Project Summary
While the overall economy in Georgia experienced significant growth during the years preceding the signing of the compact, the performance of the rural economy had stagnated. Of particular concern was the agriculture sector, which accounted for one-quarter of Georgia’s economic output and an even larger share of employment. Georgia’s diverse climactic zones and rich natural resources provided the potential for future development of the agriculture and agribusiness sectors, particularly in the regions outside of Tbilisi. With increased quantity and quality, Georgian agricultural products were expected to better compete with imported food products, thereby improving the living standards of the rural poor. Yet businesses faced problems with poor technology, processing, marketing, management skills, and credit access.
The Enterprise Development Project was designed to address two of the key constraints faced by small and medium enterprises in agribusiness and other sectors in the regions: the need for additional long-term risk capital and the need for improved skills and capacity in enterprises to recognize and take advantage of market opportunities. The project included two activities: the Agribusiness Development Activity and the Georgia Regional Development Fund Activity.
Agribusiness Development Activity (ADA)
The ADA (original budget: $15 million; total disbursed: $20 million) was designed to improve the economic performance of agribusinesses by accelerating the transition from subsistence to commercial agriculture through technical assistance, targeted grants to farmers and agribusinesses in critical value chains, and expanded market information. The causes of decreased agricultural production were identified as (a) limited access to high quality seed, fertilizers, and plant protection materials; (b) inadequate access to productive assets (e.g., machinery, spare parts, and transport vehicles); (c) limited access to financing; and (d) poor farm management skills. The ADA Activity was designed to address these causes by stimulating the rural economy through agricultural enterprise development that would expand production, improve quality, and add value across the agricultural system.
The program launched with a “value chain approach” to strengthening commercial linkages among agricultural service providers, producers, processors, wholesalers/distributors, and markets. Program activities focused on the provision of grants to farmers and agribusinesses in critical value chains that supply agricultural products to local markets. ADA was implemented by a professional grants manager that awarded grants based on a transparent, open, and competitive application process that required matching contributions from program participants. In addition, the grant manager provided proposal and business development services to applicants and grantees. Originally this was a $15 million activity that received an additional $5 million following a reallocation from the RID Activity.
Technical Assistance
A key element of ADA’s technical assistance was the creation of a network of farm service centers throughout the country to supply production inputs and technical advice to groups of local producers. The aim was to provide technical assistance to farm service centers, primary producers, and value-adding enterprises which would lead to increased volumes and values of production. During implementation, it became clear that the activity should reconsider the balance of increased technical assistance versus access to finance. Although a significant amount of funding went towards grants, the project design was weak on technical assistance. While good design would have better balanced the distribution of funding between technical assistance and grants, ADA was able to connect and partner with USAID and SIDA to further focus on technical assistance.
Farmer and Agribusiness Grants
Grants under the ADA program were awarded to four categories of beneficiaries:
- Primary Producers: ADA targeted farmers and farming operations producing fruits and vegetables with improved farming practices; as well as, worked with livestock and cattle-farmers to develop specializeddairy products. Livestock included: beef, pork, and lamb production; poultry and egg production; beekeeping; fish farms and hatchery supports.
- Value-Adding Enterprises: Value-adding enterprises were expected to increase production volume and quality in addition to introducing new and improved technologies and expanding market access. Targeted projects generally fell into two categories: Collection, Storage, and Distribution (e.g., milk collection stations, small-scale vegetable/fruit packing houses, and conventional cold storage); and Processing and Packaging for the Retail Market (e.g., small-scale dairy processing, fruit and vegetable canning, dried fruits and vegetables, slaughterhouses and meat-cutting operations, enterprises adding value to walnuts and hazelnuts, tea processing, and honey processing or packaging).
- Farm Service Centers: Farm Service Centers were profit-oriented, privately-owned legal enterprises designed to meet the needs of Georgian farmers through the supply of inputs; provision of machinery; veterinary, breeding, and agricultural extension services; marketing of farmers’ products; provision of market and technical information; and links to credit providers. In early 2009, the Machinery Rings Initiative was added. This additional component provided grants up to $150,000 to existing Farm Service Centers to purchase agricultural equipment that could be rented to farmers to facilitate improved technology adoption. The machinery rings included a set of 3-4 tractors with a range of implements such as plows, cultivators, seeders, fertilizer spreaders, sprayers, and trailers to serve farmers in their areas.
- Value Chain Initiative Grantees: Value Chain Initiative grants focused on key enterprises in “nationally important” value chains. These included input suppliers, service providers, processors, distributors, and other off-farm enterprises that were to build the foundation for a stronger agricultural sector. They were expected to strengthen the rural economy, providing increased opportunities for job creation and income generation.
After nine rounds of reviewing grant applications, the program had over 1400 applicants, awarded 283 grants for a total value of over $16 million. ADA grants awards ranged from beekeeping, cattle and sheep breeding, dairy, feed production, fruit and vegetable production over to processing, nuts and meat processing, fishery, among others.
Market Information
The market information component included a series of activities to disseminate information on agricultural best practices and pricing mechanisms, as well as promoting the other components of ADA. This component of ADA shared costs with USAID’s AgVantage project to produce the bi-weekly magazine Agroinfo, that provided information on prices and market demand. The cooperation was secured through a Memorandum of Understanding which expired in June 2008. After expiration, MCG conducted a survey to learn of the actual benefit delivered by this activity and decided not to continue funding because of unsatisfactory results.
Georgia Regional Development Fund Activity (GRDF)
The GRDF (original budget $32.5 million; total disbursed: $32 million) was a risk capital fund made of loans and equity investments that sought to increase investment in, and improve the performance of, small and medium enterprises (SMEs), particularly in regions outside Tbilisi. The activity created a professionallFy and independently managed investment fund to provide capital to SMEs, offered technical assistance to companies within the GRDF portfolio, and identified legal and policy reforms needed to encourage further investment in SMEs. The investment fund manager reported to an independent GRDF governing board comprised of individuals with financial and development experience acceptable to MCC and MCG. This Board also acted as an Investment Committee and approved every investment or divestment proposal from the investment fund manager. MCC maintained a seat as a non-voting observer on the Board.
GRDF’s primary objective was maximization of development returns, defined as a combination of annual changes in four indicators relating to wages, revenue, taxes, and supplier purchases. These indicators were tracked throughout the life of the GRDF. It was also expected to earn a reasonable financial return from investments in SMEs. While the GRDF was open to investment in all sectors, of particular interest were SMEs involved in agribusiness and tourism. The selection process was based on the viability of proposed investment opportunities based on the quality and experience of the management and/or owners, their competitive advantage and market position, and their prospect for dynamic growth, among other factors that contributed to a strong partnership. Investments typically ranged between $500,000 and $3 million and were in businesses that generally had less than 250 employees and less than $5 million in revenue. GRDF investments financed a variety of growth-oriented activities, such as purchase of new technologies, access to export markets, and expansion of production.
The GRDF investment period began upon entry into force (April 7, 2006) and was scheduled for a total of ten years, including a five-year wind-down period after the termination of the investment period. It was planned that any loan repayments from the GRDF loans would be held and re-invested towards charitable, educational, or other nonprofit developmental gains, that benefit people working in agribusiness and/or other enterprises outside of Tbilisi.
GRDF invested a total of $32 million over the full investment period, of which MCC’s original contribution of $30 million for loan investments and $2 million for technical assistance to loan recipients. The GRDF reinvested an additional $2 million from early reflows, and also used the reflows to cover management and operational expenses to the investment fund manager.
GRDF’s investment performance was mixed, with the investment fund manager unable to exit many investments within the five-year wind-down window and several investments underperforming despite having been operationally sound. The GRDF encountered several challenges during compact implementation, notably the twin shocks of the August 2008 Russia-Georgia conflict and the global financial crisis. The program was designed to finance investments considered riskier than those made by Georgia’s commercial banks. GRDF targeted companies that might not have access to in-country financing, and would be willing to take on marginally higher interest rates and/or accept greater equity stakes. Some of the companies in the investment portfolio experienced financial difficulties related to the global economic climate. Additionally, the aggressive job creation targets set at the onset of the compact proved unrealistic for GRDF. GRDF’s directives were to invest primarily outside the capital city, and in the tourism and agribusiness sectors, but not specifically in sectors that were labor-intensive. By the end of the wind-down period, the GRDF still had several companies due to exit or liquidate. In 2016, the investment fund manager agreed with the Board to waive its management fees and continue overseeing the GRDF exit pro-bono.
By the end of March 2019, the fund manager reported over $25 million in reflows, from which over $13 million was distributed to the investees, $2 million was re-invested, and the rest was used to pay management and operating expenses. Despite several failed investments, the GRDF interventions had positive effects on economic growth in the form of paid wages and taxes and realized proceeds from debt and equity investments. As of April 2017, GRDF’s investments contributed to over GEL 66 million (around $33 million) in wages, GEL 44 million (around $22 million) in taxes, and supported just over 2,400 jobs.[[Source: GRDF Evaluation Report by A2F Consulting]]
Notwithstanding problems faced, some GRDF investments are expected to have a lasting impact. For example, high-speed fiber internet was delivered in rural areas of the Adjara region to 8,000 retail customers as a result of the GRDF investment in an IT company.
MCC signed a subsequent compact with the GoG on July 26, 2013. The compact included a clause regarding the use of the GRDF proceeds directing they support the activities of the Science, Engineering, Technology, and Math Higher Education Project funded through the compact. In 2015, MCA-Georgia, the accountable entity that implemented the subsequent compact, entered into an agreement with the San Diego State University of Georgia (SDSU-Georgia) to use GRDF proceeds to recruit and provide scholarships for students enrolled into SDSU-Georgia programs, and funded educational exchanges of students and faculty.
Project Economic Analysis
- $47,500,000 million Original Compact Project Amount:
- $52,040,799.99Total Disbursed
Estimated benefits correspond to $52.0 million of project funds, where cost-benefit analysis was conducted:
- Estimated beneficiaries at the time of compact signing: 26,285
- Estimated net benefits at the time of compact signing: $30.7 million
Estimated Economic Rate of Return:
At the time of compact signing, activity-level ERRs were calculated for the ADA and the GRDF. Estimated benefits at time of signing come from original ERRs and correspond to the original $47.5 million of project funds, where cost-benefit analysis was conducted. The ERRs were not updated at compact closeout because supporting documentation was not available. The compact closed before MCC instituted its policy on closeout ERRs.
| Estimated Economic Rate of Return | Estimated Beneficiaries | Estimated Net Benefits | ||
|---|---|---|---|---|
| Agribusiness Development Activity (over 10 years) |
At the time of signing | 12% | 9,931 | $787,344 |
| At compact closure | Not estimated | 14,145 | Not estimated | |
| Georgia Regional Development Fund Activity (over 15 years) |
At the time of signing | 26% | 16,354 | $29,875,848 |
| At compact closure | Not estimated | 3,130 | Not estimated |
Key Performance Indicators and Outputs at compact end date
| Indicators | Baseline (2006) | Actual Achieved (2011) | End of Compact Target (2011) | Percent Complete[[Formula for Percent Complete: (Actual-Baseline)/(Target-Baseline)*100]] |
|---|---|---|---|---|
| Agribusiness Development Activity | ||||
| Jobs created | 0 | 3,264 | 3,377 | 97% |
| Firm Income (USD) | 0 | 3,847,492 | 1,046,000 | 368% |
| Household Net Income (USD) | 0 | 12,306,272 | 4,491,000 | 274% |
| Number of Direct Beneficiaries | 0 | 3,585 | 3,823 | 94% |
| Georgia Regional Development Fund Activity | ||||
| Increase in Gross Revenues of Portfolio Companies (USD) | 0 | 16,880,669 | 22,200,000 | 76% |
| Increase in Portfolio Company Employees | 0 | 208 | 1,892 | 11% |
| Increase in Wages Paid to the Portfolio Company Employees | 0 | $1,787,378 | $3,118,000 | 57% |
Explanation of Results:
The ADA indicator Jobs created includes additional jobs created through ADA investments. A non-zero baseline could not be calculated because the grant manager did not request businesses provide job creation information, and data provided on grant applications were not reliable or verified. This indicator’s success cannot be tied directly to the project based on the information that was provided at the time of closeout.
The Firm Income indicator included all increases in firm revenues generated after the ADA investment. Because the business line in which the ADA investment occurred was required to be already established, the increased revenues generated from that line were considered as attributable to ADA grant for the purposes of this monitoring indicator. Income from all other business lines were not reported. The Household Net Income indicator includes increases in net wages for additional employees generated by Primary Producers and increases in Household Net Revenues for the Primary Producers (farm-based enterprises). A non-zero (level) baseline cannot be calculated because businesses were not asked to provide that information, and data provided on grant applications were unreliable and not verified. Based on the information that was provided at the time of closeout, this indicator’s success cannot be tied directly to the project.
No information was provided in the closeout Indicator Tracking Table to explain why the targets were not achieved for the GRDF indicators Increase in Gross Revenues of Portfolio Companies and Increase in Wages Paid to the Portfolio Company Employees. Further detail is available in the final evaluation of the GRDF Activity, summarized below.
Evaluation Findings
Under the Enterprise Development Project, two evaluations were conducted—one assessing the ADA, while the other evaluation appraised the GRDF.
Agribusiness Development Activity
MCC commissioned an independent performance evaluation for the ADA, and the full results and learning can be found on the evaluation catalog and summarized in the Evaluation Brief. This evaluation was originally designed as an impact evaluation, but was later reverted to a performance evaluation due to data limitations and implementation changes, as described in the evaluation methods section of the Evaluation Brief and the Final Report. The final performance evaluation was designed to answer the following questions:
- What is the ADA’s impact on economic growth and poverty reduction; including household incomes and expenditures, employment, production value (goods and services), value added, investments, and other indicators in agriculture?
- What is the impact of the project on agricultural productivity and, if possible, income?
- What is the ADA’s impact on net agribusiness revenue, number and type of employees, employee wages, and use of equipment?
Key Findings include:
Investment and Access to Credit
- Grantees used their grants to increase their agricultural equipment and machinery investments.
- Access to credit increased substantially after the grant application opened. Four years later, the number of respondents with bank loans increased for both grantee and non-grantee respondents, with grantees showing an increase of 10 percentage points over non-grantees. Non-grantees refers to applicants, but not recipients of a grant.
Production and Profit
- The majority of grantees and non-grantees reported increases in production levels and profits.
- Grantees frequently indicated technological improvements as the main driver of growth, while non-grantees cited increases in the scale of their operations.
- Grantees did not experience larger increases in profits relative to non-grantees in the years after receiving the grant.
Employment and Wages
- Four years after applying for the grant, both grantees and non-grantees reported increasing their number of employees.
- Both grantees and non-grantees tended to report paying higher wages. After adjusting for inflation, however, wage levels for both skilled and unskilled workers remained relatively constant over time for both grantee and non-grantee agribusinesses.
MCC Learning from this evaluation
- Randomized lotteries are not just tools for impact evaluations. In grant-making programs where demand significantly outpaces supply, a randomized lottery can be an effective tool in addressing transparency and fairness issues in the selection process.
- Align application procedures with the level of sophistication of potential applicants.
- Design processes and procedures for grant administration to mitigate fraud and abuse.
- Involvement of the evaluator in data collection from the beginning is key to a successful impact evaluation.
Georgia Regional Development Fund
MCC commissioned an independent performance evaluation of the GRDF, and the full results and learning can be found on the evaluation catalog and summarized in the Evaluation Brief. The final performance evaluation was designed to answer the following questions:
- Did GRDF meet its stated objective?
- What factors explain the success of the relatively more successful/profitable firms?
- What barriers/challenges explain any underperformance noted in GRDF portfolio firms?
- What were some indirect effects of GRDF investments?
- To what extent has the GRDF investment been essential for SME development and for their access to finance?
- Did GRDF provide financing that wouldn’t have been accessible otherwise?
Key Findings include:
Financial Performance
- The GRDF portfolio companies’ financial performance was mostly poor. The overall Internal Rate of Return was estimated at -14.22 percent.
- 12 out of a total of 14 GRDF investees ran into financial difficulties and fell behind on debt payments.
Development Returns
- The GRDF inconsistently impacted development returns.
- Only half of the 14 companies had positive returns, while the other seven were negative or zero.
Economic Growth and Employment
- Of the 14 GRDF investees, four were successful in boosting economic growth and employment in the regions outside Tbilisi, while another four eventually became insolvent. The remaining six showed mixed performance. Those that were successful were generally able to attract outside sources of private investment.
- GRDF investments helped create 3-4 transformational companies in Georgia with positive externalities. This confirms that private equity is well suited to provide patient capital and can be a market-friendly way of providing grants to countries.
MCC Learning from this evaluation
- Measuring and attributing non-financial outcomes of an investment fund proved to be difficult. Moreover, the emphasis on development return to determine a portion of the fund manager’s compensation incentivized short-term performance over long-term value creation and ultimately led the fund manager to take riskier investments that were not necessarily financially sustainable.
- The five-year time limit on MCC compacts creates a number of challenges in the design of investment funds. Even though it was extended ten years beyond the compact period, the GRDF encountered difficulties in liquidating its portfolio in a timely manner and the inability to intervene in the post-compact period introduced reputation and other risks.
- Potential synergies between compact components could have been more adequately exploited to increase the probability of success. Expanding the role and size of the Technical Assistance Facility may have helped improve business viability and build SME capacity prior to and during investment. Additionally, if the ADA was given more lead time to address the primary agriculture market, GRDF investments in the secondary agricultural market may have been more successful.