Georgia: Emergency Assistance for Post-Conflict Recovery

Validation Report Reference Number: PCV: GEO 2011-49 Project Number: 32023 Loan Number: 2469-GEO(SF) December 2011 Georgia: Emergency Assistance for Post-Conflict Recovery Independent Evaluation Department

ABBREVIATIONS ADB Asian Development Bank DMF design and monitoring framework EAPCR Emergency Assistance Post-Conflict Recovery GDP gross domestic product IDP internally displaced person IMF International Monetary Fund JNA joint needs assessment PCR project completion report RRP report and recommendation of the President NOTES In this report, $ refers to US dollars. Key Words Georgia, Asian Development Bank, emergency assistance, Independent Evaluation Department, adb, lessons, asian performance development evaluation, bank, project emergency completion assistance, report, post-conflict georgia, growth, assistance ied, independent evaluation, lessons, performance evaluation, post-conflict recovery, project completion report validation, rehabilitation, resettlement, restoration, social development Director Team leader Team member W. Kolkma, Independent Evaluation Division 1 (IED1), Independent Evaluation Department (IED) A. Morales, Evaluation Officer, IED1 V. Melo, Evaluation Assistant, IED1 The guidelines formally adopted by the Independent Evaluation Department (IED) on avoiding conflict of interest in its independent evaluations were observed in the preparation of this report. To the knowledge of the management of IED, there were no conflicts of interest of the persons preparing, reviewing, or approving this report. In preparing any evaluation report, or by making any designation of or reference to a particular territory or geographic area in this document, the Independent Evaluation Department does not intend to make any judgments as to the legal or other status of any territory or area.

PROJECT COMPLETION VALIDATION REPORT PROJECT BASIC DATA Project Number: 32023 PCR Circulation Date: December 2010 Loan Number: 2469-GEO(SF) PCR Validation Date: November 2011 Project Name: Emergency Assistance for Post-Conflict Recovery Country: Georgia Approved ($ million) Actual ($ million) Sector: Multisector Total Project Costs 70.0 69.9 ADB Financing ADF: $70.0 million Loan (SDR equivalent) 70.0 (46.9) 69.9 (46.9) OCR: 0.0 Borrower 0.0 0.0 Beneficiaries 0.0 0.0 Others 0.0 0.0 Approval Date: 12 Nov 2008 Effectiveness Date 19 Dec 2008 8 Dec 2008 Signing Date: 19 Nov 2008 Completion Date 30 Sep 2009 22 Jan 2009 Closing Date 30 Sep 2009 22 Jan 2009 Project Officers: Name/s: D. Kertzman A.C. Schou-Zibell Location: Headquarters Headquarters From 2008 2010 To 2009 2010 Validator: P. Choynowski Team Leader: A. Morales Consultant Evaluation Officer, IED1 Quality Reviewer: N. Bestari Advisor, IEOD Director: W. Kolkma, IED1 ADB = Asian Development Bank, ADF = Asian Development Fund, IED1 = Independent Evaluation Division 1 (Independent Evaluation Department), IEOD = Office of the Director General (Independent Evaluation Department), OCR = ordinary capital resources, PCR = project completion report, SDR = special drawing right, SF = special fund. A. Rationale I. PROJECT DESCRIPTION 1. According to the report and recommendation of the President (RRP), 1 the August 2008 armed conflict with the Russian Federation caused economic growth to fall from 12.4% in 2007 to 3.5% in 2008 because of a steep decline in domestic and foreign investment. The conflict resulted in a need to resettle more than 120,000 internally displaced persons (IDPs) and to find jobs for more than 100,000 newly unemployed. Georgia s public finances were under stress from shortfalls in revenue collections and a decline in privatization proceeds, and the banking system faced severe liquidity constraints. 2. A joint needs assessment (JNA) estimated that $3.7 billion was needed for Georgia s post-conflict recovery. Out of this, $895 million was needed for immediate recovery efforts, including $480 million in budgetary needs. The JNA called for support in three major areas: (i) rapidly restoring confidence; (ii) meeting social needs; and (iii) meeting critical investments to maximize recovery prospects. 3. The interim Operational Strategy for Georgia (2008 2009) 2 of the Asian Development Bank (ADB), approved in January 2008, focused on (i) improving service delivery in municipal 1 Asian Development Bank (ADB). 2008. Report and Recommendation of the President to the Board of Directors: Proposed Loan to Georgia for Emergency Assistance for Post-Conflict Recovery. Manila. 2 ADB. 2008. Interim Operational Strategy: Georgia, 2008 2009. Manila.

2 infrastructure within the evolving decentralization process, (ii) reducing road transportation constraints on economic activity, and (iii) upgrading and developing energy infrastructure. These priorities were identified based on the following considerations: (i) alignment with the government s development agenda, (ii) selectivity in focusing limited resources on a small number of priority areas, and (iii) complementarities with other development partners. The strategy also highlighted the need for responsiveness to rapid changes and flexibility in assistance modalities. B. Expected Impact 4. The program loan was expected to help Georgia revive its economy to pre-conflict levels of growth and social development, as envisaged in the government s long-term development strategy for 2003 2015 and detailed in its 2003 Economic Development and Poverty Reduction Program. Based on the design and monitoring framework (DMF) in the RRP, the program loan targeted sustained real gross domestic product (GDP) growth of more than 4% during 2008 2011. C. Objectives or Expected Outcomes 5. The expected outcome was a mitigation of the adverse economic and social impact of the conflict. The program loan was to provide immediate short-term financial support to help the government address revenue shortfalls; meet the transitional safety net needs arising from the conflict, including expenditures on social protection and IDPs; and sustain its core public expenditure program comprising pensions, health care for the poor, and other essential operational and maintenance needs. Based on the DMF, the following indicators were identified: (i) economic recovery began in the second quarter of 2009 (with GDP overall growth in 2009 at 4%), and (ii) resettlement of IDPs progressed. D. Components and Outputs 6. The program loan was to result in two outputs. The first output was to ensure that the immediate incremental expenditure needs arising from the conflict were met. The second output was to ensure that the core public expenditure program for 2008 was delivered in accordance with the approved budget. E. Provision of Inputs 7. A SDR46,879,000 ($70 million equivalent) from ADB s special funds resources in support for implementation of the Emergency Assistance for Post-Conflict Recovery (EAPCR) program was to be provided. The program loan carried an interest rate of 1% per year and a maturity of 40 years, including a grace period of 10 years, with repayment of principal at 2% per year for the first 10 years after the grace period and 4% per year thereafter. F. Implementation Arrangements 8. The Ministry of Finance was to be the executing agency. The proceeds of the program loan were to be released in a single tranche upon effectiveness. The expected closing date of the loan was 30 September 2009, and it was planned that the loan would be fully utilized by 31 March 2009.

3 9. The program loan was to be disbursed into a foreign currency bank account at the National Bank of Georgia. The government was to ensure that the proceeds of the program loan were used exclusively to fund the state budget expenditures in full compliance with the government s public expenditure procedures and reporting rules. Proceeds of the program loan were not to be used to fund ineligible items. 10. There was significant uncertainty regarding the time frame for the Georgian economy to adjust to the shock of the conflict. The RRP identified two types of risks- external and domestic. External risks included (i) the protracted global credit crisis and recession, and (ii) rekindling of regional tensions. Domestic risks included (i) increased economic difficulties that could set reforms back, (ii) countercyclical fiscal policy that was insufficient to kick-start growth, and (iii) weakening of the banking sector. The external risks were mitigated by several factors. While a protracted global credit crisis likely meant a reduction in financial flows to Georgia, it was expected to trigger a refocus on the strengthening of the regulatory environment for the finance sector and increase reliance on internal deposit mobilization by banks. The structural reforms of the previous 4 years (2004 2007) increased the resilience of the economy to adjust to external shocks. In regard to the risk of increased regional tensions, efforts to reach a peaceful settlement were in progress. 11. In terms of mitigating factors for domestic risks, the government launched the JNA within days of the outbreak of the conflict to ensure that there was a clear strategy for keeping the focus on reforms and that the necessary resources for remaining on track were secured. Support proposed under the program loan was also part of a broader stabilization package, such that the overall impact in terms of ensuring effectiveness of the countercyclical fiscal policy stance is expected to be positive. In regard to the risk of weakening of the banking sector, earlier capital requirements were conservative enough to allow for the current countercyclical adjustments, and the JNA development partners were expected to provide support to this sector. 12. Out of 12 covenants, 10 were fully complied with and 2 were substantially complied with. One related to monitoring results, tracking assistance provided to the government in connection with the JNA, and assessing the impact of such assistance. As output indicators in the DMF were not clearly defined, other relevant data were identified at project completion. The other covenant related to providing ADB with certified copies and translations of (i) the state budget execution report for 2009 as submitted to the parliament, and (ii) the opinion of the Chamber of Control on such reports. This covenant was substantially complied with as a result of the loan being closed in January 2010, prior to the required dates for which the certified copies and related translations were to be submitted to ADB. The required copies were compiled at the time of project completion. Details of the covenanted conditions and their compliance status may be found in Appendix 3 of the project completion report (PCR). 3 II. EVALUATION OF PERFORMANCE AND RATINGS A. Relevance of Design and Formulation 13. The PCR stated that the design of the EAPCR program was highly relevant. It justified the rating by pointing out that the EAPCR program was consistent with (i) ADB s Interim Operational Strategy for Georgia, 2008 2009 (footnote 2); (ii) the country s development objectives, as outlined in the government s Basic Data and Directions for 2008 2011; and 3 ADB. 2010. Completion Report: Georgia: Emergency Assistance for Post-Conflict Recovery. Manila.

4 (iii) the JNA approved in October 2008. Also, the financing instrument based on the International Monetary Fund s (IMF s) stand-by arrangement with the government was appropriate. Lastly, while all performance targets for the EAPCR program were not clear, other available data supported achievement of targets as set out in the DMF. The PCR noted that IDPs were provided with (i) temporary emergency support in the form of one-time disbursements, (ii) allowances, and (iii) state-financed insurance. Essential expenditures arising from the war were also maintained. Although the intended impact of restoring the Georgian economy to its pre-war trajectory of 4% annual economic growth was not likely to be met, the emergency loan arrested the negative growth trajectory, with the economy expected to expand 5.5% in 2010 and 4.0% in 2011. 14. The PCR s justification seems valid except in the case of consistency of the EAPCR program with ADB s Interim Operational Strategy. The strategy was approved in January 2008, while the conflict broke out in August of the same year. The PCR should have explained how the strategy was consistent because it was unlikely that the strategy foresaw the conflict. The latter part of the PCR s justification on the performance targets and the various achievements of the EAPCR program do not validate relevance, but rather effectiveness. Given the absence of stronger justification of the program loan s relevance, this validation downgrades the PCR s rating to relevant. B. Effectiveness in Achieving Outcomes 15. The PCR rated the EAPCR program effective in achieving outcomes. It stated that by preventing a reduction in public expenditures, the EAPCR program helped mitigate adverse social impacts of the war through resettlement of IDPs. These people received assistance with the rehabilitation of damaged and destroyed homes, the restoration of food security and livelihoods, and the replacement of household items. Some were resettled and received an offer of government-built housing units or monetary compensation to acquire property. For instance, of the 138,000 people displaced in August 2008, about 75% have gone back home. 16. However, due to the impact of the global financial and economic crisis, under the EAPCR program it was not possible to sustainably mitigate the adverse economic impact of the war on GDP growth, which contracted by 3.9% in 2009. The PCR notes that this was in contrast to the intended outcome of 4.0% GDP growth for 2009. Nevertheless, the PCR argued that given the urgency of the crisis, the swift and timely intervention and coordination with other development partners allowed for an effective response to bridging the financing gap. Real GDP growth for 2010 was projected at 5.5%, based on the expansion of economic activity and the resumption of credit growth, complemented by a gradual decline in interest rates. This validation concurs that the EAPCR program was effective. C. Efficiency in Achieving Outcomes and Outputs 17. The PCR rated the program highly efficient. In the context of process efficiency, the underlying business process and design of the EAPCR program were efficient in assisting Georgia to address the impact of the war. The EAPCR program facilitated the quick deployment of financial resources and ensured that immediate incremental expenditure needs arising from the war were met. It contributed to averting a collapse of domestic demand because of reduced consumer and lender confidence, and supported employment. ADB and the government both fast-tracked their business process during project preparation and disbursement to ensure a timely response to the crisis.

5 18. A substantial number of IDPs were resettled. Between November 2008 and May 2009, the Social Service Agency provided one-time disbursements of GEL200 to more than 18,000 households to help them settle into collective centers. Allowances and state-financed insurance were provided to IDPs from 2008. The number of people receiving targeted social assistance increased in 2009 and the monthly pension benefit was increased by 36% in real terms during 2008 2010, with the targeted social assistance cash benefit for vulnerable families doubled for additional (non-head) household members. The number of recipients of health insurance vouchers increased to about 900,000. This validation concurs with the PCR s highly efficient rating. D. Preliminary Assessment of Sustainability 19. The PCR rated the EAPCR program likely sustainable. The JNA was successfully implemented and the program was an important part of the JNA. The government exhibited commitment to public expenditures as outlined under the outputs in the DMF, and ensured that progress was made in resettling IDPs. The PCR also noted that, although not part of the EAPCR program, the government increased its institutional capacity to ensure more effective financial accountability for public resources through extensive reform of policies and procedures. Similarly, the consolidation of a range of social benefits into a single registry and application system and applied to health insurance vouchers, targeted social assistance, benefits for IDPs, and electricity vouchers proved effective in alleviating poverty. The government exhibited continued support for essential public expenditures, in particular on health, education, and social protection. Finally, the PCR further adds that economic growth, in step with global economic recovery, was expected to rebound in 2010, with real GDP growth projected at 5.5%. This validation concurs with the likely sustainable rating. E. Impact 20. The PCR concluded that the intended impact of the EAPCR program of restoring the Georgian economy to its pre-war trajectory of growth and social development was not likely to be achieved. The economy of Georgia was confronted first with the war crisis and then, at the same time, with the global financial crisis, which was unforeseen and thus not factored into the program design. Nonetheless, growth was expected to rebound to 5.5% in 2010 and 4.0% in 2011. Average GDP growth for 2008 2011 was estimated at 2.1%, instead of the 4.0% projected in the DMF. Also, the assumption in the DMF of a return of investment and consumer confidence was not realized. Foreign direct investment inflows were expected to continue to be weak in 2010, with IMF estimates of 6.5% of GDP. The downturn also led to a fall in fiscal revenues and the public deficit widened to 9.2% in 2009. 21. The PCR also underscored the fact that programmatic support provided by ADB and other development partners enabled the government to increase essential expenditures for social development from 26.6% of the budget in 2007 to 27.4% in 2008 and to 31.4% in 2009, thus meeting output performance targets. In addition, although the impact of the crisis and the associated policy responses on poverty were emerging, poverty rates were decreasing. According to economic simulations, public expenditures on social protection significantly mitigated the incidence of poverty in Georgia; without pension payments, poverty in 2007 would have been about 2% higher. The PCR did not rate the impact criterion. Given the discussions above, this validation rates the impact significant.

6 III. OTHER PERFORMANCE ASSESSMENTS A. Performance of the Borrower and the Executing Agency 22. The PCR rated the performance of the borrower and the Ministry of Finance satisfactory. The government (i) maintained essential expenditures for social services and social protection; and (ii) made significant progress in improving public financial management, social services delivery, and social protection. However, the Ministry of Finance did not provide a PCR. This validation concurs with the PCR s satisfactory rating. B. Performance of the Asian Development Bank 23. The PCR rated ADB s performance satisfactory. The PCR noted that ADB quickly responded to the government s request for assistance and designed a flexible support modality. ADB managed its relationship with the government and with other stakeholders well, provided adequate levels of resources in line with development needs, and proactively managed the implementation of the EAPCR program with regard to approvals, disbursement, and monitoring. The PCR also revealed that ADB actively monitored implementation of the program through mission visits and policy dialogue. ADB also monitored the progress made in strengthening public financial management and in developing and reforming the delivery of social services. This validation concurs with the PCR s rating that ADB performance was satisfactory. C. Other Factors 24. The PCR provided no assessment of safeguards, gender, governance, anticorruption, or fiduciary aspects, and did not discuss the government s assessment of the emergency assistance. IV. OVERALL ASSESSMENT, LESSONS, AND RECOMMENDATIONS A. Overall Assessment and Ratings 25. The PCR rated the EAPCR program successful. The emergency assistance was consistent with the JNA and the IMF s stand-by arrangement with the government. Therefore, it was relevant. It was effective because the outcomes were achieved, allowing the government to meet the immediate incremental expenditure needs arising from the war and the core public expenditure program for 2008. The underlying business process and design of the program were efficient in helping Georgia address the impact of the war. It enabled the quick deployment of financial resources and provided timely direct assistance to IDPs. Therefore, it was highly efficient. The emergency assistance was likely sustainable because the government increased its institutional capacity to ensure more effective financial accountability for public resources through extensive reform of policies and procedures. This validation also rates the project successful.

7 Overall Rating PCR IED Review Reason for Disagreement/Comments Relevance: Highly relevant Relevant Insufficient justification for the highly relevant rating. Effectiveness in Effective Effective Achieving Outcomes: Efficiency in Achieving Highly efficient Highly efficient Outcomes and Outputs: Preliminary Likely sustainable Likely sustainable Assessment of Sustainability: Borrower and Satisfactory Satisfactory Executing Agency: Performance of ADB: Satisfactory Satisfactory Impact: No rating Significant The rating is in accordance with IED s PCR Validation Guidelines. Overall Assessment: Successful Successful Quality of PCR: Satisfactory ADB = Asian Development Bank, IED = Independent Evaluation Department, PCR = project completion report. B. Lessons 26. The PCR identified two lessons. The first dealt with the appropriateness of the lending modality. The second was related to the DMF, which could have been better developed. This validation concurs with these lessons. C. Recommendations 27. The PCR recommended no further follow-up action. It recommended that the current definition of sustainability under ADB s Guidelines for Preparing Performance Evaluation Reports for Public Sector Operations 4 be reviewed to better evaluate emergency assistance. It also recommended that the government take a greater role in the design and implementation of the DMF, including measurement of performance targets. This validation concurs with these recommendations. V. OTHER CONSIDERATIONS AND FOLLOW-UP A. Monitoring and Evaluation Design, Implementation, and Utilization 28. The JNA included a results framework that was incorporated into the DMF of the EAPCR program. The PCR adequately discussed the DMF and pointed out its deficiencies. This validation concurs with the PCR s assessment of the DMF. B. Comments on Project Completion Report Quality 29. The PCR was generally well prepared and in accordance with PAI 6.07. 5 The PCR presented a well-balanced analysis of facts and issues. The lessons identified in the PCR are appropriate. Overall, the quality of the PCR is rated satisfactory. 4 ADB. 2006. Guidelines for Preparing Performance Evaluation Reports for Public Sector Operations. Manila. 5 ADB. 2009. Project Completion Report. Project Administration Instructions: PAI 6.07A. Manila.

8 C. Data Sources for Validation 30. The sources of data for this validation consist of (i) the RRP, (ii) program documents of ADB missions and related correspondence, and (iii) the ADB PCR. D. Recommendation for Independent Evaluation Department Follow-up 31. The PCR recommended that a program performance evaluation report be prepared about 4 5 years after the PCR, following the maturity of IMF s stand-by arrangement and the $500 million Eurobond issued in 2008. The program performance evaluation should not be confined to the original indicators in the DMF. The IED may consider this recommendation in its future work program.

REGIONAL DEPARTMENT S RESPONSE TO THE PROJECT COMPLETION REPORT VALIDATION REPORT On 10 November 2011, the Independent Evaluation Department (IED) circulated the draft validation report for interdepartmental comments. IED received the following comments from the Public Management, Financial Sector, and Trade Division, Central and West Asia Department on 11 November 2011: We are okay with IED s evaluation. We have noted that there is no change in the overall assessment and that it remains rated successful.