. This appointment and any decisions beyond the routine operation of the company are made in a general meeting of the partners by majority vote. The general meeting is held at least once a year to present the annual report, which needs to be audited by an independent auditor. Apart from the director and the general meeting, a supervisory council is also elected of between 3 and 21

17

The name of the Joint Stock Company may include the names of the partners, a name that reflects the activity of the company or any other name, but must include “Joint Stock Company” or “JSC”.


21

members, which meets at least quarterly and controls the activities of the director. This structure seems a bit out of proportion for small microenterprises.

60. Tax payments and accounting. Upon registration a taxpayer identification number and tax registration certificate will be received. The JSC is required to pay 20% profit tax over the net profit. Part of the profit may be paid out as dividend to the partners, over which 10% tax needs to be paid. No further income tax needs to be paid over such dividends. A profit tax return needs to be filed once a year before April 1st. JSC’s having been in operation the previous year, are required to pay quarterly tax instalments based on the annual tax of the previous year. Accounting and auditing must be carried out in accordance with the laws of Georgia. This entails the keeping of a proper cashbook and accounting books and the preparation of an annual balance sheet, statement of profit and losses, and business report. Examples of the annual balance sheet and statement of profit and losses can be found in Annexes 3 and 4. The business report should reflect the course of economic activities of the company and its economic state, also reporting the events of special significance for the company expected to take place after the end of the year. Where a JSC carries out more than GEL 100,000 worth of VAT taxable transactions, it is required to register as a VAT taxpayer and has to charge 18% VAT over the services provided and submit a VAT tax return each month. The JSC is furthermore obliged to withhold 12% income tax from any wages paid to employees and transfer this to the GoG, and to pay 20% social tax over the wages of the employees (to be withheld at the source). The fact that JSC’s need to pay profit tax and carry out formal accounting and auditing, means that an accountant will most likely need to be hired.

61. Distribution of profit. A proposal for the distribution of the profit of the company is made by the director and needs to be approved by the supervisory council, and if there is no agreement the final decision is taken in the general meeting. The profit may be fully paid out as dividend or partially retained as an increase to the authorized capital. Distribution is according to shares. The distribution of profit therefore provides no problems.

62. Change of members. Changes to partners in Joint Stock Companies do not need to be registered in the Entrepreneurial Register. The Joint Stock Company needs to keep a register of shareholders in which such changes are registered. Shares in a JSC can be sold freely. This means the other partners have no control over the change of partners which is not desirable for maintenance microenterprises.

REGISTERED COOPERATIVE (RC)

63. A Cooperative is a company based on the labour activity of its members or established with the purpose to develop the business and increase the profits of its members. The objective of the cooperative is to fulfil the interests of the members. The cooperative is not aimed primarily at gaining profits. Although cooperatives for providing (public) services are not expressly listed in the Law on Entrepreneurs, this does not seem to mean that it is not possible to create road maintenance cooperatives.

64. Number of members. A Cooperative requires at least two members. There is no maximum number of members. As such it is suitable only for associative microenterprises.

65. Liability and minimum authorized capital. The cooperative is responsible for its obligations before the creditors with its own property only and there is no personal liability of the Cooperative members. There is no minimum authorized capital, only requirements regarding the minimum share of the different Cooperative members. This minimum share of a cooperative member shall be determined by the Cooperative founders, but must be at least GEL 50 and be divisible by GEL 50 without balance. One member of the cooperative may have several shares. Although the required cost of shares is not necessarily very high, as it is per person it will likely be more than for Limited Liability Companies. It should not form a problem for the microenterprises, however.

66. Registration. The Cooperative has to be registered with the local tax office, which will take 3 workdays and will require payment of the registration fee. To register they have to draw up a Charter and submit the notarized documents listed in the table below. These documents are easily


22

obtainable, although their notarization will imply certain costs as will the registration itself. It is recommended to draw up templates for the Charter and other documents to facilitate the registration process. It is also recommended to have a legal specialist draw up all legal documents and assist in the registration process.

State and tax registration of the Registered Cooperative





A certificate of evaluation of non-cash contributions



67. Management. The daily management of the Registered Cooperative is carried out by the Board of Directors, consisting of at least 2 directors who are appointed by the RC members and who shall represent the company in legal relations with third persons. The directors may not be members of the cooperatives and are elected for 4 years unless otherwise determined in the Charter. The activities of the Board are controlled by the Supervisory Council which has between 3 and 15 members elected by simple majority by the RC members. All decisions beyond the routine operation of the RC by the Board and the responsibilities of the Supervisory Council as well as the appointment of the directors and the election of the Supervisory Board members are carried out in the General Meeting. The General Meeting is held at least once a year after the end of the economic year and the call for the meeting needs to be published in one of the official newspapers of the Republic of Georgia or in the newspaper determined by the Charter. Decisions are made by simple majority vote and each member of the RC has one vote. The management structure appears to be out of proportion for microenterprises. Also, the fact that two directors are required, both of which cannot be members of the Cooperative, makes it a less suitable modality for road maintenance microenterprises. Lastly, the need to publish meetings in newspapers is also an over requirement for microenterprises where the members live near each other.

68. Tax payments and accounting. Upon registration a taxpayer identification number and tax registration certificate will be received. The RC is required to pay 20% profit tax over the net profit. Part of the profit may be paid out as dividend to the partners, over which 10% tax needs to be paid. No further income tax needs to be paid over such dividends. A profit tax return needs to be filed once a year before April 1st. RC’s having been in operation the previous year, are required to pay quarterly tax instalments based on the annual tax of the previous year. Accounting and auditing must be carried out in accordance with the laws of Georgia. This entails the keeping of a proper cashbook and accounting books and the preparation of an annual balance sheet, statement of profit and losses, and business report. Examples of the annual balance sheet and statement of profit and losses can be found in Annexes 3 and 4. The business report should reflect the course of economic activities of the Cooperative and its economic state, also reporting the events of special significance for the Cooperative expected to take place after the end of the year. Where a RC carries out more than GEL 100,000 worth of VAT taxable transactions, it is required to register as a VAT taxpayer and has to charge 18% VAT over the services provided and submit a VAT tax return each month. The RC is furthermore obliged to withhold 12% income tax from any wages

18

The name of the Cooperative may include the name of the partners, refer to the activity of the RC, or be any other name, but must include “Registered Cooperative”.


23

paid to employees and transfer this to the GoG, and to pay 20% social tax over the wages of the employees (to be withheld at the source). The fact that RC’s need to pay profit tax and carry out formal accounting and auditing, means that an accountant will most likely need to be hired.

69. Distribution of profit. The profits and losses of the cooperative will be distributed amongst the members of the cooperative. In the first year this is done proportionally according to the members’ actual contributions. For the following years the distribution is performed according to the shares existing by the end of the previous economic year. The Charter may provide for other rules regarding the distribution of profit.

70. Change of members. Members of the Cooperative may withdraw from the Cooperative only at the end of the economic year and have to apply for withdrawal in writing at least three months in advance. Upon withdrawal from the Cooperative, only the profit share is paid out, not the share of the reserve fund or any other property of the Cooperative. New members can join the Cooperative by presenting a signed and notarized application of membership in the Cooperative and paying the required minimum share. Any changes to the members must be registered in the Enterprise Register. This means the change of members is a bit complicated and time consuming.

JOINT LIABILITY COMPANY (JLC)

71. A Joint Liability Company is a company where several natural persons carry out repeated and independent entrepreneurial activity under the same firm's name.

72. Number of members. A JLC requires at least two members. If there are more than 50 partners, it has to be transferred into a Joint Stock Company. As such it is suitable only for associative microenterprises.

73. Liability and minimum authorized capital. The partners of Joint Liability Companies are responsible before the creditors as joint debtors - directly, immediately, without any limitation and with their whole property. As there is no limited liability, there is also no minimum authorized capital required. This lack of limited liability is a serious disadvantage of this modality, similarly to the Individual Enterprise.

74. Registration. The joint liability company has to be registered with the local tax office, which will take 3 workdays and will require payment of the registration fee. To register they have to draw up a Charter and submit the notarized documents listed in the table below. These documents are easily obtainable, although their notarization will imply certain costs as will the registration itself. It is recommended to draw up templates for the Charter and other documents to facilitate the registration process. It is also recommended to have a legal specialist draw up all legal documents and assist in the registration process.

State and tax registration of Joint Liability Company


number of each founding partner o Powers of representation


A certificate of evaluation of non-cash contributions



19

The name of the Joint Liability Company must include (sur)name of at least one partner and the addition “JLC” or the (sur)names of all partners, as well as possible additions.


24

75. Management. A Joint Liability Company may be managed by any of the partners, who shall represent the company in legal relations with third persons. Decisions beyond the company’s routine operations require a meeting of all partners, whereby a majority is required to make a decision. As such the management structure is very simple and suitable to microenterprises.

76. Tax payments and accounting. Upon registration a taxpayer identification number and tax registration certificate will be received. The JLC is required to pay 20% profit tax over the net profit. Part of the profit may be paid out as dividend to the partners, over which 10% tax needs to be paid. No further income tax needs to be paid over such dividends. A profit tax return needs to be filed once a year before April 1st. JLC’s having been in operation the previous year, are required to pay quarterly tax instalments based on the annual tax of the previous year. Accounting and auditing must be carried out in accordance with the laws of Georgia. This entails the keeping of a proper cashbook and accounting books and the preparation of an annual balance sheet, statement of profit and losses, and business report. Examples of the annual balance sheet and statement of profit and losses can be found in Annexes 3 and 4. The business report should reflect the course of economic activities of the company and its economic state, also reporting the events of special significance for the company expected to take place after the end of the year. Where a JLC carries out more than GEL 100,000 worth of VAT taxable transactions, it is required to register as a VAT taxpayer and has to charge 18% VAT over the services provided and submit a VAT tax return each month. The JLC is furthermore obliged to withhold 12% income tax from any wages paid to employees and transfer this to the GoG, and to pay 20% social tax over the wages of the employees (to be withheld at the source). The fact that JLC’s need to pay profit tax and carry out formal accounting and auditing, means that an accountant will most likely need to be hired.

77. Profit distribution. At the end of the financial year, each partner is entitled to the payment of dividends from the annual profit of up to 4% of the value of his/her share in the authorized capital as defined in the previous year. Where profits are insufficient, this percentage is reduced. Where profits are higher, the additional part can only be demanded in the next economic year. Undistributed profits are added to the shares of the company partners. The Charter of the company may provide other rules, however. A partner may also request part of his/her share of authorized capital with the consent of the other partners. This means that in principle the profit distribution is limited to 4% of the authorized capital (which may be problematic in the case of microenterprises with limited capital, especially since there is no minimum authorized capital), but that higher levels of distribution are possible with the consent of the partners, as long as this is reflected in the Charter.

78. Change of members. Where a partner wishes to leave the company, he/she is paid the sum he/she would receive in case of the company’s liquidation and the freed shares are distributed amongst the remaining partners. The changes to the partners will need to be registered with the local tax office for inclusion in the Entrepreneurial Register. This does make it relatively easy for partners to change.

UNION (ASSOCIATION)

79. A Union is a legal person in which a number of persons set a common goal, and its existence is independent from changes in its membership.

80. Number of members. At least five founding members shall be required to constitute a union. There is no maximum number of members. This makes it suitable only for associative microenterprises.

81. Liability and minimum authorized capital. The union is independently liable for its obligations before the creditors with its own property only and there is no personal liability of the union members. There is no minimum authorized capital, however, as this modality is not intended for commercial purposes. The limited liability makes it suitable for road maintenance microenterprises.


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82. Registration. A Union shall be subject to registration by a court. An application and Charter signed by all founders and all members of the governing board are necessary for registration. The materials necessary for registration of a union shall be filed with the court having jurisdiction over the location of the residence of the Union. The court shall decide on the registration within one month from the day of filing of the application. If within this term no decision is made, the registration shall be deemed effective. The organization and structure of a union shall be regulated by a Charter, which shall include the items listed below. The fact that registration is with a court and takes one month makes the registration of this modality more complicated. Although this may acceptable for a pilot project, for its subsequent replication it may prove a serious hindrance.

Contents of the Charter of a Union

Objectives of the Union

The name of the Union20

The legal address of the Union

The procedure for property liquidation and distribution

The name, surname, date and place of birth, occupation and place of residence of each founder, contributor and member of the governing board of the union, procedure for calling board meetings and making decisions at such meetings

Authority of Union members

83. Management. Daily operation of the Union is by the members of the Governing Board of the Union. The governing board represents the Union in its relations with third persons. The scope of the authority of the Governing Board is stipulated in the Charter. The charter may provide that one person will exercise all authority individually, or it may establish joint direction by two or more persons. The charter shall regulate whether the persons given representational authority may act individually, jointly between some of them, or jointly between all of them. The Governing Board will be elected by the General Meeting of the Union members for a term of four years unless otherwise stipulated in the Charter. The charter of the Union shall also establish rules regarding the remuneration of the members of the Governing Board. The General Meeting is called at least once a year by the Governing Board. Decisions on all matters outside the competence of the Governing Board are made by the General Meeting. A decision of the Meeting is made by a majority of the votes of members present and a decision on alteration of the charter by a two-thirds majority. As such the management structure is relatively simple and suitable to microenterprises.

84. Tax payments and accounting. Under the Tax Code of Georgia, unions are defined as organizations. Where such organizations carry out entrepreneurial activities, the part of its property and activities which are directly connected to its economic activity are recognized to be the activities and property of an enterprise. As such they follow the standard tax regulations for such economic activities21, although they do not need to pay tax over grants or contributions. The Union is required to pay 20% profit tax over the net profit regarding its economic activities. The profit may not be paid out as dividend to the partners as it remains a non-profit organization. A profit tax return needs to be filed once a year before April 1st. Unions having been in operation the previous year, are required to pay quarterly tax instalments based on the annual tax of the previous year. Accounting and auditing of economic activities must be carried out in accordance with the laws of Georgia. This entails the keeping of a proper cashbook and accounting books and the preparation of an annual balance sheet, statement of profit and losses, and business report. It is not clear if VAT needs to be charged by Unions for services rendered, although it is likely they will have to do so if the amount of VAT taxable transaction exceeds GEL 100,000. A Union is furthermore obliged to withhold 12% income tax from any wages paid to employees and transfer this to the GoG, and to pay 20% social tax over the wages of the employees (to be withheld at the source). The fact that, despite being a non-profit organization, Unions need to pay tax and follow the same accounting regulations as for-profit modalities with respect to their commercial activities, makes

20

The name of the foundation must include “Union”. 21

This will need to be confirmed as it is not fully clear from the Civil Code that regulates Unions.


26

this modality less suitable for road maintenance microenterprises, especially in light of the fact that it will be complicated to justify the use of non-profit modalities for this purpose.

85. Profit distribution. The distribution of profits among the members of a Union (Association) is not allowed. Any profits will be taxed under profit tax but cannot be distributed as dividend. This makes this modality less suitable, as it takes away the incentives to improve efficiency and increase profits, as such profits cannot be used by the Union members.

86. Change of members. The Governing Board admits members to the union on the basis of written applications by interested persons, or in other cases provided for in the Charter. Each member is entitled to withdraw from the union. The charter may provide for a certain period of time for withdrawal, which period may not exceed one year. Membership may not be transferred to or inherited by other persons unless otherwise provided for in the Charter. If a Union serves a significant function in meeting the vital social or other needs of a person interested in joining, then such person is entitled to demand admission to the Union, unless his admission would contravene the fundamental principles of the Union. This means that it is difficult to deny anybody membership to the Union, which could form a problem for road maintenance microenterprises that will require a closed membership.

FOUNDATION

87. A Foundation is a legal person in which one or more founders transfers a special property to the ownership of an independent subject having no membership, for the accomplishment of a useful, common and public purpose.

88. Number of members. A Foundation can have one or more founders, although it has no membership. Instead it has contributors who can make contributions to the Foundation indicating what these may be used for. It does, however, have a Governing Board which does have members. As such it seems less suitable for road maintenance microenterprises.

89. Liability and minimum authorized capital. The Foundation is independently liable for its obligations before the creditors with its own property only and there is no personal liability of the Foundation members. There is no minimum authorized capital, however, as this modality is not intended for commercial purposes. However, the notarized document creating the foundation requires the founder(s) to contribute property to the Foundation in the amount required to accomplish the purpose of the Foundation. If the property is inadequate, the registration of the foundation shall be refused. The limited liability makes it suitable for road maintenance microenterprises, although it is not clear what a proper contribution for a road maintenance microenterprise would be and whether this would be feasible.

90. Registration. A Foundation shall be subject to registration by the Ministry of Justice. An application and Charter signed by all founders and all members of the governing board are necessary for registration. The materials necessary for registration of a foundation shall be filed with the Ministry of Justice. The Ministry of Justice shall decide on the registration within one month from the day of filing of the application. If within this term no decision is made, the registration shall be deemed effective. The organization and structure of a foundation shall be regulated by a notarized Charter, which shall include the items listed below. The fact that registration is with the Ministry of Justice and takes one month makes the registration of this modality more complicated. Although this may acceptable for a pilot project, for its subsequent replication it may prove a serious hindrance.


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Contents of the Charter of a Foundation

Objectives of the foundation

The name of the foundation22

The legal address of the foundation

The procedure for property liquidation and distribution

The name, surname, date and place of birth, occupation and place of residence of each founder, contributor and member of the governing board of the foundation, procedure for calling board meetings and making decisions at such meetings

Authority of foundation members

The minimum amount and type of contributions and instructions on its use

91. Management. Daily operation of the Foundation is by the members of the Governing Board of the Foundation. It is not clear how the Governing board members are elected, but it would appear they are elected upon the registration of the Foundation by the founders. The governing board represents a Foundation in its relations with third persons. The scope of the authority of the Governing Board is stipulated in the Charter. The Charter may provide that one person will exercise all authority individually, or it may establish joint direction by two or more persons. The charter shall regulate whether the persons given representational authority may act individually, jointly between some of them, or jointly between all of them. A report on the state of the property of the Foundation shall be prepared annually, in an appropriate form.

92. Tax payments and accounting. Under the Tax Code of Georgia, Foundations are defined as organizations. Where such organizations carry out entrepreneurial activities, the part of its property and activities which are directly connected to its economic activity are recognized to be the activities and property of an enterprise. As such they follow the standard tax regulations for such economic activities23, although they do not need to pay tax over grants or contributions. The Foundation is required to pay 20% profit tax over the net profit regarding its economic activities. The profit may not be paid out as dividend to the partners as it remains a non-profit organization. A profit tax return needs to be filed once a year before April 1st. Foundations having been in operation the previous year, are required to pay quarterly tax instalments based on the annual tax of the previous year. Accounting and auditing of economic activities must be carried out in accordance with the laws of Georgia. This entails the keeping of a proper cashbook and accounting books and the preparation of an annual balance sheet, statement of profit and losses, and business report. It is not clear if VAT needs to be charged by Foundations for services rendered, although it is likely they will have to do so if the amount of VAT taxable transaction exceeds GEL 100,000. A Foundation is furthermore obliged to withhold 12% income tax from any wages paid to employees and transfer this to the GoG, and to pay 20% social tax over the wages of the employees (to be withheld at the source). The fact that, despite being a non-profit organization, Foundations need to pay tax and follow the same accounting regulations as for-profit modalities with respect to their commercial activities, makes this modality less suitable for road maintenance microenterprises, especially in light of the fact that it will be complicated to justify the use of non-profit modalities for this purpose.

93. Profit distribution. The distribution of profits among the contributors of a foundation is not allowed. Any profits will be taxed under profit tax but cannot be distributed as dividend. This makes this modality less suitable, as it takes away the incentives to improve efficiency and increase profits, as such profits cannot be used by the Union members.

94. Change of members. Because a Foundation officially has no members, only founders and contributors, the members cannot be changed. It seems the founders cannot be changed, and everybody is free to become a contributor. Only the members of the Governing board are changed through elections. All in all, however, the structure of a foundation seems unsuitable to a microenterprise.

22

The name of the foundation must include “Foundation”. 23

This will need to be confirmed as it is not fully clear from the Civil Code that regulates Foundations.


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OVERVIEW AND CONCLUSIONS

95. Based on the information provided in the previous sections, this section will give an overview of the advantages and disadvantages of the different legal organizational modalities with respect to road maintenance microenterprises, and draw conclusions as to the most suitable modalities. The table below gives an overview of the different modalities with respect to the different issues dealt with previously.


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Table 5: Overview of legal organisational modalities

Individual Enterprise

Limited Liability

Company

Joint Stock Company

Cooperative Joint Liability

Company

Union / Association

Foundation

Profit (P) or non-profit (NP) P P P P P NP NP

Minimum number of members 1 1 1 2 2 5 1

Maximum number of members 1 50 unlimited unlimited 50 unlimited unlimited

Legal person No Yes Yes Yes Yes Yes Yes

Limited liability No Yes Yes Yes No Yes Yes

Minimum capital - GEL 200

GEL 15,000

GEL 50 per member

- - -

Registration Local tax office

Local tax office

Local tax office

Local tax office

Local tax office

Court Ministry of Justice

Daily management Individual entrepreneur

Appointed director

Appointed director

2 appointed directors

One of the partners

Governing board

Governing Board

Supervisory body n/a - Supervisory council

Supervisory council

- - -

Final decision making Individual entrepreneur

Partners meeting

General meeting

General meeting

Partners meeting

General meeting

Founders

Ta

x

Profit (income tax for IE) 12% 20% 20% 20% 20% 20% 20%

Accounting Simple Full Full Full Full Full Full

Income tax employees 12% 12% 12% 12% 12% 12% 12%

Social tax employees 20% 20% 20% 20% 20% 20% 20%

VAT 18% 18% 18% 18% 18% 18% 18%

Distribution of profit Free As dividend if in charter

As dividend if partners

agree

As dividend As dividend up to 4% of

capital

Not allowed Not allowed

Change of members n/a Notarized agreement

Partners

permission if in charter

Free At end of economic

year

With three months notice

With partners

agreement

Open to any new

members

Only for Governing

Board

96. With respect to the non-profit modalities (Union and Foundation), these do not really provide any advantages over the for-profit modalities, especially as for taxing purposes they are treated as for-profit modalities regarding their commercial activities such as road maintenance. At the same time they bring with them some serious disadvantages, such as the registration with courts or the Ministry of Justice and the long registration time of one month. Also, they are unable to distribute any possible profit, thus deleting any incentive to improve the working efficiency (something which has been witnessed in many other countries where non-profit modalities have been adopted). Lastly they present a number of problems regarding their membership and changes to this. In conclusion, it is not recommended to use such non-profit modalities, especially since in Georgia the registration of for-profit modalities is relatively easy (not like in Latin America in the 90’s) and in terms of operation (especially taxes) the processes are very similar between non-profit and for-profit modalities.

97. Within the for-profit modalities, the Joint Stock Company has a serious disadvantage in terms of the required capital, which may prove to be beyond the reach of most microenterprises. The management structure is also overly complicated for an enterprise of this size and nature. The fact that shares can be traded freely means that there is no control over the partners of the JLC, which is also a drawback of this modality. All in all, this modality is also considered to be unsuitable for road maintenance microenterprises.

98. The Registered Cooperative has an overly complicated management structure for the size and nature of road maintenance microenterprises, requiring two directors, a Supervisory Council and calls for meetings in newspapers. Especially the fact that the directors may not be members of


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the Cooperative makes it a less suitable modality. The change of members is also a problem, as this is bound by many regulations regarding timing and notice. This modality is possible, but is not considered very suitable for road maintenance microenterprises. Also it is not clear if road maintenance microenterprises are allowed to use this modality, as it is not mentioned in the list of possible types of Cooperatives presented in the Law on Entrepreneurs.

99. The Joint Liability Company has the significant drawback that it does not provide limited liability and its members are fully and personally liable which forms a large risk for any entrepreneurs. The distribution of profits is also complicated, but is feasible. The Individual Enterprise has the same drawback regarding the liability of its owner, but it has the advantage of allowing for simplified accounting and taxation, whereby profits of the enterprise are seen as income and taxed as such. Both modalities complement each other, in as far as Joint Liability Companies only allow for associative microenterprises and Individual Enterprises only allow for individual microenterprises. Both these modalities are feasible, although special attention will have to be paid to limiting the risk of microenterprise members becoming liable for damages.

100. The Limited Liability Company appears to come out best. It allows for both individual and associative microenterprises, and provides limited liability. The capital requirements are acceptable, the management structure is simple, and the distribution of profits is easy. The only drawback is that many of the decisions have to be notarized, implying extra costs.

101. In conclusion, it is recommended to use the legal organizational modality of Limited Liability Company. In the case of individual microenterprises, the Individual Enterprise may form a good alternative despite its lack of limited liability because it allows for simple accounting and easier taxation processes. In any case, it is recommended to have these two modalities analysed in more detail by a corporative legal specialist who may also be made responsible for drawing up the template legal documents for registration and operation.

2.3 PROCUREMENT OF MICROENTERPRISES

102. This section will look at a number of issues regarding procurement legislation in Georgia and its impact on the contracting of microenterprises and the use of performance-based contracts. The analysis in this section is primarily based on discussions with staff of municipalities and the Roads Department and on the Law on State Procurement and its Regulations. The Law on State Procurement has changed frequently over the past decade. For the purpose of this analysis, three versions will be discussed, the 1999 law, the law that entered into force in 2006 which introduced significant changes, and the recently amended law which entered into force in 2010. This latest law actually allows both the new and the previous procedures to be applied until September 2010, after which the new procedures will only be allowed (although it is likely that additional changes will be made in this period based on the experience in applying the new procedures). The changes to this law and its regulations tend to be the result of a wish to increase transparency and curb corruption, and do not pay much attention to the promotion of employment and local economic development through increased access for micro and small enterprises. Some of the changes actually make it more difficult for micro and small enterprises to participate in public procurement processes. It is hoped that future versions of this law will attempt to also integrate such objectives.

COMPETITIVE BIDDING

103. Although competitive bidding is generally promoted in public procurement, including road maintenance, in the case of road maintenance microenterprises single-source procurement has often been applied in the initial phases in order to facilitate the creation of the microenterprises. These microenterprises are generally created with the help of the procuring entity, and it is not desirable to create multiple microenterprises for the sake of competition if only one will be contracted. Generally procurement was opened up to competition after some years.

104. Although microenterprises are often very weak initially and will have problems competing with existing contractors, the contract size and activities included in the contracts for microenterprises will generally not be very interesting for existing contractors (which is why the


31

microenterprises are being promoted in the first place). The main problem with competitive bidding is therefore not so much the competition itself (although this may form a problem in some cases), but the requirement of a minimum number of bidders which may not be achievable, thus nullifying the procurement process. For this reason, in most of the existing experiences with maintenance microenterprises, single-source procurement was initially applied, often under the norms of the World Bank or other funding agencies.

105. The 1999 Law on State Procurement distinguishes three types of bidding processes: open tendering, closed tendering and single-source procurement. The type of bidding process to be applied depends on the contract amount and the type of procurement (works, goods or services), as can be seen in the table below. Routine maintenance is generally seen as a service, although it appears that in Georgia it may be treated as works. This will have to be confirmed as it has quite some significance on the procurement procedures and guarantees to be applied.

Table 6: Allowable contract amounts by type of bidding process (1999 Law on State Procurement)

Type of bidding process Services or goods Works

Single-source procurement <GEL 50,000 <GEL 100,000 Closed tendering GEL 50,000-100,000 GEL 100,000-200,000 Open tendering >GEL 100,000 >GEL 200,000

106. Under the 1999 law, single-source procurement was therefore possible to relatively large contract amounts, which would have allowed for at least the smaller microenterprise-based routine maintenance contracts, and if treated as works, probably most of the maintenance contracts. For larger contract amounts closed tendering would have had to have been applied which requires the invitation of at least 5 bidders and the receipt of no less than 3 tender proposals, and it is here that a serious problem would have arisen as it would have been difficult to ensure at least three bids in a context where few microenterprises exist, and certainly not along the same (group of) roads. The only option would then have been to apply open tendering, where no such minimum number of bids exists, although this would have made the tendering process more complex as the tender notice had to be announced via the mass media.

107. In the 2006 Law on State Procurement and subsequent revisions, the possible bidding processes were changed, with open tendering becoming the norm, and the allowable contract amount for single-source procurement being limited to GEL 20,000 (GEL 50,000 for works). Closed tendering was abolished and in its place price quotation was introduced (a type of shopping), which was allowable for contract amounts of up to GEL 50,000 (GEL 120,000 for works). Single-source procurement is thus only possible for the smallest maintenance contracts, especially if treated as a service. The price quotation modality, however, contrary to closed bidding, does not stipulate a minimum number of bidders, although a minimum of three candidates have to be invited. This does solve the problem where insufficient invitees submit a bid, although still three invitees have to be identified. Although it is of course possible to identify three invitees (for instance inviting larger contractors or microenterprises created in other parts of the municipality24), this would seem a bit artificial as their mobilisation costs will generally be much higher (although it would ensure that the bid of the microenterprise along the road concerned would not be artificially high). If routine road maintenance is treated as a service, the allowable contract amounts would still be too low for many contracts, but if treated as works they would most likely cover all contracts. Where contract amounts are too large, open tendering would need to be applied, which would not necessarily be a problem except for the more complicated tendering process.

108. The newly amended 2010 Law on State Procurement has done away with the distinction between open tendering, price quotation and single-source procurement and only distinguishes two types of procurement: simple tender for contracts of less than GEL 100,000 (GEL 200,000 for

24

This was done in Peru, when execution of the microenterprise maintenance programme was transferred from execution under World Bank norms using single-source procurement to execution under national procurement legislation whereby three bids where required. Generally the other microenterprises had significantly higher bids as a result of higher mobilisation costs. For the national road network, however, where contract amounts where larger, the mobilisation costs were of relatively less importance and some of the other microenterprises actually won the contract.


32

works) and normal tender for contracts of higher value. The normal tender appears to be the same as open tender in the previous versions of the law. The terms of simple procurement are not explained in the new law, however, and will most likely only be explained in the regulations to the law which are currently under review. It is likely, however, that this will possibly include both price quotation and single-source procurement, or be limited to price quotation only. In any case, the permissible contract amounts have been increased again, and would thus allow for most of the contracting of routine maintenance by microenterprises, especially if it is treated as works. The exact nature of the procurement process under simple procurement will have to be analysed once the review of the regulations has been finalised.

109. Another aspect introduced by the 2010 law is electronic tendering. As from March 2010, electronic tendering is introduced, although normal tendering is also allowed up to September 2010, after which electronic tendering will be the norm. The impact of this on microenterprises is debatable. Although e-tendering generally increases transparency and access to information, and lowers the costs of participation in a tender (no tender fee if tender documents are downloaded, no need to travel to the location of the procuring entity as documents can be downloaded and sent over the internet), it does require access to the internet and a basic knowledge of working with computers. It is likely, however, that in a country such as Georgia, access to internet is relatively high and computer skills are quite developed compared to the situation in many Latin American countries when e-bidding was introduced over the past decade.

CONTRACT PACKAGING AND DIVISION

110. An important issue regarding the contract amount (and with it the type of procurement process to be applied) is the packaging of the routine maintenance contracts and the possibility of division of contracts. Division here refers basically to the possibility of issuing separate contracts for each road or for groups of roads (putting the execution of the contract within the scope of a microenterprise, which is not able to carry out the maintenance of the whole local road network in a municipality), and of issuing separate contracts for those routine maintenance activities which can be carried out by microenterprises and those that require certain technical skills or heavy machinery and will be awarded to a larger contractor. Where such division is not possible or not applied, the microenterprises will not be able to carry out the contract.

111. As in many other countries, the 2006 Law on State Procurement states that the deliberate and artificial division of procurement is not allowed for the purpose of lowering the contract amounts and avoiding the need for higher level procurement procedures (e.g. open tendering). The discussion is then whether the contracting of maintenance by road instead of for the whole municipality is seen as artificial. It is likely, however, that it will be necessary to apply open or normal tendering to avoid any problems in this respect. An alternative is to issue a decree allowing simplified tendering and the packaging of smaller maintenance contracts with limited scope specifically for the case of routine maintenance microenterprises. The Roads Department has already indicated that this would be possible, certainly for the proposed pilot projects. Another option for the pilot project would be to apply the norms of the World Bank for the procurement.

GUARANTEES AND OTHER FINANCIAL REQUIREMENTS

112. The provision of guarantees is also known to form a problem for microenterprises, either because of the high amounts required, but also because of the forms in which the guarantees are to be presented, which are not always easily accessible for microenterprises. In Georgia three types of guarantees are generally required in public procurement contracts: bid guarantees, performance guarantees and advance guarantees.

113. Bid guarantees are required at the time of presenting a bid to ensure that the bidder will carry out the contract according to the bid submitted in case of being selected. The guarantee should be issued by a bank, insurance company or other lending agency and is usually required to be unconditional, entitling the buyer to receive the amount immediately upon request. This bid guarantee should be 1% of the contract sum, but according to the current regulations to the Law on State Procurement it only needs to be applied in contracts over GEL 200,000 (GEL 1,000,000 for works). This guarantee will therefore not be required for routine road maintenance contracts with


33

microenterprises. But even if this guarantee would be required, it is not very high and the period of its validity is generally not very long. Apart from the bid guarantee, according to the 2010 law, bidders are required to pay a tender fee of GEL 150 to obtain the tender documents25 and a tender charge of GEL 50 for submission of their tender.

114. Performance guarantees are required to reimburse any damage or costs caused to the buyer by non-performance or improper performance of the supplier. This guarantee should also be issued by a bank, insurance company or other lending agency and should be unconditional, entitling the buyer to receive the amount immediately upon request. According to the regulations to the Law on State Procurement, this guarantee should be between 2% and 5% of the total contract sum, although a tendency was noticed to apply the highest percentage of 5%. The current regulations (which are under review) state that this guarantee is not required for contract amounts below GEL 200,000 (GEL 1,000,000 for works), but the 2010 Law on State Procurement states that this guarantee is not required in the case of simplified tendering, i.e. for contract amounts below GEL 100,000 (GEL 200,000 for construction works). It is questionable whether all the routine road maintenance contracts with the microenterprises will be below GEL 100,000, and the provision of this guarantee could prove complicated for microenterprises because of the relatively high amounts (especially if 5% is applied) and the long period of validity required. A separate insurance against third party damages is usually also required. For the international and secondary roads maintained by the larger contractors, an insurance of GEL 40,000 is required. It is likely that for the local roads and microenterprises a lower amount can be set. The amount and type of insurance is defined by the procuring entity.

115. Advance guarantees are only required in case an advance to the contract sum is provided, in which case the guarantee should cover the full 100% of the advance. It is unlikely that this guarantee can be waived, although experience exists with similar programmes in other countries where advances are provided without guarantee, and discounted from subsequent payments. The advances for road maintenance microenterprises are generally only required to purchase tools (or the tools are provided by the client at the beginning of the contract), and the amounts involved are generally low compared to the total contract (approximately 5-10%). Given the small amount of the contracts themselves, these advances are generally only a few thousand lari, and if possible the advance should be given without guarantee to ensure the microenterprises are able to purchase proper tools and equipment and carry out their work efficiently and effectively.

QUALIFICATION DATA AND TENDERING DOCUMENTATION

116. Apart from guarantees, tender fees and charges, bidders are required to provide qualification data and all other documentation defined in the tender documentation26 in order to be allowed to participate in a tendering process and to be qualified as a candidate. Regarding the qualification data, the Law on State Procurement simply states that the required qualifications and documentation are to be defined by the procuring entity, but should be fair, non-discriminatory and should promote development of healthy competition. The regulations state that qualification requirements may be worked out for professional and technical qualification, financial resources, experience and reputation, technical equipment and other tangible assets of bidders as well as for those issues that are related to the legal side of their activities.

117. In several countries negative experiences exist with the (mis)use of required qualification data that is not directly linked to the successful achievement of the objective of the contract, in this case the routine maintenance of the local roads. Such requirements may include, for instance, the possession of certain types of heavy equipment, a minimum number of years of experience of the staff, technical level of the staff, number of years of existence of the enterprise, minimum capital of the enterprise, etc. For the type of activities to be carried out by maintenance microenterprises, which are technically simple, limited in scope and require little capital, such high requirements make little sense and effectively ban the microenterprises from participating in the tender. Although

25

This tender fee does not have to be paid in the case of (simplified) electronic tendering. 26

This includes licenses for certain activities. However, in the case of road maintenance, no license is required according to the Law of Georgia on Licenses and Permits.


34

for certain activities such requirements may be justified, for those proposed to be executed by microenterprises this is not the case, and allowance should be made for the nature of such microenterprises, which generally consist of unskilled staff, are recently created, have little capital, have little or no experience with road maintenance and have very little or no equipment. Just as the Law on State Procurement states that the “description of the procurement object may not indicate a trade mark, patent, model, source of origin or producer” in order not to favour specific bidders, the required qualification data should not be set too high and thus exclude microenterprises from participation. The requirements should be kept simple and those irrelevant requirements that block the participation of microenterprises and limit competition should be removed, while the minimum requirements needed to ensure quality and cost-efficiency, remain.

118. This needs to be taken into account when preparing the tender documents. In Georgia, where standard tender documents exist, it is important that these do not pose any unnecessary restrictions to the participation of microenterprises. A review of the standard tender documents included in the regulations to the Law on State Procurement show that this is not the case. But even where the standard tender documentation does not form a problem, the specific tender documentation prepared by local authorities may include such high requirements, which they are used to applying in other (larger) contracts. To avoid this, it is recommended to prepare specific template tendering documents for routine road maintenance, with microenterprises including the Terms of Reference and the Specific Conditions of Contract, and to train local authorities in their use. This could be done as part of the guide for procuring entities that is planned as part of this project.

PERFORMANCE-BASED CONTRACTING

119. As mentioned at the beginning of this chapter, the concept of microenterprise-based routine road maintenance requires the use of performance-based contracts to simplify administration of the contracts, considering the multiple smaller contracts that are generally used under the concept. Apart from that, performance-based contracting has also proven to result in higher efficiency, lower costs for the procuring entity and higher profits for the contractor (microenterprise), as well as better overall road conditions due to more timely interventions on the part of the contractor.

120. As yet, no experience exists in Georgia with the use of performance-based contracts, at least not in the road sector. This is not a problem, as performance-based contracting was first introduced in several countries as part of microenterprise-based routine road maintenance. The question is, however, if there are any obstacles to its implementation.

121. A review of the different versions of the Law on State Procurement and its regulations, as well as the standard tender documents and existing contracts for routine road maintenance show no obstacles whatsoever for performance-based contracting. There is no instance of input-based contracts being required, especially not for services such as maintenance.

122. The only problem which has been mentioned in discussions with contractors, and which was confirmed by the Roads Department, is the issue of profit tax. Profit tax requires that the profit be determined, and being the difference between gross income and expenditure, this basically comes down to the definition of the expenses as the income is generally easy to verify. The tricky issue in Georgia is that, due to high levels of corruption in the past, the tax office is currently very strict in its control, and is dealing out severe sentences to those who are considered to have evaded the payment of taxes. Given that the gross income is easily proven, this means that evasion of profit tax basically comes down to an exaggeration of the expenditure to make the profit seem less27.

123. The justification and verification of the expenditure is therefore the key to proving that there is no evasion of tax payment. In the past under the input-based system this was quite straightforward, as the procuring agency approved the expenditure (inputs) on a monthly basis, thus verifying and justifying the expenditure. Under a performance-based system, however, only

27

For instance, by presenting the receipt of purchased materials, but not that of the sale of surplus materials.


35

the completed work is verified, not the expenditure required for achieving that result. The contractor (microenterprise) will therefore have to justify the expenditure in another way. However, in the specific case of routine maintenance microenterprises, the major part of the expenditure will be in the form of salaries for the workforce, and as such easily controllable through the income tax. Other expenditure will include tools and equipment, but this is only a minor part of the total expenditure. The issue of verifying and justifying expenditure before the tax office is therefore not considered to be a very serious one in the case of routine maintenance microenterprises, but could very well be a problem if performance-based contracts are extended to maintenance types requiring more material and equipment inputs.

124. In order to apply performance-based contracting, quantity and quality indicators have to be developed against which the fulfilment of the contract can be compared. Quality or performance indicators refer to the required quality or end-result for the different maintenance activities to be carried out. In the case of routine maintenance by microenterprises, these should be simple and easy to measure, to allow both the microenterprise to evaluate its work and to facilitate inspections by the procuring entity. For instance, in the case of cleaning and clearing the drainage system, the indicator could be that the side drains and culverts may only be silted up to less than 10% of their cross section, or for repairs to the road surface, that only a certain number of square metres of deformation (potholes, ruts, rills) is allowed per kilometre of road. The performance indicators refer to the desired end result against which the work of the microenterprises will be evaluated. Once the exact activities to be carried out by the microenterprises have been agreed upon, these performance indicators can be developed in coordination with the Roads Department and the municipalities.

125. Quantity indicators refer to the amount of work that needs to be completed according to the defined performance indicators. In Latin America this generally included the entire road section and all the road elements under the responsibility of the microenterprise. This was possible because these programmes generally included a rehabilitation component, and the microenterprises therefore started working in a road that was in good condition and their task was to keep it that way. In Georgia this is also feasible for those roads that have recently been rehabilitated. Most roads, however, are in poor condition, and for those roads two options exist.

126. One option is to develop monthly workplans as is currently the case, whereby certain activities and a certain section of road are identified where the condition of the road elements needs to be improved according to the defined performance indicators. During the inspection, not only the condition of the road elements is compared to the performance indicators, but also the quantity of completed work is compared to the workplan.

127. Another option is to apply lower standard or performance indicators, which are more easily achieved, and to apply the inspection to the whole road section and all road elements under responsibility of the microenterprise. These lower standards would still need to be better that the current condition, but not yet to the standard of a road in good condition. For certain activities the standards can be gradually increased each year.

128. Which option is best applied will depend on the activities that the microenterprises are made responsible for. The drainage system and vegetation is generally not very deteriorated, and can be significantly improved by the microenterprise and the monthly workplan approach can work well. In case of the road surface, however, especially where deteriorated paved road surface is concerned, the impact of the microenterprise will be limited and the use of lower standards will give better results. This can be discussed and decided upon once the maintenance activities have been agreed upon.


36

2.4 MAINTENANCE FUNDING

129. The most important issue for (routine) road maintenance in any country is funding. This includes both the general funding for the road sector, but also its use within the sector and the prioritisation of road maintenance. This section will first look at the required funding for routine maintenance by microenterprises by estimating the costs involved. This will then be compared to the available funding for local road maintenance at municipal level.

COSTS OF ROUTINE MAINTENANCE BY MICROENTERPRISES

130. As has been mentioned before, the principal cost of routine maintenance microenterprises is the labour cost, i.e. the salaries of the workers, whether they are members/partners of the microenterprise or simple employees. These workers will need to be paid at least minimum salaries to comply with national legislation, and possibly more if market prices are higher, to ensure that sufficient labour is available and the workers do not leave the microenterprise at the first other employment opportunity they get. Based on discussions with municipal authorities and existing contractors, a net daily wage rate of GEL 18-20 is currently being paid to the unskilled workforce in road maintenance activities.

131. It is expected that between 60 and 80 workdays per year will be required per kilometre of road, although this will depend strongly on the types of activities to be carried out by the microenterprises (especially repairs to the road surface will require significant inputs) and how many months of the year they are expected to work. The total amount of workdays per year allows us to determine the net cost per kilometre per year of the labour inputs of the microenterprise.

132. On top of this, the employer has to pay social taxes over the income of the employees (whether these are the members/partners of the microenterprise or external employees). The social tax is 20% of the net income. Over the total net income including social tax, income tax has to be withheld by the employee and paid to the State budget. This income tax is 12% of the gross income. This allows us to calculate the gross cost of labour inputs per kilometre per year.

133. Apart from the labour costs, there are also the costs of the tools and equipment (material costs are expected to be minimal as most of the required materials will be provided by the procuring entity), of transport and communication, and of health and risk insurances. A small percentage for contingencies/profit should also be included. For the sake of this initial calculation, these costs together are estimated to form 15% of the net labour costs, based on international experience and the high wage levels in Georgia. This allows us to determine the gross costs per kilometre per year of routine maintenance by microenterprises.

134. Finally, it is understood that the microenterprises will be required to charge VAT over the services rendered where these exceed GEL 100,000 per year. Most of the local road maintenance contracts will be below this amount, but for the sake of completeness the cost of VAT is included here. This means that for contracts exceeding GEL 100,000, an additional 18% VAT needs to be charged over the gross costs per kilometre per year. The resulting costs are given in the table below.

Table 7: Costs per km of routine maintenance by microenterprise (GEL)

Cost item 60 wd/km 80 wd/km

Net daily wage 18 18 Net daily wages per km 1,080 1,440 Social tax (20%) 270 360 Income tax (12%) 184 245 Other costs (15%) 191 254 Subtotal 1,725 2,299 VAT (18%)* 379 505 Total costs per km 2,103 2,804 *The VAT is only applicable for contracts over GEL 100,000


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135. As can be seen in the table above and the graph below, the estimated costs per kilometre are GEL 1,725 and GEL 2,300 for respectively 60 workdays per kilometre and 80 workdays per kilometre. In case the total contract amount exceeds GEL 100,000, i.e. when the total road length exceeds 58 km and 43 km for respectively roads requiring 60 and 80 workdays per kilometre per year, the additional VAT will result in higher costs of respectively GEL 2,100 and GEL 2,800 per kilometre per year. As such, for contracts below GEL 100,000 the wage costs making up 63% of the total cost, with taxes forming 26% and the remaining 11% taken up by the other costs (tools and equipment, transport and communication, insurances and contingency). For contracts exceeding GEL 100,000 where VAT needs to be charged, the wage costs only form 51% of the total costs, with 9% formed by the other costs and as much as 40% formed by taxes. It may be clear that in case VAT is charged, the percentage spent on taxes becomes out of proportion (profit tax is not included here, as that will be paid from any profits made by the microenterprise). It is estimated, however, that this will only be the case for some very long local roads.

Figure 1: Relative costs of expenditure items for microenterprises

AVAILABLE FUNDING

136. As was mentioned in the first chapter, currently an average of GEL 790 is spent on local road maintenance per kilometre per year. It must be noted that this is for a large part spent on winter maintenance and repairs to the road pavement (e.g. asphalt patching). Although specific percentages are not known for the local roads, for the international and secondary roads these activities take up approximately 80% of the routine maintenance budget. Only a small part of the activities related to winter maintenance and pavement repairs can be carried out by microenterprises, as was discussed in section 2.1. The amount available for the other remaining routine maintenance activities, considered to be executable by microenterprises, is therefore only a small portion of this, and may be estimated to be around GEL 200 per kilometre per year. This is approximately one tenth of the required budget per kilometre per year.

137. One option is to limit the maintenance to only a small part of the local road network in each municipality, as is currently also happening with the maintenance carried out by the larger contractors. This would mean that the microenterprises could only be contracted for 10% of the network. Another option is to limit the scope of the pavement repairs. Although this is a very debatable issue, it is evident that a lot of money is currently being spent on patching on roads where this is not the most cost-effective solution and where more intensive repairs are needed including overlays or even rehabilitation. Some of this money may be better spent on avoiding or slowing down deterioration of other local roads in the network. In the case of winter maintenance the issue is not as straightforward, as winter maintenance is required to provide minimal access to

63%

51%

26% 40%

11% 9%

0%

25%

50%

75%

100%

Contract < GEL 100,000 Contract> GEL 100,000

Other costs (tools&equipment,transport&communication,insurances,contingencies&profit)

Taxes (income tax, social tax,VAT)

Wages


38

the different villages. However, the objective should be to provide minimum access, i.e. to provide each village with one access road. This will allow all villages to obtain access, albeit in a roundabout way for some of them. Given that winter maintenance forms almost half the maintenance budgets for local roads, cutting of unnecessary winter maintenance to additional access roads can free up a significant part of the budget. Both these issues require proper planning to see how available funds can be spent most cost effectively.

138. It may be clear, however, that the main problem facing the maintenance of local roads is not the planning and distribution of the funding, but the amount of funding itself. This is simply not enough. Even if all the funding were to be used to contract microenterprises, only a third to half the required funding would be available, and the winter maintenance and pavement repairs would not be carried out.

139. Worse is that there seems to be a trend to decrease funding for maintenance of local roads. Although overall the funding for local road maintenance has remained more or less the same over the past 3 years, for the majority of the municipalities funding has actually decreased and only for a third of the municipalities has funding increased (with 13% never having funded local road maintenance over the past three years). For 2010, a third of the municipalities have not allocated any budget for local road maintenance, or only symbolic amounts of less than GEL 10,000. Only 18% have allocated more than GEL 100,000 in 2010. With such low allocations to local road maintenance, the microenterprise-maintenance concept will have little sustainability.

140. It is clear that local road maintenance funding must be increased. On the one hand, the concept of microenterprise-based road maintenance should be seen as a means of promoting inexpensive basic maintenance there where maintenance is currently not being carried out at all, and as a means of convincing municipalities to invest at least some minimum amounts in maintenance of local roads in order to ensure basic access. More promotional work will need to be carried out at municipal level to convince them to allocate more funding to local road maintenance.

141. A second recommendation is to provide earmarked funding. Just like that is currently done for capital investments in local roads, a subsidy or grant for local road maintenance could also be provided to municipalities. The Roads Department is currently looking at the possibility of using remaining budget for the maintenance of important local roads, but this would not involve a transfer of funding to the municipalities, and will therefore not create capacities or raise awareness as to the benefits of local road maintenance at municipal level. Only by providing funding for local road maintenance will such capacities and awareness be created. Such funding should be subject to counterpart funding from municipal funds, to ensure that municipal funding is not simply replaced by funding from central government, which would still not result in a significant increase in overall funding for local road maintenance.

142. Although for the proposed pilot project this will not be of much significance, as the Roads Department has indicated that it will ensure the funding for the pilots from the Ministry of Rural Development and Infrastructure, the issue of local road maintenance funding is one that must be tackled urgently for any replication of the pilots to be successful.


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3. CONCLUSIONS AND RECOMMENDATIONS

143. The main conclusion from the first visit to Georgia and the subsequent analysis of the relevant documentation and legislation is that there is definitely scope for the introduction of microenterprise-based routine maintenance of local roads in Georgia, and that no significant obstacles are foreseen. It is also expected that such an introduction would result in a more adequate preventive maintenance of a larger part of the local road network, while at the same time creating significant levels of employment and incomes and introducing entrepreneurship to the rural areas.

144. The foreseen microenterprises will necessarily take over part of the activities currently carried out by larger contractors, specifically the labour-based activities that do not require higher technical skills or significant levels of heavy equipment. This is not expected to lead to much resistance from the existing contractors, as their interest lies mainly with the winter maintenance and the pavement repairs, which will not be transferred to the microenterprises and will remain under the responsibility of the larger contractors. The execution of the other activities by microenterprises is expected to result in better overall quality due to the continued presence of the microenterprise workers and as a result of the use of performance-based contracting. An allowance for the purchase of tools, safety equipment and possibly some light machinery will need to be included in the contract. It is further recommended that materials, where these are required in significant amounts or are not locally available, be provided by the procuring entity separately from the contract. The exact activities to be included under the contracts with the microenterprises need to be defined in coordination with the Roads Department, the municipalities and the existing contractors. This will also determine the number of months per year that the microenterprises will be active (i.e. if they will be carrying out part winter maintenance activities). Clear descriptions of these activities and the tasks involved will then be included in the guide and manuals to be developed for the procuring entity, the supervisors (inspectors) and the microenterprises as part of this project.

145. With respect to the legal organisational modalities in existence in Georgia, the non-profit modalities do not appear very advantageous, resulting in the same operational requirements as the for-profit modalities and posing certain difficulties in their creation. Amongst the for-profit modalities, the modalities of Individual Enterprise and Limited Liability Company prove to be the most promising, whereby the Individual Enterprise has the advantage of allowing simplified accounting and tax procedures, but has the disadvantage of not providing limited liability as well as allowing only single owner microenterprises to be created. The only disadvantages of the Limited Liability Company is the high degree of formality required in the notarization of decisions and changes to the company and the need for formal accounting procedures. Advantageous of this modality, however, is the fact that it requires little capital while still providing limited liability, and allows for both single-owner individual and multiple-owner associative microenterprises to be formed. Once the legal organisational modality to be used has been decided upon, clear guidelines on the creation and operation (including required reporting and taxes) should be developed, as well as templates for the Charter and required accounting and tax documents and any other legal documentation, and these should be included as part of the proposed manual for microenterprises to be developed as part of this project. The involvement of a local specialist on corporative legislation is highly recommended in this respect.

146. With regard to the procurement of the microenterprises, the Law on State Procurement and its regulations are currently being revised and the exact impact is therefore not yet fully clear. However, it is not expected that the law or its regulations will pose any significant obstacles. It is recommended that standard tender documents for microenterprise-based routine road maintenance be elaborated on the basis of the existing standard documentation to ensure that obstacles are kept to a minimum. Based on the 2010 Law on State Procurement, simplified (electronic) tendering will be allowed for contract amounts of up to GEL 100,000. Based on the estimated costs of between GEL 1,725 and GEL 2,300 per kilometre per year for microenterprise-based routine maintenance of local roads (depending on the exact activities to be included and the existing road conditions), simplified tendering will be allowable for most routine road maintenance


40

contracts covering road lengths of up to 40-60 km (again depending on the activities to be included and the condition of the road). The exact nature of such simplified tendering still needs to be determined in the regulations currently under review, but it is likely to be comparable to shopping with an invitation for 3 bids, with no guarantees required except in the case where an advance on the contract is given. The microenterprises will also not be required to charge VAT for such contract amounts, leading to significantly lower costs per kilometre per year. For longer roads, where the contract amount exceeds GEL 100,000, normal (electronic) tendering will have to be applied, open to all bidders and requiring a performance guarantee which may prove difficult for microenterprises. Other disadvantages of normal tendering are the added administrative costs in the call for and selection of candidates. For such higher contract amounts VAT will also need to be charged by the microenterprises. One important issue to be looked at is the possibility of packaging road maintenance contracts by road and including only labour-based activities executable by microenterprises. Without such packaging, the scope of the contracts will be beyond the maintenance microenterprises. The generalised use of normal tendering (or at least the opening up to all bidders) may be required for this to be allowed, although for the pilots it is expected that a decree can be issued by MRDI. The need and degree of using normal tendering will need to be further discussed with relevant authorities (State Procurement Agency) and the definition of routine maintenance as a service needs to be confirmed. An exact description of the procurement process and the required documentation will be included in the guide for the procuring entity and in the manual for the microenterprises. The tendering templates mentioned above will also be included in the guide for procuring entities.

147. Although performance-based contracting is not yet in use in Georgia, no obstacles were found for its introduction or for its use in parallel to input-based contracts for winter maintenance and pavement repairs by the larger contractors. The exact method of application of performance-based contracting will need to be defined in coordination with the Roads Department and municipalities, whereby either monthly workplans will be used to determine the volume of work or differentiated maintenance standards will need to be developed based on the existing condition of the road, which will be applied to the entire road section. Once this has been decided upon and the maintenance activities have been defined, specific performance indicators need to be developed for each maintenance activity. These will be included in the different guides and manual to be developed as part of this project, especially the manual for supervisors (inspectors) and the manual for microenterprises.

148. The funding issue is not of direct importance for the implementation of the pilots, but is an issue that will need to be discussed in more detail with relevant authorities with respect to the possible future replication of the microenterprise-based maintenance concept, but also for the local road maintenance in general. For the pilots themselves, the amount of funding required and its source will need to be discussed further with the Roads Department, and possibly with the municipalities where the pilots will be carried out.

149. In line with this, decisions have to be taken regarding the pilot projects. This includes the type of roads to be included (condition, surface type, topographical variation, geographical location) as well as the identification of the specific pilot roads. The total length of pilot roads to be included also needs to be confirmed (100 km was proposed originally). The start date for the pilots also needs to be decided upon. Currently maintenance contracts appear to run from May to April, although this may be different in the case of local roads. The pilots are supposed to start in 2011 and depending on existing contracts and their duration, a starting date will need to be defined.

NEXT STEPS

150. A second consultancy mission is proposed for June 2010. This second mission will aim to confirm the information presented in this report and complement it with additional data where required. The main focus, however, will lie on the discussions with the Roads Department and possibly some representative municipalities and contractors on the proposed design of the microenterprise-based routine maintenance system for local roads.


41

151. A decision needs to be taken on the exact maintenance activities to be included under the responsibilities of the microenterprises, and those to remain under the contracts with the larger contractors. Also the legal organisational modality to be used has to be decided upon and additional information collected regarding the selected modality. Thirdly, the characteristics of simple tendering need to be confirmed with the State Procurement Agency, and the possibility of packaging maintenance contracts and applying such simplified tendering needs to be analysed. Based on the selected maintenance activities, decisions also need to be taken regarding the performance-based contracting modality, including the use of monthly workplans or alternatively differentiated maintenance standards (performance indicators), as well as the exact definition of these performance indicators. Proposals will be prepared by the consultant and discussed with the Roads Department and municipalities once the maintenance activities have been decided upon.

152. A number of decisions regarding the pilot projects will also need to be taken. The selection criteria for the pilot roads will need to be defined in coordination with the Roads Department, including the total length and surface types, as well as the desired topographical and geographical variation. Based on this, the funding of the pilots will need to be further defined in coordination with the Roads Department. The detailed selection of the pilot roads can be carried out after the mission has ended based on the defined criteria. The starting date for the pilots will also need to be defined, taking into account the current practice of maintenance contracts running from May to April.

153. After the second mission, the consultant will prepare the guide for the procuring entity, the manual for the supervisors (inspectors) and the manual for the microenterprises, based on the decisions taken and the additional information gathered during this second consultancy mission. These will be sent in draft form before the third consultancy mission.

154. During the third consultancy mission, planned for August 2010, these documents will be presented in a national level workshop, and any comments received will be incorporated in the final versions. The consultant will also visit the proposed pilot roads during this third mission based upon which the required tendering and contracting documents will be finalised, and the characteristics of the required microenterprises will be defined.

155. The pilot projects will most likely start in 2011 as part of the second phase of this project. The exact details of the consultancy inputs for this second phase will be defined during the third mission, once the starting dates and characteristics of the pilot projects have been defined.


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ANNEX 1: ALLOCATIONS TO LOCAL ROAD MAINTENANCE

Municipality 2008 2009 2010

Region of Kakheti

1 Telavi, Municipality of 186,987 224,983 234,000

2 Gurjaani, Municipality of 21,000 55,707 248,750

3 Dedoplis Tskaro, Municipality of 334,800 156,400 14,600

4 Akhmeta, Municipality of 5,700 106,800 230,000

5 Lagodekhi, Municipality of 0 0 0

6 Sagarejo, Municipality of 385,485 29,542 0

7 Sighnaghi, Municipality of 0 9,200 50,000

8 Qvareli, Municipality of 3,500 7,700 10,000

937,472 590,332 787,350

Region of Mtskheta-Mtianeti

9 Mtskheta, Municipality of 0 0 0

10 Dusheti, Municipality of 43,000 5,100 0

11 Tianeti, Municipality of 0 0 0

12 yazbegi??? 20,000 20,000 20,000

63,000 25,100 20,000

Region of Shida Kartli

13 Gori, Municipality of 506,200 705,100 450,000

14 Kareli, Municipality of 83,600 31,100 70,000

15 Kaspi, Municipality of 66,700 2,000 15,000

16 Khashuri, Municipality of 24,548 227,958 20,000

681,048 966,158 555,000

Region of Kvemo Kartli

17 Rustavi, City of 715,630 797,260 900,000

18 Bolnisi, Municipality of 601,000 600,920 451,250

19 Marneuli, Municipality of 499,035 549,956 454,500

20 Gardabani, Municipality of 231,000 311,000 300,000

21 Dmanisi, Municipality of 60,000 90,000 120,000

22 Tetri Tskaro, Municipality of 94,000 111,000 185,000

23 Tsalka, Municipality of 20,000 21,000 22,000

2,220,665 2,481,136 2,432,750

Region of Samtskhe-Javakheti

24 Akhaltsikhe, Municipality of 0 181,000 577,000

25 Adigeni, Municipality of 22,000 128,000 20,000

26 Akhalkalaki, Municipality of 660,000 240,000 521,000

27 Borjomi, Municipality of 13,000 642,000 602,000

28 Ninotsminda, Municipality of 135,000 158,000 52,000

29 Aspindza, Municipality of 265,000 208,000 7,000

1,095,000 1,557,000 1,779,000

Region of Imereti

30 Kutaisi, City of 400,000 1,573,000 1,140,000

31 Tskhaltubo, Municipality of 284,900 252,800 46,900

32 Tkibuli, Municipality of 312,000 131,000 493,000

33 Chiatura, Municipality of 63,100 308,500 80,000

34 Baghdati, Municipality of 264,600 180,600 307,100

35 Vani, Municipality of 29,800 80,000 54,000

36 Zestaponi, Municipality of 758,000 252,000 0

37 Terjola, Municipality of 317,000 440,000 0

38 Samtredia, Municipality of 263,000 40,000 11,000

39 Sachkhere, Municipality of 0 0 0

40 Kharagauli, Municipality of 56,000 142,000 20,000

41 Khoni, Municipality of 0 0 0

2,748,400 3,399,900 2,152,000


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Municipality 2008 2009 2010

Region of Samegrelo-Zemo Svaneti*

42 Zugdidi, Municipality of 347,000 337,100 600,000

43 Poti, City of 122,300 24,400 50,000

44 Abasha, Municipality of 0 0 0

45 Martvili, Municipality of 58,000 79,900 0

46 Mestia, Municipality of 0 0 0

47 Senaki, Municipality of 330,000 237,000 120,000

48 Chkhorotsku, Municipality of 9,000 11,000 0

49 Tsalenjikha, Municipality of 92,500 461,900 0

50 Khobi, Municipality of 296,000 11,000 30,000

1,254,800 1,162,300 800,000

Region of Guri

51 Ozurgeti, Municipality of 89.968 12.0 0.0

52 Lanchkhuti, Municipality of 11.2 93.1 22.8

53 Chokhatauri, Municipality of 11.8 15.0 15.0

112.984 120.1 37.8

Region of Racha-Lechkhumi and Kvemo Svaneti

54 Ambrolauri, Municipality of 75,123 96,540 15,000

55 Lentekhi, Municipality of 104,000 80,000 55,000

56 Oni, Municipality of 25,000 27,160 2,549

57 Tsageri, Municipality of 27,000 59,900 50,000

231,123 263,600 122,549

Autonomous Republic of Adjara

58 Batumi, City of 1,490,700 1,775,000 2,150,400

59 Kobuleti, Municipality of 1,456.7 93.5 0.0

60 Khelvachauri, Municipality of 762.4 0.0 0.0

61 Shuakhevi, Municipality of 204.7 0.0 0.0

62 Keda, Municipality of 147.6 0.0 0.0

63 Khulo, Municipality of 189.2 0.0 0.0

1,493,460.5 1,775,093.5 2,150,400.0

Total 10,725,081.5 12,220,739.6 10,799,086.8


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ANNEX 2: ROUTINE MAINTENANCE ACTIVITIES

Maintenance of the Road Structure

1

Compacting of the road shoulder The works under this item include the mechanized compacting of road shoulders; Unit of measurement – m

2

2 Filling up and compacting of the road shoulder The works under this item include the spreading and compacting the selected material along the road shoulder; Unit of measurement – m

3

3 Cutting of the grass The works under this item include the cutting of the grass in the rod shoulders and ditches; Unit of measurement – m

2

4 Clearing of the road ditches using the road graders The works under this item include the clearing of ditches from soil and other material using the road grader, the removed material to be deposited at the road side; Unit of measurement – m

5 Clearing of the road ditches using the workforce The works under this item include the clearing of ditches from soil and other material using the workforce, the removed material to be deposited at the road side; Unit of measurement – m

3

6 Clearing of the road ditches using the road graders, the removed material to be loaded and transported to a suitable dumping site The works under this item include the clearing of the road ditches from soil and other material using the road grader, the removed material to be collected and transported to the dumping site using the self-loading vehicle; Unit of measurement – m

3

7 Clearing of the road ditches using the workforce, the removed material to be loaded and transported to a suitable dumping site The works under this item include the clearing of ditches from soil and other material using the workforce, the removed material to be loaded and transported to a suitable dumping site using the self-loading vehicle. Unit of measurement – m

3

8 Clearing of the road ditches using the excavator, the removed material to be loaded and transported to a suitable dumping site The works under this item include the clearing of ditches from soil and other material using the excavator, the removed material to be loaded and transported to a suitable dumping site using the self-loading vehicle. Unit of measurement – m

3

9 Clearing of the drainage system using the workforce The works under this item include the clearing of the drainage system (culverts and inlets) from sediment, the removed material to be deposited at the road side; Unit of measurement – m

3

10 Clearing of the drainage system using the workforce, the removed material to be loaded and transported to a suitable dumping site The works under this item include the clearing of the drainage system from sediment (culverts and inlets), the removed material to be loaded and transported to a suitable dumping site; Unit of measurement – m

3

11 Removing of landslides, the removed material to be deposited at the road side The works under this item include the clearing of the road shoulder from soil and stones caused by a landslide, the removed material to be deposited at the road side; Unit of measurement – m

3

12 Removing of landslides, the removed material to be loaded and transported to a suitable dumping site The works under this item include the mechanized clearing of the road shoulder from soil and rocks caused by a landslide, the removed materials to be loaded and transported to a suitable dumping site using the self-loading vehicle. Unit of measurement – m

3


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13 Clearing of the road ditches and landslides using the excavator, the removed material to be deposited at the road side and to be loaded transported to a suitable dumping site using the bulldozer The works under this item include the clearing of the road ditches and landslides using the excavator, the removed material to be deposited at the road side and to be loaded and transported to a suitable dumping site using a bulldozer; Unit of measurement – m

3

14 Removing of the accumulated soil/ debris from both the road surface and right-of-way using the road grader, the removed material to be loaded and transported to a suitable dumping site The works under this item include the removing of the accumulated soil/ debris from the road surface and right-of-way using the road grader, the removed material to be loaded and transported to a suitable dumping site using a self-loading vehicle Unit of measurement – m

3

15 Reinforcing of the land structure using the rocks obtained from drilling/ explosion The works under this item include the crushing of the rock through drilling or exploding, the crushed pieces of rock to be loaded and transported to the site for the reinforcement of the land structure. Unit of measurement – m

3

16 Reinforcing of the land structure by rocks The works under this item include the loading and transportation of rocks and reinforcement of the land structure by rocks; Unit of measurement – m

3

17 Constructing of the rock dam The works under this item include the relevant land works, construction of the timber dam and their filling with rocks; Unit of measurement – m

3

18 Constructing of the road pocket The works under this item include the land works, construction of the pocket dam and its filling with rocks Unit of measurement – m

3

19 Drilling and exploding of the rocks, the material to be deposited at the road side The works under this item include the drilling and exploding of the rock by blast hole charge, the material obtained to be deposited at the road side using vehicle; Unit of measurement – m

3

20 Constructing of the stone dam The works under this item include the accumulation of stones and construction of the stone dam; Unit of measurement – m

3

Artificial Constructions

21 Painting of the bridge (metal) beams with paint The works under this item include the cleaning of the bridge metal pillars and their painting with paint; Unit of measurement – m

2

22 Constructing of the metal pipe D-1m The works under this item include the excavation works (using the excavator), construction of the ground layer using the gravel as well as the damp proofing, installation of the pipe, and landfill; Unit of measurement - m

23 Constructing of the reinforced concrete pipe D-1m The works under this item include the excavation works (using the excavator), construction of the ground layer using the gravel as well as the damp proofing, installation of the pipe, and landfill; Unit of measurement - m

24 Constructing of the metal pipe D<18 The works under this item include the excavation works (using the excavator), construction of the ground layer using the gravel as well as the damp proofing, installation of the pipe, and landfill; Unit of measurement – m

25 Constructing the rock retaining walls using cement concrete The works under this item include the excavation works, construction of the wall footing and the wall itself with the rock and cement mortar; Unit of measurement – m

3

26 Constructing of the cast concrete structured wall The works under this item include the excavation works, construction of the wall footing and the wall itself using the cement concrete mortar; Unit of measurement – m

3


46

27 Repairing of the bridge roadway with timber The works under this item include repairing of the bridge roadway, guardrails and bridge railings using the sawn timber; Unit of measurement – m

3

28 Painting of the bridge guard rails and railings The works under this item include the cleaning and painting of the guard rails and railings with paint; Unit of measurement – m

2

29 Rehabilitating of the bridge guard rails and railings The works under this item include the installation of the new metal guard rails and railings. Unit of measurement – t

Maintenance of the Roadway

30 Repairing of potholes with hot asphalt concrete – 4 cm layer The works under this item include the removing of the loose and cracked pavement around the pothole, applying of the bitumen to the pothole, filling of the pothole with the asphalt concrete and compacting the asphalt concrete Unit of measurement – m

2


2


2

33 Patching of cracks and joints with hot asphalt concrete - 3cm layer The works under this item include the repairing of the cracks and joints with the hot asphalt concrete Unit of measurement – m

2

34 Sealing of the deteriorated sections of the road with hot asphalt concrete The works under this item include the sealing of the rill and ruts with the hot asphalt concrete Unit of measurement – m

2

35 Repairing of the road surface with the sand and gravel mixture The works under this item include the repairing of the roadway with the sand and gravel mixture and compacting the mixture, Unit of measurement – m

3

36 Repairing of the road surface with the borrow pit material The works under this item include the repairing of the roadway with the borrow pit material including its compacting Unit of measurement – m

3

37 Filling of the joints with the borrow pit material/ ground The works under this item include the filling of the joints with the compressed ground Unit of measurement – m

3

38 Sealing of the cracks with bitumen or emulsion The works under this item include the removing of the loose and cracked pavement around the crack and filling them with the bitumen or emulsion; Unit of measurement – m

39 Compacting of the roadway The works under this item include the mechanized compacting of the roadway without adding the inert materials Unit of measurement – m

2

40 Constructing of the road base with the sand and gravel mixture The works under this item include the cutting of the damaged road base and constructing the sand and gravel road base; Unit of measurement – m

3

41 Constructing of the road base with the fractured rock The works under this item include the construction of the new road base with the fractured rock Unit of measurement – m

3


47

42 Repairing of the potholes with cold asphalt concrete The works under this item include the repairing of the potholes on the roadway during the winter season through applying the cold asphalt concrete Unit of measurement – t

43 Repairing of the potholes with impregnation The works under this item include the repairing of the potholes with impregnation Unit of measurement – m

3

44 Repairing of the potholes with emulsion impregnation/ using the road-building machinery The works under this item include the mechanized repairing of potholes by filling the potholes with ground and impregnating them with emulsion using the combined road building machinery ; Unit of measurement – m

3

45 Repairing of the separate damaged elements of the roadway and artificial constructions with cement concrete The works under this item include the repairing – rehabilitation of the separate damaged elements of the roadway and artificial constructions with cement concrete; Unit of measurement – m

3

46 Grinding of the damaged asphalt concrete layer and road base with an asphalt grinder (10cm layer) The works under this item include the grinding of the damaged asphalt concrete layer and road base with the further compacting of the grinded material on the roadway; Unit of measurement – m

2

47 Milling of a 5 cm asphalt concrete layer; its applying and compacting The works under this item include the milling of the damaged asphalt concrete layer as well as applying and compacting the milled asphalt to the surface; Unit of measurement – m

2

48 Milling of a 5 cm asphalt concrete layer and adding the 10 cm sand and gravel mixture and its compacting The works under this item include the milling of the asphalt concrete layer, adding of the sand and gravel mixture to the milled asphalt material; its mixing, applying and compacting Unit of measurement – m

2

49 Milling of a 10 cm asphalt concrete layer; its applying and compacting The works under this item include the milling of the asphalt concrete layer as well as applying and compacting the milled asphalt to the surface Unit of measurement – m

2

50 Milling of a 10 cm asphalt concrete layer and adding the 5 cm sand and gravel mixture and its compacting The works under this item include the milling of the asphalt concrete layer, adding of the sand and gravel mixture to the milled asphalt material; its mixing, applying and compacting; Unit of measurement – m

2

51 Milling of a damaged sections of the asphalt concrete layer The works under this item include the milling of the damaged asphalt concrete layer; Unit of measurement – m

2

52 Carpeting of the damaged sections of the roadway The works under this item include the bituminous carpeting (bitumen or bitumen emulsion) of the separate road sections; Unit of measurement – m

2

53 Daily inspection of the roads of international significance and high capacity state roads (more than 1000 vehicles in 24 hours) The works under this item include the daily inspection of the roads, clearing of the roadway and right-of-way from debris and obstructions. Unit of measurement – a person/ a month

54 Clearing of the roadway with the special vehicle The works under this item include cleaning of the roadway from sediments and debris with the “special vehicle” Unit of measurement – an hour

Maintenance of Technical Means of Traffic Regulation

55 Painting of the road signs The works under this item include the cleaning of the road sign posts and their painting Unit of measurement – m

2


48

56 Installing (cementing) of the circular orientation posts The works under this item include the installation (cementing) of the circular orientation posts Unit of measurement – a unit

57 Installing (without cementing) of the flat orientation posts The works under this item include installation ( without cementing) of the flat orientation posts in compliance with the existing standards Unit of measurement – a unit

58 Washing of the reflecting studs, parapets and other road elements The works under this item include washing of the reflecting studs, parapets and other road elements Unit of measurement – m

2

59 Repairing and rehabilitation of the damaged reflecting studs The works under this item include removing of the damaged reflecting studs with their further repairing and fixing Unit of measurement – m

60 Painting of the metal reflecting studs The works under this item include cleaning and painting of the metal reflecting studs Unit of measurement – m

2

61 Painting of the concrete reflecting studs, parapets and other concrete elements of the road The works under this item include the cleaning and painting of the concrete reflecting studs, parapets and other concrete elements of the road Unit of measurement – m

2

62 Installing of the new road signs of the standard size The works under this item include the installation of the new road signs of the standard size (with new posts) Unit of measurement – a unit

63 Installing of the new road signs of a non-standard size The works under this item include the installation of the new road signs of the non-standard size (on the new posts) Unit of measurement – m

2

64 Installing of the new road boards of a non-standard size The works under this item include the installation of the new road boards (non-standard size) on the existing posts Unit of measurement – m

2

65 Rehabilitating of the road boards (restoring the reflecting surface) The works under this item include the removal of the damaged surface from the existing non-standard road boards and application of the new reflecting surface Unit of measurement – m

2

66 Washing of the road boards The works under this item include the washing of the road boards using the bucket truck; Unit of measurement – m

2

67 Installing of the km signage The works under this item include the installation of the km indicating signs to be fixed on new posts Unit of measurement – a unit

68 Installing of the new concrete cement parapet The works under this item include the transportation and installation of the new concrete cement parapet Unit of measurement – m

3

69 Installing of the new metal reflecting studs The works under this item include the transportation and installation of the new meta; reflecting studs Unit of measurement – m

70 Applying of the reflecting surface to the orientation posts The works under this item include the application of the reflecting surface to the orientation posts; Unit of measurement – a unit

71 Installing of the brackets (with reflecting surface) on the reflecting studs and concrete parapets The works under this item include the installation of the brackets (with reflecting surface) on the reflecting studs and concrete parapets Unit of measurement – a unit

72 Horizontal marking with paint 1.1. The works under this item include the marking of the roadway with paint (with the additive of reflecting material) Unit of measurement – m


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75 Vertical marking with paint The works under this item include the marking of the safety fence with paint Unit of measurement – m

2

Improvement of the Road Supported Property

76 Constructing of the brick structured wall The works under this item include the construction of the brick structured wall with the cement concrete mortar Unit of measurement – m

3

77 Constructing of the block structured wall The works under this item include the construction of the block structured wall with the cement concrete mortar Unit of measurement – m

3

78 Replacing of the roof with the roofing slate The works under this item include the replacement of the roofing slate and roofing timber Unit of measurement – m

2

79 Replacing of the roof with the tinned plate (on the timber base) The works under this item include the replacement of the tinned plate and roofing timber Unit of measurement – m

2

80 Replacing of the roof with the tiling (on the timber base) The works under this item include the replacement of the roof tiling and roofing timber Unit of measurement – m

2

81 Lining of the walls with the sand and cement mortar The works under this item include the dressing of the walls with the sand and cement mortar Unit of measurement – m

2

82 Painting of the walls with the paint The works under this item include the painting of the walls with the paint; Unit of measurement – m

2

Small-scale Works

83 Works of Hoisting Crane This item lists works performed by hoisting crane. Unit of measurement: hour

84 Works of Bulldozer This item lists works performed by bulldozer. Unit of measurement: hour

85 Works of Heavy Duty Bulldozer This item lists works performed by heavy duty bulldozer. Unit of measurement: hour

86 Works of Truck This item lists works performed by truck. Unit of measurement: hour

87 Works of Excavator This item lists works performed by excavator. Unit of measurement: hour

88 Works of Grader This item lists works performed by grader. Unit of measurement: hour

89 Works of Compressor This item lists works performed by compressor. Unit of measurement: hour

90 Works of Self-loading Vehicle This item lists works performed by self-loading vehicle. Unit of measurement: ton/km

Road Reserve Vegetation Maintenance

91 Cutting of Dried Trees This item lists works performed to cut branches of dried trees, cutting, digging out and transportation of dried trees. Unit of measurement: item

92 Cutting of Tree Branches This item lists works performed to cut tree branches. Unit of measurement: 1 tree

93 Liming of Tree Bottoms This item lists works performed to lime tree bottoms. Unit of measurement: m

2


50

94 Cutting of thorns, weeds and bushes This item lists works performed to cut thorns, weeds and bushes at road reserve. Unit of measurement: m

2

95 Watering of Plantation This item lists works performed to water green plantation. Unit of measurement: m

3

96 Trimming of Green Plantation This item lists works performed to trim green plantation. Unit of measurement: m

2

Winter Road Maintenance

97 Road Inspection in Winter This item lists salary paid to mechanics and workers to inspect road in good weather which road maintenance indicators do not require to sprinkle road with salt and remove snow. This will give an opportunity to mobilize the above staff any time during 24 hours and take them to the road section that requires immediate cleaning due to snow and icy condition of road. In other days they will be reimbursed in accordance with actually performed works. Unit of measurement: man/ shift

98 Sprinkling of Roadway with Salt by Cars (Manually) This item lists works performed to transport salt and sprinkle roadway with salt by hand. Unit of measurement: ton

99 Sprinkling of Roadway with Salt by Cars This item lists works performed to transport salt and sprinkle roadway with salt by cars. Unit of measurement: ton

100 Spreading of Mixture of Salt and Sand (Fraction 0-5) on Roadway by Cars (Manually) This item lists works performed to mix salt and sand (fraction 0-5), transport the mixture and spread it on the roadway by hand. Unit of measurement: ton

101 Spreading of Mixture of Salt and Sand (Fraction 0-5) on Roadway by Cars This item lists works performed to mix salt and sand (fraction 0-5), transport the mixture and spear it on the roadway with it by cars. Unit of measurement: ton

102 Sanding ( Fraction 0-5) of Roadway by Cars ( Manually) This item lists works performed to transport sand (fraction 0-5) and to sand roadway by hand. Unit of measurement: ton

103 Sanding ( Fraction 0-5) of Roadway by Cars This item lists works performed to transport sand (fraction 0-5) and to sand roadway by car. Unit of measurement: ton

104 Sweeping of Snow by Grader This item lists works performed to sweep snow by grader. Unit of measurement: hour

105 Sweeping of Snow by Bulldozer This item lists works performed to sweep snow by bulldozer. Unit of measurement: hour

106 Sweeping of Snow by Heavy Duty Bulldozer This item lists works performed to sweep snow by heavy duty bulldozer. Unit of measurement: hour

107 Sweeping of Snow by Rotor This item lists works performed to sweep snow by rotor. Unit of measurement: hour.

108 Sweeping of Snow by Heavy Duty Rotor This item lists works performed to sweep snow by heavy duty rotor. Unit of measurement: hour.

109 Sweeping of Snow by Motor Based on Caterpillar Tractor This item lists works performed to sweep snow by snow cleaner rotor of caterpillar tractor


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ANNEX 3: ANNUAL BALANCE SHEET

The template given below gives the general contents of an annual balance sheet as per the Law of Georgia on Entrepreneurs (25 May 2006). These contents may be adapted based on the field of activity of the enterprise, but should equal the structure given below with slight modifications. Where a company does not have any relevant data on the below-mentioned items, it may be deleted from the balance sheet. Where an annual balance sheet needs to be presented by microenterprises, it is recommended to provide a template and clear directions in the manual. A. Unpaid contributions to the company's authorized capital, including the contributions

due. B.

C. Fixed Assets

1. Fixed assets 1.1. Land plots with buildings and structures thereon 1.2. Land plots without buildings and structures 1.3. Buildings and structures on other's land plots 1.4. Equipment and machinery, equipment and vehicles 1.5. Production and office facilities 1.6. Other fixed assets 1.7. Uncompleted capital investments

2. Intangible assets 2.1. Concessions, intellectual property and licenses 2.2. Goodwill 2.3. Other intangibles

3. Financial investments 3.1. Investing other companies 3.2. Bonds and other securities 3.3. Loans granted for more than one year term, including those secured by leasehold to

land

D. Circulating assets 4. Production reserves

4.1. Raw materials, materials 4.2. Semi-products 4.3. Finished products, goods

5. Other circulating assets 5.1. Advance payments to suppliers and lessees 5.2. Receivables from delivery and services 5.3. Received bills 5.4. Cheques 5.5. Cash available in the cash-office 5.6. Cash holdings on bank accounts 5.7. Short-term financial investments 5.8. Receivables from partner (affiliated and other) enterprises 5.9. Receivables from the credits given to the management and the supervisory council 5.10. Receivables from the credits given to the partners of the company 5.11. Other circulating assets 5.12. Other material and non-material values


52

E. Future expenses Liabilities a) Shareholding capital

1. Authorized capital 2. Reserves 3. Target-oriented financing 4. Outstanding losses carried over from previous years 5. Retained profit (outstanding loss) of the business year

b) Deductions 1. Pension security deductions 2. Other deductions

c) Attracted capital and other liabilities 1. Liabilities before the bank

1.1. Long-term liabilities 1.2. Short-term liabilities, including secured by leasehold to land

2. Loans 2.1. Long-term loans 2.2. Short-term loans

3. Payables from delivery and services 4. Payables according to bills 5. Received advances 6. Payables to the partner (affiliated and other) enterprises 7. Payables to partners 8. Payables to personnel 9. Payables to the budget 10. Other payables

d) Future earnings


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ANNEX 4: STATEMENT OF PROFIT AND LOSSES

The template below gives the items to be included in the statement of profits and losses and their order as per the Law of Georgia on Entrepreneurs (25 May 2006). In preparing the statement of profit and losses, either the accrual or the cash-based method can be applied, as long as the same method is applied throughout the year and is replicated in the cashbooks and bookkeeping. In applying the accrual method

1. Products (works, services) sales revenues 2. Increase or decrease of the finished goods and semi-products in stock 3. Other capitalized own products 4. Total output (of products, works, services) 5. Raw materials and materials costs 6. Receivables from subordinate enterprises 7. Receivables from participation in other enterprises 8. Return on financial investments 9. Other interest and similar revenues 10. Earnings of sales of fixed assets and increase of book cost 11. Earnings from reduction of reserve against doubtful loans 12. Earnings from unused reserves against possible loss 13. Earnings from the reduction of undertaken other's loss 14. Other earnings 15. Wages (salaries) 16. Social deductions 17. Expenses on old-age benefits and support 18. Depreciation deductions and adjustment of the book cost of tangible and intangible fixed

assets 19. Depreciation deductions and adjustment of the book cost of financial investments 20. Losses from decreasing the cost or sales of the circulating assets and book-cost

adjustments of receivables 21. Losses on sales (write-off) of the fixed assets objects 22. Interest and similar losses 23. Losses incurred by undertaking other's losses 24. Other losses 25. Earnings (losses) of ordinary business activity 26. Incidental earnings 27. Incidental costs 28. Annual profit/annual losses 29. Profit transferable to the concern 30. Profit tax 31. Net annual profit 32. Allocations to reserves and other allocations 33. Undistributed annual profit (uncovered losses)


54

In applying the cahs-based method 1. Products (works, services) sales revenues 2. Main costs incurred by sold products (works, services) 3. Sales result 4. Commercial costs 5. Management costs 6. Other production earnings 7. Other production costs 8. Earnings from participation in other enterprises 9. Earnings from other financial investments 10. Other interests and similar earnings 11. Write-offs of financial investments 12. Other interests and similar expenses 13. Profit (losses) of ordinary business activity 14. Incidental earnings 15. Incidental costs 16. Annual profit (losses) 17. Profit transferable to the concern 18. Profit tax 19. Net annual profit 20. Allocations to the reserve and other allocations 21. Undistributed annual profit (uncovered losses)