Post-conflict aid to Georgia: mission accomplished or fait accompli?

The military conflict of August 2008 between Russia and Georgia brought misery to thousands of people who lost their beloved, their homes, or both. In response, and following swiftly on from ceasefire operations, the international donor community pledged billions in post-conflict aid to Georgia, money which soon after took on another guise: economic crisis support following the aftershocks of the autumn 2008 crash in the west. But where have these billions been flowing, and who has benefitted?

Soon after the cessation of the armed conflict, the World Bank, the Asian Development Bank (ADB), the European Investment Bank (EIB), the European Bank for Reconstruction and Development (EBRD) and the International Monetary Fund, as well as the European Union and the USA, announced they would be disbursing roughly USD 4.5 billion based on the so-called Joint Needs Assessment (JNA) developed exclusively in consultation with the Government of Georgia.

While up to USD 500 million of this total has gone to address the urgent needs of the affected population including internally displaced people, the majority of the aid has been assigned for activities that, in accordance with the JNA, is intended to bring long-term economic sustainability for Georgia. This includes loans and grants to finance major infrastructural projects, including roads and power transmission lines, as well as to support the economic crisis-hit national banking system.

One and a half years on, however, it has become clear that while the USD 4.5 billion has been almost fully allocated, the impacts of that aid are still very much open to question. As a 2009 analysis – “In the line of fire: How international post-conflict aid billions are failing Georgia’s people and environment” – from the Coalition Transparent Foreign Aid to Georgia and Bankwatch member group Green Alternative describes, the USD 3 million loan component provided by the international financial institutions (IFIs) is being directed mainly at previously proposed projects – that is, projects on the drawing board even before the conflict, that even then were attracting concerned attention from environmental and social watchdog groups.

One such project, rejected during Stalin’s time, the large Oni hydropower cascade, ’emerged’ once again with official indications pointing to potential EBRD and EIB support. While plans for this project in the Racha mountains involving a 105 metre dam were jolted by a 6.2 earthquake in September 2008, the project promoters (the Georgian Ministry of Energy and the Norwegian company Econ) have switched their attention to developing the Upper Mtkvari Cascade of two to three hydropower plants near the Turkish border. The project would impact an area of high archaeological value, and the invitation for tender bids has featured on the EBRD’s website.

Another such project and one approved in March for a EUR 100 million loan by the EBRD – with EIB support also being sought – is the EUR 300 million Tbilisi Railway bypass project, that aims to improve the efficiency and safety of rail operations within the city of Tbilisi. However the project foresees the construction of a new railway line through one of the capital city’s densely populated districts of Tbilisi, and safeguard measures to protect the city’s drinking water supply among other things are widely regarded as being far from sufficient as presently conceived.

These and other major infrastructure projects that are gobbling up post-conflict IFI money, such as the ADB-backed Ajara highway, are also bringing questionable economic returns for Georgia. Construction of them tends to be carried out by foreign companies that primarily offer only low quality, short term contracts to local workers. With unemployment still at 16 percent, the number of people on benefit support from the government has also been trending up in the last year. On top of this, Georgia’s external debt has already hit USD 3.5 billion and Georgians ultimately will be digging deep to pay for these new additional loans.

A portion of the aid has been deployed too to prevent liquidity crashes at Georgia’s leading private banks – yet there is mounting evidence showing that those banks receiving significant support from the EBRD and the International Finance Corporation are not injecting funds into the real economy. The state of the local business environment, though, is causing increasing concern, in spite of Georgia’s surprising elevation to number 11 in the World Bank’s ‘Doing Business’ rankings for 2009. On a recent visit to Georgia, EBRD president Thomas Mirow’s remarks that there is a “lack of healthy companies” in the country were reported in the national media. Government interference in the activities of Georgian SMEs is widely regarded as the major barrier currently frustrating expansion of the sector.

It is surely, then, a highly pressing question for international development lenders: if the projects and the ultimate value added are of such compromised quality, why are the big lending flows still being churned out and being spun as positives for Georgia?

At the heart of the difficulties lies a government that has offered no coherent economic development plan, other than the prevailing assumption that the national economy should and will be developed by the market. Perhaps it is unblinking donor sympathy with this approach that is restricting due and proper scrutiny.

Meanwhile a non-transparent privatisation agenda aims to attract short term cash inflows for the state budget, rather than prompting investors to develop new, credible – even, whisper it, sustainable – business. Still prevailing is a general environment that features weak rule of law and transparency norms, a lack of property rights protection, the non-existence of anti-monopoly legislation and competition policy, and the absence of free media. With these handicaps still rooted on the Georgian map there is little hope for now of stimulating the development of the real economy, of creating robust new businesses and, ultimately, jobs.

Real effort is required to address these failings. The IFIs may finally be taking note – they now need to act.