The lessons summarized below are observations from the MCC team that was responsible for overseeing compact implementation.
Samtskhe-Javakheti Road Rehabilitation Activity
- Effective contract management goes hand-in-hand with achieving desired results: Faced with the contractor’s failure to meet construction milestones, the MCG management team, with MCC’s support, reduced that contractor’s section incrementally while adding performance targets through an amendment to the contract. Even before taking this action, it was necessary to take extraordinary financial measures (such as converting retention to a bond to improve contractor cash flow and making direct payments to the contractor’s suppliers and subcontractors) to ensure continued progress of the works. In spite of these actions, the poor performance continued, and under growing concern MCG ultimately terminated the contract in a responsible manner. This resulted in the re-bidding of those contracts to achieve completion during the final construction season of the compact. It is important to recognize and acknowledge problems early, rather than letting them linger, and to be decisive and pro-active. Also, it is important to know when and how to effectively utilize the dispute resolution mechanisms incorporated into the construction contract for timely and decisive project correction when needed.
Energy Rehabilitation Activity
- Build local capacity to help ensure sustainability and growth: In 2006, no Georgian companies were qualified for large scale pipeline work. The final phase of the project featured six qualified bidders, of which three were Georgian companies. Eager to gain a share of the business and the phased approach, they invested in gaining an understanding of the design standards and construction techniques applied by foreign contractors. The technical skills and expertise gained from working to international standards set a new bar for engineering achievement in Georgia and strengthened local capacity to ensure the pipeline’s sustainability over the long term. Moreover, the new designs and standards reduce long-term maintenance costs. Building on this experience and extending new standards throughout the organization, GOGC applied what it had learned as the implementing entity on the MCG-funded energy rehabilitation project and went on to implement a broader investment program in the rest of the pipeline network funded by itself, other donors (including USAID), and the GoG.
Regional Infrastructure Development Activity
Parallel financing of the municipal water projects with EBRD demonstrated both the benefits and pitfalls arising from relying on another donor. There was a clear tradeoff between the benefits of financial leverage and the heightened completion risk for those parts of an integrated and inter-dependent project being funded by an institution not driven by the five-year clock.
- Seek efficiencies and synergies in implementation: In order to leverage compact funds, MCC and MCG financed water projects in parallel with the EBRD and entered into projects conceived by and overseen by EBRD and the World Bank. In determining how best to oversee the Regional Infrastructure Development It was important to seek efficiencies rather than duplicating what was already in place. However, MCC retained its rights of oversight, inspection, and audit.
Georgia Regional Development Fund Activity
- The initial high quality project due diligence done by professionals is crucial for the project’s success. Usually, market due diligence and pipeline development is a pre-requisite to investment fund creation and is done by the professional fund manager. Notably, this was not the case for the GRDF. Prior to fund formation, most private equity fund managers have identified potential investments, have established networks in the target market, and are well informed on the market prospects. The GRDF investment manager was new to the Georgian market, and so the GRDF got off to a slow start and encountered early difficulties in developing a robust pipeline of viable investments. Professional fund manager engagement prior to fund creation is therefore critical and will serve to better define expectations.
- Clarity, visibility, and incorporating country ownership are critical to ensuring a strong public-private partnership. Efforts were made to prevent any perceived connections between GRDF and the GoG, the sole de facto owner of the interests and the key partner of the compact. While it is understandable that the MCC position was to shield the GRDF from potential political interference, the lack of ownership by the GoG and a lack of accountability by agents entrusted to carry out the GRDF objective only served to fuel misconceptions, distrust, and animosity among the stakeholders. A perfect solution to this problem did not exist. Yet, greater involvement at the strategic level, constant dialogue, and more proactive relationship management would have helped nurture and build the sense of partnership.
- Private equity requires flexibility and a long-term commitment beyond the MCC compact’s five-year timeline. Like GRDF, many private equity funds have a defined time limit, usually lasting from 7-10 years, consisting of an investment period followed by a wind-down period. GRDF would have benefitted, at the onset, from a clear plan and mechanism to transfer ownership at the end of the compact and ensure an orderly wind-down of the investments without pressure to liquidate. A holding structure versus a fund should be considered for similar ventures going forward.
- Figuring out the role and appropriate size of the Technical Assistance Facility would help improve business viability and build small and medium enterprise capacity. The Technical Assistance Facility was well received by managers and shareholders. The technical assistance provided by the Facility went towards building financial management and building needed accounting skills for participants. The implementation of enterprise risk management was also well received given their improved knowledge of their own businesses following the implementation of the project. In general, the technical assistance was seen as a significant value enhancer and improved business acumen. However, technical assistance was only applied to investees despite the option to expend on potential investees. Expanding the role and size of the Technical Assistance Facility might have improved viability of potential businesses and should be applied to both potential and accepted investment deals.