USAID_EPI_Year_2_Annual_Report_(3).pdf

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Tuesday, October 30, 2012

Deloitte Consulting LLP produced this publication for review by the United States Agency for International Development.

ECONOMIC PROSPERITY

INITIATIVE (EPI)

ANNUAL REPORT

Year 2 October 1, 2011 – September 30, 2012

DISCLAIMER

The report made possible by the support of the American People through the United States Agency for International Development (USAID). The contents of this report are the sole responsibility of Deloitte Consulting LLP and do not necessarily reflect the views of USAID or the United States Government.

ECONOMIC PROSPERITY

INITIATIVE (EPI)

ANNUAL REPORT

YEAR 2

OCTOBER 1, 2011 – SEPTEMBER 30, 2012

USAID ECONOMIC PROSPERITY INITIATIVE

CONTRACT NUMBER: AID-114-C-10-00004

DELOITTE CONSULTING, LLP

USAID/CAUCASUS

TUESDAY, OCTOBER 30, 2012

EPI | Year 2 Annual Report (October 1, 2011 – September 30, 2012) i

CONTENTS

1.0 EXECUTIVE SUMMARY

2.0 INTRODUCTION

3.0 CHALLENGES

4.0 PROGRESS OF ACTIVITIES BY COMPONENT

4.1 BUSINESS ENABLING ENVIRONMENT COMPONENT (BEE) (GANTT CHART

LEVEL 40000)

4.1.1 Improve Regulatory Environment and Licensing (Gantt Chart Level 42300)

4.1.2 Property Rights (Gantt Chart Level 42400)

4.1.3 Investment Sector Economic Governance (Gantt Chart Level 42500)

4.1.3.1 Investment management services (ims) (Gantt Chart Level 42530)

4.1.4 International Trade and Customs (Gantt Chart Level 42600)

4.1.5 Tax Systems (Gantt Chart Level 42700)

4.1.6 Procurement and Privatization Systems (Gantt Chart Level 42800)

4.1.7 Agricultural Policy Environment (Gantt Chart Level 42900)

4.1.8 Core Team of Reform Specialists (Gantt Chart Level 43000)

4.1.9 E-Governance Activities (Gantt Chart Level 47100)

4.2 AGRICULTURE SECTORS COMPONENT (AG) (GANTT CHART LEVEL

20000)

4.2.1 AG Value Chain Action Plan Implementation (Gantt Chart Level 24000)

4.2.2 Improve Access to AG Information (Gantt Chart Level 25000)

4.2.3 Improve Sustainable Access to Support Services (Gantt Chart Level 26000)

4.2.4 Model Small Holder Groups (MSHG) (Gantt Chart Level 27000)

4.2.5 AG investment promotion (Gantt Chart Level 29000)

4.3 MANUFACTURING & SERVICE SECTORS COMPONENT (M&S) (GANTT

CHART LEVEL 30000)

4.3.1 M&S Value Chain Action Plan Development (Gantt Chart Level 33000)

4.3.2 M&S Value Chain Action Plan Implementation (Gantt Chart Level 34000)

4.3.3 Improve Competitiveness of Tourism Sector (Gantt Chart Level 35000)

4.3.4 Improve Competitiveness of ICT Sector (Gantt Chart Level 36000)

4.4 CROSSCUTTING ACTIVITIES COMPONENT (CC) (GANTT CHART LEVEL

16000)

4.4.1 Gender and Youth Integration (Gantt Chart Level 16100)

4.4.2 Increasing Economic Knowledge (Gantt Chart Level 16200)

4.4.3 Establish Public-Private Partnerships (Gantt Chart Level 16400)

4.4.4 Access to Finance (Gantt Chart Level 16600)

4.5 MANAGEMENT AND OPERATIONS COMPONENT (M&O) (GANTT CHART

LEVEL 1000)

4.5.1 Work Planning (Gantt Chart Level 12000)

4.5.2 Communications (Gantt Chart Level 13000)

4.5.3 Grants (Gantt Chart Level 14000)

4.5.4 Procurement (Gantt Chart Level 15000)

4.5.5 Performance Monitoring (Gantt Chart Level 17000)

4.5.6 Environmental Evaluation (Gantt Chart Level 18000)

EPI | Year 2 Annual Report (October 1, 2011 – September 30, 2012) ii

4.5.7 EPI Staff Development (Gantt Chart Level 19000)

ANNEX 1: PMP REPORT

ANNEX 2: UTILIZATION OF USG PERSONNEL

ANNEX 3: UTILIZATION OF LOCAL PARTNERS

ANNEX 4: SUCCESS STORIES

TABLE OF TABLES

Table 1: BDS Consulting Projects Undertaken to Date Table 2: Financial Advisory Program Results to Date Table 3. Employment Data in EPI Targeted Sectors and Value Chains Table 4. EPI Productivity Results Table 5: WEF GCR & EPI Business Perception Survey

TABLE OF FIGURES

Figure 1: EPI Results Dashboard Figure 2. Foreign Investment: Progress Towards the EPI Targets Figure 3. Contribution of EPI Value Chains and Sectors in Current Foreign Investment Results Figure 4. Foreign Investment, Commitments and Pipeline Figure 5. Domestic Finance: Progress Towards EPI Target Figure 6. Contribution of EPI Value Chains and Sectors in Current Domestic Finance Result Figure 7. Exports: Already Exceeded EPI Target of USD 150 Million Figure 8. Contribution of EPI Value Chains and Sectors in Current Export Result

EPI | Year 2 Annual Report (October 1, 2011 – September 30, 2012) iii

ACRONYMS

ACT Azerbaijan Competitiveness and Trade

ADB Asian Development Bank

AG Agriculture Sectors Component

ANSI American National Standards Institute

BAS Business Advisory Services

BDS Business Development Services

BEE Business Enabling Environment Component

BPR Business Process Reengineering

BSP Business Service Provider

CAB Conformity Assessment Body

CC Cross Cutting Component

CCID Community Colleges for International Development

CRA Civil Registry Agency

CSPA Competition and Stage Procurement Agency

CTC Caucasus Transit Corridor

DEA Data Exchange Agency

EBRD European Bank for Reconstruction and Development

EJD Economic Journalism Development

ELFA Equipment Leasing and Finance Association

EPI Economic Prosperity Initiative

EU European Union

FAP Financial Advisory Program

FHC Frontline Hospitality Course

FIZ Free Industrial Zone

FSC Farm Service Center

GAC Georgian Accreditation Center

GCR Global Competitiveness Report of the World Economic Forum

GDA Global Development Alliance

GEOSTM Georgian Agency for Standards, Technical Regulations and Metrology

GIPP Georgia Investment Promotion Partnership

GITOA Georgian Incoming Tour Operators Association

GNIA Georgian National Investment Agency

GNTA Georgian National Tourism Administration

EPI | Year 2 Annual Report (October 1, 2011 – September 30, 2012) iv

GoG Government of Georgia

G-PAC Policy, Advocacy and Civil Society Development in Georgia

GSP+ Generalized System of Preferences

GWA Georgian Wine Association

IBC International Building Codes

ICC International Codes Commission

IFC International Finance Corporation

IMS Investment Management Services

IPM Integrated Pest Management

IPR Intellectual Property Rights

KC Knowledge Center

KMS Key Management Solutions

KP Knowledge Plot

M&S Manufacturing & Services Sectors Component

M&O Management & Operations Component

MFN Most Favored Nation

MICE Meetings Incentives Conferences and Exhibitions

MoES Ministry of Education and Science

MoESD Ministry of Economy and Sustainable Development

MoF Ministry of Finance

MoU Memorandum of Understanding

MSHG Model Small Holder Groups

NEO New Economic Opportunities

PERSUAP Pesticide Evaluation Report and Safer Use Action Plan

PMCG Policy and Management Consulting Group

PMP Performance Monitoring Plan

PPP Public Private Partnership

RS Revenue Service

SCC Supply Chain Council

SPMIS State Property Management Information System

SVVP Software Verification and Validation Plan

T&L Transport & Logistics

TFS Trade Facilitation System

TLC Tbilisi Logistics Center

ToT Training of Trainers

USG U.S. Government

EPI | Year 2 Annual Report (October 1, 2011 – September 30, 2012) v

WCO World Customs Organization

WEF World Economic Forum

WFD Workforce Development

WRAP Worldwide Responsible Accredited Production

WSET Wine and Spirit Education Trust

EPI | Year 2 Annual Report (October 1, 2011 – September 30, 2012) 1

1.0 EXECUTIVE SUMMARY

“Man's mind, once stretched by a new idea, never regains its original dimensions.”

Oliver Wendell Holmes

Economic Prosperity Initiative (EPI) project has reached its mid-point. The due diligence activities of conducting over eighty assessments at the project start, followed by targeted action plans, have paid off. EPI was able to identify opportunities for catalytic policy reforms and activities in key leverage points within its value chains and sectors where EPI’s assistance was applied during Year 2 of the project. As a result, several EPI supported policy reforms have been implemented in a broad consultative process, such as financial leasing, risk-based audit, customs warehousing, tax simplification, and e-Governance initiatives, which are already creating a positive impact for the Georgian economy. Similarly, sectors that barely existed when EPI commenced its activities, with very limited knowledge of their potential, such as corrugated paper packaging, heated greenhouse industry, Meetings, Incentives, Congresses, and Exhibitions (MICE) tourism and crop insurance, are truly starting to take off. EPI connected Georgian businesses to the market and helped them adopt the right technology, standards or practices; after which, these businesses saw the potential and made their own investments to seize on these opportunities.

EPI’s targeted approach supported by rigorous impact analysis of all our activities, including policy reforms, enabled the project to made significant progress towards meeting or even exceeding its life of project targets already at this half-way point. EPI was able to achieve this by building partnerships, promoting public private dialogue and facilitating fact-based policy making, as well as by building the capacity of local businesses and employees to adopt international best practices and standards. EPI’s efforts secured USD 109 million in foreign investment and commitments, with an additional pipeline of investment opportunities of USD 559 million. EPI also facilitated USD 155 million in exports, mostly through its efforts in the wine and MICE tourism, hazelnut and apparel sectors, already exceeding its life of project export target of USD 150 million.

The financial leasing reform that EPI implemented through a consultative process with private and public sector stakeholders, the promotion of investments in the heated greenhouse industry, and the launch of a crop insurance industry, resulted overall in a domestic finance increase of USD 125 million since project start. EPI also achieved consistent increases in productivity (40% average productivity increases for all of its value chains), employment (7,050 new jobs) and revenues (annual revenue increase of 27% or USD 11.8 million for agricultural sector, and 61% increase or USD 47 million for manufacturing and services sectors) for all of its value chains (see Figure 1: EPI Results Dashboard for details).

EPI also ensured that the project activities impact a broad population of farmers and businesses, while building local capacity of Georgian service providers. EPI policy reforms and value chain activities reached 5,666 farmers and 212 agribusinesses, and 588 businesses in the manufacturing and services sectors. EPI also engaged 92 agricultural service providers (in turn reaching another 32,600 farmers and 6,208 agribusinesses), and 42 business service providers (reaching another 877 businesses).

At the same time, EPI created a solid foundation from where additional targeted assistance by EPI can build from during Year 3 of the project. EPI’s world-class apparel industry vocational program will be a key factor for attracting new foreign investment and positioning Georgian apparel factories to expand their exports and create much needed jobs. Further investments in workforce to increase customer service skills and wine knowledge have created ripple effects in the tourism sector to offer higher quality services to incoming floods

EPI | Year 2 Annual Report (October 1, 2011 – September 30, 2012) 2 of tourists. Other trainings, such as large-scale agricultural producer programs created double-digit productivity increases for the agricultural value chains that were previously dismissed as non-commercial sectors as they are dominated by smallholder subsistence farmers. EPI is now working with these farmers to create sustainable commercial linkages between lead farmer groups and higher value markets to generate revenue increases for large communities in Western Georgia.

EPI’s targeted investment promotion function has heightened the Georgian government’s interest to adopt best practices in investment promotion and thereby create sustainability.

Not only that, it has also built up a pipeline of actual and committed investments and new investment leads that will bring the needed know-how, market linkages and finance to Georgian productive industries, creating new jobs and opportunities for Georgians, especially in the rural areas.

EPI was able to achieve such results through its “open-source” approach to development.

EPI continues to look for opportunities to partner with others who have similar objectives as EPI. Whether it is transitioning its resources to US Treasury team at the Revenue Service, providing training to beneficiaries of USAID New Economic Opportunities (NEO) and USAID Azerbaijan Competitiveness and Trade (ACT) projects or partnering with GIZ to improve the quality of infrastructure, EPI’s top consideration is how to multiply the project impact and effectively use available resources in the country. The focus of EPI activities is first and foremost commercial – the feasibility studies and business plans fully justify any investment that EPI makes in terms of its resources or consulting services. Only when viable, and often tested through small-scale pilots, EPI proceeds with activities, aligning other stakeholders’ objectives and securing and leveraging additional funds and resources to achieve common goals.

In the hazelnut sector, EPI helped USAID establish its first Global Development Alliance (GDA) for the USAID Georgia Mission, leveraging around USD 1.5 million of private funds from Ferrero International to improve the competitiveness of the hazelnut industry. EPI also identified an opportunity to facilitate trade and truly position Georgia closer to its aspiration of becoming a regional trade and cargo hub. Specifically, EPI garnered the support and resources of global shipping lines and port operators, Georgian railways, freight forwarders and Customs to jointly implement a port community system similar to those of the most developed ports, such as Rotterdam and Singapore, to achieve further trade efficiencies for the sector. The new GDA is expected to follow in Year 3.

EPI’s focus remains the same: living up to its principle of “Georgians for Georgia”, building local capacity and ensuring sustainability of all the activities. Starting with trainings and leadership development of its own staff with all the components now fully transitioned to leading Georgian experts, EPI has created a lasting impact for talent development long after EPI ends. EPI’s highly coveted internship program is creating buzz among students as it ensures high job placement rates after only a brief yet challenging internship program with EPI. Over 134 business development service providers, financial advisors, and agricultural service providers are all enhancing their capabilities, with EPI assistance, to provide high-value services to its clients. EPI’s focus on women entrepreneurs and fully embedded women-focused community outreach specialists in EPI’s agricultural sector are creating new opportunities and development impact for women that were often excluded from participating in business or other leadership roles.

By now, EPI has fully established itself as the connector, bringing diverse audiences to the table to engage in informed debates and promote participatory and transparent policy-making. While not always easy to quantify its immediate impact, such an eco-system of trust and multi-stakeholder engagement will enable Georgia in the long run to achieve the ultimate goal of EPI – increase competitiveness and bring prosperity for Georgians.

EPI | Year 2 Annual Report (October 1, 2011 – September 30, 2012) 3

Figure 1: EPI Results Dashboard

0 25 50 75 100 125 150 175 200

0 50 100 150 200 250 300 350 400 450 500

0 25 50 75 100 125 150

Remaining Foreign Investment Target $390 million

EPI achieved $109 million in Foreign Investment and Commitments, or 21.8% of its target, including 9 large transactions (target is 10).

EPI achieved $124.6 million in Domestic Finance, or 62.2% of its target.

EPI achieved $154 million in Exports, or 107% of its target, and has increased export capacity of 184 firms (target is 100).

Remaining Domestic Finance Target

$75 million

32,600 farmers

6,208 agribusinesses 93 agricultural service providers

877 businesses 42 business service providers

Greenhouses

Agriculture sector

Transport and Logistics

Wine Tourism Packaging

Apparel MICE Tourism

ICT Sector Hazelnuts

Remaining Amount to meet EPI Targets

M&S Sector

Color Legend

Leasing Insurance

Policy Impact

EPI met its service provider targets and indirect clients served.

EPI generated 7,050 new jobs and increased productivity by 40%.

5,666 farmers 212 agribusinesses

27% annual revenue increase

588 businesses 61% annual revenue increase

EPI increased annual revenue by 45% for targeted farmers and businesses.

28% average productivity increase

750 jobs

44% average productivity increase

6,300 jobs

EPI | Year 2 Annual Report (October 1, 2011 – September 30, 2012) 4

2.0 INTRODUCTION

This annual report documents the results and progress made in the Economic Prosperity Initiative (EPI) in Georgia, covering the second year of operations, from October 1, 2011 to September 30, 2012. It starts by documenting EPI’s progress and results during the year and since project start, including a summary of completion of outputs and progress against the Year 2. Annexes include a detailed presentation of EPI’s achievements toward high-level result targets and targets against selected indicators included in the latest World Economic Forum’s Global Competitiveness Report 2012-2013 (Annex 1); the utilization of resources and cooperation with other U.S. government (USG) agencies (Annex 2) and local partners (Annex 3) and success stories (Annex 4). A separate MS Excel document provides detailed results and Year 3 targets for all EPI’s Performance Management Plan (PMP) indicators.

3.0 CHALLENGES

EPI’s success requires a close collaboration with the Government of Georgia (GoG) to support relevant business enabling environment reforms. EPI recognizes that this collaboration will be further strengthened in close partnership with USAID and other U.S.

Government agencies. EPI has been serving as an expert advisor to the GoG, engaging numerous mid-level officials across ministries and agencies to offer international best practice advice, while building strong partnerships with interested private sector stakeholders to participate and contribute to such policy reform initiatives. This approach allowed EPI to continue smoothly its critical reform initiatives in the after-math of the parliamentary election results and despite a complete change-over of all high-level policy decision-makers.

New government in Georgia may request additional or different policy priorities be supported by EPI that may not have been anticipated during the original EPI proposal, initial assessments in Year 1 or subsequent work plans and budget. EPI proposes to engage in a dialogue with USAID to agree on any relevant course corrections, including potential contract modification, to ensure that the reform momentum of the new government receives appropriate support, through EPI experts and EPI facilitated public private dialog, to generate further improvements in the business environment and increase capacity of public sector institutions.

As discussed several times with USAID, Deloitte anticipates that USAID will proceed with modification of the contract scope to incorporate the upcoming scope change recommendations of USAID IG Audit team and Deloitte’s outline of proposed changes submitted to USAID in July, as a response to the IG Audit Team request. The PMP documentation in this report further proposes for USAID consideration the indicators to be removed, especially since USAID Mission does not track or report on them anymore.

4.0 PROGRESS OF ACTIVITIES BY COMPONENT

4.1 BUSINESS ENABLING ENVIRONMENT COMPONENT (BEE)

(GANTT CHART LEVEL 40000)

In comparison to other countries in the region, Georgia has made strides in removing obstacles in the business environment. Over the past few years it has lowered trade barriers, significantly reduced petty corruption and embraced e-Government solutions to provide efficient public services to its businesses and citizens, including innovative “one-stop shop” Public Service Halls that are sprouting up across the country. Most recently, it has focused on improving tax and customs administration, working to build institutional capacity and address implementation issues under the new Tax Code. For several initiatives supported by EPI, the GoG also embraced a consultative process in reform dialog that EPI supports and expects to continue expanding.

EPI | Year 2 Annual Report (October 1, 2011 – September 30, 2012) 5

Supported testing laboratories in two key value chains to gain ANSI accreditation, boosting the credibility and long-term quality standards of Georgia wine, fruits and vegetables and other food producers. Estimated impact on hazelnut exports alone ranges from USD 7.5 million to

USD 18.8 million per year

Drafted model building code regulations that would bring

Georgia into line with 21st century, international best practice, enhancing the safety and credibility of Georgian building codes in the eyes of international investors. If adopted, the savings to businesses are estimated at USD

11.5 million per year and USD 40 million of savings for consumers over the period of building exploitation due to energy savings

Directly contributed to a sharp and sustained increase in trademark applications and at least USD 2.4 million in annual savings for public and private sector stakeholders through development of an e-filing system IPR applications

Provided assistance to the Georgian RS on a number of fronts to implement a risk-based approach to tax audit and administration and a streamlined tax payments system.

EPI’s ongoing support will result in a lower risk, more efficient tax environment for Georgian and international businesses. Estimated benefits for business include USD

14.6 million in cost savings, USD 9.6 million in exports, USD 12.5 million in investment and USD 27 million in

GDP growth.

Developed a state procurement supplier guide to improve the rate of private sector participation in public procurement and trained over 181 participants from private and public sector on state procurements.

Facilitated more than USD 18.9 million in new foreign investment among logistics and cold storage companies after streamlining regulatory issues for bonded warehouses.

Number of days required to trade good across borders

(exports): 9 (according to World Bank Doing Business)

Number of days required to trade good across borders

(imports): 10 (according to World Bank Doing Business)

Year 2 Highlights in the Agricultural Sectors

Component

Despite these improvements, EPI identified several areas within the business environment that hindered increased competitiveness and economic growth in Georgia:

• The lack of an internationally recognized accreditation system in quality infrastructure;

• Inconsistencies in building codes and standards, which draw from a wide and sometimes conflicting range of Soviet-era and other international sources;

• Poor and inconsistent enforcement of building codes;

• Very low levels of awareness on and enforcement of the intellectual property rights (IPR);

• Wide range of other business environment issues revealed by surveys of investors, such as land issues and extraction licenses;

• Strong need to institutionalize modern customs procedures and practices;

• A tax collection system that suffered in recent years from a public perception of heavy-handedness and overreaching in conducting tax audits, despite having nominally adopted a risk-based approach to tax collection;

• Very low levels of public land registration in the cadastral register;

• A tax rule that bio-asset investments must be depreciated in the first year of acquisition, which stands as a substantial obstacle to horticultural investments;

• An existing legal framework that is not conducive to farmers’ cooperation: it neither creates attractive tax environment, nor provides simple mechanisms for registration and operation of farmers groups; and

• A current food safety regulatory framework that does not provide sufficient mechanisms for effective control of food safety in the country.

EPI worked closely with the GoG to address these issues through policy recommendations, reforms, capacity building and public outreach. Highlights of EPI’s results are included in the box above.

EPI | Year 2 Annual Report (October 1, 2011 – September 30, 2012) 6

4.1.1 IMPROVE REGULATORY ENVIRONMENT AND LICENSING (GANTT CHART LEVEL

42300)

ANSI ACCREDITATION OF CONFORMITY ASSESSMENT BODIES (CAB)

EPI identified the lack of a competitive field of CABs in Georgia, including labs and certification bodies that complied with appropriate international standards and were accredited under multilateral and mutual recognition agreements under leading international accreditation bodies.1 Georgia’s own accreditation body, the Georgian Accreditation Center (GAC) was not a signatory of these agreements, so Georgian CABs needed to be accredited by another body. EPI established a partnership through a Memorandum of Understanding (MoU) between GAC and the American National Standards Institute (ANSI) to achieve internationally recognized accreditation for Georgian CABs.

EPI and ANSI narrowed focus on specific, manageable areas where improvement would have the most tangible results. To help Georgia achieve competitiveness as an exporter and boost its overall economic development, they focused on the largest sector in Georgia – agriculture. Therefore, EPI and ANSI focused on addressing production certification bodies and laboratories that certify and test food products.

During Year 2, EPI and ANSI worked closely with two food product testing laboratories. These included the Wine Laboratory, which tests wine and Multitest, which tests wine, mineral water, hazelnuts and fresh and processed fruits and vegetables. At the beginning of 2012, the laboratories began to introduce a quality management system and started to improve the technical aspects of quality management in accordance with ISO/IEC 17025 “General requirements for the competence of testing and calibration laboratories.” The accreditation assessment of laboratories took place in June 2012 and, in September 2012, after addressing the findings of the assessment and gradually closing nonconformities in the following months, both laboratories were granted ANSI accreditation.

EPI and ANSI also worked with GAC to build the center’s understanding of the U.S.

accreditation system, schemes and practices through meetings with ANSI staff, direct observation of ANSI assessments and training of GAC staff.

Given these achievements, EPI assessed the economic impact of international accreditation of laboratories, based on a case study in the hazelnut industry. The estimated monetary impact ranges from USD 7.5 million to USD 18.8 million in an annual increase in the value of hazelnut exports.

BUILDING CODES

In 2011, EPI assessed Georgian building codes and found an obvious inconsistency in application of building codes and standards, including a mix of Soviet construction rules (SNIPs) and rules from other countries (U.S., UK, Germany, etc.). Some of the basic codes, like fire safety, were either non-existent or based on outdated SNIPs. This deficient regulation coupled with ineffective enforcement compromised the quality of buildings, the safety of occupants and the reputation of Georgian construction industry. Addressing the

The International Accreditation Forum (IAF) and the International Laboratory Accreditation Cooperation (ILAC).

Photo 1: Multitest and Wine Laboratory Receive Internationally-Recognized ANSI

Accreditation

EPI | Year 2 Annual Report (October 1, 2011 – September 30, 2012) 7

GoG’s urgent need to streamline technical regulations, EPI considered building codes a high priority.

In response, EPI developed draft building code according to the international model regulations International Building Code (IBC) of the International Code Council (ICC). EPI drafted and advocated new Building Codes in collaboration with the Prime Minister’s Office, the Ministry of Economy and Sustainable Development (MoESD) and private sector stakeholders. EPI carried out the codes development process in two phases:

• During Phase I, EPI translated and adapted Non-Structural Building Codes and drafted the relevant Government Resolutions. The new regulation introduces modern and up-to-date approaches to building planning and design. It covers such important issues as area and height limits, fire safety, requirements for accessibility, requirements for exterior walls and roof assemblies. EPI successfully ran public-private consultations and advocacy of the Non-Structural Code among government institutions and actively involved private sector stakeholders as well as academia throughout the process of codes adaptation. EPI also developed tailor-made training materials on the Non-Structural Building Code and delivered a series of trainings to public officials responsible for construction permitting and inspection and to representatives of construction companies in Tbilisi and other regions. The adoption of the Government Resolution on Non-Structural Building Code was projected to take place by the end of 2012.

• During Phase II, EPI translated and reviewed the Structural Building Code and ASCE/SEI Standard on Minimum Design Loads. EPI also completed the first round of public-private consultations on the Structural Code. The adoption of a Structural Building Code was anticipated to take place by the end of 2013.

According to quantitative impact assessment conducted by EPI, application of new building code will result in savings for businesses in amount of USD 11.5 million per year. The major source of saving is reduced external wall thickness affecting building area and materials used for building structure. New insulation requirements will reduce energy consumption which in monetary terms would amount to approximately USD 40 million of saving for consumers over the period of building exploitation.

OUTPUTS STATUS

At least 1 Georgian CAB accredited by ANSI Completed – Accreditation of two laboratories

Postponed – Accreditation of a product certification body postponed to Year 3 or Year 4

At least 15 persons from laboratories trained in Proficiency Testing and Measurement of Uncertainty

Completed

At least 10 persons from GAC trained on ISO/IEC Guide 65 on Standards for Product Certification Bodies

Completed

Georgia’s conformity assessment system representatives trained on certification procedures

Completed

At least 3 persons from GAC trained on ISO 17025 on Quality Management of Laboratories

Completed

Best practice Building Code (Non-Structural and Structural parts) developed and submitted for the GoG‘s approval

In Progress – Government Resolution draft for Non-Structural Building Code developed; initial draft for Structural Building Code developed

EPI | Year 2 Annual Report (October 1, 2011 – September 30, 2012) 8

Trainings to central and local government and private sector representatives on new Building Code delivered

Completed

Level playing field for construction business created

Delayed until actual implementation of the IBC

Regulatory impact assessment Completed – For ANSI accreditation

Completed – For building codes

4.1.2 PROPERTY RIGHTS (GANTT CHART LEVEL 42400)

During Year 1, EPI conducted an assessment of Georgia’s IPR environment which found very low levels of awareness and reliance on the IPR system among Georgian businesses and professionals. Based on this assessment EPI developed targeted interventions to raise awareness among businesses and to improve accessibility to IPR registration. EPI supported the development of an electronic register for IPR applications at Sakpatenti, Georgia’s IPR registration body.

During Year 2, EPI conducted a competitive tender to choose local software company UGT to develop an e-filing system for Sakpatenti to streamline the registration process for IPR applications. Software development will be completed by January 2013. According to EPI’s impact assessment of Sakpatenti’s e-filing system, completed in May 2012, the total annual savings for both public and private sector stakeholders will be approximately USD

2.4 million.

EPI also conducted awareness campaigns through business outreach events and media coverage that resulted in increase of IPR registrations. From September 30, 2011 to October 1, 2012, the number of trademark applications submitted to Sakpatenti increased by 28% from 637 (baseline) to 816. EPI also assisted with customs enforcement of IPR through training and implementation of legislation and procedures for IPR enforcement at borders.

OUTPUTS STATUS

Completion of the system’s requirements for the Sakpatenti e-filing system

Completed

Procurement to develop an e-filing software system, including quality assurance of the software development process

In Progress – Anticipated in January 2013

Assessment of the IPR enforcement processes by customs offices of the Revenue Service (RS)

Completed

IPR enforcement reform strategy Completed

Linkage established between the Customs’ IPR registration and the Sakpatenti’s e-filing system

Completed

Increased number of IPR registrations 28% increase over the baseline.

Investors Guide: How to Buy Land in Georgia In Progress – To be finalized in Year 3

Photo 2: EPI and Sakpatenti Celebrate World IP Day on

April 26

EPI | Year 2 Annual Report (October 1, 2011 – September 30, 2012) 9

4.1.3 INVESTMENT SECTOR ECONOMIC GOVERNANCE (GANTT CHART LEVEL 42500)

Despite reforms reflected in Georgia’s high ranking in the World Bank’s 2011 Doing Business Index, the World Economic Forum’s (WEF) Global Competitiveness Index and other international indices suggested an environment of pessimism and uncertainty among investors. Businesses and investors express concerns over property rights protection, investor rights, accounting standards, audit practices, corporate governance, and competition policy, among others. Early in Year 1, EPI conducted assessments of Georgia’s investment sector economic governance to pinpoint areas where the project could yield results.

That assessment identified Georgia’s corporate governance framework, accounting and auditing standards, protection of investors’ rights, and competition policies as priority areas to be addressed by EPI. As a result, EPI formulated a plan to develop a draft investment law.

In close collaboration with the Parliamentary Committee for Economic Policy and Sector Economy and relevant stakeholders, EPI revised the draft law on Investment Activities to conform with international best practices. The draft law incorporated the provisions of existing laws.2

While existing protections and guarantees were largely aligned with international practices, the new draft gave special consideration to (1) strengthening provisions related to dispute settlement to guarantee State commitment to international arbitration, irrespective of individual investment contracts and treaties; (2) providing clear criteria for expropriation and compensation; and (3) creating a more level playing field by extending an explicit guarantee of fair and equitable treatment to foreign investors, as well as Most-Favored Nation (MFN) treatment. The revised draft was submitted to Parliament in June, 2012.

OUTPUTS STATUS

Recommendations to streamline the AAL that envisions simplified reporting standards for SMEs

Completed

New GNIA Charter adopted Postponed – Due to other GoG priorities

Draft Law on Investment passed Postponed – Due to other GoG priorities

4.1.3.1 INVESTMENT MANAGEMENT SERVICES (IMS) (GANTT CHART LEVEL 42530)

Investment promotion has long been a strategic priority for the Georgian government;

however, at project start, EPI found there was no unified approach to proactive targeted investment promotion. Therefore, EPI developed recommendations to support a “Georgian Investment Promotion Partnership” (GIPP) to coordinate the investment promotion activities through a network of key partners, including the Georgian National Investment Agency (GNIA), major municipalities, regional investment promotion agencies, business associations, government ministries and the international donor community.

The underlying theme in EPI’s investment promotion activities has been to proactively promote export-platform FDI in a strategic and systematic manner, with its efforts targeting investors in Turkey across several industrial sectors. To this end, EPI established an Investment Management Services (IMS) team, which includes a core team of investment consultants in Tbilisi and investment promoters in Istanbul, Turkey. IMS has two primary mandates: sustainable capacity building and supporting investment promotion activities.

Law on Promotion of Investment Activities and Guarantees, as well as two related laws, the Law on Georgian National

Investment Agency (GNIA) and the Law on State Support of Investments.

IMS has been moved from CC to BEE and will be reported under BEE going forward.

EPI | Year 2 Annual Report (October 1, 2011 – September 30, 2012) 10

As such, EPI has focused on supporting GNIA as a partner in its investment promotion activities, and has also focused on enhancing the ability of GNIA and other GIPP members to more effectively promote Georgia as a destination for investment. This has included the development of industry-specific investment promotion strategies and five trainings designed to introduce and enable 18 organizations to promote new FDI throughout Georgia’s regions.

Additionally, EPI has mentored these organizations on strategy development, conducting and supporting investor site visits and promotional materials development.

As a key component of EPI’s annual action plan with GNIA, EPI provided support in developing information management tools to assist investors in conducting feasibility studies. To address a lack of available, easily accessible and updated information for investors to consider during the decision process, EPI and GNIA developed the Investor Information System (IIS). The system includes sector and market-specific information, as well as information about the Georgian business environment and links to key GoG agencies and private sector organizations that can address investors’ queries or concerns. IIS includes more than 60 fact sheets covering virtually every aspect of the decision-making process.

In order to remove obstacles in investment climate, EPI conducted an assessment of Poti Free Industrial Zone (FIZ) and the Georgian underlying legal and regulatory framework for special regimes. EPI identified specific opportunities for the GoG to address the weaknesses in the current legal and regulatory environment and made specific recommendations to Poti FIZ on how to increase its occupancy, attract investment and create jobs for the regional workforce.

Since establishing IMS team in late March 2012, EPI has made investment presentations to 135 investors, resulting in site visits for 30 investors this year. Jointly with GNIA, EPI facilitated these site visits in Georgia across agricultural, textile/apparel, paper packaging, and transport and logistics sectors. Additionally, EPI conducted four demand-driven outreach missions to Turkey and two investment forums in Tbilisi, as well as participated in 7 investment conferences and 5 investor events.

OUTPUTS STATUS

Develop and distribute 7 EPI sector brochures Completed –The total number of EPI sector brochures developed in 2012 has been reduced from 7 to 1 (apparel sector) to avoid redundancy with brochures already printed by GNIA, GNTA and MoA.

Provide ongoing investment promotional trainings to 15-20 Georgian Investment Promotion Partnership (GIPP) member organizations (including investment promotion agencies, municipalities, government ministries, business associations and private firms) and 12-16 interns

Completed – EPI has delivered 5 trainings to more than 50 participants from 18 organizations, and IMS team has trained 12 interns.

Implement an internal EPI system to (1) identify potential investors and (2) manage the investment facilitation process for each investor

Completed – The investor pipeline tool has been developed and is updated on a regular basis

IMS consultants also customized this pipeline tool for GNIA and provided it to their entire staff for managing their pipelines.

Develop specific investment promotion strategy for Develop apparel, agriculture, packaging, and transport and logistics sector investment promotion strategies

Completed – Investment promotion strategies were developed for all 4 sectors.

EPI | Year 2 Annual Report (October 1, 2011 – September 30, 2012) 11

OUTPUTS STATUS

Execution of 10-15 investment promotion events in apparel, agricultural, packaging, and transport and logistics sectors

Completed – 5 events completed and additional events anticipated in Year 3

Attend and promote investment opportunities at 5-6 VC-specific shows, fairs and conferences

Completed – 7 events completed

Travel to Turkey for 5 investment outreach missions to meet with potential investors and investor groups

Completed – 4 outreach missions completed

(demand-driven mission)

Support 10-15 investment transactions within the AG and M&S VCs and GNIA

Competed - 10 investment transactions completed, 9 investments have been committed, and 40 are in progress.

Coordinate site visits for 50 investors In Progress – Site visits for 30 investors

Provide 7 pre-feasibility studies to high-probability investors

In Progress – Pre-feasibility study for leveraged leasing facility is completed

Additional studies to be developed, if needed.

Develop an initial GoG investment promotion action plan

Completed

4.1.4 INTERNATIONAL TRADE AND CUSTOMS (GANTT CHART LEVEL 42600)

In addition to addressing specific, cross-value chain customs and trade issues, EPI focused during Year 1 on identification and prioritization of assistance needs in Georgia’s customs administration practice and regulatory environment. This was especially critical on the heels of serious staff reduction reforms of Georgia customs administration, which resulted in the lay-off most of its line customs officials. While seriously reducing perceptions of corruption, this major staff change also gave rise to a need for significant assistance to develop modern customs procedures and practices.

During Year 1, EPI conducted a diagnostic assessment of Georgia’s customs administration and developed a post-clearance audit action plan to support implementation of a risk-based approach to customs. EPI also facilitated a public-private dialog process between the Georgian RS and members of the trade and transport sector, leading to stakeholder-driven improvements of customs procedures. EPI developed an automated Trade Facilitation System (TFS) implementation plan in close cooperation with the Data Exchange Agency

(DEA).

TRADE FACILITATION SYSTEM

In Year 2, EPI focused on developing a TFS, an electronic gateway that facilitates exchange of information among multiple agencies and private sector transport and logistics stakeholders in international trade. The system aims to harmonize the electronic flow of information among public- and private-sector participants in the Georgian logistics, shipping, and transport industries.4

Similar systems are largely experienced worldwide under various brand names. These refer to single window or port-community systems. Some of the most successful ones are: TradNet in Singapore; Rotterdam’s port community system and South Korean customs single window.

EPI | Year 2 Annual Report (October 1, 2011 – September 30, 2012) 12

TFS would enable traders, customs brokers, freight forwarders, shipping lines, and others participating in international trade to submit information through a single entry point. TFS will process and transmit trade-related information electronically to government and private stakeholders in a standardized format. Via TFS, companies can benefit from a multitude of intelligent services for simple and efficient information exchange, both between the public and private sector. This enables all participants to optimize their logistics processes, improving their competitive position. EPI anticipates that the establishment of the TFS would reduce both time and costs per transaction, simplify trade in Georgia and create incentives to further increase trade and cargo flows through Georgia. This in turn will contribute significantly to Georgia’s goal to position itself as a regional logistics hub and trade corridor.

EPI has been supporting the development and implementation of the TFS in collaboration with the DEA, Georgia’s RS, and key private sector representatives in trade. These include shipping lines, seaport operators, terminal operators, customs, freight forwarders and Georgian Railway.

A MoU was signed between all parties in February 2012, and EPI is currently leading the development of a GDA.

EPI has already documented current “as is” business processes for the movement of the containerized cargo and validated the “to be” processes with all the relevant TFS stakeholders.

Based on the validated “to be” processes, EPI developed detailed business requirements to be used for the software development.

Currently DEA, with the assistance of EPI’s system developers, is working with stakeholders over technical issues to enable them to connect to, and design interfaces for, the system.

EPI also conducted two focus groups with some 25 freight forwarders to understand policy constraints and operational issues hampering their business development. EPI communicated the identified issues to the RS. The issues included perceived ambiguity regarding types of goods subject to the postal carriage and related formalities, which EPI communicated to the RS. Also, due to high interest in the TFS, EPI separately delivered a presentation on TFS to focus group participants.

CUSTOMS WAREHOUSE REGULATION

The Parliament of Georgia passed legislation on October 13 that streamlines customs supervision over customs warehouses providing temporary storage of imported goods.

Facilitated by EPI recommendations, the new law provisions allow for simplified technical and security requirements for customs warehouses, creating a favorable logistics environment for traded goods. According to the impact assessment, EPI facilitated more than USD 18.9 million in new foreign investment among logistics and cold storage companies after streamlining regulatory issues for bonded warehouses and produced USD 12 million cost savings. The regulatory reform on bonded warehouses impacted also 9 places improvement of Doing Business Rank of Trade Across Border Category.

CUSTOMS CARGO TIME RELEASE STUDY

EPI subcontractor Policy and Management Consulting Group (PMCG) developed the customs cargo release time measurement methodology based on the World Customs Organization (WCO) guidelines and principles. EPI assisted the RS in preparation for conducting a pilot customs time measurement exercise using the methodology. The pilot

Photo 3: USAID Mission Director Haykin Signs the MoU for Trade Facilitation System

Development

EPI | Year 2 Annual Report (October 1, 2011 – September 30, 2012) 13 exercise will allow identifying problem areas and taking corrective actions to improve border crossing efficiency. This will help Georgia to better meet the needs of effective transport planning, tight production schedules, and inventory management systems that all cross-border trading systems require.

OUTPUTS STATUS

Customs cargo release time measurement institutionalized at the RS

In Progress

Tax code commentary provisions on Customs drafted in coordination with JILEP

Completed

TFS implementation plan adopted by the GoG Completed

TFS-related business processes documented and reengineered

Completed

CTC’s public outreach campaign implemented Completed – EPI helped co-organize a regional Trade Facilitation Conference where specific competitiveness issues of the corridor were discussed. Next steps depend on the interest and ability of the GoG and Georgian transport and logistics (T&L) sector to engage with countries along the corridor to increase its competitiveness.

Study tour on the TFS Completed

4.1.5 TAX SYSTEMS (GANTT CHART LEVEL 42700)

EPI activities addressed two key objectives in tax administration. First, EPI aimed to improve the RS’s tax audit administration to incorporate a risk-based approach that relies on voluntary taxpayer compliance rather than enforced collections from taxpayers. To achieve this, EPI established an effective partnership with the RS and has assisted the RS in the implementation of a risk-based audit system:

• EPI assessed taxpayer audit processes at the RS, developed and submitted recommendations to the RS to implement risk-based audit system and to enhance the automation of existing business processes.

• EPI organized a study tour of RS Tax Audit Department senior officials to the US Internal Revenue Service to observe first hand best practices on advanced risk-based audit processes and techniques. As a result of the study tour, the RS has incorporated into its 2012 Action Plan activities to develop risk-based audit processes, such as effective pre-audit planning and quality assurance controls.

• EPI provided technical assistance to improve the RS’s audit selection methodology by providing trainings to the Revenue Service’s Risk Management Division.

• EPI developed the Tax Audit Methodology Manual, including drafting the content and advocating for its adoption in discussions with private stakeholders and government officials, as well as educating relevant RS tax auditors on the manual’s key principles. The Tax Audit Methodology Manual was adopted on April 2, 2012.

The U.S. Treasury will continue support in implementation of the risk-based audit and capacity building of the tax auditors and technical assistance on quality assurance.

Another area of focus was tax payment system simplification. In Georgia, taxpayers must make tax payments to various specific accounts at the RS and separately apply for the transfer of tax amounts from one account to another. This is a time-consuming process and

EPI | Year 2 Annual Report (October 1, 2011 – September…