Document of

The World Bank

Report No. 13543-GE

STAFF APPRAISAL REPORT

REPUBLIC OF GEORGIA

MUNICIPAL INFRASTRUCTURE REHABILITATION PROJECT

OCTOBER 17, 1994

Housing and Municipal Services DivisionCountry Department IVEurope and Central Asia Region

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CURRENCY EQUIVALENTS(as of August 1994)

Currency Unit = CouponI Coupon = US$0.0001 cents

US$1 = 1,500,000

AVERAGE EXCHANGE RATES1,500,000 Coupons = US$1

WEIGHTS AND MEASURESMetric System

FISCAL YEARJanuary 1 - December 31

ABBREVIATIONS AND ACRONYMSAgency - Independent Agency for Development of Municipal Services

Beneficiaries - Beneficiary Municipality of the ProjectBMIR - Batumi Municipal Infrastructure RehabilitationCCTV - Closed Circuit Television

CIS - Commonwealth of Independent StatesEBRD - European Bank For Reconstruction and Development

FEC - Foreign Exchange CostsFSU - Former Soviet UnionGDP - Gross Domestic ProductGEF - Global Environment Facility

Georgia - Republic of GeorgiaGIS - Geographic Information System

IBRD - International Bank For Reconstruction and DevelopmentICB - International Competitive Bidding

ICZM - Integrated Coastal Zone ManagementIDA - International Development AssociationIMF - International Monetary Fund

IS - International ShoppingLCB - Local Competitive BiddingLIB - Limited International BiddingLS - Local Shopping

MIRP - Municipal Infrastructure Rehabilitation ProjectMOP - Manual of ProceduresNGO - Non-governmental OrganizationNMP - Net Material ProductPMA - Project Management Agreement

PIP - Project Implementation PlanPMIR - Poti Municipal Infrastructure Rehabilitation

PPF Project Preparation FacilitySAKENERGO - Republic Power Company

SIA - Scientific Industrial AssociationSOE - Statement of ExpendituresSTIP - Short Term Investment Program

TA - Technical AssistanceTCC - Technical Coordination Committee

TIAP - Thilisi Immediate Action PlanTMIRP - Tbilisi Municipal Infrastructure Rehabilitation ProgramUSAID - United States Agency for International Development

VAT - Value Added TaxWWF - World Wildlife Fund

STAFF APPRAISAL REPORT

REPUBLIC OF GEORGIA

MUNICIPAL INFRASTRUCTURE REHABILITATION PROJECT

CONTENTS

CREDIT AND PROJECT SUMMARY .................................................. i

PART 1. INTRODUCTION. ICountry Background. IMacroeconomic Background. 2Bank's Interim Strategy. 3Urban Sector ............................................................. 4Municipal Services ......................................................... 4Government Strategy for Municipal Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SIDA's Previous Role and Lessons .5....... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SJustification for IDA Involvement ........ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

PART II. PROJECT OBJECTIVES AND DESCRIPTION ...... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Infrastructure Rehabilitation Investment Component ....... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Tbilisi Immediate Action Plan ....... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8Weatherization and Energy Services ...... . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8Urban Transport Services ....... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Short Term Investment Program ....... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9Tbilisi Municipal Infrastructure Rehabilitation Program ..... . . . . . . . . . . . . . . . . . . 9Batumi Municipal Infrastructure Rehabilitation ...... . . . . . . . . . . . . . . . . . . . . . 10Poti Municipal Infrastructure Rehabilitation .I.I.... . . . . . . . . . . . . . . . . . . . . . . . 11Other Municipalities ....... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Institutional Development Component ....... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12Independent Agency for Development of Municipal Services ..... . . . . . . . . . . . . . . . . . . . 12Technical Assistance and Studies ....... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

PART III. PROJECT IMPLEMENTATION ........ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14Status of Project Preparation ........ . . .. . . . . . . . . . . .. . . . . . . . . . . . . .. . . . . . . . . . . . . 14Project Cost and Financing .1..4..... .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . 14

Project Cost Estimates ........ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14Financing Plan ......... . . . .. . . . .. . . . . .. . . . . .. . . . .. . . . . . .. . . . .. . . . . . 16Co-financing ......... . .. . . . .. . . . .. . . . .. . . . .. . . .. . . . .. . . . .. . . . .. . . . 16Local Contribution ........ . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . .. .. . . 16Financial Analysis ........ .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . .. . . . . . 17

Financial Impact ........ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17Cost Recovery and Pricing of Municipal Services ..... . . . . . . . . . . . . . . . . . . . . 17

Institutional Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . 18Borrower .... ................................................ 18Independent Agency for the Development of Municipal Services ...... . . . . . . . . . . . . . . . . 18

Legal Framework ........ . . . .. . . . . . . . . . . . . .. . . . . . . . . . . . . .. . . . . 18Management of the Agency ....... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19Recruitment of Agency's General Manager ...... . . . . . . . . . . . . . . . . . . . . . . . 19Supervision of the Agency ....... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Contractual Arrangements ........ .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . . 20Procurement ............. .. .. .. .. ... .. .. .. .. ... .. .. .. ... .. .. .. .. ... .. .. . 20

Procurement Procedures ......... . . . . . .. . . . . . .. . . . . . .. . . . . . .. . . . . .. . . . . 20Methods of Procurement ........ .. . . . . .. . . . . . .. . . . . . .. . . . . . .. . . . . . .. . . . 21

Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . .. . 21Civil works ............. .. .. ... .. .. ... .. .. ... .. .. ... .. .. ... . 22Advanced Procurement/Retroactive Financing ....... . . . . . . . . . . . . . . . . . . . . 23Review of Procurement Decisions by the Bank ...... . . . . . . . . . . . . . . . . . . . . . 23

Hiring of Consultancy Services ....... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23Currency of Foreign and Local Expenditures under the Credit ..... . . . . . . . . . . . . . . . . . . 23Project Preparation Facility ........ . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . 24

Disbursement ........................................................... . 24Disbursement Schedule. . . ......... ................... 25Flow of Funds.� ............. ........................ 26

Project Management .......... ... I.I. .. . .. .. .. .. I. .. . .. .. . .. .. . .. .. . .. .. . .. .. . 26Accounting .......... .. . .. .. . .. .. .. . .. .. . .. .. . .. .. . .. .. .. . .. .. . .. . 26Auditing ........... .. .. .. .. .. .. . .. .. .. .. .. .. .. .. .. .. .. .. . .. .. .. . . 27Finanicial Reportinig ......... . .. . . .. . .. . . .. . . .. . . .. . .. . . .. . . .. . .. . . . . 27Project Monitoring ......... . . .. . . .. . . .. . . .. . . .. . . . .. . . .. . . .. . . .. . . . . 27Mid-Tern Review ......... . .. . .. . .. . .. . . .. . .. . .. . . .. . .. . . .. . .. . .. . . . 28

Operational Plan and Project Implementation Plan ....... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28Borrower's Operational Plan ........ . . . . . . . . . . . . .. . .. . . . . . . . . . . . . . . . . . . . 28Borrower's Project Implementation Plan ....... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29Supervision Plan ......... .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . . 29Environmental Review ........ .. . . . . .. . . . .. . . . . .. . . . . .. . . . .. . . . . .. . . . . 29Public Environmental Awareness, NGO, and Community Participation ..... . . . . . . . . . . . . . 30Economic Analysis ......... . . .. . . .. . . .. . . .. . . . .. . . .. . . .. . . .. . . .. . . . . 31Social Analysis ........ .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . . 32Poverty Alleviation ......... . . .. . . .. . . .. . . .. . . . .. . . .. . . .. . . .. . . .. . . . . 32

PART IV. BENEFITS AND RISKS .34

PART V. AGREEMENTS AND RECOMMENDATIONS .35

ANNEXES

1: Detailed Description of Project Investments2: Integrated Coastal Zone Management Strategy3: Housing and Municipal Sector Study - Terms of Reference4: Detailed Project Cost Table5: Institutional Arrangemenlts

Attachment I . Legal FrameworkAttachment 2. Contractual Framework

6: Legal Document-Charter7: Estimated Schedule of Disbursements8: Procurement Implementation Ilan9: Performance Indicators10: Supervision Plan11: Project Implementation Schedule12: Environmental Review and Mitigation Plan13: Qualitative Benefits14: Selected Documents Available in the Project File

MAPS IBRD No. 26163 and 26136

This report was prepared by Messrs/Mmes. Robert Maurer (Task Manager), Mats Andersson, Bidzina Imnadze, MarthaJarosewich, Dipika Mathur, and Betsy McGean (EC4HM), based on the findings of preparation (August 1994) andAppraisal (September 1994) missions. Other collaborators were: Messrs. Antti Talvitie (TWUTD) and Howard Carter(consultant). The Project Peer Reviewers were Messrs/Mmes. Maryvonne Plessis-Fraissard (AF31N), George Russell(ACTCO), and Thakoor Persaud (LA3EU). The Department Director, Country Division Chief, and the Sector DivisionChief are Basil Kavalsky, Wafik Grais. and Thomas Blinkhorn respectively.

REPUBLIC OF GEORGIA

MUNICIPAL INFRASTRUCTURE REHABILITATION PROJECT

Credit and Project Summary

Borrower: Republic of Georgia

Beneficiary: Tbilisi, Batumi, Poti and other municipalities

Amount: SDR12.5 million (US$18.0 million equivalent)

Terms: Standard IDA terms (thirty-five years, including four years of grace)

Cofinancing: USAIDExpected contribution is about US$0.3 million

Objectives: The project's three major short-term objectives include: a) arrestingfurther (ieterioration of, and thereby stabilizing, critical municipalinfrastructure services evaluated as vital to public welfare in selectedGeorgian cities; b) improving overall management and delivery ofmunicipal services in a sustainable, environmentally beneficial manner;and c) reinforcing credibility of local governments through visibleinterventions in key services in order to help reinstate public confidenceand ensure social stability. In the longer term, the timely and efficientimplementation of the assistance program will help lay an importantfoundation for future reform and restructuring efforts aimed atimproving overall management and delivery of crucial municipalservices.

Description: The project will have two main components: (a) an infrastructurerehabilitation investment component aimed at protecting essentialexisting infrastructure from further decay and renovating someadditional urgently needed economic and social services. Thiscomponent includes five types of operations: ( i) heating and energy-saving measures for schools and hospitals; (ii) urban transport; (iii)water supply; (iv) waste water; and ( v) solid waste collection anddisposal; and (b) an institutional development component aimed at:(i) implementing the project effectively; (ii) initiating a process todevelop, over time, local capabilities in such critical areas as projectand financial management, procurement, investment analysis, andenvironmental assessment and management; (iii) developing coherentstrategies and action programs, mainly at the local levels, to deliver keymunicipal services and control or alleviate serious pollution problemsalong Georgia's Black Sea coast. This would represent a firstintervention in Georgia to operationalize studies and analyses being

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done by the regional Black Sea Clean-up Program, financed by theGlobal Environment Facility (GEF).

Implementation: The project would be implemented through the newly created non-governmental, non-profit Agency designed to function as a "contractmanager". The Agency's legal framework (Charters, ProjectManagement Agreement, and Manual of Procedures) is designed toprovide broad operational autonomy. The Agency has been establishedwith assistance from the Project Preparation Facility (PPF). Pilot sub-projects will be carried out to test internal and procurement proceduresunder a bridge loan from the Soros Foundation. The Agency's generalmanager has been hired. A financial and management audit every sixmonths, as well as thorough Annual Reviews of sub-projects, willmonitor compliance with agreed procedures. The projectimplementation period is estimated at three years.

Justification: The project will help improve delivery of key economic and socialinfrastructure in the capital, Tbilisi, and two key coastal cities, Batumiand Poti. A financial provision is also included to help additional citieswith urgent infrastructure needs; these would be identified andappraised during the life of the project. Basic infrastructure serviceshave deteriorated critically in the cities as a result of the difficulteconomic transition, which has been compounded by earthquakes andcivil war. The combination of these forces has preoccupied theGovernment, absorbed virtually all available financial resources, andcreated an acute and pervasive lack of maintenance and repair of basicmunicipal infrastructure services.

Benefitsand Risks: The project will have four direct benefits: (a) helping rehabilitate

essential infrastructure in key municipalities. It will thus facilitate, inthe near term, the government's macro-economic stabilization effortsand, in the long term, help provide the foundation for better managed,environmentally sound municipal service systems; (b) arresting furtherdeterioration and disruption of essential services; (c) mitigating to someextent environmental and health hazards and helping maintain crucialhealth care services and educational programs during the winter; (d)demonstrating through effective operation of the independentimplementation Agency a workable alternative to traditionalprocurement procedures in Georgia.

There are several risks involved, primarily the risk of politicalinstability. The Government is still in the process of consolidating itspower and determining institutional responsibilities. To minimizepotential problems or delays, the project focuses specifically on: a)rehabilitation priorities, (b) establishing a non-bureaucratic

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implementation Agency; and (c) undertaking a pilot phase withprocurement activities in order to identify potential problems early inthe project cycle. The second major risk is that the Agency couldmisuse its independence. However, this risk will be mitigated by theselection of a well-qualified manager, whose appointment will have tobe acceptable to IDA. Additionally, frequent supervision missions,close monitoring of the implementation of the Manual of Procedures,and frequent external audits will provide an opportunity to deal withpossible inadequate performance. The third major risk is that localcontractors and consulting firms may lack the capacity required toimplement the project on time. This risk will be reduced by the factthat the project will be carefully scaled and spread over three years totake into account local absorptive capacity. However, this risk willhave to be reassessed during the mid-term review.

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Summary Project Cost Estimate (net of taxes and duties)(US$ Million)

% Foreign % TotalLocal Foreign Total Exchange Base Costs

A. Infrastructure Rehabilitation Component1. Tbilisi

Heating/Energy Saving 1.0 3.1 4.1 75 24Urban Transport 0.4 3.6 4.1 90 24Water Supply, Wastewaterand Landfill 0.2 2.0 2.1 90 14

Subtotal Tbilisi 1.6 8.8 10.4 84 60

2. BatumiWater Supply and Wastewater 0.2 1.9 2.1 93 12

3. PotiWastewater and Landfill 0.1 0.8 0.9 90 6

4. Other Cities 0.2 1.6 1.8 90 10Subtotal Infrastructure Rehab Component 2.1 13.2 15.3 87 89

B. Institutional Development Component1. Project Implementation 0.1 1.3 1.4 90 82. Studies 0.1 0.4 0.5 90 3

Subtotal Institutional Development 0.2 1.8 1.9 90 11Component

Total BASELINE COSTS 2.3 15.0 17.3 87 100Contingencies (Physical & Price) 0.2 2.1 2.3 14

Total PROJECT COSTS 2.5 17.2 19.7

Financial Plan(US$ Million)

% of TotalLocal Foreign Total Project Cost

Government 1.4 1.4 7.1IDA 1.1 16.9 18.0 91.4Other Donors _ 0.3 0.3 1.5

TOTAL COSTS 2.5 17.2 19.7 100

Percentage 13 87 100

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Summary of Proposed Procurement Arrangements(US$ Million)

ICB LCB OTHERS NBF TOTAL

Goods 5.4 2.5 0.3 13.5Equipment for water supply (5.0) (2.4)aSewerage, landfill 2.4 (12.4)Urban transport, and (2.3)bHeating system 0.6

(0.5)c2.3

.__ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ . _ _ _ _ _ (2 .2 )d

Works 2.6 2.3 4.9(2.4) (2.0) (4.4)

Consultancy - - 1.3 - 1.3(1.2) _ (1.2)

TOTAL 8 2.3 9.1 0.3 19.7ol' which IDA (7.4) (2.0) (8.6) (18.0)

(a) LIB ($2.4) - Item available from a limited number of suppliers.(b) IS ($2.3) - Contracts below $250,000 each.(c) LS ($0.5) - Contracts below 20,000 each.(d) DC ($2.2) - Spare parts for buses, trams, and trolleys.(e) According to Bank's Consultant Guidelines.

Estimated IDA Disbursement ( by fiscal year)(US$ million)

IDA Credit FY 1995 FY 1996 FY 1997 FY 1998

Annual 4.1 7.8 5.1 1.0

Cumulative 4.1 11.9 17.0 18.0

(Note: numbers may not add up due to rounding)

Estimated Economic Rate of Retirn: Not Applicable

REPUBLIC OF GEORGIA

MUNICIPAL INFRASTRUCTURE REHABILITATION PROJECT

STAFF APPRAISAL REPORT

PART I. INTRODUCTION

A. Country Background

1.1 Situated in the southern part of the Caucasus region (See Map 1), Georgia is a relativelysmall country with a population of 5.4 million and a geographical area of 70,000 squarekilometers. The capital, Tbilisi, has a population of 1.5 million. Georgia was the first of thenon-Baltic states to declare Independence from the Former Soviet Union (FSU) on April 9,1991. Formal contacts between the World Bank and the Republic of Georgia (hereinafterreferred to as Georgia) began in March 1992, and the country joined the World Bank in August1992. One year later, Georgia joined IDA.

1.2 Soon after its Independence, the country became embroiled in political and civil strife.The consequences have had a devastating effect on the nation's economy and its social stability,further compounding the difficult transition to market orientation. Conflicts in Ossetia, locatedin north central Georgia, resulted in numerous casualties and refugees; since 1992 peace-keepingforces have stabilized the situation. A separatist war in Abkhazia continued throughout 1992-1993, resulting in an estimated 260,000 refugees migrating to other parts of Georgia, includingTbilisi and the coastal cities of Poti and Batumi. A cease-fire in Abkhazia is now in effect,although the Government does not control the region. During the same period, the Governmentalso fought military supporters of former President Gamsakhurdia, generating additionalcasualties and destruction.

1.3 In combination with an economy under severe transitional stress, Georgia's three civilconflicts have worsened the socio-economic plight of the country. The serious deterioration ofbasic infrastructural and municipal services is adversely affecting the economy, and in turn, iscausing widespread environmental degradation. Public health is jeopardized by unpotable watersupplies, untreated sewage and unmanaged dumps and landfills. Refugees of war have migratedto the capital and other key cities such as Poti and Batumi, adding to the existing strain onhousing and dysfunctional municipal services. Having endured the two past winters withminimal or no heat, the urban population is preoccupied with the onset of another difficultwinter. By 1993, Georgia's economic decline had placed the majority of the Georgianpopulation under the official poverty line. The standard of living for the majority hasplummeted over the past four years, particularly for more marginalized and vulnerable groupswho suffer most as the system of social protection collapses. Meanwhile, there has been a crisisin public confidence, and a related erosion in social order and discipline. Only relativelyrecently, since the intensity of armed conflicts abated in late 1993, has the Government beenable to refocus its attention on the task of maintaining law and order, and rebuilding theeconomy. Essential to this broad-based effort is the need, first, to arrest further deteriorationand possible collapse of basic infrastructure and municipal services, and, second, to begin torehabilitate infrastructure and services deemed essential to public health, safety and welfare.

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B. Macroeconomic Background

1.4 At the time of Independence, Georgia was a relatively well-off Republic with fairly goodgrowth potential. The economy's sources of strength included a well-educated labor force, astrong tradition of entrepreneurship, agriculture and agro-industries, tourism on the Black Seacoast, mineral and natural resources, and production of other commodities. The country'slocation made it a primary transit conduit for goods shipped elsewhere in the Caucasus region.External trade, mainly with the republics of the FSU (96 percent of total exports), played a largerole in the economy. Georgia relied heavily on imports of energy from other republics, notablyRussia for electricity and crude oil, and Turkmenistan for natural gas. Imported energycomprised 95 percent of the total energy supply in 1992-1993.

1.5 However, the conflicts and disruption in payments and trade within the FSU have hada severe impact on the Georgian economy. At present, it ranks among the poorest countries ofthe FSU with GDP per capita estimated at US$563 in 1993. The decline in production began in1989, but has been particularly sharp since 1991. In the period 1991-93, net material product(NMP) fell by a cumulative total of 75 percent, affecting all sectors. The most significantrelative decline has occurred in construction, where economic activity practically halted in 1993.Agricultural production fell by 42 percent in 1993, and industrial production by 21 percent.

1.6 The budget deficit was about 28 percent of GDP in 1992 and 1993; it deteriorated furtherin the first quarter of 1994. Inflation accelerated from 80 percent per annum in 1991 to 8,400percent per annum in 1993. While the underground economy is pervasive, the revenuecollection was only 3 percent of GDR in 1993. The Georgian Coupon, introduced in April 1993at a conversion rate of 1 Coupon per ruble and proclaimed as the only legal tender in August1993, virtually collapsed by early 1994. The rate of exchange for one U.S. dollar was about1,500,000 Coupons in August 1994. Increasingly, only Russian rubles and hard currencies(mainly the US dollar) are accepted as means of payment. There has been a clear erosion ingovernmental control over the economy (e.g., revenue collection accounted for only 3 percentof GDP in 1993), and there is a growing underground economy.

1.7 With the continuous deterioration of the economic situation over the past five years, theliving standards of the majority of the population have declined sharply. Unemployment, almostnegligible at the beginning of 1992, reached 8.4 percent of the labor force by December 1993.Real wages have declined by about 90 percent over the last two years. In addition, centralheating was discontinued during the winters of 1992 and 1993 because of malfunctioning heatingsystems and lack of fuel. Electric power has been rationed. With more than 12 hours of dailypower shutdowns, the shortage of fuel and electricity has forced cuts in public transport andimposed considerable hardships on the population. The breakdown in key municipal servicesis also having a serious environmental impact, particularly on public health. The incidence ofintestinal and other water-related diseases is increasing; surveys indicate that digestive ailmentsamong people on the Black Sea coast are twice the national average because of polluted waterand other causes. Expenditures on health and education have declined from 11 percent of GDPto only 2% in 1993. In general, the health of the population is substandard and declining incertain areas; adults suffer high mortality rates in cerebro-vascular and heart diseases (3-4 timesEuropean average), while both infant and maternal mortality rates are on the rise.

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1.8 Since the beginning of 1994, the Government has begun to consolidate its control overthe country. There is some improvement in the law and order situation, and a newgovernmental team has renewed efforts to rebuild the economy through market-oriented reforns.While lagging in macroeconomic stabilization, progress has already been made in implementingstructural reforms in several areas. Virtually all housing has been privatized, and agriculturalland is being privatized successfully. The government has initiated small-scale enterpriseprivatization, most prices have been liberalized, and the import regime is relatively open.Interest subsidies and a cash management system are planned in order to limit monthlyGovernment expenditures to revenues. However, Georgia is initiating a comprehensive programof stabilization policies and structural reforms under very difficult conditions and stringentfinancial constraints. Without drastic measures, as well as strong commitment to reforms onevery level of Government, it will be difficult to achieve success in this process.

C. Bank's Interim Strategy

1.9 The overall intention of the Georgia program has been to support efforts to reverse theeconomic declines of the past few years and to move to a private sector led, market-basedeconomy. Through the end of 1993, however, given the civil conflict and resulting lack of focusand capacity in the Government to implement economic reform, lending was not practicable.Instead, the focus was on building macroeconomic and sector knowledge and providing limitedtechnical assistance through Bank missions. Since the beginning of 1994, the Government hasinitiated an economic stabilization program, as noted above.

1. 10 With the Government's new focus on reform matters, the Bank has initiated a broaderprogram of lending and sector work in municipal infrastructure, energy, health, agriculture,transport, and environment. Other work is soon to be undertaken on enterprise reform,including privatization, and on the financial sector, augmenting the work carried out under theInstitutional Building Credit. Furthermore, the Bank organized and chaired an informal donorsmeeting in July 1994. At that time, the Government and donors exchanged views on theGovernment's efforts to put in place macroeconomic stabilization and structural reform.Discussion focused on current and planned assistance programs in Georgia, including energy andtransport development, telecommunications, health and education, and municipal infrastructure.An energy donors meeting was also chaired by the Bank in London on August 4, 1994 and a C.G. is planned in November 1994.

1.11 The recently approved Institution Building Credit and the proposed MunicipalInfrastructure Rehabilitation Project represent first steps in helping Georgia progress towards anenvironment in which economic stability, sustained growth and improved living standards cantake place. This is at the core of the Bank's strategy for Georgia. In a program of two projectsper year, the Bank will also prepare projects in agriculture, to build on the substantial potentialfor higher value and export-oriented production, in energy, to assist with the rehabilitation offacilities in this crucial sector, and in health, to upgrade delivery of primary, maternal and childhealth care. Another project may also support the upgrading of telecommunication systems.

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D. Urban Sector

1.12 Georgia is becoming increasingly urbanized, with 55 percent of its total population livingin urban settlements. In the pre-World War II period, the majority of the population lived inrural areas. The process of urbanization has mainly been spurred by enforced industrializationand excessive concentration of economic activity in urban centers.

1.13 Tbilisi, the capital and largest city in the country (1.5 million), constitutes 27 percent ofthe total population and 48 percent of the urban population. Tbilisi experienced rapid growthafter World War II and continues to expand, despite its lack of adequate infrastructure. Therecent civil unrest has caused a major inflow of refugees to the city, estimated at 100,000. Therate of natural population growth has declined during recent years and at present is only 0.8percent per annum.

1.14 The remaining six largest urban settlements include: Kutaisi (236,000), Rustavi(160,000), Batumi (137,000), Sukhumi (122,000), Poti (75,000) and Gori (60,000). Togetherwith Tbilisi, their population represents approximately 75 percent of the urban population ofGeorgia. During the last decade, growth of these cities has been slow but steady. Due to recentmilitary actions, the city of Sukhumi in the Abkhazia Autonomous Republic has beensignificantly destroyed, forcing large numbers of people to flee to other parts of Georgia. Noreliable information on migration trends is yet available.

1.15 The current urban sector can be characterized by five main features: (a) continuingurbanization, coupled with economic contraction, resulting in high unemployment and under-employment; (b) growing scarcity of public resources during the last several years, resulting ina steady decline in per capita urban investment; (c) poor performance of the main governmentbodies responsible for urban development and housing; (d) deteriorating environment,particularly with respect to public health from polluted water, open sewerage, poorly managedhousehold and industrial waste; and (e) inadequate institutional and fiscal structures. The bulkof the responsibility for maintaining infrastructure and services has been transferred tomunicipalities and local communities, but without increasing their resources or authority.

E. Municipal Services

1.16 Georgia is organized into a three tier system of governance, consisting of central, rayon(an intermediate government level somewhat similar to counties in the United States and someother countries), and local governments. The country is divided into 63 rayons, which in turn,are divided into local territorial units. The city of Tbilisi has a special status as the capital city,and is divided into ten districts. In addition, there are two autonomous entities in Georgia,namely Adjaria and Abkhazia. Provision of municipal services is delegated to localadministrations, or, in some cases, entrusted to quasi-independent enterprises. However, localadministrations and these enterprises are still heavily controlled by the central Government,particularly on such issues as tariff policy and investment decisions. The tariff structure inmunicipal services is highly distorted. Higher tariffs are charged to industrial users tocompensate for low residential tariffs. The latter are set and controlled by the centralGovermment. As a result, complex systems of cross and hidden subsidies have developed to

sustain operations of municipal services enterprises. Investment decisions are frequently madeat the central level, without clear economic criteria and without regard for local conditions andneeds.

1.17 The municipal services sector is characterized by an excessive level of centralization anda virtual absence of cost recovery. The consequence is a significant dependence on the financialsupport of the central Government. The recent sharp contraction in economic activity and thedrastic increase in the budgetary deficit have had major negative impacts on the municipalsector, including low service levels, inadequate maintenance and operations practices, andnumerous and often under-employed manpower. The situation is compounded by the extremeweakness of local governments, which have poor tax collection systems and inadequate controlprocedures.

1.18 In collaboration with Georgian national and municipal authorities, as well as otherinternational donors, priorities were analyzed and the cities of Tbilisi, Batumi and Poti wereselected as the first three target areas in which to address critical municipal infrastructure needs.(There is financial scope for additional cities with urgent needs to be identified and addressedduring the course of the project's life). Like most municipalities in the country today, all threecommunities suffer from a grave breakdown in basic services, including wastewater treatment,solid waste disposal, drinking water, electric power supply, heating, and transport. WhileTbilisi comprises over one quarter of the nation's population, two of the major coastal cities ofBatumi and Poti, with a combined population of over 200,000, including substantial numbersof refugees from Abkhazia and are strategic locations as the only reliable port access points forthe entire country. (Abkhazia and its major city of Sukhumi are still largely inaccessible dueto tight security). In addition, both Batumi and Poti have been identified in studies by the BlackSea Program for Environmental Protection and Management (funded by the Global EnvironmentFacility and supported by the six coastal nations on the Black Sea) as major pollution "hotspots"in the regional Black Sea clean-up effort. By focusing on certain critical municipal infrastructureneeds such as waste water treatment and landfill management in Batumi and Poti, majorenvironmental and public health benefits will also be achieved.

F. Government Strategy for Municipal Development

1.19 As part of the overall economic stabilization, the Government is beginning to initiatework on redefining its sector strategy and objectives. To save on meager resources, the centralGovernment is planning to withdraw, at least partially, from direct support to urban services,urban infrastructure development and provision of shelter. To the extent possible, thesefunctions are to be taken over by local governments and the private sector. Some of thesefunctions, such as water supply, have been already largely entrusted to quasi-independentagencies. However, excessive control by local administrations is still maintained. In additionto the process of decentralization, the Government needs to clearly articulate sector policies inorder to guide investment priorities and cost recovery efforts, and promote quality and efficiencyof services. Notwithstanding certain recent positive developments in this field, there are stillnumerous unresolved problems, particularly pertaining to rapidly deteriorating municipalinfrastructure, financial management, administrative organization, and human resources.

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G. IDA's Previous Role and Lessons

1.20 Georgia joined the Bank and IDA within the past two years. Thus, neither IDA norIBRD have had operational experience in the country, except for some economic and sectorwork as well as a recently approved Institution Building project involving a loan of US$10.1million. The proposed Municipal Infrastructure Rehabilitation Project (MIRP) is the Bank's firstresponse to the pressing needs of urban infrastructure and essential municipal services inGeorgia. To some extent, the Bank can draw upon experience in assisting other membercountries, several in the former FSU, with similar issues.

H. Justification for IDA Involvement

1.21 The devastated economy has already pushed the majority of the population below povertylevel, and the living conditions are reaching the catastrophic stage. The Government lacksresources even to focus on these issues and is unable to invest in improving the basic services.The project will directly impact the lives of population-at-large, which would facilitate generalsupport to the economic reforms.

1.22 Most external donors are focusing their assistance efforts in Georgia almost exclusivelyon humanitarian aid. IDA is the only concessional source available to help finance programsto reduce deterioration of basic infrastructure services in municipalities. Concessional assistanceis required because the economic crisis in the country is severely straining financial resourcesavailable for maintenance of basic community services. In addition to economic reform support,IDA funds are essential for public health and safety, and environmental stabilization.Assistance from IDA can thus play a significant role in helping foster an environment in whicheconomic stabilization, and growth can take root and lay the foundation for improved futuremanagement and delivery of municipal services.

1.23 It must be emphasized, however, that there is no complete assurance of the long-termsustainability of the proposed MIRP. The macroeconomic and structural dialogue is onlybeginning with Georgia. However, this emergency-track operation, the timing and priorities ofwhich are deemed critical to help restore social and economic stability, will also strengthen thedialogue and emerging partnership between Georgia and the World Bank. Given the seriousdeterioration in essential services, a rapid and innovative project is justified. Further breakdownin municipal and environmental systems appears unavoidable without immediate Bankintervention.

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PART II. PROJECT OBJECTIVES AND DESCRIPTION

Project Objectives

2.1 The project's three major short-term objectives include: a) arresting further deteriorationand thereby stabilizing critical municipal infrastructure services evaluated as vital to publicwelfare in selected Georgian cities; b) improving overall management and delivery of municipalservices in a sustainable, environmentally beneficial manner; and c) reinforcing credibility oflocal governments through visible interventions in key services in order to reinstate publicconfidence and ensure social stability. In the longer term, the timely and efficientimplementation of the immediate assistance program will help lay the foundation for futurereform and restructuring efforts aimed at improving overall management and delivery of crucialmunicipal services.

Project Description

1. Infrastructure Rehabilitation Investment Component (US$15.3 million-base cost)

2.2 During project preparation, the adequacy of the Government's program for dealing withthe deteriorating municipal services situation and its link with the economic stabilization effortwas reviewed. The national Government, particularly the Office of Head of State, seems fullyconcerned about, and committed to, the rehabilitation of basic infrastructure. However, it facesserious constraints in trying to formulate with municipalities priority public investment activitiesas well as longer term reform programs. Although civil strife has ceased, the Governmentremains preoccupied with the difficult political situation in the Abkhazia Autonomous Republic.In addition, Georgia's deteriorating economic situation has left the Government strapped forfinancial resources. Finally, the central administration and municipalities find it difficult tomove quickly to address urgent infrastructural problems.

2.3 Since sectoral reform programs are still evolving, or in the early stage of formulation,the Bank mission, after consulting with national and local officials, agreed to concentrate onmunicipal services which meet the following criteria: (a) those on which the population dependsfor its health or survival; (b) those deemed essential for sustaining labor mobility and economicactivity; c) those that can be stabilized, reactivated or rehabilitated through provision of sparesand/or replacements in a relatively short period; (d) those in which the combination of socialdisruption and economic transition creates risks of unacceptably high social costs if not remediedimmediately; and (e) those for which alternative external assistance is not likely to be availablein the short-term. Tbilisi was selected because it is the capital, containing about one-third ofthe total population. Batumi and Poti were selected because they are key port cities, and theonly currently operative points for external trade for the nation. Additional cities might beincluded during project implementation. These municipalities would receive assistance underan investment component (see Annex 1) divided into two phases as follows:

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a. Tbilisi Immediate Action Plan (TIAP) (US$3.17 million)

2.4 The objective of the TIAP is to address the most urgent problems in municipalinfrastructure prior to the onset of the 1994/95 winter (starting December, 1994). The proposedelements for Tbilisi include: (i) weatherization and insulation for 23 key hospitals and schoolsbuildings; (ii) installation of dedicated electricity lines for 15 hospitals; and (iii) essential sparesand equipment for the city underground system and aboveground public transport system.These measures constitute the most important part of the first year work program.

1) Weatherization and Energy Services (US$2. 11 million)

The investments will conserve energy and trap heat in hospital and school buildingsthrough replacement and repair of damaged or missing windows, doors, and draught-proofing measures. Where possible, improvements in the city's electrical distributionsystem will be made to ensure that hospitals can obtain dedicated, continuous suppliesof power. The Government and the Municipality of Tbilisi have agreed that adequatefuel for school and hospital heating systems will be provided as part of the city'semergency program from sources to be financed by bilateral donors.

(i) Schools. The first emergency action is to implement primary weatherizationof 200 Tbilisi schools. It is anticipated that this will reduce the period duringwhich schools are shut down for the winter by about 6 weeks, based onaverage winter temperatures. Without completing this weatherization,rehabilitating heating systems would be ineffective. Primary weatherizationincludes replacement of missing windows with single pane glass, repair orreplacement of window frames, installation of polyethylene film, caulking,and exterior door repair. This will enable children to attend school longerand more comfortably on a revised yearly schedule.

(ii) Hospitals. The second emergency action is to provide primary weatherizationand special power supplies to priority-listed hospitals. Two options will bepursued to achieve assured power. The first is to provide dedicated electricaldistribution from high voltage electrical sources directly to the hospitals. Thesecond is the installation of on-site, diesel-driven electrical generators. Underthe TIAP, the highest priority will be to secure dedicated electrical distri-bution to the hospitals.

2) Urban Transport Services (US$1.06 million)

Essential spare parts will be procured for the underground metro, and for trolley anddiesel buses before the onset of the 1994/95 winter months. This activity is included inthe immediate action plan because the lack of spare parts for both above and below-ground transport systems has reduced the operation of public transport in Tbilisi to acritical edge, and the public is at risk from the hazard of water leaking into electricalsystems. For the Metro, the emergency action program is directed to improvements ofthe central control room, pumping water away from the underground electrical system,

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returning to service about 20 cars, and providing essential spare parts for ailing in-service cars.

2.5 Two elements of the emergency operation (i.e., weatherization in hospitals and schoolsand rehabilitating the public transport system) will be partially financed by a US$300,000 PPFadvance and a US$500,000 bridge loan from the Soros Foundation. These will be refinancedupon project effectiveness. Funding from the advances will be used to meet urgent needs andaccelerate development of local capacity in the areas of procurement, and mobilization of localcontractors/consultants. Experience in this phase will be closely monitored and the lessonslearned applied in order to improve the efficiency and effectiveness of project implementationgenerally.

b. Short Term Investment Program (STIP) (US$12.16 million)

2.6 The STIP will also respond to urgent identified needs in Tbilisi, Batumi, Poti, as wellas other potential cities. Its implementation will be carried out over about three years. Theshort-term investment program will expand on the TIAP in Tbilisi, and will incorporateadditional municipal infrastructure for rehabilitation, including sewerage, water supply, and solidwaste disposal. The STIP will include the following elements:

1) Tbilisi Municipal Infrastructure Rehabilitation Program (US$7.27 million)

Four subcomponents have been prepared:

(i) Heating (US$1.97 million)

The proposed assistance, a "second stage" improvement, will complement theTbilisi Immediate Action Plan. In addition to primary and secondary glazingand frame replacements, rehabilitation of existing heating systems for schoolswill be undertaken where possible. Installation of diesel generators andrehabilitation of heating infrastructure for hospitals is planned, along withadditional repairs and insulation, particularly roof insulation.

(ii) Urban Transport (US$3.03 million)

For Metro, the assistance will: (a) improve ventilation, pumps, escalators, andelectrical substations to enable dependable service; (b) repair the track atstrategic locations to maintain safety in the operation of trains; (c) overhaula portion of the rolling stock; (d) complete restoration of the central controlsystem destroyed by fire; and (e) modernize the fare collection system toeliminate losses in fare box income. For Tbiltrans, the above-ground system,the short-term investment will help repair or maintain existing vehicles.

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(iii) Water Supply (US$1.32 million)

The water supply and distribution system currently suffers from defectiveequipment and unreliable electrical supply. These problems produce supplyinterruptions that severely restrict the operation of the system and increasestress on the electrical distribution network. The distribution networkoperates at its limit, with no spare capacity whatsoever. The short-terminvestment proposal will enable the purchase of essential spares, materials andequipment. The program will replace essential equipment (i.e., pumps,motors, switchgear, cabling, chlorination, laboratory and short-wavecommunication radio), replace the distribution pipework, and repair servicereservoirs.

(iv) Wastewater (US$0.61 million)

Acute operational difficulties in waste water treatment result primarily from:(i) the poor condition of some 40% of the sewers, resulting in blockages andflooding in the streets of Tbilisi; and (ii) the lack of spare parts and equipmentto make emergency repairs. The project will finance: plant and equipment forthe maintenance of sewers; renovation works to sewers, and water treatmentplant.

(v) Solid Waste (US$0.32 million)

Due to fuel shortages and other problems with collection vehicles, much ofthe solid waste is deposited in unofficial dumps within the 10 city districts.Priority problems are mainly the lack of transfer trucks and use ofunauthorized dumps which pose a health hazard. In the short term, thepriority needs to be financed under the project include: equipment for theefficient operation of existing dumps; and equipment, including spare parts,to improve solid waste collection and transport operations.

2) Batumi Municipal Infrastructure Rehabilitation (US$2.13 million)

Batumi faces considerable difficulties in maintaining adequate water supply, waste watertreatment, and solid waste collection and disposal. These priorities will be addressed asfollows:

(i) Wastewater (US$0.93 million)

Emergency repairs are virtually impossible due to the lack of spare parts. Atthe pumping stations, the electrical and mechanical equipment is in poorcondition. Additionally, the equipment used for emptying septic tanks is ina poor operational state. In order to maintain the operational integrity ofexisting facilities, the following works will be undertaken: (i) provision ofsewer cleaning equipment; (ii) renovation of sewers in urgent need of

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attention; (iii) provision of spares for sewer repairs; and (iv) upgrading ofthree sewage pumping stations.

(ii) Solid Waste (US$0.48 million)

The city's existing garbage collection and disposal system is inadequate,causing unhealthy conditions and significant environmental problems to themarine waters and shores of the Black Sea. The rehabilitation programincludes financing for the rehabilitation of the landfill as well as makingprovision for improvements to operating practices. Included are: additionalequipment (compactor/dozer) and waste containers; spare parts for existingequipment; and improvement in handling solid waste.

(iii) Water Supply (US$0.72 million)

Batumi's water supply is adversely affected by the quality of the river waterwhich deteriorates rapidly from excessive turbidity during frequent storms.A lack of attenuation or treatment capacity forces the Water Trust to close theriver intakes until water quality improves. While treated water storagecapacity is available in Batumi, it cannot be used without increasing powerconsumption. Thus, when the river sources are closed, the population iswholly dependent on the alternative borehole supply. The reliability of theboreholes is linked to the supply of electricity from the Batumi grid, whichis severely restricted. The following short-term solutions will be financed toimprove the quantity and quality of the city's potable water supply:refurbishment or provision of pumps and standby generator equipment at oneof the main borehole water sources to secure reliability of the supply when theriver intakes are closed; equipment to permit the continuation of repair work;communication equipment, including short wave radio, to improvecommunication between pumping installations and treatment plants; leakagedetection apparatus and improvements in chlorination plant, are also included.

3) Poti Municipal Infrastructure Rehabilitation (US$0.95 million)

The two major environmental and health hazards in Poti are related to wastewater andsolid waste management. The project proposes funding to address mitigation needs tobegin to alleviate these difficulties.

(i) Wastewater (US$0.73 million)

Poti's population is only partly served by a sewerage network. The majorityof the residential parts of the city (70%) are dependant on septic tanks. Thesewerage network depends on a number of pumping stations which are inurgent need of mechanical and electrical refurbishment. There are insufficientoperational tanker vehicles to maintain an adequate level of service. Theurgent works identified to maintain the operational integrity of the existing

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facilities include: provision of sewer cleaning equipment; renovation ofsewers; upgrading of four wastewater pumping stations; and provision ofvehicles and associated equipment for emptying septic tanks.

(ii) Solid Waste (US$0.21 million)

The proposed short-term solution aims to improve the efficiency of solidwaste collection and landfill management which is now seriously deficient andposes a health hazard. The short term investment includes: spare parts forexisting collection equipment to improve solid waste management, andpurchasing of equipment to grade and cap existing solid waste with inertmaterials.

4) Other Municipalities (US$1.80 million)

A small fund is proposed to help finance urgently needed infrastructure rehabilitation inadditional cities during the life of the project. The selection criteria for theseinvestments will be the same as those applied to the identified portfolio (see para. 2.3).

2. Institutional Development Component (US$1.95 million)

2.7 The project's second component includes institutional development support to help: (a)implement the project effectively; (b) initiate a process to develop, over time, local capabilitiesin such critical areas as project and financial management, procurement, investment analysis,environmental assessment; (c) Government in its effort to formulate a realistic future strategyfor the management and delivery of key municipal services; (d) develop coherent strategies andaction programs, mainly at the local government level, to control and alleviate serious pollutionproblems along Georgia's Black Sea coast. This would represent a first intervention in Georgiato operationalize studies and analyses being done by the regional Black Sea Cleanup Program,financed by the Global Environment Facility (GEF). The following activities would besupported:

a. Independent Agency for Development of Municipal Services (US$0.26 million)

2.8 In order to ensure expeditious and efficient implementation of the proposed MIRP,including rapid procurement and disbursement, the Government has established an independent,non-governmental, non-profit private company--the Independent Agency for Development ofMunicipal Services (the Agency). All operational costs of the Agency, including technicalassistance, training, and equipment to achieve the project's objectives, will be financed throughthe Credit for the duration of the project. As agreed with the Government during negotiations,the Agency is meant to be a temporary facility, designed to respond to an emergency situationby facilitating project implementation outside normal Government channels; upon projectcompletion in about three years, the Agency will cease to exist. During its life, the Agencywill be staffed by a General Manager, an Assistant General Manager (both Georgian nationals),a procurement adviser (expatriate specialist), secretaries and a driver. It will have its ownoffice in Tbilisi.

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b. Technical Assistance (TA) and Studies (US$1.68 million)

2.9 Technical assistance and training will focus on such key areas as: general projectorganization and management, procurement planning and execution, project accounting, varioustechnical assessments, and analysis of environmental and social impacts. Specifically, the TAsubcomponent will help finance: (a) special environmental public awareness activities, parti-cularly on the Black Sea coast; (b) public relations programs to develop public support for theemergency heating assistance in Tbilisi (schools and hospitals); (c) specialized assistance forimproved environmental assessment, monitoring and management; (d) development of futureoptions for more effective management of the household waste problem in Batumi and Poti; (e)water supply development in Tbilisi and Batumi; (f) and improving the management of the urbantransport system. Assistance would also be provided for a number of technical studies in thefollowing areas: (a) Integrated Coastal Zone Management on the Black Sea coast, focusing andbuilding on initial pollution abatement investments in Batumi and Poti (see Annex 2 for details);(b) a master plan for the Tbilisi water supply and household waste systems; (c) a sectoral studyof municipal services, including housing (Annex 3 and para 5 .2g for Agreements andRecommendations).

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PART III. PROJECT IMPLEMENTATION

A. Status of Project Preparation

3.1 The MIRP was identified in June, 1994, prepared during a broad based pre-appraisalmission in August 1994, and appraised in September 1994. The Agency responsible for projectimplementation is established, an experienced General Manager has been hired, and technicaland costing data have been prepared for each of the project components. In order to speedimplementation after negotiations and Credit effectiveness, the Borrower, through the GeneralManager and with assistance from the Bank is currently: (a) contracting a local engineering firmto prepare a detailed inventory of the needs in the Tbilisi schools and hospitals as input to thepreparation of bidding documents; (b) contracting a public relations firm to inform variousaudiences about the project's objectives and develop an interactive communication programdesigned to increase the public's awareness and support; (c) finalizing a Manual of Proceduresfor Agency operations and accountability; and (d) preparing the first set of procurementdocuments. In order to facilitate the project, a Project Preparation Facility (PPF) of US$0.3million was approved, and additional bridge funds (US$0.5 million) are expected from the SorosFoundation to start implementation of the Immediate Action Plan before project effectiveness.

B. Project Cost and Financi

1. Project Cost Estimates

3.2 Total project cost is estimated at US$19.69 million equivalent. The foreign exchangecosts (FEC) have been estimated for each subcomponent; combined, their overall weightedaverage is 87 percent of total cost. All local costs have been converted to US dollars at anexchange rate of 1,500,000 coupons per dollar. Costs are expressed in US dollars due to theunpredictability of national inflation and devaluation rates during the implementation period.

3.3 The estimates for consultancy/studies are based on typical current costs for suchassignments. Investment cost estimates are based on engineering studies carried out by localand foreign consultants financed by the Bank and with the assistance of municipal officials. Theunit prices come from two major sources: (a) quotations on equipment and materials fromforeign and local suppliers; (b) prices for goods and works from recent contracts in Georgia.Costs have been subjected to contingencies of 14.5 percent, including physical contingencies (10percent of base cost), and price contingencies (4.5 percent of base cost). Goods imported forthe project with Credit proceeds are exempt from import duties and taxes. Annual inflationrates have been estimated as follows:

TABLE 1: Local and Foreign Inflation Rates(in %)

1993 1994 1995 1996 1997Local 4084.0 45749.7 3220.3 91.6 22.7Foreign 0.5 3.4 2.9 3.1 2.7

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3.4 The proposed IDA credit of US$ 18.0 million equivalent will finance 91 percent ofproject costs, net of duties and taxes over a three-year period. The cost summary for the projectis presented in Table 2 and additional details are given in Annex 4. The government's financialcontribution will be US$1.39 million equivalent, or 7.1 percent of the total project cost, withthe balance to be made available by USAID (1.5 percent). The local contribution will beprovided to the Agency in addition to those contributions financed by IDA and other potentialco-financiers.

TABLE 2: Project Cost Summary (net of taxes and duties)Cost Estimate (US$'000)

(US$ '000) % Foreign % TotalLocal Foreign Total Exchange Base Costs

A. Infrastructure Rehabilitation Component1. Tbilisi

Heating/Energy Saving 1,026.0 3,078.0 4,104.0 75 24Urban Transport 409.0 3,681.2 4,090.2 90 24Water Supply 66.1 1,255.9 1,322.0 95 8Wastewater 91.5 518.5 610.0 85 4Landfill 32.0 287.6 319.5 90 2

Subtotal Tbilisi 1,624.6 8,821.1 10,445.7 84 602. Batumi

Water Supply 36.0 684.0 720.0 95 4Wastewater 46.3 878.8 925.0 95 5Landfill 73.4 415.7 489.0 85 3

Subtotal Batumi 155.6 1,978.4 2,134.0 93 123. Poti

Wastewater 73.3 659.7 733.0 90 4Landfill 21.8 196.2 218.0 90 1

Subtotal Poti 95.1 855.9 951.0 90 64. Other Cities 180.0 1,620.0 1,800.0 90 10

Subtotal Infrastructure Rehabilitation 2,055.3 13,275.4 15,330.7 87 89ComponentB. Institutional Development Component

1. Project ImplementationThe Agency 26.8 240.8 267.5 90 2Technical Assistance/Consulting Services 113.4 1,020.6 1,134.0 90 7

Subtotal Project Implementation 140.2 1,261.4 1,401.5 90 82. Studies

Technical Studies 48.4 435.6 484.0 90 3Municipal Sector Study 6.5 58.5 65.0 90 -

Subtotal Studies 54.9 494.1 549.0 90 3Subtotal Institutional Development 195.1 1,755.5 1,950.5 90 11ComponentTotal BASELINE COSTS 2,250.3 15,030.9 17,281.1 87 100

Physical Contingencies 225.0 1,503.1 1,728.1 10Price Contingencies --- 681.7 681.7 4

Total PROJECT COSTS 2,475.4 17,215.7 19,691.1

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2. Financing Plan

3.5 The financing plan for the project is presented in Table 3. The IDA Credit would bemade on standard IDA terms (thirty-five years, including ten years of grace), with an annualcommitment charge of 0.5 percent on the undisbursed balance, and a 0.75 percent service chargeon the amount disbursed and outstanding. The foreign exchange cost requirements are estimatedat US$17.21 million. The local currency requirements (equivalent of US$2.47 million) wouldbe met partially by the Borrower from its own resources. The IDA credit would finance about100 percent of the foreign exchange cost, 80% of local cost, and about 91 percent of the totalproject cost.

TABLE 3: Financing Plan(US$ '000)

% of TotalLocal Foreign Total Project Cost

Government 1,389 0 1,389 7.1IDA 1,086 16,915 18,001 91.4USAID 0 300 300 1.5

TOTAL COSTS 2,475 17,215 19,690 100

Percentage 13.3 87 100

3. Co-financing

3.6 Parallel financing with USAID was reviewed during appraisal/negotiations. It was agreedthat USAID will finance the purchase/installation of glass (US$0.3 million) as soon as possible.This funding would come from a USAID umbrella component earmarked for energyconservation investments in Georgia, and will finance weatherization of schools and hospitals.Additional funds might be provided by USAID for complementary action in the heating sectorduring the course of project implementation.

4. Local Contribution

3.7 Local cost contribution will come from the municipal budgets of participating cities inthe form of dedicated, retained allocations from the Ministry of Finance. Each participatingmunicipality will contribute (or be expected to contribute) to the funding of local subprojects ona matching grant basis. Contributions to project financing would total US$1.39 million.

3.8 As a condition of credit effectiveness, the Borrower would establish and make an initialdeposit of US$300,000 to a specific local project bank account (Local Contribution Account),representing the 1994 local contributions (see para 5.3 of Agreements and Recommendationssection). The Borrower will deposit US$272,000 equivalent on July 1, 1995. The subsequent

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semi-annual contributions of US$272,000 would be deposited by the Borrower in twoinstallments no later than January 1 and July 1 for 1996, and January 1 for 1997. The Agencywill wait until the first advance has been fully deposited in this account before awardingcontracts of any significant size requiring local counterpart financing. This will ensure that theAgency has the money in time to meet its obligations towards suppliers and contractors, andthereby maintain its creditworthiness. Final agreement on the budgetary and payment proceduresof the Borrower's financial contribution was reached during negotiations.

3.9 During the annual budget process, the Borrower would allocate the required localcontribution for the Municipal Infrastructure Rehabilitation Project as part of the municipalbudgets for the participating municipalities. The national budget will cover approximately one-third of the total local contribution. Corresponding amounts would be retained by the Ministryof Finance and deposited in a Local Contribution Account with the National Bank of Georgia.The Government has delegated the management of this account with regard to withdrawals for

eligible expenditures, reconciliation of bank statements, etc., to the Agency.

5. Financial Analysis

a. Financial Impact

3.10 The financial impact of this project is related to the ability of the municipalities tomaintain their basic infrastructure, i.e., prevent further service degradation or complete servicecollapse. Inadequate infrastructure has already created serious environmental problems,including public health, and has become an obstacle to economic growth.

3.11 The least cost alternative approach would be applied to all project components, i.e.solutions are sought which attain the project's objectives at the lowest cost. For example,regarding the heating of schools and hospitals, the main guiding criteria would be the ability toextend the time for schools and hospitals to be open with acceptable safety for pupils/patientsduring the winter season. The solution that contributes most to this criteria at the lowest cost,including future maintenance and operation for financial sustainability, is then selected. In thiscase, weatherizing of buildings by installing glass in existing window frames and sealing framesand cracks has been determined as the first priority. In the case of the Tbilisi metro system, theguiding principle would be critical operational equipment needed to prevent system failure, andequipment and facilities to avert safety hazards that could cause serious or fatal accidents.

b. Cost Recovery and Pricing of Municipal Services

3.12 Public utilities and urban transport are heavily subsidized at the present time. Thecollection of municipal utility charges is further undermined by a very high inflation of theCoupon, the national currency. A program designed to achieve significant stabilization progresshas been discussed with the IMF. It includes a reduction of the budget deficit, improved controland management of the monetary system, elimination of subsidies to enterprises, increasedcharges for gas and electricity, and increased rates of VAT and import duties, among others.With the implementation of IMF recommendations in September, the price of bread increased285 times, electricity 500 times, gas for cooking over 780 times, and gas for heating about 4

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times. Stabilization of the economy and the local currency would be a prerequisite for anysignificant improvement of the cost recovery situation.

3.13 Due to the serious state of the economy, affordability will also remain an issue for sometime. The feasibility of cost recovery for municipal services through user fees or other leviesis difficult to assess at the present time. In the case of urban transport, although the subsidieshave been reduced in accordance with IMF recommendations in September, an estimated 50%of the riders do not pay because of either an exemption status or cheating. The gradual subsidyelimination scheme proposed by the IMF together with reduction of the free ride right wasdiscussed with the concerned municipal officials and will be implemented over the next threeyears to improve fare box revenue generation needed to maintain the fleet.

3.14 Under the project, technical assistance would be provided to help municipalities tostrengthen their procedures for costing, tariff setting and collection. The institutionaldevelopment component includes a sector study of municipal services, which would provideanalyses and recommendations to this effect. Thus, the dialogue for future sector managementand reform will be strengthened with a view to establishing the basis for specific future remedialaction in municipal operations.

C. Institutional Arrangements

1. Borrower

3.15 The Borrower is the Republic of Georiga, represented by the Minister of Finance. Inorder to ensure expeditious and efficient implementation of the project, an independent Agency,which is non-governmental and non-profit in nature--named the Independent Agency forDevelopment of Municipal Services--and referred to as the Agency, was established to act as theimplementing agency of the Borrower. A special Technical Coordinating committee wasestablished during negotiations. It will be chaired by the Ministry of Finance, withrepresentatives from central and local governments as well as Ministry of Environment, willoversee activities of the Agency. Annex 5 provides the institutional arrangements for thisAgency.

2. Independent Agency for the Development of Municipal Services

a. Legal Framework

3.16 Legal procedures, required under Georgian legislation for setting up the Agency andspecified during pre-appraisal, have been followed for establishment of the Agency. Formalestablishment of the Agency was finalized prior to negotiations. The Agency is founded by thefollowing Georgian institutions: the Chamber of Commerce, the Academy of Engineering, andthe Tbilisi Municipality. Efforts are being considered to extend or revise the foundingmembership by replacing Tbilisi in due course with a representative of a group of municipalities;to this end, a Georgian Municipalities' Association is being considered. The Agency willperform its functions in accordance with the Charter of the Agency and the Manual ofProcedures for the project. The Charter and the Manual were finalized during appraisal (see

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para. 5.1 a). Procedures of the Agency conform to the procurement and disbursementprocedures of the Bank. Annex 6 details the legal arrangements for the Agency.

b. Management of the Agency

3.17 The Agency is responsible for implementation of the project as defined in theDevelopment Credit Agreement. Specific responsibilities of the Agency include, inter alia: (a)managing and monitoring the overall execution of the project, communicating with the Bank onissues of procurement and disbursement, and submitting progress reports on implementation; (b)communicating with the beneficiaries during all stages of implementation, and ensuring thatproject objectives and procedures are being followed; (c) preparing a roster of suppliers andconsultants, including firms responding to the General Procurement Notice, which could becontacted to submit quotations/proposals; (d) launching bids for the procurement of goods andworks, and sending Letters of Invitation to consultants; (e) conducting bid openings, evaluatingbids and consultant proposals received, placing contracts with suppliers, contractors, andconsultants; (f) administering the Special Account and local project bank accounts; and (g)preparing and submitting disbursement applications to the Bank, monitoring project accounts andarranging for the audits required.

C. Recruitment of Agency's General Manager

3.18 A General Manager for the Agency was recruited after formal establishment of theAgency. Several candidates were interviewed and an experienced financial and managementprofessional was identified as the best suitable candidate. The candidate has been accepted bythe Government and was appointed as a General Manager by the Board of Directors of theAgency by the Board of Directors of the Agency. The candidate selected for General Managerhas completed graduate level work in finance and foreign languages. He worked for a numberof years as a Manager of Iberia Bank in Tbilisi (see para 5. 1c). The Agency's organizationalchart was reviewed during appraisal and agreed upon (see para. 5.2f). The General Managerparticipated in the Negotiations.

d. Supervision of the Agency

3.19 Given the urgency of the project and its economic, social and environmental importanceit will be essential during implementation to have close liaison with Government in order tomaintain Government's support and to have Government's input on sensitive project matters.In addition, the Government and the relevant beneficiaries (i.e., municipalities, public utilities)should have the possibility of overseeing the implementation process and to access informationrelated to the performance of the Agency (See Annex 5, Attachments 1 and 2). In order toaddress both issues, a Technical Coordination Committee (TCC) was established by the orderof the Minister of Finance. The Minister of Finance chairs the Committee, which also consistsof representatives of the beneficiaries and of the Council of Ministers. It is expected that arepresentative of the Ministry of Environment will join the Committee in the near future. TheAgency's General Manager will report directly to this Committee. The TCC will have the rightto request the Ministry of Finance to cancel the Project Management Agreement with the Agencyif performance has been deemed unsatisfactory after sufficient evidence has been presented to

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the Bank. The Project Management Agreement can be cancelled upon agreement between theGovernment and the Bank.

3. Contractual Arrangements

3.20 The Borrower, the Ministry of Finance, will sign a Project Management Agreement withthe Agency, according to which the Agency will be authorized to act on behalf of theGovernment for project implementation. The draft Agreement was was discussed between theGovernment and the Agency and finalized during negotiations (see para. 5.1b). The signatureof the Project Management Agreement would be a condition of effectiveness (see para. 5.3a ofAgreements and Recommendations). This Agreement sets forth the functions, responsibilities andrights of the Agency in regard to the project implementation. For the purposes ofimplementation of the individual project components, the Agency will enter into sub-agreementswith the municipalities (see Annex 5, Attachment 2). Such sub-agreements were finalized duringnegotiations and will be signed after signing the Project Management Agreement. These sub-agreements conform with the general principles of the Agreement between the Ministry ofFinance and the Agency, and will delegate to the Agency all rights necessary for the executionof the project components. The obligations of contracts regarding the performance and guaranteeby the contractors and suppliers will be towards the beneficiaries.

D. Procurement

3.21 Procurement and disbursement will be administered by the Agency, assisted in by aProcurement Consultant. Responsibilities of the Procurement Consultant will, inter alia,include: (a) training of the Agency's staff and developing monitoring procedures for theAgency's use in managing procurement and disbursement; (b) detailing the procurement plan(types of goods, quantities, estimates, delivery requirements, procurement schedule); (c)preparing technical specifications of materials and equipment required; (d) preparing specific biddocuments based on the Bank's standard documents, including notifications of biddingopportunities; (e) preparing terms of reference and finalizing documents for hiring consultantsaccording to models prepared by the Bank; (f) participating in the evaluation of bids andproposals received and in the preparation of evaluation reports; (g) advising on contracts withsuccessful bidders and selected consultants; (h) providing, upon request, on-the-job training tostaff from the Purchasing Units of beneficiaries in order to gradually develop their capabilitiesin handling international procurement.

1. Procurement Procedures

3.22 Procurement procedures used in Georgia are based on arrangements which prevailedunder central planning in the former Soviet Union and are not appropriate under IDA-financedprojects. With the assistance of the Procurement Consultant, the Agency will apply IDA'sprocurement procedures, in accordance with World Bank/IDA's Guidelines for Procurement andfor Use of Consultants. After discussions with each of the beneficiary agencies/departmentsunder the municipal authorities of Tbilisi, Poti and Batumi, the Bank agreed with theGovernment on a list of essential imports and related services for heating systems for schoolsand hospitals, urban transport, water supply, sewerage, solid waste, and waste water facilities.

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During project appraisal, a Procurement Plan was prepared (see Annex 8). However, the listmay be amended from time to time by the Borrower, after consulting with the Bank. Theproposed procurement arrangements are presented in Table 4 below:

Table 4: Summary of Proposed Procurement Arrangements(US$ million equivalent)

ICB LCB OTHERS NBF TOTAL

Goods 5.4 2.5 0.3 13.5Equipment for water supply (5.0) (2.4)aSewerage, landfill 2.4 (12.4)Urban transport, and (2.3)bHeating system 0.6

(0.5)c2.3

______ (2.2)d _ _ _

Works 2.6 2.3 - 4.9(2.4) (2.0) (4.4)

Consultancy - - 1.3 - 1.3Consultancy_________________________ _______ _______ (1.2)e (1.2)

TOTAL 8 2.3 9.1 0.3 19.7of which IDA (7.4) (2.0) (8.6) (18.0)

(a) LIB ($2.4) - Item available from a limited number of suppliers.(b) IS ($2.3) - Contracts below $250,000 each.(c) LS ($0.5) - Contracts below 20,000 each.(d) DC ($2.2) - Spare parts for buses, trams, and trolleys.(e) According to Bank's Consultant Guidelines.

3.23 The figures in the above Table were revised during appraisal. The few categories in theproposed Table will keep project implementation as flexible as possible. The categories havenot been separated per sector, or municipality, to make it easy to reallocate funds from onesector, or municipality, to another depending on demand and performance. Consultancyarrangements include: feasibility studies, engineering, project management, technical assistance,training, procurement and inspection services.

2. Methods of procurement

a) Goods

* Contracts for the supply of goods and equipment estimated to cost more thanUS$250,000 up to an aggregated amount of US$5.0 million, shall be awardedon the basis of international competitivie bidding (ICB) procedures. Bank'sStandard Bidding Documents for goods (July 1994) will be used for ICB

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procurement. Limited International Bidding (LIB) procedures will be usedwhere there are only a limited number of suppliers of the particular goods orequipment needed (i.e., equipment for water supply, etc.) up to an aggregatedamount of US$2.4 million.

* Contracts for the supply of goods and equipment estimated to cost less thanUS$250,000, up to an aggregate amount equivalent to US$2.3 million, shall beawarded through International Shopping (IS) on the basis of quotations to beobtained from a minimum of 3 suppliers from at least 3 countries, inaccordance with procedures acceptable to the Bank.

* Contracts for the procurement of items or groups of items to cost less thanUS$20,000 each, up to an aggregate amount equivalent to US$500,000, may beawarded on the basis of Local Shopping (LS), depending on the availability ofsuch items in Georgia. In this case, a minimum of 3 quotations should beobtained from qualified suppliers.

: Direct contracting, irrespective of the contract amount, may be used under thefollowing circumstances: (a) where the required equipment or spare parts mustbe compatible with existing equipment. For such purchases to be justified, theoriginal equipment should be suitable and the advantages of having anothermake of equipment should have been considered and found unsuitable; (b) theequipment is of proprietary nature and obtainable only from one source; and (c)in exceptional cases where the need for early delivery of particular goods orequipment is essential. The total aggregated amount under DC is estimated tobe US$2.2 million. Procurement of spare parts for buses, trolleys and tramswill be arranged through LIB in case such parts could be obtained from sourcesother than the original manufacturers.

b) Civil works

* Civil works above US$500,000, up to an aggregate of US$2.4 million will beawarded on the basis of ICB following Bank's Standard Bidding Documents ofJuly 1994. These contracts shall have prequalifications.

* Smaller works with an estimated value of US$500,000 or less each will beprocured through local competitive bidding procedures, acceptable to the IDA,from a list of contractors prequalified in accordance with paragraph 2. 10 of theBank Guidelines, May 1992 (see para. 5.2.b). The Borrower will use Bank'sStandard Bidding Documents (July 1994) for smalleer works through LCB. Thepre-qualified roster will be established at the initial phase of the PPF bynotification in the local papers.

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c) Advanced Procurement/Retroactive Financing

* The project will include retroactive financing for the following reasons: (a)prevention of delays in starting the physical implementation of the TIAP; and(b) maintenance of momentum achieved during the early stage of projectpreparation. The expenditures will mostly cover activities required before thecoming winter (weatherization of schools and hospitals). Retroactive financingis restricted to contracts entered into after appraisal, and justified, case by case,by the emergency nature of the activity. The retroactive financing consideredunder the project would be limited to about 10% of the credit amount forexpenditures. The procedures for procurement will meet the Bank'srequirements.

3. Review of Procurement Decisions by the Bank

3.24 Prior review of bid evaluations and contract award recommendations would be requiredfor all contracts exceeding US$250,000, LIB and DC contracts. In addition, with respect toeach contract estimated to cost the equivalent of US$100,000 or more, the Bank will pre-reviewthe first two invitations to bid and contracts awarded for: (a) goods procured under contractsawarded on the basis of IS; and (b) civil works procured under contracts awarded on the basisof local competitive bidding among prequalified contractors. All contracts for spare parts,equipment of a proprietary nature, goods needed for early delivery and installation work awardedafter direct negotiations with suppliers will be subject to prior review by the Bank.

4. Hiring of Consultancy Services

3.25 The contracting of consulting firms or individuals for the various studies, for technicalassistance, and other services, would be done according to the Bank's "Guidelines for the Useof Consultants by World Bank Borrower and the World Bank Executing Agency" published inAugust 1981.

3.26 For complex, time-based assignments, the standard form of contract for consultantservices issued by the Bank in May 1993 should be used. All consultant contracts will besubject to prior review by the Bank.

5. Currency of Foreign and Local Expenditures under the Credit

3.27 It is also recommended that the portion of the bid price representing local costs inGeorgia be expressed in foreign currency, such as US dollars. Due to the high inflation rate inGeorgia and the highly fluctuating exchange rate of the Coupons, it is presently common practicein Georgia that local contractors, suppliers, or consultants, insist on being paid in either USdollars or Rubles. Although the Ruble is now an international currency, it is not yet widely usedin international trade.

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3.28 During appraisal, ways were explored to overcome the constraints imposed onmunicipalities and government entities by the fact that their budgets are allotted in Coupons.These entities currently exchange Coupons into Rubles or US dollars in order to pay their localsuppliers, contractors, and consultants. It was agreed during negotiations that local costs willbe paid in Coupons at the official US dollar exchange rate on the payment date.

3.29 The Borrower will keep the Bank informed about the progress of the procurementactivities through the submitting of a regular quarterly progress report.

6. Project Preparation Facility (PPF)

3.30 An IDA advance to Georgia in the amount of US$0.3 million has been approved topermit payments for project preparation activities related to studies and technical assistance.Contracts under PPF will be carried out in accordance with the Procurement Guidelines underIDA credits.

E. Disbursement

3.31 Disbursements would be administered by the Agency. The project will considerpayments in the local currency at the US$ market exchange rate on the payment date. As theeconomic situation changes, the Agency will consider both tendering and payment in the localcurrency.

I. Disbursement Schedule

3.32 The proceeds of the Credit are expected to be disbursed in accordance with thedisbursement schedule and summarized in Table 5, over a period of three years. Thisdisbursement schedule was determined after taking into consideration the content of the project,which includes significant purchasing of goods, the urgency of certain project components, andthe high priority given by the Government to address issues for the 1994/95 winter. The totalproject disbursement schedule is presented in Annex 7. The project is expected to be completedby June 30, 1997 and the Closing Date would be December 31, 1997.

Table 5: Estimated IDA Disbursements (by rLscal year):(US$ million)

[IDA Credit FY 1995 FY 1996 FY 1997 FY 1998

Annual 4.1 7.8 5.1 1.0

[Cumulative 4.1 11.9 17.0 18.0

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3.33 For withdrawal of the proceeds of the proposed Credit, including the PPF advance, theestimated amounts per categories and disbursement percentages are presented in Table 6 below.

Table 6: IDA Disbursements by Category(US$ million)

Category Amount % of Expenditures to be Financed

1. Goods 10.4 100% of foreign expendituresEquipment/Material 100% of local expenditures (ex-factory)

80% of local expenditures for other items procuredlocally

2. Works 3.5 100% of foreign expendituresPublic Works/Urban 80% of local expendituresServices

3. Technical Assistance' 1.2 100% of expenditures

4. Operating Costs 0.2 100% of expenditures(the Agency)

5. PPF Refinancing 0.3

6. Unallocated 2.4

TOTAL 18.0

3.34 Since the project seeks to encourage small and medium-scale enterprises for localinstallation works, it is important that contractors and consultants be paid promptly for servicesrendered. The Manual of Procedures for the project allows the Agency to give an advanceagainst bank guarantee, and/or make payments in stages at the completion of works, as definedin the contracts. The private status of the Agency will allow its General Manager to facilitatepayments, without being submitted to any additional clearances within the Government.

2. Flow of Funds

3.35 Special Account. To facilitate project implementation, the Borrower may establish aSpecial Account in US dollars in a major foreign commercial bank, on terms and conditionssatisfactory to IDA, to cover the IDA share of expenditures. The Special Account will beopened in the name of the Borrower and managed by the Agency which has signing authority(see para. 5.2a). The authorized allocation would be US$500,000, representing about fourmonths of average expenditures effected through the Special Account. At the request of the

1/ Includes consulting services, studies, training, project monitoring, and auditing.

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Borrower and, based on the project needs, IDA would make an initial deposit or deposits intothe Special Account, up to the amount of the authorized allocation. Applications for thereplenishment of the Special Account would be submitted monthly or when one-third of theamount deposited has been withdrawn, whichever occurs earlier. Documentation requirementsfor replenishment would follow the usual Bank procedures. In addition, monthly bankstatements of the Special Account, reconciled by the Borrower, would accompany allreplenishment requests.

3.36 Direct Payment. Disbursements to suppliers of goods or services would in most casesbe made by the Agency from the Special Account to the supplier bank account in Georgia orelsewhere. Expenditures of more than US$200,000 would be disbursed through direct paymentsfrom the World Bank/IDA to the supplier based on fully documented withdrawal applicationssubmitted by the Agency. Standard disbursement procedures will be applied during projectimplementation. The minimum application size for direct payments would be US$50,000.

3.37 SOE Procedure. Disbursements against contracts for less than US$50,000 may be madeon the basis of certified Statements of Expenditures (SOEs) detailing the individual transactions,should the Borrower decide to pay certain contracts with Government funds before beingreimbursed from IDA. All operating costs, including salaries and local travel expenses, wouldbe paid out of the Local Contribution Account and be reimbursed by IDA using the SOEprocedure. The documentation to support these expenditures would be retained by the Agencyfor at least one year after receipt by IDA of the audit report for the year in which the lastdisbursement was made. This documentation would be made available for review by theauditors and IDA upon request. All other disbursements would be made against full standarddocumentation.

3.38 Other Bank Accounts. To cover eligible local operating expenses, the Borrower/theAgency would open a local current account (Project Current Account) in a Georgian commercialbank, to be managed by the Agency, on terms and conditions satisfactory to IDA (see 5.3c ofAgreements and Recommendations). This would be a condition of effectiveness. In addition,as described in para 3.8, the Borrower would open a local bank account in US dollars for thecontribution to the project financing (Local Contribution Account).

F. Project Management

1. Accounting

3.39 The project accounting system will be set up as described in the Manual of Proceduresfor the project. To ensure accountability for project funds, the Agency would: (a) maintainrecords of the receipts and disbursement of all funds used for the project as well as records ofthe value, location and condition of all items purchased but not yet utilized, (b) maintain internalcontrols to ensure there is an appropriate procedure to obtain or deliver goods and services,proof of receipt or delivery, that receipts and payments are accurately recorded on a timelybasis, and that assets and liabilities are adequately controlled, (c) report on the use of funds, and(d) facilitate verification of these reports by independent auditors.

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3.40 The accounting for all Special Account transactions and for all other project-relatedaccounts will be maintained in accordance with international accounting standards.

2. Auditing

3.41 Bi-quarterly financial statements of the Agency with specific references to the IDA-financed components will be prepared and audited in accordance with International AuditingGuidelines by suitably qualified independent auditors acceptable to IDA, and submitted to IDAwithin three months of the close of the accounting period. Audits will also be carried out, atthe same time, and for corresponding periods and in accordance with IDA guidelines, for SOEsagainst which disbursements have been made or are due to be made out of the Credit proceeds.Specific reference to the Special Account, SOEs, and the other project bank accounts (for thelocal financial contribution, and for the local operating expenses) will be made in the auditreports accompanying the financial statements. The Borrower reviewed proposed Terms ofReference for the auditor and an agreement was reached during negotiations. The Borrowerproposed a short list during negotiations (see paras. 5.2c and 5.2d). Appointing and signing acontract with an auditor agreeable to IDA is a condition of effectiveness (see para 5.3d ofAgreement and Recommendations). The project will finance the expenses for conducting theaudits.

3.42 The project account audits would include, inter alia, verification of how the funds havebeen spent based on project accounting records, bank statements, etc., and provide separateopinions on: (a) sources and uses of funds and related financial reports, (b) disbursements basedon Application for Withdrawal and Statement of Expenditures (SOEs), (c) the internal financialmanagement procedures, and (d) compliance with all Bank/IDA agreements. A separatemanagement letter with recommendations for improvements would accompany each audit report.

3. Financial Reporting

3.43 The Agency would produce consolidated financial statements at the end of each quarterand maintain records for monthly reporting, all in US$, of: (a) expenditures and commitments;(b) disbursements; (c) donor funding and disbursement (as appropriate); (d) contracts; and (e)other transaction reports (logs). The reports would distinguish sub-projects (schools, transport,water supply, etc.); expenditure category (equipment, works, services); location; and expendituretype. A printout will be sent to the Bank as a proof of the operational reporting and accountingsystem. The transmission of the printout, acceptable to IDA, will be a condition of effectiveness(see para. 5.3b of Agreements and Recommendations).

4. Project Monitoring

3.44 Project monitoring would be the responsibility of the Agency. Successful achievementof project objectives will require intense, ongoing monitoring of actual progress and performanceto assure timely resolution of any bottlenecks and to provide quality control. Detailed, ex antereviews by the Agency would be required of the detailed specifications of project componentsprovided by the beneficiaries. The review would entail evaluation of their consistency with theoverall project specification. In view of the emergency nature of the operation, procurement

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monitoring will be an essential element of IDA review process. Based on the procurement planthe progress reports will detail procurement related activities including consulting assignments.The receipt of goods and control of the quality of works are other areas where particularly closemonitoring would be required. The Agency is expected to contract out most of these functions,as required. Separate studies to monitor issues related to wages, completion delays, unit prices,etc. may also be commissioned. Performance would be monitored and evaluated on a quarterlybasis by IDA.

3.45 In addition to the financial and management audit, the Agency will commission bi-quarterly technical performance reviews to a technical consulting firmn or individual consultantswith appropriate technical and managerial expertise. The timing of these reviews of the Agencyshould coincide with the financial and managerial audits to the extent possible.

a. Mid-Term Review

3.46 A formal joint review will be carried out after about 18 months of project effectiveness.This review will be another opportunity to evaluate the effectiveness of the Agency andinvestments, and, if needed, to modify some major features of the project, or include newactivities in the project scope in order to better meet the project objectives. (See para 5.2e ofAgreements and Recommendations)

3.47 The Agency would furnish IDA with various reports on a regular basis. These reportswill include: (i) quarterly progress reports on execution in a format and degree of detailacceptable to IDA, (ii) audited financial statements within three months after each semester, (iii)records and financial reports on a monthly basis; and (iv) additional information that IDA mayrequest from time to time. The Agency would record and report on physical/volume datacorresponding to the structure of financial accounts.

3.48 The Government and the Bank agreed to exchange views on the status of projectimplementation, particularly regarding: (a) the Agency's performance in project implementationprocedures agreed with the Bank, and (b) adjustments in the project, including revisions toproject structure as well as reallocations of funds within and between categories. Specialperformance indicators have been established and are included in Annex 9. (See para 5.2h forAgreements and Recommendations)

G. Operational Plan and Project Implementation Plan

1. Borrower's Operational Plan

3.49 The Bank has appraised the Borrower's plans with respect to project operation in orderto ensure effectiveness. Most of the financial investments by the project involve stabilizationor rehabilitation of existing installations, managed by established municipal units or enterprises.The management and staff of these organizations are considered capable of ensuring effectiveinstallation, maintenance, and use of these investments.

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3.50 In order to strengthen the Borrower's operational plan, the municipalities will need to paymore attention to maintenance planning and scheduling, particularly to ensure that all newelectrical and mechanical equipment will be properly maintained. This will require attention tothe manufacturers' maintenance recommendations, setting aside required funds, and preparingmaintenance programs and plans for each equipment item. In recent years, the operationalpersonnel have only been maintaining old and used equipment.

3.51 With respect to the solid waste disposal sites (land fills and unofficial dumps) in Batumi,Poti, and Tbilisi, new organizational and procedural arrangements will need to be establishedfor effective operation. For the urban transport sector in Tbilisi, rationalization of the operationwas recommended by the mission as a parallel activity within the municipality in order to ensureoverall cost efficiency of the service delivery in the future.

2. Borrower's Project Implementation Plan (PIP)

3.52 The Borrower's Project Implementation Plan will include arrangements for the timelyprovision of all necessary input, adequate staffing of the Agency, training, implementation ofadequate financial management procedures, specification of the monitoring and evaluation systemto be applied, and implementation of other operational procedures required for effective projectexecution. The PIP was formalized under the Project Management Agreement (PMA) whichwill be signed between the Government of Georgia and the Agency. A project implementationschedule was prepared during project appraisal (See Annex 11). Dissemination of informationregarding the project has been initiated and the tentative performance indicators by which theproject will be monitored and evaluated have been defined during appraisal (see para 5.2h forAgreements and Recommendations).

3.53 In addition to the PMA, the Borrower will prepare a Manual of Procedures (MOP) forthe project implementation activities containing more detailed guidelines to the Agency and otherorganizations involved in implementing the agreements reached with the government (see para5.2i of Agreements and Recommendations).

3. Supervision Plan

3.54 As this is the first Bank-supported investment credit to Georgia, and given the particularimplementation arrangements, the project is expected to require a significant supervision effort,particularly during the first year when a large portion of the procurement will be undertaken.Therefore, it is planned that about 40 staff weeks of effort for the first year and about 20 staffweeks in each of the following two years would be required for supervision. A detailedsupervision plan was discussed during project appraisal and negotiations, and is attached asAnnex 10 (See para 5.2h of Agreements and Recommendations).

4. Environmental Review

3.55 No new construction or development is planned under the project. There will be noprimary negative environmental or socio-economic impacts. The project has been placed in theenvironmental screening category "B," as consistent with the provisions of Bank Operational

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Directive 4.01 "Environmental Assessment". The project will be environmentally beneficial tothe communities and sectors targeted for financial assistance by: (a) reducing the degradation ofmunicipal infrastructure systems; (b) maintaining a minimal level of operational service; (c)helping arrest declining socio-economic and environmental conditions; and (d) providing acritical contribution to reducing the health risks from infectious diseases.

3.56 The primary benefits include: (a) curtailing the threat of infectious diseases to publichealth by reducing the amount of raw sewage flow through the city streets in Batumi, Poti, andTbilisi; (b) introducing a more effective system of waste collection and disposal and land fillmanagement in Batumi, Poti and Tbilisi; (c) restoring and maintaining potable water suppliesin Tbilisi and Batumi; (d) providing heating and weatherization in schools and hospitals inTbilisi; (e) operationalizing the urban transport system; and (f) initiating a wider action programfor improved management of Georgia's coastal resources. Annex 12 provides a more detailedaccount of the environmental review and proposed mitigation plan.

5. Public Environmental Awareness, Non-governmental Organizations, and CommunityParticipation

3.57 Historically, a certain level of public awareness about the environment and appreciationfor nature has existed in Georgia. It is probable that while this awareness still exists, wide-spread support for environmental programs has temporarily subsided due to more pressingeconomic and political concerns.

3.58 Nonetheless, an environmental NGO movement is gaining recognition and proliferatinginto more specialized groups, stemming mainly from the political party of the Georgia Greens.The Green Party, which played an active role in the Independence movement, has since gainedgreater representation in the Parliament, despite the nation's current focus on short-term,economic survival needs. President Shevarnadze's new party, the Citizen's Union, hasincorporated many Green members with the objective of emphasizing environmental issues,including the urgency of the ecological situation on the Black Sea coast.

3.59 Current institutional relationships between government and non-governmentalorganizations, while new, seem cooperative. If properly encouraged, potential exists forcollaboration between public and private sectors. Yet, the idea of "community-based" resourcemanagement, in which local resource users participate in planning and management decisionsabout their rights to, and responsibilities for, resource use, remains alien--both to communitiesthemselves and to government institutions. Excluding the Orthodox church, there are very fewindigenous cultural community institutions on which to build. While the concept of localparticipation is familiar to NGOs, mechanisms for achieving coordination between users andgovernment agencies, and encouraging community decision-making and field action, are not welltested. Meanwhile, small-scale, traditional resource users on the coast, such as fishermen,wood-cutters, and farmers comprise an important group which needs to be understood in termsof their own concerns regarding the natural resource base, its use, and overexploitation. Effortswill be made in the Coastal Zone Management program to reach these groups.

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6. Economic Analysis

3.60 One of the project's main objectives is to support the Government's economicstabilization efforts by helping to increase the productivity of the urban population in three keycities. This will be achieved through the provision of spare parts and equipment urgently neededto arrest an aggravated deterioration of basic infrastructure services (i.e., urban transport,heating, water supply and sewerage) and to lay the foundation for future improvement of themanagement and delivery of such services. Without this intervention, labor mobility and theproductivity of urban populations will continue to decline, thus jeopardizing the nationaleconomic stabilization. It is not very meaningful to attempt to quantify precisely the aggregateimpact of the proposed project, given the many distortions and uncertainties in the Georgianeconomy. However, an analysis has been made on individual project subcomponents whichindicates that in all cases, given the rapid deterioration of key municipal services and theircrucial role in national economic stabilization and future growth, the benefits are substantial,clearly outweighing costs. This is normally the case in rehabilitation interventions of this kind.In addition, individual subcomponents taken together help lay the foundation for greater futurebenefit to the economy by instituting or setting in motion processes that aim to improve overallmanagement and delivery of essential municipal services. Annex 12 provides details on thequalitative analysis, which may be summarized as follows:

* Tbilisi Schools and Hospitals. Immediate and short-term assistance forweatherization and heating, costing an estimated US$4.1 million, will: (a)increase public access to education and health care facilities; (b) reduce energyrequirements to some extent; (c) enable pupils to attend school longer this yearand in the future than in the past two years (when total school days were reduceddue to winter closings) through improved facilities; (d) ensure a more continuouseducational process for students by reducing the winter break from 12 weekstaken last year--which proved disruptive for the students--to approximately 5weeks; (e) ensure continued health care services and greater access to 23 hospitalsin the city during the winter; (f) increase the efficiency and utilization of hospitalspace through a migration of patients from hospitals which will not beweatherized (and are planned to close because of underutilization) to those 23 thatare rehabilitated; (g) reduce the patient overload at ambulatory care clinics whichhave been burdened in the past winters by patients who are understandablyunwilling to tolerate poor hospital conditions.

* Tbilisi Urban Transport. Immediate and short-term assistance through theproject, costing an estimated US$4. 1 million, will help: (a) increase labormobility and thus support economic activity in the capital, (b) increase frequencyof trips resulting in increased access and reduced waiting time; and (c) increasepassenger safety and mitigate or stop the rate of equipment deterioration.

* Water Supply in Tbilisi, Batumi: Project investments totaling US$2.04 million,will help: (a) improve environmental quality and reduce exposure to water-relateddisease; (b) maintain or improve the quality of drinking water; and (c) maintainexisting access to water supply services.

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* Wastewater Treatment in Tbilisi. Batumi and Poti: Project investments totalingUS$2.26 million, will: (a) reduce the serious hazard to the public and helpalleviate environmental degradation; (b) increase access to sewerage services; and(c) increase operational efficiency by reducing electricity requirements forpumping stations and reducing somewhat the overall manpower requirements.

* Solid Waste Management in Tbilisi, Batumi and Poti: Project investmentstotalling US$1.02 million will help: (a) reduce environmental pollution and publicexposure to health hazards; (b) reduce probability of accidents at garbage landfillsites; and (c) increase operational efficiencies by increasing productivity ofmanpower and hours of access to needed equipment.

7. Social Analysis

3.61 No detailed social assessment was undertaken as part of project preparation orappraisal. However, some salient social features may be highlighted. More than 25% of thepopulation, or 1.5 million, reside in the capital city of Tbilisi; three of the other major cities,Batumi, Poti and Sukhumi, are ports on the Black Sea. The Black Sea coastal watershed covers40% of the country geographically and contains almost 40% of its population.

3.62 Until recently, standards of living in Georgia have been relatively high. A longtradition of close family ties and communal barter exchanges, combined with an historicallyrobust agricultural economy and a large informal or underground economy, have helped maintainboth cultural integrity and socioeconomic security. At the same time, Georgia has until recentlyenjoyed a comprehensive system of social welfare, including free health care, consumersubsidies such as bread and electricity funded from the state budget, and other welfare benefitprograms (i.e., pensions, disability, maternity, child care allowances). Health standards and lifeexpectancy have also been comparatively high, although substandard technologies have prevailedthroughout FSU countries. Historically, Georgian society has been acculturated to place highvalues on education. By the 1980s, the Georgian population was considered among the besteducated in the USSR.

3.63 Now, in the midst of a social and economic breakdown that is considered moreextreme than any other former Soviet republic, living standards in all socioeconomic classes havedropped precipitously since the late 1980s. Georgia's strong economic dependency on Russia,especially in the vital energy sector and other supplies, has made it particularly vulnerable to thecontraction of the Russian economy. Lay-offs, hyperinflation, and chronic shortages of basiccommodities such as bread have eroded livelihoods. Although precise statistical data are notavailable, it is now believed that 90 percent of the population currently lives below the povertyline. Health standards are declining in certain key areas, including a rise in infant and maternalmortality rates.

8. Poverty Alleviation

3.64 The proposed project will, by stemming the further deterioration of key municipalservices such as heating in hospitals, waste water treatment and landfill systems, and potable

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water supplies, help alleviate poverty to some extent, particularly the most vulnerable socialgroups. It is the more vulnerable groups, such as the sick, the poor, and refugees of war whosuffer disproportionately when basic services breakdown and the environment degrades. InBatumi, the clogged septic tanks overflow in neighborhoods of war refugees, while those mostdirectly exposed to the mismanaged and fast eroding landfill are impoverished grazers, garbagescavengers, and those in the area who depend on subsistence fishing and local river drinkingwater in order to survive. In Tbilisi, ensuring a minimal level of heat during the winter tohospital patients and school children, and upgrading potable water supplies and other urbaninfrastructure, contribute to the health and the welfare of marginalized groups, as well as thegeneral population. Rehabilitation of essential municipal services, and the direct linkage toenvironmental resource amelioration, is fundamental in the longer term strategy of povertyalleviation.

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PART IV. BENEFITS AND RISKS

1. Benefits

4.1 The proposed project will help rehabilitate essential infrastructure in key municipalitiesdamaged or rendered inoperable from the recent years of political conflicts and natural disasters.It will thus facilitate, in the near term, the government's macro-economic stabilization effortsand, in the long term, help provide the foundation for better managed, environmentally soundand supportive municipal service systems. Further deterioration and disruption of essentialservices would be unavoidable without this intervention, and could, for example in the case ofthe urban transport system in Tbilisi, become a significant obstacle to economic growth in theparticipating municipalities. Various project components are directly related to the preventionof environmental and health hazards. The Tbilisi Immediate Action Plan will help maintaincrucial health care services and educational programs during the winter. Smooth operation ofthe Agency (project implementation unit) will have a demonstration effect and show a workablealternative to traditional procurement procedures in Georgia. Through institutional development,the project will lay the foundation for further municipal management and environmental reformswhich will need to be addressed over the medium term.

2. Risks

4.2 There are several risks involved, primarily the risk of political instability in thecountry. The government is still in the process of consolidating its power and determininginstitutional responsibilities. To minimize potential problems or delays, the project isspecifically: a) focusing on specific rehabilitation objects, (b) establishing a non-bureaucraticimplementation Agency with special powers and capacity to undertake the implementationactivities in a appropriate manner, and (c) undertaking an initial emergency phase withprocurement activities in order to identify potential problems early in the project cycle.

4.3 The risk that the Agency may misuse its considerable independence will be mitigatedby the selection of a well-qualified manager, whose appointment will be acceptable to IDA.Close monitoring of the implementation of the Manual of Procedures and frequent external auditswill provide ample opportunity to deal with inadequate performance on the part of the Agency.

4.4 Local contractors may lack the financial or technical capacity required to implementthe project in a timely manner. To reduce this risk, the project has been designed to allow foradjustments of project content between cities and sectors during the implementation period. Thisrisk will also receive particular attention during the mid-term review.

4.5 It must be acknowledged that the general state of infrastructural disrepair is partly afunction of the lack of adjustment in the economy and of the resultant lack of cost recoverymechanisms. At present, no real assurance exists regarding the long term sustainability of theoperation. The macroeconomic and structural dialogue is now starting with Georgia and thisoperation will help reinforce the need for the continuity of this dialogue. To further mitigatethis risk, the need for maintenance management procedures will be emphasized in targetedtechnical assistance.

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PART V. AGREEMENTS AND RECOMMENDATIONS

5.1 The following agreements were reached during Appraisal:

(a) legal arrangements for the establishment of the Agency (para. 3.16);

(b) draft of the Project Management Agreement between the Government and theAgency (para. 3.20);

(c) appointment of, and signing of, a contract with an interim General Manageracceptable to IDA (para. 3.18);

5.2 The following agreements were reached during Negotiations:

(a) agreement on the Agency's signing authority for project contracts, bank accounts,and withdrawal applications (para. 3.35);

(b) agreement on the prequalification procedure of local consultants, contractors, andsuppliers (para. 3.23b);

(c) agreement on Terms of Reference acceptable to IDA for financial, and managerialaudit of the project (para. 3.41);

(d) agreement on the short list for financial, and managerial, audits (para. 3.41);

(e) agreement on the scope and dates for the Annual Reviews and the Mid-termReview (para. 3.46);

(f) agreement on the staffing of the Agency (para 3.18);

(g) agreement on the scope and time schedule for the Housing and MunicipalServices study (para. 2.9); and

(h) agreement on supervision plan (para. 3.54) and performance indicators (paras.3.52 and 3.54);

(i) The Bank must receive final Governmental approval of the negotiated CreditDocuments: Credit Agreement, Project Implementation Agreement, Manual ofProcedures, and Project Implementation Plan (para. 3.53);

5.3 Following the signing of the Credit Documents, the requirements for Effectiveness ofthe Credit Documents must be completed on behalf of the Borrower, in accordance with thefollowing provisions:

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(a) the Project Management Agreement shall have been cigned by the Borrower andthe Agency and is acceptable to the Association (para. 3.20);

(b) the Agency has adopted the Manual of Procedures and estabished an accountingsystem, both acceptable to the Association (para. 3.43);

(c) the Agency has opened the Project Current Account in a commercial bank (para.3.38);

(d) the Borrower has opened the Local Contribution Account in its National Bank andhas deposited an amount of $300,000 into such account (see para. 3.8); and

(e) appointment of, and signing of a contract with, independent auditors acceptableto IDA (see para. 3.41).

5.4 Subject to the above conditions, the proposed MIRP is suitable for a Credit to theGovernment of Georgia of US$18.0 million equivalent on standard IDA terms.

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Annex 1Page 1 of 3

DETAILED DESCRIPTION OF PROJECT INVESTMENTS

The Government is facing a difficult transition which has been exacerbated by the series of civilwars and earthquakes experienced over the past 3 years. The combination of these forces hasabsorbed virtually all available financial resources and has created a pervasive lack ofmaintenance and repair of basic infrastructure services, some of which are essential for publicsafety, health, and effective functioning of the economy. The concern for public health andsafety, and ultimately improving the welfare of the citizens of Georgia, are the fundamentalcatalysts that will operationalize these project investments.

Annex I provides an overview of the municipal services which will be affected by the investmentprojects, and background information supporting the conditions of the investment projects. TheAnnex focuses on the TIAP energy and transport projects in Tbilisi, followed by a discussionof the different water supply, wastewater and solid waste projects in Tbilisi, Batumi, and Poti.

Central heating systems. During the last several years, only a small portion of the districtheating systems were operational. These systems, which have supplied hospitals, governmentbuildings, schools, and other essential services, have suffered by receiving only the most basicmaintenance. Both district heating systems and local systems use natural gas as a primary fuel.Some district boiler houses use imported mazout as an emergency fuel. However, both naturalgas and mazout must be imported and due to the country's fiscal crisis (including substantialunpaid fuel bills), supplies of fuel have been meager and unreliable. Some fuel is expected tobe provided this winter with external financing from bilateral donors on an emergency basis.However, even when fuel is available, effective and reliable heat delivery is questionable giventhe system's large efficiency losses due to inadequate maintenance. Auxiliary equipment andmaterials such as pumps, motors, valves, pipes, and cables are urgently required to increase boththe functioning and reliability of the system. As a result of the present heating crisis in schools,children have been unable to attend school during the winter (3 months) over the last two years.Similarly, due to intolerable temperatures, hospitals have been underutilized during the past twowinters. Only the most needy remain in hospitals. Others, who are also in need ofhospitalization but are not willing to stay in the present conditions, seek treatment at theoverburdened ambulatory care clinics.

Power Supply. In the past, about 50% of Georgia's electricity was generated by hydropowerplants. The other 50% was derived from natural gas-fired thermal plants. Coal once was usedsince Georgia has substantial deposits, but gas was substituted in the 1970s because it wascheaper then). Today, thermal generation is almost non-existent due to the lack of importedfuel. Hydropower does not have the capacity to meet electrical demand, especially during the

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Annex 1Page 2 of 3

winter. Huge inefficiencies exist in the system on both production and distribution. As a result,the Tbilisi Power Distribution Company must ration the electricity supply through load-sheddingto the residential sector. Since most hospitals share electricity lines with the residential sector,their power is also rationed.

Urban Transport. Most Georgian municipalities are served by publicly-owned bus operationsthat are in a serious state of disrepair. Tbilisi's public transit system has two autonomous parts:Thiltrans, the above-ground transport service, which serves an estimated 150,000 passengers perday, and underground Metro, serving about 950,000 passengers daily. In 1988, when theoperation was fully operational, Tbiltrans fleet included 600 buses, 150 trolley buses and 80trams. Today, one third of the vehicles are in operation, and the other two-thirds are eitherunder repair or cannibalized for spare parts. The Metro has two lines, together about 30 km,and 233 cars, 150 of which are in operating condition. Fares are set by the central Governmentand are well below cost. In order to restore service, the city has begun franchising buses tocommercial operations. Drivers are responsible for fuel and spare parts, and can charge faresto cover costs, including a fee for leasing the buses and a 15% profit. In addition to aninadequate fleet, obsolete equipment and lack of spare parts, improper maintenance, restrictedelectricity supply to both underground and above-ground systems, as well as unrealistically lowfares, the system exempts 50% of the passengers (elderly, school children, pensionners, militaryand others) from payment. Two other problems make the Tbilisi Metro potentially dangerous.First, the central control room burned in a fire last year and, despite some rehabilitation, is notfully functional. Secondly, accumulating water from leaking pipes in the underground, and thelack of adequate pumps to extract the water, poses a serious danger of electrocution.

Water Supply. As one of the nation's most critical resources, water supplies are inconsistent,poorly managed, and, in some cases, increasingly contaminated. In Tbilisi, water is derivedfrom two main sources, both located about 40 kilometers from the city. The supply anddistribution system is currently suffering from two major problems: (i) poor condition ofequipment, and (ii) poor quality and unreliability of electricity supply. The net result is that thedistribution network has no spare capacity. In Batumi, in addition to 150,000 inhabitants of thecity, the water supply system serves an additional 50,000 surrounding rural inhabitants. Batumihas two river intakes approximately 25 to 30 kilometers upstream from the city, as well as aborehole field with 30 boreholes to the southeast. Although the two river sources appear ableto supply a sufficient quantity of water, reliability is seriously affected by the quality of the riverwater, which deteriorates rapidly from high turbidity during frequent storms. During high floodstages, the population is wholly dependant on the borehole supply, which is unreliable due tothe limited electricity supply from the Batumi grid. In addition, there are pressure problems inthe distribution network, placing considerable strain on the capacity of the system.

Wastewater Treatment. The wastewater disposal facilities for Tbilisi consist of a gravitysewerage system with a collector pipeline connecting the city to the treatment works at thenearby Gardabani facility. Due to numerous leakages, there is high infiltration to ground water.

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Annex 1Page 3 of 3

In Poti and Batumi, the sewers are in very poor condition, with limited capacity, malfunctioningpumps, and unreliable electricity supply. As a result, sewerage often floods the streets of thecities and nearby rivers, posing a public health risk and running off untreated to further pollutethe marine waters of the Black Sea coast. These municipal service problems in Batumi and Potihave been identified as environmental "hot spots" by the international consortium for cleanupof the Black Sea, supported financially by the Global Environment Facility (GEF).

Solid Waste Disposal. In most municipalities, solid waste is collected by a fleet of conventionalopen-bed trucks operating in conjunction with a number of compactor trucks. In each of thethree project cities, the collection vehicle fleet is inadequate and suffers from a lack of parts andmaintenance. There are nuineroLIs interrelated management problems in the solid waste sector,including health and safety hazards as well as environmental contamination. Wastes are notspread, compacted, nor covered on a regular basis. Slopes and grades of landfills are notmaintained to channel surface water runoff and minimize leachate contamination. Access isuncontrolled, access roads are inadequate, and fires burn openly. In Batumi, the collection fleetdelivers waste to a landfill directly sited on the Chorokhi River delta of the Black Sea. Whenthe river reaches flood stage, entire sections of the landfill are eroded and washed into the BlackSea, depositing debris along Batumi's city shoreline. Even in non-flood periods, the river watercourse consistently undercuts the landfill banks, leading to the collapse of waste material intothe river.

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Annex 2Page I of 6

The Black Sea CoastIntegrated Coastal Zone Managem..nt Program

I. INTRODUCTION

1.0 The initial activities for the development of Georgia's Integrated Coastal ZoneManagement (ICZM) Program, as currently envisioned, will be funded by both GEF Black Seafunds, where available, as well as by the Institutional Development component of the MunicipalInfrastructure Rehabilitation Project (MIRP) credit. Certain project investments in municipalinfrastructure, namely wastewater treatment and landfill systems in the coastal cities of Batumiand Poti, were identified and prepared with financial assistance from the GEF Black Seaprogram. They are designed to mitigate further deterioration of the environment, particularly asit relates to increasing threats to public health. This will be achieved through improvements inwater quality, wastewater treatment, garbage collection and disposal. For the first time, theseinvestment activities will operationalize studies and identified needs in the GEF Black SeaEnvironmental Program's Urgent Investment Portfolio for Georgia, thereby providing a directlink and foundation for an emerging, long-term, multi-sectoral plan of improved coastal resourcemanagement. The program for coastal zone management will attempt to raise additional grantfunds to support many of its proposed activities for the longer term, while at the same timehelping to identify future municipal investment opportunities.

II. THE BLACK SEA: Environmental Setting

2.0 Known to the ancient Greeks as "Pontos Axenos", or the inhospitable sea -- named forits rough storms and warring inhabitants -- today the Black Sea has become one of the world'smost polluted water bodies. Formed by tectonic plates and characterized by vast depths (6000feet) and a huge inland area (160,000 square miles), the Black Sea is tenuously connected to theworld's oceans by the narrow, 19-mile Straight of Bosphorus leading into the Mediterranean Sea.The basin's geomorphology has influenced the sea's ecological history. Lacking a goodmechanism for water exchange with larger oceans, the land-locked Black Sea has historicallydeveloped into two separate seas, one atop the other. A fertile, biologically productive waterbody is underlain below 450 feet by an enormous anoxic or oxygenless layer which supports nolife. The two layers fail to blend due to differences in density and salinity. Without regularintra-mixing between bodies, nor regular flushing to outside oceanic sources for renewal, the toplayer is trapped, akin to a closed pool of water and highly vulnerable to excessive pollutionloading.

2.1 The Black Sea is the only warm water, marine environmental resource for all of EasternEurope. Draining an area of 2.5 million square kilometers through more than 300 rivers of 17nations, the basin stretches from Germany to Belarus and Russia. It is thus affected by theupstream activities of some 165 million people and receives thousands of tons of toxic pollutants

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Annex 2Page 2 of 6

and sewage every year. The sea's vulnerability stems from a combination of itsgeomorphological isolation and its massive quantities of land-based pollution. This has createda major crisis of eutrophication, or overfertilization of the sea by nutrient loading. It has alsoled to the further elevation and spread of anoxic conditions which shortens the marine food chainand results in declining productivity of coastal food resources. Due to a combination of factors,including increased anoxic conditions from nutrient enrichment, a loss of top predators fromoverfishing, and the loss of benthic habitats -- which reduces breeding and hiding grounds forsmall fish, molluscs and crustaceans -- the Black Sea is now dominated by an exotic species ofsingle-celled jellyfish (Mnemiopsis leidyi).

2.2 Three decades ago, the Black Sea fishery, characterized by mackerel, sturgeon, shad,shrimp, mullet, bonito, anchovies, oysters, and blue mussels, was five time richer than theneighboring Mediterrean. Its shallow northeast arm, the Sea of Azov, was the second mostproductive source of fish per acre in the world. In the past, over two million coastal inhabitantsderived their livelihoods from the Black Sea fishery. Yet over the last decade the number ofcommercial species has plummeted from 26 to five, and ten marine species which live orreproduce along the Black Sea coast have disappeared entirely. Today, the economic losses alonefrom Black Sea pollution are enormous, estimated to range up to US$1 billion a year. Situatedin a region undergoing massive political and economic transition, the degenerating Black Seasymbolizes another environmental tragedy of Communism.

111. GEORGIA'S COAST: Background and Threats

3.0 Georgia's 350 kilometer long Black Sea coastline exhibits a rich ecological andgeological diversity of subtropical and temperate habitats (See Map 2). The subtropical climateembraces a year-round growing season for many plant species, including citrus fruits, maize,bamboo, and conifers. The Greater and Lesser Caucasus ranges to the north and south shelterthe coast from the cold, easterly winter winds which are driven by arctic air masses. In addition,the Black Sea functions as a heat sink, further moderating winter temperatures. Characterizedby marshes and wetlands along much of the coast, and steep cliffs and mountains in the north,major habitat types include nearshore marine fishery areas, coastal barrier dunes, extensive peatbeds and marshlands, coastal deltas, and dynamic braided rivers. The extremes of elevation,hydrological regimes, and immediate proximity to both mountains and the Black Sea provideabundant niches within a narrow range for a large variety of waterfowl, mammals, andtemperate and subtropical vegetation.

3.1 Georgia's Black Sea coast, with a watershed encompassing almost 40% of the nation'spopulation, faces an ecological crisis. Decades of uncontrolled pollution from raw sewage,agricultural runoff, and industrial discharges in watershed rivers and the key port cities ofBatumi, Poti, and Sukhumi, have devastated coastal waters, killing off or seriously threateningnatural animal and plant life. The ongoing deterioration in coastal and marine water quality isnow leading to a serious decline in biodiversity, a breakdown in productivity and functioning of

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Annex 2Page 3 of 6

ecological processes, and a growing threat to public health. Intensive over-fishing, and theabsence of a coherent national strategy for addressing unsustainable harvesting and pollutionproblems, have resulted in a total collapse of commercial fishing. A once-thriving tourismindustry, in which Georgia's coastline was the most popular along the entire Black Sea, has alsobeen badly undermined.

3.2 Important wetlands, such as vegetative floodplains and marshes in Georgia's Kolkhetilowlands near Poti, have traditionally served as natural filters, trapping pollutants and sedimentsfrom the rivers, and providing natural tlood protection. Wetland plants also mitigateeutrophication by helping absorb excessive nutrients, while wetland soils favor the breakdownand release of nitrogen by certain bacteria. Bays and estuaries have historically providedspawning ground habitat, fundamental to the reproductive lifecycle of Black Sea fisheries. Thecoastal margin has been severely altered during the past one hundred years from the upland andlocalized impacts of draining the majority of these Kolkheti wetlands for agriculture. Theremaining wetlands are now threatened and malfuLnctioning due to unregulated development, peatmining, channelization, and excessive pollution from wastewater, agriculture, and industrialsources. At this stage, stemming further deterioration of coastal resources is an urgent priorityfor ecological viability and economic recovery.

3.3 As a result of environmental degradation, public health is being seriously jeopardized onGeorgia's Black Sea coastline. The most prevalent source of coastal pollution is untreated, orinsufficiently treated, sewage. Sewage treatment has been identified by numerous Georgianexperts as the most critical priority for the nation's coastal amelioration effort. At present, allof Georgia's coastal wastewater facilities -- where they even exist in the major cities -- are eithermalfunctioning or completely dysfunctional. Municipal wastewater contributes significantly tothe effluent mix of organic materials and nutrients, spreading disease through pathogenicmicrobes. Sewage frequently backs up in the streets of Batumi, Poti and other communitiesbefore running off untreated to the sea. The quality of drinking water is compromised in manycases by contamination from polluted wastewater. The health of Georgia's citizens is growingworse as a result, with increases in the incidence of intestinal and other water-related diseases.Research indicates that digestive ailments in the coastal population are twice the nationalaverage. Beaches in Batumi and Poti are closed for a portion of every year due togastrointestinal outbreaks or occasional incidences of cholera.

3.4 The Black Sea's natural resources have already been adversely affected by many yearsof poorly planned and mismanaged activity. Compounding the situation has been the nation'srapid economic decline. This has forced decision-makers into a crisis management mode, whilealso tending to divert attention away from fundamental environmental issues that threaten longer-term economic viability. A mnajor challenge for Georgia, and other countries in the region, isto survive the difficult period of transition to market-oriented, stIstainable development withoutrreversibl y da;n:mi- n I in r s. paiticuLrlFy the strategic Black Sea coastal region.There is a consensus among the highest governmental levels that the development of an

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Annex 2Page 4 of 6

Integrated Coastal Zone Management program could provide the necessary framework andimpetus for sounder development planning on the coast. The current timing of the MIRP creditprovides an unusual window of opportunity to pursue this important goal as Georgia movesthrough its transitional period.

IV. PROPOSED COASTAL PROGRAM

4.0 The Municipal Infrastructure Rehabilitation Project offers a clear linkage to Black Seaenvironmental initiatives by including two components: (a) Project Investments for municipalservices (mainly wastewater and landfill systems) in Batumi and Poti, involving a total of overUS$4 million or about one fifth of total project cost. These activities will, in addition topreventing further deterioration in essential community services, provide environmental benefitsby reducing the threats of contaminated water to human health; and b) Project InstitutionalDevelopment and Technical Assistance totaling about $100,000 to support immediate priorityactivities which will help establish and leverage a longer-term ICZM program and will, amongother things, help identify future municipal investment opportunities, address institutional andmanagerial impediments to coastal environmental improvement, and initiate a comprehensiveevaluation process that aims to further identify and ameliorate some of the additional criticalpollution "hot spots" on Georgia's coast. Certain of these hot spots have already been identifiedby the Black Sea Environmental Programme, including the Batumi oil refinery. Expendituresof the proposed "seed" funds of $100,000 for the coastal program under the MIRP credit willbe closely tied to the municipal investments and will help leverage future funds, ideally on agrant or concessional basis from the GEF, foundations, or bilateral sources. These funds willsupplement currently available GEF funds for coastal zone management.

V. SHORT TERM COASTAL ACTIVITIES

5.0 The objective of this coastal resource program is to achieve the stabilization,rehabilitation and, ultimately, sustainable management of essential ecological and socio-economicassets along Georgia's Black Sea coast. The short-term investments in municipal infrastructure,which will improve coastal water quality, are strategic first steps that provide a foundation foran emerging ICZM program. The following program of specific activities embraces some ofthe most fundamental problems and priorities identified by the Government as well as GEF andBank missions. They are estimated to cost a total of $215,000 over the next 1-2 years, andwill be funded from a combination of GEF Black Sea funds and the allocated $100,000 forICZM under the MIRP credit. They will be implemented in a closely coordinated fashion, asfollows:

i) Rioni River Watershed Field Reconnaissance (Fall, 1994): to identify future municipalinvestment and pollution "hotspot" needs, investigate hydrological and ecological conditions ofthe most important coastal watershed draining the Kolkheti wetlands, and identify potentialconservation and development activities along the Rioni River.

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Annex 2Page 5 of 6

ii) Public Environmental Awareness Program on Coast: initial activities include a documentaryfilm by Georgian NGO coalition on key ecological issues as related to municipal serviceinvestments on the Black Sea and an organizational workshop for ICZM planning in December,1994. Other program activities with NGOs and the Georgia Public Relations firm include TVPublic Service Announcements and teacher training for environmental education.

iii) Regional Film on Ecology of the Black Sea by combined international and Georgia team.

iv) Coastal Point Source Pollution "Hotspot" Study to identify future investment needs andBatumi Oil Refinery Environmental Audit and Terms of Reference for comprehensive, integratedfeasibility study on its future role in meeting Georgia's energy requirements.

v) Kolkheti Wetland Information Synthesis Study to support process of management planningfor park designation in collaboration with WWF-Georgia and Lake Paliostomi Channel OptionsStudy.

vi) Municipal Level Environmental Assessment. Monitoring and Management Training in twophases: i) Batumi and Poti wastewater treatment and landfill enterprises and ii) othermunicipalities to build capacity to manage future investments.

5.1 Additional activities related to the coastal environmental improvement program, also tobe financed under other investment components of the MIRP credit, are as follows:i) hydrological engineering feasibility study for proposed Choroki river diversion to help stabilizethe landfill erosion in Batumi; ii) Batumi landfill topography survey; iii) Choroki river diversionworks (pending feasibility and topography study).

VI. OTHER INSTITUTIONAL ACTIVITIES

6.0 Despite its political and economic situation, Georgia continues to exhibit strong nationalwill and commitment to longer term efforts to rehabilitate its coastal zone and improve theregional ecology of the Black Sea. In 1992 in Bucharest, the country ratified the Convention onthe Protection of the Black Sea against Pollution and its Protocols. This was followed the nextyear in Odessa by a higher level and more broad-based Ministerial Declaration on the Protectionof the Black Sea, which among other things, advocates conservation of biodiversity, and ICZMpolicies and planning. This year, Georgia signed the 1992 Biodiversity Convention. Georgiahas also applied to the international Ramsar Convention, which protects geographicallyrepresentative wetlands of international significance, and has nominated the Kolkheti wetlandcomplex for Ramsar designation. All six coastal countries are currently negotiating a secondConvention on Fisheries which would institute catch quotas.

6.1 To achieve effective rehabilitation of the Black Sea, including the regulation of its useto ensure resource recovery and renewability, a common regional management regime must be

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Annex 2Page 6 of 6

coordinated among all six coastal nations (as well as the additional nine countries lying in thedrainage basin of the Black Sea). While a momentous task, a positive start has been made onmultiple fronts. Georgia has joined with the five other Black Sea coastal countries andinternational organizations to launch a Programme for the Environmental Management andProtection of the Black Sea (BSEP). The programme is financed from 1993-95 by the GlobalEnvironment Facility (GEF), a trust fund managed by the World Bank, the United NationsEnvironment Program (UNEP) and the United Nations Development Programme (UNDP). TheBlack Sea Project Coordination Unit in Istanbul coordinates this regional approach, and financesspecial studies, regional workshops, and training, with the objective of serving as a catalysttoward the coordinated, sustainable use of common property natural resources such as the BlackSea. A primary goal of the BSEP program is to use these studies to inform and attract specificoperational investments from international donors.

6.2 Over this past year, with support from the BSEP, each coastal country has establisheda regional center of specific expertise, supported technically by Working Party groups; Georgia'sregional "Biodiversity Activity Center" has been established at the Fishery Research Institutein Batumi. In collaboration with the Biodiversity Working Party, the Center is completing thecompilation of a National Biodiversity Review report and maps on the current status of coastaland marine resources of Georgia. The Institute of Geography in Tbilisi is serving as the DataManagement focal point for the BSEP program.

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Page 1 of 2

Housing and Municipal Services Sectoral StudyTerms of Reference

Objectives of the Study

During implementation of the proposed Municipal Infrastructure Rehabilitation Project (MIRP), aninformal study will be undertaken to identify future investment opportunities for the Bank's next lendingprogram to Georgia in the sector. Since the proposed MIRP addresses urgent municipal infrastructureneeds, the next lending program should include medium-to-longer term infrastructure investments. Thestudy should investigate the state of housing and municipal services in the country, as well as efficiencyof the delivery process. The study should ultimately produce a sector strategy which prioritizes futureinvestment opportunities.

Scope of the Study

Investment Opportunities

The assessment of housing and municipal services should include both an investigation ofinfrastructure needs not addressed under the MIRP (e.g. housing) as well as a secondary-phaseinvestigation of those problems which were identified but, due to their relatively lower priority andlimited resources, could not be included in the proposed lending program. The study should includethe following sectoral areas:

a) primary investment opportunities in housing construction, especially in: i) old Tbilisi, andparticularly in those buildings which have been deemed structurally hazardous by the municipality,and ii) Western Georgia, where a great proportion of the housing stock was demolished duringrecent civil strife;

b) primary investment opportunities for rehabilitating the heating and utilities infrastructureinside residential buildings;

c) secondary investment opportunities in urban transport, water and sewerage, and solid wastemanagement that exceed the MIRP's primary objective to mitigate further deterioration ofinfrastructure. The future investments identified should include, in addition, a rationalization andcomprehensive analysis of the existing systems.

In addition to investigating a wider range of sectoral areas, the study should explore investmentopportunities in other municipalities, among others, Kutaisi - the second largest city in Georgiacharacterized by many of Tbilisi's same sectoral problems.

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Annex 3Page 2 of 2

Technical Assistance Opportunities

In addition to investigating investment related opportunities, the study should also encompass aninvestigation of policy issues, legislation, and financing arrangements surrounding the delivery ofmunicipal services and current housing situation in selected municipalities. The generalcharacteristics of the finances of the municipal and intergovernmental fiscal relations systems inGeorgia should also be studied in order to provide the World Bank with a better understanding ofthe strengths and weaknesses of the current systems, new policies being considered in theParliament, and the potential impact on future Bank lending operations.

The technical assistance component can be broken down into three components:

1) municipal financing arrangements, including:

a) expenditure responsibilities;b) revenue sources;c) revenue generating capacities of the municipality;d) revenue-sharing between central and local governments;e) subsidies;

2) housing maintenance and privatization arrangements, including:

a) housing laws;b) housing privatization procedures;

3) operational arrangements, including:

a) responsibility for delivery of urban services;b) decentralization and reform of an institutional setup for delivery of urban services.

The study would be financed under the proposed lending operation in an effort to facilitate theexpediency under which a subsequent program in the sector could be initiated. It is estimated tocost approximately US$65,000.

Municipal Infrastructure Rehabilitation ProjectAnnex 4

Detailed Costs Page 1 of 4(US$ '000)

Base Cost Totals Including Contingencies Foreign Local Duties &TBILISI INVESTMENT PROGRAM 94/95 95196 96197 Total 94/95 95/96 96t97 Tolal Exch. Costs Taxes TotalA. Heatina/Enerpy saving

a. PrFimfary weath. of 200 schools and 23 hospitalsSupply of glass 300.00 0.00 0.00 300 00 333 59 0.00 0.00 333.59 251.09 82.50 0 00 333.59Door repair material 100.00 0.00 0.00 100 00 111.20 0 00 0.00 111.20 83.70 27 50 0 00 111.20Othermaterials(caulking,wood) 132.00 0.00 0.00 13200 14678 0.00 0.00 14678 11048 36.30 000 146.78Building works contracts 450.00 0.00 000 450 00 500 38 0.00 0 00 500 38 376.63 123.75 0 00 500.38Shippingcompany(glass) 10.00 0.00 0.00 1000 11 12 0.00 000 11 12 8.37 275 000 11.12Warehouse space 5.00 0.00 000 500 5.56 0.00 000 5.56 418 1 38 000 5.56Quality control team 20.00 000 0 00 20 00 2224 0 00 0 00 22.24 16 74 5.50 0 00 22.24

Subtotal Primaryweath. of200 schoolsand 23 hospitals 1,017.00 0.00 000 1.01700 1,13087 000 000 1,13087 851.19 27968 000 1,130.87Direct electriciy feeds to 15 hospitals 76.25 112.85 115 90 30500 84 79 128.32 134.68 347 79 26391 83.88 0 00 347.79Installation of direct lines 5000 74 00 7600 20000 5560 84 14 88 32 228.06 17306 55 00 0 00 228.06Supplyfinstall diesel generators (2 hospitals) 37.50 5550 5700 15000 4170 63.11 66.24 171.04 129.79 41 25 000 171.04Supply of glazing kis 150.00 200.00 7500 42500 166.79 227.42 87.15 481 37 364.49 116.88 000 481 37Installationof glazing kis 8000 120.00 10000 30000 8896 136.45 116.21 341.61 259.11 82.50 000 341.61Roof insulatingmaterial 25.00 37.00 3800 10000 27.80 42.07 44.16 114,03 8653 2750 000 114.03Install roof insulating material 12.50 18.50 1900 5000 1390 21.04 22.08 5701 43.26 13.75 000 57.01Boilers (hospitals) 450.00 0.00 0.00 45000 50038 000 000 50038 376.63 123.75 000 500.38Installation of boilers 54.00 0.00 0.00 54 00 60 05 0 00 000 60 05 45.20 14.85 0 00 60.05Repair of 1 boiler house 0.75 1.11 1.14 300 0.83 1.26 1.32 3.42 2.60 0.83 000 3.42Rehabilitateheatingsystems(upto50schools) 15000 500.00 350.00 1,00000 166.79 568.54 406.72 1,14206 867.06 275.00 000 1,142.06Quality control 1250 1850 19.00 5000 13.90 21.04 22.08 5701 43.26 13.75 000 57.01

Subtotal Sec. weath. for 200 schools and 23 hospitals 1,098.50 1,137A46 851 04 3,087 00 1,221 49 1,293 39 98896 3,503 83 2,654.91 848 93 0.00 3,503.83Subtotal Heating/Energy saving 2,115.50 1,137.46 851.04 4,104.00 2,352.36 1,293.39 988.96 4,634.70 3,506.10 1,128.60 0.00 4,634.70B. Urban Transport

1. Tbilisi MetroLocomotive traction motors 35.00 0.00 0.00 35 00 39.00 0.00 0.00 39.00 35.15 3.85 0.00 39.00Spare parts for traction motors 20.00 0.00 0.00 20 00 22.29 0.00 0.00 22.29 20.09 2.20 0 00 22.29Spare parts formetrocarfiages 1900 0.00 0.00 1900 21.17 0.00 0.00 21.17 19.08 2.09 000 21.17Batteriesandelectricalitemsforcarriages 1600 0.00 0.00 1600 17.83 0.00 0.00 17.83 16.07 176 0.00 17.83Modernizefarecollectionsystem 0.00 132.50 132.50 26500 000 151.65 155.62 307.26 278.11 2915 000 307.26Spare parts for rolling stock 101.25 149.85 153.90 40500 112.83 171.50 180.75 465.08 420.53 44.55 000 465.08Rehabtitatepumpingstations 11380 120.40 20.90 25510 12681 137.80 24.55 28916 261.10 2806 000 289.16Rehab. escalators 0.00 350.00 100.00 45000 0.00 400.58 117.45 51802 468.52 49.50 000 518.02Upgrading power supply 238.80 305.40 210.90 755 10 266 11 34953 24770 863.33 780.27 8306 000 863.33Rail rehabilitation 42.50 62.90 64.60 17000 47.36 71.99 75.87 195.22 176.52 1870 000 195.22Miscellaneous equipment 60.00 88.80 91.20 24000 66.86 101.63 107.11 275.60 249.20 26.40 0.00 275.60

Subtotal Tbilisi Metro 646.35 1,209.85 774.00 2,630 20 720.26 1,384.67 909.04 3,013.98 2,724.65 289.32 0 00 3,013.982. Tbiltrans

Trolley and overhead cable 75.00 0.00 000 75.00 83.58 0.00 0.00 83.58 75.33 8.25 0 00 83.58Spare parts (engines, gear, brakes, etc.) 167.50 247.90 254.60 670.00 186.65 283 72 299.02 769.40 695.70 73.70 0 00 769.40Spare parts for trolley buses 163.75 242.35 24890 655.00 182.48 277.37 29233 752.17 68012 72.05 0.00 752.17Purchase of inspection and repair truck 15.00 22.20 22.80 60.00 16.72 25.41 26 78 68.90 62.30 6.60 0.00 68.90

Subtotal Tbiltrans 421.25 512.45 526.30 1,46000 46942 586.50 618.12 1,674.04 1,513.44 160.60 0.00 1,674.04Subtotal Urban Transport 1,067.60 1,722.30 1,300.30 4,090.20 1,189.69 1,971.17 1,527.16 4,688.02 4,238.10 449.92 0.00 4,688.02

Municipal Infrastructure Rehabilitation ProjectAnnex 4

Detailed Costs Page 2 of 4

(LJS$ 000)

Base Cost Totals Including Contingencies Foreign Local Duties &TBILISI INVESTMENT PROGRAM 94/95 95/96 96/97 Total 94/95 95/96 96/97 Total Exch. Costs Taxes Total

C. Water supply1 Excavators and cranes 23000 0 00 0 00 230 00 256,49 0 00 0.00 256 49 243 84 12 65 0 00 256 492. Lorries. pipe lorry and trailor, transporter and trailor 140 00 0 00 0 00 140 00 156 12 0 00 0 00 156 12 148 42 7 70 0 00 156 123 Main repair vehicles 150.00 0 00 0 00 150 00 167 27 0 00 0.00 167 27 159 02 8 25 0 00 167 274 Laboratory equipment 800 11 84 12 16 3200 892 1358 14.33 3663 3507 1 76 000 36835 Chlorination dosing equipment and pipework 17,50 25 90 26 60 70 00 19,52 29 71 31.35 80,57 76 72 3 85 0 00 80,576 Supply/installation short wave radio communications network 25 00 75 00 100 00 200 00 27 88 86.02 117.86 231 76 220 76 11 00 0 00 231 767 Spare parts for electrical gear (pumping stations) 35.00 0 00 0 00 35 00 39 03 0.00 0.00 39 03 37 11 1 93 0 00 39.038 New pumps (w/ electrical motors) 193 00 0 00 0 00 193 00 215 22 0 00 0.00 215 22 204.61 10 62 0 00 215,229 High voltage motor statorsforpump motors 17200 000 0 00 172 00 191.81 000 000 191 81 182 35 9 46 000 191.81

10 Replacement electric motors 30.00 7000 0 00 100 00 33.45 80 29 000 113 74 108 24 5.50 0 00 113 74Subtotal Water supply 1,000.50 182.74 138.76 1,322.00 1,115.71 209.60 163.54 1,488.85 1,416.14 72.71 0.00 1,488.86

D. Wastewater1 Sewer cleaning equipment 22.50 33.30 34 20 90 00 25.06 38 03 40 03 103.11 88 26 14 85 0 00 103.112 Spare parts forsewer repairs 1250 1850 1900 5000 13.92 21 13 22.24 5728 4903 8625 000 57.283. Sewer renovation 75.00 111.00 114 00 300 00 83.52 126.77 133.42 343.70 294.20 49 50 0 00 343.704. Gardabani wastewater treatment plant (renovation) 42.50 6290 6460 17000 47.33 71 83 7560 19476 16671 2805 000 19476 o

Subtotal Wastewater 152.50 225.70 231.80 610.00 169.82 257.76 271.28 698.86 598.21 100.65 0.00 698.86

E. Landfill1 Used compactor garbage transfer trucksand spare parts 121 50 18000 000 301 50 13539 20601 000 341 40 30824 3317 000 341.40

2 Spare parts for repair of existing vehicles 1600 0 00 0 00 18 00 20.06 0 00 0.00 20.06 18 08 1.98 0 00 20.06Subtotal Landfill 139.50 180.00 0.00 319.50 155.45 206.01 0.00 361.46 326.32 35.15 0.00 361.46

Total Tbilisi Investment Program 4,475.60 3,448.20 2,521.90 10,445.70 4,983.02 3,937.92 2,950.95 11,871.89 10,084.86 1,787.03 0.00 11,871.89

M Tblcomt Ax4

Municipal Infrastructure Rehabilitation ProjectAnnex 4

Detailed Costs Page 3 of 4(US$ '000)

Breakdown of Totals Incl. Cont.Base Cost Totals Including Contingencies Foreign Local Duties &

94/96 96/96 96/97 Total 94/96 95196 96197 Total Exch. Taxes Total

BATUMI MUNICIPALITYA. Water supply

1. Supplyfinstallation of diesel generator 60.00 50.00 0.00 110.00 66.91 57 35 0.00 124.26 118.21 6.05 0.00 124.262. Supplyfinstallationof boreholepumps 80.00 100.00 100.00 280.00 89.21 11470 117.86 321.77 306.37 15.40 0.00 321.773 Equipment for main repairs 50.00 72.00 50.00 172.00 55.76 82 58 58.93 197.27 187.81 9.46 0.00 197.274 Spare pipes for water main repairs 50.00 38.00 0.00 88.00 55.76 4358 000 99.34 94.50 4.84 0 00 99.345. Communications network 10.00 40.00 000 5000 11 15 4588 000 57.03 54 28 2 75 000 57.036. Chlorination dosing equipment 20.00 0.00 0.00 2000 2230 0 00 0.00 22.30 21.20 1 10 000 22 30

Subtotal Water supply 270.00 300.00 150.00 720.00 301.09 344.09 176.79 821.97 782.37 39.60 0.00 821.97B. Wastewater

1. Sewer cleaning equipment 20.00 29.60 30.40 80.00 22.30 33.95 35.83 92.08 87.68 4 40 0 00 92.082. Spare parts for sewer repairs 10.00 1480 15.20 40.00 11.15 16.98 17.91 46.04 4384 220 0.00 46.043 Sewer renovation 101.25 149.85 153.90 405.00 112 91 171 87 181.39 466.17 443.90 2228 0.00 466.174 Upgrading 3 Pumping Stations 100.00 148.00 152.00 400.00 111.52 169 75 179.15 460.42 438.42 22.00 0.00 460.42

Subtotal Wastewater 231.25 342.25 351.50 925.00 257.88 392.55 414.28 1,064.71 1,013.84 50.88 0.00 1,064.71C. Landfill

1 Newlandfiflcompactor/dozer 50.00 74.00 76.00 200.00 55.68 84.51 88.95 229.13 196.13 3300 0.00 229.132 Tractorandtrailor (garbage collection) 10.00 14.80 1520 40.00 11.14 16.90 17.79 45.83 39.23 6.60 0.00 45.833. Spare parts (garbage vehicle maintenance) 3.75 5.55 570 15.00 4.18 6.34 6.67 17.18 14.71 2.48 0.00 17.184. River engineering works 58.50 86.58 88.92 234.00 65.14 98.88 104.07 268.09 229.48 38.61 0.00 268.09

Subtotal Landfill 122.25 180.93 185.82 489.00 136.13 206.63 217.47 660.23 479.66 80.69 0.00 560.23Total BATUMI 623.50 823.18 687.32 2,134.00 695.10 943.27 808.64 2,446.91 2,276.76 171.16 0.00 2,446.91

POTI MUNICIPALITYA. Wastewater

1. Sewer cleaning equipment 19.50 28.86 29.64 78.00 21.73 33.03 34.81 89.57 80.99 8.58 0.00 89.572. Spare parts for sewer repairs 20.00 29.60 30.40 80.00 22.29 33.88 35.70 91.87 83.07 8.80 0.00 91.873. Sewer renovation 25.00 37.00 38.00 100.00 27.86 42.35 44.63 114.84 103.84 1 1 .00 0.00 114.844. Refurbishment of 4 sewage pumping stations 83.75 123.95 127.30 335.00 93.33 141.86 149.51 384.70 347.85 36.85 0.00 384.705. Tractors and tanks (for septic tanks) 35.00 51.80 53.20 140.00 3900 59.29 62.48 160.77 145.37 15.40 0.00 160.77

Subtotal Wastewater 183.26 271.21 278.64 733.00 204.21 310.40 327.14 841.74 761.11 80.63 0.00 841.74B. Landfill

1. Landfill equipment 42.50 62.90 64.60 170.00 47.36 71.99 75.87 195.22 176.52 18.70 000 195.222. Spare parts/maintenance 12.00 17.76 18.24 48.00 13.37 20.33 21 42 55.12 4984 5 28 000 55.12

Subtotal Landfill 64.50 80.66 82.84 218.00 60.73 92.32 97.29 250.34 226.36 23.98 0.00 250.34Total POTI 237.76 351.87 361.38 951.00 264.94 402.72 424.43 1,092.08 987.47 104.61 0.00 1,092.08

OTHER MUNICIPALITIESA. Equipment 225.00 333.00 342.00 900.00 250.73 381.12 401.67 1,033.52 934.52 99.00 0.00 1,033.52B. Civil works 225.00 333.00 342.00 900.00 250.73 381.12 401.67 1,033.52 934.52 99.00 0.00 1,033.52

Total OTHER MUNICIPALITIES 460.00 666.00 684.00 1,800.00 501.46 762.24 803.34 2,067.03 1,869.03 198.00 0.00 2,067.03

otherC.goo

Municipal Infrastructure Rehabilitation ProjectAnnex 4

Detailed Costs (USS '000) Page 4 of 4

Base Cost Totals Including Contingencies For. Local Duties94/95 95/96 96/97 Total 94/95 95/96 96/97 Total Exch. Costs &Taxes Total

I Agency's CostsA. Equipment

Computers and small equipment 4,50 2 80 0 00 7.30 5 01 3 20 0 00 8 22 7 42 0 80 0.00 8.22Printer and typewriter 1 70 1 50 0 00 3 20 1 89 1 72 0 00 3 61 3 26 0 35 0.00 3.61Photocopier 4 00 0.00 0 00 4 00 4 46 0 00 0 00 4 46 4 02 0 44 0.00 4 46Fax machine and telephones 1 50 0 50 0 00 2 00 1.67 0 57 0 00 2 24 2 02 0 22 0 00 2,24Generator 5 00 0 00 0 00 5 00 5 57 0 00 0 00 5 57 5 02 0 55 0.00 5 57Software 1 50 1 00 0 00 2.50 1 67 1 14 0 00 2 82 2 54 0 28 0.00 2 82Heaters 050 050 000 1.00 056 0.57 000 1 13 1 02 011 000 1 13

Total Equipment Costs 18 70 6 30 0 00 25 00 20 84 7 21 0 00 28 05 25 30 2 75 000a 28 05B. Company's operating costs

Salaries 20 30 22 70 27 20 70 20 22 62 25 98 31 95 80 55 72 83 7 72 0.00 80,55Officemanagement 3010 4620 5180 128.10 3354 5288 6084 14726 13316 1409 000 14726Miscellaneous equipment 12 90 15,30 16 00 44 20 14 38 17 51 18 79 50 68 45 82 4 86 0 00 5068

Total Recurrent Costs 63 30 84 20 95 00 242.50 70 54 96 37 111 57 278 48 251.81 26.68 0 00 278 48Total Agency Costs 82.00 90.50 95.00 267.50 91.38 103.58 111.57 306.53 277.10 29.43 0.00 306.53

:t Support ActivitiesA Technical AssistanceIProcurementConsultant 12000 18000 10000 40000 133.72 20601 11745 45718 41318 4400 000 457.182 Survey Specialist 2.50 3 70 3 80 10.00 2 79 4 23 4 46 11.48 10 38 1 10 0 00 11 483 Technical Supervision 50 00 45 00 40 00 135.00 55 72 51.50 46 98 154 20 139 35 14 85 0 00 154.204 Accounting/Auditing consultdnt 30 00 45 00 40 00 115.00 33 43 51 50 46,98 131.91 119.26 12 65 0 00 131 91

Subtotal Technical Assistance 20250 27370 183.80 66000 22566 31325 215.87 754.77 68217 72.60 0,00 75477 tinB. Public Relations Actions1 Launchingworkshop/seminar 2260 1740 1500 55.00 25.18 1991 17.62 62.72 5667 605 000 62.722 Public Awareness Campaign 10 00 20,00 5.00 35.00 1114 22 89 5.87 39.91 36 06 3.85 000 39 91

Subtotal Public Relations Actions 32 60 37 40 20 00 90.00 36 33 42 80 23 49 102.62 92 72 9 90 000 102.62C. Consulting Services1 Batumi Landfill Topographical Survey 6,25 925 950 25.00 696 1059 11,16 28.71 2596 2.75 0.00 28 712 FeasibilityforBatumilandfillprotection 1000 1480 1520 40.00 11.14 16.94 1785 45.93 41,53 440 000 45.933 TbilisiBatumi/Poti sewerage network mapping 26.00 38,48 39 52 104.00 28.97 44 04 46 42 119 43 107 99 11 44 000 119.434 ModelingofBatumiwatersupplynetwork 10.00 14.80 15.20 40.00 11.14 1694 1785 4593 41.53 4.40 0.00 45.935 UrbanTransportmanagement 35.00 2480 2020 80.00 3900 2838 23.72 91 11 82.31 880 000 91.116 Coastal Zone Programa Pollution "hotspot" study 20.00 000 0 00 20,00 22.29 0 00 0 00 22.29 30 58 3 30 0 00 22,29b Municipal level training in EA 30.00 000 0 00 30.00 33.88 0 00 0 00 33 88 20 09 2 20 0 00 33.88c Kolkheti wetlands-Lake Paliostomi info, synthesis 1500 000 000 1500 16.72 000 000 16.72 1507 1 65 0.00 16 72d Coastal zone public awareness campaign 15.00 15 00 0 00 30 00 16,72 17 17 0 00 33 88 30 58 3 30 0 00 33 88

SubtotalCoastalZoneProgram 8000 1500 000 9500 89.60 1717 0.00 10677 95.87 10.45 000 10632Subtotal Consulting Services 167.25 117.13 9962 384.00 186.38 13406 117.00 437.43 39519 42.24 000 43743Subtotal T.A.I Consulting Services 402.35 428.23 303.42 1,134.00 448.36 490.11 356.36 1,294.83 1,170.09 124.74 0.00 1,294.83

D. Studies1 TbilisiWaterSupplyMasterPlan 15000 000 000 150.00 16715 0.00 000 167.15 15065 1650 000 167152 Tbilisi Waste Management Master Plan 69.00 0 00 0 00 69.00 76 89 0 00 0 00 76 89 69 30 7 59 0 00 76 893 Municipal Sector Study 65.00 0 00 0 00 65.00 72 43 0 00 0 00 72.43 65 28 7 15 0 00 72A434 Fare Collection System Study 50.00 0 00 0.00 50.00 55.72 0 00 0 00 55.72 50 22 5 50 0 00 55 725 Communication study 15.00 000 000 15.00 16872 0.00 000 16.72 1507 1 65 000 16 726 Studies (other cities) 200,00 0 00 0 00 200.00 222 87 0 00 0 00 222 87 200 87 22 00 0 00 222 87

Total Studies 549.00 0.00 0.00 549.00 611.78 0.00 0.00 611.78 551.39 60.39 0.00 611.78

Total Institutional Development 1,033.35 518.73 398.42 1,950.50 1,151.52 593.69 467.93 2,213.14 1,998.58 214.56 0.00 2,213.14

-SibUd g-O

- 53 -Annex 5

Page 1 of 3

Institutional Arrangements

1. The institutional setup of this project is reflected in the legal and contractualdocuments, defining relationships between the Central Government, the Ministry of Finance,the Beneficiary Municipalities (hereafter referred to as Beneficiaries), the executing entity,titled the Independent Agency for Development of Municipal Services (hereafter referred toas the Agency), contractors, consulting firms, and individual consultants.

2. In order to ensure expeditious and efficient implementation of the Georgia MunicipalInfrastructure Rehabilitation Project (MIRP), it has been decided to establish a non-governmental, non-profit entity which will be authorized to manage IDA and local fundsavailable for the Project. However, the purposes of the Agency are broader. They includeoverall support to development of urban services through acquisition of appropriate skills formanaging foreign and local funds, and their application for this particular project, as well asfor other possible investment projects or tasks.

3. In order to ensure viability and efficiency of this arrangement, four main componentshave been integrated in the Charter, as well as in the other legal documents related to theAgency: (i) the legal structure of the Agency; (ii) the relationship between the CentralGovernment and the Agency; (iii) the relationship between the Beneficiaries and the Agencyand (iv) the relationship between the Agency and sub-contractors.

4. The Charter of the Agency determines its legal structure (see Annex 6). The Agencyis an independent, non-governmental, non-profit organization, which is registered inaccordance with the Georgian legislation. It is liable for all of its property. Its proposedstructure and status ensures sufficient independence of the Agency and, at the same time,gives the Government a tool to supervise its activity.

5. The Agency is founded by the Chamber of Commerce of the Republic of Georgia, theAcademy of Technical Sciences, and the Tbilisi Municipality, hereafter referred to as theFounders. However, any other non-governmental institution can join the Founders, if thelater agree to this, with the status of co-founders. It is expected that as soon as anAssociation of Georgian Municipalities is created, it will become co-founder of the Agency.The Founders will cover all fees required for registration of the Agency.

6. The Board of Directors is the governing body of the Agency. The Directors will beappointed by the managers of the Founders, two selected from each. The Board will conveneits meetings upon request of any of the Founders, or upon request of the management of theAgency. The Directors will not be remunerated for fulfilling their functions.

7. The Board will appoint a General Manager of the Agency. The General Manager isresponsible for managing the activity of the Agency on a daily. basis, including hiring thestaff. In his/her activity, the General Manager follows the Manual of Procedures of the

- 54 -Annex 5

Page 2 of 3

Agency and reports directly to the Board of Directors. The General Manager will receiveappropriate rem11uLn1eration for his\hier- activity.

8. For implemiienitationi ot' the Georgia Municipal Infrastructure Rehabilitation Project, theAgency will enter- into the Project Management Agreement with the Ministry of Finance ofGeorgia (see Alnnlex 6). On behalf of the Ministry of Finance, the Agreement will be signedby the high ranklineg official of the Ministry, not lower than Deputy Minister. On behalf ofthe Agency. the Agreement will he signed by the General Manager of the Agency.

9. The lProject Man1agemernt Agreement will authorize the Agency to manage IDA andlocal f'unds available for the purposes of the Project. While in charge of projectimplementation. the Board of Director-s should ensure appropriate qualifications of theGeneral Manaoer. Therefore, the General Manager has to be acceptable to the Governmentof Georgia ancd to IDA at all times. For the same purposes, the Manual of Procedures of theAgency has to comply with procurement, dishursement and other IDA requirements. TheManual ot Procedur-es establishes rules for operations of the Agency, including samplebidding documiienits, sample contracts with consultants, and the like. The experience in similararrangemenits demonstrates that such a manual is extremely useful for the company's dailyOperatiOl)s. since it outlinles, inl much detail. all internal and external procedures which bindthe Agenicy.

10. For the purposes ot' the Project, the Beneficiaries will enter into sub-agreements withthe Agency. Suclh sub-agreemiienits will authorize the Agency to act on the behalf of theBeneficiaries in all aspects regarding implementation of the corresponding projectcomponents. Printciples of the sub-agreements shall comply with the General Principles of theProject Management Agreemiienit between the Agency and the Ministry of Finance. TheManual of Plocedur-es applies as well to procedures to be followed for execution of the sub-agreemenits.

11. The Project Management Agreement between the Agency and the Ministry of Financeand Sub-Agreements between the Agency and the Beneficiaries are consistent with Georgianlegislation and create the appropriate legal basis for fulfilling the tasks assigned.

12. In order to support and supervise execution of the Project Management Agreementbetween the Ministr-v of Finance and the Agency, the Government of Georgia will set up theTechnical Coordci nationi Committee, hereafter referred to as the Committee. Appropriatedocumentation, required for establishment of such Committee is provided to IDA (see Annex6). The Committee will be comprised of representatives of the Aid Coordination Unit withinthe Council of Ministers, the Ministry of Finance, the Beneficiaries, the Economic AdvisoryCouncil of the I-lead of State, the Ministry of Envionment, and the Founders.

13. The main purposes of the Committee are: (i) to provide sufficient support to theactivity of the Agency on the highest political level of the Government and (ii) to supervisecompliance of' the project implementation process with the requirements of the CreditAgreement. Tle Commiiittee will convenie its meetings upon a reqiucst of any of its members,

- 55 -

Annex 5Page 3 of 3

but not less than every six months.

14. The relations of the Agency with the Central Governmnent, the Beneficiaries, and thecontractors and consultants are shown in Attachments 1 and 2.

iX B ----------- --------

z I ________~~~~~~~~x E40 cE

I _ .F.0.--- - - - -1- -- 1 -

V)~~~~~~~~~~'Fo .,l ,l _ -------- ,-- . --.:-------.

Ifi z , , ,.,,/=.v,0

I _____________________________________________________________________________________.____.. {0-

Ig II'

- 57 -

GEORGIA MtNTCIPAI. INTRASTRU(`CTURE REHIAB3ITATION PROJECT

Annex 5AUachmcnt 2

CONTRACTUAL FRAMEWORK

PROJECT BENEFICIARIES

- LOCAL GOVI.LRNMN[S& PUBLIC UnILTILS

* TBlLISI* BATU.MI* P(JI I* OTH13R crriFs

SUB-AGREEMENT

I NON-PROFIl! NON^GOVERNMENA I

t ~AGENCY)

CONTRACTF CONTRACTFOR FORWORKS DESIGN/

WORKS SUPERVISION

(1)

|7CONTRACTORS CONSULTANTSI,

WORKS/GOODS FEASIBILUTYISUPERVISION

(1) sometimes two contracts/often one

- 59 -

Annex 6Page 1 of 3

The Charter of the Independent Agency for Developmentof Municipal Services

1. General Conditions and Purposes

1.1 An Independent Agency for Development of Municipal Services (further referred to asthe Agency) is a noni-governmental non-profit organization.

1.2 The purposes of the Agency are to support development of public enterprises involvedin provision of urban services; introduce methods of competitive bidding for works requiredin the sector: provide assistance to local governments in dealing with international donorsand, particularly, to ensure expeditious and efficient implementation of the proposed GeorgiaMunicipal Infrastructure Rehabilitation Project (further referred to as the Project).

1.3 The Agency is established and acts in accordance with the Laws of the Republic ofGeorgia concerning the private sector.

1.4 The Agency will follow in its activity the Charter of the Agency and the Manual ofProcedures of the Agency, agreed upon by the Ministry of Finance of the Republic ofGeorgia.

1.5 The Agency is competent and acquires the status of a legal entity from the moment ofits registration in accordance with the acting legislation of Georgia.

1.6 The Agency is created for the period of 3 years. The term of the Agency will beautomatically cancelled, unless a decision on liquidation of the Agency has been adopted bythe Board of Directors 2 months prior to termination of the aforementioned period.

1.7 The office of the Agency is located at the following address: 27, Rusteveli Ave.

2. Functions and Responsibilities of the Agency

2.1 The functions and responsibilities of the Agency in respect to the MunicipalInfrastructure Rehabilitation Project are defined in the Project Management Agreementbetween the Ministry of Finance of the Republic of Georgia and the Agency.

2.2 For the purposes of implementation of the Project components the Agency will enterinto sub-agreements with the final beneficiaries, i.e. municipalities of Tbilisi, Poti, Batumi.

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Annex 6Page 2 of 3

2.3 The Agency will be responsible, inter alia, for implementation of the Projectcomponents as defined in the Credit Agreement between the Government of Georgia and theWorld Bank, and for monitoring of the implementation process.

2.4 The Agency has the right to select contractors, negotiate and sign contracts forsupplies and works on behalf of the Borrower in accordance with the Credit Agreement andthe Manual of Procedures. The Agency has the right to manage banking accounts open in thename of the Borrower for the purposes of the Project.

3. The Fouinders of the Agency

3.1 The founders of the Agency, on the Trustee Basis, are the Chamber of Commerce ofthe Republic of Georgia, the Academy of Technical Sciences, and the Tbilisi Municipality.

3.2 Other non-governmental organizations of Georgia can join the Founders at any time,subject to agreement with the Founders, with the status of co-founder of the Agency.

3.3 The Board of Directors is a governing body of the Agency. Directors will beappointed by the management of the founding organizations, two selected from each. TheBoard will meet upon the request of any of the Founders. The Founders carry out publicsupervision of the Agency.

3.4 The Founders do not carry responsibility for results of any activities of the Agency.Any Registration fees required should be covered by the Founders. All other possibleoperational expenises of the Founders in regard to the Agency will be compensated by theAgency.

4. Support and Supervision of Agency's Performance with Respect to ProjectInipleiineiitation

4.1 Support and supervision of the Agency's performance with respect to the Projectimplementation anid fulfillment of the obligations, assumed by the Agency under the ProjectManagement Agreement with the Ministry of Finance will be rendered by a TechnicalCoordination Committee (further referred to as the Committee) consisting of high levelrepresentatives of' the Aid Coordination Unit in the Council of Ministers, the Ministry ofFinance, nmunicipalities of Tbilisi, Batumi, Poti, the Economic Advisory Council of the Headof State, Ministr-y of Envir-onmnent, and the Founders of the Agency.

4.2 The Commiilttee will have access to all information related to the performance of theAgency and its activities.

4.3 Tlle Commiiittee will use its best effort to ensur-e political support to, and facilitate theactivity of' tllc Agency

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Annex 6Page 3 of 3

4.4 The Committee will have a right to request the Ministry of Finance to cancel theProject Managemiient Agreement with the Agency or to dismiss the General Manager of theAgency, if performance of the Agency or of the General Manager has been deemedunsatisfactor-y and sufficient evidence has been presented.

4.5 Periodic financial and technical reviews of the Agency's performance will be carriedout by an exter-nal auditor. Periodical interim reports and complete annual audit reports willbe submitted to the Committee and the Founders.

4.6 The accounting and reporting system of the Agency should satisfy the generalprinciples as defiled in the Credit Agreement.

5. Staffing of the Agency

5.1 The management of the Agency will be executed by the General Manager, who willbe appointed by the Board of Directors of the Agency in consultation with the Government ofGeorgia to ensur-e that his/her qualifications and experience are adequate.

5.2 The Agenicy will hire personnel for Disbursement and Procurement procedures, andsupport staff.

5.3 The Agency will retain, when required, an independent consultant or consulting firm,with various skills appropriate for undertaking specific tasks.

6. Finanicial Sources and Property of the Agency

6. 1 Financial sources of the Agency are obtained from the proceeds of the Credit oravailable unider local financing, as stipulated in the Project Management Agreement.

6.2 The property of the Agency for the period of its existence is equipment and otherinventory needed for fulfillment of its purposes.

6.3 The Agency is liable with all of its property.

7. The Liquidation of the Agency

7.1 Decisions on liquidation or extension of the terms of the Agency are made by theBoard of Directors. Procedures of liquidation are defined by the Board in accordance withGeorgia legislation.

7.2 The property left after liquidation will be at the disposal of the Government ofGeorgia.

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Annex 7Page 1 of 1

GEORGIA

MUNICIPAL INFRASTRUCTURE REHABILITATION PROJECT

Estimated Schedule of Disbursements(US$ millions)

BankFiscal Semester Disbursement Cumulative Disbursement %Year Ending in Semester Amount of Total Credit

1995 a 12/31/94 1.2 1.2 6

06/30/95 3.3 4.5 23

1996 12/31/95 4.3 8.8 45

06/30/96 4.1 12.9 66

1997 12/31/96 3.5 16.4 83.6

b 06/30/97 2.1 18.5 94

1998 b 12/31/97 1.1 19.6 100

a Includes initial deposit into the Special Account.

b Rate of disbursement reduced to recover advance made to Special Account.

- 65 -GEORGIA - MUNICIPAL INFRASTRUCTURE REHABILITATION PROJECT Annex 8

PROCUREMENT IMPLEMENTATION PLAN Page I of 4

Ref City Description Proc. Est. Start TRI f. C ItDciio I code amount Year Tp

CONSULTANTS

Water supply STIP. Technical assistance for design andI M WS Batumi specification of radio communication installations. DC 15,000 1995 C

Transport STIP. Study for modernisation of fare2 T TR Tbilisi collection system. DC 50,000 1995 C

3 I P1 MS Municipal Sector Study DC 65,000 1995 C4 T LF Tbilisi Landfill STIP. Study for solid waste master plan. DC 69,000 1996 C

5 CONSULTANTS TOTAL DIRECT CONTRACTING DC 199,000 C

Water supply STIP. Technical assistance for design and6 M WS Tbilisi specification of radio communication installations. SL 15,000 1995 C7 I Pi TA Technical assistance AccountingfDisbursmneit SL 95,000 1995 C

Tbilisi &Batumi

8 M WS I Pot) Sewerage network mapping SL 104,000 1995 C9 T WS Tbilisi Water supply STIP. Study for water supply master plan. SL 150,000 1996 C

10 M MU XX Technical Feasibility sutdies "Other Cities" SL 200,000 1995 C

Technical assistance. Procurement advisor for the11 I I Pi TA Agency SL 400,000 1995 C

|CONSULTANTS TOTAL SHORT LIST SL 964,000 C

TOTAL CONSULTANCY SERVICES 1,163,000

GOODS

Tbil/Bat./ Wastewater STIP. Sewer clealling equipment and sewer1 M WW Poti jetting vehicles (3no.) ICB 248,000 1996 G

_ Tilisi & Water supply STIP Design supply and installation of2 M WS Batumi short %kavc radio communication equipment ICB 250,000 1996 G

Water supply STIP. Supply of tipping lorries, pipe lorry,3 T WS Tbilisi transporter & water main repair vehicles. ICB 290,000 1995 G

Heating STIP Suppl! onhN of indepeindent heating4 T HS Tbilisi systems for 19'7 schools ICB 300,000 1995 G

Landfill STIP. Supply of 3 transfer tnicks, 45 cu.m.5 T LF Tbilisi capacitN. ICB 301,500 1995 G

Heating STIP Supply only of secondary glazing kits for6 T HS Tbilisi 197 schools and 22 hospitals. ICB 425,000 1995 G

Water supply STIP. Purchase of new water pumpsTbilisi & complete with electric motors.

7 M WS Batumi 29 units Tbilisi/15 units Batumi. ICB 473,000 1995 G

Heating STIP Supply and installation of independent8 T HS Tbilisi boilcrs for hospitals. ICB 484,000 1995 G

Heating IAP Supply only of electrical cable for dedicated9 T HS Thilisi ecectricilt supplics lo hospitals ( I 5 no ) ICB 700,000 1994 G

- 66 -GEORGIA - MUNICIPAL INFRASTRUCTURE REHABILITATION PROJECT Annex 8

PROCUREMENT IMPLEMENTATION PLAN Page 2 of 4

Ref i D Proc. Est. Start TypR If. j City I Description codc amount I Year Tel

W;jstc.rater STIP. Refurbishmlient of wastewater pumpingBatluini & stations inciltidi ig rencuval of electri cal anid mechan ical

10 M WW Poti installations. ICB 735,000 1995 G

Tbilisi uN%acr suppN Purchase of eX,cavators & cranes.Tbilisi. Batumni landfill Purchalsc of tracked compactor/dozcr

Batumi & Batumit s:atcr supply Purchase of nains repair equip.11 33fTBP Poti Poli wsater supplh Purchase of mains repair cquipilent. ICB 772.000 1995 G

GOODS TOTAL INTERNAT. COMP.BIDDING ICB 4,978,500 G12 T WS Tbilisi Water supplh SlIP. Laboratory equlipiienL IS 32,000 1996 G13 T TR Tbilisi Transp lAP Suppl of NMctro locomotive traction motors. IS 135,000 1995 G

Transport STIP NMetro - rehabilitation of purmping14 T TR Tbilisi station, Russian supplh Is 155,000 1995 G

Transport STIP. Purchase of inspectioni and repair tnick15 T TR Tbilisi for Tbiliraits surfa;lc transp)ort IS 160(),(0 1996 G1b 1 rIR Tbilisi Transporl IAI' SupplI ol trolle and train overhcead cable iS 175,000 19955 G17 T HS Tbilisi Heatinig IAP SuIpp ol timiiber etc for v.iiidoss franies. IS 180,000 1994 G

Water supplh Sl'IP Supply of spare pipes for ssater main18 B WS Batumi repairs: pipes for stock IS 188,000 1995 G

Water suippiy STIP Supply only replacement electric19 T WS Tbilisi motors for existing pum1ips IS 200,000 1995 G

Tbilisi Wastcewater STIP Spare parts for scu~er repairs: pipeBatumi & stocks 150-600mini. dia., concrcte, uPVC,asbestos

20 M WW Poti cement is 170,000 1995 G

Landfill STIP Batuii: supp1y of agricultiral tractors andtrailers for solid %kastc collcctioni

Batuini & Wastewater STIP Poti: supplk of agricultural tractors21 M WW Poti and suctioll tanikcrsfor septic tiank cntpt'ing. IS IX80,0()( 1995 G

Transport STIP Metro - upgrade pouer supply,22 T TR Tbilisi switchgear. IS 180.000 1995 G23 T HS Tbilisi Heating IAP SuIpply of timl1ber etc, for window frames. IS 220,000 1994 G

24 M Other Purchase of Equipment (provision for other cities) IS 200,000

25 M Other Purchasc ol Spare parns (pro%ision for other citics) IS IU(),()()()

GOODS TOTAL INTERNATIONAL SHOPPING IS 2,275,0114) CTbilisi & Walcr supply STIP Purchase and installation of

26 M WS Batunii chlorination dosing eqtuipmciit LIB 90()000 1995 G

Wastewater STIP Gardabani wastewater treatment plant;reneual of electrical and mechanical installations for

27 T WW Tbilisi preliminars and primarv treatient. LIB 270,000 1996 G

Tratisport STIP Metro - upgrade poser stipplv. electrical28 r TR Tbilisi equipment LIB 280,000 1995 G

Transport STIP. Metro - upgrade power supply, HV29 T TR Tbilisi equipment LIB 295,(()0 1995 G

- 67 -GEORGIA - MUNICIPAL INFRASTRUCTURE REHABILITATION PROJECT Annex S

PROCUREMENT IMPLEMENTATION PLAN Page 3 of 4

* I I |Pruc.Il Est. StartRef. City Description code aot Year Type

I_IcIde amount Year

18/TI Heating STIP Tbilisi & Water Supply STIP Batumni.B/HS/ Tbilisi & Suppply and installation of standby diesel generators. (2

30 M WS Batumi no. hospitals Tbilisi. water borehole source, Batumi.) LIB 250,000 1995 G31 T TR Tbilisi Transpor STIP. Mctro - modernise fare collection syst. LIB 265,000 1996 G

Heating IAP Supply of glass and mastic for32 T HS Tbilisi vcatheri/ation of 197 schools and 22 hospitals. LIB 302,000 1994 G

33 M P Other Purchase of Equipmenl (provision for other cities) LIB 300,000 1996 G

34 M P Other Purchase of Spare parts (provision for other cities) LIB 300,000 1996 G

GOODS TOTAL LIMITED INTERNAT. BIDDING LIB 2,352,000 G

Landfill STIP. Supply only of spare parts for existing35 B LF Batumi solid wvasic collection vehicles. LS 20.000 1995 G

Water supply STIP. Spares for HV control gear at36 T WS Tbilisi e.xisting watr pumping stations. Russian supply. LS 20,000 1995 G

Transport TIAP Supply of batteries and electrical items37 T TR Tbilisi for Metro carriages. LS 19,000 1995 G

Landfill STIP Supplh only of spare parts for existing38 T LF Tbilisi solid waste collection vehicles. LS 18,000 1995 G39 T TR Tbilisi TranspoTt lAP Supply of spares for Metro carriages. LS 19,000 1995 G40 M AGENCY Office equipment for the Agency LS 20,000 1994 G

Provision for miscellanous equipments (for41 M P Other municipalities) under approximatly 1) contracts LS 200.000 1996 G

Provision for spares (for niunicipalities) tinder42 M P Other approximatly 7 contracts LS 150,000 1996 G

GOODS TOTAL LOCAL SHOPPING LS 466,000 G

43 T TR Tbilisi Traiis on IAP Su I s ares for existing traction motors SSC 20,000 1995 G

Water supply STIP Spares for HV control gear al44 T WS Tbilisi existing water pumping stations. Ukraine supply. SSC 20.000 1995 G

Landfill STIP. Purchase of spare pans for repair and45 P LF Poti rnaintienance of existing solid waste collection vehicles. SSC 48,000 1995 G

Water supply STIP. Supply only HV motor stators for46 T WS Tbilisi existing pumps. SSC 172,000 1995 G

Transpon STIP. Metro - spare parts for rolling stock.47 T 'R Tbilisi Russian suppl) SSC 250.000 1995 G

Transport STIP Metro - spare parts for rolling stock.48 T TR Tbilisi Ukraine supply. SSC 205,000 1995 G49 T TR Tbilisi Transport STIP. Metro - supply of miscellaneous equip. SSC 240,000 1996 G

Transport STIP. Supply of spare parts for existing trolley50 T TR Tbilisi bus and tram fleet - Ukraine. SSC 655,000 1995 G

Transport STIP Supply of spare pans for existing busSt T TR Tbilisi fleet - Ikarus, Hungary. SSC 670,000 1995 G

GOODS TOTAL SOLE SOURCE CONTRACT SSC 2,280,000 G

TOTAL GOODS 12,351,500

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GEORGIA - MUNICIPAL INFRASTRUCTURE REHABILITATION PROJECT Annex 8PROCUREMENT IMPLEMENTATION PLAN Page 4 of 4

I I ~~~~~~~~~~~~~~~Proc. 1 Est. 1StartRef. City Description Proc_ Est. Start Typecode amount Year

WORKS _

Heating IAP Building contract for installation of urgent1 T HS Tbilisi primary weatherization LCB 45,000 1994 W

Heating IAP Building contract for installation of urgent2 T HS Tbilisi primary weatheriz.ation LCB 45,000 1994 W

Heating IAP Building contract for installation of urgent3 T HS Tbilisi primary weatherization LCB 45,000 1994 W

Wasiewater STIP. Sewer renovation works. Civil4 P WW Poti engineering construction contract. LCB 130,000 1996 W

Landfill STIP. River engineering works; site fencing atexisting landfill site. Civil engineering construction

5 B LF Batumi contract LCB 234,000 1996 W

Heating IAP - Installation of cables for dedicated6 T HS Tbilisi electricity supplics to hospitals. LCB 400,000 1994 W

Wasiewater STIP Sewcr renovation. civil engineering7 T WW Tbilisi construction contract. LCB 300,000 1996 W

Wastewater STIP. Sewer renovation works: civil8 M P Other engneering construction contract. LCB 400,000 1996 W

Wastewater STIP. Sewer renovation works; civil9 B WW Batumi engneering construction contract. LCB 405,000 1996 W

TOTAL LOCAL COMP. BIDDING LCB 2,004,000 W

Heating STIP Building %sorks contract for installation of10 T HS Tbilisi secondary glazing. Approx. ICB 561,000 1995 W

Heating [AP Building contracts for installation ofII T HS Tbilisi prima.rN weatherization ICB 690,0)00 1995 W

Heating STIP. Installation of independenl school heating12 r HS Tbilisi sysems. ICB 700,000 1995 W

Waslewater STIP. Sewer renovation works; civil13 M P Other engneering construction contract. ICB 490,000 1996 W

TOTAL INTERNAT. COMP. BIDDING ICB 2,441,000 W

TOTAL WORKS 4,445,000

TOTAL PROCUREMENT PLAN 17,959,500

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Annex 9Page 1 of 2

Performance Indicators

Tentative primary monitoring indicators to measure project progress and the Agency'smanagement efficiency are specified in this Annex. Tentative targets to be achieved for eachproject year are indicated. The indicators and their targets were reviewed during theAppraisal mission.

General Indicators for the Agency Performance

The Agency's general management will be measured against the following criteria:

Independent Agency for Development of Municipal Services

INDICATOR Year I Year 2 Year 3

Contract amounts signed with foreign and 40% 80% 100%local enterprises (of total project amount).

Number of contracts completed (% of 40% 80% 100%estimated total number of contracts in theproject).

Percentage of contracts completed on time 50% 70% 80%

Percentage of contracts completed on budget. 50% 75% 90%

Percentage of payments to suppliers and 50% 70% 80%contractors within 30 days of invoicereception.

Average time for processing local contracts 8 weeks 6 weeks 4 weeks(period from specification completion to awardof contract).

Indicators per Project Component

The following indicators would be examined to confirm the success of the respectiveproject component. (Note: All percentages are targets compared to the situation at the timeof credit effectiveness).

- 70 Annex 9Page 2 of 2

Project Component Year 1 Year 2 Year 3

Heating/Energy SectorTbilisi Schools and Hospitals .

Primary weatherization%losss of schools days 50 20 0

Secondary weatherization% loss of school days 20 10 0

Dedicated electrical supply lines (15 Hospitals)No. of power failures during 6 month period 4 10 15

Transport SectorMetro - passenger miles increase 15% 20% 25%Buses - passenger miles increase 10% 20% 25%

Tbilisi Water SupplyNo. of water main repairs per week 10 15 20No. of bacteriological failures of water supply per week <10 <5 <2

Tbilisi WastewaterKm. of sewer cleaned per month 5 5 10

Tbilisi Solid Waste% increase in solid waste removed (by weight) 20% 25% 30%

Batumi Water Supply% reduction in supply interruptions based on hrs./month. 10% 20% 30%No. of bacteriological failures of water supply per week . <10 <5 <2

Batumi WastewaterKm. of sewer cleaned per month 4 6 8No. of pumping stations refurbished 1 3 5

Batumi Solid Waste% of landfill surface graded and covered 30% 80% 100%

Poti WastewaterKm. of sewer cleaned per month 2 3 4No. of pumping stations refurbished 1 3 4% increase in septic tanks emptied per month 10% 20% 25%

Poti Solid Waste% of landfill surface graded and covered 25% 60% 100%

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Annex 10GEORGIA

MUNICIPAL INFRASTRUCTURE REHABILITATION PROJECT

Supervision Plan

The supervision plan below supplements the regular review requirements forprocurement actions, advisory services, and general administration. It is important to notethat since this is the Bank's first investment project in the country, there exists little localimplementation experience. Therefore, supervision will include technical assistance expertsfrom the Bank.

Approximate Dates Activity | Expected Skill Staff-(month/year) | | Requirements Weeks

12 / 94 Supervision Task Manager 12(Project Launch) Procurement Specialist

Operations SpecialistEngineeringEnvironment

3 - 4 / 95 Supervision Task Manager 10Review overall progress Procurementand the implementation of Disbursementprocurement and Engineeringaccounting procedures.

6 - 7 I 95 Supervision Task Manager 10Review overall progress. Procurement

EngineeringEnvironment

9 - 10 1 95 Supervision Task Manager 8Review overall progress. (others as required)

3 - 4 1 96 Mid-term Review: Task Manager 10Detailed review of project (others as required)and compliance withcovenants.

9 - 10 / 96 Supervision Task Manager 8Review overall progress. (others as required)

4 - 5 / 97 Supervision Task Manager 6Review overall progress. (others as required)

11 -12 / 97 Supervision Task Manager 6(Project Completion)

- 73 - Annex 11

Project Implementation Schedule Page 1 of 3

GEORGIA Municipal Infrastructure Rehabilitation Project

1 1995 L 196 1997-ID Name Q l 2IQ 4Q 2IW 1~W~2 401 HEATING/ENERGY SAVING 2I 03V4NG

HEATING/ENERGY SAVING

2 Immediate Action Plan . Immediate Action Plan

3 Purchase glass

4 Purchase door material

5 Purchase other materials

6 Building works contracts

7 Hire shipping company

8 Short Term Investment Plan Short Term InvestetPa9 Purchase direct electricity feeds (15 hospitals)

10 Install direct lines

11 Install diesel generators 12 hospitals)

12 Supply of glazing kits |l

1 3 Contracts for installation of kits

14 Purchase roof insulating material l

15 Install roof material

16 Purchase boilers (hospitals) /2 ,'/4g./

17 Install boilers

18 Repair boiler

19 Rehab. school heating systems 120 URBAN TRANSPORT ~ 'URBAN TRANSPORT21 Tbilisi Metro 1 I

22 Immediate Action Plan _ Immediate Action Plan

23 Locomotive traction motors

24 Spare parts for traction motors

25 Spare parts for metro carriages

26 Batteries/electrical items for cartiages .

27 Short term investment plan Short term investment plan

28 Study on fare collection system .

29 Modernize fare collection system

30 Spare parts for rolling stock

31 Rehab. pumping stations

32 Upgrade power supply

33 Rail rehabilitation .___d

34 Purchase misc. equipment

35

Project: GEORGIA MIRP Critical //////////////S//ffi/ Progress Summary 1

Date: 10/7/94 Noncritical Milestone *Rolled Up

Page 1

- 74 - Annex 11Page 2 of 3

GEORGIA Municipal Infrastructure Rehabilitation Project

1995 1 '36 1997

ID Name Q4 Q01 020 Q3 0 Q4 010 Q2 0 Q3 Q4 01 Q2 03 4 136 Tbiltrans .

37 Immediate Action Plan Immediate Action Plan

38 Purchase trolley/overhead cable

39 Short Term Investment Program , Short Term Investment P

40 Purchase spare parts lengines, gear, etc.)

41 Purchase spar3 parts (trolley buses)

42 Purchase inspection/repair truck

43 WATER SUPPLY WATER SUPPLY

44 Tbilisi . _ Tbilisi

45 Study for water supply master plan

46 Purchase excavators and cranes

47 Purchase lorries

48 Purchase main repair vehicles 7'

49 Purchase lab equipment .

50 Purchase chlorination equipment .

51 TA for commnunications network

52 Install communications network

53 Purchase spare parts (pumping stationsl

54 Purchase new pumps

55 Purchase hv motor stators

56 Purchase replacement motors a

57 Batumi_ I Batumi

58 TA for design of comm. network

59 Purchase diesel generator |

60 Install diesel generator |

61 Purchase eqmt for main repairs

62 Purchase spare pipes

63 Purchase communications network

64 Purchase chlorination eqmt

65 WASTEWATER ERWASTEWATE

66 TbilisivTbilisi

67 Purchase sewer cleaning eqmt

68 Purchase spare parts .

69 Sewer renovation ._E

70 Renovate cardabani plant .

Project: GEORGIA MIRP Critical Progress Summary 2

Date: 1017194 Noncritical Milestone *Rolled Up C)

Page 2

- 75 - Annex 11Page 3 of 3

GEORGIA Municipal Infrastructure Rehabilitation Project

1995 19'5 1997ID Name Q4 01 Q2 0 Q3 4 1 2 3 40Q1 JQ2 0Q3Q4Q171 Batumi Batumi

72 Purchase sewer cleaning eqmt .

73 Purchase spare parts for sewer repairs

74 Sewer renovation

75 Upgrade pumping stations 13) _______|

76 Poti _P Poti

77 Purchase sewer cleaning equiment

78 Purchase spare parts for sewer repairs

79 Sewer renovation

80 Refurbish pumping stations (4)

81 Purchase tractors and tanks .

82 LANDFILL .T _~~~~~~y LANDFILL

83 Tbilisi _ _ Tbilisi

84 Study solid waste master plan

85 Procure garbage transfer trucks & spare parts ,,,,,

86 Purchase spare parts for vehicles

87 Batumi Batumi

88 Purchase compactor/dozer

89 Purchase tractor and trailor

90 Purchase spare parts Li91 River engineering works

92 Poti Poti

93 Purchase equipment

94 Purchase spare parts .i

95 STUDIES ____ _ __ _ __ _ STUDIES

96 Tech. feas. studies (other cities)

97 Municipal Sector Study _

98 Sewerage network mapping (T,B,P)

Project: GEORGIA MIRP | Critical P rogress Summary g 3Date: 10/7/94 Noncritical Milestone *Rolled Up

Page 3

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Annex 12Page 1 of 11

GeorgiaMunicipal Services Rehabilitation Project

Environmental Review and Mitigation Plan

I. EXECUTIVE SUMMARY

1.0 The environmental review and mitigation plan is prepared in accordance withOperational Directive 4.01 for a Category B classification. This Project will entail no newconstruction or development. There will be no primary environmental and socio-economicnegative impacts. In a few investments there are minor secondary impacts. In general, theinvestments will have positive primary and secondary impacts in reducing public health risks.Current investment efforts will contribute to some improvements in the natural resource base.Mitigation and monitoring efforts, outlined in Table 1, are proposed during theimplementation and operation of the proposed investment activities.

2.0 At a minimum, the investment Project will: (i) reduce the degradation of municipalinfrastructure systems; (ii) maintain a minimal level of operational integrity; (iii) arrest thedeclining socio-economic and environmental conditions; and (iv) provide a criticalcontribution to reducing the health risks from infectious diseases.

II. INTRODUCTION

3.0 The Ministry of Health states that the health, economic, and social consequences ofwater pollution have already become evident to the residents of Georgia. The level ofmorbidity by waterborne gastrointestinal infection diseases in several regions of Georgia hasdramatically increased in the last decade. The consumption of untreated drinking waterwhich has contributed to outbreaks of acute gastrointestinal diseases have been occurringalmost every year during the last decade. Annual outbreaks of dysentery have taken place inTbilisi with an average of 150 cases a year. An increase of morbidity of children withHepatitis A is evident in the region of the Black Sea basin. 'Fhe beaches of the Black Sea arestrongly polluted from high bacterial counts (e.coli) ranging from 43,000,000 mg/l to110,000,000,000,000 mg/I. Of equal concern is the unmanaged disposal of municipal wastewhich has lead to increase in infectious diseases, impacts on water quality, and exposure tovermin.

4.0 The project investments in Batumi and Poti have the additional environmental benefitsof helping to alleviate serious pollution from some of the most critical "hot spots" onGeorgia's coast as identified by the GEF-supported Programme for the EnvironmentalManagement and Protection of the Black Sea. Institutional development and technicalassistance activities will help lay the foundation for a long range resource conservation andmanagement program on Georgia's coast.

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Annex 12Page 2 of 11

III. REHABILITATION PROJECTS

Baseline Conditions5.0 Tbilisi Transportation: Since almost 90% of the urban transport users are dependanton the Metro, it is important to improve the system to maintain cohesion of city operationsand improve the safety environment. Exposed electric cables and wires as well as water andoil leakages resulting from a poorly managed system create a hazardous environment forpassengers. The investment plan would provide spare parts and improve system operations sothat the social benefit of passenger safety is achieved, in addition to efficiency gains.

Analysis of Alternatives5.1 With no action, the transportation infrastructure would continue to deteriorate andthreaten the operations and efficiency of the entire transportation system, and significantlyincrease the potential for accidents. Use of individual vehicles would be the only alternativeto public transportation system. The use of individual vehicles is not a cost effective,practical, and environmentally sensitive alternative.

Impacts/Mitigation/Monitoring5.2 The proposed immediate and short term action will have positive primary andsecondary impacts in reducing the potential for paralysis of urban operations and providingbetter systems operations. Tree pruning, required for clearance of overhead electric cables,will be managed in a sensitive way to reduce impacts to trees. The Metro and Thilitranoversight committee and the TCC (Technical Coordination Committee) will monitortransportation service operations and management.

6.0 Tbilisi Heating. For the past two winters, all 200 schools in the country's capitalwere closed and many of the city's most critical hospitals had limited operational capacitydue to the lack of heating, including fuel shortage, degraded heating infrastructure, and poorweatherization of buildings. To help provide the necessary environment to maintain a basiclevel of educational and health services through the winter, investments to mitigate thissituation should be initiated immediately (before the onset of winter).

Analysis of Alternatives6.1 Alternative heating options, such as the use of kerosene heaters, were deemedinappropriate for schools and hospitals as they were considered extremely unsafe foroperation in the presence of children. Additionally, the noxious fumes from the use ofkerosene heaters in closed, unventilated rooms would have a significant adverse public healthimpact. For these reasons, kerosene heaters were deemed unsafe. Other space heatingalternatives depended too heavily on unavailable fuel and electricity inputs. The option oftaking no action would have a significant detrimental impact on the continuity of educationand on the vulnerable hospital patients of Tbilisi.

Impacts/Mitigation/Monitoring6.2 The dominant environmental issue is the public health risk of exposure tocold/freezing conditions. The TIAP would provide continuous power supply to hospitals,

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Annex 12Page 3 of 11

implemenit primllary weatherization for 200 schools and 23 hospitals. Weatherization ofschools would provide positive impacts on public health, create a foundation for developinglong term enlvironimental conservation strategies, and contribute positively to the social fabricof the communiity.

6.3 Weatherizatioin of these facilities may indirectly reduce the uncontrolled harvesting ofurban trees fo r firewood; thus, this approach impacts positively on the environmental. Toreduce the poor air quality in hospitals, low sulfur mazout fuel (.5%) will be recommended.Although the project does not encompass the purchase of fuel, the municipality has ensuredthat fuel will be provided for the critical facilities identified.

7.0 Waiter Sul)plv aInd Distribuition (Tbilisi and Batumni): The water supply and distributionsystem is currently suffering from defective equipment, leakage, and an unreliable electricalsupply. Contituous loss of pressure in the distribution system and the consequent emptyingof mains give rise to potable water quality problems due to groundwater infiltration into thenetwork. In most districts, water supplies are only made available for two-hour periods.During winter monitlhs, wheni electricity shortages are acute some residents are deprived ofwater for periods of up to 4 days. In Batumi, the lack of treatment capabilities duringflooding forces tlle river intakes to the Water Supply Enterprise to close and requires the cityto be dependant on borehole water supply (which is energy intensive). The short-terminvestmenit project intends to reduce the rate at which the system is deteriorating, reducewastage of water, maintain water quality, and improve utilization of the system in each city.

Analysis of Alter-nlatives7.1 An alter-native to improvements in public water supply is the use of bottled water.However, bottled water can only be used for consumption and does not satisfy the need forother uses. Furtlhermore, bottled water is not cost effective, and it increases the productionand use of bottles and containers, which is energy intensive. Taking no action will onlyprolong the inadequate supply of potable water and continue the risk to public health.

7.2 Sole dependency on borehole supply would require a detailed investigation ofgroundwater resource supply and management of groundwater supply. Sole dependency onriver water- is limaited during periods of high flow due to increase of turbidity in river water.

Impacts/Mitig,ationi/Monitoring

7.3 Improvinig the distribution of potable water would have a positive impact on publichealth by reducing the occurrence of infectious diseases. A potential negative impact couldresult if chlorine, a hazardous gas, is not properly handled and stored. Management planswill be developed for storage and handling of chlorine. Temporary impacts would result fromdisruption in traffic and water supply due to pipeline repairs. The Water Supply Enterprisewill be advised on improving water supply system operations. The TCC will review andsupervise components of the project implementation activities.

8.0 Water Treatmlent Facility (Tbilisi/Gardaboni): Currently only the mechanical screensare is operating while intermittent electrical power prevents operation of the secondary

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Annex 12Page 4 of 11

biological treatment within the facility. The dominant environmental issue pertains to thepoor quality of water discharging into the Kura River. Additionally, the disposal of sludge,including both industrial and municipal wastes, is potentially toxic and therefore can causeenvironmental problems on the land which it is dumped on. The short term investmentswould include the renovation of sufficient primary tanks and associated systems, to permit atotal of seven tanks in service.

Analysis of Alternative8.1 Taking no action would continue the deterioration of the treatment facility system, andcontinue to impact water quality of the Kura River. With regard to establishing the proposeddedicated hydropower facility which will be utilizing power plant cooling water to providepower to the facility, preliminary calculation indicate there is insufficient hydraulic head togenerate sufficient electricity to make the Gardaboni facility somewhat self-sufficient.

Impacts/M itigation/Monitoring8.2 Improvements to primary treatment would provide appropriate capacity consistentwith the flow arriving at the works. Operating consistent primary treatment operations at aminimum would slightly improve the quality of the effluent being discharged into the KuraRiver. The TCC will monitor the implementation activities.

9.0 Sewerage Systems( Tbilisi, Batumi, and Poti): Thirty to forty percent of the Tbilisi'ssewers are reported to be out of service because of blockages. This is a problem in all threecities and has caused flooding into the streets and consequent public health risks evidencedthrough the rise of infectious diseases. The proposed short-term investment would supplypumps, spare parts, sewer renovation and cleaning equipment to maintain operationalintegrity of the system and reduce sewerage overflow in the streets.

Analysis of Alternatives9.1 There are no cost effective feasible alternatives in either city. All three are verydependant on the existing sewerage infrastructure. Both Poti and Batumi are located in atopographically flat river floodplain areas where gravity drainage is poor and Tbilisi islocated in an area where alternative use (ie. septic systems) are not geographically feasible.Furthermore, installation of self composting systems is neither cost effective nor viable incities as it is a system which serves primarily residential areas.

Impacts/Mitigation/Monitoring9.2 The proposed investment for cleaning equipment and supply of spare parts wouldimprove the pipeline system and reduce sewerage flow into the streets, resulting in areduction to public health risks. This reduced exposure to infectious diseases would be theprimary positive impact.

9.3 A temporary negative impact, if sewerage management is not improved, wouldinclude the potential increase in flow from cleaned pipelines which would discharge into theKura River. A temporary impact may result from disturbance and disruptions during sewer

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Annex 12Page 5 of 11

main repairs. Appropriate construction measures will be taken to reduce impacts. The TCCwill monitor the implementation activities.

Technical Assistance/Institutional Needs9.4 The Water Supply Enterprises in all three cities will be advised on improvingsewerage system management. Technical Assistance will be provided to work with the CityDesign Institutes to conduct the Sewerage Network Mapping which will entail a closedcircuit television inspection survey.

9.5 The Integrated Coastal Zone Management Strategy will incorporate intermediate andlong term management efforts for waste water treatment to reduce the impacts of sewerageoutflow on Black Sea coastal resources.

10.0 Solid wvaste disposal (Tbilisi, Batumi, and Poti): The dumps or landfills in all threecities are posing problems to public health, surface and ground water quality, and local airquality. In Tbilisi, there are a number of non-sanctioned dumps located throughout regionsof the city which are located on river banks, commonly have open fires, and are infestedwith vermin. The proposed short term action for Tbilisi includes establishing a dump-trucktransfer system that would allow more efficient operation of trash disposal to the sanctionedlandfills and a systematic reduction of hazards which arise from the illegal dump sites.

10.1 In Batumi, the landfill is located at the bank of the Choroki River floodplain delta andis causing adverse environmental hazards, including poor water quality and deterioratingpublic health from the rapidly eroding landfill debris which washes to up on the coastline ofthe Black Sea. Additionally, the landfill impacts its informal users (i.e. scavengers,shepherds, grazers) who derive their livelihood on the resource. In Poti, much of the landfillwas cannibalized from the civil conflicts and remains unmanaged. The short-term investmentstrategy includes the provision spare parts and equipment to improve landfill management inboth locations.

Analysis of Alternatives10.2 The proposed Technical Assistance for a topographical survey of the existing landfillsite may provide insights on a possible feasible alternative site, possibly adjacent to thecurrent landfill. Similarly, a feasibility study should be conducted in Poti to identifyalternative sites, if necessary.

Impacts/Mitigation/Monitoring10.3 The closure of unauthorized dumps in Tbilisi would have a positive impact on thesurface and groundwater quality by reducing runoff and leachate problems to the Kura river.The dump closure will also improve air quality from reduced burning trash, and reducepublic health risks from infectious diseases. The TCC will review transfer system operationsand dump closures.

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Annex 12Page 6 of 11

10.4 In B3atumi and l'oti. landfill investments would have significant positive impacts onthe puiblic hlealth anld local and regional water quality by reducing exposure of contaminantsand debris in the water. Implemiientation of a landfill management plan, if prepared properly,should have bhotl primary positive impact on public health, and a secondary positive socio-economlIi' impact on the infor-mal users of the landfill. Care should be taken to not dislocatethese people durinlg operationis. The TCC will review landfill management and operations.

Technical Assistance10.5 Techlical Assistance will be provided for a Tbilisi Waste Management Master Plan.The plan would propose to incorporate a community public participation component in wastemanagement and recyclinig as one step in a strategy to reduce waste and improve itsdisposal.

10.6 In 13Latum1i. technical advice will be provided for a topographical survey of the existinglandfill site undertaken using aerial survey. Technical Assistance will also be provided for aLandfill Protection Program. This study for will focus on floodplain protection as an interimmeasur-e to diver-t the flow in the channel and reduce landfill bank undercutting and erosion.Additionally, the work program may include a feasibility study for a channel modificationstrategy anid temlpor-ar-y bank stabilization of the Choroki River in order to mitigate landfillelosionl into the Sea. In both Batumi and Poti, Technical Assistance will be provided for theIntegrated Coastal Zone Management Strategy (ICZM). The ICZM will incorporateintermiediate, slhort-term-s, and long term management efforts to reduce the impacts of thelandfill operations on the Black Sea coastal resources.

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Annex 12Page 7 of 11

MUNICIPAL INFRASTRUCTURE REHABILITATION PROJECT

TABLE 1. ENVIRONMENTAL MITIGATION PLAN

INVESTMENT ISSUES ACTIVITIES IMPACTS MITIGATIONS MONITORINGPROJECT

TRANSPORT TIAP GeneralTbilisi * metro and * purchase of * positive im- * positive im- * for monitoring

rolling stock spare parts for pacts to socio- pacts will not and review:require spare metro and rolling economic fabric require mitigation Metro over-parts stock of the city effort sight committee

and Tbiltrans* system in * improvements * provide better oversight com-disrepair to power distribu- system operations mittee will be

tion system for established* control room metro and rolling * more energyin disrepair stock efficient system

X operational Short Term * tree pruning * tree pruningequipment and * revision of will be managedinfrastructure in fare structure to minimizedeteriorated impacts to treesconditions * improve opera-

tional equipment* poor manage-ment of repair * improve tracksoperations

* restore controlroom

* refurbishvehicles

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Annex 12Table 1 coilt. Environimiienital Mitigation Plan Page 8 of 11

INVESTMENT ISSUES ACTIVITIES IMPACTS MITIGATION MONITORINGPROJECT

HEATING TIAP General GeneralTbilisi * insufficient * repairs to * positive pri- positive impacts TCC will review

heating in schools glazing of schools mary and second- will not require projects/instal-and hospitals ary impacts on mitigation effort lation

* no insulation public healthin buildings * installation of

2nd glazing to * reduce impact* deteriorated schools and hos- on urban forestsconditions pitals

* no negative* no electricity * installation of primary or sec-

independent ondary impactsheating systems socio-economic

and natural re-* provisions of sourcesdedicated electri-city lines

Short Term* repair thefabric of build-ings

Specific Specific* insulation of * public health * insulation will * TCC willroofs concerns from be specified as inspect insulation

insulation asbestos free* provisions for productsindependentheating systemsin hospitals

* provisions for * noise from * the generators * TCC will eval-independent generators will be housed, uate optimalelectricity for and placed in location forhospitals locations to min- placement of

imize impacts generatorsfrom noise

* use of mazout * use of low-fuel sulphur fuel

(<0.5%)

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Annex 12Table 1 cont. Environmenital Mitigation Plan Page 9 of 11

INVESTMENT ISSUES ACTIVITIES IMPACTS MITIGATION MONITORINGPROJECT

WATER Both Cities Both Cities Both Cities * Water SupplySUPPLY * interrupted Short Term * positive pri- Enterprise will beTbilisi and water supply mary and second- advised on systemBatumni ary impacts on management and

* limited electri- public health operationscal supply

* equipment for * temporary * appropriate * TCC will re-* loss of water repairing mains impacts; disrup- construction view repairpressure tion in traffic due measures mini- activity

to pipeline repairs mize impacts* water loss dueto leakage

* chlorination * providing * secondary im- * proper storage * managementplant in poor chlorination pact: chlorine is and handling of plan will be de-condition equipment toxic gas chlorine veloped for han-

dling chlorine* switch gearand materials forpumping (motor)equipment

Specific SpecificBatumi Batumi

- deteriorated * standby gen- * noise from * the generators * TCC willpumps and elec- erators and re- generators will be housed supervise place-trical equipment placement pumps and placed in ment and housing

locations to min- of generatorsTbilisi imize impacts* laboratory/ from noise * managementequipment for plan and trainingwater quality will be providedtesting for laboratory

operations* studies: prepa-ration of waterdistribution man-agement plan

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Annex 12Table I cont. Environmental Mitigation Plan Page 10 of 11

INVESTMENT ISSUES ACTIVITIES IMPACTS MITIGATION MONITORINGPROJECT

WASTEWATER All Cities All Cities All Cities * Water Enter-COLLECTION * untreated sew- * sewer cleaning * primary and prise will beAND erage discharged equipment secondary posi- advised on systemTREATMENT to river tive impacts on management andPoti * spare parts for public health operationsTbilisi * sewer network sewer partsBatumi in deteriorated * positive sec-

condition ondary impactson water quality

* frequent block- and ecosystemages in sewers * excavatingand flooding in equipment * temporary * appropriate * TCC willstreets impacts from construction review repair

* basic renova- disturbances measures to activity* no equipment tion of primary during sewer minimize impactsavailable for treatment facili- repaircleaning sewers ties

Tbilisi* intermnittent * sewerage line * appropriate * water qualityelectricity Poti cleaning may sewer line man- testing will be

* refurbishment have possible agement and initiated* treatment facil- of pumping temporary im- piping will beities inadequate stations pacts on river implemented

water quality with All Cities* primary treat- * vehicles and flushing the CCTV inspectionment under equipment for system of sewers forcapacity emptying septic future sewer line

tanks improvements* no secondaryand tertiary treat-ment

* treatment facil-ities non-access-ible, bridge in-operational

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Annex 12Table 1 cont. Environmental Mitigation Plan Page 11 of 11

INVESTMENT ISSUES ACTIVITIES IMPACTS MITIGATION MONITORINGPROJECT

SOLID WASTE * disposal of * study and * positive pri- * TCC review ofCOLLECTION waste in uncon- implementation mary and second- landfill operationsAND DISPOSAL trolled landfill! for interim river ary impacts onBatumi dumps at river's bank stabilization public health,

edge to reduce landfill water quality, anderosion into river air quality

* water quality * appropriateproblems from * landfill man- * temporary sediment andrunoff/debris aged equipment negative impacts erosion controlwashing into the from increased measuresriver * new collection turbidity during

and transport construction of* limited supply vehicles river bank stabil-of vehicles and izationequipment * spare parts

* unmanaged * landfill man- * socio-economic * landfill man-disposal agement strategy impacts to infor- agement strategy

mal users of the will be sensitive* open burning landfill to informal users

of the landfill

e socio-economic * compensationimpact to gravel and reestablish-operators on the ment of gravelriver channel operations in

river bed

Tbilisi * disposal of * equipment, * positive im- * management * TCC review ofwaste in unauth- vehicles to estab- pacts would plan will de- landfill operationsorized dumps in lish transfer col- reduce impacts on velopedregions of the lection system public healthcity * unauthorized

* Study - a * positive im- dumps will be* water quality feasibility study pacts on air closedimpacts from to produce master qualityurban runoff and plan for futureleachate development of * positive im-

municipal solid pacts on water* poor incinera- waste collecting qualitytor operations and disposal

operations* fires at dumps

Poti * unmanaged * equipment for * positive im- * management * TCC willlandfill landfill operations pacts to public plan would be review landfill

health, water developed operationsquality, and airquality

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Page 1 of 2

The Project's Qualitative Benefits

Because of the urgent character of the Project, cost recovery requirements, normallyapplied to public sector projects, are not applicable in this case. Therefore, benefits cannot bequantified and the economic analysis, based on qualitative characteristics, will sufficiently reflectthe effectiveness of the investment.

The major benefit of the Project is to provide financing for arresting further deteriorationand maintaining operations of key municipal services in 3 cities. Thus, the Project will allowthe Government of Georgia and the beneficiaries to avert potential system collapses or disaster,which otherwise might occur. Thus, the project has an explicit preventive and mitigation nature.In addition, this project will lay the foundation and facilitate further intervention of the Bank andother donors into the sector.

Tbilisi Schools and Hospitals.

COST BENEFITS

Total cost of the component is US$ 4.1 The length of the academic year will not bemillion and it will be implemented only in shortened.Tb iIi si

Providing heating for 23 hospitals, thusensuring health care services through thewinter for needy population

Increased access to 200 educational and 23health care facilities during the winterperiod through

Reduction of energy requirements forheating of schools and hospitals

Tbilisi Urban Transport

COST BENEFITS

Total cost of the component is US$ 4.1 Increased frequency of trips, resulting in:million and it will be implemented only in (a) increased access; (b) reduced waitingTbilisi tinme

Increased mobility of labor resources

Increased passenger safety

Decelerating equipment deterioration rate

Increasing sustainability of operations

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Annex 13Page 2 of 2

Water Supply

COST BENEFITS

Total: US$ 2.0 million, of which: Maintaining quality of drinking water(a) US$ 1.3 million Tbilisi component Reducing exposure to diseases(b) US$ .7 million Batumi component

Maintaining existing access to water supplyservices

Sustaining deterioration rate of pumpingequipment

Wastewater Treatment

COST BENEFITS

Total cost: US$ 2.2 million, of which: Reducing exposure to health hazard(a) US$ .6 million Tbilisi component(b) US$ .9 million Batumi component Increasing access to sewage services(c) US$ .7 million Poti component Reducing negative environmental impact of

exposed sewage by mitigating air and waterpollution

Increasing efficiency of operations by: (a)reducing electricity requirements forpumping stations and (b) reducingmanpower requirements

Solid Waste Management

COST BENEFITS

Total: US$ 1.0 million, of which: Reducing exposure to health hazards(a) US$ 0.5 million Batumi component Increasing safety of landfill sites by(b) US$ 0.3 million Tbilisi component reducing probabi]ity of accidents(c) US$ 0.2 million Poti component

Mitigating negative environmental impactsby reducing water, air pollution and litter

Increasing efficiency of operations by: (a)decelerating deterioration rate ofequipment; (b) increasing hours of accessto equipment; (c) increasing productivity ofmanpower

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Annex 14

Republic of GeorgiaMunicipal Infrastructure Rehabilitation Project

Selected Documents Available in the Project File

l. Project Preparationa) Signed Letter of Agreement for Project Preparation Advance from the Deputy Prime

Minister, dated September 23, 1994.b) Letters from Government to Soros Foundation, dated September 23 and 29, 1994.

2. Environmental Data Sheet dated September 9, 1994.

3. Minutes from Review Meeting before Pre-Appraisal mission, dated July 18, 1994.

4. Feasibility/Preparation Studiesa) Dedicated Electricity Feed Study for Hospitals (MEB International October 6, 1994)b) Weatherization of Schools and Hospitals (RMA consultants - August 30, 1994)c) Coastal Zone Management Study (Delaney, August 24, 1994)d) Wetlands Study (Huppman, August 26, 1994)e) Black Sea Biodiversity Study (Wilson, August 25, 1994)t) Water Supply Study for Tbilisi and Batumi (Halcrow consultant - August 30, 1994)g) Waste water Treatment for Study Tbilisi, Batumi, and Poti (Halcrow consultant -

August 30, 1994)h) Landfill Study for Tbilisi, Batumi, and Poti (Cummings, August 29, 1994)i) Urban Transport Study for Tbilisi (GITEC, August 29, 1994)

5. RVP Authorization to Appraise, dated September 13, 1994.

6. Legal Documentsa) Development Credit Agreementb) Project Management Agreement between Ministry of Finance and Agencyc) Agency's Manual of Proceduresd) Charter of the Agencye) Sub-Agreements with Municipalitiesf) Delegation of Agency to General Manager

7. Negotiationsa) Minutes of Negotiations, dated October 5, 1994.b) RVP Approval to Negotiate in field ad referendum, dated September 23, 1994.c) RVP Approval of Negotiations outcome, dated October 7, 1994.

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