Com 46 Georgia PSD 26012012

Final Evaluation of Proinvest Final report
Framework Contract Commission 2011

Lot 1: Studies and Technical assistance in all sectors Specific Contract N 2011/268 761/1 Support to the Private Sector in Georgia Formulation Study
FINAL REPORT Date: 27 December 2011
This project is funded by the European Union
A Project Implemented by SACO SACO Consortium (SAFEGE/COWI)
Georgia Support to Private Sector Development Formulation study report
Table of Content
1 2 3 3.1 3.2 3.3 3.4 3.5 3.6 4 4.1 4.2 4.3 4.4 4.5 4.6 5 5.1 5.2 Context and methodology ..........................................................................................................8 Executive summary ....................................................................................................................9 The market for EU support to Private Sector Development.................................................... 10 Place of the private sector in the Georgian Economy ..................................................................... 10 Sectors.............................................................................................................................................. 10 GoG priorities and actions by sector................................................................................................ 11 Business climate............................................................................................................................... 12 Enterprises ....................................................................................................................................... 13 Size of enterprises............................................................................................................................ 15 Issues faced by the private sector, to be addressed by the proposed projects........................... 16 Financing .......................................................................................................................................... 16 Gaps in skills ..................................................................................................................................... 17 A small internal market.................................................................................................................... 18 Few products to export.................................................................................................................... 18 A changing legal and tax environment............................................................................................. 19 A major redistribution of sectors, which just started ...................................................................... 19 Support for Private Sector Development activities currently under way ................................... 20 Government support........................................................................................................................ 20 European Union ............................................................................................................................... 20 Eastern Partnership: SME Flagship initiative........................................................................... 20 NIF Neighbourhood Investment Facility (2007-2013) ............................................................. 20 PSD-related EU Delegation in Georgia projects....................................................................... 21
5.2.1 5.2.2 5.2.3 5.3 5.4 5.5 5.6 5.7 6 6.1
USAID ............................................................................................................................................... 21 MCC Millenium Challenge Corporation ........................................................................................... 23 GIZ .................................................................................................................................................... 23 UNDP ................................................................................................................................................ 23 EBRD................................................................................................................................................. 24 Support organisations............................................................................................................... 24 Government and regional organisations ......................................................................................... 24 GNIA......................................................................................................................................... 24 Regional Governments ............................................................................................................ 25
6.1.1 6.1.2 6.2 6.3 6.4 6.5
Georgian Chambers of Commerce................................................................................................... 25 Georgian business organisations ..................................................................................................... 25 International and foreign Chambers of Commerce ......................................................................... 25 Other support organisations............................................................................................................ 26
7 7.1
Financing .................................................................................................................................. 26 External financing............................................................................................................................. 26 European Bank for Reconstruction and Development (EBRD)................................................ 26 European Investment Bank (EIB)............................................................................................. 26 Kreditanstalt fr Wiederaufbau (KfW) .................................................................................... 27 Asian Development Bank (ADB) .............................................................................................. 27 World Bank .............................................................................................................................. 27 International Finance Corporation (IFC, World Bank Group) .................................................. 27 7.1.1 7.1.2 7.1.3 7.1.4 7.1.5 7.1.6 7.2 7.3
Financing SMEs................................................................................................................................. 27 Micro-credit ..................................................................................................................................... 29 Export promotion ..................................................................................................................... 29 Trade treaties ................................................................................................................................... 29 Export promotion............................................................................................................................. 29 Products ........................................................................................................................................... 30 Consultancy.............................................................................................................................. 30 The projects which could be implemented................................................................................ 31 The rationale for the choices ........................................................................................................... 31 Issue: Access to finance ................................................................................................................... 31 Proposed project: Loan Guarantee fund ................................................................................. 31 Proposed project: TA for Private Equity fund.......................................................................... 32 Proposed project: Training of staff.......................................................................................... 33 Proposed project: Supporting consultancy services ............................................................... 34
8 8.1 8.2 8.3 9 10 10.1 10.2
10.2.1 10.2.2 10.3 10.3.1 10.3.2 11 11.1 11.2 11.3 12 12.1 12.2 12.3 12.4 12.5 13 13.1 13.2 13.3 13.4
Issue: Skills ....................................................................................................................................... 33
Projects considered, but not recommended at this stage.......................................................... 34 Reinforcing intermediary organisations........................................................................................... 34 Supporting specific sectors and regions .......................................................................................... 34 Grants............................................................................................................................................... 35 CONCLUSIONS AND RECOMMENDATIONS ................................................................................ 35 Terms of Reference .......................................................................................................................... 35 Findings ............................................................................................................................................ 35 Choice of areas and projects............................................................................................................ 36 Identified projects ............................................................................................................................ 36 Recommendations ........................................................................................................................... 37 Draft Fiche: Setting up a Loan Guarantee Fund ......................................................................... 41 Rationale .......................................................................................................................................... 41 Georgian Context and similar projects ............................................................................................ 41 Lessons learnt................................................................................................................................... 42 Expected results ............................................................................................................................... 42
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13.5 13.6 13.7 13.8 13.9 14 14.1 14.2 14.3 14.4 14.5 14.6 14.7 14.8 14.9 15 15.1 15.2 15.3 15.4 15.5 15.6 15.7 15.8 16 16.1 16.2 16.3 16.4 16.5 16.6 16.7 16.8 16.9 17 17.1
Activities........................................................................................................................................... 42 Setting up a lasting fund.......................................................................................................... 42 Identified counterpart...................................................................................................................... 43 Budget .............................................................................................................................................. 43 Sustainability .................................................................................................................................... 44 Visibility ............................................................................................................................................ 44 Draft Fiche: Developing training ............................................................................................... 45 Rationale and country context......................................................................................................... 45 Georgian context, similar projects ................................................................................................... 45 Lessons learnt................................................................................................................................... 45 Expected results ............................................................................................................................... 46 Activities........................................................................................................................................... 46 Identified counterpart...................................................................................................................... 46 Budget .............................................................................................................................................. 46 Visibility ............................................................................................................................................ 46 Risks and assumptions ..................................................................................................................... 46 Draft Fiche: Supporting consultancy ......................................................................................... 47 Rationale .......................................................................................................................................... 47 Georgian context and similar projects ............................................................................................. 47 Lessons learnt................................................................................................................................... 47 Expected results ............................................................................................................................... 48 Activities........................................................................................................................................... 48 Identified counterpart...................................................................................................................... 48 Budget .............................................................................................................................................. 49 Risks and assumption....................................................................................................................... 49 Draft Fiche: Supporting Business Incubators ............................................................................. 49 Rationale and country context......................................................................................................... 49 Georgian context.............................................................................................................................. 50 Expected results ............................................................................................................................... 50 Activities........................................................................................................................................... 50 Identified counterpart...................................................................................................................... 50 Budget .............................................................................................................................................. 50 Sustainability .................................................................................................................................... 50 Visibility ............................................................................................................................................ 50 Risks and assumptions ..................................................................................................................... 50 Draft Fiche: Supplying Technical Assistance to a private equity fund......................................... 51 Rationale and country context......................................................................................................... 51
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13.5.1
13.10 Risks and assumptions ..................................................................................................................... 44
17.2 17.3 17.4 17.5 17.6 17.7 17.8 17.9 18 18.1 18.2 18.3 18.4 19 19.1 19.2 19.3
Georgian Context ............................................................................................................................. 51 Lessons learnt................................................................................................................................... 51 Activities........................................................................................................................................... 52 Identified counterpart...................................................................................................................... 52 Budget .............................................................................................................................................. 52 Visibility ............................................................................................................................................ 52 Sustainability .................................................................................................................................... 52 Risks and assumptions ..................................................................................................................... 52 Draft fiche: Regional Development ........................................................................................... 52 Rationale .......................................................................................................................................... 52 Georgian and similar projects .......................................................................................................... 53 Expected results ............................................................................................................................... 53 Activities........................................................................................................................................... 53 Projects considered, but not recommended at this stage.......................................................... 53 Reinforcing intermediary organisations........................................................................................... 53 Supporting a specific sector ............................................................................................................. 54 Grants............................................................................................................................................... 54
Annex 1 Terms of Reference.................................................................................................................... 55 Annex 2 Doing Business, 2004 and 2012 .................................................................................................. 62 Annex 3 World Economic Forum, Global Competitiveness Index ............................................................. 63 Annex 4 : Taxes ....................................................................................................................................... 64 Annex 5: Bibliography and websites........................................................................................................ 66 Annex 6: List of persons met ................................................................................................................... 67
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List of annexes
Annex 1: Terms of Reference Annex 2: Doing Business, 2004 and 2012 Annex 3: World Economic Forum, Global Competitiveness Index Annex 4: Taxes Annex 5: Bibliography and websites Annex 6: List of persons met
List of tables
TABLE 1 GDP BY SECTOR, 2010 TABLE 2 POPULATION, 2011 TABLE 3 NUMBER OF ENTERPRISES, BY SECTOR OF ACTIVITY TABLE 4 INTEREST RATES TO LEGAL ENTITIES TABLE 5: IMPACT OF TAX REFORM ON TAX REVENUES TABLE 6 NIF FINANCED PROJECTS TABLE 7 USAID ECONOMIC GROWTH PROJECTS TABLE 8 USAID PSD RELATED HEALTH PROJECTS
List of figures
FIGURE 1 RANKING IN DOING BUSINESS FIGURE 2 TRANSPARENCY INTERNATIONAL PERCEIVED CORRUPTION INDEX FIGURE 3 NUMBER OF ENTERPRISES, BY TURNOVER FIGURE 4 NUMBER OF ENTERPRISES, BY NUMBER OF EMPLOYEES FIGURE 5 EXPORTS BY CATEGORY OF PRODUCTS, 2010
The opinions expressed in this document represent the authors points of view which are not necessarily shared by the European Commission or by the authorities of the countries concerned.
List of Acronyms
Acronym ACP ADB AMP DCFTA EIB EBRD EPI EU EUR FDI GEL GIZ GNIA GoG GSP HSSP IDP IFC IFI ILO KfW LGF m MCC MFI MFN MSMEs NBG NEO NIF OeEB PSD SMEs TA ToR UNDP USAID Meaning Africa, Caribbean, Pacific Asian Development Bank Agriculture Mechanization Project (USAID) Deep and Comprehensive Free Trade Area European Investment Bank European Bank for Reconstruction and Development Economic Prosperity Initiative (USAID) European Union Euro Foreign Direct Investment Georgian Lari Gesellschaft fr Internationale Zusammenarbeit Georgian National Investment Agency Government of Georgia General System of Preferences Health System Strengthening Project (USAID) Internally Displaced Persons International Finance Corporation (World Bank) International Financial Institution International Labour Organisation Kreditanstalt fr Wiederaufbau Loan Guarantee Fund Million Millennium Challenge Corporation Micro-Finance Institution Most Favoured Nation (Trade tariff) Micro, Small and Medium Enterprises National Bank of Georgia New Economic Opportunities (USAID) Neighbourhood Investment Facility sterreichische EntwicklungsBank Private Sector Development Small and Medium Enterprises Technical Assistance Terms of Reference United Nations Development Programme United States Agency for International Development
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Acronym USD VET
Meaning US Dollar Vocational Education Training
Lari (GEL) Rate Date 1 Euro = 1/12/2011 2.2214 GEL 1/01/2011 2.3345 GEL 1/01/2010 2.4162 GEL 1/01/2009 2.3323 GEL 1/01/2008 2.3534 GEL
Source: Inforeuro
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Context and methodology
This report has been prepared by the expert (Jean-Michel Netter) in accordance with the Terms of Reference of this project (annex 1). The specific objective of this survey1 is to identify most suitable areas of intervention of the EU in the area of private sector development and assistance to business in Georgia. Make recommendations to help the EU Delegation to best consider the possible areas/ways of intervention to support the private sector. The report has been prepared by the expert through desk work (review of the existing surveys, programmes etc) and extensive field work (in Tbilisi, Batumi and Gori) during three missions in Georgia: Sept 26th to Oct 14th, 2011 Oct 24th to Nov 3rd, 2011 Nov 14th to Nov 26th, 2011 Interviews were held with members of the Government of Georgias administration, EU Delegation experts (private sector, agriculture, trade, regional development, taxation, education, VET, health, culture), Regional administrations, Chambers of Commerce and professional associations, donors, banks, microfinance organisations, and individual entrepreneurs. However, and as discussed in the inception report after the end of the first phase of this mission, the emphasis on the agricultural sector (ToRs: The agricultural sector should in particular be looked at since the development of the agricultural sector and development of rural agriculture is a current priority of the Georgian Government) has been reduced, as there are already numerous support schemes in this sector, including a Budget support from the EU (40m) and other focused programmes from other donors (in particular USAID EPI). The sector will be studied, but no project proposed unless it brings additional value to the existing projects. Agro-industry, though, remains within the scope of this survey. The main objective of this survey is to propose practical, implementable projects, accepted by the stakeholders. It also complies with the ToRs, which ask for an exhaustive survey of existing programmes. Those two aspects complement each other, as the proposals for new projects must take into account existing or planned actions. As the emphasis is on practical proposals, the survey uses a marketing approach, defining first the market for the support to private sector development, then the instruments which could be used. The private sector development activities presently under way (and planned) are taken into account for both the market survey and the proposals, and are detailed in a separate chapter and in appendices. The report is organised in two parts: the first one comprises the survey on the private sector in Georgia and the issues that have to be addressed, with a brief description of the proposed projects, the second one is a more detailed analysis of each proposal, which can be the basis for a fiche. The expert would like to thank all the interviewed persons, from Government agencies, EU Delegation, donors, and the private sector, for their kind cooperation, for the revision of the drafts, and for their proposals, which have been key to the formulation of this report.
Terms of Reference, Art. 2 8
Executive summary
Supporting Private Sector Development in Georgia is, in practice, supporting the whole economy as the State Owned sector is more and more limited. In 2009, the private sector accounted for approximately 75% of Georgias GDP. A programme of support to Private Sector Development must take into account the characteristics of this sector, its problems, and the already existing programmes. Among the characteristics of Georgian Private Sector today is the small size of the enterprises (all but 600 of them would be considered microenterprises by EU standards), the concentration on some large firms (1% of the firms account for 60% of the Corporate tax revenue), and the small size of the local market (4.4 m inhabitants). This small internal market is not compensated by a dynamic export sector. The main export products remain temporary resources (scrap metal) and products of the extractive industries. The role of industry remains limited, while the agricultural sector, once a major asset of Georgia, has still not regained its previous production level and is not able today to supply the local market, and even less to supply inputs for an export oriented agro-industry. The business climate has drastically improved since 2004, in terms of business environment, corruption control, and supply of basic services. The ranking of Georgia, in the various surveys of business environment and perceived corruption, is better than many EU countries. New institutions (Business/Tax Ombudsman) are in place and should enable a dialogue with the Government as well as a resolution of the remaining problems. In terms of competitiveness, Georgia has also made progresses,(in particular, investors in the garment industry are attracted by cheap labour, cheap energy, and minimal red tape) but has still not reached a sufficient level of efficiency. Its most traditional export product (wine) is expensive compared to its competitors, its agricultural production is insufficient, and most products and services are still not competitive. In term of sectors, a priority is now given to agriculture (so that it can at least ensure self-sufficiency for the country, then supply an agro-industry) and tourism. Other sectors are likely to develop: in particular apparel (thanks to cheap manpower, ease of doing business, and proximity with Turkish investors) and all services linked to logistics (thanks to the geographical position of the country). The problems faced by Georgian companies are linked to the above description (small firms, small internal market, few exportable products). In addition, the enterprises also highlight two types of problems: access to finance (except for the largest companies) and skills. Within access to finance, two main issues have been identified: high interest rates, and the need for collateral. The problem of skills apply to all levels of the enterprises: many small firm managers have no management background, and the number of technicians and skilled workers is not sufficient. Many of them have emigrated in search of a better salary, and the educational system did not provide enough qualified technicians and skilled workers. Georgia has received and still receives substantial support from donors and financial institutions, first to improve its business environment, its infrastructure (energy, roads, ports) and its financial sector, now for agriculture and tourism. Taking into consideration the above description, the proposals of this survey concentrate on the two issues pointed out by nearly all enterprises during interviews: access to finance and human resources. To address the problem of access to finance, the proposals concentrate on two financial instruments, of limited scope but still insufficiently developed in Georgia, and which can prove effective for some enterprises: - A loan guarantee fund, for creditworthy companies with a proper track record and sound, bankable, projects, but insufficient collateral;
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- Technical assistance to a private equity fund, to enable the fund to reach smaller companies. To address the problem of Human Resources, this survey concentrates on the training of staff already employed in the enterprises, and on the use of consulting services by enterprises. This can be done by extending the activities of the existing BAS project. In addition, linking financial resources and consulting services, a support to business incubators and to regional development are proposed. Other projects, which have not reached a sufficient stage of formalisation at the end of this mission, but which are potentially interesting, could be monitored by the EU delegation: Support to regional development (GIZ); support to a regional business development centres (GIZ,GNIA, provided those centres meet some conditions of independence and expertise), support to Chambers of Commerce, in particular Ajara, provided those institutions benefit from a stable regional or governmental financial support.
3 3.1
The market for EU support to Private Sector Development Place of the private sector in the Georgian Economy
The Government of Georgia has started, since 2004, a wide-ranging reform of the economy, with an emphasis on improving the business environment, privatising most of the economy, and deregulating. The private sector now equates most of the Georgian economy. In 2009, it amounted to approximately 75% of the GDP2. The State sector is now restricted to a few large enterprises (Railways for example, and some energy companies). The share of the private sector is even expending, as the Government of Georgia is in the process of privatising most of the healthcare sector still under its control, as well as part of the education sector.
3.2
Sectors
Table 1 GDP by sector, 2010
The size of the respective sectors is shown below: 2010 Agriculture, hunting and forestry; fishing Mining and quarrying Manufacturing Electricity, gas and water supply Processing of products by households Construction Wholesale and retail trade; repair of motor vehicles, motorcycles and personal and household goods Hotels and restaurants Transport Communication Financial intermediation
2
% 8.4 1.0 9.2 3.0 3.0 6.1 16.8 2.3 7.9 3.7 2.6
1 509.9 181.0 1 654.8 534.2 536.9 1 100.0 3 024.9 411.7 1 415.1 661.9 476.7
OECD South Caucasus Competitiveness report 2011 p 34, EBRD Transition report 2010 Table 1.1; 10
Real estate, renting and business activities Imputed rent of own occupied dwellings Public administration Education Health and social work Other community, social and personal service activities Private households employing domestic staff and undifferentiated production activities of households for own use Financial Intermediation Services Indirectly Measured (FISIM) (=) GDP at basic prices (+) Taxes on products (-) Subsidies on products (=) GDP at market prices Source: Geostat
887.8 590.3 2 343.1 874.0 1 202.0 825.5 20.1 -235.5 18 014.4 2 834.3 105.3 20 743.4
4.9 3.3 13.0 4.9 6.7 4.6 0.1 (1.3) 100.0
One striking feature of this analysis is the small percentage of agriculture, with less than 9% of the GDP, compared to 47% of the population living in rural areas. Some twenty years ago, agriculture used to account for nearly half the GDP. Mining and quarrying, with 1 % of the GDP, represents the sector with the main export products.
Table 2 Population, 2011 Location Number 000 % Urban 2371 53.1 Rural 2098 46.9 Total 4469 100.0 Source: Geostat
3.3
GoG priorities and actions by sector
In recent years, the Government of Georgia has emphasized the development of tourism, energy, and more recently agriculture. Furthermore, healthcare and a large share of the educational system are being privatised. In October 2011, the Georgian Government has announced a comprehensive 10 point programme, the 2011-2015 Plan for Modernization and Employment. This programme fosters: 1. Macroeconomic Stability 2. Improvement of Current Account Balance 3. Creation/Maintenance of Favourable Investment and Business Environment 4. Establishing the country as a regional trade and logistic hub 5. Improvement of Infrastructure 6. Development of Agriculture 7. Improvement of the Education System 8. Fine-Tuning Social Policy 9. Establishment of an Affordable, High-Quality Healthcare System 10. Urban and Regional Development
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3.4
Business climate
Georgia was 12th on the ranking of the World Bank survey Doing Business in 2011. With a change of methodology (i.e. the introduction of Electricity supply as one of the criteria), it is now 16th in the 2012 edition. It would have been 17th in 2011, using re-computed data with the new set of criteria. Of the 27 EU countries, only 5 have a better ranking. As the authors of the Doing Business survey state an economys ranking on the ease of doing business does not tell the whole story about its business environment. The underlying indicators do not account for all factors important to doing business, such as macroeconomic conditions, market size, workforce skills and security. Still, this is a striking change: in the 2006 edition (when the first Doing Business rankings were computed), Georgia was still ranking 100th (or even 137th after recalculation). The time and expenses of registering a business have declined from 30 days, and 26% of per capita income, to 2 days, and 2% of per capita income. One-stop-shops, where all the formalities can be executed, have been set up in the cities. For more remote locations, travelling one-stop-shops (buses) are used. Figure 1 Ranking in Doing Business
Source of original data: Doing Business editions, 2006-2012 The ranking of Georgia also improved markedly in the Transparency International Perceived Corruption Index:
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Figure 2 Transparency International Perceived Corruption Index
Source: Transparency International reports
Strong anti-corruption measures (including disbanding the whole road police force, most of the customs, diminishing the size of law enforcement agencies but increasing drastically salaries, eliminating many licences and permits which are considered a major source of corruption) have had a drastic positive effect on daily life and business environment. 3 The interviewed enterprises and associations acknowledge the progresses made (especially on corruption) but have, at the time of writing this report, major concerns about the implementation of the tax law. Those concerns relate to the way the tax inspection applies this law, a way considered often arbitrary and unjustified; They also relate to the very stiff penalties which are levied whatever the origin of the infraction (actual fraud, or mere error in good faith or difference of interpretation of the text) and to the classification as criminal of any infraction over 25,000 GEL (approximately 11,000 EUR), which sends the alleged offender to jail. As the PriceWaterhouseCoopers 2011 Tax Guide states The Georgian language does not distinguish between avoidance and evasion. The Georgian administration, on the other hand, purports that such problems, when they exist, can be rapidly and efficiently solved through the Business/Tax Ombudsman office, and direct access to ministry officials.
3.5
Enterprises
The number of enterprises can be assessed in different ways, giving totally different figures.
www.georgianreforms.com 2004-2010 Seven years that changed Georgia forever 13

Table 3 Number of enterprises, by sector of activity
Kind of Activity Total Agriculture, hunting and forestry Fishing Mining and quarrying Manufacturing Electricity, gas and water supply Construction Wholesale and retail trade; repair of motor vehicles and personal and household goods Hotels and restaurants Transport and communication Financial services Real estate, renting add business activities Public administration Education Health and social work community, social and personal service activities unknown activity
Source: Geostat website, Business Register
As per website As per survey 366 224 38 973 4 128 1 073 184 106 646 228 16 210 5 546 558 95 6 699 2 696 286 545 5 410 8 695 2 014 9 774 1 973 3 298 3 641 16 400 49 16 508 1 668 2 073 5 245 637 1 308 1 185 605
Geostat releases two different numbers (366,000 or 39,000). The main difference comes from the definition of the enterprise and, as in all countries, from the enterprises with no activity. The larger number includes self-employed persons, and probably many of them do not de-register. We must use both figures: the smaller one (39,000) gives more or less the number of active, registered, formalized enterprises, which will be the main market for PSD support. The highest number (366,000) is definitely high for a country of 4.4 m inhabitants but it represents the small entrepreneurs, many of whom are no longer active, and are sometimes forced entrepreneurs (i.e. they could not find employment in established firms and had to set up their own business). They constitute a reserve for PSD growth and, in the meantime, poverty alleviation programmes may be implemented for them. The Ministry of Finance reports an intermediary number, of some 161,000 firms. The large businesses (over 1.5 mGEL sales, about 675,000 ) would represent 1% of the companies. As, according to Geostat (see below), there are 1,616 companies with more than 1.5mGEL turnover, this would put the total number of registered enterprises at some 161,000. In this survey, we shall use the smallest number (39,000).
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3.6
Size of enterprises
Figure 3 Number of enterprises, by turnover
Source: Geostat According to the above data, all but the top two categories (above 5m GEL, 2.2 m ), totalling 642 companies, would be, according to EU definitions, micro-enterprises (sales< 2m Euros). The data cannot be fully used, due to the high proportion (24%) of respondents in the unknown category. However, the unknown companies are likely to be newly registered ones, with a low turnover, and consequently the data on companies with a high turnover should remain valid and usable. Though there is no official definition of a SME, firms with a turnover of more than 1.5 m GEL (approximately 700,000 ) are usually considered as large or corporate, and those under this turnover are MSMEs. According to the above chart, 1616 enterprises fall in the large enterprise, corporate category.
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For tax purposes (2011 tax reform), the classification is: Class Micro Small Medium Large Max. turnover GEL 30 000 100 000 1 500 000 Over 1 500 000 Tax rate 0% 3 or % 5 of gross income 15 % of profit 15 % of profit
Figure 4 Number of enterprises, by number of employees
Source: Geostat According to the EU definition of SMEs by number of employees (Micros < 10 employees; small <50; medium<100), all but 543 of the Georgian enterprises are MSMEs.
Issues faced by the private sector, to be addressed by the proposed projects
When carrying out this survey, we found the usual problems faced by enterprises in most developing countries, and others which are more specific to Georgia. Many of those problems have been identified in the numerous studies devoted to the Georgian economy and its competitiveness (see Annex 5, Bibliography), and have been confirmed by interviews with enterprises, banks and associations.
4.1
Financing
SMEs (and not the largest companies) complain that they cannot have sufficient access to finance, mainly because of high interest rates and the need for collateral. On the other hand, the banks are reluctant to lend to companies, except the largest and most established ones, as: - the companies are under-capitalized, with a small capital and a large, but volatile, partner account;
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- their financial statements are not credible; - they can give no liquid collateral; - their business plan is not credible (quite often drafted by an independent consultant with no knowledge of the market and of the sector); - the management is family/friends-based and not efficient. At the time of this survey, the high interest rates seem to be the most serious problem, the access to credit (due to a lack of collateral, and/or of sound project) coming only second. However, the rates (which had reached 19%) are still too high, even after having taken into account inflation, to permit long term industrial investment.
Table 4 Interest rates to legal entities
Source: National Bank of Georgia The lack of credible financial statements is only an indirect obstacle: the banks have learned how to go around the lack of reliable accounts by doing their own assessment of the company, based on factual observations (physical level of inventories, counting the clients of the borrower, monitoring the turnover, going through the movements of the bank account etc). But there is a major indirect risk: incorrect accounting can lead to heavy tax penalties, leaving the borrower with no cash to repay its loan.
4.2
Gaps in skills
There is a major human resources qualification gap: for industry and services, the education system at all levels has collapsed for the last twenty years; for agriculture, the land has been attributed to kolkhoze/sovkhoze employees who had not sufficient knowledge of agricultural techniques. Many younger people have left the countryside (for cities, or to work abroad), and the remaining farmers have difficulties adapting to new techniques. From the experience of donors working with them, farmers are also reluctant to organise into any kind of cooperative, association, grouping etc: such organisations remind them too much of the kolkhoze/sovkhoze they had to belong to. In services and industry, many specialists (managers and skilled workers) emigrated. Some younger managers are being schooled abroad, but their number is insufficient and they do not always return to Georgia or are too expensive for smaller firms. Schooling also takes place now in Georgia for managers and skilled workers, but the graduates lack practical experience. A particular characteristic of the Georgian managers met during this survey is the recognition, by many of them in the smaller companies, of a lack of skills in the management team itself. This gap is acknowledged in management technique, in marketing, and in finance/accounting. As a consequence, the need for training applies not only to the younger people, but also to those already in a medium or high position in the enterprise and who have little time to devote to training.
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4.3
A small internal market
The population is comparatively small (4.4 m) and with a low purchasing power. The GDP per capita is 2620 USD, still a significant improvement over the 2003 value (922 USD), but not enough to be considered a valuable market.
4.4
Few products to export
There are numerous export oriented projects (see below 8 Export promotion, page 27), training of exporters and would-be exporters on EU/US import regulations, export techniques. Many entrepreneurs look for export markets, as the local market is too small. But the main problem remains the absence of products to be exported. Few would-be exporters have products which can be competitive. Figure 5 Exports by category of products, 2010
Source of original data: Geostat Some classes used by Geostat (custom classification) have been grouped to permit a better grasp of the importance of some industries (garments, water and sodas) otherwise spread among various categories. With the resale of cars (imported from Europe, sold in Azerbaijan and Armenia) and the sale of scrap metal (from former factories, rusting infrastructure), the largest export products are coming from the extractive industry, dominated by a few large companies (JSC Ferro for Manganese, JSC Madneuli for copper and gold). The export of manufactured products (JSC Georgian Steel for rods, garments) is lying far behind the export of products from extractive industries, or the export of agricultural products.
Agricultural products (including wines and waters, sodas) have not yet recovered from a major loss of market in 2008: the traditional Russian market, which absorbed practically any agricultural product, without much concern for quality, or with specific requirements (sweet wines) closed down and has been replaced by difficult markets: - Some close markets (Azerbaijan, Armenia, Kazakhstan) are controlled by local interests which do not allow free entry, and can be closed overnight on political grounds, or have industries and agro industries much more efficient than the present Georgian ones (Turkey). Ukraine is a major
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market, but it is also an agricultural country (i.e. with competing products) and can also be subject to foreign policy considerations, just like the Russian market. - The EU market requires qualities and quantities which, at present, cannot be supplied by the Georgian agriculture, let alone its agro-industry, except for a very small number of products (nuts, some wines). Many products do not qualify for entry on western markets because of quality control. The unreliability of supply does not permit, for the time being, the growth of the agro-industry. - Some niche export markets, in very small amounts, exist: herbs, seeds for Christmas trees. Tea, which was a major production, is slowly recovering.
4.5
A changing legal and tax environment
Georgia is at a transition point from the former economic system, dominated by corruption and a lack of transparency, to an open, transparent system. Petty corruption has been eliminated, through a strong anti-corruption plan. The tax system has been changed in 2005 and 2011, leading to a simpler, and eventually more effective, tax system, as can be seen below.
Table 5: Impact of tax reform on tax revenues
Number of taxes Potential tax revenue as % of GDP Actual tax revenue as % of GDP Compliance rate
Before Tax Reform 22 40-45% 15.6% 35%
After Tax Reform 6 28-30% 23.4% 78-85%
Source: Ministry of Finance, Tax reform in Georgia Despite this progress, the path to full transparency, as seen from the enterprise side, is at this stage slowed down by a cautious attitude towards established business channel (which are perceived as likely to block the growth of competitors) , and by a lack of confidence in the tax authorities. The consequence is that some level of grey economy still subsists though the consequences for the companies can be severe. Banks are reluctant to lend to a company which can be so heavily fined that it will not be able to reimburse its loans.
4.6
A major redistribution of sectors, which just started
The Government of Georgias decision to privatize (to insurance companies) most of the health infrastructure (hospitals in particular) is adding to the importance of the private sector, but also giving to this sector responsibilities it was not prepared for. The same goes for the education system, where many schools are being privatized (the students receive from the State vouchers which they give to the school of their choice where they enlist, as partial payment for their tuition fees). Those two sectors could, in coming years, prove major pillars of the private sector. In agriculture, there must be a major change in the production methods to achieve at least selfsufficiency, then export. A significant consequence of this evolution is that one of the most important and promising sectors, agro-industry, which should emerge when the production reaches a more stable level, is still underdeveloped. As this sector does not exist in practice today, it is too early to implement a support programme. In the future, such a support programme may or may not be necessary, depending on the importance of the foreign investment in this industry.
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Support for Private Sector Development activities currently under way

- To improve the business environment - To improve the situation of given sectors - To improve exports - To introduce new methods that can be used by all sectors
The Georgian private sector receives assistance, direct and indirect, in all fields:
5.1
Government support
The Government of Georgia is actively promoting the private sector through investment in infrastructure, privatisation, improvement of the business environment, tax reform, establishment of a Tax/Business Ombudsman etc. It also implements, through the Georgian National Investment Agency (see- Paragraph 6.1.1), programmes aimed at facilitating Foreign Direct Investments and supporting Georgian exports.
5.2
European Union
5.2.1 Eastern Partnership: SME Flagship initiative

The SME Flagship initiative is one of the 5 Flagships of the Eastern Partnership (together with Integrated Borders Management Programme; Regional Electricity Markets; Environmental Governance; Prevention of, and preparedness for, and response, to natural and man-made natural disasters). The SME Flagship Initiative operates in all the Eastern Partnership countries (Armenia, Azerbaijan, Belarus, Georgia, Moldova, Ukraine). The aim of this facility is to strengthen the role of SMEs through advice, funding, TA, and improvement of the regulatory framework. It has three main components: 1 Institutional Technical Assistance (East invest), a 8.75 m project (7m of which financed by the SME Flagship initiative, the rest from other stakeholders) launched in March 2011; 2 Direct Technical Assistance (TA) to SMEs: TAM/BAS, funded by EU and operated by the EBRD; 3 SME Facility: Funding through IFI: Technical Assistance to Financial Intermediaries, First risk loss guarantee and Interest free loan co-financing. In Georgia, all three components of the SME Flagship initiative are active: - East-Invest, in partnership with the Georgian Chamber of Commerce and Industry and the Georgian Employers Association has organised seminars on acquis communautaire, export procedures and regulations to the EU, DCFTA. - TAM/BAS was active in Georgia well before being funded by this initiative (see below, Chapter 5.7 page 22) - EBRD and EIB are also active mainly in infrastructure, finance (see below, Chapter 7.1.1 and 7.1.2 page 24)
5.2.2 NIF Neighbourhood Investment Facility (2007-2013)

This facility, which started operating in 2008, is not geared directly at PSD, but supports the economy through the financing of major infrastructure projects in energy, environment and transport sectors in the EaP countries. A leading IFI (EBRD, EIB, KfW.) finances the project, and the NIF contributes with a grant. The NIF is funded with 745m, and the member states contribute with an additional 63m. For Georgia, this means investment in the following projects: (6/10/2011)
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Table 6 NIF Financed projects

Project NIF share m Total project Lead IFI Status
Black Sea Energy Transmission System Tbilisi Railway Bypass Enguri Dam Rehabilitation Water infrastructure modernisation Water supply/Sewage Batumi Source: EU Commission websites
8 8.5 5 4 4
220 253 40 86 44
KfW (EBRD, Disbursing EIB) EBRD Approved EBRD Signed EIB Disbursing Approved
5.2.3 PSD-related EU Delegation in Georgia projects

Although the EU Delegation has no specific PSD programme at this stage, other programmes operated by the Delegation are closely linked to PSD. Agriculture Agriculture is linked to PSD as it is a major segment of the economy (even though its share of the GDP has been falling) and, of course, it is the basis of inputs for the agro-industry. The EU is preparing a 40 m Budget Support Programme for agriculture. It will include a 3.5 m first loss guarantee programme, which will be operated by EBRD through its banking counterparts in Georgia.
Trade The Delegation has been involved in the preparation of the DCFTA negotiations. This preparation led to the launch of trade negotiations on the DCFTA in December 2011. On a practical level, necessary to implement the trade measures, the EU Delegation has started several twinnings: In Sept 2011 the twinning Strengthening of the metrology and standardisation according to the best practice in the European Union (27 months, 1.4 m EUR). In Nov. 2011, a 1.8 m twinning project with the Georgian Revenue Service for improving the Customs system: Strengthening the national customs and Sanitary/phyto-sanitary border Control system in Georgia. Another trade-related twinning is to take place in January 2012 : "Strengthening Accreditation Infrastructure According to the Best Practice in the EU Member States" (21 months, 1.15 m EUR).
Regional Development, Vocational Education The EU has signed a 19 m budget support programme for regional development to reduce disparities between regions and promote economic development. Part of it (5.1m in Dec 2011) goes to Vocational Education. Tourism A twinning on tourism (18 months, 900,000 ) started in Dec. 2011.
5.3
USAID
All text and data in italics transcribed directly from USAID documentation Under the heading Economic Growth, USAID lists the following projects:
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Table 7 USAID Economic Growth projects Programme Period Amount (m USD) 40.4
Economic Prosperity Initiative Sept 2010 Sept 2014 Municipal and Internally Displaced people Feb 2011-Feb 2014 Infrastructure rehabilitation project New Economic Opportunities Apr 2011 Apr 2015 20.5 Establishment of a Ph D in business at the March 2008 May 2012 Caucasus University Agricultural Mechanization Project Sept 2009- March 2012 5.1 Abkhazia Community Revitalization Project Sept 2010 Sept 2012 (implemented by UNDP) Womens economic independence in Post Conflict Sept 2009 Dec 2012 zones and remote regions of Georgia Sustainable Integration of IDPs into Value Creation Chains of the New Settlement Areas and Sept 2009 Nov 2012 Supporting Self-Employment of the Most Vulnerable Populations Empowering women of Samegrelo Sept 2009 Dec 2012 Loan Portfolio Guarantee for Basis Bank Sept 2010 Sept 2014 6* Portable DCA Guarantee to Crystal (Microfinance) Sept 2009- Sept 2012 1.5 According to USAID data, this is a 9 m USD project. But this is the amount of loans which can be guaranteed by the fund, the actual amount of this fund is 6 m USD. However, there are other projects which are related to financial instruments or to management training under Health and social development: Table 8 USAID PSD related Health Projects Date Amount (m USD) Education June 2009- June 2012 management project Development Credit Guarantee for a 8m Authority (DCA), TBC July 2010-July 2020 USD loan Bank Block Georgia Loan Portfolio Guarantee for a 20m Sept 2010- Sept 2020 Guarantee, TBC Bank USD portfolio Source: USAID Georgia website/documentation EPI (Economic Prosperity Initiative). September 2010 September 2014 This comprehensive program will improve Georgias overall economic competitiveness through assistance designed to: 1) expand and deepen the countrys economic governance capacity; 2) improve agriculture sector productivity; and 3) strengthen targeted non-agricultural value chains that have the highest growth potential. EPI has already conducted a set of surveys to focus its actions. It has in particular identified growth sectors which could be supported to become major growth drivers (apparel, agro-industry etc). NEO (New Economic Opportunities) is a $20.5 million four-year U.S. Government program designed to improve rural incomes, reduce poverty levels, improve food security, and address water constraints in targeted communities. The program will also help communities of internally displaced persons to work cooperatively on shared issues. Over the next four years, the NEO project aims to benefit at least 70,000 rural and vulnerable households in ten municipalities: Dusheti, Stepantsminda, Kareli, Gori,
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Khashuri, Oni, Tsageri, Lentekhi, Zugdidi, Tsalenjikha. The program is administered through the United States Agency for International Development (USAID). AMP (Agriculture Mechanization Project) The 30-month, $5.1 million, Access to Mechanization Project will establish 25-30 Machinery Service Centres (MSCs) nationwide, using a combination of matching grants, leveraged commercial finance, business and extension training and volunteer technical assistance. MSCs established through the program will provide fee-based custom machinery services to up to 14,000 small farmers. (Source AMP) Development Credit Authority DCA: USAID signed a DCA loan guarantee agreement with the TBC Bank for the $8 million loan to Block Georgia. The funding will be used by Block Georgia to construct and/or rehabilitate 9 hospitals in West Georgia. Loan portfolio guarantee, TBC Bank: USAID has signed another DCA loan portfolio guarantee agreement with the TBC Bank for the $20 million total loan portfolio. The loans to be issued by TBC Bank and covered by the guarantee are intended for the private health sector borrowers for construction, renovation, and equipping of hospitals and clinics. The program will primarily address the financing needs of private insurance companies, which are obliged to build hospitals in 27 health care districts across Georgia by December 2011.
5.4
MCC Millennium Challenge Corporation
MCC invested 395 m USD in Georgia from April 2006 to April 2011, mainly in infrastructure rehabilitation (gas pipes, water pipes, roads) but also in the Enterprise Development sector, with two activities: - A 15.8 m USD agricultural project (grants to co-finance farm service centres) - A 30 m USD private equity investment fund, managed by SEAF (Small Enterprise Assistance Fund), the Georgia Regional Development Fund. The fund has invested 32 m USD (original funding and earnings) in 14 projects, including a hotel chain, fisheries, a poultry farm, a supermarket, an internet provider.
5.5
GIZ
GIZ Georgia is implementing a comprehensive 2009-2012 Private Sector Development Programme (PSDP), coordinated with other GIZ programmes (PSDP South Caucasus, Legal and Judicial Reform, and Self Governance South Caucasus). The Georgia PSDP has three components: - Economic Policy (Advising at Ministry level) - Labour market oriented Vocational Training Education (mainly advising at Ministry level) - Local and Regional Economic Development in Gori/Shida Kartli: this programme assisted the municipality and the businesses in Gori in developing initiatives, in particular on the tourism sector (creation of a tourist information centre, dissemination of information about norms, best practices, new ideas for the development of tourism in the region). In the framework of the PSDP South Caucasus programme, GIZ has fostered the development of exporting companies through participation to trade fairs and seminars on EU import regulations. GIZ is also in the process of designing new projects, among which regional development projects and, in cooperation with GNIA, Regional Business Advice centres.
5.6
-
UNDP
Economic reform
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UNDP is active in Georgia in many fields:
Professional Education: in particular Vocational Education Training Regional Development Social services, in particular small loans and assistance to internally displaced persons Assistance to regions affected by conflicts (Among which COBERM Confidence Building Early Response Mechanism, funded by EU) More specifically for PSD, UNDP runs an incubator in Batumi, financed mainly by the Ajara Autonomous Government.
5.7
EBRD
The EBRD is present mainly as an investor and lender (see below chapter,7.1.1, page 24) , but it also operates two programmes: TAM (Turn Around Management) and BAS (Business Advisory Services). Both programmes have been funded by various donors since their inception (in 1995 for BAS). They are now funded by the EU, under the SME Flagship initiative. In Georgia, they started operating in 2003. The BAS programme is currently active in 19 countries, including Ukraine, the Russian Federation, the Balkans, and South Caucasus. Its purpose is to develop both the local consultancies and the local private sector. It provides the local firms with assistance in using consultants. This assistance is both financial and operational. Financially, the programme subsidises a percentage of the cost of the consultancy. This percentage varies, in order to promote new types of consultancy and not to distort the market for types of consultancy which are already well accepted by the enterprises. Typically, a new type of consultancy service would start with a high percentage of subsidies. This percentage would diminish over the years as the local firms understand its usefulness and are ready to carry the cost themselves. Operationally, the programme assists the client firm in defining its needs, in writing the ToR for the consultants. It provides the client firm with a shortlist of reliable consultants, and then monitors the work of those consultants. This operational assistance is most important: for many SMEs, the main deterrent in the use of consulting services is not the cost, but the risk of not receiving value for their money. Those firms fear they will not be able to find the right consultant, the right working method, and that they will discover only too late whether those consulting services are of value for them. It is thus as important to comfort them in the use of consultancy services as to subsidise those services. The TAM programme provides MSMEs with professionals with a long experience in the relevant sector, who can advise the management on a long period of time. The significant advantage of this programme over most consulting/coaching is that the high level of experience of the expert permits a dialogue with the local management. They speak the same technical language, and it is much easier to establish trust and dialogue.
6 6.1
Support organisations Government and regional organisations
6.1.1 GNIA
The main support to the private sector comes from the GNIA (Georgian National Investment Agency). The main objective of the GNIA is to attract Foreign Direct Investments (FDI). FDI can significantly contribute to develop the private sector by providing both financing and technology transfer. The GNIA very actively promotes Georgia as a place for investments, (www.investingeorgia.com) emphasising low cost, good infrastructure and a favourable business environment, and in so doing it
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supports the Georgian private sector, which can receive foreign financing, and new techniques. The Agency also provides indications on the investment opportunities, on investment regulation in Georgia, and the advantages of investing in Georgia. In particular, the GNIA has launched campaigns to attract investors in Tourism (Anaklia on the Black Sea, ski resort of Mestia). For apparel manufacturing, it proposes free training of the labour force to suit the needs of foreign investors. The GNIA is also active with export promotion, assisting companies to find partners and to know the rules for their export market (see below, Chapter 8 page 27). In addition, the GNIA plans to become active in promoting consulting services, in cooperation with regional governments.
6.1.2 Regional Governments

Today, this supporting role of support to PSD applies mainly to the Ajara autonomous region, with the rapidly developing Batumi area (www.investinbatumi.ge). The region is actively supporting the investments, in particular in tourism and textile, but also tea and agriculture. It finances a business incubator in Batumi. The other regions could become more involved in the development of Business Development Services, with GNIA (see above).
6.2
Georgian Chambers of Commerce
The local Georgian Chambers of Commerce and Industry are under the Georgian Chamber of Commerce and Industry, located in Tbilisi, except for the autonomous regions. The Chambers are being revitalised. Until now, they lacked the possibility to attract members by offering services (except the usual administrative ones, like the Certificate of Origin). They are now planning new services (training, finding partners) which could bring them paying members. However, this initiative is just starting, and the funding must still come from the State rather than from fees for memberships and services. The Georgian Chamber of Commerce is associated with the East-Invest programme to organise seminars on EU-related matters (EU legislation, export to EU etc). The Ajara Chamber of Commerce expects to have one thousand members by the end of 2011, seven times its membership at the end of September.
6.3
-
Georgian business organisations

Georgian Small and Medium Enterprises Association Georgian Employers Association
There are several organisations representing the Georgian business community, in particular:
They lobby in favour of SMEs, especially on tax related and labour related matters, and inform their members on legal and tax developments. The Employers association also organises training sessions on labour issues and business improvement, supplied by the ILO (Improve your business, Expand your business training packages).
6.4
International and foreign Chambers of Commerce
Many countries are represented through their local Chamber of Commerce, but some of them are particularly active: International Chamber of Commerce
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AmCham, American Chamber of Commerce in Georgia French Business Council DWVG, Deutsche Wirtschaft Vereinigung Georgia, German Business Association in Georgia The EU-Georgia Business Council
The Chambers are representing the interests of their members in discussions with the administration. They also organise seminars on trade and investment related topics, and disseminate information about Georgia in their own country and about their own country to Georgian would-be partners, through seminars and information newsletters (investor.ge for AmCham).
6.5
Other support organisations
The major auditor firms (Deloitte, Ernst & Young, KPMG, PriceWaterhouseCoopers) are present in Georgia: There are also other auditor firms (for example BDO). Enterprises can obtain quality certification (ISO, HAACCP) in particular from the certification agency TUV. Consultancy and training services are also widely available (see below, Chapter 9, page 28).
7 7.1
Financing External financing
Most foreign loans are directed towards infrastructure projects. Some, however, are going to Georgian banks in order to provide them with long term funds, which the banks can then on-lend to enterprises, and in particular to SMEs. But the EU definition of a SME means that, in many cases, those loans can also be attributed to enterprises which are large by Georgian standards.
7.1.1 European Bank for Reconstruction and Development (EBRD)

The EBRD is a major financial actor in Georgia, investing in and lending to the Georgian financial system, and lending for infrastructure programmes. As of March 2011, the EBRD states a total portfolio (loans, equity) of 691.3 m. The EBRD is involved in infrastructure programmes: it invested in the hydro-electric power company (Georgian Urban Energy LLC), and granted it a 63.5 m USD loan EBRD is a major actor in the financial sector, as a shareholder of Basis Bank, Republic Bank, TBC Bank, and a lender to Bank of Georgia, TBC Bank, VTB Bank, Cartu Bank and Republic Bank. The Bank is also active in micro-finance. In particular, it provided a local currency loan (0.4m) to a micro-finance organisation, Crystal. This is a small but needed facility, as currency risk on loans is one of the major problems of MFIs. As they cannot receive deposits from the public they have to rely on shareholder funds, grants and loans. Most of those loans being in foreign currency, the MFI have to bear the risk or the cost of risk coverage, which adds to their cost structure. The EBRD also grants loans directly to major firms: for example to ABC Pharmacia, 4mUSD
7.1.2 European Investment Bank (EIB)

EIB has granted loans for major infrastructure projects in 2010 (Enguri Hydro Power Plant, 20m; High voltage transmission lines, 80m, Water infrastructure modernisation 40m) and to the financial sector, mainly for SME and energy efficiency activities in 2010 and 2011(Bank Republic, 35m, 2010) and ProCreditBank (15m 2011). The purpose of those credit lines is to provide the banks with long term funds, which can be on-lent as long term loans to SMEs.
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7.1.3 Kreditanstalt fr Wiederaufbau (KfW)

KfW helped establishing ProCreditBank (mainly aimed at SMEs) with loans (23m.5, 2008). KfW is financing infrastructure projects (Batumi water, 65.7 m) and the Black See Transmission Network (see above, Chapter 5.2.2, page 19) with a 75m loan and a 25m grant.
7.1.4 Asian Development Bank (ADB)

The Asian Development Bank is a major player in infrastructure financing in Georgia, often in cofinancing activities with the EBRD. In 2011, the ADB co-financed with 500 m USD the water sanitation programme, and with 500 m USD the Road Corridor Investment Project. It also lends to the Georgian banks for on-lending (Bank of Georgia, 50 m USD).
7.1.5 World Bank

The World Bank is financing infrastructure projects (roads), credit lines to be on-lent to particular categories (farmers, SMEs) and direct budget support. Its present portfolio totals 469 m USD.
7.1.6 International Finance Corporation (IFC, World Bank Group)

The IFC portfolio in Georgia amounts to 373m USD, mainly in an infrastructure project (Tbilisi airport), an investment in a shopping centre (Rakeen) and loans to banks (BoG, Bank Republic, TBC bank) and companies (Tbilvino). IFC also provided technical assistance (on food safety, tax reform).
7.2
Financing SMEs
As of 31/12/2010, there were 19 registered banks in Georgia. 84.4% of their share capital was owned by foreign residents.4 Of the 19 banks, 16 had foreign capital investment, 2 were branches of foreign banks. The sector is dominated by two major actors, Bank of Georgia and TBC Bank, which together represent some 56% of the assets of the Georgian banking system. All major banks lend to SMEs. SMEs are defined by various criteria, which vary from bank to bank in terms of sales, credit amount. Usually companies with sales under 1.5mGEL (700,000 Euros) are considered SMEs. The banks do lend to enterprises, but preferably to corporate clients rather than SMEs, for the reasons evoked above (difficulty to have good financial documentation, good collateral, sound projects). As stated by a major bank in its financial reporting: The financial performance of corporates in the Principal Markets (Georgia) is generally more volatile, and the credit quality of such corporates on average is less predictable, than that of similar companies doing business in more mature markets and economies. . For small loans, the risk is even higher, as stated by another bank which raised its minimum loan level to 2000 GEL (about 900), the decision was taken in view of the over-indebtedness of the businesses in this segment and their tendency to misuse loan funds for consumption rather than investment purposes. In spite of this increased risks, and contrary to what the SMEs perceive today, the banks will probably address more and more the SME market as the corporate segment may become too crowded and too competitive, with falling margins. For example, one major bank states in its annual report that at the end of 2010, the banks corporate clients base exceeded 1,571. This statement is to be put in the context of the Geostat statistics quoted above: there are in Georgia 1,616 firms with sales over 1.5 m GELProbably as a result of this market saturation, the same bank states that in 2010, the number of SME clients increased by 25% and the volume of funds was raised by 48%. Some banks, which have a tradition of SME lending, are already more involved in the SME market, in particular Procredit.
Bank of Georgia, Annual report. 27
The problems faced by SMEs, which have already been pointed out above (Chapter 4.1, page 15), are not unlike those met in most countries: The SMEs complain that credit is too expensive, and that it requires exaggerate collateral; The banks admit that the cost of credit may be high, but that they cannot diminish it because their own cost of funds (deposits, borrowing) is high due to a high risk premium; they also add that they ask for a fair value of collateral (the main difference being that the borrower considers the acquisition cost of the property, while the bank considers the amount it could obtain in case of a fire sale following a default). They also point out the lack of reliability of the financial documentation, the lack of management preparation of most entrepreneurs, and the inadequate capitalisation of the companies: the loans requested by the entrepreneurs would be too high, compared to the equity of the company.
This is a situation common to many countries, and for which there is usually no global solution, though various mechanisms can be implemented to improve the financing of SMEs . Used together, they are likely to alleviate the problem. Increasing the transparency of the financial documentation of the SMEs: this option gives the lender a better instrument to assess the borrower. It also diminishes the risk to see the borrower extensively fined for tax evasion and unable to continue its activity. From the Revenue Service side, his path is already undertaken, in two directions: a) the smaller companies (micro-enterprises) do not have to submit any accounting documents. b) the others have seen the procedures greatly simplified, and the new tax code is being enforced, though sometimes heavy-handedly, leading to a general trend to implement proper accounting in the enterprises. Improving the financial awareness of the enterprises: not all the financing needs are to be covered by loans. Other methods can be used: leasing, which does exist in Georgia, factoring, increasing the share capital of the company (which is usually not favoured by the entrepreneurs, as it diminishes their flexibility of action), using mezzanine funds, improving the working capital. Today, many companies are financing themselves through supplier credit. Improving the competitiveness of the enterprises, through skills improvement, which increases the chances for the SME to be profitable and decreases the risk of default. This can be done by providing technical assistance, consultancy or, even better and more sustainable, improving the skills of the company staff through training, on-the-job training etc. This partially addresses the problem mentioned above by one of the banks: the volatility of the corporate performance. Increasing the share capital, the financing, and the skills: this is what private equity funds usually propose. The problem with SMEs is that they are in most cases too small to justify the costs of due diligence and technical assistance. In small firms, frequently family based, there is also a reluctance to open the company to a stranger, and an excessive valuation of the worth of the company. Implementing a credit guarantee fund, that would share the risks with the banks.
Implementing those measures does ease SME financing. It does not, however, completely solve the financing problem, witness the number of seminars, surveys, complaints, projects etc on SME financing, even in the countries where those facilities are implemented.
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7.3
Micro-credit
Micro-credit is not normally within the scope of this survey. However, it has also been investigated as it is a source of initial funding for entrepreneurs, which can grow from micro-enterprises to SMEs. Enabling micro-credit organisations to safely grow with their borrower, and cautiously increase the size of their loans, could also be an option to support the private sector. Support to this sector, however, has not been retained for this survey, as the micro-credit organisations are already strongly supported, financially and through training, either by the large banks they belong to, or by international organisations (EBRD, IFC, KfW) or both. As of 31/12/2010, 49 micro-credit institutions were active in Georgia.5
Export promotion
As the internal market is small, and the economy was to a large extent relying on export of agricultural products (in particular wine, fruits and bottled water) to Russia, it is not surprising that export (of goods, but also of services) is considered a major source of growth.
8.1
Trade treaties
Georgia is a member of WTO and benefits from the Most Favoured Nation clause. Many Georgian goods can already be freely exported to the USA through a GSP (General System of Preferences) agreement, and to the European Union through a GSP+ agreement. There are also free trade agreements with the CIS and Turkey. DCFTA negotiations with the EU should begin in early 2012. This would open the EU market to Georgian products though, as seen above, the range of products involved is, for the time being, extremely limited. However, the details and implementation of treaties is not so favourable. Apparel is excluded from the US GSP system, wine and citrus are excluded from the EU GSP+. Sanitary regulations can block the export of agricultural products to the Russian Federation, and market access to neighbouring markets can be controlled by local vested interests. At this stage, those treaties have not significantly helped industry (as it hardly exists) or agriculture (as the quantities are too small for export and/or the food safety standards are not in place): the vast majority of goods exported to the US through this GSP agreement come from extractive industries.
8.2
Export promotion
There are numerous export promotion projects, or export promotion components in larger projects. All the above mentioned business organisations are trying to provide their members with information about export possibilities (and constraints), in particular to the EU and the USA. As already mentioned, the GNIA has a special export promotion arm (Export Service, www.tradewithgeorgia.com). The GNIA, in collaboration with other organisations, offers seminars on export techniques, regulations, export related issues etc. It also provides foreign potential buyers with information on Georgian products. The main products promoted until now were wines and mineral waters, but the range of products is now increasing (sheep, tea, fruit juices).
National Bank of Georgia, 2010 Annual report 29
GNIA is also indirectly promoting export by attracting foreign investors who invest into exporting sectors (apparel). The GNIA, DWVG and GIZ, quite often in collaboration between themselves and with the Georgian municipalities, are organising seminars on the theme of export, in particular to the EU. GIZ also has a special programme for trade development within the framework of the Caucasus Initiative and sponsors the participation of Georgian would-be exporters to trade fairs (for example the Anuga food and beverage fair in Kln in Oct. 2011). Other organisations also deal with export promotion: the Georgian Chamber of Commerce is working with exporters (see above, with East-Invest), USAID made a study on the Georgian wine sector (the main locally produced export product, after extractive industries) the American Chamber of Commerce is facilitating export to the US (seminars on GSP preference system), and the EU-Georgia Business Council is issuing documentation on how to export to the EU. Those export promotion efforts are striving to: - Improve the knowledge of the import regulations (in particular to EU, USA) by farmers/manufacturers - Find partners (i.e. buyers, agents) - Improve the production method to obtain exportable products (both in quantity and in quality)
8.3
Products
The main issue remains the limited number of products that can be exported at this date. As seen from the table above (Figure 5 Exports by category of products, 2010, page 17) the main exports come from one-time abnormal operations (sales as scrap metal of obsolete equipment and infrastructure), and from the extractive industry (ferroalloys, gold, copper). Then come some agricultural products: wine, nuts, followed by mineral water and juices. The garment industry is also an exporter, though mostly, at this stage, as subcontractor for Turkish manufacturers. Each of those productions has major problems relative to export: for instance, the wine is considered too expensive to really compete with other producers (South Africa, Australia, Argentina, Chile). The export of most agricultural products is limited, for the time being, by the low production level. This may change with the focus now attributed to agriculture, but it may take some years for an export oriented sector to develop, as most of the future production may be first directed to the local market.
Consultancy
There definitely are Georgian consultants, at least in Tbilisi, who can provide most of the services needed by the enterprises. Programmes like BAS use them constantly. With EU funding, and until Oct. 2011, the BAS programme has implemented 44 consultancy projects, using local consultants. In the six preceding years, BAS Georgia had implemented 465 projects using 176 consultants, 156 of them local. Many consultants have studied or worked, at least for a period of time, abroad. This means that, except for a few specialised fields (and in the smaller cities), there is no shortage of consultants. The consultants, however, are faced with a major problem of acceptance of their services. Local firms are not ready to pay for services they do not usually value, with the exception of the implementation of financial documentation and of ISO/HAACCP standards. But even this demand is biased: financial documentation is sought after in order to comply with tax requirements and avoid fines, and only very rarely to be used as a management tool. ISO/HACCP are sought after to enter markets which
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require such labels, not because of a focus on quality. Smaller companies do not have the financial means to use a consultant and quite often do not have the absorption capacity to understand or implement its advice. As a result, the consultants work mostly with larger firms and for international organisations. Developing the market for consultancy remains an objective, as small firms (and Georgian firms are definitely small) cannot be expected to have all the in-house capacities to run their business properly. This need (which does exist, as opposed to the demand) must be met with a supply the enterprises are ready to accept. To be accepted by the enterprises, the consultancy services require some comforting assistance to encourage the firms to have at least a first try at using consultancy services.
10 The projects which could be implemented 10.1 The rationale for the choices
The projects should address the problems identified in the present survey, taking into account the actions from other institutions (in order to maximize added value), the possibilities to find partners, and the visibility of the project. It also takes into account the duration of EU projects (normally three years after the approval of the project). The targeted date for implementation is the first quarter of 2013.
The two major identified problems to be addressed are: Access to finance and Skills.
10.2 Issue: Access to finance

As mentioned above, the cost of funds, for the banks and consequently for the borrowers, results from the risk perceived by the depositors (local) and lenders (foreign), from the inflation level, and to some extent from the other markets which the banks consider safer and more remunerative. The proposed projects cannot act on this level. An action to assist the bank to diminish their costs, and to better assess the SMEs, could be envisaged, but such training has already been implemented by other institutions, in particular the EBRD and USAID. There are two subsets of financing problems upon which this proposed project could act: - The lack of collateral in the case of borrowing - The lack of equity in the case of borrowing and development The first problem can be addressed by a Loan Guarantee Fund, the second one by a private equity fund. Both are of interest to a comparatively small number of companies, but can be very effective in their respective market.
10.2.1 Proposed project: Loan Guarantee fund

Loan Guarantee Funds can facilitate access to financing for established companies, with good development prospects, but lacking the needed collateral to obtain bank financing. In some cases, it can also be a policy instrument (for a Government, a region) to promote a given type sector or region. To be fully efficient, it must be established as a permanent institution, linked to the banking community. It must also be carefully designed, in order to be used by this banking community: if the conditions set for obtaining the guarantee are too lenient, or not carefully monitored, the fund may
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bankrupt. If the conditions are too restrictive, or the cost is too high, or the delay in answering the final client is too long, then the banking community will not use the facility. The design must of course evolve with time, and have different modalities for different sectors of the economy. Such a permanent fund does not exist in Georgia, although short term, specific LGF are already functioning or are about to be implemented: - A 20m USD guarantee line with TBC bank for the health sector, within its HSSP (Health System Strengthening Project), - A specific guarantee line for a 8m USD loan from TBC to Block Georgia (a specialist of hospital, clean rooms, construction and reconstruction), and - A 6m USD fund to guarantee loans to SMEs by Basis Bank, which must be used at 35% for agriculture projects. The EU is also including, in its 40m budget support programme for agriculture, a 3.5m guarantee fund for agricultural projects. EBRD is also set to implement a loan guarantee fund within the SME Flagship initiative.
These guarantee funds, however, are mostly aimed at specific priority sectors (agriculture, health). They also have a limited life-span (the duration of the donors project). A wider scope is needed, to provide guarantees to companies that have a sound financial structure, good projects, good management, but lack collateral. And the LGF should be designed, from the start, as a sustainable financial entity: it should be a local financial institution, with the banks (and maybe with the State, the regions) as shareholders. The EU should provide only the seed capital, the feasibility study (to determine which banks would participate, which would be the conditions set to deliver the guarantee, to monitor the guarantees, to refund the bank in case of default) and the initial staffing and training.
The final borrower is not supposed to know that his loan is guaranteed by an international institution. This could lead the borrower to confuse between guaranteed loan and outright grant, as it happened in numerous cases. As a result, the Loan Guarantee Fund would be a low visibility operation for the EU.
10.2.2 Proposed project: TA for Private Equity fund

One efficient way to finance companies, and at the same time to provide them with TA, is to use Private Equity Funds. Those funds take a minority shareholding in the investee company, complete the financing with some participatory loans, and provide TA and networking as needed. In Georgia, most of the TA would go to the implementation of proper Management Information System. One such fund already exists in Georgia (SEAF managed, MCC funded, see above). Another fund is about to be launched with EBRD participation. The costs of due diligence and of TA in the investee company are roughly the same irrespective of the size of the investment. Consequently, the Equity Funds invest in comparatively large companies. In order for the funds to address the issue of financing (and skills improvement) in smaller companies, the expenses linked to due diligence and TA in smaller companies must be subsidized. This has already been done (EU Bangkok funds, with the share capital of the s provided through EBRD and the fund manager, and approximately the same amount in TA supplied through the EUPhare/TACIS programmes). The experience has had contrasted results, and cannot be fully used as a reference, as the conditions have drastically evolved: the Equity Funds are no longer pioneers in a countries which had not fully evolved from the planned economy, the amount of TA may be reduced.
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The proposal is to finance the TA (or part of the TA) which would enable investees to improve their internal organization (financial reporting, production system). The financed TA should be used only for smaller companies, which the private equity fund would not consider otherwise because of excessive fixed costs of due diligence and TA.
The impact could be high, though for a limited number of companies (maybe 5/10, to be determined with the partner fund). The visibility of the EU could also be high, as the Funds often communicate on their investments.
10.3 Issue: Skills

As noted, skills are a major problem. This can be tackled in various ways: supporting vocational training, consulting (provided it includes on-the-job training, and increases the capacities of the company), training for management and employees. It must be well targeted, to make sure that there is no mismatch between supply and demand. This is the reason why the priority choice is to improve those skills in priority for the persons already employed in an enterprise, as the training received will be immediately used, and will correspond to the needs of the firm. Improving the skills of the management and staff also reduces the risks of failure of a company and should, in theory, limit the perception of risk from the banker side and lower the rates, or the collateral required. In practice, however, this is rarely taken into account to a significant level to score a potential borrower.
There are various ways to improve skills: - Training, through training sessions or through a mix of consultancy and related on-the-job training - Assisting consultancies, again including on-the-job training - For the younger enterprises, supporting business incubators, and in particular incubators for light industrial activities - For small developing firms in a more difficult region, a combination of training and improvement of work methods, information on possible profitable opportunities, improvement in the regional/municipal infrastructure to permit the development of those potential sources of development, is necessary.
10.3.1 Proposed project: Training of staff

The need for training, skills improvement, is widely recognized among Georgian enterprises. They do not, however, translate this need into a proper skills improvement programme for various reasons. Of course, they may lack funds to finance this training programme, but there are other reasons: they lack time to devote to training, they lack a clear concept of how to organize a proper training programme and with which training institution. Assisting the BAS project, which is already specialized in implementing consultancy services, in extending its activity to training, could be a project with a substantial added value. In such a project, consideration must be given to the financing, but also to other issues, and in particular to the absorption capacity of the recipient (BAS) programme, in order to maintain its quality standard. The visibility for the EU could be high.
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10.3.2 Proposed project: Supporting consultancy services

As the experience of the BAS project (and of other consultancy projects) already makes clear, the smaller
enterprises are not very receptive to consultancy services, even when they need them. The reason lies not only in the cost of those services, but in the perception of the utility of such services by the SME manager. She/he is more ready to invest in a machine or in inventory than in soft assets like training and consultancy services. Moreover, this SME manager is not able to determine exactly the needs of the company, nor to find the right consultant or monitor the work. Consultancy services are only valued in accounting and, when needed to penetrate a market, in ISO certification. On the other hand, subsidizing heavily the consultancy services is not an efficient solution: the companies tend to underestimate the value of a free consultancy service. A proper balance must be found. Supporting institutions which do not provide consultancy services, but advice on, and monitoring of, consultancy services, has proved an efficient method to develop local consultants and promote their services. The EU could support BAS or BAS like services, and so address the problems of skills and competitiveness of Georgian enterprises.
11 Projects considered, but not recommended at this stage

Other sectors have been investigated during this survey, for example, as mentioned above, the extension of micro-credits to SMEs, but the potential beneficiaries were either already widely supplied with support programmes (micro-credit) or, at the other end of the scale, still lacking the absorption capacity and the sustainability. New projects were also being designed, but they were not at a stage that permitted a valid analysis. This situation may evolve and has to be monitored.
11.1 Reinforcing intermediary organisations

Chambers of commerce, business associations: This is not favoured in the present circumstances because such entities are not sustainable as long as (paying) membership is not compulsory. The main services they could offer are undercut by other organisations: some business associations for lobbying, and government/donors funded incubators, consulting centres, for education and advice. The case of Ajara, however, should be closely monitored, as the autonomous region is already quite active in its FDI promotion. The local Chamber of Commerce plans a major overhaul. Farmer associations, cooperatives: Such a support is quite needed, but as mentioned a prior coordination is most necessary and EU funds are already available through the budget support programme.
11.2 Supporting specific sectors and regions

The above proposed measures address practically all sectors. If we look for a sector or region approach, the following possibilities could be foreseen: Supporting an autonomous region (Ajara) Supporting a region with particular problems (IDP, post conflict, higher poverty level).
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11.3 Grants
This is not an impossible measure, given the relatively small number of enterprises. It has been used by other EU programmes (in particular for Research and Development), including PSD projects (Proinvest in ACP countries). However, it requires a significant back office in terms of programme promotion, project selection (in particular to ensure a complete transparency in the selection process), project control and monitoring. This is why it is not recommended in this particular case.
12 CONCLUSIONS AND RECOMMENDATIONS 12.1 Terms of Reference

The consultant was requested, by the ToRs, to review the private sector activities currently under way by the EU and other donors. This is the object of Chapter 5 above. In the same chapter, the consultant added the activities undertaken by the Government of Georgia, mainly through GNIA. The consultant was also requested to identify a potential EU-PSD project and to make recommendations on best support to be provided, tools to be used, and relevance of Technical Assistance. Several projects have been identified, listed above (Chapter 10) and detailed (tools to be used, potential partners, risks and assumptions, lessons learnt) in the draft fiches. The main areas to be covered were Business support services and enabling environment, SME Capacity and Access to Finance, Export and investment promotion. This list was not limitative. Agriculture was considered a priority area in the ToRs, but the scope was limited to agro-industry after discussion with the EU Delegation, to avoid duplication with the already existing EU Support programme to agriculture.
12.2 Findings
In order to determine the best intervention areas, the first step was to identify the characteristics of the Georgian private sector, the needs of the private sector, the activities already catering to those needs (to avoid duplication), and finally the potential partners. The main identified characteristics of the private sector are: - The private sector accounts for some 75% of GDP - The business climate, though not yet perfect, has definitely improved - Most Georgian firms would be considered MSMEs by EU standards - The internal market is small, there is practically a necessity to have export products - Agriculture is the main sector of employment, but the competitiveness of agricultural products is low - Low wages, low energy costs and limited bureaucracy can prove an advantage for new manufacturing operations The identified issues faced by the private sector are: - Difficulties to find proper financing, except for the largest enterprises (this is a common problem in most countries) - Gaps in skills - Few products to export at this stage - A changing tax and legal environment
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A changing configuration of sectors: agro-industry should emerge within a period of time, and some manufacturing (today limited to subcontracting for Turkish apparel investors) could take advantage of the low manpower costs.
12.3 Choice of areas and projects

In term of areas and issues, the conclusion was to address in priority the area SME capacity and Access to Finance. The reason for this focus is that the two issues of improving skills and facilitating financing were mentioned systematically in the interviews with all stakeholders, as well as in the documentation surveyed and that, while there are many activities already taking place in those two fields, from international donors, from the Georgian administration, and from the concerned private sector parties, there still remain some fields are not or not sufficiently covered, and where the EU projects could bring added value. Among the other areas reviewed, direct support to Export and investment promotion was not retained as there is already a significant effort from GNIA and international donors concentrating on a number of products which, today, is still limited. This would limit the added value which could be brought by the proposed EU project. However, the projects proposed in the SME and Access to finance area should indirectly support the export area by improving the skills and financial capacities of the companies. This may lead to a larger choice of exportable products in coming years, but it is too early to design a project. The area of Business support and enabling environment must be split: assisting some business support activities (training, consultancy) is one of the tools in improving the skills of the enterprises, while enabling environment has already been widely covered by previous actions of the Georgian Government and donors. Even if this area of business environment is still not perfect, in particular in the implementation of the tax reform and in the availability of a level field where all private sector players can have equal opportunity, it is clear that progresses are being made and that the Georgian administration is keen on conserving the lead in this domain.
12.4 Identified projects

As mentioned above, among all the issues relative to the private sector, two stood out in all the interviews with stakeholders as well as in the reviewed surveys: improving the skills of management and staff, and facilitating access to finance. In both fields, there are already activities aimed at alleviating the problems, implemented by the Georgian government and by the donors. But there remain gaps where a new project could bring some added value. Those new projects could be: - A Loan Guarantee Funds, - Supporting the training of management and staff, - Improving the reach of consultants activities, - Supporting private equity funds in order to reach smaller companies. - For younger companies, business incubators For each of those projects, partners or potential partners could be identified. As the situation in Georgia is evolving, other possible activities could be considered shortly, though the state of the project, or of the counterpart, does not permit a full study at this stage: - Regional Development project (with GIZ, outside its present Gori project, and/or with GNIA) - Assisting Chamber of Commerce, in particular in Ajara.
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12.5 Recommendations
The recommendations are based on: - The impact of the project on PSD - The risk involved in implementing the project - The present stage of preparation of the project - As a secondary criteria, the visibility of the EU The first recommendation would be to extend the support already given to the consultancy and training activities of the BAS programme, as this is a low-risk, comparatively high impact project. A second would be to set up the Loan Guarantee Fund, as it is probably the project which can have the highest impact on the private sector. However, such a project has its risks, and a proper feasibility study and advice which can be obtained from various successful LGF is necessary for its implementation (for example OSEO (France), Kafalat (Lebanon), Caisse Centrale de Garantie (Morocco)). Supporting the Batumi incubator is also a high impact, comparatively low risk project. But the amount to be allocated to this project could not be ascertained with enough precision, and should still be reviewed with the other donors, in particular the Ajara Government. Providing TA to the SEAF/EBRD fund is an efficient, high visibility, method of developing a limited number of leading companies. Some proposals are valid but cannot be finalised, as the stage of development of the project or the organisation was not sufficiently advanced at the end of this field mission. They could be monitored by the EU Delegation, and eventually included or not in the final PSD programme: - Supporting a regional business consultancy network (project still in the design stage) is also an option, but only if the project (not finalised at the end of this field mission) sufficiently separates the consultancy services from the State administration (as MSMEs may be unwilling to disclose their data to an institution too close to the Revenue Service) , and if the consultants are qualified and experienced. - Supporting regional development and the Chambers of Commerce (in particular Ajara) is to be considered, but depends on the proposed activities (not finalised at the end of this field mission for GIZ) and on the development of a sustainable State or Regional funding, also not finalised at the end of this field mission.
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The choice of the best option or combination of options lies with the EU Delegation. It will be driven by considerations linked with the visibility, the risks, the funding, economic scenario, the degree of preparation of the implementing partner, the probability of success, the impact on PSD. All these elements should be analysed together and not individually. The identified projects can be summarised in the following table: - The stage of preparation of the implementing partner is to be considered at the time the EU Delegation makes its decision, while the table below only appreciates this stage as of Dec 2011. Some organisations (Chambers of Commerce) may evolve rapidly. - The impact on PSD can be measured by the increase in sales, employment, sustainability, access to finance of the companies. This impact on PSD depends on the number of enterprises affected by the project, and on the impact for each firm. For example, Private equity funds, incubators, have a huge importance for the investees and incubated firms, but the number of those companies is comparatively small. Consultancy, training, can have an impact on a larger number of companies. Regional Development has an impact on all the economy of a region, but with different degrees from firm to firm. - The visibility of the EU depends on the visibility of the project (seminars held, communication on events, investments, opening of branches etc) and on the visibility of the EU within the project: logos mentioning the co-financing, EU logos on all the documentation, business cards, buildings etc. In one project (loan guarantee fund) this visibility is limited to the banking community. Project Total amount (for a 3 year project), million Euros 6-7 Impact on PSD EU visibility Stage of Risks and assumptions preparation of counterpart/project as of Dec 2011 Medium The banks must be interested in the project The feasibility study must properly design the procedures, so that the banks use the LGF High Only limited by the absorption capacity of BAS Other comments
Setting up a loan guarantee fund, permanent institution Developing training through existing channel (BAS) Extending the consultancy activity of BAS
High
Low
Probable heavy involvement of EU delegation, to make sure the fund is properly managed. Difficult, low visibility project, but high impact Efficient, fast implementation, but possible administrative problems of funding through two EU channels Efficient, fast implementation, but possible administrative problems of funding through two EU channels
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0.6
High
Medium
0.6
High
Medium
High
Only limited by the absorption capacity of BAS
Project
Supporting consultancy, BAS programme Supporting consultancy, Regional facility Supporting business incubators Supplying TA to private equity fund
Total amount (for a 3 year project), million Euros 2
Impact on PSD
EU visibility
High
High
Stage of Risks and assumptions preparation of counterpart/project as of Dec 2011 High Only if the EU PSD project starts after 2014
Other comments
To be determined, probably 1 1-2
High
High
Low
Medium
High
High
GoG support of the project Acceptance by SMEs of a State consultancy Availability of skilled consultants Continuous support of the Ajara government Depends on actual launch of a fund
Only if EU decides not to continue BAS funding, and no other donor takes over the BAS South Caucasus programme Efficiency depends heavily on the design, not completed at this stage
The amount depends on the participation of other donors Contract must make clear that the funds can be used for Georgia, and for particular companies which would not be reached otherwise by the fund To be monitored with counterparts, for projects starting after 2013. Possibility to test the concept in Ajara. Very heavy involvement of EU Delegation, heavy risks, not recommended
Medium
Medium
High
Supporting regional development Reinforcing intermediary organisations Grants
1-3
Medium
Medium to high High
Medium
Cost to be investigated, too early
High
Low
High
High
Not applicable
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13 Draft Fiche: Setting up a Loan Guarantee Fund 13.1 Rationale

Access to finance is a major problem for Georgian SMEs. The interest rates are high and the collateral required exceeds the possibilities of most entrepreneurs. Little can be done regarding the interest rates. They reflect the risk of the Georgian market, and to some extent the fact that the banks have other sources of income which they consider less risky and less costly than loans to SMEs (corporate banking services for a few companies, personal credit, fees on credit cards etc). Another approach would be to diminish the cost of lending by the banks through better administrative practices, and a better approach to SMEs, diminishing the risk. This kind of administrative streamlining and staff training has already been implemented by most banks, often with EBRD assistance. The Loan Guarantee Fund addresses the problem of a restricted number of companies: the existing companies with sound development projects that cannot be financed because of insufficient collateral. Sharing the risk with the banks allows those banks to finance projects which are sound, bankable, but lack sufficient collateral. This may be of value for a comparatively small number of firms, as the main problem faced is the high rate of interest and indeed adding the cost of the guarantee may increase the cost of the credit. The fund itself, at least in a first approach, is not expected to be large (3 to 5 m).
13.2 Georgian Context and similar projects

USAID has set up a number of funds to guarantee specific investments or sectors: - A 20m USD guarantee line with TBC bank for the health sector, within its HSSP (Health System Strengthening Project), - a 8 m USD guarantee line to cover a loan from TBC to the company Block Georgia, and - a 6m USD fund to guarantee loans to SMEs by Basis Bank. 35% of the loan amounts must be used for agriculture projects. Another such scheme will be implemented by the EU in agriculture (3.5m). The guarantee will be managed by EBRD, which will make it available to its Georgian counterpart banks for agricultural projects. EBRD is also implementing a LGF project through its usual banking counterparts, in the context of the SME Flagship initiative. This also will be a limited time guarantee fund, with a double purpose: improving the access to finance of the final borrower, and giving the participating banks an experience in using loan guarantee facilities. TA for the participating banks will also be part of this facility. The problem encountered by the present schemes is that there is a limitation on the type of project that can apply: Health sector (but most borrowers are linked to insurance companies, which can provide the needed guarantees), or a high percentage (35%) for agriculture when loans to agriculture, today, represent only 1% of total bank loans. As a result, they are not fully used by the banks. Those guarantee funds have also a limited scope and lifespan: they are not supposed to be permanent structures, their lifespan is limited to the duration of the donors guarantee. The proposal of a permanent LGF has been accepted at various degrees by the interviewed banks. Some (with foreign experience) are definitely favourable to the LGF, some are not against, but with caution. For example: We have already more clients with good collateral than we can supply, there is no point in adding clients which we could not serve
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Our clients are very sensitive to the cost of credit. Any measure that would increase this cost (and a guarantee would indeed raise this cost) will not be accepted by the client. The rules of implementation of the guarantee must be wide enough. Otherwise, we shall not be able to use it.
13.3 Lessons learnt

From the experience of the guarantee funds already operating in Georgia, we see that the fund must be used for a wide range of activities: if they are restricted to sectors where the participant banks are not active, they run a high risk of not being used. In other countries, such guarantee funds have already been implemented by the EU, with various degrees of results: Morocco (Chabi and Paigam) and the EU funded, with other institutions, guarantee funds in Jordan (now JLGC), Egypt. The EU also provided technical assistance to SOTUGAR (government funded) in Tunisia and co-financed the successful Kafalat guarantee fund in Lebanon. From other funds set up by the EU, or with EU or other donor participation, we also see that the legitimate concern of controlling the public funds used in such a facility can lead to extensive controls, and delays in answering the final borrower. This leads to delays which diminish the attractiveness of the Participating Bank in the competition for the SME market, and eventually the LGF is not used. The procedures used by the fund must lead to a fast appraisal (positive or negative) of the requests for guarantees, and to a fast and easy reimbursement of the bank in case of default of the borrower. We also see that it is much better if the foreign donor is not visible by the borrower: when an international donor is involved, many borrowers find it difficult to distinguish between a grant and a guaranteed loan. And if the default occurs, the foreign donor does not want to be seen suing a small local firm. This absence of visibility is then necessary for the success of the facility, but it also deprives the EU of a possible positive image. In order to add value over the already existing or planned facilities, the structure must be permanent, and if possible have the banks as shareholders.
13.4 Expected results

SMEs benefiting from more bank financing A functioning LGF is set up and works in a long-term, sustainable way.
13.5 Activities 13.5.1 Setting up a lasting fund

Ideally, the LGF must not be limited to the proposed 3 year EU project. Rather, it should be a permanent
structure, initially funded, and technically supported, by the proposed project. This is why prior acceptance by the financial community is critical. Moreover, a LGF is a useful instrument, but: - It is useful for a very specific type of clientele: creditworthy companies with a sound project, but not enough collateral.
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- It must be very fine-tuned: if the rules are too liberal, the fund will go bust; if they are too strict, or if they delay the implementation of the loan, or if it prices the loans out of the market, the banks will not use the guarantee. The EU and other donors have had experience with both cases, sometimes in the same country: too liberal (and the fund could not fulfil all its guarantees) or too restricted (and the banks eventually preferred not to use the LGF). The implementation of the LGF could be done in the following way: 1 Setting LGF conditions and choosing participating banks A first mission, with a team of LGF experts, will visit the banks to determine the optimal conditions for this LGF (size of the loans, tenor, percentage of risk shared, sectors, conditions on the balance sheet of the borrower and its business plan, cost of the guarantee, reimbursement mechanism in case of default of the borrower). There may be various types of guarantee schemes, for different market sectors. This mission would select a small number (two, maybe three) participating banks, and start the discussions with the banks for the implementation of a permanent structure. 2 Implementing the LGF A permanent team of LGF foreign specialists and Georgian trainees, for the duration of the project, sets up the LGF. In order to ensure the sustainability of the fund, its transfer to a permanent structure must be decided (and the counterpart identified) from the beginning, including the training of staff to continue the activity. The team works closely with the participating banks in a first period in order to achieve a common understanding of the functioning of the LGF: which loans are eligible for guarantees, which are not. This, in theory, is stated in the Participation Agreement, but in practice this agreement has to be wide enough to be operational, and there may be many grey zones. Initially, the implementing team participates to the appraisal of the borrowers to be guaranteed. Once a common approach has been secured, and the administrative and reporting mechanisms are in place and functioning, the participating banks take the decision themselves, and the expert team only controls the process through random ex-post checks. 3 Handing over the LGF An EU project has typically a 3-year duration, while the LGF is supposed to stay longer. The loans guaranteed by the LGF are recommended to stay over the 3 year period. The fund must thus be handed over to another institution, which will continue the activity. This is only possible if the institutional setting is agreed from the beginning and if the relevant staff has been trained during the project life and is fully operational at the end of the project.
13.6 Identified counterpart

As mentioned above, the project must be implemented either through a Project Implementation Unit (PIU), which will then select the participating banks and create a permanent structure, or through an existing IFI with links to Georgian banks, which, in practice could be EBRD or KfW. There will be no overlapping with the existing or planned LGF, which are supposed to be limited in time.
13.7 Budget
The fund should start with a low level of capital (3 to 5m) in order to test the concept. The total cost must include the above mentioned seed capital, plus the cost of a PIU during three years (two persons, of which at least one expatriate, 1.5m), and the feasibility study costs (0.2m). A hidden cost is the involvement of the Delegation, as this may be (in spite of its low public visibility) a high
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profile project within the financial community, and has to be followed carefully. If the fund goes bankrupt, the image of the EU could suffer.
13.8 Sustainability
The operational structure of the fund can be sustainable if the transfer process is implemented from the start, with agreements between the participating banks to take over the structure, and a proper training of the staff. The funding, however, may have to be renewed from time to time (by the participating banks and other stakeholders).
13.9 Visibility
The EU visibility will be low, as the presence of the EU behind the facility will be known only among the financial community it will not be communicated to the borrowers or to the public at large. The fund will not have direct contacts with the borrowers, only with the Participating Banks. Previous experiences show that the borrowers who know they are being guaranteed by a foreign donor, even partially, feel little urge to reimburse the bank. This is why, from the outset, the LGF must not be an EU project, but a permanent local structure initially funded and assisted by the EU.
13.10 Risks and assumptions

There are two opposite risks: a) that the fund does not disburse, or b) that it cannot cover the actual default rate. The fund may not disburse for various reasons: the procedures are too slow, and the banks would rather not use the guarantee fund than wait for the decision and risk losing a client. The procedures to compensate the bank in case of default of a borrower are not fast or transparent enough: the banks will not trust the fund and will not use it. The rules set to the bank for the choice of guaranteed borrowers are too restrictive, and do not correspond to the present, nor potential client base of the bank: the bank is not interested in using the guarantee fund The bank has already enough good clients with sufficient collateral, and those who do not have collateral have no bankable project either. The bank does not need the guarantee scheme. The cost of the guarantee is too high. Added to already high financing costs, it puts the total credit rate out of the market. The bank will not use it as its final offer to the client would not be competitive. The Central Bank might also consider that the guarantee fund is not sufficient collateral for the loans granted by the banks. The participating banks would have to make additional provision deposits with the Central Bank for the loans that benefited from the LGF. This would price the guarantee out of the market.
On the other hand, the fund can also be in default if the conditions set to grant the guarantees have been too lenient or if the loans are not properly monitored. Those risks should be reduced by a careful preliminary market study and by proper implementation procedures.
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14 Draft Fiche: Developing training 14.1 Rationale and country context

The lack of skills is a recognised problem for Georgian enterprises, identified in all the surveys of Georgian competitiveness and recognised by all the entrepreneurs and staff. The educational system has suffered after the independence, many skilled persons have emigrated in search of better salaries, and today there is a mismatch between the supply of the educational system and the needs of the enterprises. To this background it must be added a lack of quality management culture in many enterprises, legacy of Soviet times when the demand for goods was high and the supply was low. Training the personal already in place and working is a necessity. It requires special methods as the trainees are also needed in their enterprise and have little time to devote to their training.
14.2 Georgian context, similar projects

There is a demand for training, and there are consultants specialised in training. Programmes directly or indirectly related to training, in different forms (Vocational Education, on the job training, incubators, training for consultants, assistance to the relevant administrations) have already been implemented by most donors: EU, GIZ, UNDP, EBRD, USAID. The Government of Georgia is considering subsidising training in apparel factories, to attract investors. The problem is to organise training in such a way that it will be really useful for the enterprise, as a Human Resources manager would do: making sure that the need perceived by the enterprise is truly what is needed, that the trained person will be able to use her/his new skills within the enterprise, that (s)he will be understood by the rest of the staff (who has not followed the training), that (s)he will be able to use those skills within the enterprise, and finally will not find it financially more advantageous to sell her/his new skills to a competing company or abroad. A proper consultancy work is needed within the enterprise, to define which type of training is necessary, and how to implement it.
14.3 Lessons learnt

From the previous training schemes for SMEs established in different countries, we see that there is a delicate balance to be found for subsidies: If the full cost, or a substantial part, of the training is subsidised, the attendance is not fully committed to the success of the course. Many registered trainees will not attend, and when they attend, their newly acquired skills will not be used in the company. If an insufficient part is subsidised, the cost will be considered too high and the local firms will not be willing to attend.
The training must also be delivered by local trainers, and organised through local firms, and not, except in exceptional cases and for very specialised subjects, by foreign experts. Some trainings are already much in demand, and need not be part of this scheme because enterprises are ready to pay for it (accounting, in some cases English language). However, related fields (for example financial analysis, management information systems) are not sufficiently recognised and can be included in the scheme. For example, accounting is used for nearly only its tax implication, and training in management information systems is needed, so that this accounting data could be also used as a management tool.
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Reinforced, more competitive SMEs, through the acquisition of new management skills.
14.5 Activities
The implementation could be left totally to the counterpart (see below). The implementing counterpart would assess the needs of the company, select the consultants/trainers, make sure that the terms or reference for their assignment is on line with the needs of the company, and finally monitor the quality of the training supplied.

The EBRD BAS programme (presently funded by the EU under the SME Flagship Initiative) has been working in Georgia since 2003 and is mainly working in the field of consultancy services. It has a component devoted to training, but this training is mainly targeted at the consultant community (how to improve their activity as consultants). In its present form, the BAS programme provides companies with two forms of assistance in their use of consultants: - It subsidises the cost of the consultancy (the percentage of subsidies varies with the type of consultancy) - It monitors the work of the consultant: it prepares the ToRs for the action, gives the enterprise a short-list of selected consultants to choose from, and monitors the quality of the output. This could easily be extended to training services, as many consultants offer both consultancy and training and, as mentioned above, the proposed training should be preceded by an analysis of the company and its needs. The training scheme may exclude fields which are already in high demand and are covered by private institutions (accounting, languages).
14.7 Budget
The present BAS budget (about 600,000 per year), and hence the absorption capacity, of the BAS programme in Georgia should be taken into account. The additional budget could be estimated at 200,000 per year, including a reinforcement of the structure of BAS Georgia to cope with extra activity.
14.8 Visibility
The EU logo could easily be used, together with the EBRD logo, on all documentation.

There are risks in the absorption capacity of BAS, to maintain its quality standard, as this is a comparatively new field for BAS: today, BAS mainly offers consultancy services which may include some training, rather than training schemes which include some consultancy.
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15 Draft Fiche: Supporting consultancy

This fiche refers to three options, with broadly the same rationale, and which are not exclusive of each other. If this area is retained, the fiche must be adapted to take into account which options have been retained.
15.1 Rationale
Consultancy is needed in most Georgian firms, which do not have the in-house skills to solve many basic problems linked to their market strategy, their production process, their Human Resources etc. Consultant services, however, are not yet well accepted in Georgia, where they are not sufficiently valued except accounting services in order to comply with the tax system and avoid fines, and ISO/HAACCP in order to enter foreign markets. Part of the problem lies in the cost/benefit ratio of consultancy services, as perceived by Georgian firms. Part of it also lies in the difficulty faced by the Georgian SMEs to define their own problems, write the Terms of Reference for the consultant, find the right consultant, and monitor the work of the consultant. As a result, the consultants presently working in Georgia are working either for the largest corporations or for donor projects. The above does not apply to such consultancies as accounting, ISO/HAACCP, which are sought after by the Georgian firms, though not always for the right reasons, and do not need support. In most firms, accounting is being sought after as it is supposed to help the company comply with tax requirements, and avoid fines not because it improves the management of its operations. ISO/HAACCP is sought after because it is necessary for export markets not because of a concern about quality production.
15.2 Georgian context and similar projects

There are numerous Georgian consulting firms of very variable quality. There is no association able to deliver a quality label. However, the BAS programme, managed by the EBRD, and for the period 2010-2014 funded by the EU, provides a good solution for those enterprises really interested in using the services of a consulting firm. It provides subsidies, a short-list of reliable consultants, it assists in defining the ToRs for the consultants and monitors their work. There is also the possibility, for the near future, that the GNIA, together with GIZ, implement a network of business consulting centres. In this case, the concept will be new, but some caution is to be taken: according to the present GIZ proposal (which may change, as it is not fully defined yet) those centres will be run by local (probably regional) authorities or the Government, and will be staffed by government/region/municipality employees. This may have two major drawbacks: - the enterprises may not act in a fully transparent manner with an organisation linked to the State and thus, however indirectly, to the tax administration; - the employees of the government/region/municipality may not have the experience and level necessary to become consultants for the development of private enterprises. Training may help, but cannot replace experience.
15.3 Lessons learnt

Consultancy services (Business Development Centres, SME support centres etc) have been established in most countries where donor programmes operated (including Georgia, before 2004: EU funded SMEDA (SME Development Agency), BCC (Business Consulting Centre); and CERMA, (Centre for Enterprise Restructuring and Management Assistance). The need for consultancy services
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is not usually recognised by SMEs (they prefer to invest in machinery, buildings or real estate), and the entrepreneurs are not ready to pay for them. One reason for this is that they cannot be sure of the quality of the consultancy services delivered: they cannot analyse their own problem, find the right consultant, organise and monitor the consultancy work. Thus, a prior analysis, with the company, is necessary. Consultancy services must also be individually delivered, as they are specific to each enterprise, and in particular to its absorption capacity and financial capacity: there is no point in giving an advice which will not be implemented because it is not fully understood or because the recipient SME does not have the financial and human resources to implement it. However, assisting with subsidies and prior analysis also has its drawbacks: - It is recognised that free consulting services are not the solution: the beneficiaries tend not to pay enough attention to those services. A balance should be found between the financial possibilities of the SME, and the sum which would secure its involvement. - the prior analysis must be extremely fast and effective, otherwise the SME loses interest in the consulting services, or those services arrive too late to solve the problem. This means that flexibility in the operation, knowledge of the local consultancy market, trust established between the consultant (or the consulting centre) and the SMEs, are essential to the success of the scheme.

- Reinforced SMEs
- Reinforced local consultants
15.5 Activities
The activities will be: advising SMEs. The implementation of the activities is to be left to the counterpart. There are three possible projects: Increasing the activity of the existing BAS programme (allowing more companies to apply, allowing companies to apply a second time, increasing the type of consultancy offered); Setting up a completely different consultancy network; Funding the BAS programme in Georgia after its termination

There are two identified counterparts: - The BAS programme - GIZ/GNIA The first one (BAS) is already very active in this field (since 2003 in Georgia) and has a positive track record. It is already funded by the EU. Including it in this proposal is meaningful only if this leads to additional activity or to the continuation of its activity after the end of the present funding. An additional activity could be the use of the possibility for Georgian companies to benefit from the BAS programme for more than one project. Presently, the companies assisted by BAS Georgia cannot have a second consulting project financed by BAS. This may be too restrictive, as the company may still need consultancy services, and may still not have the resources to obtain them. A method which has been used in other BAS programmes is to accept such requests but with a lower rate of subsidies. There have even been cases where the company would apply to the BAS programme without the incentive of subsidies in this case BAS would act as a consultant in consultancy
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providing a short-list of reliable consultants, assisting in drafting of the Terms of Reference, and monitoring the work of the consultant. Another possibility with BAS is to fund the whole Georgian operation of the project. The BAS Georgia project is presently funded by the EU until the end of 2014. Funding by the EU Delegation of the BAS Georgia project makes sense only if the PSD programme is delayed, and starts only in 2015 No donor funds the whole BAS, or BAS Caucasus programme
The second possible partner is the network of Business Consulting Services which the GNIA expects to develop with the assistance of GIZ. This partner is not yet operational and, as mentioned above, may not have the same appeal for its client companies as the BAS programme, being linked to the State and staffed by State employees. State-led projects can work only when there is full confidence in the tax authorities. This confidence today is increasing (no more petty corruption) but is not sufficient (Tax inspection decisions the SME consider, rightly or wrongly, arbitrary). There must also be well trained, experienced, and consequently well paid, consultants. This depends on the budget the State and the regions are ready to allocate to this project.
15.7 Budget
The funding being limited to an additional activity of BAS, could be in the order of 100 000 to 200 000 per year (0.3 to 0.6 m over three years). For the GNIA/GIZ project, which is being developed, we have no information at this stage, but the budget is expected to be small (maybe 100,000 Euros per year), as the Regional Governments should provide the premises and the staffing.
15.8 Risks and assumption

If the project is implemented with BAS, the risk of additional activity is to overgrow BAS in such a way that the team cannot successfully control the quality of the work done. If the PSD project is to support the full BAS Georgia programme after 2014, the problem is the coordination of this financing with the overall financing decision of the EU: if the EU decides to continue its financing of BAS after 2014, the PSD programme is not necessary, and if the EU decides not to continue its financing of BAS, then the question will be raised of why it should continue to do so exceptionally in Georgia. If the project is implemented with GNIA/GIZ, the risk is to fund a project which has not yet proved its worth (it has not started), and which, in its present stage of conception, may have problems of effectiveness. The relationship with the Regional Government or to the Municipality, hence with the State, may be too close, and deter the firms from giving the full information that is necessary for a proper consulting work. The use of Regional/Municipal employees may limit the technical capabilities of the consultants.
16 Draft Fiche: Supporting Business Incubators 16.1 Rationale and country context
Newly founded companies have, worldwide, a high mortality rate. This is why banks are most reluctant to lend to new enterprises, and either require significant collateral or refuse altogether. The same still applies, though to a lesser extent, to companies which have managed to operate for a couple of years. Those comparatively new companies are facing multiple challenges, on top of their operational problems: financing, organizational, administrative. Properly designed and operating
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business incubators can alleviate those problems by diminishing the costs for the enterprise (pooled, and partly subsidized, costs of premises, communication) and by providing free or subsidised consultancy services: in-house consultants for most current matters (tax, accounting, administrative obligations) and subsidized consultancies for technical or marketing advices linked to a particular sector.
16.2 Georgian context

To this date, there is only one business incubator, in Batumi, financed by the Autonomous Ajara Government,
with the assistance of UNDP. This incubator is quite recent and has only recently released its first companies. It operates only for service activities, but it intends to expand its scope to the light industrial sector (related for example to construction, maintenance of equipment). The incubator would provide the premises and the basic services (electricity, water etc), plus of course the consultancy services, and the enterprises would bring their own specialized equipment.

Viable SMEs after two years through the incubator.
16.4 Activities
The funds will have to be transferred to the UNDP/Ajara Government, upon approval of the business plan of the incubator and of the use of the funds by the Delegation.

As mentioned, there is at present just one such incubator, in Batumi, with UNDP and the Ajara Autonomous Government. The region is developing rapidly, in particular with significant Turkish investment, and new enterprises are needed in all sectors of activity.
16.6 Budget
The cost will depend on the stage of development reached by the incubator at the time of the availability of financing (i.e.: will the industrial incubator be running?). Financing equipment, rehabilitation work for the premises of the industrial incubator is not recommended, as the tender procedures might delay the project. Financing the running costs is more appropriate, and could reach 100 000 per year. UNDP is already looking for other donors.
16.7 Sustainability
Incubators are not profitable, and require a constant funding. Using an already existing structure, linked to the regional government, increases the chances of sustainability.
16.8 Visibility
This could be a high visibility project, though visibility will have to be shared with other institutions (UNDP, Ajara Government, probably the Austrian Development agency financing the rehabilitation of the industrial premises, and the Romanian government which initially financed with 200 000 Euros the service incubator).

There are two kinds of risks:
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That the decision to launch the industrial incubator be delayed, which would reduce the need for financing That the enterprises which now left the incubator fail, which would mean that a restructuring of the incubator is necessary. It is too early to say at this date.
The assumption is that the Batumi regional government will continue supporting the incubator.
17 Draft Fiche: Supplying Technical Assistance to a private equity fund 17.1 Rationale and country context
Many companies which have reached a certain size cannot grow further because they lack the financial means, and some technical capacities. The banks would not finance them as those companies do not have sufficient share capital, collateral, and track record. The enterprises look for partners who can bring them finance, technical assistance, and partnerships in their field of activity. The founders of the company, though, are not willing to give away the control of their company. Private equity funds can be a solution to this problem, as they provide finance (through equity and participatory loans), technical assistance and partnerships (through their network). The founders of the company must accept some implication of the fund in the running of the company, but do not lose the control of the company and have, in most cases, the possibility to buy back the shares owned by the fund after some years. However, Private Equity Funds tend to invest in companies that are significantly larger than the usual Georgian enterprise, as the costs of due diligence and TA are roughly the same, whatever the size of the investee. Investing in smaller companies would then mean increasing the costs with no increase in profits. A solution to this problem, from a development institution viewpoint, is to subsidise the costs of downsizing the investments: technical assistance to the fund and to the investee, sometimes running costs. This method has been in particular used for EBRD funded projects in the former Soviet Union (under the so-called Bangkok facility), where the EU financed a substantial amount of TA and running costs (equivalent to 50% of the amounts invested). This percentage was justified in the context of the transition years, when most concepts, beginning with market economy, were new. It may be lowered today.
17.2 Georgian Context

There is one such fund operating in Georgia at present (Dec 2011): The Georgia Regional Development Fund, funded by the Millennium Challenge Corporation and managed by SEAF. The fund started with 30 m USD, but eventually invested 32m USD by re-investing revenues. It holds shares in 14 Georgian companies and is about to start divesting. As the capital market in Georgia is practically non-existent, this divesture may take two forms: sale to a strategic investor, or sale to the founders of the company, according to a calculation method set in the initial investment agreement. This is a delicate moment, as strategic investors may not be numerous, and the company founders may not have the financing resources to buy the shares. As of December 2011, SEAF and the EBRD have reached an advanced stage of negotiation to start another fund, with a regional scope (Armenia, Azerbaijan, Georgia), and a funding which should start at some 40 m USD to reach 70 m USD. EBRD would invest 10 m USD or up to 25% in the fund.
17.3 Lessons learnt

From the previous experiences of common work between EBRD and the EU in the former Soviet Union, it appears that this subsidy has been most useful in enabling the funds to enter markets where they were introduced. The percentage (50% of the project) proved high, but may have been
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justified by the pioneering character of those funds which may no longer be the case today. This subsidised TA enables the fund to reach for smaller investees, and to limit the risks of failure in those investees.
17.4 Activities
Implementation is simple, as it only means transferring the funds to the EBRD, which will then transfer them to the equity fund as needed. As the fund has a regional scope, and no limitations on the sector of activity to invest (except alcohol, gambling, weapons, real estate, etc) a special agreement must be signed between the EU and the Fund, to ensure that this TA will be used only for Georgia, and for smaller investments.

The identified counterpart is the EBRD.
17.6 Budget
The percentage of the total invested fund can be discussed. The CIS funds had a TA amounting to 50% of the full project, which was quite high. A percentage of up to 20% may be more adequate, as the purpose is not to provide general TA for the Fund, but to make sure that it can reach smaller companies. If 60% of the investments of the Fund are expected to take place in Georgia, a Fund of (for example) 30m would require a subsidised TA of 30x60%x20%= 3.6 m.
17.7 Visibility
There could be a significant visibility, as the Fund itself is supposed to be quite visible to attract investees. This visibility must also be part of the agreement between the EU and the fund.
17.8 Sustainability
By nature, this is a one time operation, but eventually the sustainability comes from the success of the investees companies.

The risk is that the Fund is delayed, as investment money is difficult to obtain presently, 2012 and 2013 are election years in Georgia (Parliament and President) and, quite probably, the present SEAF fund has already skimmed the market. The investors may also wait to see how SEAF is divesting from its present investments before taking a final decision. This may not be a serious problem for a 2013 funding, (the situation will have cleared by that time) but it may lead to budgeting problems, as a 2013 funding means a 2012 decision.
18 Draft fiche: Regional Development
18.1 Rationale
Outside Tbilisi and Batumi, the development is suffering even more. The private sector is hindered by all the problems already mentioned, but also by the lack of an enabling infrastructure, of possibilities to build on whichever local resources exist. Developing those areas requires a concerted effort of all
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the parties involved: the SMEs to provide the development, the donors to give those SMEs the necessary technical and managerial skills, and the local administration to put in place the infrastructure which could enable this development.
18.2 Georgian and similar projects

The EU is already proposing a 19m budget support programme for regional development. More focused, GIZ has implemented a regional development programme around Gori. This programme, which was planned until 2012, has been extended for another year. This GIZ programme has focused around one potential of the region: Tourism. It has involved the municipality (which is now running a tourism information centre) to provide the enabling environment, the information to tourists. It has also involved the local firms (hospitality firms, hotels or guest houses), training them and informing them on the expectations of foreign tourists, the regulations on hotel/guest houses and the rating criteria. The programme is now trying to develop new local activities to attract and retain tourists.

Economic development in one presently under-developed region.
18.4 Activities
To be determined according to the chosen region, as each region has a distinctive range of possibilities: agri-business, summer tourism, eco-tourism, ski etc. The activities, in any case, should involve both the local administration and the local enterprises.
19 Projects considered, but not recommended at this stage

Other sectors have been investigated during this survey, for example, as mentioned above, the extension of
micro-credits to SMEs, but the potential beneficiaries were either already widely supplied with support programmes (micro-credit) or, at the other end of the scale, still lacking the absorption capacity and the sustainability. This situation may evolve and has to be monitored.
19.1 Reinforcing intermediary organisations

Reinforcing Chamber of commerce and business associations is not favoured in the present circumstances because such entities are not sustainable as long as (paying) membership is not compulsory. The main services they could offer are undercut by other organisations: some business associations for lobbying, and government/donors funded incubators, consulting centres, for education and advice. Reinforcing farmer associations/cooperatives is also quite needed, but as mentioned a prior coordination is most necessary and EU funds are already available through the budget support programme.
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19.2 Supporting a specific sector

New sectors should emerge as a result of the present economic transformation: agro-industry, health, education. A sector which is also of interest is the publishing sector, which develops in spite of the small market. However, in order to assist those sectors in the required time-frame (2013), there should be already existing sector organisations. This is not the case, as some sectors just hardly exist (agro-industry) or are in the process of organising themselves (publishing). Those sectors should however be closely monitored for future PSD projects. Other sectors are already a priority (tourism, agriculture), and the added value might come from budget support programme. (this is already the case in agriculture) or from reinforcement of existing or planned programmes (as proposed with the regional development project, which in practice support a sector which is specific to the region it works in. For example, the present GIZ project in Gori supports regional development in particular through support to the local tourism sector).
19.3 Grants
This is not an impossible measure, given the relatively small number of enterprises. It has been used by other EU programmes (in particular for Research and Development), including PSD projects (Proinvest in ACP countries). However, it requires a significant back office in terms of programme promotion, project selection (in particular to ensure a complete transparency in the selection process), project control and monitoring.
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Annex 1 Terms of Reference
SPECIFIC TERMS OF REFERENCE Support to the private sector in Georgia FWC COMMISSION 2011 - LOT 1 EuropeAid/2011/268761/1
1. BACKGROUND
1.1 General Background

After November 2003 Rose Revolution, the new Georgian Government has initiated an extensive programme of reforms, directed to promote political stability and economic growth. In 2004 a Statewide programme of reforms to strengthen the public sector management, fight corruption and promote economic development has been designed and implemented. The programme encompassed three aims: to improve governance through administrative and civil service reform; to reinforce public expenditure management through an enhanced process for the State budget preparation and execution; to fight corruption through the reorganisation of some line Ministries (Interior, State Security and Office of the Persecutors), changes in the legislation (e.g. elimination of special revenues; re-focus the role of the financial police), improved structure and function of the court system and the executive branches of the government, and enhanced transparency. In June 2004, Georgia was included among the country benefiting from the European Neighbouring Policy. This opens a new partnership prospective, by intensifying political, security, economic and cultural relation with the EU. In November 2006, the EU-Georgia Action Plan6 was signed which covers 5 year timeframe, and its implementation contribute to deepen economic integration and political co-operation with the EU. Since then, the Eastern Partnership initiative was launched in May 2009 with EU Eastern neighbours. The new Partnership foresees stronger political engagement between these countries and the EU, in particular through a new generation of Association Agreements including a Deep and Comprehensive Free Trade Area (DCFTA), easier travel to the EU through gradual visa liberalisation and increased financial assistance. 1.2 Background specific to the project In recent years, Georgia has introduced sweeping free market structural reforms, opened up to international trade and movement of capital and have made considerable progress in improving regulatory conditions for the private sector. In the World Banks 2010 Doing Business Report, Georgia is ranked 11th7. Despite these economic successes, business and trade relations remain
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http://ec.europa.eu/world/enp/pdf/action_plans/georgia_enp_ap_final_en.pdf http://www.doingbusiness.org/reports/doing-business/doing-business-2010 55
underdeveloped, and the potential for trade of Georgia with the EU and neighbouring countries is still far from exhausted. The Government of Georgia has a very liberal (laissez-faire) approach towards the private sector and has up to now focused on a series of facilitating measures supportive of business development8 rather than on interventionist policies9. Georgias investment and export promotion activities started in 1999 with financial assistance from TACIS. TACIS continued its assistance with a 4 year program (2001 2005) and an Export Promotion Agency (GEPA) was established in 2001. In 2003, GEPA became a part of the Georgian National Investment Agency (GNIA). The Government of Georgias focus was on foreign direct investment (FDI) promotion, and while export promotion was in theory part of GNIA, in practice there was no export promotion activity of any significance. With a change in government GNIA was disbanded and between 2005 and 2009 there was no investment or export promotion agency. With the departure of staff, and storage of all files, all institutional memory was lost. In 2009, economic realities (August war with Russia, world economic crisis) put pressure on the Georgian economy as FDI and exports decreased. In recognition of the importance of improving Georgias export performance, the new Minister for Economic and Sustainable Development has again allocated responsibility for export promotion to GNIA. Up to now, EU Support has been concentrating on regulatory aspects and the support to the private sector has been very limited. The EU Delegation would like to identify possible areas of intervention in this field.
Related programmes and other donor activities: GTZ (German Technical Cooperation) implements a regional private sector development programme, including in Georgia. It has three main components: Economic Policy; Labour market-oriented Vocational Education and Training Policy and Local and Regional Economic Development in Shida Kartli. GTZ is also providing some export promotion support to GNIA. Experts from GTZ are assisting the Export Promotion Department in a number of areas including the development of an Export Market Information Centre, a web trade portal and round tables for Georgian exporters. USAID (US Agency for International Development) has just launched the Economic Prosperity Initiative (EPI), a four-year, $40.4 million dollar program. It aims to improve the business environment, expand access to capital, enhance business skills, improve agricultural productivity, increase competitiveness of targeted business sectors, and expand economic opportunities in rural communities. The Business Enabling Environment component (BEE) will assist the Government of Georgia to broaden and deepen reforms that enhance the environment for business to flourish and that attract greater volumes of foreign investment. Georgia is part of the EBRD Early Transition Countries (ETC) initiative which aims to increase investments in the Banks seven poorest countries. Through this initiative, the EBRD focuses its efforts on private sector business development and selected public sector interventions. As of the end of 2005, the EBRD had signed 49 investment loans in Georgia with cumulative
Eased customs and tax procedures, tax exemptions for investors through Free Industrial Zones or sector exemptions (tourism), etc 9 The "Cheap Credit Programme" designed to support development of SMEs, the only State programme of the kind, has eventually proven a failure. 56
commitments totalling USD 401.3 million. The current portfolio includes 33 private sector projects (of which five are regional). Other EU projects/programmes: East Invest: it is a programme designed to promote investments and trade between the EU and Eastern Partnership countries and among the Eastern Partnership countries. This will be achieved by bringing together into a trade and economic network SMEs and SME Support Organisations from the European Union and Eastern Partner countries. TAM/BAS: The TAM and BAS programmes provide for individual technical assistance helping enterprises adapt to the demands of a liberal market economy and seeking to develop capacities of local SMEs as well as local business advisory services. The technical assistance will be individual and tailored on the needs of each enterprise accepted for assistance. SME Facility: it is a financing instrument dedicated to SME and micro- enterprises set up by the European Union under the Neighbourhood Investment Facility (NIF). The Facility combines loans provided by European Finance Institutions (EBRD, EIB etc) and a grant contribution of NIF.
2. DESCRIPTION OF THE ASSIGNMENT Global objective To contribute to the improvement of business environment and private sector in Georgia Specific objective(s) Identify most suitable areas of intervention of the EU in the area of private sector development and assistance to business in Georgia. Make recommendations to help the EU Delegation to best consider the possible areas/ways of intervention to support the private sector. Requested services The Contractor will: a. Prepare a feasibility study identifying the possible areas of support to the private sector in Georgia. The following are examples of likely areas of focus (this is non-exhaustive): Export development SME Capacity and access to finance enabling environment measures, e.g. fostering entrepreneurship support to local enterprises and intermediary business organisations Innovation and start-ups b. make recommendations on possible areas of intervention and the most appropriate tools to be used.
The study should: Review the private sector development support activities currently underway by the EU and other Donors Through consultations and review of recent studies (e.g. IFC competitiveness report), identify a potential EU PSD project looking i.a. at the approach (national vs regional), the level of intervention (macro, meso or micro) the type of intervention (capacity building, matching grants, training, etc.), potential national partners (i.e. GNIA, MoED, MRDI, etc. ) and potential implementing partners (i.e. bilateral donors, IFI, NGO, etc.) to be followed
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The agricultural sector should in particular be looked at since the development of the agricultural sector and development of rural agriculture is a current priority of the Georgian Government. Required outputs The Contract will produce: 1. One report which will include: The above-mentioned feasibility study Recommendations on best support to be provided and tools to be used Recommendations on the relevance of EU technical assistance in this sector The following option areas in particular should be examined. They are not exhaustive, and following preliminary research other avenues of inquiry could be identified. The review findings need not be developed in great detail but to a sufficient level of detail to facilitate a more intensive and focused second phase of PSD program support design. Business Support Services and the Enabling Environment Review the overall Business Support Services environment in Georgia, focusing in particular on the operations of the principal Business Support Organisations (BSOs) currently active in the country. Identify gaps in the overall structures and level of business support services provided by these BSOs. Pay special attention to the coverage and level of BSO support for the SME sector. Examine the feasibility of and provide recommendations concerning capacity building programs for BSOs, in a range of potential areas to be identified in the study, for example: o Provision of consultancy, training, or technical support services to enterprises o Strengthening of international networks, o Delivery of joint initiatives (with other entities in the private or public sectors) o Policy formulation and/or lobbying o Market intelligence services o Deployment and dissemination of technology o Awareness raising strategies Identify any regulatory barriers to SME and overall business development Review the involvement of Georgia third level institutions in the delivery of training, entrepreneurship development and/or other services to the business community. Examine ways in which this might be strengthened. Consider the possibility and viability of creating structures to help companies, such as small business development centres, with the aim to provide support to companies, e.g. coaching, training, facilitation of contact with banks etcHowever, synergy between existing structures/business support services, both in Tbilisi and in the regions, should be paid a special attention. A geographical mapping of existing business support centres would be recommended.
SME Capacity and Access to Finance Carry out a review of the overall Georgia SME sector through targeted consultations and review of background material. Based on this review, identify the key areas of deficit - e.g. financing, management capabilities, staff skill levels/training, input costs, import competition, or technology. Differentiate by SME sub-sector as appropriate, including service sector and sub-supply sector SMEs.
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Identify the particular challenges of export oriented and/or internationally traded SMES (e.g. product design/quality/cost, logistics, adaptation to changing market requirements, access to markets, import competition). Review the training and financing needs and priorities of export oriented SMEs. Do this in conjunction with the Export Strategy module that follows. Review the impact of changing technology and automation and the ability of Georgia SMEs to integrating and using these (e.g. for product promotion). Pay particular attention to the financing constraints faced by SMEs, i.e. shortage of working or investment capital, and availability/cost of financing channels. Review the structures for business financing in Georgia, and identify areas where deficiencies exist and remedial supports might be considered. The activities of international organizations such as the EBRD and/or the IFC in this area in Georgia should be examined, and any gaps identified.
Export and investment promotion: Review the existing support structures for export and investment promotion and development in Georgia. In particular, evaluate the adequacy of GNIA support structures, with reference to recently implemented and donor supported GNIA initiatives in this area. The focus should not be restricted to GNIAs Export Promotion Unit but should also examine GNIAs current and planned investment promotion activities and the scope for export development support within this wider area. The recently drafted GNIA Strategy should be a close reference point. Potential innovations within GNIA that might be examined (illustrative examples only) might include: o Further development of the exporter information base (e.g. on taxation, funding opportunities etc). The example of the European Small Business Portal could be looked at. o Use of IT for Client Relationship Management o Training needs of GNIA staff o Sector prioritization o Agency representation o Participation in trade fairs; o Export related incentive programs; Review generally within Georgia the potential for improvement in the provision of export consultancy services to SMES, addressing enterprise management and/or technology related constraints in the areas of quality control and standards, certification, marketing, international distribution and export development, market identification/analysis, packaging and promotion, export financing, shipping, and related fields. Review the activity of agencies other than GNIA (e.g. business associations) that are active in the area of export development. Identify capacity gaps. Options including stand alone or collaborative initiatives with the GNIA that might result in a more focused and coherent export support strategy for Georgia should be examined.
3. EXPERTS PROFILE or EXPERTISE REQUIRED Number of requested experts per category and number of man-days per expert or per category. One senior expert is required.
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Senior expert: Education University degree in law, economics, political/social science, Business Administration or any other relevant field. Experience Ten year experience in the field of private sector development Proven experience in conducting research and analysis of private sector issues Good knowledge of investment climate and business issues in general Experience with post-Soviet environment would be an asset Qualifications Strong analytical skills In-depth knowledge of EU external assistance procedures and policies Good drafting skills Fully conversant with usual computer office software Fluent English, oral and written Georgian/Russian would be an asset
4. LOCATION AND DURATION Starting period The intended start of the assignment is beginning September 2011. We ideally propose two missions: one mission starting in the beginning of September (ideally on the 5/9/2011) and one mission starting around mid October 2011. Foreseen finishing period or duration The intended ending date of the assignment is 15 November 2011. Planning including the period for notification for placement of the staff as per art 16.4 a) The first assignment of the public administration expert will tentatively be organised as follows: Input Senior Expert Category Cat. Senior Working days 40 (of which 35 in Georgia)
Upon his/her arrival in Georgia, the expert will meet the responsible Task Manager at the EU Delegation. He/she will organise his/her mission and provide requested output according to the table above. He/she will organise a synthetic presentation of findings and recommendations at the very end of his stay in Georgia for interested task managers of the EU Delegation and possibly other donors. Consultative body An informal expert group shall be created for the purpose of this contract. It should comprise representatives of the Ministry, other government bodies, business organisations, trade unions, etc .The main purpose of these meetings should be to discuss the draft documents prepared by the consultant (recommendations on best support to be provided, recommendations on the relevance of EU technical assistance in the private sector, etc ). Location(s) of assignment
60
Tbilisi, Georgia. As relevant, business trips to other regions and cities in Georgia shall be foreseen, including the region of Khvemo Khartli. 5. REPORTING Content Prepared by the Expert, the report will include the following: The above-mentioned feasibility study Recommendations on best support to be provided and tools to be used Recommendations on the relevance of EU technical assistance in this sector Reports and other documents prepared by the consultant shall make it clear that any opinions expressed therein remain those of the consultant and do not represent the opinion of the European Commission. They shall be made public only after the approval by the EC Delegation. Language All reports and project documents must be submitted in English Submission/comments timing Reports and documents will be submitted as follows: Ahead of the second mission, a draft feasibility report shall be provided. It should contain at least the state of play, a list of content of the final study and the preliminary findings/recommendations. The work plan for the second mission will be discussed in cooperation with the Task Manager. A draft final report will be submitted shortly after the second mission. Number of report(s) copies All reports and project documents will be submitted in electronic version to the relevant task manager at the EU Delegation to Georgia.
6. ADMINISTRATIVE INFORMATION Logistical arrangements for travel, visa, working space, recruitment of support staff (but interpreters and/or translators) etc. are the responsibility of the Contractor. The maximum budget for this project is 50.000 Euros. Fees: All office-related costs, report production, secretarial/interpretational and administrative services both in the Contractors Headquarters and/or individual experts home office are included within the fee rates of the expert. No costs of this nature may be charged in addition. Per Diem: covers accommodation, meals, and transport costs at the place of assignment. Reimbursable: appropriate budgetary allocations should be foreseen under reimbursable costs at least for: local Support staff International and local travel Translation
These costs will be reimbursed upon submission of the original supporting documents. Language of the specific contract English.
61
Annex 2 Doing Business, 2004 and 2012
62
Annex 3 World Economic Forum, Global Competitiveness Index
In 20102011.
And in the 2011-2012 edition:
63
Annex 4: Taxes
In the tax misery index below (Forbes, 2009), Georgia ranks very favourably as the country with the 4th lowest tax burden. This index, however, has been diversely commented, in particular from angry French readers who pointed out that the heavy French tax burden finances a functioning Health Care and Pension system for which US citizens have to pay heftily on top of their taxes at least those who can afford it.
64
Source: Ministry of Finance, Georgia
65
Annex 5: Bibliography and websites
Apart from the documentation supplied by the interviewed organisations (annual reports, project description), the following documentation has been used: Doing Business, World Bank, 2006 to 2012 editions Transparency International perceived corruption reports, 2005 to 2011 editions World Economic Forum Global Competitiveness Report, 2012 USAID, EPI Sector Assessment Report, 2011 2004-2010, Seven years that changed Georgia forever Bank of Georgia, Annual reports OECD: Competitiveness and private sector development, Eastern Europe and South Caucasus, Competitiveness outlook, 2011 PriceWaterhouseCoopers Tax Guide EBRD Transition reports, 2010 and 2011 TAM/BAS: TAM/BAS Brief for Georgia, 2009-2011 and TAM/BAS programme in Eastern Partnership countries, Status report oct 2011 The following websites are also most useful: www.businessombudsman.ge www.investingeorgia.org www.tradewithgeorgia.org www.georgianreforms.com www.geostat.ge www.nbg.gov.ge www.eeas.europa.eu/georgia www.weforum.org www.undp.og www.worldbank.org Databank.worldbank.org www.oecd.org www.tbcbank.ge www.east-invest.eu www.mof.gov.ge www.basisbank.ge www.microcapital.org www.crystal.ge Bankofgeorgia.ge www.procreditbank.ge www.gtz.de www.kfw-entwicklungsbank.de georgia.usaid.gov www.georgiatoday.ge www.investor.ge Business/Tax ombudsman GNIA, investment GNIA, export promotion Georgian reforms Geostat statistics National Bank of Georgia EU Delegation in Georgia World Economic Forum UNDP World Bank World Bank Databank OECD TBC Bank East Invest Min. Finance Basis Bank Micro finance Crystal microfinance Bank of Georgia Procredit Bank GIZ KfW USAID Georgia News AmCham Information magazine
66
Annex 6: List of persons met

First name Last name GEORGIAN ADMINISTRATION Giorgi Pertaia Organisation Position Address City Zip Tel +995 Mail address
Georgi
Oniani
Magda
Bolotashvili
Irakli
Matkava
Gvantsa
Meladze
Ani
Kvaratskhelia
Ministry Economy Sustainable Development of Georgia GNIA Georgian National Investment Agency GNIA Georgian National Investment Agency
Business /Tax Ombudsman of Georgia Deputy Tax Ombudsman of Georgia tax/business ombudsman office of Deputy and Minister
Gvt Chancery Tbilisi 7 Ingorokva St Gvt Chancery Tbilisi 7 Ingorokva St Gvt Chancery Tbilisi 7 Ingorokva St Min. Economy & Tbilisi Sustainable Development 12 Chanturia St
0134
(322) 923 552
gpertaia@geo.gov.ge
0134
(322) 28 25 12
goniani@geo.gov.ge
0134
(322) 923 552
mbolotashvili@businessombuds man.ge i.matkava@economy.ge
0108
(322) 99 10 81
Head of export Min. Economy & Tbilisi Sustainable service Development 12 Chanturia St Min. Economy & Tbilisi Export Sustainable Support Development Service 12 Chanturia St Coordinator
0108
(322) 102 017 /102 g.meladze@investingeorgia.org 026
0108
(322) 102 017 / anik@investingeorgia.org 102 026
67
First name Nino
Last name Tsetskhladze
Lali
Gogoberidze
Mikheil
Janelidze
Organisation GNIA Georgian National Investment Agency Ministry of Economy and Sustainable Development of Georgia Ministry of Economy and Sustainable Development of Georgia
Position Investor Relations Coordinator
Address City Min. Economy & Tbilisi Sustainable Development 12 Chanturia St Head of Min. Economy & Tbilisi Sustainable Economic Analysis and Development 12 Chanturia St Policy Dpt Head Dpt Foreign Trade and International Economic Relations Min. Economy & Tbilisi Sustainable Development 12 Chanturia St
Zip
Tel +995 Mail address (322) 102 017 / ninot@investingeorgia.org 102 026
0108
(322) 199 11 14
lalig@economy.ge
0108
(322) 199 11 17
m.janelidze@economy.ge
INTERNATIONAL ORGANISATIONS Ramon Reigada Granda Francesca Mazzucco Philippe Virginie Juan-Jose Irakli Bernhard Cossoul Echanove Khmaladze
EU Delegation Georgia EU Delegation Georgia EU Delegation Georgia EU Delegation Georgia EU Delegation Georgia EU Delegation Georgia
in Head of 38 Nino Chkheidze operatIons in (PSD) 38 Nino Chkheidze Str in (Dvlpt 38 Nino Chkheidze Regional) in (Trade) 38 Nino Chkheidze Str in (Agriculture) 38 Nino Chkheidze Str 38 Nino Chkheidze in (Economics and public Str finance)
Tbilisi Tbilisi Tbilisi Tbilisi Tbilisi Tbilisi 0102 0102 0102 0102 0102
322943673 322943763 (32) 943 763 322943763 322943763 322943763
ramon-maria.reigadagranda@eeas.europa.eu Francesca.MAZZUCCO@eeas.eur opa.eu philippe.bernhard@eeas.europa. eu Virginia.cossoul@eeas.europa.eu Juanjose.echanove.eeas.europa.eu irakli.khmaladze@eeas.europa.eu
68
First name Olilver Nino
Last name Reisner Kochishvili
Anne Charlotte Jaap
Hutton Ruhe Sprey
Severian George Douglas
Gvinepadze Nanobashvili Balko
Rezo
Ormotsaze
George Nino
Khechinashvili Kumsishvili
Position Civil society Education EU Delegation in Sant, Georgia Vocational training EBRD (Telephone Mgr, Equity Interview) EBRD (Telephone TAM/BAS mgr Interview) EBRD TAM/BAS head of regional progr TAM/BAS South Caucasus Turkey Ebrd Bas Prog Manager, BAS Mgr Georgia UNDP USAID Georgia Director, Economic Growth USAID Georgia Senior Financial Commercial advisor USAID Georgia Health program mgt USAID Georgia Project mgt Economic Growth
Organisation Eu Del Tbilisi
Address City 38 Nino Chkheidze Tbilisi Str 38 Nino Chkheidze Tbilisi Str (Phone interview) (Phone interview) London London
Zip 0102 0102
Tel +995 322943763 322943763
Mail address oliver.reisner@eeas.europa.eu nino.kochishvili@eeas.europa.eu
+44 (20) 7338 7333
huttona@ebrd.com
6 Marjanishvili st Tbilisi Green Building
0102
+44 (20) 7338 7356 ruhec@ebrd.com (sec) (322) 91 16 73 jaapsprey@yahoo.com
6 Marjanishvili st Tbilisi Green Building 9 Eristavi St Tbilisi 11 George Tbilisi Balanchine St 11 George Tbilisi Balanchine St
0102
(322) 91 16 73 322251126ext112 (322) 544 134
gvinepas@ebrd.com George.Nanobashvili@undp.org dbalko@usaid.org
0131
0131
(322) 544 179
rormotsadze@usaid.gov
11 George Tbilisi Balanchine St 11 George Tbilisi Balanchine St
0131 0131
(322) 544 169 (322) 544 169
gkhechinashvili@usaid.gov nkumsishvili@usaid.gov
69
First name Jrg
Last name Oelschlger
Organisation GIZ
Johanna Giorgi
Wohlmeyer Okropridze
GIZ GIZ
Jrg
Senn
GIZ
Helmut
Grossmann
GIZ/GOPA GIZ/GOPA
Darejan Muradashvili (Dako) CONSULTANTS, TRAINERS Tornike Irina Natia Irakli Laska Ekaterine FINANCIAL ORGANISA Rijvadze Khantadze Zedginidze Tekturmanidze Komakhidze Gigashvili
Address German House 3 Elene Akhvlediani Khevi Economic Min. Economy Policy Advisor 12 Chanturia St Programme German House Expert 3 Elene Akhvlediani Khevi Senior Expert German House VET 3 Elene Akhvlediani Khevi Khevi Senior advisor 16/224 Stalin St LRED 16/224 Stalin St
Position Programme Director
City Tbilisi
Zip 0103
Tel +995 (32) 220 18 33
Mail address joerg.oelschlaeger@giz.de
Tbilisi Tbilisi
0108 0103
(32) 298 22 53 (32) 220 18 31
johanna.wohlmeyer@giz.de giorgi.okropridze@giz.de
Tbilisi
0103
(32) 220 18 17
joerg.senn@giz.de
Gori Gori
1400 1400
(370) 22 66 15 (370) 22 66 15
helgrossmann@yahoo.com d_muradashvili@yahoo.com
EBRD BAS correspondant CTC Consultancy Executive 34 Al Kazbei Av Director plot 3 CTC Consultancy Quality mgt 34 Al Kazbei Av systems plot 3 TBSC Consulting Director 6 Marjanishvili Green Building Batumi Incubator Manager 73 Parnavaz Mepe St Gori University Head of 53 Chavchavadze St Administration
Batumi Tbilisi Tbilisi Tbilisi Batumi Gori (370) 73554 0177 0177 (322) 20 67 74 (322) 20 67 74 (322) 95 90 19
tornike_batumi@yahoo.com irina@ctc.org.ge natia.zedginidze@ctc.org.ge irakliT@TBSC.ge lasha.komakhidze@undp.org ekaterine62@mail.ru
70
First name TONS Esben Maya Vazha Thea
Last name
Organisation
Position
Address
City
Zip
Tel +995
Mail address
Emborg Meredova Menabde Jokhadze
Seaf Mgt Georgia ProCredit BoG Bank Of Georgia BoG Bank Of Georgia BoG Bank Georgia TBC Bank of
7 Niko Nikoladze Gal Director Head of SME Gagarin 29a Banking Head Of Debt Capital Markets
Tbilisi Tbilisi Tbilisi
0108
(322) 99 81 15 32220222#110 3227444200 322444192
eemborg@seaf.ge m.meredova@procreditbank.ge vmenabde@bog.ge tjokhadze@bog.ge
Vasil Mariam Christian Goga
Khodeli Megvinetukhut sesi Carmagnolle Japaridze
Tbilisi Tbilisi 2 GrvAbashidze Tbilisi 0179 322925555 (32) 3012 2925555
vkhodeli@bog.ge mariamm@tbcbank.com.ge christian.carmagnolle@republic.g e - Goga.Japaridze@republic.ge
Ani
Skhirtladze
Eka
Machaidze
Republic Bk CEO Socgen Republic Bank Head of Corporate banking Basis Bank International Financial Institutions Relationship Manager Basis Bank Head of SME Dpt Seaf Mgt Georgia Crystal Microfinance Finca Microfinance
Grigol Abasidze str Tbilisi #2 1, Ketevan Tbilisi Tsamebuli Ave
32 922 922+171
Ani.Skhirtladze@basisbank.ge
Armands Malkhaz Vusal
Fomicevs Dzadzua Verdiyev
CEO CEO
1, Ketevan Tbilisi Tsamebuli Ave 112 Tsereteli Av 7 Niko Nikoladze Tbilisi 77 Tamar Mepe Str Kutaisi 71 Vazha Pshavela Tbilisi Av
+(995 32) 922+436 0108 4600 0816 (322) 99 81 15 (431) 5 33 43
922 eka.machaidze@basisbank.ge
armands@seaf.ge director@crystal.ge
(322) 20 74 10 vusal@finca.ge /11/12

71
First name
Last name
Organisation
Position
Address 3rd floor 19 #407
City
Zip
Tel +995
Mail address
Giorgi
Tsimakuridze
Partnership Fund
Gamrekeli Tbilisi
(577) 786783
gtsimakuridze@partnershipfund. ge
INTERMEDIARY ORGANISATIONS Nino Chikovani
Tina Fady Nick
Iashvili Asly Gvinadze
Georgian Chamber Commerce Industry ICC Georgia ICC Georgia
Director of and Coordinator Chairman
29, Berdznis Str.
Tbilisi
0114
272 07 10
nc@gcci.ge
Kakha Maya Konstantin e Tamar Tami
Kokhreidze Reistavi Nanobashvili
Khuntsaria Shavadze
Iraklii
Samhidze
Gvinadze and Managing Partners - EU Partner Georgia Ch. Com GSMEA ICC Georgia Executive Director Executive Georgian Director Employers Association EU Georgia Representativ Business Council e in Georgia Chairman Chamber commerce industry Batumi Chamber commerce industry Batumi
19 Gamrekeli Saburtalo 19 Gamrekeli Saburtalo 44 Leselidze St
St Tbilisi St Tbilisi Tbilisi
0160 0160 0105
(32) 2 389 833 Ext tina.iashvili@icc.ge 118 (32) 2 389 833 asly@agri.ge (322) 438 970 n.gvinadze@gvinadzeandpartners .ge
19 Gamrekeli St Tbilisi 19 Gamrekeli St Tbilisi Saburtalo 88 Lvovi ST, Tbilisi Saburtalo 38 Saburtalo St Tbilisi Batumi
0160
322389833 kkokhreidze@gsmea.com (32) 2 389 833 Ext icc@icc.ge 118 service@employer.ge
0194
(322) 59 36 07 (4222) 70262
Tamar.Khuntsaria@bp.com tamazi@mofea.ge
Batumi
(4222) 70262
irakli.samhidze@gmail.com
72
First name Nino
Last name Dolidze
Organisation Chamber commerce industry Batumi Hipp GZA Siesta Publishing Hotel Victoria GZA Guest House Svetlana Mtsignobartukhut sesi School Sense Selection Sense Selection GeoUkrEnergo/EL -DK ltd Prince Ltd
Position
Address
City Batumi
Zip
Tel +995 (4222) 70262
Mail address nino.dolidze@hotmail.com
COMPANIES Archil Jvania Metin Ketevan Mediko Malkhaz Svetlana Jacob Gigi Giorgi Zurab Merab Eren Kiguradze Samadalshvili Dumbadze Kasaeva Beridze Mikabadze Surmanidze Kapanadze Kuradadze
General Director Technical Mgr Manager Manager Director Manager Manager Managing partner Managing Parnter
9 Sulkhan Saba Str 51 L Astiani Bld 16 Veriko Anjaparidze 76 Tamar Mepe St 51 L Astiani Bld Abashidze 8 Abakelia 1 13 Chikobava St 13 Chikobava St
Tbilisi Batumi Tbilisi Gori Batumi Gori Tbilisi Tbilisi/Batumi Tbilisi/Batumi Rustavi
0105
(322) 93 15 07 (422) 22 11 11 (322) 22 07 08
archil.jvania@hipp.ge meti.eren@gza.us.com keti@siestagroup.ge
1400 0108
(422) 22 11 11 (370) 27 30 62 (322) 98 99 69 (322) 424 600 (322) 424 600 34192408 568 555 254
malkhaz.dumbadze@gza.us.com kasatik56@mail.ru jacob.beridze@gmail.com g.mikabadze@sense.ge g.surmanidze@sense.ge z.kapanadze@geoukrenergo.com.ge
14 Meskhishvili Rustavi Street
73

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Final Evaluation of Proinvest Final report

Framework Contract Commission 2011

FINAL REPORT Date: 27 December 2011

This project is funded by the European Union

A Project Implemented by SACO SACO Consortium (SAFEGE/COWI)

Georgia Support to Private Sector Development Formulation study report

5.2.1 5.2.2 5.2.3 5.3 5.4 5.5 5.6 5.7 6 6.1

6.1.1 6.1.2 6.2 6.3 6.4 6.5

Georgia Support to Private Sector Development Formulation study report

8 8.1 8.2 8.3 9 10 10.1 10.2

Issue: Skills ....................................................................................................................................... 33

Georgia Support to Private Sector Development Formulation study report

13.10 Risks and assumptions ..................................................................................................................... 44

Georgia Support to Private Sector Development Formulation study report

Georgia Support to Private Sector Development Formulation study report

Georgia Support to Private Sector Development Formulation study report

Georgia Support to Private Sector Development Formulation study report

Acronym USD VET

Meaning US Dollar Vocational Education Training

Georgia Support to Private Sector Development Formulation study report

Context and methodology

Terms of Reference, Art. 2 8

Georgia Support to Private Sector Development Formulation study report

Georgia Support to Private Sector Development Formulation study report

Georgia Support to Private Sector Development Formulation study report

4.9 3.3 13.0 4.9 6.7 4.6 0.1 (1.3) 100.0

GoG priorities and actions by sector

Georgia Support to Private Sector Development Formulation study report

Georgia Support to Private Sector Development Formulation study report

Source: Transparency International reports

www.georgianreforms.com 2004-2010 Seven years that changed Georgia forever 13

Georgia Support to Private Sector Development Formulation study report

Georgia Support to Private Sector Development Formulation study report

Georgia Support to Private Sector Development Formulation study report

Figure 4 Number of enterprises, by number of employees

Issues faced by the private sector, to be addressed by the proposed projects

Georgia Support to Private Sector Development Formulation study report

Georgia Support to Private Sector Development Formulation study report

A small internal market

Few products to export

Georgia Support to Private Sector Development Formulation study report

A changing legal and tax environment

Before Tax Reform 22 40-45% 15.6% 35%

After Tax Reform 6 28-30% 23.4% 78-85%

A major redistribution of sectors, which just started

Georgia Support to Private Sector Development Formulation study report

Support for Private Sector Development activities currently under way

5.2.1 Eastern Partnership: SME Flagship initiative

5.2.2 NIF Neighbourhood Investment Facility (2007-2013)

Georgia Support to Private Sector Development Formulation study report

Table 6 NIF Financed projects

5.2.3 PSD-related EU Delegation in Georgia projects

Georgia Support to Private Sector Development Formulation study report

Georgia Support to Private Sector Development Formulation study report

MCC Millennium Challenge Corporation

UNDP is active in Georgia in many fields:

Georgia Support to Private Sector Development Formulation study report

Support organisations Government and regional organisations

Georgia Support to Private Sector Development Formulation study report

6.1.2 Regional Governments

Georgian Chambers of Commerce

Georgian business organisations