Completion Report

Project Number: 43171 Loan Number: 2534-GEO(SF) June 2013

Georgia: Municipal Services Development Project – Phase 2

CURRENCY EQUIVALENTS

Currency Unit – lari (GEL)

At Appraisal (29 June 2009)

At Project Completion (5 April 2013)

GEL1.00 = $0.605455 $0.603172 $1.00 = GEL1.65165 GEL1.65790

ABBREVIATIONS

ADB – Asian Development Bank CPS – country partnership strategy EIRR – economic internal rate of return ICB – international competitive bidding IFA – investment financing agreement IOS – interim operational strategy km – kilometer MDF – Municipal Development Fund MRDI – Ministry of Regional Development and Infrastructure MSDP – Municipal Services Development Project NCB – national competitive bidding O&M – operation and maintenance SAR – subproject appraisal report SSR – subproject summary report UWSCG – United Water Supply Company of Georgia

WSS – water supply system W1 – window 1 W2 – window 2

NOTES

(i) The fiscal year (FY) of the Government of Georgia and its agencies ends on 31 December. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2008 ends 31 December 2008.

(ii) In this report, "$" refers to US dollars.

Vice - President X. Zhao, Operations 1 Director General K. Gerhaeusser, Central and West Asia Department (CWRD) Director A. Chiplunkar, Urban Development and Water Division, CWRD

Team Leader B. Goalou, Urban Development Specialist (Transport), CWRD Team Members T. Papuashvili, Senior Project Assistant, CWRD

C. Soliman, Associate Operations Officer, CWRD

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS Page

BASIC DATA I. PROJECT DESCRIPTION 1 II. EVALUATION OF DESIGN AND IMPLEMENTATION 1

A. Relevance of Design and Formulation 1 B. Project Outputs 3 C. Project Costs 5 D. Disbursements 5 E. Project Schedule 6 F. Implementation Arrangements 6 G. Conditions and Covenants 7 H. Consultant Recruitment and Procurement 8 I. Performance of Consultants, Contractors, and Suppliers 8 J. Performance of the Borrower and Executing Agency 9 K. Performance of the Asian Development Bank 9

III. EVALUATION OF PERFORMANCE 10

A. Relevance 10 B. Effectiveness in Achieving Outcome 10 C. Efficiency in Achieving Outcome and Outputs 10 D. Preliminary Assessment of Sustainability 11 E. Impact 12

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 13

A. Overall Assessment 13 B. Lessons Learned 14 C. Recommendations 14

APPENDIXES 1. Design and Monitoring Framework 16 2. Project Costs and Financing Plan 20 3. Breakdown of Yearly Disbursements, 2009–2013 22 4. Flow of Funds 23 5. Implementation Schedule 24 6. Status of Compliance with Loan Covenants 25 7. Contract Packages and Procurement Procedures 32 8. Municipal Development Fund Organization Structure 33 9. Economic Reevaluation 34 10. Overall Assessment Methodology 37 11. Contribution to Level 2 Indicators 38 SUPPLEMENTARY APPENDIXES (available on request) A. Profile of Completed Subproject Facilities B. Field Visit Reports on the Selected Subprojects C. MDF Staff Training Program D. Contribution to Level 2 Indicators

BASIC DATA

A. Loan Identification

1. Country Georgia

2. Loan Number 2534-GEO(SF) 3. Project Title Municipal Services Development Project

- Phase 2 4. Borrower Georgia 5. Executing Agency Municipal Development Fund 6. Loan Amount $30.0 million (SDR19,374,000) 7. Project Completion Report Number {to be provided prior to Board circulation}

B. Loan Data 1. Appraisal 2. Loan Negotiations

– Date Started – Date Completed

3. Date of Board Approval

4. Date of Loan Agreement

5. Date of Loan Effectiveness – In Loan Agreement – Actual – Number of Extensions

6. Closing Date – In Loan Agreement – Actual – Number of Extensions

7. Terms of Loan – Interest rate – Maturity (number of years) – Grace period (years)

8. Terms of Relending – Interest Rate – Maturity (number of years) – Grace Period (years) – Second-Step Borrower

Waived during Management Review Meeting held on 28 April 2009 10 June 2009 10 June 2009 28 July 2009 20 August 2009 19 October 2009 28 October 2009 None 30 June 2014 TBD None 1.6 % per annum 32 8 12% per annum 10 1.5 2 municipal governments for loans and grants 29 municipal governments for grants

9. Disbursements a. Dates

Initial Disbursement

14 December 2009

Final Disbursement

TBD

Time Interval

TBD

Effective Date

28 October 2009

Original Closing Date

30 June 2014

Time Interval

56 months

TBD = To be determined.

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b. Amount (SDR)

Category Subcategory

Original

Allocation

Last Revised

Allocation Amount

Canceled

Net Amount

Available Amount

Disburseda

Un- disbursed Balance

1. Project financing facility 16,802,000 17,500,000 0 17,500,000 17,422,943 77,057 - Subprojects under W1 11,137,000 3,760,000 0 3,760,000 3,750,151 9,849 - Subprojects under W2 5,665,000 13,740,000 0 13,740,000 13,672,792 67,208 2. Project management and capacity development

867,000 195,000 0 195,000 178,777 16,223

3. Incremental administration 1,517,000 1,679,000 0 1,679,000 1,415,847 263,153 4. Unallocated 188,000 0 0 0 0 0 Total 19,374,000 19,374,000 0 19,374,000 19,017,567 356,433

W1 = Window 1; W2 = Window 2. a To be confirmed.

Note: Amounts may not add up due to rounding.

C. Project Data

1. Project Financing Plan ($ million)

Cost Appraisal Estimate Actuala

Implementation Costs Borrower Financed Municipal Development Fund 3.00 1.02 Municipal Governments 6.61 5.44 Central Government 0.84 0.41 ADB Financed 30.00 29.41 Other External Financing 0.00 0.00 Total 40.45 36.28

IDC Costs Borrower Financed 1.05 1.00 ADB Financed 0.00 0.00

Other External Financing 0.00 0.00 Total 1.05 1.00

ADB = Asian Development Bank, IDC = interest during construction. Note: Amounts may not add up due to rounding. a To be confirmed.

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2. Cost Breakdown by Project Component ($ million)

Component Appraisal Estimate Actuala

A. Investment Program 1. Investment Program – Subprojects under W1

Base Cost 21.51 7.25 Taxes and Duties 3.80 1.31 Subtotal 25.31 8.56

2. Investment Program – Subprojects under W2 Base Cost 8.77 21.27 Taxes and Duties 1.55 3.83 Subtotal 10.32 25.10

3. Project Management and Capacity Development Base Cost 1.44 0.30 Taxes and Duties 0.24 0.05 Subtotal 1.68 0.35

Subtotal (A) 37.31 34.01 B. Incremental Administration

Base Cost 2.37 1.92 Taxes and Duties 0.39 0.35

Subtotal (B) 2.76 2.27 C. Contingencies

Physical 0.38 - Price 0.00 -

Subtotal (C) 0.38 - D. Interest Charges During Implementation 1.05 1.00

Total 41.50 37.28 W1 = Window 1; W2 = Window 2. Note: Amounts may not add up due to rounding. a Estimated dollar equivalent. Amounts to be confirmed.

3. Project Schedule

Item Appraisal Estimate Actuala

A. Preparatory Work Processing of MSDP 2 Loan Q1 – Q2 2009 Q1 – Q3 2009 Imprest Account Opened Q3 2009 Q4 2009 B. Investment Projects Selection of Municipalities Q2 2009 – Q3 2010 Q3 2009 – Q2 2012 Feasibility and Other Studies Conducted Q2 2009 – Q4 2010 Q3 2009 – Q2 2012 Municipal Financial Agreement Signed Q4 2009 – Q3 2011 Q4 2009 – Q2 2012 Design and Preparation of Bidding Documents Q4 2009 – Q3 2012 Q2 2009 – Q2 2012 Bidding and Evaluation Q2 2009 – Q1 2012 Q3 2009 – Q2 2012 Construction and Commissioning Q4 2009 – Q4 2013 Q3 2009 – Q4 2012 C. Capacity Development Technical and Engineering Management Q3 2009 – Q2 2013 Q4 2009 – Q1 2013 Institutional and Managerial Development Q3 2009 – Q2 2013 Q4 2009 – Q1 2013 Financial Management Q4 2009 – Q3 2013 Q4 2009 – Q1 2013 Operation Management Q4 2008 – Q3 2013 Q4 2009 – Q1 2013 Project Performance Monitoring Q4 2009 – Q1 2014 Q4 2009 – Q1 2013 Environmental Management and Reporting Q4 2009 – Q1 2014 Q4 2009 – Q1 2013 Training and Workshop Conducted Q4 2009 – Q3 2013 Q4 2009 – Q1 2013

MSDP 2 = Municipal Services Development Project – Phase 2, Q = quarter.

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4. Project Performance Report Ratings

Implementation Period Ratings

From 1 November 2009 to 31 December 2010

Development Objectives

Implementation Progress

Satisfactory

Satisfactory

From 1 January 2011 to 30 April 2013

On Track

D. Data on Asian Development Bank Missions

Name of Mission

Date

No. of Persons

No. of Person-Days

Specialization of Members

a

Fact-finding 2 – 8 Mar 2009 2 14 a, e Loan Inception 24 Nov–3 Dec 2009 3 30 a, e, c Review 1 1–8 Oct 2010 6 36 a, b, c, d, f, g Review 2 9–14 May 2011 1 6 a Midterm Review 26-30 Sep 2011 3 15 b, c, g Review 3 17–20 Apr 2012 5 20 b, c, g, h, i Project completion review 4 Mar - 9 Apr 2013 5 40 b, c, g, j, k

a a = senior urban development specialist (transport), b = urban development specialist (transport), c = national

officer, d = lead professional (urban services), e = urban development specialist, f = water supply and sanitation specialist, g = senior project assistant (GRM staff), h = director’s advisor, i = director, cwuw, j = engineer (staff consultant), k = economist/financial specialist (staff consultant).

I. PROJECT DESCRIPTION

1. Georgia’s municipal services, including roads, urban transport, water supply and sanitation, solid waste management, and other municipal infrastructure were improved in recent years with the assistance of international donors. 1 The funding was provided through the Municipal Development Fund (MDF),2 which enabled municipal governments to take out soft loans and grants for municipal infrastructure investments. The MDF strengthened the institutional and financial capacity of municipal governments by financing local infrastructure investments and capacity development projects, but these investments were insufficient to meet the growing demand. The poor level of basic municipal services constrained business development, hampered urban development, and affected the quality of life of urban residents. In 2008, the Asian Development Bank (ADB) approved a loan to finance the Municipal Services Development Project (MSDP I).3 The project was satisfactorily implemented from 2009 to 2012.4 2. Several urgent urban transport subprojects were not implemented under MSDP I, as the resources were committed to other priority subprojects and municipalities. MDF found that additional urban infrastructure rehabilitation and development investment was particularly essential in the urban transport sector, because of traffic congestion, and air and noise pollution in urban areas. In 2009, the government requested assistance from ADB to improve municipal infrastructure services delivery. A loan of SDR19.374 million ($30.0 million equivalent) from ADB’s Special Funds was approved on 28 July 2009.5 The Loan Agreement was signed on 20 August 2009 and became effective on 28 October 2009. The project is categorized as financial intermediation.

3. The project was designed to improve the urban environment, the local economy, and public health in urban areas. The project focused on rehabilitation of urban roads and traffic management measures, with other urban municipal subsectors also considered for possible financing to support project flexibility and responsiveness. The project consisted of two components. Part A—the Project Financing Facility—provided MDF with capital resources for lending to municipal governments to implement subprojects to increase the service quality, coverage and reliability of the transport, water supply, wastewater, and solid waste management systems. Part B—Project Management and Capacity Development—aimed to: (i) improve municipal government capacity to prepare and appraise feasibility, engineering, design, environmental, social, and other related studies; (ii) improve municipal-level project management capacity; and (iii) strengthen corporate and business planning processes within MDF, provide training to MDF staff, and improve the capacity of MDF to conduct studies.

II. EVALUATION OF DESIGN AND IMPLEMENTATION

A. Relevance of Design and Formulation

4. The government’s overall development strategy is given in the Economic Development

1 Includes the World Bank, European Bank for Reconstruction and Development, European Union, United Nations

Development Programme, ADB, and bilateral aid agencies. 2 Established on 7 June 1997 under Presidential Decree No. 294.

3 ADB. 2008. Report and Recommendation of the President to the Board of Directors: Proposed Loan to Georgia for

the Municipal Services Development Project. Manila. The loan in the amount of $40 million was approved on 12 September 2008.

4 ADB. 2012. Completion Report: Municipal Services Development Project in Georgia. Manila. The report was

circulated on 7 November 2012, and rated the project successful. 5 ADB. 2009. Report and Recommendation of the President to the Board of Directors: Proposed Loan to Georgia for

the Municipal Services Development Project-Phase 2. Manila.

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and Poverty Programme of Georgia6 in 2003. However, during project preparation in 2009, no national sector development plan, strategy, overall urban policy, or long-term investment program had been prepared. It was only in June 2010 that the State Strategy for Regional Development of Georgia for 2010–2017 was issued through a government resolution.7 This strategy provides the main principles for Georgia’s medium-term regional development policy, objectives and tasks for government regional development, emphasizing effective management of municipal services and infrastructure development. 5. The project was consistent with MDF’s mandate and its operational strategy. 8 The strategic directions comprise two core areas: (i) the financial and institutional sustainability of MDF, and (ii) rehabilitation and/or development of the social and economic infrastructure of Georgia. The strategy was approved by the MDF Supervisory Board in June 2010 and uploaded on MDF’s website; it emphasizes improvement of urban roads and traffic management. Subproject formulation and design were undertaken through a community demand-driven approach. The subprojects were prepared on the basis of a needs assessment conducted through municipal government meetings with stakeholders, including local communities. MDF also conducted public relations activities, including workshops to introduce the project to potential municipal governments and beneficiaries before and during project implementation. 6. ADB’s priorities are stated in the interim operational strategy (IOS) 2008–2009 for Georgia.9 They were based on: (i) alignment with the government’s development agenda, (ii) selectivity in focusing limited resources on a small number of priority areas, and (iii) complementarity with other development partners. The IOS focuses on enhancing sustainable economic growth, with the cross-cutting themes of governance, regional cooperation, and environmental protection by: (i) improving service delivery in municipal infrastructure within the evolving decentralization process, (ii) reducing road transportation constraints on economic activities, and (iii) upgrading and developing energy infrastructure. The IOS states that ADB’s proposed support for municipal infrastructure is in line with the government’s development agenda, which prioritizes poverty reduction, economic growth, and governance and anticorruption. The improved municipal and local infrastructure services fall in the economic growth category. The project interventions are in line with the draft country partnership strategy (CPS), which is scheduled to be approved in early 2014. 7. The project took a sector and programmatic approach by channeling funds for investments through the central government, and in turn from the MDF to municipal governments. It supported the government’s objectives of decentralization, poverty reduction, and human development by improving urban infrastructure services, and strengthening the institutional capacity of the MDF and the participating municipal governments. The project design was sound and relevant at appraisal and completion, and it adequately incorporated the project objectives. Project implementation involved local stakeholder participation and ownership by the beneficiary communities. At appraisal, the project focused on financing urban transport and traffic management to address traffic congestion, and air and noise pollution in several municipalities, including Tbilisi. No changes in project scope were made. An increase in the number of subprojects was in line with the government’s strategy, and resulted in project benefits reaching more municipal governments across a larger area.

6 Economic Development and Poverty Programme, 2003. (http://www.imf.org/external/pubs/ft/scr/2003/cr03265.pdf)

7 Resolution No. 172 dated 25 June 2010.

8 State Strategy for Regional Development of Georgia for 2010–2017, issued on 25 June 2010.

http://mrdi.gov.ge/en/legislation/strategy.html 9 ADB. 2008. Georgia: Interim Operational Strategy, 2008–2009. Manila.

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B. Project Outputs

1. Part A: Project Financing Facility

8. Georgia has 64 municipalities and four self-governed cities. The project was to finance investments in municipal infrastructure and utility services, focusing on urban transport. At appraisal, subproject selection criteria were prepared to screen and appraise the proposed subprojects by the municipal governments. Only subprojects meeting general and program eligibility conditions were considered for financing. The general conditions specified that investment subprojects would be for rehabilitation, construction, repair, and extension of the existing municipal infrastructure in (i) water supply, including resources development and improvement; (ii) sewerage collection and treatment; (iii) wastewater and solid waste collection and disposal; (iv) urban transport; and (v) local road improvement, including drainage and street lighting, traffic management, and other municipal services and goods. The program eligibility conditions categorized candidate municipal governments into those eligible for (i) the grant and loan scheme under window 1 (W1), and (ii) for the grant financing under window 2 (W2), based on their financial position. At appraisal, it was envisaged that about 70% of the loan proceeds allocated under the Project Financing Facility would be financed for municipal governments categorized under W1, and about 30% under W2. Five large-scale subprojects for road reconstruction and improvement in Tbilisi and some other large municipalities were also listed for possible financing. 9. During the first year of project implementation (2010), MDF reassessed the creditworthiness of candidate municipalities, and categorized 27 municipal governments for 34 subprojects under W2, and only two municipal governments for four subprojects under W1. The municipalities had populations between 8,800 and 77,400, and were concentrated in the western part of the country. Most (34) of the subprojects were for rehabilitation or improvement of roads, with four subprojects for water supply system (WSS) rehabilitation. In addition, procurement of operational equipment for solid waste management in two municipal governments was included as category W2, and procurement of operational vehicles for MDF project management and construction supervision was included under the incremental administration category. In July 2010, ADB approved a multitranche financing facility for the Sustainable Urban Transport Investment Program,10 to help the government improve urban transport in major municipalities. The investment program covered two road subprojects for Tbilisi and Kutaisi 11 (the largest municipalities originally listed for the project), and these subprojects were thus excluded from the project. 10. Road rehabilitation subprojects improved 101.7 kilometers (km) (7.7 km under W1 and 94.0 km under W2) of urban streets and suburban roads with asphalt or concrete pavement, sidewalks and drainage. A road tunnel (0.24 km long) on the Zugdidi–Jvari–Mestia–Lasdili road was constructed under W2. The WSS subprojects were implemented for four municipalities, one under W1 and three under W2. The works included the development and rehabilitation of well and spring intakes, pumping stations and reservoirs, disinfection facilities, and transmission and distribution pipelines. The expansion and rehabilitation of distribution networks were a major item of works for all the municipalities. No water treatment plant was constructed, because the raw water collected from artesian wells or springs was adequate for use without treatment.

10

ADB. 2008. Report and Recommendation of the President to the Board of Directors: Proposed Multitranche Financing Facility to Georgia for the Sustainable Urban Transport Investment Program. Manila. The facility, for $300 million, was approved on 21 July 2010. The loan agreement for tranche 1 (Loan 2655) in an amount of $85 million equivalent was signed on 5 August 2010.

11 The proposed subproject for Kutaisi was eventually excluded from project 1 of the investment program.

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Disinfection was required, and chlorinators were installed for disinfection in three WSS subprojects (in Poti the existing chlorination system was working well). The WSS subprojects included: (i) 223.2 km of transmission and distribution pipelines, with diameters of 50 mm to 300 mm; and (ii) other facilities, including production wells, pumping stations with underground reservoirs, and disinfection facilities. The project also provided 22,823 house connections including yard piping (20,000 under W1 and 3,823 under W2). Water meters for house connections are being provided by municipal governments or the United Water Supply Company of Georgia (UWSCG), 12 using their own funds. Under the solid waste management subprojects, four solid waste collection vehicles and 350 mobile containers were procured. 11. The project components as implemented were basically unchanged from the appraisal, although the proportion of subprojects allocated to W1 and W2 did change. As envisaged, the urban and suburban roads subprojects were the major project component with 34 subprojects, followed by four WSS subprojects. No other components were implemented, except procurement of solid waste collection bins and vehicles and MDF operational vehicles for project implementation supervision. These changes did not affect the total project cost, but resulted in project benefits reaching more people and covering a wider geographical area.

2. Part B: Project Management and Capacity Development

12. Upon notification by the Ministry of Finance and MDF about the project, interested municipal governments prepared and submitted subproject proposals with preliminary design and cost estimates to MDF and Ministry of Regional Development and Infrastructure (MRDI). Using its own funds, MDF provided consulting services to the municipal governments to prepare their feasibility study reports, where required. Upon receipt of the proposals and feasibility study reports, MDF assessed them and prepared subproject appraisal reports (SARs) for W1 and subproject summary reports (SSRs) for W2 for review and approval by the Supervisory Board and ADB. Upon approval, MDF executed investment financing agreements (IFAs) with the municipal governments. MDF undertook preparation of detailed design, bidding documents and contract awards, and carried out supervision of civil works according to the agreed operations manual. No consultant was engaged at the municipal level, except for construction supervision services for the Zugdidi–Jvari–Lasdili road rehabilitation works and the rehabilitation of Poti water supply system network. The environmental aspect of the subprojects was assessed in accordance with the environmental assessment and review framework prepared at loan appraisal and the environmental management plan prepared by MDF. No investment subproject involving land acquisition and resettlement was included. No indigenous peoples exist in Georgia by ADB’s definition, and therefore none were involved in any of the subprojects. 13. The capacity of the operational staff of MDF was strengthened through training seminars and workshops undertaken in Tbilisi and overseas in 2011 and 2012. The training programs were financed separately from the project, by the World Bank and other development partners. The training subjects were identified through a needs assessment, and included financial management, environmental protection and social activities, design and implementation of civil works, and procurement procedures and management. The main topics of the training programs and people trained are shown in Supplementary Appendix C. 14. The project was envisaged to include technical assistance to help participating municipal governments identify their urban priorities; undertake planning and project feasibility studies;

12

UWSCG was established in January 2010 under the “Law of Georgia on Entrepreneurs”, with a capitalization of

GEL57.9 million. The government owns 100% of company shares through the MRDI. Currently, it operates 56 WSS systems through six regional branches.

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and improve charges, accounting, financial management, and reporting systems. It also aimed to provide institutional strengthening and capacity development to the municipalities to ensure project benefits were sustainable. However, no consultant was engaged for capacity development. The trained MDF staff visited the participating municipal governments and provided on-the-job training in preparing subproject feasibility reports and detailed designs, and in construction supervision. All (29) selected municipal governments were involved in the entire process of subproject preparation and implementation. However, these activities consist of the usual project management tasks, and actual training for municipal government staff would have been more beneficial. C. Project Costs

15. During project preparation, the total project cost, including interest charges and contingencies, was estimated at $41.50 million. The ADB loan of $30.00 million would therefore cover 72.29% of the total project cost. The remaining costs were to be covered as counterpart funds: $1.89 million equivalent (4.55%) by the central government, $3.00 million (7.23%) by MDF, and $6.61 million (15.93%) by the participating municipal governments. The provision of counterpart financing was sufficient and timely. The loan proceeds as originally allocated were equivalent to $17.24 million for W1 subprojects and $8.77 million for W2 subprojects under the project financing facility, $1.34 million for project management and capacity development, $2.35 million for incremental administration, and $0.29 for contingencies. In June 2011, MDF requested the reallocation of the loan proceeds to effect the changes in the proportion of funds allocated to W1 and W2, and to transfer part of the unused loan proceeds from project managment and capacity building to the project financing facility (W2).13 Accordingly, the loan proceeds allocated for the project financing facility were changed from $16.66 million (66.3%) to $5.85 million (22.5%) equivalent for W1, and from $8.47 million (33.7%) to $20.19 million (77.5%) equivalent for W2. The allocation for project management and capacity development was also changed from $1.30 million to $0.38 million equivalent. At project completion, MDF also requested the reallocation of loan proceeds to reflect the actual total amount disbursed, which was approved by ADB on 1 April 2013. 16. Contract awards totalled 38 civil works contracts for 29 municipalities, 3 contracts for procurement of solid waste management equipment for 2 municipalities, and 1 contract for operational vehicles for MDF. The investment subproject component (including civil works and goods contracts) amounted to $33.66 million, compared to $35.63 million estimated at appraisal. For project management and capacity development, the actual cost was $0.35 million, compared with the $1.68 million estimated at appraisal. The unused amount resulted from the cancellation of consulting services. As a result, the actual project cost at completion became $36.28 million equivalent. ADB financed $29.41 million (80.3%), while the balance was financed by the central government ($0.41 million, or 1.1%), MDF ($1.02 million, or 2.8%), and the participating municipal governments ($5.44 million, or 14.9%). The project cost estimated at appraisal and the actual cost are shown in the Basic Data Sheet and Appendix 2. The summary of contract awards estimated at appraisal and actual is shown in Appendix 7. D. Disbursements

17. Total ADB loan disbursements equaled $29.41 million, compared to $30.0 million envisaged at appraisal. Loan disbursements were made smoothly over the period from December 2009 to March 2013. Funds were disbursed according to ADB standard payment procedures and there were no significant problems. The subloan approval and withdrawal

13

The request was approved by ADB on 20 June 2011.

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procedure was introduced in accordance with the ADB’s Loan Disbursement Handbook (2012, as amended from time to time), but not actually used. The participating municipal governments transferred the funds from their resources to their MDF account without delays, in accordance with the investment financing agreements. No change in the flow of funds was made as shown in Appendix 4. 18. MDF established the MSDP 2 imprest account at the Treasury on 2 November 2009. The first disbursement from the imprest account was made on 14 December 2009 for $2.85 million, which was within the imprest account ceiling of $3.0 million as stipulated in the Loan Agreement. The use of the imprest account was effective and it guaranteed direct and timely payments to civil works contractors and suppliers. The average turnover ratio of the imprest account during project implementation was estimated at 2.67. The full impact of the above payment procedures was found to be positive. A breakdown of yearly disbursements is in Appendix 3. E. Project Schedule

19. The loan was approved by ADB on 28 July 2009; the loan agreement was signed on 20 August 2009, and became effective on 28 October 2009. MDF screened subproject requests from municipal governments based on the prescribed criteria and proceeded with preparation of feasibility studies for the selected subprojects, with the assistance of local consultants engaged by MDF. Almost all the SARs for W1 and the SSRs for W2 were prepared during 2010. Following approval by the MDF Supervisory Board, the SSRs for the first three subprojects14 were submitted to ADB on 16 July 2009. Most of the other SSRs were submitted to MDF and ADB during February to May 2010. Only 6 SSRs, including 2 subprojects for the Zugdidi–Jvari–Mestia–Lasdili road rehabilitation works, were submitted to ADB during 2011–2012. Following ADB approval of the SARs and SSRs, the IFAs were signed, detailed design and bidding documents prepared, and contractors for civil works engaged in accordance with the procurement plan. The civil works and equipment supply were completed by September 2012, 15 months earlier than the scheduled physical completion date of 31 December 2013. With the exception of one contract awarded in June 2012, all the civil works contracts were awarded between October 2009 and August 2010. Progress of construction works was smooth and satisfactory, with due diligence and supervision by the MDF and municipal governments. Of 34 civil work contracts, 5 contracts were physically completed within 2010, 4 contracts within 2011, and the others by September 2012. Four water supply subprojects15 were put into operation satisfactorily. The actual implementation schedule compared to appraisal is in Appendix 5. F. Implementation Arrangements

20. The project implementation arrangements designed during project appraisal were followed. MDF was the executing agency; it had overall responsibility for project coordination and implementation, and acted as liaison with the relevant government agencies and ADB. No project management or implementation units were established. The same technical, financial, and administrative staff assigned to MSDP I were responsible for implementation of the project. The project was overseen by MDF’s Supervisory Board, which was chaired by the President of Georgia and consisted of representatives from MRDI and other ministries concerned under its decree No. 118, dated 23 July 2005 (updated 10 November 2011). The decree authorized the Supervisory Board to approve subproject feasibility and appraisal reports, a yearly financing plan, and implementation arrangements. The Supervisory Board convened meetings on a

14

Keda and Shuakhevi road rehabilitation projects, and Tsalka water supply subprojects. 15

Ozurgeti, Sachkhere Municipality Villages and Merjevi, Tsalka, and Poti water supply rehabilitation subprojects.

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monthly basis and as needed. After the general election in October 2012, MDF organization, including management and staff members, was substantially changed. However, the impact on project implementation appeared minimal as key personnel were retained. The new MDF organization chart is given in Appendix 8. Project implementation management was primarily administered by MDF. All preconstruction work, including preparation of detailed design and bidding documents and engagement of contractors and suppliers, was undertaken by MDF with the participation of the municipal governments.16 Upon receipt of investment requests from municipal governments, MDF prepared the SAR for W1 subprojects and the SSR for W2 subprojects. MDF engaged local consultants for preparation of feasibility studies, preliminary and detailed design and bidding documents, and other related studies. No consulting firm was engaged for overall project implementation services, and local consultants were engaged for construction supervision services for the rehabilitation of Poti water supply network and the Zugdidi–Jvari–Mestia–Lasdili road rehabilitation subprojects. MDF undertook project performance monitoring, including environmental and social development outcomes, in accordance with the operations manual. The municipal governments conducted tasks related to community participation and socioeconomic surveys during the preconstruction stage. Consultations were held with communities so that opinions could be reflected in project implementation. 17 Day-to-day construction supervision was undertaken by the participating municipalities, supported by the MDF engineer who visited sites on a monthly basis and as needed. In general, however, the capacity of the municipal governments appeared weak. The number of staff with adequate qualifications and experience is limited, partly because of the high rate of staff turnover. After the October 2012 election, personnel at the management level were substantially replaced. Almost all municipal governments lack an inventory or database of municipal infrastructure—including that constructed under the project—which may adversely affect planning and operation and maintenance (O&M) of municipal infrastructure services. G. Conditions and Covenants

21. Twenty-one covenants are stipulated in the loan and project agreements, and all covenants were fully complied with, with the exception of Schedule 5 of the Loan Agreement, which stipulates (para. 5) that not less than SDR11,137,000 equivalent of the loan proceeds be used to finance subprojects under W1, and an amount not exceeding SDR5,665,000 equivalent be allocated to subprojects under W2. Based on the creditworthiness assessment, the reallocation of the loan proceeds for four subprojects under W1 (20.8% of the loan) and 33 subprojects under W2 (78.0% of the loan) was requested by MDF and approved by ADB in June 2011. At project completion, SDR3,760,000 in loan proceeds were used to finance subprojects under W1 and SDR13,740,000 to finance those under W2. MDF selected subprojects based on the prescribed criteria, prepared the SARs and the SSRs, and submitted them to ADB in a timely manner. The investment financing agreements with the participating municipal governments were prepared in the agreed format. Counterpart funds were provided in a timely manner. MDF maintained its project management and information system and monitoring system reports were updated at 6-monthly intervals. The environmental monitoring report was satisfactorily prepared and included in the progress report. The MDF submitted to ADB progress reports, audited financial statements, and other required documentation in a timely manner. The audited financial reports were prepared in accordance with improved procedures for budgeting, finance, and operations. The status of compliance with loan covenants is in Appendix 6.

16

The State Department of Roads was involved in preparation of the feasibility study and detailed design for the Zugdidi–Jvari–Mestia–Lasdili road rehabilitation subprojects because these are classified as national roads.

17 MDF reported that only 25% of public consultation participants were women, which could have been improved by involving additional nongovernmental and civil society organizations that work on issues prioritized by women.

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H. Consultant Recruitment and Procurement

22. During project implementation, a detailed procurement plan was prepared and updated based on a list of subprojects and contract award schedules. At appraisal, consulting services were estimated at a contract value of $4.44 million in the procurement plan, and were to cover legal and/or technical aspects of project implementation, O&M, and planning, and funding (including feasibility studies, detailed designs, and construction supervision). However, only two local consultants were engaged for a total of $0.35 million (for construction supervision of the two subprojects for Zugdidi–Jvari–Mestia–Lasdili road rehabilitation and the rehabilitation of Poti water supply network for sectors I-VI). These local consultants were recruited in February 2011 and July 2011, respectively, using the least-cost selection method as agreed by ADB.18 No other consultants were engaged, because MDF assured ADB that it had adequate capacity to perform construction supervision in cooperation with the participating municipal governments, as practiced for the implementation of MSDP I. In addition, the reallocation of the funds that were slated for consulting services to the investment component maximized project benefits by covering additional municipalities across a wider area. Feasibility studies and detailed designs were prepared by MDF staff, or local consultants funded by MDF. Thirty-eight civil works contracts were awarded to local contractors. In accordance with Schedule 4 of the Loan Agreement, all contractors were selected using national competitive bidding (NCB) procedures, except for three large contracts—two for Zugdidi–Jvari–Mestia–Lasdili road rehabilitation (for $1.54 million and $3.27 million equivalent) and one for rehabilitaion of Poti water suppy network (for $7.71 million equivalent)—which were selected using international competitive bidding (ICB) procedures. Post-qualification was used in selecting civil works contractors. The engagement of contractors by NCB was undertaken smoothly and contract amounts were in line with the engineer’s estimates. Procurement of operational equipment for solid waste management, consisting of three packages for 350 mobile containers and four collection vehicles for two municipalities, was made through ICB, and procurement of six vehicles for MDF was made using the shopping procedure. The actual contract packages and procedures were shown in Appendix 7. I. Performance of Consultants, Contractors, and Suppliers

23. The performance of the local consultants, financed by MDF for preparation of the feasibility studies and detailed designs, was generally satisfactory. The required design and bidding documents were submitted on time. In several road rehabilitation subprojects, lack of adequate drainage facilities to collect storm or rain water from the road surface has been noticed. Provision of traffic safety provision was generally found insufficient as marking for drive lane and pedestrian crossing has not been systematically installed in commercial and residential areas. The performance of the civil works contractors was generally satisfactory. Almost all the construction works were completed on time. Some contractors slightly failed to complete the works within the original contractual period, and so liquidated damages for the delays were imposed according to the conditions stipulated in the contract.19 The quality of asphalt pavement works was generally satisfactory. However, curb installation and concreting work for construction of sidewalks and side ditches was found to be substandard for some of the subprojects. The rehabilitation of water supply facilities and distribution networks appeared

18

The consultant for Zugdidi–Jvari–Mestia–Lasdili road rehabilitation was performing construction supervision for another section of the same road financed by tranche 1 of the Sustainable Urban Transport Investment Program (footnote 10). The consultant for Zugdidi–Jvari–Mestia–Lasdili road rehabilitation was recruited 5 months after the award of the works contract (including winter, when no works occur in this mountainous region) and performed construction supervision for 8 months.

19 Out of 34 contracts, five contractors were penalized for delays with liquidated damages.

9

satisfactory. Upon completion, pressurized quality water is supplied to the target population for 12–24 hours per day. The environmental and safety provision was adequate and monitored during construction work in accordance with the environmental management plan. The contracts for the supply of equipment for solid waste management, such as collection trucks and bins, were awarded to three local suppliers, and for supply of vehicles for MDF to one local supplier. J. Performance of the Borrower and Executing Agency

24. The performance of the borrower and of MDF, as the executing agency, was satisfactory. The MDF maintained adequate coordination among ADB, municipal governments, and contractors. All the documents, including SARs and SSRs, were prepared in a timely manner. MDF submitted the first batch of SARs and the SSRs to ADB in July 2009, and these were approved. With assistance and guidance from the ADB project team, MDF and the municipal governments have obtained valuable experience and knowledge through project implementation. Reporting requirements were largely met. A total of five semi-annual reports were prepared. The first semi-annual report (for March to September 2010) was submitted in October 2010 and the last (covering April to September 2012) was submitted in October 2012. Unaudited and audited financial statements were also submitted in a timely manner. The project completion report by the borrower was submitted in February 2013. The construction supervision was in most cases carried out by municipal government engineers and technical staff, supported by the MDF engineers. Day-to-day construction supervision was undertaken by the municipal government staff, with visits by the MDF engineer on (at least) a monthly basis. Almost all the subprojects were completed on time. However, the poor quality of works with respect to concreting and curb installation on some subprojects was considered to result partially from the limited experience and insufficient knowledge of some municipal governments, as well as some MDF local staff, regarding technical standards. However, these works were accepted and handed over to the concerned municipal governments based on a joint completion inspection. Frequent changes in MDF organization and management posed a risk to the continuity of their activities. Also, a high turnover of municipal government staff, resulting mainly from changes in position and responsibilities and low wages, impacted negatively on the accountability of MDF for project implementation. After the October 2012 general election, some MDF staff were replaced, although most key staff responsible for project implementation remained. Replacement of municipal government personnel appeared to have a more significant impact, and the transfer of responsibilities—including data and information—appeared inadequate. UWSCG is now responsible for water supply system O&M;20 although UWSCG has regional and municipal branch offices, their capacity for local-level O&M appears limited, with only operators and technicians but no managers, engineers or specialists. K. Performance of the Asian Development Bank

25. ADB’s performance is considered satisfactory. During project implementation (from October 2009 to September 2012), ADB fielded six missions—inception, four review missions (including the midterm review), and the completion review. The review missions were effective and instrumental in addressing various issues to achieve the timely completion of the project. MDF noted that ADB’s approvals and disbursements were made in a timely manner. ADB approved two requests from MDF for reallocation of loan proceeds. ADB worked closely with MDF and gave it timely assistance to solve various problems, including the preparation of project performance monitoring system reports, and procurement and payment issues. ADB’s Georgia Resident Mission actively participated in monitoring project implementation. ADB

20

Municipal governments were responsible for O&M of water supply systems before the incorporation of UWSCG in January 2010.

10

review missions frequently visited the subproject sites and met municipal government officials, local MDF staff, and contractors to observe the progress of civil works. The missions also interacted with the project beneficiaries and explained the impacts that would affect them during project implementation and upon completion of the project. The mission responded promptly to MDF’s queries regarding project implementation.

III. EVALUATION OF PERFORMANCE

A. Relevance

26. The project is rated highly relevant. It was consistent with the government's priorities at the time of appraisal, and is consistent with its current priorities, as given in the State Strategy for Regional Development of Georgia for 2010–2017 (footnote 8). ADB intervention was coordinated with other international development partners, including the World Bank and European Bank for Reconstruction and Development,21 which also provided assistance in line with the government’s strategy for municipal infrastructure development, aimed at achieving poverty reduction and economic growth. MSDP I was ADB’s first intervention in this sector, and was satisfactorily completed in June 2012 (footnote 4). The project followed MSDP I to help the government finance improvement of municipal infrastructure and services and improve the urban environment and living conditions of the population in municipal areas. Urban services and infrastructure are expected to be a priority area in the new ADB country partnership strategy (to be finalized in 2013). B. Effectiveness in Achieving Outcome

27. The project is rated highly effective and exceeds the outcome envisaged at appraisal (more subprojects were financed from the loan proceeds than envisaged). The project provided improved municipal roads in 27 municipalities (101.7 km of urban roads were improved and upgraded) and a reliable and safe water supply in four municipalities. Over 2% of the urban roads in each participating municipality were improved, and travel time has been reduced by more than half. Increased bus services benefit local people. According to the February 2013 project performance monitoring system report, about 390,000 people benefit from access to the improved roads. The improved WSS benefits 72,000 people in four municipalities by providing a pressurized quality water supply for 12–24 hours a day. The water quality is tested according to the national standard for drinking water. In addition, 50,000 people in two municipalities benefit through installation of garbage collection cans and collection trucks. The project has improved the urban environment, local economy, and people’s health in the participating municipalities. C. Efficiency in Achieving Outcome and Outputs

28. The project is rated highly efficient. Project implementation was originally envisaged to take place from October 2009 to December 2013. The selection of subprojects, preparation of feasiblity studies and detailed designs, and selection of contractors were mostly completed during 2010. All 38 civil works contracts were awarded in 2009 and 2010, and completed in 2010 and 2011, except the rehabilitation of Poti water supply network subproject, which was completed in September 2012. The prompt implementation is attributed to the ability of MDF and the municipal governments to process the subprojects. The capacity of MDF, the participating municipal governments and UWSCG was strengthened through implementation of the project, which has increased their capacity for O&M of the municipal infrastructure and services provided under the project.

21

Other development partners include the European Union, United Nations Development Program, United States Agency for International Development, and Kreditanstalt für Wiederaufbau (KfW).

11

29. The economic internal rate of return (EIRR) was reevaluated for 10 sample subprojects (two WSS and eight road improvement subprojects). For WSS, project benefits were based on (i) willingness-to-pay tariffs; (ii) expected values of safe drinking water; and (iii) time, labor, treatment, and storage cost savings. The estimated EIRR for the W1 water supply subproject is 18.2%, and for W2, 15.6%. The range of estimated EIRR values for roads improvement for W1 is 30.7%–33.8%; for W2 roads subprojects, the EIRR is 26.9%–41.2%. The average EIRR for WSS subprojects is 16.9%, and for roads, 32.4%. For all W1 subprojects, the EIRR averages 27.6%, and for W2, 30.0%. The range of benefit–cost ratios for all subprojects is 1.1–2.1, with an average of 1.7. For the roads subprojects, quantified benefits include vehicle operating cost savings and time savings. O&M cost savings have not been quantified as municipal government budgets do not disaggregate roads, and specific road sections, from the other budget appropriations. The range of benefit–cost ratios for the road subprojects is 1.5–2.1, with an average of 1.9. In both sectors, the average EIRR at completion is slightly higher than estimated at appraisal, and all exceed the threshold economic opportunity cost of capital of 12%. A detailed financial reevaluation was not undertaken as financial viability was not a criterion for subproject selection.22 The economic reevaluation is in Appendix 9. D. Preliminary Assessment of Sustainability

30. The project is rated less likely sustainable. 23 As of March 2013, all the subproject facilities are functioning and being maintained relatively satisfactorily. The O&M of municipal roads is contracted out to local contractors for annual maintenance and repair works under the supervision of municipal governments. However, the budget allocation of the municipal governments is insufficient and needs to be increased. The capacity of municipal governments needs to be strengthened although it has been partly addressed through on-the-job training activities. A limited number of staff are responsible for infrastructure, with only 10 people on average, including 2–3 for municipal road maintenance. No municipal government has a database system to store and archive their asset inventories, which will be essential for planning, improvement and O&M of municipal infrastructure and services. 31. The improved water supply systems are being satisfactorily operated by the UWSCG, delivering pressurized quality water to the targeted consumers for 12–24 hours a day. The state-owned UWSCG is responsible for operating and managing all water supply facilities in Georgia except for Tbilisi and the main municipal governments. The water quality is monitored in the UWSCG laboratories at the local and regional level to ensure water quality meets the national standard. However, the capacity of UWSCG needs to be further developed to ensure that O&M is technically and financially sustainable, particularly during and after the gradual

22

For Poti, UWSCG tariffs are GEL0.80 per cubic meter (m3) for metered house connections and GEL3.00/m

3 for

commercial and other non-domestic connections. For non-metered house connections, the tariff is GEL1.20/household member/month. Poti connections are reportedly 99% metered. Households pay on average GEL5.00–GEL8.00/month. In 2012, UWSCG reported earnings of GEL1.773 million against expenditures at GEL1.801 million. Losses in the previous years were greater prior to system improvement under the project. The consumers experience the service improvement and are willing to pay higher tariff for the satisfactory service. Most relied on supplementary supplies in the past despite being connected to the water system that provided only 2-hour irregular service, and this strained their finances. In Naruji village, the consumers are very satisfied with the new service. The whole village of Ozurgeti, comprising 500 households now benefits from 24-hour service provided by UWSCG; prior to the project, each household depended on very unsafe public artesian wells and trucked water. The tariff is GEL 0.40/m

3 with average household consumption of 20–25 m

3/month; average water expenditure is

GEL 8.00–GEL10.00, or about 4%–5% of the average income of village households (GEL250–GEL 300/month). 23

The project could be ranked likely sustainable if the budgetary subsidies for road maintenance were provided

reliably by the national government and if WSS tariff reforms resulted in O&M expenses being met in the medium term. The rating on sustainability could therefore be reconsidered in the project performance evaluation report.

12

introduction of meters. Best practice dictates charging tariffs that are based on cost-recovery principles for sustainability. Tariffs should fully cover O&M costs and depreciation; if households cannot afford to pay the full amount needed to cover depreciation, they could pay part of the amount and gradually work towards full depreciation coverage as economic conditions permit. The depreciation budget is the main source of funding for replacements and asset renewals. Sample subprojects have been subjected to economic reevaluation and were found to be economically viable. The project upgraded the irregular (2–4 hours, subject to water availability) WSS to a 24-hour service. Water pressure at the tail ends of the new and improved networks satisfy the minimum pressure requirements, including on the top floor of apartment blocks. The quality of water meets potable standards and ensures protection from possible disease and prevents unnecessary medical expense. However, to maintain consumer satisfaction with the current service level, UWSCG needs to review the existing tariff-setting guidelines, implement and institute the necessary tariff reforms, and accelerate the metering program that will help with reforms. The existing tariff-setting procedures lack transparency, so that ordinary customers would fail to easily identify the costs behind the price they pay. Under the current situation, cross-subsidization is needed to balance the requirements of service centers. Tariff reform should consider a timeline over which subsidies would be gradually decreased and eliminated.

E. Impact

32. Overall, the project impact is rated substantial. For the rehabilitated urban streets and roads, the beneficiaries enjoy savings in travel time and O&M costs for vehicles owing to the removal of potholes and cracks on the roads. The municipal governments also benefit from accrued savings on road maintenance costs. The project also led to better access to schools, hospitals and public facilities, and improved sales by some retail shops and local markets, as a result of improved access for customers and suppliers. The improved WSS with installation of disinfection facilities will provide quality water to the targeted population in the four subproject areas. In Poti, water is supplied 12 hours a day, compared to 4.5 hours a day before the project. All the municipalities including Poti are planning to extend their water supply to 24 hours per day, which will ensure that all water used is safe and hygienic. The project will therefore achieve its long-term objective of improved living standards and public health. Through the rehabilitation of distribution networks and installation of metered house connections, the water wastage has been reduced; water that is not unaccounted for has been reduced from about 50% before the project to an average of 20%–25% after the project. All the beneficiaries interviewed appreciated the enhanced services provided by the subprojects. In particular, people who had used artesian well water before the project expressed great appreciation for the piped water. 33. Economic. The project directly benefited the municipal population in terms of improved health and living conditions resulting from (i) a safer and more reliable water supply; (ii) having more time available to spend on more productive and creative endeavors than collecting water from public faucets, which was particularly appreciated by the women and children usually tasked with the activity; (iii) actual cash savings to households, as medical expenses for specific diseases are avoided; and (iv) avoided additional costs for electricity and cleaning agents to ensure water quality. The project also made possible safer, more rapid travel for businessmen and tourists, with increased revenues that contribute to the local and national economy. Foreign direct investment to develop the services sector has been the economy’s main driver. This means that the service sector-driven provision of basic services has been a key priority in urban centers such as Kutaisi, Poti, Ozurgeti and Mtskheta, where larger populations are associated with high demand for municipal services. Urban centers in tourist destinations—such as Mtskheta, and at a smaller scale Tsalenjikha, Keda and Shuakhevi—are attracting tourists and the development of hotels and resorts has become a priority, together with road and transport

13

linkages to these key destinations. Local workers and students benefit in particular from shortened travel time to their destination, making more time available for productive and creative endeavors. Improved road systems attract new shops and markets that also create opportunities along the supply and retail chain, with earnings flowing into the cash economy. 34. Involuntary resettlement and indigenous people. No investment subproject involved land acquisition and resettlement; subprojects were carried out within the existing rights-of-way and did not involve any land acquisition and/or resettlement that would trigger ADB’s Involuntary Resettlement Policy (1995). No indigenous peoples exist in Georgia by ADB’s definition, and therefore were not involved in any of the subprojects. 35. Environment. The project is environmentally beneficial. The physical component of the subprojects, with simple, appropriate, and low-cost technology, did not pose any adverse environmental consequences. The improved municipal roads reduced noise, dust, and air pollution. The provision of safe drinking water had a positive impact on the environment. MDF appraised all subprojects in accordance with the Environmental Assessment and Review Framework and government laws. MDF staff conducted preliminary environmental assessment of the proposed subprojects. MDF staff visited the proposed subproject sites to carry out field investigations, including public consultations, and prepared an environmental management plan for each investment subproject. During construction, MDF monitored the environmental impact of the subprojects, visiting the worksites at least monthly in accordance with the schedules outlined in the environmental management plan. The environmental monitoring activities were discussed in the progress reports. Changes in design and construction methods were made where negative impacts on the local environment were foreseen at assessment. 36. Consultation and civil society. MDF and the participating municipal governments ensured that for all subprojects, the results of social assessments and stakeholder consultations were taken into account in identifying investment priorities. After signing of the loan agreement, MDF initiated a series of public relations programs to disseminate MDF’s roles, functions and activities, and report to the communities on the implementation of the subprojects. The public relations program was carried out in cooperation with the participating municipality to (i) identify social issues, including gender, vulnerability, labor, affordability, and other social issues; (ii) identify measures to minimize any risks; and (iii) ensure that the subproject was tailored to the needs and priorities of the participating community as identified through the consultation process. Under the program, nearly 100 meetings were held in many municipalities with participation of representatives of MRDI, municipal governments, local communities and central and local mass media. MDF and the municipal governments ensured that men and women were paid an equal rate for work of equal value.

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS

A. Overall Assessment

37. Overall, the project is rated successful. The project outputs and outcome exceed those envisaged at appraisal. The completed project facilities are less likely sustainable; the capacity of municipal governments and UWSCG needs to be strengthened and adequate funds for O&M should be allocated. If the allocation of such funds is confirmed during project performance evaluation, the project would qualify for likely sustainable and overall highly successful ratings. The environmental impact was positive, and a positive social impact was achieved. The EIRRs are satisfactory, taking into account such impact factors as travel cost and time savings; improved access to business and commercial centers, and public establishments such as

14

schools and hospitals; and the economic benefits of improved water delivery, improved health, and increased revenue. The overall assessment and methodology are detailed in Appendix 10. B. Lessons Learned

38. Based on the assessment of the project, the following lessons were learned: (i) Proactive consultation with municipal governments by MDF to ensure prompt

selection of subprojects created a momentum that was maintained during project implementation and contributed to completion of physical works ahead of schedule.

(ii) Considering there were some shortfalls in the road subproject detailed design work (such as drainage and ditch cover, sidewalk, and traffic safety provision), MDF technical staff, local consultants and contractors need training on technology and workmanship in order to reach international standards. MDF and ADB need to ensure timely recruitment of construction supervision.

(iii) On-the-job training activities alone are less effective than actual training courses in terms of capacity development. The capacity of the municipal governments remains weak; all lack a filing and database system to store their asset inventories, which will be essential for planning, improvement and O&M of municipal infrastructure and services.

(iv) Issues regarding legal and/or technical aspects of O&M planning and funding, measures for cost recovery, tariff collection, and the metering system should be properly studied by consultants to mitigate the risk associated with inadequate O&M of project WSS facilities.

(v) The management information system proved to be an efficient means to provide all project information and data and helped MDF monitor implementation of the project in a timely manner. The same system should be used other projects.

C. Recommendations

1. Project Related

39. Future monitoring. The following actions are required: (i) The municipal governments should strengthen their capacity for O&M of roads

and municipal infrastructure, including ensuring an adequate budget allocation. (ii) UWSCG should ensure that 24-hour supply of water is sustained, which will

benefit consumers and eliminate contamination through distribution pipelines. (iii) UWSCG should monitor the installation of water meters and collection of water

tariffs based on consumption in the years to come. Once tariffs have been introduced, they should be reviewed regularly and regulated to ensure financial sustainability based on affordability by consumers.

(iv) A review of the actual WSS O&M cost requirements must be undertaken at the municipal level so that tariffs are set appropriately. Flat rates or the practice of charging for service based on number of household members must be replaced with volumetric tariffs. The metering program must be accelerated to enable this.

40. Future actions or follow-up. The following actions are recommended to enhance the project’s sustainability and benefits:

(i) Ensure the enhanced capacity of municipal government staff for O&M monitoring of urban streets and semi-urban roads.

(ii) Ensure an adequate budget allocation is made for O&M of municipal roads so that local contractors can be engaged to carry out cleaning and repairs.

15

(iii) Provide further traffic safety provisions, such as marking drive lanes, humps and pedestrian passages.

(iv) Municipal governments should prepare inventories of their assets, including municipal infrastructure.

(v) Asset valuation must be undertaken of all municipal assets. 41. Timing of the project performance evaluation report. All civil works and project components were physically completed by the end of September 2012. An additional 2–3 years may be required to assess the long-term socioeconomic benefits of the project. The suitable timing for preparing the project performance evaluation report will, therefore, be in 2015 or 2016. 2. General

42. General recommendations are as follows: (i) Project implementation arrangements designating MDF as the executing agency

were adequate. However, a long-term strategy to develop MDF as a financial intermediary will succeed only if MDF finances subprojects in the form of subloans (the W1 scheme), which will accrue and generate funds to MDF from repayments by the borrowers or municipal governments.

(ii) MDF should ensure that qualified staff are retained during project implementation. Adequate salaries that are competitive with the private sector should be guaranteed to avoid high staff turnover.

(iii) There is a continuing need for improved municipal infrastructure. About 30%–50% of urban streets and more than 70% of semi-urban or village roads are in poor condition, with potholes and damaged drainage systems. Water supply systems need to be expanded and be fitted with water treatment facilities to deliver clean water to the wider population. Municipal government sanitation, sewerage, solid waste management and street lighting systems also need improvement. Given that MDF is still receiving financing requests from municipal governments, ADB’s continued support is needed until MDF becomes a full-fledged financing institution able to finance investment in municipal infrastructure development programs on a sustainable basis.

(iv) The capacity of the participating municipal governments remains weak, because of significant staff turnover following the 2012 election. Nationwide municipal government staff training should be conducted to help municipal governments develop their O&M infrastructure and service capacity.

(v) The national standard and specifications applicable for roads design is the Georgian Road Geometrical and Structural Data.24 It is incomplete, however. A unified national road design standard should be prepared, and consultants and contractors should be trained in its use.

(vi) The capacity of local construction companies should be strengthened to improve knowledge of concrete work and enable them to undertake proper maintenance, which is already needed as potholes and cracks have been observed.

(vii) MRDI‘s plan to install a geographic information system (GIS) should be pursued, which will enable compilation and archiving of inventories of municipal infrastructure, including roads, bridges, tunnels, water supply systems, and other infrastructure.

24

Issued by the Georgia State Road Department, MRDI in 2009.

16 Appendix 1

DESIGN AND MONITORING FRAMEWORK

Design Summary Performance

Targets/Indicators Project Achievements Key Issues and

Recommendations Impact

Improved urban environment, local economy, and public health in urban areas

By 2020

(i) Accidents and casualties reduced by 10% compared to baseline in 2007; (ii) Particles emissions reduced by 10% compared to baseline in urban areas in 2007; (iii) Access to businesses and communities improved by 10% in central areas compared to baseline in 2008;

By 2020

(i) Ministry of Internal Affairs records for 22 municipalities indicate the following reductions in traffic accidents, injuries and casualties in 2011 compared with 2008: car accidents, 20%; casualties, 40%; injuries (70%) (36% in average are female). This implies the possibility that the targeted rate will be achieved by 2020. (ii) National Environmental Agency survey results indicate air pollution (dust, carbon, nitrogen, sulfur, lead) in major towns (including Tbilisi and Kutaisi) in 2012 was 10%–50% lower than in 2007. (iii) Access to businesses and communities has been significantly improved: the travel time of beneficiaries to central or commercial areas has been cut to less than half what it was before the project. New markets have been established along improved areas and generate new opportunities to reduce unemployment and improve productivity of citizens.

The government should install traffic safety provisions (e.g., road markings and humps) and strengthen traffic control to reduce urban traffic accidents. Police and traffic management groups should be updated on traffic management procedures and implementation guidelines; consideration should be given to development of traffic regulations at the earliest possible opportunity where they are absent or lacking. Physical road improvements should be accompanied by strict enforcement of existing penalties for traffic violations to instill discipline among drivers. Government laws related to the urban environment and vehicle emission gasses need to be instituted or strengthened The air pollution monitoring devices are currently installed in only a few major towns. The government should expedite its plan to establish monitoring stations in the other towns. Improved utility services will not be sustained and expanded unless the central and municipal governments allocate adequate funds for O&M and expansion.

Continued improvement of infrastructure services including road, WSS, solid waste management and hotels is essential to

Appendix 1 17

Design Summary Performance

Targets/Indicators Project Achievements Key Issues and

Recommendations (iv) Attractiveness and preservation of cultural heritage achieved, with a 20% increase in tourist nights compared to baseline in 2008.

(iv) Attractiveness and preservation of cultural heritage has been achieved in the municipalities, including Borjomi and Mtskheta, where the number of tourists has increased (measured conservatively) by over 200%, compared to 2008. Mtskheta had 28,500 foreign visitors in 2012, in addition to over 2 million local tourists and visitors, 23% of whom were female. According to GEOSTAT, the number of non-resident visitors (who cross the border to Georgia) was estimated to be 1.29 million in 2008 and 4.39 million in 2012 (of these at least 10% are tourists and 18% female); 0.27 million people stayed in hotels in 2008, which increased to 0.85 million in 2011 (15% were female).

promote the tourism industry. Support must be given to strategies such as development of micro-credit to promote SME related to tourism.

Outcome

Improved municipal infrastructure, service delivery, and better living conditions in urban areas

By 2014

(i) Number of kilometers of pavement and road upgraded in the city increased by 1%; (ii) Fluidity and capacity of city road network to reduce travel costs and time to major commercial and service centers improved by 5% on the upgraded arteries; (iii) Number of legal parking places increased by 1% in historical center; (iv) Citizens enabled to benefit from project construction.

Achieved

(i) Municipal roads (total length of 101.7 km) were improved and upgraded in 27 municipalities, accounting for more than 2% of the existing urban roads in each participating municipality. (ii) Travel time reduced by more than 50%. The increased bus services benefit local people. (iii) None of the subprojects provided new parking places. Sufficient parking was already available in the participating municipalities. (iv) Local people were engaged for subproject construction works. About 20–50 local people were employed for each subproject construction works

The capacity of municipal governments needs to be strengthened to adequately maintain the improved municipal roads. Also, the ability of local contractors engaged for O&M of municipal roads need to be improved. Reduced travel time translates to reduced vehicle O&M. Buses and other utility transport should consider fare reductions for students and low-paid workers. Delivery trucks should consider reductions in the price of retail products they carry, all to the benefit of consumers.

18 Appendix 1

Design Summary Performance

Targets/Indicators Project Achievements Key Issues and

Recommendations Outputs 1. Part A: Investment Projects Financing Facility

Increased quality of service, wider network coverage, reliability of urban transport system, water supply, wastewater, and solid waste management 2. Part B: Project Management and Capacity Development

Improved capacity of municipal governments to prepare and appraise feasibility, engineering design, environmental, social, or other related studies Improved capacity of municipal governments in project management

By 2014

Two rehabilitation projects completed; By 2014

(i) Two project feasibility studies prepared and recommendations implemented; (ii) Design and supervision contracted out in at least two municipalities; (iii) Project outputs informed by sex-disaggregated data analyses and gender-balanced consultations.

Achieved

Rehabilitation projects (38 total) were completed by September 2012. Urban roads (total length 101.7 km) were improved under 34 subprojects in 27 municipalities. Water supply systems were rehabilitated and expanded with installation of 264 km of distribution pipes in 4 municipalities. Achieved

(i) Three subproject appraisal reports (SARs) and 35 subproject summary reports (SSRs) were submitted to and approved by ADB. (ii) Detailed design works for all 38 subprojects were contracted out to local consultants by MDF. Construction supervision was undertaken directly by MDF with participation of the municipal governments. Two consultants were engaged for construction supervision, one for the road project in Mestia and the other for the water supply project for Poti. (iii). MDF staff is gender balanced (46.4% of staff were female in 2013 as opposed to 27.4% in 2008). Two impact performance targets are informed by sex-disaggregated data; 25% of public consultation participants are female.

Adequate O&M funds need to be allocated by the municipal governments and UWSCG to sustain the improved infrastructure and service. The need for collection of water tariffs should be fully recognized by water users; UWSCG and municipal governments should disseminate their tariff policy. The metering program must be started to allow tariff reform to be undertaken.

Continued capacity building is needed as MDF is expanding its activities as a financial intermediary for future projects. Capacity building is essential for municipal governments, almost all of which lack an inventory or record of municipal infrastructure and facilities. Financial records are not kept at water service centers. Budgets are centrally prepared. Consumers are unaware of how the tariffs they pay have been established, and even service-center staff are unaware of tariff-setting and its guidelines.

Activities with Milestone

1.1 Criteria to define creditworthy municipalities

1.2 First project

development and loan and/or grant agreements

Already in place when project starts. Entered into in mid 2010.

The criteria used for MSDP1 were used. The first IFAs for three subprojects were signed in September and October 2009.

Credit-worthiness must be regularly reviewed and updated as budgets are centrally planned.

Appendix 1 19

Design Summary Performance

Targets/Indicators Project Achievements Key Issues and

Recommendations 1.3 Rehabilitation of

certain municipal infrastructure in two municipalities

2.1 Operations manual

used by MDF 2.2 MDF pursues

sound institutional strategy as part of the implementation of the project

2.3 Institutional

strengthening activities, including training.

By end of 2013. Already in place when project starts. Completed by June 2013

34 civil work subprojects were completed by February 2013. The project operations manual was prepared in December 2009 for implementation of the subprojects, as agreed by ADB. The MDF institutional strategy is unchanged, but substantial changes in management and staff were made in 2010 and in December 2012, following the October 2012 general election. MDF staff received ongoing training between 2011 and 2012.

ADB = Asian Development Bank, GEOSTAT = National Statistics Office of Georgia, IFA = investment financing agreement, km = kilometer, MDF = Municipal Development Fund, MSDP1 = Municipal Services Development Services (Loan 2441), O&M = operation and maintenance, PIT = project implementing team, SME = small and medium enterprise, UWSCG = United Water Supply Company of Georgia.

20 Appendix 2

PROJECT COSTS AND FINANCING PLAN

Table A2.1: Summary Project Costs ($ million)

Component Appraisal Estimates

Actuala

A. Investment Program

1. Investment Program – Subprojects under W1

Base Cost 21.51 7.25

Taxes and Duties 3.80 1.31

Subtotal 25.31 8.56

2. Investment Program – Subprojects under W2

Base Cost 8.77 21.27

Taxes and Duties 1.55 3.83

Subtotal 10.32 25.10

Subtotal (A) 35.63 34.01

B. Project Management and Capacity Development

1. Base Cost 1.44 0.30

2. Taxes and Duties 0.24 0.05

Subtotal (B) 1.68 0.35

C. Incremental Administration

1. Base Cost 2.37 1.92

2. Taxes and Duties 0.39 0.35

Subtotal (C) 2.76 2.27

D. Contingencies

1. Physical 0.38 0.00

2. Price 0.00 0.00

Subtotal (D) 0.38 0.00

E. Interest Charges During Implementation 1.05 1.00

Total 41.50 37.28 Note: Amounts may not add up due to rounding. a Estimated US dollar equivalent. Amounts to be confirmed.

Sources: Asian Development Bank and Municipal Development Fund of Georgia.

Appendix 2 21

Table A2.2: Financing Plan (SDR million)

Category (1)

Original Allocation

(2)a

Last Reallocation

(3)b

Disbursed Amount

(4)c

Undisbursed Balance

(5 = 3-4)d

Asian Development Bank

Project Financing Facility 16.802 17.500 17.423 0.077

Subprojects under Window 1 11.137 3.760 3.750 0.009

Subprojects under Window 2 5.665 13.740 13.673 0.067

Project Management and Capacity Development 0.867 0.195

22 0.179 0.016

Incremental Administration 1.517 1.679 1.416 0.263

Unallocated 0.188 0.00 0.00 0.00

Total 19.374 19.374 19.018 0.356

Municipal Development Fund 1.934 0.687 0.682 0.005

Municipal Governments 4.262 4.476 3.638 0.838

Central Government 1.219 0.354 0.274 0.079 Notes: 1. “Unallocated funds” have been transferred to categories where they were actually used. 2. Disbursed amount and undisbursed balance are to be confirmed after processing of final withdrawal application and liquidation of the imprest account. 3. The last reallocation was approved by the Asian Development Bank in April 2013. а Exchange rate at appraisal: SDR1.0 = $1.55102.

b Exchange rate at reallocation: SDR1.0 = $1.49911.

c Exchange rate at the time of disbursement: To be determined.

d At preparation of this report: SDR1.0 =$1.49549.

Source: Asian Development Bank estimates.

22 Appendix 3

BREAKDOWN OF YEARLY DISBURSEMENTS, 2009–2013

($ million)

Period Disbursements Cumulative

Disbursements %

2009 Q-4 2.855 2.855 9.71

2010 Q-1 0.000 2.855 9.71

Q-2 2.017 4.872 16.56

Q-3 6.683 11.555 39.29

Q-4 8.866 20.421 69.43

2011 Q-1 0.000 20.421 69.43

Q-2 0.147 20.568 69.93

Q-3 4.604 25.172 85.58

Q-4 0.644 25.816 87.77

2012 Q-1 0.000 25.816 87.77

Q-2 0.830 26.646 90.60

Q-3 1.437 28.083 95.48

Q-4 1.056 29.139 99.07

2013 Q-1 0.273 29.412 100.00

Total 29.412 Q = quarter Source: Asian Development Bank.

Appendix 4 23

FLOW OF FUNDS

MDF = Municipal Development Fund

Asian Development Bank

Government of Georgia –

Ministry of Finance

Other MDF project loan repayments

Municipal Development Fund

Investment component Capacity development

Payments Payments

Project agreement

Suppliers and

contractors

Consultants and

suppliers

Assets turned over Provide services

Municipal governments or

local utility enterprises

Key to arrows

Releases and payments

Loan repayments

Project development agreement

Activities

IMPLEMENTATION SCHEDULE

Activity Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

A. Preparatory Work

Processing of MSDP 2 Loan

Imprest Account Opened

B. Investment Projects

Selection of Municipalities

Feasibility and Other Studies Conducted

Municipal Financial Agreements Signed

Design and Preparation of Bidding Documents

Bidding and Evaluation

Construction and Commissioning

C. Capacity Development

Technical and Engineering Management

Institutional and Managerial Development

Financial Management

Operation Management

Project Performance Monitoring

Environmental Management and Reporting

Training and Workshop Conducted

Loan Effectiveness Midterm Review Physical

Completion

Q1 = first quarter, Q2 = second quarter, Q3 = third quarter, Q4 = fourth quarter, MSDP 2 = Municipal Services Development Project - Phase 2.

Municipal Development Fund of Georgia estimates.

Actual.

20142009 2010 2011 2012 2013

24

A

pp

end

ix 5

Appendix 6 25

STATUS OF COMPLIANCE WITH LOAN COVENANTS

Covenants Reference in Loan

and Project Agreement

Status of Compliance

Project Management and Implementation

1. Executing Agency Established, Staffed, and Operating PMU or PIU MDF shall be the Project Executing Agency responsible for carrying out the Project. MDF shall promptly as required, take all action within its power to maintain its corporate existence, to carry out its operations, and to acquire, maintain and renew all rights, property, powers, privileges and franchises which are necessary in the carrying out of the Project or in the conduct of its business. MDF shall carry out the Project with due diligence and efficiency and in conformity with sound administrative, financial, engineering, environmental and business practices.

LA Schedule 5, para. 1 PA, Article III, section 3.01, 3.11

Complied with. As the project executing agency, MDF, carried out the project in a satisfactory manner. An ad hoc PMU or PIU was not established, but a system was in place within MDF that enabled financial, technical and other divisions to fulfill their areas of responsibilities for implementation of the project since Loan 2441-GEO(SF): MSDP I was implemented.

2. Fielding of Consultants In carrying out the Project, MDF shall employ competent and qualified consultants and contractors for the subprojects, eligible for ADB financing, to an extent and upon terms of conditions satisfactory to ADB.

PA, Article III, section 3.02

Complied with. Qualified consultants and contractors were employed according to the procurement plan agreed by ADB.

3. Subproject Selection The Borrower shall ensure that each subproject financed out of the proceeds of the Loan meets eligibility criteria set forth in the Schedule to the Project Agreement. Notwithstanding anything to the contrary provided herein, the Borrower shall ensure that: (i) a portion of the Loan proceeds in an amount not less than the equivalent of SDR11,137,000 is used by MDF to finance eligible subprojects of qualifying municipal governments in the form of combination of subloans and grants upon terms and conditions satisfactory to ADB ("Window1"), and (ii) a portion of the Loan proceeds in an amount not exceeding the equivalent of SDR5,665,000 is used by MDF to finance eligible subprojects of qualifying municipal governments on a grant basis upon terms and conditions satisfactory to ADB ("Window 2").

PA Schedule, para. 2; LA Schedule 5, para. 3

Complied with. All projects implemented under MSDP 2 met eligibility criteria. The allocation of loan proceeds between windows 1 and 2 was changed based on the result of creditworthiness surveys of the participating municipal governments, which was agreed to by ADB in 2010. Namely, loan proceeds in an amount equivalent of SDR 3,760,000 were used by MDF to finance eligible subprojects

26 Appendix 6

under window 1, and an amount equivalent to SDR 13,740,000 to finance eligible subprojects under window 2.

4. Financing Window 1 Except as ADB may otherwise agree, MDF shall ensure that the following conditions shall apply to financing under Window 1: (a) the total cost of a subproject shall not be below $500,000 equivalent in current prices; (b) each subloan shall be on the terms and conditions described in Section 2.03 of this Project Agreement; (c) each MG shall finance at least 20% of the estimated cost of the subproject; and (d) each MG shall transfer the requested amount in Lari from its total contribution specified in paragraph 4 (c) above into a designated account of MDF, within 15 days upon notice from MDF.

PA Schedule, para. 4

Complied with.

5. Financing Window 2 Except as ADB may otherwise agree, MDF shall ensure that the following conditions shall apply to financing under Window 2: (a) the total cost of a subproject shall not be below $100,000 equivalent and shall not exceed $3,000,000 equivalent in current prices; pooling of smaller but related and contiguous subprojects may be allowed to meet the minimum investment requirement; (b) each MG shall finance at least 15% of the estimated cost of the subproject; and (c) each MG shall transfer the requested amount in Lari from its total contribution specified in paragraph 5 (b) above into a designated account of MDF, within 15 days upon notice from MDF.

PA Schedule, para.5

Complied with.

6. Subproject Eligibility Criteria (a) Subprojects must be for the rehabilitation, construction, repair, and extension of the existing municipal infrastructure in the following categories: (i) water supply, including resources development and improvement, (ii) sewerage collection and treatment; (iii) waste water and solid waste collection and disposal; (iv) urban transport; and (v) local road improvement including drainage and street lighting, traffic management, and other municipal services and goods. (b) To be eligible for financing from the Loan proceeds, each subproject must:

(i) serve the purpose of improving the quality of life, helping meet basic social, environmental, public health standards, and/or promoting local economic development; (ii) be identified primarily on the basis of locally

PA Schedule, para. 2

Complied with.

Appendix 6 27

determined needs communicated to MDF by the municipal governments ; (iii) demonstrate that it can yield benefits that can be quantified or otherwise identified with an acceptable degree of certainty;

(iv) be in full compliance with all relevant provisions of the Borrower’s legislation and regulations, including environmental legislation;

(v) be in compliance with ADB’s Environment Policy (2002); and

(vi) not trigger ADB’s Involuntary Resettlement Policy (1995).

7. Eligibility Criteria for Municipal Governments (a) Unless otherwise agreed between ADB and MDF, to be eligible for financing under Window 1, an MG must have a borrowing capacity determined according to the following criteria:

(i) total annual debt service payments (principal, interest, and any other charges) on all outstanding and proposed subloans for the current year should not exceed six percent (6%) of the forecast revenues for the same year;

(ii) forecast revenues are the sum of tax, non-tax, and capital revenues, and the unconditional equalization transfer from the central government for the current year as recorded in the approved annual budget;

(iii) total outstanding debt should not exceed a hundred percent (100%) of forecast revenues; and

(iv) capacity to repay at least GEL 182,000 per annum in debt service and forecast revenues of more than GEL 3,037,000.

(b) The municipal governments that do not meet the criteria set out in paragraph (a) above shall be eligible for financing under Window 2.

PA Schedule, para. 3

Complied with.

8. Subproject Documentation (a) The SAR shall provide information on (i) the scope of the subproject, (ii) investment and financing plans, (iii) environmental screening, and (iv) economic, financial, social and other benefits and risks. (b) The SSR shall provide a short description of the subproject, its cost, scope and implementation arrangements, investment and financing plans, and possible benefits. (c) The Investment Financing Agreement shall set out terms and conditions of financing, the scope of the subproject, subproject, implementation arrangements, expected completion date, roles and responsibilities of the parties thereto, and shall include, among other things, provisions to the effect that:

(1) the MG shall operate the subproject with due diligence and efficiency and in accordance with

PA Schedule, para 6, 7, 8

Complied with.

28 Appendix 6

sound administrative, financial and environmental practices, including maintenance of adequate accounts and records; (2) the Goods, Works and consulting services to be financed out of the proceeds of the Loan shall be used exclusively in the carrying out of the subproject; (3) ADB and MDF shall each have the right to inspect, with respect to subprojects, such Goods and Works, the MG and any relevant records and documents; (4) the MG shall provide for further maintenance of the facilities rehabilitated under subproject and shall not sell or burden them with any obligations towards third parties without written notice to MDF, prior to full repayment of the principal and the interest of the subloan; (5) ADB and MDF shall each be entitled to obtain all such information as each shall reasonably request relating to the subloans and/or grants, the Goods, Works and consulting services financed out of the proceeds of the Loan, the subproject, the MG (with respect to subproject) and other related matters; and (6) MDF shall be entitled to suspend or terminate further access by the MG to the use of the proceeds of the subloan upon failure by the MG to perform its obligations under the Investment Financing Agreement.

9. Project Review The Borrower, MDF and ADB shall undertake Project review twice a year for the first two (2) years of the Project implementation and once a year thereafter. A mid-term review shall be conducted two (2) years after the commencement of the Project implementation. The mid-term review shall include a detailed evaluation of the Project scope, implementation arrangements, and progress in achieving scheduled targets and compliance with loan covenants.

PA Schedule, para. 14; LA Schedule 5, para. 5

Complied with. Review missions fielded regularly from 2009 to 2012. Midterm Review Mission fielded 26–30 Sep 2011.

10. Project Performance Management System MDF shall maintain its project management and information system including relevant indicators to monitor and evaluate the technical performance benefits of this Project at 6-months interval

PA Schedule, para. 13;

Complied with. MDF maintained the project performance management system, updated and submitted a Project Performance Management System report to ADB review missions.

Financial

11. Imprest Account (a) Except as ADB may otherwise agree, the Borrower shall cause MDF to establish immediately after the Effective Date, an imprest account at the Treasury service of the Borrower.

LA Schedule 3, para. 5 (a)

Complied with. Imprest Account established on 2 Nov 2009.

Appendix 6 29

(b) The imprest account shall be established, managed, replenished in accordance with ADB’s Loan Disbursement Handbook and detailed arrangements agreed upon between the Borrower and ADB. (c) The currency of the imprest account shall be the US Dollar. (d) The initial amount to be deposited into the imprest account shall not exceed the lower of (i) the estimated expenditure to be financed from the imprest account for the first six (6) months of Project implementation, or (ii) the equivalent of ten (10) percent of the Loan amount.

The initial amount of $1.85 million was disbursed on 14 December 2009.

12. Statement of Expenditures (SOE) The statement of expenditures procedures may be used for replenishment of eligible expenditures and to liquidate advances provided into imprest account for any individual payment not exceeding $200,000.

LA Schedule 3, para. 5 (b)

Complied with.

13. Subloan Approval and Withdrawal (SAW) Procedure (a) For a subproject in the amount not exceeding two million Dollars ($2,000,000) eligible for financing under the Project Financing Facility component, the subloan approval and withdrawal (SAW) procedure may be used in accordance with the ADB's Loan Disbursement Handbook, provided that a related SSR is submitted together with the withdrawal application inform and substance, satisfactory to ADB. (b) For a subproject in the amount equal to or exceeding two million dollars ($2,000,000) eligible for financing under the Project Financing Facility component, ADB’s prior review and approval of the related SAR and investment Financing Agreement will be required prior to disbursement in accordance with the ADB’s Loan Disbursement Handbook.

LA Schedule 3, para. 6

SAW procedure was not used.

14. Retroactive Financing Withdrawals from the Loan Account may be made for reimbursement of reasonable eligible expenditures incurred under the Project before the Effective Date, but not earlier than twelve (12) months before the date of this Loan Agreement, subject to a maximum amount equivalent to 20 percent of the Loan amount.

LA Schedule 3, para. 7

No advance actions that required retroactive financing were taken. Loan declared effective on 28 Oct 2009.

15. Condition of Withdrawals from Loan Account Except as ADB may otherwise agree, no withdrawal shall be made from the Loan Account for any Category until: (a) the Borrower has submitted to ADB the duly executed Project Implementation Agreement, satisfactory to ADB; (b) MDF has submitted to ADB a SAR or a SSR, and a craft Investment Financing Agreement for at least one subproject, all in a form and substance satisfactory to ADB.

LA Schedule 3, para. 8

First withdrawal application processed (value dated 14 Dec 2009), that proved Condition of Withdrawals from Loan Account were fulfilled.

30 Appendix 6

Notwithstanding any other provision of this Loan Agreement, no withdrawal shall be made from the imprest account for any subproject estimated to cost the equivalent of $2,000,000 and more until MDF has submitted to ADB the SAR for the relevant subproject, in a form and substance satisfactory to ADB.

LA Schedule 3, para. 9

Complied with.

16. Reallocation Notwithstanding the allocation of Loan proceeds and the withdrawal percentages set forth in the Table, (a) if the amount of the Loan allocated to any Category appears to be insufficient to finance all agreed expenditures in that Category, ADB may upon consultation and agreement with the Borrower, (i) reallocate to such Category, to the extent required to meet the estimated shortfall, amounts of the Loan which have been allocated to another Category but, in the opinion of ADB, are not needed to meet other expenditures, and (ii) if such reallocation cannot fully meet the estimated shortfall, reduce the withdrawal percentage applicable to such expenditures in order that further withdrawals under such Category may continue until all expenditures thereunder shall have been made; and (b) if the amount of the Loan then allocated to any Category appears to exceed all agreed expenditures in that Category, ADB may, upon consultation and agreement with the Borrower, reallocate such excess amount to any other Category.

LA Schedule 3, para. 3

Complied with. Final reallocation of funds request was submitted to ADB on 19 March 2013, and approved by ADB on 1 April 2013.

17. Disbursement Procedures Except as ADB may otherwise agree, the Loan proceeds for financing Goods, Works, consulting services and other expenditures shall be disbursed in accordance with ADB’s Loan Disbursement Handbook (2007, as amended from time to time).

LA Schedule 3, para. 4

Complied with.

18. Auditing and Reporting MDF shall furnish to ADB all such reports and information as ADB shall reasonably request concerning a) (i) the Loan and the expenditure of the proceeds thereof; (ii) the Project; (iii) the municipal governments , the subprojects, the subloans and/or grants; (iv) the administration, operations and financial condition of MDF; and (v) any other matters relating to the purposes of the Loan. b) Without limiting the generality of the foregoing, MDF shall furnish to ADB semi-annual reports on the execution of the Project and on the operation and management of MDF. Such reports shall be submitted in such form and in such detail and within such a period as ADB shall reasonably request, and shall indicate, among other things, progress made and problems encountered during the period under review, steps taken or proposed to be taken to remedy these problems, and proposed program of activities and expected progress during the following period. c) Promptly after the closing date for withdrawals from

PA Article III, section 3.08

Complied with.

Appendix 6 31

the Loan Account, but in any event not later than six (6) months after the said closing date or such later date as ADB may agree for this purpose, MDF shall prepare and furnish to ADB a report, in such form and in such detail as ADB shall reasonably request, on the utilization of the Loan, the execution of the subprojects, their costs, the performance by MDF of its obligations under this Project Agreement and the accomplishment of the purposes of the Loan.

Environmental and Social

19. Environment The Borrower shall ensure and cause MDF to ensure that the Project is carried out in compliance with the applicable environmental laws and regulations of the Borrower and ADB's Environment Policy (2002) and each subproject is screened and/or assessed in accordance with the agreed EARF.

LA Schedule 5, para. 4 PA Schedule, para. 9

Complied with.

20. Social The Borrower shall also ensure and cause MDF to ensure that all subprojects are carried out within the existing right-of-ways and do not involve any land acquisition and/or resettlement that would trigger ADB's Involuntary Resettlement Policy (1995). The Borrower shall cause MDF to ensure that the subprojects are carried out in a socially responsible manner seeking mitigation or any potential social risks. MDF shall ensure civil work contractors (i) comply with all applicable labor laws; (ii) provide equal pay to men and women or work of equal type; and (iii) abstain from engaging child labor.

LA Schedule 5, para. 4 PA Schedule, para. 9

21. Anticorruption MDF shall ensure that (a) ADB's Anticorruption Policy (1998, as amended to date) is complied with throughout the Project implementation, it is being understood that ADB reserves the right to investigate, directly or through its agents, any alleged corrupt, fraudulent, collusive or coercive practices related to the Project; and (b) all bidding documents and contracts financed by ADB in connection with the Project include provisions specifying the right of ADB to audit and examine Project related records and accounts of MDF, the municipal governments , contractors, suppliers, consultants, and other service providers. In furtherance of the principles of transparency, accountability and anticorruption, MDF shall enhance its website to provide the public with information on the Project, subprojects, major procurement activities under the subprojects.

PA Schedule, para. 12

Complied with.

ADB = Asian Development Bank, EARF = environmental assessment and review framework, IFA = investment financing agreement, LA = loan agreement, MDF = Municipal Development Fund, MG = municipal government, MSDP = Municipal Services Development Project, OM = operations manual, PA = project agreement, PAM = project administration manual, PIA = project implementation agreement, PIU = project implementation unit, PMU = project management unit, SAR = subproject appraisal report, SSR = subproject summary report.

32 Appendix 7

CONTRACT PACKAGES AND PROCUREMENT PROCEDURES ($ million)

At Appraisal

A. Goods and Works Contracts

General Description

Contract Value

a

($ million)

Procurement Method

Prequalification of Bidders

(Y/N) Advertisement

Date

Comments

Goods and Services 5.34

NCB/Shopping/Direct Contracting N

3rd quarter 2009 – 4th quarter

2012

Multiple Contracts

Civil Works 30.28

ICB/NCB/Shopping/Direct contracting

Y for ICB and N for the others

3rd quarter 2009 – 4th quarter

2012

Multiple Contracts

ICB = international competitive bidding, N = no, NCB = national competitive bidding, Y = yes. a Contract value includes total cost estimates including ADB and non-ADB financing.

B. Consulting Services Contracts

General Description

Contract Value

a

($ million) Recruitment

Method Advertisement

Date

International or National Assignment Comments

Subproject Feasibility Studies

4.44 QCBS/QBS/CQS/

LCS/FBS/SSS

3rd quarter 2010 – 4th quarter

2012

International/ national

Firms, multiple

contracts ADB = Asian Development Bank, CQS = consultants qualifications selection, FBS = fixed budget selection, LCS = least-cost selection, QBS = quality-based selection, QCBS = quality- and cost-based selection, SSS = single-source selection. a Contract value includes total cost estimates including ADB and non-ADB financing.

Actual

A. Works and Consulting Services Contracts

Description Procurement

Method Number of Contracts

Contract Value

a

Award Date

Contract Period

($ million) (in months)

Road rehabilitation (civil works)

NCB 31 20.89 2009 to 2012

3 to 12 ICB 3 4.68

Water supply and sewerage system (civil works)

NCB 3 2.22 2009 to 2011

6 to 9

ICB 1 7.48 2010 27

Procurement of equipment for solid waste management (goods)

ICB 3 0.53 2010 6

Procurement of vehicles (goods)

Shopping 1 0.11 2009 4

Construction supervision of Zugdidi–Jvari–Mestia–Lasdili Roads

LCS 1 0.15 2011 12

Poti water supply works I-IV supervision (consulting services)

LCS 1 0.16 2011 12

ADB = Asian Development Bank, ICB = international competitive bidding, LCS = least-cost selection, NCB = national competitive bidding. a

Contract value, in USD equivalent, includes total cost estimates including ADB and non-ADB financing.

Appendix 8 33

MUNICIPAL DEVELOPMENT FUND ORGANIZATION STRUCTURE

Source: Municipal Development Fund of Georgia.

Ap

pe

nd

ix 8

33

34 Appendix 9

ECONOMIC REEVALUATION

A. Introduction

1. The post-project economic analyses were prepared to reevaluate expected economic returns based on real costs and to compare these returns with the returns projected during project appraisal. Reevaluation was based on the methodology and framework accepted during appraisal and allows for a comparison of projected indicators with the indicators after project completion. A financial analysis of roads and water supply subprojects was not undertaken at appraisal as the financial intermediation facility did not use financial cost recovery and viable returns as selection criteria.

2. Economic reevaluation 25 has been performed for 10 sample subprojects that were selected based on a combination of (i) type (water supply and road improvement), (ii) financial eligibility (window 1 and window 2), and (iii) geographical spread; see Table A9.1.

Table A9.1: Sample Selection for Subproject Economic Analysis

Subproject Window 1 Window 2

Water Supply 1. Poti 1. Naruji Road Improvement 2. Poti 2. Keda 3. Gardabani 3. Shuakhevi 4. Sartichala 5. Mtskheta 6. Tsalendjikha 7. Agara

Source: Asian Development Bank.

B. Methodology

3. The economic internal rate of return (EIRR) was calculated based on actual investment costs, and actual and projected operation and maintenance (O&M) expenses. To calculate the EIRR, benefit and cost flows were discounted in the economic analysis, taking into account economic cost of capital valued at 12%. Subprojects are declared economically beneficial when the EIRR exceeds the economic opportunity cost of capital.

4. Economic reevaluation was conducted using data on costs and benefits obtained from discussions with municipal governments, actual beneficiary interviews and available documents provided by municipal governments and MDF. Roads and water supply investment costs configured during project preparation and as contained in the subproject summary reports (SSRs) and SARs (subproject appraisal reports) have been compared with actual capital expenditures upon subproject completion and as reported by MDF. The latter formed the basis for capital cost inputs in the analysis. O&M costs assumed at preparation stage have been updated with the actual information from subproject operations to complete the cost side of the cash flow streams. Subproject benefits (tangible and intangible) identified during preparation have also been updated with actual data. Any information deemed implausible has been verified with SSR and SAR assumptions, existing industry norms, and data used in subprojects of similar scope before being used in the analysis.

25

Economic reevaluation was prepared in accordance with the Framework for the Economic and Financial Appraisal of Urban Development Sector Projects, the Handbook for the Economic Analysis of Water Supply Projects, and the Economic Analysis Framework as annexed in the project agreement.

Appendix 9 35

5. Cost–benefit analysis has been prepared using the discounted cash flow method to arrive at the EIRR for selected subprojects. Sensitivity of the returns to possible operational cost and benefit changes has been assessed to enable stakeholders and planners to identify possible risk areas and agree on a strategic action plan to attain objectives.

C. Economic Analysis

6. Economic benefits of water supply improvements. Assumptions applied during evaluation were updated and based on actual, post-construction operating information. For water supply, these include water demand, water selling price, and O&M costs; and statistical data on subproject area population, population growth rates, served population, staff salaries, and average household income. Socioeconomic data were confirmed through beneficiary interviews. The “without-project” water consumption—which was found to be below standard levels (lifeline is 60–100 liters per capita per day)—was also adopted during reevaluation, particularly in determining incremental demand arising from first-time users of the piped water. Subproject water consumption was based on actual operational data and from beneficiary responses.

7. Economic evaluation includes both direct and indirect benefits. The indirect benefits include a higher standard of public hygiene that consequently decreases waterborne diseases, a shorter time spent on collecting water, the decrease or elimination of household water treatment and maintenance costs, the elimination or decreased use of an alternative drinking water supply such as bottled water, and power cost savings resulting from avoided exploitation costs because of lower non-revenue water (NRW). These benefits were quantified in economic terms, but health and sanitation impacts, which beneficiaries acquire only after several years of system reliance, were not quantified.

8. Average water collection time savings vary from as low as 15 minutes per day where a public faucet or well source is within 100–500 meters, to as high as 3 hours where the sources are 800–1,000 meters away and 2 or 3 trips have to be undertaken by more than one collector per household. The cost of purchasing a 1 cubic meter plastic reservoir for storing collected water, including a pump, is GEL350. Non-technical water from pilferage and illegal connections is present in the subprojects, especially in districts where water pressure is low and house connections are expensive. NRW as high as 50%–60% has been reported by water service centers. Where system rehabilitation resulted in reduced NRW, the recovered water generated revenue, together with reduced pumping costs, has resulted in cost savings.

9. Economic benefits of road improvements. Assumptions at appraisal were updated based on actual operational data. Actual annual average daily traffic and origin–destination surveys were unavailable, and thus appraisal assumptions were confirmed through discussions with contractors, local officials, and by beneficiary interviews and actual observation at site. Adjustments were then made based on actual improved lengths and area measurements as completed and actual corresponding costs. The impact of the completed road improvement subprojects includes vehicle operating cost savings arising from road upgrading, passenger time savings from increased speed of travel, generated and induced traffic, a reduction in vehicle diversion costs, and a reduction in the time lost because of restricted mobility.

10. Vehicle operating cost (VOC) savings are estimated to be GEL 0.60/kilometer (km) (average for cars, buses, and trucks, based on an MDF study). The value of time is estimated at GEL 1.56 based on the regional benchmark for Georgia, while average time saved is about 20 minutes/km.

36 Appendix 9

11. Economic costs. Economic capital investment and O&M costs were reassessed based on actual financial payments. Taxes, duties, price inflation, and other market distortions were excluded from financial expenditures. The economic conversion factors used at appraisal were applied during reevaluation. The shadow exchange rate factor is 1.01 for traded components, and 1.00 for non-traded. The shadow wage rate factor is 0.85, reflecting the real market cost of labor.

12. Benefit–cost ratio. The subproject benefit–cost ratio was assessed to determine if benefits exceed costs, indicating economic sustainability. Annual cost and benefit streams were discounted using an economic opportunity cost of capital of 12%. Results of the analysis show that the benefit–cost ratio for all subprojects exceeds 1.0. For water supply, the ratio varies between 1.1 and 1.2, averaging 1.1; for roads, between 1.5 and 2.1, averaging 1.9.

13. EIRR. Computations show that the EIRR for the base case at project completion is higher than the economic opportunity cost of capital. The average EIRR for water supply subprojects is 16.9%, and 32.4% for roads.

14. The EIRR for window 1 water supply and roads subprojects averages 27.6%,and for window 2, 30%.

15. Sensitivity analysis. All subprojects remain robust with a 20% increase in both capital and in O&M costs, with subprojects in both categories more sensitive to O&M costs. A 20% decrease in benefits shows that only the roads subprojects are economically viable; however, at 10% decrease in benefits, water supply subprojects are also viable. A combined decrease in benefits and increase in O&M costs by 20% results in an even lower average benefit of 4.8% for water supply, and 21% for roads. Table A9.2 summarizes the results of the base case and of the sensitivity scenarios.

Table A9.2: Economic Internal Rate of Return and Sensitivity Analysis

Subproject Cat.

Base

Case

Capital

Cost O&M Cost Benefit

O&M Cost

+ 20% &

Benefits 1-Yr Delay BCR

+ 20% + 20% – 20% – 20% in Benefit

Water Supply Poti W1 18.2% 15.3% 12.6% 8.5% 1.8% 12.3% 1.2

Naruji W2 15.6% 12.3% 13.8% 9.8% 7.9% 12.0% 1.1

Road Improvement Poti W1 33.8% 27.0% 25.9% 19.0% 13.3% 20.5% 1.5

Gardabani W1 30.7% 25.0% 28.5% 21.9% 20.0% 22.4% 1.8

Keda W2 30.8% 25.7% 30.2% 24.0% 23.3% 23.9% 2.1

Shuakhevi W2 28.9% 24.0% 27.8% 22.0% 21.0% 22.3% 1.9

Sartichala W2 36.6% 29.7% 34.0% 26.2% 24.1% 25.8% 2.0

Mtskheta W2 41.2% 33.0% 38.4% 29.1% 26.7% 27.9% 2.1

Tsalendjikha W2 30.3% 24.6% 29.4% 22.6% 21.8% 22.9% 1.9

Agara W2 26.9% 21.6% 25.5% 19.4% 18.2% 20.3% 1.7

Averages 29.3% 23.8% 26.6% 20.2% 17.8% 21.0% 1.7

Water Supply

16.9% 13.8% 13.2% 9.1% 4.8% 12.2% 1.1

Road

32.4% 26.3% 30.0% 23.0% 21.0% 23.2% 1.9

W1

27.6% 22.4% 22.3% 16.5% 11.7% 18.4% 1.5

W2 30.0% 24.4% 28.4% 21.8% 20.4% 22.2% 1.9

BCR = benefit-cost ratio, O&M = operation and maintenance, W1 = window 1, W2 = window 2. Source: Asian Development Bank estimates.

Appendix 10 37

OVERALL ASSESSMENT METHODOLOGY

Criterion Weight

(%) Definition Rating

Description Rating Value

1. Relevance 25 Relevance is the consistency of a project’s impact and outcome with the government’s development strategy, the Asian Development Bank’s lending strategy for the country, and the Asian Development Bank’s strategic objectives at the time of approval and evaluation and the adequacy of the design.

Highly relevant 3

Relevant 2

Less relevant 1

Irrelevant 0

2. Effectiveness 25 Effectiveness describes the extent to which the outcome, as specified in the design and monitoring framework, either as agreed at approval or as subsequently modified, has been achieved.

Highly effective 3

Effective 2

Less effective 1

Ineffective 0

3. Efficiency 25 Efficiency describes, ex post, how economically resources have been converted to results, using the economic internal rate of return, or cost-effectiveness, of the investment or other indicators as a measure and the resilience to risk of the net benefit flows over time.

Highly efficient 3

Efficient 2

Less efficient 1

Inefficient 0

4. Sustainability 25 Sustainability considers the likelihood that human, institutional, financial, and other resources are sufficient to maintain the outcome over its economic life.

Most likely 3

Likely 2

Less likely 1

Unlikely 0

Overall Assessment (weighted average of above criteria)

Highly Successful: Overall weighted average is greater than or equal to 2.7. Successful: Overall weighted average is greater than or equal to 1.6 and less than 2.7. Partly Successful: Overall weighted average is greater than or equal to 0.8 and less than 1.6. Unsuccessful: Overall weighted average is less than 0.8.

ASSESSMENT

Municipal Services Development Project – Phase 2

1. Relevance 25 Highly relevant 3

2 Effectiveness 25 Highly effective 3

3. Efficiency 25 Highly efficient 3

4. Sustainability 25 Less likely 1

Weighted average: 2.5

Overall Rating: Successful

Project Impact: Substantial, significant, moderate, negligible Substantial

38 Appendix 11

CONTRIBUTION TO LEVEL 2 INDICATORS

Level 2 Results Framework Indicators Original Target

Aggregate Output

Methods and/or Comments

Transport:

Roads built or upgraded (kilometers) • Rural • Urban

TBD 101.7

Water:

Households with new or improved sanitation (number)

TBD 24,000

Water supply pipes installed or upgraded (length of network in kilometers)

TBD 264

Households with new or improved water supply (number)

TBD 24,000

km = kilometers, tbd = to be determined. Sources: Municipal Development Fund and Asian Development Bank.