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Improving Urban Service Delivery in Georgia December 2008 Urgent need for improving basic municipal services
After the collapse of the former Soviet Union, Georgia set out structural reforms towards a free market economy. However, during the period, Georgia experienced severe economic collapse, political instability, and a weak policy and institutional environment. Capital investments and maintenance in urban infrastructure have been neglected, and as a result, municipal services have deteriorated. Most urban water supply systems are more than four decades old. Most of the water pumps and equipment are now at the end of their usable life. Sewer pipes are broken and systems are clogged. Only five out of the 29 wastewater treatment plants are operating; none of the biological treatment systems is functioning. Poorly managed solid waste disposal sites pollute water bodies and environment. The network of urban roads demands urgent rehabilitation. In the late 1990s, the Government instituted local government reforms, including decentralization of municipal administrative responsibilities and financial accountability. In 1997, the Government established the Municipal Development Fund (MDF) to support the strengthening of institutional and financial capacities of municipal governments by financing local infrastructure investments and capacity-development projects. Despite these efforts, the financial resource mobilization capacity at the local level is still limited. Municipal infrastructure financing depends heavily on national government grants, except for few municipalities, which have loans from MDF. Municipal service delivery remains to be improved. The poor levels of basic municipal services constrain business development, hampers urban development, and adversely affects the quality of life of urban residents. Georgia's first urban sector loan from ADB
On 12 September 2008, ADB approved its first urban sector loan to Georgia. ADB extended the loan to MDF, which in turn will provide funds to local governments to improve the quality, coverage, and reliability of urban services on water supply, sanitation, and solid waste and rehabilitate road infrastructure. Financially weaker municipalities will receive the funds as grants while financially stronger municipalities will receive the funds as a combination of loans and grants. The loan will encourage financially weaker municipalities to participate in the project and help these municipalities borrow in future through technical assistance in order to improve local revenues and financial management. It will likewise help financially stronger municipalities borrow more in future through technical assistance. Futhermore, it will help attract private investment. At present, most state-owned water companies are not financially viable because of low tariffs and poor payment collection levels, hampering private sector participation. Reform initiatives at municipal level and MDF
ADB loan initiates reforms to decentralize delivery of municipal services and transform MDF into a sustainable, commercially oriented financing agency. To support decentralized service delivery, MDF will select, on a pilot basis, at least one municipal government, which will identify, plan, prepare, and implement its set of urban subprojects. This pilot approach will serve as a model to be replicated. The loan will likewise assist MDF to develop into a sustainable financing institution by facilitating organizational and operational improvements within the agency. These include expanding MDF's lending operations; improving resource mobilization; and developing MDF's long-term vision, strategy, business plan, and investment plan. While MDF has evolved from multidonor support, ADB assistance adds value to MDF through improvement and expansion of its lending operations over time; and participation of financially weaker municipalities to improve their local revenues and financial management. Innovative lending modality
The traditional forms of ADB assistance to the urban sector include project loans, sector loans, and sector development program loans. However, none of these lending modalities meets the Government requirement of an infrastructure project financing facility. Thus, ADB adopted a modified financial intermediation loan modality that provides funds to MDF, which is neither a financial institution nor a commercial entity. ADB loan provides supplementary working capital to MDF to ensure its continuing ability to meet the investment requirements of various municipal governments. MDF has had considerable success as a lending and funds-disbursing agency. The primary risk associated with this new approach to ADB lending is that MDF might be unable to evolve into a sustainable financing entity. To mitigate this risk, the loan incorporates both a time-bound action plan and a capacity-development component to provide the assistance necessary for ensuring appropriate development of MDF's long-term vision, corporate strategy, and business model. ADB will closely monitor the mitigation of the risk. |
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