Georgia. Enterprise Rehabilitation Project (Credit No.3157-GE)

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Background Georgia Enterprise Rehabilitation Project (Credit No.3157-GE) Proposed Amendment of the Development Credit Agreement 1. This proposal seeks the Executive Directors approval of amendments of the development Credit Agreement and Project Agreement for the Georgia - Enterprise Rehabilitation Project (ERP) (Cr GE). The purpose is to extend technical assistance support to state-owned enterprises under consideration for possible privatization. Once the approval has been obtained the Association will also amend the Project Agreement accordingly. 2. The Enterprise Rehabilitation Project was designed to promote self-sustainable and continuous restructuring of private enterprises, including. enterprises recently privatized. ERP was approved by the Board on December 17, 1998, declared effective on, September 8, 1999, and is scheduled to close on December 31, The ERP is financed by IDA under a credit of SDR 11 million (USD 15 million equivalent), and EU TACIS grant of USD 2.9 million. The Government of Georgia s contribution under the Project is USD 2.6 million. To date, approximately SDR 9.2 million of the IDA credit has been disbursed. Implementation Experience 3. Implementation of ERP has been successful. The Project is currently rated satisfactory and the Project s planned activities are either under way or have been completed. Provision of training to managers of privatenterprises and selected management consultants progressed quickly and has been completed successfully. Technical assistance for restructuring of private enterprises has been progressing well, but experienced some delays with procurement of large consultants contracts due to the periods of political instability in Georgia, as well as due to the change of the approach to restructuring based on the recommendations of the mid-term review. All planned activities are expected to be completed by the end of the Project. Proposed Amendments of ERP 4. The Government of Georgia (GOG) requested the International Development Association (Association) to expand technical assistance provided under the Enterprise Rehabilitation Project cover to restructuring of state-owned enterprises under consideration for possible privatization and to support the overall implementation of the privatization program (the letter of the Minister of Economic Development of Georgia dated November 24, 2004, and the letter of the Minister of Finance dated

2 December 1, 2004). The major reason for this request is that privatization of the remaining state-owned enterprises became one of the main priorities of the government reform agenda. The GOG embarked on an ambitious privatization program, approved priority privatization list of enterprises, and is seeking the Association support in providing technical assistance to some of the potential candidates for privatization. The proposed amendments respond to the government s request and would not fundamentally alter the purpose of the Project; they are intended to facilitate successful private sector development in Georgia. The amendments proposed in this regard are outlined in the following paragraphs. 5. Modification of the Project Development Obiective. It is proposed to modify the Project Development Objective and to expand the Project description in order to accommodate the government s request and include technical assistance to state-owned enterprises. The proposed modifications of the Project description do not change the nature and the scope of the Project s activity, but would make carrying out of,diagnostic analysis, restructuring and business valuation of large and medium-sized state-owned enterprises included in the privatization list, eligible for financing under the Project.. 6. Adiustments in Financing Arrangements. The adjustment of the Project description will have some financial and procurement implications. The Borrower requested the reallocation of the remaining funds under the Unallocated and Refunding of Project Preparation Advance Categories to the Consultants Services and Training Category: The proposed adjustment would allow financing technical assistance for defensive restructuring of the state-owned enterprises. 7. Modification to Procurement Procedures. In order to facilitate timely Project implementation and completion and provide more flexibility to the Borrower in procuring consultants services, it is suggested to add one of the standard procedures which is available within the Bank s procurement guidelines (but was not originally included in the procedures authorized for this Credit), i..e. Selection Based of Consultants Qualifications. The proposed amendment would allow the Borrower to procure consultants services through this procedure in addition to the procurement procedures established in the Development Credit Agreement. 8. Costs, Benefits and Risks after Amendments. Each the of recommended amendments was fully discussed between the Association s Project team and representatives of the Borrower and is consistent with the recommendations to the Project team and IDA management provided by the Quality at Supervision Assessment (QSA-6) conducted by the Quality Assurance Group. The proposed changes to the Project would not alter Project assumptions or risks. The Project s purpose and scope of activities remain essentially unchanged by the proposed amendments. All proposed amendments are introduced as direct response to the evolving reform agenda potential implementation bottlenecks. 9. Environmental Safeguard Issues and Their Management. In accordance with the World Bank safeguard policies on environment the Project was assigned Category C,

3 indicating that no environmental issues are anticipated. This is based upon the Project design which is primarily technical assistance and does not include any physical construction activities. The Project does not deal with enterprises with severe problems (including environmental ones) which can not be solved without large investments. The proposed Project modification will not affect its environmental assessment. In fact, the Project is likely to have future environmental benefits. As the Project environmental assessment underscores, the general Bank experience shows that even basic restructuring oriented to cost accountability may have positive environmental consequences, such as better use of energy and water, limitation of production waste, better use of materials. 10. While the Project will not finance any investments, it will provide technical assistance to state-owned enterprises and Georgian authorities. The terms of references for consultancies will highlight relevant environmental issues, if any, and offer guidance on how they are to be handled. Consultant contracts will require the assistance rendered to be consistent with Bank Safeguard Policies. The Bank s supervision of both social and environmental aspects will ensure that the advice provided by the consultants to enterprises and Georgian authorities is consistent with the Bank Safeguard Policies. 11. Implementation arrangements. The proposed amendment would not require any changes in implementation arrangements. The Project s existing monitoring arrangements will also be adequate to measure implementation progress of the activities in the proposed amendment.

4 . The World Bank 1818 H Street N.W (202) INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Washington, D.C Cable Address: INTBAFRAD INTERNATIONAL DEVELOPMENT ASSOCIATION U.S.A. Cable Address: INDEVAS,2005 Center for Enterprise Restructuring And Management Assistance Tbilisi, Georga Dear sir/madam: Re: Enterprise Development Project (Credit No GE) Amendment to the Project Agreement We refer to the Project Agreement for the above-referenced Project, dated January 27, 1999, between the International Development Association (IDA) and Center for Enterprise Restructuring and Management Assistance (CERMA), as amended. We also refer to your letter dated December 12,2004, requesting changes to the Project Agreement. We are pleased to inform you that the Association agrees to the requested changes and the Project Agreement is hereby amended as follows: 1. Paragraph 1 (a) of the Schedule is hereby amended to read: (a) it is a duly established enterprise under the laws of the Borrower; 2. Paragraph1 (b) oftheschedule is herebydeleted. 3. Paragraph 1 (c) is re-lettered as (b) and a new paragraph (c) is hereby added to read: (c) Large and medium-sized state-owned enterprises included in the privatization list approved by the Government of Georgia. Please confirm your agreement with the foregoing by signing, dating and returning to us the enclosed copy of this letter. This amendment will become effective, as of the date of the countersignature, upon receipt by the Association of the copy of this letter duly countersigned by you. RCA WUI FAX (202)

5 -2- Sincerely yours, INTERNATIONAL DEVELOPMENT ASSOCIATION Donna M. Dowsett-Coirolo Country Director for Georgia South Caucasus Country Unit Europe and Central Asia Region CONFIRMED: CENTER FOR ENTERPRISE RESTRUCTURING AND MANAGEMENT ASSISTANCE (CERMA) By: Name: Title: Date: (Authorized Representative

6 The World Bank INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION 1818 H Street N.W. (202) Washington, D.C Cable Address: INTBAFRAD U.S.A. Cable Address: INDEVAS,2005 H.E. Valeri Chechelashvili Minister of Finance Ministry of Finance Tbilisi, Georgia Dear Mr. Minister: Re: Enterprise Development Project (Credit No GE) Amendment to the Development Credit Agreement We refer to the Development Credit Agreement for the above-referenced Project, dated January 27, 1999, between Georgia (the Borrower) and the International Development Association (IDA), as amended. We also refer to your letter dated December 12,2004, requesting changes to the Development Credit Agreement. We are pleased to inform you that the Association agrees to the requested changes and the Development Credit Agreement is hereby amended as follows: 1. The table under Schedule 1. paragraph 1 is hereby amended. The new table is attached as an Annex to this amendment letter. 2. The Description of the project has been expanded to include support to state-owned enterprises under consideration for possible privatization. Schedule 2, first paragraph is hereby amended to read: The objective of the Project is to promote self-sustainable and continuous restructuring of private enterprises, including enterprises recently privatized, and to provide support to stateowned enterprises eligible for privatization. 3. Schedule 2, Part A.3 is added to read: 3. Carrying out of diagnostic analysis, restructuring and business valuation of large and medium-state-owned enterprises eligible for privatization. 4. Schedule3,PartC (3) is addedtoread: 3. Selection Based on Consultants qualifications. Services estimated to cost less than $100,000 equivalent per contract may be procured under contracts awarded in accordance with the provisions of paragraphs 3.1 and 3.7 of the Consultant Guidelines. RCA WUI FAX (202)

7 -2- Please confirm your agreement with the foregoing by signing, dating and returning to us the enclosed copy of this letter. This amendment will become effective, as of the date of the countersignature, upon receipt by the Association of the copy of this letter duly countersigned by you. Sincerely yours, INTERNATIONAL DEVELOPMENT ASSOCIATION Donna M. Dowsett-Coirolo Country Director for Georgia South Caucasus Country Unit Europe and Central Asia Region CONFIRMED: GEORGIA By: Name: Zurab Nogaideli Title: Date:.

8 -3 - ANNEX SCHEDULE I Withdrawals of the Proceeds of the Credit General A. 1. The table below sets forth the Categories of items to be financed out of the proceeds of the Credit, the allocation of the amounts of the Credit to each Category and the percentage of expenditures for itemso to be financed in each Category: Category Amount of the Allocated Credit Expenditures in (Expressed SDR Equivalent) % of Financed To be Consultants 9,05 services 1,500 and training Goods 100, % 100% of foreign expenditures, 100% of local expenditures (exfactory cost) and 80% of local expenditures for other items procured locally Unallocated (5) (3) Incremental operating costs (4) Refunding of Project Preparation Advance 900, , % Amounts due Pursuant to Section 2.02 (c) of this Agreement TOTAL