livable cities investment project for balanced development

Livable Cities Investment Project for Balanced Development: Detailed Economic AnalysisLivable Cities Investment Project for Balanced Development RRP GEO 53118
Detailed Economic Analysis
Georgia: Livable Cities Investment Project for
Balanced Development This detailed economic analysis is a document of the borrower. The views expressed herein do not necessarily represent those of ADB's Board of Directors, Management, or staff, and may be preliminary in nature. Your attention is directed to the “terms of use” section on ADB’s website. In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.
E. DEMAND ANALYSIS .......................................................................................................... 9
F. BENEFIT-COST ANALYSIS ............................................................................................. 11
A. INTRODUCTION
1. The economic analysis completes least cost and benefit cost analyses on proposed Outputs. Analyses have been conducted in accordance with Asian Development Bank’s (ADB) Guidelines for the Economic Analysis of Projects, the technical note on pro-poor tourism for sustainable growth and the approach of other ADB-financed tourism and cultural heritage projects. 12
2. The Livable Cities Investment Project for Balanced Development (LCIP) for a total loan amount of $120 million is proposed as a single sector loan project. The proposed loan included three outputs: (i) inclusive and climate-resilient urban infrastructure and services rehabilitated and constructed; (ii) accessibility, connectivity and economic competitiveness of regional tourism clusters improved; and (iii) institutional framework and capacity for sustainability enhanced. The ensuing loan for LCIP will contribute to improved urban infrastructure and services in selected areas of Georgia.
3. The project is structured as a sector loan, as such the full details of all the subprojects has yet to be finalised. The sector loan focusses on enhanced urban liveability and tourism through a series of integrated investments in the urban sector, including urban realm improvements, restoration and conservation of cultural and heritage assets, and provision of urban amenities. As per ADB Guidelines, the economic analysis focuses on a set of representative subprojects in tourism (Mestia and Gurjaani), early years education (Kutaisi), sports/leisure (Kutaisi and Zugdidi) and urban green space (Tbilisi).3
B. MACRO-ECONOMIC CONTEXT
4. Georgia is strategically located at the crossroads of Europe and Asia, rich in natural resources and cultural heritage. Despite these comparative advantages, substantial infrastructure, urban services, and capacity gaps remain to unlock its economic growth potential especially for secondary cities and towns in the regions. Although Georgia is an upper middle- income country, living standards are poor and access to economic opportunity is not distributed evenly—20.1% of the population lives below the poverty line, and access to essential services varies across the country.4 Economic growth has been unevenly distributed between Tbilisi, the capital city and other urban areas across the regions. It has a population of 3.7 million people, with about 59% living in urban areas. Over 30% of the total population lives in the capital, Tbilisi, which contributed 52% of gross domestic product (GDP) in 2019. Total population of Georgia has also been steadily declining from 4.12 million in 2000 to 3.72 million in 2020.5 Tbilisi experienced an increase in its 1.18 million population by 8.48% from 2010 to 2020 while the Kakheti and Samegrelo-Zemo Svaneti regions experienced a decline in their population during the same period from 369,800 to 310,000 and 413,200 to 311,100 respectively. The reverse trend in regional cities highlights issues such as out-migration, limited job opportunities, low social benefits and poor quality of life.6 Growing disparities between urban and rural areas challenge inclusive
1 ADB. 2017. Guidelines for the Economic Analysis of Projects. Manila; and, ADB. 2007, ERD Technical note no. 20.
Tourism for Pro-Poor and Sustainable Growth: Economic Analysis of Tourism Projects. 2 ADB. 2018. Second Greater Mekong Subregion Tourism Infrastructure for Inclusive Growth Project. Economic
Analysis. Manila. 3 ADB. 2017. Guidelines for the Economic Analysis of Projects. Manila, page 10, para. 30-31. 4 ADB. 2020. Statistical Database. Poverty Data: Georgia (accessed 6 July 2020). Manila. 5 National Statistics Office of Georgia. 2020. https://www.geostat.ge (accessed on 28 May 2020 and 26 June 2020). 6 State Commission on Migration Issues, 2015, 2015 Migration Profile of Georgia. Tbilisi Georgia.
economic growth nationwide.7
5. The government has implemented progressive structural reforms to support international economic integration, and enjoyed 4% average annual growth during 2015–2019.8 The country’s service industry represents over 65% of GDP and employs half of the Georgian workforce.9 COVID-19 and the associated slowdown in tourism and domestic demand are having severe impacts on the Georgian economy. The fiscal deficit widened as COVID-19 relief and mitigation spending placed pressure on the state budget. Projections indicate that GDP growth will drop to -5%, and GDP per capita growth is expected to be -0.2% by end of 2020.10 The International Monetary Fund (IMF) assessed Georgia’s public debt sustainability to be stable over the medium term.11 Timely budget support is critical for Georgia to provide urgent fiscal relief and manage COVID-19. Budget support is also required to assist the government advance structural reforms, particularly against fiscal risks arising from state-owned enterprises (SOEs), to reduce macroeconomic vulnerability, and enable more sustainable growth. ADB is supporting Georgia through a comprehensive package of support to Georgia designed to contain COVID-19 impact.
6. Untapped economic potential. Tourism is a fast-growing industry and a key driver for Georgia’s economic growth, accounting for 26.3% of the GDP in 2019.12 Tourism is an important source of employment, contributing to 27.7% of total employment in 2019 in Georgia, the highest in Central and West Asia region. International visitors increased by 345% between 2010 and 2019 and totaled about 7.7 million in 2019, generating $3.2 billion in receipts.13 The majority of trips (76.3% or 5.5 million), were from neighboring countries, while only 23.7% (1.7 million) were from other countries. Despite high visitor numbers, associated tourism revenues lag behind. The low visitor spending is a result of a shortage of high-quality tourism experiences and the skills deficiencies to manage and market the tourism assets (footnote 16). The Georgia National Tourism Strategy 2025 aims to create unique, high-quality visitor experiences based on the country’s inherent natural and cultural assets.14 Despite the promising prospect, basic urban services and associated tourism infrastructure in the regions have become outdated and are partially functioning. Integrated investments in urban services and tourism infrastructure will urgently help improve the livability for the citizens, meet the increasing demand for quality tourism, and unlock the economic potentials. Increased employment and improved urban services could help slow down migration to Tbilisi.
C. SECTOR CONTEXT
7. As noted above the project contributes to a number of sectors through the development of subprojects in the tourism, education, sports, leisure and health, and urban sectors.
8. Tourism contributed 7.6% to Georgia’s GDP or GEL 2.7 billion in 2018 an increase of
7 Georgia ranked 70 out of 189 countries and territories on the human development index, and ranked 75 on the Gini
index in 2019. 8 National Statistics Office of Georgia. GeoStat (accessed 30 May 2020). Georgia signed an Association Agreement
with the European Union in 2014, and implemented anticorruption strategies as well as public administration and tax reforms, liberalized trade policies, and streamlined business regulations.
9 ADB. Data Library (accessed 28 April 2020). 10 ADB. 2020. Asian Development Outlook. Manila. 11 IMF. 2020. IMF Country Report No. 20/149. Washington, DC. IMF projected considerably lower GDP growth of -
4.0% for Georgia. 12 World Travel and Tourism Council, 2020. Travel and Tourism. Economic Impact Georgia. Accessed 25 Jun 2020;
ADB. 2020. Sustainable Tourism Development in the Central Asia Regional Economic Cooperation Region, TA Consultant: CAREC Tourism Skills Report
13 Georgian National Tourism Administration. Economic Indicators. accessed on 25 Jun 2020. 14 Georgian National Tourism Administration. 2015. Georgia Tourism Strategy, 2015–2025. Tbilisi.
21.5% on the previous year. Tourism growth has been consistently rapid over the last 5 years with an average growth rate of 13.3%.15 Figures from the World Travel and Tourism Council which takes into account the direct, indirect and induced impacts of tourism and travel, suggest that the contribution of the sector to GDP in 2019 was 26.3%, and accounted for approximately 488,000 jobs or 27.7% of employment.16 International visitor arrivals grew by an average of 9% per year between 2014 and 2019 from 5 million to 7.7 million. Over the same period international tourism receipts grew to GEL 9.7 billion, 39% of total exports.17 The majority of international tourists visiting Georgia are from Azerbaijan (20%), Armenia (18%), Russian Federation (19%), Turkey (15%) and Iran (1.6%), although European, Middle Eastern and East Asian markets are of growing significance.
9. Georgia’s Tourism Development Strategy envisages that by 2025 Georgia will become well-known as a premier, year-round, high-quality tourism destination – centered on its unique cultural and natural heritage, world-class customer service, and timeless tradition of hospitality. The strategy targets an increase in annual tourism revenues to USD 5.5 billion and tourist arrivals to 11 million by 2025. This will be managed by a diversification of tourism markets from the current concentration on neighbouring countries to encourage greater tourism from high income markets, particularly in Western Europe. The aim is to see tourists increase their time spent in Georgia from an average of 4.3 days to 5.3 days. Georgia also will work to increase Foreign Direct Investments (FDIs) flowing into the tourism sector by 63 percent – a growth from today’s $559 million to $910 million per year.18 The strategy aims to do this through developing tourism infrastructure, improving the quality of service, increasing awareness about Georgia, implementing marketing activities on domestic and international markets and developing tourist products.
10. Education - enrolments in preschools in Georgia have increased significantly from 42% to 66% between 2012 and 2013 in response to the abolition of parental contributions to public school fees.19 The most recent figures put total enrolment in Georgia of young children ages 25 years in preschool at 69.5 %, while it is higher (80%) for 56yearold children this still falls well short of the EU target of 95%.20 There are also significantly lower enrolment rates for children with special needs, ethnic minorities, the socially vulnerable and those living in rural areas. Increased demand for formal childcare, caused in part by the abolition of fees in public early and preschool institutions, has resulted in excessive number of children in a limited physical space, with challenges to the infrastructure capacity of public kindergartens. The demand has also made waiting lists prevalent in childcare centers.21 Public sector provision has expanded as a result of the abolition of fees and now accounts for 86% of preschool institutions in Georgia. The preschool subsector is under local governance with wide variation across municipalities in terms of cost per child, teacher salaries and qualifications. Based on the latest Public Expenditure Review (2014), the education expenditure on preschools was GEL 97 million. Since then, fiscal share has increased slowly while the access to preschool education continues to lag the EU and remains
15 GNTA, 2019, Georgian Tourism in Figures 2018. 16 World Travel and Tourism Council. 2020. Georgia 2020 Annual Research Key Highlights. Note, these estimates
include both direct and indirect economic activity related to tourism and are based upon WTTC’s economic model. 17 Ibid. 18 GNTA, 2015, Tourism Development Strategy 2025. 19 World Bank. 2019. Project Appraisal Document on a Proposed Loan in the Amount of US$102.7 million to Georgia
for a Georgia I2Q Project. 20 Ibid. 21 World Bank. 2019. Why should we care about care? Supply and Demand Assessment of Care Services in Georgia:
A Mixed Methods Study. Washington D.C.
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highly inequitable.22
11. Community sports facilities in Georgia mostly date from the soviet period and are in poor condition. Either facilities are no longer in use, do not meet modern health and safety requirements or do not have sufficient capacity to meet demand. Of the 550 sports facilities in the country it is estimated that 40% require renovation.23 There is a need to reconstruct, upgrade and build new facilities in order to meet community needs.24 Sports facilities have been identified as an important element of local infrastructure and are highlighted as key facilities in regional development plans.25 Government spending on community sports increased from GEL 48 million to GEL 128 million, or around 16% a year between 2012 and 2019.26 However, only around 5% of this was allocated to community sports. Funding for municipal sports facilities is even more limited and municipalities are constrained in their ability to invest in sports infrastructure.
12. Sports, leisure and health - community sports facilities provide significant economic, health and social benefits. In particular, there growing evidence of the public health imperative for the provision of community sports facilities. Regular physical activity is a well-established protective factor for the prevention and treatment of leading noncommunicable diseases (NCD), namely heart disease, stroke, diabetes and breast and colon cancer. It also contributes to the prevention of other important NCD risk factors such as hypertension, overweight and obesity, and is associated with improved mental health, delay in the onset of dementia and improved quality of life and well-being. Increased provision of sports facilities is a critical element in addressing these public health concerns.27
13. Georgia has a high NCD burden.28 Recent evidence indicates increased incidence of noncommunicable health conditions such as cardiovascular disease, hypertension and cancer.29,30 Between 2010 and 2016 the share of the population who are overweight increased from 56.4% to 64.6% and who are obese increased from 25.1% to 33.2%.31 In 2017, healthcare costs for NDC amounted to GEL 590 million, 54% of total healthcare expenditures.32 This is in the context of rapidly increasing public healthcare costs. 33 Estimates based upon 2013 data suggest that healthcare costs and productivity losses attributable to a lack of physical activity and the
22 Ibid. 23 Ministry of Culture and Sport, http://sport.gov.ge/?pg=objects. 24 Government of Georgia, 2014 Sport National Policy Document 2014-2020. 25 Ministry of Regional Development and Infrastructure of Georgia, 2017, Regional Development Programme of
Georgia 2018-2021. 26 Committee of Sports and Youth Affairs of the Parliament of Georgia; Committee of Education, Science and Culture
of the Parliament of Georgia; Committee of Health Care and Social Issues of the Parliament of Georgia; Parliamentary Budget Office of Georgia; and, Research Department of the Parliament of Georgia, 2019, Regulatory Impact Assessment of the Draft Law on Physical Education and Sports Final Report.
27 WHO, 2018, Physical Activity for Health. More active people for a healthier world: draft global action plan on physical activity 2018-2030. WHO Discussion Paper (9 April 2018). KPMG and Australian Government, 2018, The Value of Community Sports Infrastructure. Investigating the value of community sports infrastructure in Australia.
28 According to WHO figures the morality rate due to NCD is significantly higher than European and neighbouring countries. WHO, 2016, Global health observatory visualizations, Total NCD Mortality Data by country.
29 Government of Georgia, 2014 Sport National Policy Document 2014-2020. 30 Steven Russell, Lela Sturua, Chaoyang Li, Juliette Morgan, Marina Topuridze, Curtis Blanton, Liesl Hagan and
Stephanie J. Salyer, 2019, The burden of non-communicable diseases and their related risk factors in the country of Georgia, 2015. BMC Public Health 2019, 19 (Suppl 3):479
31 WHO, 2010, Georgia STEPS survey 2010. Fact Sheet; WHO, 2016, Georgia STEPS survey 2016. Fact Sheet. Retrieved from https://www.who.int/ncds/surveillance/steps/georgia/en/.
32 Committee of Sports and Youth Affairs of the Parliament of Georgia; Committee of Education, Science and Culture of the Parliament of Georgia; Committee of Health Care and Social Issues of the Parliament of Georgia; Parliamentary Budget Office of Georgia; and, Research Department of the Parliament of Georgia, 2019, Regulatory Impact Assessment of the Draft Law on Physical Education and Sports Final Report.
33 State spending on healthcare increased at 19.4% per year between 2012 and 2017.
consequent higher incidence of NCD cost Georgia US$ 20.25 million (international dollars) per year.34 WHO monitoring data on NCDs shows that the number of people not engaging in vigorous physical activity has increased from 78.6% in 2010 to 82.4% in 2016.35 Increases in NDCs in Georgia have, amongst other things, been related to change in diet and physical activity. Falling levels of public participation in sports, particularly amongst younger people, who are increasingly involved in sedentary activities is deemed to present a growing and long-term issue for public health. 36
14. Urban green space - Tbilisi is the capital and the largest city of Georgia, lying on the banks of the Kura River with a population of approximately 1.2 million people in 2020. Tbilisi dominates the urban system in Georgia, accounting for 32% of the total population and 52% of the urban population in 2020. While population growth is relatively slow at around 1% per year between 2010 and 2020, this represents a significant increase relative to the previous decade and stands in contrast to stagnant national population growth (-0.2%) over the same period.37 The city accounted for approximately 51% of national GDP in 2019 and 70% of national FDI (US$ 912 million).38 In recent years the city has seen rapid real GDP growth of approximately 4.1% per year between 2010 and 2019.39 As such, Tbilisi is the economic the capital possesses a very high share of the economic, social and cultural capital.
15. Tbilisi has a GDP per capita approximately 2.4 times higher than the rest of the country of Georgian Lari (GEL)19,915 in 2018,.40 At the same time, Tbilisi continues to suffer from high unemployment (16.3% in 2019)41 and poverty (18.6% in 2014)42 rates. Tbilisi’s environmental quality has also deteriorated in recent years, with declines in ambient air quality and the availability of urban green space. Growing use of private transport and private appropriation and reduction of open public spaces have been key drivers of these changes.43 The deterioration in ambient air quality is a result of greater generation of dust, carbon monoxide, oxides of nitrogen and sulphur, with maximum allowable concentrations exceeding WHO standards. This is largely explained by growth in motorised transportation, which is concentrated in Tbilisi.44
16. Population and economic growth in the city have put increased pressure on land use and urban green space (UGS) in particular, with newly built infrastructure and residential and office buildings often encroaching on public green spaces.45 Recent GIS-based analysis has shown that built-up areas in Tbilisi increased by 13.9% between 1987 and 2016, the area of UGS declined
34 Ibid. 35 WHO, 2010, Georgia STEPS survey 2010. Fact Sheet; WHO, 2016, Georgia STEPS survey 2016. Fact Sheet.
Retrieved from https://www.who.int/ncds/surveillance/steps/georgia/en/. 36 Ministry of Health, Labour and Social Affairs National center for Disease Control and Public health, 2016, National
Strategy and Action Plan for Non-Communicable Diseases Prevention and Control 2017-2020. 37 National Statistical Office of Georgia (GEOSTAT) website, retrieved from https://www.geostat.ge/en. 38 Ibid. 39 Ibid. 40 2018 prices. Staske, S., Mzhavanadze, G. and Giucci, R., 2020, Income distribution and poverty reduction in Georgia.
A comparative analysis. Policy Briefing 4/2020. Berlin Economics. 41 National Statistical Office of Georgia (GEOSTAT) website, retrieved from https://www.geostat.ge/en. 42 World Bank, 2016, Georgia: Recent Trends and Drivers of Poverty Reduction (FY16 Georgia Poverty Assessment)
Poverty and Equity Global Practice. Retrieved from http://pubdocs.worldbank.org/en/980951472223098077/Georgia-PPA-FY16-presentation-AUG2016-final.pdf.
43 J. Salukvadze, 2018, Urbanization Trends and Development of Cities in Georgia Cities of the South Caucasus: a view from Georgia
44 World Bank, 2015, Georgia Country Environmental Analysis Institutional, Economic, and Poverty Aspects of Georgia’s Road to Environmental Sustainability.
45 Tbilisi City Municipality and EBRD, 2017, Tbilisi Green City Action Plan 2017 - 2030
by 10.64%.46 While the last official green spaces inventory was carried almost 30 years ago, Tbilisi City Municipality reports that levels of UGS have reduced to 5.6 m2 of green space per capita against an accepted minimum benchmark of 10 m2 per capita.47 This compares to EU standards of 25 m2 per capita.48 These factors are compounded by the increasingly visible impacts of climate change, with average urban temperatures in Tbilisi increasing by 0.7°C over the past century.49
17. The value of UGS is increasingly recognised as an important factor in improving the quality of urban settings, enhancing local resilience and promoting sustainable lifestyles, improving both the health and the well-being of urban residents. Public UGS can help to ensure that urban residents have adequate opportunities for exposure to nature; urban biodiversity is maintained and protected; environmental hazards such as air pollution or noise are reduced; the impacts of extreme weather events (heatwaves, extreme rainfall or flooding) are mitigated; the quality of urban living is enhanced; and, the health and well-being of residents is improved.50 It is desirable to ensure UGS are easily accessible for all population groups and distributed equitably within Tbilisi.51 The importance of UGS is recognised by Tbilisi City Municipality, which identified the improvement of green spaces, including the remediation of brownfield sites, as an established priority in its Green City Action Plan 2017 – 2030.52
D. SUB-PROJECT DESCRIPTION AND RATIONALE
18. Tourism. Two tourism focussed sub-projects were identified for economic analysis, i) in Gurjaani municipality, the urban upgrade of the center of the important historical settlement of Velistsikhe; ii) in Mestia municipality the urban upgrade of Laghami district and the restoration and conservation of medieval ‘Svan’ towers in the UNESCO World Heritage site of Ushguli;
19. Velistikhe village is one of the oldest villages in Georgia and an important historical settlement. It is located in the Alesani river, in Gurjaani municipality in the Kakheti region, approximately 170 Km east of Tbilisi, and close to the popular primary tourist destinations of Telavi and Signaghi. The area is an increasingly popular tourism destination, it is a centre for wine and viticulture, houses a number of important historical sites (such as the Church of the Mother of God dating from the 5th century, and the Castle-Hall complex dating from the 9th century), as well as offering access to mountainous scenery and a number of national parks. 53
20. The project is composed of investments for the rehabilitation of the central street of the village of Velistsikhe. Currently, the center of the village is dilapidated underused and in need of restoration. The project includes the rehabilitation of 400 meters of the main street in the centre of the settlement, the reconstruction and conservation of the facades on 55 buildings in the street, and renovation of the theatre, the theatre square and the park area in the centre of the village. The consideration of different approaches to the rebuilding and renovation of these structures was constrained by the requirement to use building techniques and materials consistent with the
46 “Built-up” areas are identified using remote sensing data of change in land cover. L. Gadrani, L., Lominadze,G., and
Tsitsagi,M., 2018, Assessment of landuse/landcover (LULC) change of Tbilisi and surrounding area using remote sensing (RS) and GIS. Annals of Agrarian Science 16 (2018) 163–169.
47 Tbilisi City Municipality and EBRD. 2017. Tbilisi Green City Action Plan 2017 – 2030. Tbilisi Georgia. 48 L. Gadrani, L., Lominadze,G., and Tsitsagi,M., 2018, Assessment of landuse/landcover (LULC) change of Tbilisi and
surrounding area using remote sensing (RS) and GIS. Annals of Agrarian Science 16 (2018) 163–169. 49 World Bank, 2015, Georgia Country Environmental Analysis Institutional, Economic, and Poverty Aspects of
Georgia’s Road to Environmental Sustainability. 50 WHO. 2017. Urban Green Spaces. A Brief for Action. WHO Regional Office for Europe. 51 Ibid. 52 Tbilisi City Municipality and EBRD. 2017. Tbilisi Green City Action Plan 2017 – 2030. Tbilisi Georgia. 53 ADB TA-9220: – Livable Urban Areas: Integrated Urban Plans for Balanced Regional Development. Tourism and
Cultural Heritage Report – Mike Sharrocks (Nov 2017).
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historical architecture.
21. The economic rationale for public investment in tourism related infrastructure including the restoration and maintenance of traditional architecture, improvements to the public realm including streetscape and public green spaces, is that the investments required are too large for individual investors, without prospect for an attractive financial return.54 Furthermore, there are important positive externalities associated with these investments which cannot be captured by the owners of the buildings. These market failures mean there is a justification for public intervention. The urban realm improvements will also help catalyze additional private investment in the hospitality and retail sectors, which would not occur without this investment. Recent studies suggest that each 1% increase in tourist arrivals to an exporting country increases that country’s exports to the tourist’s home country by 9%.55
22. Mestia municipality is located in northwest Georgia, at an elevation of 1,500 metres in the Caucasus Mountains, 128 km from the regional capital of Zugdidi. Its population of 9,400 is scattered across 132 villages, with approximately 2,000 people living in Mestia town. The municipality is important centre of Georgian culture and is an increasingly popular tourism destination with high mountainous scenery, distinctive culture, language, and medieval towers, especially in the vicinity of Ushguli which is designated as a UNESCO World Heritage Site. There is a need to preserve these heritage and tourism assets, and at the same time preserve the historic character of settlements in the municipality through sensitive regeneration.
23. The project is composed of investments in the Laghami district, which lies to the north of and is contiguous with Mestia town, and in Ushguli community which lies 45 km to the East of Mestia. The investment will restore and conserve dilapidated historical buildings and preserve the vernacular architectural style in project locations. The project design includes the restoration and rehabilitation of historical Laghami district and the restoration, reconstruction and conservation of medieval Svan towers in Ushguli. The restoration work in Laghami includes one church, 11 Svan towers, 22 traditional residential buildings, 45 traditional agricultural buildings and supplementary structures, and 38 modern dwellings, as well as upgrading local roads, storm-water drainage and the electricity distribution network. In Ushguli, 22 Svan towers in a state of disrepair or otherwise in need of remedial work have been identified for reconstruction and restoration. The consideration of different approaches to the rebuilding and renovation of these structures was constrained by the requirement to use building techniques and materials consistent with the historical architecture.
24. The economic rationale for public investment in the restoration and maintenance of cultural heritage assets rests largely on the value of tourism and tourism investment.
25. Project investments will add tourist capacity and arrest issues developing from overcrowding and degradation of the unique cultural and environmental qualities of this area. In addition, restoration and conservation of cultural heritage assets will improve and maintain the attractiveness of the region for tourism. The investments required are too large for the owners of these heritage assets or individual investors, without prospects for attractive financial returns.56 Furthermore, there are important positive externalities associated with the preservation of these
54 World Bank. 2012. Investment in Urban Heritage. Economic Impacts of Cultural Heritage Projects in FYR Macedonia
and Georgia. 55 M. Santana-Gallego, F. Ledesma-Rodriguez, and J. Perez-Rodriguez. 2016. International Trade and Tourism Flows:
An Extension of the Gravity Model. Amsterdam, Netherlands: Elsevier. 56 World Bank. 2012. Investment in Urban Heritage. Economic Impacts of Cultural Heritage Projects in FYR Macedonia
and Georgia.
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assets which cannot be captured by the owners of the buildings. These market failures mean there is a justification for public intervention. Renovation of these urban heritage sites will also help catalyze additional private investment in the hospitality and retail sectors, which would not occur without this investment. Recent studies suggest that each 1% increase in tourist arrivals to an exporting country increases that country’s exports to the tourist’s home country by 9%.57
26. Kindergartens. One 180 capacity kindergarten in Kutaisi municipality was identified as representative of other similar sub-projects. The project design represents a least cost alternative taking into account lifecycle economic costs. Other designs were considered, using alternative building envelopes and heating systems. The current design, incorporating energy efficient fixtures and building standards represented the lowest lifetime cost.
27. Education is a key driver of longterm economic growth, it fosters innovation, strengthens institutions, and helps develop social cohesion. Improving access to quality early childhood education and care (ECEC) in Georgia through better kindergarten provision is expected to have significant and longlasting social and economic benefits, especially for disadvantaged children. Early childhood (from ages 06) is a critical period in a child’s physical, cognitive, linguistic, and
socioemotional development. International research shows that holistic ECEC interventions have benefits in three broad categories of interrelated outcomes: (i) enhancing school readiness and educational outcomes; (ii) improving physical and mental health and reducing reliance on the health care system; and (iii) reducing engagement in highrisk behavior. ECEC has also been linked with societal benefits, such as lower welfare participation rates, reduced criminality, and greater maternal labor force participation.58 High quality interventions in the early years have a high costbenefit ratio and can deliver about 13% per year return on investment.59 Globally, there is a 9% increase in hourly earnings for one extra year of schooling.60 Recent World Bank analysis of the longterm benefits of early childhood education in 12 countries found that children who attend preschool stay in school for nearly a year longer, on average, and are more likely to be employed in highskilled jobs.61 Over the longer term, ECEC interventions are also linked with higher educational attainment, postschool productivity, and increased income levels.
28. The conflicting demand on women’s time for care and work activities represents a fundamental barrier to economic participation and generates a vicious circle of low labor market attachment and prominence of the care provider role that leads to increased vulnerability and gender-based inequalities. It has been estimated that differences in labor market activity between men and women amount to potential economic losses in GDP per capita of approximately 11% in Georgia.62 Overall, kindergarten provision can be beneficial for the development of pre-school
57 M. Santana-Gallego, F. Ledesma-Rodriguez, and J. Perez-Rodriguez. 2016. International Trade and Tourism Flows:
An Extension of the Gravity Model. Amsterdam, Netherlands: Elsevier. 58 On this latter point, see Morrissey, T., 2017, Child-care and parent labor force participation: a review of the research
literature. Review of Economics of the Household volume 15, pages1–24 59 Heckman, J. 2017. There’s more to gain by taking a comprehensive approach to early childhood development.
Retrieved from https://heckmanequation.org/www/assets/2017/01/F_Heckman_CBAOnePager_120516.pdf on 28 July 2020
60 Psacharopoulos, G. and Patrinos, H.A. 2018. Returns to Investment in Education: A Decennial Review of the Global Literature. Policy Research Working Paper; No. 8402. World Bank, Washington, DC.
61 World Bank. 2019. Project Appraisal Document on a Proposed Loan in the Amount of US$102.7 million to Georgia for a Georgia I2Q Project.
62 Cuberes, D., and M. Teignier, 2016, Aggregate Effects of Gender Gaps in the Labor Market: A Quantitative Estimate. Journal of Human Capital 10 (1): 1–32; and, How Important Are Labor Market Gender Gaps in the South Caucasus? Paper prepared for the “FY16 South Caucasus Gender Assessment Program.
children and to facilitate the return of mothers to work.63
29. Sports and swimming facilities. The economic analysis considered two sports facility sub-projects, i) a Sports Complex in Zugdidi; and, ii) a Swimming Pool in Kutaisi. The Sports Complex in Zugdidi, includes two swimming pools with seating for 500 spectators, a gym and weightlifting hall, boxing and wrestling facilities, dressing rooms and showers, as well as rooms for administration, staff and storage. There is also a café and small shop on the first floor and conference room, an open terrace and space for parking. The Kutasi swimming pool similarly includes two pools, 500 seats for spectators and supporting facilities including changing rooms and showers, administration, staff and storage rooms, an exercise hall, small café and shop, and space for parking.
30. Public sector provision of community sports facilities is justified as they represent up-front investments that are too large for individual private sector investors. Such facilities will therefore tend to be undersupplied. Sports infrastructure offers private personal benefits including increases in economic productivity of those who are physically active as a result of such infrastructure and personal health benefits to those less likely to contract NCDs. This also offers benefits to the public health system from a healthier population. Positive externalities are also important including increased human capital resulting from social interactions that are facilitated by community sport infrastructure and the broader community benefits of providing “green space”, general amenity value and improved liveability.64
31. Urban Green Space. The proposed Dighmis Chalebi park covers a landscaped and planted area of approximately 8 ha. It will include an artificial lake, landscaped access to the banks of the Mtkvari river, a series of bridges across the river and access to the existing island in the river. The development will also include parking facilities, space for athletics, attractions for children an amphitheatre and a media library.
32. The provision of publicly accessible UGS is economically justified it is a public good and provides a number of large positive externalities, and would otherwise tend to be undersupplied. Important positive externalities include reduced environmental health risks associated with urban living through improved air and water quality, buffering of noise pollution and mitigation of impacts from extreme events.65 UGS supports and facilitates health and well-being by enabling stress alleviation and relaxation, physical activity, improved social interaction and community cohesiveness. Health benefits include improved levels of mental health, physical fitness and cognitive and immune function, as well as lower mortality rates in general.66 UGS also provides significant aesthetic, amenity and biodiversity values.
E. DEMAND ANALYSIS
33. Tourism - Tourism to the Kakheti region has grown significantly, while domestic tourists have remained at approximately 1 million per year between 2015 and 2019, international tourism has grown from approximately 291,000 to 490,000. Estimated tourism revenues have grown from
63 World Bank. 2019. Why should we care about care? Supply and Demand Assessment of Care Services in Georgia:
A Mixed Methods Study. Washington D.C.. 64 KPMG. 2018. The Value of Community Sport Infrastructure. Investigating the value of community sport facilities to
Australia; See for example, AfDB, ADB, EBRD and IDB, 2019, Creating Liveable Cities. Regional Perspectives. Manila.
65 See for example, WHO, 2017, Urban Green Spaces. A Brief for Action. WHO Regional Office for Europe; and, Van der Ploeg, S. and De Groot, R. 2010. The TEEB Valuation Database – a searchable database of 1310 estimates of monetary values of ecosystem services. Wageningen. The Netherlands. Foundation for Sustainable Development.
66 Ibid.
10
GEL 326 million in 2015 to GEL 444 million in 2019, an average annual growth rate of 8.0%.67 Gurjaani has not yet seen significant tourism development like other municipalities in the Kakheti region. In 2019, international and domestic tourists were estimated to be approximately 23,000, and had grown at a rate of 5.5% per year between 2010 and 2019.68
34. Similarly, tourism to Mestia municipality has grown significantly with international tourists increasing from 78,000 in 2015 to 142,000 in 2019, and total tourism revenues have grown from GEL 88.3 million in 2015 to GEL 174.7 million in 2019, an average annual growth rate of 18.6%.69 Accommodation in the Mestia settlements are entirely guesthouse and family-run. During the summer months available rooms are typically fully booked. Winter tourism also has strong development potential. Tetnuldi, which has been operational since end-2016, hosted nearly 9,000 visitors during the 2016- 2017 season, while nearby Hatsvali received over 7,300 visitors.
35. Preschool provision - there is currently insufficient kindergarten provision in Kutaisi. Between 2015 and 2020, the proportion of the population in Georgia of less than 6 years of age has been stable at approximately 9% of the population, amounting to an estimated 12,100 infants in Kutaisi municipality.70 At present there are 37 preschool education and care institutions in the municipality, serving on average 252 children each and with a staff-student ratio of 3:14 In general, evidence suggests that there is insufficient space and facilities to cope with demand, overcrowding is common, there are concerns relating to the quality of facilities and enrolment is managed by long waiting lists.71 In addition, approximately 60 percent of working-age women not looking for a job in Georgia cite family responsibilities as the main reason and the share is 67 percent among married women. 72
36. Sports and leisure facilities - recent national survey evidence found that the availability of sporting facilities is an important factor in taking-up sports. Of the adult population between 18 and 64, 9.4% cited the availability of sports facilities as an important determinant of engagement in sporting activities.73 Zugdidi had an estimated population of 100,200 in 2020 of which 59% were between 18 and 64.74 This implies that demand for sports facilities from adults amounts to 5,566 people in Zugdidi, at an assumed level of three person visits per week this implies a demand for over 868,000 person visits per year. Even given established rates of population decline in the city of 2% per year, this still amounts to the demand for approximately 567,000 person-visits per year in 2041. This suggests that there is likely to be significant effective demand for sports facilities. Zugdidi currently has insufficient sports facilities with four outdoor sports stadiums and one swimming pool.
37. Recent national survey evidence found that the availability of sporting facilities is an important factor in taking-up sports. Of the adult population between 18 and 64, 9.4% cited the availability of sports facilities as an important determinant of engagement in sporting activities.75 Kutaisi had an estimated population of 136,700 in 2019 of which an estimated 59% were between
67 Estimated based upon Georgia's annual International Visitor and Domestic Visitor Surveys conducted by GEOSTAT,
retrieved from https://gnta.ge/statistics/. 68 Annual survey of hotels, guesthouses and other hotel-like establishments in Georgia, conducted by the National
Statistical Office of Georgia, 2010 – 2019. 69 Annual International Visitor and Domestic Visitor Surveys conducted by GEOSTAT, retrieved from
https://gnta.ge/statistics/. 70 National Statistical Office of Georgia. 2020. website, retrieved from https://www.geostat.ge/en. 71 World Bank. 2019. Why should we care about care? Supply and Demand Assessment of Care Services in Georgia:
A Mixed Methods Study. Washington D.C. 72 Ibid. 73 Based upon, Research in the Fields of Problems and Development of Sports in Georgia, ARC. 2017, 74 National Statistical Office of Georgia (GEOSTAT) website, retrieved from https://www.geostat.ge/en. 75 Based upon, Research in the Fields of Problems and Development of Sports in Georgia, ARC. 2017,
18 and 64.76 This implies that demand for sports facilities from adults amounts to 7,581 people in Kutaisi, at an assumed level of three person-visits per week this implies a demand for over 1.1 million person-visits per year. Even given established rates of population decline in the city of 1.6% per year,77 this still amounts to the demand for approximately 834,000 person-visits per year in 2041. This suggests that there is likely to be significant effective demand for sports facilities including swimming pools. Kutaisi currently has three outdoor sports stadiums for football and rugby, and two swimming pools, only one of which is currently operational.
38. Urban Green Space in Tbilisi - the Dighmis Chalebi park project is located in Saburtalo District to the north-east of the city. The district was home to approximately 154,000 people in 2020, and approximately 179,000 by 2040.78 As noted above a minimum requirement for UGS regarded as 10 m2 per capita and EU standards make provision for 25 m2 per capita.79 If these requirements are to be met, this implies a minimum of 154 ha of UGS, and up to 385 ha of UGS in the district, and between 179 ha and 446 ha of UGS by 2040. A recent survey of 224 people conducted in Tbilisi in 2020 found that 40% of respondents used UGS several times per week, and 93% of respondents stated they would visit parks more often if they had such spaces closer to their work or homes.80
F. BENEFIT-COST ANALYSIS
39. Net present values (NPV) and economic internal rates of return (EIRR) were calculated for all six sub-projects using the methods and parameters discussed above. For each of the sub- projects the results of the economic analysis and sensitivity analysis are considered in turn.
40. Velistsikhe urban upgrade - the economic analysis compared the costs and benefits in with- and without-project scenarios to estimate the incremental benefits of the project over a period of 20 years from 2021 to 2041, including a three-year construction period. The economic viability of the project was assessed by computing the economic internal rate of return (EIRR) and net present value (NPV) from a stream of incremental benefits and costs attributable to the investments. All costs and benefits were based on 2020 prices in Georgian Lari (GEL). Economic incremental costs and benefits were subjected to sensitivity analysis to test their robustness to various changes in assumptions.
41. The economic cost of the capital investment and of O&M expenditures is based on 2020 constant values. Price contingencies, financial charges, and taxes and duties were excluded because they represent transfer payments rather than a real generation of economic value in the Georgian economy. Where identified physical contingencies were included because they represent real consumption of resources. Financial prices are converted into economic costs by applying appropriate conversion factors. The principal differences between economic and financial costs are that (i) taxes and price contingencies are excluded from economic costs; (ii) For tradable inputs given the small and open nature of the national economy, the shadow exchange rate factor was estimated to be 1; and, (iii) local labor costs are adjusted using a shadow wage
76 National Statistical Office of Georgia (GEOSTAT) website, retrieved from https://www.geostat.ge/en. 77 Based upon population estimates for the years 2010-2019 from the National Statistical Office of Georgia, ibid. 78 Assuming established population growth trends of 0.7% between 2010 and 2020 continue. 79 See Tbilisi City Municipality and EBRD, 2017, Tbilisi Green City Action Plan 2017 – 2030 and L. Gadrani, L.,
Lominadze,G., and Tsitsagi,M., 2018, Assessment of landuse/landcover (LULC) change of Tbilisi and surrounding area using remote sensing (RS) and GIS. Annals of Agrarian Science 16 (2018) 163–169.
80 Chachava, M., 2020, Tbilisi Central Park Project – Call for More Green Space in the City. Georgia Today. Retrieved from http://gtarchive.georgiatoday.ge/news/23173/Tbilisi-Central-Park-Project-–-Call-for-More-Green-Space-in-the- City.
rate (estimated to be 0.7).81 The economic opportunity cost of capital was assumed to be 9% in real terms.
42. The economic benefits considered in this analysis relate to the increase in international tourism with the project relative to the counterfactual scenario. In both scenarios, domestic tourism trends are not expected to be affected by development of the project. The following assumptions regarding international tourism were made for the without project scenario:
(i) Average international tourist expenditures per trip are expected to grow consistent with the established trend for the Kakheti region for 2015-2019 of 2.9% from a of level of GEL 637 in 2021, until the post-pandemic recovery of the sector is complete in 2023. From 2024 average expenditures are assumed to increase to GEL 2,640 in 2041, equivalent to a growth rate of 7.9% between 2023 and 2041;82
(ii) Following the global pandemic, international tourist visitors to the region rebound to 2019 levels by 2023 (7,163), reaching 50% of 2019 levels in 2021 and 75% in 2022;83
(iii) From 2024 the number international tourism visitors is assumed to return to growth, but at a reduced rate (2%), growth is assumed to continue at this level reaching 10,231 tourists in 2041;
43. Based upon these assumptions, average annual international tourism revenue without the project between 2021 and 2041 will be GEL 13.2 million.
44. Relative to the counterfactual, project investments are expected to increase tourism growth and tourist capacity. Gurjaani and Velistsikhe are therefore expected to see additional growth in tourism in line with the trends experienced elsewhere in the Kakheti/Alesani valley region. The following assumptions were made for the with project scenario:
(i) Average international tourist expenditures per trip are expected to remain the same as the without project scenario;
(ii) The growth in international tourist visitors will be the same as the without project scenario between 2021 and 2023. From 2023 tourist numbers will grow at 16% per year until 2041, reaching 85,000 international tourists by the end of this period.84
45. Based upon these assumptions, average annual international tourism revenue with the project between 2021 and 2041 will be GEL 75.6 million.
46. The increase in international tourists will generate more revenues from increased tourist spending and create tourism-related jobs. To compute the net expenditure of tourists, the analysis conservatively applies an income multiplier of 33% to incremental tourist spending to account for
81 ADB, 2020, Sustainable Water Supply and Sanitation Sector Development Program (RRP GEO 51132) 82 Average expenditure per visit is based upon 2019 figures from the International Visitor Survey, it is assumed that
average expenditure per trip will grow in real terms to equal current levels of expenditure per trip in peer countries of GEL 2,640 (US$ 800). Gart & Taggart, 2018, Georgia’s Tourism Sector. Tourism at Full Speed. Industry Overview. This represents a higher level of growth than that in the 2015-2019 passenger survey figures (3.8%), but this reflects an increasing proportion of tourism from high income countries in line with the expectation of the National Tourism Development Strategy.
83 International Tourism visitor and expenditure figures are based upon Georgia's annual International Visitor and Domestic Visitor Surveys conducted by GEOSTAT, retrieved from https://gnta.ge/statistics/.
84 Above the established trend for the Kakheti region between 2015 and 2019 reflecting excess capacity in Gurjaani, Ibid.
economic leakage.85 Substitution effects were also taken into account given the possibility that increased tourism in the region may displace activity elsewhere in the country, the analysis then assumes only 50% of the net tourist expenditure is the project-induced benefit.
47. Economic costs and benefits. The economic costs included (i) investment costs (e.g., construction work, equipment, and materials); and (ii) the cost of operation and maintenance. The project EIRR is 12.9%, and the economic NPV is GEL 18,788,720 (Table 1). The EIRR exceeds the economic opportunity cost of capital, confirming the project’s economic viability. Sensitivity analysis examined the impact of changes in costs and benefits on project economic performance. Estimates of the EIRR for the overall project remain above 9%, except in the case of increased investment, recurrent costs and a 1-year project delay. The results of the analysis suggest that the economic performance of the overall project is generally robust against these identified sources of risk.
Table 1. Economic Viability and Sensitivity Analysis
EIRR (%) NPV (GEL)
1-year construction delay 10.9% 8,029,938
Growth rate of international tourists
reduced by 3% relative to base case86 9.0% 171,416
10% increase in cost, 10% increase in
recurrent costs, 1-year delay in
completion. 10.0% 4,553,304
( ) = negative, EIRR = economic internal rate of return, NPV = net present value; a Switching value is the percentage increase or decrease in costs or benefits to maintain an EIRR equal to the economic opportunity cost of capital of 9%.
48. The project’s tourism components will generate significant cross border spill overs that were unquantified in the cost benefit analysis. Mestia and Velistsikhe are popular regional tourism destinations due to its historical sites, national parks as well as being centers of wine and viticulture. The majority of international tourists visiting Georgia are from the region: Azerbaijan, Armenia, Russian Federation, Turkey and Iran, although European, Middle Eastern and East Asian markets are of growing significance. Through the project, regional cooperation benefits will arise from attracting additional external funding and private sector investments, allowing the cities to capture regional tourist markets, and improving cross border cooperation in the long run.
49. Laghami, Mestia urban upgrade/Ushguli Svan tower restoration - The economic analysis compared the costs and benefits in with- and without-project scenarios to estimate the
85 Value estimated based upon modelling in Gegeshvidze, 2014, Tourism industry effects on the economic Growth and
Development in Georgia. Summary of the Study for: 5th International Scientific-Practical Conference. Tourism: Economics and Business. Batumi, Georgia, July 5-6, 2014.
86 Equivalent to an annual average growth rate of 13% from 2023 onwards.
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incremental benefits of the project over a period of 20 years from 2021 to 2041, including a three- year construction period. The economic viability of the project was assessed by computing the economic internal rate of return (EIRR) and net present value (NPV) from a stream of incremental benefits and costs attributable to the investments. All costs and benefits were based on 2020 prices in Georgian Lari (GEL). Economic incremental costs and benefits were subjected to sensitivity analysis to test their robustness to various changes in assumptions.
50. The economic cost of the capital investment and of O&M expenditures is based on 2020 constant values. Price contingencies, financial charges, and taxes and duties were excluded because they represent transfer payments rather than a real generation of economic value in the Georgian economy. Where identified physical contingencies were included because they represent real consumption of resources. Financial prices are converted into economic costs by applying appropriate conversion factors. The principal differences between economic and financial costs are that (i) taxes and price contingencies are excluded from economic costs; (ii) For tradable inputs given the small and open nature of the national economy, the shadow exchange rate factor was estimated to be 1; and (iii) local labor costs are adjusted using a shadow wage rate (estimated to be 0.7).87 The economic opportunity cost of capital was assumed to be 9% in real terms.
51. The economic benefits considered in this analysis relate to the increase in international tourism with the project relative to the counterfactual scenario. In both scenarios, domestic tourism trends are not expected to be affected by development of the project. The following assumptions regarding international tourism were made for the without project scenario:
(i) Average international tourist expenditures per trip are expected to stay at 2019 levels of GEL 1,175 until the post-pandemic recovery of the sector is complete in 2023. From 2024 average expenditures will increase to GEL 2,640 in 2041, equivalent to a growth rate of 4.6% between 2023 and 2041.88
(ii) Following the global pandemic, international tourist visitors to the region rebound to 2019 levels by 2023, reaching 50% of 2019 levels in 2021 and 75% in 2022;89
(iii) From 2024 the number international tourism visitors return to growth but at a reduced rate (8%), growth will slow as the regional capacity for international tourists is reached (200,000 per annum) by 2029, thereafter international tourist numbers will fall (in response to continued degradation of cultural assets) by 1% per year until 2041.90
52. Based upon these assumptions, average annual international tourism revenue without the project between 2021 and 2041 will be GEL 318.4 million.
53. Relative to the counterfactual, project investments are expected to increase tourism growth, tourist capacity and arrest any declines in tourist numbers in the region. The following
87 ADB, 2020, Sustainable Water Supply and Sanitation Sector Development Program (RRP GEO 51132) 88 Average expenditure per visit is based upon 2019 figures from the International Visitor Survey, it is assumed that
average expenditure per trip will grow in real terms to equal current levels of expenditure per trip in peer countries of GEL 2,640 (US$ 800). Gart & Taggart, 2018, Georgia’s Tourism Sector. Tourism at Full Speed. Industry Overview. This represents a higher level of growth than that in the 2015-2019 passenger survey figures (3.8%), but this reflects an increasing proportion of tourism from high income countries in line with the expectation of the National Tourism Development Strategy.
89 Annual International Visitor and Domestic Visitor Surveys conducted by GEOSTAT, retrieved from https://gnta.ge/statistics/.
90 International tourist visitor numbers are assumed to grow at 8% in 2024 and 2025, half the average 2015-2019 growth rate of 16%, slowing to 6% in 2026 and 2027, and 4% in 2028, reaching regional capacity of 200,000 in 2029.
assumptions were made for the with project scenario:
(i) Average international tourist expenditures per trip are expected to remain the same as the without project scenario;
(ii) The growth in international tourist visitors will be the same as the without project scenario between 2021 and 2023. From 2024 international tourist visitor numbers will grow at a reduced rate, although higher than that without the project (11%). Total annual international tourist capacity is increased by 10% (to 220,000), tourism growth will slow as this increased capacity is reached in 2029. From 2029 international tourism visitor numbers will remain at capacity of 220,000 per year until 2041;91
54. Based upon these assumptions, average annual international tourism revenue with the project between 2021 and 2041 will be GEL 364.3 million.
55. The increase in international tourists will generate more revenues from increased tourist spending and create tourism-related jobs. To compute the net expenditure of tourists, the analysis conservatively applies an income multiplier of 33% to incremental tourist spending to account for economic leakage.92 Substitution effects were also taken into account given the possibility that increased tourism in the region may displace activity elsewhere in the country, the analysis then assumes only 50% of the net tourist expenditure is the project-induced benefit.
56. Economic costs and benefits. The economic costs included (i) investment costs (e.g., construction work, equipment, and materials); and (ii) the cost of operation and maintenance. The project EIRR is 16.0% and the economic NPV is GEL 21,075,307 (Table 1). Sensitivity analysis examined the impact of changes in costs and benefits on project economic performance. Estimates of the EIRR for the overall project remain above 9% in all tests. The results of the analysis suggest that the economic performance of the overall project is generally robust against these identified sources of risk.
EIRR (%) NPV (GEL)
1-year construction delay 14.1% 14,915,311
19% decrease in tourist capacity relative
to base case93 9.0% 61,358 (1.2)
91 International Tourism visitor and expenditure figures are based upon Georgia's annual International Visitor and
Domestic Visitor Surveys conducted by GEOSTAT, retrieved from https://gnta.ge/statistics/. 92 Value estimated based upon modelling in Gegeshvidze, 2014, Tourism industry effects On The economic Growth
and Development in Georgia. Summary of the Study for: 5th International Scientific-Practical Conference. Tourism: Economics and Business. Batumi, Georgia, July 5-6, 2014.
93 Compared to a 10% increase under the with-project scenario.
recurrent costs, 1-year delay in
completion. 12.9% 12,107,802
57. Kindergarten in Kutaisi - The economic analysis established costs and benefits of the project. The kindergarten is a new project, and all benefits are considered incremental therefore no counterfactual scenario was considered. Costs and benefits were calculated for the period from 2021 to 2041, including one year of construction. The economic viability was assessed by calculating the economic internal rate of return (EIRR) and net present value (NPV) from a stream of incremental benefits and costs attributable to the investment.
58. The economic cost of the capital investment, of O&M expenditures and the opportunity cost of land94 are based on 2020 constant values in Georgian Lari (GEL). Price contingencies, financial charges, and taxes and duties were excluded because they represent transfer payments rather than a real generation of economic value in the Georgian economy. Where identified physical contingencies were included because they represent real consumption of resources. Financial prices are converted into economic costs by applying appropriate conversion factors. Costs were valued using the domestic price numeraire. The principal differences between economic and financial costs are that (i) taxes and price contingencies are excluded from economic costs; (ii) For tradable inputs given the small and open nature of the national economy, the shadow exchange rate factor was estimated to be 1; and (iii) local labor costs are adjusted using a shadow wage rate (estimated to be 0.7).95 The economic opportunity cost of capital was assumed at 9% in real terms.
59. Economic incremental costs and benefits were subjected to sensitivity analysis to test their robustness to various changes in assumptions. The economic benefits identified and quantified are (i) lifetime earnings benefits for children benefiting from kindergarten provision; and, (ii) Earnings benefits due to greater enabled maternal labor-force participation.
60. Lifetime earnings benefits. This costbenefit analysis considers quantifiable benefits of cash flows from lifetime earnings of the number of children who enrol and receive an additional one year of preschool through the provision of kindergarten facilities. Following similar economic analysis conducted for ECEC investment in Georgia 96 children benefiting from early years education provision in the kindergarten, as a consequence, are expected to enjoy enhanced lifetime earnings. The impact of one year of preschool education on educational attainment is assumed to be in line with other studies showing a 0.053 standard deviation effect on academic achievement,97 and that a one standard deviation increase in academic achievement results in
94 Land for the project is to be provided by the municipality, economic value of the land is calculated at the opportunity
cost of foregoing rental earnings from the land. 95 ADB, 2020, Sustainable Water Supply and Sanitation Sector Development Program (RRP GEO 51132) 96 World Bank, 2019, Project Appraisal Document on a Proposed Loan in the Amount of US$102.7 million to Georgia
for a Georgia I2Q Project. 97 Analysis developed for the World Bank using the 2015 PISA survey of performance in mathematics in ECA countries.
See World Bank, 2019, Project Appraisal Document on a Proposed Loan in the Amount of US$102.7 million to Georgia for a Georgia I2Q Project, page 85-86
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12% increase in earnings.98 The kindergarten has capacity for 180 children and is assumed to operate at that capacity for the 20-year period of the economic evaluation. Kindergarten pupils are assumed to become economically active 14 years subsequent to leaving kindergarten and labor market participation is assumed to last 25 years. A conservative estimate of earnings was adopted, using average annual nominal earnings in 2019 (GEL 14,448)99 with annual earnings growth in line with average price inflation over the last decade (3.69%).100 Based upon these assumptions total lifetime earnings benefits to the project were estimated to be GEL1.1 million in net present value.
61. Increased maternal labor force participation. Kindergarten provision will also enable greater labor force participation and higher productivity amongst women who continue to be responsible for most child-care duties.101 The benefit of this was estimated by first establishing the child-care provision offered by the kindergarten, estimated to be four hours per day. It is assumed that an additional 30 minutes per day will be taken in bringing children to kindergarten and picking them up. This will enable the 67% of women carers who cite childcare responsibilities as the reason they don’t participate in the labor market to take up employment for 4 hours per day for each day the kindergarten is open.102 The academic year in Georgia is approximately 167 days a year, resulting in a total time saving for carers of 180 children of 90,180 hours per year. Taking into account the 16% of women who are likely to be unemployed,103 the opportunity cost of time for carers is assumed to be the hourly wage rate based upon average nominal wages for women, indexed to reflect expected future earnings.104 The total net present value of greater labor-force participation is estimated to be GEL 4.3 million.
62. The economic costs included (i) investment costs (e.g., construction work, equipment, and materials); (ii) the opportunity cost of land, and (iii) the cost of operation and maintenance. The project EIRR is 10.9% and the economic NPV is GEL 729,502 (Table 1). The EIRR exceeds the economic opportunity cost of capital, confirming the project’s economic viability. Sensitivity analysis examined the impact of changes in costs and benefits on project economic performance. Estimates of the EIRR for the overall project remain above 9% in all tests. The results of the analysis suggest that the economic performance of the overall project is generally robust against these identified sources of risk.
EIRR (%) NPV (GEL)
Base case 10.9% 729,502
98 Lazear, E. P. 2003. Firm Specific Human Capital: a skillweights approach. NBER. Working Paper 9679.
http://www.nber.org/papers/w9679. 99 National Statistical Office for Georgia. 100 2010-2019 IMF, International Financial Statistics 101 As the 2016 World Bank Georgia country gender assessment noted, labour-force participation amongst women
remains 18-20% below that of men, with Household responsibilities appear to play a critical role in reducing female labor force participation.
102 Based upon responses in a recent survey, see World Bank, 2019, Why should we care about care? Supply and Demand Assessment of Care Services in Georgia: A Mixed Methods Study. Poverty and Equity Global Practice Europe and Central Asia Region.
103 Unemployment figures for 2019 from the National Statistical Office of Georgia, retrieved from https://www.geostat.ge/en.
104 As for earnings benefits based upon average nominal annual earnings from the National Statistical Office for Georgia and the average annual inflation rate for the 2010-2019 from IMF International Financial Statistics.
1-year delay in construction 9.6% 254,751
1.6% annual decline in demand105 9.5% 189,955
63. Zugdidi sports complex - The sports complex is a new project, and all benefits are considered incremental therefore no counterfactual scenario was considered. Costs and benefits were calculated for the period from 2021 to 2041, including a one-and-a-half year construction period. The economic viability was assessed by computing the economic internal rate of return (EIRR) and net present value (NPV) from a stream of incremental benefits and costs attributable to the proposed investment. All costs and benefits were based on 2020 prices in Georgian Lari (GEL). Economic incremental costs and benefits were subjected to sensitivity analysis to test their robustness to various changes in assumptions.
64. Economic costs of works and annual O&M were derived from the project cost estimates. Price contingencies, financial charges, and taxes and duties were excluded because they represent transfer payments rather than a real accretion of wealth to the Georgian economy. Physical contingencies were included because they represent real consumption of resources. Financial prices are converted into economic costs by applying appropriate conversion factors. The principal differences between economic and financial costs are that (i) taxes and price contingencies are excluded from economic costs; (ii) For tradable inputs given the small and open nature of the national economy, the shadow exchange rate factor was estimated to be 1; and (iii) local labor costs are adjusted using a shadow wage rate (estimated to be 0.7).106 The sports facilities are new and therefore additional land is required, the opportunity cost of land provision was based upon the annual rental value of vacant land in the urban area of Zugdidi of GEL 1.89 per m2.107 The economic opportunity cost of capital was assumed to be 9%.
65. The main economic benefit identified and quantified was effective willingness-to-pay derived from user revenue projections from both the use of the pool and gym facilities. Capacity at the two pools housed in the facility as estimated to be 100 persons per session.108 Based upon 6 sessions per day for 288 days a year, total session capacity was estimated to be 172,800 sessions per year. User fee estimates were (i) GEL 25 per one-off session; (ii) GEL 150 per month for a membership; and, (iii) Free usage of facilities for individuals from socially vulnerable families and those with disabilities.109
66. User revenue projections for the swimming facilities were based upon demand estimates
105 Population growth trends for Kutaisi were -1.6% for 2000-2019, the assumption is that these declines are reflected
in demand for kindergarten places over the period of the project. 106 ADB, 2020, Sustainable Water Supply and Sanitation Sector Development Program (RRP GEO 51132). 107 Zugdidi municipality. 108 Design capacity of the pools. 109 Likely fee levels obtained from MDF.
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suggesting a 75% capacity utilisation of the facilities, equivalent to 129,600 sessions per year.110 Two thirds of usage were assumed to be attributable to one-time users, and one third to users with a membership (using the facilities on average 3 times per week). Non-fee-paying users were estimated to compose approximately 20% of total users.111 It is estimated that 25,972 sessions would be accounted for by non-fee paying, concessionary users. Of the fee-paying users, demand for one-time user sessions is estimated to be 68,395, yielding GEL 1.7 million per year, and demand for monthly memberships accounted for 34,197 sessions per year yielding GEL 395,000 per year. Total revenues were estimated to be approximately GEL 2.1 million per year.
67. User revenues from the gym facilities were estimated in a similar manner. Total capacity was estimated to be 30 persons, assuming an average visit length of one hour, the opening of the facilities 288 days per year and 14 hours per day, equivalent to a maximum number of person visits per year of 120,960. Based upon typical demand profiles for gyms, actual demand is assumed to amount to approximately 42% of total capacity, or 50,803 person visits per year.112 20% of demand is expected to be accounted for by non-fee-paying customers, of the remainder 27% of person visits are assumed to be by pool members and would not yield additional revenue. Additional revenues would result from one-off fees from the remaining 53% of person visits (26,811 visits), with a fee of GEL 25, amounting to approximately GEL 1.0 million per year.
68. The economic costs included (i) investment costs (e.g., construction work, equipment, and materials); (ii) the opportunity cost of land; and (iii) the cost of operations and maintenance. Benefits consisted of effective willingness-to-pay indicated by expected revenues for the swimming pool and gym facilities. The project EIRR is 12.7% and the economic NPV is GEL 2,518,061 (Table 1). The EIRR exceeds the economic opportunity cost of capital, confirming the project’s economic viability. Sensitivity analysis examined the impact of changes in costs and benefits on project economic performance. Estimates of the EIRR for the overall project remain above 9% in all cases. The project also remains economically viable for declines in demand of up to 2% per year. The results of the analysis suggest that the economic performance of the overall project is generally robust against these identified sources of risk, although attention should be given to demand projections and likely revenues.
EIRR (%) NPV (GEL)
4.2 24
2.8 35
Decline in demand of 2% per year from
commissioning 9.0% 355
110 Based upon MDF estimates of typical usage levels of similar facilities in Georgia. 111 Concessions are expected to be available for poor/disadvantaged households (16.4% of households in Zugdidi
according to National Statistical Office of Georgia figures) and persons with disabilities (3.6% of the population based upon 2014 census figures).
112 Based on a review of usage data for similar facilities in Georgia.
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69. Kutaisi swimming pool - The swimming pool is a new project, and all benefits are considered incremental therefore no counterfactual scenario was considered. Costs and benefits were calculated for the period from 2021 to 2041, including a two-year construction period. The economic viability was assessed by computing the economic internal rate of return (EIRR) and net present value (NPV) from a stream of incremental benefits and costs attributable to the proposed investment. All costs and benefits were based on 2020 prices in Georgian Lari (GEL). Economic incremental costs and benefits were subjected to sensitivity analysis to test their robustness to various changes in assumptions.
70. Economic costs of works and annual O&M were derived from the project cost estimates. Price contingencies, financial charges, and taxes and duties were excluded because they represent transfer payments rather than a real accretion of wealth to the Georgian economy. Physical contingencies were included because they represent real consumption of resources. Financial prices are converted into economic costs by applying appropriate conversion factors. The principal differences between economic and financial costs are that (i) taxes and price contingencies are excluded from economic costs; (ii) For tradable inputs given the small and open nature of the national economy, the shadow exchange rate factor was estimated to be 1; and (iii) local labor costs are adjusted using a shadow wage rate (estimated to be 0.7).113 The swimming facilities are new and therefore additional land is required, the opportunity cost of land provision was based upon the annual rental value of vacant land in the urban area of Kutaisi of GEL 9.45 per m2.114 The economic opportunity cost of capital was assumed to be 9%.
71. The main economic benefit identified and quantified was effective willingness-to-pay derived from user revenue projections. The design capacity at the two pools housed in the facility is 140 persons per session. Based upon 6 sessions per day for 288 days a year, total session capacity was estimated to be 241,920 sessions per year.115 User fee estimates were (i) GEL 25 per one-off session; (ii) GEL 150 per month for a membership; and, (iii) Free usage of facilities for individuals from socially vulnerable families and those with disabilities.
72. User revenue projections for the swimming facilities were based upon demand estimates suggesting a 75% capacity utilisation of the pool facilities, equivalent to 181,440 sessions per year.116 Non-fee-paying users were estimated to compose approximately 20% of total users, accounting for 36,361 user sessions. 117 Of the remainder, two thirds was assumed to be attributable to one-time users, and one third to users with a membership (using the facilities on average 3 times per week). Of the fee-paying users, demand for one-time user sessions was 95,752, yielding GEL 2.4 million per year, and demand for monthly memberships accounted for 47,876 sessions per year yielding GEL 552,400 per year. Total revenues were estimated to be approximately GEL 2.95 million per year.
73. Economic costs and benefits. The economic costs included (i) investment costs (e.g., construction work, equipment, and materials); (ii) the opportunity cost of land; and (iii) the cost of
113 ADB, 2020, Sustainable Water Supply and Sanitation Sector Development Program (RRP GEO 51132) 114 Kutaisi municipality. 115 Based upon typical opening hours of 8am -10 pm with 2 hour sessions, and a break of 2 hours in the afternoon, one
day per week closure for regular maintenance, and an additional 25 days per year closed for public holidays. 116 Based upon MDF estimates of typical usage levels of similar facilities in Georgia. 117 Concessions are expected to be available for poor/disadvantaged households (16.4% of households in Zugdidi
according to National Statistical Office of Georgia figures) and persons with disabilities (3.6% of the population based upon 2014 census figures).
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operations and maintenance. Benefits consisted of effective willingness-to-pay indicated by expected revenues for the swimming pool. The project EIRR is 13.3% and the economic NPV is GEL 2,407,858 (Table 1). The EIRR exceeds the economic opportunity cost of capital, confirming the project’s economic viability. Sensitivity analysis examined the impact of changes in costs and benefits on project economic performance. Estimates of the EIRR for the overall project remain above 9% in all cases. The project also remains economically viable for declines in demand of up to 2% per year. The results of the analysis suggest that the economic performance of the overall project is generally robust against these identified sources of risk, although attention should be given to demand projections and likely revenues.
EIRR (%) NPV (GEL)
One-year delay in construction 10.5% 955,337
Reduction in demand of 2% per year
from commissioning 9.0% 6,106
74. Dighomi park - The park is a new project and at present the site is used as an informal waste dump, thus all benefits are considered incremental therefore no counterfactual scenario was considered. Costs and benefits were calculated for the period from 2021 to 2041, including a two-year construction period. The economic viability was assessed by computing the economic internal rate of return (EIRR) and net present value (NPV) from a stream of incremental benefits and costs attributable to the proposed investment. All costs and benefits were based on 2020 prices in GEL. Economic incremental costs and benefits were subjected to sensitivity analysis to test their robustness to various changes in assumptions.
75. Economic costs of works were derived from the project cost estimates. Investment costs are estimated to be GEL 10.9 million over two years, including GEL 78,000 resettlement costs. O&M costs estimated to be GEL 150,000 per hectare per year were provided by Tbilisi Development Fund. Price contingencies, financial charges, and taxes and duties were excluded because they represent transfer payments rather than a real accretion of wealth to the Georgian economy. Physical contingencies were included because they represent real consumption of resources. Financial prices are converted into economic costs by applying appropriate conversion factors. The principal differences between economic and financial costs are that (i) taxes and price contingencies are excluded from economic costs; (ii) For tradable inputs given the small and open nature of the national economy, the shadow exchange rate factor was estimated to be 1; and (iii) local labor costs are adjusted using a shadow wage rate (estimated to be 0.7).118 The park is a new facility and therefore additional land is required, the opportunity cost of land provision was based upon the annual rental value of vacant land in the urban area of Tbilisi of
118 ADB, 2020, Sustainable Water Supply and Sanitation Sector Development Program (RRP GEO 51132).
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GEL 30 per m2.119 The economic opportunity cost of capital was assumed to be 9%The main economic benefits identified include a range of ecosystem services associated with UGS including climate regulation, mitigation of extreme events, recreational use of green space, carbon sequestration, air quality improvement, reduction in noise pollution and aesthetic value. These could not be valued directly but were estimated based upon a hedonic pricing approach based upon uplifts in land and property valuations in proximity to UGS.120
76. Numerous studies have noted the influence of property values of proximity to UGS.
Hedonic pricing studies have found that proximity to UGS raises property values by between 3% and 23% in various different locations. 121 Comparable studies for Tbilisi have not been available, nevertheless property valuation data gathered for otherwise identical properties in Saburtalo District, suggested properties in the vicinity of UGS were on average 24.4% more valuable than those located further from UGS.
77. Based upon this, the park is conservatively assumed to raise values by 16% for properties within walking distance of the park.122 Walking vicinity of the park was estimated to be 1.5 km, population density estimates from census data were used to calculate the population within this area. Average residential floor area per capita was assumed to be 24 m2.123 Average property prices for the area in 2020 were estimated to be GEL 1,760/m2.124 Based upon this, the total value of property within the vicinity of the park was estimated to be approximately GEL 544 million. The uplift in property prices due to the construction of the park was estimated to be approximately GEL 87.1 million, which is deemed to accrue to the property owners incrementally over a 10-year period (2023-2032) as the park is established and matures.
78. Economic costs and benefits. The economic costs included (i) investment costs (e.g., construction work, equipment, and materials); (ii) the opportunity cost of land; and (iii) the cost of operations and maintenance. Benefits consisted of benefits capitalised into property values in the vicinity of the park. The project EIRR is 20.2% and the economic NPV is GEL 4,735,239 (Table 1). The EIRR exceeds the economic opportunity cost of capital, confirming the project’s economic viability. Sensitivity analysis examined the impact of changes in costs and benefits on project economic performance. Estimates of the EIRR for the overall project remain above 9% in all cases. The project also remains economically viable for lower increases in local property prices. The results of the analysis suggest that the economic performance of the overall project is generally robust against these identified sources of risk.
119 Based upon review of web-based advertisements for vacant urban land in the area. 120 It is recognized that ADB guidance on the economic assessment of projects advises against the use of land values
as a proxy for economic benefits as speculative increases in land can function of obscure the actual magnitude of economic benefits. However, in the absence of other data, this approach was adopted with due care taken to use conservative estimates.
121 See Olmsted, F.L. In Crompton, J.L. (2007). The role of the proximate principle in the emergence of urban parks in the United Kingdom and the United States. Leisure Studies, 26(2) pp.213-234; Neill Dunse. (2007). Urban parks, open space and residential property values, RICS; Nickson, A. (no date). The Economic benefits of Parks: paper to London GreenSpace Conference; and, Bengochea, A., 2003, A hedonic valuation of urban green areas. Landscape and Urban Planning · December 2003.
122 Nickson, A. (no date). The Economic benefits of Parks: paper to London Green Space Conference. 123 World Bank, 2015, World Bank, 2015, World Bank, 2015, Georgia Urban Strategy. Priority Area II Housing. Final
Report. 124 Colliers. 2020, 2020 Residential Real Estate Market Report Tbilisi.
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EIRR (%) NPV (GEL)
2.3
56
6.6
15
13.5% uplift in property price 9.0% 474
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26 Annex 1
Kutaisi kindergarten (GEL)
Annex 1 27

livable cities investment project for balanced development

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