ENVIRONMENTAL FINANCE

Debt-for-Environment Swap in Georgia: Potential Project Pipelines for the Expenditure Programme

PART TWO

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT

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ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT

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EAP TASK FORCE

The Task Force for the Implementation of the Environmental Action Programme for Central

and Eastern Europe (EAP Task Force) was established in 1993 at the “Environment for Europe” Ministerial Conference in Lucern, Switzerland. Its Secretariat was established at the OECD as part of the Centre for Co-operation with Non-Members. Since its creation, the EAP Task Force has proven to be a flexible and practical tool for providing support to political and institutional reforms in the countries of the region. After the Aarhus Ministerial Conference in 1999, its efforts were refocused on the countries of Eastern Europe, Caucasus and Central Asia (EECCA). More detailed information about Task Force activities can be found on its website at: www.oecd.org/env/eap

This report is also available in Russian:

Обмен долгов на охрану окружающей среды Грузии: потенциальные направления программы для

финансирования

© OECD 2006

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FOREWARD

This report was prepared in the framework of the Task Force for the Implementation of the Environmental Action Programme for Central and Eastern Europe (EAP Task Force), whose Secretariat is located in the OECD’s Environment Directorate. It complements the first part, Pre-feasibility Study and Institutional Options, which analyses opportunities for and challenges to swapping part of Georgia’s external debt for domestic financing of priority environmental projects. This report was prepared by a team of consultants under the guidance and supervision of the EAP Task Force Secretariat, Grzegorz Peszko supported by Nelly Petkova. Gabriel Labbate was responsible for the overall management and implementation of the project. He also prepared the chapter on biodiversity. Paata Janelidze did the work on small and mini-hydropower plants and the production of biogas from animal waste. Grigol Lazriev and Gabriel Labbate prepared the report on waste management in coastal cities of Georgia. Nino Partskhaladze and Gabriel Labbate did the work on improving the collection and treatment of sewage affecting international waters. The Dutch Government, through its Ministry of Housing, Spatial Planning and the Environment, has provided financial support for this project. Special thanks go to Xavier Leflaive (Manager of the Environmental Finance Programme at the EAP Task Force) for his support and guidance during the last phases of work on this project and to Brendan Gillespie (Head of the Non-member Countries Division at the OECD’s Environment Directorate) for reviewing the report. Dinara Aknazarova provided administrative support. All these contributions are gratefully acknowledged. The views expressed in this report are those of the authors and do not necessarily reflect those of the OECD or its member countries.

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TABLE OF CONTENTS

EXECUTIVE SUMMARY .......................................................................................................................... 7

BIODIVERSITY PROTECTION ............................................................................................................. 11

SYNTHESIS................................................................................................................................................. 16 1. INTRODUCTION .................................................................................................................................... 20 2. AN OVERVIEW OF THE SYSTEM OF PROTECTED AREAS IN GEORGIA .................................. 21 3. IDENTIFYING PRIORITY CONSERVATION ZONES IN GEORGIA................................................ 23 4. THREATS TO BIODIVERSITY: MAIN PROBLEMS TO BE TACKLED .......................................... 31 5. OBJECTIVES AND STRATEGY FOR THE USE OF DFES RESOURCES......................................... 44 6. CHARACTERISTICS OF PIPELINE FINANCING............................................................................... 52 7. REFERENCES ......................................................................................................................................... 57

SMALL AND MINI HYDROPOWER GENERATION......................................................................... 59

SYNTHESIS................................................................................................................................................. 64 1. TECHNICAL EXPLOITABLE POTENTIAL OF THE MINI HYDROPOWER SECTOR................... 67 2. ELECTRICITY DEMAND AND SUPPLY............................................................................................. 71 3. DESCRIPTION OF THE ELECTRICITY SECTOR OF GEORGIA...................................................... 73 4. REGULATORY FRAMEWORK ............................................................................................................ 77 5. ELECTRICITY TARIFFS........................................................................................................................ 78 6. DESCRIPTION OF DONOR, STATE AND PRIVATE ACTIVITIES IN THE MINI HYDROPOWER GENERATION SECTOR ............................................................................................... 80 7. STAKEHOLDER ANALYSIS................................................................................................................. 81 8. CAPITAL AND OPERATION AND MAINTENANCE COSTS OF MODEL PROJECTS.................. 82 9. EVALUATION OF THE ECONOMIC POTENTIAL OF REHABILITATING EXISTING, AND CONSTRUCTING NEW, MINI HYDROPOWER PLANTS............................................................ 88 10. FINANCIAL VIABILITY OF REHABILITATION AND CONSTRUCTION OF NEW MINI HYDRO POWER PLANTS ............................................................................................................... 91 11. SENSITIVITY ANALYSIS ................................................................................................................... 97 12. CAPITAL NEEDS FOR THE ENTIRE PIPELINE............................................................................... 99 13. RISKS AND RISK MITIGATION MEASURES ................................................................................ 100 14. ESTIMATION OF GREENHOUSE GASES (GHG) ABATEMENT POTENTIAL.......................... 101 15. SUSTAINABILITY ASSESSMENT ................................................................................................... 102 16. REFERENCES ..................................................................................................................................... 105

BIOGAS PRODUCTION......................................................................................................................... 107

SYNTHESIS............................................................................................................................................... 112 1. TECHNICAL EXPLOITABLE POTENTIAL OF THE BIOGAS SECTOR........................................ 114 2. BIOGAS TECHNOLOGIES .................................................................................................................. 117 3. CAPITAL AND OPERATION AND MAINTENANCE COSTS OF MODEL PROJECTS................ 123 4. ECONOMIC ANALYSIS OF BIOGAS PRODUCTION...................................................................... 124 5. FINANCIAL VIABILITY OF BIOGAS PRODUCTION ..................................................................... 128 6. SENSITIVITY ANALYSIS ................................................................................................................... 132 7. MARKET POTENTIAL OF BIOGAS REACTORS............................................................................. 134 8. CAPITAL NEEDS FOR THE ENTIRE PROJECT PIPELINE............................................................. 136 9. RISKS AND RISK MITIGATION MEASURES .................................................................................. 136

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10. ESTIMATION OF GREENHOUSE GASES (GHG) ABATEMENT POTENTIAL.......................... 137 11. REFERENCES ..................................................................................................................................... 138

MUNICIPAL WASTE MANAGEMENT .............................................................................................. 139

SYNTHESIS............................................................................................................................................... 143 1. INTRODUCTION .................................................................................................................................. 145 2. DESCRIPTION OF THE MUNICIPAL SOLID WASTE SECTOR..................................................... 146 3. BENEFITS FROM IMPROVED MUNICIPAL SOLID WASTE MANAGEMENT SYSTEMS ........ 152 4. MODEL PROJECTS FOR MUNICIPAL SOLID WASTE MANAGEMENT..................................... 154 5. RISKS ..................................................................................................................................................... 169 6. ESTIMATED SIZE OF ENTIRE PROJECT PIPELINE....................................................................... 170 7. REFERENCES ....................................................................................................................................... 171

WASTEWATER MANAGEMENT........................................................................................................ 173

SYNTHESIS............................................................................................................................................... 177 1. INTRODUCTION .................................................................................................................................. 179 2. OVERVIEW OF THE WASTEWATER SECTOR OF GEORGIA ...................................................... 179 3. POTENTIAL PROJECTS FOR DFES FINANCING............................................................................ 183 4. SUMMARY AND CONCLUSIONS ..................................................................................................... 204 6. REFERENCES ....................................................................................................................................... 208

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Exchange Rates In the conversion of financial data presented in this report, i.e. Georgian Lari into US dollars (USD) and Euros (EUR), the following annual average exchange rates were used:

Table: Exchange Rates, Lari/USD, and Lari/EUR, Yearly Average

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Lari/USD 1.26 1.3 1.39 2.02 1.98 2.07 2.2 2.15 1.90 1.82

Lari/EUR .. .. .. 2.16 1.83 1.86 2.07 2.43 2.36 2.27 Source: Transition Report Update, May 2005, EBRD, London and the National Bank of Georgia.

Map of Georgia

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EXECUTIVE SUMMARY

The Task Force for the Implementation of the Environmental Action Programme for Central and Eastern Europe (EAP Task Force) (OECD), in co-operation with the Georgian Ministry of Environmental Protection and Natural Resources Protection, has conducted a pre-feasibility analysis of implementing a debt-for-environment swap (DFES) in Georgia. The main conclusion from this study is that a debt-for-environment swap between Georgia and creditors of the Paris Club is feasible and could generate benefits for both, Georgia and the international community. The main recommendation to Georgia is to focus on bilateral swaps (no third party involved) but to keep the institutional structure open for accommodating possible private swaps or even direct domestic and international grants. This report builds on a complementary pre-feasibility study which, amongst other things, stresses that establishing a credible expenditure programme is an essential element to gain support for a DFES. This expenditure programme should focus on a few priorities for both creditors and the Georgian government. This report identifies potential environmental project pipelines for the DFES programme in Georgia. This work was implemented in two stages: a scoping phase and an assessment phase. During the scoping phase, a group of local and international experts identified the three potential priority areas and project opportunities for the DFES programme in Georgia (Scoping Phase Report)1. These areas were: reducing greenhouse gases, reducing pollution of international waters, and protecting biological diversity. In each of these areas, various types of projects have been screened against general eligibility requirements agreed upon with the Georgian government. The requirements for the pipelines were:

• To achieve environmental benefits together with poverty reduction; • To facilitate local sustainable growth and job creation; • To provide regional or global environmental benefits and to facilitate fulfillment of international

environmental agreements by Georgia (including the environment-related Millennium Development Goals and the objectives of the Johannesburg Summit Agenda: WEHAB Water Supply and Sanitation, Energy, Health and Environment, Agriculture and Biodiversity;

• To contribute to peace and security in the Caucasus region by alleviating regional and cross-border conflicts related to the management of shared and trans-boundary natural resources;

• To be consistent with Georgia’s environmental policy priorities; • To take into account the size of the swap, including a reasonable assumption about long-term

revenue streams generated by the swap, and the financial leverage that can be achieved with matching grants;

• To demonstrate “additionality” of DFES financing in relation to existing or planned financing sources;

• To attract co-financing from other sources, including the private financial sector, IFIs and foreign grants.

1 See Labbate, G., Janelidze, P., Partskhaladze N., and Peszko G. (2003). Potential Project Pipelines for the Expenditure Programme Financed by the Debt-for-Environment Swap in Georgia – Scoping Phase. Report Financed by OECD/ENV. Tbilisi, Georgia.

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During the assessment phase, solid, realistic and “bankable” project pipelines were identified within these priority areas, and analysed in detail. The methodology used to identify and assess potential project pipelines in the DFES expenditure programme included the following steps: 1. Familiarisation with current and expected projects of international agencies, government and NGOs in

the three thematic areas in Georgia. Thus, this report builds on and complements existing and expected work of other partners in Georgia.

2. Identification of “entry points”, i.e. national priorities that currently receive no, or insufficient, funding. This step comprised an analysis of existing portfolios and project pipelines against priorities set by strategy documents in the thematic areas of biodiversity, international waters and climate change, and poverty reduction.

3. Identification of the most promising pipeline opportunities. Within the strategic entry points, various types of projects were screened against the general eligibility requirements defined above. This work formed the basis for the identification of the potential pipelines in each of the three thematic areas. Then, these pipelines were analysed in terms of:

• geographical location of eligible projects;

• types of projects, including size;

• project owners (e.g. municipalities, municipal enterprises, private enterprises, individuals, communities, etc.); and

• justification of DFES financing of the pipeline.

4. Selection of the five most promising project pipelines. The five most promising pipelines were identified in consultations with the OECD and the Georgian authorities.

5. Detailed assessment of the five project pipelines. During this stage, the proposed pipelines were analysed in detail, including a description of the respective sector, analysis of the institutional and regulatory framework, economic analysis and financial viability of the proposed project pipelines, sensitivity analysis, and risks and risk mitigation measures.

The five most promising pipelines are identified in Table 1 below.

Table 1. Priority Areas and Project Pipelines for DFES in Georgia

Three Priority Areas Five Project Pipelines Reducing greenhouse gases 1. Rehabilitation of existing and construction of

new mini hydropower plants;

2. Production of biogas from animal waste;

Reducing pollution of international waters 3. Improvement of collection and treatment of sewage affecting international waters;

4. Waste management in coastal cities;

Protecting biological diversity 5. Strengthening buffer zones of protected areas and strategic corridors.

Assuming a flow of revenue of EURO 42 mln (about USD 50 mln) to be generated by DFES in Georgia under the most optimistic scenario (with the participation of the six most likely creditors2) and about USD 2 These creditors include: Austria, Germany, the European Union, Russia, Turkey and the USA.

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35 mln under the more realistic scenario (with the participation of four of the creditors only) over the period 2006 – 2023, most of the pipelines could realistically be financed within the DFES scheme. Calculations of the capital investment needs made as part of this work show that the estimated financial envelopes for each of the pipelines are of the following magnitudes: • Biodiversity protection – USD 3.7 mln; • Biogas production – USD 300 000; • Municipal waste management – USD 3.6 mln; • Wastewater management – USD 8 mln; and • Small and mini hydropower generation – USD 15 mln.

For the larger project pipelines, or any large individual capital investments, additional resources would be needed, including from private and foreign sources. It is recommended that DFES resources should be used primarily to support investment project costs. In this context and in order to make a real difference in any of the priority areas listed above, careful selection of the most cost-effective projects, and requirements to co-finance projects from other sources, will need to be a cornerstone of project selection. This is also a prerequisite for creditors to be convinced that Georgia has the capacity and commitment to manage their funds effectively. What the final expenditure programme would look like would depend on the actual agreements with individual creditors. However, going to the negotiating table prepared with a well-designed and focused expenditure programme can only facilitate the discussions. Even if the DFES do not materialise, the project pipelines prepared as part of this work could still be used by Georgia in discussions with donors when developing technical cooperation programmes.

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BIODIVERSITY PROTECTION

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TABLE OF CONTENTS

SYNTHESIS................................................................................................................................................. 16

1. INTRODUCTION .................................................................................................................................... 20

2. AN OVERVIEW OF THE SYSTEM OF PROTECTED AREAS IN GEORGIA .................................. 21

3. IDENTIFYING PRIORITY CONSERVATION ZONES IN GEORGIA................................................ 23

3.1. The WWF Identification of Priority Areas......................................................................................... 23 3.2. Criteria for Evaluation of Priority Sites for DFES Financing ............................................................ 26 3.3. Identification of the Highest, High and Medium Priority Sites for DFES Financing ........................ 26

4. THREATS TO BIODIVERSITY: MAIN PROBLEMS TO BE TACKLED .......................................... 31

4.1. Deforestation ...................................................................................................................................... 31 4.2. Grazing............................................................................................................................................... 38 4.3. Hunting............................................................................................................................................... 42

5. OBJECTIVES AND STRATEGY FOR THE USE OF DFES RESOURCES......................................... 44

5.1. Areas of DFES Assistance ................................................................................................................. 46 5.2. Target Groups..................................................................................................................................... 51

6. CHARACTERISTICS OF PIPELINE FINANCING............................................................................... 52

6.1. Expected Location and Size of Target Groups................................................................................... 52 6.2. Type of Support and Range of DFES Financing for Projects ............................................................ 53 6.3. Expected Size of the Project Pipeline................................................................................................. 54

7. REFERENCES ......................................................................................................................................... 57

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LIST OF BOXES

Box1: Microcredit in Georgia – Some Successful Initiatives....................................................................... 54 Box 2: Microgrants in Georgia – Examples from CARE, Mercy Corps and the Eurasia Foundation ......... 55

LIST OF FIGURES

Figure 1: Woodcutting Among Poorest and Non-Poor Households in Svaneti, Racha and Lechkhumi (in Percent) ................................................................................................................................................. 36

Figure 2: Poorest and Non-Poor – Attitudes and Capabilities (Racha; Svaneti; Lechkhumi) ...................... 37

LIST OF MAPS Map 1: The Caucasus Biodiversity Hot Spot................................................................................................ 20 Map 2: Nature Reserves in Georgia.............................................................................................................. 21 Map 3: WWF Priority Sites and Location of Donor Support ....................................................................... 25 Map 4: Important Bird Areas of Georgia...................................................................................................... 25 Map 5: Grazing Migration Patterns .............................................................................................................. 39

LIST OF TABLES Table 1: Nature Reserves - Georgia.............................................................................................................. 22 Table 2: Hunting Reserves - Georgia............................................................................................................ 23 Table 3: Characteristics of the WWF Priority Sites for Georgia .................................................................. 24 Table 4: Correlation of WWF Priority Areas with DFES Selection Criteria................................................ 27 Table 5: Wood Fuel Reliance - Share of the Population Using Wood Fuel in Selected Districts ................ 33 Table 6: Consumption of Wood for Heating (m3/winter) (*) ....................................................................... 34 Table 7: Consumption and Origin of Wood for Heating – Regional Averages in Percent........................... 35 (Combined Urban and Rural) ....................................................................................................................... 35 Table 8: Is Your Household Engaged in Woodcutting? (Share in Percent) ................................................. 35 Table 9: If Your Family Cuts Wood, What Is the Main Purpose of This Activity? (In Percentage)............ 36 Table 10: Size of Target Groups by Location............................................................................................... 52 Table 11: Estimated Expenditures by Areas in the First Priority Group ...................................................... 56 Table 12: Annual Disbursement for 3 and 4-Year Periods........................................................................... 56

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ACRONYMS ACDI/VOCA Agricultural Cooperative Development International/Volunteers in Overseas Cooperative Assistance BSAP Biodiversity Conservation and Action Plan CIG Community interest group DFES Debt-for-Environment Swap GCCW Georgian Center for Conservation of Wildlife GDP Gross Domestic Product GEF Global Environmental Facility GEL Georgian Currency Lari GO Governmental Organisation GoG Government of Georgia GORBI Georgian Opinion Research Business International ha Hectare IBA Important bird area IUCN The World Conservation Union KfW Bank Kreditanstalt für Wiederaufbau (German Bank for Reconstruction) km Kilometre NGO Non-Governmental Organisation NR Nature Reserve PA Protected Areas PADP Protected Areas Development Project PCZCSC Priority Conservation Zones and Corridors of the South Caucasus UNDP United Nations Development Programme USAID US Agency for International Development USD US Dollar WB World Bank WWF World Wildlife Fund

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SYNTHESIS

This report is a continuation of the work performed in 2003 by a group of local and international experts that identified potential project pipelines for the debt-for-environment swap (DFES) programme in Georgia (the Scoping Phase Report).3 One of the identified potential pipelines was the strengthening of buffer zones of protected areas and biodiversity corridors. The Scoping Phase Report recommended the pipeline to finance projects with the dual objectives of making buffer zones and strategic corridor areas biodiversity-friendly productive landscapes and improving local living standards. The type of projects preliminary identified included capital investment support, technical assistance and public awareness. This Assessment Phase Report explores the feasibility of the biodiversity pipeline in detail. First, it presents an overview of the most biodiversity significant areas in Georgia. Second, it proposes a ranking of priority areas and identifies 1st, 2nd and 3rd priority groups. Third, this report describes the main threats affecting priority sites. Fourth, it describes the type of projects recommended for DFES support, and finally provides an estimation of the size of the pipeline. This report proposes that the main objective of the DFES programme in buffer/support zones be the promotion of biodiversity protection among local communities that live around protected areas. A secondary objective would be to test and replicate successful projects and initiatives from and for other areas of Georgia. As a main strategy, this report proposes that DFES resources be directed towards increasing living standards of the population living around protected areas, particularly increasing livelihood security as measured by access to food, energy and basic social services (e.g. education). Support for increased living standards would be complemented with investment in raising public awareness. This report proposes investing DFES resources in priority areas using the following criteria:

• Global and national biodiversity value. This is a crucial criterion for evaluation in view of the objectives of DFES, which should support projects that provide benefits to both national and international stakeholders.

• Value added in relation to existing or expected activities of other donors. The resources from DFES are to be invested in buffer and support zones of protected areas. At present, there are several projects from donors aimed at increasing the management capacities of selected reserves. DFES contributions will have the greatest effect when invested in protected areas that are functional and their management has at least minimum operational capabilities.

• Degree of threat. There can be situations in which DFES resources will fall short of achieving demonstrable impact because of the magnitude of the threat at hand. Conversely, there can be situations in which DFES resources will not be critically necessary as other donors may already be on

3 See Labbate, G., Janelidze, P., Partskhaladze, N. and Peszko, G. (2003). Potential Project Pipelines for the Expenditure Programme Financed by the Debt-for-Environment Swap in Georgia – Scoping Phase. Report financed by the OECD/ENV, Tbilisi, Georgia.

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track to demonstrate achievable impact. DFES should avoid investing its limited resources in either of these two situations.

Based on these three criteria, the 1st, 2nd and 3rd priority groups are defined as follows: 1st Priority Group. These areas contain biodiversity of high global significance. They can comprise protected areas that are already receiving support from donors/government. They can also comprise areas in which national parks are likely to be established and whose boundaries have already been defined. Their level of threat is considered as manageable and within the financial possibilities of DFES.

2nd Priority Group. These areas contain biodiversity of global significance and receive limited donor support. They are not considered as protected areas (PA). Even though there may be plans to do so, borders have not yet been defined. These are areas that can receive DFES support once protected areas have been established and buffers/support zones have been clearly identified.

3rd Priority Group. These areas may (i) be situated in conflict zones; (ii) receive substantial support from donors already; (iii) have no PAs established and no donor activity; and/or (iv) have biodiversity of lesser global significance. The following 14 areas have been identified and distributed according to the definitions of the 1st, 2nd and 3rd priority groups:

First Priority Group

• Adjara • Vashlovani • Lagodekhi • Tusheti

Second Priority Group

• Racha • Svaneti • Southern Javakheti

Third Priority Group

• Abkhazia4 • Kolkheti • Trialeti • Kura • Manglisi (Algeti) • Kvernaki • Askhi-Karst Massif

The main threats to biodiversity are deforestation, grazing and hunting. These threats affect areas in all three priority groups. Exceptions are few; these include the oil infrastructure in the Kolkheti National Park and water management in Southern Javakheti.5

4 However, should the security situation improve and Georgian sovereignty be restored, Abkhazia would be included in the 1st priority group.

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This report proposes the following areas for DFES assistance: 1. Increasing the productivity and volume of agricultural activities in the villages neighbouring protected

areas; 2. Supporting non-traditional income generation activities; 3. Facilitating access to local markets; 4. Sustainable forest management; 5. Pasture management; 6. Social infrastructure; and 7. Environmental awareness and education. The target groups that may access DFES resources include: 1. Non-governmental organisations (NGOs). The term NGO is used here in the wide sense, and includes

not only Tbilisi-based donor-supported organisations, but also local unaccredited organisations, such as a local hunting union, a shepherd association, and others.

2. Governmental organisations (GOs). This group could involve the administration of nature reserves, local representations of the Department of Forestry and the Department of Protected Areas, and local enforcement bodies. Such institutions may apply for support to improve resource management, monitoring and enforcement capacities in and around buffer zones.

3. Common interest groups (CIG). The concept of “common interest group” refers to a small number of people who share an activity, common concerns or problems.6 CIGs are not NGOs as they do not have an established management structure. CIGs are likely to include people who are conducting joint or individual household or economic activities and who are willing to contribute toward solving social or ecologic problems through common efforts.

These groups may be found in target communities with the following characteristics: 1. Villages whose inhabitants’ daily activities are naturally connected to, and/or have an impact on, the

targeted protected area since they are located either within or in the immediate surroundings of the targeted protected area and there is no natural or clear separating border; and

2. Villages whose inhabitants are active users of the targeted protected area. These villages would be located not far from the targeted protected area (e.g. 5 km).

The two main types of support are (i) microcredit and (ii) grants. Microcredit. This would be used primarily to provide support for increasing farming productivity and alternative income generation projects. Experience with microcredit in Georgia indicates that most loans are in the range of USD 500 - 3 000 and that they rarely exceed this amount. Bigger amounts are given either to families who are well off or to credit groups.7 Collateral would be required to access credit.

5 There is a half-built oil terminal within the Kolkheti National Park. Construction has been stopped due to financial problems. The presence of the oil terminal represents a pending threat because of disturbance (during construction and operation), pollution and the risk of spills. In southern Javakheti, lakes have been dried up for agricultural purposes. This happened during Soviet times, and it is not clear that work of this magnitude would have a positive return today. 6 The idea of CIG is also part of the Small Grant Programme of the WB/GEF PADP. 7 This is a group of people linked by family ties or profession who apply collectively for a loan.

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Grants. They would be used primarily for technical support in income generation projects, support to access local markets, sustainable forest management, pasture management, social infrastructure projects and environmental awareness campaigns. Experience in Georgia indicates that the maximum size of the grant would be USD 25 000, with the exception of social infrastructure projects, which can easily go beyond this ceiling.8 There would be co-financing requirements. Based on previous experience, the total DFES allocation has been estimated at USD 3.7 million, with 3.1 million distributed as grants and 0.6 million as microcredit. This USD 3.7 million would constitute the first phase of a DFES programme and would be invested in the areas of Vashlovani, Lagodekhi, Tusheti and Adjara, with an estimated distribution of 20%, 30%, 15% and 35%, respectively. The period for disbursement of this first phase has been estimated between 3 and 4 years. After this period, DFES would carry out an impact evaluation to define additional expenditure needs in areas of the 1st priority group. DFES expenditures in the areas of the 2nd priority group would depend on a clear definition of nature reserve boundaries since these will determine the target communities. This information is expected to be available before the completion of the 1st phase of the DFES programme.

8 An example could be improving the access road to communities in Tusheti. This single measure would perhaps have the greatest impact on living standards of the community. The access road is often closed and its poor state precludes regular connections with Kakheti. This project would require resources above the USD 25 000 ceiling.

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1. INTRODUCTION

The Caucasus region is recognised as holding an important reservoir of biodiversity. It is considered a globally significant “biodiversity hotspot” because of its richness of species and the level of endemism.9 The reason for this diversity may be explained by its location (at a juncture of two major biogeographic regions), the land shape (the peninsula between the Black and the Caspian seas provides an important migration route and flyway), the topography of the landscape (with great variations in altitudes, and opportunities for isolation) and the climate (which varies significantly across the country, resulting in very varied habitats – from sub-tropical drylands and dry forests, to mountain tundra). Georgia is located at the heart of the Caucasian hot spot. The country has a diverse climate and landscape. With only 69 700 km2, the country presents 23 soil-climatic zones and harbours a unique plant and fauna diversity.

Map 1: The Caucasus Biodiversity Hot Spot

Source: Conservation International.

This report is a continuation of the work performed in 2003 by a group of local and international experts that identified potential project pipelines for the DFES programme in Georgia (Scoping Phase Report).10 One of the identified potential pipelines was the strengthening of buffer zones of protected areas and biodiversity corridors. The Scoping Phase Report recommended the pipeline to finance projects with the dual objectives of making buffer zones and strategic corridor areas biodiversity-friendly productive landscapes and improving local living standards. The type of projects identified included capital investment support, technical assistance and public awareness. The Scoping Phase Report also recommended to concentrate resources primarily around protected areas whose management capacities are being, or have already been, strengthened. Specifically, the report indicated that the areas targeted by the World Bank (WB)/Global Environmental Facility (GEF) Protected Areas Development Project (PADP)

9 For further information about the characteristics of the Caucasian hot spot see: http://biodiversityhotspots.org/xp/hotspots/caucasus 10 See Labbate, G., Janelidze, P., Partskhaladze, N. and Peszko, G. (2003). Potential Project Pipelines for the Expenditure Programme Financed by the Debt-for-Environment Swap in Georgia – Scoping Phase. Report financed by the OECD/ENV, Tbilisi, Georgia.

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would be eligible candidates: Kolkheti National Park, the Borjomi-Kharagauli National Park and other areas recently identified by the Caucasus Network of Protected Sites (World Wildlife Fund). The present report explores the feasibility of the biodiversity pipeline in detail. First, the report presents an overview of the Georgian system of protected areas. Second, it introduces the recent work of the World Wildlife Fund (WWF) on priority conservation areas in the Caucasus. This work stands as one of the most comprehensive studies for ranking priority areas in Georgia and the Caucasus. Third, the report presents the criteria for selecting priority areas for DFES. These criteria differ from those of the WWF and, therefore, the resulting ranking of areas is not the same. Fourth, the report describes the main threats affecting the priority sites. Then, the threat analysis is followed by a description of recommended areas for DFES assistance. The report closes with an estimation of the size of the proposed project pipeline.

2. AN OVERVIEW OF THE SYSTEM OF PROTECTED AREAS IN GEORGIA

Map 2 below presents the system of protected areas that Georgia inherited from the Soviet Union.

Map 2: Nature Reserves in Georgia

Source: Ministry of Environmental Protection and Natural Resources Protection of Georgia.

In the mid-1990s, this list of nature reserves grew with the establishment of the Kolkheti National Park and the Borjomi-Kharagauli National Park. The Kolkheti National Park incorporated the former Kolkheti Nature Reserve, the Paliastomi Lake Nature Reserve and the Kolkheti National Marine Reserve (indicated as “Poti” in Map 2). The Borjomi-Kharagauli National Park incorporated the Borjomi Nature Reserve. Below is a brief description of the nature reserves and national parks on Georgian territory.

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Table 1: Nature Reserves - Georgia Name Category Size and Location Main Characteristics

Ajameti Nature Reserve

4 845 ha (Bagdati and Zestaponi districts)

The reserve is located on the Kolkheti lowland. Forests occupy 4 700 ha (97%), of which 95% is covered by oak forest. Fauna diversity is limited.

Algeti Nature Reserve

6 822 ha (Tetritskaro district)

The flora and fauna are rich and diverse. Botanists call the Southern slopes of the Trialeti range a "florist junction", since one could find here flora of Kolkhic, Hircanic, Iberian, Caucasian, Middle Eastern, Persian and other origin. There is substantial impact of human activities on the reserve.

Babaneuri Nature Reserve

770 ha (Akhmeta district)

Babaneuri reserve, together with the Batsara and Tusheti reserves, form the Akhmeta Nature Reserve. The objective of the reserve is to protect the remnant tree - zelkova carpinifolia.

Batsara Nature Reserve

3 042 ha (Akhmeta district)

The objective of the reserve is to preserve the virgin massifs of yew trees (taxus).

Bichvinta-Miusera

Nature Reserve

27 334 ha (Gagra and Gudauta districts)

The objective of the reserve is to preserve rare species: Bichvinta pine tree, strawberry tree, manna, box tree, pterocaria pterocarpa, etc.

Borjomi National Park 76 000 ha (Borjomi and Kharagauli districts)

This reserve protects the forest massifs of the Borjomi gorge which are important for Caucasian deer.

Gumista Nature Reserve

400 ha (Sokhumi district)

The objective of the reserve is to protect the chestnut (castanea) and other endemic plant species.

Kazbegi Nature Reserve

8 707 ha (Kazbegi district)

The reserve controls all forests of the Kazbegi district (3 % of the territory).

Kintrishi Nature Reserve

13 893 ha (Kobuleti district)

The objective of the reserve is to protect the flora and fauna of the middle Kolkhic mountains, particularly the chestnut and beech forests with evergreen elements.

Kolkheti National Park 28 940 ha, including 15 742 ha of marine area.

This is the most important wetland of Georgia and an important bird area.

Lagodekhi Nature Reserve

17 932 ha (Lagodekhi district)

The objective of the reserve is to protect the main Caucasian south-east slope's rare endemic flora and fauna.

Liakhvi Nature Reserve

6 388 ha (Gori district)

The objective of the reserve is to protect and study the southern micro steppes' natural landscapes of the Caucasian range.

Mariamjvari Nature Reserve

1 040 ha (Sagarejo district)

The Mariamjvari reserve and the Saguramo reserve are jointly administered (see below). The Mariamjvari reserve protects the Caucasian pine tree.

Pskhu Nature Reserve

27 334 ha (Sokhumi district)

This is jointly administered with the Gumista and Skurcha reserves. The reserve protects the natural tracks of Abkhazian flora and associated fauna.

Ritsa Nature Reserve

16 289 ha (Gudauta district)

The objective of the reserve is to protect and study the high mountain Kolkhic and sea forests.

Saguramo Nature Reserve

5 359 ha (Mtskheta district)

This is jointly administred with the Mariamjvari reserve. The objective of the reserve is to protect broadleaf forests, third period remnant of Kolkhic flora and the rare animals of the Transcaucasus.

Sataplia Nature Reserve

354 ha (Tskaltubo district)

The objective of the reserve is to protect the karstral cave places, where dinosaur footprints can be found. Almost the whole territory of the reserve (98%) presents young Kolkhic forests (cast hornbeam, hornbeam, alder, box, chestnut, beech, ilex, ivy, rhododendron, bilberry, blackberry, etc.).

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Skurcha Nature Reserve

85 ha (Ochamchire district)

This reserve is jointly administred with the Gumista and Pskhu reserves. Its aim is to protect the tertiary period remnant flora: box tree, fig tree, Kolkhic oak, pterocaria pterocarpa, staphylea colchica, rhododendron ponticum, etc.).

Tusheti Nature Reserve

12 485 ha (Akhmeta district)

This reserve is jointly administred with the Batsara and Babaneuri reserves. Its objective is to protect virgin pine and birch forests.

Vashlovani Nature Reserve

8 034 ha (Dedoplistskaro district)

The objective of the reserve is to protect and study East Georgia "savannah" light forests.

Source: Ministry of Environmental Protection and Natural Resources Protection of Georgia. In addition to this list of nature reserves and national parks, the protected area system in Georgia includes several hunting reserves, which are described in Table 2 below.

Table 2: Hunting Reserves - Georgia Name of Reserve Area (ha) Year When

Established Gardabani 3 315 1957 Korugi 2 068 1958 Iori 1 336 1965 Chachuna 5 200 1965 Katsoburi 295 1964 Source: Biodiversity Conservation and Action Plan.

3. IDENTIFYING PRIORITY CONSERVATION ZONES IN GEORGIA

3.1. The WWF Identification of Priority Areas

The protected areas system in Georgia has come under close scrutiny because of two main issues. The first is its capacity to cover a representative sample of the Georgian fauna and flora. The second is to identify priority areas for receiving assistance. During the 1990s, Georgia received assistance from the World Bank/Global Environmental Facility (GEF) to produce a Biodiversity Strategy and Action Plan (BSAP). Unfortunately, the BSAP does not contain a prioritisation of protected areas or guidelines that could indicate which area should come first in terms of receiving donor assistance. This task, however, was recently completed by the WWF for the whole region of the Caucasus. At present, the work of WWF is the most authoritative and complete assessment of priority conservation zones in Georgia and the Caucasus. The list of areas, which are classified as “highest”, “high” and “medium” priority, includes some existing nature reserves (NR), but not all of them. Because of its comprehensiveness, the work of the WWF will be used in this report as a starting point for the selection of priority areas for DFES assistance. The complete list of priority conservation zones is presented below.

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Table 3: Characteristics of the WWF Priority Sites for Georgia # Area/Corridor Presence of NR WWF Priority

Assessment Donors Active in the Area

1 Adjara Kintrishi NR and the former Tsiskara NR (no longer operational)

Highest UNDP/GEF project (under preparation)

2 Iori and Vashlovani

Vashlovani NR Highest WB/GEF PADP site Project site of UNDP/GEF project (completed)

3 Southern Javakheti

Does not include existing NR

Highest UNDP and NGOs, such as CARE, World Vision and others, are active in development and conflict prevention in Javakheti

4 Lagodekhi-Zakatala

Lagodekhi NR Highest WB/GEF PADP site

5 Trialeti Borjomi-Kharagauli National Park

Highest KfW supports the operation of the National Park and its buffer zone

6 Abkhazia Includes Ritsa and Bichvinta NR, and partly Pskhu-Gumista NR

Highest Abkhazia is still considered a conflict zone and there is no work of donors on environmental issues

7 Khevi-Tusheti Tusheti and Kazbegi NR

High UNDP/GEF PADP site

8 Rioni Includes Kolkheti National Park

High WB/GEF project site The area also recently received assistance from the Japanese Social Development Fund

9 Kura-Jandari Gardabani Hunting Area

High UNDP, UNDP/GEF and USAID are active in the management of the Kura River, a trans-boundary river. These initiatives partly include the protection of biodiversity important sites

10 Racha No High WB/GEF PADP site 11 Alazani No High This is an area of interest to the WB/GEF

PADP since it bridges the work in the Vashlovani and Tusheti sites. However, the area is not officially included under the project

12 Svaneti No High WB/GEF PADP site 13 Askhi-Karst

Massif No Medium N/A

14 Manglisi It borders Algeti NR Medium N/A 15 Kvernaki No Medium N/A Source: WWF; WB/GEF PADP; UNDP. Note: N/A – Non applicable. There is a common understanding of what the most important areas are for conservation purposes in Georgia. The priority areas identified by the WWF is an expanded list of sites identified by other agencies and NGOs. As can be seen from Maps 2, 3 and 4, the list of existing protected areas, the WWF priority sites, important bird areas, and the project target sites of major donors and agencies share similar sections of the country.

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Map 3: WWF Priority Sites and Location of Donor Support

Source: WWF; UNDP; WB. Map 3 shows the priority areas of the WWF (highest, high and medium). The areas in Map 3 are numbered according to Table 3 above. The rectangles (in blue) show the areas receiving the most substantive donor support for strengthening nature reserves or protecting agro-biodiversity. Finally, Map 4 shows the list of important bird areas of Georgia. It can be seen that priority areas in Maps 2, 3 and 4 overlap.

Map 4: Important Bird Areas of Georgia

Source: Georgian Center for Conservation of Wildlife.

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3.2. Criteria for Evaluation of Priority Sites for DFES Financing

The evaluation of priority sites for DFES financing will build upon the work of the WWF on the Priority Conservation Zones and Corridors of the South Caucasus (PCZCSC) project. There are two main reasons for that. The first is that the Biodiversity Conservation and Action Plan (BSAP), as it stands today, does not provide guidance as to which reserves should receive priority attention. While it is true that almost all of them are valuable for one reason or another, in an environment of scarce government and donor resources, some NRs may deserve greater priority than others. Second, the PCZCSC does not fundamentally depart from the common understanding in the Georgian environmental community about the location of the most important areas with regard to biodiversity. In fact, the PCZCSC shows a high degree of overlapping with existing reserves, important bird areas (IBAs) and areas receiving donors’ support. However, the PCZCSC covers 15 areas and this is beyond the number of sites that can expect support from DFES. A further prioritisation is needed. Consequently, this report will depart from the WWF ranking in that it will use modified criteria to select candidate sites. The criteria for identification of priority sites are based on the following: 1. Global and national biodiversity value. This is a basic criterion for evaluation in view of the objectives

of DFES, which require the support of projects that provide benefits to both national and international stakeholders.

2. Value added in relation to existing or expected activities of other donors. The resources from DFES are to be invested in buffer and support zones of protected areas. At present, there are several projects from donors aimed at increasing the management capacities of selected reserves. DFES contributions will have the greatest effect when invested in protected areas that are functional and their management has at least minimum operational capabilities.

3. Degree of threat. There can be situations where DFES resources will fall short of achieving demonstrable impact because of the magnitude of the threat at hand. Conversely, there can be situations where DFES resources will not be critically necessary, as other donors may already be on track to demonstrate achievable impact. DFES should avoid investing its limited resources in either of these two situations.

Table 4 below provides a description of each area in relation to these three criteria.

3.3. Identification of the Highest, High and Medium Priority Sites for DFES Financing

Biodiversity criterion

Table 4 shows that the biodiversity in the majority of areas is of global significance. The top-ranked sites are: • Adjara • Iori and Vashlovani • Southern Javakheti • Lagodekhi-Zakatala • Trialeti • Abkhazia.

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Table 4: Correlation of WWF Priority Areas with DFES Selection Criteria Area Biodiversity Value Complementarity with Work of

Other Donors Degree of Threats

Adjara Biologically most diverse section of the western Caucasus

UNDP/GEF and WWF likely to support the establishment of the Mtirala National Park. Candidate area for the WWF/CI Trust Fund

Woodcutting, grazing and hunting of a low to medium intensity

Iori and Vashlovani

Remnant historical woodland and floodplain forests. Ten species listed in the IUCN as endangered or threatened. IBA

WB/GEF PADP supports the operations of the Vashlovani Reserve

Grazing and hunting of a moderate to high intensity. Shepherds usually set fires to dry grass causing habitat damage to threatened species

Southern Javakheti

Unique mountain lakes and bird areas. Also shows agro-biodiversity of global significance

Priority area for WWF and the GCCW, though there is no PA at the moment

Grazing of low and medium intensity; water management

Lagodekhi-Zakatala

Deciduous mountain forests and alpine grasslands. IBA

WB/GEF supports the operations of the Lagodekhi Reserve

Woodcutting and hunting of high intensity. Grazing of medium intensity

Trialeti Encompasses the border of eastern, western and southern geo-climatic areas of Georgia, with a rich combination of flora and fauna. IBA

Major ongoing support for the park and buffer operations financed by KfW

Habitat fragmentation, forest cutting, pollution, grazing, and hunting of medium to high intensity

Abkhazia Comprises subtropical and alpine environments with significant endemic flora and fauna. IBA

There is no work of donors. The area is still a conflict zone

N/A

Khevi-Tusheti As a result of its isolation, the vegetation, and especially the forests, is of an extraordinary diversity. The fauna includes bearded vulture, eagle, griffin, Caucasian tur, roe and red deer, brown bear, wolf, fox, badger, and marten. IBA

The WB/GEF supports the operations of the Tusheti National Park

Hunting is the most important threat. Woodcutting and grazing of medium intensity

Rioni The most important wetland ecosystem in Georgia and a habitat for species of global significance. IBA

The WB/GEF and WWF supported the establishment of the Kolkheti National Park, while the Government of Japan supports the strengthening of the buffer zone

Woodcutting of medium intensity and potential development of an oil terminal

Kura-Jandari Riverine forests. Small IBA UNDP, UNDP/GEF and USAID have projects on international waters management (Kura basin)

Grazing, woodcutting and hunting of medium to high intensity

Racha Part of the Central Caucasus system with several endemic species, fragile forest and alpine habitats. IBA

Receives assistance from the WB/GEF PADP, though there is no PA at the moment

Woodcutting and hunting of medium to high intensity, depending on section

Alazani Floodplain forests of global significance. Importance as a corridor between areas in Lagodekhi and Vashlovani. IBA

A priority area for the WB/GEF PADP

Woodcutting, grazing and hunting of medium intensity. Intensive illegal fishing

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Svaneti Part of the Central Caucasus system with several endemic species, and fragile forest and alpine habitats. It also shows agro-biodiversity of global significance. Sections of it contain IBA

A priority area for the WB/GEF PADP, though there is no PA at the moment

Woodcutting of moderate to high intensity depending on section; grazing and hunting of low intensity

Askhi-Karst Massif

Sections of it contain an IBA No work of donors Isolated area. Low degree of human impact

Manglisi Because of its location, it is sometimes called a "florist junction", since one could find flora of a Kolkhic, Hircanic, Iberian, Caucasian, Middle Eastern, and Persian origin

No work of donors Human impact is substantial. Woodcutting of high intensity. There are no longer any virgin forests in the Algeti reserve. Hunting and grazing of moderate to high intensity

Kvernaki IBA No work of donors Hunting of low intensity Source: Own compilation.

Of the rest, only Kvernaki, Manglisi and the Askhi-Karst Massif are ranked as medium priority areas, while the remaining areas are in between these two groups.

Value-added criterion

Running the list of areas through the-value added criterion highlights important differences. Because DFES invests its resources in buffer zones of functional protected areas, those receiving donor support come up first. These are:

• Vashlovani

• Lagodekhi

• Tusheti

• Rioni (Kolkheti National Park)

• Trialeti (Borjomi-Kharagauli National Park).

All 5 areas contain nature reserves with management receiving support from donors. However, two of the areas in the list above, Rioni and Trialeti, are already receiving substantial assistance from international organisations. Rioni, which includes the Kolkheti National Park, receives assistance from the World Bank (WB)/GEF for strengthening the park’s management, and recently has also secured support from the Japanese Social Development Fund for strengthening the buffer zone. The latter is a programme for assisting communities in improving their livelihoods. In turn, Borjomi-Kharagauli receives considerable assistance from the German Bank for Reconstruction (KfW) and from the WWF for supporting both its management and buffer zone. The level of support going to these two areas creates doubts about the value added of investing DFES resources there. Adjara, a high value biodiversity area, is a nature reserve (Kintrishi) that is not receiving support from donor organisations at the moment. However, this is likely to change, as the United Nations Development Programme (UNDP) and the WWF are working on an application for GEF resources, which should not encounter serious difficulties in being approved. Investment plans for Adjara are also likely to receive strong backing from the central authorities (Tbilisi), in view of recent development in that region.

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Racha and Svaneti do not count yet as established protected areas, although they are part of the Central Caucasus system targeted by the WB-PADP project. The situation in southern Javakheti is similar. There are no protected areas at the moment, though there are several initiatives by the WWF and the Georgian Center for Conservation of Wildlife (GCCW) to establish them. It is expected that considerable resources will flow to this area because of its high ranking in the WWF list of priorities (see Table 3). All other areas are not covered through current or expected (operational) reserve management. Using the value-added criterion, Vashlovani, Lagodekhi and Tusheti come up at the top of the ranking, followed by Adjara, Racha, Svaneti and Southern Javakheti. Kolkheti and Borjomi-Kharagauli are not in critical need of additional support and therefore the value-added of DFES resources is low. All other areas identified in Table 4 do not yet have functional protected area management, which poses major barriers for investing DFES resources in buffer zones.

Degree of threat criterion

The areas identified as priorities in Section 3.3.2 above (Iori-Vashlovani-Alazani, Lagodekhi, and Tusheti) are affected by a combination of woodcutting, grazing, hunting and agriculture. The intensity and relative importance of these activities vary from site to site. However, none of them stands as a threat that could not be controlled with support from DFES. Adjara, which is the most biologically diverse part of western Georgia, shows threats that are of medium and low intensity and therefore manageable within DFES resources. Racha and Svaneti face woodcutting as the main threat but its impact is concentrated along the main roads. Preventing the activity from damaging other sections should be a feasible goal. Southern Javakheti presents a low intensity of threats as the most important sectors are almost uninhabited.

Ranking results

This report will rank target areas in terms of the 1st, 2nd and 3rd priority groups defined as follows: 1st Priority Group. These areas contain biodiversity of high global significance. They can comprise protected areas that are already receiving support from donors/government. They can also comprise areas in which national parks are likely to be established and whose boundaries have already been defined. Their level of threat is considered as manageable and within the financial possibilities of DFES. 2nd Priority Group. These areas contain biodiversity of global significance and receive limited donor support. However, they are not considered as an established protected area. Given that DFES resources are expected to be limited, these areas can receive support after PAs have been established and buffers zones have been clearly identified. 3rd Priority Group. These areas may (i) be situated in conflict zones; or (ii) receive substantial support from donors already; (iii) have no PAs established and no donor activity yet; and/or (iv) have biodiversity of lesser global significance. The list of areas, distributed according to the priority groups, is as follows:

First Priority Group

• Vashlovani. This nature reserve is receiving support from the WB/GEF PADP. The area contains riverine forests of global significance. The threats to biodiversity have been well researched and

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necessary actions identified. DFES would also extend support to cover the eastern section of the Alazani river, which acts as a corridor between this nature reserve and Lagodekhi (see below).

• Lagodekhi. The area is currently receiving support from the WB/GEF for strengthening protected area management. Lagodekhi contains forests of global significance. The threats to biodiversity have been well researched and necessary actions identified.

• Tusheti. This area receives support from the WB/GEF for strengthening protected area management. Tusheti contains alpine biodiversity of global significance. Threats to biodiversity have been identified, although further fine-tuning of required actions is still needed. This work is currently underway and should be completed by the time DFES is established.

• Adjara. This is indisputably the area with the highest biodiversity value of western Georgia. There are advanced discussions between the UNDP and the WWF to strengthen the Kintrishi State Nature Reserve through the establishment of the Mtirala National Park. Threats to biodiversity have been well identified and are manageable within the expected scope of DFES resources.

Second Priority Group

• Racha. This is part of the Central Caucasus and receives limited assistance from the WB/GEF for establishing a protected area system. Threats to biodiversity have been identified, although further fine-tuning of required actions is still needed. This work is currently underway and should be completed by the time DFES is established.

• Svaneti. This is part of the Central Caucasus and receives limited assistance from the WB/GEF for establishing a protected area system. Until recently, the area was almost inaccessible for the work of donors due to the poor security situation. Security, however, appears to have improved recently following the change in government in Georgia.

• Southern Javakheti. While this is an important bird area, it is not a protected area. Threats to biodiversity are at present of a low intensity (large parts of the area are uninhabited) and the situation is unlikely to change in the short or medium term. Further, the area is likely to receive WWF support. Under the present conditions, it is recommended to wait with regard to DFES until the boundaries of the expected protected area have been established and the subsequent specific challenges in the buffer zones have become clear.

Third Priority Group

• Abkhazia. This would have been in the list of the highest priorities because of its biodiversity value. Unfortunately, the area is still a conflict zone. If the political conflict with Abkhazia is resolved and Georgian sovereignty restored, the area should join the 1st Priority Group of sites for DFES.

• Kolkheti. This is the most important wetland of Georgia and a Ramsar site. Kolkheti, which includes the national park of the same name, is receiving substantial support for its protected area and buffer zones. It does not critically need DFES resources at this time.

• Trialeti. This area comprises the Borjomi-Kharagauli National Park, which is receiving substantial support from the WWF and the KfW, for both its protected area and buffer zones. It does not critically need DFES resources at this time.

• Kura. Its biodiversity value is less than that of other areas in the list of highest and high priorities. In addition, the whole of the Kura River will undergo a Strategic Action Plan (SAP) exercise that will identify hot spots and best strategies to address threats. It is also expected that the Kura River will receive support from the GEF and other donors. It is recommended to wait for SAP results and the confirmation of donor support before investing DFES resources in the area.

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• Manglisi (Algeti). Human influence over the reserve territories is substantial. Due to uncontrolled tree cutting, cattle grazing and hunting activities, there are no virgin forests left within the reserve. The reserve has been partitioned into agricultural areas and settlements, and maintenance of the protection regime is a complicated task. The biodiversity significance of the area is ranked as “medium”. It is recommended to direct DFES resources to this area once the operational capacities of the reserve (e.g. enforcement) have been improved.

• Kvernaki. Biodiversity in the area is considered of less importance than in other areas (i.e. of highest and high priority). There is no established protected area. It is recommended to invest DFES resources in Kvernaki once areas of highest and high priority have been properly covered.

• Askhi-Karst Massif. Threats to biodiversity in the area are low. No protected area has been established there. It does not critically need DFES resources at this time.

The compatibility of this analysis with the WWF ranking should be noted. All but one area of the First Priority Group described here are identified by WWF as highest priorities.

4. THREATS TO BIODIVERSITY: MAIN PROBLEMS TO BE TACKLED

This section contains a summary of threats affecting areas in the 1st priority group. The threats comprise deforestation, grazing and hunting. Even though the description of threats for areas in the 2nd and 3rd priority groups has been omitted for reasons of space, basically the same type of threat affects these areas as those in the 1st priority group. Exceptions are few; these include the proposed oil infrastructure in the Kolkheti National Park and water management in Southern Javakheti.11

The objective of describing threats to biodiversity is to familiarise policy makers with the main characteristics of these activities. Tackling the negative impacts of activities that threaten biodiversity will require strengthening the buffer functions of areas around nature reserves. This report therefore proposes to use DFES resources to help improve living standards of communities around protected areas and to combine these efforts with public awareness campaigns and better enforcement capacities.

4.1. Deforestation

The overall status of forests in Georgia is still a matter of controversy and opinions are divided. On the one hand, there are claims that forests are being depleted at an alarming rate and that the impact of illegal cutting for commercial purposes is already visible in the greater frequency of landslides. On the other hand, there are estimations that total forest resources have actually increased in the last decade, following the collapse of the Soviet wood processing industry.

11 There is a half-built oil terminal within the Kolkheti National Park. Construction has been stopped due to financial problems. The presence of the oil terminal represents a pending threat because of disturbance (during construction and operation), pollution and the risk of spills. In southern Javakheti, lakes have been dried up for agricultural purposes. This happened during Soviet times, and it is not clear if work of this magnitude would have a positive return today.

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There appears to be some truth in both claims. Even a casual inspection of some regions, such as Samtskhe-Javakheti, Racha or Svaneti, will show clear signs of logging activities. Deforestation is most visible along roads, because these facilitate the transportation of wood, and around rural settlements, because of their heavy reliance on fuel wood. It is also possible that the collapse of the Soviet wood processing industry counterbalanced the increased reliance on fuel wood that followed the collapse in central heating systems and electricity distribution.12 The intent of DFES, however, is not to ensure sustainable forest extraction at a national level. This is a local responsibility, and dealing with it is in the long-term best interest of Georgia. In addition, the country has taken out a USD 21 million credit from the World Bank to ensure sustainable forest extraction. Rather, the objective of DFES is to ensure that woodcutting around protected areas does not threaten these areas. DFES resources should therefore ensure that woodcutting is carried out in a sustainable manner and results in an increased fuel security for the local population. If this type of support is to be effective, it is necessary to understand the main characteristics and purposes of the activity (“who does it?”, “why?”). These characteristics are presented below.

Most people cut wood because of need and because there is no other fuel source

Wood is cut for three purposes: wood as fire material, wood as building material, and wood for commercial selling. In the communities around protected areas, the bulk of logging is done to obtain fuel wood. Almost 15 years after independence, the country still faces an acute energy crisis. With too little cash to afford the rehabilitation and operation of its thermal plants, the country relies significantly on hydro-electrical sources of power. With rains coming mainly during the summer period and peak demand taking place in winter, the result is widespread blackouts. A regime of 8 hours/day of electricity is considered a “good” one by the rural population and in many urban settlements. For years, many parts of Georgia have only received a couple of hours of electricity per day, at best.13 Some have received none for days at a time. With the new government, the situation is beginning to change for the better, but solving the energy crisis will remain one of the greatest challenges for the development of Georgia. With electricity in short supply, central heating systems out of order, natural gas distribution restricted to a few districts, and diesel beyond the purchasing power of the majority of the population, wood fuel has become the main energy source for most people in Georgia.

12 The district (central) heating system collapsed after independence due to lack of maintenance. Later, it was looted and the material was sold as scrap metal. Electricity supply also collapsed after independence, and the majority of the population receives less than 8 hours of electricity a day, with large parts of the country receiving less than 4-5 hours/day in winter. Some villages have no electricity for days at a time. 13 For example, on average, Guria received electricity for 1 hour a day during the winter of 2001. Several parts of Kakheti received none for months. See National Human Development Report 2001-2002. United Nations Development Programme. Tbilisi, Georgia.

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Table 5: Wood Fuel Reliance - Share of the Population Using Wood Fuel in Selected Districts What % of your cooking fuel needs are met by

wood? What % of your heating fuel needs are met

by wood?

100% > 50% 50% < 50% 0% 100% > 50% 50% < 50% 0% Akhmeta 23.0 48.0 22.0 3.0 4.0 99.0 0.0 0.5 0.0 0.5 Lagodekhi 36.0 22.0 20.0 16.0 6.0 68.0 26.0 2.0 3.0 2.0 Dedoplistkaro 12.0 20.0 28.0 25.0 15.0 92.0 0.0 2.0 2.0 5.0 Oni 58.7 8.7 28.0 3.3 1.3 70.7 24.0 4.7 0.7 0.0 Ambrolauri 16.0 53.3 26.0 4.0 0.7 74.7 16.7 8.0 0.7 0.0 Tsageri 30.7 40.7 25.3 3.3 0.0 82.7 13.3 4.0 0.0 0.0 Lentekhi 28.7 49.3 19.3 2.0 0.7 76.1 17.7 5.5 0.5 0.2 Source: WB/GEF PADP; Forestry Development Project (reports produced by GORBI); 2000. Table 5 shows the reliance on fuel wood for selected districts within the 1st and 2nd priority groups of areas. It is clear that reliance on fuel wood is very significant. For example, full reliance (100%) for heating purposes is at its lowest in Lagodekhi, but still 68% of the families have no other energy option. Full reliance peaks in Akhmeta, where almost all families (99%) depend on wood to heat up their houses. Table 5 shows that, on average, more than 90% of families either depend totally (100%) or heavily (>50%) on fuel wood for heating. The situation concerning cooking is less dramatic. This is because families often resort to the use of bottled gas14 or electricity (if available)15 when it is economically unjustified to light up the wooden stove only for light meals, such as boiled eggs or hot drinks, such as tea. The results of Table 5 are similar to those obtained in the vicinity of Kolkheti National Park (Guria and Samegrelo).16 There, almost 100% of households reported wood as the main energy source for heating. For cooking, firewood was also predominant, although bottled gas and electricity were used to some extent. Adjara, the site of the 1st priority group area, also shows wood as the primary fuel for heating and cooking for 81% and 56% of families, respectively. These results are also in line with those for the population of Georgia as a whole. More than 80% of households in the country, with the exception of Tbilisi (25.2%) and Rustavi (40.2%), use wood as the primary fuel for heating. For cooking, wood is the predominant source of energy in Svaneti (92.7%), Racha-Lechkhumi (79.7%), and Guria (74%), while families in other regions have a greater use of bottled gas or electricity17. The data clearly indicate that people consume wood primarily out of necessity and because they have few other choices. The vast majority of the rural population cuts wood because other types of energy sources for heating, which were available under the Soviet regime, are no longer functional (e.g. electricity) or affordable (e.g. diesel). The majority of households (90.2%) that relies exclusively on wood for heating and cooking declared that non-wood forms of fuel were too expensive.

14 Bottled gas is expensive for most families, with the full charge at about 15 GEL. If used for all cooking needs, a bottle can last up to two weeks for a monthly expense of 30 GEL. For the purpose of comparison, the poverty line is about 114 GEL. In other words, using gas for cooking purposes can take about a quarter of the subsistence income in Georgia. 15 In addition to irregular electricity supply, there is the problem of low voltage. For example, Svaneti receives a relatively good supply in terms of hours/day, but electricity is often of low voltage (e.g. 140-160 V). This makes it inappropriate for cooking or heating purposes. 16 See Nadareishvili, M., Pkhakadze, V., and Kapanadze, N. (2001). Kolkheti Wetlands Community Household Survey. 17 The Status of Households in Georgia – 2002. Save The Children, Tbilisi, Georgia.

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These data allow two conclusions that are relevant for the work on DFES. The first is that woodcutting will continue in the foreseeable future. Measures can be taken to stop illegal logging and to ensure that the logging pressure is sustainable and distributed among Georgian forests (so that there are no severe localised impacts). However, it is unrealistic to expect a massive substitution of wood with other energy sources. The second conclusion is that communities need to be provided with access to a forest area big enough to allow sustainable extraction rates in view of current consumption needs. This area can combine sections inside and outside of buffer zones. Protocols of extraction should be agreed with the reserve management authorities and the Department of Forestry. In principle, areas in the 1st and 2nd priority groups should be able to allocate enough forest resources to meet local needs.

Family consumption of wood varies between 5-20 m3/year depending on location

Both urban and rural households depend on wood for heating and cooking purposes. The level of consumption depends on whether the area is urban or rural and, not surprisingly, on the severity of winter.

Table 6: Consumption of Wood for Heating (m3/winter) (*)

Region Wood

Consumption

Samegrelo 9.05 Imereti 6.32 Guria 8.88 Tbilisi 4.53 Rustavi 6.46 Mtskheta-Mtianeti 7.24 Kvemo Kartli 7.11 Kakheti 8.60 Shida Kartli 5.29 Samtskhe-Javakheti 10.10 Racha-Lechkhumi 8.30 Svaneti 14.66 Adjara 4.82

(*) Average amount of wood used by household over the winter period (3 months) for heating. Source: The Status of Households of Georgia 2002. Save the Children. Table 6 shows wood consumption for heating during the three months of winter. It also shows averages for the regions, plus the cities of Tbilisi and Rustavi. However, the consumption of wood in communities around targeted protected areas is greater than the averages shown in Table 6. This is because these communities are mainly rural and heating needs are usually greater than the 3 months of winter. A Social Assessment carried out under the World Bank Forestry Project has found that families in the districts of Oni and Tsageri, which are located within the 2nd priority group of areas, consume approximately between 8 to 18 cubic metres of firewood a year. The households surveyed in rural Racha reported using a total annual average of 10.2 cubic metres of wood for fuel. In the neighbourhood of the Kolkheti National Park, where fuel wood is the only energy source available, people consume between 15-20 m3 per year. In Svaneti, where winters are long and harsh, the annual consumption is rarely lower than 20 m3. The data show that there is already enough information to estimate family fuel needs. These data, in combination with the size of targeted communities, will indicate the estimated forest areas that need to be secured to meet local fuel wood requirements.

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Most families purchase wood rather than cutting it themselves

Table 7 below shows the origin of wood consumed for heating in different regions and in the cities of Tbilisi and Rustavi.

Table 7: Consumption and Origin of Wood for Heating – Regional Averages in Percent (Combined Urban and Rural)

Source of Wood for Heating Region

Purchased Cut by Family

Other

Samegrelo 79.7 17.2 3.2 Imereti 68.3 24.4 7.3 Guria 57.2 39.8 3 Tbilisi 74.9 14.9 10.3 Rustavi 71 4.1 24.8 Mtskheta-Mtianeti 72.2 24.7 3.1 Kvemo Kartli 83.6 8.15 8.25 Kakheti 77.7 17.8 4.5 Shida Kartli 85.4 12.3 2.3 Samtskhe-Javakheti 85.8 9.4 4.9 Racha-Lechkhumi 47.3 49.3 3.3 Svaneti 19.5 77.9 2.7 Adjara 80.7 12.3 7.0

Source: The Status of Households of Georgia 2002. Save the Children. The data indicate that most families purchase their wood rather than cut it themselves. In cities and rural towns, the proportion of families that purchase wood is much greater than in rural villages. Table 7 indicates that the countryside generates wood to meet its consumption needs plus the needs of urban families. The result is a woodcutting sector of significant proportions that goes mostly unregulated.

Most families cut wood for their own consumption

Table 8 below shows the share of families engaged in woodcutting for a selected number of districts.

Table 8: Is Your Household Engaged in Woodcutting? (Share in Percent) Oni Ambrolauri Tsageri Lentekhi Total

Yes 56.0 68.7 58.0 74.7 64.3 No 44.0 31.3 42.0 25.3 35.7

Source: GORBI, 2000. Table 8 shows that on average over 2/3 of families are engaged in woodcutting in the districts of Oni, Ambrolauri, Tsageri, and Lentekhi. These figures are higher than those reported for Akhmeta, Lagodekhi and Dedoplistkaro (11%), and similar to those reported for the vicinity of the Kolkheti National Park (approximately 50%). Unfortunately, information about the main reason for woodcutting is only available for selected districts. The available data, combined with information from interviews and personal observations, nonetheless suggest that usually only a minority of families engages in woodcutting for commercial purposes.

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Table 9: If Your Family Cuts Wood, What Is the Main Purpose of This Activity? (In Percentage) Region

Oni Ambrolauri Tsageri Lentekhi Total

Commercial 3.6 0.0 25.6 3.6 7.6 Fuel 96.4 100.0 72.1 96.4 91.9 Building materials 0.0 0.0 2.3 0.0 0.5 Source: GORBI, 2000.

Except for Tsageri, where commercial woodcutting involved 25.6% of local families, all other districts show that only a minority cuts trees to sell. This result is in line with those reported for the vicinity of the Kolkheti National Park, where the percentage of households engaged in wood selling is only 4.4%. The implication for a DFES programme is that, on average, DFES projects will deal with communities that cut wood mainly for their own consumption needs. This will simplify project design and implementation. First, fuel needs for local consumption are going to be lower than when commercial felling is also present. This will diminish the forest area required to meet local needs. Second, woodcutting for commercial purposes often involves illegal logging and it is not unusual to find local authorities, including police, benefiting from the activity. This can be a difficult constituency to deal with.18 The lower the frequency of commercial logging, the easier it will be to secure sustainable forest use around priority target areas.

The poorer the household, the likelier it is to cut wood; the better off the household, the likelier it is to cut wood for commercial purposes

A good determinant for identifying households that cut wood is their economic status. Basically, the poorer the household, the likelier it is to cut wood. On average, 57.5% of non-poor households surveyed in Racha, Svaneti and Lechkhumi cut wood, but this figure goes up to 76.5% for those that reported being unable to afford food.

Figure 1: Woodcutting Among Poorest and Non-Poor Households in Svaneti, Racha and Lechkhumi (in Percent)

76.5

100

57.5

76.6

0

20

40

60

80

100

120

Cuts wood Cuts wood for fuel

Per

cent

age

Poorest

Non-poor

Source: GORBI, 2000.

18 For the purposes of illustration, a regular truck can load 10 m3 of wood, which at a price of 25 GEL/m3 gives a gross revenue of 250 GEL per truck (approximately USD 130). A truck can be easily loaded and its contents sold in a day of work. A person with access to a few trucks and the right connections can earn a gross revenue of about USD 4 000/month, not a trivial amount in Georgia.

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Figure 1 shows data for the regions of Svaneti, Racha and Lechkhumi. The percentage of households engaged in woodcutting steadily declined as the reported economic conditions improved. Among the poorest households, 100 % cut wood for the sole purpose of obtaining fuel. In contrast, 23.4% of all households able to afford both food and clothes engaged in woodcutting also for commercial purposes. In general, this does not involve large-scale operations but rather supplying a limited number of other families. While these findings are strictly relevant for Racha, Svaneti and Lechkhumi, it is safe to assume that in general the poorest households will be involved in woodcutting mostly to satisfy their own consumption needs. The poorest households (e.g. those unable to afford food) cited unemployment as one of their most serious problems, and were most likely to cite this problem as their single greatest difficulty (57.0%, as compared to 29.9% of the other households). This finding indicates that the poorest households would not support further restrictions on forest access and utilisation simply because they have no means to access other fuel sources. An important difference between households primarily cutting wood for sale and those cutting to meet their own fuel needs is their willingness to start their own business utilising forest resources. Households cutting wood for commercial purposes seem much more inclined to start a business utilising forest resources (48.3%, compared to 28.4% of households cutting wood for fuel). The majority of these households would start beekeeping activities or forest nurseries. Surprisingly, few, if any, want to initiate woodcutting or wood processing enterprises.

Low income appears to be associated with lower interest in forest management and less access to information

The poorest and non-poor groups shown in Figure 2 are the same as in Figure 1, and the results are strictly valid for Racha, Svaneti and Lechkhumi. However, circumstantial evidence suggests that these findings could be applicable in general. Figure 2 shows that the poorest individuals have less inclination to participate in forest management. Specifically, only 56.6% of them would participate in forest management, even though they completely depend on that resource for their heating and cooking needs. In contrast, 8 out of 10 non-poor households would take part in forestry management activities. The poorest families also know less about felling permits and the forest code. They also have much less access to information than other income groups.

Figure 2: Poorest and Non-Poor – Attitudes and Capabilities (Racha; Svaneti; Lechkhumi)

4.6

48.9

30.2

11.8

56.4

18

71.4

60.1

44.6

81.3

0 20 40 60 80 100

Has heard about the Forest Code

Knows about felling permits

Gets information from television

Is satisfied with informationsources

Would participate in forestmanagement

Percentage

Non-Poor

Poorest

Source: GORBI, 2000.

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These findings are relevant to a DFES programme on several fronts. First, the poorest households will resist attempts to restrict woodcutting. They simply do not have the means to access alternatives energy sources. Second, they are less inclined to participate in forest management and this could reflect a misconception about what “forestry management” means and/or the high opportunity cost of time. DFES projects would have to invest time in clarifying the benefits to the community arising from secure access to forest resources and sustainable extraction rates. Third, the poorest households often spend much energy and time just trying to survive. Their participation rates could still turn out to be lower than other groups even in the presence of awareness campaigns. Fourth, households involved in woodcutting for commercial purposes will likely have a greater income and greater capacity to accommodate to changes in their activities, for example, such as cutting wood in a different area and using different protocols or gradually switching to other forest activities.

The decisions on resource ownership and management might need to be made on a case-by-case basis

Much has been said about the need to transfer the ownership of forest resources to local communities as the ultimate solution to ensure sustainable use and conservation. As the argument goes, local communities are dependent on forests and if they gain legal title to the resource and can exercise this right, it will be in their best interest to ensure the sustainable use of the forest. In the Georgian context, this argument is not watertight. First, as data show, communities are heavily dependent on fuel wood. Tree-cutting does not take place because of the lack of public awareness about the importance of forests or because of unclear property rights. Most families cut trees because there are no other options available. Second, institutions in rural Georgia, such as the judiciary and the police are weak and still riddled with corruption problems. It is not enough to give a community the legal right to a resource; the community also has to have the means to enforce these rights. If the community perceives that it does not have the capacity to enforce its rights over the resource, for example, if intruders continue to extract wood from the forest and the local police are unwilling to intervene, the result can be the same as in an open access resource setting. Third, rural communities in Georgia are not homogenous groups that will manage resources equitably and sustainably, if only given clear property rights. They are also affected by problems of information on how to manage the resource as well as power asymmetries among community members. It would be an oversimplification of reality to expect sustainable resource use only because of a transfer of ownership from the state to communities. The definition of formal access rights can be an attractive tool to promote sustainable extraction rates but not the end objective. The implication for DFES is that community ownership of forest resources can be an option among others, and that the arrangement should be made on a case-by-case basis. DFES projects should be flexible in their approach. One should expect to find situations that need state ownership of the forest, while DFES projects support communities in their management and enforcement efforts. In other situations, formal titles may be given to community associations. In any arrangement, the crucial point is not so much the formal ownership of the resource, but rather the existence of mechanisms ensuring the right to use of the resource by communities, as well as internal community mechanisms for enforcing agreed protocols of extraction.

4.2. Grazing

Grazing inside protected areas can have negative effects on the process of natural reforestation because it usually results in the destruction of young saplings of plants. However, grazing outside of protected areas can be an admissible activity as long as the carrying capacity of the area and the rotation patterns are respected.

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Grazing affects the 1st and 2nd priority groups of areas in quite different ways. Adjara and the Central Caucasus system (Racha and Svaneti) are little affected by overgrazing problems. They also have animal loads that remain more or less constant during the year. In contrast, eastern Georgia is much more affected by land degradation from overgrazing, particularly the Dedoplistkaro district, which includes the Vashlovani reserve. Eastern Georgia also shows a major change in the distribution of grazing pressure from winter to summer. The remaining sections will describe the main characteristics associated with grazing, with a focus on eastern Georgia, including Tusheti. In this region, tackling overgrazing will require paying attention to migration patterns, institutional issues regarding land use and the introduction of systematic rotation patterns. It will not be easy to deal with these issues. In contrast, dealing with grazing in Adjara, Racha and Svaneti will be much simpler and will require investment in public awareness about park boundaries.

A distinctive migration pattern in eastern and central Georgia

Eastern Georgia, particularly the pastures in the district of Dedoplistkaro and Signagi, has relatively mild winter weather. The area receives sheep from several districts of Georgia, including Kvareli, Dusheti, Telavi, Kazbegi, Tianeti, Akhalgori, Akhmeta and Gurjaani, as well as from the region of Samtskhe-Javakheti and sections of Azerbaijan.

Map 5: Grazing Migration Patterns

Source: Own production based on reports prepared as part of the UNDP/GEF project “Arid and Semi-Arid Ecosystem Conservation in the Caucasus”.

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Migration takes place primarily in May and September. Sheep leave eastern (winter) pastures in May and stay in summer pastures until September, when they start to return. These months are not exact, and the migration may start a month earlier or a month later, depending on weather. In contrast, Adjara, Racha and Svaneti do not have migration patterns. Livestock mostly stay within these regions all year round. Owners and shepherds consistently report that moving sheep between winter and summer pastures is a significant problem. The population has narrowed the driving routes and restricted night camps. Many traditional routes are only for cars these days. In order to feed the sheep, shepherds have to buy pastures from the local population. Theft of animals is common and the police impose a heavy “tax” on shepherds by means of multiple bribes.

The overall quality of pastures has decreased

The general perception of people is that the quality of pastures has decreased in the recent past. A survey conducted in the year of 2000 found that 92% of shepherds in Dedoplistkaro declared that the conditions of pastures had worsened over the past 5 years. In Akhmeta and Lagodekhi, 88% and 50% respectively thought that the quality of pastures had declined. None of the shepherds reported that pastures have improved in recent years.19 Fortunately, major land degradation problems because of overgrazing have not yet affected the area immediately around the Vashlovani reserve.20 As one moves away from the Vashlovani reserve, the state of pastures worsens, especially in the southern part that borders the river Iori. The pastures of the Arboshiki zone are rented mainly to shepherds from Iormuganlo in Azerbaijan. Here, the quantity of sheep amounts to approximately 10-15 sheep per hectare. The soil is exhausted and erosion is obvious, even for the non-expert eye, especially on the 500-1000 meters wide area along the left bank of the river Iori. In summary, while the overall state of pastures appears to have worsened, the situation is still not critical, except for specific places, particularly those that have the best access to water, which are also sectors that contain riverine forests of global biodiversity value. This presents a good opportunity for DFES projects. The fact that pastures around Vashlovani are not fully used at present is of little relief. If other winter pastures become degraded, the pressure will be to occupy those closer to the reserve. Moreover, a programme of support for sustainable pasture use should go beyond the strict vicinity of the Vashlovani reserve. Because pastures are in general not yet severely degraded, promoting sustainable pasture use is still possible without the need for closing major areas. This greatly eliminates the scope for conflicts and increases the likelihood of success.

The current land tenure regime erodes incentives for conservation

Pastures are mostly state owned and are managed by the State Land Management Department, which rents the land to private individuals for a period of 49 years. This period is long enough to allow for internalising the cost of land degradation and, in theory, this arrangement should promote land conservation. However, the system is riddled with problems and corruption. Pastures are constantly “sub-rented”. Indeed, a large part of pastures has already been rented to non-shepherds, including many state officials, who in turn sub-rent the land to sheep owners or shepherds for profit. Individuals, who rent land directly from the state, are not bound by enforceable contract provisions regarding the condition in which the land should be 19 Protected Areas Development Project: a Social Assessment. Prepared by GORBI for the WB/GEF Protected Areas Development Project. Tbilisi, Georgia 2000. 20 According to employees of the Vashlovani reserve, no more than 2/3 of the pastures are loaded.

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given back. Further, as there is no previous assessment of the land’s condition at the beginning of the renting period, there is no benchmark for comparison once the land is returned.21 The most important consequence of the present regime is a serious erosion of incentives for conservation. First, people who actually shepherd animals on the land plots are not landowners. Second, shepherds pay a fixed amount per hectare (between GEL 1.5-3) and an additional fixed amount per animal head. In other words, the land rent cost per animal head diminishes the greater the herd. Third, because of the little transparency with which land was originally allocated for rent, many individuals have concerns about the long-term viability of their contracts with the state. This helps to increase the discount rate of the renter. Pastures end up being rented to shepherds for periods far shorter than 49 years. Renting periods are usually between 1 and 5 years. Fourth, individuals renting land from the state appear to be unconcerned about the condition of their land as they rarely check the number of animals grazing on their plots. The data clearly indicate that DFES projects aimed at introducing sustainable pasture use will have to pay considerable attention to land tenure issues, if the negative impact of land degradation is to be internalised into the cost-benefit calculations of shepherds. This is easier said than done. The current pasture renting system is the result of an overall privatisation process that has become famous for its nepotism and unaccountability. Though the new government is undertaking a frontal assault on corruption, one should still expect resistance to change in rural Georgia. The shepherds are also wary of entering into long-term contracts with the government. The last 15 years saw a general retreat of the state from its basic responsibilities, such as paying pensions, salaries and providing basic services (e.g. electricity; water, security). In several regions, the state apparatus was captured by local elites and put at their own services. Shepherds consider the state as an unreliable partner, and hesitate to enter into contract with it.22. Because of these factors, DFES projects will have to work hard to gain back the trust of shepherds.

Traditional rotation methods have been completely abandoned

Traditional methods of pasture rotation have been totally abandoned. In addition, awareness about pasture protection methods, including rotation, is low in eastern Georgia. In Lagodekhi, less than 1% of respondents had heard about methods to preserve pastures. In Akhmeta and Dedoplistkaro, only 14% and 7% of households respectively were aware of rotation methods. This is most unfortunate because historical records show that before the Soviet revolution, communities had applied a system of rotation based on seasonal and “year-to-year” pasture utilisation. Shepherds involved in the animal migration cycle used to work in co-operative sub-groups. Each sub-group would receive two plots for 10-15 years to utilise as pastures. Each plot consisted of two different types of pastures: hills and plains. At the beginning of the autumn season, each sub-group would first occupy the hilly areas of one of their two land plots. In winter, they would bring their herds down to the plain areas. This seasonal and “year-to-year” scheme resulted in leaving one plot of pasture untouched throughout the whole year. In the following year, the same method was repeated in the area that had been left idle the year before. In addition, there was a full rotation of plots among shepherds after 10-15 years.23 Mutual 21 See “Social Problems of Grazing on Arid and Semi-Arid Grazing Plots of Eastern Georgia. A Social Evaluation”. Report prepared by GORBI for the UNDP/GEF project “Arid and Semi Arid Ecosystem Conservation in the Caucasus”. Tbilisi, 2001. 22 Surveys show that shepherds are unwilling to enter into 49-year contracts with the State. Specifically, they fear a change in environmental conditions, as well as a lack of capacity of the state to enforce its own contracts (they fear that “the government of someone could take our land back”). 23 As reported by S. Makalatia, 1934.

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enforcement appears to have been possible probably due to the size of the groups and the social links among their members. The re-introduction of rotation methods will be a major step towards ensuring sustainable pasture grazing around protected areas and biologically important zones (e.g. along the river Iori). DFES projects are likely to face major challenges in achieving this. For example, rotation requires a bigger grazing plot per shepherd and, at current renting costs, this does not seem possible. Shepherds should rent land directly from the state, thus avoiding intermediaries, and at prices that make rotation economically feasible. There is also a problem of water availability in expanding the total pasture grazing area. It is not a coincidence that the worst erosion problems are observed along the river Iori and other sources of water. Rotation does not eliminate the problem of long-term contracts. It is still necessary to have shepherds bound to a piece of land long enough so that they can internalise the costs of land degradation. For that to happen, the shepherds have to perceive the state as a reliable partner with which they can engage in long-term renting contracts. Finally, rotation does not take away the limits imposed by carrying capacity. There is still a role for state agencies to control the number of animals per hectare.

Project strategies will have to vary according to the ethnic origin of the target group

There are Georgian and Azeri shepherds in eastern Georgia, and they tend to show different attitudes and perceptions towards the state of pastures and pasture management. Azeri shepherds and their households, while friendly to Georgians, do not have strong social or emotional ties to Georgia. Surveys have indicated that they show a lower level of interest in the protection of reserves, that they are affected by language and cultural differences, and that they have greater problems in gaining access to information. Surveys have also reported that locals believe Azeris overgraze pastures because it is not “their land”. Independently of these subjective results, it is clear that DFES projects will have to approach these two groups using different strategies and methods. For example, public awareness campaigns will take a different form, depending on whether the target group is Georgian or Azeri. Also, concerns over entering into long-term contracts with the Georgian state are likely to be higher among Azeri shepherds.

4.3. Hunting

Hunting can be a major limiting factor for the reproduction of species populations. Even single cases of poaching can have a significant impact on species with low reproduction rates. Hunting also affects biodiversity because of its degree of disturbance. Human movements, weapon shots, and hunting dogs are all high disturbance factors. In Georgia, the impact of hunting varies from site to site and from species to species. Hunting is assessed as the biggest threat to targeted species populations in eastern Georgia, particularly bear and deer. In western Georgia, hunting seems to be less of a threat. Hunting is primarily of an amateur nature. It is less commonly practised now than it was in Soviet times, mainly because of its expense. Bullets, for example, are generally too expensive to make it possible for the majority of the population to hunt regularly. The percentage of households engaged in hunting activities varies. Depending on the district surveyed, between 15% and 33% of households hunt in Racha and Svaneti. In the vicinity of the Kolkheti National Park, the figure is 15%. There are no quantitative figures for eastern Georgia.

There are three main types of hunters: non-local, local and professional

Non-local hunters are becoming more common in eastern Georgia and the Central Caucasus because of the type of game animals present there (e.g. bear; deer). Locals often blame this group for the bulk of

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poaching. Non-local hunters are usually wealthier than local ones, and can afford bullets and the cost of transportation. Policemen, government authorities and businessmen are regularly mentioned as participating in non-local hunting groups.24 Local amateur hunters constitute the second group. They can include shepherds who shoot wolves, farmers who set traps in their farming fields, and local people shooting birds. Professional hunters form the third group. Their numbers are low and they make a profession of hunting. Shepherds sometimes hire them to kill wolves. They may also provide guidance to other hunters, and the best of them can even have a waiting list. The relevance of this data for a DFES programme is that non-local hunters seem to be the greatest threat to game species, such as deer (almost extinct) and bear (threatened). This group hunts for pleasure and has the means to afford the activity. Non-local hunters can include wealthy businessmen from Tbilisi as well as authorities, such as members of the local police. Keeping these types of people far from protected areas will require a credible deterrent, rather than simply raising public awareness. Local hunters are likely to be less of a problem and more reachable through public awareness campaigns. Professional hunters are very few in numbers and identifiable. Because of their skills, it may even be possible to include them in projects aimed at running managed hunting grounds.

Hunting is either for food or for pleasure, but rarely for profit

Hunting in Georgia is done mostly for two reasons: for food or pleasure or both. In the vicinities of the Kolkheti National Park, most people hunt during hunting season, and 67% of all hunters hunt to obtain food. Only 19.4% hunt for pleasure. A similar distribution is likely for the expected location of the proposed Mtirala National Park. In eastern Georgia, the situation is reversed. Except for professional hunters and shepherds, people hunt for pleasure. Hunting is perceived as a sport that sometimes may even produce a good dinner. But it is the former, not the latter, that is the main driving force of hunting.

Hunting as business is unprofitable because of the high prices for ammunition and petrol. According to interviews in eastern Georgia, hunting requires about GEL 25 of petrol and at least 10 cartridges per person. Income from hunting is of an occasional nature. The skin of a fox can be sold at GEL 20-30; a pheasant can get a price of GEL 25-30. The exception seems to be the hunting of quails, which can be sold at an average price of 1 GEL a piece. A skilled hunter, using projectors, can kill about 100 a night. The fact that hunting can be primarily for food does not pose a problem for DFES projects aimed at controlling the activity. Hunting for food appears to take place mostly in coastal (western) Georgia and on a scale that does not pose a serious threat to species. DFES projects can support awareness campaigns to further minimise the impact of hunting (e.g. avoid certain species during reproduction periods), without fears of cutting populations off from crucial sources of food. In contrast, bringing hunting under control in the east of Georgia will require more forceful methods. In addition to public awareness campaigns, there will be a need to increase the deterrence capacities of law enforcement agencies.

Law enforcement agencies are ineffective in controlling hunting activities

While public awareness can go a long way in decreasing hunting activities, it is no substitute for the policing role of law enforcement agencies. Unfortunately, police capacities are low. The last 14 years of Georgian history have been marked by a serious, sometimes almost complete, breakdown of the rule of law. The police became a self-serving institution that failed to provide the most basic services. There is no

24 Conservation of Arid and Semi-Arid Ecosystems in the Caucasus - Results of a Sociological Survey. Report produced by CIVITAS. Tbilisi, Georgia. 2001.

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reason why those in charge of policing poaching activities should be an exception. With the change of government in late 2003, the situation is changing for the better. However, major efforts will have to be made before district police units show acceptable levels of efficiency.

There are several reasons for the lack of capacity of law enforcement agencies to fight poaching. The first, of course, is low salaries, which are always below the poverty line and insufficient to meet the basic needs of a family. It is not surprising that policemen engage in income supplementing activities, such as accepting bribes. The second is that those who take poaching seriously lack basic equipment, such as transport and weapons. These officials are unable to patrol open areas and the weapons they have are out of date and/or there are not enough of them. The third problem is the lack of knowledge about current legislation. The people in charge of controlling illegal hunting are ordinary policemen with a poor knowledge about poaching regulations. Finally, the fourth problem is the lack of interest. The combination of low salaries, no equipment and no knowledge results in many instances in general apathy. Why bother about the survival of a few species when one is not able to provide sufficient food for the family? Stopping poachers can also be a dangerous activity. They are also armed and/or could include influential people.

Illegal hunting is not always perceived as socially unacceptable

The public shares some perceptions about what constitutes acceptable and unacceptable forms of hunting. Perceptions depend on the number and type of animals shot. The acceptable type of hunting is when the activity is on a minor scale, for example when the hunter gets meat or fish mostly for his family. Some leftovers could even be sold or exchanged. Shooting a “few birds” or small animals is usually considered acceptable and harmless for the local environment. On the other hand, the public usually disapproves of killing animals in great numbers. This includes fishermen who use electrodes, particularly when connected to high power lines, and explosives. The public understanding of poaching also depends on the type of animal that is targeted. For example, hunting deer is often recognised as poaching because of the small number of deer left in Georgia. It is also generally considered unacceptable to hunt animals during their reproduction periods or when feeding offspring. On the other hand, killing predators, such as wolves and jackals, is not always considered poaching, as these animals are perceived as “bad ones”.

5. OBJECTIVES AND STRATEGY FOR THE USE OF DFES RESOURCES

The main objective of the DFES programme in buffer zones is to promote biodiversity protection among local communities around protected areas. A secondary objective is to test and replicate successful projects and initiatives from, and for, other areas of Georgia. As a main strategy, this report will propose that DFES resources be invested in income generation, local infrastructure, public awareness and technical support projects. Given the fact that DFES resources are expected to flow for about 10-15 years, there is a possibility of taking a long-term view rather than a piecemeal approach. This section will also explore the type of projects that could be eligible under DFES support and estimate the required expenditures for areas in the 1st priority group. This report also proposes that DFES resources be directed towards increasing living standards of the population around protected areas, particularly increasing livelihood security as measured by access to

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food, energy and basic social services (e.g. education). Support for increased living standards would be complemented with investment in public awareness. Rural settlements are affected by poverty, lack of electricity, lack of employment opportunities and serious barriers to access basic social services, such as education and health care. With a national average poverty rate of 50%, life has become very difficult for many people in Georgia.25 Under these conditions, biodiversity conservation and environmental protection may not be priorities for the average person. When the local school is barely operational, the relevance of learning campaigns about the environment can fade. When there is not sufficient income to properly feed a family, illegal hunting is an issue that can lose relevance for many. People tend to invest time and efforts in proportion to their most important priorities. Securing enough income to feed a family and enough wood to warm a house in winter can override biodiversity concerns. The reverse, however, is not true. A family can still engage in harmful activities from the point of view of biodiversity conservation even after having secured enough food and energy. There is a substantial body of experience that shows that livelihood security is a necessary, though not sufficient, condition for environmental conservation. There is a need for credible enforcement and a need to link livelihood security with conservation of the targeted protected area. Projects in other settings have established this sort of link through two independent, though complementary, avenues of work. One is to support only those income activities that depend on the conservation of the resource. This explains the attention given to so-called “eco-tourism”, conservation of catchment areas for water supply purposes, and harvesting non-timber resources, among other activities. Though promising, this avenue of work is not free of problems. Often these types of activities lack a local market, or their size is insufficient to provide income for a substantial share of the local population. A second option is to make this link direct and explicit in the form of a partnership between communities and the authorities of the protected areas. In this partnership, communities engage in extractive activities in a form and scale that are not harmful for the reserve. In exchange, the authorities of the reserve support local communities in meeting their stated priorities, for example, by bringing micro-credit services to the villages, providing grants for social infrastructure projects, and offering learning and awareness campaigns. The basis of this partnership can evolve over time. In the short and medium run, it would be based on each party recognising the priorities of the other. DFES would pursue both avenues of work simultaneously. It would support communities to increase family income through projects of their choice, as long as these are profitable, feasible (in view of the human and capital endowments) and harmless to biodiversity conservation. All other things being equal, preference would, of course, be given to those income generation activities that directly depend on the conservation of the resource, thus strengthening the link between livelihood security and conservation. DFES would also support social infrastructure projects that are deemed critical priorities by local communities, such as repairing a damaged school, for example. This support would be complemented by awareness campaigns that make explicit the link between ongoing support to the community and the conservation needs of the targeted area.

25 See National Human Development Report – Georgia 2001-2002. United Nations Development Programme. Tbilisi, Georgia.

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5.1. Areas of DFES Assistance

Increasing the productivity and volume of agricultural activities in the villages neighbouring protected areas

Rural communities prefer support to expand and increase the productivity of their current income generation activities rather than embark on new ones. This choice has a rational basis. The population is already familiar with their present income generation activities, which have provided at least a lifeline throughout one of the worst periods in modern Georgian history. Traditional activities comprise farming, home gardens and livestock grazing. People expect that family income would increase if there were access to credit and/or grants. A survey among institutions currently engaged in grants and micro-credit suggests the following list of activities as potential candidates for income generation support: 1. Increasing the number of cows and pigs; 2. Beekeeping; 3. Horticulture, including construction of greenhouses; 4. Vine growing, including support to buy land and seedlings; 5. Land preparation in spring, including cultivation and tillage; 6. Irrigation (building, expanding or repairing the farm irrigation system); 7. Mushroom planting and processing; 8. Growing fruit (support to acquire planting material); 9. Floriculture; 10. Purchasing machinery (e.g. mini tractor); and 11. Basic processing of agricultural products (e.g. jam). Support for income generation activities would include training and capacity development components. This could take the form of stand-alone training or be part of a package of assistance that also includes support for capital expenditures. For example, support for basic processing of agricultural products could be complemented with training in marketing, if a lack of this training is perceived as a barrier for the family or co-operative involved. Examples of training and capacity development activities include: 1. Training in sustainable agricultural practices (e.g. soil conservation); 2. Skill upgrading in small- and medium-scale processing; 3. Skill upgrading in handicraft production; 4. Skill upgrading in non-farming services (e.g. repairing and servicing of foreign made cars); and 5. Small-scale business management and marketing skills. Support for income generation would be given through both microcredit and micro grants facilities. DFES would not administer the grants directly, but would tender the provision of grants and microcredit support to established institutions with a proven track record in this area.

Support to non-traditional income generation activities

Even though it is expected that the majority of community members will request DFES resources for the expansion of traditional activities, it is nevertheless important to promote and support some diversification of income sources. Non-traditional income alternatives should therefore be supported, but such support should not draw the bulk of attention or interest in a DFES programme. In a village, it is generally those who are better off who can take on greater risks and therefore are able to embark on alternative income generation projects.

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Examples of non-traditional income alternatives may include the following: 1. Provision of services to the tourism sector, such as accommodation, food and guiding; 2. Production of traditional handicrafts; and 3. Extraction of non-forest resources, such as medicinal plants. Support for non-traditional income generation activities would also include training and capacity development components. Support could take the form of stand-alone training, or be part of an assistance package that includes support for capital expenditures. Examples of training and capacity development activities include: 1. Skill upgrading in non-farming services (e.g. medicinal plant extraction and processing); 2. Training in provision of tourism services; and 3. Small-scale business management and marketing skills. Support for income generation would be given through both credit and grant facilities. For example, requests for improving a private guesthouse would be likely candidates for credit support, while requests for establishing a communal enterprise for extracting non-forest resources would be a likely candidate for a grant. Decisions on the composition of the credits and grants would be analysed based on the expected profitability of the project in question. DFES would not administer the grants directly, but would tender the provision of grants and microcredit support to established institutions with a proven track record in this area.

Support to access local markets

Remote rural areas suffer from the lack of cash. The lack of monetary income is a serious barrier to access some basic services. For example, while a simple visit to the doctor could be paid for with a bag of potatoes, having an x-ray taken at the district hospital requires payment in cash. In a similar vein, the local mechanic might be willing to provide his labour in exchange for farm products, but the spare part needed to repair the tractor cannot be acquired without cash. The lack of money poses a significant hurdle for meeting basic needs even in communities where barter is the predominant mode of exchange. The more remote the settlement, the less the amount of money in circulation. Large regions of the country have been relying to a great extent on a barter economy. At the heart of the problem is the lack of employment, low productivity in the rural sector and barriers to access bigger markets, for example the district capital. There are two main difficulties for communities to access bigger markets. The first is that the average family hardly produces enough to cover transportation costs. These costs include petrol, car maintenance and, more often than not, payments at police checkpoints. The second is that having a place to sell in another town demands overcoming formal and informal barriers. These barriers are usually costly for those without knowledge of the law. As part of its programme to increase livelihood security in settlements around protected areas, DFES would support the establishment of co-operatives or other types of organisations that aim to achieve economies of scale and to facilitate access to local markets. This support may include: 1. Facilitating community meetings; 2. Promoting information exchange with other co-operatives, including visits and training;

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3. Establishing links with regional distributors and/or purchasing transportation means for distributing products;

4. Meeting legal requirements to establish a point of sale in other towns; 5. Storage facilities; and 6. Basic office equipment (e.g. typewriter) for the management of a co-operative. Support for accessing local markets would be given mainly through grants. DFES would not provide direct support for the establishment of co-operatives, but would tender these services to established institutions with a proven track record in this area.

Sustainable forest management

The villages around target areas depend almost completely on wood fuel for meeting their cooking and heating needs. However, the wood needs of these communities rarely constitute a threat to the long-term preservation of forests in the buffer zone. It is the formal and informal commercial woodcutting at an industrial scale (e.g. to supply urban markets) that poses a real threat. The size of the area and the cutting protocols required to ensure sustainable wood extraction would have to be defined on a case-by-case basis and in full consultation with the local community. This type of assessment, which on average would take 3 months, could be paid for by DFES resources and considered as an integral part of the programme of support. At present, for many households in Georgia, there are no substitutes for wood fuel. Thus, the objective is not to stop woodcutting, but rather to redirect the activity towards designated areas, and to carry it out in ways that minimise habitat damage. The amount of wood extracted should cover community needs. In some cases, sustainable forest management would involve a certain degree of commercial woodcutting. This is so because in some settlements woodcutting may be the primary source of income for a number of local families. Prohibiting this source of income in the absence of feasible income alternatives would result in ongoing illegal cutting. The management arrangement for community forestry activities, including forest ownership, would be an important, if not critical, factor to ensure the success of DFES support. Unfortunately, there are no experiences that could provide lessons for replication. At a minimum, communities should have the legal right to exploit the resource according to protocols agreed with the management of the nature reserve. This legal right to resource use should extend to an area large enough to meet current fuel wood demand for local purposes. The definition of “local purposes” would include wood for heating, cooking and, in some cases, commercial cutting undertaken by local families. DFES should not allow large-scale logging by non-locals, as communities receive little benefits, if any, from this type of activity. Providing communities with legal rights to resource use is a significant step in the right direction, but it does not ensure the conservation of forest resources per se. Monitoring and supervision of agreed protocols for tree cutting will have to continue to be functions of the state, either through the park management staff or the Forestry Department, or both. DFES would provide support for the following activities: 1. Estimation of fuel wood needs of communities; 2. Identification of areas required for sustainable forestry and protocols for tree cutting; 3. Support for community consultations and discussions to agree on access to the resource; and 4. Support to increase local capacities in monitoring and supervision of forestry utilisation. This includes

support to park staff and/or staff of the Forestry Department.

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In cases where the extent of the resource allows for commercial woodcutting, DFES would provide support to ensure that the benefits from the activity flow mainly to the village and that the scale of the activity is compatible with the long-term conservation of the resource. The feasibility of commercial woodcutting by local families would be analysed on a case-by-case basis. However, if the resource allows, and communities show interest, in commercial woodcutting, there is a priori no reason why it should not be allowed. It can constitute a source of much needed monetary income and strengthen the sense of ownership over the resource. In this case, DFES would support communities to engage in commercial woodcutting, probably through the establishment of a co-operative and activities similar to those listed under Support to access local markets. Support for the establishment of sustainable forestry would be provided through grants. DFES would not provide direct support to communities, but would tender these services to established institutions with a proven track record in this area.

Pasture management

Sustainable pasture management is an important issue in eastern Georgia and, particularly, for the long-term conservation of the Vashlovani Nature Reserve. DFES would provide support for re-introducing rotation systems and ensuring that grazing pressures are compatible with the carrying capacity of local pastures. Several issues should be solved in order to ensure sustainable grazing. The first is the problem of sub-renting pastures. During the early, and turbulent, years of privatisation of state-owned assets, many non-shepherds managed to rent large sections of pastures, which were then sub-rented to shepherds for short periods of time. DFES would help shepherds to rent directly from the state for periods of at least 10 years. Shepherds should be given the guarantee that they will retain ownership of the pasture for the renting period and that the initial contract conditions will not change. The second issue is the cost of renting land. Throughout successive surveys, shepherds have declared that the cost of renting a hectare is high and that this precludes the introduction of rotation patterns. The last economic analysis of profitability of shepherding is about 4 years old.26 DFES would support the State Land Management Department to re-evaluate the cost of renting a hectare. The renting price should make rotation feasible. The third issue is that contract conditions for renting land should include assurances that the renter will give back the land in similar condition as received. At present, there is no mechanism to ensure that the renter does not exhaust the land in the final years of the contract. DFES would support the State Land Management Department and the Ministry of Environmental Protection and Natural Resources to devise additional contract clauses to ensure that pastures will be returned in acceptable condition. The fourth issue is monitoring pasture utilisation. One of the concerns of shepherds is that other shepherds that arrive early in the migration process could use plots left idle from the rotation system. This problem has already occurred, as it is not unusual to hear shepherds complain that the plot they have rented was used before their arrival. Finally, there is a need to have a last line of defence against overgrazing in the form of a monitoring system that can detect pasture overload before land degradation reaches an advanced state.

26 Conservation of Arid and Semi-Arid Ecosystems in the Caucasus - Results of a Sociological Survey. Report produced by CIVITAS. Tbilisi, Georgia, 2001.

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DFES support for ensuring sustainable pasture use will involve not only shepherds but also state structures in charge of land renting and monitoring of pastures. DFES would re-introduce pasture rotation in the vicinities of the Vashlovani Nature Reserve. This would be done in the form of pilot programmes, which would be gradually extended beyond the boundaries of the reserve. DFES would also make the re-introduction of rotation patterns in pastures along the river Iori a priority, as these contain forest of global significance and are under significant grazing pressures. The re-introduction of pasture rotation and the subsequent changes to the land renting regime are complex issues that should be tackled simultaneously, probably in the form of a programme. DFES would subcontract this programme to a local organisation with experience in grazing issues and familiarity with the arid and semi-arid zone of Georgia. This organisation would work in a close collaboration with the staff of the Vashlovani Nature Reserve.

Social infrastructure

Infrastructure in rural Georgia in general, and in remote villages in particular, is in a very poor state. This includes crumbling schools, health care centres without minimum supplies and/or equipment, abandoned cultural facilities, access roads in a bad state, and poor water and electricity supply. While the resources at the disposal of DFES would be insufficient to meet the whole range of social infrastructure needs of villages, it can nevertheless make a difference in areas that have been assessed as most critical by communities. There are two main reasons for investing in social infrastructure. First, it is part of the partnership between protected areas management and local communities, a partnership based on recognising each group’s interest and concerns. Surveys have shown that the lack of water, inaccessible health care or an impassable section of road can become top priorities for communities. Second, improved livelihood security and increased levels of human development demand that some minimum social infrastructure be operational. DFES would provide support for the following types of projects: 1. Rehabilitation or improvement of local school facilities, including provision of textbooks; 2. Rehabilitation or improvement of local primary health care facilities, which are most badly needed for

the poorest segments of the population; 3. Rehabilitation or improvement of water supply infrastructure; 4. Establishment, rehabilitation or improvement of facilities for preventing soil erosion (e.g. terraces); 5. Establishment, rehabilitation or improvement of local cultural facilities (e.g. a communal meeting

room); 6. Establishment of micro-hydro power facilities;27 7. Establishment of biogas facilities;28 and 8. Improvement of access roads, including bridges. Support for the rehabilitation or improvement of local infrastructure would be through grants. Communities would be required to formulate a list of priorities before disbursement begins. This consultation process would be facilitated with DFES resources and be considered an integral part of the programme. DFES would provide either direct support to local communities through its representatives (local authorities), and/or through NGOs. This decision would be made on a case-by-case basis.

27 This would be done in conjunction with the DFES programme on micro- and mini-hydropower. 28 This would be done in conjunction with the DFES programme on biogas facilities.

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Environmental awareness and education

Environmental awareness complements other types of community support. For example, programmes for income generation support should be complemented by public awareness campaigns highlighting links between resource conservation and livelihood security. In parallel, there would be general awareness raising campaigns on the importance of protecting nature reserves and the contributions that the community can make in that respect.29 Examples of environmental awareness and education activities include: 1. Awareness campaigns for specific target groups, such as woodcutters, shepherds, and hunters. This

type of campaign would concentrate on increasing awareness of appropriate protocols for resource use (e.g. do not hunt during the reproductive season);

2. Awareness and training campaigns for local authorities. This type of campaign would concentrate on promoting greater collaboration between local authorities and reserve management on monitoring and enforcement. It would also assist (e.g. train) local authorities in attracting funds from sources other than DFES;

3. Education programmes for children and teenagers. This can include summer camps, environmental education components in local schools, non-paid and paid internships assisting staff of the nature reserve, and youth groups for community work (e.g. community cleanup day); and

4. General environmental awareness programmes (e.g. programmes through the local radio or TV station).

Support for environmental awareness and education campaigns would be done through grants. DFES would tender these services to established local institutions with a proven track record in this area.

5.2. Target Groups

The following target groups may access DFES resources: • Non-governmental organisations. The term NGO is applied here in a wide sense. NGOs would include

not only the Tbilisi-based donor-supported organisations, but also local unaccredited organisations, such as a local hunting union, shepherd association, and others. If the local association is not a legal entity, it would have to register with DFES.30 The purpose of this registration would be to ensure identity and agreed accountability mechanisms. The future management body of DFES would define the procedure for registration and ensuring accountability.

• Governmental organisations (GO). These could include administrations of nature reserves, local representations of the Department of Forestry and the Department of Protected Areas, and local enforcement bodies. Applications from this type of institution may be for support to improve resource management, monitoring and enforcement capacities in and around buffer zones.

• Common interest groups (CIG). The concept of “common interest group” refers to a small number of people who share an activity, common concerns or problems.31 CIGs are not NGOs as they do not have an established management structure. CIGs are likely to include people conducting joint or individual household or economic activities, and who are willing to contribute toward solving social or environmental problems through common efforts. An example of a CIG could be a group of

29 For example, these contributions include ensuring that animals graze in allowed sectors and/or that woodcutting takes place according to protocols agreed between the community and the staff of the nature reserves. 30 This registration procedure is also required in the Small Grant Programme of the WB/GEF PADP. 31 The idea of CIG is also part of the Small Grant Programme of the WB/GEF PADP.

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individuals willing to organise “village cleanup days”. A given individual may belong to more than one CIG, depending on his or her interests and concerns. CIGs usually have between 5-10 people and are non-legal entities. They would have to register with DFES to ensure identity and accountability mechanisms. The procedure for registration and ensuring accountability will have to be agreed upon by the future management body of DFES.

6. CHARACTERISTICS OF PIPELINE FINANCING

This section describes the characteristics of the biodiversity conservation pipeline with regard to (i) expected location and size of target groups; (ii) type of support and range of DFES financing for projects; and (iii) total expected size of the pipeline. The results and conclusions of this section are based on field trips to priority areas, interviews with local and international professionals, and available local experiences in supporting buffer zones of protected areas.

6.1. Expected Location and Size of Target Groups

It is recommended that in a first phase DFES concentrate resources on communities around the following areas: • Adjara (expected location of the Mtirala National Park) • Vashlovani • Lagodekhi • Tusheti. DFES will focus on communities with the following characteristics: • Villages whose inhabitants’ daily activities are naturally connected to, and/or have an impact on, the

targeted protected area as they are located either within, or in the immediate surroundings of, the targeted protected area with no natural or clear separating border.

• Villages whose inhabitants are active users of the targeted protected area. These villages would be located not far from the targeted protected area (e.g. 5 km).

Based on these characteristics, target groups (by area and by number) are expected to be as follows:

Table 10: Size of Target Groups by Location Area Targeted Population

Adjara 30 000 Vashlovani 15 000 Lagodekhi 25 000 Tusheti 10 000 TOTAL 80 000

Source: Own estimates based on local census data.

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The target group in Adjara has been estimated at 30 000 people and comprises settlements in the vicinity of the proposed natural park. The core zone of the park is free of access roads and human activities. The only settlement inside the proposed park is the village of Chakvistavi. To the west and south-west, the proposed national park is bordered by populated areas. The target group in Vashlovani has been estimated at about 15 000 people. Vashlovani is distinct from other areas in that villages are not located in the vicinity of the park but about 20-30 km from it. The target group in Vashlovani includes selected areas located along the Iori River. Another distinctive characteristic of Vashlovani and Iori is that shepherds and hunters, who cause the greatest disturbance, are usually not from surrounding villages. The target group in Lagodekhi comprises the string of villages located at the border of the nature reserve, including the town of Lagodekhi. Altogether about 25 000 people live near the reserve borders, and in some places less than a hundred meters from it. In spite of this close distance, the bordering areas of the reserve do not yet show severe damage. Finally, the target group in Tusheti presents major seasonal variations. In winter, the population may not exceed a thousand while in summer it can go up to 10 000 people. All targeted areas considered, the total number of DFES beneficiaries would be approximately 80 000.

6.2. Type of Support and Range of DFES Financing for Projects

There will be two types of DFES support: (i) microcredit and (ii) grants. Microcredit. This would be used primarily to provide support for increasing farming productivity and alternative income generation projects. Experience with microcredit in Georgia indicates that most loans are in the range of USD 500-3 000, and that they rarely exceed this amount. Bigger amounts are extended either to families who are well off or to credit groups.32 Collateral would be required to access credit. Grants. These would be used primarily for technical support in income generation projects, support to access local markets, sustainable forest management, pasture management, social infrastructure projects and environmental awareness campaigns. Experience in Georgia indicates that the maximum size of the grant would be USD 25 000, with the exception of social infrastructure projects, which can easily go beyond this ceiling.33 There would be co-financing requirements. Experience with micro grants in Georgia indicates that recipients in rural Georgia have difficulties meeting co-financing requirements of above 10% of total project costs.

32 This is a group of people linked by family ties or profession who apply collectively for a loan. 33 An example could be improving the access road to communities in Tusheti. This single measure would perhaps have the greatest impact on living standards of the community. The access road is often closed and its poor state precludes regular connections with Kakheti. Improving the access road would be a project requiring resources above the USD 25 000 ceiling.

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Box1: Microcredit in Georgia – Some Successful Initiatives ACDI/VOCA supports lending to individuals and companies in the agricultural sector and has offices in several

regions of Georgia. ACDI-VOCA’s farmer-to-farmer programme supports the Seed Enterprise Enhancement Project and the USAID-funded National Rural Credit System. ACDI/VOCA’s work to promote economic expansion, through access to credit and improved agricultural production, has played a significant role in increasing favourable opinion of, and trust in, free markets and democratic processes in Georgia.

World Vision has a successful programme of microcredit aimed at supporting the entrepreneurial poor. The NGO is active in Adjara, Imereti and Samtskhe-Javakheti with resources for microcredit in the amount of USD 200 000. Its individual loans are between USD 50 – 1 500. Business plans are made by applicants and checked by technical staff of WV. Guarantees are difficult to cash so it is important for the sustainability of the program that business plans are sound. Most projects are for establishing green-houses, expanding cattle breeding and expanding current agricultural activities. WV is also supporting one of the first attempts to establish a small private company for the leasing of agricultural machinery.

The ultimate goal of the Constanta Foundation is the development of the micro and small business sector through the provision of microfinance services to micro and small entrepreneurs living in Georgia. Currently Constanta offers group and individual loans to Georgian citizens engaged in micro or small businesses. These loans comprise 4 main types. “Group Loans” are provided to a group of entrepreneurs on the basis of group guarantee. Group loans are issued without collateral, with group members collectively responsible for the payments from all members of the group. A group should have 4 to 15 members. “Initial Cycle” loans range from GEL 50 to 500. Subsequent loan amounts can be increased, contingent on the repayment capabilities of the business and the credit history of a borrower. These loans may be disbursed for 3, 4, 5 or 6 months. “Advanced Cycle” loans are for group clients who have considerably developed their businesses, consistently increased their loan amounts and maintained solid credit ratings over a certain period. Constanta offers these group clients loans with flexible terms, disbursed for 4, 5, 6, 7 or 8 months. Finally, “Individual Loans” comprise collateralised loans to Georgian micro and small entrepreneurs. This loan programme serves both the group clients of Constanta who have developed their businesses substantially and are capable of graduating to larger individual loans, and the micro and small entrepreneurs new to Constanta who need working capital for business development purposes.

ZIARI is a NGO that specialises in microcredit for the agricultural poor. Its maximum credit is about USD 1 000, though group credit can go as high as USD 3 000. The annual interest rate is 19%, and most loans are for one year. ZIARI’s resources are deposited in a local bank and act as collateral for farmers’ credit. ZIARI assists farmers in obtaining credit from the local bank and provides its financial resources as guarantee of repayment. This allows farmers to learn how to operate with banks and lowers the cost of credit for farmers by reducing its risk premium. Most loans are for expansion of current activities, like increased production and increased value added (e.g. processing).

Source: Own research.

DFES will not implement microcredit or microgrant facilities, but would tender these services to local organisations.

6.3. Expected Size of the Project Pipeline

The estimation of the size of the pipeline is based on experience from (i) strengthening the buffer zones of protected areas in Georgia; (ii) microcredit organisations; and (iii) grants for community development and environmental protection in Georgia. Currently two programmes focus on strengthening the buffer zones of protected areas in Georgia. One is the work of the KfW and the WWF in the Borjomi-Kharagauli National Park. Approximately USD 7.7 million are being invested in the five districts around the National Park. Projects include mainly improvement of social infrastructure, such as roads, schools, water supply, communal cultural buildings and support to local business activities. The programme has been rated as very successful and a further USD 9 million are likely to be invested. The targeted beneficiaries are the people living in the five districts, a total of 200 000 people.

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Box 2: Microgrants in Georgia – Examples from CARE, Mercy Corps and the Eurasia Foundation CARE provides microgrants to communities in the field of social infrastructure and agriculture. The overall goal of

its Community Investment Programmeme West (CIP-W) is to secure the sustained socio-economic development of communities affected by the western part of the Baku-Tbilisi-Ceyhan and South Caucasus Pipeline projects. In these communities, poor infrastructure and basic services have led to a decline in public health. Schools are so rundown that they are often forced to close during bad weather. Production in agriculture, which is the main economic activity, has severely declined over the last decade. Local government is widely viewed as being incapable of addressing community needs. The root causes of these problems lie in the poor coordination and use of resources by communities, government and business. Communities are empowered to take control of their own development process in a systematic and planned manner, ensuring that people’s lives will continue to improve long after the project has ended.

MERCY CORPS is a leading NGO in the field of microgrants for social investment purposes. It has received substantive resources from USAID and also technically assists the Georgian Social Investment Fund. The selection of investment projects takes place locally and is demand driven, which has resulted in a high impact per unit of dollars invested.

The Eurasia Foundation’s grant programme supports innovative projects with the potential to advance significantly one or more of the following goals in the Foundation's three programme areas. The first is “Private Enterprise Development”, which aims at supporting accelerated development and growth of private enterprises. The second is “Public Administration and Policy”, which aims at supporting more effective, responsive, and accountable local government. The third area is “Civil Society”, which aims at increasing citizen participation in the political and economic decision-making process. To achieve these goals, the Foundation supports projects aimed at strengthening human capital, developing locally sustainable forms of financing, and promoting a favourable legal and regulatory environment. The Foundation encourages projects that cross over programmematic areas and geographic boundaries.

Source: Own research.

The second programme was launched at the beginning of 2004 in the Kolkheti National Park. Approximately USD 1.4 million will be invested in the communities located in the surroundings of the National Park. The programme will support income generation activities, social infrastructure projects (e.g. school repairs) and public awareness. The implementation of the support programme will involve park authorities extensively and will be combined with public awareness campaigns in an effort to make the link between park protection and community support clear. The estimated number of beneficiaries is 36 000 people. The programmes in the Borjomi-Kharagauli and Kolkheti national parks not only share similar objectives, types of eligible projects and disbursement modalities, but are also remarkably similar in terms of expenditure per capita. These programmes invest approximately the equivalent of USD 40 per beneficiary or about USD 160 per family. This number, of course, should not be taken as a golden rule since it is not proven that investments of this magnitude are necessary and sufficient to achieve success. Having said that, these resources have achieved a measurable impact at least in the case of Borjomi-Kharagauli, whose support zone is densely populated and actively used. For estimating the size of the project pipeline, the figures of average investment per capita in Georgia were used as the starting point for calculations. Based on these figures and the estimated size of the target groups, the following results were obtained:

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Table 11: Estimated Expenditures by Areas in the First Priority Group Vashlovani Lagodekhi Tusheti Adjara TOTAL Population

15 000 25 000 10 000 30 000 80 000 Grant 584 722 974 537 389 815 1 169 444 3 118 518 Grant + Credit

734 722 1 124 537 539 815 1 319 444 3 718 518 Allocation to each area (%) 20 30 15 35 100 Source: Own estimates. Table 11 above shows the estimated target population and the estimated size of the grant component. The total for the 4 areas is USD 3 118 518. An additional USD 600 000 have been allocated for a microcredit component, bringing the total DFES investment in this pipeline to USD 3 718 518. The size of the microcredit component is based on the experience of NGOs and other organisations operating in this area. Microcredit funds of about USD 150 000 show some spare capacity when loans are directed to impoverished communities of a size similar to those targeted by this project and that have little or no experience in dealing with the banking sector. This report makes the assumption that on average funding of USD 150 000 would be made available to each project site for a total of USD 600 000. This would be a one-time investment that should be self-sustainable. The expected time frame for the disbursement of microcredit is the entire duration of the DFES programme. The resources for a microcredit programme would be tendered in the first year of operation and, if well managed, they should become a self-sufficient fund. The experience with microcredit in Georgia is very positive and most microcredit programmes, though small in size, are sustainable. The expected time frame for the disbursement of grant resources is between 3 and 4 years. This is based on the experience with biodiversity conservation projects in Georgia and the Caucasus. Attempting a faster disbursement rate will probably result in waste. A longer disbursement time most likely indicates that conditions for grant access are stringent and beyond the capacities of the average family. Table 12 below presents the annual resources required for 3 and 4-year disbursement periods.

Table 12: Annual Disbursement for 3 and 4-Year Periods Disbursement Period 1 Year 2 Year 3 Year 4 Year 3-year 1 639 506 1 039 506 1 039 506 4-year 1 379 629 779 629 779 629 779 629

Source: Own estimates. The disbursement in the first year is greater than in all others because it is assumed that the microcredit fund is tendered at the beginning of the programme. This is a one-time expense that is not repeated in the years thereafter. The figures for the 2nd, 3rd, and 4th years assume equal disbursement rates, although this may not be the case and will depend on the absorption capacity of communities. After the first allocation of USD 3.7 million has been disbursed, there will be two main types of DFES expenditures: • Follow-up expenditures in areas of the first priority group. Adjara, Vashlovani, Lagodekhi and Tusheti

should not be cut off from DFES once the initial allocation is completely disbursed. At least there will be a need to continue supporting public awareness campaigns. In addition, there may be a second phase to the support programme, depending on the absorption capacity of the community and the degree of success achieved. The amount of these follow-up expenditures will be known at the time an impact evaluation of the first phase is completed, which should be conducted at the end of the third year of operation of the programme.

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• Expenditures in areas of the second priority group. Areas in the second priority group include Racha, Svaneti and Samtskhe-Javakheti. It is expected that DFES resources will expand their initial coverage to include these biodiversity significant areas. At present, however, it is not possible to estimate the size of the expenditure for these three areas. None have so far defined the boundaries of their nature reserves, and therefore the relevant communities could not yet be identified. The definition of the boundaries of the nature reserves is expected to be approved during the next 3 years.

Summary results for the expected size of the project pipeline

The following summarises findings concerning the size and characteristics of the biodiversity conservation pipeline: • Based on previous experience, the total DFES allocation will be approximately USD 3.7 million, with

3.1 million distributed as grants and 0.6 million as microcredit. • The distribution of resources would approximately be 20%, 30%, 15% and 35% for Vashlovani,

Lagodekhi, Tusheti and Adjara, respectively. • The period for disbursement is estimated at between 3 and 4 years. • After this period, DFES would carry out an impact evaluation to define additional expenditure needs in

areas of the first priority group. • DFES expenditures in areas of the second priority group depend on a clear definition of nature reserve

boundaries since these are important for identifying the target communities. Without this information, it is not possible to estimate the size of the pipeline for areas in the second priority group.

7. REFERENCES

1. GORBI (Georgian Opinion Research Business International) (2000), Protected Areas Development Project: A Social Assessment. World Bank/GEF Protected Areas Development Project, Tbilisi.

2. GORBI (2001), Social Problems of Grazing on Arid and Semi-Arid Grazing Plots of Eastern Georgia. A Social Evaluation. UNDP/GEF Arid and Semi Arid Ecosystem Conservation in the Caucasus Project, Tbilisi.

3. CIVITAS (The Institute for the Study of Civil Society) (2001), Conservation of Arid and Semi-Arid Ecosystems in the Caucasus - Results of a Sociological Survey. CIVITAS, Tbilisi.

4. Nadareishvili, M., Pkhakadze, V., and Kapanadze, N. (2001), Kolkheti Wetlands Community Household Survey, Tbilisi.

5. OECD (Organisation for Economic Co-operation and Development) (2003), Labbate, G., Janelidze, P., Partskhaladze N., and Peszko G.in Potential Project Pipelines for the Expenditure Programme Financed by the Debt-for-Environment Swap in Georgia – Scoping Phase. OECD, Paris.

6. Save the Children (2002), The Status of Households in Georgia – 2002. Save The Children, Tbilisi.

7. United Nations Development Programme (UNDP) (2002), National Human Development Report 2001-2002. UNDP, Tbilisi.

8. World Bank/GEF (Global Environmental Facility)/Ministry of Environmental Protection and Natural Resources of Georgia (2002), Biodiversity Strategy and Action Plan. World Bank/GEF, Ministry of Environmental Protection and Natural Resources of Georgia, Tbilisi.

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59

SMALL AND MINI HYDROPOWER GENERATION

60

61

TABLE OF CONTENTS

SYNTHESIS................................................................................................................................................. 64

1. TECHNICAL EXPLOITABLE POTENTIAL OF THE MINI HYDROPOWER SECTOR................... 67

2. ELECTRICITY DEMAND AND SUPPLY............................................................................................. 71

2.1. Demand and Supply Analysis ............................................................................................................ 71 2.2. Projected Electricity Demand until 2020 ........................................................................................... 71 2.3. Electricity Supply............................................................................................................................... 72

3. DESCRIPTION OF THE ELECTRICITY SECTOR OF GEORGIA...................................................... 73

3.1. Electricity Generation ........................................................................................................................ 74 3.2. Electricity Transmission..................................................................................................................... 75 3.3. Electricity Dispatch ............................................................................................................................ 75 3.4. Electricity Distribution....................................................................................................................... 75 3.5. Georgian Wholesale Electricity Market ............................................................................................. 76 3.6. Georgian National Energy Regulatory Commission.......................................................................... 76

4. REGULATORY FRAMEWORK ............................................................................................................ 77

5. ELECTRICITY TARIFFS........................................................................................................................ 78

6. DESCRIPTION OF DONOR, STATE AND PRIVATE ACTIVITIES IN THE MINI HYDROPOWER GENERATION SECTOR ............................................................................................................................ 80

6.1. Implemented Projects......................................................................................................................... 80 6.2. Donor Activities ................................................................................................................................. 80 6.3. Value Added of DFES Financing....................................................................................................... 81

7. STAKEHOLDER ANALYSIS................................................................................................................. 81

8. CAPITAL AND OPERATION AND MAINTENANCE COSTS OF MODEL PROJECTS.................. 82

8.1. “Rehabilitation” Model Projects ........................................................................................................ 82 8.2. “New Construction” Model Projects.................................................................................................. 85

9. EVALUATION OF THE ECONOMIC POTENTIAL OF REHABILITATING EXISTING, AND CONSTRUCTING NEW, MINI HYDROPOWER PLANTS ..................................................................... 88

10. FINANCIAL VIABILITY OF REHABILITATION AND CONSTRUCTION OF NEW MINI HYDRO POWER PLANTS ......................................................................................................................... 91

11. SENSITIVITY ANALYSIS ................................................................................................................... 97

12. CAPITAL NEEDS FOR THE ENTIRE PIPELINE............................................................................... 99

12.1. Capital Costs for Rehabilitation Projects ......................................................................................... 99 12.2. Capital Costs of New Construction Projects .................................................................................... 99 12.3. Total Capital Costs ......................................................................................................................... 100

13. RISKS AND RISK MITIGATION MEASURES ................................................................................ 100

13.1. Tariffs............................................................................................................................................. 100 13.2. Payment Collections....................................................................................................................... 100 13.3. Risks Related to Operation and Maintenance ................................................................................ 100 13.4. Managerial Capacity of HPP Owners ............................................................................................ 100

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13.5. Water Supply.................................................................................................................................. 101

14. ESTIMATION OF GREENHOUSE GASES (GHG) ABATEMENT POTENTIAL.......................... 101

15. SUSTAINABILITY ASSESSMENT ................................................................................................... 102

16. REFERENCES ..................................................................................................................................... 105

LIST OF TABLES

Table 1. Mini Hydro Power Plants in Georgia (100 - 1 000 kW)................................................................. 67 Table 2. Mini Hydro Power Plants in Farming Areas .................................................................................. 68 Table 3. Potential Mini Hydro Power Plants in Georgia (0.1 - 1.0 MW) ..................................................... 69 Table 4. Projection of Electricity Demand and Required Supply in 2001 - 2020 ........................................ 72 Table 5. Projected Electricity Demand (in GWh) up to 2020 (Fast Recovery and Fast GDP Growth)........ 72 Table 6. Electricity Balance of Georgia, in GWh......................................................................................... 73 Table 7. Tariffs for Companies Purchasing Energy from the Wholesale Electricity Market ....................... 78 (Tetri/ kWh) .................................................................................................................................................. 78 Table 8. Examples of Hydropower Generation Tariff for Small and Mini HPPs (Tetri/ kWh).................... 78 Table 9. Tariff for Thermal Power Plants (Tetri/kWh)................................................................................. 79 Table 10. Tariff for Electricity Transmission and Dispatch Services (Tetri/kWh)....................................... 79 Table 11. Purchasing Tariffs for Electricity Distributing Companies (Tetri/kWh) ...................................... 79 Table 12. Characteristics of Selected Plants ................................................................................................. 83 Table 13. Capital and Operational & Maintenance Costs of Selected Plants ............................................... 84 Table 14. Capital and Operational & Maintenance Costs of Model Rehabilitation Projects........................ 85 Table 15. Capital Costs of Potential New Mini Hydropower Plants ............................................................ 86 Table 16. Capital and Operation & Maintenance Costs of Model Projects for the Construction of New

HPPs ..................................................................................................................................................... 87 Table 17. Input Data .................................................................................................................................... 89 Table 18. Economic Rate of Return (ERR)(Collection Rate = 100%) ......................................................... 90 Table 19. Input Data for Financial Calculations (Equity = 20%; Interest on Loan = 6%) ........................... 91 Table 20. Results of Financial Calculations (Equity = 20%; Interest on Loan = 6%).................................. 93 Table 21. Input Data for Financial Calculations (Equity=20%; Grant=10%; Interest on Loan=6%)........... 94 Table 22. Results of Financial Calculations (Equity = 20%; Grant = 10%; Interest on Loan = 6%) ........... 95 Table 23. Results of Financial Calculations (Equity = 10%; Grant = 25%; Interest on Loan = 6%) ........... 96 Table 24. Marginal Parameters of Financial Scheme, Guaranteeing IRR at a 15%-Level........................... 97 Table 25. Emission Factor in Electricity Generation in 2001..................................................................... 102 Table 26. GHG Emission Reductions Potential.......................................................................................... 102 Table 27. Sustainability Scoring of Rehabilitation and Construction of New Mini Hydropower Plants ... 103

LIST OF FIGURES Figure 1. Energy Sector in Georgia .............................................................................................................. 74 Figure 2: IRR Sensitivity - Full Rehabilitation Model Project ..................................................................... 97 Figure 3. IRR Sensitivity - Small-Scale Rehabilitation Model Project ........................................................ 98 Figure 4. IRR Sensitivity - New Construction Model Project ...................................................................... 99

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ACRONYMS BCR Benefit-cost ratio CBO Community-based organisation CENEF Energy Efficiency Center of the Russian Federation DFES Debt-for-Environment Swap DG Direct customer E&M Electrical and Mechanical ERR Economic Rate of Return GDP Gross Domestic Product GEF Global Environmental Facility GEL Georgian currency Lari GESI Georgian Energy Security Initiative GHG Greenhouse gases GNERC Georgian National Energy Regulatory Commission GWEM Georgian Wholesale Electricity Market HPP Hydropower Plant IHA International Hydropower Association IRR Internal Rate of Return JSC Joint-Stock Company KfW Bank Kreditanstalt für Wiederaufbau (German Bank for Reconstruction) NPV Net Present Value O&M Operation and Maintenance (costs) PDF Project Development Facility PPA Power Purchase Agreement RERF Renewable Energy Revolving Fund RNPV Rate of NPV SME Small and Medium Enterprises Tetri 0.01 GEL TA Technical Assistance TPP Thermal power plant UDC United Distribution Company of Georgia USAID US Agency for International Development USC US cent USD US dollar VAT Value Added Tax

PHYSICAL UNITS g Gramme GWh Gigawatt-hours km Kilometre kt Kilotonnes kV Kilovolt kW Kilowatt kWh Kilowatt-hours m3/s Cubic metre per second

Mm3 Million cubic metres MW Megawatt tC Tonnes of carbon tCO2 Tonnes of carbon dioxide TJ Terajoule

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SYNTHESIS

The total installed capacity of power generating facilities in Georgia constitutes about 4 800 megawatt (MW). However, at present, only 2 400 MW are in operational condition. During the winter peak, demand cannot be met by existing facilities because a significant part of the population uses electricity for heating. About 2 800 MW of Georgia's total installed generation capacity is hydroelectricity, 85% of which is concentrated in the western part of Georgia. Because of the lack of maintenance, most plants are in a poor state and have reduced their output. Hydroelectric generation constitutes about 78% of the electricity balance of the country and will continue to play a major role in Georgia's energy plans for the foreseeable future. This report briefly describes Georgia’s regulatory framework for energy provision. In particular, it focuses on the amendments to the existing laws prepared by the Ministry of Energy in order to include in the legislation the deregulation of power plants below 5 MW capacity. Deregulation will include tariffs and direct contracts. This means that mini hydropower plants will be able to sign direct contracts – including with the Georgian Wholesale Electricity Market (GWEM) – at an agreed tariff and will not need approval by the Georgian National Energy Regulatory Commission (GNERC). It is expected that the new amendments will have come into the force by March 2006 and mini hydropower plants situated near settlements, small enterprises (sawmills, small wineries, tea factories, etc.) should be able to operate outside the network, by-passing the Georgian Wholesale Electricity Market (GWEM). This report also includes a brief description of donor activities and possible links with the debt-for-environment swap (DFES). In particular:

• The project “Georgia – Promoting the Use of Renewable Energy Resources for Local Energy Supply”, which is financed jointly by the Global Environmental Facility (GEF) and the Government of Germany through the German Bank of Reconstruction (KfW), will undertake the pilot rehabilitation of small hydropower plants and geothermal hot water supply systems through the Renewable Energy Revolving Fund (RERF).

• The Georgian Energy Security Initiative (GESI), whose Community Development Component

elaborated development plans for communities, including local renewable energy sources. Construction/rehabilitation of mini hydro power plants (HPP) is planned for two communities.

The stakeholder analysis identified as main stakeholders the owners and operators of mini hydropower plants, local businesses and communities, as well as engineering and consulting companies in the field of mini hydropower. The report provides an economic cost-benefit analysis, as well as a financial analysis. Costs of rehabilitation/construction of mini hydropower plants are estimated on the basis of developed project proposals, and include capital costs and operation and maintenance (O&M) costs. Economic benefits generated by DFES projects include: • Improved living conditions of the population, since the electricity supply in rural areas of Georgia is

very limited; for cooking, heating and hot water people use mainly firewood, and for lighting - kerosene.

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• The promotion of renewable energy is one of the options to reduce dependence on imported fossil fuel and thereby increases the energy security of the country.

• Mini hydro plants will work in an autonomous regime. This will help reduce the load of the energy supply system and avoid the dependence of each region on this system. Besides, electricity will be transmitted over short distances, and subsequently energy losses will be reduced.

• Implementation of DFES projects will reduce greenhouse gas (GHG) emissions by helping to replace electricity produced by thermal power plants with renewable energy sources (e.g. small and mini hydropower units).

This report identifies two main model projects for financing under DFES. The first concerns rehabilitation projects and the second construction of new generating units. Rehabilitation and construction projects have been categorised in terms of “Expensive”, “Medium”, “Less Expensive” and “Least Expensive” projects. The report provides financial calculations using the following values of electricity tariffs in Georgia: 1. 0.015 USD/kWh (actual tariff for most small and mini hydropower plants);

2. 0.020 USD/kWh;

3. 0.025 USD/kWh (current tariff for new plants);

4. 0.030 USD/kWh;

5. 0.035 USD/kWh;

6. 0.040 USD/kWh (tariff used in the TACIS study “Natural Energy Resources in Georgia - 1999”).

Projects are assumed to be “feasible” if they show a positive Net Present Value (NPV), an Internal Rate of Return (IRR) ≥ 25%, and a payback period ≤ 7 years. The analysis was performed for different collection rates. With 100% collection rates, rehabilitation projects are feasible at a tariff of 0.025 USD/kWh. New constructions are feasible at a tariff of 0.035 USD/kWh. With less than 100% collection rates,34 only rehabilitation projects at a tariff of 0.035 USD/kWh are feasible. New construction projects do not meet the selection criteria even at tariffs of USD 0.040. The financial calculations explored different shares of equity, grant and loans. For the first round of financial calculations, it was assumed that 20% of investments would be the responsibility of the plants’ owners and the rest would be covered by DFES in the form of a soft loan at an annual interest rate of 6% and a payback period of 7 years. All existing taxes were considered. Projects with a positive NPV and an IRR ≥ 15% were considered financially feasible. The projects considered as financially feasible were the following: • Expensive full rehabilitation model project at a tariff 0.035 USD/kWh; • Less expensive full rehabilitation model project at a tariff 0.025 USD/kWh; • Small-scale rehabilitation model project at a tariff 0.025 USD/kWh; and • Least expensive new construction model project at a tariff 0.040 USD/kWh.

34 This implies a collection rate for the first year of the project of 40% (target of the Wholesale Electricity Market for the end of 2004); 60% in the second year and 80% thereafter.

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The report presents a second financial analysis assuming financing with a 20% equity share, a 10% grant share and 70% loan share at a 6% interest rate. The projects considered as financially feasible were the following: • Expensive full rehabilitation model project at a tariff 0.030 USD/kWh; • Less expensive full rehabilitation model project at a tariff 0.025 USD/kWh; • Small-scale rehabilitation model project at a tariff 0.025 USD/kWh; • Less expensive new construction model project at a tariff 0.040 USD/kWh ; and • Less expensive new construction model project at a tariff 0.035 USD/kWh. Finally, the report analyses a third financial scenario assuming a reduced equity share (10% instead of 20%) and an increased grant share (25% instead of 10%). The projects selected were the following: • Less expensive new construction model project at a tariff 0.035 USD/kWh; and • Least expensive new construction model project at a tariff 0.030 USD/kWh. The Table below summarises the marginal conditions (minimum values of equity and grant shares; minimum tariff) that ensure an IRR at a 15%-level.

Share in Project Financing Model Project Equity Grant DFES Loan

Annual Interest of

Loan

Payback Period in

Years

Electricity Selling Tariff,

USD/KWh Small-scale rehabilitation 20% - 80% 6% 7 0.02335 Full rehabilitation (Expensive model project)

20%

10%

70%

6%

7

0.03051

New construction (Less expensive model project)

10%

25%

65%

6%

7

0.03330

Source: Own estimates. Capital needs for the total small and mini hydropower pipeline can be estimated at USD 15 million. This includes USD 7 million for rehabilitation (4-5 full rehabilitation and 8-10 small-scale rehabilitation projects) and USD 8 million for new construction (12-14 hydropower plants). This amount does not include technical assistance (preparation of pre-feasibility studies, consultancy, training, etc.) and monitoring and evaluation components. The sensitivity analysis shows that IRR sharply responds to capital costs and tariff variations for all model projects. The share of the grant component in total investment also has a noticeable impact. The impact of other parameters is relatively minor.

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1. TECHNICAL EXPLOITABLE POTENTIAL OF THE MINI HYDROPOWER SECTOR

As a definition, the technical potential is the estimation of the total national capacity that is technically feasible; the economic potential is based on the technical potential constrained by the results obtained through a cost/benefit analysis (profitability requirement). The technical exploitable potential of the small (including mini) hydropower sector has been estimated by a number of different authors. Besides, there are small and mini hydropower development plans elaborated by different energy institutes and energy companies for different regions of Georgia, including the identification of potential sites and projects.

In the 1960s, approximately 300 small, mini and micro hydro plants were functioning in Georgia. These plants provided electricity to regions, villages, small enterprises, and farms. But the establishment of centralised electricity production in the following years superseded the operations of small, mini and micro hydro plants.

Currently, about 30 small and mini hydroelectric plants exist in Georgia and a significant number of these are privatised. Main data on the existing mini hydropower plants are presented in Table 1. These plants need rehabilitation. Some of them work at low efficiency and others are not functioning at all.

Table 1. Mini Hydro Power Plants in Georgia (100 - 1 000 kW) No HPP Region River Year of

Installation Capa-city, kW

Projected Output,

GWh

Net Head,

m

Discharge m3/s

1* Achi Kobuleti Acharistskali 1958 1 028 8.0 60 1.7 2 Azhara Gulripshi Azharistskali 1963 170 1.0 25 0.3 3 Besleti Sokhumi Besleta 1949 360 2.0 10 5.6 4 Gagra Gagra Zhоekvara 1938 864 4.0 276 0.4 5 Dmanisi Dmanisi Mashavera 1935 400 3.0 57 1.0 6 Zvareti Oni Kheori 1947 218 1.0 104 - 7 Kekhvi Tskhinvali Liakhvi 1941 980 5.0 16 7.6 8* Kinkisha Kobuleti Kinkisha 1954 740 4.0 67 1.4 9 Orbeli Tsageri Lajanura 1951 460 3.0 21 2.7

10 Ritsa Gagra - 1949 984 5.0 62 2.0 11 Pskhu Sokhumi - 1956 500 2.0 117 0.4 12 Goresha Kharagauli Kvataura 1937 500 1.0 45 0.1 13* Sno Kazbegi Ruistskali 1954 216 1.0 137 0.2 14 Kazbegi Kazbegi Snostskali 1951 304 2.1 96 0.42 15 Shatili Dusheti Shatili 1972 500 2.0 - - 16* Khertvisi Aspindza Tavparavani 1950 294 2.0 13 3.0 17 Sulori Vani Sulori 1953 640 4.0 20 4.0 18* Kurzu Chkhorotsku Ochkhamuri 1958 160 1.0 36 0.56 19 Skuri Tsalenjikha Chanistskali 1958 1 000 7.0 46 1.33 1* Is privatised and in

operation 1 Is privatised but not

in operation 1* In operation but is not

privatised 1 Is not privatised and not

in operation Source: UNDP/GEF (2002). Among these plants are also a number of mini HPPs, which formerly belonged to the agricultural sector. They are presented in Table 2.

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Table 2. Mini Hydro Power Plants in Farming Areas HPP River Capacity, kW Output,

GWh Net Head,

m Discharge,

m3/s Number of

Units

Ablari Ablaristskali 730 3 285 50.9 1.8 2 Khando Khandostskali 104 468 11.0 1.2 1 Ratevani On canal 640 2 880 50.0 1.6 2 Maiakovski -II On canal 200 900 18.0 1.4 1 Bakhvi Bakhvistskali 125 800 65.0 0.3 1 Vakijvari Natanebi 107 481 19.1 0.7 1 Likhauri Atchistskali 99 456 7.8 1.5 1 Uchkhoba Dvabzu 110 495 10.2 0.9 1 Patardzeuli Iori 147 661 9.3 2.0 1 Khvadabuni On canal 125 562 12.5 1.3 2 Intsoba Intsoba 220 990 58.0 0.5 1 Khidistavi Gubazouli 280 1 260 10.0 3.5 1 Bobokvati Dekhva 103 463 24.0 0.6 1 Khulo Uchkho 219 985 150.0 0.2 1

Source: UNDP/GEF (2002). The technical potential of small (mini) hydropower plants can be estimated by the sum of hydropower potential of the sections of rivers whose total capacity does not exceed 10 MW (1 MW for mini HPPs). The analysis of more than 300 rivers of Georgia shows that it would be possible to construct 1 200 derivation type small hydropower plants, of which 700 could be built in western Georgia. The total installed capacity of these plants would equal 3 000 MW, of which 2 000 MW could go to western Georgia, with an annual generation of 16 000 GWh (11 000 MWh in western Georgia). About 160 units of small hydropower plants could be feasibly constructed (including the ones to be rehabilitated) in Georgia, with a total capacity of approximately 650 MW. The corresponding annual energy output is estimated at 3.9 TWh/a. In 2002, the Ministry of Energy conducted a study entitled “Potential of Renewable Energy Resources and the Programme of their Utilisation”. Later, one of the authors of this Programme, the “Basiani 93” Engineering-Consulting Company, specified a plan of construction for 177 new small and mini hydropower plants. The parameters of these hydropower plants were determined on the basis of an analysis of topographic maps and hydrological data. Some plants have developed business plans as well. Data on mini hydropower plants are presented in Table 3. As can be seen from the table, new constructions are foreseen in practically all regions of Georgia. It is important to note that the highest potential for the development of the mini hydropower sector is in mountainous areas (Mtskheta-Mtianeti, Samtskhe-Javakheti, Racha-Lechkhumi and Kvemo Svaneti, Adjara), where electricity supply is very limited and unreliable.

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Table 3. Potential Mini Hydro Power Plants in Georgia (0.1 - 1.0 MW) No Name of HPP River Type of

Derivation Water

Discharge (m3/s)

Head (m)

Rated Capacity

(MW)

Annual Production

(kWh)

Investment (mln USD)

Cost of 1 kW

Installed Capacity

(USD)

Kakheti Region

1 Girevi Girevistskali Pipeline 0.3 82.4 0.14 0.70 0.17 1 214 2 Khoshantkhevi Khoshantkhevi Pipeline 0.2 182.0 0.32 1.70 0.35 1 094 Total in region 0.46 2.40 0.52 1 130

Kvemo Kartli Region

1 Dmanisi Dmanisi Pipeline 2.2 20.0 0.30 2.00 0.30 1 000

Total in region 0.30 2.00 0.30 1 000

Shida Kartli Region

1 Tedzami Tedzami Pipeline 1.5 48.0 0.60 2.50 0.60 1 000 2 Ateni Tana Pipeline 1.5 75.0 0.80 3.60 1.07 1 340 3 Bobnevi Tana Pipeline 1.2 40.0 0.40 1.80 0.46 1 160 4 Biisi Tana Pipeline 1.0 70.0 0.50 2.25 0.55 1 095 5 Boshuri Tana Pipeline 0.7 65.0 0.30 1.35 0.37 1 230 6 Tursebi Tana Pipeline 0.4 100.0 0.30 1.30 0.36 1 210 7 Gagluani Tana Pipeline 0.2 110.0 0.15 0.65 0.10 1 270

Total in region 3.05 13.45 3.51 1 151

Mtskheta-Mtianeti Region 1 Chkheri Chkheri Pipeline 0.7 173.0 1.00 6.82 1.15 1 150 2 Gergeti Bashi Pipeline 0.2 126.0 0.14 0.95 0.19 1 359 3 Gaiboteni Chkhati Pipeline 0.2 263.0 0.43 2.93 0.54 1 256 4 Tkarsheti Usakhelo Pipeline 0.2 186.0 0.24 1.64 0.28 1 168 5 Khurtisi Kesia Pipeline 0.6 115.0 0.47 3.20 0.56 1 189 6 Mna Mna Pipeline 1.0 107.0 0.75 5.10 0.82 1 091 7 Akhaltsikhe Artkhmo Pipeline 0.9 37.2 0.23 1.57 0.26 1 144 8 Pavliani Ksani Pipeline 2.0 50.0 0.80 5.10 1.46 1 830 9 Largvisi Ksani Pipeline 4.0 20.4 0.67 5.00 1.13 1 690

Total in region 4.73 27.31 6.39 1 351

Guria Region 1 Kadagauri Pavlisghele Pipeline 0.2 68.0 0.10 0.69 0.11 1 090 2 Ianeuli Usakhelo Pipeline 0.1 126.0 0.57 3.93 0.54 793 3 Kvirilistskali Kvirilistskali Pipeline 1.8 58.5 0.73 5.23 0.58 792 4 Chkhakoura Satevznaeghele Pipeline 0.6 94.0 0.40 2.87 0.41 1 015 5 Bakhmaro Bakhvistskali Pipeline 2.0 37.5 0.62 3.23 1.09 1 765 6 Bukshieti Bakhvistskali Pipeline 1.1 49.0 0.38 1.98 0.44 1 147 7 Askana Ochkhanura Pipeline 0.5 48.0 0.17 0.89 0.24 1 424 8 Makvaneti Agi-dakva Pipeline 0.8 34.6 0.20 1.23 0.32 1 374

Total in region 3.17 20.05 3.73 1 178

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Samtskhe-Javakheti Region 1 Niali Mirashkhani Pipeline 1.0 160.0 1.00 6.50 0.80 760 2 Gujareti 1 Gujareti Pipeline 4.0 33.6 0.89 4.41 1.38 1 545 3 Timotesubani Gujareti Pipeline 3.0 24.8 0.49 2.38 0.80 1 630 4 Tsagveri Gujareti Pipeline 4.0 28.6 0.76 3.68 1.25 1 654 5 Daba Gujareti Pipeline 4.0 30.6 0.81 3.86 1.20 1 495 6 Bakuriani 1 Bakurianistskali Pipeline 0.4 66.0 0.19 0.76 0.31 1 676 7 Bakuriani 2 Bakurianistskali Pipeline 0.4 85.8 0.24 1.07 0.42 1 763 8 Patara Tsemi Bakurianistskali Pipeline 0.5 140.0 0.49 2.19 0.76 1 549 9 Libani Bakurianistskali Pipeline 0.6 102.0 0.43 1.77 0.73 1 709

10 Tsemi Bakurianistskali Pipeline 0.6 112.0 0.47 2.07 0.76 1 615

Total in region 5.77 28.69 8.41 1 458

Raca-Lechkhumi and Kvemo Svaneti Region 1 Bobora Bobora Pipeline 1.4 86.0 1.00 6.50 1.20 1 200 2 Kveda Kvedrula Pipeline 0.7 78.9 0.45 2.90 0.71 1 580 3 Iri Chalistskali Pipeline 0.1 135.0 0.10 0.60 0.12 1 200 4 Chala Chala Pipeline 0.7 116.0 0.66 4.30 0.76 1 150 5 Chorghi Chala Pipeline 0.6 88.0 0.43 2.80 0.53 1 230 6 Nakieti Vakhatskali Pipeline 0.3 135.0 0.30 1.60 0.39 1 300 7 Khoteura Khoteura Pipeline 1.7 76.0 1.00 5.80 1.44 1 440 8 Chala Zena Pipeline 1.2 36.5 0.35 1.90 0.54 1 530

Total in region 4.29 26.40 5.69 1 325

Adjara 1 Didvake Kintrishi Pipeline 2.1 60.8 0.95 6.36 1.36 1 478 2 Orbeza Chakvistskali Tunnel 2.0 47.5 0.68 4.84 1.01 1 485 3 Afshila Kheknara Pipeline 0.8 46.5 0.27 1.77 0.42 1 556 4 Monastristskali Monastristskali Pipeline 0.5 103.9 0.34 2.33 0.51 1 506 5 Mechkhristskali Mechkhristskali Pipeline 0.5 98.4 0.35 2.40 0.59 1 686 6 Boloko Boloko Pipeline 1.2 96.0 0.86 6.14 1.08 1 256 7 Nusreti Boloko Pipeline 1.0 60.0 0.45 3.20 0.51 1 133 8 Charnali Charnali Pipeline 1.4 70.0 0.74 4.82 0.83 1 122 9 Khulo mini Diakonidzeebi Pipeline 0.5 144.4 0.50 4.00 0.45 900

Total in region 5.14 35.86 6.76 1 315

65 Total in Georgia 26.50 161.16 35.31 1 312 Source: UNDP/GEF (2002). The majority of these plants are characterised by sufficient provision of the calculated water discharge (4-6 months), only some of them represent peak (1-month provision) or basis (11-12 months) types. Most plants are of the derivation type. In order to reduce the costs, the derivation pipeline is laid alongside paved and unpaved roads.

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2. ELECTRICITY DEMAND AND SUPPLY

2.1. Demand and Supply Analysis

In Georgia, hydropower plants are practically the only source of electricity production in summer. In winter, hydropower contributes to about half of the total electricity supply. Maintenance work is erratic and insufficient to ensure proper operation. In the short term and especially in winter, hydropower generation could be an appropriate way to satisfy peak demand. Determining the actual demand for electric power is not easy. Until recently, there was a substantial difference between the estimates made by Georgian and foreign experts. According to Georgian experts, energy should be supplied to consumers under any circumstances, which resulted in a high estimate for demand. In contrast, foreign experts determined the demand for electric power not by satisfying consumer needs but on the basis of consumer’s willingness and capacity to pay for the energy consumed. The experience from Tbilisi proved the feasibility of the latter approach. When the residents of Tbilisi realised that they should pay for electric power, the population adapted to this situation and started to consume power more economically in order to reduce monetary expenditures. The fact that today people react much more sensitively to electric power tariff increases indicates that the price mechanism can work in Georgia, too. However, this sense of consumer accountability is not always matched by distributors, who fail to provide consumers with a continuous supply of quality power, despite payments.

2.2. Projected Electricity Demand until 2020

The only complete forecast of electricity demand in Georgia up to 2020 was carried out in 1998 by the energy efficiency centre – CENEF (of the Russian Federation) – upon the request of Burns & Roe Enterprises, a company contracted by the US Agency for International Development (USAID). In 2001, Dr. I. Shekriladze developed an electricity demand scenario taking into account demand growth in conformity with the estimated rates of economic growth and demand reduction as a result of a number of non-linear processes. In particular: • The improvement of collection rates results in a consumption reduction of up to 40%.

• The step-by-step increase in the electricity tariff causes a decrease in demand of 10% of consumption at 2000 levels.

• The improvement and expansion of natural gas supply causes a reduction in electricity demand of 30% of consumption at 2000 levels.

• The reduction in transmission and distribution losses causes an additional decrease of 10%.

The results are presented in Table 4.

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Table 4. Projection of Electricity Demand and Required Supply in 2001 - 2020

Year Demand,

GWh

Required Supply,

GWh

Year Demand,

GWh

Required Supply,

GWh 2001 6 430 7 940 2011 10 070 11 190 2002 6 240 7 610 2012 10 570 11 740 2003 5 970 7 190 2013 11 100 12 330 2004 6 230 7 420 2014 11 660 12 960 2005 6 710 7 800 2015 12 240 13 600 2006 7 120 8 090 2016 12 850 14 280 2007 7 890 8 770 2017 13 500 15 000 2008 8 700 9 670 2018 14 170 14 740 2009 9 140 10 160 2019 14 880 16 530 2010 9 590 10 660 2020 15 620 17 360

Source: Kipshidze, 2002. Dr. Kipshidze also developed an electricity demand forecast based on three scenarios of economic development: (i) slow recovery and a subsequent slow growth of the gross domestic product (GDP); (ii) quick recovery and subsequent slow rates of GDP growth; and (iii) quick recovery and fast GDP growth. Results for the third scenario are presented in Table 5.

Table 5. Projected Electricity Demand (in GWh) up to 2020 (Fast Recovery and Fast GDP Growth)

YEARS Electricity Consumption Levels 1990 1998 1999 2005 2010 2015 2020

Stipulated by economic development factors

17 444 7 962 8 147 10 706 13 826 18 255 24 542

Considering price variation impact

17 444 7 962 8 147 9 924 12 442 16 310 21 795

As a consequence of the implementation of energy efficiency measures

17 444 7 962 8 147 9 405 11 636 15 141 20 156

Source: Kipshidze, 2002. In summary, the estimated electricity demand varies according to different assumptions, and ranges between 17 360 and 20 156 GW/h for the year 2020.

2.3. Electricity Supply

The uneven distribution of power generating facilities creates difficulties for the energy supply. This is also a consequence of the policies in the 1960s when the use of medium and small size HPPs was discouraged. As a result, regions rich in hydroelectric power potential became heavily dependent on the state grid. Today, the state grid is a rather unreliable source of energy supply, and a large part of the rural population is cut off from the electricity supply system, particularly during winter. This has a major impact on living standards. Electricity consumption has declined since 1990 (see Table 6). This is mainly due to the lack of generating facilities, especially thermal power plants, the lack of finance to purchase fossil fuel for thermal power plants, and a general decline of industrial activity.

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Table 6. Electricity Balance of Georgia, in GWh Generation

By Hydro

By Ther-mal

Total Import Export Net

Import Total

Supply to the Grid

Losses Consump-tion

1990 55% 45% 13 613 -51 13 562 1991 56% 44% 13 140 13 140 1992 61% 39% 11 520 1 547 531 1 016 12 536 2 530 10 006 1993 71% 29% 10 150 1 051 338 713 10 863 2 965 7 898 1994 73% 27% 7 044 949 32 917 7 961 2 494 5 468 1995 90% 10% 7 082 754 754 7 836 1 993 5 844 1996 85% 15% 7 232 344 137 207 7 439 1 332 6 107 1997 84% 16% 7 172 613 277 336 7 508 1 059 6 449 1998 79% 21% 8 062 420 520 -100 7 962 1 119 6 843 1999 80% 20% 8 098 434 384 50 8 148 925 7 222 2000 80% 20% 7 447 612 211 401 7 848 829 7 019 2001 80% 20% 6 905 797 544 253 7 702 833 6 869 2002 7 215 750 251 499 7 965 836 6 883

Source: Kipshidze, 2002.

3. DESCRIPTION OF THE ELECTRICITY SECTOR OF GEORGIA

The electricity sector of Georgia has the following structure: • Electricity generation;

• Electricity transmission;

• Dispatch;

• Distribution;

• Wholesale Electricity Market; and

• National Energy Regulatory Commission.

The relationship among these structures is shown in Figure 1. Each of these components is described in more detail below.

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Figure 1. Energy Sector in Georgia

3.1. Electricity Generation

The total installed capacity of generating facilities in Georgia constitutes about 4 800 MW. However, only 2 400 MW are in operational condition. During the winter peak demand cannot be met by existing facilities because a significant part of the population uses electricity for heating. About 2 800 MW of Georgia's total installed generation capacity is hydroelectricity, 85% of which is concentrated in the western part of Georgia. Because of the lack of maintenance, most plants are in a poor state and have reduced their output. Hydroelectric generation constitutes about 78% of the electricity balance of the country and will continue to play a major role in Georgia's energy plans for the foreseeable future, primarily because of favourable weather conditions for hydroelectric generation. Georgia's largest thermal power plant (TPP) is "Tbilsresi", located south-east of Tbilisi at Gardabani (and usually referred to as “Gardabani”). The Gardabani TPP originally had ten units with a total installed capacity of 1 850 MW. The two largest units (9 and 10) have been fully restored for gas operation, and each provides about 300 MW. Only three of the remaining units are operational. These units (3, 4 and 8) are old and cannot be operated at their full capacity. At a maximum, each unit can provide about 130 MW

Generation

Thermal Power Plants

Hydro Power Plants

Auxiliary Facilities

Electricity Transmission

Electricity Dispatch

Wholesale Electricity Market

Distrib. Companies

Consumer

Electricity

Income

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for a total of about 400 MW. The remaining five units have not been maintained since the early 1990s and cannot be operated. At present, about 700 MW are available at the station as a result of extensive rehabilitation. The units, most of which were commissioned in the 1950s, are facing a critical technical situation and show a very poor state of turbines, generators, transformers and other facilities, such as canals, buildings, and access roads. Inadequate maintenance is at the heart of the problem. In many cases, the operations of these plants also suffer because of water penstock and electrical installation (wire and transformer). For the plants fed by canals (generally used for irrigation), the water levels are lower due to the lack of cleanup of canals, leaks and an increase in irrigation needs. Nearly half of the capacity is currently not operating. At present, the principal goals of the energy sector of Georgia, along with the restoration of small hydropower plants, is the rehabilitation of large and medium-size HPPs, and repairing and reinforcing the high voltage transmission system. These would involve relatively moderate investments.

3.2. Electricity Transmission

Georgia's high voltage transmission system comprises 576 km of 500 kV, 1 690 km of 220 kV and 3 911 km of 110 kV lines. In addition, the operable interconnection with Azerbaijan includes 21 km of 330 kV lines. The lack of adequate maintenance since 1991, theft and vandalism have deteriorated the network and reduced its reliability. Virtually no maintenance or rehabilitation has been done on the 35-110 kV network, causing dozens of transmission lines and pieces of sub-station equipment to become non-operational, adversely affecting the normal functioning of the network. Furthermore, the system's sub-optimal operation and too frequent switching because of the daily load-shedding (necessary to cope with winter supply shortages), has damaged sub-station batteries and switches, leaving a number of sub-stations without sufficient voltage.

3.3. Electricity Dispatch

The Central Dispatch Centre for Georgia's electric power system is responsible for monitoring and controlling the Georgian power system, including: switching of the 500, 220 and 110 kV high voltage transmission facilities, and scheduling generation to meet load requirements. Generally, it does not own operating assets (transmission lines, transformers, substations, etc).

3.4. Electricity Distribution

After reorganisation of the vertically integrated state power utility Sakenergo in 1997, the distribution sub-sector was divided into 66 distribution areas that received power from the transmission system via 21 major sub-stations. Later, the distribution sub-sector was reorganised again, to consist of 11 distribution companies (excluding Telasi-Tbilisi distribution company), all of which were registered as members of the Georgian Wholesale Electricity Market. These were: 1. Kvemo Kartli 6. Samegrelo 11. Relasi (Rustavi) 2. Shida Kartli 7. Guria 3. Mtskheta-Mtianeti 8. Racha 4. Samtskhe-Javakheti 9. Adjara 5. Imereti 10. Kakheti

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In 2001, Shida Kartli, Kvemo Kartli, Samtskhe Javakheti, Mtskheta-Mtianeti, Imereti, Guria, Samegrelo Zvemo Svaneti and Racha distribution companies were merged into the Georgian United Distribution Company (UDC), a joint stock company. So, for the time being, Georgia has 5 distribution companies. UDC serves more than 1.1 million electricity customers, of which about 98% are residential. Telasi, the distribution company for Tbilisi, serves over 340 000 customers. Distribution companies purchase most of their power from the market, and also receive some power directly from privatised hydropower plants. The physical assets of the distribution companies were, and still are, in a dilapidated condition. Emergency maintenance has only been possible over the last several years. Technical losses, as well as the incidence of operating failures, have increased dramatically due to system overloading. Attempts to commercialise the distribution sector are underway, but despite an upward trend over the last two years, theft and non-payment are still common and collection rates remain low at this stage. As a whole, total technical and commercial losses account for 32% of the system failures and run between 40-50% in many areas.

3.5. Georgian Wholesale Electricity Market

The 1999 amendments to the Law on Electricity resulted in the creation of the Georgian Wholesale Electricity Market (GWEM). The GWEM is an association of market members responsible for electricity market invoicing, settlement and administration of funds. GWEM’s primary responsibility is to allocate equitably among the transmission, dispatch and generation enterprises the funds that are received from distributors. The GWEM has the authority to issue orders of disconnection to “Electrodispetcherizatsia” for implementation by “Electrogadatsema” (e.g. because of non-payment or partial payment). The GWEM officially commenced operations on 1 July 1999.

3.6. Georgian National Energy Regulatory Commission

The Georgian National Energy Regulatory Commission (GNERC) was established as a permanent independent body with the status of a legal entity of public justice, and is not subordinated to any governmental body or organisation. The main objectives of the GNERC are: • To promote competition within the energy sector (electricity and natural gas);

• To regulate the natural monopolies within the sector;

• To balance the interests of the electricity sector entities and consumers;

• To set and regulate wholesale and retail tariffs for generation, transmission and dispatch, distribution and consumption;

• To license the operations related to the electricity sector;

• To discuss, solve and regulate disputes between the entities of the electricity sector, as well as between electricity sector entities and consumers;

• To regulate export/import activities;

• If necessary, to elaborate proposals in order to make changes in the legislation on electricity and natural gas; and

• To monitor activities of the Georgian Wholesale Electricity Market.

The GNERC is authorised to grant or refuse licenses for the:

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• Generation of electricity by all energy sources and facilities (except for those cases when the electricity is generated for own consumption and/or export and the electricity facilities are not connected to the transmission or distribution grids, or the sale of electricity is conducted under competitive market conditions, as determined by the Commission);

• Use of the transmission grid;

• Wholesale or retail sale of electricity and dispatch;

• Use of the distribution network; and

• Supply of consumers by direct contracts.

4. REGULATORY FRAMEWORK

Mini hydropower plants can supply electricity to the state grid or an isolated network. According to the existing regulation, all power producers have to obtain licences for generation and then make contracts on power supply. Until June 2004, hydropower plants could have contracts with the Wholesale Electricity Market or sign contracts directly with consumers, for example with a factory, hotel, etc. The advantage of these contracts with consumers is that the power generation facility has direct contacts with its customers rather than going through an intermediary (the GWEM) in the case of selling electricity to the state grid. The GWEM distributes what it collects from consumers and payment rates in Georgia have been historically low. Studies carried out by the UNDP/GEF project “Removing Barriers to the Development of Small Hydro Power Sector for the Mitigation of GHG Emissions in Georgia“ confirmed that direct contracts are an attractive option to secure payments from local communities, and from small and medium enterprises. This makes projects more expensive (because of regulation equipment and additional investments in the metering system) but guarantees a higher collection rate. A pre-condition for accessing the UNDP/GEF “Renewable Energy Revolving Fund” for small hydropower plants is to have power purchase agreements (PPAs) with potential direct customers (DC). Even though many small HPPs had been supplying energy to direct customers, the viability of the whole scheme came into question in June 2004, when the new commissioners at GNERC suspected that small and mini hydropower plants and small distributing companies had been underreporting electricity bought and sold. As a result, all small licences were cancelled. At present, it is not prohibited to have direct customers, but it has become technically very difficult to have PPAs approved. One exception is for HPPs that have their own distributing network, but only a few of this kind exist. A second is for HPPs to lease a portion of the network from the United Distributing Company (UDC) but this has not been tried yet. This blockage of DCs and PPAs is making serious trouble for investment projects in the small and mini hydropower sector since most of these had been developed with the assumption of direct sale to consumers rather than through the GWEM. After several rounds of discussion among the Ministry of Environment, the USAID, PA Consulting, KfW and the Ministry of Energy, it was agreed to amend the existing laws to include the deregulation of power plants with capacity of below 5 MW. Deregulation will include the

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possibility of direct contracts. In practice, this means that mini hydropower plants would be able to sign direct contracts (including with the GWEM) at an agreed tariff without needing the approval of the GNERC. It is expected that these new amendments will come into the force in March 2006. If so, mini hydropower plants situated near settlements and or small enterprises (e.g. sawmills, small wineries, tea factories) would be able to operate within isolated networks, thus by-passing the GWEM. In summary, it is expected that HPP will be able to work in isolated networks. However, in view of the current situation, this Report will leave the option of direct contracts and supply to the GWEM open, that is, the remaining sections of this report will only explore the electricity tariffs at which projects become feasible. Whether these tariffs are obtained by means of direct contracts or supply to the GWEM is left open.

5. ELECTRICITY TARIFFS

Currently, tariffs do not vary from winter to summer or between day and night periods. This is envisaged, but can only be implemented once proper metering is in place. At present, the tariffs for production, transmission, dispatch and distribution are fixed. It is expected that in the future only retail prices will be regulated by the GNERC. Resolution No 14 (15 August 2003) defines the following tariffs:

Table 7. Tariffs for Companies Purchasing Energy from the Wholesale Electricity Market (Tetri/ kWh)

Voltage Tariff, Tetri/kWh

35-110 kV 3.897

6-10 kV 1.477 Source: GWEM. Note: 1 GEL = 100 Tetri = 0.5 USD.

For small and mini HPPs, tariffs are 2.5 Tetri/kWh. However, for new plants, tariffs are much higher, which creates incentives for the construction and operation of new plants.

Table 8. Examples of Hydropower Generation Tariff for Small and Mini HPPs (Tetri/ kWh)

HPP Tariff without VAT (Tetri/kWh)

Mashaverahesi 4.17 Rustavihesi Ltd. 4.33 Independent entrepreneur M.Tarashvili 5.00 Intsobahesi 5.17 Natural vines and spirits corporation Kindzmarauli - Chalahesi 5.00 BMG Ltd. – Suramulahesi 5.00

Source: UNDP/GEF (2002).

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Table 9. Tariff for Thermal Power Plants (Tetri/kWh) TPP Tariff without VAT

(Tetri/kWh) JSC “AES Mtkvari” (Unit 9 of Tbilsresi) among them: - for firm capacity, Tetri/kWh - for supply to the grid, Tetri/kWh

6.50

1.60 4.90

Tbilsresi (Units 3, 4 and 8 of Tbilsresi) - for firm capacity, thousand Lari/month - for supply to the grid, Tetri/kWh

496.36 5.716

JSC Kartuli Shakari (Georgian Sugar) (TPP) - for supply to the grid, Tetri/kWh

2.33

Source: UNDP/GEF (2002).

The weighted-average electricity generation tariff is determined at 2.667 Tetri/kWh.

Table 10. Tariff for Electricity Transmission and Dispatch Services (Tetri/kWh) Service Recipient

Service Provider

Energy Distributing Companies

Direct Customers

1. Transmission a. JSC “Georgian State Electric

System” - 35-110-220 kV - 6-10 kV

0.70 1.28

- 2.136

b. “Saqgrusenergo” 0.18 0.18 2. Dispatch (JSC “Georgian State Electric System”)

0.15 0.15

Total - 35-110-220 kV - 6-10 kV

1.03 1.61

-

2.466 Source: UNDP/GEF (2002).

Table 11. Purchasing Tariffs for Electricity Distributing Companies (Tetri/kWh) Customer by

Voltage Electricity Suppliers

Tariff for 380/220 V Except for Population, Tetri/kWh

Tariff for 6-10 kV, Tetri/kWh

Distributing Companies 7.083 5.333 Source: UNDP/GEF (2002).

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6. DESCRIPTION OF DONOR, STATE AND PRIVATE ACTIVITIES IN THE MINI HYDROPOWER GENERATION SECTOR

6.1. Implemented Projects

The first mini hydropower plant built after Georgia’s independence was the Akhieli HPP at the River Assa. It supplies energy to three villages and frontier posts in Khevsureti. During the first phase, a 28.8 kW turbine of Bank type was also produced domestically. In 1991, the Tskhomareti HPP was built on the River Jruchula. Its two turbines (Bank type, 250 kW capacity each) were manufactured in Georgia. The first phase of the Khadori project (2001) included the construction of the Khadori mini HPP of 720 kW capacity. The total project (24 MW total capacity) was completed by the end of 2004. The rehabilitation of the Mejvriskhevi HPP (constructed in 1950; installed capacity of 133 kW) included the construction of headwork, which has resulted in an increased capacity of 100 kW. Finally, the Ministry of Energy is planning to rehabilitate three state-owned mini hydropower plants (Kekhvi HPP, Kazbegi HPP and Sanalia HPP). GEL 300 000 were allocated for each plant in the State Budget of 2004. The remaining investments were considered in 2005.

6.2. Donor Activities

One of the most important donor activities is the project “Georgia – Promoting the Use of Renewable Energy Resources for Local Energy Supply”. The project, which is jointly financed by the UNDP/GEF (USD 4.3 million) and the Government of Germany, through the KfW (Euro 5.1 million), will undertake the pilot rehabilitation of small hydropower plants and geothermal hot water supply systems through a “Renewable Energy Revolving Fund” (RERF) to be established by the project. This Revolving Fund will provide soft loans (interest rate 8%; maturity - 7 years) to private small hydropower plants. A financial intermediary (local bank) will be selected to manage the resources of the Revolving Fund which, at the same time, will take responsibility for loan repayment. Eligibility criteria for loan applications include the requirement for owners of plants to cover about 25-30% of their project cost as equity. In the longer term, it is expected that the success of the first demonstration projects will significantly increase the interest of other potential investors in the development of Georgia’s renewable energy sector. The technical assistance component of the project, financed by the UNDP/GEF, was started in May 2004 and the financial component (supported by the KfW) was started in July 2005. The resources of the RERF are limited and will not be sufficient to finance all projects that apply for support. This means that a number of already developed projects will not be financed, even though they have crucial importance for particular regions (communities). This is an area where the resources from DFES can complement and expand existing donor programmes. USAID is financing the Georgian Energy Security Initiative (GESI), which has recently completed preparatory work for its Community Development Component. About 7 000 communities have been

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identified and 10 of them short-listed. For these, the project has produced development plans, including the identification of local renewable energy sources. The primary selection criteria for identifying communities were deforestation rates, potential for generation of the highest income, and the greatest potential for designing, implementing and sustaining replicable projects. For the 10 selected communities, the construction/rehabilitation of mini HPPs is planned. Business plans have been developed based on a combination of loan and grant financing. If a non-profit community-based organisation (CBO) is the applicant institution, it will receive up to a 50% grant and a 50% loan (5% of interest rate, 7 years of maturity). However, GESI can finance only two communities. Others would have to apply for DFES resources.

6.3. Value Added of DFES Financing

DFES has the possibility of expanding state and donor pilot programmes for an increased renewable electricity supply. Specifically, DFES can increase the reach of the GEF/KfW project by expanding the financial resources available for the rehabilitation and construction of HPPs. In the present situation of Georgia, characterised by a constant energy crisis, the expansion of existing pilot programmes is a great necessity. In addition, DFES will complement the current USAID GESI programme by providing resources to communities that were selected by the GESI but cannot, because of limited financial resources, receive support for the construction of HPPs.

7. STAKEHOLDER ANALYSIS

Private owners of HPPs. The majority of small and mini hydropower plants have been privatised. The owners of these plants are mainly private persons rather than private companies. In general, owners are ready to take a risk in the form of equity in the range of 10-30% to contribute to the cost of rehabilitation. Operators of existing hydropower plants can provide maintenance at a limited level. If rehabilitated/newly constructed plants work within an isolated grid, which will include advanced regulation technologies, then operators will have to receive training. Local businesses. In rural areas, local businesses lack electricity, especially in terms of quality and guaranteed supply. As a result, many enterprises have got diesel generators and produce expensive energy for self-consumption. They can be considered not only as direct customers, but also as shareholders, especially in the case of new construction. In different regions of Georgia, many small and medium enterprises have expressed their interest to participate in mini hydropower development. Local communities. Local communities are also stakeholders, and under the GESI community based organisations (CBOs) are expected to implement mini hydropower projects. Private companies. There are a number of engineering and consulting companies, and design/engineering institutes that have experience in the field of small and mini hydropower. They are considered important stakeholders as they ensure an available pool of local expertise. Among them: • Institute “Hydroproject” - design-engineering;

• “Saktskalproject” JSC - design-engineering;

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• “Institute of Energy” Ltd. - design-engineering;

• “Georgian Hydropower” JSC - design-engineering, consulting;

• “Basiani 93” Ltd. - design-engineering, consulting, production of Bank type turbines, assembling, balancing and commissioning;

• “Sakenergomsheni” JSC – construction;

• “Feri” Ltd. - construction, production of electrical equipment, assembling, balancing and commissioning;

• “Energomsheni” JSC – construction;

• “Spetshydromsheni” JSC – construction;

• “Spetsgvirabmsheni” JSC – construction.

8. CAPITAL AND OPERATION AND MAINTENANCE COSTS OF MODEL PROJECTS

8.1. “Rehabilitation” Model Projects

Rehabilitation costs of mini hydropower plants differ from one another depending on the volume of rehabilitation work. The majority of existing mini HPPs needs significant rehabilitation, including civil engineering (construction/repair of headwork, cleaning of headrace canal, repair of penstock, construction/repair of regulation basin, repair of powerhouse, etc.) and major overhaul and often replacement of electrical and mechanical (E&M) equipment as well. Most of the small and mini HPPs are privatised in Georgia. The owners of plants carry out small-scale rehabilitation work using their own financial resources. Financial support (e.g. credit) necessary for larger-scale rehabilitation is extremely limited or non existent. In order to identify model projects, this report explores the rehabilitation projects of small and mini hydropower plants developed in the framework of different donor-supported programmes. In particular, we look at “Removing Barriers to the Development of Small Hydro Power Sector for the Mitigation of GHG Emissions in Georgia“ (hereafter the UNDP/GEF project). The GEF project has studied the following small and mini HPPs: Abasha, Borjomi, Dashbashi, Kazbegi, Misaktsieli, Orbeli, Sno, and Sulori HPPs. Among them, the Abasha, Dashbashi, Kazbegi and Misaktsieli HPPs are in operation. Data on these plants are presented in Table 12.

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Table 12. Characteristics of Selected Plants HPP

Characteristics

Aba

sha

Bor

jom

i

Das

hbas

h

Kaz

begi

Mis

akts

ieli

Orb

eli

Sno

Sulo

ri

Ave

rage

Date of start up 1928 1898 1936 1951 1964 1949 1954 1953 Current capacity, kW 400 0 420 150 1 000 0 0 0 246 Capacity after rehabilitation 1 550 1 490 2 140 1 200 2 500 920 360 600 1 345 Current annual output, GWh 3.80 0 1.50 0.80 3.00 0 0 0 1.138 Output after rehabilitation 9.30 10.67 17.00 8.07 13.00 6.30 1.60 4.20 8.768 Incremental capacity, kW 1 150 1 490 1 720 1 050 1 500 920 360 600 1 099 Incremental output, GWh 5.50 10.67 15.50 7.27 10.00 6.30 1.60 4.20 7.630

Source: UNDP/GEF (2002). After rehabilitation, HPPs are designed for both operation in an isolated network and for parallel operation in the public grid. The layout for parallel operation in the public grid assumes that the state grid will be more stable in the future. Capital and O&M costs have been estimated based on the market prices. It was assumed that western electrical and mechanical equipment would be purchased and installed. Capital and O&M costs are presented in Table 13. Table 13 shows that all 9 plants need significant rehabilitation, including the replacement of E&M equipment (48-72% of total capital costs). Very small/mini hydropower plants that need smaller rehabilitation and consequently less capital investment (below USD 100 000) were not studied in the framework of the above mentioned project, whose objective was to select 5-8 HPPs for rehabilitation of a total cost of USD 4 - 4.5 million. Therefore, average values presented in Table 13 should be taken with some caution. Taking into account the above mentioned caveat, the following model projects were identified: 1. Full rehabilitation 1 (expensive projects)35: mini HPPs needing a major overhaul (average

parameters presented in Table 13);

2. Full rehabilitation 2 (less expensive projects): mini HPP needing a major overhaul (average parameters for the 3 least expensive HPPs: Dashbash, Kazbegi and Misaktsieli);

3. Small-scale rehabilitation. since there are no available experiences of rehabilitation projects of this type, hypothetic project parameters are based on the following assumptions: civil engineering works, steel structures: 50% of the expensive project (excluding Sulori HPP – the most expensive project); E&M: 20% of the expensive project; no costs for transmission lines; design and supervision: 50% of the expensive project; unforeseen: 25% of the expensive project. The incremental output is assumed to equal 40% of the expensive project.

35 Projects are identified as “expensive” or “less expensive” according to the specific capital costs, i.e. the cost of an increased unit of capacity/output.

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Table 13. Capital and Operational & Maintenance Costs of Selected Plants HPP

Characteristics

Aba

sha

Bor

jom

i

Das

hbas

h

Kaz

begi

Mis

akts

ieli

Orb

eli

Sno

Sulo

ri

Ave

rage

Capital costs, USD 1 000 Civil engineering works 152 789 47 127 143 390 73 165 236 % in total 16 46 4 12 13 40 19 16 21 Steel structures 23 218 72 21 52 43 36 66 % in total 2 0 18 7 2 5 11 4 6 E&M equipment 691 809 783 741 704 467 236 706 642 % in total 72 47 65 71 66 48 60 70 58 Transmission lines 58 65 93 72 % in total 0 3 5 0 9 0 0 0 7 Design and supervision 43 65 50 50 49 25 20 45 43 % in total 4 4 4 5 5 3 5 4 4 Unforeseen 52 37 50 57 30 20 54 43 % in total 5 0 3 5 5 3 5 5 4 TOTAL CAPITAL COSTS 961 1 721 1 200 1 040 1 067 964 392 1 006 1 103 Capital costs of 1 kW incremental capacity, USD

836

1 155

698

990

711

1 048

1 089

1 677

1 025

Capital costs of 1 MWh incremental output, USD36

7

6

3

6

4

6

10

10

7

O&M costs, USD 1 000 Wages including social costs 19 11 15 15 Spare parts 7 4 7 6 Other materials 4 3 3 3 TOTAL O&M COSTS 30 30 22 10 18 15 10 25 20

Source: UNDP/GEF (2002).

The parameters of the model projects are presented in Table 14.

36 Assumptions: lifetime – 25 years; no discounting.

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Table 14. Capital and Operational & Maintenance Costs of Model Rehabilitation Projects Model Project

Parameter Full Rehabilitation “Expensive”

Full Rehabilitation “Less Expensive”

Small-Scale Rehabilitation

Incremental capacity, kW 1 099 1 423 N/A Current annual output, GWh 1.138 1.767 1.300 Output after rehabilitation, GWh 8.768 12.690 4.548 Incremental annual output, GWh 7.630 10.923 3.248 Annual working hours of rehabilitated capacity, hours

6 944

7 674

N/A

Plant factor of rehabilitated capacity 79% 88% N/A Capital costs, USD 1 000 1 103 1 129 317 Among them: Civil engineering works 236 106 123

Steel structures 66 104 36 Electro-mechanical equipment 642 743 127 Transmission lines 72 79 0 Design and supervision 43 50 22 Unforeseen 43 48 10

Capital costs of 1 MWh incremental output, USD

6.50 4.36 3.91

Annual O&M costs, USD 1 000 20 17 19 Source: Own estimates.

8.2. “New Construction” Model Projects

The model projects for new construction were identified on the basis of data presented in Table 15, which was provided by the “Basiani 93” company. The types of headwork are determined by the types of penstock and turbines to be installed. In the case of metal penstock, as a rule, the intake represents a Tyrol type dam and for derivation canals – an assembly dam. Powerhouses represent ground buildings of a skeleton type. For different hydropower plants, the installation of different types of turbines (Pelton, Francis, Kaplan and Bank) and synchronous generators is planned.37 It is foreseen that hydropower plants will work in a full automation regime guided by a computer system. It is assumed that plants will be able to work in parallel with the state grid simultaneously serving specific consumers. This report uses world prices for the estimation of costs of electrical and mechanical (E&M) devices. In particular, for the Kaplan turbine - 550 USD/kW was used; for Francis - 500 USD/kW; for Pelton - 450 USD/kW; and for Bank – 300 USD/kW. For 50 years Bank turbines have been manufactured in Georgia, and so turbines of this type can be produced domestically.38 In short, the assessment performed by “Basiani 93”, even if not completely accurate, is still useful for evaluating the feasibility of constructing new plants. Table 15 shows the ranking (by cost of 1 MWh) of 54 potential mini hydropower plants.

37 In some cases, where plants will be connected to the grid, non-synchronous generators can be used as well. 38 Some Georgian companies (Feri Ltd., Hydroagregat Ltd., Aviamsheni Ltd.) started designing and producing Pelton and Francis turbines. However, the long-term reliability of these turbines still needs to be proven.

86

Table 15. Capital Costs of Potential New Mini Hydropower Plants

No Type HPP Installed Capacity, kW

Annual Output, GWh

Capital Costs, 1 000 USD

Capital Costs of 1 kW, USD

Capital Costs of 1 MWh, USD

1 Kvirilistskali 730 5.23 580 792 4.44 2 Khulo mini 500 4.00 450 900 4.50 3 Niali 1 000 6.50 800 760 4.92 4 Ianeuli 570 3.93 540 793 5.50 5 Chkhakoura 400 2.87 410 1 015 5.71 6 Dmanisi 300 2.00 300 1 000 6.00 7

Lea

st E

xpen

sive

Gagluani 150 0.65 100 1 270 6.15 8 Nusreti 450 3.20 510 1 133 6.38 9 Kadarauri 100 0.69 110 1 090 6.38

10 Mna 750 5.10 820 1 091 6.43 11 Akhaltsikhe 230 1.57 260 1 144 6.62 12 Chkheri 1 000 6.82 1 150 1 150 6.74 13 Tkarsheti 240 1.64 280 1 168 6.83 14 Charnali 740 4.82 830 1 122 6.89 15 Khurtisi 470 3.20 560 1 189 7.00 16 Boloko 450 6.14 1 080 1 256 7.04 17 Chala 660 4.30 760 1 150 7.07 18

Les

s ex

pens

ive

Pro

ject

s

Gaiboteni 430 2.93 540 1 256 7.37 19 Bobora 1 000 6.50 1 200 1 200 7.38 20 Chorghi 430 2.80 530 1 230 7.57 21 Gergeti 140 0.95 190 1 359 8.00 22 Iri 100 0.60 120 1 200 8.00 23 Khoshantkhevi 320 1.70 350 1 094 8.24 24 Orbeza 680 4.84 1 010 1 485 8.35 25 Didvake 950 6.36 1 360 1 478 8.55 26 Monastristskali 340 2.33 510 1 506 8.76 27 Buksieti 380 1.98 440 1 147 8.89 28 Largvisi 670 5.00 1 130 1 690 9.04 29 Afshila 270 1.77 420 1 556 9.49 30 Tedzami 600 2.50 600 1 000 9.60 31 Girevi 140 0.70 170 1 214 9.71 32 Nakieti 300 1.60 390 1 300 9.75 33 Biisi 500 2.25 550 1 095 9.78 34

Med

ium

Pro

ject

s

Kveda 450 2.90 710 1 580 9.79 35 Mechkhristskali 350 2.40 590 1 686 9.83 36 Khoteura 1 000 5.80 1 440 1 440 9.93 37 Bobnevi 400 1.80 460 1 160 10.22 38 Makvaneti 200 1.23 320 1 374 10.41 39 Askana 170 0.89 240 1 424 10.79 40 Boshuri 300 1.35 370 1 230 10.96 41 Tursebi 300 1.30 360 1 210 11.08 42 Chala 350 1.90 540 1 530 11.37 43 Pavliani 800 5.10 1 460 1 830 11.45 44 Ateni 800 3.60 1 070 1 340 11.89 45 Daba 810 3.86 1 200 1 495 12.44 46 Gujareti 1 890 4.41 1 380 1 545 12.52 47 Timotesubani 490 2.38 800 1 630 13.45 48 Bakhmaro 620 3.23 1 090 1 765 13.50 49 Tsagveri 760 3.68 1 250 1 654 13.59 50 Patara Tsemi 490 2.19 760 1 549 13.88 51 Tsemi 470 2.07 760 1 615 14.69 52 Bakuriani 2 240 1.07 420 1 763 15.70 53 Bakuriani 1 190 0.76 310 1 676 16.32 54

Exp

ensi

ve P

roje

cts

Libani 430 1.77 730 1 709 16.50 Total in Georgia 26 500 161.16 35 310 1 312 8.76

Source: UNDP/GEF (2002).

87

These plants have been divided into 3 groups (18 HPPs in each): • Expensive projects; • Medium projects; and • Less expensive projects. In addition, 7 of the less expensive plants have been organised into a “least expensive” group. The parameters of these groups of projects are presented in Table 16.

Table 16. Capital and Operation & Maintenance Costs of Model Projects for the Construction of New HPPs

Model Project Parameter Expensive Medium Less

Expensive Least

Expensive Average capacity, kW 489 475 532 521 Average annual output, GWh 2.399 2.883 3.644 3.597 Annual working hours, h 4 909 6 073 6 847 6 899 Plant factor, % 56% 69% 78% 79% Capital costs, USD 1 000 768 641 560 454 Costs of 1 MWh output, USD 12.81 8.89 6.15 5.05 Annual O&M costs, USD 1 000 12 12 12 12

88

9. EVALUATION OF THE ECONOMIC POTENTIAL OF REHABILITATING EXISTING, AND CONSTRUCTING NEW, MINI HYDROPOWER PLANTS

There are several benefits from promoting the construction and rehabilitation of HPPs. These are listed below: • Electricity supply in the rural areas of Georgia is very limited. For cooking, heating and hot water

people use mainly firewood, and for lighting - kerosene. • Electricity generated by mini hydropower plants can be used for lighting and electrical appliances, as

well as for cooking and heating water. • The promotion of renewable energy is one of the powerful ways to reduce dependence on imported

fossil fuel and thereby can help to increase the energy security of the country. • It is generally accepted that small and medium enterprises (SMEs) are and will be the backbone of

economic development in Georgia. However, at present, their development outside of Tbilisi is limited because of the lack of a reliable energy supply.

• If mini hydro plants can work in an autonomous regime, this will reduce the load for the whole energy system and avoid the dependence of each region on this system. Besides, electricity will be transmitted over short distances and so energy losses will be reduced.

Electricity generated by mini hydropower plants rehabilitated/constructed under DFES will replace energy otherwise produced by existing facilities. Revenues generated by DFES are equal to the cost of otherwise produced electricity. Since the HPPs rehabilitated/constructed under DFES would most probably operate within isolated networks/direct customers, the cost of replaced energy will include generation, transmission and dispatch costs. According to Resolution 14 of the GNERC of 15 August 2003, the weight-average electricity generation tariff is set at 2.667 Tetri/kWh (1.40 USC/kWh); the weight-average electricity transmission and dispatch tariff is set at 1.61 Tetri/kWh (0.84 USC/kWh). Consequently, benefits generated by the DFES will equal 2.24 USC/kWh. In addition to the above, DFES resources for mini HPPs will result in a reduction of GHGs by replacing electricity produced by thermal power plants. Based on energy balance data for 2001 (amount of electricity generated by HPP, by TPP, amount of fuel combusted in TPP) and the future share of HPPs in total energy generation, the carbon emission factor was calculated for the country’s electricity system. On average, the generation of 1 kWh of electricity emits 198 g of CO2 or 198 tCO2/GWh (see Section 14 of this report). The world price for reducing a tonne of CO2 at present equals USD 5 (or USD 18/t C), which means that 1 kWh of electricity produced by the projects implemented under DFES would generate additional 5 * 198 / 1 000 000 = 0.1 USC. Taking into account the above calculation, the electricity produced by the projects implemented under DFES would generate 2.24 + 0.1 = 2.34 USC/kWh. In order to refine the technical potential of mini HPPs according to current economic conditions, the following assumptions were used: • Discount rate: 10 %; • Economic duration life of HPP: 25 years; and • Duration of rehabilitation/construction: 1 year. Tables 17-18 present the input data and the economic rate of return.

89

Table 17. Input Data Implementation Start of implementation 01/2005 Start-up phase 11/2005 Start of production 01/2006

Rehabilitation New Construction

Expensive Less Small-

Scale Expensive Medium Less Least

Actual annual production 1.138 1.767 1.300 0.000 0.000 0.000 0.000 Production after rehabilitation/construction, GWh

8.768

12.690

4.548

2.399

2.883

3.644

3.597

Electricity generation, transmission and dispatch tariff USD/kWh

0.0224

0.0224

0.0224

0.0224

0.0224

0.0224

0.0224

Payment collection rate 100% 100% 100% 100% 100% 100% 100% Annual income, 1 000 USD

Before rehabilitation/construction 25.5 39.6 29.1 0.0 0.0 0.0 0.0 After rehabilitation/construction 196.4 284.3 101.9 53.7 64.6 81.6 80.6 Electricity generation emission factor, tCO2/GWh

198

198

198

198

198

198

198

Income due to GHG reduction, USD/tCO2

5

5

5

5

5

5

5

Income generated by 1 kWh of electricity produced by DFES project, which replaces otherwise produced energy, USD/kWh

0.0010

0.0010

0.0010

0.0010

0.0010

0.0010

0.0010 Total income generated by 1 kWh of electricity produced by DFES project, USD/kWh

0.0234

0.0234

0.0234

0.0234

0.0234

0.0234

0.0234 Annual GHG reduction, tCO2 1 511 2 163 643 475 571 721 712 Income generated by GHG reduction, 1 000 USD

7.6

10.8

3.2

2.4

2.9

3.6

3.6

Net annual income 178.5 255.5 76.0 56.1 67.4 85.2 84.1 Increase of income 0% 0% 0% 0% 0% 0% 0% Capital (investment) costs, 1 000 USD 1 103 1 129 317 768 641 560 454 Operation costs, 1 000 USD

1st year of operation 20 17 19 12 12 12 12 2-25 years of operation 20 17 19 12 12 12 12 Increase of O&M costs 0% 0% 0% 0% 0% 0% 0%

Discount rate 10% For the sake of simplicity, it was assumed that the electricity tariff and O&M costs remain constant during the project’s lifetime.

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Table 18. Economic Rate of Return (ERR)(Collection Rate = 100%)

Type of Project

Sub-Type:

Income Conditioned by

Energy Generation and GHG Reduction, USD/kWh N

PV

, 100

0 U

SD

ER

R, %

BC

R

RN

PV

Pay

back

Per

iod,

Y

ears

Expensive 0.0234 305 14% 1.26 1.28 7 Full rehabilitation Less Expensive 0.0234 945 21% 1.81 1.84 5 Small-scale rehabilitation 0.0234 179 18% 1.40 1.57 6

Expensive 0.0234 -334 3% 0.58 0.56 18 Medium 0.0234 -125 7% 0.82 0.81 12 Less Expensive 0.0234 95 12% 1.16 1.17 8

New construction

Least Expensive 0.0234 182 15% 1.36 1.40 7 Note: NPV – Net Present Value; ERR – Economic Rate of Return; BCR – Benefit-Cost Ratio; RNPV – Rate of NPV.

The development of the mini hydropower sector will also generate additional social benefits. Along with direct job creation, it will reduce indoor pollution. It will contribute to improving the education level: during short winter days, schoolchildren will no longer have to learn by candlelight or kerosene lamplight. It will facilitate access to information: due to a very limited electricity supply at present, the rural population cannot watch TV, which is a vital source of information, especially in wintertime, when access roads to mountainous regions are closed.

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10. FINANCIAL VIABILITY OF REHABILITATION AND CONSTRUCTION OF NEW MINI HYDRO POWER PLANTS

Along with the economic evaluation, a financial analysis of the rehabilitation of model projects of existing, and the construction of new, mini hydropower plants has been carried out. Input data for the financial calculations are presented in Table 19.

Table 19. Input Data for Financial Calculations (Equity = 20%; Interest on Loan = 6%) Implementation Date Start of implementation 01/2005 Start-up phase 11/2005 Start of production 01/2006

Rehabilitation New Construction

Expensive Less Small-

Scale Expensive Medium Less Least

Annual energy production, GWh 8.768 12.690 4.548 2.399 2.883 3.644 3.597 Electricity selling tariff USD/kWh 0.015 0.015 0.015 0.015 0.015 0.015 0.015 Payment collection rate 1st year 40% 40% 40% 40% 40% 40% 40% 2nd year

60% 60% 60% 60% 60% 60% 60% 3-25 years

80% 80% 80% 80% 80% 80% 80% Annual income, 1 000 USD

1st year 52.6 76.1 27.3 14.4 17.3 21.9 21.6 2nd year 78.9 114.2 40.9 21.6 25.9 32.8 32.4 3-25 years 105.2 152.3 54.6 28.8 34.6 43.7 43.2 Increase of income 0% 0% 0% 0% 0% 0% 0% Capital (investment) costs, 1 000 USD 1 103 1 129 317 768 641 560 454 Operation costs, 1 000 USD

1st year of operation 20 17 19 12 12 12 12 2-25 years of operation 20 17 19 12 12 12 12 Increase of O&M costs 0% 0% 0% 0% 0% 0% 0%

Discount rate 10%Sources of financing % Amount by Project Type, 1 000 USD Equity capital 20% 221 226 63 154 128 112 91Grant financing 0% 0 0 0 0 0 0 0Long-term loan 0% 0 0 0 0 0 0 0DFES loan 80% 882 903 254 615 512 448 363Short-term loan 0% 0 0 0 0 0 0 0Total 100% 1 103 1 129 317 768 641 560 454

92

Financing Conditions Interest Rates Payback Period Equity capital 0% 0 Grant financing 0% 0 Long-term loan 0% 0 DFES loan 6% 7 Short-term loan 0% 0 Taxes % Basis Income/co-operate tax 20% Taxable income Equity tax 1% Book value Road tax 1% Sales revenue Sales tax 1% Sales revenue Depreciation

Percentage 7.50% Process Accelerating Basis Book value

Book value by model project type 1 103 1 129 317 768 641 560 454

Working capital Initial book value, 1 000 USD 50

Without DFES or other programmes, the assumed access to project financing is limited or not available at all. It is difficult to find investors for these types of projects, either foreign or local. The conditions of local banks are very unfavourable. High interest rates and short payback periods, along with the required guarantees, make the financing of the model projects considered in this report impossible. The financing scheme for a project pipeline financed under DFES should be more flexible and consist of co-financing from the project owners (equity) and DFES (combination of grant and soft loan). Taking into account the experience/plans of similar programmes (e.g. the above-mentioned UNDP/GEF-KfW project) for the first version of financing, it was assumed that 20% of investments would be the responsibility of project owners as equity and the rest would be covered by soft loans provided under the DFES at an annual interest rate of 6% and a payback period of 7 years. All existing taxes were considered.39 These calculations were carried out using the same electricity selling tariffs as those used in the economic calculations: • 0.015 USD/kWh; • 0.020 USD/kWh; • 0.025 USD/kWh; • 0.030 USD/kWh; • 0.035 USD/kWh; • 0.040 USD/kWh. The financial feasibility of the projects was evaluated on the basis of the following indicators: • NPV – Net present value; • IRR – Internal rate of return; • BCR – Benefit-cost ratio; and • RNPV – Ratio of NPV (= NPV/(NPV + Investment). 39 The financial calculations have been carried out using the 2004 tax rates. A new (simplified) Tax Code has been approved, which is expected to create more favourable conditions for investments.

93

The results are presented in Table 20.

Table 20. Results of Financial Calculations (Equity = 20%; Interest on Loan = 6%)

Type of Project Sub-Type:

Ele

ctri

city

Sel

ling

Tar

iff

USD

/kW

h

NP

V, 1

000

USD

IRR

, %

BC

R

RN

PV

Expensive -520 0% 0.52 0.53 Full rehabilitation Less exp. -225 6% 0.71 0.80

Small-scale rehabilitation 0.015

-111 3% 0.67 0.65 Expensive (-) Medium (-) Less exp. (-)

New construction

Least exp.

0.015

(-) Expensive -303 4% 0.66 0.72 Full rehabilitation Less exp. 89 12% 0.88 1.08

Small-scale rehabilitation 0.020

2 10% 0.84 1.01 Expensive (-) Medium (-) Less exp. -249 1% 0.55 0.55

New construction

Least exp.

0.020

-157 3% 0.63 0.65 Expensive -86 8% 0.79 0.92 Full rehabilitation Less exp. 403 18% 1.03 1.36

Small-scale rehabilitation 0.025

114 17% 0.98 1.36 Expensive (-) Medium (-) Less exp. -159 4% 0.66 0.72

New construction

Least exp.

0.025

-68 7% 0.75 0.85 Expensive 131 12% 0.90 1.12 Full rehabilitation Less exp. 708 24% 1.15 1.63

Small-scale rehabilitation 0.030

222 25% 1.10 1.70 Expensive (-) Medium (-) Less exp. -69 8% 0.76 0.88

New construction

Least exp.

0.030

21 11% 0.86 1.05 Expensive 348 17% 1.00 1.32 Full rehabilitation Less exp. 998 30% 1.25 1.88

Small-scale rehabilitation 0.035

325 33% 1.20 2.03 Expensive (-) Medium -184 4% 0.66 0.71 Less exp. 21 11% 0.85 1.04

New construction

Least exp.

0.035

110 15% 0.96 1.24 Expensive 561 21% 1.09 1.51 Full rehabilitation Less exp. 1 286 37% 1.34 2.14

Small-scale rehabilitation 0.040

429 42% 1.28 2.35 Expensive -325 1% 0.55 0.58 Medium -113 6% 0.73 0.82 Less exp. 111 14% 0.94 1.20

New construction

Least exp.

0.040

198 19% 1.05 1.44

To estimate the financial feasibility of the model projects, the following main criteria were used:

94

• Positive NPV; • 15% ≤ IRR ≤ 20%. These criteria are met for: • Expensive full rehabilitation model project at a tariff 0.035 USD/kWh; • Less expensive full rehabilitation model project at a tariff 0.025 USD/kWh; • Small-scale rehabilitation model project at a tariff 0.025 USD/kWh; • Least expensive new construction model project at a tariff 0.040 USD/kWh. Taking into account the Georgian reality, and in particular the low capacity of the population to pay, it is not certain that power plants will get paid for produced energy at the planned level, especially in case of high tariffs. Moreover, if the planned deregulation of the sector is not carried out, then the GNERC will continue regulating tariffs and it is not clear if it would approve them in the range of 0.035-0.040 USD/kWh, at least in the next 2-3 years. Therefore, a second version of financing was considered. This second round of calculations is presented in Table 21 below.

Table 21. Input Data for Financial Calculations (Equity=20%; Grant=10%; Interest on Loan=6%) Sources of Financing % Amount by Project Type, 1 000 USD Equity capital 20% 221 226 63 154 128 112 91Grant financing 10% 110 113 32 77 64 56 45Long-term loan 0% 0 0 0 0 0 0 0DFES loan 70% 772 790 222 538 448 392 318Short-term loan 0% 0 0 0 0 0 0 0Total 100% 1,103 1,129 317 768 641 560 454

Financing Conditions Interest Rates Payback Period Equity capital 0% 0 Grant financing 0% 0 Long-term loan 0% 0 DFES loan 6% 7

95

Table 22. Results of Financial Calculations (Equity = 20%; Grant = 10%; Interest on Loan = 6%)

Type of Project Sub-Type: Electricity Selling Tariff

USD/kWh

NPV, 1 000 USD

IRR, % BCR RNPV

Expensive -426 1.5% 0.56 0.61 Full rehabilitation Less exp. -132 7.5% 0.76 0.88

Small-scale rehabilitation 0.015

-81 4.6% 0.71 0.74 Expensive (-) Medium (-) Less exp. (-)

New construction

Least exp.

0.015

(-) Expensive -209 5.9% 0.71 0.81 Full rehabilitation Less exp. 182 13.6% 0.93 1.16

Small-scale rehabilitation 0.020

32 12.1% 0.88 1.10 Expensive (-) Medium (-) Less exp. -201 2.1% 0.59 0.64

New construction

Least exp.

0.020

-118 4.4% 0.67 0.74 Expensive 8 10.2% 0.84 1.01 Full rehabilitation Less exp. 495 20.1% 1.08 1.44

Small-scale rehabilitation 0.025

143 20.0% 1.03 1.45 Expensive (-) Medium -272 0.5% 0.53 0.58 Less exp. -111 5.7% 0.71 0.80

New construction

Least exp.

0.025

-29 8.6% 0.79 0.94 Expensive 225 14.5% 0.95 1.20 Full rehabilitation Less exp. 792 26.9% 1.21 1.70

Small-scale rehabilitation 0.030

248 28.1% 1.14 1.78 Expensive (-) Medium -201 3.1% 0.62 0.69 Less exp. -21 9.2% 0.81 0.96

New construction

Least exp.

0.030

60 12.9% 0.91 1.13 Expensive 441 19.1% 1.06 1.40 Full rehabilitation Less exp. 1 080 34.0% 1.30 1.96

Small-scale rehabilitation 0.035

351 36.9% 1.24 2.11 Expensive -318 0.7% 0.53 0.59 Medium -130 5.6% 0.70 0.80 Less exp. 69 12.7% 0.91 1.12

New construction

Least exp.

0.035

149 17.4% 1.01 1.33 Expensive 650 23.9% 1.15 1.59 Full rehabilitation Less exp. 1 368 41.5% 1.39 2.21

Small-scale rehabilitation 0.040

454 46.2% 1.32 2.43 Expensive -259 2.6% 0.59 0.66 Medium -58 8.0% 0.78 0.91 Less exp. 159 16.4% 0.99 1.28

New construction

Least exp.

0.040

236 22.0% 1.10 1.52

The financial criteria are met for:

96

• Expensive full rehabilitation model project at a tariff 0.030 USD/kWh; • Less expensive full rehabilitation model project at a tariff 0.025 USD/kWh; • Small-scale rehabilitation model project at a tariff 0.025 USD/kWh; • Less expensive new construction model project at a tariff 0.040 USD/kWh; • Less expensive new construction model project at a tariff 0.035 USD/kWh. For new construction, the tariff remains still high. Therefore, a third version of financing was evaluated, assuming a reduced equity share (10% instead of 20%) and an increased grant share (25% instead of 10%). The results are presented in Table 23.

Table 23. Results of Financial Calculations (Equity = 10%; Grant = 25%; Interest on Loan = 6%)

The financial criteria are met for: • Less expensive new construction model project at a tariff 0.035 USD/kWh; • Least expensive new construction model project at a tariff 0.030 USD/kWh. Based on the result of the financial analysis, the report concludes that the pipeline “Rehabilitation of Existing and Construction of New Mini Hydropower Plants” is financially feasible, though for some projects the required tariff may still be high.

The marginal parameters (minimum values of equity and grant shares; minimum tariff) of the financial scheme, guaranteeing an IRR at a 15%-level, are presented in Table 24.

Type of Project

Sub-Type: Electricity Selling Tariff

USD/kWh

NPV, 1 000 USD

IRR, % BCR RNPV

Medium -181 2.3% 0.61 0.72 Less exp. -31 8.5% 0.79 0.94

New construction

Least exp. 0.025

36 12.2% 0.89 1.08 Medium -109 5.4% 0.70 0.83 Less exp. 59 13.0% 0.91 1.11

New construction

Least exp. 0.030

125 18.0% 1.01 1.27 Medium -38 8.4% 0.79 0.94 Less exp. 149 17.8% 1.01 1.27

New construction

Least exp. 0.035

213 24.6% 1.11 1.47 Medium 33 11.4% 0.87 1.05 Less exp. 239 23.2% 1.10 1.43

New construction

Least exp. 0.040

299 32.0% 1.21 1.66

97

Table 24. Marginal Parameters of Financial Scheme, Guaranteeing IRR at a 15%-Level Share in Project Financing Model Project

Equity Grant DFES Loan Annual Interest on Loan

Payback Period, Years

Electricity Selling Tariff,

USD/kWh Small-scale rehabilitation 20% - 80% 6% 7 0.02335 Full rehabilitation (Expensive model project)

20%

10%

70%

6%

7

0.03051

New construction (Less expensive model project)

10%

25%

65%

6%

7

0.03330

11. SENSITIVITY ANALYSIS

A sensitivity analysis has been carried out only for the model projects included in the financial scheme that guarantees an IRR at a 15% level. The values of the parameters presented in Table 24 were used as base parameters. The sensitivity analysis was undertaken to evaluate the influence that the parameters affecting the cash flow have on IRR. In particular, these include: capital costs, annual O&M costs, the electricity selling tariff, the share of equity, the share of grant, the collection rate, the loan interest and the payback period. In simulations, the deviations of parameters varied from -40% of the base parameters to 40% by increments of 10% for all parameters, except for the collection rate and the corresponding values of IRR and its change relative to the calculated base IRR (15%). For the collection rate, it was assumed that it can be lower than the base value only during the first five years, and after that it would reach 80%. In case of positive changes (increase of collections), the boundary condition was set – the collection rate cannot exceed 96%. The results of the sensitivity analysis are presented in Figures 2-4.

Figure 2: IRR Sensitivity - Full Rehabilitation Model Project

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

-40% -30% -20% -10% 0% 10% 20% 30% 40%

Changes of Base Parameters

Ch

ang

es o

f IR

R

Capital costs

Annual O&M costs

Electricity selling tariff

Share of equity

Share of grant

Interest of loan

Payback period

98

The sensitivity analysis shows that IRR sharply responds to capital costs and tariff variations for all model projects. The share of the grant component in total investment also has a noticeable impact. As for other parameters, their impact is relatively minor. These circumstances should be taken into account when elaborating the selection criteria for the appraisal of mini hydropower plant projects that apply for financing from DFES. In particular: • Applicants should have preliminary agreements, or at least should have initiated negotiations, on

establishing the required tariff; • Applicants should have clearly defined consumers (power purchase agreements); • Feasibility studies should be carried out presenting precise capital cost estimations; • Necessity for, and the value of, the grant component should be proven by strong arguments; and • DFES should be flexible in establishing loan conditions.

Figure 3. IRR Sensitivity - Small-Scale Rehabilitation Model Project

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

-40% -30% -20% -10% 0% 10% 20% 30% 40%

Changes of Base Parameters

Ch

ang

es o

f IR

R Capital costs

Annual O&M costs

Electricity selling tariff

Share of equity

Interest of loan

Payback period

99

Figure 4. IRR Sensitivity - New Construction Model Project

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

-40% -30% -20% -10% 0% 10% 20% 30% 40%

Changes of Base Parameters

Ch

ang

es o

f IR

R

Capital costs

Annual O&M costs

Electricity selling tariff

Share of equity

Share of grant

Interest of loan

Payback period

12. CAPITAL NEEDS FOR THE ENTIRE PIPELINE

12.1. Capital Costs for Rehabilitation Projects

As Table 13 indicates, the rehabilitation of selected plants requires significant investments, which is not available in Georgia yet. Therefore, none of those plants has been rehabilitated. Their total capital cost equals USD 8.351 million. Another USD 2 - 3 million would be needed for full rehabilitation of mini HPP plants not covered in Table 13, and a further USD 1 - 1.5 million for small-scale rehabilitation of mini HPP. Thus, total capital needs for rehabilitation of mini HPPs in Georgia would amount to a maximum of about USD 11 - 12 million. However, we estimate that plants needing a total of USD 7 million for rehabilitation would meet the financial requirement to qualify as feasible DFES projects.

12.2. Capital Costs of New Construction Projects

As Table 15 indicates, the capital costs of new construction projects would total USD 35 million. However, we estimate that constructing new plants totalling only USD 8 million would meet the financial requirement to qualify as feasible DFES projects.

100

12.3. Total Capital Costs

Capital needs for the total project pipeline can be estimated as a maximum of USD 15 million, of which USD 7 million would be for rehabilitation (4-5 full rehabilitation, 8-10 small-scale rehabilitation) and USD 8 million for new construction (12-14 HPPs). This amount does not include technical assistance (preparation of pre-feasibility studies, consultancy, training, etc.) and monitoring and evaluation components of the DFES programme.

13. RISKS AND RISK MITIGATION MEASURES

In general, financial risks in Georgia are high leading to high interest rates, short payback periods and difficulties in getting access to financing. In addition, the financial status of the local renewable energy companies is weak and they have problems in meeting the strict guarantee and collateral requirements of possible financiers. As the financial analysis shows, the financial viability of the projects (and the whole pipeline as well) is very sensitive with regards to tariffs, collection rates and capital costs.

13.1. Tariffs

As mentioned above, it is expected that at the beginning of March 2006 mini hydropower plants would be able to supply electricity on the basis of direct contracts and establish agreed tariffs without any approval by the GNERC. This would greatly reduce risks related to tariffs being set too low.

13.2. Payment Collections

In addition to low tariffs, the system suffers from low collection rates. The main reasons for this low collection rate include: low income levels of the population; absence of a proper metering system and technical inability to cut-off non-payers. Direct contracts will reduce this risk. However, rehabilitation of the metering system will lead to an increase of project costs. If mini hydropower plants will not be able to work with isolated networks and will supply electricity to the GWEM, the collection rate will be lower. However, the Ministry of Energy, the UDC, and the GWEM have planned a set of measures aimed at improving payments, but there is still a long way to go before the system can be considered financially robust.

13.3. Risks Related to Operation and Maintenance

The lack of qualified staff to operate and maintain plants, especially those equipped with advanced technologies, will lead to an increase of O&M costs.

13.4. Managerial Capacity of HPP Owners

With regard to the managerial capacity of HPP owners, the following risks have been identified:

101

• Lack of experience of CBOs in mini hydropower; • Low capacity of mini HPP owners to draw up proper contracts with energy buyers; • Low capacity of mini HPP owners to carry out analytical work (market study, planning, calculation of

cash flow profiles, etc.). Mini HPPs can operate within an isolated grid, but an investigation of their affordability (existing and future) is needed. It is important to know from the outset how mini HPPs could help generate additional income, which in turn would lead to an increase of affordability.

13.5. Water Supply

Most of the mini hydropower plants are situated on small rivers with flow curves that can vary significantly year by year. This risk can be mitigated by proper flow regulation, and thereby an increased turbine efficiency. Some mini HPPs are dependent on water supply from irrigation canals. Conflicts related to water distribution for hydropower and agriculture purposes can occur. Introducing water contracts among users can mitigate this risk.

14. ESTIMATION OF GREENHOUSE GASES (GHG) ABATEMENT POTENTIAL

To calculate the net GHG reductions associated with DFES, emissions without the programme (the "baseline case") and with the project in place (the "alternative case") have to be estimated. The establishment of a baseline GHG emission scenario is estimated using the formula:

ELEFE *= ,

where EF is the emission factor and EL produced electricity.

T

HT

E

ELELEF

+= ,

where TEL and HEL - electricity produced by thermal and by hydro power plants respectively; TE - GHG emissions due to thermal power generation. The emission factors for 2001 were calculated using energy balance data. Results are presented in Table 25.

102

Table 25. Emission Factor in Electricity Generation in 2001

Total production in 2001, GWh 6 937

Share of fossil fuel based electricity in total

20%

Source: UNDP/GEF (2002). The emission factor for the whole lifetime of the project was calculated on the assumption that the share of hydropower plants in total production would equal 55% (share before the crisis), instead of its current 80%. This means that the country would be able to buy the needed amount of fossil fuel for power generation and thereby increase electricity produced by thermal power plants. In this case, the average emission factor would be equal to 198 t CO2/GWh. The corresponding GHG emission reductions are presented in Table 26.

Table 26. GHG Emission Reductions Potential

Model Project Additional Annual Generation, GWh

Annual GHG Reduction, t

GHG Reduction in 25 Years

Full rehabilitation 7.630 1 511 37 784 Small-scale rehabilitation 3.248 643 16 084 New construction 3.644 722 18 045 Total Project Pipeline (4 full rehabilitation, 10 small-scale rehabilitation, 12 new construction)

106.727

21 141

528 515

Source: Own estimates.

15. SUSTAINABILITY ASSESSMENT

The International Hydropower Association (IHA) has published Sustainability Guidelines to promote a greater consideration of environmental, social and economic sustainability aspects in the assessment of new hydro projects and the management and operation of existing hydropower schemes. The IHA developed three sustainability rating assessments: A. Options Assessment – compares the sustainability of alternative energy supply options at the early

stages of considering requirements for the development of a new energy supply; B. Evaluation of Hydropower Projects – compares the sustainability of alternative hydropower projects

at the design stage of a development proposal; and C. Appraisal of Hydropower Operation and Management – assesses the sustainability of existing

hydropower schemes.

Fuel Used for Electricity Production

Amount Unit Specific Heat, Tj per

Unit

Energy, TJ

Emission Factor, tC/TJ

Emission Factor,

tCO2/TJ

CO2

Emissions kt

Average EF, t

CO2/GWh Gasoline 1 kt 44.80 45 18.9 69.3 3

Diesel oil 20 kt 43.33 867 20.2 74.1 64

Natural gas 441 Mm3 35.45 15640 15.3 56.1 877

Total 945 136.181

103

The first two rating assessments are used to establish supply options that best meet the sustainability criteria. The third is to be used as an industry self-evaluation tool to identify opportunities for improvements in performance. Each sustainability rating addresses twenty economic, social and environmental aspects of sustainability. These are the following: • Aspects A1 to A10 relate to economic aspects of sustainability; A11 to A15, social aspects of

sustainability; and A16 to A20, environmental aspects of sustainability.

• Aspects B1 to B3 relate to economic aspects of sustainability; B4 to B9, social aspects of sustainability; and B10 to B20, environmental aspects of sustainability. Guidance on scoring is provided for each aspect.

• Aspects C1 to C5 relate to economic aspects of sustainability; C6 to C13, social aspects of sustainability; and C14 to C20, environmental aspects of sustainability. Guidance on scoring is provided for each aspect.

The sustainability scoring is based on the following: • 5 when the option meets all relevant sustainability criteria; • 3 when most of the sustainability criteria are met; • 1 when only some of the sustainability criteria are met; and • 0 when none of the sustainability criteria are met. The scoring was performed according to the Sustainability Guidelines.40 Results of the scoring are presented in Table 27.

Table 27. Sustainability Scoring of Rehabilitation and Construction of New Mini Hydropower Plants Options Assessment

No Aspect Score No Aspect Score A1 Demonstrated need for the project 3 A11 Community acceptance 5 A2 Supply-side and demand-side

efficiencies 3 A12 Multiple use benefits 3

A3 Economic viability and planned monitoring for ongoing performance

3 A13 Opportunities and threats to vulnerable social groups

5

A4 Distribution and sustainability of economic benefits

5 A14 Cultural heritage 5

A5 Longevity of benefits 1 A15 Safety issues and hazards 5 A6 Range and flexibility of electricity

supply services 3 A16 Environmental impact assessment 5

A7 Reliability of primary energy supply 3 A17 Level of environmental impact 5 A8 Energy efficiency of option 3 A18 Environmental footprint 5 A9 Energy payback ratio 3 A19 Waste products 5 A10 Long-term resource depletion 3 A20 Carbon intensity 5 Total Average Percentage Score 78 3.9 78%

Evaluation of Hydropower Projects No Aspect Score No Aspect Score

B1 Demonstrated need for the project 3 B11 Previously developed river basins 1 B2 Economic viability and planned

monitoring for ongoing performance 3 B12 Area flooded per unit of energy

produced 3

B3 Distribution and sustainability of 5 B13 Avoiding exceptional natural and 5

40 These are available upon request. Contact Dr. Janelidze at Janelidze@caucasus.net

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economic benefits human heritage sites B4 Community acceptance 5 B14 Rare, vulnerable, or threatened

species; high-quality habitats and habitat restoration

5

B5 Multiple use benefits 3 B15 Community-support (or lack of opposition) for planned reservoir level management and environmental flow regime

5

B6 Opportunities and threats to vulnerable social groups

5 B16 Reservoir and downstream sedimentation and erosion risks

3

B7 Population displacement 5 B17 Passage of fish species 5 B8 Enhancement of public health and

minimisation of public health risks 5 B18 Water quality 5

B9 Dam safety 5 B19 Planning to manage construction impacts

3

B10 Environmental impact assessment 5 B20 Planned environmental management system

3

Total Average Percentage Score 82 4.1 81%

Appraisal of Hydropower Operation and Management No Aspect Score No Aspect Score

C1 Economic viability and monitoring for economic performance

3 C11 Employee opportunity and equity 3

C2 Distribution and sustainability of economic benefits

5 C12 Effectiveness of resettlement and/or compensation programme

5

C3 Range of services and flexibility of electricity supply services

3 C13 Cultural heritage and vulnerable social groups

5

C4 Reliability of primary energy supply 3 C14 Environmental impact assessment and environment management plans

3

C5 Energy efficiency of operations 3 C15 Environmental management system 3 C6 Community acceptance 5 C16 Environmental compliance 3 C7 Multiple use benefits 3 C17 Community-support (or lack of

opposition) reservoir level management and environmental flow regime

5

C8 Enhancement of public health and minimisation of public health risks

5 C18 Reservoir and downstream sedimentation and erosion risks

3

C9 Dam, power station and associated infrastructure safety

5 C19 Passage of fish species 5

C10 Employee safety programme 3 C20 Water quality 5 Total Average Percentage Score 78 3.9 78%

105

16. REFERENCES

1. Government of Georgia (2003), Economic Development and Poverty Reduction Program of Georgia. Government of Georgia, Tbilisi.

2. GWEM (Georgian Wholesale Electricity Market) (2003), Annual Report 2003. GWEM, Tbilisi. 3. GWEM (2004), Business Plan. GWEM, Tbilisi. 4. IHA (International Hydropower Association) (2004), Compliance Protocol to the Sustainability

Guidelines. IHA. 5. IHA (2004a), Sustainability Guidelines. IHA. 6. KfW (German Bank for Reconstruction) (2002), Draft Report on Rehabilitation of Small Hydro

Power Plants in Georgia. KfW, Tbilisi. 7. Kipshidze, M. (2002), Capacity Building to Assess Technology Needs, Modalities to Acquire and

Absorb Them, and to Evaluate and Implement Projects. II Phase of Georgia´s Climate Change Enabling Activities. Final Report, National Agency on Climate Change, Tbilisi.

8. Ministry of Energy of Georgia (2001), Energy Balance of Georgia. Ministry of Energy of Georgia,

Tbilisi. 9. TACIS (1999), Study on Natural Energy Resources in Georgia. TACIS, Tbilisi. 10. TACIS (2004, Quarter 1), Georgian Economic Trends. TACIS, Brussels. 11. United Nations Development Programme (UNDP) (1998), Energy Sector in Georgia. UNDP,

Tbilisi. 12. UNDP/GEF (Global Environmental Facility) (2002), Capacity Building to Assess Technology

Needs, Modalities to Acquire and Absorb Them, Evaluate and Host Projects. Final Report. UNDP/GEF, Tbilisi.

13. UNDP/GEF (2002a), Removing Barriers to the Development of the Small Hydropower Sector for

the Mitigation of GHG Emissions in Georgia. Final Report of the UNDP/GEF Project. UNDP/GEF, Tbilisi.

106

107

BIOGAS PRODUCTION

108

109

TABLE OF CONTENTS

SYNTHESIS............................................................................................................................................... 112

1. TECHNICAL EXPLOITABLE POTENTIAL OF THE BIOGAS SECTOR........................................ 114

2. BIOGAS TECHNOLOGIES .................................................................................................................. 117

2.1. Local Experience in the Development and Construction of Biogas Reactors.................................. 117 2.2. Lessons Learned............................................................................................................................... 121

3. CAPITAL AND OPERATION AND MAINTENANCE COSTS OF MODEL PROJECTS................ 123

3.1. Mesophilic Model Projects............................................................................................................... 123 3.2. Thermophilic Model Projects........................................................................................................... 123

4. ECONOMIC ANALYSIS OF BIOGAS PRODUCTION...................................................................... 124

5. FINANCIAL VIABILITY OF BIOGAS PRODUCTION ..................................................................... 128

6. SENSITIVITY ANALYSIS ................................................................................................................... 132

7. MARKET POTENTIAL OF BIOGAS REACTORS............................................................................. 134

8. CAPITAL NEEDS FOR THE ENTIRE PROJECT PIPELINE............................................................. 136

8.1. Capital Cost for Mesophilic Bioreactors .......................................................................................... 136 8.2. Capital Cost for Thermophilic Bioreactors ...................................................................................... 136

9. RISKS AND RISK MITIGATION MEASURES .................................................................................. 136

10. ESTIMATION OF GREENHOUSE GASES (GHG) ABATEMENT POTENTIAL.......................... 137

11. REFERENCES ..................................................................................................................................... 138

110

LIST OF FIGURES

Figure 1. Small-Scale Biogas Reactors of Fixed-Dome (A) and Floating-Dome (B) Types...................... 118 Figure 2. Bioreactor in Didi Gantiadi ......................................................................................................... 120 Figure 3. Changes of IRR due to Changes of Base Parameters for Model Project 1.................................. 133 Figure 4. Changes of IRR due to Changes of Base Parameters for Model Project 4.................................. 134

LIST OF TABLES Table 1. Potential for Biogas Production from Animal Waste ................................................................... 114 Table 2. Number of Livestock (Thousand Heads)...................................................................................... 114 Table 3. Number of Livestock in Agriculture Enterprises and Households, (Thousand Heads)................ 115 Table 4. Population (Thousands) and Number of Livestock by Regions ................................................... 115 Table 5. Bioreactors Constructed by Individual Farmers ........................................................................... 119 Table 6. Capital and Operational & Maintenance Costs of a Mesophilic Model Bioreactor ..................... 123 Table 7. Capital and Operation and Maintenance Costs of a Thermophilic Model Bioreactor.................. 124 Table 8. Some Indicators of Afforestation Projects.................................................................................... 125 Table 9. Input Data ..................................................................................................................................... 126 Table 10. Results of Economic Calculations .............................................................................................. 127 Table 11-a. Financial Calculations – Case 1............................................................................................... 128 Table 11-b. Financial Calculations – Case 2 .............................................................................................. 130 Table 12. Summary Results – Projects with Positive NPV and IRR of at Least 21%................................ 131 Table 13. Sensitivity Analysis – Changes in Absolute Values of IRR ....................................................... 132 Table 14. Sensitivity Analysis – Deviations from a Base IRR of 15% ...................................................... 133 Table 15. Average Monthly Income and Expenditures per Household by Urban and Rural Areas, GEL . 135 Table 16. Parameters of Biogas, Methane and Wood................................................................................. 137 Table 17. GHG Emission Reductions Potential.......................................................................................... 137

ACRONYMS BCR Benefit-cost ratio CBO Community-Based Organisation DFES Debt-for-Environment Swap EBRD European Bank of Reconstruction and Development E&M Electrical and mechanical GDP Gross Domestic Product GEF Global Environmental Facility GEL Georgian Currency Lari GESI Georgian Energy Security Initiative GHG Greenhouse gases GNERC Georgian National Energy Regulatory Commission GTZ Deutsche Gesellschaft für Technische Zussamenarbeit (Technical Cooperation Agency of Germany) GWEM Georgian Wholesale Electricity Market HPP Hydropower Plant IHA International Hydropower Association

111

IRR Internal Rate of Return JSC Joint-Stock Company KfW Bank Kreditanstalt für Wiederaufbau (German Bank for Reconstruction) NPV Net Present Value O&M Operation and Maintenance (costs) PDF Project Development Facility PPA Power Purchase Agreement RNPV Rate of NPV SDS State Department for Statistics of Georgia SME Small and Medium Enterprises Tetri 0.01 GEL TA Technical Assistance TPP Thermal Power Plant UMCOR United Methodist Committee on Relief USAID US Agency for International Development USC US cent USD US Dollar VAT Value Added Tax WB World Bank

PHYSICAL UNITS g Gramme GWh Gigawatt-hours kg Kilogramme kt Kilotonne kW Kilowatt kWh Kilowatt-hours Mm3 Million cubic metres MW Megawatt PJ Petajoule tC Tonnes of carbon tCO2 Tonnes of carbon dioxide TJ Terajoule

112

SYNTHESIS

Current experience in Georgia clearly indicates that there are no technical barriers to the successful operation of biogas reactors. Different types of equipment have been tested with good results. Some are easier to operate, but less effective in producing biogas. Others require more attention to operate, but produce significantly more biogas. These different types of biogas reactors respond to different needs. In addition, current experience indicates that the production of biogas reactors has not taken off in Georgia. Most efforts in this area are financed by international organisations, suggesting a problem in scaling up. This is because many farmers are still not aware of this technology and, most importantly, would have serious difficulty finding the USD 500 that the cheapest biogas reactor would cost. Resources made available through a debt-for-environment swap (DFES) could act as a financial facility to promote the expansion of the biogas sector. The report includes a brief description of donor activities and lessons learned in the field of biogas production and possible links with DFES. A stakeholder analysis has been carried out. Households, local businesses, engineering and consulting companies in the field of biogas have been identified as main stakeholders and their incentives and capacities assessed. This report identifies two types of model projects for DFES support. The first is Mesophilic Model Projects while the second is Thermophilic Model Projects. Their main characteristics are the following: • The small-scale mesophilic bioreactor has a 6m3 volume and requires the equivalent of waste material

generated from 4 cows. The temperature of the reactor is 25-400C. Modern mesophilic bioreactors can produce 0.2-0.4 m3 per m3 of installation.

• A small-scale thermophilic bioreactor has a 6m3 volume and requires the equivalent of waste material generated from 5 cows or more. The temperature of the reactor is 50-550C. Modern thermophilic bioreactors can produce 2-6 m3 per m3 of installation.

For each case, the report presents economic calculations for three scenarios. The first scenario uses current costs and current efficiency rates in biogas production. The other 2 scenarios assume that investment costs decrease and that the efficiency of biogas reactors increases over time. The costs of biogas reactors are estimated on the basis of implemented projects and future development forecasts, and include capital costs and operation and maintenance (O&M) costs. The benefits generated by the model projects have been estimated for two cases. The first case assumes that biogas will be used in gas stoves with maximum efficiency of 60%, replacing energy from burning wood. Economic benefits generated by these projects include: • Reduction of uncontrolled forest cutting, and thereby mitigation of risks such as avalanches, landslides,

etc. (Over the last decade, especially in rural areas of Georgia, people have been using mainly firewood for cooking, heating and hot water.)

113

• Contribution to the value of the standing forest saved. This “shadow price” of afforestation/reforestation is estimated on the basis of analysis of different projects developed in Georgia.

• Improved living conditions for the population (e.g. people will spend less, or no, time, energy and finance on wood collection).

• Indoor pollution will be reduced. • Electricity generation (especially in the case of thermophilic bioreactors, which produce more biogas

than necessary for generating heat). • Higher education levels (e.g. during short winter days, schoolchildren will be able to study by electric

light powered by biogas). • Better access to information: with electricity from biogas, the rural population can watch TV, which is

a vital source of information, especially in wintertime, when access roads to mountainous regions are closed.

• Reduced greenhouse gas (GHG) emissions by avoiding methane emissions and using wood in heat production and electricity.

Projects were assumed to be economically feasible if the Net Present Value (NPV) is positive, the Internal Rate of Return (IRR) is ≥ 20% and show a payback period of ≤ 7 years. Under these conditions, thermophilic projects with improved efficiency and decreased costs are economically feasible. However, it should be noted that a number of social benefits difficult to monetise have not been included in this analysis which does not allow to present the full picture of all benefits that could be obtained through such projects. The financial calculations used the same three scenarios described above and assumed that 20% of investments would be the responsibility of farmers (co-financing)41. The remaining 80% would be covered by a combination of grants and loans. The financial calculations were carried out for scenarios in which the share of the grant increases from 0 to 10%, 20%, 30%, 40% and 50% of the total DFES contribution. The results of the financial calculations show that under current costs and efficiency rates of biogas production, at least 50% of capital costs might need to be covered by a grant component. Later, if technology improvements result in increased biogas productivity and a reduction of capital costs, then the grant component may be reduced and even excluded by 2010-2012. The sensitivity analysis shows that IRR sharply responds to changes in capital costs and the share of the grant component in total investment. As for other parameters, their impact is relatively minor. This indicates that in evaluating project proposals, attention should be given to ensure that the estimation of capital costs has been properly done. The capital costs of the project pipeline have been estimated for mesophilic and thermophilic bioreactors. The cost of mesophilic reactors is in the range of USD 720 - 900. It is assumed that DFES would support the installation of 50-100 mesophilic units in 3 regions of Georgia per year (western, eastern and southern Georgia). Under this assumption, the annual capital costs would amount to USD 108 000-216 000. The cost of thermophilic reactors is in the range of USD 3 340-4 100, and it is assumed that DFES would support the installation 15-20 of these bioreactors per year. Under this assumption, annual capital costs would amount to USD 50 000-82 000. Taking into account both types of reactors, it is calculated that the annual project pipeline disbursement would amount to approximately USD 160 000 - 300 000.

41 For the purposes of comparison, the World Bank project “Reduction of Pollution from the Agricultural Sector” had 80% of biogas reactor costs covered by a GEF grant and 20% financed by farmers (cash, building materials, manpower).

114

1. TECHNICAL EXPLOITABLE POTENTIAL OF THE BIOGAS SECTOR

As a definition, the technical potential is the estimation of the total national capacity technically feasible. The economic potential is based on the technical potential constrained by the results obtained through a cost/benefit analysis (profitability requirement). Several authors have explored the issue and this report presents a summary of the results. Table 1 shows the estimated potential for biogas production from animal waste in Georgia (TACIS, 1997).

Table 1. Potential for Biogas Production from Animal Waste

No Biomass Source

Total Amount, Thousand

Heads

Biomass, kg/Day per

Unit

Total Biomass, Tonnes/Day

Biogas Amount Obtained from 1 kg of Biomass, m3

Total Biogas Production,

Thousand m3 / Day 1 Livestock 916 45 41 260 0.04 1 650 2 Pigs 328 9 2 955 0.06 177.3 3 Sheep, Goats 580 4 2 321 0.06 139.2 4 Poultry 7 580 0.17 1 288 0.07 90.1 5 Horses 22 35 786 0.04 314

Source: TACIS, 1997. The TACIS study focused on the technical and economic potential of biogas production in the country (including municipal solid waste). The analysis shows that the technical potential stands at 200 GWh while the economic potential is at 50 MGh, still a sizeable figure. Livestock data serve as a main source for the estimation of biogas potential. The official statistics on livestock numbers are presented in Tables 2 and 3.

Table 2. Number of Livestock (Thousand Heads) Year Cattle Pigs Sheep and Goats

1985 1 652.6 1 133.4 1 955.7 1986 1 645.5 1 173.4 1 979.6 1987 1 634.7 1 150.4 1 938.5 1988 1 584.8 1 117.8 1 920.5 1989 1 547.8 1 099.2 1 894.0 1990 1 426.6 1 027.8 1 833.5 1991 1 298.3 880.2 1 618.1 1992 1 207.9 732.5 1 469.6 1993 1 002.6 476.2 1 191.6 1994 928.6 365.1 958.1 1995 944.1 366.9 793.3 1996 973.6 352.6 724.8 1997 1 008.0 332.5 652.0 1998 1 027.2 330.3 583.5 1999 1 050.9 365.9 586.7 2000 1 122.1 411.1 633.4 2001 1 177.4 443.4 627.6 2002 1 180.2 445.4 659.2

Source: State Department for Statistics (SDS).

115

Table 2 shows that the number of livestock has increased over the last years and has reached about 1.2 million. The number of large agriculture farms (with 20-50 or more livestock) is also increasing.

Table 3. Number of Livestock in Agriculture Enterprises and Households, (Thousand Heads) 2001 2002

Agriculture Enterprises

Households Total Agriculture Enterprises

Households Total

Cattle 6.8 1 170.6 1 177.4 5.2 1 175.0 1 180.2 of which: Milk-cows 2.8 643.5 646.3 2.2 676.1 678.3 Pigs 0.8 442.6 443.4 0.2 445.2 445.4 Sheep and goats 27.8 599.8 627.6 25.7 633.5 659.2 Sheep 27.4 519.5 546.9 25.3 542.2 567.5 Goats 0.4 80.3 80.7 0.4 91.3 91.7 Horses 0.4 34.5 34.9 0.4 38.2 38.6

Source: State Department for Statistics. Table 4 shows livestock numbers per capita by regions.

Table 4. Population (Thousands) and Number of Livestock by Regions Livestock Population

Total Per Capita

Region Total Urban Rural Cattle

Of which: Milk-Cows

Pigs Sheep and

Goats Cattle

Of which: Milk-Cows

Pigs Sheep and

Goats

Georgia 4 371.5 2 284.8 2 086.7 1 180,221 678 270 445 364 659 156

Tbilisi 1 081.7 1 081.6 0.1 2 378 2 204 1 549 613

Tbilisi 1 073.3 1 073.3

Tskhneti 8.3 8.2 0.1

Adjara 376.0 166.4 209.6 122 717 66 311 741 17 020 0.203 0.111 0.000 0.031 Batumi 121.8 Keda 20.0 1.2 18.8 12 124 5 704 12 1 222 0.489 0.230 0.000 0.049 Kobuleti 88.1 31.7 56.4 17 991 11 778 656 892 0.026 0.017 0.001 0.001 Shuakhevi 21.9 1.0 20.9 28 581 14 011 4 147 1.104 0.541 0.000 0.160 Khelvachauri 90.8 9.5 81.3 15 781 11 721 73 3 738 0.109 0.081 0.001 0.026 Khulo 33.4 1.1 32.3 48 240 23 097 7 021 1.276 0.611 0.000 0.186 Guria 143.4 37.5 105.8 51 302 30 654 36 476 11 439 0.153 0.089 0.139 0.041 Ozurgeti 78.8 27.5 51.2 23 447 13 971 10 627 4 770 0.039 0.023 0.018 0.008 Lanchkhuti 40.5 7.9 32.6 15 919 10 311 12 527 2 063 0.187 0.121 0.147 0.024 Chokhatauri 24.1 2.1 22.0 11 936 6 372 13 322 4 606 0.367 0.196 0.410 0.142 Racha - Lechkhumi and Kvemo Svaneti

51.0

9.6

41.4

40 693

22 007

20 912

5 382

0.479

0.257

0.247

0.071

Oni 9.3 3.3 5.9 6 918 3 966 3 292 249 0.309 0.177 0.147 0.011 Ambrolauri 16.1 2.5 13.5 12 486 7 091 4 254 1 484 0.480 0.273 0.164 0.057 Lentekhi 9.0 1.7 7.3 8 538 4 413 5 914 587 0.540 0.279 0.374 0.037 Tsageri 16.6 2.0 14.7 12 751 6 537 7 452 3 062 0.516 0.265 0.302 0.124 Samegrelo and Zvemo Svaneti

466.1

183.1

283.0

202 180

112 092

134 307

19 604

0.204

0.110

0.130

0.022

Poti 47.1 2 091 1 399 1 420 30 0.002 0.001 0.002 0.000 Zugdidi 167.8 68.9 98.9 52 012 29 799 38 829 2 895 0.035 0.020 0.026 0.002 Abasha 28.7 6.4 22.3 23 445 12 758 10 257 268 0.361 0.196 0.158 0.004 Martvili 44.6 5.6 39.0 31 078 15 459 21 266 4 330 0.407 0.203 0.279 0.057 Mestia 14.3 2.6 11.7 13 730 6 270 4 900 3 100 0.556 0.254 0.198 0.126 Senaki 52.1 28.1 24.0 24 454 13 472 16 042 2 268 0.042 0.023 0.027 0.004 Chkhorotsku 30.1 5.0 25.1 19 765 10 215 16 049 2 558 0.395 0.204 0.320 0.051

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Tsalenjikha 40.1 13.8 26.4 13 542 8 508 11 558 3 283 0.082 0.052 0.070 0.020 Khobi 41.2 5.6 35.6 22 063 14 212 13 986 872 0.303 0.195 0.192 0.012 Imereti 699.7 323.8 375.9 266 615 134 456 95 623 35 868 0.234 0.113 0.088 0.034 Kutaisi 186.0 1 820 1 378 309 200 0.000 0.000 0.000 0.000 Tkibuli 31.1 14.5 16.7 12 644 5 232 4 826 1 372 0.078 0.032 0.030 0.008 Tskhaltubo 73.9 16.8 57.0 41 114 19 268 9 584 2 486 0.183 0.086 0.043 0.011 Chiatura 56.3 13.8 42.5 22 852 10 015 6 938 4 967 0.127 0.055 0.038 0.028 Baghdati 29.2 4.7 24.5 15 147 6 732 7 752 2 907 0.316 0.140 0.162 0.061 Vani 34.5 4.6 29.8 24 077 9 583 10 706 5 138 0.456 0.181 0.203 0.097 Zestaponi 76.2 25.8 50.5 26 102 14 200 13 111 2 830 0.046 0.025 0.023 0.005 Terjola 45.5 5.5 40.0 35 338 20 172 13 960 4 578 0.461 0.263 0.182 0.060 Samtredia 60.5 31.7 28.7 25 967 15 925 6 464 3 402 0.039 0.024 0.010 0.005 Sachkhere 46.8 6.7 40.2 22 587 11 756 8 402 5 588 0.266 0.139 0.099 0.066 Kharagauli 27.9 2.4 25.5 21 074 8 812 7 200 1 304 0.562 0.235 0.192 0.035 Khoni 31.7 11.3 20.4 17 893 11 383 6 371 1 096 0.134 0.085 0.048 0.008 Kakheti 407.2 84.8 322.4 116 002 68 761 73 938 243 306 0.123 0.075 0.073 0.245 Telavi 70.6 21.8 48.8 12 104 7 250 14 301 31 394 0.025 0.015 0.029 0.065 Akhmeta 41.6 8.6 33.1 20 250 11 968 13 156 62 580 0.224 0.132 0.145 0.692 Gurjaani 72.6 10.0 62.6 7 421 5 665 3 173 13 300 0.057 0.044 0.025 0.103 Dedoplistkaro 30.8 7.7 23.1 18 477 6 455 12 052 35 066 0.248 0.087 0.162 0.471 Lagodekhi 51.1 6.9 44.2 21 991 13 599 10 236 25 410 0.244 0.151 0.113 0.282 Sagarejo 59.2 12.6 46.6 19 007 10 745 5 814 43 350 0.110 0.062 0.034 0.251 Sighnagi 43.6 8.2 35.4 7 111 5 568 5 000 15 880 0.079 0.062 0.056 0.176 Kvareli 37.7 9.0 28.6 9 641 7 511 10 206 16 326 0.109 0.085 0.115 0.184 Mtskheta - Mtianeti

125.4

32.1

93.3

54 652

41 244

24 365

60 336

0.145

0.109

0.066

0.167

Mtskheta 64.8 13.0 51.8 14 499 10 324 2 358 5 912 0.080 0.057 0.013 0.033 Kazbegi 5.3 1.8 3.5 3 086 2 623 992 23 828 0.247 0.210 0.079 1.906 Akhalgori 7.7 2.4 5.3 4 596 3 261 3 347 9 537 0.266 0.188 0.193 0.551 Dusheti 33.6 10.8 22.8 23 149 17 911 10 716 17 247 0.177 0.137 0.082 0.132 Tianeti 14.0 4.0 10.0 9 322 7 125 6 952 3 812 0.311 0.238 0.232 0.127 Samtskhe - Javakheti

207.6

65.5

142.1

99 447

63 673

8 228

90 082

0.250

0.158

0.022

0.241

Adigeni 20.8 2.3 18.4 18 535 8 989 1 505 2 255 0.620 0.301 0.050 0.075 Aspindza 13.0 3.2 9.8 10 180 5 345 404 10 678 0.395 0.207 0.016 0.414 Akhalkalaki 61.0 9.8 51.2 25 939 19 122 3 527 33 835 0.223 0.164 0.030 0.290 Akhaltsikhe 46.1 23.5 22.7 15 773 9 935 727 3 722 0.032 0.020 0.001 0.008 Borjomi 32.4 20.4 12.1 9 199 5 516 1 048 5 604 0.022 0.013 0.002 0.013 Ninotsminda 34.3 6.3 28.0 19 821 14 766 1 017 33 988 0.283 0.211 0.015 0.486 Kvemo Kartli 497.5 186.5 311.0 142 553 84 405 22 892 154 891 0.167 0.102 0.024 0.185 Rustavi 116.4 553 403 524 438 0.000 0.000 0.000 0.000 Bolnisi 74.3 17.7 56.7 14 886 10 698 2 526 7 818 0.064 0.046 0.011 0.033 Gardabani 114.3 16.1 98.2 49 464 25 638 6 184 58 229 0.191 0.099 0.024 0.225 Dmanisi 28.0 3.4 24.6 20 314 13 111 1 957 19 421 0.488 0.315 0.047 0.467 Tetritskaro 25.4 6.8 18.6 15 825 10 629 6 553 16 597 0.248 0.166 0.102 0.260 Marneuli 118.2 23.7 94.5 27 382 13 180 3 530 32 615 0.048 0.023 0.006 0.057 Tsalka 20.9 2.4 18.5 14 129 10 746 1 618 19 773 0.463 0.352 0.053 0.648 Shida Kartli 314.0 113.8 200.2 81 682 52 463 26 333 20 615 0.059 0.038 0.018 0.017 Gori 148.7 49.5 99.2 29 037 19 230 10 639 5 741 0.027 0.018 0.010 0.005 Kaspi 52.2 15.2 37.0 19 087 13 629 4 312 8 804 0.101 0.072 0.023 0.047 Kareli 50.4 10.7 39.7 18 671 10 498 5 686 4 259 0.127 0.072 0.039 0.029 Khashuri 62.7 38.3 24.4 14 887 9 106 5 696 1 811 0.019 0.012 0.007 0.002 Source: State Department for Statistics. Table 4 shows that there is high potential for biogas production in several areas of Georgia. These are districts where the number of livestock per capita is 0.4 or more. In this category, we have the following areas:

• Khulo 1.276 • Shuakhevi 1.104 • Adigeni 0.620 • Kharagauli 0.562

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• Mestia 0.556 • Lentekhi 0.540 • Tsageri 0.516 • Keda 0.489 • Dmanisi 0.488 • Tsalka 0.483 • Ambrolauri 0.480 • Vani 0.456 • Martvili 0.407

According to expert estimations, the total annual amount of manure produced is about 15-20 million tonnes, of which 3-5 million tonnes can be processed for biogas (120-200 million m3 annually) and for fertiliser (1-3 million tonnes annually). This could replace 70-120 million m3 of natural gas equivalent. The potential for biogas is even more relevant when considering that wood is the main energy source in rural areas. According to the energy balance produced by the State Department for Statistics of Georgia (SDS), total energy consumption in 2001 was 125.6 PJ, of which 64.5 PJ (51%) originated from wood consumption. Wood is essentially burnt in low efficiency stoves. Switching from wood consumption to biogas use would have a positive effect on forest conservation.

2. BIOGAS TECHNOLOGIES

The development of biogas technologies in Georgia started in 1993-1994 with the assistance of GTZ (Technical Cooperation Agency of Germany). Technical support provided by GTZ allowed Georgian experts and engineers to study advanced designs and adapt technologies to Georgian climatic and economic conditions. The process of biogas production takes place in anaerobic conditions and in different temperature diapasons. There are psychrophilic (temperature diapason 10-250C), mesophilic (25-400C) and thermophilic (50-550C) regimes of bioconversion. Biogas production in a thermophilic regime is much higher than for the mesophilic and psychrophilic regimes. Modern thermophilic bioreactors can produce 2-6 m3 per m3 of installation, which amounts to 5-15 kg of waste on a dry mass base (or 50-150 kg of wet mass). For mesophilic biogas installations, these values are 0.2-0.4 m3 per m3 of installation and 0.5-1 kg on a dry mass base (or 5-10 kg of wet mass). Biogas reactors, working in a thermophilic regime, can be introduced in agricultural farms where the number of livestock exceeds 5. Biogas produced on such farms can be used not only for cooking and heating water, but for dairy production as well.

2.1. Local Experience in the Development and Construction of Biogas Reactors

In Georgia, there are a number of engineering companies, research/engineering institutes and individuals with experience in the field of biogas production. Among them, the best known are Bioenergia Ltd., Konstruktori Ltd. and the Georgian National Centre of High Technology.

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In the 1990s, Bioenergia Ltd. developed small-scale mesophilic biogas reactors of the fixed-dome and floating-dome types (Figure 1). These systems are easy to operate but less effective in terms of biogas production. Taking into account the local conditions, these reactors represent the most attractive technologies for the majority of households with 1-2 livestock. Later on, Bioenergia also developed more effective mesophilic biogas reactors with a 6 m3 volume, but these require the waste material of at least four livestock.

Figure 1. Small-Scale Biogas Reactors of Fixed-Dome (A) and Floating-Dome (B) Types

Source: TACIS, 1997. The first bioreactor was constructed in Sasireti, Kaspi in 1994. In that same year, Bioenergia Ltd. was awarded a patent, and in 1996 its brochure “Construction and Maintenance of Biogas Installations” was published and distributed with support from “World Vision”. In 1994-1996, bioreactors were installed in Gurjaani, Dedoplistskaro, Gardabani, Tsalka and Chakvi, some of them with the assistance of the US Agency for International Development (USAID). The publication of this brochure had a noticeable impact. As a result, about 60 bioreactors were installed by interested farmers, using mainly their own resources. Table 5 presents some information on these individual biogas installations.

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Table 5. Bioreactors Constructed by Individual Farmers

N Location Farmer Year of

Construction Volume of

Bioreactor, m3 1 Kaspi, Sasireti Onezashvili 1994 3 2 Gurjaani, Velistsikhe Mgebrishvili 1995 7 3 Dedoplistskaro, Kvemo Kedi Tsiklauri 1996 7 4 Dedoplistskaro, Gamarjveba Gogochuri 1996 9 5 Dedoplistskaro, Kasris Tskali Gonashvili 1996 3 6 Chakvi Kintsurashvili 1996 7 7 Zestaponi, Argveta Meladze 1995 1 8 Zestaponi, Sakara Shvelidze 1996 3 9 Zestaponi, Tvrini Chankvetadze 1996 6 10 Zestaponi, Tvrini Kveladze 1996 6 11 Zestaponi, Puti Katamadze 1995 4 12 Zestaponi, Kvaliti Guniava 1996 20 13 Zestaponi, Sazano Kobakhidze 1996 9 14 Gardabani Khardziani 1996 4 15 Gardabani Talakhadze 1996 4 16 Marneuli, Tsereteli Mumladze 1996 6 17 Chiatura, Mgvimevi Memarnishvili 1996 6 18 Tbilisi, Agaraki Gagnidze 1996 10 19 Tbilisi, Navtlugi Antidze 1996 9 20 Marneuli, Teleti N/A 1995 5 21 Lagodekh, Ninigori N/A 1995 6 22 Telavi, Kurdgelauri N/A 23 Gori, Khidistavi Talashaze 1996 24 Gori, Dzevera N/A 1996 7 25 Zugdidi, Akhalkakhati Tuzbaia 26 Zugdidi, Narazevi N/A 1996 4 27 Vani, Dikhashkho Maglakelidze 1996 6 28 Kareli, Ruisi Kutkhashvili 1996 29 Akhmeta, Shenako N/A 1996 4 30 Borjomi, Kvabiskhevi Maisuradze 1996 4 31 Kareli, Tamarisi N/A 1996 7 32 Kharagauli, Tamarisi Grigalashvili 1995 6 33 Khobi, Akhalnigula Janjgava 1997 7 34 Tskaltubo, Gvishtibi Ioseliani 1995 1 35 Martvili, Abedati Zarkua 1996 4 36 Khoni Lezhava 1997 14 37 Mtskheta, Ksani Mchedlidze 1996 4 38 Mtskheta, Gorovani Magaldadze 1996 6 39 Gurjaani Avakashvili 1996 40 Zestaponi, Didi Gantiadi Samkharadze 1996 2

Source: UNDP.

During the preparation phase of this report, a team of local and international consultants visited the bioreactor in Didi Gantiadi. This bioreactor, constructed in 1996, is still in good operating condition. In spite of the limited manure input (the family had one cow only), the produced biogas is sufficient for cooking purposes throughout the whole year.

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Figure 2. Bioreactor in Didi Gantiadi

Other promising experiences followed those of 1994-1996. In 1999, with financial support from the Coordinating Centre for the Development of Agriculture Projects, Bioenergia Ltd. constructed four small-scale bioreactors in the Terjola region. Two of them were of the heat-insulated floating-dome type equipped with a solar collector, and the two others were of the horizontal fixed-dome type.

Three different types of biogas installations have been tested in Georgia with support from the World Bank project “Reduction of Pollution from the Agricultural Sector”. In 2002, the project installed 12 bioreactors in the Khobi, Chkhorotsku and Tsalenjikha regions. Eight bioreactors were of the floating-dome type, two of the fixed-dome Chinese type, and the other two – were locally improved versions of the fixed-dome type. In 2003, the Coordinating Centre announced a tender for the construction of another 45 units. The winners were Bioenergia Ltd. and Gamon Joint-Stock Company (JSC). The Coordinating Centre constructed more than 100 installantions in 2005. In parallel to the work of the Coordinating Centre, Bioenergia constructed a 30-m3 volume bioreactor in Sachkhere with financial support from the United Methodist Committee on Relief (UMCOR), and 9 bioreactors in Akhaldaba under the MERCY Corps community mobilisation programme. The construction of bioreactors is also planned along the Baku-Tbilisi-Ceihan (BTC) oil pipeline under the BTC Social Investment Programme. After 10 years of work, bioreactor designs are getting better. In 2003, and with support from the European Bank for Reconstruction and Development (EBRD), Bioenergia manufactured 6 construction sets in order to reduce the cost and construction time of biogas installations. As a result, construction time was reduced from 1.5 months to 10 days. Different types were tested and are being used by Bioenergia and Gamon JSC. In August 2004, the aid organisation CARE42 announced a tender for the construction of 5 bioreactors for 5-15 livestock in the Tsalka region, characterised by cold winter conditions (up to -250C).

42 Humanitarian organisation fighting global poverty.

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Barriers to scaling up The total number of bioreactors installed in Georgia equals several hundred, i.e. only 0.1-0.2% of households use biogas. Most of the bioreactors are of the mesophilic type and only few are of the thermophilic type, mostly because the latter is more costly and requires more biomass resources. These experiences suggest two conclusions. The first is that there are practically no technical barriers to the successful operation of biogas reactors in Georgia. Different types have been tested, showing good results. Some are easier to operate but less effective in producing biogas. Others require more attention to operate, but produce significantly more biogas. These different types respond to different needs. The second conclusion is that the production of biogas reactors has not taken off. Most efforts are financed by international organisations, suggesting a problem in scaling up. This is because many farmers are still not aware of this technology and, most importantly, would have serious difficulty finding the USD 500 that the cheapest bioreactor would cost. During the preparation of this report, the DFES team of local and international experts confirmed that in the absence of a financial facility (e.g. soft loan), the use of biogas reactors in Georgia would remain very limited for the foreseeable future. DFES could be the needed financial facility.

2.2. Lessons Learned

Technologies

The use of biogas reactors improves living conditions of households. People in rural Georgia, particularly women, spend a significant amount of their time on wood gathering and stockpiling. The use of biogas frees a lot of time while reducing the need for hard physical work (wood felling and stockpiling).

Bioreactors provide the expected output (biogas production) in real conditions.

The costs of bioreactors of all types, especially of thermophilic ones, remain high.

The amount of biogas spent to keep substrate temperature within the limits of 50-550C (thermophilic bioreactors) did not exceed 25% of produced biogas, even under the worst climatic conditions (average temperature -80C).

Visual aids (brochures, booklets, TV broadcasts) play a significant role in promoting biogas technologies.

The interest in biogas technologies developed/adapted for Georgia is spreading to neighbouring countries. Armenia has expressed interest in thermophilic bioreactors, and a one-week training course has already been conducted. Similar training is also planned for Azeri and Serbian experts.

Operators and consumers

Knowledge about biogas and access to this information by farmers is very limited. They usually show low interest at the initial stages of biogas development.

The more farmers put into the project themselves, the longer they maintain bioreactors in working condition.

The interest of farmers in biogas is growing, as a result of pilot implementation and information campaigns.

In spite of an increased interest, most farmers do not have the financial capacity to install bioreactors.

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The lack of a strategy to finance biogas projects and the absence of credit lines for farmers impede the take-off of biogas production in Georgia.

Critical factors for biogas development

The following factors impede or delay the establishment of biogas reactors in Georgia:

Cold and dry climate. The mountainous regions of Georgia, where livestock breeding represents the main type of business, are characterised by cold winter conditions, while the lowlands have hot and dry summers. Bioreactor technologies must therefore be adjusted to local climatic conditions.

Low and irregular biogas demand.

Daily amount of manure less than 20 kg.

Difficulties in manure collection.

Absence of local building materials.

Lack of fresh water (which is used in bioreactors).

Low income of farmers.

High construction costs.

Low qualification of constructors.

Many of the above-mentioned critical factors are determined not so much by the region, but rather by the number of cows and pasture location, the grazing regime, etc. Some of the main factors that promote or facilitate the establishment of biogas reactors are listed below:

Average annual temperature above 200C.

Daily amount of manure in excess of 30 kg.

Need for fertilisers (the by-product of biogas generation is manure without methane, which is a good fertiliser).

Possibility to construct a bioreactor in the proximity of a cowshed and kitchen.

Affordable local construction costs.

Interest of farmers in energy efficiency and environmental protection.

Existence of local building materials and gas stoves.

Existence of qualified constructors in the village or town.

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3. CAPITAL AND OPERATION AND MAINTENANCE COSTS OF MODEL PROJECTS

3.1. Mesophilic Model Projects

The small-scale mesophilic bioreactor has a 6-m3 volume and requires the equivalent of waste material from 4 cows. Capital and operation and maintenance (O&M) costs have been estimated based on the experience of pilot projects implemented in Georgia over the last few years. The capital costs of bioreactors constructed by Bioenergia Ltd. in 2002-2003 are about USD 200 per cubic metre of bioreactor. This amount includes administrative and transport costs and consultancy fees. The capital costs of bioreactors constructed by farmers themselves without donor support are lower, but usually these gains are at the expense of quality. According to expert estimations, the capital costs of small-scale (up to 6-8 m3) bioreactors can be reduced to USD 120 per cubic m3 in case of mass production (above 100 units per year). Bioreactors require very small operational and maintenance costs. Annual O&M costs can be estimated at 1% of capital costs. Table 6 shows capital and annual O&M costs for a mesophilic model reactor. The costs for 2005 represent current costs, while those for future years are estimations based on expected increases in efficiency.

Table 6. Capital and Operational & Maintenance Costs of a Mesophilic Model Bioreactor Date of Construction

Category 2005 (Model 1)

2006-2010 (Model 2)

2011-2015 (Model 3)

Volume, m3 6 6 6 Capital cost of 1 m3, USD 150 120 120 Total capital cost, USD 900 720 720 Annual O&M costs, USD 9.00 7.20 7.20 Specific daily biogas production, m3/m3 0.30 0.45 0.55 Daily biogas production, m3 1.8 2.7 3.3 Heat content of biogas, MJ/m3 22.5 22.5 22.5 Capacity of bioreactor, kW 0.469 0.703 0.859 Daily heat production, kWh 11.3 16.9 20.6 Annual biogas production, m3 657 986 1205 Annual heat production, MWh 4.106 6.159 7.528

Source: Own estimates.

3.2. Thermophilic Model Projects

A small-scale thermophilic bioreactor has a 6-m3 volume and requires the equivalent of waste material from 5 cows or more. Capital and O&M costs have been estimated based on the experience of pilot projects implemented in Georgia over the last few years. The capital costs of thermophilic bioreactors constructed by the Georgian National Centre of High Technologies vary between USD 600 - 750 per cubic metre of bioreactor. This includes administrative and transport costs and consultancy fees. According to the estimations of local experts, the capital costs of small-scale (up to 6-8 m3) thermophilic bioreactors can be reduced by 25 - 35%

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in case of mass production (about 50 units per year). The annual O&M cost of thermophilic bioreactors is about 2% of capital costs. Table 7 shows capital and annual O&M costs for a thermophilic model reactor. The costs for 2005 represent current costs, while those for future years are estimations based on expected increases in efficiency.

Table 7. Capital and Operation and Maintenance Costs of a Thermophilic Model Bioreactor Date of Construction

Category 2005 (Model 4)

2005-2010 (Model 5)

2010-2015 (Model 6)

Volume, m3 6 6 6 Capital cost of 1 m3, USD 600 450 390 Total capital cost, USD 3 600 2 700 2 340 Annual O&M costs, USD 72.00 54.00 46.80 Specific daily biogas production, m3/m3 2.00 4.00 6.00 Daily biogas production, m3 12 24 36 Heat content of biogas, MJ/m3 22.5 22.5 22.5 Capacity of bioreactor, kW 3.125 6.250 9.375 Daily heat production, kWh 75.0 150.0 225.0 Annual biogas production, m3 4 380 8 760 13140 Annual heat production, MWh 27.375 54.750 82.125

Source: Own estimates.

4. ECONOMIC ANALYSIS OF BIOGAS PRODUCTION

The development of biogas production from animal manure can generate benefits both at a national and household level. In rural areas of Georgia, people use mostly firewood for cooking and heating purposes and for obtaining hot water. The uncontrolled forest cutting that took place in the country over the last decade greatly increases the risk of dangerous phenomena, such as avalanches, landslides, etc.. Besides, the woodstoves that people use are of very low efficiency. The benefits generated by the model projects have been estimated for two cases. The first case assumes that biogas will be used in gas stoves having a maximum efficiency of 60% and it will replace energy from burning wood. Specifically, biogas obtained from such projects will be characterised by:

• Heat content: 7.5 GJ/m3 or 13.2 GJ/t; • Efficiency of wood stoves: 60%; and • All produced biogas will be consumed. When considering the benefits of replacing wood as an energy source with biogas, one should take into account the contribution this will make to the value of the standing forest that is saved. This “shadow price” of afforestation/reforestation has been estimated for different projects developed (but not yet implemented) in Georgia. The cost of 1 m3 wood varies in the range of USD 4 - 9 (see Table 8) by regions and it is expected to increase in areas where forest is very scarce.

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The conservation of forests plays an important role for local communities with regard to flood control and water source protection. Uncontrolled cutting and logging, which took place during the last decade, has led to a decrease of underground water resources and initiated soil erosive processes in many regions of Georgia which have resulted in serious damage.

Table 8. Some Indicators of Afforestation Projects Project Type Carbon

Content, tC/Tonne Biomass

Investment, USD

Change in Carbon

Stock, tCO2

Change in

Carbon Stock, tC

Volume of Wood, m3

Specific Cost,

USD/m3

Afforestation43 0.50 153 462 13 906 3 793 7 585 20.23Energy plantations2 0.45 5 058 000 640 000 174 545 387 879 13.04Nabadkhevi44 0.57 0.50 351 000 18 564 65 251 5.38Ksani3

0.57 0.50 455 000 21 296 74 854 6.08Red Bridge3 0.57 0.50 325 000 15 280 53 708 6.05Dendrology Park3 0.57 0.50 299 000 19 651 69 073 4.33Total 6 641 462 253 129 1 249 439 5.32

Source: Own estimates. In addition, biogas utilisation will also generate social benefits. People will spend less or no time, energy and finances on wood collection; indoor pollution will be reduced; when biogas is used for electricity production, it will contribute to the improvement of education levels (in short winter days, school children will no longer have to do their lessons by candlelight), and better access to information. Due to a very limited electricity supply, the rural population cannot watch TV, which in wintertime, when access roads to mountainous regions are closed, is a vital source of information). Monetisation of these benefits is difficult and has not been included in the economic calculations. Moreover, the development of biogas production under DFES will generate GHG reductions by decreasing methane emissions and replacing wood as an energy source (for more details, see Section 10) at the price of 5 USD/tCO2 (or USD 18/tC). The second case assumes that biogas will be used for electricity generation in gas generators (having efficiency of 35%) and will replace electricity purchased at the usual price of 8.6 Tetri/kWh = 44.8 USD/MWh. If biogas is used for electricity generation and replaces energy otherwise produced by existing facilities, benefits generated by DFES will equal the cost of electricity produced otherwise. Since biogas reactors used for electricity generation would most probably operate within an isolated network / direct customers, the cost of replaced energy will include generation, transmission and dispatch costs. According to Resolution 14 of the Georgian National Energy Regulatory Commission (GNERC) of 15 August 2003, the weight-average electricity generation tariff is set at 2.667 Tetri/kWh (1.40 USC/kWh), and the weight-average electricity transmission and dispatch tariff is set at 1.61 Tetri/kWh (0.84 USC/kWh). Consequently, benefits generated by the DFES will equal 2.24 USC/kWh.

Other benefits derived from biogas are reduced GHG emissions. Based on the energy balance data for 2001 (amount of electricity generated by hydro power plants (HPPs), by thermal power plants (TPPs), amount of fuel combusted in TPPs) and the future share of HPPs in total energy generation, the carbon emission factor was calculated for Georgia’s electricity system. On average, the generation of 1 kWh of electricity is

43 Source: ICF Consulting. Carbon Sequestration through Afforestation and Reforestation in Georgia. 2001. 44 Project developed by the National Agency on Climate Change.

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related to 198 g of CO2 emissions or to 198 tCO2/GWh (for more information, see Section 14 of this report). The world price for a tonne of CO2 reduced at present equals USD 5 (or USD 18/t C), which means that 1 kWh of electricity produced by the projects implemented under DFES would generate an additional 5 * 198 / 1 000 000 = 0.1 USC. Taking into account the above calculations, the electricity produced by projects implemented under DFES would generate 2.24 + 0.1 = 2.34 USC/kWh. For the sake of simplicity, it was assumed that O&M costs remain constant during the lifetime of the mesophilic and thermophilic biogas reactor projects. Tables 9-10 present the input data and the results of the economic calculations.

Table 9. Input Data Case 1 - Biogas Replaces Wood Client: OECD/DFES Model Project Country: Georgia Mesophilic Thermophilic Currency: USD (2004) Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Annual biogas production, m3 657 986 1 205 4 380 8 760 13 140 Annual heat production, MWh 4.1 6.2 7.5 27.4 54.8 82.1 Annual heat production, GJ 15 22 27 99 197 296 Efficiency of gas stoves 80% 80% 80% 80% 80% 80% Efficiency of wood stoves 60% 60% 60% 60% 60% 60% Annual amount of wood replaced by biogas (w/o different efficiencies), m3

1.97

2.95

3.61

13.12

26.25

39.37

Annual amount of wood replaced by biogas, m3 2.62 3.94 4.81 17.50 34.99 52.49 Price of wood due to afforestation/reforestation, USD/m3 5.32 5.32 5.32 5.32 5.32 5.32 Annual benefit (price of afforestation/reforestation), USD 14 21 26 93 186 279 Annual GHG reduction, tCO2 5 8 10 36 72 108 Income due to GHG reduction, USD/tCO2 5 5 5 5 5 5 Annual income due to GHG reduction, USD 27 41 50 180 360 540 Total annual benefit, USD 41 61 75 273 546 819 Increase of income, % 2% 2% 2% 2% 2% 2% Capital (investment) costs, USD 900 720 720 3 600 2 700 2 340 Operation and maintenance costs, USD 9 7 7 72 54 47 Case 2 - Biogas Replaces Electricity Client: OECD/DFES Model Project Country: Georgia Mesophilic Thermophilic Currency: USD (2004) Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Annual biogas production, m3 657 986 1 205 4 380 8 760 13 140 Annual heat production, MWh 4.1 6.2 7.5 27.4 54.8 82.1 Efficiency of gas generators 35% 35% 35% 35% 35% 35% Annual amount of electricity replaced by biogas, MWh 1.4 2.2 2.6 9.6 19.2 28.7 Electricity generation, transmission and dispatch tariff USD/kWh

0.0224

0.0224

0.0224

0.0224

0.0224

0.0224

Electricity generation emission factor, tCO2/GWh 198 198 198 198 198 198 Income due to GHG reduction, USD/tCO2 5 5 5 5 5 5 Income generated by 1 kWh of electricity produced by DFES project, which replaces otherwise produced energy, USD/kWh

0.0010

0.0010

0.0010

0.0010

0.0010

0.0010 Total income generated by 1 kWh of electricity produced by DFES project, USD/kWh

0.0234

0.0234

0.0234

0.0234

0.0234

0.0234

Total annual benefit, USD 96 144 176 640 1,281 1,921 Increase of income, % 0% 0% 0% 0% 0% 0% Capital cost of bioreactor 900 720 720 3 600 2 700 2 340 Cost of gas generator 200 250 300 500 700 1 000 Total capital costs, USD 1 100 970 1 020 4 100 3 400 3 340 Operation and maintenance costs, USD 11 10 10 82 68 67

Source: Own estimates.

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Table 10. Results of Economic Calculations

Model Project

1

Model Project

2

Model Project

3

Model Project

4

Model Project

5

Model Project

6 Case 1 - Biogas Replaces Wood

NPV, USD -603 -360 -301 -2 085 -100 1 396 ERR 1% 8% 10% 5% 20% 35% BCR 0.20 0.37 0.45 0.33 0.87 1.50

RNPV 0.33 0.50 0.58 0.42 0.96 1.60

Payback, years 22 12 10 15 6 3

Case 2 - Biogas Replaces Electricity NPV, USD -577 -279 -195 -1 210 1 922 4 473

ERR 6% 13% 16% 13% 36% 56% BCR 0.34 0.58 0.67 0.61 1.47 2.24

RNPV 0.48 0.71 0.81 0.70 1.57 2.34

Payback, years 13 8 7 8 3 2 Note: NPV – Net present value;

ERR – Economic rate of return; BCR – Benefit-cost ratio; RNPV – Ratio of NPV (= NPV/(NPV + Investment).

Projects were assumed to be economically feasible if the NPV is positive, the IRR ≥ 20% and show a payback period of ≤ 7 years. Under these conditions, thermophilic projects of improved efficiency and decreased costs are economically feasible. However, it should be noted that a number of social benefits difficult to monetise have not been included in this analysis which actually does not allow to present the full picture of all benefits that could be obtained through such projects.

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5. FINANCIAL VIABILITY OF BIOGAS PRODUCTION

The evaluation of the financial viability of biogas reactors uses a discount rate of 21% and a lifetime of 25 years. The analysis includes capital and O&M costs and revenues, but not taxes and loan service. The discount rate for people investing in biogas is based on the longest Treasury bill on the market (16%), which also matches the rate at which banks lend for a period of 5 years to buy property and other capital assets. The additional 5% captures the risk premium set by users of biogas reactors. The annual income generated from biogas projects is the amount of money people save by no longer having to buy wood or electricity to meet their energy needs. The price of wood is estimated at USD 15/m3, and the current electricity tariff for customers in rural areas is 8.6 Tetri/kWh or 4.5 USC/kWh.

The financial calculations assume that 20% of investments would be the responsibility of farmers (co-financing).45 The remaining 80% would be covered by a combination of grants and loans. Tables 11a and 11b below present calculations for grants, with their shares of the total DFES contribution increasing from 0 to 10%, 20%, 30%, 40% and 50%.

Table 11-a. Financial Calculations – Case 1 Share of Farmers = 20%; Interest on Loan = 6%; Payback Period = 7 years

Case 1. Biogas Replaces Wood Model 1 Model 2 Model 3 Model 4 Model 5 Model 6

No Grant; Loan 80% NPV, USD -515 -280 -219 -1 731 253 1 786

IRR 4% 8% 1% 26% 80%BCR 0.26 0.50 0.61 0.42 1.11 1.93

RNPV 0.28 0.51 0.62 0.40 1.12 1.95

Grant 10%; Loan 70% NPV, USD -456 -232 -171 -1 492 432 1 941

IRR 6% 10% 2% 31% 89%

BCR 0.29 0.55 0.67 0.45 1.21 2.09

RNPV 0.28 0.54 0.66 0.41 1.23 2.18

Grant 20%; Loan 60% NPV, USD -396 -185 -123 -1 254 611 2 096

IRR 8% 12% 3% 36% 99%

BCR 0.32 0.60 0.73 0.50 1.33 2.29

RNPV 0.27 0.57 0.71 0.42 1.38 2.49

45 For comparison purposes, the World Bank project “Reduction of Pollution from the Agricultural Sector” had 80% of biogas reactor costs covered by a GEF grant and 20% financed by farmers (cash, building materials, manpower).

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Grant 30%; Loan 50%

NPV, USD -336 -137 -76 -1 015 790 2 251IRR -0.3% 10% 15% 5% 43% 108%BCR 0.35 0.67 0.82 0.55 1.47 2.54

RNPV 0.25 0.62 0.79 0.44 1.58 2.92

Grant 40%; Loan 40%

NPV, USD -277 -89 -28 -777 968 2 406

IRR 1.4% 13% 18% 7% 51% 118%

BCR 0.40 0.76 0.92 0.61 1.64 2.84

RNPV 0.23 0.69 0.90 0.46 1.90 3.57

Grant 50%; Loan 30%

NPV, USD -217 -42 20 -538 1 147 2 561

IRR 3.6% 17% 23% 10% 59% 128%

BCR 0.46 0.87 1.06 0.70 1.86 3.22

RNPV 0.20 0.81 1.09 0.50 2.42 4.65

Grant 60%; Loan 20%

NPV, USD -158 6 68 -300 1 326 2 716

IRR 6.5% 22% 29% 14% 68% 138%

BCR 0.54 1.02 1.25 0.80 2.15 3.72

RNPV 0.12 1.04 1.47 0.58 3.46 6.80

Grant 70%; Loan 10%

NPV, USD -98 54 115 -61 1 505 2 871

IRR 10.6% 28% 37% 19% 78% 148%

BCR 0.65 1.24 1.51 0.95 2.55 4.40

RNPV -0.09 1.75 2.60 0.83 6.57 13.27

Grant 80%; Loan 00%

NPV, USD -38 102 163 177 1 684 3 026

IRR 16.3% 36% 45% 26% 87% 158%

BCR 0.83 1.57 1.92 1.17 3.12 5.39

RNPV Note: NPV – Net present value; IRR – Internal rate of return; BCR – Benefit-cost ratio; RNPV – Rate of NPV.

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Table 11-b. Financial Calculations – Case 2 Share of Farmers = 20%; Interest on Loan = 6%; Payback Period = 7 years

Case 1. Biogas Replaces Wood Model 1 Model 2 Model 3 Model 4 Model 5 Model 6

No grant; Loan 80% NPV, USD -551 -299 -234 -1 353 1 250 3 324

IRR 8% 11% 7% 45% 103%BCR 0.36 0.60 0.70 0.60 1.45 2.21

RNPV 0.37 0.61 0.71 0.59 1.46 2.24

Grant 10%; Loan 70% NPV, USD -478 -235 -167 -1 082 1 475 3 546

IRR 0.8% 9% 13% 8% 52% 113%

BCR 0.39 0.66 0.77 0.65 1.57 2.40

RNPV 0.38 0.65 0.77 0.62 1.62 2.52

Grant 20%; Loan 60% NPV, USD -405 -171 -99 -810 1 700 3 767

IRR 2.2% 12% 16% 11% 60% 123%

BCR 0.43 0.73 0.85 0.71 1.72 2.63

RNPV 0.39 0.71 0.84 0.67 1.83 2.88

Grant 30%; Loan 50%

NPV, USD -332 -107 -32 -539 1 925 3 988IRR 3.9% 14% 19% 13% 68% 132%BCR 0.48 0.81 0.95 0.79 1.91 2.91

RNPV 0.40 0.78 0.94 0.74 2.13 3.39

Grant 40%; Loan 40% NPV, USD -259 -42 36 -267 2 151 4 209

IRR 6.1% 18% 23% 17% 77% 142%

BCR 0.54 0.92 1.07 0.88 2.13 3.25

RNPV 0.41 0.89 1.09 0.84 2.58 4.15

Grant 50%; Loan 30%

NPV, USD -187 22 103 4 2 376 4 431

IRR 8.8% 23% 29% 21% 87% 152%

BCR 0.62 1.05 1.23 1.00 2.42 3.69

RNPV 0.43 1.08 1.34 1.00 3.33 5.42

Grant 60%; Loan 20%

NPV, USD -114 86 171 276 2 601 4 652

IRR 12.5% 29% 36% 27% 96% 162%

BCR 0.73 1.23 1.44 1.16 2.79 4.26

RNPV 0.48 1.44 1.84 1.34 4.82 7.96

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Grant 70%; Loan 10%

NPV, USD -41 150 238 547 2 826 4 873

IRR 17.5% 36% 44% 34% 106% 173%

BCR 0.88 1.49 1.75 1.37 3.30 5.04

RNPV 0.63 2.55 3.34 2.34 9.31 15.59

Grant 80%; Loan 00%

NPV, USD 32 215 306 819 3 051 5 094

IRR 24.2% 45% 53% 42% 116% 183%

BCR 1.12 1.89 2.22 1.68 4.05 6.18

RNPV Note: NPV – Net present value; IRR – Internal rate of return; BCR – Benefit-cost ratio; RNPV – Rate of NPV. Table 12 shows biogas projects that have a positive NPV and an IRR of at least 21%.

Table 12. Summary Results – Projects with Positive NPV and IRR of at Least 21%

Share in Financing Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Case 1. Biogas Replaces Wood

Owners 20% 20% 20% 20% 20% 20%

Grant 80% 68% 60% 73% No grant No grant Loan 0% 12% 20% 7% 80% 80%

Case 2. Biogas Replaces Electricity Owners 20% 20% 20% 20% 20% 20%

Grant 55% 13% No grant 13% No grant No grant Loan 25% 67% 80% 67% 80% 80%

The marginal (minimum) values of the grant share that ensures an IRR of 21% for model projects 1 and 4 equal 80% and 73% respectively if biogas is used for heat production, and 55% and 13% if biogas is used for electricity production.

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6. SENSITIVITY ANALYSIS

This section provides a sensitivity analysis for model projects 1 and 4, which show an IRR of at least 15%. The sensitivity analysis evaluates the impact on IRR of changes in capital costs, annual O&M costs, the grant share, the loan interest and payback period. The simulations capture deviations from plus-minus 40% in an incremental step of 10%. The sensitivity analysis shows that IRR sharply responds to changes in capital costs. Therefore, further development of technologies and a subsequent decrease of costs have a crucial importance. For mesophilic bioreactors, the share of the grant component in total investment is also important. As for the other parameters, their impact is relatively minor. This indicates that in evaluating project proposals, attention should be focused on ensuring that the estimation of capital costs are properly done.

Figures 3 and 4 show the results of Tables 13 and 14.

Table 13. Sensitivity Analysis – Changes in Absolute Values of IRR IRR after Changes in Variable Model Project Changes of

Parameters Capital Costs Annual O&M Costs

Share of Grant

Loan Interest

Payback Period

-40% 42% 23% 12% 22% 20% -30% 34% 22% 14% 22% 21% -20% 29% 22% 16% 22% 20% -10% 24% 21% 18% 21% 21% 0% 21% 21% 21% 21% 21%

10% 18% 21% 24% 21% 22% 20% 16% 20% 28% 21% 22% 30% 14% 20% 32% 20% 22%

1

40% 13% 20% 36% 20% 23% -40% 52% 23% 19% 23% 19% -30% 39% 23% 20% 23% 21% -20% 31% 22% 20% 22% 20% -10% 25% 22% 21% 21% 21% 0% 21% 21% 21% 21% 21%

10% 18% 20% 21% 21% 22% 20% 15% 20% 22% 20% 23% 30% 13% 19% 23% 20% 23%

4

40% 12% 19% 23% 19% 24%

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Table 14. Sensitivity Analysis – Deviations from a Base IRR of 15% Relative Changes of IRR after Changes in Variable Model Project Changes of

Parameters Capital Costs Annual O&M Costs

Share of Grant

Loan Interest Payback Period

-40% 102% 7% -42% 5% -6% -30% 63% 5% -34% 3% -1% -20% 36% 3% -24% 2% -3% -10% 16% 1% -13% 1% -1% 0% 0% 0% 0% 0% 0%

10% -13% -2% 15% -1% 3% 20% -23% -4% 32% -2% 4% 30% -31% -6% 51% -4% 5%

1

40% -39% -7% 72% -5% 7% -40% 147% 10% -9% 10% -10% -30% 87% 8% -7% 7% -2% -20% 47% 5% -5% 4% -5% -10% 20% 2% -2% 2% -2% 0% 0% 0% 0% 0% 0%

10% -15% -3% 2% -2% 6% 20% -27% -5% 4% -5% 8% 30% -36% -8% 7% -7% 10%

4

40% -44% -10% 10% -9% 15%

Figure 3. Changes of IRR due to Changes of Base Parameters for Model Project 1

Model project 1

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

-40% -30% -20% -10% 10% 20% 30% 40%

Changes of base parameters

Ch

ang

es o

f IR

R Capital costs

O & M costs

Share of grant

Interest of loan

Payback period

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Figure 4. Changes of IRR due to Changes of Base Parameters for Model Project 4

Model project 4

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

-40% -30% -20% -10% 10% 20% 30% 40%

Changes of base parameters

Ch

ang

es o

f IR

R Capital costs

O & M costs

Share of grant

Interest of loan

Payback period

7. MARKET POTENTIAL OF BIOGAS REACTORS

The results of the financial calculations show that at present at least 50% of capital costs should be covered by a grant component. Later on, if technology improvements result in increased biogas productivity and a reduction of capital costs, then the grant component could be reduced and even excluded by 2010-2012. In spite of the great willingness of farmers to use biogas reactors, their low capacity to afford them will significantly decrease the scale of biogas development in Georgia. All interviewed farmers expressed their readiness to allocate required resources as an equity share. However, it is difficult to estimate how many farmers will be able to cover their part of costs, even with a grant component. Unfortunately, there are no exact statistical data on population income by regions. Available data are presented in Table 15.

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Table 15. Average Monthly Income and Expenditures per Household by Urban and Rural Areas, GEL

Urban Areas

Rural Areas

Urban Areas

Rural Areas

2001 2002 Income total 170.3 177.1 200.5 252.7 Of which: Contractual employment 79.6 23.9 90.2 27.7 Self-employment 33.1 14.9 42.1 18.3 Sales of agricultural products 2.8 41.3 3.6 56.2 Income from asset holdings (lease of property and interest income) 2.5 0.5 1.4 0.6 Pension, stipends, family allowances, benefits 12.6 12.0 10.4 5.5 Remittances from abroad 10.8 6.0 14.1 7.1 Remittances from relatives 12.9 6.1 16.0 7.8 Non-cash income 16.0 72.4 22.7 129.5 Total consumption expenditure 275.0 277.1 289.0 292.3 Of which: Food alcohol, tobacco 131.6 79.9 136.9 87.1 Clothing and footwear 13.8 10.4 14.0 10.7 Household items 29.9 21.0 8.0 7.1 Health care 14.0 8.8 18.5 12.6 Fuel and electricity 19.8 14.1 24.8 14.9 Transportation 17.4 7.0 32.5 18.3 Education and recreation 10.7 3.7 18.8 7.3 Other cash expenditure on consumption 12.1 6.0 13.0 4.8 Other expenditure - total 25.7 28.8 50.0 50.2 Consumption in kind 25.7 126.3 22.6 129.5 Total cash expenditure 274.9 179.7 316.4 213.0 Total expenditure 300.6 305.9 339.0 342.4

Source: State Department of Statistics. Table 15 shows that expenditures of rural households exceeded their incomes in 2002. The 2004 level of income is expected to be higher due to the higher prices of agricultural products, but this level will still not allow the majority of households to invest in biogas reactors. However, the environmental policy of the new government will lead to a decrease in cutting wood and a subsequent increase in wood prices. This fact, along with biogas awareness campaigns and other programmes (including DFES), is likely to increase interest in biogas development.

Another option, which can promote loan repayment, is the establishment of community-based organisations (CBOs). CBOs have already been established in communities covered by the Community Development Component of the Georgian Energy Security Initiative (GESI) in order to implement mini hydropower projects, including payment collection. Moreover, Bioenergia has developed a programme that includes the establishment of CBOs, which will not only construct bioreactors, but also collect agriculture products from farmers (loan recipients), sell these products, and re-pay loans.

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8. CAPITAL NEEDS FOR THE ENTIRE PROJECT PIPELINE

8.1. Capital Cost for Mesophilic Bioreactors

The cost of mesophilic reactors is in the range of USD 720 - 900. DFES could support the installation of 50-100 biogas units in 3 regions of Georgia per year (western, eastern and southern Georgia). Under this assumption, the annual capital costs would amount to USD 108 000 - 216 000.

8.2. Capital Cost for Thermophilic Bioreactors

The cost of thermophilic reactors is in the range of USD 3 340 - 4 100. Annually, 15 - 20 bioreactors could be constructed with DFES support. Under this assumption, the annual capital costs would amount to USD 50 000 - 82 000.

9. RISKS AND RISK MITIGATION MEASURES

The major risks identified are of technical, infrastructure and financial nature. These include: Technical Risks

• Low efficiency (lower than expected) of bioreactors, even if technical requirements are met; and

• Low quality of construction, especially when farmers construct bioreactors themselves. These risks can be mitigated by ensuring that appropriate technologies are supported in different regions of Georgia and by providing training and technical assistance to farmers. Infrastructure Risks

• Lack of appliances for biogas (gas stoves, gas generators) would limit potential benefits; and

• Thermophilic bioreactors may produce more biogas than needed by the owner and, if infrastructure is weak and biogas demand is low, then this would not allow biogas use on a full scale.

Financial Risks Due to their poor financial situation, farmers in some regions may not be able to provide even the required 20% of the total cost. For the same reason, it might be difficult for farmers to repay loans obtained through the DFES facility. In this case, either the co-financing conditions should be relaxed or the application for DFES resources rejected.

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10. ESTIMATION OF GREENHOUSE GASES (GHG) ABATEMENT POTENTIAL

In order to calculate the net GHG reductions associated with DFES, this section presents a scenario without the DFES programme (the "baseline") and one with it (the "alternative"). The baseline scenario includes emissions from manure as well as emissions from existing fuel (e.g. wood). The alternative case includes the emission from biogas.

Table 16. Parameters of Biogas, Methane and Wood Methane

Content in Biogas

Methane Density kg/m3

Methane Global

Warming Potential in

CO2

Equivalent

Heat Content of Biogas MJ /m3

Biogas Emission

Factor t C/TJ

Heat Content of Wood GJ/t

Wood Density,

t/m3

Wood Emission

Factor t C/TJ

50% 0.710 21 22.500 30.6 13.198 0.569 29.9 Source: UNDP. Our estimates of GHG reductions are based on Table 16 and on the data presented in Table 8. It has been assumed that DFES would support 700 mesophilic (model 2) and 200 thermophilic (model 5) reactors. The calculations of the GHG emission reductions are presented in Table 17.

Table 17. GHG Emission Reductions Potential Annual Emissions in Baseline Case Model

Project Methane Emissions due to Anaerobic

Digesting (t CO2 Equivalent)

Emissions due to Wood

Combustion (t CO2)

Annual Emissions in Alternative Case

(t CO2)

Annual GHG

Reduction (t CO2)

GHG Reductions in

25 Years (t CO2)

2 7.347 2.488 3.241 8.1 203 4 65.306 22.115 28.812 72.0 1 800

Total 501 769 Source: UNDP. As Table 17 shows, the total GHG reduction for a period of 25 years would be 501 769 tonnes.

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11. REFERENCES

1. Bitsadze, A. (2001), Recommendations for Construction of Biogas Installations at Small Farms (in Georgian). Energy Efficiency Centre of Georgia, Tbilisi.

2. Government of Georgia (2003), Economic Development and Poverty Eradication Program of

Georgia. Government of Georgia, Tbilisi. 3. ICF Consulting. (2001), Carbon Sequestration through Afforestation and Reforestation in

Georgia. IFC, Washington. 4. Janelidze, P. (2000), Energy Demand Modelling in Heat and Hot Water Supply Sector. Bulletin No

9 (E), National Agency on Climate Change, Tbilisi. 5. Ministry of Energy (2001), Energy Balance of Georgia, Ministry of Energy, Tbilisi. 6. Partskhaladze, G., Chkhaidze, B., Dudauri, T., Chachkhiani, M., Tsiklauri, L. (2002), One-Stage

Small-Scale Biogas Reactor – Easy in Operation and Simple in Service. Georgian Engineering News, No 4, Tbilisi.

7. TACIS (1997), Assessment of Market Potential of Home-Made and Industrial Biogas Equipment

in Georgia. TACIS, Tbilisi. 8. TACIS (1999), Study on Natural Energy Resources in Georgia. TACIS, Tbilisi. 9. TACIS (2004, Q1), Georgian Economic Trends. TACIS, Tbilisi. 10. United Nations Development Programme (UNDP) (1998), Energy Sector in Georgia. UNDP,

Tbilisi.

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MUNICIPAL WASTE MANAGEMENT

140

141

TABLE OF CONTENTS

SYNTHESIS............................................................................................................................................... 143

1. INTRODUCTION .................................................................................................................................. 145

2. DESCRIPTION OF THE MUNICIPAL SOLID WASTE SECTOR..................................................... 146

2.1. Waste Classification and Inventories ............................................................................................... 146 2.2. Legal Framework ............................................................................................................................. 146 2.4. Management of Waste Collection and Disposal Systems ................................................................ 149 2.5. Government Priorities for Municipal Solid Waste........................................................................... 150 2.6. Waste Generation Rates ................................................................................................................... 151 2.7. Waste Composition .......................................................................................................................... 151 2.8. Waste Disposal Sites ........................................................................................................................ 151

3. BENEFITS FROM IMPROVED MUNICIPAL SOLID WASTE MANAGEMENT SYSTEMS ........ 152

4. MODEL PROJECTS FOR MUNICIPAL SOLID WASTE MANAGEMENT..................................... 154

4.1. Introduction ...................................................................................................................................... 154 4.2. Strategies for Improvement of MSWM............................................................................................ 155 4.3. Selected Projects for Improved MSWM .......................................................................................... 156 4.4. Value Added of DFES Investments ................................................................................................. 169

5. RISKS ..................................................................................................................................................... 169

6. ESTIMATED SIZE OF ENTIRE PROJECT PIPELINE....................................................................... 170

7. REFERENCES ....................................................................................................................................... 171

LIST OF TABLES Table 1: Composition of MSW (Tbilisi)..................................................................................................... 151 Table 2: Landfill Fencing and Planting Costs............................................................................................. 158 Table 3: Increase in Fees According to Different Combinations of Grant and Loan (USD)...................... 158 Table 4: Concrete Wall Construction Costs (in USD)................................................................................ 159 Table 5: Increases in Fees for Different Combinations of Grants and Loans (USD) ................................. 160 Table 6: Economic and Financial IRR........................................................................................................ 160 Table 7: System Expansion - Investment Costs (in USD) .......................................................................... 161 Table 8: Annual Operation and Maintenance Costs (in USD).................................................................... 161 Table 9: Calculated Tariffs for Various IRR (in USD Capita/Month) ....................................................... 161 Table 10: Calculated Tariffs for Various IRR (in USD/Capita/Month) ..................................................... 162 Table 11: Estimated Economic IRR and its Comparison with Financial IRR............................................ 162 Table 12: Parameters of the New System of Waste Collection .................................................................. 163 Table 13: Equipment Costs (in USD) ......................................................................................................... 164 Table 14: Operation and Maintenance Costs (USD) .................................................................................. 164 Table 15: Fees for Scenario 1 - (USD/Capita/Month) ................................................................................ 165 Table 16: Estimated Economic and Financial IRR - Scenario 1................................................................. 165

142

Table 17: Fees for Scenario 2 - (USD/Capita/Month) ................................................................................ 165 Table 18: Estimated Economic and Financial IRR - Scenario 2................................................................. 166 Table 19: Equipment Costs for Improved Operation of Landfill (USD).................................................... 166 Table 20: Annual Operation and Maintenance Costs for Improved Operation of Existing Landfill (USD)

............................................................................................................................................................ 166 Table 21: Increase in Fees (in USD/Capita/Month)................................................................................... 167 Table 22: Costs of Closing an Existing Landfill and Opening a New Landfill (in USD) .......................... 168 Table 23: Increase in Fees in USD/Capita/Month (Equity Capital = 20 % of Total Investment) .............. 168 Table 24: Increase in Fees in USD/Capita/Month (Equity Capital = 0) ..................................................... 169 Table 25: Summary of Model Projects for DFES Waste Management Pipeline........................................ 170 Table 26: Estimated Cost of Waste Management Projects for Locations in the Black Sea Coastal Area and

the Kura River Basin (in USD)........................................................................................................... 171

ACRONYMS DFES Debt-for-Environment Swap EC European Community EIA Environmental Impact Assessment EU European Union GDP Gross Domestic Product GEL Georgian Currency Lari MENRP Ministry of Environment and Natural Resources Protection MSW Municipal Solid Waste MSWMS Municipal Solid Waste Management Systems NACE Statistical Classification of Economic Activities in the European Community (from French - Nomenclature générale des activités économiques des Communautés européennes) O&M Operation and Maintenance (costs) SCGD Sanitary Cleansing and Greenery Department (of Poti) SCS Sanitary Cleansing Service (of Rustavi) SDS State Department for Statistics of Georgia SEE State Environmental Examination USAID US Agency for International Development USD US Dollar VAT Value Added Tax WB World Bank

PHYSICAL UNITS ha2 Square hectare km Kilometre m3 Cubic metre

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SYNTHESIS

Per capita waste generation in Georgia is far below that in developed countries, where income and consumption levels are higher. Georgia also produces less municipal solid waste (MSW) per USD 1 000 GDP than other countries because of its undeveloped economy. The largest components of MSW are food waste and mixed paper (paper/cardboard), followed by textiles, metals, wood and glass. Together, these items represent 89% of all waste. The most significant point sources of groundwater contaminants are municipal landfills and industrial waste disposal sites. The primary method of waste disposal in Georgia is landfilling. The soil type and water tables have not always been taken into account when determining the location of landfills. Many landfills lack liners and leachate collection control systems. Groundwater contamination from landfill leachate is of concern at a number of sites. Some legal waste sites have been identified as a serious threat to the environment, for example the one at Poti, which is located right on the bank of the river Rioni without even the most basic precautions to avoid contamination of international water bodies. The most serious problem though remains the illegal disposal of waste. Traditional places are isolated locations along the coast and river margins. The final destination of the substantive amount of waste generated in Georgia is the Black Sea and the Kura River basin. Settlements along the Black Sea coastal area and in the Kura River basin are affected by one or more of the following problems: • No new waste disposal sites are under consideration, in spite of the fact that in many locations current

landfills are either hardly accessible, close to saturation or pose a serious health and environmental risk.

• Landfills are located along rivers or coastal areas. These sites are often flooded as a result of which waste is transported to international water bodies.

• The current status of legal and illegal dumping poses a major health hazard to the population. Pigs and cows often search for food in unfenced landfill sites.

• Solid waste is often dumped illegally. Traditional spots are isolated sites along river courses and the Black Sea coast.

• Little knowledge of, and skills in, modern methods of integrated water management and solid waste disposal techniques are available in the country.

This report explores the feasibility of several model projects for financing from debt-for-environment swaps (DFES). These model projects constitute good examples of affordable remedial actions aimed at decreasing pollution of international water bodies and risks to public health. These model projects include: 1. Fencing of landfills. This type of project aims at ending trespassing and the transportation of garbage

into residential areas and/or international water bodies.

2. Separation of landfills from river courses and coastal waters. The location of a landfill right on the edge of a water body is not unusual in Georgia. This type of project aims at avoiding regular flooding of landfills and the subsequent pollution of international water bodies.

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3. Expansion of existing waste collection systems. Many of the waste collection systems only partially cover urban settlements. It is common to see towns or cities with waste collection systems that leave large sections with no or limited service. This type of project explores the feasibility of partial expansion of existing waste collection systems.

4. New systems of waste collection and disposal. This type of project explores the feasibility and returns of establishing new systems of waste collection and disposal.

5. Upgrading operation of landfills. In general, the operation of landfills in Georgia is very basic. This type of project explores the feasibility of minimum upgrading to ensure the basic operation of a landfill (e.g. distribution and compaction).

6. Closing existing landfills and establishing new ones. There can be cases when separation measures, such as walls (see project 2) would not be sufficient. In other cases, the landfill could have already reached its full capacity and new ones need to be opened.

The report provides an estimation of collection and disposal fees to ensure a financial internal rate of return (IRR) of either 15% or 20%. All model projects are financed through contributions from municipalities/operators (co-financing), grants and soft/moderate loans. The report presents the resulting fees for different combinations of grants and loans. In most cases, on average, fees are considered to be within the payment capacity of the population. This report identifies three main types of risks and rates them as follows: • Technology. Low. The projects do not present sophisticated technologies or operational requirements.

• Payment collection. Medium. It is usually assumed that the population would not pay for waste collection systems. However, there are experiences that show the contrary. The private operator in Rustavi has reached collection rates of 85-93%. Collection rates depend on whether the fee is within the payment capacity of households and, most importantly, on the quality of the service.

• Institutional and regulatory issues. Low to medium. The most important risks comprise (i) regulatory changes and (ii) corruption.

The total size of the project pipeline ranges from USD 2 626 200 to USD 3 646 500. The report estimates that 2 locations would apply for DFES resources every year. This rather low application rate is based on the pessimistic assumption that the requirement for realistic collection and disposal fees will deter some municipalities. Under these assumptions, the period for disbursement has been estimated at a maximum of 5 years. After this period, an impact assessment should be conducted and a re-estimation of future DFES disbursement should be carried out.

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1. INTRODUCTION

Urbanisation and economic development have increased municipal solid waste (MSW) generation worldwide. In the 21st century, the treatment of MSW has become a serious environmental concern and MSW management continues to be an important environmental challenge. It is only recently that Georgia started to devote attention to its solid waste management problems. The current situation is bad, as waste practices have been at best sub-standard for many years. While legal dumpsites exist, waste often does not reach them because of poor collection systems. Even if waste is collected, it still does not always reach legal disposal sites and is instead discarded in scattered, unregulated dumps. The exact number of legal and illegal dumpsites in Georgia is unknown. In addition to the existence of a large number of unregulated dumpsites, industrial, municipal and hazardous wastes are often disposed of together, creating dangerous, toxic conditions because of the mixing of many different solid and liquid wastes. Improper location of disposal sites and the lack of modern engineering design (liners and collection systems for leachate) are also problems that threaten groundwater supplies, a serious issue for those regions depending almost exclusively on groundwater sources. Simple waste management practices, such as covering wastes, weighing garbage, and fences around dumps are not applied. While MSW accounts for only 40% of all waste generated in Georgia, it is spread across a larger area with more point sources than industrial waste. The government has indicated that municipal solid waste management is a priority issue in view of its negative impact on public health. The current system, or the lack of it, is an excellent medium for the transmission of diseases. While some efforts are being made to address the problem of unregulated site dumps, this remains an enormous challenge, given the large number of disposal sites, many of which will reach capacity soon and will need to be closed. The government has made certain progress in terms of developing new waste management legislation to regulate the construction and operation of new landfill sites. A crucial aspect, however, will be the establishment of sustainable sources of funding for the sector. Waste tariffs only cover 30-40% of operating costs, leaving no funds available for capital investment. The shortfall is covered with money from the central or local budgets. Unless measures are taken, problems can only get worse. Waste generation in Georgia will grow, if the Georgian economy continues growing. The composition of waste will also change as incomes increase and people change consumer habits.46 The problem is particularly serious in cities with limited spare capacity in dumpsites.

46 A classical example is the increased use of disposable diapers, which can constitute a considerable percentage of total volume disposed.

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2. DESCRIPTION OF THE MUNICIPAL SOLID WASTE SECTOR

2.1. Waste Classification and Inventories

Currently, there is no accurate inventory system for waste classification in Georgia. Data on amounts of waste generated, waste types, disposal, and utilisation are scarce and scattered among different agencies. The data are neither digitised nor accessible to different users.47 The current waste classification system is based on the Soviet model, which divided waste into five classes according to their level of toxicity. These five classes range from extremely toxic to non-toxic. However, the criteria for the classification of waste types and the definition of “hazardous waste” are sometimes unclear. Currently, Georgia is moving towards the adoption of a new system of data collection and statistical reporting. The transition is being conducted from sector-based to enterprise-based (source-specific) statistics. The State Department for Statistics (SDS) has been charged with this work and is developing a national system of waste classification. The document will have a regulatory status and its application will be mandatory for all users. Under this system, all types of waste (either substances or items) and services related to them will be subject to classification. The source of origin (genesis) and the level of hazard will serve as basic criteria for the classification system. It will cover the whole life cycle of waste management and will be compatible with the National Classification System on Economic Activities, which is in turn based on the European standard NACE.

2.2. Legal Framework

The most important laws on MSW are the following:

• The “Law on Environmental Protection” (1996);

• The “Law on Environmental Permits” (1997);

• The “Law on State Environmental Examination” (1997);

• The “Law on Transit and Import of Wastes into and out of the Territory of Georgia” (1997);

• The “Law on Hazardous Chemical Substances” (1998);

• The “Law on Pesticides and Agrochemicals” (1998); and

• The “Law on Radioactive Safety” (1998). The Law on Environmental Protection sets the framework in the field of environmental and natural resources protection in Georgia and defines the general objectives of environmental protection as well as the principles, guidelines and mechanisms for their implementation. It also defines rights and duties of citizens and authorities. The law requires that industrial facilities conduct integrated pollution control and monitoring, as well as develop emergency response plans. The Laws on “Environmental Permits” and on “State Environmental Examination” regulate the process of environmental impact assessment (EIA), State environmental examination (SEE) and the issuance of environmental permits. The Ministry of Environment and Natural Resources Protection (MENRP) of Georgia grants environmental permits provided the applicant meet environmental standards and requirements.

47 The Department of Land Resources Protection, Wastes and Chemicals Management under the MENRP recently developed a programme for the inventory of obsolete pesticides and contaminated sites but it was abandoned because of the lack of financing.

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The Law on the Transit and Import of Wastes into and out of the Territory of Georgia regulates the movement of “green”, “amber” and “red” wastes through the country. For example, it bans import and transit of hazardous and radioactive wastes in Georgia. The Law on Hazardous Chemical Substances sets the legal basis for chemicals safety management. It requires registration of hazardous chemicals, licensing of new chemicals and keeping a database on chemical registration, use and storage. In addition, the law contains provisions for the issuing of import/export permits of chemical substances. The Ministry of Health and the MENRP are the responsible authorities for the management of chemical substances. The Law on Pesticides and Agrochemicals regulates the import, production, transportation, storage and usage of agrochemicals. Among others, it requires the examination and registration of new agrochemicals, updating of a list of allowed chemicals, development of the state catalogue on agrochemicals and setting-up of the state register on agrochemicals by the Ministry of Agriculture and Food or its subordinated bodies. It has banned pesticides listed as hazardous under the Law on Hazardous Substances. The Law on Radioactive Safety sets the legal framework in the field of nuclear and radioactive safety. It contains provisions for the inventory of radioactive waste and its sources. Specifically, the Nuclear and Radiological Safety Service is responsible for keeping the state register on radioactive waste and its sources, which should include data on existing nuclear and radioactive facilities, quantities of radioactive substances used as feedstock, radioactive substances and waste imported, exported, used or generated, and the locations and technical conditions of their storage and disposal facilities. The owners/operators of nuclear and radioactive facilities are responsible for ensuring that radioactive levels are within legally accepted limits. Along with this, they are responsible for conducting inventories at the source, keeping records on their activities, and annual reporting to the MENRP. The Law on Waste Management has not yet been adopted in Georgia. A draft law is now under consideration by the Georgian Parliament. It aims to promote the gradual introduction of the European Union (EU) standards and requirements in the field of waste management. It regulates the generation, collection, transport, recycling, reuse, disposal, and rendering harmless of municipal and hazardous wastes. The draft law also establishes waste classification and inventory systems. Its three main objectives are: the application and development of clean production processes to reduce the amount of waste generated; the maximisation of the use of waste for the production of secondary materials or energy; and the provision of modern and safe conditions for the proper treatment and disposal of waste. The draft law classifies wastes according to their source of origin and their level of toxicity. Based on the source of origin, there are five types of waste: municipal waste, industrial waste, medical waste, agrochemical waste, and biological waste. The law requires keeping a national waste catalogue, using a six-digit trade code according to EC decision 2000/532/EC.48 The state database on waste should follow the directives of the classification system set in the European Waste Catalogue approved by decision 2000/532/EC in accordance with directives 75/442/EEC and 91/689/EEC. All types of waste listed in the yellow and red lists of the EU directive 259/93/EEC are classified as hazardous. The draft Law on Waste Management does not designate one specific management authority; rather, it requires the establishment of a steering committee under the MENRP for the coordination of waste management activities for all types of waste.

48 Before the rule is adopted, wastes should be identified in accordance with the Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and their Disposal, and EU Directive 259/93/EEC.

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Other regulations and codes The current standards that regulate the design/operation of landfills and waste processing facilities are based on regulations adopted in the 1970s/1980s. These standards are outdated and not always clear. For example, landfill building codes and sanitary standards can be interpreted differently resulting in improperly designed dumpsites, transfer stations and other facilities and unrealistic construction and operation budgets. It is hoped that new guidelines will be introduced soon. Some of them, such as the “environmental passport system”, have already been in force since 1994. 2.3. Institutional Setting Responsibilities for waste management are not always clearly defined and in fact are fragmented. This has led to confusion among different levels of government and waste management firms, duplication of activities and the neglect of others. Several agencies are involved in waste and chemicals management in Georgia, yet there is little co-operation among them. Data collected are seldom shared or exchanged. The MENRP is responsible for developing and implementing national waste management policies, strategies and regulatory documents, as well as for enforcing existing norms and standards for environmentally sound disposal and treatment of industrial and municipal wastes. It is in charge of coordinating the activities of different ministries and local self-governing bodies, issuing permits to large industrial enterprises, collecting payments for waste disposal, issuing licences for the transboundary movement of waste and promoting international co-operation. The Department of Land Resources Protection and Waste Management at the MENRP consists of three divisions, one in charge of land protection, and the other two of waste and chemicals management. The department gathers information on contaminated sites, and on industrial and municipal wastes and chemicals. Its main sources of information on land contamination are local authorities, MENRP labs (land contamination by pollution sources) and Hydromet (the State Department of Hydrometeorology), which provides data on ambient pollution. The department also plays an important role in issuing permits and monitoring enterprises to ensure that they are in compliance with existing regulations. The regional departments of the MENRP collect information on industrial wastes. They use standard questionnaires, which are prepared by the Department of Land Resources Protection and Waste Management, to be filled out by owners/operators of industrial facilities. The local offices of the MENRP, along with municipalities, are the main sources of information on municipal wastes. At present there are no legally binding reporting requirements for waste, and existing data are not entered in computers but stored in paper formats. Municipal and local authorities are responsible for the collection and disposal of MSW and play an important role in establishing and running waste disposal sites and facilities for processing both municipal and industrial waste. The Nuclear and Radiation Safety Service coordinates and carries out an inventory of radiation sources and radioactive waste at former Soviet military bases. It has a staff of 10 people. The Ministry of Economy, Industry and Trade49 is responsible for licensing export and import of industrial waste.

49 Transformed into the Ministry of Economic Development.

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The Ministry of Labor, Health and Social Affairs is responsible for setting and enforcing sanitary-hygiene standards, including soil and food product standards. It is also responsible for setting-up and operating the state register on hazardous substances. The Ministry of Agriculture and Food is responsible for the state inventory of agrochemicals, development of agrochemicals catalogues and approval of the list of permitted agrochemicals. The State Department for Statistics is responsible for defining and operating the national system of classification, including waste classification. The State Department of Hydrometeorology, through the National Center for Environmental Monitoring, is responsible for the regular collection of data on soil contamination in agricultural and industrial areas. While the Center has an analytical laboratory for soil analyses, soil quality monitoring is not currently conducted due to the lack of financial resources.

2.4. Management of Waste Collection and Disposal Systems

Waste collection and disposal systems in Georgia are either state managed or have combined state and private management. The biggest settlements – Tbilisi, Kutaisi, Rustavi and Poti – have a mixed (state and private) management system. On the other hand, Batumi, Zugdidi, Gori, Zestaponi and Kobuleti have the municipality managing waste collection and disposal. Below is a description of the characteristics of the mixed management systems used in the cities of Poti and Rustavi. Poti. The Ministry of Infrastructure of Georgia defines the general technical policy in Georgia for the collection and treatment of solid waste. At the local level, this general policy is fine-tuned by the Environmental Department, which sets the environmental guidelines for the collection, transportation and disposal of solid waste in Poti. The Sanitary Cleaning and Greenery Department (SCGD), which works under the Environmental Department, is responsible for: (1) collection, transport and disposal of solid waste from households and enterprises; (2) cleaning and sweeping of streets and pavements, collection of street waste, and its transport and disposal; (3) exploitation of the landfill site; and (4) management of waste disposal vehicles and equipment. The SCGD of Poti controls the largest part of the city and the landfill site, while the Port of Poti controls the harbour area and some streets around the port, and the firm Fumigator collects the waste from ships. However, this arrangement leaves sections of Poti with no waste disposal service whatsoever. In October 2002, the SCGD of Poti signed an agreement with “Alka Ltd.”, under which this company was to provide services for the streets of Agmashenebeli, Rustaveli, Jugashvili, 9 April, Akaki and Guria, located in the city centre, and for the area surrounding the market as well. This change in the waste collection and disposal system of the area was considered to be appropriate and an improvement, especially because the area has mostly tall buildings and a population density that is higher compared with other areas. Thus, the achievement of desired results was possible here in a cost-effective way from an economic and environmental point of view. From May 2003, this function was transferred to “Poti-Kalakservice Ltd.” set up on the basis of “Alka Ltd.”. The Cleaning Department handles only main streets and squares, where people dispose of their waste in containers placed on the pavement. The trucks collect the waste between 6.30 and 8.00 in the morning, emptying the containers whether they are full, half full or empty. The population of Poti does not have money to pay the Cleaning Department; the Cleaning Department does not have a budget, and the City Council cannot raise the budget, so the population, especially the

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residents of the high-rise buildings near the river, throw their waste over the concrete wall alongside the river. Rustavi. Until 2003, there was only one organisation, the Sanitary Cleaning Service (SCS) of the Rustavi Municipality, that collected waste in Rustavi. The SCS controlled waste disposal of the whole city. In 2003, the municipality signed an agreement with a private company “Avtomobili-2003 Ltd.”, which operates 9 micro districts of the city, where predominantly 9-storey buildings are to be found (in total 1 200 entrances). These buildings are equipped with bins systems. The company also operates one micro district that has mainly 5-storey buildings. The residents of these buildings take out the garbage into the iron bins placed outside their houses. The company was supplied with 12 completely obsolete Soviet-made trucks. The remaining part of the city (approximately 60 000 inhabitants) is still served by the SCS. The operating area includes about 200 entrances with a bin system. The remaining 5-storey buildings have been transferred to the bin system and are supplied with metal containers that have a capacity of 2 m3. Currently, there is sufficient capacity to increase the service, with regard to both the amount of waste collected and the area served. According to SCS information (based on tentative assessments), the total amount of solid waste dumped in the landfill site is about 81 000 m3, which corresponds to a waste generation rate of 0.7 m3/(capita/year). About 75-80% of the waste is dumped, and 20-25% vanishes into the ground and the river. The current estimate of the city’s waste production is about 100 000 - 110 000 m3 (0.87-0,93 m3/capita/year).

2.5. Government Priorities for Municipal Solid Waste

The priorities are as follows:

• Development of comprehensive waste management plans for big cities and regions;

• Creation and introduction of a system of differentiated tariffs to cover waste collection and disposal operations and investment in upgrading waste management infrastructure;

• Development of guidelines and standards for the construction and operation of landfill sites and recycling plants;

• Introduction of waste source separation and collection systems in cities and regions;

• Construction of facilities to manufacture waste containers for MSW collection;

• Design and construction of recycling plants with the objective of an 80% recovery rate of secondary materials, such as metal, glass, paper, plastics, textiles, and organic matter;

• Application of technologies for waste reduction at enterprises;

• Improvement of data collection on waste generation (weight, volume, physical and chemical composition), including recyclable materials; and

• Improvement of the transparency of the tariff collection system and minimisation of corruption in the sector.

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2.6. Waste Generation Rates

In 1989, the population of Georgia numbered about 5.4 million, but decreased to 4.6 million by 2002.50 At present, 52% of the population lives in urban areas, and 48% in rural areas. According to our own estimations, in 2003 the urban population produced a total of about 750 000 tonnes of solid waste. About 590 000 tonnes of this waste are disposed of in municipal disposal sites. The volume of waste generation has changed from year to year, depending on economic performance and the supply of utilities, such as gas, water, sewerage and heating. Per capita waste generation rates are far below those in developed countries where income and consumption levels are higher. In addition to lower per capita waste generation rates, Georgia also produces less MSW per USD 1 000 GDP than other countries. This is due to its undeveloped economy and the low level of consumption.

2.7. Waste Composition

Accurate data on the composition of MSW in Georgian cities are not available, except for data from the World Bank’s “Tbilisi Solid Waste Management Project”. Based on these data, the largest components of MSW are food waste and mixed paper (paper/cardboard), followed by textiles, metals, wood and glass. Together, these items represent 89% of all waste. Table 1 presents the composition of MSW in Tbilisi.

Table 1: Composition of MSW (Tbilisi) Component Share, %

Food 39 Mixed Paper 34 Metals 5 Textiles 5 Glass 3 Wood 3 Plastics 2 Leather 1 Stones 1 Other 7

Source: World Bank.

2.8. Waste Disposal Sites

The primary method of waste disposal in Georgia is landfilling. The soil type and water tables were not always taken into account when determining the location of landfills. Many landfills lack liners and leachate collection control systems. Groundwater contamination from landfill leachate is of concern at a number of sites. Some waste sites have been identified as posing a serious threat to the environment, for example, the one at Poti, which is located right on the bank of the river Rioni without even the most basic precautions to avoid contamination of international water bodies. In addition to being poorly designed from an engineering perspective, many old landfill sites do not operate in accordance with basic waste management standards. As a result of the lack of machinery, waste is not compacted, covered or insulated. There is no removal of leachate from wells and water sampling. Waste is not weighed when it arrives at dumpsites, nor is it categorised according to type (e.g. industrial, municipal, hazardous).

50 Migration due to economic crisis and civil war accounts for this decrease.

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3. BENEFITS FROM IMPROVED MUNICIPAL SOLID WASTE MANAGEMENT SYSTEMS

What follows is a description of the main national and international benefits that could be achieved from improving municipal solid waste management systems (MSWMS) in Georgia. Decreased pollution of international water bodies The final destination of a large part of waste is the Black Sea and the Kura River basin. First, landfills are sometimes built on the edge of watercourses. Storms and changes in the water level periodically wash out significant amounts of waste. In addition, one of the most serious problems is the illegal disposal of waste. Traditional places for this practice are isolated locations along the coast and river margins.

Figure 1. Pollution of International Waters - Landfill in the City of Poti

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Decreased groundwater contamination The most significant point sources of groundwater contaminants are municipal landfills and industrial waste disposal sites. When either of these is found in or near sand and gravel aquifers, the potential for widespread contamination is the greatest. Some landfills have been] located over aquifers used as sources of drinking water and within 1 km of a water supply well. Heavy metals and toxic organic chemicals that originate in the decomposition of municipal waste can contaminate groundwater in the vicinity of landfills.51 Surface water and rainwater leach soluble hazardous chemicals that penetrate into the groundwater used by the local population. Contaminants that may enter groundwater also include bacteria, viruses, detergents, and household cleaning materials. These can create serious contamination problems. It has often been assumed that contaminants left on or under the ground will stay there. This is not always the case. Groundwater often spreads the effects of dumps and spills far beyond the site of the original contamination. Groundwater contamination is extremely difficult, and sometimes impossible, to clean up. In Georgia, pollution of surface water by groundwater is probably at least as serious as the contamination of groundwater supplies. Preventing contamination in the first place is by far the most practical solution to the problem. This can be accomplished by the adoption of effective waste collection and disposal systems.

51 Landfills pollutants of concern: 1,4-Dioxane, 1234678-HPCDD, 2-Butanone, 2-Propanone, 4-Methyl-2-Pentanone, Alpha-Terpineol, Ammonia as Nitrogen, Arsenic, Barium, Benzoic Acid, Boron, Chromium, Chromium (Hexavalent), Dichlorprop, Disulfoton, Hexanoic Acid, MCPA, MCPP, Methylene Chloride, Molybdenum, N, N-Dimethylformamide, O-Cresol, OCDD, P-Cresol, Phenol, Silicon, Strontium, Titanium, Toluene, Tripropyleneglycol Methyl Ether, Zinc.

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Pests Flies and mosquitoes are best controlled by daily covering of the solid waste along with the elimination of any open standing water. Rats can be a problem at open dumps but the use of covers, which ensures that all food waste is buried, eliminates rat problems at sanitary landfills. Scavenging Scavenging is the uncontrolled picking of waste to recover useful items, as contrasted to salvaging, which is the controlled separation of recoverable items. While recycling may be desirable, scavenging in landfills is not. People, doing this, have been injured, sometimes fatally, while searching the waste. It is also a serious health risk issue for those involved in the activity and for those living in the proximity. Aesthetics Making an urban site pleasant to look at, while largely cosmetic, is not a frivolous benefit. Aesthetics means proper waste collection in urban settlements and litter control at dumpsites. In turn, the change in aesthetics for the better is an important incentive for the population to improve their own waste disposal practices (e.g. no littering) and payment collection rates. Fires and odours Odours are best controlled by a daily cover as well as by adequate compaction. Daily covers also form cells that reduce the ability of fires to spread throughout a landfill. Reduced emission of greenhouse gases The management of municipal solid waste presents many opportunities for greenhouse gas emission reductions. Source reduction and recycling can reduce emissions at the manufacturing stage, increase forest carbon storage, and avoid landfill methane emissions. Combustion of waste allows energy recovery to displace fossil fuel-generated electricity from utilities. Diverting organic materials from landfills also reduces methane emissions.

4. MODEL PROJECTS FOR MUNICIPAL SOLID WASTE MANAGEMENT

This report presents several model projects. These model projects constitute good examples of affordable remedial actions aimed at decreasing pollution of international water bodies and risks to public health. All data used in the economic and financial analysis of the model projects come from the city of Poti (40 000 inhabitants). This is due to the fact that Poti is a medium-size town that best exemplifies common problems affecting MSWMS in Georgia. All model projects can be easily scaled up or down according to the particular characteristics of other communities. This will be done later in the report to present the estimated size of the project pipeline.

4.1. Introduction

Poti presents problems that are common to small and medium size settlements along the coastal Black Sea area and the Kura River basin. Specifically:

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• No new waste disposal site is under consideration, despite the fact that the present location could have not been worse (on the edge of the River Rioni).

• Because the river Rioni regularly floods the landfill site, a significant amount of solid waste ends up in the Black Sea. Garbage can be seen everywhere along the shore, as far as many kilometres south of Poti.

• The present practice of legal and illegal dumping is a major health hazard for the population and violates the Black Sea Convention, which the Georgian Government is part of. Pigs and cows regularly search for food in the landfill site, which is not fenced off.

• Solid waste is dumped illegally in various parts of the town, whenever the “official” site is not accessible for trucks. Illegal dumping also occurs along the river and the Black Sea coast.

• Little knowledge of, and skills in, modern methods of integrated water management, as well as solid waste disposal techniques are available in the city.

4.2. Strategies for Improvement of MSWM

The following are general strategies that apply to all MSWM model projects in all locations: Improperly located landfills A major problem in cities such as Poti and Batumi is the location of landfills right on the edge of international water bodies. These landfills lack separation walls and lining, and constitute a major point of pollution as well as a health risk problem. The strategy for dealing with improperly located landfill sites can comprise (i) protection measures, such as the construction of separating walls, and (ii) closing the landfill and establishing a new one. Whether protection measures or the closure of the landfill is the chosen option will depend on issues of groundwater contamination with regard to the opportunity cost of resources invested in closing the existing landfill and the opening of a new one. Illegal dumpsites In the short term, an important objective is to tackle the problem of illegal dumpsites, especially those close to watercourses and the coastal belt. Before proper landfills can be made operational, an intermediate alternative is to place “skip” containers with a volume of 5 m3 in those locations where illegal dumping is known to take place. At least once a week, a collection truck would pick up these containers and transport them to the landfill site. These temporarily accepted “illegal” dumpsites would be removed after about one year and fixed collection points would be established instead. An alternative to these containers is refuse bags, possibly in combination with wheeled bins (the so-called mini-containers). Waste collection at buildings52 The original system of waste disposal in buildings was a central refuse chute. Garbage would fall to the bottom floor where there was a collection room. At present, the lack of maintenance and erratic waste collection have resulted in the saturation or non-operation of many of these systems. In many buildings, people just dispose of garbage outside in the nearest place around. A solution to non-operational refuse chutes is the use of wheeled containers. The preferred alternative would be to put a 1 000 - 1 600 litre container under the refuse chute. For places having a high rate of waste generation, it is also possible to put a 5 m3 “skip” container.

52 This refers to buildings of 5 floors or more.

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The collection of this type of container should be done with the help of a lifting system similar to the one on current collection trucks. Depending on the lifting capacity, it would be possible to update the lifting system and collect containers having a volume of 120, 240 and maybe 360 litres. This is a short-term solution. For the longer term, it is advisable to invest in collection trucks that have crushing and compacting capacity. Private households Collecting waste from buildings and a cluster of buildings is relatively simple and cost-effective. Most urban settlements, however, have large sections of private houses. This poses problems as it increases the cost of collection. The solution is to invest in collection trucks with mini container lifting systems and to set up regular routes along the households. Mini containers are plastic or steel containers having a volume of 120, 240 or 360 litres, two little wheels and a cover on top. A mini container costs about USD 50 a piece and a collection vehicle, USD 100 000. For a town of the type of Poti, this would mean an investment of approximately USD 150 000 (3 000 containers) and USD 200 000 (2 trucks). This results in a total investment of USD 350 000. Paper and cardboard To introduce a “paper route” and have the refuse collection truck collect all paper at the house holdings, enterprises, schools etc. on a monthly basis, will be a solution. Waste from commercial sources Placing containers at enterprises and charging them a differentiated fee for collection, transport and disposal can help.

Improving tariff and collection rates Financial sustainability is at the heart of a viable MSWMS. Poti, with 47 000 inhabitants, generates about 58 000 m3 of garbage per year.53 The Municipal Authority is supposed to charge fees and cover the total costs of the waste disposal system. However, a significant subsidy is involved (80% of costs). The tariff for domestic collections is GEL 3.2/m3 (USD 1.6/m3) or GEL 0.2/capita/month (USD 0.1/capita/month). The tariff for collection and disposal from commercial organisations is GEL 4.2/m3 (USD 2.1/m3). These rates do not provide for sufficient revenues. It is crucial that municipalities charge fees that cover the operational and investment costs of MSWM. This is not impossible to do. The experience from Rustavi shows that when there is proper collection, the population is willing to pay increased rates. Some sections of Rustavi that are under private MSW management have collection rates of between 85-93%.

4.3. Selected Projects for Improved MSWM

This section will present different project components for improved MSWM in Georgia. Below is a description of the characteristics and assumptions that are common to these projects. • Before implementation of project components begin, DFES resources would be invested in the

preparation of an action plan for MSWM for the municipality that applies for support. The action plan

53 However, the municipality collects just 35 000 m3 or 60 % of the total amount of solid waste generated. The remainder is dumped illegally in the river, the Black Sea or elsewhere.

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would cover a period of 15 years. The document would fine-tune the measures to be taken and the sources of financing.

• International prices for equipment were used for the economic and financial calculations. Border prices have been estimated, excluding taxes and import duties. Local labour costs are used for the analysis.

• The financing scheme comprises a combination of grant and soft or moderate loan to the city municipality, or through the municipality to the private company working under agreement with the municipality. The report explores several combinations of grant and loan shares for each type of project.

• All projects presented, including capital and labour needs, come from Poti. This allows us to provide concrete examples of the economic and financial viability of the projects.

For the economic analysis, the following assumptions apply: • Loan interest rate recovery starts in year zero (the year before the new system is put into operation);

• Annually, the loan interest rate is covered from the average value of that year and the previous year corresponding residual debt; and

• 7.5% has been taken as a depreciation rate.

All current taxes in force in Georgia are taken into account and comprise: • Value added tax (VAT) – 20% of taxable turnover;

• Tax on property – 1% of book value;

• Tax on economic activities (enterprise tax) – at most 1% of pre-VAT revenues; and

• Tax on profit - 20 % of taxable profit.

Fees and the composition of the share of grants and loans in financing have been set to attain financial returns of 15 or 20 %. It is also assumed that: • The loan is soft, if the repayment period = 5 years and the interest rate = 4%.

• The loan is moderate, if the repayment period = 5 years and the interest rate =12%.

Project 1: Fencing of landfills

The existing landfill in Poti, as well as in many other towns in Georgia, is in a very unsatisfactory condition. The territory around the landfill (at a distance of 2-3 km) is covered with trash and plastics. Everywhere there is a strong smell that makes living conditions for nearby residents very unpleasant.

The landfill site is not fenced off, nor does it have a green protection line. Pollutants are transported towards the residential area, causing air pollution and threatening the health of the local population. Pigs and cows can be regularly seen searching for food on the landfill. Fencing of the landfill territory, and creating a green buffer zone separating it from the residential area, would keep the dispersion of garbage and pollutants by wind to a minimum and partially reduce odour. These measures should be considered as a priority action. The buffer between the landfill and the residential area should be at least 50 m wide and, if possible, wider. The costs of landfill fencing and the establishment of a green line are presented in Table 2 below.

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Table 2: Landfill Fencing and Planting Costs

Cost (USD) N Unit Number of Units

Per Unit Total Fencing

1 Fence M 900 2 1 800

2 Iron poles Piece 600 4 2 400

3 Cement Tonne 30 100 3 000

4 Sand and gravel Tonne 100 30 3 000

5 Iron gate Piece 2 750 1 500

6 Wage fund (including taxes) Worker 12 520 6 240

7 Covering and compacting 2 600

Total fencing 20 540 Planting green line

1 Trees 300 3 900

2 Bushes 900 2,5 2 250

3 Transportation 90

4 Wage fund (including taxes) Worker 6 160 960

Total planting 4 200 Total fencing and planting 24 740

Source: Own estimates. These measures could be financed by the local budget of the city, which is an unlikely option for many municipalities, or be added to collection fees. The estimated increases in fees are shown in Table 3. There is the assumption that only 20% of investment would be provided by the municipality and that the share of the DFES grant would vary between 0 and 80%. According to Table 3, the maximum increase in fees with regard to the existing fee would be USD 0.011/capita/month, or up to 12% of the current rate (depending on the share of grant and loan). We estimate that an optimal combination of grant and loan would be the one that adds no more than 5-6% to the current fee.

Table 3: Increase in Fees According to Different Combinations of Grant and Loan (USD)

Soft Loan (5 Years, Interest = 4 %) 1 Grant (%) 0 20 40 60 80

2 Soft loan (%) 80 60 40 20 0

3 Equity capital (%) 20 20 20 20 20

4 Increase in fee (IRR=15%) (USD/month) 0.01 0.008 0.006 0.005 0.003 5 Increase in fee (IRR=20%) (USD/month) 0.01 0.011 0.007 0.005 0.003

Moderate Loan (5 Years, Interest = 12 %) 1 Grant (%) 0 20 40 60 80

2 Moderate loan (%) 80 60 40 20 0

3 Equity capital (%) 20 20 20 20 20

4 Increase in fee (IRR=15%) (USD/month) 0.011 0.009 0.007 0.005 0.003 5 Increase in fee (IRR=20%) (USD/month) 0.012 0.009 0.007 0.005 0.003

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Project 2: Separation of landfills from river courses and coastal waters

The location of a landfill right on the edge of a water body is not unusual in Georgia. Batumi has its own landfill on the border of the river Chorokhi. Poti has its landfill on the edge of the river Rioni. There are many illegal and legal disposal sites along the banks of rivers. Waste is regularly washed out into watercourses. This model project will take the example of Poti, from which data have been collected. These results can be easily extrapolated to other locations. The existing landfill is located 7 km north-east of Poti on the embankment of the river Rioni. The basic requirements of sanitary zoning are not observed, in particular, the one that sets the minimum distance between the river and a landfill at 300 m54. The landfill is poorly managed. It is served by only one bulldozer which, due to the lack of maintenance, operates only a few days a month and performs a simple operation consisting of spreading and compacting the garbage. The river Rioni regularly washes out the landfill. In addition, and according to information by local residents, the river has cut away about 3-4 m of the landfill a year, depending on weather conditions. The opening of a new landfill is on the agenda, but the lack of financing has made this difficult. Until a long-term solution is found, the recommendation is to construct a concrete wall along the whole bank of the landfill. The estimated price is given in Table 455.

Table 4: Concrete Wall Construction Costs (in USD)

Item Cost Materials: cement, sand, gravel, armature – steel concrete reinforcement 170 000

Rent for building machinery (structural, building engineering) 25 000

Wage fund and taxes 20 000

Total 215 000 Source: Own estimates. At present, the municipality is unable to allocate USD 215 000, but it may be able to mobilise 20% of the construction expenses. In this case, the remaining USD 172 000 could be mobilised by means of a grant and/or soft loan. The estimated increases in fees for different combinations of grants and loans are given in Table 5.

54 Another basic requirement is to have a distance of at least 500 m between the urban area and the landfill. In Poti this is also not observed. In fact, the landfill represents an extension of the city, as it begins from the yard of the last house. 55 The price of high-quality concrete is estimated to be about USD 90 - 100/m3. The estimated length is 400 m, height is 8 m, and width is 0.75 m.

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Table 5: Increases in Fees for Different Combinations of Grants and Loans (USD)

Soft Loan (5 Years, Interest = 4 %) 1 Grant (%) 0 40 80

2 Soft loan (%) 80 40 0

3 Increase in fees (IRR=15%) (USD/capita/month)

7.6 3.9 0

4 Increase in fees (IRR=20%) (USD/capita/month)

0.08 0.041 0

Moderate Loan (5 Years, Interest = 12 %) 1 Grant (%) 0 40 80

2 Moderate loan (%) 80 40 0

3 Increase in fees (IRR=15%) (USD/capita/month)

0.091 0.046 0

4 Increase in fees (IRR=20%) (USD/capita/month)

0.096 0.049 0

The increase in fees in the absence of grant components is 80% of the existing fee. This is probably not a viable option. It would be better to finance this project with a higher grant share. Using the same values of fees as in Table 5, we can calculate the economic and financial IRR. Table 6 shows that economic IRR varies in the range of 45-75% and significantly exceeds the financial IRR.

Table 6: Economic and Financial IRR Soft Loan (5 Years, Interest = 4 %)

Grant (%) 0 40 Loan (%) 80 40 Economic IRR (%) / Financial IRR 49.5 / 15 56.4 / 15 Economic IRR (%) / Financial IRR 64.7 / 20 75.6 / 20

Moderate Loan (5 Years, Interest = 12 %) Grant (%) 0 40 Loan (%) 80 40 Economic IRR (%) / Financial IRR 44.4 / 15 47.4 / 15 Economic IRR (%) / Financial IRR 55.4 / 20 63.1 / 20

Project 3: Expansion of the existing waste collection system

Many of the waste collection systems only partially cover urban settlements. That is, it is not rare to see towns or cities with waste collection systems that leave large sections with no or limited service. Poti is not an exception. “Poti-Kalakservice Ltd.” operates in the central part of the city, while the municipality partially covers the rest. The private company provides better service than the municipality. The number of residents living in the section serviced by “Poti-Kalakservice Ltd” represents about 17-18% of the total Poti population, or nearly 8 000 - 8 500 inhabitants. There are plans to expand the coverage of “Poti-Kalakservice Ltd.” to all buildings for a total of 16 - 17 000 inhabitants.56 This expanded service would require an additional collection truck and about 80 - 90 new containers, for a total investment of USD 40 500.

56 This refers to buildings with 5 or more floors.

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Table 7: System Expansion - Investment Costs (in USD)

Item Number Unit Price Cost Containers 90 250 22 500

New truck 1 18 000 18 000

Total 40 500 Source: Own estimates.

To calculate operation and maintenance (O&M) costs, it is assumed that waste is collected daily. This requires 3 truck drivers and 6 auxiliary workers. The results are shown in Table 8.

Table 8: Annual Operation and Maintenance Costs (in USD)

Item Unit Number of Units Cost per Unit Total Costs 1 Salary fund: Administration Person 3 1 500 (=125 x 12) 4 500

2 Drivers Person 3 1 500 (=125 x 12) 4 500

3 Driver assistants Person 6 1 200 (=100 x 12) 7 200

4 Wage fund in total Person 12 16 200

5 Taxes (31% of wage fund) 5 022

6 Gasoline Litre 10 000 0,5 5 000

7 Repair of trucks, spear parts, etc. 7 500

Total 33 722 Source: Own estimates. It is assumed that the operating company or municipality would mobilise it own capital for expanding the service and contribute 20% of total investment. The remaining 80% would be covered partly by a grant and partly by a loan. This report considers 2 options: (i) a five-year loan of 4% interest, and (ii) a five-year loan of 12% interest. Table 9 presents the calculations for different ratios of grant and loan. Investment is recovered in 10 years.

Table 9: Calculated Tariffs for Various IRR (in USD Capita/Month)

Soft Loan (5 Years, Interest = 4 %) 1 Grant (%) 0 20 40 60 80

2 Soft loan (%) 80 60 40 20 0

3 Equity capital (%) 20 20 20 20 20

4 Tariff (IRR=15 %) 0.260 0.252 0.244 0.235 0.227

5 Tariff (IRR=20 %) 0.264 0.255 0.247 0.238 0.229

Moderate Loan (5 Years, Interest = 12 %) 1 Grant (%) 0 20 40 60 80

2 Moderate loan (%) 80 60 40 20 0

3 Equity capital (%) 20 20 20 20 20

4 Fees (IRR=15 %) 0.267 0.257 0.247 0.237 0.227

5 Fees (IRR=20 %) 0.272 0.261 0.250 0.239 0.229 Table 9 shows that there are relatively small differences in fees as the grant share goes from 0 to 80%. This reflects the fact that loan-servicing expenses are smaller than operational expenses. Table 10 presents the results for a recovery period of 5 years.

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Table 10: Calculated Tariffs for Various IRR (in USD/Capita/Month)

Soft Loan (5 Years, Interest = 4 %) 1 Grant (%) 0 20 40 60 80

2 Soft loan (%) 80 60 40 20 0

3 Equity capital (%) 20 20 20 20 20

4 Fees (IRR=15 %) 0.279 0.268 0.256 0.244 0.233

5 Fees (IRR=20 %) 0.281 0.270 0.258 0.246 0.235

Moderate Loan (5 Years, Interest = 12 %) 1 Grant (%) 0 20 40 60 80

2 Moderate loan (%) 80 60 40 20 0

3 Equity capital (%) 20 20 20 20 20

4 Fees (IRR=15 %) 0.288 0.276 0.262 0.247 0.233

5 Fees (IRR=20 %) 0.291 0.277 0.263 0.249 0.235

Again, Table 10 shows that there is a relatively minor increase in fees as the grant share diminishes. However, these differences do matter for the population and they add up as more and more projects are implemented.57 As long as DFES resources allow it, it would be best to choose options where the grant share is the greatest. The economic and financial IRR have been calculated using the fees from Table 11, which shows that the values of the economic IRR vary in the range of 140-155% and significantly exceed the values of the financial IRR.

Table 11: Estimated Economic IRR and its Comparison with Financial IRR Soft Loan (5 Years, Interest = 4 %)

Grant (%) 0 40 Loan (%) 80 40 Economic IRR (%) / Financial IRR 150 / 15 142 / 15 Economic IRR (%) / Financial IRR 155 / 20 146 / 20

Moderate Loan (5 Years, Interest = 12 %) Grant (%) 0 40 Loan (%) 80 40 Economic IRR (%) / Financial IRR 147 / 15 141 / 15 Economic IRR (%) / Financial IRR 152 / 20 140 / 20

Project 4: New system of waste collection and disposal

Rather than expanding an existing waste collection system, this project explores the feasibility and returns of establishing a new system of waste collection and disposal for a town of 45 000 people. Two scenarios are considered: 1. Existing situation (Scenario 1). This assumes unchanged population levels and unchanged rates of

waste generation per capita;

57 This means that the fees increase as the system is expanded, the wall of the landfill is constructed, containers are placed in illegal dumping sites, and so on and so forth.

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2. Increase in population and waste generation rates (Scenario 2). In this scenario, there is a 2% increase in the population to reach 55 000, and the amount of waste generated per capita increases to reach 1.2 m3/capita/year.

For these two versions, the following assumptions hold: • The number of containers depends on population density;

• The number of daily trips to collect waste depends on the distance to the landfill and on the time necessary for emptying containers into the truck; and

• The number of drivers is calculated on the assumption that each driver works 5 days a week and 11 months a year. Each driver has an assistant.

The parameters for the new system of waste collection and disposal are presented in Table 12.

Table 12: Parameters of the New System of Waste Collection Value Unit

N Parameters Symbol / Formula Scenario I

Scenario II

1 Population P1 47 .000 55 .000 Inhabitant 2 Full unloading of containers per day P2 0.50 0.50 Full unloading of containers per month =P3/12 15.21 15.21 3 Full unloading of containers per year P3=P2 x 365 183 183 4 Number of containers per 1 000 people P4=1000/(P4/P8)/P11 6.18 8.73 Piece 5 Number of containers needed P5=P1/1000 x P4 291 480 Piece 6 Containers storage capacity P6 1.10 1.10 m3 7 Containers storage capacity as a whole P7=P6 x P5 319.6 528.0 m3 8 Per capita waste generation rate P8 0.85 1.20 kg/capita/day 9 Waste density P9 0.25 0.25 1 000 kg/m3 10 Per capita waste generation rate P10=P8/P9/1000 0.00340 0.00480 m3/capita/day 11 Per capita waste generation rate P11=P10 x 365 1.24 1.75 m3/capita/year 12 Annual MSW generated P12=P1 x P11 58.327 96.360 m3 13 Truck body space P13 7.3 7.3 m3 14 Number of containers per truck P14=P13/P6 6.6 6.6 Containers 15 Containers unloaded per day P15=P5 x P2 145 240 Piece 16 Total amount of hauls 17 Per day P16=P15/P14 22 36 Hauls 18 On average per month P17=P16 x 365 / 12 670 1 108 Hauls 19 On average per year P18=P17 x 12 8.045 13.291 Hauls 20 Number of trucks P19 8 13 Truck 21 Number of hauls per truck 22 On average per day (B14/B17) P20=P16/P19 2.76 2.80 Hauls 23 On average per month (B15/B17) P21=P17/P19 84 85 Hauls 24 On average per year (B16/B17) P22=P18/P19 1 006 1 022 Hauls 25 Number of working days per year P23=365 x 11/12 x 5/7 239 239 Day/year 26 Number of hauls per driver P24=P20 x P23 658 669 Hauls 27 Number of drivers P25=P18/P24 12 19 Person 28 Number of driver assistants P26=P25 12 19 Person 29 Normal (mean) length of haul P27 18.0 18.0 km 30 Annual mileage P28=P18 x P27 144.812 239.239 km 31 Empty run P29=P28 x 0.1 14.481 23.924 km 32 Fuel consumption per 1 km P30 0.25 0.25 Litre/km 33 Fuel consumption in total P31 x (P28+P29) x P30 39 823 65 791 Litre

Source: Own estimates.

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The increase in population and in production of waste per capita translates into an increase in investment costs. Table 13 presents the equipment costs. The prices are for second-hand equipment. “Kalakservice Ltd.” has proved that western second-hand equipment is quite effective and substantially cheaper than new units.

Table 13: Equipment Costs (in USD)

Scenario I Scenario II New containers 291 200 58 200 480 200 96 000

New trucks 8 30 000 240 000 13 30 000 390 000

Waste harvester machine 1 30 000 30 000 1 30 000 30 000

Total 328 200 516 000 Source: Own estimates. The increase in population and in production of waste per capita translates also into an increase in O&M costs, which increase from USD 80 000 to USD 141 000, as shown in Table 14 below.

Table 14: Operation and Maintenance Costs (USD) Scenario I Scenario II

Collection and Landfilling Costs Unit Value Number Total Unit

Value Number USD

1 Wages: Administration 30 14 5 040 50 14 8 400 2 Caretakers 25 67 20 100 40 67 32 160 3 Technicians 40 4 1 920 50 4 2 400 4 Drivers 50 12 7 200 75 19 17 100 5 Driver assistants 35 12 5 040 50 19 11 400 6 Wage fund in total 109 39 300 123 71 460 7 Taxes (31% of wage fund) 12 183 22 153 8 Uniforms 50 26 1 300 50 26 1 300 9 Brooms 2 360 720 2 360 720

10 Trowels 7 67 469 7 67 469

12 Gasoline 0.5 39 823 19 912 0.6 65 791 39 474

13 Maintenance costs (repair of trucks, etc.) 11 000 11 000

Total 79 884 141 576 Source: Own estimates. The financial calculations in Table 15 use fees that assure a financial IRR of either 15% or 20%. Tables 16 and 17 present the results. It can be seen that fees in Scenario 2 are 1.6 times greater than in Scenario 1, and exceed the current fees in Poti. The impact of the grant share is noticeable. With a 0% grant share, the fee is 1.4 to 1.5 times greater than when the share is 80%.

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Table 15: Fees for Scenario 1 - (USD/Capita/Month)

Soft Loan (5 Years, Interest = 4 %) 1 Grant (%) 0 20 40 60 80

2 Soft loan (%) 80 60 40 20 0

3 Equity capital (%) 20 20 20 20 20

4 Tariff (IRR=15 %) 29.2 27.1 25.0 22.9 20.8

5 Tariff (IRR=20 %) 30.1 27.8 25.6 23.3 21.1

Moderate Loan (5 Years, Interest = 12 %) 1 Grant (%) 0 20 40 60 80 2 Moderate loan (%) 80 60 40 20 0 3 Equity capital (%) 20 20 20 20 20 4 Fees (IRR=15 %) 30.6 28.0 25.5 23.0 20.5 5 Fees (IRR=20 %) 31.9 29.2 26.5 23.8 21.1

We have calculated the economic IRR for the values of fees that assure a financial IRR of 15% or 20%. As can be seen in Table 16, the economic IRR varies in the range of 45-55% and significantly exceeds the financial IRR.

Table 16: Estimated Economic and Financial IRR - Scenario 1 Soft Loan (5 Years, Interest = 4 %)

Grant (%) 0 40 Loan (%) 80 40 Economic IRR (%) / Financial IRR 48.8 / 15 52.1 / 15 Economic IRR (%) / Financial IRR 54.7 / 20 56.7 / 20

Moderate Loan (5 Years, Interest = 12 %) Grant (%) 0 40 Loan (%) 80 40 Economic IRR (%) / Financial IRR 44.5 / 15 47.8 / 15 Economic IRR (%) / Financial IRR 52.4 / 20 55.1 / 20

Table 17 shows the different fees required for Scenario 2 as the share of grant and loan varies.

Table 17: Fees for Scenario 2 - (USD/Capita/Month) Soft Loan (5 Years, Interest = 4 %)

1 Grant (%) 0 20 40 60 80 2 Soft loan (%) 80 60 40 20 0 3 Equity capital (%) 20 20 20 20 20 4 Fees (IRR=15 %) 0.457 0.426 0.395 0.364 0.333 5 Fees (IRR=20 %) 0.476 0.442 0.409 0.376 0.343

Moderate Loan (5 Years, Interest = 12 %) 1 Grant (%) 0 20 40 60 80 2 Moderate loan (%) 80 60 40 20 0 3 Equity capital (%) 20 20 20 20 20 4 Fees (IRR=15 %) 0.481 0.444 0.407 0.370 0.333 5 Fees (IRR=20 %) 0.504 0.463 0.423 0.383 0.343

Table 18 shows the economic IRR using the fees estimated in Table 17. The economic IRR varies in the range of 42-53% and significantly exceeds the financial IRR. The values of the IRR are approximately equal to the values obtained for Version 1 of the project.

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Table 18: Estimated Economic and Financial IRR - Scenario 2 Soft Loan (5 Years, Interest = 4 %)

Grant (%) 0 40 Loan (%) 80 40 Economic IRR (%) / Financial IRR 43.9 / 15 46.8 / 15 Economic IRR (%) / Financial IRR 51.6 / 20 53.1 / 20

Moderate Loan (5 Years, Interest = 12 %) Grant (%) 0 40 Loan (%) 80 40 Economic IRR (%) / Financial IRR 41.8 / 15 45.2 / 15 Economic IRR (%) / Financial IRR 47.9 / 20 50.2 / 20

Project 5: Upgrading of operations in landfills

The operation of landfills in Georgia is in general very limited. Poti is no exception. This project explores the feasibility and return from upgrading landfills, taking as an example the landfill in Poti. We keep expenditures to the minimum, and only include the equipment that is necessary for improved operation of the existing landfill.

Table 19: Equipment Costs for Improved Operation of Landfill (USD)

Number Unit Price Cost New bulldozer 1 50 000 50 000

New truck 1 30 000 30 000

New compactor 1 25 000 25 000

Capital repair of old equipment 5 000

Total 110 000 Source: Own estimates.

Table 19 shows that equipment costs amount to USD 110 000. Table 20 shows the corresponding O&M annual costs.

Table 20: Annual Operation and Maintenance Costs for Improved Operation of Existing Landfill (USD)

Category Unite value Number Total 1 Wage fund: Administration 60 1 720

2 Mechanics 40 1 480

3 Drivers 50 3 1 800

4 Wage fund in total 3 000

5 Taxes (31% of wage fund) 930

6 Maintenance costs (repair of trucks, spear parts, etc.) 3 000

Total 6 930 Source: Own estimates.

Finally, Table 21 shows the increase in fees required for different combinations of grants and loans that ensure a financial IRR or 15% or 20%.

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Table 21: Increase in Fees (in USD/Capita/Month)

Soft Loan (5 Years, Interest = 4 %) 1 Grant (%) 0 20 40 60 80

2 Soft loan (%) 80 60 40 20 0

3 Equity capital (%) 20 20 20 20 20

4 Increase in fees (IRR=15 %) 0.56 0.48 0.41 0.33 0.26

5 Increase in fees (IRR=20 %) 0.6 0.52 0.44 0.36 0.28

Moderate Loan (5 Years, Interest = 12 %) 1 Grant (%) 0 20 40 60 80

2 Moderate loan (%) 80 60 40 20 0

3 Equity capital (%) 20 20 20 20 20

4 Increase in fees (IRR=15 %) 0.62 0.53 0.44 0.35 0.26

5 Increase in fees (IRR=20 %) 0.67 0.57 0.47 0.38 0.28

Closing of existing landfills and establishment of new ones

The existing landfill is located 7 km north-east from Poti on the embankment of the river Rioni. It is not well organised, all the sanitary norms regarding waste treatment are violated, and the surrounding area gets polluted. Ever since the landfill opened, rainwater has been running into the river Rioni, which has been carrying waste into the Black Sea. The existing landfill is not equipped to cover the waste with soil; re-cultivation has not been carried out in recent years, and no geological studies were done in the beginning. The groundwater level is mostly near the surface. Moreover, the landfill is not fenced off and animals can get into the site and search for food, which also violates sanitary standards. Based on the above description and given the existing hazards, the closure of the present landfill in Poti is an alternative option to building a separating wall (see Project 2). There is no experience in Georgia with landfill closure that would satisfy modern requirements; as a rule, this has included only covering the landfill with soil and compacting. Because of this lack of experience, the costs of closure in compliance with all requirements are difficult to calculate and only estimations are available. In particular, the cost of closing the Poti landfill is estimated in the range of USD 150 000 to 250 000. It is important to note, however, that even if the landfill were closed satisfying all necessary procedures, it would still be necessary to build a concrete wall along the whole river bank, as the Rioni river cuts away about 3-4 m of the landfill per year. So, before the municipality decides on a future use of the landfill site, fencing and planting a buffer zone are desirable. Total closing costs for the Poti landfill are given in Table 22. A new waste disposal site in Poti has been under consideration for a long time now, but the Poti Council has not been able to solve this problem because of financial constraints. While it is difficult to calculate exactly the cost of opening a new landfill, various experts estimate that opening a new landfill of 3 ha2 in Poti would cost in the range of USD 870 000 to 1 190 000 (see Table 22).

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Table 22: Costs of Closing an Existing Landfill and Opening a New Landfill (in USD) Costs

Minimum Maximum Closing existing landfill

Closing procedures, including the construction of a final impermeable cover

150 000 250 000

Concrete wall construction costs 215 000 215 000 Fencing and planting 25 000 25 000

Total costs for closing of existing landfill 390 000 490 000 Opening a new landfill

Design 15 000 25 000 Hydrogeological survey (investigations) 20 000 30 000 Construction-and-assembling operations 700 000 1 000 000

New equipment 110 000 110 000 Fencing and planting 25 000 25 000

Total costs of opening a new landfill 870 000 1 190 000 Total 1 260 000 1 680 000

Source: Own estimates. Note: While making these calculations, it was assumed that the project lifetime, i.e. the operating period of the landfill, is equal to 20 years.

Table 23 shows the increase in fees required for different combinations of grants and loans that would ensure a financial IRR of 15% or 20%.

Table 23: Increase in Fees in USD/Capita/Month (Equity Capital = 20 % of Total Investment)

Soft Loan (5 Years, Interest = 4 %) 1 Grant (%) 0 20 40 60 80

2 Soft loan (%) 80 60 40 20 0

3 Equity capital (%) 20 20 20 20 20

4 Increase in fees (IRR=15 %) 22.8 – 37.0 17.6 – 28.4 12.4 – 19.7 7.4 – 11.4 2.7 – 3.5

5 Increase in fees (IRR=20 %) 26.0 – 42.4 20.1 – 32.4 14.2 – 22.5 8.3 – 12.9 2.8 – 3.7

Moderate Loan (5 Years, Interest = 12 %) 1 Grant (%) 0 20 40 60 80

2 Moderate loan (%) 80 60 40 20 0

3 Equity capital (%) 20 20 20 20 20

4 Increase in fees (IRR=15 %) 26.9 – 44.0 20.7 – 33.5 14.5 – 23.2 8.4 – 13.0 2.7 – 3.5

5 Increase in fees (IRR=20 %) 30.9 – 50.5 23.7 – 38.5 16.5 – 26.6 9.5 – 14.8 2.8 – 3.7

In the above calculations, the equity was assumed to equal 20% of total investment, i.e. USD 252 000 – 336 000. It is not probable that the municipality of Poti can allocate such financial resources. Therefore, additional calculations have been carried out for a zero share of equity capital. The results are presented in Table 24.

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Table 24: Increase in Fees in USD/Capita/Month (Equity Capital = 0)

Soft Loan (5 Years, Interest = 4 %) 1 Grant (%) 0 25 50 75 100

2 Soft loan (%) 100 75 50 25 0

3 Equity capital (%) 0 0 0 0 0

4 Increase in fees (IRR=15 %) 34.6 – 45.7 26.4 – 34.9 18.3 – 24.0 10.4 – 13.4 3.0 – 3.5

5 Increase in fees (IRR=20 %) 39.6 – 52.2 30.2 – 39.9 21.0 – 27.5 11.8 – 15.3 3.1 – 3.7

Moderate Loan (5 Years, Interest = 12 %) 1 Grant (%) 0 25 50 75 100

2 Moderate loan (%) 100 75 50 25 0

3 Equity capital (%) 0 0 0 0 0

4 Increase in fees (IRR=15 %) 41.1 – 54.3 31.3 – 41.4 21.6 – 28.4 12.0 – 15.5 3.0 – 3.5

5 Increase in fees (IRR=20 %) 47.2 – 62.4 36.0 – 47.6 24.7 – 32.5 13.6 – 17.7 3.1 – 3.7

Because of the current socio-economic conditions in Georgia, this report suggests that the grant component be above 50%. Besides, due to relatively low costs on labour and building materials, a lower limit of investment is more realistic, i.e. investment = USD 1 260 000.

4.4. Value Added of DFES Investments

At present, there is very limited support for the waste management sector in Georgia – i.e. limited contributions from the Municipal Development and Decentralisation Project, the Georgian Social Investment Fund and some grants from the US Agency for International development (USAID). The almost total absence of support from the donor community means that DFES would have very few co-financing partners. On the other hand, the value added of DFES investments would be unquestionable since it would become the main source of financing for investment in this field.

5. RISKS

Technology Low risk. The projects do not need sophisticated technologies or operational requirements. Our own survey of municipal and private operators shows that there are no problems or impediments associated with the use of current technologies. Payment collection Medium risk. It is usually assumed that the population would not pay for waste collection systems. However, there are experiences in Georgia that show the contrary. The private operator in Rustavi has attained collection rates of 85-93%. Collection rates depend on whether the fee is within families’ payment capacity and, most importantly, on providing good service. Institutional and regulatory issues Low-medium risk. The most important risks comprise (i) regulatory changes and ii) corruption. These two issues were serious problems under the previous administration of Mr. Shevardnadze. The current

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government is undertaking a frontal assault on corruption within state structures, as well as promoting a regulatory setting that is business-friendly. Even though it is too early at this stage to assess the impact of these measures, we assess the risk in this area as significantly lower than in previous years.

6. ESTIMATED SIZE OF ENTIRE PROJECT PIPELINE

The report has explored five projects. All these projects share the following characteristics: • Minimisation of waste entering international water bodies;

• Reduction of risks to public health and improvement of living conditions; and

• Increased attractiveness of the city for tourists.

Table 25 presents a summary list of the projects with a suggested ratio between grants and loans.

Table 25: Summary of Model Projects for DFES Waste Management Pipeline Investment in USD

# Project Equity Capital

Grant Soft Loan

Total

1 Construction of a concrete wall at the border of the landfill and river

43 000 20 %

172 000 80 %

-

215 000 100 %

2 Fencing of the existing landfill and construction of a buffer zone

4 948 20 %

9 896 40 %

9 896 40 %

24 740 100 %

3 Upgrading of operations in landfills 22 000 20 %

66 000 60 %

22 000 20 %

110 000 100 %

4 Expansion of existing waste collection systems 8 100 20 %

16 200 40 %

16 200 40 %

40 500 100 %

5 New system of waste collection and disposal (Scenario 1)

65 640 20 %

131 280 40 %

131 280 40 %

328 200 100 %

6 Closing existing landfills and establishment of new ones 0 0

945 000 75 %

315 000 25 %

1 260 000 100 %

Projects for this pipeline have been ranked according to their immediate environmental impact. The order of priority for these projects is given in Table 23. That is, it would be a priority to stop the regular flushing of waste into international waters and to upgrade operations in landfills. This could be done in parallel with improving waste collection systems in towns. We have used as a basis the data of model projects from Poti and extrapolated the results to other locations in the Black Sea coastal area and the Kura River basin. Table 26 shows the results. Table 26 shows that the total amount of investments ranges from USD 2 626 200 to 3 646 500. This is so because the construction of a new landfill in Poti would exclude the costs of fencing, planting a buffer zone and constructing a separating wall. These items are already accounted for in the cost of closing and establishing a new landfill.

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Table 26: Estimated Cost of Waste Management Projects for Locations in the Black Sea Coastal Area and the Kura River Basin (in USD)

No City Population Project type Estimated Investment

Project Priority

Fencing and planting of buffer zone for the existing landfills (“Gldani” and “Iagludji”)

60 000 High 1 Tbilisi 1 073 000

Upgrading existing landfills 650 000 High 2 Kutaisi 186 000 Improvement of waste collection and removal system at the

embankment of the river Rioni 120 000 High

Fencing and planting of buffer zone for the existing landfill 35 000 High Upgrading of the existing landfill 15 000 High Expansion/upgrading of the existing waste collection system 210 000 Medium

3 Batumi 122 000

Construction of a concrete wall along the border “landfill-river Chorokhi”

350 000 Highest

Improvement of waste collection and removal system for high-rise buildings

30 000 Medium 4 Rustavi 116 000

Improvement of waste collection and removal system at the embankment of River Kura

42 000 Highest

Fencing and planting of buffer zone for the existing landfill 30 000 High Upgrading of the existing landfill 15 000 High

5 Zugdidi 69 000

Expansion/upgrading of the existing waste collection system 60 000 Medium 6 Gori 50 000 Fencing and planting of buffer zone for the existing landfill 25 000 High

Fencing and planting of buffer zone for the existing landfill 24 700 High Construction of a concrete wall along the border “landfill-river Rioni”

215 000 Highest

Expansion of the existing waste collection system 40 500 Medium New system of waste collection and disposal 516 000 Medium

7 Poti 47 000

Upgrading of the existing landfill 110 000 High Closing of the existing landfill and opening a new landfill 1 260 000 Highest 8 Zestaponi 24 200 Fencing and planting of buffer zone for the existing landfill 11 000 High 9 Kobuleti 18 600 Improvement of waste collection and removal system in the

Black Sea coastal zone 45 000 Highest

Fencing and planting of buffer zone for the existing landfill 7 000 High 10 Mtskheta Improvement of waste collection and removal system at the embankment of the river Kura

15 000 Highest

Source: Own estimates.

The report estimates that 2 locations would apply for DFES resources every year. This rather low application rate is based on the pessimistic assumption that the requirement for realistic collection and disposal fees for waste collection and disposal will deter some municipalities. Under these assumptions, the period for disbursement of USD 2 626 200 USD – 3 646 500 has been estimated at a maximum of 5 years. After this period, an impact assessment should be conducted and future DFES disbursement re-estimated.

7. REFERENCES

1. World Bank (1996), Waste Management Diagnostic Study. Republic of Georgia. World Bank, Tbilisi.

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173

WASTEWATER MANAGEMENT

174

175

TABLE OF CONTENTS

SYNTHESIS............................................................................................................................................... 177

1. INTRODUCTION .................................................................................................................................. 179

2. OVERVIEW OF THE WASTEWATER SECTOR OF GEORGIA ...................................................... 179

2.1. Institutional Framework ................................................................................................................... 179 2.2. Tariff Policy ..................................................................................................................................... 181 2.3. Water Legislation ............................................................................................................................. 181 2.4. Conditions of Sewerage Systems and Wastewater Treatment Plants .............................................. 182

3. POTENTIAL PROJECTS FOR DFES FINANCING............................................................................ 183

3.1. Project Category 1: Onsite Wastewater Management...................................................................... 183 3.2. Project Category 2: Wastewater Management for Small Communities........................................... 192 3.3. Project Category 3: Rehabilitation of Large Centralised Wastewater Management Systems.......... 201

4. SUMMARY AND CONCLUSIONS ..................................................................................................... 204

5. REFERENCES ....................................................................................................................................... 208

LIST OF TABLES

Table 1. Main Technical Parameters of Municipal Sewerage Systems (Excluding Abkhazia).................. 182 Table 2. Land Area Requirement of Various Technologies (m2) ............................................................... 184 Table 3. Investment Costs of Onsite Treatment Technologies (in GEL).................................................... 185 Table 4. Operation and Maintenance Annual Cost Estimates for Onsite Treatment Technologies (GEL) 186 Table 5. Costs of Treating 1 m3 of Wastewater with Onsite Treatment Technologies (GEL) ................... 186 Table 6. Wastewater Treatment Costs per Person per Day – an Example of a Hotel (in GEL) ................. 187 Table 7. Wastewater Treatment Costs per Person per Day – an Example of a Hospital (GEL)................. 187 Table 8. Number of Hotels and their Size by Type and Location (2003)................................................... 188 Table 9. Number of Hospitals and their Size by Type and Location (2002) .............................................. 188 Table 10. Number of Preschool Institutions and Places (2002).................................................................. 189 Table 11. Number of Schools and their Size by Type and Location (2002/2003 School Year)................. 189 Table 12. Land Area Requirement of Decentralised Wastewater Treatment Technologies (m2)............... 194 Table 13. Investment Costs of Decentralised Treatment Systems with Lining (GEL)............................... 194 Table 14. Investment Costs of Decentralised Treatment Systems without Lining (GEL).......................... 195 Table 15. Operation and Maintenance Annual Cost Estimates (GEL) ....................................................... 195 Table 16. Costs of Treating 1m3 of Wastewater (GEL).............................................................................. 195 Table 17. Wastewater Treatment Costs per Person per Month (GEL) ....................................................... 196 Table 18. Economic Rate of Return for Treating a Volume of 5 000 m3 of Wastewater ........................... 197 Table 19. Investment Costs for the Rehabilitation of Gardabani’s Primary Treatment Unit (USD).......... 202 Table 20. Investment Costs for the Rehabilitation of Gardabani’s Secondary Treatment Unit (USD)...... 202 Table 21. Operation and Maintenance Costs of the Gardabani Treatment Plant (GEL/Year).................... 203 Table 22. Investment Costs (GEL) ............................................................................................................. 205 Table 23. Number of Projects that Can Be Implemented in One Year with 1.9 mln GEL Financing........ 205 Table 24. GEL per m3 of Wastewater Treated (Based on O&M Costs) ..................................................... 206 Table 25. Investment Cost Required to Match Flow Rates at Gardabani................................................... 206 Table 26. Cost of Treating 612 000 m3/Day Using Decentralised Technologies (GEL)............................ 206 Table 27. Summary of Risk Analysis ......................................................................................................... 207

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ACRONYMS ASPM Agency for State Property Management (former MSPM) CBA Cost-Benefit Analysis DFES Debt-for-Environment Swap EIA Environmental Impact Assessment EIRR Economic Internal Rate of Return GDP Gross Domestic Product GEL Georgian Currency Lari JSC Joint-Stock Companies LLC Limited Liability Companies MAD Maximum Admissible Discharges MENRP Ministry of Environment and Natural Resources Protection of Georgia MoE Ministry of Economy of Georgia MoF Ministry of Finance of Georgia MoID Ministry of Infrastructure and Development of Georgia MoLHSA Ministry of Labour, Health and Social Affairs of Georgia MSPM (former) Ministry of State Property Management N/A Non-Applicable O&M Operation and Maintenance (costs) Tetri 0.01 GEL USAID US Agency for International Development USD US Dollar USEPA US Environmental Protection Agency VAT Value-Added Tax

PHYSICAL UNITS cm Centimetre km Kilometre kW/h Kilowatt per hour m2 Square metre m3 Cubic metre m3/d Cubic metre per day

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SYNTHESIS

This report begins with a description of the wastewater sector of Georgia, followed by a brief overview of community wastewater management systems. It then explores the feasibility of different types of wastewater systems, and suggests the most appropriate ones given the local conditions. The report concludes with strategies for investing DFES resources. Projects in the wastewater project pipeline are grouped according to population size. The first category of projects comprises single facilities/dwellings or a cluster of facilities/dwellings with a maximum wastewater flow of 100 m3. For onsite treatment of wastewater, the report considers the following types of systems: • Septic systems. A septic tank or a series of septic tanks followed by any of these systems: (i)

absorption field; (ii) lagoon; (iii) sand filter; (iv) constructed wetland; or (v) a combination of these systems.

• Non-septic systems. The same technologies listed above (except for the absorption field), but without a septic tank. In this case, some type of preliminary treatment will be required, such as course screening, grit traps, sedimentation tanks, etc.

• Package wastewater treatment plant or other mechanical treatment technology.

The economic calculations show that the costs of treatment are affordable. For example, the cost of onsite wastewater treatment would be no more than 0.12 GEL/day for a hotel guest. This increase would be negligible, as hotels near the coastal area cost 30-50 GEL/day on average. For a hospital patient, the increase would be no more than 0.29 GEL/day. The second category of projects comprises small communities, towns or parts of towns with sewerage systems and with a population not exceeding 25 000 residents. This population generates a wastewater flow of 5 000 cubic metres per day (m3/d). For the treatment of wastewater from small communities, the report considers the following types of systems: • Lagoons; recirculating sand filters; constructed wetlands or a combination of these systems. Minimum

preliminary treatment with manually cleaned bar screens and grit chambers.

• Package wastewater treatment plants or other mechanical treatment technologies.

The report shows that for flows of 1 000 m3/d, the tariff per person ranges from GEL 0.138 to 0.816, depending on the technology used. In case of flow rates of 5 000m3/d, the tariff ranges from GEL 0.066 to 0.804. For the purpose of comparison, water tariffs in different regions of Georgia range between GEL 0.2 and 1.2. The third category of projects envisages the rehabilitation of large centralised wastewater treatment facilities. The report explores the feasibility of rehabilitating the Gardabani treatment plant, which serves the cities of Gardabani, Tbilisi, and Rustavi. The Gardabani treatment plant currently receives 612 000 m3/d of wastewater. If primary and secondary treatment costs are included, the per unit cost would be

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0.032 GEL/m3. Thus, if an individual generates 0.2 m3 of wastewater daily, she/he would be paying 0.20 GEL/month for treating wastewater. At present, she/he pays approximately 0.04 GEL/month.

In order to maximise the impact of the resources from the debt-for-environment swap (DFES), the report explores which wastewater treatment option provides the maximum impact per dollar invested. This report proposes that at least five variables be taken into account. The first is the size of investments; the second is the volume (m3) of wastewater treated per dollar invested. This indicates whether it is better to invest in a single major project (e.g. Gardabani) or in several smaller ones. The third factor is the location of the source of pollution. From a donor’s point of view, cities located along the Black Sea coastal area and the urban cluster of Tbilisi-Rustavi may matter more than small settlements in between. This is so because those in the coastal belt discharge directly into the Black Sea, an international water body, and Tbilisi-Rustavi is the main point of pollution of the Kura River and affects the water supply of Azerbaijan, contributing to cross-border tensions. From a national perspective, towns along the Black Sea coast and settlements higher up the Kura River may matter more. The first because improved water quality will have an impact on tourism revenues, and treating wastewater discharge of towns located along upper sections of the Kura River has a cumulative effect downstream, decreasing costs of wastewater treatment and diminishing the negative impact of water-borne diseases. The fourth factor explored is risk. Projects under decentralised management have higher risk factors than projects under centralised management. This is mostly due to the fact that there is almost no experience in the country using alternative treatment technologies. The fifth factor is sustainability, which depends on charging the true cost of wastewater treatment. If the political will is there, it may be possible that big urban settlements will have a greater capacity than smaller ones to increase collection rates, for example by tying the electricity bill to water supply and water treatment charges, as in the case of Tbilisi. Smaller settlements may lack this option. Having said that, it is by no means certain that bigger settlements will indeed show a greater willingness to cover the true costs of wastewater treatment. The report closes with the following conclusions: • If DFES resources for the wastewater management pipeline can go as high as GEL 15.5 million over 4

or 8 years, and benefits are accounted for from a regional perspective, then it would be advisable to invest this amount in the rehabilitation of the Gardabani plant, because:

- It achieves the maximum reduction in the level of pollution per unit of dollar invested;

- It will reduce tensions between Georgia and Azerbaijan; and

- Sustainability of investment could be ensured as Tbilisi and Rustavi have greater means to charge the true costs of wastewater treatment. Georgia could also enter into cost-sharing agreements with Azerbaijan, the primary beneficiary of investments in Gardabani. (This option exceeds the scope of analysis of this report and therefore will not be explored further here).

• If settlements along the Black Sea coastal area and those along the upper section of the Kura River are prioritised, the same amount as indicated above (GEL 15.5 million) could be alternatively invested in treatment units of 5 000 m3/d in settlements with an established sewerage network. This option would result in a larger amount of wastewater being treated than with an equivalent investment in smaller units.

• For smaller revenue flows available from the DFES programme, onsite decentralised management options become the preferred choice.

• There can be a mix of project categories in case DFES has sufficient funds.

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1. INTRODUCTION

The main goal of this project pipeline is to reduce pollution of international waters along the Black Sea coastal areas and the Kura-Aras basin. To achieve this goal, the pipeline aims to improve wastewater collection and treatment utilising both conventional (centralised) and alternative (decentralised) technologies. Projects in the international waters pipeline are grouped according to population size, which gives an indication of the wastewater flow rate. The first category of projects comprises single facilities/dwellings or a cluster of facilities/dwellings with a maximum wastewater flow rate of 100 m3/d. The second category of projects comprises small communities, towns or parts of towns with a population not exceeding 25 000 residents. This population generates a wastewater flow rate of 5 000 m3/d. The last category of projects envisages the rehabilitation of centralised wastewater treatment and collection facilities. This report begins with a description of the wastewater sector of Georgia, followed by a brief overview of community wastewater management systems. It then explores the feasibility of different types of wastewater systems and suggests the most appropriate ones given the local conditions. Finally, the report examines whether DFES should invest in large-scale (centralised) or small (decentralised) systems and provides suggestions for investments under different assumptions of the pipeline size.

2. OVERVIEW OF THE WASTEWATER SECTOR OF GEORGIA

2.1. Institutional Framework

The institutional structure in the field of water and wastewater management in Georgia is complicated and involves the following: • The Ministry of Environment and Natural Resources Protection; • The Ministry of Infrastructure and Development; • Geowatercanal; • The Agency for State Property Management (under the Ministry of Economy); • Municipalities; • The Ministry of Economy;58 and, • The Ministry of Labour, Health and Social Affairs. The following is a description of their main roles and responsibilities: The Ministry of Environment and Natural Resources Protection The main institution in charge of the development and implementation of environmental policy is the Ministry of Environment and Natural Resources Protection of Georgia (MENRP). The Ministry has responsibilities in all areas of environment, including water resources management and protection. The

58 Transformed into the Ministry of Economic Development.

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MENRP elaborates the strategy for the sector and is responsible for regulation, legislation, supervision, control, organisation and coordination. Specifically, the Ministry is charged with: Natural resources (including water) use licensing;

Wastewater discharge licensing (all municipal, industrial or other facilities that have direct discharge of wastewater into a surface water body need a license for wastewater discharge). The license is based on maximum admissible discharges (MAD) and is issued by the Ministry of Environment or its regional bodies based on a decision of the “Interdepartmental Council Body of Experts” or “Regional Experts Councils”;

Issuing of environmental permits. They are required for certain types of development projects, such as roads, mining, etc. The Ministry of Environment or its regional or local bodies issue the permit based on the results of an environmental impact assessment (EIA); and

Controlling pollution.

Ministry of Infrastructure and Development59 During the period of 1998-2003, the former Ministry of Urbanisation and Construction was responsible for the supervision, coordination, control and implementation of a common water supply and sewerage systems policy at the municipal level. The ministry developed policies for the sector and planned the construction of water supply and sewerage facilities. It also coordinated its actions with the former Ministry of State Property Management (MSPM) and the Ministry of Economy.60 In 2004, the Ministry of Urbanisation and Construction was abolished and its functions in the field of municipal water supply and wastewater service were transferred to the new Ministry of Infrastructure and Development. Geowatercanal Geowatercanal Ltd, which operates under the Agency for State Property Management at the Ministry of Economy, supervises, coordinates and exercises control over water utility companies. In addition to these management functions, it operates the Gardabani regional wastewater treatment plant, which treats wastewater from Tbilisi, Rustavi and Gardabani. Geowatercanal also sets regulations for water supply and sewerage systems, such as:

The Rules on the Use of Municipal Water Supply and Sewerage Systems adopted in 1998. These rules set water consumption norms for different users, and procedures and conditions for connection to the municipal network.

The Rules on the Technical Exploitation of Municipal Water Supply Systems and Networks adopted in 2000. These rules define conditions of operation of different water supply facilities and networks.

The Rules on Receiving Industrial Wastewater into the Sewerage Network (1999). Agency for State Property Management Water supply and sewerage systems are run by enterprises that are either joint-stock companies (JSCs) or limited liability companies (LLCs). These enterprises are supposed to operate on the principles of self-financing, but in reality they often receive budgetary support from municipalities and from the central government (average annual subsidy is about GEL 6 million). The municipality controls the budget allocation and tariffs. All utilities have a 100 % state ownership through the Agency for State Property Management at the Ministry of Economy. Municipalities

59 The Ministry has been restructured and merged with the Ministry of Economic Development. 60 Starting from 2003, the Agency for State Property Management is under the Ministry of Economic Development.

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Municipalities are responsible to consumers for ensuring an uninterrupted water supply of drinking quality. They also facilitate resources for investments in the water supply and sewerage systems, for otherwise the utility companies would be unable to ensure the minimum levels of maintenance. In fact, municipalities are obliged to subsidise shortfalls in the income of utility companies. Ministry of Economy The Ministry of Economy identifies capital investment projects, prepares indicative plans for their implementation and coordinates related tariff structures. The Ministry of Finance allocates funds for the development of capital investment projects. The Tax Inspection, subordinated to the Ministry, is responsible for collecting taxes for water extraction and wastewater discharge. Ministry of Labour, Health and Social Affairs The Ministry of Labour, Health and Social Affairs (MoLHSA) develops and approves sanitary rules and norms to guarantee a safe environment for the population. For example, the Ministry develops and approves norms for surface water resources that are used for drinking, and for domestic and recreational purposes.

2.2. Tariff Policy

The tariffs for water supply and wastewater services are set and approved by municipalities with the consent of the Ministry of Finance. Basically, there are two tariff rates: a low rate for the population and a higher rate for industrial companies and institutions. The tariffs in force are very low. For households, they range from 20 to 120 Tetris, depending on the region. For industry, the tariff is between GEL 1.6-4.6 in Tbilisi. The current collection rate is estimated at 20-25 % for households, and 60% for other consumers (industry and institutions). As a result, the finances of water utilities are in very bad shape. This was supposed to change with the ”1999-2005 Programme for the Establishment of Water Supply and Wastewater Disposal Systems, Operation Costs and Payment by the Population for Water Consumption”. Approved in 1998 by presidential decree, the programme established the beneficiary-to-pay principle for water supply and sewer services. It also provided for a gradual increase in tariffs. In fact, starting in 2005, municipal budgets were supposed to stop subsidising water companies. However, no plan for the revision of the tariff structure has been announced yet.

2.3. Water Legislation

There are about 30 major laws in Georgia that have significant influence over water resources management and protection. The most important ones are: • The Law on Environmental Protection. The Parliament of Georgia adopted this law in 1996. It is a

framework legislative act, which defines the general principles of natural resources (including water) management, licensing, supervision and control, and sets environmental standards and the use of economic instruments.

• The Law on Environmental Permits. The Parliament of Georgia adopted this law in 1996. It establishes the legal basis for issuing environmental permits. All new municipal, industrial, agricultural and other enterprises are required to have these permits. According to the potential impacts that they may have on the environment, all business activities are divided into four categories. For business activities that come under the first category (which includes sewerage systems and municipal treatment plants), permits are granted only after a full environmental impact assessment (EIA) has been carried out and the report has been evaluated by the Ministry of Environment. While investors are responsible for paying and organising the EIA process for their project, they are authorised to select an environmental consulting firm for undertaking the EIA.

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• The Law on Water of Georgia. The Parliament of Georgia adopted this law in 1997. It establishes that water is state property and creates the legal basis for extraction and discharge of water. Among all potential uses, the law sets the highest priority for drinking use, and defines the principles for setting water protection zones, surface water quality standards (norms), wastewater discharge limits and enforcement mechanisms.

• The Law on Health Protection. The Parliament of Georgia adopted this law in 1997. It defines risk factors on health, including risks from non-drinkable water.

• The Tax Code of Georgia. The Parliament of Georgia adopted this code in 199761. It sets water use and emission tariffs. Any discharge of water pollutants from a point source is subject to a pollution charge.

• The Sanitary Code of Georgia. The Parliament of Georgia adopted this code in 2003. It defines the sanitary-hygiene norms and describes the responsibilities of different authorities for ensuring compliance.

2.4. Conditions of Sewerage Systems and Wastewater Treatment Plants

The Soviet period managed to put in place an extensive network of sewerage systems and wastewater treatment plants. Centralised sewerage systems exist in 45 towns and settlements of Georgia, with a total length of approximately 4 000 km. Almost half (47.6%) of the population is connected to the centralised sewage systems. However, the conditions of the sewerage systems are very poor. The lack of maintenance has led to severe deterioration. About 1 520 km of the sewerage network need renovation. Annually, about GEL 4 million would be required for repairs. At present, only GEL 1.2 million are allocated.

Table 1. Main Technical Parameters of Municipal Sewerage Systems (Excluding Abkhazia)

Type of Town

Population Number of Towns with Centralised

Sewerage Systems

Length of Collectors and Networks, km

I < 1 500 1 2.0 II 1 500 - 10 000 13 188.6 III 10 000 - 25 000 8 235.8 IV 25 000 - 50000 8 376.2 V 50 000 – 100 000 (Gori, Zugdidi, Poti) 3 134.6 VI >100 000 (Tbilisi, Kutaisi, Rustavi, Batumi) 4 2941.2 Total: 37 3 878.4

Source: Ministry of Environment and Natural Resources Protection of Georgia. Over a decade ago, wastewater treatment facilities were operating in 29 towns (4 of them regional), with a total capacity of 1 596 200 m3/day. Traditional biological treatment plants existed in 26 towns, with a total designed capacity of 1 428 400 m3/day. Treatment plants with mechanical treatment were present in only 7 residential areas with a total capacity of 167 800 m3/day. All municipal wastewater treatment plants started operations before 1990. However, after more than a decade without minimal maintenance work, all of them are either non-operational or in a very poor state. The few of them that still work (Tbilisi-Rustavi, Kutaisi, Batumi, Khashuri, Gori) provide only mechanical treatment. No plant provides secondary or biological treatment.

61 The new simplified Tax Code was approved in December 2004 and entered into force on 1 January 2005.

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As a result, municipal sewage can be considered as the largest source of surface water pollution in Georgia (about 80% of the overall wastewater volume is discharged into surface water bodies). Contaminated surface and ground water is believed to be a major cause of infectious and parasitic diseases that adversely affect the health of the population. According to data from the Disease Control Centre of the MoLHSA, each year there are outbreaks of diarrhea, amebiasis, typhoid fever and other diseases related to the poor quality of the water supply.

3. POTENTIAL PROJECTS FOR DFES FINANCING

The characteristics of the three categories of wastewater treatment projects are described below.

3.1. Project Category 1: Onsite Wastewater Management

Background and rationale

About half of the Georgian population is not served by centralised sewerage systems. This is so mostly in rural areas of low population density. Here, the local population uses traditional pit latrines or improved pit latrines – a concrete container placed in the soil from which the septage is pumped out periodically. In a pit latrine, the solids settle but the liquid seeps directly into the soil. This can have serious effects on the quality of the nearby (ground) water. In contrast, improved pit latrines do not threaten groundwater, though they are a source of pollution of surface waters as the pumped septage in most cases is discharged untreated into the nearest water stream. This is a major source of pollution for coastal areas and settlements in the Kura basin. Of particular concern is the effluents from hospitals, which are not treated and thus contribute to the propagation of diseases through the pollution of both ground and surface waters with infectious substances. In view of the above, there would be international and national benefits from installing low-tech, low cost onsite treatment technologies for commercial, industrial, municipal and residential developments in unsewered areas, either for individual facilities/dwellings or a cluster of facilities/dwellings.

Objectives

• Reduce pollution of the natural environment; • Improve environmental, sanitary and health conditions; • Allow municipal and/or industrial effluents to be disposed of without danger to human health; • Introduce and demonstrate appropriate technologies for onsite wastewater treatment; and • Provide opportunities for generating economic benefits from reuse and recycling.

Beneficiaries

Public institutions, e.g. schools, hospitals, prisons, military camps, etc. and/or private businesses - restaurants, hotels, resorts, industrial enterprises, and cluster of residences.

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Selection criteria

A crucial criterion is the ability to cover operation and maintenance costs. Priority will be given to facilities that pose the highest risk to human health and pollution of international waters.

Proposed technologies and design characteristics

For onsite treatment of wastewaters, the following types of systems can be considered: 1. Septic systems. A septic tank or a series of septic tanks followed by any of the following systems: (i)

absorption field; (ii) lagoon; (iii) sand filter; (iv) constructed wetland; or (v) a combination of these systems.

2. Non-septic systems. The same technologies listed above (except for the absorption field), but without a septic tank. In this case some type of preliminary treatment will be required, such as course screening, grit traps, sedimentation tanks, etc.

3. Package wastewater treatment plants or other mechanical treatment technology.

Each of the above technologies has its advantages and disadvantages. The selection of the technology will depend on: • Site conditions; • Existing and future wastewater flows - hydraulic loading rate; • Land availability; • Reliability of electricity supply; • Ability to maintain the system; • Effluent discharge limits in a particular area; • Public acceptance of the technology; and • Climatic conditions. For example, constructed wetlands would be appropriate in western Georgia near the coastline due to favourable climatic conditions, and package wastewater treatment plants would be appropriate in areas where land availability is an issue. Table 2 below provides information about the land area requirements of various technologies broken down by the volume of effluent to be treated (the land area for natural systems includes the area occupied by septic tanks).

Table 2. Land Area Requirement of Various Technologies (m2)

Wastewater Flow Rate (m3/d) Technologies 10 100

Lagoon 200 2 000 Intermittent sand filter 343 Not recommended Recirculating sand filter 170 1 700 Sub-surface flow wetland 147 1 621

Mechanical/package treatment plant 34 180 Source: Own estimates.

The size of the system depends on the wastewater flow rate, which in turn depends on the facility being considered. For example, it is estimated that on average a wastewater flow rate of 10 m3/d can result from a hotel with 50 guests, a school with 200 children or a hospital with 20 beds.

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Investment cost estimates

Investment costs of onsite wastewater treatment systems include the design and construction costs. The calculations assume that sludge pumping and disposal are outsourced and therefore no provisions for purchasing pumping vehicles or constructing sludge disposal sites have been taken into account. For natural treatment systems, the investment costs include the design and construction costs of lagoons, sand filters or constructed wetlands, plus the design and construction costs of septic tanks. Construction costs were obtained based on the design characteristics of various systems and by estimating the cost of separate components.62 The costs of various kinds of work, such as soil excavation, backfilling, compacting, clay lining, etc., were obtained from projects financed by the Georgian Social Investment Fund and implemented in Georgia in the recent past. Costs of construction materials are based on market prices of inputs as of May 2004. Table 3 provides a summary of investment costs of treatment facilities for two different wastewater flow rates – 10 m3 and 100 m3. There are two cost estimates for natural treatment technologies – systems with bottom-lining and systems without it. In areas where soils are slowly permeable, there is no need for lining the bottom part of the systems.

Table 3. Investment Costs of Onsite Treatment Technologies (in GEL) Natural Systems with

Lining Natural Systems without Lining Technologies

10 m3 100 m3 10 m3 100 m3 Lagoon 24 815 131 258 22 573 110 210

Intermittent sand filter 44 472 Not

recommended 40 440 Not

recommended Recirculating sand filter 35 761 195 553 34 131 180 520 Sub-surface flow wetland 29 375 183 147 27 523 166 883

Mechanical/package treatment plant 35 000 190 000 35 000 190 000 Source: Own estimates. Table 3 shows that lagoons have the lowest capital costs – ranging from GEL 22 500 to 25 000. It should be noted, however, that these costs would vary depending on the characteristics of the wastewater and site conditions (accessibility, distances from manufacturers, soil conditions, availability of trucks in the area, etc.).

Operation and maintenance cost estimates

Operation and maintenance costs were estimated based on the manpower, energy and sludge removal/handling requirements of various systems. Tables 4 and 5 provide the summary of operation and maintenance (O&M) costs for various technologies.

62 The investment and O&M cost breakdown for all systems explored in this report may be obtained by contacting Ms. Nino Partskhaladze at ninopar@hotmail.com

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Table 4. Operation and Maintenance Annual Cost Estimates for Onsite Treatment Technologies (GEL)

Wastewater Flow Rate Technologies

10 m3 100 m3 Lagoon 415 2 220 Intermittent sand filter 291 Not recommended Recirculating sand filter 561 1 929 Sub-surface flow wetland 353 1 602

Mechanical/package treatment plant 2 046 5 278 Source: Own estimates.

Table 5. Costs of Treating 1 m3 of Wastewater with Onsite Treatment Technologies (GEL)

Wastewater Flow Rate Technologies 10 m3 100 m3

Lagoon 0.114 0.061 Intermittent sand filter 0.080 Not recommended Recirculating sand filter 0.154 0.053 Sub-surface flow wetland 0.097 0.044

Mechanical/package treatment plant 0.562 0.145 Source: Own estimates.

The above cost estimates are based on the following assumptions: • Natural treatment systems require non-skilled operation and maintenance personnel to visit the facility

once a week – check the system, make repairs, cut the grass when needed.

• Sludge removal from the septic tank is required once every 3 years.

• Sludge removal from lagoons is required once every 10 years.

• Sludge removal includes disinfection, pumping and transportation to the sludge disposal field.

• Gravel media and vegetation replacement for sub-surface flow wetlands can be required once every 10 years.

• The costs of pumping and of re-establishing vegetation (for wetlands) are annualised. The cost of pumping can vary greatly, depending on the distance from treatment facilities to the sludge disposal site.

• Mechanical treatment plants utilise activated sludge treatment processes and their costs are mainly for manpower and energy requirements.

• O&M costs do not include debt service expenses.

Economic and financial aspects

Costs The examples below show how much the facility (e.g. hospital or hotel) should charge the customer to cover operation and maintenance expenses of wastewater treatment technologies. In making these

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calculations, it has been assumed that the facilities do not use loan financing of capital investment and that they operate at their full capacity.

Table 6. Wastewater Treatment Costs per Person per Day – an Example of a Hotel (in GEL)

Wastewater Flow Rate

Technologies 10 m3 Hotel with 50 Guests

100 m3

Hotel with 500 Guests Lagoon 0.023 0.012 Intermittent sand filter 0.016 Not recommended Recirculating sand filter 0.031 0.011 Sub-surface flow wetland 0.019 0.009

Mechanical/package treatment plant 0.112 0.029 Source: Own estimates.

Table 7. Wastewater Treatment Costs per Person per Day – an Example of a Hospital (GEL)

Wastewater Flow Rate

Technologies 10 m3 Hospital with 20 Beds

100 m3

Hospital with 200 Beds Lagoon 0.057 0.03 Intermittent sand filter 0.040 Not Recommended Recirculating sand filter 0.077 0.026 Sub-surface flow wetland 0.049 0.022

Mechanical/package treatment plant 0.281 0.072 Source: Own estimates.

The above examples show that even with the use of the most expensive technology (package plant), the cost of treatment would be no more than 0.12 GEL per day for a hotel guest. This increase would be negligible, as hotels near coastal areas cost 30-50 GEL per day on average. For a hospital patient, the increase would be no more than GEL 0.29. Therefore, for such institutions, the cost of wastewater treatment is affordable. The same applies to restaurants, private schools and other establishments that charge customers for services. The cost of wastewater treatment should also be affordable for industrial enterprises producing goods (e.g. pig and cattle farms, fertiliser factories, etc.), as it is unlikely to cause a significant rise in the price of their goods. Demand for services In order to have an idea of the potential demand for these types of projects, the tables below provide information on the number and category of various facilities that may be eligible for DFES financing.

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Table 8. Number of Hotels and their Size by Type and Location (2003)

Region Number of

Hotels Number of Places

Number of Places per Hotel

Tbilisi 92 7 952 86 Mtskheta-Mtianeti 18 1 050 58 Adjara 30 2 731 91 Samegrelo, Zemo Svaneti 17 1 356 80 Racha-Lechkhumi, Kvemo Svaneti 3 263 88 Guria 3 293 98 Kakheti 8 628 79 Shida Kartli 8 665 83 Imereti 23 2 606 113 Samtskhe-Javakheti 25 1 812 72 Kvemo Kartli 2 62 31 Tskhinvali n/a n/a n/a Abkhazia n/a n/a n/a Georgia 229 19 418 Source: State Department for Statistics. Note: n/a – Non applicable.

Table 9. Number of Hospitals and their Size by Type and Location (2002)

Region Number of Hospitals

Number of Beds

Number of Beds

per Hospital

Tbilisi 66 7 120 108 Mtskheta-Mtianeti 6 188 31 Adjara 21 1 676 80 Samegrelo, Zemo Svaneti 27 1 275 47 Racha-Lechkhumi, Kvemo Svaneti 5 265 53 Guria 8 455 57 Kakheti 19 770 41 Shida Kartli 14 966 69 Imereti 34 2 272 67 Samtskhe-Javakheti 13 727 56 Kvemo Kartli 24 1 109 46 Tskhinvali 1 15 15 Abkhazia 1 20 20 Hospitals subordinated to various institutions 12 1 432 119 Georgia 251 18 290 Source: State Department for Statistics.

The above establishments in Tbilisi are connected to the centralised wastewater collection system. Some of the facilities in Batumi (Adjara), Kutaisi (Imereti), Khashuri and Gori (Shida Kartli) can also be connected to the sewerage systems. These are towns where primary wastewater treatment works to a certain degree. As to facilities located in other parts of Georgia, their wastewater is not treated at all, even if they are

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connected to the sewerage system. The number of hotels and hospitals without wastewater treatment in Georgia is estimated to be about 200. Tables 10 and 11 present information on educational institutions in Georgia. Their number significantly exceeds the number of hotels and hospitals, and it is estimated that a couple of thousand educational institutions may need onsite wastewater treatment systems.

Table 10. Number of Preschool Institutions and Places (2002)

Region Number

of Preschools

Number of Places

Number of

Children

Occupancy Rate (%)

Tbilisi 87 33 391 24 556 74 Adjara 46 4 703 3 663 78 Guria 43 3 405 1 314 39 Imereti 221 21 339 11 781 55 Kakheti 210 17 752 9 260 52 Mtskheta-Mtianeti 60 3 889 1 945 50 Racha-Lechkhumi, Kv. Svaneti 33 1 625 1 013 62 Samegrelo, Zemo Svaneti 142 10 072 5 523 55 Samtskhe-Javakheti 33 2 795 1 607 57 Kvemo Kartli 109 13 709 7 224 53 Shida Kartli 101 8 331 4 591 55 Georgia 1 185 121 011 72 477 60

Source: Ministry of Education.

Table 11. Number of Schools and their Size by Type and Location (2002/2003 School Year)

Region Number of

State Schools

Number of Pupils in

State Schools

Number of Private Schools

Number of Pupils in Private Schools

Number of Pupils

per School

Tbilisi 200 155 197 66 8 624 616 Adjara 403 66 403 8 976 164 Guria 154 21 074 0 0 137 Imereti 518 101 697 24 2 061 191 Kakheti 253 59 522 9 595 229 Mtskheta-Mtianeti 196 19 301 0 0 98 Racha-Lechkhumi, Kv. Svaneti 115 6 074 0 0 53 Samegrelo, Zemo Svaneti 408 63 019 9 766 153 Samtskhe-Javakheti 253 36 295 0 0 143 Kvemo Kartli 347 80 330 6 1 295 231 Shida Kartli 253 51 163 9 1 075 199 Georgia 3 100 660 075 131 15 392 209

Source: Ministry of Education. Benefits Projects of this scale are expected to produce direct and indirect social benefits that are difficult to quantify in monetary terms. In case the treated effluent is used for irrigation purposes, then direct benefits will include the savings on irrigation water. Other direct benefits might include: • Increment (rise) in property value;

• Increase in tourism, especially in coastal areas;

• Change in fisheries production and revenues;

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• Due to improved water quality, reduction in treatment costs for water-borne diseases and fewer workdays lost; and

• Decreased pollution of international water bodies.

It should be noted that due to the small scale of these projects, the reduction in the level of pollution from a single facility will be insignificant unless nearby facilities install onsite treatment systems as well. Only then is a significant impact on fisheries production and tourism likely (if just one hotel treats its wastewater near the coastline, it will not bring more tourists). This is one of the reasons why economic analysis has not been conducted for only one facility. Finally, the financial return has not been estimated because the report assumes that given the current conditions, the charges will likely be set at a level to just cover investment and operational costs.

Institutional issues

The ownership, organisational structure, and management responsibilities for treating wastewaters will vary depending on the type of institution and the technology being considered. In case of small wastewater flows, the institution can be the owner of the treatment system. For a cluster of facilities, the ownership of the treatment system can be exercised jointly, or one institution can serve others and charge for the services. As to the operation of the wastewater treatment systems, owners can take responsibility for operating the systems themselves, or a maintenance contract may be required. Also, a local, designated management entity might assume responsibility for the ongoing care of onsite systems within its jurisdiction.

Risk analysis

A two-step process was used in performing the risk analysis. First, an evaluation was made of the areas of potential risk for a project pipeline. Then, each risk factor was reviewed and classified as high, medium or low, according to its likelihood of occurrence and its expected scale of impact. This classification is based on expert judgment, knowledge of the current situation and previous experiences. Below is the list of risk factors, along with at least one specific mitigation measure. Risk Factor 1: Level of infrastructure development for onsite management systems – HIGH RISK. At present, the infrastructure for onsite wastewater management systems is underdeveloped. For example: - There is very little or no experience in the country in designing, constructing and managing onsite wastewater treatment systems, with the exception of mechanical treatment plants. - Georgian scientists and engineers are not experienced in designing onsite systems and therefore favour centralised wastewater management systems. - Wastewater utility agencies that now exist in Georgia do not have the necessary skills and equipment to maintain and supervise the systems. - Most of the remaining hauling vehicles from Soviet times, which were used for pumping sewage from individual residences, are obsolete. New hauling vehicles will be necessary for pumping septage and sludge from septic tanks and lagoons. - At present, there are no legal provisions for regulating the proper installation, functioning and inspection of such systems. Consideration of the above issues is very important in order to avoid improper maintenance of the systems, which may in turn affect further dissemination of alternative technologies in years to come.

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Mitigation measures: - Formulate capacity building activities to ensure appropriate technical and financial management of the systems; - Prompt necessary policy, institutional and legal reforms so that policies for achieving better control over decentralised systems can be developed and implemented; - Provide technical assistance to newly established utility companies or existing utility agencies in order to develop appropriate project and operational management skills for staff in wastewater enterprises; and - Train and educate local officials so that they can provide their support in the implementation of the projects. Risk Factor 2: Existence of demand for the projects – HIGH RISK. The demand for onsite wastewater treatment largely depends on the enforcement of laws on pollution. It was mentioned earlier that the Law on Water of Georgia regulates the wastewater discharge limits and enforcement mechanisms. The Tax Code of Georgia also has a provision that any discharge of water pollutants from a point source is subject to a pollution charge. However, these laws are not enforced in all areas of Georgia, either because water quality monitoring in not performed or for some other reason. Under these conditions, facilities are less likely to have incentives to treat their wastewater, which would entail an increase in the price of their goods and services. Mitigation measures: - To reduce this risk factor, the government should enforce the laws and collect pollution charges from all non-complying facilities; - The government may consider issuing regulations to encourage facilities to treat their wastewater and yet stay competitive (even with increased prices for their goods and services); and - Local authorities should only allow the construction of new facilities if they can ensure that the wastewater produced by these facilities will be treated. Risk Factor 3: Acceptability of the technology. From LOW to HIGH RISK, depending on the technology.

Because some of the natural treatment technologies may cause odour and other nuisances, such as mosquitoes, people may be against constructing them. The risk may be high with surface flow wetlands and anaerobic lagoons; as to the other natural treatment technologies, the risk is likely to be minimal.

Mitigation measure: - The risk can be reduced by installing the technologies causing minimal nuisances.

Risk Factor 4: User support (contribution) and participation – LOW RISK.

Projects in this category may require co-financing, either in the form of cash, labour, and/or locally available materials. Such types of projects usually have a community mobilisation component (e.g. projects on schools rehabilitation). Low user participation may impact on the timely completion of the projects. Mitigation measures: - Conduct information and awareness building/educational programmes to ensure the involvement of beneficiaries (especially users of public facilities), develop the cooperation potential of people, and general acceptance; and

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- Set certain criteria which would have to be met by sub-projects, e.g. beneficiaries would have to fulfil certain criteria, such as community involvement, to be included in the programme. Risk Factor 5: Affordability and willingness to pay O&M expenses – from LOW to HIGH risk, depending on the facility. The economic analysis showed that for private institutions which charge customers for goods and services, operation and maintenance cost of onsite wastewater treatment systems would be affordable. As to public institutions, such as schools, the risk can be high. Because of the low demand for wastewater treatment, parents’ willingness to pay for the schools’ onsite wastewater treatment is likely to be low. This may have an impact on the proper functioning of the systems. The risk depends also on the type of onsite system that is installed. Natural treatment systems require the least O&M expenses and therefore the risk will be lower. Mitigation measures: - Risks for public facilities can be reduced if local authorities provide subsidies for onsite wastewater treatment; and - For natural treatment systems, community residents may be asked to provide a contribution in the form of labour, where applicable. Risk Factor 6: Reliability of power supply – from LOW to HIGH risk, depending on the facility. This risk factor concerns only package treatment plants and recirculating sand filters that require electricity for proper functioning. The risk is low for most of the natural treatment systems, as well as for the facilities located near mini hydropower plants. Mitigation measure: Risk can be minimised by adding generators to the treatment systems. However, this could significantly increase treatment costs. A second option is to have “direct purchase agreements” with power generation plants, located nearby. Risk Factor 7: Ability to maintain the system – LOW RISK. Maintenance requirements for natural treatment systems are low, especially for small-scale systems, and they do not require professional staff to operate them. However, if the systems are improperly managed, failures may occur. Mitigation measures: - System maintenance can be contracted out to an operating agency (if one has been established); - Training can be provided for the operating personnel; - A set of rules and regulations can be developed by which the agency will operate; and - Once the systems have been installed, a routine monitoring schedule must be set up to ensure the long-term performance and reliability of these systems.

3.2. Project Category 2: Wastewater Management for Small Communities

Background and rationale

Table 1 showed that 22 towns in Georgia with fewer than 25 000 residents have centralised sewerage systems. The cumulative length of collectors totals 426 km, of which approximately 40% need rehabilitation. Treatment facilities exist in a few locations, but none of them work at present.

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There are two types of wastewater management problems in these communities. The first is associated with leaking sewage collectors. These collectors are usually placed close to water supply pipes, which are also damaged, resulting in the contamination of drinking water and creating a public health threat. Furthermore, leaking pipes can cause cracks in buildings, if the wastewater that seeps out passes and/or accumulates beneath the foundation. This is a serious problem for the impoverished inhabitants, who have no means to fix or rebuild their homes. The second problem is associated with the surface or sub-surface discharge of untreated wastewater. In this case the sewerage system acts as a point source of pollution. In fact, except for a few locations, sewage systems of communities located in coastal zones and in the Kura basin can be considered as a point source of pollution.

Objectives:

• Reduce pollution of the natural environment;

• Improve environmental, sanitary and health conditions;

• Introduce and demonstrate appropriate technologies for small-scale wastewater management in communities with sewerage systems; and

• Provide opportunities for generating economic benefits from reuse and recycling.

Beneficiaries

These comprise municipalities, rural settlements, towns or sections of towns.

Selection criteria

The selection criteria include: • Communities with sewerage systems;

• Sites with the least pumping requirements (gravity collection system) and low energy demand;

• Sites with the highest threat to public health;

• Capacity of the beneficiary to operate the facility; and

• Communities planning, or already rehabilitating, water infrastructure (the Municipal Development Fund finances activities in this sector). In this case, the wastewater bill can be combined with the water bill and the increased user charge fee linked to water supply and quality improvement.

Proposed technologies and design characteristics

• Lagoons; recirculating sand filters; constructed wetlands or a combination of these systems. Minimum preliminary treatment with manually cleaned bar screens and grit chambers.

• Package wastewater treatment plants or other mechanical treatment technologies.

The land area required for wastewater treatment technologies has been calculated for two wastewater flow rates. The wastewater flow rate of 1 000 m3/day corresponds to a population of 5 000 people, while the wastewater flow rate of 5 000 m3/day corresponds to a population of 25 000.63 63 This assumes that each person generates 200 litres of wastewater a day. This may look like a low value, but water supply is rationed in many parts of Georgia.

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Table 12. Land Area Requirement of Decentralised Wastewater Treatment Technologies (m2)

Wastewater Flow Rate (m3/d) Technologies 1 000 5 000

Lagoon 17 000 87 000 Recirculating sand filter 13 000 65 000 Sub-surface flow wetland 13 210 66 050

Mechanical treatment plant 10 000 15 000 Source: Own estimates.

A modular design should be preferred for all natural treatment technologies. The size of the area for recirculating sand filters takes into account the area required for the recirculation tank as well. The land area requirement for mechanical treatment plants treating 5 000m3 of wastewater daily is based on the example of a recently designed treatment plant in the Black Sea coastal town of Ureki. It can be seen from the table above that lagoon systems have the highest land area requirements, reaching almost nine hectares for a system treating 5 000 m3/d. In contrast, mechanical treatment plants have the least land area requirements, taking up six times less space than the lagoon systems and more than four times less space than natural filter systems.

Investment cost estimates

As with onsite treatment technologies, investment costs of wastewater treatment systems include design and construction costs. These costs, based on the design requirements of various systems, were obtained by estimating the cost of separate components.64 The costs of various types of work, such as soil excavation, backfilling, compacting, clay lining, etc., were obtained from projects financed by the Social Investment Fund in Georgia. The costs of construction materials are based on market prices of May 2004. Tables 13 and 14 provide a summary of investment costs for wastewater flow rates of 1 000 m 3/d and 5 000 m3/d. There are two cost estimations for natural treatment technologies – systems with a bottom-lining requirement and systems without a lining. As mentioned above, in areas where soils are slowly permeable, there is no need to line the bottom part of the systems.

Table 13. Investment Costs of Decentralised Treatment Systems with Lining (GEL)

Wastewater Flow Rate (m3/d) Technologies 1 000 5 000

Lagoon 338 244 1 640 604 Recirculating sand filter 1 018 824 4 840 775 Sub-surface flow wetland 878 167 4 285 568

Mechanical treatment plant 825 000 1 500 000 Source: Own estimates.

64 The investment and O&M cost breakdown for all systems discussed in this report may be obtained by contacting Ms. Nino Partskhaladze at ninopar@hotmail.com

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Table 14. Investment Costs of Decentralised Treatment Systems without Lining (GEL)

Wastewater Flow Rate (m3/d) Technologies 1 000 5 000

Lagoon 133 466 616 714 Recirculating sand filter 869 873 4 109 806 Sub-surface flow wetland 705 398 3 421 439

Mechanical treatment plant 825 000 1 500 000 Source: Own estimates.

Depending on bottom-lining needs, investment costs for lagoons serving 25 000 people range from GEL 617 000 to GEL 1 640 000. The lining requirement for lagoons makes the system three times more expensive, whereas for other natural treatment technologies this increase is not significant. This is because the bulk of costs of filter technologies is taken up by the filter medium. Furthermore, the investment costs of mechanical treatment plants for smaller wastewater flow rates are comparable with the costs of natural treatment systems. However, for higher wastewater flows, the investment cost of mechanical treatment plants is much lower than the cost of natural treatment systems, except for lagoon treatment technology.

Operation and maintenance cost estimates

As with onsite treatment technologies, operation and maintenance costs were estimated based on the manpower, energy and sludge removal/handling requirements. Tables 15 and 16 provide the summary of O&M costs for various technologies.

Table 15. Operation and Maintenance Annual Cost Estimates (GEL)

Wastewater Flow Rate (m3/d) Technologies 1 000 5 000

Lagoon 10 192 41 860 Recirculating sand filter 15 652 69 160 Sub-surface flow wetland 8 372 20 020

Mechanical treatment plant 49 504 243 880 Source: Own estimates.

Table 16. Costs of Treating 1m3 of Wastewater (GEL)

Wastewater Flow Rate (m3/d) Technologies 1 000 5 000

Lagoon 0.028 0.023 Recirculating sand filter 0.043 0.038 Sub-surface flow wetland 0.023 0.011

Mechanical treatment plant 0.136 0.134 Source: Own estimates.

The above cost estimates are based on the following assumptions: • Natural treatment systems require non-skilled operation and maintenance personnel to visit the facility

once a week (e.g. check the system, make repairs, and cut the grass when needed);

• Sludge removal from lagoons is required once every 10 years;

• Sludge removal includes disinfection, pumping and transportation to the sludge disposal field;

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• Cost of chlorine for sludge disinfection can be as much as 4 GEL per m3 depending on the solid content;

• Gravel media and vegetation replacement for sub-surface flow wetlands can be required once every 10 years;

• The costs of pumping and re-establishing vegetation (for wetlands) are annualised. The cost of pumping can vary greatly, depending on the distance from treatment facilities to the sludge disposal site;

• Mechanical treatment plants utilise activated sludge treatment processes and their costs are based mainly on manpower and energy requirements; and

• O&M costs do not include debt service expenses.

Economic and financial aspects

The examples below show the amount that the municipality (or the treatment facility) should charge the serviced population to cover operation and maintenance expenses. In making calculations, it was assumed that the facilities do not use loan financing of capital investment.

Table 17. Wastewater Treatment Costs per Person per Month (GEL)

Wastewater Flow Rate (m3/d) Technologies 1 000 5 000

Lagoon 0.168 0.138 Recirculating sand filter 0.258 0.228 Sub-surface flow wetland 0.138 0.066

Mechanical treatment plant 0.816 0.804 Source: Own estimates.

As the table shows, with mechanical treatment plants the monthly fee per person (which includes only wastewater treatment and not collection) can reach 81 Tetris. For the purpose of comparison, water tariffs in different regions of Georgia range from 20 to 120 Tetris. If we take the lowest cost technology – a wetland system serving 25 000 people – and assume that wastewater treatment fees will be linked with water fees, the combined water/wastewater bill (for 5 000 m3/d wastewater flow rates) would increase from 5% to 30%, depending on the service area. For lagoon systems, this increase would be in the range of 12% to 70%. In case of mechanical treatment plants, the increase would be from 70% to 400%. Consequently, if land availability is not an issue, natural treatment systems are the most financially viable option. Economic aspects The economic analysis has been done for a wastewater flow of 5 000 m3./d. Potential direct and indirect benefits include: • Availability of water for irrigation purposes, if the effluent will be reused;

• Increase in property values;

• Increased tourism revenues, especially in coastal areas;

• Change in fisheries production and revenues;

• Generation of jobs (some people will be employed directly by the treatment facility; others may have jobs as a result of increased tourism and fisheries activities);

• Due to improved water quality, reduction in costs for treating water-borne diseases and fewer workdays lost; and

• Decreased pollution of international water bodies.

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Because of difficulties in estimating the shadow prices, only two benefits from the above list (increased tourism and water for irrigation) could be calculated in monetary terms. For tourism, it was assumed that as a result of improved sanitation, approximately 750 additional tourists a year would be attracted to the resort area. Provided that each tourist spends 10 days and 50 GEL/day (accommodation, meals, transportation and other services) at the resort, the additional benefit would be in the range of 375 000 GEL a year. As for irrigation, the benefit of using treated wastewater for this purpose during six months, for example, is expected to yield 37 500 GEL (5 Tetris per cubic meter). The economic analysis also assumed the following: • The system operates for 20 years;

• There is no growth in the volume of wastewater to be treated (O&M costs are considered constant throughout 20 years);

• Capital costs, O&M costs and cost savings are VAT exclusive;

• Standard conversion factor of 0.8 was applied; and

• Costs are given in constant 2004 year prices.

The economic analysis shows that the economic internal rate of return (EIRR) for various systems – treating 5 000 m3 of wastewater daily during 21 years (1 year of construction and 20 years of operation) – would range from 4% to as high as 60% (see Table 18 below). It should be noted that as only two possible benefits (increased tourism and water for irrigation) could be calculated in monetary terms, the rates of return are likely to be substantially higher.

Table 18. Economic Rate of Return for Treating a Volume of 5 000 m3 of Wastewater

Technologies Natural Systems with

Lining Natural Systems without

Lining Lagoon 22% 60% Recirculating sand filter 4% 5% Sub-surface flow wetland 7% 10%

Mechanical/package treatment plant 9% 9% Source: Own estimates.

Lagoon systems have the highest economic rate of return due to their low construction costs (three times less than other natural treatment technologies). If land availability is an issue, then the most economically attractive option is mechanical treatment plants that have 9% of EIRR. Financial aspects The financial return has not been estimated because the report assumes that given the current conditions in Georgia, the charges will likely be set at a level to just cover investment and operational costs.

Institutional issues

As stated in the overview of the wastewater sector, wastewater treatment companies are owned by the state through the Agency for State Property Management. These companies, in turn, own the wastewater treatment facilities and are allowed to carry out commercial activities and generate profit. However, tariffs need to be submitted to local authorities and approved by them. Also, due to the low level of tariff collection (25% on average nationwide), these companies in reality often receive subsidies from municipalities and the central government.

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Municipalities are supposed to facilitate investments in the water supply and sanitation sector so that water quality standards are met. They are also supposed to supervise the activities of water supply and wastewater treatment companies. At the national level, the supervision of wastewater sector operations is the responsibility of Geowatercanal. Joint billing for water supply and wastewater treatment services is recommended, but this requires commercial agreements between water supply and wastewater treatment companies. In Tbilisi, for example, a commercial agreement was signed between AES Telasi and Tbilwatercanal in 2004 and now there is joint billing for three items – water, wastewater services and electricity. It is expected that this will lead to an increase of the collection rate for water and wastewater services, and a decrease of the administrative costs of tariff collection. Risk analysis Most of the risk factors discussed in Section 3.1.10 are also applicable to this category of projects, but the likelihood of their occurrence and scale of impact are different. The main risk factors identified for the current category of projects are the following: Risk Factor 1: Level of infrastructure development for onsite management systems – HIGH RISK. At present, the infrastructure for small-scale decentralised wastewater management systems is underdeveloped because: - There is very little or no experience in Georgia in designing, constructing and managing onsite wastewater treatment systems, with the exception of mechanical treatment plants. - Georgian scientists and engineers are not experienced in designing onsite systems and therefore favour centralised wastewater management systems. - Existing wastewater utility agencies do not have the necessary skills and equipment to maintain and supervise the systems. - Most of the hauling vehicles that remained from Soviet times, and were used for pumping sewage from individual residences, are obsolete; new hauling vehicles are necessary for pumping septage and sludge from septic tanks and lagoons. - At present, there are no legal provisions that regulate the proper installation, functioning and inspection of such systems. Consideration of the above issues is very important in order to avoid improper maintenance of the systems, which may in turn affect further dissemination of alternative technologies in years to come. Mitigation measures: - Formulate capacity building activities to ensure appropriate technical and financial management of the systems; - Prompt necessary policy, institutional and legal reforms so that policies for achieving better control over decentralised systems can be developed and implemented; - Provide technical assistance for newly established utility companies or existing utility agencies in order to develop appropriate project and operational management skills for staff in wastewater enterprises; and - Train and educate local officials so that they can offer their support in the implementation of projects. Risk Factor 2: Existence of demand for the projects – MEDIUM RISK.

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Because laws on paying pollution charges are not enforced in most cases, the demand for wastewater treatment is likely to be low in the 22 communities that have sewerage systems and meet criteria for implementing DFES supported projects. However, there is demand to improve water and sewerage infrastructure and the Municipal Development Fund and the Social Investment Fund, together with municipalities, can provide co-financing for these types of projects. Thus far, there has been no co-financing for the installation of wastewater treatment plants by these agencies. Mitigation measures: - DFES investments in wastewater treatment can be linked to the improvement of water and sewerage infrastructure, provided that the above two agencies impose the conditionality that collected wastewater be treated as well; - Local authorities should collect charges for the pollution that water and wastewater utility companies create. Risk Factor 3: Acceptability of the technology. From LOW to HIGH RISK, depending on the technology. Because some of the natural treatment technologies may cause odour and other nuisances, such as mosquitoes, the public may be against constructing them. The risk may be high with surface flow wetlands and anaerobic lagoons; as to the other natural treatment technologies, the risk is likely to be minimal.

Mitigation measures: - The risk can be reduced by installing the technologies that cause minimal nuisances.

Risk Factor 4: User support (contribution) and participation – LOW RISK. Projects in this category may require co-financing, either in the form or cash, labour, and/or locally available materials. Such types of projects usually have a community mobilisation component. Low user participation may have an impact on the timely completion of the projects. Mitigation measures: - Conduct information and awareness building/educational programmes to ensure the involvement of beneficiaries, and foster the co-operation potential between people, and general acceptance; and - Set certain criteria which would have to be met by sub-projects; e.g. beneficiaries would have to fulfil certain criteria (e.g. community involvement) to be included in the programme. Risk Factor 5: Affordability of O&M costs – from LOW to HIGH RISK, depending on the technology and the community under consideration. The financial and economic analysis showed that the cost of wastewater treatment per person per month may range from about 14 Tetris to 81 Tetris, depending on the technology used. According to the O&M cost estimates, the cost of wastewater treatment by natural systems does not exceed 26 Tetris, whereas treatment at a mechanical treatment plant is three times more expensive. If we consider the maximum cost of treatment using natural systems (26 Tetris), then for a family of four, the cost will be about GEL 1. If we add the cost of wastewater collection and of drinking water provision (maximum 1.2 GEL per person), then the combined water and wastewater bill can range from GEL 5 (for natural treatment systems) to GEL 8 (for a mechanical treatment plant). Taking into account that on average Georgian households in rural communities in 2001 had GEL 122 of cash income per month (total income is GEL 195, Source: Georgian Households 1996-2001, SDS), then the water and wastewater bill may represent 4% of that income for natural treatment systems, and 6.5% for mechanical treatment plants. In urban areas, including towns where decentralised treatment systems can be implemented, the average household monthly cash income is

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GEL 174. In this case, the combined water and wastewater bill may constitute 2.9%-4.6% of the household budget. If the household budget is tight, then this percentage will indeed matter. Mitigation measures: - The risk for community wastewater treatment projects can be reduced if local authorities are willing to either: a) charge community members the real cost of water and wastewater treatment, or b) provide subsidies for the systems in operation.

Risk Factor 6: Willingness to pay – HIGH RISK. Under the project “Water Management in the South Caucasus” (financed by the USAID), a survey on water and wastewater services was conducted in 2003 in Telavi (population of 25 000). It showed that 62% of the population would be willing to pay increased fees for an improved water supply. A survey conducted in Dmanisi found that 63% of the population found the existing water fee of 20 Tetris acceptable, while 27% of respondents declared that the fee should be lower. In Gurjaani (population of 14 000), the existing fee of 90 Tetris was considered acceptable for only 32% of the population. The surveys showed that even with low tariffs for water services, satisfaction with the level of water tariffs was low. Moreover, about a third of the Telavi community members were not willing to pay increased fees, even with the improvement of water services. However, the situation may be different in other parts of Georgia. Dissatisfaction with the level of charges could be partly due to the lack of understanding of the system’s operation and maintenance costs. People fail to understand why they should pay for water. As a result, the tariff collection rates rarely exceed 50%. The general opinion is that Georgia has abundant water resources and that the state should provide it for free, as in Soviet times. People in general give little value to water as a resource, partly because the resource is not priced. Water left running and the lack of repairs of leaking taps are common and this, in turn, increases the volume of wastewater to be treated. Mitigation measures: - Conduct information and awareness building/educational programmes to foster co-operation between people, and general acceptance of combined water/wastewater tariffs; and - Increase public awareness (through information programmes) about the cost of providing water and sanitation services. The implementation of this public awareness campaign would cost about GEL 0.5 million (preparation of brochures, posters, TV programmes and their broadcasting, etc.). This may increase the combined water tariff collection rates and provide savings on water supply costs, as well as reduce the volume of wastewater to be treated. Risk Factor 7: Reliability of power supply – from LOW to HIGH risk, depending on the facility. This risk factor concerns only package treatment plants and recirculating sand filters that require electricity for proper functioning. The risk is low for most of the natural treatment systems, as well as for the facilities located near mini hydropower plants. Mitigation measure: The risk can be minimised by adding generators to the treatment systems. However, this could increase significantly the cost of treatment. An alternative option would be to enter into direct power purchase agreements with power plants nearby. Risk Factor 8: Ability to maintain the system – LOW RISK. Maintenance requirements for natural treatment systems are low and they do not require professional staff to operate them. However, if the systems are improperly managed, failures may occur.

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Mitigation measures: - It is important to develop a set of rules and regulations by which an agency should operate the treatment systems; and also provide training for personnel; - Once the systems have been installed, a routine monitoring schedule must be set up to ensure the long-term performance and reliability of these systems.

3.3. Project Category 3: Rehabilitation of Large Centralised Wastewater Management Systems

Background and rationale As mentioned in the overview of the wastewater sector of Georgia, large centralised treatment plants work only in the cities of Tbilisi-Rustavi, Kutaisi, Batumi, Khashuri and Gori. Currently, only primary treatment works, and this to a limited degree. Secondary treatment facilities have collapsed. As a result, partially treated wastewater is discharged into surface waters. This is a threat to public health and a cause of tension between Georgia and Azerbaijan. Approximately 612 000 m3/d of unsatisfactorily treated effluent is discharged from the Gardabani treatment plant – which serves the cities of Tbilisi and Rustavi – into the Kura River at a point 20 km from the border with Azerbaijan. For this country the Kura River is an important source of drinking water.

Objectives

• Eliminate a source of tension between Georgia and Azerbaijan;

• Improve environmental, sanitary and health conditions;

• Provide opportunities for generating economic benefits from reuse and recycling; and

• Decrease pollution of international water bodies.

Beneficiaries

The beneficiaries include municipalities and wastewater utility companies.

Investment cost estimates

The investment costs for rehabilitating the existing Gardabani treatment plant are based on the rehabilitation needs of primary and secondary treatment facilities. These estimates were made by engineers and economists at Geowatercanal and are presented in the tables below.

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Table 19. Investment Costs for the Rehabilitation of Gardabani’s Primary Treatment Unit (USD) Facilities to be Rehabilitated Costs

Wastewater distribution tank 8 000 Bar racks for course screening 90 000 Horizontal flow grit chamber 25 000 Primary radial flow sedimentation tanks (8) 1 000 000 Distribution tank for primary sedimentation tanks (3) 5 000 Sludge pumping stations (3) 130 000 Three unit pumping station 60 000 Emergency discharge collector 400 000 Grit disposal field 5 000 Sludge disposal field 70 000 Water supply system 17 000 Collector system 90 000 Administrative building / Laboratory 80 000 Power receiving station 200 000 Fencing the territory 50 000 Trucks and special equipment. 100 000 Total 2 330 000 VAT 466 000 Grand Total 2 796 000

Source: Geowatercanal.

Table 20. Investment Costs for the Rehabilitation of Gardabani’s Secondary Treatment Unit (USD) Facilities to be Rehabilitated Costs

Aeration tanks (8) 2 000 000 Activated sludge pumping station 30 000 Air pumping station 50 000 Air chamber 50 000 Methane tanks (6) 400 000 Emergency discharge unit 500 000 Sludge dewatering unit 60 000 Effluent discharge unit 50 000 Secondary radial flow sedimentation tanks (10) 1 000 000 Heat generation station 160 000 Access road 50 000 Fencing of the territory, lights 50 000 Equipment for the laboratory 50 000 Total 4 450 000 VAT 890 000 Grand Total 5 340 000

Source: Geowatercanal. In total, rehabilitation of both primary and secondary treatment units would cost USD 8 136 000. The investment can be phased over six to eight years. Operation and maintenance cost estimates Geowatercanal staff have also provided operation and maintenance cost estimates, which are presented in Table 21. These estimates are based on manpower, energy and other requirements of primary and secondary treatment systems, and on the assumption that approximately 150 staff will be employed by the treatment facility and that energy consumption will be approximately 6 600 kW/h.

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Table 21. Operation and Maintenance Costs of the Gardabani Treatment Plant (GEL/Year) Budget Item Costs

Salary fund 700 000 Taxes on salary fund (31%) 217 000 Energy 4 640 000 Other operation expenses 205 000 Repair of the system 200 000 Amortisation 400 000 Per-diems 20 000 Communal services 28 000 Chemicals for laboratory analysis 20 000 Office expenses 24 000 Other expenses 50 000 Total 6 504 000 12% 780480 Total without VAT 7 284 480

Source: Geowatercanal. Treatment unit costs The Gardabani treatment plant currently receives 612 000 m3/d of wastewater. If the cost of secondary treatment is included, then the per unit cost would be 3.2 Tetris/m3. This means that if an individual in Tbilisi generates 200 litres of wastewater daily, she/he would be paying 20 Tetris/month for treating wastewater. At present, she/he pays approximately 4 Tetris/month. A cost-benefit analysis has not been done for Gardabani. Located about 40 km from the border with Azerbaijan, the main benefits of the Gardabani treatment plant accrue to Azerbaijan and not to Georgia. An economic analysis would have been justified if undertaken at a regional level. Risk analysis Risk Factor 1: Level of infrastructure development for centralised management systems – LOW RISK. The infrastructure for centralised management systems is well developed – there are scientists and engineers experienced in designing and constructing mechanical wastewater treatment plants; the existing plants are staffed with experienced personnel and operate under set rules and regulations. However, most of the rules and regulations date back to Soviet times and might need revision. Risk Factor 2: Existence of demand for the rehabilitation of the systems – NO RISK. Rehabilitation of wastewater treatment plants, especially of the Gardabani regional treatment plant, is considered a priority in the National Environmental Action Plan. Until now the government has been trying (unsuccessfully) to attract investment for rehabilitation. Risk Factor 3: Acceptability of the technology – NO RISK. Risk Factor 4: User support and participation – NOT APPLICABLE. Rehabilitation work requires skilled workers. Risk Factor 5: Affordability to pay O&M costs – MEDIUM RISK.

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It has been shown above that with secondary treatment of wastewater, the bill will increase by 16 Tetris; that is, for a family of four, the combined water/wastewater bill will come to about GEL 5.5, which constitutes 2.9%-4.6% of a family’s budget in large cities. This can be a noticeable percentage when family budgets are tight. Besides, with the introduction of joint billing for water, wastewater and electricity, the tariff collection rate is expected to increase.

The sustainability of investments at Gardabani depends on the willingness of local authorities to price wastewater treatment at its real cost. At present, the tariff would cover barely 20% of costs. Unless the present tariffs are corrected, or long-term sources of subsidies ensured, investments in Gardabani would not be sustainable.65

Risk Factor 6: Reliability of power supply – LOW RISK. The Gardabani treatment plant is located near an electricity generation station. Risk Factor 7: Ability to maintain the system – NO RISK. The system is run by professional personnel.

4. SUMMARY AND CONCLUSIONS

This section summarises the results of the analysis for all three project categories under the wastewater management pipeline, and draws conclusions about the introduction and implementation of these projects.

The first two categories of projects are decentralised wastewater management systems. These refer to small discharges of wastewater that can be treated using natural treatment systems, such as lagoons, sand filters, constructed wetlands, etc. The third category of projects refers to large discharges of wastewater where the only option for wastewater treatment is a mechanical treatment plant. The current analysis considered five main criteria for project selection and prioritisation, which are summarised below. Criterion 1. Size of Investments

65 Sustainability of investments can also be enhanced by entering into cost sharing agreements with Azerbaijan, the main beneficiary of improved water quality from Gardabani.

Project Categories Project Category 1: Onsite wastewater management in unsewered areas. Project Category 2: Wastewater management for small communities with sewerage system. Project Category 3: Rehabilitation of centralised wastewater management systems in large settlements.

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Table 22 summarises the investment costs for all three categories of projects, while Table 23 gives estimates of the number of projects that can be implemented under each project category with USD 1 million (GEL 1.9 million) financing. It can be seen that the investment costs for the first category of projects fall well below the expected size of DFES funds, hence a large number of projects can be implemented. The second category of projects is also within the range of DFES funds, with the exception of projects that can be phased over 2 years. As to the third category of projects, rehabilitation of Gardabani, the largest functioning treatment plant in Georgia, can be phased over 8 years. Therefore, if we consider only this criterion (i.e. investment costs), all three categories of projects can be implemented.

Table 22. Investment Costs (GEL)

Wastewater Flow Rate (m3/d) 10 100 1 000 2 500 5 000 612 000 Technology

Category 1 Category 2 Category 3 Lagoon 22 573 110 210 133 466 308 357 616 714 - Intermittent sand filter 40 440 Not recommended - Recirculating sand filter 34 131 180 520 869 873 2 054 903 4 109 806 - Sub-surface flow wetland 27 523 166 883 705 398 1 710 719 3 421 439 - Mechanical/biological treatment plant 35 000 190 000 825 000 1 050 000 1 500 000 15 539 760

Source: Own estimates. Note: Costs are without lining requirements for natural systems.

Table 23. Number of Projects that Can Be Implemented in One Year with 1.9 mln GEL Financing

Wastewater Flow Rate (m3/d) 10 100 1 000 2 500 5 000 612 000 Technology

Category 1 Category 2 Category 3 Lagoon 85 17 14 6 3 - Intermittent sand filter 47 Not recommended -

Recirculating sand filter 56 11 2 1 1 project phased

over 2 years -

Sub-surface flow wetland 69 11 3 1 1 project phased

over 2 years - Mechanical/biological treatment plant 55 10 2 2

1 project phased over 2 years

Gardabani project phased over 8 yrs

Source: Own estimates.

It should be noted that Table 23 above provides a technical estimate. The real total size of the project pipeline, however, is difficult to estimate as there is, at present, almost no demand for small and medium decentralised systems. This is so because maximum allowed discharges are insufficiently enforced, thus precluding private investment, and because municipalities lack resources to rehabilitate or construct new systems. Criterion 2. Cost-effectiveness – volume (m3) of wastewater treated per unit of dollar invested. Table 24 below presents a summary of the per unit costs of wastewater treatment using various technologies at different wastewater flow rates. It can be seen from this table that because of economy of scale, the cost of treatment for a specific technology decreases with an increase in wastewater flows. Therefore, maximum effect in terms of pollution reduction per unit of dollar invested is likely to be achieved for larger wastewater flows.

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Table 24. GEL per m3 of Wastewater Treated (Based on O&M Costs)

Wastewater Flow Rate (m3/d) Technology 10 100 1 000 5 000 612 000

Lagoon 0.114 0.061 0.028 0.023 Not applicable Intermittent sand filter 0.080 Not applicable Recirculating sand filter 0.154 0.053 0.043 0.038 Not applicable Sub-surface flow wetland 0.097 0.044 0.023 0.011 Not applicable Mechanical/biological treatment plant 0.562 0.145 0.136 0.134 0.032

Source: Own estimates. Note: The cost of treatment for the Gardabani treatment plant (serving Tbilisi and Rustavi) also includes the cost of secondary treatment. Tables 25 and 26 address the question of whether it is more cost efficient to invest in a single large project or in several smaller ones.

Table 25. Investment Cost Required to Match Flow Rates at Gardabani Wastewater Flow Rate (m3/d)

10 100 1 000 2 500 5 000 Number of units required to match outflow at Gardabani 61 200 6 120 612 245 122

Investment required to match outflow at Gardabani (GEL) Lagoon 1 381 467 600 674 485 200 81 681 192 75 485 794 75 485 794 Intermittent sand filter 2 474 928 000 Not applicable Recirculating sand filter 2 088 817 200 1 104 782 400 532 362 276 503 040 254 503 040 254 Sub-surface flow wetland 1 684 407 600 1 021 323 960 431 703 576 418 784 011 418 784 134 Mechanical treatment plant 2 142 000 000 1 162 800 000 504 900 000 257 040 000 183 600 000 Source: Own estimates.

Table 25 above compares the investment costs for decentralised and centralised technologies in order to achieve the rate of treatment of the wastewater flow similar to that of Gardabani. For example, if all DFES resources were invested in plants with a maximum flow rate of 100 m3/day, there would be a need for 6 120 of these decentralised units. If all of these units were of the lagoon type, then the total investment costs would be approximately GEL 674 million. For Gardabani, the investment required to treat the same amount of wastewater is GEL 15.5 million. The main conclusion from Table 25 is that, provided resources are available, it would be advisable to invest the bulk of resources in a large treatment plant. A similar result can be obtained by comparing the cost of treating the daily wastewater flow rate from Gardabani, but using decentralised wastewater treatment options. Table 26 shows the daily costs of treating 612 000 m3/day using units with flow rates of 10, 100, 1 000 and 5 000 m3/day.

Table 26. Cost of Treating 612 000 m3/Day Using Decentralised Technologies (GEL) Wastewater Flow Rate (m3/d) 10 100 1 000 5 000 Lagoon 69 768 37 332 17 136 14 076 Intermittent sand filter 48 960 Not applicable Recirculating sand filter 94 248 32 436 26 316 23 256 Sub-surface flow wetland 59 364 26 928 14 076 6 732 Mechanical treatment plant 343 944 88 740 83 232 82 008

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For Gardabani, the daily cost of treating 612 000 m3/day is GEL 19.584. It can be seen that some technologies in Table 26 provide cheaper options, such as sub-surface flow wetlands with a flow rate of 5 000 m3/day. These gains, however, are not sufficient to counterbalance the difference in investment costs required to build the number of units necessary to match the flow rate at Gardabani. Criterion 3. Location of the Point Source of Pollution Here, the question is whether reducing pollution along the Black Sea coast matters more than reducing pollution near the border with Azerbaijan or at points in between. The answer depends on factors outside the scope of this report. From a donor’s point of view, cities located along the Black Sea coastal area and the urban cluster of Tbilisi-Rustavi may matter more than small settlements in between. The reason for this is because those in the coastal belt discharge directly into the Black Sea, an international water body, and Tbilisi-Rustavi is the main point of pollution of the Kura River, affecting the water supply of Azerbaijan and contributing to cross-border tensions. From a national perspective, towns along the Black Sea coast and settlements higher up along the Kura River would matter more. First because improved water quality will have an impact on tourism revenues for towns along the Black Sea and, second, treating wastewater discharge from towns located along the upper sections of the Kura River will have a cumulative effect downstream, decreasing the costs of water treatment and diminishing the negative impact of water-borne diseases. All these issues should be discussed between the Government of Georgia and donors as part of the process of establishing DFES.

Criterion 4. Risk Most of the issues for this criterion were discussed under the risk analysis for each project category. Table 27 below summarises the risk analysis for all project categories. The first four factors deal with the feasibility of the projects, while the last three factors concern the sustainability issues that will be discussed later.

Table 27. Summary of Risk Analysis

Category 1 Category 2 Category 3 Risk Factors Low Medium High Low Medium High Low Medium High

1. Level of infrastructure development √ √ √ 2. Existence of demand for projects √ √ - - - 3. Acceptability of the technology (1) √ √ √ √ √ √ - - - 4. User support and participation √ √ - - - 5. Affordability and willingness to pay O&M expenses (2)

√ √ √ √ √ √ √

6. Reliability of power supply (3) √ √ √ √ √ √ √ 7. Ability to maintain the system √ √ - - - Source: Own estimates.

Notes: (1) Risk can vary from low to high depending on the technology used. (2) Risk can vary from low to high depending on the technology used. (3) Risk can vary from low to high depending on the technology used. Table 27 shows that projects under decentralised management (Categories 1 and 2) have higher risk factors than projects under centralised management (Category 3). This is mostly because there is almost no experience in Georgia with using alternative wastewater treatment technologies. Although a cost-benefit analysis was conducted for only Category 2 projects, it is useful for comparing different technologies. It should be noted, however, that all capital and operation and maintenance costs given in this report are average costs (actual costs may vary by 20%, depending on the site) and are used for comparative purposes.

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This report has shown that under decentralised wastewater management, lagoons have the least capital investment requirements and the highest economic internal rate of return. When land availability is not an issue, the lagoon technology is likely to be the preferred option for wastewater treatment. Moreover, the EIRR was positive for all technologies, even when not all benefits were monetised. Criterion 5. Sustainability (in terms of the feasibility of charging the true cost of wastewater treatment, and the affordability and willingness to pay O&M expenses, the ability to maintain the system, and the reliability of the power supply (summarised in Table 27, Factors 5-7). The feasibility of charging the true cost of wastewater treatment depends on the will of local authorities in the city or town in question. If political will is there, big urban settlements may have a greater capacity than smaller settlements to increase collection rates, for example, by tying the electricity bill to water supply and water treatment charges, like in Tbilisi. Smaller settlements may lack this option. Having said that, it is by no means ensured that bigger settlements will indeed show a greater willingness to cover the true costs of wastewater treatment. In view of the above, this report reaches the following conclusions: • If DFES resources for the wastewater management pipeline can go as high as GEL 15.5 million over 4

or 8 years, and if benefits from a regional perspective are taken into account, then it would be advisable to invest this amount in the rehabilitation of the Gardabani plant, because:

- It achieves the maximum reduction in the level of pollution per unit of dollar invested.

- It will reduce tensions between Georgia and Azerbaijan.

- The sustainability of investment could be ensured as Tbilisi and Rustavi have greater means to charge the true costs of water treatment. Georgia could also enter into cost-sharing agreements with Azerbaijan, the primary beneficiary of investments in Gardabani. (This option exceeds the scope of the analysis of this report and therefore has not been further explored.)

• If settlements along the Black Sea coastal area and those along the upper section of the Kura River are prioritised, the same amount (GEL 15.5 million) could be alternatively invested in treatment units of 5000 m3/day in settlements with an established sewerage network. This option results in a greater amount of wastewater being treated than with an equivalent investment in smaller units.

• For smaller amounts available under a DFES programme, onsite decentralised management options become the preferred choice.

• There can be a mix of project categories in case DFES has sufficient funds.

7. REFERENCES

1. State Department for Statistics of Georgia (2001), Georgian Households 1996-2001, Tbilisi.

2. http://www.agry.purdue.edu/landuse/septic/cttpp2/buried.htm

3. www.epa.gov/owm/mab/indian/wwtp.pdf