Document Type: Studies

This report present and discuss issues relating to (a) development of agricultural insurance and (b) pension fund assets, in relation to their ability to facilitate access to credit and financing by SMEs and individual entrepreneurs.

A quick market assessment and understand of the agricultural insurance and pension landscapes is Georgia was mainly performed and obtained by gathering of and analyzing information elicited from interviews with insurance company officials, officials of most concerned ministries of the Government of Georgia, some members of the Business Association of Georgia and the director of the Georgian Insurance Association. Information was supplemented by reading materials made available by the EPI project office in respect of recent studies, research and surveys relating to agricultural insurance and agri credit.

In relation to agricultural insurance vis-à-vis agri credit/finance a common barrier to their development expressed by stakeholders is the lack of positive and forward looking governmental support to agriculture. Certain of these barriers and how to address and overcome them are presented and discussed in the body of this report.

In respect of pension fund, the asset accumulation in exiting voluntary pension is so small. There would be a need to look a compulsory pension mechanism that will promote and increase national savings. Some issues and moving forward recommendations are spelled in the main body of this report.

The EPI Transport and Logistics (T&L) Sector analysis of the logistics infrastructure and trade within Georgia and the Caucasus region determined that building logistics and supply chain capability and applying commercial best practices will be vital to improving the overall competiveness of Georgian companies, the Georgian transport and logistics sector, and the Caucasus Transit Corridor (CTC). The Supply Chain Council and its Supply Chain Operations Reference-Model (SCOR) was identified as a potential enabler of improved supply chain competiveness in the Region, and an initial “Pilot” training class was conducted to introduce SCOR, build awareness and solicit feedback, and form the basis for an action plan to develop a SCC Chapter in Georgia. This report outlines the background and approach for training, as well as the findings, recommended actions, and target outcomes for SCC Chapter formation.

The purpose of this report is to present and analyze potential options and structures for an Investment Facility that will be dedicated to financing leasing companies in Georgia and that can attract international financiers to participate. The Facility will serve as a mechanism to provide access to capital for leasing firms in Georgia to facilitate their expansion, with a focus on the use of leveraged leasing, an innovative financing structure that can be attractive to international financiers and that achieves tax efficiencies for leasing companies. In addition to presenting the potential options and structures for the Facility, the report also presents the pros and cons of the various options and the next steps and fact finding that would need to be taken to further advance the initiative.

DISCLAIMER: This report is presented for informational purposes and includes analysis and suggestions based on initial research. The information in the report is presented for the purposes of deciding whether or not to further develop the concepts presented. A full feasibility study and/or due diligence should be conducted by the recipient of the report and any other readers of the report before pursuing or entering into the structures and transactions discussed here or structures and transactions of the like.

BACKGROUND

Leasing can play an important role in facilitating capital investment, as it offers an alternative form of financing that addresses some of the common constraints to expansion. Companies can obtain equipment needed for expansion without straining their balance sheet and with fewer upfront costs. At the same time, it is a form of asset-based lending as opposed to balance sheet lending, serving as an alternative, tax efficient risk structure to build up the availability of capital in a country

Though there are 15 registered leasing companies in Georgia, there are reportedly only three that are operating, and only two with significant market share. The total leasing asset value in Georgia is approximately $30 million (contracted from $40 million in 2010), in comparison with a total asset value of the banking sector in Georgia of approximately $7.6 billion.

The prevalence of lease financing in relation to the amount of investment, the size of the banking sector, and GDP is relatively low in Georgia in comparison to Western countries and other developing countries, suggesting significant room for leasing industry growth in Georgia. Additionally, initial case assessments of the development of leasing on their emerging markets demonstrate that rapid growth in the leasing sector is possible.

Leasing laws in Georgia (policies and tax treatment), with a role by EPI and as reported in EPI’s “Developing Leasing in Georgia” reports, has recently been improved to make leasing businesses more viable and attractive in Georgia.

Several factors indicate that there are opportunities for attracting financing to the leasing sector and thereby expand the use of leasing. These include the relatively undeveloped and small size of the leasing sector in Georgia together with the recent regulatory improvements and several other emerging market case examples. An expanded leasing market will increase availability and benefits of this alternative form of financing to Georgian enterprises.

WHAT IS LEVERAGED LEASING?

Overview: Rather than funding the entire lease transaction for a client, the leasing company only has to contribute a portion (for example, 10-30%) of the total cost of the equipment, whereby a lender finances the remainder. The lease receivables and the equipment behind the leases secure the loan. The loan is a non-recourse loan, which means the leasing company itself is not responsible to pay the loan even in case of default. The loan is tied to and paid from the specific lease or set of leases and lease cash flows that secure the loan only. Since the leasing company finances a portion of the lease itself, the loan achieves collateralization greater than 100%.

Tax Benefit: Leveraged leasing is usually structured so that the leasing company benefits from what becomes an efficient tax structure. Though the leasing company is directly financing only a portion of the lease, the leasing company can still depreciate the full value of the leased equipment, and can deduct the interest payments to the lender from its net income tax base. This tax efficiency makes leasing companies more financially competitive, thus in theory making them able to offer more attractive rates to its lessees. (Note: this tax benefit normally only occurs for operating leases, not financing leases, since it is the lessee who books the depreciation in financing leases. The majority, or 90%, of leases in Georgia are financing leases; however, for taxation purposes under Georgian law, financing leases are treated as operating leases. Thus, leasing companies in Georgia will have significant potential to benefit from the tax efficiency of leveraged leasing.)

PROPOSED LEVERAGED LEASING FACILITY

Overview: A Facility (fund, special purpose vehicle or trust) into which a set of international investors can invest and that are interested in a means for investing into the leasing sector in Georgia. The Facility would then engage in leveraged leasing transactions with leasing companies in Georgia.

NEXT STEPS

The next steps, outlined in detail in Appendix F (Recommended Next Steps), include the following:

• Feasibility Study (estimated 2-4 months)
• Launch of Fundraising/Start-Up (estimated 4-8 months)
• Launching of Operations

Georgia’s strategic location, its Black Sea ports, the petroleum pipelines threading through the country and its railway system connecting the former Soviet Union provide the foundations for Georgia to become an integral player in regional and global trade. The Government of Georgia has long desired to develop this ‘transit corridor’ and take advantage of its geographic location of being a land bridge, making it an integral part of the shortest route between Europe and Asia. Transport-related industries aided the significant growth of Georgia’s transport and logistics industry. Over 20% of all FDI into Georgia in 2009 was directed into transportation-related industries, thereby demonstrating the sector’s potential for expansion and its key links throughout the economy.

The Transport and Logistics Analysis conducted by EPI’s transportation and logistics team uncovered a number of potential opportunities that, if seized, would bring tangible economic impact to Georgia’s economy. The team also uncovered several roadblocks and potential issues that may hinder this growth, unless there is active intervention soon. The research focused on supporting the selected value chains currently being studied in the EPI program as well as how Georgia could develop its potential to become a world class transport corridor for shipments through Central Asia, Black Sea, Europe, the Middle East and beyond.

ACTION PLAN

Georgia’s logistics and transportation sector is poised for growth in the coming years. With the right strategy and resources, this growth can be expeditious and significant. Improvements in the competitiveness of some of the agriculture and non-agricultural value chains targeted by EPI will require a robust transportation and logistics sector. This is required in order to improve access to critical supply chains, raw materials and improved access to regional and global markets. The Action Plan laid out in this report is designed to be a catalyst for growth for these value chains and for the transport and logistics sector as a whole. The logistics industry also has the potential to create significant employment if Georgia develops competitive regional transportation niches and takes advantage of the complementary and ancillary business.

This Action Plan was designed under the premise that Georgia also has the potential to become the most important trade outlet for the landlocked countries of the Caucasus and Central Asia. Georgia’s liberalized economy and corruption-free transit offers a smooth state-of-the-art logistics and transportation corridor to and from the Black Sea for all of these countries. This corridor will also be an alternative to other, often more difficult transit routes, mainly those through Russia, China and Iran.

The Action Plan is focused around two complementary perspectives:

1. The Pan Caucasus-Central Asian perspective is focused on developing Georgia as a globally significant transport corridor, and
2. Linking Logistics and Transportation into the Georgian Value Chains, which is a more localized perspective, focused on how logistics and transportation will support the Georgian Value Chains and the initiatives planned by EPI.

The Transport and Logistics Action Plan implementation supports these two strategic perspectives. The implementation builds the roadmap to address policy and regulatory improvements, infrastructure development, workforce enhancement, logistics standards establishment and improvements, market access, partnerships and logistics product and services development. An additional theme that applies to all of the supply chain actors is transportation and logistics technology awareness, establishment of supply chain visibility tools and market communications.

Finally, this Action Plan is designed to be largely market driven. It can only be implemented if there is sufficient market demand for the emergent freight transport requirements in the region while supporting Georgia’s domestic value chains. Many of these value chains are poised to expand internationally.

The Action Plan is a multi-year vision for the implementation of a Caucasus Transport Corridor (CTC) and logistical support for the development of critical domestic value chains. Each component of the plan in this document includes a description with:

• A detailed description of each component,
• The objective of each component, and
• The roadmap action required to deliver the component

There are immediate Action Plan components that must begin upon approval of the Action Plan. These activities will serve as the foundation on which to build lasting momentum for growth. Also included is a discussion of the longer term Action Plan components, which will leverage initial results and will support the fulfillment of the vision.

The present report focuses on issues around fostering economic independence of youth within the framework of EPI. The report objectives are to respond to two main research questions: (1) To determine, through mapping, what are the capacities of the Georgian nongovernmental organizations to foster youth economic independence and integration of youth in EPI’s agricultural and nonagricultural value chains; and (2) To develop recommendations for fostering economic independence of youth and their integration in EPI’s sectors.

To achieve its goals, the report draws on the mapping of Georgian nongovernmental organizations focusing on youth economic integration components as part of their work. Another set of research data is derived from consultations with youth, NGOs, private-sector representatives from EPI-relevant value chains, and other stakeholders. The report also draws upon national and international research and data on youth economic integration, economic activity, employment, and education in Georgia, as well as international best practices regarding youth economic empowerment programming.

Based on the assessment data, Focus Group Discussions (FGDs) with youth, interviews with national and international youth-centered agencies, as well as private-sector representatives, several important clusters of issues were identified in relation to the economic opportunities of youth:

• Employment and employability
• Education
• Guidance and mentoring
• Access to finance
• Crosscutting issues: Youth participation, gender, and ethnic origin

Lack of jobs, as well as the inability for youth to determine their career interests at an early age have been identified as acute problems relevant to youth employment. Youth are inactive, often discouraged and demotivated to search for work. Lack of internships or other professional training opportunities was pointed out as a major problem.

Issues around education concerned both the low quality of professional education, as well as geographical and financial access to professional education centers. Another important problem was the low profile of these institutions in the society and lack of trust in the quality of education provided in the centers.

The need for more nonformal education activities was identified by all parties: trainings in life-skills and employability skills, languages, entrepreneurship, and basic business skills were identified as very important and often unavailable or inaccessible to youth living in the regions.

The lack of professional guidance and mentoring was identified as a problem that contributes to low motivation levels of youth and a reluctance to get involved in economic activities.

Inaccessibility of finance was another problem acute for youth. Start-up loans and family funding are often not available for young entrepreneurs.

In addition, youth appears to be less included in decision making in matters concerning their lives, young women tend to experience more difficulties on their way to economic independence and ethnic minority youth have problems with integration and access to services due to the lack of national language skills and their minority status.

Most of these findings were also supported by backgrounds research conducted to explore economic activity, employment, and education aspects of the economic integration issue of Georgian youth.

After a careful review of youth issues and international best practices in youth livelihoods and workforce development programming, several clusters of recommendations have been identified, grouped under four clusters of competencies and assets that successful economic development programs need to transfer to youth:

1. Human capital
2. Social capital
3. Financial capital
4. Physical assets

An additional cluster of recommendations on cross-cutting issues has also been identified.

A human capital cluster included recommendations on formal and nonformal education and employability skills training needs, the creation of training and employment opportunities, as well as career and guidance services for youth. The financial capital section, based on international best practice, identified several approaches that can be used to support youth access to funds. Social capital cluster covers issues concerning the need to establish mentorship and guidance schemes, as well as peer-coaching schemes whenever possible. Physical capital cluster covered some of the challenges and opportunities related to the programs equipping youth with work tools or other physical goods after completion of the training programs.

In the light of identified needs and proposed recommendations, in its last part, the report provides an analysis of NGO capacity to meet the needs and contribute to EPI youth integration programming. In addition to describing assets and needs of Georgian youth-serving NGOs, the report provides an individual analysis of each NGO according to its activities, capacity building programs, and track record of successful work with other development collaborators in order to identify their role in EPI youth integration strategy.

The following report serve as customs reform strategy for the Georgian Revenue Service (RS), laying down recommendations according to priorities and the possible outcomes of each recommendation. The roles and responsibilities of RS and donor organizations are defined regarding to each recommended action. EPI will plan its activities in the area of customs according to the recommendations provided in this report.

This report addresses the need for the RS to create an enabling environment necessary to allow reforms to be undertaken and remain sustainable.

Some of the actions required for such an environment include:

• A strategic planning process including the establishment of key performance indicators to ensure management accountability;
• A change management process including a project control office to coordinate technical assistance inputs from all donors and to implement mechanisms for stakeholder consultation and participation in reforms.
• Human institutional capacity development (HICD) to correct fundamental weaknesses in human resource management and development. An HICD project would:
  • Develop a new organizational structure serving the strategic needs and objectives of Georgian Customs consistent with international best practices;
  • Draft clear job descriptions for all positions;
  • Undertake a pay survey and ensure staff receive adequate remuneration;
  • Ensure incentive/bonus schemes that actually motivate staff;
  • Implement a staff performance appraisal/measurement scheme with links to staff promotion, rotation and career path;
  • Ensure merit-based staff recruitment promotion; and,
  • Develop a comprehensive training strategy for both staff and stakeholders.
• An anti-corruption strategy for both RS staff and stakeholders.

The report proposes detailed strategies for undertaking the following two major reform programs outlined below.

NATIONAL TRADE FACILITATION PROGRAM

It is recommended that the USAID Economic Prosperity Initiative (EPI) support hosting a regional WTO Trade Facilitation Seminar in Georgia. The outcomes of this seminar would be a national trade facilitation agenda and national implementing committee. This report provides a comprehensive list of trade facilitation measures, which would further enhance Georgia‟s existing initiatives.

CUSTOMS REFORM AND MODERNIZATION PROGRAM

It is also recommended that technical assistance be provided to the following priority areas:

• Documenting and benchmarking customs legislation, regulations and procedures against and acceding to the Revised Kyoto Convention
• Preparing Standard Operating Procedures (SOP) manuals for staff and stakeholders
• Strengthening post-clearance audit
• Strengthening customs valuation and dispute resolution mechanisms
• Introducing an authorized economic operator (AEO) regime to strengthen supply chain security and export value chains
• Strengthening risk management
• Supporting decision making related to remaining with ASYCUDA or implementing another commercially available customs software suite which supports a single window platform
• Strengthening customs enforcement and investigations capabilities
• Improving the functionality of customs infrastructure

Various matrices describe and justify each proposed area of reform, as well as the specific
deliverables and the estimated type, duration and timing of technical assistance.

The crucial role of Small and medium-sized enterprises’ (SMEs’) development in the economy is well described in number of publications, books, articles, papers etc. SMEs play a vital role in the economic growth of developing countries, typically accounting for over 90% of business establishments and about half or more of output and export shares. However, in Georgia only 40% of Labor Force is working in SMEs. Despite the importance of SME development majority of companies are facing significant constraints for their development: internal and external. SMEs in Georgia are facing similar problems to those that are companies in other countries: lack of managerial resources, inability to hire experienced or professional staff, low marketing resources as well as high barriers to access to capital: high interest rates, collateral requirements, reluctance of Banks to work with SMEs especially in agricultural industries.

SMEs in Georgia are still at the beginning stages of development. Global statistics show that SMEs account for up to 90% of jobs in a given country; however, in Georgia, SMEs made up only 42.4% of jobs created in 2009. Currently, SMEs face problems common to those in other developing countries (including Eastern Europe): undercapitalization, high barriers to financing, poor corporate governance practices, high interest rates and excessive collateral requirements from financial institutions. Although there are many real, significant barriers that prevent SMEs from accessing financing, some exist due to
erroneous preconceptions held by SME owners/managers.

Based on the survey responses, there are several conclusions about the barriers to SMEs ability to access financing through the Georgian commercial banking and nonbanking financial institutions. The perception-related issues that are barriers for SME borrowers can be summarized as follows:

For larger SMEs that already have previously established relationships with commercial banks in Georgia, the variety of banking products and level of service are more or less satisfactory. However, even representatives of these companies noted that the main barriers to financing are the currently high interest rates and the perception that commercial bank are risk adverse.

SMEs believe that commercial banks make decisions based on collateral requirements (where the average required collateral ratio equals 1.3 times liquidation value to a loan amount) rather than a cash flow analysis. Because of this collateral issue, many SMEs do not qualify for credit at commercial banks.

Another issue that is challenging for SMEs is the transparency of banks’ commissions, as a loan’s effective interest rate is unknown until the final stage of the process, when a borrower signs the loan agreement.

Due to real and perceived bank requirements, many SMEs are limited to personal loans, self-financing or MFI loans or simply opt out of taking a bank loan.

Below is a summary of the SMEs perception of banking and non-banking lending requirements:

• High interest rates for banking loans.
• High collateral requirements.
• Difficult bureaucracy and lengthy procedures for new customers.
• Lack of information (in Georgian) on getting financing, business development and relevant legislation, such as the Tax Code of Georgia.
• Banks have limited experience in financing projects/loans for agriculture.
• Availability of information on non-banking financial institutions (i.e. leasing) is limited.

This Report presents the findings from the research conducted by the USAID/Kosovo Property Rights Program (PRP) in four pilot courts (Courts of Merit – CoM) in Kosovo. That research has been directed at identifying case flow and case management bottlenecks arising in the adjudication of property cases, with the ultimate aim of designing and introducing improvements to courts’ internal processes and to procedural law in order to enable courts to adjudicate property claims more efficiently.

PRP designed and applied a methodology of Differentiated Case Management (DCM) to develop substantive and procedural data elements with which to disaggregate and analyze court procedures to process and resolve property cases, in order to formulate recommendations to improve efficiency and court performance. PRP applied this analysis to a total of 1,829 property rights cases that were disposed within a 30-month period (2013-2015).

PRP has found that on average these cases were disposed over a considerable length of time that far exceeds international standards. PRP has also found that the courts are not using comprehensive case management techniques for managing their caseflow.

Based on these findings, PRP has identified the Next Steps to be undertaken – to introduce basic case management techniques and methods within the CoM, which will then make it possible to apply a more refined DCM analysis to the courts’ caseflow and to develop further specific recommendations for improving the efficiency of the CoM in adjudicating property cases.

One of the most influential factors that would stimulate Georgia’s economic growth would be for Georgian companies to have increased access to credit. Currently, the Georgian financial sector offers companies a similar array of standardized credit facilities to finance companies in three main areas: working capital, fixed assets and real estate.

While the currently available credit instruments represent a large percentage of corporate financing activities, additional financial instruments are necessary to stimulate rapid industrial growth, including purchase order financing (POF), factoring and a warehouse receipt program (WRP).

EPI has identified the development of Georgia’s small and medium enterprise (SME) business sector as one of its main priorities and is in the process of developing several initiatives to stimulate further growth in this sector. Specifically, one of EPI’s goals is to eliminate barriers that SME’s currently face in accessing credit facilities for working capital and business expansion initiatives.

This consultancy will identify the positions of Georgia’s major commercial FI’s and their willingness and capacity to introduce these new products. By identifying these variables, EPI can best assess how to direct its resources and personnel in developing new programs to increase Georgian companies’ access to credit facilities and, therefore, to stimulate economic growth.

Georgia has a wide range of microclimates suitable for the cultivation of high-value agricultural products, such as hazelnuts, that have ready markets in numerous export markets. As Georgia is the 6th largest producer of in-shell hazelnuts globally, the 5th largest exporter of in-shell hazelnuts and the 3rd largest exporter of shelled hazelnuts, EPI can work with hazelnut producers and processors to leverage these market opportunities. By introducing a strategy that includes productivity increases, product quality improvements, food safety assurances and marketing activities, EPI can establish a model of highly productive hazelnut production and processing that satisfies the food safety requirements of high-value export markets. By doing so, EPI will directly contribute to industry growth, increased farm revenues, higher export sales and values and new job creation.